National Instruments Corp (NATI) 2005 Q3 法說會逐字稿

Please standby. Good day, everyone and welcome to the National Instruments Corporation Third 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 PM Central time today, and will end at midnight Central Time on October 31, 2005.

With us today are Dr. James Truchard, President and Chief Executive Officer; Alex Davern, Chief Financial Officer; and Tim Dehne, Senior Vice President of R&D.

For opening remarks and introductions, I would like to now turn the conference over to Mr. David Hugley, Corporate Counsel. Please go ahead, sir.

Good afternoon. During the course of this conference call, we shall make forward-looking statements regarding the future financial performance of the Company including statements regarding our expected revenue and earnings per share, future release and success of our new products, growing revenues and generating operating leverage. 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, 2004, and our Form 10-Q for the quarter ended June 30, 2005. 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 President and CEO of National Instruments Corporation, Dr. James Truchard.

Good afternoon and thank you for joining us. Our key points today are record quarterly revenue, up 13% year-over-year. Net income increased 81% year-over-year, and record sales of PXI and modular instruments. We turned in a solid performance in Q3 in all regions with strong growth of our virtual instrumentation products across a diverse set of applications.

In our call today, Alex Davern, our CFO will review our financials. Since John Graff is away on business Tim Dehne, our Senior Vice President of Research and Development, 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 third quarter with record quarterly revenue of $142 million, up $16 million or 13% from Q3 last year. GAAP net income was $14.4 million, with fully diluted GAAP earnings per share of $0.18, up from $0.10 in Q3 2004. Net margin was 10% compared to 6% in Q3 of last year.

During Q3, we saw year-over-year revenue growth in all regions, with revenue up 15% in Asia, up 6% in Europe, and up 16% in the Americas. Our improved revenue growth was driven by the success of our new products, especially in data acquisition, distributed I/O, PXI and modular instruments. Our instrument control products, which now only represent 12% of revenue, continued to show weakness, falling by 11% year-over-year and 14 -- excuse me -- by 4% sequentially.

Excluding our instrument control products, our year-over-year growth would have been 17%. On a year-over-year basis, the acquisitions of Electronic Work Bench and of Measurement Computing net of divestiture of our German System Integration Business, added to $3.9 million in revenue in Q3.

Moving down the income statement, gross margins in Q3 were 73.2%, up from 72.7% in Q3 last year. Gross margins were down from 73.9% in Q2. The primary reason for this decline was a negative sequential impact of the weakness of the Euro, which we discussed in our last call. This reduced our gross margins by 50 basis points sequentially. Included in cost of goods sold is the amortization $500,000 of intangibles related to acquisitions.

Total expenses dropped from 65% of revenue in Q3 2004 to 60% this quarter. Our R&D expenses were $21 million, down by 4% from Q3 2004. In Q3, we capitalized $4.4 million of internally develop software costs, up from $800,000 in Q3 2004. We expect the level capitalization to drop significantly in Q4 as a result of the release of LabVIEW8 in October. Amortization to cost of goods sold of previously capitalized software development costs sold was $1.8 million in Q3.

Sales and marketing expenses were $53 million in Q3, up 14% from Q3 last year. G&A expenses were $11.4 million, up 10% year-over-year. Patent litigation expenses were down from $2.6 million in Q3 2004 to $125,000 in Q3, 2005. Our GAAP operating income increased by 83% year-over-year and represented 13% of revenue compared to 8% in Q3 last year.

Now, turning to the balance sheet, inventory was down $1.3 million sequentially and accounts receivable were down $500,000. Net cash and short-term investments were $181 million, up $24 million from June 30th. Headcount as of September 30 was 3,707, up 75 from June 30. During the quarter, the company paid $4 million in dividends, and on October 21 the board of directors declared a cash dividend of $0.05 per common share, payable November 28, 2005 to shareholders of record on November 7.

