National Instruments Corp (NATI) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the National Instruments corporation fourth quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] You may refer to your press packet for the the replay dial-in number and passcode. The replay will be available from 7 p.m. Central time today and will end at midnight central time on February 6th, 2006. With us today are Dr. James Truchard, President and CEO, Alex Davern, CFO, and John Graff, Vice President of Marketing. And now for opening remarks and introductions I would like to turn the call over to Mr. David Hugley, Corporate Counsel. Please, go ahead, sir.

Good afternoon. During the course of this conference call, we shall make forward-looking statements regarding the future financial performance of the Company including statements regarding our expected revenue growth and expected GAAP and non-GAAP earnings per share, future product announcements and expanding market opportunities. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We will refer you to the documents the Company files regularly with the SEC including the Company's annual report on form 10K for the year ended December 31, 2004 and our form 10Q for the quarter ended September 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 the President and CEO of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon and thank you for joinin us. Our key points are: record quarterrly revenue is up 17% year-over-year. Record quarterly profits with 17% operating margin and record revenue from new products in 2005, with record new product output. We are pleased with the very strong sales of our virtual instrumentation platform in Q4; our strong investments in R&D coupled with excellent sales and marketing execution resulted in strong revenue for the quarter and for the year. In our call today, Alex Davern, a 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?

Good afternoon. [AUDIO RESUMES] Today we reported record quarterly revenue of $160 million, a 17% increase over Q4, 2004, and a 13% sequential increase from Q3. GAAP, fully diluted earnings per share for Q4 was $0.26 with record quarterly net income of $21 million, up 27% from Q4, 2004. For Q4, operating margin was 17% showing significant progress towards the Company's longterm goal of 18% operating margin. For 2005, revenue totalled $572 million, up 11% from 2004, marking record annual revenue and the Company's 28th year of revenue growth. Having achieved our 20% revenue growth target in 2004, we are disappointed not to have repeated that performance in 2005. Going into 2006, we'll be focused on improving on our 2005 revenue growth and on continuing to drive operating leverage. GAAP fully diluted earnings per share for 2005 was $0.76, with record annual net income of $62 million, a 27% increase over 2004, and an operating margin of 14%, up from 12% in 2004.

Now, looking at Q4 revenue in more detail, sales [inaudible] the control products were up 2% year-over-year and up 11% sequentially, showing their first year-over-year growth since Q3 of 2004. We believe this indicates a modest improvement in the test market in Q4. Sales on the rest of the product portfolio, i.e. our virtual instrumentation platforms, were up 19% year-over-year. Our growth in Q4, and for the year, was driven by the success of our new products.

During Q4 we saw growth in all regions, revenue was up 10% year-over-year in Eur -- excuse me, year-over-year in Europe, up 25% in Asia, and was up 18% in the Americas. Giving overall growth of 17%. On a year-over-year basis, acquisitions, net of divestitures, added $5.8 million in revenue in Q4. Our average order size for Q4 was a little over $3,000, up 4% from Q4 last year. This was driven by a 34% sequential increase in the value of orders over $50,000. This is consistent with our historical pattern of seeing large orders increase in Q4, and decrease in Q1. Gross margins of Q4 were 73.5%, up in 73.2% in Q3.

Total operating expenses in Q4 were $91 million, up approximately $5 million sequentially. The sequential increase was primarily made up of a $1.3 million increase related to October raises, a $1.3 million increase due to the the [Iotech] acquisition and a $2 million increase in R&D expenses due to a sequential reduction in the amount of software development costs capitalized in Q4 as a result of the release of LabVIEW 8 in October. On a year-over-year basis, total expenses in Q4 were up $11 million or 14%; R&D expenses were up 13% year-over-year and amounted to 15.3% of revenue. Software development expenses capitalized in the quarter amounted to $2.5 million.

Also during the quarter, $2.5 million in previously capitalized software development costs were amortized to cost of goods sold. In Q1, 2006, we expect to see another sequential decline in the amount of software development costs capitalized, as the release of LabVIEW 8 is felt for a full quarter, and as a result we expect the R&D costs to increase to approximately $26 million, in Q1. SG&A expenses in Q4 dropped from 44% of revenue in Q4, 2004, to 42% in Q4, 2005.

