National Instruments Corp (NATI) 2007 Q3 法說會逐字稿

Welcome to the National Instruments Corporation third quarter 2007 conference call. Today's call is being recorded. You may refer to the press packet for 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 November 1. 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 would now like to turn the conference over to Mr. David Hugley, Corporate Counsel. Please go ahead, sir.

Good afternoon. During the course of this conference call we shall make forward-looking statements regarding the future financial performance of the company, including statements regarding our expected revenue, revenue growth, GAAP and non-GAAP net income, non-GAAP gross margin, non-GAAP net margin, expected earnings per share, impact of stock-based compensation and amortization of acquisition related intangibles, recently introduced products, 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 ending December 31, 2006, and our quarterly report on Form 10-Q filed August 7, 2007. 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 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 for Q3 are record revenue up 12.4% year-over-year, very strong growth of our C-series products and platforms and the introduction of a new version of our labVIEW software platform. We turned in a strong quarter in 3 -- Q3 delivering record revenue growth and strong operating leverage with record sales and key product areas including USB data acquisition, distributed I/O, (inaudible) instruments, and the PXI platform.

In our call today, Alex Davern, our CFO, will review our financials. John Graff 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 record quarterly revenue of $184.4 million, a 12.4% increase over Q3, 2006. Net income for Q3 was $21.5 million, up 15% year-over-year, with fully diluted earnings per share of $0.27. This was above the midpoint of our guidance of 24 to $0.29 per share. Non-GAAP net income was $25.8 million, up 17% from Q3, 2006 with non-GAAP fully diluted earnings per share of $0.32. This is also above the midpoint of our guidance of 29 to $0.34 per share. For Q3, 2007, non-GAAP operating margin was 16.3%, with non-GAAP net margins of 14%. A reconciliation of GAAP to non-GAAP results is included in part of our earnings release.

In reviewing Q3, we are particularly pleased that the success of our system level platforms enabled us to deliver record revenue and solid earnings growth despite the significant decline in the global PMI during the quarter. For the first nine months, we have delivered record revenue and strong operating leverage, which has allowed us to report a 25% increase in non-GAAP net income in what has been a challenging year for the industry so far. This builds on the outstanding operational performance of the company and all its employees over the last four years, and positions us well to make significant progress towards achieving our goal of 18% annual non-GAAP operating margin.

Now looking at revenue in more detail, our virtual instrumentation and graphical system design products, which represent the vast majority of our product portfolio had14.3% year-over-year revenue growth in Q3. This represents another quarter of strong year-over-year revenue growth driven by the success -- our success in the areas of software, data acquisition, distributed I/O, modular instruments, and the PXI platform. Additionally we saw $2.1 million sequential increase in deferred revenue on the strength of good software sales in Q3. In contrast, sales of our instrument-control products, which represent 10% of our revenue were down 3% year-over-year in Q3. We believe the decline in instrument control sales is related to the weakness of the global PMI during the quarter and reflects the challenges faced by the industry in Q3.

On a regional basis during Q3 we saw growth in all regions. Year-over-year revenue growth was 20% in Europe, 15% in Asia, and 7% in the Americas giving overall growth of 12.4%. Our worldwide growth was again was affected by year-over-year decline in our sales in Japan. This decline was similar to what we saw in Q2 and was reflective of the weak Japanese PMI during Q3.

Now, looking at the non-GAAP income statement in more detail. Non-GAAP gross margin in Q3 was 75.4% up from 74.7% in Q3 last year. The modest seasonal decline from Q2 is related to a shift in the regional mix as a result of the summer pause in Europe. Additionally the cost of transitioning our U.S. shipping operations to Hungary had a slight negative impact on margins in Q3. We expect non-GAAP gross margin to be approximately 76% in Q4. R&D expenses were up 15% year-over-year in Q3. Software development expenses capitalized in the quarter, amounted to $1.7 million down from $3.6 million in Q2. This reduction in software development cost capitalized is equivalent to 1% of revenue and relates to the release of labVIEW 8.5 in Q3. Also during the quarter, $2.2 million in previously capitalized software development costs were amortized to cost of goods sold.

