National Instruments Corp (NATI) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to the National Instruments Corporation's second quarter 2008 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and passcode. The replay will be available from 7:00 p.m. Central time today, and will end at midnight Central time on August 5th, 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 like to turn the call over to Mr. David Hugley, Corporate Counsel. Please go ahead, sir.

Good afternoon.

During the course of this conference call, we shall make forward-looking statements regarding the future financial performance of the company, including statements regarding our expected revenue, expected revenue growth, expected effective tax rate for each of the next two quarters, expected earnings per share, benefits from sales force expansion, our position when there is an eventual recovery in the global PMI, and growth of large system-level sales. 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 company's annual report on Form 10-K for the year ended December 31, 2007, and our quarterly report on Form 10-Q filed May 5th, 2008. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that, I will now turn it over to the President and CEO of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon, and thank you for joining us. Our key points for Q2 are 17% revenue growth, record sales of USB data acquisition, PXI and modular instruments, and very strong growth in large system-level orders. We turned in a strong quarter in Q2, delivering record revenue and 17% revenue growth in spite of continued weakness in the global industrial environment. This success was driven by very strong growth of large orders for system-level platforms such as PXI and [compact reel].

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

Good afternoon.

Today we reported record quarterly revenue of $210 million, a 17.3% increase over Q2 2007. Net income was $24.7 million, up 19% year-over-year, with GAAP fully diluted earnings per share of $0.31. Non-GAAP net income was $29.1 million, a 17% year-over-year increase, with fully diluted earnings per share $0.37. Reconciliations of the company's GAAP and non-GAAP results are included as part of the news release.

Strong double digit growth in Q2 was driven by the success of our system level products and record revenue in the areas of USB data acquisition, modular instruments and PXI. As you can see from Slide 5 of the presentation which accompanies this webcast, our performance relative to the global PMI has been steadily improving over the last seven quarters, and Q2 showed our momentum continued to improve. The success of our sales force in driving large orders in new application areas has been the key to this growth, and validates our strategy of investment and R&D and the field sales force. Our business has very good momentum right now, and we are committed to our goal of doubling the field sales force between the start of this year and the end of 2010.

During Q2 we saw growth in all regions. We are pleased to see continued growth in the Americas in Q2 with a 6% increase in revenue. Asia continued its strong performance with 25% year-over-year growth, and Europe also saw continued growth this quarter, up 29% year-over-year, helped by an easier compare as a result of a shift in timing of Easter.

Now looking at some of the details of the non-GAAP income statement. Gross margin in Q2 was 76%. Our non-GAAP tax rate for the quarter was 16%, as a result of a revaluation of our Hungarian deferred tax asset. Additionally, we expect the non-GAAP tax rate for Q3 to be approximately 17%, before returning to approximately 20% in Q4. This is a forward-looking statement and is subject to risks, including any tax law changes.

At the midpoint of 2008, I think it is useful to review how the evolution of the company over the past five years has significantly improved our ability to perform well during an industrial slowdown. The core of our strategy has been to expand the percentage of our revenue coming from large 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 through moderate industrial slowdowns, preserving our investments, and then to accelerate our revenue growth when the industrial economy recovers.

Among the relative changes over the last five years are our relative exposure to instrument control is less than half what it was in 2003; the percentage of our revenue coming from key growth areas of modular instruments, PXI and [distributed] IO has more than tripled; the percentage of our revenue coming from emerging economies has almost tripled; and the number of employees in emerging countries has increased by a factor of 4, helping to lower our cost base. This strategy has worked very well and the changes have shown through in our performance. While the last five years have not been easy for our target markets, NI has increase its revenue by 110% since Q2 of 2003, a 5-year compound annual growth rate of 16%. Additionally, we have increased our non-GAAP diluted earnings per share by a factor of 4 during that same time, a 5-year compound annual growth rate of 32%. We believe that accelerating the expansion of our sales force will reinforce this strategy.

