National Instruments Corp (NATI) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the National Instruments Corporations' first quarter 2004 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 PM Central time today and will end at midnight Central time on May 4, 2004.

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 revenues 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 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 annual report on Form 10-K for the year ended December 31, 2003. 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.

Good afternoon and thank you for joining us. Our key points for Q1 are record revenue with 26 percent year-over-year growth, net income up 90 percent year-over-year, and strong customer acceptance of our new products.

We are pleased with our solid performance in Q1. Our aggressive R&D investments throughout the economic downturn are paying off with many new products that have been very well received by our customers. We will continue to invest with the goal of strengthening our position and expanding 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 it up for your questions.

Thank you for joining us today. We had a very strong Q1 with revenue of $125 million, up 26 percent from Q1 2003. This represents the highest quarterly revenue in NI's history, beating the previous record of $122 million in Q4.

Fully diluted earnings per share was 16 cents with net income of $12.8 million, up 90 percent from Q1 2003. The improvement in our revenue growth is a product of both the success of our new products and a recovering global industrial economy. These new products have helped fuel our growth with strong year-over-year growth in Q1 for LabVIEW, PC-based data acquisition, PXI, Compact FieldPoint, machine vision and modular instruments.

Our average order size in Q1 increased by 14 percent to approximately $2,800 from $2,450 in Q1 of '03. In Q1 last year the decrease in our average order size was greater than normal seasonal pattern. We believe that this was related to the uncertainty caused by the war in Iraq. The average order size in Q1 this year reflected a more normal seasonal pattern.

During Q1 we saw U.S. dollar year-over-year revenue growth of over 20 percent in all regions. Revenue was up 23 percent year-over-year in the Americas, up 27 percent in Europe, and up 29 percent in Asia, giving overall growth of 26 percent. In local currency terms revenue was up 7 percent in Europe and up 25 percent in Asia.

While we realize the 20 percent year-over-year foreign exchange rate benefit from the strength of the euro, that benefit is offset by year-over-year price reductions of approximately 20 percent in our euro prices. So our volume increase in Europe in Q1 approximates our U.S. dollar growth rate. The adjustment of pricing in international regions is a standard part of our strategy to avoid excessive disparity between the U.S. and international prices for our products.

Moving down the income statement, gross margins in Q1 were 75 percent, up from 74 percent in Q1 last year. As our revenues hit new record levels we saw the leverage in our model with improved gross margins. Total expenses dropped from 65 percent of revenue in Q1 2003 to 62 percent this quarter. Our R&D expenses increased by $4.7 million or 31 percent year-over-year. This reflects our continued commitment to expanding our portfolio of new products.

In Q1 we capitalized $2 million of internally developed software costs, and amortized to costs of goods sold $1.8 million of previously capitalized costs. In Q1 2003 we capitalized $4.6 million of internally developed software costs and amortized $1 million to costs of goods sold.

Sales and marketing expenses were up by 21 percent year-over-year. Following up on a record revenue in Q4 we have continued to aggressively promote our new products.

G&A expenses were up 18 percent year-over-year. The total litigation expense of $200,000 in Q1 is down significantly from the $4.1 million expense in Q4 of 2003. Q4's expense was high due to the $3.8 million charge for patent litigation expenses. This charge reflected our estimate of the expense which will be incurred to take our patent dispute with a small IB (ph) competitor to trial in early 2005.

Our operating income increased by 96 percent. And our operating margin increased to 13 percent of revenue from 8 percent in Q1 last year, demonstrating the outstanding operating leverage in our business model. Net income for the quarter was $12.8 million, up 90 percent from $6.8 million in Q1 last year.

Now turning to the balance sheet. Inventory increased by $13 million from December 2003, and inventory days increased to 149 from 134 in Q1 last year. As I stated in our conference call in January, we entered this quarter with the intent to significantly increase our inventory to compensate for the surge in volume that we have seen since October, and to put us in a good position to deal with any expansion of component lead times with out affecting our rapid delivery to our end-users. Days sales outstanding were 60 days, up from 58 days in Q1 2003. Net cash and short-term investments increased to a record of $199 million.

