National Instruments Corp (NATI) 2009 Q2 法說會逐字稿

Good day and welcome, everyone, to the National Instruments second quarter 2009 earnings conference call. Today's call is being recorded. (Operator Instructions). The replay will be available for 7 PM. central time today and will end at midnight central time on July 28, 2009. With us today are David Hugley, VP Corporate Counsel, Mr. James Truchard, Chief Executive Officer and Mr. Alec Davern, Chief Financial Officer, and Mr. John Graff, VP of Marketing.

For opening remarks I would like to turn the call over to Mr. David Hugley, Vice President 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 expense management and manufacturing costs, expected inventory decline in the third quarter, revenue and earnings per share guidance, gaining market share and improvements in operating margin. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer to you the documents the Company files regularly with the Securities & Exchange Commission, including the Company's most recently filed annual report on the Company's most recently filed annual report on form 10-K and quarterly report on form 10-Q filed May 7th, 2009. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that, I will turn it over to the Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon and thank you for joining us. Operating conditions remain very difficult in Q2 resulting in a 28% year-over-year decline in our revenue. Despite this weakness, we believe the worst may be behind us. The PMI, while still indicating contraction, has improved from Q1 and Q2 from the record low in December. Likewise, we saw a 1% sequential increase in Q2 orders over Q1 and a partial reemergence of our traditional end of quarter surge in large orders. We believe our business model again proved to strength and resilience as we were able to make significant reductions in operating expenses without cutting strategic investments and new product R&D.

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

Good afternoon and thank you for joining us today. Today we reported quarterly revenue of $152.2 million at 28% year-over-year decline. Net income for Q2 was $4.4 million with fully diluted earnings per share of $0.06. Non-GAAP net income was $8.3 million with non-GAAP fully diluted earnings per share of $0.11. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

While Q2 is a very difficult quarter, there are clear positives to take away. Firstly, with the quarterly average for the global PMI having hit an all time record low we saw significant improvement in Q2 with the PMI averaging 44.7. While still indicating sequential contraction, it did make a significant move towards the break even level of 50 during the quarter ending at 46.9 for June. Second, our visibility has improved, which allows to us give guidance. Third, while our revenues are down 4% sequentially from Q1, our orders in the quarter were actually up 1% sequentially resulting in a $6 million sequential increase in the backlog of orders during the quarter. Fourth, while we did not see the full traditional end of quarter surge in larger orders, we did see an encouraging improvement in large orders closing at the end of June compared to both December and March. Lastly, our expense management efforts kicked in fully in Q2 allowing us to reduce our non-GAAP expenses by 16% year-over-year and by $10 million sequentially. This allowed us to significantly increase our non-GAAP earnings per share from Q1, increasing our non-GAAP operating margin from 2% in Q1 to 5.5% in Q2 with non-GAAP net margin of 5.4% in Q2.

Looking forward, it now appears increasingly likely that Q1 will be the low point in non-GAAP operating margin for this cycle. This forward-looking statements is subject to the risk factors I will mention later. From a product point of view our instrument control revenue saw 46% year-over-year decline in Q2 are revenue from the rest of our products being down 26% year-over-year. From an order point of view, we saw a modest sequential decline in instrument control orders offset by sequential growth for CompactRIO and PXI and modular instrument products. We saw the impact of industrial recession across all regions. During Q2 year-over-year revenue growth in US dollars was minus 35% in Europe, minus 25% in Asia, and minus 23% in the Americas. In local currency terms, revenue was down 25% year-over-year in Europe and 17% in Asia giving an overall local currency decline of 21%.

Now looking at the income statement in more detail, non-GAAP gross margin in Q2 was 74.2% compared to 75.2% in Q2 of last year. Our ability to maintain very stable gross margins in Q2 despite a 28% year-over-year revenue decline is attributed a variability we have built into our manufacturing cost structure and to very high level of differentiation we have designed into our products. Total head count was 5,135 as of June 30th, up 5% year-over-year. The primary focus for head count addition this is year has been in R&D and field sales.