Now turning to the balance sheet. As of June 30, 2008, the company had $248 million of cash in short term investments. During the quarter the company paid $9 million in dividends and $8.6 million to repurchase approximately 270,000 shares of the company's common stock at an average price of $31.72 per share. In addition, the Board of Directors approved a quarterly cash dividend of $0.11 per common share payable September 2nd to shareholders of record on August 11th.

Now I'd like to make some forward-looking statements concerning our expectations. In January, we gave guidance for the first half of 2008, and that guidance was based on an assumption that we would see meaningful sequential declines in the global PMI for Q1 and Q2. While that macro-economic assumption proved correct, our good strategic execution over the last five years has allowed NI to deal with that slowdown and to deliver record revenue, 17% revenue growth and 17% non-GAAP net income growth in Q2. There can be no doubt that we are driving market share gains. For our second half guidance, we are assuming that the global PMI remains weak and has modest sequential declines in Q3 and Q4 before recovering in 2009.

For Q3 2008 we currently expect revenue to be in the range of $208 million to $218 million. This is equivalent to revenue growth of between 13% and 18%. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.25 to $0.33 for Q3, with non-GAAP fully diluted earnings per share e Expected to be in the range of $0.31 to $0.39. For Q4, we currently expect revenue to be in the range of $231 million to $245 million. This is equivalent to revenue growth of between 13% and 20%. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.38 to $0.47 for Q4, with non-GAAP fully diluted earnings per share expected to be in the range of $0.44 to $0.53.

As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any longer than expected decline in the global economy, delays in new product releases, expense overruns, manufacturing inefficiencies, effective tax rates and foreign exchange fluctuations. The company has very good momentum going into the second half. Achieving the mid-point of our guidance for the second half would result in 15% revenue growth for the full year, an outstanding performance given to macroenvironment.

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

Thank you, Alex.

We delivered record revenue in Q2 in spite of continued weakness in the global industrial economy. Growth in the quarter was a product of record sales in key product areas, in addition to very strong execution by our field sales force to close large-system opportunities. Orders over $20,000 were up 36% from Q2 last year, resulting in a record average order size of $3,616, up 13% from a year ago. Our growth in these large orders has continued to accelerate over the past three years, and revenue from these orders is up more than 200% from the first half of 2005. This accelerated growth of large orders is particularly impressive in light of the significant decline of the global PMI over the past seven quarters, and demonstrates our success in bringing the market invasions which open up large new opportunities.

Many of these large orders are based around our system level platforms, such as PXI and FPGA-based CompactRIO, which have been the focus of significant R&D investments over the past several years. Our technical field sales force plays a key role in identifying and closing opportunities for these system-level platforms. While the large volume of orders we processed every quarter leads to a relatively small average order size, we have seen increased frequency of very large orders of more than $1 million. In Q2 we closed the largest order in NI's history, a 14.4 million order to supply PXI-based RF test systems to a customer in the aerospace industry. This order is scheduled for delivery over three years beginning in Q3. Identifying and closing this order would not have been possible without the dedication and collaboration of our global sales team, and I would like to congratulate them on this outstanding success.

We were pleased in Q2 with strong software revenue growth that outpaced the rest of the business. Software growth was again driven by strong sales of Developer suite, a configurable bundle which packages LabVIEW with other core NI software. Software services also had strong growth in the quarter, led by an increase in software subscription renewal rates and very strong growth of customer education sales in Europe and Asia. Our USB data acquisition devices had record revenue in Q2, as we continued to fill out our USB product offering and released new higher-end USB devices. Over the past year we have released 17 new USB data acquisition devices. Many of these new devices have improved speed and resolution, and we have had good success in moving customers to these higher performance options. We also continued to see strong growth of our C-Series based CompactDAQ USB data acquisition system, as we added support for several new C-Series modules during the quarter.

As mentioned previously, Q2 was a record quarter for PXI system units and revenue. The PXI 1033 integrated chassis and controller saw strong growth in the quarter as the lowest-cost entry point onto the PXI platform, and we released two new low-cost PXI-embedded controllers for value-based test measurement and control applications. Our higher performance PXI Express chassis and controllers also saw continued strong growth in the quarter, and now account for a significant portion of total PXI system sales. Modular instruments also had record revenue in Q2, fueled by key new product areas including PXI RF instruments, programmable power supplies, and dynamic signal analyzers for sound and vibration measurement.

