National Instruments Corp (NATI) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the National Instruments Corporation's first quarter--fourth quarter 2007 conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and pass code. The replay will be available from 7:00 p.m. Central Time today, and end at midnight Central Time on February 7, 2008. 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 call over to Mr. David Hugley, Corporate Counsel. Go ahead, sir.

Good afternoon. During the course of this conference call we'll make forward-looking statements, regarding the future financial performance of the Company, including statements regarding our expected revenue and earnings per share, impact of stock-based compensation and amortization of acquisition related intangibles, major product releases, growing the sales force, improving revenue growth, increasing geographic bandwidth, identifying large opportunities and accelerating the growth of software module instruments and embedded and industrial applications. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to the documents the Company files with the Securities and Exchange Commissions including the Company's annual report on Form 10-K for the fiscal year ending December 31, 2006 and our quarterly report on Form 10-Q filed October, 2007. These documents contain and identify important factors that can cause our actual results to differ materially from those in our forward-looking statements. With that I will turn it over to the President and CEO of National Instruments, Dr. James Truchard.

Thank you, David. Good afternoon. Thank you for joining us today. Our chief points today are record quarterly revenue up 13% year-over-year. Record quarterly net income and continued validation of our long-term investment strategy. We turned in a strong quarter in Q4 delivering record revenue growth and strong operating leverage, with record sales in key areas, including USB data acquisition, distributed IO, modular instruments and the PXI platform. In our call today, our Alex Davern our CFO will review our financial, 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. We reported record quarterly revenue of $205 million, a 13% year-over-year increase and our best revenue growth quarter of the year. This was in the middle of our guidance range of $200 to $210 million. As discussed in detail in our press release included in both GAAP and non-GAAP results for Q4 are an $18 million tax credit from release of a valuation allowance and pretax operating expense charges of $2 million. These items net to approximately $0.21 for both GAAP and non-GAAP results. Net income was new quarterly record of $46 million with fully diluted earnings per share of $0.56. Non-GAAP net income was a record of $50 million with non-GAAP fully diluted earnings per share of $0.62. Excluding the $0.21 per share for the items discussed earlier, non-GAAP net income for the quarter increased by 18% year-over-year. A reconciliation of the GAAP to non-GAAP results is included as part of our earnings release. Looking at the full year 2007 we delivered another record year with record revenue of $740 million up 12%, and record GAAP and non-GAAP net income. For 2007 we delivered outstanding cash flow from operations of $145 million up almost 50% from 2006. This demonstrated a very strong cash return that we can generate on the net capital that is invested in operating the business.

As we close out 2007 I think it is useful to review how the Company has evolved so far this decade. Among the major changes since 2000, are that relative exposure to instrument control is now one third of what it was. The percentage of our employees in the emerging counts trees increased by a factor of ten, helping lower our cost base and the percentage of revenue coming from emerging countries has more than tripled. As a result of these changes we anticipate that our annual operating margins will be less volatile during industrial slow-downs going forward.

Now, looking at Q4 revenue in more detail, our virtual instrumentation and graphical system design products which represent the vast majority of our product portfolio, had another strong quarter with 14% year-over-year revenue growth. Additionally in Q4 we saw a record $6 million sequential increase in deferred revenue on the strength of record software orders. This compares with a net increase in deferred revenue of $3 million in Q4 2006 and $14 million for all of 2007. Sales of instrument control products were up 6% year-over-year in Q4. We believe the modest improvement in control sales is related to the easier compare we faced in Q4. Given our assumption of a further weakening of global PMI we expect these products to see a meaningful year-over-year revenue decline in Q1. While our instrument control products remains sensitive to the global PMI they now represent 9% of revenue compared to almost 30% in 2000. On a regional basis, during Q4, year-over-year revenue growth was 24% in Europe, 26% in Asia is and flat in the Americas, overall growth 13%. We believe that our performance in the U.S. was impacted by the significant decline of U.S. PMI, which ended the year at 47.7, a negative reading for the industrial economy in the U.S. This was lower than we expected and a full five points below its ten year average. Our performance in Asia was helped by growth in Japan during Q4.

Now, looking at the non-GAAP income statement in more detail. Non-GAAP gross margins in Q4 was 76.2% up from 75.4% in Q4 last year, and was at its highest level since 2000. R&D expenses were up 16% year-over-year in Q4. Software development expenses capitalized in the quarter amounted to $500,000, down from $1.1 million in Q4 2006 and $1.7 million, in Q3, 2007. Also during the quarter $2.4 million in previously capitalized software development costs were amortized to cost to consult.

