National Instruments Corp (NATI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Instruments Corporation first quarter 2007 conference. Just as a reminder, today's conference is being recorded. You may refer to your press packet for the replay dial-in number and pass code. The replay will be available from 7:00 p.m. Central time today and will end at midnight Central time on May 3, 2007. 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 and introductions I would like to turn the conference over to Mr. David Hugley, Corporate Counsel.

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, gross margins, expected GAAP and non-GAAP earnings per share, future product announcements, future growth per PXI, growth and investment in industrial and embedded applications, 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, 2006. 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 key points today are double-digit revenue growth in a tough quarter for our industry, 51% year-over-year growth in GAAP net income, and success in key product areas validating our strong investment in R&D. We turned in a solid quarter in Q1 delivering excellent operating leverage and strong revenue, growth was driven by many key product areas, including record PXI system sales and record distributed I/O revenue. In our call today, Alex Davern, our CFO will review our financials, John Graff will -- our Vice President of Marketing, will discuss our business, and I will close with a few comments before we open up for your questions. Alex?

Thank you. Today we reported first quarter revenue of $172 million, an 11% increase over Q1 2006. GAAP fully diluted earnings per share was $0.23 with GAAP net income of $19 million up 51% from Q1 2006. This compares to GAAP fully distributed earnings per share of $0.15 in Q1 last year. Non-GAAP net income was $22.5 million, up 39% from Q1 2006, with fully diluted earnings per share in Q1 of $0.28 per share. This compares to non-GAAP diluted EPS of $0.20 per share in Q1 last year.

For Q1 non-GAAP operating margin was 15.5%, up from 13.0% in Q1 2006. This 250 basis-point increase positioned the Company well to achieve our goal of 18% non-GAAP operating margin for the full year. Our performance in Q1 builds on the excellent operating performance of the Company over the last few years and represents an increase in non-GAAP net income of more than 100% over the last two years. Our virtual instrumentation and graphical system design products which represent the vast majority of our product portfolio had 13.4% year-over-year revenue growth. This represents the third consecutive quarter of strong revenue growth for those products despite three sequential quarterly declines in the Global Purchasing Manager's Index.

Our growth in Q1 was driven by the success of our new products, especially in the areas of software, USB data acquisition, distributed I/O, Modular Instruments, RF, and PXI. This continued strong organic growth validates our stragedy of increased investment in R&D, to drive new product success. In contrast, sales of our instrument control products were down 6% year-over-year in Q1 compared to a 5% year-over-year decline in Q4. This decline is in line with the continued weakness of the global PMI and the recent weak results reported by many companies in the traditional test and semiconductor test markets. Instrument control now represents less than 11% of our revenue down from 13% in Q1 last year, and 20% of revenue in Q1 2003.

During Q1 we saw growth in all regions, revenue in U.S. dollars was up 4% year-over-year in the Americas, up 14% in Europe, and up 21% in Asia, giving overall growth of 11%. Additionally, we saw a $2.2 million sequential increase in deferred revenue on the strength of good software sales in Q1. The one weak region for us in Q1 was in the Americas where we had a very tough compare against 22% year-over-year revenue growth in Q1 last year, and where the U.S. PMI indicated a contraction in manufacturing earlier in the quarter.

Entering 2007 we focused on achieving double-digit revenue growth in the face of a weaker industrial economy. While also continuing to drive operating leverage as we move towards our goal of 18% non-GAAP operating margin for 2007. We're very pleased to have been able to deliver on these goals in Q1 growing our non-GAAP net income by 39% in what was a tough quarter for the industry. We believe our strategy of increased investment R&D over the last six years has allowed us to significantly outperform our industry during this weaker period.