Now turning to the balance sheet. As of September 30, the company had $276 million of cash and short-term investments up $35 million from June 30. This cash balance is net of $8 million in dividends paid during the quarter. For the full year, our cash and short-term investments are up by $26 million and this is net of $68 million used to repurchase stock and $19 million paid in dividends during the first nine months.

Now I like to make some forward-looking statements concerning our expectations for Q4 and the full year. Currently the company expects revenue for Q4 to be a new quarterly record and to be in a range of 200 to $210 million. GAAP fully diluted earnings per share for Q4 is expected to be in a range of 34 to $0.40 per share and non-GAAP fully diluted earnings per share for Q4 is expected to be in the range of 39 to $0.45 per share. With non-GAAP gross margins of approximately 76% and non-GAAP operating margins of between 19 and 22%. For the full year of 2007, we are expecting to report record revenue approximately 76% non-GAAP gross margin, non-GAAP operating margin of between 17 and 18%, and non-GAAP net margin of between 14 and 15%.

In Q4, the company expects to combine the impact of stock-based compensation and the amortization and acquisition related intangibles to be approximately $0.05 per share. As these are forward-looking statements I must caution you that actual revenues, gross margins, and earnings could be negatively affected by numerous factors such as any decline in the global economy, delays in new product releases, expense overruns, manufacturing inefficiencies, and foreign exchange fluctuations.

In summary, Q3 was a good quarter with record revenue and non-GAAP net income growth of 17% year-over-year. Before I turn it over to John Graff, Vice-President of Marketing, I want to let you know I will be presenting at the Bear Stearns conference in New York on November 13th and the Credit Suisse T technology Conference in Scottsdale on November 29th. I look forward to seeing you there.

Thank you, Alex. We turned in a strong performance in Q3 with record revenue up 12.4% year-over-year. Growth was driven by key product areas including USB data acquisition, distributed I/O, modular instruments, and the PXI platform. Our investment and new product R&D over the last five years continue to play a significant role in our revenue growth in Q3. With strong option of labVIEW software and very strong growth of our FPGA-based compact Rio systems. Our mature instrument control business was slightly negative in Q3 in line with the broader test to measurement market, while the rest of our business saw better than 14% revenue growth.

Our system level business had another strong quarter in Q3, led by PXI and compact Rio system sales. We saw a record number of orders over $20,000, which accounted for over 35% of bookings in the quarter. This led to a record average order size of nearly $3,400. These results are attributable to the success of our modular PXI and C-series based compact Rio platforms, as well as our increased focus of building and leveraging expertise in our field sales channel. Growing our field sales channel will be a focus of investment moving forward to better identify and pursue large opportunities.

A key highlight in Q3 was our annual NI Week Conference where we announced several key new products including the newest version of our labVIEW platform, labVIEW 8.5. We saw a record attendance in NI Week this year with over 2,500 customers, partners, trade editors, and investors joining us from 5,300 countries around the world. We had very strong attendance at our product and technology sessions including over 900 people in the RF and wireless sessions and over 1,000 people in the graphical system design sessions. In addition, a record number of companies exhibited at the NI Week Expo, which continues to transform NI Week from a user conference into a comprehensive global industry event.

Much of the excitement in it at NI Week this year was centered on the release of labVIEW 8.5. This new version is optimized for use on new multi-core processors that are common on today's PCs. The inherent parallelism and graphical nature of labVIEW 8.5 make it uniquely suited for development on multi-core machines allowing users to benefit from parallel processing with little to no change in their code. This is not possible with traditional programming tools.

The early response to labVIEW 8.5 from trade editors and their readers has been very positive. Journalists from leading technical trade publications have featured labVIEW 8.5 in articles about the benefits of multi-core programming and tests, and industrial, and imbedded applications. Mark David, Group Editorial Director for Electronic Design Magazine reported, quote labVIEW 8.5's multi-threading capabilities are particularly powerful and NI particularly present in taking this approach as we move into the era of multi-core processing. End quote.

After seeing a demonstrational labVIEW 8.5, Eric Heikkila, Imbedded Systems Lead Analyst for BBC corporation said, quote, as for multi-core programming, labVIEW is far ahead of the curve. Many tool vendors still have to take time to address and organize how they will achieve effective multi-core programming in their environments. While these tool providers are still figuring it out, labVIEW has already solved it. End quote.