Now turning to the balance sheet. As of December 31 the Company had $289 million of cash and short-term investments up $13 million from September 30. This cash balance, is net of $8 million in dividends paid during the quarter and $12 million used to repurchase 370,000 shares of NTI common stock at $31.87. For the full year our cash and short term investments are up by $38 million. This is net of $27 million paid in dividends and $80 million used to repurchase stock at a average price of $29.20. We also announced today that the Board of Directors approved a 10% increase in the Company's quarterly dividend to $0.11 per share payable on March 3rd, to shareholders of record on February 11, 2008

Now I'd like to make some forward-looking statements. As we discussed previously our business plan for 2008 through 2010 is to focus on our long term model while accelerating annual growth in field sales resources with the goal of doubling our technical sales headcount by the end of 2010. Given the current economic uncertainty our guidance is deliberately conservative, and assumes we'll see a meaningful deterioration in global PMI during Q1. This conservative assumptions means for 2008 we will be investing in R&D and field sales while being cautious with head count growth and other areas. We expect to see operating margins in 2008 below our long term target. In addition, because of our returns business, we are also assuming similar to 2005 the shift of Easter to Q1 from Q2 last year will have approximately $5 million negative impact on revenue during Q1 primarily in Europe. We expect a corresponding positive impact in Q2. As a result for Q1 the Company expects revenue to be in the range of $182 to $196 million, equivalent to year-over-year revenue growth of 6% to 14%. GAAP fully diluted earnings per share for Q1 is expected to be in the range of $0.18 to $0.28 per share and non-GAAP fully diluted EPS for Q1 is expected to be in the range of $0.23 to $0.33 per share. We are expecting our non-GAAP effective tax rate for 2008 to be approximately 20%.

For Q2 the Company is currently expecting revenue to be in the range of $194 million to $208 million, equivalent revenue growth of 8% to 16% year-over-year. GAAP fully diluted earnings per share per share for Q2 is expected to be in the range of $0.25 to $0.34 per share with non-GAAP EPS in the range of of $0.30 to $0.39 per share. As these are forward-looking statements, I caution you that actual revenues and earnings could be negatively affected by numerous factors such as any greater decline in the economy, expense overruns, manufacturing inefficiencies, tax credits and foreign exchanges fluctuations.

In summary we delivered a very good operating performance in 2007. Our focus in 2008 is to continue to generate strong profitability and strong cash flow while accelerating the growth of our field sales resources with the goal of doubling their head count by the end of 2010. We believe this positions us well for eventual recovery in global PMI.

I'll turn it over to John Graff, Vice-President in Marketing.

Thank you, Alex.

We turned in a good performance in Q4 with difficult economic head winds. While the global PMI dropped in December to its lowest level in the past two and a half years, we saw our strongest revenue growth of the year in Q4 with revenue up 13%. For the full year we delivered record revenue up 12%. Our 30th year of revenue growth in our 31 year history. We also delivered a strong operating performance for the full year and made significant gains towards our long-term goal of 18% operating margin. In Q4 our mature instrument control business saw a modest gain but growth was again driven by our virtual instrumentation and graphical system design products which now account for over 90% of revenue. Growth of our virtual instrumentation and graphical system design products came in at 14% for Q4. We have record revenue in many key product areas including data acquisition, distributed I/O, PXI and modular instruments. Large system sales, especially PXI and CompactRio once again had very strong growth in the quarter and helped drive our average order size to a record $3,616.00 up 12% from Q4 last year.

We were very pleased with strong software orders that outpaced company growth in Q4. LabVIEW version 8.5 released in August has seen strong early orders and adoption from both new users and customers upgrading from previous versions. In particular, LabVIEW 8.5's ability to leverage the performance of multi core processors has generated very strong response from accounts and industries that are historically focussed on traditional text-based programming languages. LabVIEW 8.5's enhanced support for hardware targets such as FPGAs and touch panel PC's, generated new applications particularly in the industrial and embedded space. We saw strong software growth in academia as well as large multi-seat LabVIEW license agreement.

Q4 was another strong quarter for our data acquisition product line. During the quarter and throughout 2007, we introduced new high-end data acquisition devices that improved the average selling price and gross margin of the product line. Our USB products continue to be strong growth driver for us with CompactDAQ system based on C-series technology closing the year with a very strong Q4. We had our fifth executive order of PXI sales in Q4, continued success of the low-cost integrated PXI chassis and controller help drive sales. While strong sales of new PXI express, chassis and controllers that provide very high bandwidth for multi instrument and data streaming applications. PXI modular instruments hit record revenue in the quarter, led by dynamic signal analyzers for sound and vibration measurement, high speed digitizers and RF instruments. We continue to see strong sales of our RF modular instruments into applications such as spectral monitoring and testing of emerging wireless standards which benefits from the flexibility of our software-based approach to measurement and signal analysis. We continued to see success in industrial and embedded applications driven by another quarter of triple-digit year-over-year revenue growth of our FPGA based CompactRio systems. CompactRio has been instrumental in helping us win business in new application areas including robotics and autonomous vehicle control.

