National Instruments Corp (NATI) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to the National Instruments Corporation's 2006 earnings release conference call.

With us today are Dr. James Truchard, President and Chief Executive Officer, Alex Davern, Chief Financial Officer, and John Graff, Vice President of Marketing. For opening remarks, I'd 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 performance of the Company, including statements regarding our expected revenue growth and expected GAAP and non-GAAP earnings per share, future product announcements, expanding PXI capabilities and radio frequency in wireless areas, continuing to invest in embedded systems design, and expanding opportunities for growth. 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, 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 joining us. Our chief points today are: Strong revenue growth, up 19% year-over-year; strong sales of our data acquisitions, PXI, modular instruments and distributed IO products; and strong operating leverage with good expense control. We are pleased with strong sales of our Virtual Instrumentation platform in Q1, as investments in R&D, coupled with excellent manufacturing sales and marketing executions, resulted in 19% year-over-year revenue growth for the quarter.

In our call today, Alex Davern, our CFO, will review our financials, John Graff, our Vice President of Marketing will discuss our business, and I will close with a few comments before we open up for your questions. Alex?

Good afternoon. Today we reported first quarter revenue of $155 million, a 19% increase over Q1 2005. GAAP fully diluted earnings per share for Q1 was $0.15, with GAAP's net income of $12.6 million, up 13% from Q1 2005. This compares to the GAAP diluted earnings per share guidance we gave in January of $0.13 to $0.17 per share. Non-GAAP net income was $16.2 million, up 44% from Q1 2005, with fully diluted earnings per share of $0.20. This compares to the non-GAAP diluted EPS guidance we gave in January of $0.18 to $0.22. For Q1, non-GAAP operating margin was 13%, up from 11% in Q1 2005. Please note that included in both GAAP and non-GAAP net income is charge of $900,000 to cost of goods sold, related to consolidation of our manufacturing operations. In Q1, we converted some of our Austin manufacturing space to space, and this write off reflects previous manufacturing facility improvements, which now have no future use.

Now looking at Q1 revenue in more detail, sales of our instrument control products were up 2% year-over-year. We believe this is in line with the revenue growth of the traditional instrument companies in Q1. The first-year impact of acquisitions added $7.9 million in revenue in Q1. Sales at the rest of our product portfolio, i.e., our Virtual Instrumentation platforms, were up 15% year-over-year in U.S. dollars. We believe this revenue growth rate is significantly higher than the test and measurement industry overall. Our growth in Q1 was driven by the success of our new products, especially in the areas of data acquisition, distributed IO, modular instruments and PXI. During Q1, we saw growth in all regions. Revenue in U.S. dollars was up 16% year-over-year, in Europe, up 17% in Asia, and and was up 22% in the Americas, giving overall growth of 19%. The year-over-year strength of the U.S. dollar, compared to Q1 2005, reduced our revenue by $5.3 million, and on a constant currency basis, year-over-year revenue was up 26% in Europe and 22% in Asia, for overall constant currency growth of 23%. Our average order size for Q1 was approximately $2,750 and consistent with 2005, it was down from Q4, due to the sequential decrease in large system orders.

Now looking at the income statement in more detail, non-GAAP gross margin in Q1 was 73.7%, up from 73.5% in Q4. As I mentioned earlier, included in Q1 cost of goods sold is a charge of $900,000 related to a facilities consolidation. Non-GAAP total operating expenses in Q1 were $94 million, up 13% year-over-year compared to a 19% year-over-year increase in revenue. Non-GAAP R&D expenses were up 31% year-over-year to $26.6 million, and were in line with the guidance we gave in our January earnings call. Software development expenses, capitalized in the quarter, amounted to $1.1 million, compared to $3 million in Q1 of last year. Also during the quarter, $2.7 million in previously capitalized software development costs were amortized to cost of goods sold. Non-GAAP SG&A expenses up 7% year-over-year in Q1, and dropped from 48% of revenue in Q1 last year to 43% this year.

