National Instruments Corp (NATI) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the National Instruments Corporation first quarter 2008 earnings conference call. With us today are Dr. James Truchard, President and Chief Executive Officer, Alex Davern, Chief Financial Officer and John Graff, Vice President of Marketing. For opening remarks I would now like to turn the conference over to David Hugley, Corporate Counsel.

Good afternoon. During the course of this conference call we shall make forward-looking statements regarding the future financial performance of the company including statements regarding our expected revenue, revenue growth, earnings per share, growing sales force, identifying large opportunities, evolving towards larger order system-level business and positioning in an economic recovery.

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 regularly with the Securities and Exchange Commission including the companies Annual Report on Form 10K for the year ended December 31, 2007. These documents contain important factors that can cause results to differ materially from those contained in our forward-looking statements. With that, I will now turn it over to the President and CEO of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon and thank you for joining us. Our key points today are double digit year-over-year revenue growth, strong sales in key product areas and continued large system success.

We turned in another quarter of double digit revenue growth in Q1 in spite of continued weakness in the global economy. Large system sales again drove much of our growth and we saw strong sales in our key product areas including software, USB data acquisition, distributed I/O, PXI and RF modular instruments. In our call today, Alex Davern, our CFO, will review our financials, John Graff, our Vice President of Marketing, will discuss our business and I'll close with a few comments before we open up for your questions. Alex?

Good afternoon. Today we reported first quarter revenue of $193 million a 12.4% increase over Q1, 2007. GAAP fully diluted earnings per share for Q1was $0.22, non-GAAP fully diluted earnings per share for Q1 was $0.28 per share at the mid-point of our guidance for Q1. Net cash provided by operating activities was $30 million for the quarter.

We are pleased with the continued double digit growth of the company, despite the significant weakening of the global industrial economy since Q4 of 2006. The success of our sales force in driving large orders in new product areas has been the key to this growth and validates our strategy of investment in R&D and a field sales force. We are committed to our goal of doubling the field sales force by the end of 2010 and believe this will position us well for the eventual recovery in the global PMI.

Our virtual instrumentation and graphical system design products which now represent over 90% of our product portfolio had 15% year-over-year revenue growth. This represents another quarter of strong revenue growth for these products, despite the significant decline in the global Purchasing Managing Index since Q4, 2006. Our growth in Q1 was driven by the success of our new products, especially in the areas of software, USB data acquisition, distributed IO, PXI and RF modular instruments.

Additionally, we booked a $3.6 million sequential increase in deferred revenue on the strength of continued strong software sales in Q1. In contrast, sales of our instrument control products were down 5% year-over-year in Q1, compared to 6% year-over-year growth in Q4. This decline is in line with the weakness of the global PMI in Q1 and our guidance in January. Instrument control now represents 9% of revenue, down from 11% last year and 28% in Q1, 2000.

The ability of our overall revenue growth to resist a decline in our instrument control revenues is a significant event for NI on our path to becoming a multibillion dollar company. During Q1, we saw growth in all regions. We are pleased to see the Americas return to growth in Q1, with a 7% increase in revenue after being flat year-over-year in Q4. This improvement came despite the drop in the US PMI below 50 during the quarter. Asia continued it's strong performance with another quarter 20% year-after-year revenue growth.

Europe also saw continued growth this quarter, up 14% year-over-year. In our guidance, we had set the expectation that the shift of Easter from Q2 last year to Q1 this year would have a negative impact on revenue in Q1, with a corresponding positive impact in Q2. We clearly saw that impact with a significant slow down in European bookings in the second half of March, offset by the benefit of a very easy compare in Europe in the first half of April. Now looking at the income statement in more detail.

Non-GAAP gross margin in Q1 was 76%. Non-GAAP total operating expenses in Q1 were $122 million up 17% year-over-year as a result of continued investment in sales and marketing, and R&D, a significant decline in software development costs capitalized and the weakness of U.S. dollar. As we start 2008, I think it's useful to review how the company has evolved so far this decade.

Among the major changes since 2000 are that our relative exposure to instrument control is now one-third of what it was. The percentage of our employees in emerging countries has increased by a factor of 10 helping to lower cost base. The percentage of our revenue coming from emerging economies has more that tripled and percentage of our revenue coming from key new product areas of modular instruments, PXI and distributed IO has also more than tripled. The core of our strategy this decade has been to expand the percentage of our revenue coming from application areas that are new to NI, but which heavily leverage our technology and our competitive position.