One example is a team of engineering students at Virginia Tech that used LabVIEW and CompactRio to win third place from a field of 89 competitors in the DARPA Urban Challenge. The government sponsored program was focused on autonomous ground vehicles that had to navigate traffic and other obstacles in a mock city environment. The team used CompactRio for throttle, brake and steering control and LabVIEW running on two quad core servers to process several high end team vision algorithms. In addition to being used as a prototyping platform to design embedded systems, CompactRio has also been deployed as the measurement and control system in sophisticated machines and in high-end automation applications.

To better serve this space we released a new low cost integrated Compact Rio chassis and controller. This provides OEM customer with a lower price point to serve deployments in higher volumes. In November we released a new family of Smart Cameras aimed at helping us better serve industrial test and inspection applications. The first two Smart Cameras integrated image sensor and power PC processor that can run LabVIEW in a ruggedized package suitable for harsh industrial environments. Early sales results have been very positive.

Before closing, I would like to take a moment to review the significant changes we have seen in our business over the past four years. We have continued to grow as a truly global company with 55% of revenues in 2007, coming from sales outside the United States. We have transitioned from being a transaction-focused PC peripheral and software Company to now operating a platform based business that also includes large system sales to high-end test, industrial and embedded applications. While we have seen instrument control drop to only 9% of revenue, our PXI modular instrumentation revenue has tripled to become one of our larger product areas. We believe that our unique software-based and customer defined approach to instrumentation has disrupted the traditionally served instrumentation market and provided us continued growth opportunity in automated test. Since 2003 our distributed I/O revenue has tripled as well. New technologies introduced in that time including LabVIEW FPGA and CompactRio have presented an opportunity to address the historically underserved custom design space and expand our opportunity in industrial and embedded applications.

The success of PXI and Compact Rio over the last four years as system level platforms has dramatically changed our business in other ways. As mentioned earlier, our average order size at the end of 2007 was slightly over $3,600 Compared to approximately $2,900 at the end of 2003. This was driven by a greater percentage of our orders being larger system-level sales. Orders over $20,000 were 35% of our business in 2007, compared to only 25% of our business in 2003. Looking at what has transpired for NI over four years clearly democracy demonstrates the investments we have made in R&D in the past four years paid off and the products those investments produced have gained scale, and contribute to do our growth. The fastest growing areas of the business included embedded machine design, RF and digital test, where we have relatively low market share. I should point out that what we have accomplished over the past four years was also during a period where we delivered strong operating leverage, taking our non-GAAP operating income from 9% in 2003, to 17% in 2007. Our direct deal sales force is a tremendous competitive advantage in helping identify, develop, close and support the larger opportunities made available by our system-level platforms. Given the tremendous progress R&D has made with our new platforms and the major product releases we expect in 2008, we believe now is the right time in our product cycle to aggressively expand 0 sales team to leverage this R& D investment.

In closing we're pleased with record revenue in Q4, and a full year, despite a difficult economic climate. We look forward for new opportunities for growth in 2008. With that I'll turn it over to Dr. T.

Thank you, John. I was pleased with our performance in Q4 and for the full year we again delivered record revenue and record net income, turning in our 30th year of revenue growth in our 31-year history. We also delivered a strong operating performance for the full year and made significant gains toward our long-term goal of 18% operating margin. These efficiencies gained in 2007 and over the past four years, have been a direct result of the commitment and dedication of our employees. I would like to take this opportunity to congratulate our employees on National Instruments being named for the ninth consecutive year to Fortune magazine's 100 Best Companies To Work For'. It is a testament to our long-term approach to growing a company built to last.

During the year we made significant progress toward our graphical system design. We continue to produce innovative new products to drive our new business into new areas such as LabVIEW 8.5 for multi-core processors, PXI express modular instruments and higher performance and lower-cost CompactRio systems. These new products combined with solid execution of our sales force, fuel very strong growth of large-system sales. We plan to further invest in our systems level business in 2008 to support our success in industries such as military, aerospace and energy.

