National Instruments Corp (NATI) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the National Instruments Q1 2009 earnings 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 PM central time today and will end at midnight central time on May 3rd, 2009. With us today are: Mr. David Hugley, VP, Corporate Counsel, Mr. James Truchard, Chief Executive Officer, Mr. Alex Davern, Chief Financial Officer, and Mr. John Graff, Vice President of Marketing. For opening remarks and introductions, I would now like to turn the call over to Mr. David Hugley, Vice President, Corporate Counsel. Please go ahead.

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 the following: daily order rate stabilizing, stable gross margins, declining inventories and eventual recovery, gaining market share, profit growth in a recovery, reducing operating expenses, and expanding into new application areas.

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 filed regularly with the Securities and Exchange Commission including the company's annual report on form 10K for the year ended December 31, 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. Thank you for joining us. Q1 proved to be a very difficult operating environment in which the global PMI declined sequentially for seven consecutive quarters and our revenue saw an 18% year-over-year decline. We continued however to fare better than others in the industry, gain market share and gain further traction in new growth areas for the business. The diversity and adaptability of our products and channel once again proved to be a powerful asset for the company, and despite the economic challenges, our business model again improved its strength and resilience. 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. And thank you for joining us today. Today we reported quarterly revenue of $158 million and 18% year-over-year decline. Net income for Q1 was $400,000, nonGAAP income was $3.1 million with nonGAAP fully diluted earnings per share of $0.04. Given the record low global PMI in Q1, our 18% year over year revenue decline while disappointing was a very good relative performance. Our performance was slightly worse than the 16% daily bookings decline we discussed on our March 9th update call.

On that call, we did not give specific guidance for Q1 as we were concerned that the economic situation would seriously weaken the traditional quarter end surge in larger orders. This proved to be a valid concern as John will discuss later. From a product point of view, our instrument control revenue saw a 42% year over year decline in Q1 with the rest of our products being down 16% year-over-year. Our instrument control products are the most economically sensitive portion of revenue, and given the tougher revenue compares in the next two quarters, we expect the revenue trend and instrument control to continue to deteriorate, to be down approximately 50% year-over-year in Q2 and Q3.

Q1 represented the lowest quarterly revenue for our instrument control products since 1994, and they are now down to only 6% of revenue. This decline is consistent with several T&M players seeing their lowest revenue since the 1990s. This data plus the very negative news recently announced in the industry suggests a very severe contraction in the tested measurement industry during Q1, especially in the semiconductor ATE segment. The better performance of the rest of the business during Q1 was helped by our modular instruments PXI [sulfur] and CompactRIO, which performed well in light of the industry contraction.

Within modular instruments our RF test products were a standout performer with double digit revenue growth in Q1. We saw the impact of the industrial recession across all regions. During Q1, year-over-year revenue growth in the US was minus 16% -- excuse me. During Q1 year-over-year revenue growth in US dollars was minus 16% in Europe, minus 21% in Asia and minus 18% in the Americas. In local currency terms, revenue was down 14% year-over-year in Europe and 15% in Asia and the Americas, giving an overall local currency decline of 15%. We believe that our performance in Europe was helped by the shift of Easter from Q1 last year to Q2 this year and that this will have a corresponding negative impact on Europe in Q2.

Now looking at the income statement in more detail, nonGAAP gross margin in Q1 was 74.9% compared to 75.1% in Q1 2008. Our ability to maintain our gross margins despite the significant year over year revenue decline is a tribute to the variability we have built into our manufacturing cost structure and to the very high level of differentiation we have designed into our products. R&D expenses were down 2% year-over-year in Q1 and SG&A expenses were down by 6%. As a result, total operating expenses for the quarter were down by 5%. This reduction exceeded our expectations and illustrated a very strong fiscal discipline that has been shown throughout the organization and response to unprecedented downturn we have seen for the T&M industry.

Now turning to the balance sheet, inventory decreased by $5 million during the quarter as we made progress on realigning our production to the lower level of business. We'll continue to monitor our production schedules and we expect to see inventories decline again in Q2 and Q3. Accounts receivable days outstanding were down five days from Q4. Cash flow from operating activities was down $25 million in Q1, and the company had $241 million of cash and short-term investments at the end of the quarter, up $6 million from December 31. This cash balance is net of $9.3 million in dividends paid during the quarter and $9.2 million used to repurchase 489,000 shares of NI's common stock at an average price of $18.77 per share. We also announced today that the board of directors approved a quarterly dividend of $0.12 per share payable on June 1st to shareholders of record on May 11th.