Now, turning to the balance sheet. Inventory days increased to 136 days from 132 at the end of September and day sales outstanding were 55 days, flat with Q4 last year. Given the record year for revenue and profits in 2005, the board of directors has approved a 20% increase in the Company's cash dividend to $0.06 per common share, payable February 28th, 2006, to shareholders of record on February 6th. This dividend increase is a reflection of the improved performance of the Company during 2005. Also, during the quarter the Company spent $8 million for the purchase of 315,000 shares of NI's common stock at an average price of $25 per share.

Now, moving on to the subject of recent change in accounting standards for stock based compensation and the impact that this new standard will have on the future presentation of our results: in accordance with the new accounting standard, NI will begin expensing all stock based compensation in its GAAP results starting in Q1, 2006. As a result of this new standard, the Company plans to present non-GAAP operating results in future periods. Management believes that including non-GAAP results, will assist investors in assessing the Company's operational and cash flow performance. These non-GAAP results will be provided as a complement to results provided in accordance with GAAP and should not be regarded as a substitute to GAAP. In line with common industry practice and to enable comparability with our peers, the Company's non-GAAP presentation will exclude the impact of both stock based compensation under the new accounting standard and will also exclude the amortization of acquisition related intangibles.

Now I'd like to make some forward-looking statements concerning our expectations for 2006. While we have seen recent moderation in the global PMI, we are budgeting for record revenue and double digit revenue growth in 2006. For Q1, NI expects revenue to follow the seasonal pattern of being down sequentially from Q4 and to be in the range of $150 million to $156 million. This is equivalent to revenue growth of between 16 and 20% year-over-year. We expect that GAAP fully diluted earnings per share will be in the range of $0.13 to $0.17 per share for Q1.

Regarding non-GAAP EPS for Q1, 2006, the Company expects the net, after tax impact, of stock based compensation to be $0.04 per share and the net after tax impact of the amortization of acquisition related intangibles to be $0.01 per share. As a result, management expects Q1, 2006, non-GAAP, fully diluted earnings per share to be in the range of $0.18 to $0.22 per share. As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any decline in the global economy, delays in new product releases, R&D expense overruns, manufacturing inefficiencies, and foreign exchange fluctuations.

In summary, Q4 was a good quarter with revenue growth of 17% and net income growth of 27%. Our discipline in managing our expenses to drive operating leverage paid off in Q4. With that I'll turn it of to John Graff, Vice President of Marketing.

Thank you, Alex. We are pleased with our record Q4 results, delivering our 14th consecutive quarter of year-over-year revenue growth and finishing 2005 with another record year. Our results were driven by strong revenue growth for our virtual instrumentation products as well as continued success with our new product initiatives. Virtual instrumentation continued to see broad adoption among engineers and scientists with a record number of orders in Q4. The success of virtual instrumentation is further demonstrated by the record revenues we had in Q4 for software, data acquisition, PXI, modular instruments, distributed I/O, motion control and machine vision.

During Q4, we continued to see strong interest in adoption of our new products, which we define as products introduced in the past eight quarters. For the third consecutive quarter revenue from new products met our internal goal for overall contribution to revenue. This success with new products is the direct result of our increased investment in R&D. After record new product output in 2003, 2004, and now, 2005, we are very pleased with the initial sales of these products, as they are key to filling out and strengthening our product platforms and expanding the market opportunity for virtual instrumentation.

We continued to see strong adoption of our software platforms in Q4 with record software revenue. The quarter was highlighted by the introduction of LabVIEW 8, and as we discussed in our last call, new features included expanded express technology, the new LabVIEW project, and distributed intelligence to help take virtual instrumentation to new users and applications. Although it's still early, we were pleased with the initial response to LabVIEW 8 from customers. In addition, the trade press recognized LabVIEW 8's innovative features and impact on tested measurement with the 2005 product of the year award by the trade publication Electronic Product, and an editor's choice award from Control Engineering magazine.

As customers continue to build systems with diverse operating systems and connectivity, we expanded the capabilities of the LabVIEW platform by releasing LabVIEW 8 through the Lenox operating system, including support for a much broader set of NI data acquisition devices and modular instruments. By tripling the number of NI devices for Lenox, we made it even easier for the growing number of global Lenox users to take advantage of the benefits of virtual instrumentation, including increased productivity and lower system costs. The built in I/O, analysis, and communication libraries in LabVIEW provide native connectivity to virtually any sensor, bus, or software interface. While [GPIB] continues to be widely used for instruments of PC connectivity, ethernet and USB ports are becoming more common on stand alone instruments.

