National Instruments Corp (NATI) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the National Instruments Corporation's fourth-quarter 2003 earnings release conference call. (OPERATOR INSTRUCTIONS). 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 now 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 improvement in the global economy. 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 the Securities and Exchange Commission, including the company's quarterly report on Form 10-Q for the September 2003 quarter. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that, I will now turn it over to the President and CEO of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon, and thank you for joining us.

Our key points today are -- we delivered more new products in 2003 than any other year in our history. We delivered record revenue for the quarter, and for the year. And we delivered outstanding operating leverage.

We are pleased with our solid performance in Q4, and for the year. I believe that 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, 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 ?

Thank you for joining us today. We had a very strong Q4, with revenue of $122 million -- up 14 percent from Q4 2002, and up 16 percent, sequentially. This represents the highest quarterly revenue in NI's history, beating the previous record of $114 million set in Q4, 2000. Fully-diluted earnings per share was 21 cents, with net income of $11.2 million -- up 13 percent from Q4 2002, and up 41 percent, sequentially.

Total operating expenses were $77.4 million, and included $3.8 million of patent litigation charges related to a patent case with a small LabVIEW competitor. The after-tax impact of this charge is equivalent to 5 cents per share.

Revenue for 2003 was $26 (ph) million -- up 9 percent from 2002. This represents the highest annual revenue in NI's history. While the last three years have presented difficult economic conditions, our discipline in continuing to increase our investments in R&D and our sales force have clearly pay off, allowing us to gain market share during this downturn, and positioning us to sell more through existing customers as the economy recovers.

The 16 percent sequential revenue growth in Q4 is significantly higher than the 10 percent average Q4 sequential increase we have seen (indiscernible) the IPO in 1995 and 2002. This improvement in our growth is a product of both a recovering global investor economy and the success of our new products. These new products have helped fuel our growth, with dramatic sequential increases in sales of our Compact FieldPoint, PXI, and modular instrument hardware platforms in Q4. We also saw very strong sequential and year-over-year revenue growth in software, as LabVIEW 7 Express continued to be a big success, and as we saw the benefits of our victory in the patent trial last year.

During Q4, we saw revenue growth in all regions. Revenue was up 10 percent year-over-year in the Americas; up 15 percent in Europe; and up 22 percent Asia, giving overall growth of 14 percent. In local currency terms, revenue was up 3 percent in Europe, and up 30 percent in Asia, giving overall growth of 11 percent.

Now, moving down the income statement. Gross margins in Q4 were 74.5 percent -- up from 73.8 percent in Q3. As our revenues returned to record levels, and as we are now producing more than 50 percent of our hardware at our Hungarian facility, we saw the leverage in our model, with improved gross margins. Total expenses increased by $10 million, sequentially. The biggest components of this was a $3.8 million charge for patent litigation expenses. This charge reflects our estimate of the expense which will be incurred to take our patent dispute with a small LabVIEW competitor to trial in early 2005.

Our R&D expenses in the quarter increased by $2 million, sequentially -- primarily as a result of an increase in profit-sharing and the fall in the amount of software development expenses capitalized from $1 million in Q3 to only $400,000 in Q4.

Sales and marketing expenses were up by $3 million, sequentially, and by 9 percent, year-over-year. Following up on the success of NI Week, we have continued to actively promote our new products in the marketplace, and have significantly increased our sales and marketing investments in Asia. G&A expenses were up 10 percent, year-over-year.

The patent litigation expense of $3.8 million reduced our operating income to $13.5 million, or 11 percent of revenue, from $17.3 million, or 14 percent of revenue. This is up significantly from our 9 percent operating margin in Q3, demonstrating the outstanding operating leverage in our business model.

In Q4, as a result of the significant fall in the U.S. dollar, we recognized the gain on foreign exchange of $1 million. This is an unusually large gain, and is unlikely to be repeated in future quarters.

Net income for the quarter was $11.2 million -- up 41 percent from $7.9 million in Q3. The after-tax impact of the patent litigation charge was $2.9 million, or 5 cents per share.

Now, turning to the balance sheet. Inventory days declined to 114, from 128 last quarter. Day sales outstanding were 58 -- down from 60 last quarter. We had good cash flow in Q4, with $25 million in cash, net cash provided by operating activities. Net cash and short-term investments increased by $22 million, to a record of $195 million.