Now, looking at Q4, although the JP Morgan Global Purchasing Managers Index showed some improvement in September, we remain concerned about the economic environment, with rising interest rates and higher oil prices and with US industrial production in September suffering its largest drop in 23 years, we remain cautious. Given our historical seasonal pattern, we are expecting record revenue in Q4 of between $152 million and $157 million, which equates to a year-over-year revenue growth rate of between 11% and 15% for the quarter.

In Q4, we expect to report fully diluted earnings per share of between $0.20 and $0.24 per share. As these are forward-looking statements, I must caution you that actual revenue and earnings for Q4, 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, Q3 was a good quarter with improved revenue growth and good earnings growth. For the rest of the year and into 2006, we will be focused on continuing to grow the topline, while managing the growth in our expenses to continue to generate operating leverage. I will be presenting at the Bear Stearns Conference in New York on November 8th, and I hope to see you there.

With that, I will turn it over to Tim Dehne, Senior Vice President of R&D

Thank you, Alex. As Alex said, we turned in record quarterly revenue in Q3 and our 13th consecutive quarter of year-over-year revenue growth. We saw strong growth of virtual instrumentation products across the diverse set of applications. In particular, we were pleased with the record sales of our strategic PXI and modulate instrument platforms, and continued strong year-over- year revenue growth from new products released in the last eight quarters.

Our 11th Annual NI Week conference in August was a success with over 2,400 attendees, a 23% increase over last year. With a record number of attendees from over 40 countries, NI Week demonstrated the growth and adoption of virtual instrumentation across test, control and design. One particular area of success at NI Week was the Specialized Summit Expos and technical track, that attracted key experts from academia and companies in diverse areas, such as RF and wireless, and signal processing and control design.

Those of you who attended our annual investor conference, where we outlined our key growth drivers and our strategic and financial objectives, saw firsthand the energy and excitement among our customers and partners. We thank you for coming. In Q3, we sustain the success we saw with new product revenue that we discussed last quarter.

For the second quarter in a row, the contribution of new products to overall revenue continued at levels not seen in many years. We continue to see strong year-over-year growth in new products, including M Series data acquisition devices, CompactRIO Industrial platform, and RF instrumentation products. Our USB data acquisition products continue to perform well as many new customers have adopted these low cost measurement devices. We continue to fill out our USB product family with the addition of eight new devices in the early Q3.

National Instruments had a long history of leveraging commercial technologies to further improve the capacities of virtual instrumentation. One of the latest PC advancements is the high-speed bus known as PCI Express, an exciting next-generation technology developed by Intel and other PC component vendors, that delivers an order of magnitude plus speed improvement over current generation bus.

During NI Week, we released the industry's first PCI Express data acquisition products and the PXI system alliance, the multi-vendor organization that maintains the PXI specification announced and approved the PCI Express specification. This new specification will allow higher performance PXI modules to take advantage of the dedicated high-speed Bandwidth of PCI Express technology, while maintaining compatibility with today's PXI systems and modules.

We expect the release the first PXI Express product next year, furthering the growth and penetration of PXI into higher frequency and higher channel count applications. We are very pleased with the strong adoption of our PXI and modular instruments platforms, as customers adopted our PC based approach for test in a wide range of applications from biomedical to automotive to consumer electronics.

For example, Microsoft is using LabVIEW PXI in modular instructions to test the controllers on the next-generation game console, the Xbox 360. Rob Walker, Development Manager for Microsoft X box accessories stated, "National Instruments hardware and software gives us both the performance and flexibility that is critical in meeting our time to market demand for the upcoming Xbox 360. With an industry standard platform based on Microsoft Windows, PXI and NI LabVIEW, we developed a high-performance, low-cost test solution that resulted in a 50% reduction in our all test time." End quote.

A very important component of automated test is switching, which can often account for significant portion of the total test system part. In Q3, we released four new high-frequency RF PXI switch modules that increased bandwidth and increased flexibility for modular communication test systems. These RF switch module add to the extensive family of switch devices offered by NI. And when combined with NI's modular instruments and switch executive software, can form the building blocks of functional test systems, in circuit testers, or manufacturing defect analyzers.