Aerospace and defense was again an area of growth for the PXI platform in Q2. One example was ALE System Integration's development and deployment of a PXI-based system to test a new communications interface base for navy surveillance aircraft. The PXI system simulates analog audio, high-speed digital and serial signals from the aircraft to test and qualify the design of the new communications device.

In addition to direct sales successes, we also continue to receive endorsement for virtual instrumentation as the future of military test systems. At a Mill Arrow event in the UK during the quarter, Colonel Marcus Ransom of the British Ministry of Defense said, "Virtual instrumentation, that is software defined architectures and modular hardware, are essential technologies that will perform the core of future test systems for the Ministry of Defense.".

In Q2 we continued to see success in industrial and embedded applications, driven by another strong quarter of revenue growth of our FPGA-based CompactRIO systems. One area where our industrial and embedded products have seen recent success is in mining and oil and gas applications. One example is at Catatech in Chile, where several CompactRIO-based systems were deployed for monitoring and predictive maintenance of large open pit mining shovels. To overcome limitations of traditional vibration analysis tools and meet the needs of their application, Catatech worked with a local university to develop a custom analysis algorithm. For deployment, this algorithm was compiled onto the CompactRIO FPGA, where acquired data is processed in realtime and sent wirelessly to an offboard server. In addition to the FPGA capability of CompactRIO, the rugged specifications of the system were a requirement due to the harsh environment of the mining operation.

To improve the safety and efficiency of oil drilling, Impact Solutions Group recently deployed NI LabVIEW realtime and distributed IO in their secure drilling, monitoring and control systems. The system monitors dynamic flows and pressures, and uses advanced control algorithms running in realtime to actively manage and control pressure at the surface to maintain well control. To date, these systems have been deployed to many of the leading oil companies around the world, including Petrobras, Chevron, Pemex and Schlumberger.

Our success in areas as diverse as oil exploration and communications tests has been a result of very strong new product introductions over the past several years, followed by strong execution by our sales force to identify and close large-system sales. We remain committed to our goal to double the sales force by the end of 2010, and believe that this expanded sales presence combined with a very strong product portfolio will position us well for the eventual recovery in the global recovery.

With that, I'll turn it over to Dr. Truchard.

Thank you, John.

I was pleased with the solid execution in Q2 across all areas of business. Our ability to achieve 17% revenue growth, even as the PMI continued to decline, speaks to the resilience of our business model and the diversity and differentiation of our product portfolio. Our investments in R&D have enabled us to move into new markets and applications, and our expanding sales channel has produced dramatic growth of large system-level orders.

One application where we have seen recent success is in instructional health monitoring, as increasing political pressure to improve the safety of civil structures has created opportunities for new measurement systems. The China Earthquake Administration recently selected LabVIEW and CompactRIO-based systems to monitor seven recently constructed megastructures in China, including both the main venues of the 2008 Summer Olympics, the Beijing National Stadium, and the National Aquatic Center. The data collected from this research will be used to improve the structural integrity of future buildings and reduce the impact of catastrophic events.

A year ago we began laying out our opportunity and plan to address green engineering applications, with increasing political and corporate focus on reducing energy consumption and its impact on the environment. I believe NI provides a unique value to our customers with the ability to both measure and fix inefficient processes and products. Customers around the world are using graphical system design for applications, from more energy efficient machines to environmental monitoring and alternative energy design. This measure-it-and-fix-it approach to green engineering is part of what I see as a much broader and fundamental shift in the way scientists and engineers approach complex research and design challenges.

I see measurements playing an increasingly important role in our ability to solve the world's most challenging problems, including those associated with global warming and the environment. The ability of our computer-based systems to measure, analyze and store vast amounts of data enable researchers and designers to make measurements, rather than estimates, to describe scientific phenomenon and prove products and processes. We have sold approximately 50 million measurement channels in the past 10 years. The petabytes of data from those systems acquired are aiming - arming scientists and engineers with real world measurements to better characterize problems and more efficiently design fixes for them. This is the foundation of the true value proposition of graphical system design, and I believe that National Instruments is in a unique position to derive a benefit from this new approach to using large amounts of data to fuel scientific discovery and any engineering innovation.