For many years we have tracked our performance compared to the aggregate revenues of many key U.S. public companies in the traditional test and semiconductor test industries. A copy of this chart is included with the slides which accompany our webcast of this call. Based on this chart our percentage of the total revenue reached an all time high in the last two quarters and has nearly tripled since 2000. Our 11% revenue growth in Q1 was outstanding when compared to the 3% year-over-year revenue decline for the aggregate of all companies. We believe our strategy of increased investment in R&D over the last six years has been key to our outperformance during this weaker period and we believe we are well-positioned to benefit from any recovery in the global PMI.

Now looking at the income statement in more detail, non-GAAP gross margin in Q1 was 75.9%, up from 73.7% in Q1 last year. This represents our highest quarterly gross margin percentage since 2000. Aiding this improvement were strong software sales, the continued transition of production to our Hungarian facility and a transition of certain components to new lower cost suppliers. Non-GAAP total operating expenses in Q1 were $104 million up 10.6% year-over-year, compared to a 14.3% year-over-year increase in gross margin. Non-GAAP net margin was 13% of revenue, within 1% of our long-term model of 14% non-GAAP net margin.

Now turning to the balance sheet, inventory was flat with December 31, and accounts receivable were down $7 million. As of March 31, 2007, the Company had $245 million of cash and short-term investments. And during the quarter, the Company used $29 million to repurchase 1.057 million shares of the Company's common stock at an average price of $27.67 per share. Also, in April, the Board of Directors approved a quarterly cash dividend of $0.07 per common share, payable on June 4, 2007 to shareholders of record on May 14.

Now, I'd like to make some forward-looking statements concerning our expectations for Q2 and the full year. For Q2, 2007 we currently expect revenue to follow the seasonal pattern of being up sequentially from Q1 and to be in the range of 174 million to $183 million. We expect GAAP diluted earnings per share to be in the range of $0.23 to $0.28 per share for Q2. Regarding non-GAAP diluted earnings per share for Q2, 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 non-GAAP diluted earnings per share for Q2 to be in a range of $0.28 to $0.33 per share.

For the full year, we expect to record our fifth consecutive year of record revenue, and our third consecutive year of record net income. Additionally, management also currently expectancy our GAAP and non-GAAP effective tax rate for the full year to be 22%. 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, effective tax rates and foreign exchange fluctuations.

In summary, Q1 was a good quarter with double-digit revenue growth and extremely good operating leverage. Our virtual instrumentation and graphical system design products continued to deliver good revenue growth despite the incremental weakness of the global PMI and we made significant progress towards our goal of 18% non-GAAP operating margin for the year. Before I turn it over to John Graff, VP of Marketing, I want to let you know that we will be presenting at the Baird growth conference in Chicago on May 10, the Credit Suisse semiconductor and supply chain summit in New York on May 15, the JPMorgan technology conference in Boston on May 23. Also, the NI investor conference will be held during NI week this year on Tuesday, August 7. And we look forward to seeing you there.

Thank you, Alex. We turned in a solid performance in Q1 with double digit revenue growth driven by continued strong growth of our virtual instrumentation and graphical (Inaudible) and products. We were especially pleased with our products and platforms that fuel larger system sales like PXI, modular instruments, and distributed I/O. Although orders over $20,000 were down sequentially from Q4 as expected, due to capital purchasing patterns, we saw strong year-over-year growth in large system sales during Q1. This led to an average order size of approximately $3,100 compared to $2,750 in Q1 last year. We also saw continued expense in our broad based high volume business, highlighted by very strong USB data acquisition growth and a continued strong adoption of NI's software.

The success with both large system sales as well as broad-based high volume business was once again driven by our investments in new products over the past six years. This new product success also played a roll in achieving our fourth consecutive quarter of non-GAAP gross margin at or above our long-term model of 75%. Strong software sales worldwide in Q1 were driven by the continued success and adoption of the LabVIEW family of products and services. We were pleased with the growing acceptance of LabVIEW 8.20, which was released in Q3 2006, as well as continued strong growth of many LabVIEW add-on modules, including LabVIEW Real-Time and LabVIEW FPGA for industrial and embedded applications.