Now turning to the balance sheet. Similar to Q1, inventory decreased by $7 million during the quarter, as we made further progress on realigning our production to the lower level of business. We will continue to monitor our production schedules and we expect to see inventories decline again in Q3. As of June 30, the Company had $251 million of cash and short-term investments, up $9.2 million from March 31st. This cash balance is net of $9.3 million in dividends paid during the quarter and $5.7 million used to repurchase 249,000 shares of NI's common stock at an average price of $22.97 per share. We also announced today the Board of Directors approved a quarterly dividend of $0.12 per share payable on August 31st to shareholders of records on August 10th.

Now I would like to make forward-looking comments concerning our strategy to deal with the current economic environment. As I discussed earlier, while the global industrial economy was still declining sequentially through June, the rate of decline has slowed considerably. As a result, it is becoming increasingly likely that global industrial production will turn positive in the near term. However, when it does turn positive, the industrial economy will be dealing with significant amounts of excess capacity, which will take a considerable period of positive growth to absorb. Given that assumption, I wanted to reiterate our business strategy to manage the threat created by the situation, but to also 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 sound financial management by building strong cash reserves and maintaining profitability. Key to this is maintaining stable gross margins and optimizing our operating expense os structure through variable costs and thoroughly reviewing discretionary expenses, while maintaining very strong employee productivity. At our investor conference at NI week on August 4th, we'll translate this strategy into spending targets for 2010 and 2011. These targets will not be absolute but will be relative to a number of possible revenue scenarios that we will present. This will give a clear picture of our strategy for driving operating leverage during the recovery.

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

In the slides accompanying the presentation on the web, you can see the track regard of our execution on this strategy since the last recession and the resulting gains we have made relative to other test and measurement companies. Together with insight into our budgeted additions in R&D and field sales for 2009. We believe our core strategy of expanding the percentage of our revenue coming from large applications area that is are new to NI, but which heavily leverage our technology and competitive position, has allowed to us out perform our competitors through this recession and should accelerate our revenue growth when the industrial economy recovers.

Now before I turn to forward-looking guidance let me remind you the third quarter of last year is a tough compare. It was the highest revenue quarter in the history of the Company with 17% year-over-year growth. Looking to Q3 this year, we currently expect revenue to be up sequentially and to be in the range of $158 million to $168 million. We currently expect GAAP fully diluted earnings per share to be in the range of $0.04 to $0.12 for Q3. With non-GAAP fully diluted earnings per share expected to be in the range of $0.09 to $0.17 per share. These are forward-looking statements I must caution that actual revenues and earnings 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 over runs, manufacturing inefficiencies and foreign exchange fluctuations.

So in closing, I believe we have been both strategic and prudent in our business planning and our reaction and execution in this downturn is once again demonstrated that our business model is solid. With they'll turn it over to John Graff, Vice President of Marketing.

Thank you, Alec. As the rate of decline of the industrial economy slowed in Q2, we did see some bright spots in our business that reflect the strength of our long-term strategy. While companies remain cautious about large expenditures, we did see a partial reemergence of our traditional end of quarter surge in large orders. During our June update call, we mentioned that orders over over $20,000 were down 30% year-over-year. While we saw this number improve in the last three weeks of Q2 to end the quarter down 26% year-over-year. Our smaller transactional orders were down 24% year-over-year in Q2 and the average order size increased sequentially to $3,360 for the quarter.

Despite the challenge of the current economic situation, we did see growth in some areas of the business. Sales to academic institutions were up in Q2 and represented 13% of our quarterly revenue. We continue to see increasing support within the academic community to work more closely with NI to introduce students to the latest technologies and better prepare them for industry. In Q2, we released a new version of our educational laboratory virtual instrumentation suite or ELVIS for short. ELVIS integrates twelve different instruments together and is designed to help connect theory to real world applications. The new version adds support for several add on boards that expand teaching capabilities into new areas including wireless communications, and megatronic systems. One add on board was a joint collaboration between NI, and XILINKs, the world's largest supplier for (inaudible) logic devices. This board provided students hands on experience with field programmable gate array or FPGA technology. As you know, FPGAs have been a significant focus area for NI in recent years since LabVIEW enables domain experts to take advantage of the performance benefits of FPGAs without having to learn complex embedded design languages.