One of the significant trends that emerged in 2007 was the intensified focus on green technology and environmentally friendly design. Looking into 2008 and beyond, we believe there will be significant investments made in improving the environment and we believe that National Instruments is uniquely suited to benefit from this moment. While we have taken steps to reduce the environmental impact on our campus and with our products, our real strength is how we empower researchers to measure environmental conditions and armed designers tools to remedy them Even with climate change at the top of the global agenda, I believe that progress will be somewhat a voyage of discovery. Scientists and engineers must be able to measure and characterize a problem before they can correct it. Because our software and hardware abstracts and complexity and embedded monitoring, researchers can utilize NI tools with little or no expertise, and complex instrumentation or controlled design. This enables researchers in fields such as biology and energy production to monitor environmental conditions and design more efficient alternatives faster and at a lower cost. One example is UCLA's use of CompactRio in aerial suspended robotic sensors used to monitor global change indicators in the Costa Rican rain forest, as well as biological pathogens in rural eco systems. In addition, researchers in academia are using NI software and hardware to simulate, prototype and monitor alternative energy systems including, wind, solar, harvesting and fuel cells. These are just a few of the many examples of our customers using NI tools to improve the environment and I believe our continued investment in these areas both provide new growth opportunities for us moving forward.

To close, I was pleased with our performance in Q4 and for the full year I believe our long-term approach to aggressively invest in our systems level platforms has been key to our continued growth. I believe our long-term vision is sound and I look forward to continued strong execution in 2008 and beyond. Thank you. We will now take your questions.

(OPERATOR INSTRUCTIONS) The first question is from Antonio Antezano with Bear, Stearns.

Hi, Antonio, how are you.

Good. It would seem you are committed to your plan to expand the sales resources despite the slow-down in the market. I was wondering, first, I have a question on that, first, what kind of operating margin would you expect in this environment, I guess for the next couple of quarters where you have provided guidance, and secondly; after PMI start to recover in the future, what kind of sales or revenue growth target do you have in mind that given for the last two quarters the global PMI index was inclined more higher single digit and you have outperformed that. So I would argue then if the PMI start to recover, you might see more leverage on sales than what you've seen in the past. So can you comment on that?

Sure, really what we're trying to do, Antonio, it is about balancing the short-term and the long-term. In the short term we're being conservative in our expectations for the market. We're being cautious on our hiring outside of strategic areas R&D and technical sales. And we've almost doubled our operating margin in the past four years as a percentage of revenue and made significant improvements in our cost base. Really benefit during this period and we do expect to see some operating margin hit as we are conservative in our expectations on the market and on revenue, and we do intend to continue on the sales force expansion. But looking out for the next two quarters obviously we tried to build that into our guidance and I'll use guidance as the best indicator for you of where we expect margins the next couple of quarters. Over the long term we're very bullish. Our new platforms are doing very well. We see a lot of growth opportunities, and we have major product introductions. We believe this is the right time in our product cycle to ramp the sales force. The decision to ramp the sales force is based on the timing around our product evolution. When we get to 2009 and 2010, we want our shareholders to be happy witness decisions we're making now. Clearly the intent of our ramping the sales force is to get greater acceleration of revenue growth when the PMI recovers. And with that we would expect to see greater leverage during that recovery on profitability, as well.

Thank you.

We'll take our next question from Will Stein with Credit Suisse. Mr. Stein, your phone line is open if you'd check your mute button. And we'll check his line. We'll go on to the next question from Mark Moskowitz with J.P. Morgan.

Hi, Mark. How are you?

Good, and yourself?

Not too good. My voice is giving out, I'm afraid.

I'll try to be brief.

No problem.

Maybe a few questions here. First, butting up on Antonio's question, as far as the opec, head count, velocity. Can you give us a point of reference, where are you in terms of the field sales head count now, and how should we think of that in terms of being rolled out in the next two quarters instead of the back half of '08?

Maybe we'll start with a little bit of history lesson, if that's okay. You know, during the late '90's and through 2000 we had grown our field sales force in high teens to 20% ish type of rates. As we were maturing product platform and getting to a completion stage with products with modular instruments and PXI and C-Rio, we restricted the growth of our hiring in the field to a level that has been significantly below our historical rate as we have driven up profitability and really evolved those products. Looking to our product road map going forward and where we stand right now, we have about 370 or so technical field sales people, that are deployed globally right now. We did start the process of preparing for expanding the field in 2007, as you're probably aware, our process of putting people in the field is typically to recruit them into our application engineering ranks for 12 to 18 months and then deploy them into the field as quota-carrying sales people. We did ramp up our hiring of AEs in '07 and we'll see gradual increase of deployment of resources into the field throughout 2008. We expect the field to grow by more than 20% in '08 and that will continue on as we go into 2009 and 2010. In terms of the benefit, you know, short-term we believe that the pay-back and then return on investment in sales force is much quicker than that for R&D and really the hard heavy lifting from a product strategy point of view is largely done. I will turn it over to Dr. Truchard, and John really to talk about these sales forces engage and these key platforms and where they drive value.