Now I'd like to make forward-looking comments concerning our strategy to deal with the current economic environment. In Q1 the quarterly average for the global PMI reached record lows, indicating that the industrial economy was still declining rapidly through the end of March. Therefore it is unlikely that global industrial production will turn positive in the near term. In addition, when it does turn positive it is clear that the industrial economy will be dealing with significant amounts of excess capacity and that it would take a considerable period of time to absorb that excess. This challenging environment has had a significant impact on our revenues with a rapid 25% decline in revenue between Q3 last year and Q1 this year. While it appears the period of very rapid decline has passed, and that our daily order rate in absolute dollars is stabilizing, we are anticipating that conditions in our serve markets will remain weak throughout 2009.

Give that assumption, I wanted to lay out our business strategy to manage the threat created by the situation but also to take advantage of the long-term opportunity it creates. In dealing with the threat, our primary goal is to maintain the financial strength of the company. Our strategy for achieving this goal is to practice prudent financial management by building strong cash reserves and maintaining profitability. Key to this is maintaining stable gross margins by having a flexible manufacturing cost structure, by leverage out strength in this economy to achieve lower component costs and by having a very differentiated product offering. The other key is optimizing our operating expense structure through variable costs and by thoroughly reviewing discretionary expenses while maintaining very strong employee productivity. If we can achieve our goals, then we would be in a good position to generate significant positive operating leverage when we see revenues recover.

Now to the opportunity. We believe this severe recession is creating major shifts in the market positions of many of the players and industries we serve. Some will not survive. And some will have to scale back investment so dramatically they will never be able to catch up. The bottom line is that similar to the tech crash of 2001 to 2003, this will create an opportunity for permanent shift in long-term industry leadership. Given this opportunities, our goals are to gain market share, maintain that share during recovery and use this as a platform to drive strong profit growth in the recovery. Our strategy is to achieve this goal are to strengthen our R&D investment, to deepen our customer relationships by expanding our field sales channel, to acquire key new talent which has traditionally been very difficult to hire and enter large, new adjacent application areas during this recession. We believe this will create a path to long-term, sustainable and profitable growth for NI.

In the slides accompanying on the web, you can see the track record of our execution of this strategy since the last recession and the resulting gains we have made relative to other tests and measurement companies, together with insight into our budgeted editions in R&D and field sales for 2009. We believe we are very well positioned to execute our strategy and that this will generate significant shareholder value over the long term. Now, turning to specific guidance. The current economic uncertainty has limited our visibility for Q2 and as a result we have decided not to give revenue or EPS guidance for second quarter at this time. We have scheduled a business update call for Tuesday June 9th when we can expect to have a clearer picture on Q2. On the expense side we continue to be very prudent in managing our expenses. We'll sustain our strategic investments in R&D and field sales while reducing discretionary expenses elsewhere.

Given our expectation that there's unlikely to be any meaningful recovery in 2009, we have reduced our spending plan for the full year 2009 by a further $25 million in order to better position the company to deal with the extended economic uncertainty. As a result for the full year of 2009, we are now budgeting for a 10% year-over-year reduction in nonGAAP operating expenses compared to a 14% increase in 2008. For Q2, we are currently budgeting for a year over year decrease of approximately 11% in total nonGAAP operating expenses. As these are forward-looking statements, I must caution you that actual results and expenses could be negatively affected by numerous factors such as any further decline in the global economy, delays in new product releases, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates and foreign exchange fluctuations.

So in closing, I believe we've been both strategic and prudent in our business planning and our reaction and execution in this downturn has once again demonstrated that our business model is solid. I would also like to let you know that in May and June, I will be presenting at the Baird Conference in Chicago, the Credit Suisse Conference in Boston and the Thomas Weisel Partners Conference in Baltimore. With that I will turn it over to John Graff, Vice President of Marketing.

Thank you, Alex. The historically low global PMI average in Q1 of [36] clearly evidenced the severity of the economic headwind that we faced to start 2009. The instrument controlled portion of our business was down 42% in the quarter which we believe is in line with results from others in the measurement industry and points to a severe contraction of the industry in Q1. While disappointing, the 16% decline of our virtual instrumentation and graphical system design products appears to be markedly better than others in our industry and suggests that we continue to drive market share gains in the face of these downward forces.