In Q4, we released a number of new LabVIEW instrument drivers for third party ethernet and USB instruments, bringing the total number of drivers for these peripheral buses to 350. These drivers joined the more than 4,000 instrument drivers already on the ni.com, furthering LabVIEW's position as the standard software platform for instrument control.

In Q4, PXI continued to show its strength as the market leading modular test platform with record revenues. This strength in Q4 finished off a strong year in which we sold over 50,000 PXI devices; a 31% increase over 2004. This tremendous success, combined with the PXI devices shipped from the more than 60 other PXI vendors shows that PXI has become an extremely successful industry standard modular platform for measurement and automation.

PXI's success was across a diverse set of application areas and was adopted by both small and large companies as they recognized the benefits of coupling powerful test software with modular hardware. One customer, [San Mina SDI], one of the world's leading contract manufactures, selected PXI modular instruments and NI testing and software to develop an FDA approved production tester for testing and calibrating medical devices that measure blood glucose levels. Mike Orleans, [San Mina's SDI] senior staff engineer said, "The NI test platform delivered the accuracy and flexibility we needed to quickly build a compact test system that exceeds our throughput requirements of testing 83,000 devices per week while maintaining a cycle time of 30 seconds per device."

One of the fastest growing application areas for PXI systems is wireless tests. With the rapid increase in wireless technologies available today from automotive components, cellular technology to inventory control, the need for modular and flexible RF test systems is crucial. In 2005, we continued to invest in new RF products and delivered strong year-over-year revenue growth in Q4.

One growing application area is in communications where manufacturers are using our hardware and software products as a lower cost solution to expenses, single function box instruments, for applications such as wireless bay station testing, and spectral monitoring. One customer [Summatech Instruments], used LabVIEW and our PXI RF products to build a system capable of monitoring interference in wireless communications. Jim Pearson, development engineer at [Summatech] stated, "Using the NI hardware and software is an excellent off-the-shelf solution for customers who needed a spectrum monitoring solution. The complete hardware and software solution is more efficient and economical than most bench-top spectrum analyzers alone." We are excited with the early successes and embedded design and control applications including biomedical instruments, industrial machinery and automotive electronic designs.

NI's products provide a unique and powerful solution for system designers who need flexible and easy to use tools to design and prototype their new products. With our portfolio of powerful software such as LabVIEW RealTime and LabVIEW FPGA, and flexible hardware platforms such as CompactRIO and PXI, customers can graphically design their system at a lower cost then traditional tools while allowing them to improve productivity and shorten design time. One customer, Integrated Industrial Systems, incorporated CompactRIO into their PLC base steel rolling mill system, increasing both production through put and quality. The traditional PLC system was unable to accommodate the high speed analog input and signal processing required to improve the performance of the system. With LabVIEW RealTime and CompactRIO, they were able to quickly program the FPGA and RealTime processor and successfully integrate it with minimal change to the existing PLC architecture.

We delivered record results in 2005, with 11% year-over-year revenue growth, driven by record new product output and revenue. Key new products released in 2005 included the flexible resolution digitizer, winner of a tested measurement world magazine best in test award, PCI express M Series, the next generation of our data acquisition technology, and LabVIEW8, the upgrade to the flagship software program. These new products, along with many others, extended our core virtual instrumentation platforms to new applications and customers; we saw particular new product success in data acquisition, led by our next generation M Series and low-cost USB data acquisition devices, with new annual records for both revenues and unit. These new products introduced many new users to virtual instrumentation and the NI software platform, and we will continue to focus on migrating these customers to our higher performance platforms going forward.

In summary, we were pleased with record sales of our core virtual instrumentation software and hardware platforms which resulted in record quarterly and annual revenues. We believe virtual instrumentation is a mainstream approach in automated test and are encouraged by the end roads and fast-growing application areas such as wireless tests As we enter our 30th year, virtual instrumentation has seen tremendous success in many diverse application areas in attracting new customers. With that, I'll turn it over to Dr. T.