This is John, as Alex mentioned, this field sales force plays a big role especially as we're seeing traction with system level platform and large opportunities. As you naturally would expect, field and especially trained and technical field resources play a key role in identifying, working, and servicing these large opportunities. So when we look at the momentum level we have on system-level platforms, we think this investment, starting first with application engineers; but as they roll into the field in the next one to two years, can really have a positive impact on continuing the momentum with the large system business. We expect some benefit this year, but again as Alex said where we would probably see the most impact, most return, would be the 2009, 2010.

Okay. That's helpful. And maybe we can tackle the more near-term environment. Obviously not withstanding the PMI. Maybe we could look at the Japan versus the U.S. Can you give us context around the products, the verticals and certain types of customer profiles that are lending to both the strength as well as the weakness.

I'll let John address the products and the customers' segments and I'll perhaps adjust the geography areas, Mark. We're very pleased with Japan in Q4 after two quarters of negative growth or decline in revenue with the drop in PMI we saw modest recovery in the Japan PMI in Q4. And we saw a return growth in our Japanese operation with almost 10% year-over-year continued growth in dollars in Q4. We saw as you saw from the overall numbers accelerated revenue growth from the rest of Asia as well as during Q4. So we saw great execution there. Also good execution in Europe, as you saw, during the quarter. The thing that's making me cautious on guidance and obviously the U.S. PMI for December came in below the lowest point of all, I think 52 expectations that were out there. So clearly came in at a level much lower than anybody anticipated including ourselves. And certainly the Feds decision to cut 75 basis points also engendered caution and they in terms of looking out at environment we're likely to see over the next couple of quarters. As I said, short-term we're deliberately being cautious about what we expect to see. We'll see how that plays out over the next course of couple of months in PMI data, as to whether we're being adequately cautious or overly cautious. Perhaps John is going to address the question.

Briefly on products, I mean, first of all, as you know, we don't break out product line revenues but I can tell you that if you look at regions like Americas, primarily U.S. compared to Japan, there is not a significant variation in the product mix. Software is--has been strong to our platform world wide. Japan has done an outstanding job with LabVIEW and our software platform over the last years. No significant change in terms of the product mix and like Alex said, we're just overall very pleased to see Japan come back to growth and we've had some outstanding execution by the team there.

Okay, thanks, John. Lastly, you mentioned maybe more product or major product announcements in 2008, should we think about that? Is that in the RF side or embedded piece or maybe a souped up, oscilloscope.

We look forward to seeing you at NI week where you might find out if some of that is true.

And obviously, Mark, we are going to be reinforcing our success and that's where the bulk of our R&D is focussed.

Next question from Ajit Pai, with Thomas Weisel Partners.

Good afternoon.

Hey, Ajit.

Quick question. The first question is new sales engineers. Can you give us color as to where they're going to be deployed in terms of geography?

Certainly. We will be obviously deploying an increase across the globe. We be focusing on the regions were we seen the fastest growth. Which is countries of emerging growth in terms of a positive headcount. We continue to see lot of good opportunity for a new product platforms in the developed world as well and so we will be growing our field in the Americas in Europe and in Asia.

And proportionate, how many would be in North America?

I would look at the rough portions relative to revenue to give you a good guide as to the distribution.

Got it. When you look at your head count at the end of the quarter and the end of the year, what was it?

It was 4,647.

Okay.

That was about up 500 from this time last year, and we had about 60% or some of it coming from the emerging countries, the increase.

Got it. When you look at the share buy-backs you did this quarter, can you give us some color as to how you're thinking about share buy-backs right now. What sort of media increase or dividend going forward and what are the other uses for cash?

Certainly, well maybe I'll start with reiterating our long term strategies we've laid out. The number one priority for cash is dividend. We view that as a tax efficient way to return cash to shareholders and obviously we increased the dividend 10% here, the Board increase the dividend 10% in January and little over 50% over the past 12 months. Buy-backs is our number two priority for cash and our strategy there is opportunistic. Based on our expectations of the long-term value of the Company and our strategy will continue to be opportunistic as we look forward. And then on acquisitions, we're always looking at acquisitions but we're cautious to make sure we see real value. And to be honest in the last couple of years we haven't done any acquisitions because pricing in my view has not been realistic. I think, it is more likely in 2008 that pricing is likely to be more realistic and that may give us an opportunity to find value in acquisitions in 2008.