To help us further address interactive benchtop and research applications, in Q1 we introduced LabVIEW SignalExpress, an interactive, no programming version of LabVIEW that strengthens our position for common data acquisition and data logging applications. LabVIEW's SignalExpress is optimized for use with our expanding family of USB data acquisition products including our modular CompactDAQ data acquisition system we introduced last May. In addition to its seamless integration with NI hardware, we are also pleased to continue our successful partnership with Techtronics by supporting several of their series of digital storage assort scopes with NI SignalExpress Techtronics addition. An evaluation version of SignalExpress ships with many of Tech's scopes.

LabVIEW continues to garner industry acclaim. In Q1, LabVIEW was recognized by EDM Magazine as innovation of the year in the software product category. In addition, Test and Measurement World Magazine awarded LabVIEW with its test of time award in recognition of the continuous high quality and efficiency of the LabVIEW graphical development environment. In the March issue of Test and Measure World, Rick Nelson, Editor in Chief stated, "In the 20 years since its debut, the LabVIEW graphical programming platform has revolutionized the development of scalable test, measurement, and control applications."

LabVIEW adoption continues to grow in Academia both in undergraduate and graduate courses as well as in university research labs. Demonstrating the success in Academia, in Q1, two new textbooks were introduced that incorporate LabVIEW into the curriculum and we continue to see an increase in LabVIEW textbook material based on the LabVIEW 8 platform for a broad range of subjects including signal processing and communications. For example, at the University of California San Diego, students gain practical hands on experience in a new communications systems engineering lab by working with LabVIEW and NI modular instruments for RF signal generation, acquisition, and analysis. We continue to invest in Academia to ensure future engineers are trained on the latest technology needed to solve future complex applications when they enter their careers in industry.

As I mentioned previously, we are continuing to see very strong growth in USB data acquisition, fueled by our expanding line of USB devices, and our modular USB-based compact DAQ system. During the quarter we tripled the number of modules supported by CompactDAQ to 30. These new C-Series modules also supported on CompactRIO added new measurement types, increased measurement range, and expanded channel density.

With these new plug and play modules as well as the integrated signal conditioning, CompactDAQ can address a wider range of applications from benchtop data acquisition to industrial and embedded systems. CompactDAQ and our USB devices continue to see strong sales to first-time customers, thus expanding our user base and seating future platform opportunities. A key platform driving our success in test and measurement is PXI, and we were pleased with strong sales of our PXI products driven by a record number of PXI systems ordered in Q1. PXI modular instrumentation sales were highlighted by strong success in RF and digital test, with both areas growing significantly faster than the Company average in Q1.

Since PXI is based on commercial off the shelf technologies, customers benefit from the quick integration of the latest technologies into new PXI products. For example, in Q1, we introduced the family of PXI, PXI Express, and PXI real-time embedded controllers based on Intel's core 2 DUO dual core processor. These new controllers can deliver a performance improvement of more than 100% compared to systems running traditional single core processes. Customer adoption of PXI continues to be strong.

One customer, John Gmitter, test engineer at Harris RF Communications, was recently named test engineer of the year by readers of Test and Measurement World Magazine for the successful implementation of a LabVIEW and PXI-based test system for military radios. In the article, Gmitter described how his team had used LabVIEW for over 10 years and after review decided to add NI test stand, test executive software for sequencing, coordination, and management of their many tests. For the hardware, the Harris team focused on the PXI platform for its flexibility and expandability to address future application needs. In one communications test system, they replaced a number of obsolete traditional instruments with several PXI-based instruments from NI including an arbitrary wave form generator, audio analyzer, and modulation analyzer. By leveraging PXI and NI software, Harris reduced the footprint of their systems by 80%, and increased the testing throughput by 300%. Gmitter said the team is looking to adopt more PXI instruments over time.