Now, turning to the balance sheet. Inventory increased by $10 million from December 31st. This increase is to support a transfer of one of our two remaining Austin-based production lines to our manufacturing facility in Hungary in Q2. The additional inventory is intended as a buffer to support continued production, as both the capital equipment and the inventory needed to support its operation are physically moved to Hungary. Accounts receivable were down $1.5 million sequentially, and day sales outstanding were 55 days, flat with Q1 last year. As of March 31, 2005. the Company -- 2006, excuse me, the Company had $194 million of cash and short term investments, up from $176 million at December 31st. In April, the board of directors approved quarterly cash dividend of $0.06 per common share, payable May 30, 2006, to shareholders of record on May 8th.

Now I'd like to make some forward-looking statements concerning our expectations for Q2. In considering our revenue guidance for Q2, investors should be cognizant that we have a tough compare, due to the unusually strong sequential growth we saw in Q2 of last year. The very strong sequential growth in Q2, 2005, was partially due to the acquisition of Measurement Computing that quarter, but excluding this acquisition, Q2, 2005 had our strongest second quarter sequential revenue growth since 1999. For Q2, 2006, we currently expect revenue to follow the seasonal pattern of being up sequentially from Q1 and to be in a range of $155 million to $162 million. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.15 to $0.20 per share for Q2.

Regarding non-GAAP EPS for Q2 2006, the Company expects the net after-tax impact of stock-based compensation to be $0.04, and a net after-tax impact of the amortization of acquisition related to intangibles to be $0.01 per share. As a result, management expects non-GAAP fully diluted earnings per share for Q2 to be in a range of $0.20 to $0.25 per share. As these are forward-looking statement's, 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, Q1 was a good quarter, with revenue growth of 19% and non-GAAP net income growth of 44%. Our discipline in managing our expenses to drive operating leverage paid off in Q1,

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

Thank you, Alex. We turned in solid performance in Q1, with strong sales from our Virtual Instrumentation products in all regions of the world. While we saw the expected seasonal decline in revenue, due to the fiscal buying cycle for large system-level orders, we did see strong year-over-year growth in these large orders in Q1. In addition, we were also pleased with the success of our broad-based higher volume business, demonstrated by the record quarterly revenue and record units we saw for our data acquisition products in Q1. This success was driven by the continued strong performance of our M series and USB products, and does not reflect Data Acquisition revenues from acquisitions.

While we saw Data Acquisition growth in all regions of the world in Q1, we were especially pleased with very strong results in Asia, as Data Acquisition is the most common hardware products from which we introduced engineers and scientists to the capabilities of Virtual Instrumentation. We're encouraged by the continued growth of our software in Q1, following the release of LabVIEW 8 in Q4. The number of users who rely on LabVIEW to solve their engineering and scientific applications continued to increase, as thousands of new users adopted NI software in Q1. The broad impact LabVIEW is having on the scientific and engineering community was demonstrated by EDN Magazine, a leading electronics publication honoring LabVIEW 8 with it's Innovation of the Year award. In addition, LabVIEW 8 has recognized with numerous other awards by engineers, scientists, and trade press around the globe, from Korea and Japan to the United Kingdom.

By investing in academic initiatives, localizing LabVIEW into native languages, and fostering a global LabVIEW community, we continue to expand LabVIEW's global reach. For example, in Q1, we held a university tour across China, where LabVIEW and Virtual Instrumentation are taught in more than 100 science and engineering classes in China's major universities. We saw good growth of software sales in Asia in Q1 driven, in part, by success of our localized Korean version of LabVIEW 8, as well as success at large accounts, where companies such as Hyundai Motors and Samsung Electronics adopted NI software in their design validation and manufacturing areas.

Further extending the LabVIEW platform to bench top instruments and electronic design engineers, in Q1 Tektronix and NI announced a customized version of the LabVIEW-based SignalExpress software that ships with the new tech -- DPO 4000 line of oscilloscope. Craig Overhage, Tektronix Senior Vice President of the Instruments business stated, quote -- thousands of Tektronix oscilloscope users control their instruments with National Instruments LabVIEW and the NI is drawn from its leadership in instrument control to create SignalExpress Tektronix edition.-- end quote. We are plazed -- we are pleased with early response from Tektronix sales channels and look forward to working with them to bring the benefits of these two leading platforms, Tektronix oscilloscope's and NI software, to the test and measurement market.