The intent of this strategy is for NI to be able to grow thorough moderate industrial slow-downs, preserving our investments and to then accelerate our revenue growth when the industrial economy recovers. We believe that doubling our sales force by 2010 will reinforce this strategy. On March 31st, the company had $238 million of cash and short-term investments, and as disclosed in our 10K, $8 million of option rate securities have been reclassified as long-term investments during Q1.

Also during the quarter, the company paid $9 million in dividends, $17 million for the acquisition of MicroLEX, and paid $49 million to repurchase 1.833 million shares or 2.3% of company's common stock at an average price of $26.77 per share.

Today the company announced that the Board of Directors has approved a new share repurchase plan, increasing the number of shares that the company is authorized to repurchase to 3 million shares. In addition the Board of Directors approved a quarterly cash dividend of $0.11 per share. I'd like to make some forward-looking statements concerning our expectations.

For Q2, 2008 we currently expect revenue to follow the seasonal pattern of being up sequentially from Q1and to be in a range of $198 to $210 million. This is equivalent to revenue growth of between 10% and 17%. We currently expect the GAAP fully diluted earnings per share will be in the range $0.24 to $0.33 for Q2, with non-GAAP fully diluted earnings per share expected to be in the range of $0.30 to $0.39 per share. This non-GAAP EPS guidance is consistent with that given in January.

These are forward-looking statements. I must caution you, actual revenues 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, effective tax rates and foreign exchange fluctuations.

Entering 2008, we expected a continued weakening in the industrial economy, and we focused on achieving double digit revenue growth, while also investing to double our field sales force by the end of 2010. We're very pleased with the progress we have made in Q1. Our strong competitive position and our long-term investment strategy have allowed us to take the current global industrial slowdown, now six quarters old, in stride. We expect our expanding sales force to derive incremental benefit from the eventual recovery in the global PMI.

As I reminder, I'll be presenting at the Credit Suisse conference in Boston on May 13th, the Baird Growth conference in Chicago on May 14th, and the JPMorgan Technology conference in Boston on May 21st. With that I'll turn it over to John Graff, Vice President of Marketing.

Thank you, Alex. We achieved another quarter of double digit revenue growth in Q1 inspite of difficult economic headwinds. While the global PMI dropped during the quarter to its lowest level since 2003, we were pleased to deliver 12.4% revenue growth, which was above the mid point of our guidance and on par with the past six quarters. Much of this growth was driven by continuing strong sales of large systems. Orders over $20,000 were up 34% from a year ago and now account for 37% of total revenue.

This success translated to an increase in average order size to $3,480, up 13% from Q1, 2007. This continued strong growth of large orders was driven by our R&D investments and strategic system-level platforms and further validates our strategy of investing to grow field sales resources. Much of our success at identifying, winning and supporting large systems can be attributed to the competitive advantage that our technical direct bill channel provides.

We remain committed to our goal to double the field sales force by 2010 and believe that this will position us very well to benefit from an eventual recovery of the global industrial economy. In Q1, our mature instrument control business saw a modest decline consistent with the weakness of the global PMI during the quarter. In contrast, our virtual instrumentation and graphical system design products, which now account for over 90% of revenue, saw revenue grow at 15% during the quarter.

We had strong revenue in many key product areas, including software, USB data acquisition, distributed IO, PXI and RF modular instruments. We were very pleased with an increase in software orders that outpaced company growth in Q1. This was driven by continued growth of LabVIEW development systems and in particular Developer Suite, which packages together several of our core software products.

LabVIEW version 8.5 continued to see strong adoption as its inherent parallelism has proven to be a strong differentiator in programming and running on multiple core processors. During the quarter we joined the Multicore Association with Intel, Free Scale and others to develop standards to shorten time-to-market for products that involve multicore implementations. In addition, we announced last month a joint initiative with Intel to deliver free, hands-on multicore programming workshops.

These workshops will visit 34 cities around the globe to teach attendees how to leverage software design and development strategies to program multicore processors with LabVIEW. We also saw strong growth in our software services business in Q1.

A focus area for the company has been to develop LabVIEW user expertise and increase the number of certified LabVIEW developers. We made progress towards this goal during the quarter with customer education showing strong attendance and revenue growth from paid courses. We've also seen a significant increase in the number of LabVIEW users registering for and completing LabVIEW developer certification.

Q1 was another strong quarter for data acquisition products, with much of the growth coming from continued strong sales of USB-based devices and systems. In addition to strong USB unit growth, the average selling unit price continued to increase as we introduced more high-end USB data acquisition devices, including new high resolution devices that use a 18-bit analog to digital converter. We also saw another strong quarter for CompactDAQ, our modular USB system based on our C-Series modules. As it enters it's third year on the market, CompactDAQ continues to see very strong revenue growth, in addition to a large percentage of sales to new customers. In Q1, we also introduced several new USB-based instruments, including two digitizers, a 6.5 digit digital multimeter and an RF power meter. All of these devices are powered by the USB bus, for improved portability and benefit from the fast set-up time and ease of use that USB provides.