This year represents the tenth-year anniversary of the introduction of the PXI modular instrumentation platform. During the past 10 years PXI has seen tremendous growth. At its creation, the PXI system alliance had four charter members. Today, there are over 70 PXI vendors. A handful of products at PXI's introduction has now grown to over 1500 PXI products available today. And that doesn't even include the CompactPCI modules available from hundreds of vendors that are compatible with and often used in PXI systems. The future looks very bright for PXI, a key reason being the addition of PXI Express, which leverages the significant performance advantage of PCI Express. PXI Express is software and hardware compatible with today's PXI systems, ensuring very long continuity for the platform and for customers. The improved performance of PXI Express along with the move to multicore processors, helps open up an even wider range of applications for the platform. The recent entry of additional TNM suppliers into the PXI market is also a reflection of the growing investment into the platform.

An exciting area of investment and growth for NI is industrial and embedded applications where more and more customers have adopted our unique graphical system design tools such as LabVIEW Real-Time, LabVIEW FPGA and industrial measurement and control platforms like Compact RIO which is based on our C-Series architecture. With continued strong sales of Compact FieldPoint and CompactRIO, our distributed I/O products delivered record revenue in Q1, building on a very strong performance over the last five years and an accelerated growth rate in the last four quarters.

This month we also extended the reach of LabVIEW Real-Time to target Wind River VxWorks Real-Time Operating System running on the latest CompactRIO controller and we also announced version two of the LabVIEW embedded development system for ADI Blackfin processors for customers who require high volume deployments. In diverse applications such as controlling and collecting data on wind turbines in India, controlling semiconductor test systems in California and controlling the exploration of natural gas in the North Sea, customers are choosing NI's graphical system design approach for greater flexibility, increased productivity and lower cost. One OEM customer out of Germany, FAG Industrial Services, developed a machine conditioned monitoring and control system called ProCheck that's based on Compact RIO and LabVIEW Real-Time and FPGA software. By embedding the modular and scalable CompactRIO system in their design, FAG is able to significantly improve machine maintenance, avoid unplanned shutdowns, increase machine availability, reduce costs, and safeguard product and process quality.

In closing, we were very pleased with our results in Q1 in a tough industrial environment. Our strong investment in new product R&D is paying off, including very strong growth in USB data acquisition, continued strong adoption of LabVIEW, further growth, and penetration of the PXI modular instrumentation platform, and very strong growth of our graphical system design platform for industrial and embedded applications. With that, I'll turn it over to Dr. T.

Thank you, John. Three years ago we shared our vision of graphical -- first shared our vision of graphical system design, building upon their success from 20 years of virtual instrumentation by taking advantage of powerful new technologies such as reconfigurable FPGA's for rapid design, prototyping, and deployment of design, control, and test systems. Earlier this month, I attended the Embedded Systems conference in San Jose where it was clear to me that our vision of graphical system design is taking hold and the show was a great success for NI on many fronts. From the positive response, from the trade press on the products we've introduced, to the excitement from product collaboration with partners like Analog Devices, Wind River, and others, to the growing number of customers whose successes were on display at the show. This success is the result of our continued strategic investment in R&D over the past number of years. After the major downturn in 2001, National Instruments chose to increase our investment in R&D from 12% of revenue to 16% of revenue. That investment enabled us to introduce significant new products at a time when many industry players are pulling back on their investments.

Over the last six years, we've worked to adjust our business model to have increased R&D investment by driving significant operating efficiencies in other areas of the Company. We believe these changes have proven successful and will allow us to return to our goal of 18% non-GAAP operating margin while sustaining a much larger investment in R&D. This strategy has allowed us to continue to disrupt traditional markets by creating new products such as LabVIEW FPGA, CompactRIO and PXI Express and expanding our vision with graphical system design today by combining powerful, flexible, graphical programming software with increasingly powerful technologies such as multicore processors, reconfigurable FPGA's, higher performance and easier to use bus architectures, such as PCI Express and USB, we believe we can continue to expand on our opportunity.

As our platform continues to strengthen, we remain focused on investing aggressively to address the growing number of opportunities in design control and test. I encourage you to attend NI week on August 7, where you'll see our newest products as well as hear about the many customer successes. Our investor conference will also be held during NI week on Tuesday, August 7.