We were pleased with continued strong growth of our PXI and modular instrument products in Q1, as our investments in expanding the capabilities of this platform continue to pay off. We have continuously invested in producing best-in-class modular instruments that meet or exceed the capabilities of stand alone instruments. One of our most innovative modular instrument products, the flexible resolution digitizer introduced in early 2005, was recently named by Test and Measurement World Magazine as the test product of the year. This is the first PXI product to win this prestigious award, beating out several traditional instruments.

Another key investment area for PXI is wireless test, and we continued to see strong success in this area in Q1. One customer, LG Innotech, an electronic components manufacturer, replaced traditional RF testing equipment with NI hardware and software for their automated test applications. Mr. [Sun Ho Jung], senior manager at LG Innotech stated, quote -- after adopting NI's fully automated PXI-based RF instruments, NI LabVIEW and NI Test Stand, we were able to dramatically reduce the test time of the new DVDH chips on our production floor. With the conventional RF systems, a full 24 hours was required. But with the new PXI system, only four hours was needed to test the equal amount of chips with comparable results. We are looking forward to seeing more of NI's PXI-based instruments on our production floors -- end quote.

We continue to introduce new products that expand the capabilities of PXI in the RF and wireless base. For example, earlier this month, we announced several new signal generators, including one that extends the frequency range of PXI products to 6.6 GHz, allowing PXI to address a wider range of applications at higher frequencies in areas such as consumer electronics, military aerospace and telecommunications. NI has always provided a wide selection of products to the various PC [inaudible] over the years, from the ISA bus in the '80's and '90, to PCI, ethernet and more recently to USB and PCI Express. While traditional like to focus on one bus as the feature bus for measurement and automation, we pride ourselves on remaining bus agnostic and giving our customers a wide range of choices for building their measurement and automation systems, while adhering to our long history of backwards compatibility to protect their software and hardware investments.

We continued this strategy with our announcement last week of the industry's first PXI Express chassis and controllers, giving our customers another option for high-performance applications. These new products leveraged the latest advances in commercial technologies to deliver up to one gigabyte per second per slot performance, a 45 times increase over the first generation PXI product. [Hans Neistrum],team leader of test and verification for Flextronix Design said, quote -- to provide cost effective test solutions, Flextronix has standardized on the PXI test platform.

The telecom industry, PCI Express is rapidly becoming a standard interface. In order to provide matching performance, the PCI Express technology and the PXI platform is the natural way to solve a continuously increasing bandwidth application in this domain -- end quote. We are very pleased with the continued adoption of PXI, especially in the electronics and mil-aero industries. And the positive reactions by customers with the new PXI Express technology,, not only for its increased performance, but also to provide long-term compatibility and continuity for their test systems.

In addition to automated test and bench-top design applications, NI hardware platforms and LabVIEW software are being increasingly used as graphical system design tools in a wide variety of industrial automation, machine control, and embedded applications. Customers in industries as diverse as biomedical, oil and gas and consumer electronics are adopting LabVIEW and our CompactRIO, Compact FieldPoint and PXI hardware platforms to improve their productivity, shorten design cycles and reduce costs in their design, prototyping and deployment applications. For example, Spinex Technologies, a life sciences device manufacturer in Switzerland, chose LabVIEW PGA and PXI because of their modularity and flexibility to create a high-precision laser and motion control system that has allowed their customers to speed-up processes in drug discovery from days to hours. And a consumer electronics, Daewoo Electronics, is using LabVIEW FPGA and CompactRIO to prototype the world's first high performance Servo motion control system for 3 dimensional holographic digital data storage, a pioneering technology that promises order of magnitude improvements in data storage density and speed.

[inaudible], assistant chief researcher at Daewoo Electronics state, quote -- rather than spending tens of thousands of dollars and many months of development to design a custom DSP board, our team was able to develop this ground-breaking system quickly and economically, using NI CompactRIO, high-speed FPGA technology and easy to use NI LabVIEW software. We were amazed that the project could be completed so quickly and efficiently -- end quote. We expanded the hardware platforms LabVIEW can target with our recent announcement of availability of the LabVIEW embedded development module for Analog Devices blackfin processors. Both companies demonstrated this product at the recent embedded system conference in San Jose, and feedback from trade journalists and customers alike was very positive. Ed Spurling, editor and chief of Electronic News stated in his show write-up, quote --in simple English, the Company is now firmly in the embedded system design world -- end quote.