PXI was again a revenue growth driver for the company in Q1, despite the continued weakness of the global manufacturing climate. PXI modular instrument revenue was led by strong sales of PXI high speed digitizers and high resolution DMMs, as well as record revenue for RF modular instruments. These record RF results followed a very strong Q4 last year and were driven by continued success in spectral monitoring applications and in consumer electronics tests.

Also during the quarter we released our first PXI source measure unit in addition to the industry's highest density PXI switches. These products have seen strong early sales and precision DC applications such as semiconductor parametric tests and electronic device and component validation.

As test engineers continue to face the challenge of testing increasingly complicated designs or shrinking timelines and budgets, we see greater opportunity for the latest technologies, including PXI Express, FPGAs and multi core processors, to develop high performance test systems that can meet consumer demand for higher quality products. In a recent Frost & Sullivan report, industry analyst Kiernan Uni said "the adoption of tools such as PXI is an indicator that companies recognize the benefits of moving towards software defined instruments."

In Q1, we continued to see success in industrial and embedded applications driven by another quarter of strong CompactRIO revenue growth. CompactRIO, based on FPGA technology and C series modules, has helped us win business in new high growth areas such as civil structural monitoring and alternative energy system monitoring. One such example is that Miazza Stadium in Milan, home field of the AC Milan soccer team. Engineers recently installed a network of CompactRIO systems in the stadium to monitor vibrations during events as well as corrosion of the structure.

With new research funding and municipal budgets for monitoring highways, bridges and dams, we see structural health monitoring as an expanding opportunity for NI hardware and software. The C series modules used in CompactRIO, CompactDAQ and other modular systems, have been a very strong growth driver in the past few years. NI now offers more than 40 unique modules for measuring electrical, physical, acoustic and mechanical signals, as well as controlling actuators and digital protocols. This does not include the dozens of modules designed and supplied by partner companies.

In Q1, we released a new C series dynamic signal analyzer module and three new C series-based devices for USB. We're also very pleased with strong sales in Q1 of our new family of smart cameras that released late last year. The first two smart cameras integrate an image sensor and a power PC processor that can run LabVIEW in a recognized package suitable for harsh industrial environments. The smart cameras are already helping us find and close large opportunities including key design wins with industrial machine builders. In summary, we were pleased with our performance in Q1 in a tough environment for the industry.

We are particularly up-beat about the continued growth of large system sales. Our increased order size is a result of strong R&D execution since the last economic downturn, which has put us in a very strong competitive position. We now believe that our strong product portfolio will allow us to gain sufficient leverage in the long-term as we accelerate the growth of our field sales channel.

As I mentioned previously, we remain committed to our goal of doubling our field resources by the end of 2010. And we believe this will position us well to take advantage of the eventual recovery in the global and industrial economy.

As a final note, the National Instruments Investor conference will be held in conjunction with our annual NI Week User conference on Tuesday August 5th. We look forward to seeing you there. With that I'll turn it to Dr. T.

Thank you, John. I'm pleased with the resilience we demonstrated in Q1 in a challenging industrial environment.

I believe that our solid results in the quarter substantiate the viability of our long-term financial model and goals. We were able to achieve double digit revenue growth while accelerating our investment in the field sales channel. We continue to execute toward a vision of graphical system design and made especially strong progress in the area of industrial and embedded.

Two weeks ago, we attended and exhibit at the Embedded Systems conference, North America's largest show for the embedded design market. We were excited to see how much the level of awareness, interest and usage of National Instruments products has improved from just a few years ago. This was evidenced by the awards and recognition we received this year at the show.

EE Times Magazine awarded National Instruments with the 'Medium-sized Company of the Year' award. In addition, EDM Magazine awarded NI CompactRIO with the Industry Innovation award. Receiving these accolades at the Embedded Systems Conference was especially rewarding considering National Instruments was a newcomer to this space just a few years ago.

Last month we also announced that the First Foundation Robotics Competition selected CompactRIO and LabVIEW's embedded controller technology platform for the next five years, beginning with the 2009 competition. Each year, more than 40,000 high school students aspiring to become scientists and engineers will learn how to program FPGA-based control systems using National Instruments tools as they participate in the International First competition.