Thank you, John. As John said, we turned in our 14th consecutive quarter of revenue growth in Q4 with record sales of our virtual instrumentation platform. This success helped us to finish the year strong delivering our 28-year revenue growth. Having achieved our 20% revenue growth target in 2004, we are disappointed not to have reached that goal in 2005. This year we'll be focused on improvement in our revenue growth, while continuing to drive our operating leverage.

Overall, 2005 was a record year for new product output, and early demand for new product help deliver 11% annual revenue growth. Our success this past year with new products is the direct result of our increased R&D investments and these new product will deliver increased sales efficiencies as we fill out our product offerings and deliver complete systems to our customers. Our success in measurement and test systems and especially our performance with PXI RF products shows the rapid growth and adoption of virtual instrumentation for automated test. As PXI has continued to grow and become a de facto automated test standard, more customers are recognizing the importance of using such a widespread and accepted platform.

I'm excited about the PXI express products that we'll be releasing later this year, allowing customers to take advantage of the superior bandwidth of this next-generation technology. This will expand our opportunity in the aerospace and communications test market while maintaining software and hardware compatibility with existing base of PXI systems.

We are committed to releasing new and innovative products to extend LabVIEW's role as a system design platform. With with this combined hardware and software platform, design engineers will not only be able to test their designs, but they will also be able to rapidly design and prototype their systems. LabVIEW, our graphical system design software, and hardware platform like CompactRIO and PXI can handle a wide range of applications, from very high speed control embedded board level design to proprietary electronic.

Going forward, we will continue to augment this platform, providing a more complete solution that I believe will result in more design wins of machine builders and device manufacturers in a wide range of industries. The innovative spirit at National Instruments is one that I invest much of my time fostering and I believe this is the key reason that earlier this morning Fortune magazine named National Instruments one of the 100 best companies to work for, making the 7th consecutive year the Company has appeared on this prestigious list. National Instruments is full of talented employees who not only contribute to our success, but also inspire our culture, and I am please that the employees recognize the Company's engaging environment and consistent commitment to innovation.

For 2006, we will leverage our existing infrastructure in sales and marketing to attract new users with our low cost products and deliver more valued than traditional instrumentation with our high performance measurement products. In the coming quarters, I will challenge our R&D staff to continue the record new product output, delivering innovative products that will fill out the graphical system design platform. And, in addition I will focus on increasing the revenue growth and maintaining budget discipline while positioning the Company for longterm success. Thank you for taking time to join us, we will now take questions,

[OPERATOR INSTRUCTION] Our first question comes from Antonio Antezano from Bear Stearns.

Hello, everyone.

Hi Antonio, how are you?

Hi. My first question's regarding cash generation this quarter. Cash, I think, was around 176 million. Prior quarter was around 181. Just wondering, beyond the [inaudible -- highly accented language] activity you have in the quarter, whether this just is part of the normal, I guess, increases working capital given the sequential increase in sales. Or if there is something else, because to be frank I was expecting a little bit more cash generation this quarter.

Sure, Antonio. We had a good cash generation in the quarter actually, but in terms of cash use during the quarter, we spent obviously $8 million on repurchase, $4 million for dividends, and then we also paid cash for the acquisition of [Iotech] in October. That was a significant use of cash during the quarter.

What about working capital?

Working capital you can see, obviously from our balance sheet, sequentially, there was some increase in inventories and, also, in receivables but from a day's point of view, very much in line.

In line with your --

Yes, so the cash generation when we published the cash on the 10K, I think you'll see it in more detail. But the other big use of cash was the acquisition of [Iotech] which we paid 100% cash for.

Alright, and then the second question regarding your target for operating margin: you continued to target 18%. Do you have more [inaudible -- highly accented language] in terms of when would you expect to achieve that target?

Well we are very committed to continuing our target at 18%, and we've talked in the past that our hope is to try to achieve that goal towards the end of 2007. I think we made good progress in 2005 going from 12% to 14%. I'm very focused and we're budgeting for a continued operating leverage in 2006 and really, the time frame in which we expect to hit that goal is heavily dependent on revenue growth overall, so that's the key determinate. As a business -- as a management team we're very focused on good budget discipline and on growing our target to grow our revenues faster then expenses in 2006.