Got it, and then lastly just from the strength you talked about in Japan. Large number of other companies have not talked about any strength over there. Is there any vertical driving the strength? Is it broad based? What are you seeing in that geography?

I revert back to John's comment earlier on. Recovery in PMI and Q4 and product distribution is very--very uniform across the world, and we are seeing great success in some of our USB platforms over there which may potentially be a game changer in some of the spaces that we serve. But beyond that it is a very homogeneous distribution that we have geographically.

Right, but you also talked about in the past, Alex, PMI is more of a forward indicator, than a coincident indicator. So is it fair to assume that the health you're seeing in Japan in the PMI would mean the first half of 2008 is going to remain healthy?

Well, if I could predict the first half of 2008 I wouldn't be doing this job. You know, our approach to this is we want to be fiscally prudent and we are going to, like I say, balance the short term and long term. With the Fed's rate drop and weak PMI in the U.S. for December, that gives me enough information to choose to be pretty cautious at this point in time. We will, you know, it would be like Ben Bernanke here, we'll react to date tan we will evolve as we go through the quarter. If the data comes in positive, then our conservative assumptions, then I will be happily surprised by that. But we'll be fiscally prudent and ensure that we protect the strategic investments in R&D and field sales force that we believe are going to want to see done when we get to 2009 and 2010, those are the things we want to be sure we have done in '08.

Got it. Thank you.

Go next to Richard Eastman with Robert Baird.

Hi. Just a couple of questions for John. John, with this investment in the field sales force, is the primary effort going to be towards the embedded industrial applications? Just given the basic definition of business?

Well, I think as we talked about it in NI week, and we have been in past calls, there is two areas we see for growth. One is continuing to get share and tests and high end tests and RF platform that we have talked about. Digital test is another where we're seeing some traction and strong growth and one where we are having some real success. But obviously industrial embedded is the key area for growth, and one where we're having significant success. As we mentioned the last call, that is probably the fastest growing area. We mentioned distributed I/O, record revenues, CompactRio, triple-digit revenue growth, and that's four years into its existence as a product area. So we will invest, as Alex said, regionally as we see the opportunity for growth. And the same kind of applies in terms of the investment and test versus industrial and embedded. So as we see the opportunistic investment and the return on that, we continue to expect that to be the fast growing part of our business.

And that drives the average sale price higher presumably, as well.

Exactly. These areas that John mentioned are the one gaining scale, Compact Rio and our test systems, especially things like RF, and both of these areas require higher level system level support. So we're investing where we can get them, we see opportunity in capability needed to accomplish that, and keep gaining scale in these areas.

Okay. And then could I just ask a question; on this receivable write-off, that seems like a big number given your average order size. I mean, how does that happen?

This came as a bit of a surprise to us. Alex here. It was a company in the Americas that declared bankruptcy last week and they were a channel partner of ours and it is a lot individual pieces of business going through. It appears they got into trouble as a result of a failed acquisition. They represent less than a quarter of 1% of our revenue. As we look forward, they are a number of one of our channel partners going forward that the bulk of that revenue that was going through their channel will divert to other channel partners who will service that business.

Oh, okay. And then just the last thing, Alex, detailed question, of the 2 million of restructuring, the receivable as well as 600,000 of Ireland, Hungarian admin. What line items did that hit?

The receivable is on in sales and marketing.

It is.

And the restructuring is in G&A.

Okay. Very good. Thank you.

Thank you.

We'll take our next question from Terence Whalen with Citi Investment Research.

Thank you for taking my question. This one is regarding head count. Can you repeat what you said about the field sales? You say they would be up per head by 20%? And then if you could also comment on the broader head count. I think you said it was up about 12% this year. What would be your expectation for 2008?

Certainly, Terence. So the broader head count was 4,647 which is up 12% year-over-year and of that increase 60% came in the emerging countries. When we look at the sales force we have about 375 approximately technical sales people deployed globally. The increase that we're anticipating for 2008 in that --in those numbers is somewhere north of 20% for 2008. And our goal is to roughly double that head count by the end of 2010. That is a significant acceleration in growth compared to the last four to five years. And in terms of remainder of head count in 2008, based on our conservative expectations for the first half, I will anticipate our head count growth in other areas will be less than what we saw in 2007.