This is another example of our committment to enhancing Engineering and Science education worldwide by providing educators and students with powerful graphical system design software and hardware to connect the curriculums with the real world. Our industrial and embedded products also continue to see strong adoption and deployment in applications for Green engineering as environmental and energy related investments continue to buck the trend of the current economic cycle.

As I discussed in our last quarter, I believe that there will be significant investments made in improving the environment, and that National Instruments uniquely suited to serve and benefit from this movement. As with any design challenge, scientists and engineers must be able to measure and characterize a problem before they can correct it. Our hardware and software are being used to both measure the environmental impact of products and processes as well as to improve them.

One example is at new Nucor Steel, North America's largest steel recycler. Steel recycling is incredibly energy intensive, and controlling process variables such as the amount of electricity required to heat a batch of steel, has historically been a manual, operator driven process.

At the Nucor's Marian, Ohio facility, LabVIEW and CompactRIO were installed to measure the amount of steel being recycled and precisely calculate the amount of electricity required to process the steel.

Dave Bran said "by programming NI hardware and LabVIEW versus programming with PLCs and ladder logic, we've seen a ten-fold increase in efficiency and drastically reduced the cost of facility automation." I believe that Nucor's success demonstrates our value proposition to the very large industrial and embedded markets, and that Green engineering initiatives such as Nucor's power saving process will provide additional growth opportunities for National Instruments.

To close, I was pleased with our performance in Q1. Large system sales again drove much of our growth in the quarter and I believe our investment to grow our field sales channel is key to continuing and accelerating this trend. Our strong product portfolio, in addition to growth of our field sales channel, will position us well to benefit from the eventual economic recovery. Thank you. We will now take your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from Antonio Antezano with Bear, Stearns & Co.

Good evening.

Hey, Antonio, how are you?

Good. I was wondering regarding large orders, what product is the biggest contributor to this growth that you're experiencing in larger orders or maybe the RSS test or maybe some particular market?

Antonio, this is John. Really, there's a variety of our system-level platforms that are behind the success with the large orders. Examples include our PXI platform that we've now had on the market for 10 years. As we fill that platform out with modular instrumentation and RF instruments, we've seen a lot of success and increasing our average order size into a lot of automated test applications.

So this is part of our initiative, we've talked about increase our share of wallet and those types of applications. Another system level platform is CompactRIO. It's now been in the market just over four years. It's another one where we continue to see very strong growth. Again it has a modular architecture, it's tightly coupled with our software, especially our LabVIEW FPGA and LabVIEW Real-Time software.

This platform has really taken us into a lot of industrial and embedded opportunities. So it's those platforms and R&D investment over the last number of years is really kind of fueling the strong success of our sales team as they go out and identify and close these large businesses.

And on expansion of field sales, you mention your target to double by 2010. I was wondering if you could share where you are at this point and whether you have to start to (inaudible) the application engineers that I believe you started to hire last year.

Antonio, it's John again. So as you mentioned and we mentioned in the call in Q4, we did start the hiring of application engineers in the second half of 07. We started to see the deployment of those resources into the field in Q1, so as we ended the quarter, we have approximately 415 technical field sales representatives. That's our global number.

That was approximately an 18% increase from a year ago. That compares to a growth rate and our sales headcount of 12% for all of 2007. I think that's a good example of that acceleration that we talked about and we're very excited to get those feet on the street. The representation was pretty evenly distributed globally, on par with revenue break down between Americas, Europe and Asia.

If I may, a very quick one. I noticed your R&D spending was higher this quarter, I was wondering just translation or there is something else. It was17.6% of sales I believe, we exclude stock compensation.

Antonio, it's Alex here, as you're familiar, Q1 is obviously always the seasonally lowest quarter of the year. We tend to see an aberration across the board in the business model where every element of the business model is at it's highest level. We have our lowest operating margin historically in the first quarter. Then usually obviously in the fourth quarter, highest operating margin historically and those numbers tend to come down.

Additionally this year we did see a 40% reduction in software capitalization in Q1 of '08 versus Q1 of '07. That also did bump up the year-over-year growth in R&D. While it doesn't reflect a real spending left level from a GAAP point of view, you see that portrayed in the income statement numbers.

Thank you.

Thank you, Antonio.

Our next question will come from Mark Markovitz of JPMorgan.

Couple questions if I could, one, last quarter you guys were willing to give out two quarters of guidance. Was that because of the Easter effect or is it because you are still trying to figure out what sort of impact you may have from new products that could be introduced in conjunction with NI Week?