Our continued innovation and commitment to customer success would not be possible without the consistent dedication of our employees. As we continue to be named one of Fortune 100's best places to work, I'm pleased our employees continue to find NI as a place where they can have challenging and rewarding careers for the long term. In summary, I am pleased with our strong results in Q1 and with our growth strategy in key product areas as we continued our success in graphical system design and virtual instrumentation. Thank you, we will now take your questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Antonio Antezano from Bear Stearns.

I wanted to ask you about gross margin outlook. Gross margin is getting close to 76%, I think that was kind of the level that you guys had in the late '90s. So probably the train is not boring anymore but what is your outlook for the rest of the year in gross margin?

Well, I will agree that 75.9% is definitely getting close to 76, and we are pleased, Antonio, obviously to be back to gross margin levels we'd seen in the '99, 2000 time frame. And I think that's a real testament to the success of a whole bunch of groups within the Company, both from a product side, on software and very good margin in the hardware projects as well as manufacturing and sales and marketing departments as well. It's a combined effort by the whole company. I think it really demonstrates the differentiated market position we have built up within the business and our franchise over the last 30 years. The outlook looking forward for the rest of the year, is I will anticipate margins to be relatively consistent as we go through the next couple quarters. That's our planning horizon for now.

Okay. Then looking at the revenues by geography, Europe, in local currency was about 6%, although when we look at the, I guess, the manufacturing indicators in Europe, those were very strong in Q1, especially in Germany. Why the, I guess, the mid single-digit growth rate? Is the business mix in Europe very different from business mix in other regions?

No, the business mix globally is actually very consistent, and as we talked before, we do adjust our pricing and exchange rates we use to set our prices internationally as the exchange rates change over time. And we did make an exchange rate adjustment in our U.S. -- our European list price last summer. So you got to take account of the reactions we make to compensate for exchange rate changes. And that has an impact obviously on the local currency number. We've traditionally over time looked to the U.S. dollar numbers as a better compare of the overall volume change and we'll be continuing to adjust pricing globally each quarter as we look at changes in the dollar exchange rate with our other currencies we do business in, to ensure we keep a fairly narrow range of price differential globally.

Thank you. I'll go back to the queue. Thank you.

Thank you, Antonio.

We'll now move onto Mark Moskowitz with JPMorgan.

Thank you, good afternoon.

Hi, Mark.

One clarification and a question, if I could, guys. First off, Alex, you reference how National Instruments is clearly bucking recent trends within the global PMI. Could you give us a little more in terms of the underlying forces there? How much of this is driven by National's new product thrust versus perhaps a shift by the customer base to lower-cost , more flexible

Well, I think there's definitely, a combination of both. We're certainly very pleased to see our performance relative to this space in this quarter and I think also in Q4. The key behind it, I think definitely is the push in new products but obviously as global manufacturers become more cost conscious that tends to play to our favor. I'll ask Dr. Truchard to comment there and add his two-cents worth.

Sure. Obviously in PXI we have expressed several advantages that we bring. Typically lower cost, higher system integration yielding often significant performance benefits in automated test, especially on the manufacturing floor, then, of course, the new products will play the key role. Products like cRIO, CompactRIO, off to very good starts and sustained growth over multiple years and have allowed us to really take advantage of the software graphical system design software. So we are very encouraged by those results.

Obviously, our strategy, Mark, over the last number of years has been to ramp up our R&D to create a bit more independence in our revenue stream from the macroeconomics, and that's certainly a goal that we're pursuing as we go on into the future.

I appreciate that. Then my question is, we've noticed that the Defense related orders have dropped off the past couple months in the durable goods data. How has that impacted your outlook for defense spending, if at all, given your customer exposure there?

