National Instruments Corp (NATI) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the National Instruments Corporation Second Quarter 2005 Earnings Release Conference. 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 7:00 p.m. Central time today and will end at midnight Central Time on August 2nd. With us today are Dr. James Truchard, President and Chief Executive Officer; Alex Davern, Chief Financial Officer; and John Graff Vice President of Marketing. Now for opening remarks and introductions of like to turn the conference over to Mr. David Hugley, Corporate Counsel. Please go ahead.

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, success of our new products and expanding market opportunities. We wish to caution you those statements are predictions and 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 10K for the year ended December 31, 2004 and our Form 10Q for the quarter ended March 31, 2005. These documents contain and identify important factors that could cause actual results to differ materially from those contained in 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 record revenue of 141 million, up 11% year-over-year, record revenue from new products, and year-over-year GAAP net income up 32%. We are pleased with the strong sales of our Virtual Instrumentation platform in Q2 and the penetration of our new products into new application areas including RF Communications tests, in vehicle tests and rugged industrial control. Our strong sales and marketing execution coupled with record new product revenue resulted in record revenue for the quarter. In our call today at 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 your questions. Alex?

Thank you for joining us today. We had a strong second quarter with revenue of $141 million, up 11% year-over-year and up 9% from Q1. This represents the highest quarterly revenue in NI's history, and is a very good performance given the decline that we saw in the J.P. Morgan Global Purchasing Managers Index during April and May. GAAP net income was $15 million up 32% from Q2, 2004 with fully diluted GAAP earnings per share of $0.19. Included in GAAP net income are a number of items related to acquisitions. These include a $400,000 non-cash charge to cost of goods sold and a $200,000 non-cash charge to R&D related to the amortization of acquisition related intangibles. Additionally as our patent litigation with Measurement Computing was settled on acquisition the Company reversed its remaining accrual of $1.9 million which is equivalent to $0.02 per share. This is netted with our other patent litigation expenses on the income statement. The resolution of this litigation and the addition of several additional graphical [prototyping] patents strengthens our over all IP position.

Our improved revenue growth is driven by the success of our new products, along with record revenue from our data acquisition, industrial communications, PXI and modular instruments and motion control products. Improvement in our growth was also driven by significant increase in revenue from our -- our larger orders over $20,000 which helped increase our average order size by 6% sequentially to almost $2,900, closer to the record we saw in Q4. It is likely that some of this increase in orders over $20,000 was related to pent up demand after a pause in Q1.

Our Instrument Control products which now represent 13% of revenue continue to show a year-over-year decline, falling by 16% year-over-year and by 5% sequentially. Year-over-year revenue growth for our other products was plus 16% reflecting the incr -- the success of our new products in what was a tough quarter overall for test and measurement companies. On a year-over-year basis, the acquisitions of Electronic Work Bench and Measurement Computing net of divestiture of our German System Integration Business added to $2.4 million in revenue in Q2. During Q2 we saw year-over-year revenue growth in all regions. Year-over-year revenue was up 19% in Asia, up 11% in Europe and up 8% in the Americas, giving overall growth of 11%.

Moving down the income statement, gross margins in Q2 were 74% in line with Q2 last year but down approximately 1% from Q1. The main drivers of the sequential decrease in gross margin for the addition of the lower gross margins sales from the acquisition of Measurement Computing and the amortization of $400,000 of intangibles related to acquisitions. This non-cash amortization charge will continue to appear in our GAAP financials for several years and we will be specifying the amount in future earnings calls.

Total expenses dropped from 62% of revenue in Q2, 2004 to 60% this quarter. Our R&D expenses increased by $2 million from 9% sequentially from Q1. This includes the incremental R&D costs picked up in the acquisition of Electronic Workbench and Measurement Computing as well as a $200,000 non-cash charge related to the amortization of acquisition related intangibles. In Q2 we a -- we capitalized $3.4 million of internally developed software costs, up slightly from $3 million in Q1. We expect this level of capitalization to continue through Q3. Amortization to cost of goods sold or previously capitalized software development costs was $2.1 million in Q2, up from $1.8 million in Q1. SG&A expenses for flat sequentially. Our GAAP operating income increased by 35% sequentially and represented 14% of revenue compared to 11% in Q1.