Alright. Thank you.

Thanks very much, Antonio.

Next, we'll hear from Ajit Pai, Thomas Weisel Partners.

Good evening gentleman, and congratulations on a solid quarter.

Thanks very much, Ajit. Happy new year.

To you, too. Couple of quick question. The first one would be, just looking at the acquisitions you made in '05, could you gives an update on whether the integration is complete? And what's left to do over there, whether [inaudible -- highly accented language] have been consolidated? And also, the revenues in this quarter, could you us some indication as to what percentage of the revenues came from acquisitions that were made in the past 12 months?

Sure, Ajit. The revenue from the acquisitions net of divestiture of our German services subsidiary, which we divested on January 1, net of the divestitures added $5.8 million in revenues in the quarter, which we talked about in the call. In terms of the integration plan, I'm really very, very pleased and I want to congratulate all of our employees involved in leading the integration with both [Iotech], Measurement Computing , and Electronic Workbench. We've really seen tremendous progress, a great dedication from the employees on both sides. We've seen the integration process in terms of product strategy move along very nicely and then, obviously, the integration process relative to operational leverage, manufacturing, et cetera, is staged based on the time at which we bought the company so it's very far along with Measurement Computing, and it's progressing according to plan with [Iotech]. I do want to congratulate the employees and welcome again the employees both [Iotech] and MMC and EWB and thank them for staying very focused on executing on the business and maintaining and executing under a business plan post acquisition.

Okay. The next question would be about your head count during the quarter. What was the headcount, and I'll get back in the queue because I have a few other questions.

Yes. Total headcount at the end of the quarter was 3,812. Excluding employees, that joined the Company from the acquisition of [Iotech], we added a net of 40 people during Q4. 30 of those new employees came in the the emerging countries and then, 10 new employees in the developed countries.

Does the 38 of the 12 -- could you give us an indication of how many were U.S. employees?

We probably added about 70 U.S. employees counting the employees who joined us from [Iotech].

And -- in -- out of the [38/12] what percentage of the employees would be in the United States of the total number?

I don't have that number off the top of my head, Ajit, but it's somewhere around about 54%, 55%, we can take that offline. I just don't have it in front of me.

Okay. Thanks so much.

No problem.

Next, we'll go to Richard Eastman, Robert W. Baird.

Hi, Alex.

Hi, Richard. How are you?

Good. Couple things. One is, could you give the percentage of your revenue that's instrument controlled in the quarter?

Yes, it was the first positive quarter we'd seen in a while. Up 2% year-over-year and up, I think, 11% sequentially. As a percentage of revenue, it was right about 12%, I believe, I don't have that in front of me either but, it was up 2% year-over-year, 11% sequentially, and I can touch base with you offline on the exact percentage.

Okay, and then, just, could you just give us an update on your data acquisition business in terms of the switch over to the M Series and the tradeoff on the volume price differential there? Have we lapped that price disparity between the two products?

Rick, I'll just to get back to you in answer to your question. Instrument control in Q4 was 12% of revenue. And, I'm going to let John Graff, Vice President of marketing deal with your second question.

Yes. On the data acquisition as we mentioned in the call the and we've had tremendous success with M Series and our low cost USB, seen record revenues in record units. The low cost nature of both the M Series and USB did have the dynamic of bringing down our average selling price, our ASP's, but now we've had three quarters where that ASP has been stabilized. The Q4 ASP was just slightly below Q1 of '05. We're in the process of lapping it, as you put it.

Okay.

And this way we look forward to continuing the -- to drive that unit revenue growth into revenue growth and, again, it played a key part in our record revenues for Q4.

There will be some slight impact in Q1 over Q1, but we're reaching the end of that phenomenon.

Is there any way -- we don't know the relative size of, this how to weight this, but is there a way to look at your sales growth for '05 or for the fourth quarter and say -- this has gotten to be a fairly sizable piece of the business, is there a way to give us a feel for how that penalized the sales number year-over-year, a point or two or any way to do that?

It's not like -- we don't want to break out revenues specifically by product line but certainly, I think we talked about it in the first quarter to give you some idea the difference between unit growth and revenue growth on data acquisition, which is our largest product line was about 10 points. So it was quite substantial. That has somewhat lessened as we've gone through the year. I haven't put a specific number on it for the full year but it's not inconsequential. On a full-year basis.