Well, this is John. I'll mention first that in the quarter, we saw very strong sales into the mill aerospace for us. A lot of that is in testing. And again, as Dr. T mentioned, success with the PXI platform, we have a strong position with our software. You also heard us mention in the call our RF products, which is also opening up new application opportunities, and we're seeing very strong growth there. So overall, mill aero was very strong for us both on a year-over-year and sequential basis.

I think PXI has certainly seen very good acceptance in the mill aerospace.

And in quite a number of cases it's replacing VXI systems that have been out there in the field now almost two decades in some cases. So we're seeing very strong interest in use of PXI in those applications.

Okay, thank you.

Thanks, Mark.

Moving on from Credit Suisse we'll go to Will Stein.

Hi. Operating margin goal of 18%, I think the previous comments you had made is that the timing for that was calendar '08. Am I correct in hearing you say that that's essentially pulled in a year to calendar '07? If so, can you talk a little bit about what is driving that, and also would you expect that to improve throughout time as we go into calendar '08?

Sure. Let me answer that question. We had set a public goal as you know in 2003 to get our operating margins back to 18% by 2008. And we've been pursuing that over the last four years. We obviously would like to get back there sooner, and based on our performance as we come through the last few years going from 10% operating margin in '03 to 12% in '04 and 14% in '05 and a 16% operating margin in 2006, and a good strong start to 2007, we are feeling significantly more confident that we will be able to potentially hit that goal this year. So we are pushing towards a goal of 18% operating margin on a non-GAAP basis for 2007. And we certainly would like to hit that goal a year early.

So what's driving that? I know that in the past you've talked about the manufacturing shift to Hungary and also sourcing components from lower cost vendors, I would imagine in Asia, that would, I imagine affect primarily the gross margin line. Is that where we're going to see ongoing benefits throughout the year or is there something else I'm missing? Maybe something in--?

We obviously are looking for leverage in multiple elements of our business and certainly the elements you referenced are certainly very accurate. The transition to Hungary, very good software sales, new products are very, very key in terms of driving good margins, very differentiated products. So we've been successful not only in scaling our business, but also in scaling our business into directions where we have significant amounts of differentiation. Allowing us to disrupt traditional markets and still retain a high gross margin. So I think there's a strategy element, there's obviously execution in the design side, with R&D and in manufacturing side. We've had very good expense management from the employee base and then also we have been driving and looking for leverage in areas like G&A as well as in sales and marketing.

So we're being very prudent, I think and disciplined in our execution and I really feel the performance of the Company on an operational basis over the last four years has been really phenomenal. To be able to step operating margins steadily up 2% a year while sustaining R&D at 16, has really allowed us to transition our business model and I think leaves us very well positioned for any upturn in the global PMI to take advantage of that.

Now, in terms of the long term, post-2008, I hate to start speculating what would happen if we get beyond 18% until we get to 18% for the year, but our bias in general, as I've said on previously calls as we move towards that 18% number, we will be starting to look for incremental areas of investment primarily in sales and marketing that we feel may help us accelerate the top line. That would be the strategy we'll be pursuing as we look out into '08 and beyond.

Great, thanks. I'll get back in queue.

Thank you very much, Will.

We'll now move onto Rob Mason with Robert W. Baird.

Yes, Alex, the North American sales growth, I guess is reasonable given the economic backdrop, I was just curious if you could talk about the trends that you saw here in the U.S. as you move through the quarter, the monthly trends and then maybe what your outlook reflects for North America. As well as the other two regions here in the second quarter and moving through the year.

Sure. Well, as you're aware, there was a contraction in the PMI in the United States early in the quarter which was something we were conscious was likely when we gave guidance in January. And we did also have a very, very tough compare for our U.S. business, the strongest quarter for growth there last year was in Q1, a 22% year-over-year growth in the Americas in the first quarter of '06. And I feel like we had tremendous execution by our U.S. sales force throughout the first quarter. Those guys have been very focused on executing and closing business, creating good opportunities and I'm optimistic about their execution as we go out through the rest of the year. In terms of relative growth in the regions, my gut feel based on where we are right now is while the PMI at a global level has dropped the last three-quarters in a row, the rate of dissent has now started to slow down as we went through Q1. And it's hard to predict exactly what will happen there but it's not unreasonable to think that it may start to decline less rapidly as we go into the next number of months.