Now, turning to the balance sheet. Inventory was flat sequentially with inventory days dropping on the higher revenue level. Accounts receivable were down $2 million with our day sales outstanding falling on the higher revenue. Net cash and short-term investments were $157 million compared to $221 million on March 31st. This is net of dividends, stock repurchase and cash payments related to the acquisitions of Measurement Computing and High Perception. Head count as of June 30th was 3,632, up 119 from March 30. Excluding personnel added via acquisition personnel is up by 48 in the quarter.

During the quarter the Company paid $4 million in dividends and paid $41.5 million to repurchase 1,741,000 shares of the Company's common stock at an average price of $23.85 per share. This is equivalent to 2.2% of the Company's outstanding stock. On July 22nd, the board of directors declared a cash dividend of $0.05 per common share payable August 25th, 2005 to shareholders of record on August 8.

Now looking out to Q3. Given our typical season pattern and the impact of the recent weakness of the Euro which will have a negative effect on revenue in Q3 we're expecting revenue in Q3 to be between $135 million and $141 million. In Q3 we expect to report fully diluted earnings per share of between $0.13 and $0.17 per share. As these are forward-looking statements I must caution you that actual revenue and earnings for Q3 could be negatively affected by numerous factors such as any decline in the global economy, delays in new product releases, manufacturing inefficiencies, expense overruns, and inventory and foreign exchange fluctuations.

So in summary Q2 was a good quarter with improved revenue growth and good earnings growth. For the second half of the year we will be focused on continuing to grow the top line while managing the growth in our expenses to continue to generate operating leverage. With that, I will turn it over to John Graff a Vice President of Marketing.

Thank you Alex. We turned in a strong performance in Q2 delivering our 12th consecutive quarter of year-over-year revenue growth in a new quarterly revenue record. Sales of our Virtual Instrumentation Products were solid driven by record revenues for data acquisition, industrial communications, PXI, modular instruments and motion control products. New products which we define as those released within the past two years are a key growth driver for the Company and continue to be a strategic focus for the business as solidify our position and test and measurement and expand into newer areas and industrial automation, industrial control and embedded design. We're pleased that in Q2 the percentage of revenue from new products reached the highest point in many years, resulting in record new product revenue. This is a key metric pursuing the health and adoption of our Virtual Instrumentation Platform and validating our decision to accelerate R&D investment over the past five years. In Q2 our average order size increased to almost $2,900, as our sales force executed on closing large orders greater than $20,000, which increased by 24% sequentially from Q1. After seeing a pause in large orders in the previous quarter, we believe that a resurgence in large orders in Q2 was partly due to customer's completing their postponed orders from Q1.

In looking at key product areas, our Data Acquisition Products set a new record for revenue and units driven in part by the strong demand for our new M Series and USB data acquisition devices. We were pleased to see our year-over-year average selling price for plug-in data acquisition stabilize in Q2 as customers purchased more of our higher performance products. Our new USB products continue to see extraordinary growth, with record revenue and record units for the quarter. In our Q1 Conference call in April we outlined a plan to increase the average selling price of our USB products by releasing higher performance models. In July, we made significant progress towards this goal by releasing eight new USB products that offer higher performance and higher price points. During the coming quarters, we will continue to focus on leveraging the demand for low-cost USB products to up sell and cross sell our entire product platform as well as continue to fill out the Data Acquisition Product Line with mid-level and high-level performing products.

PXI and Modular Instruments have been two of our strongest performing product areas over the last few years and their strong growth continued in Q2. Both set new quarterly revenue records as more customers adopted software based automated test systems using modular instrument class measurement hardware. In Q2 we continued the new product output in this area by releasing several new products that further increase the performance and capabilities of PXI and Modular Instrumentation. For example, we released new to new PXI controllers that leverage the latest technology from Intel including one that delivers the industry's highest performance.

The Military Aerospace Industry has traditionally been one of the biggest consumers for automated test equipment, and we continue to see strong adoption of PXI, NI Software and Modular Instrumentation in this space. For example, the U.S. Army is using LabVIEW and Modular Instrumentation in their new ultrasonic non-destructive test system and Lockheed Martin is using -- is using PXI and LabVIEW for flight simulator model development.

NI Modular Instrumentation products also continue to be successful in communications to RF applications. In Q2 SeaSolve’s Software Solutions delivered a complete RF communications test and analysis solution based on NI hardware, labVIEW and the modulation toolkit to test compliance of Wireless' protocol such as ZigBee. As a new standards are introduced to wireless communications such as the emerging Y-Max standard engineers can take advantage of the new flexibility of NI RF hardware and software to scale to these new standards.