I will explore this topic and its implications in new areas such as green engineering in my keynote address next Tuesday as we kick off the 14th Annual NI Week Conference. We are once again expecting a record number of attendees. We are also very excited about new products that we will introduce in key growth areas for the company, including software, RF, and FPGA-based hardware. Immediately following the keynote, Tuesday morning we will begin our annual investor conference. Tim Dehne, Senior Vice President of Research and Development will join us this year to discuss the impact of new products announcing next week and Pete Zogas, Senior Vice President of Sales and Marketing, will discuss our system-level sales business and our investment strategy to grow our sales force. We are looking forward to seeing you at the conference next week, next Tuesday.

In summary, I am pleased in Q2 with record revenue and 17% revenue growth in a difficult industrial environment. Our investments in R&D over the past several years have paid off as the new products released in that timeframe have opened new markets and growth opportunities. Our sales force continues to effectively identify and close large system level sales, and I believe our investments to grow this channel will position us very well for future growth. I am excited about new products and the opportunities we will introduce next week, and we believe that we are well positioned for a successful second half of the year.

Thank you. We will now take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from John Harmon with Needham & Company.

Hi, good afternoon.

Hi, John. How are you?

Good. Alex, I don't know if there is any way to quantify this but can you just talk about the effect of the weak dollar, how it affected your sales? I don't recall whether you price on dollars or whether you change pricing during the quarter?

Sure, John. Good question. The local currency growth rates are in the press release. As you're aware, we do adjust pricing periodically as the dollar evolves over time. So we looked at the US dollar growth rate as the key metric for the business growth. We did see double digit revenue growth in local currency both in Europe and in Asia, and the data is I believe there in the press release.

Thank you. Secondly, this I guess counts as a follow-up, if you look at the PMI it looks like the US improved slightly and Europe is heading downward. It seems - [where] do - you get your view you expect the PMI to go down in a couple quarters but it seems like the performance in Europe is much stronger than the PMI would indicate. Maybe that is because of currency?

That has some impact on it, John, but again as we said earlier on we do adjust pricing periodically. I would look in Europe for our business to - the results for the full first half. At the start of the year we said we expected to get a negative impact in Q1 from Easter and a positive impact in Q2 from Easter, in Europe in particular, and that did come through. So overall I would look at the revenue growth for the first half strong, strong double-digit growth and a 20%-plus range for Europe for the first half.

We see our European business and the execution by our marketing team in Europe being very, very successful in growing large orders, and our business in Europe right now as we speak has a lot of momentum, so we feel quite positive about the business in Europe going forward. Obviously we have been, I think, tremendously successful in the ast couple of years in breaking away from the PMI over the course of the last seven quarters, as the PMI has seen seven sequential declines over the last almost two years now. When we look at the European/US experience, it is not unusual for the US PMI to go down and the European PMI to follow six months later. That's a pretty common trend over time. We have seen the US PMI stabilize over the last few months, and now we see the European PMI pretty much where the US was in December, January of this year. So when we give guidance at the beginning of the year we said we expected meaningful declines in the PMI sequentially to Q1 and Q2. That's what happened.

We see a more modest decline going forward, and at this point I expect to see a recovery in '09. But more importantly has been our success, and I think if you look at Slide 5 of the webcast, you can see really clearly that we have driven a separation between our business and the global PMI over the last seven quarters. That's the fruit of seven years of hard work of investment and R&D and now expansion of our field. So we see the PMI in this timeframe is becoming less relevant to our results, and that growth and large orders is much more relevant to our results the next few quarters out.

Great. Thank you very much.

Thank you, John.

Thank you. We will go next to Mark Moskowitz with JP Morgan.

Thanks very much. This is Anthony [Lespry] for Mark.

Hi.