The Board of Directors has declared a cash dividend of 5 cents per common share payable June 1, 2004 to shareholders of record on May 11. This dividend is a 50 percent increase over our previous quarterly dividend, which was equivalent to 3.3 cents per share on a post split basis. Our results in Q1 were above our expectations, with revenue growth of 26 percent compared to our guidance of 20 percent, and earnings per share of 16 cents, at the top end of our guidance of 14 to 16 cents.

As a result of this and the continued improvement in the industrial economy, we have increased our internal revenue forecast for 2004. We have also increased our 2004 spending plans above our original budget. In our revised budget we are accelerating and increasing our investments in engineering talent for R&D, sales and marketing.

With our increased revenue forecast we're still budgeting for mid teen operating margins for 2004, which will allow NI to make significant progress towards our goal of 18 percent operating income, while providing the resources needed to help take advantage of future opportunities. As a result we are expecting revenue in Q2 to follow our normal seasonal pattern of being flat to slightly down sequentially. This would represent an increase of approximately 25 percent year-over-year.

We expect to report fully diluted earnings per share of between 15 and 16 cents, up significantly from 9 cents in Q2 of 2003. Our revenue growth compares will get tougher as we go through the second half of this year, but we are currently expecting to report record revenue and record net income for the full year. And fully diluted earnings per share of between 70 and 75 cents for 2004, up significantly from 41 cents in 2003.

As these are forward-looking statements, I must caution you that actual revenue and earnings for Q2 and 2004 could be negatively affected by numerous factors, such as any decline in the global economy, delays in new product releases, manufacturing inefficiencies, and foreign exchange fluctuations. With that I will turn it over to John Graff, VP of Marketing.

We turned in our second consecutive quarter of record revenue in Q1, delivering 26 percent year-over-year revenue growth. It is clear that our strategy of increasing our R&D investments during the economic downturn is paying off. With the improved economy our expanded sales force and strong customer acceptance of our new products, we are expecting to set another new record for revenue in 2004, as Alex just stated.

We began ramping up our sales and marketing initiatives in the second half of 2003 to promote our many new products, and we got off to a strong start in 2004. And in Q1 we had a record 3 million visits to NI.com, strong attendance and interest at trade shows and seminars, and strong growth in activity between potential customers and our sales force, which all help drive our solid growth.

Continued positive reaction to LabVIEW 7 Express led the very strong growth for LabVIEW sales in Q1. LabVIEW 7 Express has been very well received by existing customers. In addition, it is clear that LabVIEW 7 Express is also helping us achieve our strategic goal of attracting new customers that did not previously use our software. In Q1 we continued to see strong growth in unit sales of new LabVIEW development systems.

In addition to new features that clearly benefit our customers, LabVIEW 7 Express also includes underlying architectural elements that allow us to bring new products to market faster. You will continue to see this benefit demonstrated with significant new product announcements this year.

In addition to positive customer reaction, many leading industry publications have recognized LabVIEW 7 Express with prestigious awards, several of which were mentioned in our last call. Earlier this month we were very pleased to announce that LabVIEW 7 Express was selected by readers of EDM Magazine, the leading publication for engineers in electronic design, as the Innovation of the Year for Test and Measurement.

We also continued to be pleased with strong customer acceptance of our new LabVIEW PDA and LabVIEW FPGA products. LabVIEW PDA has been used in a variety of interesting new applications, including portable environmental monitoring devices, portable systems for testing heavy equipment in remote field locations, mobile engine vibration monitors installed in big rig trucks, and handheld diagnostic systems for automobiles, airplanes and more.

The most common use of LabVIEW PDA has been to simply enhance the functionality of existing systems by adding PDAs with LabVIEW to provide remote access interfaces. This allows customers to remotely monitor and control their existing systems using their handheld PDAs from anywhere at any time.

An example using LabVIEW FPGA is a customer who designs and builds analytical instruments for research in areas such as drug development and genomics. One system currently under development moves a camera at very high speeds to acquire and analyze images from large arrays of sample bins. They hit a roadblock when a control algorithm embedded inside another vendor's hardware could not meet their speed and accuracy requirements. With no prior experience with LabVIEW FPGA, they were able to configure a hardware-based LabVIEW FPGA solution in two days that allowed them to diagnose and fix the problem.