We will continue to invest in this area with the goal of doing for the embedded market when the the PC did for the desktop, by bringing powerful, easy, flexible software and off-the-shelf reconfigurable hardware to the design engineers desktop, empowering them to design, prototype and deploy their next generation systems more quickly and in a less cost than traditional approaches.

In summary, we are pleased with Q1. A strong revenue growth was driven by record sales of our Data Acquisition products and solid growth of our PXI, modular instruments and distributed IO products. We believe our Virtual Instrumentation approach continues to gain momentum in test and measurement applications, and we are very pleased with the early success we have had with our differentiated graphical system design platforms in industrial and embedded applications.

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

Thank you, John. I'm pleased with our performance in Q1, turning in 19% year-over-year revenue growth, while meeting our goals of delivering strong operating leverage, thanks to solid expense management by our employees across the Company. Quarter after quarter we have introduced award winning new products that meet our customers' needs, while expanding our opportunity for growth and disrupting the traditional approaches to measurement and automation. I am especially pleased see the [LINE INTERFERENCE] recognize our flexible resolution digitizer with the test product of the year award -- it's the first PSI product to win this award -- as well as numerous awards LabVIEW 8 has received. This is yet another testament to the success Virtual Instrumentation is having in the marketplace.

This quarter marks very two significant milestones in the history of our Company and our industry; National Instruments 30th anniversary and LabVIEW's 20th anniversary. When we started National Instruments in 1976, we had a vision of creating a highly innovative Company with differentiated products that greatly improve the way scientists and engineers did their jobs. We demonstrated this innovation early on when, in 1986 we introduced LabVIEW, a graphical programming language that empowers engineers and scientists to graphicly design their measurement and automation systems. We coined this vision, the software is the instrument, emphasizing the powerful role software can play in improving our customers' productivity with a user-defined approach.

Today LabVIEW is widely recognized as the industry's leading software platform for measurement and automation, with hundreds of thousands of installed applications. In the past few years, we have built on LabVIEW's success as a system design tool for instrumentation to better address its role as a graphical systems design tool for industrial control in embedded applications. We have made significant progress towards this goal by delivering key product platforms, including LabVIEW PGA software and CompactRIO hardware, that provided reconfigurable approach and help our customers decrease time-to- market and lower cost for designing, prototyping and deploying their systems.

As we look out to the next 20 to 30 years, I believe our vision has never been sounder, as we continue to deliver innovative new products that strengthen our vision of Virtual Instrumentation, while expanding our opportunities in new areas such as graphical system design. We will be celebrating these important anniversaries at this year's NI week, where numerous measurement, semiconductor and automation partners will join thousands of developers, NI alliance partners and press from around the world for our eleventh annual conference on Virtual Instrumentation. We have already secured commitments from leading experts and technologists in the field, such as design and signal processing, to participate in special forums and [inaudible] NI week. This year's conference is scheduled for August 8 to 10, with our annual investor conference scheduled for Tuesday, August 8. Mark your calendars now and look for more details to come.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Antonio Antezano.

Good afternoon.

Antonio, how are you.

Good. I was looking at topline growth. For the first quarter, you mentioned at about $7.9 million in revenue came from, I guess, acquisitions last year. If I exclude that and I calculate the year-over-year growth, it is about 13%, right?

Yes, we had a couple of things going on in this quarter. Obviously, we had acquisitions from last year, as you called out. And we also had an FX hid of about $5.3 million, which largely offsets that as a result of the strength of the dollar over the course of last year compared to Q1 last year. So, those things broadly offset. But in U.S. dollar terms, organic growth was 13%. In local currency term,s it would have been 17 %.

Right. But then when I look at the outlook, if I just take the middle point, say 158 and then -- let's say 159, and then I take out a little bit for acquisition, also, because I think the acquisition was at the end of April that year. If I do that, then the year-over-year growth that I get is about 11 or 12%. That would be, you know, slightly lower, or lower than the first quarter. Then when I look at the, I guess, the productions for -- industrial production growth both in the U.S., let's say, Europe and Japan, I get actually higher industrial production growth in the second quarter. So is there a disconnect there? Are you being concerned about this for any reason?