We're pleased to see Virtual Instrumentation become mainstream in automated tasks and are excited about its expanded use in areas that we're accustomed to using proprietary custom build hardware that resulted in long product design cycles and high development costs. For example, in the biomedical industry, Spencer Technologies, a global clinical research company, is using commercial off the shelf NI products to develop a clinical diagnosis machine for the detection of the ear canal infection. Mailee Hess, hardware engineer for Spencer technologies stated quote: Using PXI based modular instruments, we rapidly developed a specialized medical diagnostic instrument without developing custom hardware. We also debugged the system faster and gained greater insight into our processing algorithms by using labVIEW to both control the measurement hardware and analyze the resulting data. End quote.

On the software front we continued to be pleased with the success of our core LabVIEW platform following significant upgrades over the past few years where LabVIEW's abilities have expanded to include programming FPGAs, running on PDAs, and performing complex simulation and control models. In Q2 we further expanded LabVIEW as a Graphical System Design Platform by bringing the power of Graphical Programming to the Imbedded Design space with the release of the new LabVIEW Imbedded Development Module. With this new module we extend LabVIEW to any 32-bit embedded processor such as those from analog devices, Texas Instruments and free scale semiconductors. Just as LabVIEW revolutionized the test and measurement world by empowering engineers to develop custom virtual instruments rather than rely on a vendor defined-stock instruments, the LabVIEW embedded development module empowers domain experts in a wide variety of fields to use their expertise to develop and embedded code without relying on embedded programming experts. Jerry McGuire General Manager of the Media Platform and Service Group and Analog Devices said quote: The LabVIEW Embedded Development Module marks a very significant milestone in the quest to build a broad base of users with access to the latest design, development, test and measurement technologies. With the LabVIEW graphical development environment engineers are able to shorten time to market for the development and deployment of systems involving programmable components. End Quote.

In Q2 we also introduced the LabVIEW DSP Module for programming a select number of Texas Instruments DSP products. The new labVIEW DSP Module lets engineering students use the LabVIEW Graphical Development Environment for embedded signal processing applications and offers an easy to use hands on approach to learning key signal processing techniques. By using LabVIEW students can focus on the concepts and results rather than tedious implementation details and avoid programming at low level text based languages.

We continue to see success in the Industrial Control space as more customers are recognizing the benefits of LabVIEW Real-Time and our programmable automation controller platforms as a reliable and deterministic solution for developing mission critical automation and control systems. One customer, the University of Colorado replaced a control system composed entirely of PLC's with NI PXI and LabVIEW Real-Time to control one of the largest [interfuges] in the world. The old PLC based system employed a loose collection of equipment performing various functions spread out over three floors and linked together with miles of cabling. The NI system allowed all of the functionality to be localized in a tightly integrated PXI system, lowering system complexity and implementation costs while meeting the stringent environmental and determinist demands of the complex control application.

One of our key and platforms for programmable automation controllers is CompactRIO and our success with labVIEW FPGA and CompactRIO continued in Q2 as end-users and OEMs integrated it into many applications from machine control to in-vehicle data acquisition to vibration monitoring. One OEM customer, Global Electronics, a leading electronics test company in Germany used CompactRio, LabVIEW PGA and LabVIEW Real-time to create a portable measuring unit for on board vehicle analysis and diagnostics. They use these products to create a rugged hand-held data recorder for use in the lab, environmental chambers, wind tunnels and on proving grounds. With CompactRIO Global was able to create highly customized algorithms in the FPGA delivering to their customers a user defined measurement system.

To meet the growing needs of our customers using CompactRIO and Industrial Control Applications, we recently released six new CompactRIO modules. One of these modules, and high-speed CAN interface allows CompactRIO to communicate with many of the automotive sub systems that use the standard CAN protocol delivering the highest performance in-vehicle measurement and control platform on the market. In addition, many third-party companies have developed specific custom modules for the CompactRIO platform bringing the total number of modules released since its introduction last August to 38.