In Q1 we also continued to execute on our strategy to expand the role that LabVIEW plays in simulation and modeling. Caterpillar, for example, used PXI, LabVIEW Real-Time and our simulation interface toolkit with their existing computer models to control testing of specialized scale model robotics equipment. Using LabVIEW engineers can now select from any machine simulation model, apply any conceivable change in operating parameters, and immediately run a real world scale model test. They can now quickly test multiple design variations for a fraction of the cost of equivalent full-scale prototyping, helping them to bring new products to market faster.

In addition to very strong LabVIEW sales growth we also saw very strong year-over-year sales growth in Q1 for our PC-based data acquisition, PXI, Compact FieldPoint, machine vision and modular instrument products. We were very pleased that our price reductions for PC-based data acquisition products help drive very strong unit volume growth for those products in Q1.

We intend to continue our long tradition of bringing our customers the latest technologies, as well as the best performance at the lowest price for PC-based data acquisitions.

Sales of our PXI switching products doubled from Q1 last year. And we also saw continued strong sales of our 100 mega sample per second PXI mixed signals suite of modular instruments that we introduced last August at NI Week. We built on that momentum by recently introducing PCI versions of our 100 mega sample per second mixed signals suite to extend their functionality for use with desktop PCs. Like their PXI counterparts these new PC-based modular instruments include two digital waveform generators, a 16 bit arbitrary waveform generator, and a 14 bit high-resolution digitizer.

We believe this gives more engineers and scientists the opportunity to use world-class PC-based modular instruments in their applications, while providing a path to PXI when they need increased flexibility and scalability for larger systems.

The most significant new PXI product in Q1 was our new 2.7 GHz spector signal generator module. This new module is the latest addition to our growing RF product line, which includes our RF Vector Signal Analyzer announced at NI Week 2002, as well as our modulation and spectral measurement software toolkits for LabVIEW 7 Express.

High frequency RF applications account for a significant portion of the overall test and measurement market, with annual sales of traditional RF box instruments surpassing $1 billion. With our new PXI RF signal generator and our PXI RF analyzer we now have a matched RF product line with the ability to both generate and analyze RF signals, which gives us an entry point into the large RF market.

Our PXI RF products use a modern vector-based technology that is powerful and flexible. And with our modulation and spectral measurement software toolkits, customers can create customized, user-defined functionality that goes beyond the capabilities of traditional RF box instruments.

We now have a complete PXI-based platform that can address RF applications, ranging from surveillance and defense, broadband satellite and electromagnetic compliance testing to testing of wireless consumer devices, such as mobile phones, wireless LAN systems, satellite receivers, analog and digital television systems, remote key files for automobiles, remote control toys and more.

We have been very pleased with sales of our PXI RF products, as well as with the boost they have given to sales of our other PXI products. One of our beta testers and first customers was Professor Robert Heath, Jr., a leading researcher on Next Generation 4G wireless systems at the University of Texas at Austin.. He stated, "The NI RF vector signal generator, combined with the RF vector signal analyzer, makes a flexible platform for wireless communication system development. The capabilities of the NI platform make it exceptional for sophisticated research and testing, while the intuitive LabVIEW interface also makes it outstanding for classroom use."

We continue to have success in Q1 penetrating large system applications with more NI product content per system. This was clearly demonstrated by the increase in our average order size from $2,450 in Q1 of 2003 to $2,800 in Q1 of 2004. The strong growth of our PC-based data acquisition, PXI, Compact FieldPoint, machine vision and modular instrument products has been driven not only by our new hardware products, but also by the success customers are having using the real-time and FPGA versions of LabVIEW 7 Express to quickly build systems that are high-performance, small in size, rugged and cost-effective.

For example Viewpoint Systems, one of our alliance partners, was contracted to build a test and validation systems for a major fuel cell company. Using Compact FieldPoint and LabVIEW Real-Time they were able to provide a flexible solution with advance control algorithms that they believe would be cumbersome if not impossible to implement with traditional TLC devices. ADD Switzerland, who produces surge arresters that protect medium and high-voltage networks, recently used our PXI mixed signals suite to develop a new test system that they estimate increased their measurement accuracy by a factor of 14.

And using LabVIEW and NI hardware, Rouse Technologies successfully developed a compact mobile system for a large university in England that allows them to study driver reactions inside automobiles on actual roads for the first time, rather than relying on the large expensive driving simulators that they have been forced to use in the past.

As you know, in addition to LabVIEW 7 Express last year that we introduced new versions of our other major software products, including TestStand, LabWindows/CVI, Measurement Studio, DIAdemand MATRIXx.