The release is already benefiting customers as well. The Max Planck Institute in Germany is using labVIEW 8.5 with their Tokamak system for fusion research and has realized dramatic performance benefits by leveraging a multi-core system. Lead researcher Dr. Louis Giannone said quote, in the first design stage of our control application program with labVIEW, we have obtained a 20 times processing speed up on an octal core processor machine over a single core processor. End quote.

In addition to strong software growth in Q3, many of our key hardware products, including our products and platforms based on our C-series architecture had a very strong quarter as well. Our C-series technology was first introduced with our compact Rio platform in 2004. Since then, we've added many new C-series products including USB data acquisition devices, our compact DAC USB data acquisition system in 2006, as well as several new C-series modules. The C-series architecture has given us not only great technology leverage across a broad range of products, but also significant revenue growth. Our USB data acquisition devices, including the C-series compact DAC system, had record revenue in Q3 and continued to sell to a higher percentage of newer customers than the company average.

We continue to target new users with the release of seven new USB data acquisition devices in the quarter broadening our offering to a total of 45 devices to address a wide range of benchtop and portable measurement needs. The addition of these new USB data acquisition devices further increased the average selling price for USB data acquisition in Q3. PXI revenue reached an all-time record in Q3 as we sold a record number of PXI systems for the fourth consecutive quarter. Growth of PXI systems benefited from continued strong sales of the new low-cost integrated chassis and controller, as well as strong early sales of new PXI express chasses and controllers. PXI modular instruments also had a record revenue in the quarter driven by very strong growth, high speed digitizers, and dynamic signal analyzers.

In its 10th year, PXI continued to be a growth driver for the company and continued to expand into new opportunities and applications addressable with PXI Express. At NI Week we announced a new PXI Express imbedded controller with a dual core processor in addition to new high density high drives for data and bandwidth intensive test applications. Together, our multi-core processor base controllers, PXI express chassis, and new high-density hard drives enabled PXI to serve very high speed data streaming applications that previously were only possible with dedicated proprietary systems. In describing how his company benefits from the latest PXI technology, Mark Jewell, Wireless Business Development Manager at AmFax said, quote, with labVIEW and a PXI dual core imbedded controller ,we are achieving a 5X speed savings versus our previous generation GPIB-racked instruments for testing RF modules and cell phones. End quote.

Our industrial and imbedded business had another strong quarter in Q3 driven by record revenue for our FPGA-based compact Rio systems, as well as new and imbedded design wins. One recent compact Rio design win was SonaRes Medical where designers developed a medical machine to treat non-benign breast tumors with a novel minimally invasive procedure. Their machine uses compact Rio to control a cryogenic freezing process to destroy and remove affected tissue. Engineers at SonaRes chose compact Rio over a custom outsource design to speed time to market while minimizing development risk.

NIFPGA -- NIFPGA-based hardware and software are also controlling one of the world's most complex scientific experiments. The European organization for nuclear research, more commonly known as SERN, is the world's particle physics laboratory and is nearing completion at the Large Hadron Collider. Billed as the most powerful instrument ever built, the particle collider is 27 kilometers in diameter and produces a proton beam with as much energy as a 400-ton train traveling at 200 miles per hour. When operation began in may of 2008, researchers were using the collider to recreate and study the conditions in the universe immediately after the Big Bang. SERN will use more than 100 PXI chasses running (inaudible) real time and FPGA-based control modules to monitor and control the particle beam. SERN engineers chose PXI due to its small size and lower cost than a traditional BME and PLC-based system and the use of NIFPGA-based hardware enabled SERN to avoid having to design custom control hardware.

We gained further traction in industrial imbedded space in Q3 with the release of new versions of labVIEW FPGA and real time modules, in addition to the new multi-core capabilities in labVIEW 8.5. Last month, labVIEW 8.5 was awarded the Imbedded Systems Conference Best in Show Award from BBC. The award noted that national instruments will quote, continue to draw interest from imbedded development teams looking to rapidly build, optimize, and debug designs based on increasing complex multi-core hardware environments. End quote. Winning this award at one of the world's foremost conferences on imbedded technology and design is a strong testament to NI's early success in adoption in the imbedded market and illustrates the growing opportunity we have in this space for labVIEW as a system design tool.