We're very pleased with our academic efforts and in Q2 saw strong sales growth to academic institutions worldwide. We believe that exposing future scientists and engineers to our products is critical to the long-term growth of the Company. An example of the adoption of NI products in academic was the widespread use of NI Hardware and Software at the recent GM sponsored Challenge X Competition where students from top engineering universities unveiled their designs for more environmentally friendly sport utility vehicles. We encourage you to come to NI Week this year and see how students are learning what LabVIEW and how NI products are being used for academic research.

In summary, we're pleased with continued strong adoption of our core Virtual Instrumentation Software and Hardware Products and our record revenue performance in Q2. We will continue to execute on the success of our new products and our focus throughout the Company to achieve our business growth goals both short-term and long-term. We'd like to remind you that our 11th Annual NI Week Conference is only three weeks away and is a key event for launching new products and meeting with our customers and strategic partners. Please note that our Investor Conferences Tuesday, August 16, which is the first day of NI Week when we will demonstrate new products that expand our market opportunity and strengthen our core. The event will kick off with a keynote address by Tim Dehne, Senior Vice President of Research and Development. Dr. Truchard and other Senior Management will then discuss the opportunities created by our new products and our expanding vision for Virtual Instrumentation. We look forward to seeing you there.

With that I will turn it over to Doctor T.

Thank you John. While we are pleased to turn in our 12th consecutive quarter of year-over-year growth, we're still focused on reaching or business goal of 20% revenue growth. As Alex and John highlighted, we saw a sequential increase in our average order size in Q2 as a result of larger than normal sequential increase in large system level orders resulting in record revenue for Q2. Although we believe that some of these orders were delayed from Q1, there was significant adoption and excitement in our new products in Q2 that we believe will translate in the continued product success going forward.

Over the past several years we have expanded R&D development and as a result, in Q2, new product revenue accounted for the largest percentage of revenue and many years. For example, we had record revenue for Data Acquisition fueled by strong sales of our new M Series and USB products. As well as record sales of PXI and Modular Instruments where we've continued to introduce many new products. Our hardware platforms including PXI and CompactRIO provide a means to prototype a system very quickly and offer and easily migration path to move directly into production, thereby eliminating costly time-consuming work for bringing a product to market. Just as a LabVIEW revolutionized the test and measurement world with system designed for instrumentation, PXI, CompactRio and LabVIEW offer a complete system design platform for industrial control and embedded design. With this approach, were the drivers, the IO choices, real-time, and LabVIEW capabilities, FPGA capabilities, and IP component reuse are all available in one platform, engineers can rapidly prototype their applications.

We are also very excited about LabVIEW's prospect as a tool for users to do fully custom embedded design using their choice of operating system and processor. Engineers can now use LabVIEW's intuitive graphical programming environment to program any 32-bit embedded processor throughout the whole system design process from algorithm design, to simulation, to prototyping and finally to deployment.

At NI Week this year we will further expand our future potential of graphical system design for embedded development in addition to our growing opportunity in test and industrial control. We have a record number of exhibitors this year including involvement of key leading semi-conductor manufacturers such as Analog Devices, Freescale Semiconductors, eziLink, Intel, and National Semiconductor. We are pleased to see registration running 20% ahead of last year. We look forward to seeing you there.

In summary, we're pleased with record revenue from new products as well as a strong return to growth of large orders in Q2. While we believe that investment in new products and the emerging markets are paying off with growth that is out pacing the industry, we have more work ahead of us to reach our business goal of 20% revenue growth and become a billion dollar company by 2008. I am pleased that R&D has delivered innovative products and that sales and marketing have executed in selling these revolutionary new products to our customers. We look forward to a second half of 2005 as we focus on increasing our revenue growth while positioning the Company for long-term success. Thank you for taking your -- your time to join us today. We will now take your questions.

[ OPERATOR INSTRUCTIONS ] John Harmon, Needham & Company.

Good afternoon.

How are you?

Alex I was wondering if you could make an attempt to explain the psychology of your customers? When we go back three months to your Q1 call it sounded like your customers were -- were in a highly panicked state about the price of oil and rising interest rates and here we are three months later and you beat your guidance by a wide margin and you were talking about pent-up demand left over from Q1.

Maybe we should ask Tom Cruise, but I think as we look at -- at the psychology, it's -- it's an interesting question. You know one thing I've noticed over the years and I don't want -- but I've seen that over time as information becomes more and more easily acceptable business tends to respond at the same time to the same things. And so what we did see was a definite pause in our weakness in large orders as we talked about in April, especially in March, and we saw that really start to free up as we went to May and June. We did see the Global PMI as you're aware continue to decline all the way to the first quarter and declined again in April and then again in May, and did recover and show its first uptick in a year in June. So the combination of that, I think which gave people some confidence that we were restarting potentially to see a bottom in the industrial economy coupled with the success of some significant opportunities on a product area, really is what -- what drove up the larger orders.