Well, I certainly would agree with your characterization in terms of industrial production numbers still look quite strong. When we look at our guidance for Q2, kind of specific issue related to that topic is that we had a very, very strong Q2 last year, as I said in the call. The strongest Q2 -- in '05 the Q2 was the strongest we've had since '99. As we enter Q2, we will still carry the same FX in it that we had in Q1, which is 4% negative hit. We won't have the same acquisition lift to offset it. Once we get past the second quarter, the foreign exchange, certainly if the dollar stays where it is today, will stop to be such a drag on our revenue growth, and that four percentage point hit that we're taking in Q2 will start to dissipate, as we get later into the year. So Q2, there's a number of kind of unique factors around that and I do certainly see a positive sign in the overall industrial economy. But given the dynamics of our strong second quarter last year and the fact that we'll continue to have a FX hit in Q2 this year, that's what driving the guidance that we have in place, which is broadly in line with the more traditional long-term increase we saw in the second quarter. If you recall last year, it was a bit of an aberration.

Alright. Because you have also mentioned that you expected that given the [inaudible] mix for large order systems that seasonality would be more pronounced in Q1, so, frankly, I was expecting probably kind of a higher jump in the second quarter because of that. In terms of margins, you keep your target margin of 15%. You mentioned that that's something that you plan to achieve in 2007?

Our goal is to achieve that by the end of '07. Our strategy, as we said in our January call, is to try to increase our expenses about 70% the rate of revenue growth for '06 and '07, and I think we had a very successful execution on that strategy in Q1. We look forward, certainly, for a record revenue year in 2006, and we'll try to continue to execute on the goal of driving operating leverage, as you saw on the call, with 19% revenue growth and 44% non-GAAP earnings growth, even with the facilities consolidation charge, we're very focussed on driving that operating leverage.

Right. Thank you.

Thank you.

Our next question will come from Rob Mason with Robert Baird.

Alex, I wanted to circle back to your comment on your margin. With respect to the 70% target, expense growth versus sales growth, are you seeing any cost pressures anywhere that you weren't seeing maybe a couple of months ago?

In general I would say broadly, no. Certainly we intend to remain very competitive in salaries and compensation for employees. One of the things that will drive some modest sequential increase in expenses in Q2 is company-wide raises, which we put in place on April 1st as part of our normal program. Other than the normal salary increase cycle we're going through, we don't see any significant noticeable cost pressures at this point.

Okay. And then if I could just touch on Europe real quick, the growth rate there looked very strong, certainly relative to the performance over maybe the last four or five quarters. Just curious if you could provide some commentary there and whether you think that type of growth rate is sustainable this year? I know it was going against an easier comparison in first quarter, but how that may shake out for the year, because it looks like the European economy is starting to waken a little bit more, so --

We're pleased with the execution of our Europe organization. Sales and marketing teams did a really good job in Q1. As you pointed out, Q1 last year was a tough quarter -- a tough quarter for the overall European economy, and we certainly are seeing in the broader based economic metrics, a strong recovery in European business competence and industrial production in the PMI there. And there may be some elements of some pent-up demand that was held back that we're now seeing being released. I don't want to call too specific in terms of guidance of particular regions, but in a broad-based way I would say that the improvement in the European industrial economy we would certainly see to be a good thing for our business going forward.

Thanks, Rob.

Next we'll go to Ajit Pai from Thomas Weisel.

Yes, good evening.

Ajit, how are you?

Good. Couple of quick questions. One of the $900,000 that you've taken as a charge, is that in a post-tax basis and is that entirely in gross margins?

It is a pretax basis and it is entirely in gross margin.

It's on a pretax basis.

Pretax basis and entirely --

Exclude that and you had, probably, your best gross margin in four quarters?

Yes, we're very pleased with gross margin in Q1, a very good execution from engineering and R&D and manufacturing to deliver on that as we also continue our conversion of production from the acquisition companies, as well as from a base business to Hungary, we're certainly seeing the benefits of that. That's helping to drive operating leverage.

Does that also mean that some of the pricing in the sort of businesses that you recently acquired is improving?

Really, the operating leverage is coming from driving out cost and leveraging our scaled infrastructure, and there's really been no pricing change, per se, at the acquired companies. The real focus is on leveraging our much greater scale and the overlap in resources to drive out costs and, in that way, significantly improve the operating profitability of those businesses. We're very pleased with execution by the employees that -- for Measurement Computing and [Iotech] and Electronic Workbench that we bought last year. They've remained very focused and have done a tremendous job in executing and improving the profitability of those businesses.