Large system level orders, which were key to our growth in 2008, did not see the quarter end surge in Q1 which had been the historical pattern. Orders over $20,000 were down 17% in the quarter, only slightly better than our orders less than $20,000, which were down 20%. This led to an average order size of $3,200 in Q1, down 3% from Q1 2008. While the economic headwinds challenged all areas of the business, we did see bright spots in Q1. Sales to academic institutions were positive, as we won several opportunities to outfit teaching labs with LabVIEW and our USB based measurement hardware. Also at quarter's end, we had 49 schools worldwide participating in the LabVIEW academy where students take courses geared at preparing them for an exam to become certified LabVIEW application developers.

In aggregate, universities around the world are our largest customer group. In fact with continued growth and sales to academia in the midst of an industrial decline, sales to academic institutions accounted for 12% of our revenue in Q1. While this is a departure from our long-standing trend of no single industry accounting for 10% of our revenue, we view this as a development for the company. In addition to benefiting from the financial consistency and stability of academic institutions, we are also positioned well in the near term to benefit from investment in science and engineering teaching and research, stemming from global government stimulus spending. In the longer term, teaching science and engineering students how to make measurements and design systems using LabVIEW and NI hardware should pay off as these students graduate and take jobs in industry.

Last week was a testament to the headway we've made to expose students to graphical system design with LabVIEW. We participated in the first robotics championships in Atlanta where 30,000 students, coaches, and industry mentors converged to compete in a series of robotics challenges. The most challenging level of the competition required teams of high school students to build a CompactRIO based robot to complete a series of challenges while collaborating and competing with other robot teams. The teams had only six weeks to design, prototype and deploy their robot requiring them to quickly learn and develop advanced sensor measurement and control systems in addition to sophisticated algorithms to traction control. One industry mentor from BellSouth was quoted as saying, "With LabVIEW, the kids can now focus on solving a mission rather than spending all their time writing code." Our participation in the first competition exemplifies our focus on teaching future scientists and engineers the power of graphical system design. We plan to continue to invest in building this strong base for our future and believe that doing so will provide a foundation for long-term success.

In addition to strong interests from our academic customers, we were also pleased with continued strong activity and interests from customers across the diverse set of industries we serve. For example, while overall attendance at industry trade shows may be down, NI continues to see year-over-year growth of sales leads as customers look for low-cost solutions for their test, design, and control applications. The web in particular has allowed to us more efficiently reach a large base of customers and prospects to drive interest in our virtual instrumentation and graphical system design products. Our web presence continues to see high levels of activity, and we are pleased with the response to our many web-specific initiatives, including for example, a recent green engineering webinar series.

In Q1, we saw continued growth and sales of c-series acquisition, CompactRIO and RF products, all areas that have been focal points of our R&D investments. Our c-series based Wi-Fi data acquisition devices which released last year were standout performers. Through Q1, they had surpassed our sales forecast set last summer prior to the economic fallout. And earlier this month, they were named by "Test and Measurement World" magazine as test product of the year. The award nominees were chosen by the magazine's editors and voted on by readers. We are continuing to focus new product R&D in this area and during the quarter, we added six additional wireless and ethernet devices to this product family in addition to specialized enclosures, enabling the devices to operate in remote harsh environments.

Our FPGA based CompactRIO systems also had a strong quarter, with double-digit growth in Q1, as the new single board RIO systems released at NI week last year provided a significant lift to unit growth. These embedded systems leverage the same c-series, module and FPGA technology as the rest of the CompactRIO product family, but have simplified mechanical packaging geared at higher volume deployments. We were also pleased with the strong relative sales performance of PXI products and modular instrument in Q1 led by double digit growth in RF product sales. During the quarter we announced a new wireless plan test solution that can generate and analyze RF signal measurements up to 10 times faster than traditional box instruments. These systems are representative of our success at developing new software to work with our very successful RF modular instrument to expand into new measurement categories and application areas.

Our strong investments in R&D since the last economic downturn have kept our product pipeline very healthy. We're as excited about plans for NI week this year in August as we were with the products introduced at NI week last year, including new RF and wireless data acquisition products, single board Rio and new version of LabVIEW. We believe these disciplined investments and new products geared at new application areas have enabled to us to outperform the market even during economic contraction and provide a strong position for to us take advantage of the eventual recovery. With that, I'll turn it over to Dr. T.