In software, revenue in Q2 was helped by growth in our volume license agreements or VLAs. Growth in VLA orders is an indicator of the growing number of companies that recognize the value of providing greater access to NI software and the efficiencies it delivers during the development cycle. Complementing the large orders we saw in software, we saw strong relative performance this quarter in our lower cost, highly transactional data acquisition products, which are commonly sold through the web. Our focus on building the web channel for transactional products during the past few years has allowed our field sales force to increasingly focus on systems sales and in the current economic climate, this is allowed the field to pursue opportunities in areas such as education and government or stimulus and other funding as made capital more readily available.

Our position in the industrial embedded space continued to expand as we saw another quarter of year-over-year revenue growth per NI CompactRIO products, which continue to see success in prototyping applications as well as deployments for machine control. The combination of LabVIEW and CompactRIO helps engineers quickly try out and modify new designs using the graphical system design approach to achieve faster time to market. Our single board Rio products, which we released last year, provide a cost effective option for higher unit volume deployments for OEMs allowing them to use the same software they developed during the prototyping stage in their final product and thus further accelerating their time to market. One example of a customer who has fully embraced the N I platform throughout their development cycle is Silicon Renewable Energy, a company that manufacturers solar panels. After using LabVIEW and NI hardware during their design and validation they deployed LabVIEW and FPGA for Silicon purification and characterization of solar modules during manufacturing. In the end, they were able to achieve better accuracy in their measurements, while at the same time significantly increasing their test throughput.

Another area where we continue to see strong relative performance is with our PXI and modular instrument products, especially with our RF offering. While we continue to rapidly increase our investment in RF hardware development, we have also been significantly increasing our investment in software for RF standards. In Q2, NI released a measurement suite for WiMax applications and another for GPS simulation. With software defined PXIRF measurement systems, engineers can reduce their cost of equipment by using a single set of hardware to test WiMax, wireless LAN, GPS, GSM, WCDMA, and many other wireless standards, while performing the same tests up to ten times faster than traditional RF instrumentation.

A specific modular instrument success story this quarter was with Sony, who chose the PXI platform to perform production testing of their BluRay disk player products. Sony was experiencing slowdowns in their production schedule due to in-efficient testing, but by using PXI and LabVIEW they were able to meet their cost and performance requirements, while improving their test throughput by 33%. We hear similar stories from many of our customers, who are being tasked with growing efficiency in test engineering with the same or decreased budgets. Sony and others are realizing the benefits they can achieve by moving to the NI platform.

We're also very excited about our announcement last year, the National Instruments and Techtronics would be unveiling a joint product initiative at NI week. Martin (inaudible), Vice President of Marketing for Techtronics describes the collaboration as one that "brings together two leading brands of one goal of enabling customers to innovate and bring products to market faster". We're committed about this collaboration that will enhance customer's productivity, combining the expertise of Techtronics and high performance measurements and the expertise in National Instruments in software, instrument control and modular instrumentation. We'll discuss more details of this initiative at NI week.

In summary we were pleased with our ability to sustain investments in new product R&D and expand our field sales force, while significantly reducing our overall operational expenses. We are excited about the NI week conference in two weeks where you will see announcements of a number of new innovative products that will continue to expand NI's addressable markets. At our annual investor conference we will discuss these products and examples of customer successes, as well as our approach to the opportunities that NI has in tests and industrial embedded applications. We hope to see you there. With that I will turn it over to Dr. T.

Thank you, John. Despite the continued weakness in the global economy, I was once again pleased by the strength and resilience that we showed in Q2. Our strong business model has enabled us to sustain profitability while continuing to make strategic investments throughout this downturn. It is through these challenges we are reminded of the importance of our consistent long-term approach to growing and operating a Company built to last.