In closing, we were pleased with record revenue in Q3 with strong growth in our broad base software and data acquisition business as well as record system level sales driven by our PXI and compact Rio system platforms. In addition, the release of labVIEW 8.5 for multi-core and FPGA-based systems helped drive broad adoption of our software platform and further strengthen our position in the imbedded market. With that I will turn it over to Dr. T.

Thank, you John. When we first shared our vision of graphical system design three years ago we described how graphical software centric approach to test industrial and imbedded design helps act -- abstract complexity to make engineers and scientists more efficient. As a result of this abstraction of complexity, labVIEW is being used in a broad array of applications from 10-year-old students programming LEGO Mindstorm's robots to leading physicists at SERN programming the world's most powerful instrument in their work to study the origins of the universe.

Q3 marked another major milestone in the evolution of graphical system design with the release of labVIEW 8.5. The inherent parallelism of labVIEW makes it uniquely positioned to leverage multi-core processors with little to no change in the way users develop their code. Unlike tech space programming languages that are serial in nature, labVIEW lets users easily visualize and program parallel applications so engineers and scientists with little or no pro -- programming background can spend more time problem solving and less time writing code. As Intel and others continue to advance processor technology by adding additional CPUs on a single chip, the benefit of lab use intrinsic ability to target multiple cores should become even more compelling.

Graphical system design builds on 20 years of success with virtual instrumentation by combining flexible, graphical programming software with increasingly powerful technologies such as multi-core processors and reconfigurable FPGAs. This unique approach allows us to further disrupt traditional tests industrial and imbedded markets while expanding our opportunities in these areas. New products and technologies such as PXI Express, modular instruments, labVIEW FPGA, and Compact RIO have helped us sell a demanding applications including experimental physics applications and the high-end machine -- machine control that previously required custom hardware design.

I believe that our graphical system design approach to test industrial imbedded applications has defined a unique and defensible position for National Instruments. With recent successes in semiconductor RF and Mill Arrow test applications as well as imbedded successes with applications such as SERN, our vision for graphical system design is being validated for both virtual instrumentation as well as imbedded. I was pleased in Q3 with solid execution across all areas of our business, which helped drive record revenue and strong net income growth for the quarter. Growth was led by record revenue and many product areas including record revenue for USB data acquisition, distributed I/O, modular instruments, and the PXI platform. Continued efficiency improvements over the last four years have allowed us to maintain a strong R&D investment while improving our non-GAAP operating margin to our goal of 18%. In summary, I am pleased to hit record revenue and strong earnings growth in Q3 and believe we are well positioned for success in Q4 and into the next year. Thank you. We will now take your questions.

Thank you. Our question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) As a courtesy, please limit your questions to one, with one follow-up question. (OPERATOR INSTRUCTIONS) Our first question comes from Antonio Antezano with Bear Stearns.

Good evening.

Hi, Antonio. How are you?

Good. The first question is more market related. I guess now that October is almost over, I was wondering -- what is what you are seeing in the quarter when we look at the global PMI toward September, it was still declining. For this month the flash PMI for Europe was very weak again. So, I was wondering what is what you are seeing in I guess for your business in October and how confident in the quarter?

Well, it's Alex and I will take a -- a stab at that question. Obviously we based our guidance on expectations and building in our expectations on the economic data that we have access to and obviously we look at the PMI, as you are well aware, and we have seen the flash PMI for Europe for October. As we look out, we also take in mind the run rates of our business, the seasonal patterns we have seen in the past and the trends we've seen in different product lines and as always we built all of that into setting our expectations for Q4.

Then as we go forward, I guess for next year the expectations are again market related that Europe would slow down maybe some record in the U.S. and Japan. But, under those assumptions, to what extent you can keep those profit margins, especially gross margin because, I guess, to some extent there was a positive theme park front as trend in Europe this year.

Well, I guess my answer to that would be two things, Antonio. First, we have seen the industry in many of our peers have a pretty tough year this year and we've managed to sustain our revenue growth and improve our revenue growth as we have gone through the year despite some of the noise that's been out there around some of our peer companies. And the PMI being up and down, et cetera, during the course of the year.