Thank you, John. Q1 was indeed one of the most challenging periods in the history of the company. It is these challenging times however that we are reminded of the importance of our consistent, long-term approach to growing and operating a company built to last. During the formative stage of the company we faced the recession of 1980 to 1982. Those difficult years ingrained in our culture and operating model the importance of wise expense management focused on our cash flow and continuous innovation. During the last recession, we made the difficult decision to take a short-term reduction in operating profit to fund strategic investments in R&D. Those decisions resulted in introduction of new products that have fueled much of our growth for the past several years, including CompactRIO, modular instruments, RF & many enhancements to LabVIEW. We are now faced with similar challenges as we work to preserve our investments in R&D and field sales while gaining leverage in other parts of the business.

I have seen our organization prove that these challenges can be a catalyst for innovation. Our ability to quickly adjust our spending plans as economic conditions deteriorate is a testament to this. And I'd like to, again, thank our employees for their efforts in this area. Our marketing and sales channels have been quick to respond to opportunities in markets where's our capital is flowing. A clear example is the government-funded institutions including universities and research labs.

As John mentioned previously, our education channel provided revenue growth in Q1, in addition to exposing the concepts of graphical system design to hundreds of thousands of students around the world over the past year. This base of new scientists and engineers will provide the foundation for our long-term success. I believe this recession is creating an opportunity for National Instruments as it has and will continue to force our competitors to retrench while we continue to innovate. I believe this will create major shifts in the market positions that many players in the industry reserve. Some will not survive. And some will scale back investments so dramatically, they may never be able to fully recovery. Ultimately this will create an opportunity for a permanent shift in industry leadership similar to what happened in the tech crash of 2001 to 2003. Given this opportunity, our goal is to gain market share throughout this economic cycle and leverage our market and financial strength to drive strong growth, a profit growth in the recovery.

To accomplish these goals, we will maintain a strong level of investment in R&D, exploit market weaknesses by acquiring key new talents in areas such as RF, leverage our field sales channel to deepen our customer relationships and continue our focus to grow share in new application areas. In summary, while Q1 proved to be a very difficult economic environment, I remain convinced that we continue to navigate it better than others in that industry, gain market share and continue to make headway in strategic new growth areas for the business. We remain in a strong strategic and financial position which enables us to fund investments through this economic cycle in key areas, including software, industrial embedded and RF. I believe we are making appropriate decisions to operate efficiently through this downturn while retaining the resources and establishing the foundation to support growth as conditions recover. Thank you. We will now take your questions.

Thank you. Today's question and answer session will be conducted electronically. (Operator Instructions) We will proceed us in the order that you signal us, and we will take as many questions as time permits. As a courtesy, please limit questions to one with one follow-up question. (Operator Instructions) Our first question comes from Antonio Antezano with Macquarie Capital.

Hey, Antonio. How are you?

Good. I wanted to -- if you could provide more color on your activities during the quarter. You mentioned in the last business update an order decline 20% and generate 12% in February. I was wondering what happened in March and so far in April?

Okay. Antonio, good question. So we, our daily order rate through about March, I think it was March 8th and 9th when we did the update call was minus 16% on a daily rate. We did have a day less in Q1 this year from Q1 last year. So if you net that out it's roughly about minus 18% at that point in time. It was fairly consistent for the quarter. It was minus 24% for the month of March in total if you take it just on a calendar month. On an absolute dollar basis from the positive side, we did see the daily rate improve from January to February to March as we went through each month. We talked in the conference call about stabilization that we're starting to see at this point and time. The key behind that really is we're seeing April business now similar level to January. And that's a significant improvement over the dramatic drop that we saw between October and January.

Right. And then regarding the new costs or I would say reduction and spending which seems to be very significant, what specifically you are doing to get to that target that you have? That life is more SG&A or somewhere else or whether you can provide issues you are taken to get to that?

Sure. A couple areas around that. As we talked on the call, we have chosen to reduce our budgeted spending plan for 2009 by about $25 million from the plan that we outlined back in March 9th. The main factors driving that we are reducing our net hiring for the year. When we were on the call on March 9th we're anticipating about 110 net additions for the company this year. We have reduced to that to 15 net additions. We will see attrition in some departments offset by above that increases in areas like R&D in the field. Reduced hiring is number one. We have taken a hard look at travel and entertainment expenses across the company, in that scenario where we're going to make a significant increase in our use of a web as a communication vehicle with our customers. And so travel is an area we took a hard look at and then reduced discretionary expenses across other areas of the business, really to make sure we're focusing on the highest value, most productive use of our cash in this time frame.