In Q3, we saw success in RF and wireless applications, as customers recognized the lower cost and higher performance of modular instruments. One customer, Huari Telecom, a major developer and manufacturer in China of RF navigation equipment selected NI, PXI, RF products for $0.5 million wireless applications.

Jingyou Mo, President of Huari Telecom stated, "We significantly improved the functionality and performance of our radio monitor and directional finding systems by using NI's models and the PXI platform. Because our new system uses an open software defined radio platform, we can outperform standard and customer measurements that previously required several dedicated standalone instruments. In addition, we can also make system updates to meet the future needs of wireless standards, which is critical as wireless standards rapidly change".

Time to market and increased design complexity continue to be two of the top challenges faced by our customers. And virtual instrumentation continues to bring productivity gains to engineers during the new product design process. For example, earlier this year, we expanded the LabVIEW platform by releasing the LabVIEW embedded development module, which led to design engineers use LabVIEW's graphical programming with any an 32-bit processor.

At NI Week, NI and Analog Devices announced the public beta of the LabVIEW embedded module for the black bin processors. That delivers an integrated, plug and play embedded programming experience. LabVIEW as a graphical system design to, removes to the low-level complexity to give engineers an intuitive view of the entire system, helping them rapidly prototype and deploy to black bin base systems.

We're pleased with the early response and will be working closely with the beta customers and early adopters to refine and enhance this exciting technology. Our industrial CompactRIO platform continue to be strong adoption in Q3, as more early adopters realized the flexibility and performance of CompactRIO and LabVIEW FPGA. But using the CompactRIO platform with LabVIEW, the customers can design their system in LabVIEW, prototype their design on CompactRIO hardware, and then deploy the final system on CompactRIO, PXI, or even custom hardware, if needed without major rewrites of their code.

For example Boston Engineering, and Engineering Services Company, use CompactRIO and LabVIEW to design and prototype a digital printing kiosk that operate at a 10 times of speed of competing kiosk. Erik Goethert, Technical lead at Boston Engineering stated, "We turned to the CompactRIO system to enable us to prototype the design and get our control system up and running quickly for a more intelligent design. CompactRIO gave us the flexibility to be able to customize our controller and validate our design. With CompactRIO and LabVIEW we were able to prove that these ability our design to our customers and ourselves".

While working on these LabVIEW embedded innovations, we were simultaneously finishing the development of LabVIEW8, a significant effort that actually began in 2001. LabVIEW8, which we announced on October 3rd, has over 100 new features, including new Express technology for increased ease of use, professional project-based development for large scale applications, and new distributed system design tools for managing the development of processes running across multiple systems.

Building on success of Express technology, first introduced with LabVIEW7, which attracted many new users to virtual instrumentation, LabVIEW8 includes new Express technology for simplifying instrument control and data acquisition. For example, with the new LabVIEW instrument finder, engineers and scientist can now automatically recognize connected instruments and search, download and install the appropriate driver from the more than 4,000 available on our website.

Just as you can easily add a printer to your PC set up, this completely automated process eliminates tedious manual configuration and setup time, significantly reducing the time to first measurement. LabVIEW is also being used in large scale development where teams of programmers are leveraging the inherent productivity of graphical programming to develop large systems.

LabVIEW8 adds new features that greatly assist with these large developments, including the new LabVIEW project that streamlines applications and system management with tools that help manage all the files in a large application, in addition to simplifying the challenges of team software development.

Rick Bluestein (ph), Senior Software engineer at General Dynamics stated, "With the LabVIEW project, I can organize and manage all of my LabVIEW8 and all other files within a single view, the result to streamline development that makes creating a large-scale application easier than ever." Anticipating the trend towards more pervasive and distributed computing, LabVIEW8 dramatically simplifies the development of distributed systems with distributed Intelligence, a powerful suite of new capabilities that usually design, distribute and synchronize intelligent devices and systems.