Where we really are focusing our attention is the success we've had in building our business, especially around these new system-level platforms that really validates the investment we've made in R&D over the last seven years and given us the ability as in Q3 to grow our business despite the drop in the PMI during Q3. So, as we look out to the future, we are really focused on what we control as we talked about in our investor conference at NI Week in August. We are focused on our bias now as we come close to 18%, is to accelerate our investment in our technical field, sales and marketing resources. We believe we have a very rich product portfolio. And we will be continuing to invest in that to try and take advantage of the opportunities we've opened up over the last couple of years. And that's how we will approach next year.

Thank you. Just one follow, very detailed question. Your G&A spending was a bit high for what I expected, I think close to 8%. What is your expectation going forward, there was any kind of one-time off there or --?

We did have some restructuring charge in our G&A number for Q3 and for Q2. And that did cause some modest increase there and we would expect that rate of increase to weaken or ease off a little bit as we go into Q4 and then into Q1 next year.

Okay, thank you. I will go back to the queue. Thank you.

With Needham and Company, John Harmon has our next question.

Sorry, hi. Good afternoon.

Hi, John, how are you?

Good. Alex, I guess my two questions are if we could just -- similar to the last question. You made pretty negative comments about the state of the test measurement industry this year leading them to the performance of your instrument control cards, which were (inaudible) down year-over-year. I don't think things are quite that bad out there. Is that really what you intended to get across? And my follow-up, if could -- you spoke so quickly in the introduction if you could repeat your expectations for next year, please.

Sure, obviously let me take the first part first. We have not given any specific expectations for next year, John. What we are saying is that we believe we have done a good job this year of sustaining our revenue growth, especially in Q3 despite the downturn in the PMI. We have a lot of new product platforms where we have a lot of room to run and good revenue growth and will be continuing to commit lots of resources behind those as we go into next year. We will be giving more detailed guidance about our expectations for next year in the January call.

In relation to the state of our instrument control business and the overall market space, I mean I judge our competitors generally under order flow and that's how I look at the state and health of the market. And so I look at year-over-year relative order flow as a deciding factor. Our instrument control business has saw some improvement sequentially. We were minus 8% in Q2, minus 3% in Q3, which is the -- we guided in our July call that we expected the year-over-year decline to moderate in Q3. So we saw some sequential improvement in that. But from my perspective, looking at this industry and looking at the order flow I think a number of companies have had a pretty tough time this year.

Okay. Thank you.

Mark Moskowitz with JP Morgan has our next question.

Hi, this is Anthony (inaudible) calling in for Mark.

Hi, Anthony, how are you?

Good. Good. I have a couple questions here. First, in terms of your business that you've classified as the industrial imbedded, I think you have spoken 25 to 30% of your business is related to that. What is the sales velocity of that segment? Should we assume it's above the 14% that you named for the virtual instrumentation and graphical systems products?

This is John. As you mentioned, we estimate that the industrial imbedded is approximately -- the range is 20 to 30. It's hard for us to quantify it exactly by the nature that some of the products like labVIEW or PXI or compact RIO are sold booked into test applications as well as industrial imbedded.

Having said that, though, we do feel we are getting a lot of traction. We are newer in industrial and imbedded applications. So to answer your question we do believe it is at a higher growth rate. There is some velocity. We are seeing design wins, which is a couple we mentioned in the call. And we believe there is a lot of potential for us and so we continue to invest in the product development to fill out our platforms for serving those applications as well as investment in sales resources to go after those opportunities.

What are -- going forward, the swing factors for that segment. How should we look at the -- for example, your system order size, is that above or below the corporate average for that segment? How should we look at the -- next year?

It's -- again we can't quantify exactly to the nature of what I said earlier. But in aggregate the order sizes are larger than the company average. And so those play a key role and driving that increase and the record average order size. And obviously played a key role in the record revenue for the quarter.

Okay. And then moving on to your instrument control products, can you talk a little bit about the impact of the semiconductor equipment market -- that segment as of this quarter and what you are looking forward to next?