Also today, the Board of Directors has declared a three-for-two stock split to be affected as a stock dividend of one share of common stock for every two shares of common stock outstanding, payable on February 20th, 2004 to shareholders of record on February 5th. All per-share numbers included in the conference call today are on a pre-split basis, including the company's cash dividends and guidance for Q1 2004. The Board of Directors has also declared a cash dividend of 5 cents per common share, payable February 20th, 2004 to shareholders of record on February 5th.

Now, looking out to 2004. The global industrial economy showed strong signs of improving in Q4, with J.P. Morgan's Global Manufacturing Index reaching a six-year high of 58 in December. This shows that the industrial economy is beginning to benefit from the improvement in global GDP, and the record low inventory to sales ratio in the U.S. industrial economy. This is a positive sign for NI's business in 2004. Based on our view of the global economy, and of our customers' acceptance of our new products, we believe that National Instruments will continue to see year-over-year revenue and earnings growth in Q1 2004. In Q1 2004, we are currently expecting revenue to increase by approximately 20 percent, year-over-year, and to report fully-diluted earnings per share of between 21 cents and 25 cents per share -- up from 13 cents per share in Q1 2003.

These are forward-looking statements; I must caution you that actual revenue and earnings for Q1 could be negatively affected by numerous factors, such as any decline in the global economy; delays in new product releases; manufacturing inefficiencies; and global and foreign exchange fluctuations.

On a final note, we will be having our first-every New York Investor Conference on February 26, and we hope to see you there. If you did not receive your invitation, please let us know.

With that, I will turn it over to John Graff, Vice President of Marketing.

Thank you, Alex. We turned in a very solid performance in Q4. We delivered our sixth consecutive quarter of year-over-year revenue growth, accelerated our growth rate, and set new revenue records for both the quarter and the year. In 2003, we introduced more new products than in any other year in our company's history. It is clear that our strategy of increasing our R&D investment during the economic downturn is paying off.

With the economy improving, our expanded sales force executing, and our strong customer acceptance of our many new products, we are excited and optimistic about the future. With our many new products, we aggressively ramped up our sales and marketing initiative in the second half of 2003. Strong acceptance of LabVIEW 7 Express led to double-digit year-over-year growth and record sales of our application software products for the quarter and for the year.

We believe our strong software growth clearly demonstrates the benefits of our 300 (indiscernible) of investments in LabVIEW 7 Express, as well as the benefits of our patent infringement lawsuit victory last January. Software is the most strategic sale we can make, because it aligns the customer with all of our platforms today and for the future.

In addition to positive customer reaction, we were pleased that many leading industry publications recognized LabVIEW 7 Express with prestigious awards, including "Top Hot Products of the Year Award" from Median (ph) Magazine; "Reader's Choice Award" from the Evaluation Engineering Magazine; "Amateurs (ph) Choice Award" from Control Engineering Magazine; "Automation Excellence Award" from Industrial Automation News; "Product of the Year" from Electronic Products Magazine; and "Product of the Year for Test, Measurement, and Control from Design News Magazine.

(indiscernible), one of the judges for the Design News "Product of the Year Award," stated "the design process of LabVIEW 7 Express has led to features that will simplify the development of complex virtual instruments for experts, yet ease the use of this product for novelty. It's not difficult to imagine that a chemist or biologist will find as much innovation and renewed capacity for design and test, measurement, and control applications in LabVIEW 7 Express, as will a control process engineer."

We were also pleased with strong customer acceptance of our new LabVIEW FPGA and LabVIEW PDA products. Both of these new products exceeded our sales expectations in Q4, and were used in a wide variety of new applications that we could not have addressed in the past.

In Q4, we continued to execute on our strategy to expand the role that LabVIEW plays in communication systems, test and design, in simulation and modeling, and in DSP development. We introduced new versions of our LabVIEW modulation toolkit and LabVIEW spectro-measurements toolkit; a new LabVIEW math interface toolkit; and new tools to integrate LabVIEW's real-world measurement and control data for SPICE and PSpice PDA circuit simulation tools.

In addition, we acquired Hyperception, a leading supplier of graphical software development tools that generate embedded codes for industry-leading DSP chips, including those from Texas Instruments and analog devices. We believe this acquisition strengthens our position as a leader in graphical development tools for design and test engineers, and offers enhanced capabilities for our LabVIEW platform to directly target the entire design-to-test cycle of many new embedded signal processing applications.