The new flexible communication tools present a scalable interface for communication and synchronization between remote intelligent devices and systems, such as real-time processes and FPGAs. With LabVIEW8, users can program multiple processors and devices and integrate them into a single, real-time distributed system. Although we're just a few weeks into this, we're very pleased with the initial interest in LabVIEW8. In fact, if you do a Google search on the term LabVIEW8, you'll find over 275,000 hits, a testament to the broad reaching impact of LabVIEW.

We will continue to launch momentum with a series of user events and technical symposiums in 84 cities worldwide over the next three months, to demonstrate the power and growing capabilities of LabVIEW and virtual instrumentation. As is the case of new versions of LabVIEW, the impact of the LabVIEW8 launch on our business will unfold over the next 6 to 9 months, as customers schedule upgrades into their existing systems and new customers evaluating design LabVIEW into their applications.

In summary, we are pleased with the continued adoption of our computer-based measurement automation platforms in Q3. Led by record sales of PXI and modular instrument products, as well as strong adoption of new platforms such as CompactRIO, we delivered our 13th consecutive quarter of year-over-year revenue growth, and are focused on our execution in sales and marketing to make LabVIEW8 and all of our new product a success in Q4 and into 2006.

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

Thank you, Tim. In Q3, we were pleased with record quarterly revenue and strong earnings growth. Our virtual instrumentation products continue to perform well with record sales of our strategic PXI and modular instrument platform. And we continued our strong output of new products that are in line with our vision and that strengthen the foundation of virtual instrumentation in test, control and in design.

At NI week, this year we further expanded on our opportunity in test and industrial controls, as well as future potential for optical system design for embedded development. In fact, LabVIEW has always been a design tool as engineers have quickly designed prototype and deployed a wide range of measurement and automation systems with LabVIEW for nearly 20 years. LabVIEW unique combination of front panel user interface, and graphical data flow diagrams, make it flexible and powerful tool in many applications from data acquisition to control to system design and more.

When we invented LabVIEW, our goal was to dramatically reduce the software development time needed to build, test and measurement systems. We wanted to do for test and measurement lots of spreadsheet just for financial analysis. Our latest release of LabVIEW furthers that goal by simplifying distributive design for heterogeneous multiprocessing or combinations of processors and FPGAs.

Two key features are the shared variable in the project. These capabilities are especially important in designing complex test and measurement systems and distributed control systems. As such, the launch of LabVIEW8 represents a major milestone in our quest to make LabVIEW a premier tool for graphical system design.

LabVIEW8, when combined with hardware platforms like PXI and CRIO, redefined the methodology for designing, prototyping and deploying complex systems. For example, CompactRIO combines the power of LabVIEW Real-Time with the LabVIEW FPGA to create programmable automation controllers, which are the new way to build industrial control systems.

High performance algorithms, such as control or filters can run on either real-time processors or the FPGA. The combination of the FPGA and a wide choice of I/O models eliminate the need for custom design boards, providing a very flexible I/O system at a competitive cost. I see this technology becoming the cornerstone of our industrial control strategy.

We continue to see success with our RF project, and with the release of LabVIEW8 have a new disruptive technology for FPGA-based RF instrumentation called IF-RIO. With this technology, early adopted can run LabVIEW algorithms and the FPGA to further enhance performance for RF instrumentation and software radial applications.

We saw the benefits of our increased R&D investments pay off with record levels of new products over last year. And for the last two quarters we have seen new product revenue achieving our internal goal as a percentage of total revenue. Now the same graphical concepts can be used for algorithm design, software simulation and embedded prototyping and design, thereby substantially reducing the learning curve and development time for product design.

I want to thank our R&D organization for the same execution on new products, especially LabVIEW8. going forward, our focus will continue to be on new product output and execution in sales and marketing as we drive towards our business and financial objectives.

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

Thank you.

[Operator Instructions].

Our first question will come from John Harmon with Needham & Company.

Hi. Good evening.

Hi, John. How are you?

I'm good, Alex. I'd like to ask you the following question. I might ask you to reiterate your comments. It looks like the global PMI index is moving upward. I was maybe looking at the wrong data. The date I was looking at -- you said something about a plunge in your industrial production which I didn't see. But based on that global PMI, what is causing you to adopt that additionally cautious stance?