Since the last recession and throughout the current one, we have pursued a unique strategy, which has proven to be a disrupter within the traditionally served markets. I believe we are redefining instrumentation through our ability to leverage technologies such as FPGA and multi-core processors with LabVIEW, and that these unique capabilities have established a significant competitive advantage. These technologies combined with the strength of our field sales force are allowing to us take on some of the world's most significant scientific and engineering challenges that previously would have required highly customized solutions. The benefits of our graphical system design approach have become even more pronounced in this environment of tighter budgets and shorter design cycles as engineers look to do more with less, so I believe we have an opportunity to gain market share not only because of our strategic research and development investments and expanding field sales force, but also because of our core strategy of combining hardware and software can lead to significant performance improvements for our customers.

As we mentioned previously, I believe this recession is creating an opportunity for National Instruments as we have seen our competitors cut costs and retrench as we continue to innovate. I believe this will lead to major shifts in the market positions of many players in the industries we serve, and that we are creating an opportunity for a permanent shift in industry leadership. I believe that National Instruments is very well-positioned to benefit from these dynamics and that our management through this downturn will allow us to leverage the economic recovery. I have seen our organization prove these challenges can be a catalyst for innovation. For example, if the progress we have made in our expanding our vision to include industrial embedded applications, our ability to quickly adjust our spending plans as economic conditions deteriorated are also a testament to this, and I would like to again thank our employees for their efforts in this area.

In summary, while Q2 proved to be a very difficult economic environment, we see evidence that the worst may be behind us. We have remained profitable even as we have maintained our strategic investments in new product research and development and expanded our field sales force leading to opportunities that we previously would not have had access to or the products to address. Throughout the recession, I am pleased that our business management has allowed us to avoid compromising our long-term strategic vision, while allowing us to further differentiate ourselves from other players in the market we serve and providing a strong foundation to support growth. I am excited about our new products and plans to release it NI week this year in addition to our recently announced collaboration with Techtronics. I hope to see you here in Austin in two weeks. Thank you. We will now take your questions.

(Operator Instructions). Our first question comes from Anthony [Luscrussy] with JPMorgan.

Thanks for taking my question.

Hey, Anthony, how are you doing?

Good. Can you talk a little bit more about your ability to provide guidance for the September quarter? What has changed and how is your visibility improved?

In a number of ways, Anthony. Certainly we have obviously went through a period of fairly rapid decline, not only in the global economy, the global PMI starting last fall that really came to a trough in December at some really record low numbers, and then obviously we have seen a rate of decline in the broader economy slowdown as we're heading through Q1 into Q2 and that gives us some confidence that the likelihood is pretty strong that industrial production globally will probably turn positive sometime in the next few months. Now, that combined with the behavior of our customers we're seeing a change in -- or we saw a change in the behavior pattern, especially in the last three or four weeks of June on a large order front to what we had seen in December and in March. In December and March we saw a very, very reluctant customer's relative to larger orders, and we saw that free up noticeably at the end of the June quarter. That allowed us obviously to add about $6 million in backlog during the June quarter and a combination of those factors with the traffic pattern we're seeing in a more transactional orders and the stability we have seen there has given us confidence that we're in a position now to give guidance here for the September quarter.

Okay. My follow up would be the large orders that you saw in the June quarter, do you believe those to be sustainable and what vertical if you can be specific are you receiving those orders from?

Anthony, this is John. In terms of the sustainability, I guess we have to see. It is still subject to capital purchasing patterns in the end markets. After not seeing it in Q4 and in Q1, we were pleased to see some re emergence of that pattern. In terms of the verticals, again, it is a variety. The diversity of our business has been one of our strengths. Obviously the large orders are smaller and the quantity of, but we saw successes in large orders for RF and communications tests, and I know we saw large orders for industrial and embedded machine type applications, so I think it is really nice execution by our field sales force to identify, manage, and close these opportunities.

Following up from John, we define large orders as any order over $20,000, so for a lot of companies that would be considered maybe smaller order, but in the NI business we regard them as -- you're talking about a fairly significant number of orders, not just one or two customers.

Okay. Thank you.

Thank you very much.

We'll take our next question from William Stein with Credit Suisse.

Thanks. Following up on that last one, about the predictability here, you're guiding September up about 7% sequentially, and I think kind of average seasonality in September is up 1%, so it is pretty clear you're putting the guidance in line with your comments the worst is behind us. Can you remind us how big the backlog is typically? How much of the September number is driven by what's kind of already in the bag as opposed to what we expect to get from transactional business or bigger orders later in the quarter?