I would like to mention one final success story today that highlights the benefit of having a broad portfolio of software products. As you may know, Lockheed Martin was awarded the joint strike fighter contract. A crucial part of this contract is the many test systems for use in applications from manufacturing to environmental stress screening to depot testing of more than 3,000 aircraft. To meet this challenge Lockheed Martin developed a standardized test system architecture that uses our TestStand and LabWindows/CVI software products at the core. By standardizing on NI software for this massive program, multiple suppliers, including BAE Systems, Northrop Grumman, Rockwell Collins and Raytheon can simultaneously and independently develop test program sets that work together.

Lockheed Martin estimates this approach has already saved the U.S. government millions of dollars and has the potential to save hundreds of millions more over the life of the program.

We want to thank those of you who attended our first ever New York investor conference. Our annual NI Week conference in August was a key event for launching new products and meeting with our customers and strategic partners. This year like last year we will be announcing new products and sharing more on our vision for the future of virtual instrumentation. NI Week will be held August 17 through the 19 here at Austin. Our investor Day is Wednesday, August 18th. With that I will turn it over to Dr. T.

We are pleased with our performance in the first quarter. Strong demands and world-class execution produced another quarter of record revenue and tremendous -- the tremendous operating leverage in our business model is clearly demonstrated. The industrial economy has improved, and our aggressive R&D investments throughout the economic downturn are now paying off with many new products that have been very well received by our customers.

Our expanded product offering and our solid execution have put us in the strongest position in our history. The measurement capabilities of virtual instruments today are approaching, and in many cases exceeding, those of traditional instruments with the added benefit of computer-based automation.

I believe this strong growth of LabVIEW 7 Express, PC-based data acquisition, PXI, Compact FieldPoint, machine vision and our modular instruments have increased the success and penetration of virtual instrumentation into the mainstream of measurement and automation applications. We have a large opportunity to expand our customer base, as well as to sell more to our existing customers, and successful execution is the key to taking advantage of this opportunity. We will continue to invest aggressively, especially in R&D, with the goal of continuing to strengthen our core and expand our future opportunities.

In closing, the value we can deliver to our customers today is the highest in our history. We are confident in our business, our vision, our strategy, our employees, our culture, our customers, and our future. We are committed to providing long-term value to our shareholders as we drive toward a goal of becoming $1 billion Company.

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

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

I apologize for missing this, but I was wondering if you could walk us through your operating margin discussion again? Whether you think you're going to (indiscernible) 18 percent this year for the whole year, exiting the year, and what you're going to do to spending to maybe stay there?

What I said in the call, John, is that we did exceed our expectations in the first quarter. Revenue growth is at 26 percent versus our guidance in January of 20. Earnings were at 16 cents versus our guidance of 14 to 16 in January. As a result of that, and as we have looked at our business going through, we have increased our internal revenue forecast for 2004.

And we have also decided to take a long view on the market opportunities that we have in front of us, and we have increased our expense budget for 2004 as well, primarily focused on adding engineering talent in sales, marketing and R&D. Actually over the last three months we have added about 100 people.

We are expecting to have operating margins in the mid teens this year. As regards to 2005, we will give guidance on that in January. So we're not intending to hit 18 percent for the full year. How Q4 will shake out at this point, we will wait to see. We're giving earnings guidance of 70 to 75 cents a share for the full year, as opposed to 41 cents a share for last year.

And what is your feeling about manufacturing and the correlation to your results? In other words, looking at industrial production it is at a pretty high level, but it is really kind of flattish at this point. At a high level, is that enough to drive 25 percent year-over-year growth through the rest of the year, or how sustainable do you feel things are at this level?

Well, as we said in the call we believe our revenue growth is driven really by the success of our new products, and also some benefit from a recovering economy. Industrial production in the United States in the month of March was up year-over-year only about 3 percent. So that is not knocking the ball out of the part in industrial production, but it is an improvement from a year ago.

So we're definitely focused on the things that we control, which is the success of our new products. And that is where we are committed to make our new investments. We're certainly optimistic about Q2. As you heard me say, we anticipate approximately 25 percent year-over-year growth in the second quarter. And if that comes to pass obviously that will put us at 25, a little over 25 for the first half.