No, that was primarily because of the Easter effect and obviously we're glad now to be able to increase the revenue guidance for the second quarter and obviously we are standing steady with the earnings guidance we gave in January. That was to illustrate that dynamic from Q1 and Q2. We're glad to see revenue accelerate even a little bit more than we anticipated as we look into the second quarter.

Okay. Can you give us any stance in terms of what percentage of total revenues now come from manufacturing test versus R&D test environments versus other?

Mark, this is John. It's hard for us to quantify the break down, especially within tests. If you look at our products, for example, PXI and modular instruments and LabVIEW, we can easily sell those products into research validation tests as well as obviously a lot of success in the production environment. So I really couldn't give you data on that.

The other question that comes up a lot is then our growth into new market areas, like industrial and embedded and again, review what we see as key growth opportunities for us. We continue to be really excited about increasing our share of wallet in automated test applications. That's where we are seeing a lot of success. As well as continued penetration in the newer market opportunities in the industrial embedded and that includes getting designed into industrial machinery, machine condition monitoring and new application areas that we haven't previously served.

As far as the two latter points in terms of where you're seeing strength in terms of ATE and embedded. How should we think about the revenue stream longer term? Is there a greater hook in that type of business where you can develop a really good relationship where you can have somewhat of a construction of a recurring revenue stream perhaps?

First, let me talk on the test side, part of our success on test is predicated on the strong new product execution that we've highlighted, but it's also based on relationships we've had with those accounts for really 20 plus years in some cases. It goes back to our instrument control and software position.

We've seen very good, loyal, long-term customers. Now as we go into industrial and embedded, we do think there's some opportunity that as we get designed into some industrial machinery, there is the opportunity for perhaps more OEM business. You get a design win that could hopefully pay off over many years. And assuming that they are successful with our products and platforms, that can carry over into new designs and new equipment.

I think historically we've proven, Mark, a very high repeat business level. Upwards close to 90% of our revenue in any year comes from customers that did business with us the previous year. So, while we may have to win in combat with our competitors, one customer at a time, our ability to retain those customers for a long period of time is very strong.

Thank you.

Our next question comes from John Harmon with Needham and Company.

Hi, Good afternoon. Last quarter, you certainly anticipated this drop in PMI, and you said it would last for a couple quarters. Has the drop been in line with your expectations? Has anything changed in your outlook? Did you expect the U.S. manufacturing to pick up in the second half?

Certainly John, that's a good question, and one I've thought a lot about coming into this call. I would characterize what we saw in Q1, obviously we hit the mid point of our guidance for the first quarter. We're leaving earnings guidance unchanged for Q2, so I would characterize what we saw in Q1 as very much in line with what we're expecting to see. My assumption on Q2 is that we'll see another sequential decline in the PMI in the second quarter, in the global PMI and that's the assumption I'm building into my expectations for the second quarter.

In terms of the second half, it's a little hard to see, I will say that from my point of view, the slow down in PMI now is six quarters old and if we do see another sequential decline in Q2, that'll make it seven quarters. So I'm no expert, I'm no economist, but it's getting a little bit long in the tooth and we'll see when it turns around. I'm very confident it will turn around.

I believe the decisions we're making in terms of both our R&D investment and scaling in the field as John mentioned as we continue to accelerate that deployment, I think when we get to '09 and '10 we'll feel very happy with the decisions we made in 2008.

Okay, thank you. My second question is that you talked about strong growth in large system level orders, is that similar to just large orders in general and I apologize if you gave it, but do you have the average order size for the quarter?

This is John, the average order size in Q1 was $3,480 which represents 13% year-over-year increase. Now it is down from the Q4 peak, but that's a pretty traditional pattern we see, very aligned with capital purchasing patterns that we've seen for a number of years now. Again, it's driving the large system success, the execution on the new products and these system level platforms and then the field channel, really plays a key role. These new products and new platforms kind of fit right into the wheel house of field sales, they can take them into these accounts where they have relationships and solve a greater portion of their test needs or some of the advanced control they need in industrial machinery applications.

So we're very excited and like Alex said, this is what's predicating us to embark on the next phase of our strategic investment, to continue R&D and look to expand our field sales.

Great, thank you.

Our next question will come from Terrence Whalen with City Investment Research.

Thanks for taking my question and good job on the results.

Thank you.

So I have a couple questions. The first one is on currency. It looks like ex the effect of currency, revenue growth was about 7.7%. Can you confirm that, what ex currency growth was and then I have a follow-up.

Sure, Terrence, as you know our strategy is to adjust pricing periodically over time as we see the shift in exchange rates. We focus more on the dollar number, but your number is approximately right, around 7% to 8% local currency growth. We feel that unit volume growth will be a little bit higher as we have adjusted pricing overseas over the last year.