Doug Grazer (ph), Vice President of Worldwide Strategic Marketing for Texas Instruments stated "the integration of the Hyperception graphical DSP technology of National Instruments LabVIEW is a leap forward in simplifying the development of signal processing solutions, and expands the reach of DSP technology to many new users and applications."

In addition to record sales of applications software, we also had a record quarter for sales of PXI, FieldPoint, data acquisitions, modular instruments and machine vision products.

One of the company goals for 2003 was to strengthen our position in PC-based data acquisitions. We released many new data acquisition products during the year, including the Q4 release of 5 new low-cost digital I/O and analog output boards with high-reliability industrial features, and two new low-cost high-density analog output modules to lower the cost-per-channel by up to 70 percent, compared to other similar devices.

Leveraging improved exchange rates and lower manufacturing costs, we are continuing to set the standard for price performance. Just last week, we announced lower prices for many of our data acquisition products, and we are proud that Control Design Magazine recently selected National Instruments data acquisitions product line for its prestigious Readers Choice Award.

We also had record sales for our machine vision products in Q4. Our new Compact Vision System, that extends the power of LabVIEW into rugged machine vision applications, had very strong sales in Q4. In November, we announced a new version that delivers nearly twice the processing power and four times the storage capacity of the original product, which we released in July. We are pleased with the variety of new customers in packaging, assembly and robotics that have embraced this new product. We are also pleased that the editors with Test and Measurement World Magazine recently named our new Compact Vision System a "best in test" winner for 2004, and a finalist for "test product of the year."

Larry Maloney, editorial director, stated "we selected the NI Compact Vision System because of its advanced spire (ph) wire connectivity, and powerful vision-builder feature, as well as its superior compatibility with the widely-used NI LabVIEW development environment."

The star performers in Q4 were, once again, our PXI and Compact FieldPoint Systems platforms. Our new PXI mixed signals suite of modular instruments, which we announced at NI week, did extremely well, helping drive sales of modular instrument products up 65 percent, sequentially, from Q3.

We also continued to expand our PXI portfolio in Q4, with new Pentium 4 and Celeron controllers, new high-density PXI switch modules for ATE applications, a new 18-slot chastity for large high-channel-count test applications, and more.

We added several new rugged industrial modules to our large family of Compact FieldPoint products in 2003, including the Q4 release of the new 8-channel combination analog input/output module. In Q4, sales of Compact FieldPoint products were up over 70 percent, sequentially. The success of both PXI and Compact FieldPoint has been driven strongly by the tremendous success of LabVIEW Real-Time and LabVIEW SEGA (ph).

Throughout 2003, we told you that our many new products had opened up a wide variety of new applications and opportunities. From the Australian military, using PXI onboard Black Hawk helicopters, and saving two-thirds on test hardware costs, to Telebyte (ph) using our new PXI mixed-signal instruments in the new generation DSL test systems, and saving over $1 million.

In Q4, we continued to have success penetrating large system applications, with more NI product content per system. This was clearly demonstrated by our average order size increasing to a record $2900 in Q4 -- up from $2700 in Q4 last year. Let me give you a few examples of these new success stories.

NASA and the Jet Propulsion Laboratory are using our products to perform extensive testing for the current Mars Rover mission, including controlling a simulated environment like the semi vacuum on Mars, testing the airbag deployment on the Rover landing gear, and testing communications between the Rover, satellites and earth.

Whirlpool is now using our software and hardware to perform extensive testing during the design phase of (indiscernible) appliances. They can now make improvements before release that previously would have taken 4 to 5 years of customer feedback and product (indiscernible) to address.

Several customers are using our new products in biotech and drug discovery applications. For example, Coleman (ph) Technologies use LabVIEW, along with our machine vision and other hardware products, to automate the acquisition and analysis of microscope images to identify and count tumor cells in blood samples. Previously, people had manually moved slides under a microscope, and used a clicker to count and visually examine the cells.

In China, one of the world's top surface-mount LED manufacturers adopted our products for use in a new generation of high-volume automated manufacturing and test systems. A major manufacturer of turbines, used in power generation installations worldwide, is now using LabVIEW and PXI to monitor and control pressure spikes that can damage or destroy the turbine. In addition to costing less, their new systems give them much more visibility for predictive maintenance to avoid failures.