Great. And then a follow-up. Pretty straight forward actually, it looks like the mid-point of guidance for the next couple of quarters is going to be in the 10% to 12% area, and I understand there's a little bit of vacillation because of Easter and the $5 million change there. But looking more broadly at the first half versus the second half, are you budgeting your capital budgets with an expectation of similar growth in the second half, reduced growth, or higher growth in that 10% to 12%? And I guess as as corollary, do you expect operating margins on a pro forma basis to increase or decrease in 2008? Thanks.

On the first question, our capital budgets are not going to be that heavily affected by a few percentage points change in revenue growth one way or the other. Our capital needs are quite modest. I think we had about $24 million in capital spend in 2007, versus about $36 million in depreciation and amortization. So there might be some modest change because of a shift in revenue growth from the first half to the second half. But I think it would have de minimus impact on the dollars we spend capital wise. In terms of your second question, if I interpret your question correctly; whether you expect to see higher operating margin from the second half of '08 from the first half of '08, am I interpreting your question correctly?

To simplify it. I apologize. Would you expect higher growth in the second half on a revenue, of 10% to 12%. And also, for the full year of '07 you came in a little bit below your operating margin plan. Do you expect for the full year in '08 operating margins to increase or decrease? And that's it, thanks.

Sure, on the second question, what we said in the call, is based on our conservative expectation or deliberately conservative expectation we anticipate we won't hit our 18% operating margin during 2008. As a result of a conservative expectation and a decision to ramp up the field sales force. In terms of revenue growth in the second half, obviously we've given first half guidance. The second half at this point is just too far away to really comment. What I can tell you is that we would expect to see acceleration of revenue growth when the global PMI shows a decent recovery.

But on the question of whether operating margin for a full year is up or down, I understand it is going to be under the 18% but relative to '07, 16.6%.

I think if you work--if you use the guidance for the first half as a basis, that should be able to give you a pretty good range for the year. We would certainly expect to see operating margin levels much higher than we saw in the early 2000s, but we are planning on--, we've given conservative guidance and we're planning to have a fairly decent increase with R&D head counter in the sales force, and that will put pressure on operating margin.

And so we could expect operating margin on a pro forma basis to be down slightly from '07, 16.6%

Sorry, Terence, we're only giving guidance for the first half of the year. At this point I'm not in position to give guidance for the second half of the year.

Okay, appreciate it. I was just trying to tailor the model.

No problem.

We'll take our next question from David Yuschak with SMH Capital.

Just to revisit that a little bit on the EBIT margins, Alex, for the first half of this year. How much has been conservative versus potentially the drag of building up the field sales force even though you might be taking that from some other places? How much of that drag on assumptions on EBIT margins is really equated to getting that part of the cost--basically investment in that area versus being more conservative about the outlook?

Well, I would say they're fairly balanced, David. Before we saw the falloff in the PM in Q4, was to be able to hit 18% operating margin in 2008 while going to field sales force and leveraging other areas of our business to deliver that leverage needed to fund the sales force expansion. As we looked at the new economic data that came in through Q4, obviously Q4 was our best quarter in the year. So 13% revenue growth, very good operating income, very good leverage. But as we look at the data points that have recently come out especially with the Fed's decision, we're choosing to be cautious because we want to be open about the data that is coming in as we see it and we are committed to the sales force expansion should be. I would say those two elements are some what balanced in terms of impact on EBITDA.

As far as what would--what kind of conditions--obviously you made the commitment here to ramp up the field sales force. What if anything would be out there that would kind of--discourage you from that or are you well into that already that no matter what happens that is embedded in the numbers?

Well we have already launched a key portion of this initiative as we ramped up our application engineering hiring in 2007 and as we discussed this plan to increase our sales force aggressively as we went through '07.. The real key that is driving this and I hope everybody understands this from our comments in the call, the trigger for driving the sales force expansion is really built around where we are with our products and the platform completion we're reaching with our core new product platforms. And that's the key trigger that has been driving our decision which we made quite a while ago to execute on the sales force expansion in this time frame. The fact that we're seeing a down-turn from a PMI point of view is more coincidental and it's happening at the same time. But the core thing that is driving our decision to increase the sales force is based on our product strategy and this is a plan we had put in place some time ago. So in terms of executing on that we're very committed. We believe in 2009 and 2010 that our shareholders glad we made that decision and so based on what we know today that's where we're headed.

Another key point is the areas like CompactRio, it is growing at 100% and we would like to keep it going at that rate. And so basically those investments will help keeping the most successful, hopefully keep us growing the most successful areas of the business.

Now this sales cycle on some of these newer products, you find them to be shorter duration because of the robust nature of them and that is what makes you committed to make this sales force expansion as aggressive as it is, despite some of these concerns on the economic front?