Related to that, what's the EPS impact of currency on the results?

Well I don't think it's really determinable just from looking at the top line and the expense level, because we do compensate for currency also by price adjustment. I don't think that's a relevant metric to look at.

Okay, great. On operating margin, it seems like margins were down about 320 to 350 basis points year-on-year, is that a level we can assume going forward or will we narrow? I guess for the full year, what's your expectation for operating margin? Will it decline by more than 150 basis points?

Well, we haven't given guidance for the full year. Terrence, I can't answer that question directly. What I can tell you, obviously EPS, at a non-GAAP level was flat from Q1 last year to Q1 this year. There's a number of factors factored into that, including obviously the Easter impact. We are guiding to reacceleration of EPS growth in the second quarter. So we do anticipate a recovery in margin as we go into Q2 and we certainly would not expect to see a 300 point drop in operating margin for the full year as we go out through the second half. We'd expect to see a result significantly better than that.

Okay and last one is regarding the European observation that you made. I think you said you saw significant flowing in Europe which you attributed to the Easter effect. I guess now that we're beyond that, what's the run rate look like in terms of European orders? I don't want to overly attribute that just to a seasonal vacation effect, because if you look at PMI, that's declining in Europe and other observations, in terms of economics in Europe, aren't necessarily pointing towards positive indicators.

We clearly laid out this impact because we've seen it repeatedly over time as this has happened. It was crystal clear. As I look at the daily bookings rates from Europe and weekly, you can see that we had very strong bookings growth through mid-March and then in the second half of March we saw a significant shift in the bookings rate. When we got to the easy compares in April, we saw the reverse. We saw strong growth in bookings in Europe in the first half of April. I have absolutely no doubt that the impact of Easter on a transactional business like NI's is very definite and real. Certainly, obviously as we started with a very strong half, first half in April our bookings growth rate in Europe for the month of April is significantly better than the average we saw for Q1. So that's the data I would give you, but I would not rule out the impact of Easter on the European businesses. It's a very real element.

Okay, thanks for the clarity and good luck.

Thank you very much, Terrence

Our next question will come from Richard Eastman with Robert W. Baird & Co Inc.

Just a couple things. Alex, could you give the headcount number at the end of the quarter in total?

Sure, Rick. Right at about 4,800 people.

Okay. Dr. T would you maybe just talk through the MicroLEX acquisition, the strategy there and what that brings to the table?

Yes, MicroLEX was a strategic partner of ours serving the audio and video space, with mixed signals tests. They were using our products heavily, and expert in area of audio video tests and bringing that expertise to NI along with growing base of customers. So we're real excited about the acquisition, we believe it fits well with our strategy, our product line, and we look forward to success with it.

And so that would be, that would be more on the systems side when you have a video test or audio test?

Exactly. Often doing production testing on devices with audio and video.

Okay. Alex just on the same thought, from a system's perspective, are we in a position yet, given that we're almost at 40% of sales that our systems, large systems, that we start to have some backlog at the end of the quarters, that becomes at least a decent indicator for your following quarter sales guidance?

At this point our strategy, Rick is to not only be innovative on products and innovative on sales channel, but be very innovative on manufacturing and distribution. So we have a very efficient and effective distribution model. As you know we're building 90% of our hardware now in Eastern Europe and we actually distributed direct into the U.S. and all of Western Europe and Japan, directly to customers straight from the factory. So we have a tremendously effective and efficient logistics system.

It has offered a competitive advantage in being able to out-deliver our competitors for complete systems, assemble systems, significantly faster with complete systems than anyone else I'm aware of that we compete with. We view that as a real competitive advantage. We're going to endeavor to try to stay as efficient and effective and keep backlog down as much as possible. At this point I don't anticipate backlog becoming a significant indicator.

I think the velocity with which we satisfy our customer needs is a real competitive edge for us. We would like to keep that going.

Okay. Then just one last question rather than queueing back up again, John, as you've added and you continue to add to the field sales force, do they also provide a service element for some of your industrial control and embedded applications? Will they do follow-up service, if necessary?

To various extents. If it's a requirement where there's extensive, after the systems installed, ongoing service, there are aspects of what NI will provide. Often we'll work with our alliance channel and partners. Often on those kind of systems there'll be a system integrator involved who then also provides a level of post sales service and follow-on support. So it really varies case to case, but you do bring up a key point that it is very different than our traditional, transactional approach where we ship the product and then we have world class application engineers that will support over the phone, over the web. There is a little more hand holding involved, both pre-sales and post sales on these large orders.