And finally, one last example from the military. Low Altitude Navigation and Targeting Infrared for Night, known by the acronym LANTIRN, is a system used on the Air Force's premier fighter aircraft -- the F-15 Eagle and the F-16 Fighting Falcon -- as well as the Navy's F-14 Tomcat. LANTIRN significantly increases the combat effectiveness of these aircraft, allowing them to fly at low altitudes at night, and under the weather.

Several years ago, Mantech (ph) test systems was awarded a government contract to upgrade the LANTIRN automated test system. Their original plan was to use a total of seven 6-foot-tall racks of (indiscernible) box instruments per system. In other words, these are very large test systems. Working closely with Mantech, the new LANTIRN ATE systems are now PXI-based, use LabVIEW, and occupy only three racks instead of seven.

These are just a few of the success stories that have resulted from our increased investment in R&D of many new products, our expanded sales force, and an improving economy. We are excited about 2004 and the many additional new products we have in the pipeline.

With that, I will turn it over to Dr. T.

Thank you, John. I am pleased with our solid execution throughout the company in 2003. We have delivered more new products than any other year in the history of the company. We delivered record revenue, and delivered outstanding operating leverage. I can assure you, however, that we are not satisfied. We did not meet our minimum revenue goal of 20 percent. As you know, with our historically-deep profitability, we made a strategic decision to aggressively increase our investment in R&D throughout the economic downturn. Our strategy was to gain market share and strengthen our position, in preparation for the eventual economic recovery. That investment resulted in a record number of new products and a successful completion of some of the most ambitious R&D initiatives in the history of our company.

It is clear that our strategy is paying off. We delivered record revenue, not only for the company overall, but also for all of our newer product areas. I congratulate and thank our employees for their hard work, dedication and solid execution in 2003.

Earlier this month, we announced that for the fifth consecutive year, Fortune Magazine recognized National Instruments as among the 100 best companies to work for. Keeping NI an innovative, rewarding and fun place to work is a commitment we take seriously. And, we met the challenge again in 2003 by keeping our focus on the success of our employees and our customers.

I believe our investments have been wise, our timing is good, and our execution is rock-solid. We look forward to a future with the goals of increasing our growth rate and delivering long-term value to our shareholders.

We will now take your questions.

(OPERATOR INSTRUCTIONS). John Harmon, Needham & Company.

Hello. Good afternoon. Congratulations. Sorry, this is kind of a touchy subject, but I was wondering if you could talk about the software (ph) lawsuit a little bit? Why did you take the charge now, if you are going to trial in 2005? And then, roughly, when in the year do you think you might go to trial?

Well, I cannot comment on the ongoing litigation, John. But, let me tell you this -- LabVIEW is a revolutionary innovation. It's got more than 40 patents issued. And we have demonstrated over the years, including last year in our successful jury trial, that we would aggressively protect the intellectual property that the company shareholders have paid for. The reason for taking the charge now is because we anticipate that this case will go to trial, and we intend to pursue it very aggressively. And so, we are taking the charge at this time. That means that we will not incur any expense for the software case in 2004.

Okay, and do you still anticipate getting 5.5 million from the MathWorks around the fourth quarter of '04?

Well, the appeal is progressing, as we expected. Obviously, we won that case in a jury trial; we were awarded those damages. The appeals with Court of Appeals, we hope to conclude late this year. And certainly we are optimistic. We will have to see how that plays out.

Thank you. Do you anticipate any other legal expenses going into '04?

Not at this time.

Okay. Thank you. And secondly, I was wondering if you could give us -- not guidance, but kind of a feeling for '04, given that many of the economic indicators -- the ISM index that other firms' global PMI are really at record levels. One part of the question that I would like to ask is -- what does it take in the global PMI for you to get to your target margins? Or, how do feel about getting to them in 2004 -- (multiple speakers) --?

As you said, from a macroeconomic point of view, the current data is very strong, and we are optimistic. (indiscernible) our guidance for Q1, we are giving guidance of a significant acceleration in our year-over-year growth rate as we go into the first quarter. But, given that we are already in the cycle, it is a little difficult to predict the narrow range of revenue for the year. We will review that decision, and as we go through the year, we will be able to revise that strategy, and perhaps in April, we may choose to give guidance for the year --once we see a recovery take more firm hold. So, that would be the way I would position it. We do have an investor conference in New York on the 26th. And so, certainly we will be, I am sure, discussing that topic with investors at that time.

Thanks. Just one quick one, finally -- generally, without giving the details, what kind of products could we expect to be introduced between now and I-week?