All right. I'll take a guess, thank you.

Next, we'll hear from Kerwin Camp, Cowen and Company.

Yes, Alex, with the improved demand in Q4, how are you reassessing your spending and hiring plans for '06? For example, what do you think the headcount will be by the end of the year?

We are planning in 2006, we're budgeting for double digit revenue growth. We are also budgeting at this point for continued increase in operating leverage. And so, we're targeting for our budget to grow our expenses at about 70% of revenue. And, our hope is to grow head count at a slightly lower level. So, we are anticipating growing head count less then revenue in 2006. And so, we will see an increase, primarily in the emerging countries, but overall we're hoping to increase our revenue per person in '06.

Okay. In terms of guidance, for stock option expense and amortization of intangibles, can you talk about what you think those might be going forward?

Well, we've given guidance, obviously, for Q1, Kerwin. That's the best indication I can you for the rest of the year; that's likely to be very close to the number on a full y -- for each quarter. It shouldn't vary dramatically from quarter to quarter.

Okay. I'll go back into the queue.

We'll take our next question from David Yuschak, Sanders Morris Harris.

Just to follow up on that, Alex. As far as allocating it across your operating expense items, because it comes out to about 4.5 million in the quarter, I think, first quarter or so, how would you allocate that on your operating expense line? Are you going to kind of spread it across the different categories?

Obviously, we will follow the guidance in GAAP, David, and we will have to spread the stock-based comp across the various different categories. The intangible amortization is all a cost of goods sold item. The reason we're looking at backing that out -- we've never done proforma before so, it's not something we chose to do in the past. As it has increased this year with the incremental acquisition of [Iotech] in Q4, and then also as we were somewhat forced, I guess, into doing the non-GAAP financials for the first time as a result of the new accounting standard that has came into force we really scanned what the vast majority companies did and we want some consistency with our peers and other tech companies. And this seems to be a universally adjusted item. [overlapping speakers]

The amortization, that was -- is that already in the fourth quarter, though?

It's counted in the first quarter GAAP numbers. We did not do non-GAAP for Q4. We will start with Q1.

I just wanted to make sure that number was already in there.

That number is already in Q4, that's correct. Just one -- then I'll get back into the queue. Sequentially on acquisitions, how much did you pick up in the way of revenue versus the third quarter? I believe it was approximately $2 million. I'll have to go back and check my notes, but I'm fairly sure the numbers were approximately $2 million sequentially.

Okay, and then the variance --- you end up with about 3 million or so higher on up thar end of your guidance; could you us an idea of what accounted for that?

Which variance are you talking about.

On your revenue in the quarter. Your top expectations on your guidance was like 157, maybe. You came in closer to 160.

I think our range was 152 to 157.

Right.

And we were very pleased with the success of PXI in the quarter. Modular instrumentation, RF and also data acquisition, which was very successful, so it was fundamentally across the board in some of our main virtual instrumentation product lines including the new CompactRIO where we saw better growth than we had anticipated, so the upside on the revenue was really, from the core of our virtual instrumentation products.

Okay, I'll get back in queue.

Thanks very much, David.

[OPERATOR INSTRUCTIONS] Next, we'll take a question from John Harmon, Needham & Company.

Hi. Good afternoon. Alex, so we have just a basis for the numbers, what was amortization of tangibles in Q4?

It was approximately $700,000.

700,000, probably still roughly $0.01a share?

Roughly $0.01in Q4, John, that's correct.

Excuse me, thanks for giving us the numbers we asked for. But, they kind of flew by kind of quickly,

No problem; if you want a refresh just go ahead.

Just a couple. How many shares did you rep -- buy back again?

We bought back 315,000 shares in the quarter at an average price of $25. And that brings us to -- we spent about $50 million for the full year, bought back $2.1 million shares at an average price of 24.

Thanks. I think you gave out a couple of numbers, growth rates of modular instruments?

We talked about the growth or the size of PXI in terms of number of devices. In 2005, we sold and shipped over 50,000 PXI devices. Including PXI modular instruments and that was, I believe, 31% over 2004.

Could there have been a fourth quarter number you gave out up 19%?