Okay. And you will, say 90% of the time you'll have an alliance partner, integrator involved. Is that a good number or is it less than that?

I don't think it's that high. Definitely less than that. Again, this is part of our investment in the field channel. We've talked about some of the resources are system engineers and those system engineers get involved in both that pre-sales and post sales. Because again, we're not just going to ship the products, you know to the customer and say "good luck." We're going to make sure it gets installed, up and running successfully and meeting the requirements set out on a particular proposal or opportunity.

Additionally our customers have, in-house integration services, so they often integrate it themselves. The times that we don't have alliance partners, usually in-house integration, we are beginning to offer some services that are more traditional after-sales service and this is a newer area for us. In general, we've either depended on an alliance partner or an in-house integration service.

Interesting, okay, thank you.

Thanks, Rick.

Our next question will come from (inaudible) with Thomas Weisel Partners.

Quick question on the Asian revenue that you have, I think as a percentage of your revenue in dollar terms, it's probably the highest you've ever had in this quarter. Could you give us some color as to, is that where a large chunk of your new headcount is going and also how you think about that particular market because as a percentage of your revenues, you're still far lower all of Asia than some of the folks in the electronic measurement industry.

That's a good observation, you know, we typically see Asia as a percentage of revenue tends to often be highest in the first quarter.

As you're probably well aware, the end of fiscal year, part of Japanese economies its the end of March when they tend to have their big budgetary spending and that's a historical trend we've seen in the past. However, we've seen a very steady March of our Asian businesses as a percentage of revenue. Increasing, basically a percentage of revenue, one percentage point a year almost for the last 10 or 12 years. We have tremendous execution by our Asia sales marketing and support staff and we see lots of opportunity for continued growth there.

And certainly as I've traveled around Asia extensively in the last year as we've been doing site selection and process for our next manufacturing facility, I've had a chance to see first hand the available opportunity for growth there is in Asia. I'm a firm believer that we have a lot of room to run in Asia and relative to our competitors, as you said, while we got started a little bit late in Asia, relative to some of the older traditional companies, I think we have the opportunity to continue to significantly increase Asia as a percentage of the overall company.

That's certainly along the lines of my expectations, so we've had excellent execution there and I anticipate we'll be able to build on the strong staff we have in Asia and continue to see that scale as part of the company going forward.

Got it. Looking at the expense line on your operating margins, I think you mentioned there was a certain number of folks, you know actually a large chunk of folks that moved from software being capitalized to hitting the expense line. Can you quantify what the first quarter impact would be?

About $2.5 million in capitalized software in Q1of 07, and about $1.5 million in Q1of 08. That increases, year-over-year growth by about $1 million dollars.

Okay, so just a million. And the headcount that you're adding right now, do you have some kind of breakup, I know it's mainly for the channel on the sales side, but what geographies you're adding them in primarily?

I don't have that data in front of me now, perhaps we can talk about that offline. I can tell you at a broad level it's about 50% in the emerging countries and about 50% in developed countries. In terms of exact regions, I don't have that.

That should be fine. In terms of the tax rate of the 20% tax rate for '08, does the tax rate step up after that in '09 or stay relatively flat?

Well, as you know, we've steadily reduced or tax rate over the last decade or so and we are giving guidance of non-GAAP tax rate of about 20% for this year. Next year, those are too early to determine at this point. We'll have to see what happens in the U.S. election.

Okay, thanks so much.

Thank you very much.

(Operator Instructions). We'll hear from David Yuschak with SMH Capital.

Good afternoon, gentlemen.

Hey Dave.

On the gross margins, as far as the discussion on that, how much would that gross margin have been impacted by the shift in Europe because of Easter. Then two, when you take a look at your numbers from this average order size, you indicated in your press release that that was up 34% year-over-year but yet your average order size was only up 13%. Does that suggest that maybe your better gross margins are at that low ticket item and that really was one of the weaknesses in the quarter? Pick up business as a matter of course?

David, Alex here, let me address that. Certainly the impact in shift in revenue had a negative impact on the operating business model all the way down through the P&L. We would have seen definitely better operating margin and business model results if we hadn't had that seasonality, but that was anticipated and expected. So, we were able to hit the mid point of earnings guidance because we planned for that. In terms of Easter's impact on order size, if you take the dollar value of orders over 20K was up in the 30% range and about 1/3 of revenues.

So when you do that out, you'll see that the vast majority of revenue growth is coming from large orders and the smaller orders are relatively flat which I think is somewhat consistent of what we'd expect to see given where we saw the decline in the PMI during the quarter. Where we've introduced very differentiated products with very good system platforms, we clearly continue to take market share. We continue to deliver 76% gross margin. We feel we see a rebound and are anticipating a higher level of guidance on the revenue front for the second quarter than we had guided for the first quarter.