We have a lot of new products coming. As we talked in the conference call, 2003 was a record year for new products, and that really helped propel us to a record revenue for the quarter and the year. I don't want to pre-announce anything in product-wise in this call, but we are very excited with the product flow we have coming. And, we believe that I-week 2004 is going to be very exciting.

Okay. Thank you very much.

Robert Tango, William Blair.

Alex, just to follow up on the capabilities in Hungary, again. You know, when we met, I know we spent a lot of time talking about the facility and its capabilities and you gave me the impression that it was still -- I don't want to say in the early stages of ramping up, and you know, providing the company with some more operating leverage -- can you just give us a better sense as to -- you know, as we go through this year -- what plays out in Hungary? And, what kind of additional leverage you may see from the facility? And what kind your team has -- (multiple speakers) to utilize the facility?

Sure. We are at over 50 percent of our production now being in Hungary. And we intend to continue to expand that. Obviously, we are expecting our growth rate to accelerate here in the first quarter, as we start off 2004. And, despite that increase in revenue, we also expect to increase the percentage of our hardware that is being built in our Hungarian facilities. That should be north of 60 percent by the end of the year. So, we definitely see continuing gross margin, operating margin, leverage coming from that investment that we made. You know, in the downturn, is was a tough decision to make, but we really believe that it is going to pay off for us in 2004 and beyond. So, we are very pleased with where we are with that initiative.

And, is your -- in terms of people required to operate the facility -- is it fairly easy? Or, relatively easy to acquire people in order to ramp up production there? Is that --?

Absolutely. There is a relatively high level of unemployment in that region. And I know recently we had an application -- I think we had 20 open positions, and we had something in the order of about 6 or 700 people apply. So, adding staff in our Hungarian manufacturing facility is not a problem.

Great. Okay. The other thing -- I don't know if you got -- if your team can comment, but -- I mean, obviously you're selling product into dozens and dozens and dozens of segments. You have great insight into many different industries. You know, maybe, what are the top three industries right now where you are seeing the most optimism?

Rob, this is John. This past quarter, we saw a lot of strength, really, across the diversity of industries that we serve. That is one of the key aspects of our long-term success -- is that diversity in many industries, with no single industry being more than 10 percent of our revenues.

If you look at Q4, some of the best performers were electronics -- in consumer electronics. Strong growth in automotive and industrial, as well as a lot of success in the medical and biomedical. We also saw growth in the military aerospace and telecom. But again, it was pretty broad-based strength we saw in Q4.

And, heading into this year, would you assume that those 5 or 6 areas -- I mean, given -- I know there is a -- the number varies that are probably going to show some strength for you this year, but would those be the 5 or 6 areas that could experience faster than the normal growth, relative to overall revenues?

You know, again, I think in our diversity message, there continues to be strength in those end markets. And, obviously that is a benefit to us. Meanwhile, the record new product output that we talked about is opening up a lot of new doors to new applications and new industries, and we're seeing a lot of initial success with the results in Q4. So, that continues to help us penetrate, not only new applications in these industries, but further penetrate some of the other industries I did not mention.

Okay. Very good. I appreciate it. And congratulations.

Richard Eastman, Robert W. Baird.

Just a couple of things. Alex, could you just give us a sense for what the traditional instrument control business did in the fourth quarter?

Sure, Rick. That continues to lag the overall business. Excluding the instrument control business, our computer (indiscernible) measurement automation products are already, in Q4, growing at almost 20 percent, year-over-year. So, we did see some modest recovery in that segment, but it is certainly continuing to lag the rest of the business. It continues to decline as a percentage of revenue.

Is it up year-over-year -- (multiple speakers) -- or is it down?

It is up high single digits year-over-year. But it is dropping now to around 16 percent of revenue. And the rest of our business, as I said in Q4, rapidly approaching 20 percent year-over-year growth in fourth quarter.

Within the rest of the business, do you put the applications software -- is that in that PC-based?

Computer-based measurement automation -- that is right.

Yeah, okay. Would you care to break out just a year-over-year growth rate in applications software sales?

No. But I will tell you, it has been very strong. We were very, very pleased with our software execution, not only in Q4, but throughout the year. LabVIEW 7 Express has been a very, very big hit, and we're very excited about the success we've had with that -- building new customers, new applications. Software was a very strong year in 2004.

Another thought --

2003 -- excuse me.