So as we look for the full year we're expecting record revenue for the full year and record net income. So hopefully that helps you see out at least what we are expecting for the second quarter. We're quite optimistic for Q2.

Thank you. And without obviously telling us what they would be, give us some kind of idea of new product directions between now and NI Week. New types of hardware instruments or software packages? I'm not sure it is both, but --?

John, this is John Graff. I will start with that. As we also mentioned in the call, if you refer back last year when we introduced LabVIEW 7 Express we talked about a lot of the underlying architectural development both in LabVIEW and DAC connect driver software. We believe those architectural developments really free us up now to release a steady and increasing stream of new products. As far as commenting on exactly what they are, you know we will encourage you to come to NI Week and stay abreast of our announcements. Maybe Dr. T. can add some comments.

Well, as we said, we have continued to invest in R&D. And as John mentioned, we built a solid base of technology that we can leverage. And the available components that we're seeing available for us to develop products have certainly been continuing to come. So come to NI Week and see all the new things we will be talking about. So I think it would be fair to say they expect to see significant new product announcements between now and August 19th, the last day of NI Week.

Richard Eastman from Robert W. Baird.

Just a couple of questions. Alex, could you provide us with the percentage of your business that is traditional instrument, and how that did in the quarter?

Sure, Rick. I think you're talking about instrument control business, right?

Yes.

Okay. We are connecting traditional instrumentation to computers. That business has seen a good recovery in Q1 as it did in Q4. It didn't grow as fast as the Company overall, and it is down as a percentage of revenue from, I think, 20 percent in Q1 last year to 19 percent in Q1 this year. So it did see good strong double-digit growth.

We're very committed to providing the broadest portfolio of instrument control products at the best price. And we continue to invest quite heavily there. So we're pleased to see the return of instrument control. I think it is somewhat correlated to some of the improved results that many of the traditional instrument companies have seen. And also I think gives some support to the thesis that the recovery in the industrial economy is pretty broad-based. So we're glad to see that.

Given that we don't know the percentage exactly what this makes up of your revenue, can you just give us a sense of what your application software sales did year-over-year?

Application software had a very strong quarter. They were up in -- I guess, we could say they were higher than the Company average. So they were -- grew more than 26 percent. We're very pleased with the success of application software sales. And they increased as a percentage of revenue during the quarter. So we're very optimistic about that. As you know, our software sales are very, very strategic for us and they provide lots of future opportunity.

Okay. And then just lastly, I just wanted to touch on something that John had mentioned a bit earlier. When you track the LabVIEW 7 Express sales can you give us a sense of just what percentage of those sales are new users? Do you know that versus upgrades? Has that percentage increased?

This is John. We do track that internally, but again for competitive reasons we don't want to release that specifically. But I think as we have mentioned in past calls we kind of looked at (technical difficulty) three areas. One is upgrade revenue, which we're extremely pleased with. And then probably more importantly in coupling what Alex said about the strategic nature of software is looking at development system sales. And there we're seeing strong growth rates both into existing account, but definitely ahead of our projections in terms of new accounts. So we're definitely seeing an increase in new users.

OK, very good. Thank you.

Very encouraging for the future.

Richard Chu of SG Cowen.

First of all, just back on this whole question that of LabVIEW 7 Express momentum and the changed revamped architectural foundations. Is there any way you that you can give us a sense of how much of your Q1 revenue stream is attributable to this dynamic, which is LabVIEW 7 being revamped?

As we said in the call, we have seen a strong growth in software sales since the release of LabVIEW 7. So that is throughout the last pretty much four quarters. We do intend to continue to build on that, and we are continuing our investments in our application software products. And we will be continuing to bring out upgrades which will add more features and more architectural elements as we go forward.

In terms of trying to classify exactly what percentage of revenue is related to the fact that we did the upgrade to LabVIEW 7 versus the momentum of LabVIEW itself. I can't think of any way I could actually do that and have any hope of giving you an accurate data.

What we see is a combination of factors. I think the fact that we've had very successful hardware platforms has been a good benefit to LabVIEW. The architectural elements have been very important. And obviously a recovery economy is also very important. But to split it up between the three is very difficult. We do certainly feel however, that given the scale of the investments in LabVIEW 7 there is more momentum related to that release that is feature-based than we have seen for quite a number of years.