John, I think there's some noise in the data post the hurricanes. We did see, you know, the Fed reports on industrial production each month, so reported for September, I guess, early the last week. And they saw a significant sequential drop in industrial production from August to September. A lot of that is obviously driven by oil and gas production. There was, I think, a fair bit of surprise with the PMI overall. When the US PMI came out for September on the 1st of October, it was up very significantly when the overall forecast was for to drop. So that was quite a surprise.

I'm a little concerned that there may be some noise in that PMI number post hurricane. And I'm real keen to see how the numbers will play out for October and November to see if we can establish a trend. But the data going forward, the US PMI was so different than expectations that I'm just a little bit concerned about being certain that data will hold up as we go through October and November. And that's what given the cause for caution.

Okay. Thank you. Just a quick.

You have follow-up John, that's fine.

Well, I'm kind of speaking in a different question.

Okay. All right. Good.

Traditionally, the instrument control revenue seems to be in secular decline and the cost really attracting the rest of the industry as it is. Do you think that a trend that people are just kind of moving to more modern types of instrumentation?

Well, based on the data as I look at John, I do think it is tracking the industry pretty closely. Now, if you look at the data from the big T&M (ph)companies and you back out acquisition that they have done several of them in significant acquisitions in last number of quarters, you'll find at the base level of business in the main T&M companies is quite negative in Q2 over Q 3. And as we look at the way we track the data relative to the industry, as we back out the acquisition related increases in order volume in order to try to get a baseline. Or we track again since in the control business and we've seen that data attract very closely in Q3.

Okay. Thank you very much.

Thanks, John.

Moving next Richard Chu with SG Cowen.

Hi. This is actually Cowen Camp (ph) for Richard Chu.

Hi, Cowen. How are you?

Hi. Good. Just one -- couple of questions on the acquisition, and can you talk when that being too close and some impact on revenues?

It has closed, Cowen. We did a simultaneous sign of purchase agreement and close October 17. And so it is included. And it is a fairly small acquisition certainly very small relative to NI, but then it is included in our guidance for Q4. So it will be I guess, 10 weeks of revenue for Q4.

Okay. You guys talked about PXI -- record revenues in PXI modular instruments. Is it combined or you're talking about for each segment?

Each one separately had a record.

Okay. And can give us --

...And they both separately saw very strong year-over-year growth.

Okay. For software, can you talk about the contribution to revenues this quarter for software (ph)?

Well, as a percentage of revenue software was continued to track around 20% target that we have seen for some time. And consumer would like to comment on LabVIEW8 the recent launch, which obviously the timing is a little bit different this years and last yeas on the LabVIEW released. LabVIEW 71 was released in May and this year LabVIEW 80 almost figure released is coming in October and customer like to comment on LabVIEW.

Right. Yes. So if you look at LabVIEW8, the timing last year for LabVIEW 71 and we mentioned that significant number of new features well over 100, new features added in. We continue to invest very strategically and substantially in LabVIEW, taking it into new areas, particularly in control and design. And several of the features that we highlighted in the call here shared variable and the LabVIEW project are geared for new users in terms of applications spaces, and then strengthening, it's already a strong presence intact. But this is a very substantial release for LabVIEW.

And when we released LabVIEW8, we also every group in the company is involved with that release. All hardware groups are kind of involved in testing that. It is quite a great feat to get that out and get it out on the marketplace and watch it grow.

Okay. In terms of expenses, last quarter you talked about keeping you are still going to keep expense controls pretty tight until revenues increased to a projection -- to with your projections were initially. For next quarter, what are your expectations?

Next quarter, we will from a GAAP perspective Cowen, will see a significant increase in R&D expenses as the software capitalization drops off in Q4 from the release of LabVIEW8. We expect to see the rest of the expenses be pretty modest increase in Q4. That's our current expectation.

Okay. And do you have an average order size for this quarter?