When I look out into the Q1 period, and I look at the EPS guidance that you give and the sales guidance that you give -- if I adjust the legal expense -- we will have none, it sounds like, in '04. First quarter, we had 2.7, 2.8 -- in the first quarter of '03. If I make that adjustment, it looks like your incremental margin guidance is in the 20 to 30 percent range at the EBIT line?

Well, we are going to see some increase in our expenditures in Q1. We're going to have raises here in the first quarter, and an increase in profit-sharing on our improving performance. We will see some incremental expenses as we go in, and obviously, I'm giving guidance to approximately 20 percent revenue growth. So, obviously what we will see on the bottom will have a lot to do with what we see on the top. But, it will have certainly something to do with the strength of the economic indicators that we normally point to during the course of the first quarter. We do expect a very significant earnings growth in the first quarter.

Okay. Just lastly, I want to understand the currency. The EPS currency gain -- in this case, in the quarter -- shows up at the other (indiscernible). Was there any positive EBIT variance from currency in this quarter (multiple speakers) --?

There was some modest improvement. You will see that there was a 3 percent differential between our local currency rate of growth and our dollar rate of growth. (multiple speakers)

A little of that comes down to the EBIT line?

(multiple speakers) that will be significantly less than you will see, probably, for many technology companies. We will be unwinding many of our hedge positions as we finish up 2003, and that will allow us to take advantage of the improvement in the dollar. So much of the strength of the dollar that we have seen, now, will begin to bear on our results in the first quarter. And that, obviously, allows us to be more competitive in our pricing and improve our competitive position, versus our major competitors like the traditional instrument companies.

So, in '04, we should look for -- by definition of bigger currency -- positive currency impact at the sales line, a least?

Based on what we know today, that is correct -- yeah. Many companies have seen that already because of our hedge position. We don't really start to see that in the first quarter.

But then, we will not see the other income gain -- correct? On the hedge?

Right. Assuming -- the only way that will recur, is if the dollar takes a very strong fall in the first quarter.

Okay. (multiple speakers)

Let me put it this way, Rick, the dollar's move in Q4 was pretty unusual. Unless that is repeated, I would not expect to see that foreign exchange gain repeated.

At the other income line -- okay -- very good. Thank you.

Ajit Pai, Thomas Weisel Partners.

Good afternoon gentlemen, and congratulations on a great quarter. Just a few questions. The first is -- did you have an absolute number of new products, and what this was versus last year?

Ajit, this is John. It is hard for us to give a number. We quantify it internally in a lot of different ways, in terms of projects that our engineers work on. Another is the output and (indiscernible) -- was that a customer can order. Using these various internal metrics, I can tell you that there clearly was a record output.

I think another thing that is important to realize, and we've mentioned in past calls -- some of the products that we were introduced in 2003 were some pretty major platform initiatives, which obviously took a significant investment by our R&D team. Now, as we go forward, we get the advantage of leveraging those platforms for (indiscernible) products. So, as we mentioned, the pipeline is full, and we continue to plan to pump out a lot of products in '04.

Could you provide, as a percentage of revenues within the quarter, that was from new products -- just an approximately, which is products introduced over the past two years?

I'm not sure if I can give you the exact number. What I can tell you is that we've seen the percentage of revenue come from new products increase steadily, as we went through 2003, and it certainly reached a peak for the year and the fourth quarter. So, we are very pleased with the new revenue that is coming from those products. And, I think that positions us well as we go into Q1 -- and one of the reasons we're confident in delivering 20 percent growth in Q1.

Okay. And then, the average order size -- you know, you usually do provide us some indication of that. Can you give us some indication of that?

Sure. I think John actually talked about it in the call. The average order size came in at $2900 for the quarter, which is an all-time record for the company. That is up from $2700 in Q4 last year. And that really is a very keen indicator, because what that shows you is we are delivering a lot of new products; we are selling a lot more to our customers; and our platform products and our platform that we put out are clearly having a lot of success -- things like the mixed-signal suite, PXI, Compact FieldPoint, LabVIEW, Real-Time, LabVIEW PFGA. These are the products that are driving us in the systems sales and pulling up our average order size, which obviously makes our sales force a lot more efficient. And this is one of the key drivers of this tremendous operating leverage that we delivered, sequentially from Q3 to Q4 -- has been the efficiency of our sales channel. You know, with 16 percent more revenue, we hope to deliver 41 percent more net income. And after the charge for legal -- if you back that out, obviously you get a much bigger number. So you can kind of get an understanding for the leverage that is available in our business model.