And I do want to take a minute to thank the employees in the organization across the whole company in all regions have taken a very, very realistic and rapid look at exactly how the financial situation and in the broader economy has affected our business. The organization's being very pragmatic and responding very well I think to innovation and new ways in which we can reach customers and get our job done at a lower cost. I will also tell you we are leveraging in our market position as a relatively stable customer in this time frame to also leverage our vendors as a way to look for significant cost savings on the pricing side with our vendors. And the combination of all those is allowing to us take a significant reduction in our total expenses this year while at the same time maintaining our fundamental increase in investment in R&D and in the field. And these slides accompanying the webcast we show the net headcount additions we're anticipating in the budget in year for field sales force and R&D. So I think we'll be able to sustain our long-term investments while also responding to the realities that we're seeing with a record low PMI.

We'll go next to William Stein with Credit Suisse.

Thanks. Two quick ones. First, if you could quantify the impact of Easter, and then also inventory trends. We've seen inventory increase on a days basis fairly significantly over the last three quarters and I'm wondering what the long-term plans are either dollars or days basis. Thanks.

Sure, Will. I'm going to take the inventory question first. Obviously as I said on the call, we reduced inventory about $5 million in Q1. We do anticipate inventory in absent dollar terms. Normally we do see the day's inventory reduce in the quarter. Obviously, with the first quarter also being the first real quarter of impact from this decline in the economy, we saw an outsized increase in our days of inventory in Q1. We do expect that directionally to turn around quite significantly in Q2 and Q3 to move towards a more normal situation by the fourth quarter.

In terms of Easter, it's a difficult one to actually put a dollar figure on. We've traditionally seen a couple of weeks before and after Easter Sunday where we see an impact in our European business. That was a slight positive to us in Q1 and we believe it's a slight negative to us in April. But to put an exact number on it is pretty difficult. I would guesstimate it in a nonscientific basis somewhere around $4 million as a rough guess.

Thank you.

And moving on, we'll take our next question from John Harmon with Needham & Company.

Hi. Good afternoon.

Hi, John.

Okay. So my two questions. Ordinarily, the seasonality of the June quarter would be up sequentially but certainly looking at the he PMIs seeing manufacturing still contracting you can make a case that the June quarter would be down from the March quarter. I'd like to hear your comment on that. And being sequentially down with the cost figure you gave us, we're kind of getting towards break-even, so what is your break-even level for Q2? Would you continue your dividend? And I guess that's my two questions.

I think you got in more than two there, John, but we won't call you on it. Let me take the second question first. We estimate given our current costs profile that the break-even level for the company in terms of revenue's somewhere below $150 million, probably around $147 million to $148 million. We do intend to continue with the dividend at this point in time. Obviously that's a decision made by the board. At this point in time it's management's intention to continue with the dividend. The company is a very, very strong financial position. The businesses responded very well to this downturn. I really believe as we go through this time frame I'm becoming more and more confident that we're going to be able to take advantage of this significant opportunity that this recession is going to create in this industry space and use that as an opportunity to drive a significant amount of long-term shareholder value. And that's the way we're going to be approaching it as we go forward.

In terms of the June versus march quarter, as you commented PMI continues so be very week. Obviously it's good, after reaching an all-time low in the month of December it has increased each month in January, February, and March, although at fairly modest rates. That's certainly a positive sign. I think that's likely to continue in Q2 is my guess. Although, I also think it's unlikely to get back over [50] in the second quarter. I think that's pretty unlikely. So having said that it is positive that the June quarter could be down from the March quarter. I certainly wouldn't rule it out.

However, what we see at this point in time is after a very rapid deterioration between October and March, we feel like we're seeing the significant signs of stabilization at this point in time. And despite the fact that Easter was in the month of April, to see this quarter start out with booking rates similar to the January quarter -- to the March quarter gives us an increasing level of confidence that we are seeing stabilization in our market. Having said that, the economy's a tough thing to predict, so I can't give you any guarantee that we won't see a decrease in Q2. We'll take the next question.