Sure. The average order size for this quarter was right about -- a little over $2,800. It was down about 3% sequentially and up I think about -- I have to go back and look for it in the low single digits year-over-year. We typically see it drop in the third quarter, because we tend to see a drop in big orders in Q3. As you probably aware of Europe, our revenues for Europe in general tend to follow-up quite significantly in the third quarter due to the vacation season in Europe, and that tends to pull down our overall average orders size as it tends to be the big orders that don't materialize in Europe in Q3.

What was the growth end orders greater than 20k for this quarter?

Sequentially?

Yes. Sequentially, or year-over-year?

I don't have that right in front of me. I can get offline with you.

Okay.

Overall the average order size is up 4% year-over-year. I just got the data now.

Okay. That's all I have for now. Thanks.

Thanks, very much Cowen.

We'll hear next from Richard Eastman with Robert Baird.

Just a couple of question. Alex, could you just maybe bring us up-to-date on where we are from a revenue perspective on this transition from the E Series to the M Series? Is our average selling price in that data acquisition area is that flattened out?

Yes. The ASP there has definitely flattened out both in the USB side and on the -- and also in the plug-in side. We've seen the M Series continued to be successful. It's now turning up towards 50% plug-in volume and we're seeing that negative that we were accounting on a year-over-year and sequentially ASP decline as pretty much mitigated at this point in time.

Okay.

And as we continue to bring out more higher end products that will probably become more of a favorable element and unfavorable element as we go forward.

So we should see more of a unit growth --?

Yes. We had very good unit growth in Q3 on PC-Based data acquisitions. And really we feel like our position now versus a year or 18 months ago in PC-Based data acquisition is especially on the lower end but outcome performance end is dramatically stronger throughout as we based on last year that we really see acquisitions as significantly incrementally stronger than 18 months ago.

And just as a follow-up, Dr. T, maybe you could just walk us through very quickly as you are introducing your RF tools. It would appear though as you're focusing on the data acquisition, now you have LabVIEW 8.0 to support that. Are we targeting design or manufacturing applications out of the box here?

It's probably the area we definitely target manufacturing typically products that customers are producing in volume and they want to lower their overall manufacturing costs both by lower cost equipment, but substantially improved performance in time-to-test. So, that's value and proposition and manufacturing. But we are also finding quite a few applications like spectrum (ph) monitoring and more that you might classify as RF data acquisitions. So both of those are successful, and our broad based approach of virtual instrumentation makes it possible for us to do those kinds of applications very nimbly for our customers.

Okay. Thank you.

Thanks Rick.

Moving on to Ajit Pai with Thomas Weisel Partners.

Yes. Good afternoon, and congratulations on a very solid quarter.

Thanks Ajit. How are you doing?

Good. A couple of quick questions, the first one would be largely when you're at your IOtech acquisition, could you give us some color as to whether your plan to, sort of, introduce similar products using your own modular platform just taking the core technologies and applications over there and doing that? And what kind of ramp could you expecting from that business through 2006, if you are planning to do that?

Sure. This is Tim. I'll take that. Clearly, there is some overlap just like there was with the measurement computing acquisition in our product line. But in each case the measurement computing in IOtech -- they were successfully focusing on some niches that we weren't covering so well. And in the IOtech case that's portable beta acquisition they kind of specialized in that, and application portability was that a premium and then focusing also in the sounded vibration marketplace, and both of those areas we have some products, but in there niches they were stronger. So that is highly complementary with what we're doing, so we look to leverage the strength that they have in that, learn from it, and continue to position that as well positioned the IOtech brand with their other products.

And if you have to, sort of, broadly sort of define of kind of overlap there is product, would you say it's over 50% overlap, or under 50% overlap?

With IOtech, its somewhere in that neighborhood, probably little less. They're a little bit like I said, more niche focus in portable data acquisition. But it is in that neighborhood.

We will obviously be focusing also on time improving operational efficiency and leveraging a scale of NI to also improve the profitability as we go forward.

And on the measurement -- on the acquisition, could you give us some color as to with the strategy over there was to control the low end with that platform and keep that going exactly the way it is? Has there been any change in the strategy or are you trying to integrate it more than you were previously? Has nothing changed there?