Okay. And then if I could just follow-up, your growth in software, you've called out for I guess the last several quarters. This quarter could you compare that growth to your, on relative terms to your corporate average, how that might appeared and maybe also we've talked about moving up the design chain, maybe what percent of the software sales relate to that effort?

Well, from an absolute point of view, if you stood the impact of deferred revenue, then certainly our software business is growing faster than the Company overall. In terms of sales into the specific elements of the design chain, I'll let Dr. Truchard or John address that question.

I'll start first as we highlighted, we're seeing a lot of success with modules like LabVIEW Real-Time and LabVIEW FPGA, which those products are pretty targeted primarily into industrial and embedded applications and are part of this graphical system design platform that we talked about. At the same time, though, they're sold as part of the LabVIEW platform or LabVIEW system. So we sell a lot of core LabVIEW units that are used both from research and test but also in designing systems, algorithm engineering is something Dr. T. can talk about and then also for these industrial and embedded applications.

Thanks, Rob.

We'll move onto Ajit Pai with Thomas Weisel Partners.

Good evening and congratulations on a very solid quarter.

Thank you, Ajit.

A couple of quick questions about the uses of cash, you've had some pretty decent cash flow, and you've been buying back shares this quarter. Could you prioritize for us, it's been a while since you've done any acquisitions, how would you prioritize the uses of cash right now?

Certainly we put the priorities there for that obviously, maintaining enough cash to operate the business is number one.

How much cash do you think that is?

That's a good question. Generally I think to operate a business successfully you need to have probably at least 90 to 120 days of expenses on hand to feel like you have a comfortable position. We also, second priority would be the continued payment of a dividend and obviously if we continue to increase our profitability we'd like to see that increase as we go over time. We'll also be opportunistic in buyback, understand our strategy has never been mechanical, it's been an opportunistic strategy based on the conditions in the marketplace at any point in time. And acquisitions are on our list of priorities for cash use, but as we have seen from other companies, not only in other spaces but in our own space, you have to be quite careful on acquisitions you do to make sure that one plus one really equals three. We've been very, I think prudent in our acquisition strategy, we continue to look for good opportunities, and that's something we will be watching as we go forward. But we certainly, in the current quarter, we did spend obviously about $30 million to buy back a little over a million shares. Our cash balance is down slightly in the quarter, but is largely unchanged from Q4 and we'll be continuing to evaluate market conditions as we go forward.

Okay. Then the follow-up question will be just clarifications. One is about your expected continuing tax rate and then just what your headcount at the end of the quarter was?

Sure the headcount at the end of the quarter was 4,230, that's up about 7% from this time last year. And what was the -- the other question was what?

On the tax rate.

What's the question?

On an ongoing basis for the rest of this year as well as next year do you expect the declining trend in tax rate to continue?

Well, our expectation now for the rest of the year is 22%, it's a little too early to call next year but I'm not aware at this point of any reason that would cause it to go up in 2008.

Okay. Thank you so much.

Thanks, Ajit.

From SMH Capital we'll move onto David Yuschak.

Good afternoon, guys, good quarter. As far as getting to 18% operating margins this year on a non-GAAP basis, you would basically probably need probably high teens, maybe 20% revenue gains, maybe in the second half of the year, and that probably is going to come from your operating expense line, then the gross margin, is that fair to say?

Can you repeat the question, David? I missed when you said--?

To get an 18% operating margin non-GAAP this year, it would kind of suggest you need at least upper teens revenue growth second half of the year, probably the leverage has to come out of your operating expenses because gross margin as good as it's been, can't push it too much more there. Is that a fair statement?