The other thing I would say this that I think we are starting to understand how the future patterns of our business will look as our large order size -- as our order size increases over time. And I think there was potentially -- we see the emergence of a pattern for larger orders will be weaker in Q1, once we get past the fiscal year end and the budget spending at the end of Q4. And that pattern as I said in the call in April was probably a muted in 2004 because of the very high PMI and was probably a little bit exacerbated in 2005 because of the falling PMI. So I think my gut feel is looking forward into '06 and '07 it's likely that we will probably see a sequential drop in a larger orders from Q4 to Q1 as a more normal part of our business pattern going forward with some recovery in the second quarter.

Thanks. It took a second but I got the Tom Cruise a joke. This is a logical follow-up, then. In the Q1 call you talked about slowing the growth rate of hiring to -- to re -- reduce the rate of expense growth, are -- are expense growth rate reductions still on the table or can you go back to business as usual?

Well we -- well we fell behind our original revenue budget in the first quarter and we reset our revenue budget at a lower level for the rest of the year. We have made up some of that ground in Q2 and we exceeded our revised budget in Q2 in the top line, but we've made a decision until we catch up to [inaudible] we're going to stay on the revised spending level. So we're going to operate in Q3 in the same kind of spending pattern and plan that we had set in for Q2. Looking into Q3, obviously we've guided to sequential down revenue and there's a couple of things given me a more conservative bent there. One is we do expect that given the weakness of the Euro during Q2 as [inaudible] in Q3 to see about a $3 million sequential decline in revenue related to just the exchange rate shift during Q2. And that plus the fact that we've only had one up month in the PMI, those of the two things that are giving me a little bit continuing conservative bent as we go into Q3. Now we do obviously expect to see a good year-over-year growth in Q3 and I think we're very much on track for a record year in 2005. But those two things are making me a little conservative going into Q3 and I'll be waiting for things to develop as we go through the quarter.

Thanks. And finally you said acquisitions and everything added together were 2.4 million? Well we -- the two acquisition, one in Q1 and one in Q2 and we divested ourselves of our German System Integration Company effective January 1, and when you net the effect of the acquisitions and divestitures it added 2.4 million to revenue and Q2. Okay and that's a figure we can -- we can pretty much go with for Q3 and Q4?

I don't anticipate any significant differentials. That's correct.

Thank you.

Richard Eastman, Robert W. Baird.

Yes. Good afternoon. Can I just, I guess just dig a little bit deeper into that -- the latest set of comments that you had on sales. You know, when I -- when I look at the quarter and I pull out FX and pull out the net effect of the 2.4 million from MCC and Electronic Workbench, I'm coming up with the local currency growth rate of about 3%, and I guess I don't see that you necessarily beat guidance by a wide margin. How do you -- how do you reconcile that? Is that about right from a local currency core growth rate?

I wouldn't look at it that way at all, Rick, to be honest with you. Our exchange rates from Q2 to -- from Q1 to Q2 sequentially were very consistent, so there's no real differential exchange rates from Q1 to Q2. And as we've talked on the call before we just --.

Well I'm just looking year-over-year.

Sure and I'm getting to that. We adjust our pricing into local currencies based on a change in exchange rates as we move through the year. So when we saw a shift in exchange rates in Europe last year we were dropping pricing, and so we view the low currency growth rate as not being very meaningful in terms of understanding the business. The reality in terms of increase in unit volume and in terms of revenue is reflected in the U.S. dollar growth rate number. And obviously we gave guidance at the end of Q1 based on our revenue growth through Q1 and exchange rates we saw in Q2 where exactly what we anticipated we would see in April. So relative to the guidance we gave I think it's clear we significantly beat that on the upside of revenue.

So you're -- so you look at your unit volume growth -- well, it's going to be -- it's going to be the 10.8% [call] the 11% less.

Less the 2.4 million.

Yes less, okay, less the two -- the 2% from acquisitions. And then your unit volume growth is going to be in excess of that number, correct? Because we still have some pricing -- .