Is it fair to say then, when you look at your company in this first quarter, seeing the strength you've had in system sales, the over $20,000 item, the investors kind of look at this in two ways, One is the PMI is affecting small dollar orders, having success in large dollar orders in the face of PMI. Is that a fair assessment?

I think that's a fair assessment. I think that's a pretty significant development. As I said, our ability as a company to continue to show double digit growth and pretty much unchanged growth despite a significant shift in the revenue pattern of instrument control business from plus 6% to -5%, for us to be able to absorb that change in instrument control without affecting really our top line growth overall is a really significant change for NI. If you go back seven years ago, that shift in our instrument control business would have had a dramatic impact on our top line and our profitability.

I see this as really important change. We've been working towards this for the last seven years, I think we'll only be able to build on this going forward and we'll expect to see the strength of our non-instrument control business continue to improve as we continue to both invest in R&D and deploying people in the field. I think this is a significantly misunderstood or underappreciated change in the business. NI really is a very different company from seven years ago.

The pattern of which we absorbed and responded to this significant drop in the PMI over the last last six quarters is significantly better than how the business has responded to that kind of change historically. We feel very good about the strategy we've embarked on this decade and how we've executed that this will make us a fundamentally much stronger company going forward.

The instrument control stuff, other small orders, basically you've got 1/3 of your company really driving the business despite PMI, and if you get the business to turn around some smaller orders including the instrument control stuff should respond accordingly. How do you get to 50% plus --

Historically our business has responded very well to a strengthening PMI. We're accelerating our deployment in field sales force, so we can hopefully reinforce that trend when we see the PMI recover.

You talked to us in the past about order sizes over $50,000. How much of the over $20,000 average order or orders was the $50,000 levels? What percent does that represent of the total 20?

David, we don't have that information in front of us. It was very strong, I believe it's growth was slightly better than that 34% that we say for over 20 K. Again the key factors, the number of orders in this segment is really in the hundreds and again, this is why our field sales is such a critical component. These are all opportunities that they're touching, they're working, they're following up on versus the transactional business where it's tens of thousands of orders. As Alex mentioned earlier, we watched the daily run rate on that part of the business.

Now--

Go ahead.

You got 18% increase in your technical field sales force year-over-year. That total is 415?

Correct. As of the March, end of March.

And obviously we're planning for that year-over-year increase to accelerate as we go through the year.

Okay, so long-term, you're just expecting more and more. You're getting away from the transactional models towards the system that the PMI can go away as you seek solutions for your customers?

That would be nice.

Okay. Thanks.

We'll hear a follow-up question from Antonio Antezano.

Thank you. Regarding end markets, I was wondering what end markets have been doing good this quarter, what markets are softer?

Antonio, this is John, as we stated many times in calls, diversity of our business is another key part of sustaining success with no one industry more than 10%. As I look at the Q1 data, I think it was a good example of that diversity. Areas where we saw very strong results included biomedical, energy, industrial machinery, process industries, and also, some slight growth in semiconductor and electronics.

That was offset by some weakness we saw in the quarter in the Mil-Aero, automotive and consumer electronic space. So again, I think the diversity of our business, the ability of the system level platforms to address a wide range of applications has been key to the results we saw in Q1 and results for many years.

And a follow-up, this month you announced the introduction of low cost PXI Embed controllers, from a business standpoint, whether that's more kind of a regular product introduction or are you planning to get into new segments of the market?

Our basic strategy is good, better or best one. Low cost is serving the whole of the marketplace. Some customers want the highest performance controllers, others, cost is a key issue. So we can serve both customers side with a good, better, or best strategy.

And then just one final. I noted your inventory levels have been trending up a bit over the past few quarters. Is that related to the large system sales?

Antonio, Alex here. That's certainly part of the investment there, we do tend to try to get inventories, I try to run manufacturing fairly steady and efficient as we can. It tends to be more efficient even though we see a drop in revenue in Q1. It tends to be efficient to continue to run production at a fairly steady rate. You'll see the DSO typically increase in Q1, and it's relatively consistent with Q1of last year. Then we'll see DSO trend down as revenue picks up. It's really related to trying to run manufacturing as efficiently as possible.

All right, thank you.

Thank you.

And that's all the time we have for questions today. I'll turn the conference back to our speakers for any additional or closing remarks.

Thank you very much for your time today, and we look forward to seeing at NI week in August