Not really the way I would see it. Looking at the math as I view it, I think it's entirely possible that we could hit 18% operating margin if we're able to have revenue growth that's in the low double digits. There's a lot of leverage from our gross margin position relative to last year, and so, no, I don't see it as the requirement that we have high teens revenue growth in the second half to hit 18.

So you're still looking for more gross margin expansion, then?

Well,--.

In that kind of environment?

Our margins right now are significantly higher than in the first quarter than they were in the second half of last year.

Right. Okay. One other thing, in this kind of slow-growth environment, I think you guys have said your marketing force is pretty much in place. It's just a matter of realizing a better environment in which to work with. Are you doing anything within that marketing effort today in a slow-growth environment to kind of change some things to try to see if there's things that can be done to jet up the growth even more than what you've done already in this environment when you do get a turnaround? Or is it more basically going to be just a more positive macro environment?

I guess my take on that, Dave, would be we've continued to invest in marketing and scale it up over the last number of years. I think the marketing department has done a phenomenal job of driving efficiency and leveraging the tools like the web to be much more effective without having to scale the expense at the same rate of revenue, John can share a lot more tails on their successes with driving that leverage.

Yes, and what I would say, David, is first of all you've got to look at the new products. R&D's handing marketing a great set of tools in that we have a very focused message around the new applications that we can now address with these new products. So an example, you heard Dr. T. talk about this embedded systems conference that we went to. I mean, that's a new market area we've entered and just in three years we've seen an incredible traction that Dr. T. referred to. So we've been able to kind of reallocate marketing expenses, as Alex said, we're getting incredible leverage out of the web, which is bringing a lot of efficiency, and then at the same time we continue to make investments in our field salesforce, especially in the emerging areas, in Asia, Eastern Europe, and elsewhere around the world. So we feel very good about where we are with our sales and marketing investments, and we continue to be opportunistic to drive that revenue growth.

You've always given us a number about what percent of your business was over 10,000, or could you give us maybe over 30,000 what percentage of your business was?

Oh, on the large order size?

On the large order size. Yes, then I'll let you go.

The orders over 20,000 was approximately 35%, I don't have the exact numbers in front of me. But I think last quarter we said in the 33 to 35% range.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS). We'll take a follow-up from Will Stein.

Thanks, you guys gave some commentary on the end markets, I think you mentioned mill aero was doing well in the quarter. I have a question about that generally if you could just kind of broaden that out and talk about other end markets, any particular strengths and weaknesses? And then also, last time I met with you guys we spoke about your efforts to get PXI into the production of handset, testing for handsets. Any success in that area, if you could please let us know, it would be helpful. Thanks.

All right, Will, this is John. First, on the industry color, on the positive side, again, mill aero was very strong both year-over-year and sequentially. We also saw strong results in semiconductor, as well as computing, consumer electronics, and also automotive industry. On the weak side, the instrument and ATE business as we mentioned in the call, we saw weakness there, and of course that's been reflected in results of many other companies. Communications was also down, as well as sales into general research organizations.

On the PXI front, obviously we've had very, very good success with PXI into consumer electronics, and also in RF test as well. I don't think it would be a good idea for us to share specific customer examples or get too specific on particular niche industries from a competitive point of view but we are very happy with the success of PXI and our RF products into consumer electronics, applications.

What I might mention, I think the strength of our platform, one being modular hardware, but then the software based approach to RF, is we can address a much wider range of applications than I think you would see with a lot of the traditional RF instrumentation. Meaning, you see successes like the Harris application that was highlighted in the call where PXI and our modular instruments are being used to test military radios. We've seen a lot of success in that whole radio area. XM and Sirius radio sets, even just digital audio broadcasting, there's a lot of new standards on a software-based approach to testing, both in the validation and in production has been an ideal solution or an ideal match for our products.

Great, thank you.

And gentlemen, there are no further questions at this time. I'd like to turn the conference back over to you for any closing remarks.

Thank you for joining us today, and we will look forward to talking to you next time.

That does conclude our conference today. We thank you for your participation. Have a great day.