We'll go next to Ajit Pai with Thomas Weisel Partners.

Good afternoon.

Hi, Ajit. How are you doing?

Okay. Couple of quick questions. I think the first one is just looking at software as a percentage of your overall revenues. I think usually it's around 20% of our totals. But when I look at your reported reports of the way you break it up, the products and software maintenance, I see that while your products were down 21% year-over-year, your software maintenance was up 29% and your gross margins were 91%. So give us color as to what changed? Was it the volume of what that software maintenance comprises and as a percentage of your overall revenues for the software has increased materially especially with the dropoff on the product side?

Yes. Sure. As a percentage revenues, as you said, Ajit, certainly we saw software and related maintenance increase as a percentage of the total in the first quarter. As you might expect, software maintenance from a revenue recognition point of view as a type of business tends to be more stable that product revenue. So it tends to be more resistant to short-term economic moves. Perhaps a little bit like the academic thing that John talked about early on, certain pieces of our business are more stable while obviously our production test, the end of line production task pierce of our business tends to probably be the most volatile. So that's why we see software as a percentage of revenue increasing in the quarter.

But what about the 29% year-over-year increase? That's quite a material increase. Is there something one time in nature there? Is it higher volume sales in the software maintenance side? Is it better pricing? What's driving such a significant increase?

Well, we've been putting a significant focus on renewal rates on our software maintenance programs over the last couple of years. And I know we've had very good execution on that from our software team and our sales team over the course of the last probably three years. That has built momentum that's sustained itself through the first quarter.

Ajit, this is John. I think if you also reflect back on what our calls in the past year, we talked about success in LabVIEW and software penetration and large account where's we're seeing standardization efforts. In almost all those cases there's going to be a maintenance and service agreement as part of it. We also saw some very strong software development system growth this past year. And again that's going to reflect itself in some of those maintenance numbers you see now.

Of course, as you know, software is very strategic to our market position. We've been putting a lot of emphasis on it.

Do you have a follow-up, Ajit, or second question?

The percentage of revenue is now approaching about 30% and since the software maintenance is going up, and the rest of the packet software is also -- I would imagine that is following suit with the rest of your products?

Yes, certainly the percentage of software as a percentage of the total mix of it is definitely up in Q1 relative to our normal mix, but I think Q1 is a pretty unusual quarter. So I would also caution that when we see a recovery, and as we increase continue to push forward in this market and look to grow our way out of this downturn, I think it's likely in the long term that software as a percentage of revenue would move back down towards our long-term lerve reach.

(Operator Instructions) We'll go next to David Yuschak with SMH Capital.

Yes. Could you give us the sense, guys, sales, your orders over $10,000, what percentage of sales that might be and what kind of trends or anything interesting that may be coming out of that given the soft first quarter?

Yes, David, this is John. So in Q1, the order's over $20,000 which we use as a reflection of the system level business, amounted to about 35% of revenues, which was effectively flat with a year ago. And so as I mentioned the call, the large orders were down 17% in the quarter which was close to the 20% we saw for the smaller transactional orders. We continue to see a lot of uncertainty. I think that reflected itself in what we typically see is an increase in those large orders in the last weeks of the quarter. And we didn't see that in Q1. And we really believe that's just a reflection of all the uncertainty that's out there in the global economy. We continue to monitor and watch the opportunity pipeline. Our sales force continues to be very active and very engaged in the large system level opportunities. Right now, we're limited in the visibility of how those large orders will play out this coming quarter.

Having said that, we still believe we're very well positioned, especially with our system level platforms like PXI and CompactRIO, and we believe long term that the system level orders will continue to grow at a much higher rate. But exactly how that plays out in Q2 we'll just have to wait and see.

Is there any particular industry is there anything that's kind of shown up as far as where the opportunities are then this point?

No significant difference than in the past. So the uncertainty and the failure to see that uptick at the end of the quarter was really across regions and across industries. So again, I think it's more tied to just the global uncertainty than any particular areas. Now, that does bring up just commentary on industry outlook. And as you would expect we did see some pretty significant weakness in the usual candidates. That would be the semiconductor market and automotive market. On the other side, we saw strong growth as we mentioned in the script in terms of the academic and university business as well as our sales into research organizations.

We'll go next to a follow-up from Antonio Antezano with Macquarie Capital.