And those businesses, Measurement Computing, for example, have you shifted like most of the manufacturing over to NI, or is it still, you know, primarily done by them?

It is scaled. With Measurement Computing, which we bought in April last year, we're much further along. With Iotech, we'll be reaching substantial critical mass when we get to the third quarter. And as I said to Antonio earlier on in the discussion, really we're seeing benefit of the increased revenue from the acquired companies is really being offset by the strength of the dollar this year, and we look forward to the equalizing of exchange rates, as we go through Q3 and Q4 to remove that exchange head wind from the picture.

And could you give us the average or the size number that you usually give out, as well as the overall head count at the end of the quarter?

Sure, the average order size was $2,750, and that was consistent with Q1 last year. We saw the decline from Q4. And we would typically expect to see some improvement in that in the second quarter. When we look at the total head count, we were at 3,943.

3,943. So that is up from 3,812 at the end of last year?

Correct, we had increase of about 100 people in the emerging countries and then, developed countries is relatively flat.

Okay. Thank you so much and congratulations on a very solid quarter.

Thank you, Ajit.

[OPERATOR INSTRUCTIONS] Next we'll go to Kerwin Kam with Cohen.

Hi, good afternoon. Just a quick question on the cash balance. Just wanted to see if you could talk about the increase cash and some of the [other like] components, as well as CapEx.

Certainly, Kerwin. We start with CapEx first. You will see year-over-year -- or I should say compared to Q4 in December, you see our net property and equipment is down about $2 million, as our depreciation is exceeding our CapEx in Q1 by about $2 million. We don't anticipate any significant CapEx outside of our run rate in '05 -- the run rate we had in '05. We don't expect any significant change in '06. And at this point I do, expect depreciation to exceed CapEx in '06. In terms of the cash balance, we have an increase in cash of almost $20 million, obviously heavily driven by the non-GAAP operating income running at about $16 million. That is the strongest contributor to cash growth.

Okay. And then can you talk about some of the linearity in the quarter and what you saw?

The linearity was very consistent with what we saw in 2005. So no significant change in the trend of percentage of revenue coming in each month.

Okay. Thank you.

Your next question will come from David Yuschak with Sanders Morris Harris.

Good afternoon, gentlemen. I missed the first part of your comment, Alex. Did you say it was a $900,000 charge in the current quarter because of the plant issues?

Yes, Dave. We converted part of our Austin manufacturing facility. I know you've se -- I think you've seen it a few years ago. We converted part of it to office space. As a result of that conversion, there was a number of improvements, which have been done to that space that have no future use. And the net book value of those improvements, which -- many of which were done in late 1990s -- was written off in Q1 to cost of goods sold and that was a $900,000 charge. That was not anticipated when we gave guidance.

You didn't say anything I don't think, either, about what the trend were in your order sizes over $50 000. I don't think I caught anything on that.

Sure, it was in -- I think we discussed it briefly in the comments, but orders over $50,000, very similar to 2005, were down sequentially from Q4, and up sequent -- up year-over-year from Q1 last year. Strong growth on year-over-year, Dave, but sequentially, as we've seen more and more, those big orders tend fall after the fiscal bubble, if you like, spending at the end of Q4, and that's a trend we saw repeated again here in Q1.

So when you say strong year-over-year, what kind of growth rate would that be?

I mean we had 19% growth overall, and it was slightly higher than that. So very good success and continuing to drive our system-level sales.

Now, there's a lot of interest today about the factory automation -- the digital factory more than I've seen in several years. I remember you guys had a -- were working with even Siemens, I think. this may date me how long I've been working with you guys. It's been about three or four years ago, maybe, Could you give us some sense as to what you're seeing in the way of factory automation, as this interest seems to be building and how you see it potentially playing out and where your opportunities are and are those opportunities going to be like working with corporate partners like a Siemens? Just kind of curious as to how you see this potentially, though. Particularly, you know, with manufacturing picking up some momentum here.