The strategy continues to be the same. And we're very pleased with the success in that how that transition is going. Since the acquisition is on plan.

Okay. And then the next question will be just looking at the growth that you've had it is going to be international growth that you've had in overall terms it's been stronger than in other terms. But you also reported a foreign exchange loss. Is that just a translation of balance is held abroad, or is that some hedging involved over there as well?

That's the net of the two. So we have a large volume of receivables in countries like Japan and in Europe. We tried to hedge against those receivables, to the best of our ability and it's a little bit of an estimation gain. And so, what you get there is the net exposure times the shift in rates during the quarter results in that loss.

Right.

It's balance sheet adjustment from the beginning to the end of the quarter.

Right. Alex, in your previous conference call, when you just finished with that, you mentioned that you expected seasonality from the December quarter going into the March quarter to actually be slightly exaggerated. But also the seasonality going from September to December to be exaggerated. So the uptick in December could be stronger because of the trade of sort of mix of -- I think as high ASB products. And then after that also could be a dip. But now the instrument control et cetera is a smaller percentage of revenue, and that is probably one of the more cyclical aspects of your business. Do you think that it will be sort of equivalent to seasonality in prior years?

That's a very good question, Ajit. Obviously we will know a lot more about that in January. But where we stand right now is we typically see an 8 to tenish percent sequential increase. And that's the kind of guidance we are giving. If I had seen a strong industry production number in September or probably we might have been a little bit more aggressive, but at this point, we're looking for or would have been fairly typical seasonality in the Q4 ,and then we'll have a better read on how we see for Q1 falling out once we get to January.

Okay. Thank you so much. I'll get into the queue, and ask a couple of questions after.

No problem.

From Bear Stearns we have Antonio Antezano.

Good afternoon.

Hi Antonio.

I wonder if he could talk a little bit about any indication of early acceptance for the products that were launched back in August. You mentioned these Google search as an indicator for the LabVIEW product. What about PCI Express or embedded design areas?

Sure. On PCI Express, as we mentioned that is a new technology to the computer industry so it's going through its own ramp up, to the Dells of the world. And it's as expected, going to take some time for that to become on board everywhere. We do have some significant products as we outlined it in NI week, in the last quarter. And that is well above the PCI Express data acquisition products.

On the LabVIEW embedded front, that is kind of a two-pronged strategy we have there. LabVIEW embedded running on our own hardware and applications in control and design, primarily with LabVIEW up PCI in our CompactRIO platforms. And then, like we announced last quarter where we can target other people's hardware or processors such as the analog devices black bin processor. And that again in the -- what we call in an early adopter phase. We're working very closely with the users on that, trying to rapidly respond to the feedback and many features and gaps that they find. But we found that acceptance and excitement over what is possible by broadening the set of users with a tool as good as LabVIEW, we find very exciting.

When you say slow you mean you have any idea of both say comprise how long could it take to be a factor in terms of revenues?

We only really had about five weeks after the launch in NI week in the quarter. So there's not a lot of time there to gather data. And typically, it takes 6 to 9 months more for to play out. So that we have an idea how it's going to stay overtime. It's really just too early frankly to draw any conclusions at this point.

Okay. Now on the spending side, sales and marketing as a percent of sales was I think 37.5% and sales and marketing as a percent of sale has been consistently above last year levels and your target I believe continues to be 35%. So how are you going to drive a reduction towards that target of 35%.

Well we did see in our increase in expenses early this year is something exceed our revenue growth, as we fell at the short of our anticipated revenue in the first quarter. As we go through Q4 -- Q3 into Q4 we have a pretty solid plan on scaling our sales and marketing expenses as we go forward with our certainly our objective to grow in a better rate less in revenues, so we will be focusing on that and execution against that plan as we go through the next five to six quarters.

Any detail on those plans what, what type of activities?