Yes. Given the lower SP we've seen in [DAC] it's [absolutely] true. I think the other point that I would -- I would make as we look at this, that I think is very important for investors to understand is that we had Instrument Control business down 16% year-over-year. We had a very strong peak in Instrument Control in Q2 last year as the Semiconductor Business was quite strong. And excluding that we were up 16% in the rest of our business. And that I think is the key point that -- that should be understood by investors as they -- as they look to examine our performance here in Q2.

And then in -- then should we as we move into Q3, the FX impact that you expect in Q3 as a minus three million, and you're doing that sequentially?

We are doing that sequentially, that's correct.

Okay. Alright. And then just a last comment. Could you just give a -- maybe a thought or two? You know one of the numbers that we talk to is, again this PMI index, and obviously when you look at how it correlates to your sales, it looks like the Global PMI needs to be in the very high 50s, plus perhaps getting some currency benefit for -- for NI sales to be up at the 20% mark?

Well let me take the second part of the question a first. I think the currency benefit is pretty irrelevant frankly because we adjust pricing as we go, so I think I wouldn't look to that as an issue. It's not something we factor on as we look at how we run the business. In terms of the PMI, what's important for us is to stools of our growth, one is revenue from the expansion of the overall market which is really driven I think by the PMI, and the other is revenue growth from the expansion of our available market within -- in our market share within our serve market which is really driven by new product growth. At 16% revenue growth excluding the Instrument Control space when the PMI, you know, for the quarter I think was around 51 or 51.5, that gives me confidence that once we get past the issue with Instrument Control especially in our Semiconductor Test Business and see that have an easier comparison the second half, that we will have a lot less headwind as we look forward. So the key for us is continuing to increase our revenue from new products and I believe if we can execute on that part of our strategy I believe we will be able to see 20% revenue growth somewhere when the PMI is in the mid 50s. So I don't think the high 50s is a requirement for us to hit 20% if we execute on our new product strategy.

When the new product --

I think the FX piece is really -- it's pretty irrelevant.

Okay, thank you.

Thanks, Rick.

Ajit Pai, Thomas Weisel Partners.

Good evening and congratulations on a solid quarter. A couple of quick questions. The first is you talked about the net for the revenues from the acquisition being about 2.4 million, but can you give us color as to how much was the general contribution and how much actually came from Measurement Computing before I move on can I follow on?

We decided for competitive reasons and pricing reasons, Ajit, that we don't really want to break out the revenue by the various different acquisitions. None of them is individually material and so we're -- we're going to -- I think to view the net effect at what is most important for investors.

Right the other two you already talked about and Measurement Computing is the only one that is incremental. So just in terms of -- if you don't want to talk about the other two that's fine but can you give some color as to the incremental revenues from Measurement Computing?

Like I said, we -- we haven't disclosed the financials for that business and we don't intend to at this point in time.

Okay. The second thing is that the integration with Measurement Computing can you give us some color as to how that's going? Because even if you go to the Measurement Computing site today they still talk about selling their products at -- if you go -- the only difference is the price and they're selling the products for a 40% discount to what National Instrument sells their PCI products for. So can you give us some color as to when that integration get complete? When do you have Measurement Computing Products being National Instruments brand of products? And do you intend to keep the -- that of a lower line -- lower-cost line to penetrate other markets?

Sure as we go forward we'll be working on this transition over the next six months and the results of early transition have donned really [inaudible] we're very pleased with it. Our intent is to retain the Measurement Computing brand. And we will continue to have Measurement Computing branded products and continue to serve their customers with the existing products that are in the portfolio today. We will be working very hard on leveraging some of the key strengths of NI which are technology availability at a scale of our operations, our pricing power when it comes to the availability of components and leveraging our manufacturing operations in Eastern Europe to drive it down the cost of goods sold for Measurement Computing, improve their gross margins and significantly improve their profitability over time. We do intend, however, as many companies do, we will maintain Measurement Computing as a separate brand that will be -- have a -- I think an important role to play for National Instruments in our portfolio of brands as we go forward. We have done this in the past with other small acquisitions like Capital Equipment Corporation, Electronic Workbench, and then we will leverage their market position over time as it fits into our longer term product strategy.

And when you look at Measurement Computing can give us some idea of the percentage of their product that overlaps with National Instrument's products?

There's a significant percentage. It's certainly well over 50% that would have some form of overlap. We felt that the time we did the acquisition in the past at the only difference is the price was perhaps not how we would review the marketing strategy.