Got it. And just in terms of geography, you talked about global signs of a recovery. But, when I look at your numbers -- in Europe, the growth is still 3 percent, which is almost flat, the growth in local currency terms, with last quarter. And then, in Asia, you are seeing a deceleration in local currency -- from 33 percent last quarter to 30 percent this quarter. And then, in the United States, of course, you are seeing that maturation from 1 percent growth to 10 percent growth. But, can you give us an idea of whether it has to deal with the rollout of new products into areas where (indiscernible) that is the state of the economy there?

Sure. Obviously, the U.S. economy showed the strongest sequential improvement from Q3 to Q4, in terms of the industrial economy. We have seen our growth rate in the U.S. go from basically zero in Q3 to 10 percent in Q4, which is pretty rapid acceleration in one quarter.

In Europe, we have gone from -- I think we were slightly negative in the third quarter, so we are back into positive territory. And there, industrial metrics, like the PMI in Europe, are starting to slowly recovery. But, they have not exhibited yet as strong results as the U.S. has.

Now, in terms of Asia -- 33 versus 30 on a number like that, I would not call it deceleration. I would call that, kind of, statistical noise. I would say we are continuing to execute very, very well in Asia. We feel like there is a lot of opportunity there. We have continued to invest there. And we are very optimistic that we will continue to see good results in Asia, going forward.

So on a broad spectrum, I would say all regions are definitely improving, in terms that are macroeconomic metrics. And, I think that we have had the new products and the foresight to put the people in the field, to position NI to take advantage of it. And that is why we see our growth returning to 20 percent here in Q1.

Right, and you talked about your hedges rolling off in 2003 fourth quarter. Will there be any remaining hedges in the first half of '04, because you mentioned that the first quarter might not see the full impact of those hedges rolling off?

Sure, there are some remaining, but they are a much smaller percentage of our overall business.

And when do those roll off?

Substantially, by the second half of the year.

By the second half. Is it fair to say that by the end of 2004 you will not have any of those hedges remaining?

Unless we decide to engage in new hedges for 2005.

Okay, but that (multiple speakers) --? All existing hedges, long-term hedges would be off?

That is correct. And our decision on that would be based on the trend of the dollar during the year.

Okay. And then, just in terms of the Hyperception acquisition, how much extra expense on the expense line is going to be from this acquisition, on a quarterly basis or annual basis?

The full expense of the operation of Hyperception is included in Q3. We concluded the acquisition effective October 1.

Okay. And one last question, which is -- as your production ramps up in Hungary, is your tax rate going to be affected further on the downward side?

At this point, as we said in the last call, we're modeling a tax rate of 25 percent for '04. And, as to '05, we will probably look to update that later in the year.

Okay. Thank you so much, and congratulations again on the great quarter.

OPERATOR INSTRUCTIONS). David Yuschak, Sanders Morris Harris.

Congratulations on a good quarter. The variance of about $5 million from your expectations early in October when you did your fourth quarter guidance -- again, that would suggest, as the previous questions were asked, the surprises really came out of North America?

Certainly, we were positively surprised both in Europe and in North America. We were somewhat conservative in our guidance, obviously, going into Q4. We saw -- a lot of our new products came out in August at NI Week. It was still a little early for us to kind of make any determinations of how successful they were going to be. The uptick in those new products was significantly stronger than we had expected. And that provided a very positive lift, as we went into the year. Our customers are very excited about our mixed-signal suite, very excited about our Compact FieldPoint, very excited about LabVIEW. And so, that has translated into good revenue. And as I said, with our expectation of accelerating year-over-year growth in Q1, we are expecting that to continue as we go into the first quarter.

I think, longer-term, you have mentioned that you thought maybe international could end up being about 60 percent of sales, compared to North America's, because of manufacturing moving off shore in many places. Is there any resources -- because your are in pretty good shape in Eastern Europe (indiscernible) maybe adding a line or so forth. Is there any other additional resources you may need to put into play here, as you look at where the key marketing areas are to get you to 60 percent of sales?

We believe we are in a pretty good position in both the U.S. and Western Europe. But, we will be continuing to be aggressively adding sales and marketing resources in Eastern Europe and in the Far East. So, those will be the areas we're concentrating on.