This is John. Started off we did see weakness obviously in the semiconductor segment. We have traditionally had an element of our instrument control business that fills into the semiconductor capital equipment as well as the semiconductor test vendors and so obviously we saw some weakness there in the quarter and also on the year.

And your view next quarter?

we don't really like to obviously break out the expectations from a product line basis. But, what we did say to Antonio and in the July call is that we expected the performance of our instrument (inaudible) to improve in the second half of 2007 because we would get easier compares. The downturn on the (inaudible) capital really started in the second half of last year and we certainly saw that improvement come to fruition in Q3 and certainly the compares do get easier sequentially as we go into Q4. So, we will see how that plays out. I would emphasize now although it's the most sensitive part of our business to the overall PMI, it is now a pretty small part of our business and it's below

Okay, thanks. And then one last question. Can you talk a little bit about a currency impact here. Revenues and margins this quarter.

Sure. Our strategy on currency is generally we adjust pricing periodically to respond to exchange rates. And we did some of that as we went through 2007. On the headline rate, I think we were at about 10% local currency growth. So about a two-point swing there and some of that is compensated by, for example, a decrease of pricing that we did in Europe. But we generally focus on a dollar number but it's about a 2% differential.

Okay. Thank you.

Thank you very much.

We will hear from Terrance (inaudible) with Citi Investment Research. Thank you, Terrance.

Thanks for taking that question, and good job in a difficult environment. My question relates, I may have missed this, did you give a stock buy-back number this quarter?

We did not. We did not buy stock back during the third quarter, Terrance.

Okay, okay.

When I was going through the cash situation for the full year, I did mention the -- the stock buy-back for the full year.

I see. Okay.

I should say -- let me correct that for the first nine months.

Inclusive on 1 and 2Q

Correct.

Then the -- the second question is one on seasonality. I think that Europe is seasonally your strongest geography in the fourth quarter and grows maybe 30% sequentially sometimes. Is that a sort of level of sequential growth that we could expect maybe based on your corporate growth of roughly 13%?

The question is Europe suddenly has been the key driver for sequential growth in Q4 over the years. And we have seen the pattern of revenue being double digit sequentially in Q4, very steadily executed throughout the last 10 years or so. Even in 2001, for example, we saw that same pattern come to fruition. So, the momentum that has built behind that pattern around the seasonal spending and year-end budget spending has tended to be pretty strong and through Q3 we certainly had no reason and obviously were given, building into our guidance today, the expectation that will recur in 2007.

Okay then one last one if I could. On Asia/Pacific, Japan I think you mentioned in the past that Japan was over 50% of that region. Obviously Japan has undergrowing, Asia x Japan. Want to get an update on what mix of business is Japan for overall revenue. Thank you.

Let me make a correction there. The Asia Japan business is our largest geography within Asia/Pacific. But it is not over 50%. It's less than 50%, but it is the largest single country in Asia/Pacific for us. We saw some modest improvement in our sales from a year-over-year performance in Q3. We have seen a slight double digit decline in Q2 and we saw high single digit in Q3. So some modest improvement despite the fact that the PMI clearly worsened in Japan in Q3. And so that was what we saw in the quarter. I can't remember if there was a second part to your question I missed.

Just current proportion of Japan of total rev.

We do not disclose by country, so the best I can tell you is that it is the largest country in the region, but it is less than 50%. From a performance in the rest of Asia and let me also say for our Japan team, we have seen some pretty bad numbers from some of our peers in Japan. And I feel like our Japanese team has done a very good job of executing in a very tough environment. And we are proud of the efforts that the team there continue to execute going forward. And the rest of Asia we have seen revenue growth above 20%. So that's continued in Q3. And there is certainly seems to be a lot of momentum in the emerging countries and rest of Asia and we will be continuing to expand our investment in those regions to take advantage of any opportunities to gain market share that we may see there.

Great, thanks and good luck.

Thank you.

Ajit Pail with Thomas Weisel Partners has our next question.

Good afternoon.

Hi, Ajit, how are you?

Good. Couple of quick questions, the first one is I think that John mentioned the metric, I think orders above $25,000 and 35% of orders. Do you measure that in terms of number orders or measure that in terms of the revenue in orders?

The 35% was in the revenue.

It was orders over 20,000, Ajit, not 20.