But, David, this is John, as we seen the success with the large orders, we've spent the last year or so really doing some in-depth analysis looking at what has been driving that success and one key factor is the system platforms, CompactRio and PXI being two examples. But, the second thing that has been driving those is the role of the field sales force, and it was that knowledge and insight that naturally led us to look and say well how do we continue the growth and possibly accelerate it in the future, is that investment in field sales? As Alex mentioned that was part of the thinking that went into some of the decision making in 2007 and what gives us the, you know, the opportunity to make this investment for long-term growth.

One last question on PMI issue, Alex. Seen a sharp falloff in the U.S., part of the concern you might see that in overseas even though you have good experience out there, or is it more that the mix on the conservative side is skewed to the U.S. economy than it is international.

Well, it is a little bit of both, David. Our guidance we're giving is based on a definite assumption that we assume that the global PMI will fall meaning fully in Q1. Now, that may prove to be overly conservative, it may prove to be not conservative enough. We'll have to see as we go through the next few quarters. We want to make certain we're preparing for whatever circumstances may come along and that we're doing it in a way that guarantees that we can execute on the long-term investment strategy--excuse me--that we feel is crucial to deliver good growth fort company in '09 and beyond. So we're making it a definite call at this point in time in terms of giving guidance, we assume things get worse globally and we'll let the data play ut and see what it tells us over the next three or four months. Well, I'm not sure following the Bernanke approach and reacting to data is the smart thing to look. We're looking forward to make sure we preserve our best investments and we'll see as we go.

We'll take our next question from John Harmon from Needham & Company.

Good afternoon.

Hey, John.

I guess first of all I was wondering if you could talk about your on the way you said your guidance. On one hand you said you were conservative but on the other hand you said you widened the range and the range, I looked at it, it was $14 million, I think it was $12 million the quarter before Usually about $10 million. Did you widen the range on the bottom end, probably not the on the--in short, how much did you subtract from your guidance and talk about this $5 million from Easter. Is Easter a catch-all for Easter and Chinese New Year and Super Bowl and this and that? Or does Easter affect that large in Europe?

On Easter front, it is one--I was hesitant to bring up. It is one of the reasons we gave guidance for two quarters out there. In '05 we saw a real clear impact for when Easter shifted from Q2 to Q1 and we saw revenues in the last week of the quarter in Europe which is our second largest market drop in half in the last week of March and then be up almost 100% in the first week of April in that time frame as a result of that change. That has a noticeable swing on a certain hundred million dollars. We factored that into your guidance this quarter and we wanted to make people aware of that, As they were understanding the same goals that we were looking at, same metrics that we were looking at for the next two quarters. In terms of guidance, obviously we did widen the range about $4 million dollars. Last quarter it was $10 million dollars.From 200 to 210 and we came right in the middle of that range for Q4, which was our best revenue growth quarter of the year. As we look at first half of next year, certainly we are widening the range on the down side from 6% to 14%. That moves the midpoint down from, I believe, about 13% in Q4 to around 10% or so in Q1.

And this last thing just kind of an observation. I looked at your balance sheet, and looks like cash is piling up faster than you're able to find something to do with it. I guess you could talk about what level of cash you're comfortable with. And your dividend strategy and so on, please.

Sure. We talked a bit earlier on the call on what our priorities for cash usage were. But obviously as you noted we steadily increased our cash position this year despite a $27 million in dividends paid in '07 and about $80 million in stock buy-backs during the course of that time frame. And, I think if you look at our cash flow from operations at $145 million which was significantly higher than non-GAAP net income heavily driven by increase in deferred revenue which is also obviously a deferral of profit. Cash flow was stronger than non-GAAP net income during the course of the year and that is something we've seen in the past. In terms of our ideal amount of cash, I would certainly feel the company has an adequate amount of cash and has some flexibility in terms of its fiscal resources. Our priorities will remain the same for dividends, opportunistic stock buy-backs and it's not unlikely given the pricing dynamics we've seen over the past two years that acquisitions may be a more attractive proposition for us in 2008 as pricing is perhaps more realistic than it has been with private equity firms in '07 and '06.

Sure, that helps.

Thank you.

That is all the time we have for questions today. At this time, I'd like to turn the conference back over to you Mr. Davern.

Thank you again for taking the time to join us today. As a reminder, we will be presenting at the Thomas Weisel Conference on February 5th in San Francisco. We look forward to seeing you there.

And that does conclude today's conference. Thank you for your participation. You may disconnect at this time.