First question, can you give us a little bit of an update regarding your sales force build out in terms of the progress there? We have heard your 2010 goal. But where do we stand? Then second, what is the interaction between your sales force and your alliance partners? Are there any possible synergies going forward? Is that relationship changing as we go forward or any conflicts possibly?

Anthony, this is John. So the expansion in the field sales force is continuing as planned. As of the end of Q2 our field sales count is up 21% year-over-year, and that includes all our field sales managers, business development resources and growth in system engineering head count. That growth includes expansion of all three major geographies, Americas, Europe and Asia.

In terms of the second part of your question, this expansion in the field sales force, the momentum with large orders actually ties in very well with our partners in our alliance program. I think if anything, we are strengthening that relationship. It is a very cooperative relationship. Many times these large opportunities include the work, the system integration and development efforts of our alliance partners. So if anything, I think that relationship is strengthening. And this will be an area we will actually discuss and cover more next week, especially during Pete Zogas's section of the investor call - or investor conference.

Okay. Great. One other question. Regarding your manufacturing strategy, today it stands the majority in Hungary, low volume in Austin, and then you are doing some outsourcing to subcontractors. As your volume increases, is there any change to that strategy? Do we see more outsourcing to Asia as we move along?

No - it's Alex here. Our strategy remains intact at this point in time. We are continuing to expand our operations in Hungary. We are in a process of evaluating locations for a third manufacturing site which would be slated to open sometime in 2010 or 2011. So that's an ongoing project right now. We will look as we move towards capacity in manufacturing in Hungary to make that additional capacity change in a couple years' time. But right now we feel very comfortable where we are on the manufacturing front and we see continued leverage out of our Hungarian manufacturing operation for the next couple of years that should be of benefit to us on the gross margin front.

Okay. Thank you very much.

Thank you. And we will hear next from Terence Whalen with Citi Investment Research.

Thank you, and thanks for taking my question. I guess this one relates to first of all gross margin trends. It seems like the software sales are performing nicely based on deferred revenue. We saw a little bit of a year-on-year decline, not much at all in gross margin, but that was with about a 27% year-on-year build in inventory. I was wondering what are the dynamics going on with the gross margin? As you see larger-system orders are they slightly lower profitability than smaller orders or is gross margin also more driven by geographic mix? Thanks.

Terence, it is Alex here. There is some slight variability to gross margin on a geographic basis. I think if you look across the second quarter compared to same quarter of last year or first half to first half, we see that gross margins are essentially stable and static from first half last year to first half this year. We typically - see when you look at it on a manual basis, we typically see our greatest leverage in the manufacturing operations in the fourth quarter ,which tends to be our peak quarter for revenue, that tends to create greater leverage and allow us to have an expanded gross margin as we get into the second half of the year.

From an inventory days point of view, our inventory days are up about 10 days over this time last year. As you alluded to, we're certainly seeing a growth in larger orders. We want to continue to preserve our operational advantage over the competition, our ability to deliver very rapidly. Large orders tend to require a broader breath of inventory, and so we're shifting our inventory strategy a little bit to ensure that we continue to maintain a very rapid delivery as we shift our mix towards a larger system level order business. This I believe will be a compelling competitive advantage for the business and one that we will be able to sustain going forward.

From a gross margin picture, in terms of the split of the business between largest system level orders and smaller transaction based orders, there is really next to no difference in gross margin at all. So we don't see that as a factor that will influence margin going forward.

Okay. Great. That's helpful. Then I think the earlier question alluded to currency effect on growth. I think we can derive that, that was about 7 points or so of the 17 based on what's in the press release. But my question is, what is the effect of mergers and acquisitions? So in other words the merger you did in the first quarter, did that contribute to revenue? And then I'm going to throw a last one in on tax. You said that tax guidance was back to 17 and 20 for the third and fourth quarter. Was that non-GAAP or GAAP? And if you did not provide GAAP, can you? Thanks.

I'll take the second question first, Terence. The guidance for tax rate is non-GAAP. The difference between GAAP and non-GAAP tax rate is driven, as you're probably aware, by stock based compensation, and unfortunately without knowledge of exactly how many stock instruments will be exercised by employees during the third quarter, it is very difficult to predict the tax rate on a GAAP basis. So we have consistently given a non-GAAP expectation when it comes to the tax rate.