It's 20,000. Can you compare that metric that 35% (inaudible) the prior quarter as well as the quarter a year ago and give us some color as to what that was about three years ago?

Unfortunately, Ajit, I don't have that in front of me. But, we can follow-up and we have shared that in the past calls.

Year-over-year the average order size is up about 7% and we will have to check the two-year number, but that's (inaudible) been done in past calls.

Okay, and then --

Ajit, I can certainly tell you that -- that the value of orders over 20K is the percentage of revenue. That proportion has definitely been increasing over the last number of years.

Okay. And then just looking at SERN -- at the order that you talked about, I think you mentioned hundred systems so assuming that was over 20K, is the order of magnitude of that particular project somewhere between 2 and 5 million to the low end of the range to the high end of the range. Also how much of that has been shipped and how much is going to be shipped and is there a services component to that as well?

Lot of good questions there, Ajit. I just qualify with this business actually came to fruition in the first quarter. And we have been working with SERN on the ability to publicize it and we are talking about it now as a public and they are moving towards deployment. We actually shipped and recognized the revenue on this order back in the first quarter.

In terms of its value, it's certainly a lot more than $20,000. It was one of the largest -- larger orders in the history of the company when we booked it and shipped it in the first quarter. There is a services component and we are very, very pleased and excited about the ability to publicize the success of a real lead user building what is an incredible device and certainly something we will be highlighting in our marketing materials going forward.

Yes, just one thing, Alex. You found that -- I mean it was 100 systems. So do you assume that each one of the systems is over $20,000, so which would sum up to over a couple of -- between 2 and $5 million?

Ajit, I'll let you add a lot of value and I will let you speculate. If that's okay.

Okay.

But it certainly was one of the largest orders we have received as a company when we booked it and shipped it.

One housekeeping question which is the non-cash compensation. Can you give me a breakdown of how much of it was in the (heavily accented language) and each of the expense line categories, please.

The cost to goods sold -- sold break down is in the press release, Ajit, if you want to grab it. On the rest of the expense categories I don't have it with me right now but we can follow-up.

Thank you.

No problem.

(OPERATOR INSTRUCTIONS) And David Yuschack with SMH Capital has our next question.

Congratulations guys on a good quarter and a difficult environment. I was just curious, as you looked at your actual results and I think you were looking at 179 to $187 million in this quarter in your guidance, where were you at variance both from the upside and the low end and upper end versus what you actually received in way of your expectations.

Well, we came in slightly above the mid point of our guidance, Dave. So I would say we were a little bit over the midpoint of our expectation. This year I would say if there is one thing that I have been a little surprised about in Q2 and Q3, not obviously in guidance for Q3, but was a little bit of the weakness of Japan if we look at the full year in terms of our expectations coming into the year. And that's something we hope sorts itself out as we go over the next couple of quarters. But Q3 was pretty much on track with what we expected.

But if you are looking at the upper end -- to get the upper end of that range, would it have been basically continuation of Japan that kept you from getting to the upper end of the range would you say then?

We were a couple million dollars off the upper end of the range. We were at 99% of the upper end of the range, if you like. Once you get down to that level of granularity, it's as close as we could probably call and feel like we are being realistic.

Okay. But, Asia has been a pleasant surprise for you given what Japan is going on.

Yes, non-Japan Asia has been a -- has continued to retain a lot of momentum. And as I said, our team in Japan has done a great job of executing in a tough environment and delivering good value to our customer base and we are excited about the success of our new product platforms in Japan. But certainly in light of the Japanese situation the rest of Asia it's really good to see a continuing momentum.

Would North America be a problem for you if it continued to see some concerns here domestically because that seems to me where everybody is concern is right now compared to say a Europe and particularly what you are doing in Asia as well. I'm curious if that's the more vulnerable part of the market place right now.

Well, we certainly saw a pretty significant drop off in the PMI in North America in Q3 as we did in Japan and globally. And the thing I feel really good about and I want to congratulate the -- all of the employees of the company is that the success of the new product platforms that we have driven, which have opened up new market opportunity for us, has really allowed us to grow despite the drop in the PMI in Q1 and in Q3. And I think that there is a lot of opportunity there for us and we need now to make sure that we are investing enough and we are driving enough investment into the success of those product platforms in the marketplace so that we can realize the full potential. And I think our story really as we look at it now maybe compared to where we were seven years ago, Dave, is that we have been able to grow despite the significant drop in the PMI in Q3.