Yes. You mentioned in your prepared remarks that you would expect instrument control revenues to be down 50% in Q2 and 50% in Q3. And I was wondering how you get to that. Do you have visibility for that portion of the business six months out?

Antonio, this is Alex here, I'll take that question. It's really a reflection of where the global PMI is now and its historical correlation. And also accounting for the fact that we do have slightly tougher competitors on the instrument control business in Q2 than we did in Q1. So the combination of those two things is going to leave you quite challenging. I think while we will see a better performance in the rest of our business, which hopefully will allow to us continue to gain market share, I think the overall T&M industry is going to remain under severe pressure certainly out into the second quarter.

Just to follow up on a prior portion, the gross question, the gross margin then based on some of the call with action initiatives should remain stable. Would that be a reasonable assumption?

Yes. Best guess right now is pretty stable gross margins, at least out into Q2.

We'll go next to David Yuschak with SMH Capital.

Yes. On the R&D spending, it was 22% sales in this quarter here, and you mentioned about how much you're cutting back on operating expenses. As far as an absolute level of R&D, are you going to continue to keep that at a relatively high level here as a percentage of sales as well as absolute basis, maybe try in that cutback to find it whether it's marketing sales? The R&D number itself on an absolute basis will pretty much stay right around this run rate it's been running?

So, David, it's Alex here, David, if you take a look at the slides on the web, we show the actual budget for R&D in terms of personnel going back the last 10 years including 2009. So we will be adding about 10% -- or excuse me about 100 people into R&D this year. But as you're aware, we do have a fairly significant amount of discretionary expenses and then also variable costs relative to our overall labor costs. So we will not see R&D expenses overall increase at that kind of rate. I do expect a modest decline in total R&D expenses this year, despite the fact that we will have an increase in headcount. In Q1, I believe, R&D expenses were down 2%. And SG&A were down 6%. And that reflects the strategic decision making within the management team to keep a very strong focus on R&D going forward. So with the overall budget down minus 10, the majority of that drop is going to come in SG&A. And the decline in R&D in dollar terms much more modest while R&D in terms of people will also have the greatest increase in total headcount, 2009.

It looks like that's going stay at least a good high platform.

Right. We've got very well defined plans, and a lot of my time and effort goes into making certain we're defining opportunities that will help us grow, and that certainly our goal this time frame, to see that we have products that will grow if we can attack new markets as we use our R&D resources to find the products and design the products.

And we'll go next to William Stein with Credit Suisse.

Thanks. In the prior downturn, the company acquired some smaller technologies. And I'm wondering if that's part of the plan this time around. Is the company looking at anything, technology's or maybe something bigger? And if you can talk about the strategy there it would be helpful.

As you know, our strategy for dealing with the cash reserves have been clearly laid out. Number one is dividends. Number two is opportunistic stock buybacks. And number three is strategic acquisitions. And as we've talked the last few calls, the current valuation of the pricing environment certainly elevates the focus on acquisitions and I think the constrained funding environment is also making potential targets be a lot more concerned about long-term future and looking for a larger company perhaps to make a combination with. So it's certainly starting to get a higher level of focus right now. I think in focus of a large acquisition which is part of your question, I think it's unlikely that NI's going to do any acquisition that would be large relative to our market cap or to our total revenues during this downturn. But we certainly are looking at technology acquisitions. I do have some concern that the management teams had quite a few companies have not fully come to grips with the realities of the valuations in the current market. So I'm not sure if that reality is fully set in yet, but it's something we'll be continuing to look at and work on over the next six months.

Another factor in this time frame with distressed companies around it's also a very good time to acquire talent. We have well defined opportunities and well defined plans for what we're doing in product development. So if we can hire the right kind of talent, it can be very effective in expanding our capability to grow.

That can be a lot less expensive and a lot less risky, too.

And Dr. T., you mentioned -- I believe it was you that mentioned that the company could pursue adjacent product areas as you have in the past during these kinds of downturns. Anything you can talk about at this point?

Sure. Trying to mention to areas. We have our RF area is a pretty wide open area. We've got a good base of technology. We've got also opportunities in the industrial embedded space where we've got a very well defined position with our embedded design approach with LabVIEW and additional instrumentation opportunities. So -- and wireless is another area we think we have a nice opportunity and things like structural, help monitoring and light come into the fort. So we believe we've got well defined opportunities that align very well with our LabVIEW platform and our adjacencies that can be pursued without major shifts in the way we operate it.