On your first question in terms of the revenue growth rate, as we talked early on we really look to the US dollar rate as a primary indication of the growth rate of the business. We believe that local currency underrepresents the growth of the business, because it doesn't allow for the fact that we have made multiple changes in pricing in Asia and in Europe as the US dollar has weakened over the course of the last year. So that's something you need to factor into it when you take account of that. On the acquisition front, for the first half of the year, or even for Q2, while microLEX is a very strategic acquisition, our revenue growth rate would have still been 17% excluding the acquisition.

Thank you.

Less than 1% from that front.

Okay. Thanks. Nice job.

Thank you very much.

Thank you. We will now hear from Mr. Richard Eastman with Robert W. Baird.

Hi. Could you provide the percentage sales from large orders in the quarter? Total sales that came from large orders?

Rick, this is John. So again, this is looking at orders over $20,000. They now in Q2 were 38% of revenue.

Okay.

There is a slide on large orders, the average order size, Rick, that goes with the webcast as well that might be useful to you.

I can find that. I've got the other stuff. Just a question. It sounds like in the press release you talk about Q3/Q4 guidance, and you seem very confident with your sales guidance out into Q4 as well as Q3. When you look at your guidance relative to your confidence level, is the system sales, this percentage of sales from large systems, are you starting to see and gain confidence out of a backlog number in terms of shipments out six months?

It is Alex here. Maybe I will address that first, and John may pile on as we go forward. Certainly when we came into the year, Rick, we were pretty conservative about guidance for the first half, and very conservative on the progress of the economy. It was a little controversial at the time. Some people thought we were being overly conservative. I think that it proved to be very accurate, and we were able to deliver at the top end of our revenue guidance for the first half.

We continue to be cautious on the economy but we very, -- we have very definitely seen the transition to system-level sales, and the momentum we have right now in terms of those sales and these product platforms. Also from a management point of view -- and Pete will talk about this a lot more next week -- how we're now looking at the business and getting data on opportunities. The combination of those factors is certainly improving our confidence and our ability in being able to assess our revenue growth.

I would point you also to look at the slide on the webcast that goes and shows where we are versus the PMI, et cetera. I think that the evidence is quite compelling now that we are sustaining a shift away from the PMI as the primary driver of our business.

One thing, the large system orders certainly have been making a difference. In ATE and test and measurement our competitive advantage is very nice, in the fact that cost of PXI systems are typically very competitive and favorable relative to alternatives. So when money is tight, people shop a little bit more. Also, the performance is typically must better, so that less systems are needed. Of course in this era of green, as we will talk about at NI week, our products use a lot less power, so even from that point of view.

On the industrial front, we have seen very nice growth in systems like CompactRIO systems, especially in the investment areas as we mentioned in the call of activities involving improving the efficiency of machines. Many of the alternative energy source projects are using our technology. And it's a good time to market advantage over traditional solutions. So all in all, these large systems are making a difference for us in this timeframe.

Okay. Thank you. Just one last question. In the quarter the capitalized software development costs jumped - stepped up. I'm just curious why that was the case?

Rick, as you probably remember from discussions in previous years that software capitalization is obviously heavily impacted when our main software products go into beta. That increase in software cap was in line obviously with our guidance on earnings for the quarter. While it may move a little bit between quarters from one year to the next, our net deferral is pretty much in line with where we were last year. But the key trigger for an increase in software capitalization is major software projects going into beta.

That happened this quarter?

That had a significant impact on quarter, yes.

Yes.

In terms of -- that obviously creates - the positive impact of that is we are obviously getting close to release on significant new projects.

All right. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

We will now hear from Ajit Pai with Thomas Weisel Partners.

Good afternoon. Two quick questions. The first one is just your tax state. On a go-forward basis, what do you expect to be on a pro forma basis '08 and then for '09? And we'll get to the next one.