Sure. We're very much a turns business, so the vast majority or vast majority of our revenue at any quarter comes from orders booked within that quarter, and typically we have seen our backlog range anywhere from one to four or five days worth of order volume. So relatively small by capital equipment standards, so it is not really in terms of looking at guidance, it is not really a reliance on backlog, certainly increasing backlog during Q2 was nice to be able to do that. That gives us certainly a little bit more visibility into Q3, but fundamentally our confidence in terms of our guidance is really coming from the activity trends that we're seeing both in the transactional orders and in the over $20K orders. During Q3, excuse me, during Q2 and obviously into July.

That's very helpful. Just a follow-up on the cost side. You beat the margin expectation. By my model it looks like much of that came from R&D although that's clearly a focus for the Company in order to provide a future for revenue growth, so I am wondering if you can talk a bit about whether there were incremental cost savings in R&D and then also whether there are more savings to come in the September or in the December quarters or are we kind of done with all the cost savings actions that have happened?

First I will address the second part first. At this point our focus as we said in the June call is going to be on growing the business. The Company and the whole economy is reset to a new point here. Our focus is going to be growing the top line from here as we continue to push forward investment in R&D, our overall head count in R&D is up in the mid-single digits year-over-year and in the field sales force is up in the high teens, so we're going to continue to push forward on that investment, and we do not have any plans at this point in time for any incremental cost saving initiatives on the operating expense side. We are continuing to work with our vendors on the material cost side and elsewhere to drive pricing benefits where we can. We have a pretty strong business in terms of a steady repeat customer, and we're continuing to leverage that to make sure we're getting good market pricing from our vendors. That's where we'll be focusing continuing cost reductions, but in terms of the broader operating expense we do not have any current plans to expand that beyond what we have already put in place.

In terms of R&D, you're pretty well aware that we have typically a fairly large software capitalization number in the second quarter that's been traditional, the last number of years built around the anticipation of a major software release at NI week, and the last number of years that has obviously been a new release of the LabVIEW platform. That was obviously a factor in Q2 of this year and software capitalization year-over-year was up about $600 or $700, so modest impact on the year-over-year number but has a significant impact on the sequential pattern of R&D. We would expect that to revert upwards now as we move into Q3 and those products that are in beta would hopefully be released here at NI week in ten days.

Very helpful. Thank you.

Thank you, Will.

Our next question is going to come from Rob Mason with Robert W. Baird.

Alec, I just wanted to stick on the cost theme a second. I think it was last quarter, maybe the update call that you mentioned that you had implemented a mid-single digit pay reduction for the workforce. Is that correct?

That is correct, yes, effective March 1st.

Does your guidance assume that's remaining in place here through year end?

Obviously we have only given guidance for the third quarter, but it does assume that remains in place for Q3, and I would like to take this opportunity for the employees on the call that, one of the things that I think has been remarkably positive about this impact of this economic downturn on NI is our ability to rally the whole employee base and stay very, very focused with a very high level of productivity on executing against our goals, and the employee base while no one is happy about a pay reduction, I have seen it build a stronger Company and make the Company more unified and seen employees respond as well as you could possibly hope, so I want to take this opportunity to thank the employee base for that commitment to the future success of the Company and I think that is just an example of the strength of the NI culture and one of the key elements that will help to carry the Company forward and we believe improve our leadership position in this industry over the course of the next decade.

Question on the traditional instruments business. It looked like perhaps that finished a little bit better than it was tracking at your update call. As you have moved into July, utilization rates are up, granted still much excess capacity, but are you seeing any hint that business might have bottomed yet for you?

Certainly there is some significant signs of stabilization without a doubt, and our instrument control business led the decline if you like and it turned negative in Q3 of last year and really the whole Company broadly didn't see a negative impact until the fourth quarter, so it has easier compares let's say in Q3 than the rest of the business, which will catch up in the fourth quarter. We saw a dramatic drop in instrument control from Q3 to Q4 to Q1, and then very, very modest drop from Q1 to Q2, so certainly some strong signs of stabilization there, and we may see from a year-over-year growth rate point of view that business may change direction here in Q3.