Will, I encourage to you come to NI week this August. We believe it's going to be an exciting event this year. I think that will give further clarity to the area where we're going to be launching new products to try and attack some of the adjacent markets where the incumbents may be disrupted at the moment.

We'll take a follow-up from Ajit Pai with Thomas Weisel Partners.

Yes, just looking at competitor dynamics. You talked about certain folks being impacted quite severely and a lot of folks cutting back on investments and some not being able to make it. So in that kind of environment, the opportunities that you see, are you seeing them more in terms of entering new markets? Are you seeing them as opportunities to pick up teams from some of the competitors or pick up intellectual property. How soon do you think strategically some of these players might have to get out of part the operations?

Certainly one of the areas that we're looking very actively is where we can pick up key talent to work in the new areas. We are also looking to in our marketplace with our present products to continue with our efforts and expansion in the sales area and also in a system engineering where we're able to take our products into these new spaces and some of these other companies are spending less money, pulling back. We can define opportunity for ourselves.

Got it. And broadly, it more on the test and measurement space or more on the industrial automation space? Which side are you most attracted to right now in terms of technology acquisitions as well as fortifying your position in?

It's both because I see we're able to take LabVIEW into the megatronics, robotics, industrial embedded space and then we're also taking it into the test and measurement where multi-core and FPGA technology give us some significant advantages over traditional test and measurement systems.

We'll go next to David Yuschak with SMH Capital.

Yes, as far as your R&D efforts here and of course in the past couple years, in past conference calls, you'd indicated, Alex, in normalized business, a lot of your products which rollout can begin to mature. It's like a two or three-year cycle. Is that correct? What I'm trying to think here as you put all this money to work here in the last few years, how do you evaluate the profitability of those things that you're rolling out where you've been introducing them into a market environment to know and test comfortably that the spending will be productive coming out, knowing this isn't normalized conditions?

So David, that's a good point. We do tend to see new products tend to reach maturity in a two to three year timeframe. That's exactly right. We do have a significant number of coming out over the last couple of years. And John mentioned several in his call. I think one of the key things that's allowed us to continue to gain market share, our ability to the grow revenues in new areas like RF. John also talked about the RIO doing well, the wireless acquisition stuff doing well. So it certainly gets more difficult, I won't deny, in a severe downturn, it gets more difficult to assess are we getting the return we expect from a new product introduction. But you have to look at it on a relative basis.

I think you have to be very aware and cognizant of the relative dynamics of what's going on in that marketplace. You have to adjust your expectations based on that. And I would say certainly in the areas I mentioned early on especially in the RF arena where there's probably been a dramatic pullback, to be able to continue to grow, I think is a very positive sign. I'll hand it over to John.

Yes. And David, when we look at the return on investment in these new products that as Alex mentioned in this timeframe, some of the data can be cloudy. Having said that, we still do some pretty extensive analysis. I mean, we'll track sales of new products into new customers and new applications because we see that as an indication of a good return. We'll also analyze what we call platform pull. So for example like RF as we've come out with new products with RF what it does is actually pull the whole PXI platform. We sell more chassis, more controllers, more of our whole PXI platform, which is enabled by those new RF products. So there's a lot of different ways that we gauge the ROI, and that's what continues to make us feel bullish about that investment in R&D.

So if I'm to judge from your comments here about the testing, what you're kind of saying is when you do get this recovery going, RF and industrial imbedded could be two key areas in the market that really can accelerate the opportunities because of your initial success here. Is that kind of what we're hearing?

That's exactly right. And one thing, in some ways that these areas get obvious because they're the ones that growing even when they the economy is really tough. The other thing is often when you're attacking the marketplace, your resource limited to do so, and so the effect, say the market that you're attacking is 50% down, and your resource limited -- the impact of it being 50% down is less than if you had all of the resources to attack the whole market. So in fact it can be a good situation for introducing and bringing new products to market.

And there are no further questions at this time. At this time I would I like to turn the conference over to Mr. Davern for any additional or closing remarks.

Thanks for joining us today. Just to reemphasize, we will be presenting at the Baird Conference in Chicago in May, at the Credit Suisse Conference in Boston also in May, and then at the Thomas Weisel Partners Conference in Baltimore in June. If you'd like to schedule a meeting, please contact our investor relations department. Thank you.

And that does conclude today's conference call. We thank you all for your participation.