David, this is John. Might start by talking that we do see a lot of opportunity in industrial markets, industrial applications. As we talked about in the call we see an evolution of our platform that we call Graphical System Design where, again, we're leveraging integratored hardware and software, a lot of it's LabVIEW, but we're taking advantage of real-time edition of LabVIEW and the LabVIEW embedded technology that you've heard us recently talk about and then, the exciting hardware platforms like CompactRIO that are really a very good solution for people building advanced machinery, or doing advanced industrial control. So it's not necessarily that we're going in and doing complete plant automations. That's not our approach. But there's a lot of equipment and a lot of unique applications. There is a large market opportunity but one that we think we can kind of uniquely serve to really help the engineers more quickly design and prototype these systems used in industrial applications.

Now, will you need to work with people like a Siemens and all that just to help bring in that application to something that they see as a need in planning out that factory floor?

Yes. In relationship with Siemens it was back in the '90's and many other partners, many of which are focused on particular industries or industrial market is key. And again that is similar to the approach we did in Test and Measurement. Virtual Instrumentation and graphical system design, it is an open platform. So, yes, we do work with, you know, the existing players and partners in that space.

Now, the orders over $50,000, would you see more and more coming out of factory automation applications than the traditional test and automation market?

It is one factor that's helping drive the growth, but I wouldn't say exclusively. It's another area that we're seeing significant growth is our RF and Communications and Test. Those orders also tend to be much larger size.

Okay. But you are seeing improvement in factory automation, though, relative to some of your --

We definitely are seeing success, the adoption of, you know, our LabVIEW Real-Time, LabVIEW embedded and the associated hardware platforms like PXI and CompactRIO are definitely seeing very strong growth.

Jim --

Go ahead.

Jim Truchard, We're also, in this category, seeing OEM's building machines and using products like CompactRIO and our PXI platform in their machines that they -- and we're serving as an OEM, so those will typically be larger orders, as well.

One last question and I'm going to get off the line. Does that mean, does it generally mean a smoother ramp because of some of the technology embedded in there that the sales cycle may be a little longer just because of adoptions?

That is true across the board on the larger orders because, typically, a company'll buy one to prototype with, and then once they get it developed and get into their deployment cycle, it will ramp up. So definitely a longer sales cycle.

Thanks a lot, gentlemen.

Thanks, Dave.

Our next question comes from [Richard Shew] with Coles Investment Banking.

Yes, hi. Alec?

Yes, RIchard.

Good afternoon. Couple of questions. Regarding the 14 --18% operating margin goal that you have aspirations for getting to by year-end, what sort of volume do you think that will require? And I got a couple of follow-ups.

Syre, Richard, to be clear, We're talking about non-GAAP operating margin. What I said earlier on was we're targeting to get to that point by the end of '07 --so I want to make sure that that's clear -- that's the target that we're trying to head towards. It is possible that that might happen by Q4 of '06.

It's '07, I'm sorry.

We're looking at the full year and we're targeting '07. It is possible, as we said before, that we could hit 18% in Q4 of '06, that would be require a continued good growth in mid to high-teens.

Okay. Number of companies have commented on the -- you know, elimination of the R&D credit impacting their tax rate assumption. What sort of assumptions, if any, are you making on the 24% accrual?

We factored in for now that the R&D tax credit -- we've had to assume it won't be renewed. And obviously, as we continue to move more production overseas, we're able to absorb any transitionary effect that may come from the R&D credits lack of renewal before the Easter break. Obviously, we hoped the government to renew the R&D credit and then we'll reassess our tax position. For now I would encourage you to continue to use 24% until that plays through.

So despite the non-renewal, you did not get a hit on that?

Well, I would say it offset what would potentially otherwise have been a benefit of decreasing the tax rate.

[MULTIPLE SPEAKERS] -- if it gets reinstated.

I would -- let's discuss it again when it gets reinstated and we'll assess our overall tax position.

And then, finally on gross margins, is it your thinking that we ought to take into account the $900,000 hit and normalize everything else being equal at roughly a point higher?

Certainly if I was modelling the Company, that's what I would do.

Good. Thanks.

Thank you, Richard.

We have no questions at this time. I'll turn the call back over to Alex Davern.

I just want to let you know that I will be presenting at the Baird conference on May 11th in Chicago, and Dr. Truchard will be presenting at the S.G. Cowen conference on June 1st in New York City, and we hope to see you there. And also hope you will mark on your calendar's our investor day for NI week in August, and we hope to see you there, too. Thank you.

And that does conclude our conference today. We thank you for your participation. Have a wonderful day.