Non-GAAP, Ajit, obviously we got it to 17% for Q3, 17% non-GAAP tax rate and 20% for Q4. Out into next year we have not obviously given guidance at this point but I would look to numbers similar to the 20% guidance we had originally given for 2008.

Right. But if you are having a look at your business mix changing and the international businesses growing faster than your domestic business, what is the long-term threshold, low threshold? Could your tax rate get down to 12%? Can you give us the drivers there?

Obviously the mix of business regionally is a crucial factor in determining what the tax rate's going to be. Long-term right now, as I said ,we are in a review and negotiation and determination of the location of our next manufacturing site. So I think we will be in a position to probably give you a better feel for that once we make that determination, and make a public announcement as to the location of our next manufacturing facility.

But if you expect the mix shift to continue in 2009, is there any reason why your tax rate shouldn't fall about 200 basis points in '09?

At this point, I'd be inclined to look to the guidance we gave on non-GAAP tax rate for this year. Then we would have to see what happens from a tax [point], as we look at the political evolution and developments into next year.

Got it. Can you give us some color as to - in terms of geography what you know what your performance and how NI is delivered. BUt you also have 20, looking at Asia, you're looking at Europe, and then looking at the Americas. What do you see happening, and then market fundamentals?

I think I will ask John to comment on the end markets, but for us fundamentally the key reason NI is growing and gaining market share in the market today and is performing differently, and perhaps has different expectations than many other players in this space is because we're driving revenue growth in new areas that are new to NI, where we have a lot of leverage. driving new areas that are new to NI where we have leverage. So we're getting the reward for the hard work we've done the last six or seven years with on their companies. Our results may not be typical of what you're seeing at other companies, but I think it's the benefit of that effort over these timeframes that is now paying off.

From a regional point of view, obviously we had very good growth this year in the first half from Asia and from Europe. We saw the US stall out last year in Q4 with zero growth in Q4 as the PMI fell, and then recovered here in Q1 and Q2. So we have seen some improvement in the Americas compared to late last year. As I said, although we anticipate a modest decline in PMI, global PMI the next two quarters we expect to see -- the midpoint of our guidance, 15% revenue growth for the year. In terms of the industry stuff, there there is a lot of interesting stuff going on and John can perhaps shed better light than I on that subject.

This is John. First when you look at the product line results, and we talked about some of the record product areas and the success with these system-level platforms, those are trends we see consistently across all the regions. So the sales execution has been very strong in all three geographic regions.

Looking at vertical industries, I don't have that data broken down by region but it's given at a consolidated level, and in Q2 we saw growth in our sales into industrial machinery, process industries and energy. I think that's a good reflection of some of the success we're having in the new industrial and embedded applications. Where we saw softness in Q2 was in communications, consumer electronics and sales into the semiconductor industry.

In terms of geography, were there any trends that you saw? Not in terms of the hard numbers you've delivered but the sales folks over there saying it is becoming harder to close sales, or any kind of trend where you see a material deterioration in fundamentals either in like China or India - I mean anywhere in Asia or even in Europe in terms of regions?

I think right now, given our results in Q2 and the momentum we have right, now our sales force are pretty confident right now. So I haven't heard - relative to our product portfolio and our competitive position, I haven't heard rumblings in that direction.

Got it.

In Q2 we saw success stories in the platforms PXI and CompactRIO and CompactFieldPoint around the globe, so I so couldn't point to any - much differences between the territories.

As John said earlier on when we were talking, we are seeing more million dollar-plus order opportunities and actual orders booking right now. With the $14 million order, biggest order in history of the company, setting a new benchmark, I think our sales force are feeling pretty good about their ability to win the types of business that we perhaps couldn't have closed a number of years ago because we didn't have the right products then. Now we are seeing the ability to take that business.

Got it. Thank you so much.

Thank you.

Thank you. We have no additional questions at this time. I'd like to turn the conference back over to Alex Davern for any additional or closing remarks.

Thank you very much for your time today. We hope you can join us at NI week next week, and we look forward to the Investor Day on Tuesday. Thank you.

Thank you. Ladies and gentlemen, this does could conclude today's presentation. We thank you for your participation and have a great afternoon.