If I can modify the question, perhaps you can discuss whether in terms of what you have exploited already between last spring and now, versus what you might be planning to do between now and this August. Is the bulk of the moves up ahead or is it behind you?

It is a number of categories. First off, in LabVIEW itself we can approach a new set of users who are more casual users. So that is one category, and that we have seen very positive. Another category is the support of a higher end instrumentation module like a mixed signal suite which we reported very good growth and results from, but early in their lifecycles.

Another category is in the core architecture for our drivers support for our data acquisition. There we have a combination of features that are -- expand the out take opportunities we have, and simply making it easier, as John mentioned, to create additional new products.

So we intend to build on the momentum. That's our plan.

And if I can follow up on a couple of other things? You mentioned, I think you said the headcount was up already 100.

100 people since December 31. That's right.

Can you talk about how much of that is engineering and R&D oriented versus (inaudible)?

Sales and engineering would make up the majority of it. So it is going to be more focused in that direction. We're aggressively expanding our headcount in Asia-Pacific and in R&D. Those would be the two primaries that I would refer you to.

And other things, we looked at our spending plans actually in this last couple of weeks, looking at the strength we saw in Q1 which exceeded our expectations. We feel good about the decisions we're now making. We're trying to take the very long view to the business market here and really focusing on growth in '05, '06 and '07 with these incremental investments.

I think the tone of the discussion from a couple of months ago at the Analyst Day was that you had already completed a major investment cycle on the R&D side particularly?

Right.

And consequently I think from a longer intermediate perspective than the investment needs there would be probably not quite as (inaudible). Have you --?

Well, our rate of growth in R&D headcount is not -- it is much less than it was back in 2001, '02 and into early '03. But we are continuing to increase our headcount there. You know we doubled between January 1 of 2000 and the end of '03. And I don't anticipate doubling in the next three years. But we will be continuing to add resources into that area as opportunities come up.

What is interesting about the dynamic of our business is that as we penetrate into new markets more opportunities become obvious. And so as that becomes -- as that happens we wanted to -- as we have done over the history of the Company -- take advantage of those. Now we have in our New York Investor Conference we made a change in our business model to increase our long-term target of R&D spending from 14 percent of revenue to 16 percent of revenue. We were at 16 percent in the first quarter. And our goal is to keep it at that level as we go forward. That would require us obviously to increase our investment level as our revenue -- if and as our revenue increases.

Alex, you alluded to the fact that the changes in spending -- the investment plans coming on the heels of an upward revision in some sense in your expectations for business. Is the Q2 -- obviously we're not privy to your Q2 assumptions prior to this. But is the Q2 guidance that you're providing on revenues does that represent an increase versus your prior thinking?

Yes, that is definitely up quite a bit from our original budget in November.

Ajit Pai from Thomas Weisel Partners.

Two quick questions. One is on the pricing policy. You talked about reusing (ph) your pricing and trying to have a standard pricing globally. Now why do you think that is necessary to have the same pricing in North America and Europe rather than -- I have seen a number of companies have a slightly different pricing structure, depending on what the competitor dynamics in (indiscernible) markets are.

Yes, Ajit, this is John. There still is some variation in our pricing worldwide. But obviously you've got two major trends, an increase in global companies looking at global purchasing -- companies from Nokia, Phillips, Ericsson and others. The other major trend obviously is the Web. You have much greater transparency. So if you look over the last 5 to 10 years you know global pricing there has been dramatic trends. And then again and I think Alex stated this in the call. This is somewhat standard operating procedure for us in reflection to changes in exchange rates.

Just to reinforce what John said, Ajit, as the euro has moved a lot against the dollar in the last six months, that causes a big change in the relative price between the U.S. dollar price and the euro price. And just like when the dollar was strengthening quite a lot in '99 and 2000, in 2001 we were increasing our prices in Europe. And now as that reverses we're decreasing our prices in Europe. What we're trying to do is keep the differential static, not keep the price the same. Does that make sense?

Yes, it does make sense. But what I'm trying to get at is you're getting up a lot of profit when you reduce the price. Is it actually helping you win more business in those countries by being more competitive price-wise?

It is a long-term strategy and you have got to address two things. You want to avoid a lot of great marketing. And yes, we do believe that in having pricing that is relatively comparable to the U.S. is a competitive necessity over the long term.