And one last quick question. On the gross margin was down 50 basis points from the second quarter. Was there anything particular there that may have produced that?

Well, we were up about, I guess, 80 basis points year-over-year. And what you will see is that sequentially in the third quarter we traditionally have a seasonal decline in gross margin that is heavily driven from one of our highest gross margin reaches is Europe and it falls as a proportion of the mix in the third quarter. We also transition our distribution operations, our U.S. distribution operations, out of Austin to Hungary during Q3 and we did pick up some cost as a result of that, kind of a one-time transition. And I want to also congratulate all of the employees involved in that exercise because they carried it off pretty flawlessly and we delivered all of our U.S. revenue from direct from that location to our customers into U.S. in Q3 and that was a very good operational performance.

That is why I figured it just dropped a little more in that -- in that third quarter than traditionally and I figured something had to be in there.

That's correct, Dave.

Alrighty, thanks.

Thank you very much.

And with Robert W. Baird, Richard Eastman has our next question.

Alex, can you give us a head count number at the end of Q3?

Sure. We had 4,459 people. so it was up a little over 10% year-over-year. As you are aware, Q3 is our big, big hiring quarter. We added about 200 people roughly in the third quarter. So, we do a lot of engineering and application engineering, sales, graduates that we'll hire in Q3.

And then I just had a question, maybe a bigger picture question about we have been adding infrastructure -- on the essentially -- on the industrial and imbedded side of the business, not only products but also field support. Have we been doing that geographically or has most of that investment been in the U.S.? And if I look at that product line, the industrial imbedded line, all of the products that you talk about being in that, has that growth been driven by sales in the U.S.? Or have we managed to add infrastructure and grow those sales geographically.

Actually, Europe has been a real star in this new area of graphical system design for imbedded. We have seen really nice applications. We mentioned the SERN one, but we also saw a lot of machines and equipment being built using our technology. So, Europe has certainly done well. We have seen good strong applications as well in Japan and the U.S., of course. So it's pretty well been across the board. There is more opportunity to expand in this area geographically. But we are off to a good start.

In terms of the investment in the sales resources, that has been geographic. In addition to any kind of geographic expansion in the field, we have been putting some business development and some expertise focused around our real time and FPGA products globally.

Rick, I need for you to come back to your follow-up question. It's Alex here. I need to make a correction. The actual head count at the end of September was 4,559. I think I misspoke when I said 4,559.

Okay. Okay.

4,559

Okay. And then one last question, Alex, when you gave the geographic growth rates, the traditional instrument control business, is that all reflected in North America? Or is that spread out geographically?

That's spread out geographically. For some reason they are slightly more concentrated than others. It's got a very good geographic distribution. Okay. It's probably moved more to Asia over the years as more production has moved to Asia, but it's quite well spread out.

Yes, okay. Great. Thank you.

And our final question in the queue will come from Antonio Antezano.

Yes, very quick follow-up. What is your outlook for the tax rate and whether there is any preference for the corporate tax reduction in Germany?

That's a funny one you're asking, Antonio. We had a small actually you'll notice our tax rate this quarter is a little bit less than 22. We picked up a couple hundred thousand dollars on benefit from the reduction of the tax rate in Germany, which they reduced from 40% to 30%, which I think is pretty progressive of the Germans and that was an impact on deferred tax asset we have in Germany. In terms of our global scheme and the tax rate going forward it's a pretty modest impact. We are still looking at 22% for Q4.

And the same for next year I guess?

Next year we're -- it's a little too early to give guidance on. That we will give guidance on that in January.

Thank you.

And gentlemen, it appears that we have no further questions. I would like to turn the conference over to Mr. Davern for any closing or additional comments.

Thank you for joining us today and we look forward to seeing you in either New York or Scottsdale if you are attending those investor conferences.

And thank you, everyone. That does conclude today's conference. We thank you for your participation on behalf of National Instruments and today's speakers. I would like to wish everyone a great day.