Okay.

But nonetheless Measurement Computing has built up in market position over many years. We certainly are -- are very happy to be doing business with their customers. And we intend to keep a set of very satisfied customers in the Measurement Computing customers.

And you're relatively confident that Measurement Computing as a set of lower end lower price brand would be able to check all the other competitors that are trying to compete with you in that segment?

We certainly feel with the incremental benefit that we can bring to bear in lower costs that Measurement Competing as a brand with its market position will be more competitive going forward.

Okay. Thank you so much.

[Cowen Camp], SG Cowen.

Hi, yes. This is actually Cowen Camp with SG Cowen. Just had a quick question for you. In terms of Measurement Computing, can you talk about your gross margins in that business and how different it is from what you're selling?

Yes our gross margins are 75% or so and the Measurement Computing gross margins are somewhere around 15 points below that. We will be continuing to work over the next six to nine months improving the gross margins at Measurement Computing via cost reductions because we tend to get better pricing as a much bigger consumer of components. And then also we will be leveraging our operational strengths to improve their gross margins over time, so we would anticipate narrowing that gap over the course of the next six to nine months.

Okay. And can you talk about your performance in Japan this quarter? Last quarter it was down 9%, just want to see what happened this quarter.

Sure last year we did see -- last quarter -- excuse me, we did see a large high single digit decline in Japan. We saw significant improvement in the operational execution of Japanese brands in Q2. They returned to growth year-over-year in Q2 and obviously we saw our overall Asian business grow almost 20% in the second quarter significantly helped by an improved performance in Japan. We seem to be seeing a little bit more optimism there. We're seeing good success of our newer products in Japan as well which be viewed as encouraging.

Okay. Do you feel that there were larger orders there were pushed back from Q1 at to Q2?

When we talk about a -- an apparent pause it's really anecdotal, I don't have any hard evidence to just point on quantify that. But we've seen an unusually significant increase in large orders between Q1 and Q2 which would be indicative that there was some pause that led to a little bit of catch-up in the second quarter as people felt that the industrial economy was probably bottoming. I think that was especially true in probably May and June.

Okay. Can you talk about DAP ESOPs. I know they've been coming down to [inaudible] growing is that trend still continuing at?

Cowan, this is John. As we mentioned in the call the -- we're really pleased to see our of plug-in ASPs, plug-in data acquisitions stabilize in Q2. So one now, as we go into Q3 we'll be lapping the introduction of the M Series Modules and as we've also mentioned past calls, we've been filling out the product line. We introduced some higher end models that are part of the M Series family that have higher performance, higher -- higher channel count. So we are pleased to see the stabilization. USB, there, we're seeing a significant volume growth. It's really a tremendous and with -- while the average selling price there is -- is a lower, we're really seeing a strong adoption into new accounts, so it's helping take Data Acquisition to new customers and new applications that we hadn't reached before.

Thank you.

David Yuschak , Sanders Morris Harris.

Good quarter, guys.

How are you?

Alright. Hey question for you. On the large orders could you give us an idea as to what percentage of revenue that may represent as far as may be a high, low for you guys and how that might fit into what you're seeing today?

Sure Dave. We're certainly seeing orders over 20 grand significantly increase over the last number of years. In terms of specific high, low data of course we can talk off line later, I don't have it right in front of me but it is now a significant part of our business. We can maybe get some specifics offline.

And then as far as the ability to get to the billion dollars in by 2008, doesn't the large orders have to play a part in that and how would then the new products which you are introducing fit in to the potential for wrapping up the 20,000 plus orders to get you to that?

Sure. A large orders are absolutely a critical part of our product strategy going forward and I think continuing to see significant growth in the revenue and total dollars and probably in the percent of revenue coming from those large orders is critical to our execution on that billion dollar plan. As we look forward, new products are very, very key to that. Modular Instrumentation, PXI, CompactRIO, and the extensive expansion of the capabilities of LabVIEW have been very, very key to allowing us to penetrate into new larger system sales. Examples are product areas like RF where we're seeing a significant -- and your average order size there is significantly higher than our traditional average. So that -- that is very important. We're also scaling our sales force and our capabilities in terms of support, ectcetera, to be able to support and deliver the level of customer service needed to be able to a close on those larger orders as we go forward.