The second question is about headcount. What was the actual headcount at the end of the quarter? And then on the same note, you know the sales and marketing uptick that you've seen over the past two quarters, is all of that headcount related, or is it also related to other marketing initiatives or sales initiatives that you're making?

The ending headcount is 3,207. And the increases is related to both. It is certainly related to an increase in headcount, especially in our Asia-Pacific business. And then also to more aggressive advertising and other efforts related to driving demand. As John said, you know it has been very successful. Not only have we had revenue growth that has far exceeded our expectations here in the first quarter, we have had tremendous interest from our -- (indiscernible) interest from our customers. Over the 3 million visits to NI.com in the first quarter. And that is without a major LabVIEW release. So that is really an outstanding level of inbound demand, inbound interest we're getting from our customers. So we want to capitalize on that.

Okay. Thank you so much and congratulations on a strong quarter.

David Yuschak from Sanders Morris Harris.

Congratulations again to you gentlemen on the quarter. A question I have got on the revenue growth, as you look at your different sales channels from Internet to systems, is there anything in particular that stands out? Because I think your average order size is down a tick from the fourth quarter and then it up nicely year-over-year?

Could you kindly review with us what those growth rates may have been in different channels?

David, it is Alex here. And I will maybe take a stab at the average order size, and then I will pass it onto John on channel issue. Our average order size seasonally pretty much always goes down in the first quarter. And that typically tends to be driven by the end of year budget phenomena in Q4. That tends to break lose more big orders as you get into December and people want to spend their budgets. Also the October fiscal year end for the U.S. government.

And so traditionally we have seen a decline in average order size from Q4 to Q1. It is much more relevant I think as a metric to look at the comparable quarter in the prior year. So I think the 14 percent increase we have seen in our average order size from Q1 of '03 to Q1 of '04 is very indicative of the success of our new hardware product platforms and the success of PXI, Compact FieldPoint, our modular instrumentation. Those are the things that are driving the average order size up, as we are able to capture more and more of our customers wallet and get a higher percentage of the application investment, if you like, coming to NI versus a variety of other vendors. I will turn to John for the channel.

I would just add a couple of things on top of that. As we see increased interest with these platform level products and our field channel label to successfully sell them the more volume, lower average order size. That inbound activity that Alex talked about is really helping drive some good success there. And that is even reflected back to the Web where we tend to see lower order size, but again high volume. And actually through our Web store we had record revenues in Q1.

One other comment channel related, our VAR and system integrator channel, we actually had record revenues through that channel in Q1. So overall pretty broad-based success through kind of all elements of our direct model that help drive the record revenue.

As far as your sales and marketing support people-wise in the channel, is it still seen pretty robust support for the systems side of it then at this point in time? Is that were most of your resources --?

We're continuing to add -- if I understand your question correctly, David, we're certainly adding to our efforts to support on the Web. But we are also adding direct field people in the territories that are growing. Certainly obviously Asia-Pacific has been very strong now for almost two years, and we want to capture that available market that is there. So it is across the board in sales and marketing, but we are continuing to invest in developing the field.

If I hear you right though a lot of that support that was coming where your greatest growth opportunities have been in like Asia, where you put most of the resources?

That's correct. The last 12 months we have put the majority of the new sales and marketing resources into Asia.

If I can just quickly add, as mentioned, the average order size was a slight tick down, basically pretty flat with Q4. But obviously that drives the record revenues. We saw some pretty good volumes, again pretty broad-based across products and across our business.

As you introduce these products, you mentioned earlier about the people count to it. Is it possible when added -- because you have the ability with your platform today to launch products, new products sooner, that because of the launch -- the proliferation of product launches -- it requires a lot more support in actual dollars because you are supporting a lot more launches, before you get the buildup to where that product becomes more mature and a more profitable product for you? Is that maybe one reason too why you get the boost in the support for those roll outs?

Yes, obviously that plays a factor. And I think we have mentioned in past calls that typically our products ramp up over one to two year type life cycle. It ranges, but it is pretty typical across the portfolio of our products. And as Alex mentioned in his section of the call, as we saw the early success with new products like the mixed signal suite, we kind of ramp up the sales and marketing initiative supporting it in accordance with that.

So I think, yes, the more emerging stars you have the more resource they take to support them in the marketplace until they become self-sustaining.