One last thing -- on some of these matrixes we have seen with industrial production and the ISM index and so forth and so on. It appears that there has been a lot of inventory build in the fourth quarter, and a lot of people are expecting that GDP numbers will be biased -- (indiscernible). Are you seeing anything out of your customer base -- if, in fact, there is some inventory build -- (indiscernible)? Is there anything in the kind of things that you are seeing from your customers, hearing from your customers, that suggest that, even in the (indiscernible) that there is going to be ramped-up spending in automation and T&M that would suggest that that 20 percent growth rate could be sustained for the rest of the year?

Well, our customers (indiscernible) do not stock our products. Almost all of our business is direct to the end-user -- about 85 percent. So we only have 6 or 7 present going to OEMs. So, we have absolutely no indications on the inventory build on our customers side.

The Federal Reserve, when they reported the production figures for December, showed the inventory-to-sales ratio in the U.S. economy at a record low. So, the data that we see is that inventories are at an all-time low, relative to revenues. So, I think, if anything, there is a possibility that companies, as we go into January and the rest of '04, will have to start reconsidering the amount of inventory they hold, relative to an increased amount of volume. In terms of -- I can't remember what the second part your question was, David --

On the inventory side, it really was -- I am aware that your product is not inventoried, but the decision-makers, as they go out and buy your product, have to make their decision based off of something sustainable in the way of needs for your product in the manufacturing and the T&M markets -- (multiple speakers). That inventory thing may -- like you said, the inventory (indiscernible) are awful low, so we can get pretty good sustainable pop in inventories just to get your (indiscernible) levels. But then, after that little bit of a pop, you've got to go back to whether there is a particular need on a sustained basis after that for a good manufacturing (indiscernible). I'm wondering if there's anything in your customer base that suggests that they do see a need, even after a bit of a manufacturing pop, because of inventories, to need to accelerate this spending to sustain the 20 percent growth?

I think many pundits expect that industrial companies will have to re-stock their inventories. And, if that drives industrial production, that will certainly be positive for NI. And the thing I would refer to is that -- look at the purchasing manager index -- I think continues to be the broadest metric of what is going on. The economy in Q4 did not expand at its fastest rate in 20 years, but the purchasing manager's index is at it's fastest rate -- its highest rate in 20 years. So I think that that indicates that the industrial economy has got to catch up with the broader economy. And I think an all-time low in inventory-to-sales ratio is a key guide to the psychology that will impact the decisions of manufacturing companies, as we go through '04.

One last question. Just on the whole idea behind your new LabVIEW released back last summer was to accelerate the product introductions. You are indicating that that particular revision has helped accelerate new products into your revenue stream in the second half, particularly into the fourth quarter. Is that the kind of thing that you have been expecting? Or, has it been maybe better than you expected, given that kind of backdrop -- (multiple speakers)?

One of the key elements there was that (indiscernible) MX technology, which was a very large effort for our driver software. And once we release that, we could release follow-on products they use the driver software. That was a typical example. LabVIEW 2 opened new doors, especially in areas like our high-frequency mixed-signal suite measurements, where we were able to add product lines in complementary products, as a result of the major product introductions.

Okay, that's all I've got, but now. Thanks.

John Enrich (ph), Franklin Capital.

Two unrelated questions, I will ask them separately. First of all, related to the patent litigation expense charge -- I am new to the story -- just so I understand, I have an apples-to-apples model. March '03 quarter, were you running that through as an ordinary expense?

In March '03, we were in the patent litigation line on our earnings release. If you're looking at the 10-K our 10-Q, it will probably be included under G&A.

Okay.

It was a $2.7 million expense. We took a separate case to trial -- a jury trial -- that we won in the first quarter of last year. This is a separate case. We are expensing this amount here in Q4, and we do not anticipate any material patent expense, at this point, for all of '04. Does that make sense?

It does. Related to this case that you are currently taking this charge -- were you expensing in the ordinary course in Q2 and Q3 --?

We were expensing modest amounts. As the numbers started to get material, we decided to take this charge at this time to cover the total cost of getting to trial.

Okay. The other question -- I know that it is an issue that is a year away -- in the United States, anyway. But, a FASB 123 question -- what would earnings have been for the year? Or what would the dollar amount have been, had you had to expense options in the year?

(indiscernible), but that will be in the 10-K when we file it.

Thank you very much.

And that is all the time we have for questions today. I would like to turn the conference back to you for any additional or closing remarks.

Thank you for taking your time to join us today. I look forward to seeing you in New York City at our investor conference on February 26th. Thank you.

That concludes today's conference call. Thank you for your participation.