If you exclude instrument control, John. Which was up 2%; the first positive quarter since Q3 '04. The rest of the business was up 19%.

I get it. Okay. Thank you very much.

No problem, John.

We'll now go to Ajit Pai, Thomas Weisel Partners.

Yes, could you give us some color on the instrument control business, not so much as in your business but what you're expecting out of, sort of, the whole automated test market going forward. Where you believe it is in the cycle and-- whether this is this just a cyclical recovery that we saw or a seasonal one that we saw going from the third quarter into the fourth quarter in the end market?

Sure. I guess I'd reflect on it a little bit and say when you look at the overall success of the business in '05. 2005 was a pretty tough year tor the test market, and I think that's evidenced by our overall instrument during the course of the year. We were down 25% in instrument control in Q1. I believe 15% in Q2, these are year-over-year numbers, minus 11% in Q3 and then plus 2% in Q4. So, we did hit a low point in Q1 and have seen the year-over-year compares get a little easier, and the business improved somewhat sequentially as we went into the Q3 and Q4.

So, I would characterize it as stabilized and I think I believe as I said in the call, a modest improvement in the test marketing in Q4. I think you've seen a lot of the traditional test players have had a very difficult time this year including some that have reported recently. So, I'd characterize the overall test market as stabilized and maybe some modest growth in Q4. And I think that really helps, I guess, understand how strongly NI performed relative to the overall market.

I think in 2005, we significantly outperformed our peers and it's that strong investment we made in R&D in the past years that's allowing us to do it. But specific to your question, I would say it stabilized, and there, is an easy compare this Q1 for instrument control for us and that's probably the case for many vendors in the industry, so we'll see how Q1 plays out.

So Q1 we should sort of broadly model normal seasonality which is a sequential decline but not a strengthening sort of secular trend?

Well at this point, we're in January and with a moderating global PMI, my strong feeling at the moment is the appropriate thing to do is to model a normal seasonal decline which is what we're assuming.

Okay. And then, looking at the -- your tax rate for this quarter, it's, I think, modestly lower then for the rest of the year and for this year, for 2005, it's, I think, 100 basis-points lower than 2004. Going into 2006, do we expect that tax rate to fall further?

This year we came in at a full year tax rate of 23.75%. And last year we were at 24. We had been using 24 for the first three quarters of the year. And then as we got more precise data we're just truing up a little bit in Q4 to the final numbers. Looking into '05 -- excuse me, looking into 2006, we're budgeting a rate of 24% on a non-GAAP basis so that's excluding the impact of stock-based compensation which is a different tax regime so we're looking at -- we're budgeting for 24% there. It is possible as we go in beyond '06 and '07 that there may be a further decline in the tax rate but we'll need to get, I believe, substantially into 2006 before we know that.

Okay. Thank you so much.

No problem, Ajit.

And now we'll go to Kerwin Camp, Cohen and Company.

Hi, yes. Alex, what will it take to drive gross margins back up closer to 75%, or is that out of the question given your mix and some of the acquisitions that you've done?

Well, we're very pleased with our success so far in integrating the acquisitions, but we still have quite a bit of work to do to drive the gross margins on the acquired companies to where we'd like to see them so we do hope and are planning to see some incremental benefit there as we go forward. The other aspect, Kerwin, as we talked in years -- we've been taking this hit on amortization of intangibles related to acquisitions into cost of goods sold as we've gone through here and if you choose that to add that back, then, the gross margin rate here in Q4 was somewhere around 74.2 or 74.3. So, I believe we are within striking distance of 75, and we'll be working very hard of the course of the next 12 to 18 months to try to get to that number.

Okay. And then, when you talk about record quarterly sales of PXI, [Dac], Machine Vision, Motion Control, distributed I/O and [Mike's Instruments], do you include your products from acquisition in there?

No, we are not counting the products from acquisition there.

Okay, thanks.

And it appears there are no further questions at this time. I will now turn the call over to Mr. Alex Davern for any additional or closing remarks.

Thank you for joining us today. We want to also let you know that Dr. Truchard will be presenting at the Thomas Weisel technology conference in San Francisco on February 7th. If you'd like to set up a meeting with them, please contact our investor relations department. Thank you very much.

That does conclude today's conference call. We thank you all for joining us today. At this time you may now disconnect.