Well, it will largely be related to leveraging our existing resources. And as we're adding additional resources, we would be looking to try to add those new resources in the emerging countries where we'll gain significant cost leverage. We also focusing on leveraging our existing web investments to try to gain scale from what we've already done. And I feel reasonably confident that we will be able to execute against that plan going forward.

Okay. Just final question. R&D for the next quarter, percentage of sales, do you have any guidance for that. I mean the target is 16%.

We should be pretty close to the target in Q4.

Okay.

And we'll see the software cap number drop. So our GAAP expense will jump up quite a bit from Q3.

All right.

And we'll be in the ballpark of the targeted 16%.

Thank you. I'll be back to the Q.

Thanks very much, Antonio.

We'll go next to David Yuschak with Sanders Morris Harris.

Congratulations again on a good quarter.

Thanks Dave.

On the acquisition side, you give us three acquisitions this year, and the fact that you've guys have been on the acquisition front in several years. Is there a change of philosophy about what we need to do in maybe running the distribution of what you're seeing in out there in marketplace strengthening some place? Could you give us sense as to -- is this going to become more a meaningful strategy for you, particularly given the kind of cash that you've seen on the balance sheet or, is this still the kind random types of things that you've done in the past, but this just happens to be unusual year? And then I have a follow-up.

Well, I think at this point it's more the latter. Our strategy in acquisition remains the same. Our fundamental vehicle for acquisition is like an internal R&D is how we are acquiring technology and developing it ourselves, will continue to be our primary focus. Our strategy has always been to be opportunistic in acquisitions and I think our success in significantly improving our competitive position in data acquisition in particular, has created circumstances that have led to some of these opportunistic acquisitions there as much related to those developments as they are related to change in our fundamental acquisition strategy.

We did generate significant amounts of cash during the quarter adding $24 million, and the company continues to be very strongly cash flow positive. And while we'll obviously look as we grow over time to scale our dividend and response to our growth, that also will create a valid ability of resources for us to be opportunistic. So, we'll continue to look for acquisition that makes sense, but our primary vehicle for development and revenue growth is going to continue to be internal R&D.

Is valuation just becoming more compelling as far as that approach is concerned, would you think?

I think certainly the success of our products in certain areas have made the opportunity perhaps more difficult for some companies, and that maybe brought reality to bear when it comes to pricing.

A follow-up question. Perhaps as I agree with you about the PMI at industrial production -- as far as noise in the situation, in the current economy. But as you look at this current quarter and as you see things falling out here at the rest of the year, is there any thing in your revenue stream that maybe is bit of unusual, and that is better than expected from where that sector maybe come from -- that market comes from?

For instance, like the audit certainly wouldn't be expecting the whole lot out there. But is there areas where there as weaknesses maybe you haven't seen or had been surprised by? Just getting a sense if it is just a lot of noise within your own revenue stream, that's kind of tough to figure out what is happening across the different industry markets.

No. We haven't seen many operations. In the areas where we've seen weakness of these sectors areas like ATE into the semiconductor test guys, also in automotive, we've seen some weakness there. But other than that we haven't seen anything unusual. It has been very broad based. And we get to be so broad based that it's hard to pick up trends like this, but nothing significant that feels abnormal at this point.

Okay. So the noise is more the thought that the numbers are too volatile for other things.

We are so broad based that it would take something very significant to leap out of the average.

Okay.

On the plus side, this very solid execution on new products, has really given us the ability to show growth in this climate.

Okay. Thanks a lot.

Thanks very much, Dave.

And we will take our last question from Ajit Pai.

Yes. Could we have the head count at the end of quarter, please?

It's 3,707.

3,707, and where would it be after the -- at the end of the year because I think it did close on IOtech after the end of the quarter?

So, IOtech had 75 employees, sorry 72 employees. So it will be that plus some more in incremental hiring, and you know it probably be going to be around 3,800 people.

3800. Okay. Thank you.

Thank you very much. As I said earlier on I'll be presenting at the Bear Stearns conference in New York on November 8th. I look forward to seeing you there, and thank you for joining us today.

That concludes today's conference. Thank you everyone for joining us.