So you're kind of saying the new product areas will then -- has lent significant support to the potential to get you to the 20,000 plus. Is there anything going on a go forward basis that you also need to put into place other than just to continue to roll out new products on an -- on a ongoing basis to -- ?

Well we will -- in terms of execution of large orders, we will obviously continue to evolve as a Company between here and a billion dollars. And we will see evolution both in our marketing operations and in our sales operations as we continue to evolve to service those accounts. So there will be changes to our business practice as we go forward. I would also add that only are we focused on delivering higher end products, and system level products that move up our average order size. We're also very focused on maintaining our very strong position at the low end. And USB Data Acquisition is a very good example of that so we are getting a large volume of small orders from the new USB introduction of the M Series which is somewhat slowing the growth of our average order size. But as John said is really opening up new applications both in hardware and opening up new potential customers and software as well.

Yes, this is Jim Truchard. We're also seeing real good acceptance of our new [SeeReal] platform for OEM. So obviously catering to these OEM will be important as we go forward and looking at our [labors] marketing and selling.

The OEM has not -- has not been that significant of late has it?

Historically we have had OEMs, for example, a large test vendors use our Instrument Control products with OEM and this does represent new opportunity for us.

And then one final question. On the quarter did it -- a lot of your growth, in late in the quarter, Alex is you may be indicated within PMI [pick up postscript] of late?

Well what I can tell you is June -- June was certainly our strongest month for bookings and I think there was some correlation to that with the PMI but we did see overall April and May were also quite a bit better than Q1.

Okay. Thanks a lot.

Bruce [Harep, Trademark].

Hi. Just a couple of quick questions. The first one is -- is my understanding correct that is the U.S. dollar declines, say against the Euro, that you turn around and pass that decline on in your Euro pricing?

Our strategy Bruce, has been to set pricing in Europe and and other countries at a -- at a certain level, based on the dollar rate at that time. And then as the dollar moves plus or minus 5% from that -- that set level we will adjust pricing up or down. So we don't adjust pricing for a 1% or 2% move because to want to keep our marketing message and keep the friction in the system to a low level, but once we move outside a certain standard deviation which typically we look at a 5%, Then we will adjust pricing at that time.

And your customers understand that and expect that, so if -- ?

It's pretty standard in the market.

In the whole industry? Okay. If the U.S. dollar, heaven forbid, goes up then you'll actually be able to pass through price increases.

That's what we've done typically in the past.

My second question is regarding Industrial Automation as a percentage of your total sales. I know it is hard for you to get at that but can you give us an estimate as to how meaningful that has become?

This is a John. I understand the question and we're asked it often but it truly is a difficult for us to quantify in a number of just due to the fact that key platform products like LabVIEW, LabVIEW realtime, PXI can be sold everywhere for research to test to Industrial Automation Applications. So we have to go more by qualitative data in terms of the application, the success stories we hear. We are seeing an increase in definitely seeing growth and penetration in Industrial Control, Industrial Automation Applications. Certain platforms like CompactRIO -- and Compact RIO -- Compact RIO and Compact FillPoint have it really tailored themselves to more industrial applications and we've seen tremendous success and growth with those. Again, it's hard for us to quantify it to a number but we do feel good about our growing penetration in those growing applications.

And a lot of that , just to follow on what John said, a lot of the success there is in areas that might not be considered traditional and maybe factory automation or more in tune towards machine automation type applications.

Correct. Okay. But it's fair to assume that that is still much larger -- much smaller than your test and measurement sales?

Smaller but growing.

But -- so much smaller but growing, and also if you look at the whole market it's clearly substantially larger than customer measurement?

Exactly. Much broader and larger set total available market. So significant opportunity in just to build on Alex's comment, in machines alone the variety and number of unique machines out there we've highlighted some successes in the past few quarters, that's a significant opportunity for us and our new platforms it really well into those applications.

We will be sharing more ideas on how we are approaching that market and our successes at NI Week.

Okay. Alright. Thank you very much.

Dick Davis, Richard W. Davis and Company.

Thank you. My question was answered just previous to mine.

Thanks, Dick. Okay. Is that the last question, operator?

Yes.

I did want to follow-up on Dave Yuschak's question of orders over 20K, now approximately account for about 30% of our revenue. Thank you for your time today if you have any questions concerning registration for the Investor Day an NI Week please contact investor relations. Thanks very much.

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