So at this point in time you have got price adjusted, but there is nothing in that new product launch that suggests that it could be longer to mature into that profitable goal?

You can't tell for sure, but some of our -- the newer products that were released have been some of the fastest ramping up products we have ever released. So there is no indication of this point that they would be any longer ramp up than we have historically seen.

And as far as your goal to get G&A down to 6 percent from 8 -- you are at 16 basically right now in R&D. What kind of time lines would you be shooting for to get down there, and what might you need to do that?

Well, if you're talking the investor conference in New York, we went from about 9 percent of revenue in G&A in 1995 down to down to about 7 percent by 1999. So it took about a four year time frame. And the Company had to a little over double in size to achieve that goal. So that is our historical frame of reference. And that is the kind of targets that we will be having.

Obviously it will be heavily dependent upon revenue growth. The faster revenue growth is the quicker it will happen. G&A as a percentage of revenue is lower in Q1 than I expected, because the revenue growth was higher than I expected. And so that will be one of the primary drivers behind it. I'm very focused on that. That is a personal goal that I have. And Dr. Truchard is nodding his head at me here. So that is something I will obviously be working hard on over the next number of years. But it won't be instantaneous.

Okay. And one more question. Your cash was down from the fourth quarter. Some of that is because of the inventory build and the receivable build because of good revenue gains. What was your capital spending in the quarter? What is it up from what you thought it might be? And what (multiple speakers) current expectations for the year.

I think you need to look at cash and short-term investment balances together, David. Actually our cash balance as I look at it, which is cash and short-term investments, is up $4 million from December to a new record of 199 million. So our cash is actually up.

Now we did have an increase in inventory. That is preemptive and I got worried about this really in October, about the availability of components. We saw a little stretching in lead times at that point. Given the impact that this had on our business in 2001, we wanted to be sure we didn't have a repeat of that if we saw a stretching of lead times. So we initiated that action in November and it took a few months for the inventory to start to come in. So I feel very good about it now that we have increased our safety stocks and it put us in a real good position. We certainly have seen lead times start to stretch out since that time.

But now we had a new record for cash and short-term investments in the quarter, despite the buildup in inventory and despite a dividend. And in terms of capital expenditures, it is in the cash-flow statement and the press release, we had about $3 million which is down slightly from the year before.

What is your plan for the year then at this point on Capex? Is it changing at all?

No, not really. The forecast we have set for the year was around about $17 million. We spent 3 million in the first quarter. And at this point I don't anticipate any change to the budget for the rest of the year.

Keep that safety stock down as far as inventories going forward, do expect then that you will want to maintain that kind of level on the days basis to --?

Over time it should come down in terms of days. We will see some modest increase between here and the end of year. Obviously traditionally we have had a very insignificant sequential lift in Q4 in terms of revenue, which tends to bring the average days down. And part of my decision to be more aggressive was based on that. I think that there could be a tremendous amount of demand for certain components in the summer time frame as we look towards -- or as many companies look towards the surge in consumer electronics purchases in the Christmas time frame. And I wanted to make sure that we were in a good position for Q4 early in the year and didn't have to join the scramble over the summer.

Is there any particular components that standout as far as where you thought you might need that kind of extra support?

Obviously the longer lead time components and that are silicon related are the bigger risk.

John Harmon from Needham & Co.

My follow-up question is, do you stand to receive a settlement from a lawsuit that you had won? Is it still on track for the fourth quarter? And is the magnitude still 5.5 million? And is that included in your guidance?

Well, we are optimistic that the appeals court will uphold our trial win. We expect that the oral arguments will be sometime over the summer. And as to how long it will take the appeals court to return a ruling, that -- really we don't have any control over that.

Right now there is about $6 million in escrow. We have not obviously taken any gain for that. In my earnings guidance of 70, 75 cents, I am excluding any gains, so I'm not assuming that that happens. It could be this year that we get a ruling from the appeals court. It could be next year. We really don't know. So to be conservative, I have eliminated that gain from my guidance.

And that is all the time we have for questions today. I will turn it over to you, Mr. Hugley, for any closing remarks.

Well, Dr. Truchard?

It is Alex here actually. Thank you for taking the time to join us again today. I'll be presenting next week on Wednesday at the Robert W. Baird 2004 growth stock conference in Chicago. I hope to see you there. And thank you for joining us.

And that concludes today's conference. Have a great day.