But from a dollar standpoint --

From a dollar standpoint we're not anticipating any significant schedule increase in that business. Our expectations on sequential increase is coming from the rest of the Company.

Okay. Maybe last thought on your geographies. Can you just speak to the three primary geographies, where you were seeing improved visibility and maybe any geographies where you were not?

I would characterize the visibility question and the shift in the pattern on the orders over $20K at the end of June as being relatively global. I don't think there is a discernible -- this has been a highly synchronized global recession, and I think the recovery if and when it comes is likely to follow that pattern. There may be slight lags, but in general, I would say that the improvement of visibility is fairly broad based. John may care to comment further on that.

As we look at internally things like order volume and the pipeline statistics for our larger system business, it is amazingly consistent across all three regions.

Okay. Thank you.

Thank you.

Our next question is going to come from Ajit Pai with Thomas Weisel Partners.

Good afternoon.

Hey, Ajit, how are you doing?

A couple of quick questions. I think the first one is just looking at pricing trends in the markets that you're serving, you talked a little bit about how some competitors will find it difficult to compete and others are getting out of the business, but are you seeing some of the one that is are still in the business getting desperate and trying to compete more aggressively?

Ajit, it is Alec here. From a point of view in this dealing with this specific question and dealing with it in the midst of what we all know is the worst downturn in 70 years, it is good to be in the position of the disrupter and I will let Dr. James Truchard address that in a minute. We have actually seen our discount rates drop year-over-year and sequentially, so our discounts in Q2 on average globally were slightly lower than they were in Q2 last year and actually slightly lower than Q1. It is somewhat of a reflection of the OEM business and the larger orders obviously taking a bigger impact in the second quarter, but in general we have seen pricing for our business pretty consistent. Now, I have heard some anecdotal evidence talking to some of my peers at other companies that is they are seeing some pricing pressure, but that has not today been a factor, and it really comes down to the design of differentiation and our position as a disrupter.

This is James Truchard. Our products tend to have a lot of differentiation. This fear designed it will sell, and it seems to be more a matter of whether people have money or not. If they have money, they buy, if they don't, they don't. That's why one of my explanations why it is so uniform across the globe because it is a factor of how the Company that's a customer is actually doing financially.

Got it. What is the head count at the end of the quarter?

I mentioned in the comments, I believe it was 5,135, Ajit, up about 5% year-over-year, and then the biggest year-over-year increases have been in R&D, and in the field sales force.

Down about 65% sequentially?

Yes. We've had obviously some natural attrition in some areas of the business outside of R&D and field sales force, and that's something we traditionally will see during this time period. Some areas more volume related we have chosen not to back fill that attrition.

Looking at your European sales, you talked about your linearity and also the timing of Easter this year, sort of shifting revenue from the first to the second quarter. Does that mean in the second quarter that you actually saw European sales trend right through the quarter?

From terms of absolute dollars, the answer on a daily rate per month, if you like, that's definitely true. As we talked back in January, we expected the shift of Easter into as we looked at this year to hurt us in Q1 or sorry to help us in Q1 and hurt us in Q2, which is a flip of what happened last year. So that's what we saw European business was somewhat of an out performer in Q1, somewhat of a laggard in Q2, if you look at it, and we believe East certificate a heavy part of that factor, and certainly the business improved in absolute terms as we went from April into May and into June.

Got it. Just in terms of the quality of your backlog, over the past five to seven years, the mix of higher price system sales, high SP system sales has been increasing as a percentage of international instruments revenues and orders. Can you give some color right now as to how that's changed? You have always been a high turns business, but can you give us qualitative input and how to interpret backlog, some level of where it could be right now and what percentage of the backlog shipped in three months and how much in six months?

Sure. We still continue to operate on want to stress we are very, very much a turns business. We anticipate 80% of our orders received will ship within 48 hours. We carry inventory at a high level to be able to manage that. Our customers buy PCs, and they want to add instrumentation, hardware and software to the PC sales, so we manage our turns business very much like the PC. Now, having said that, typically we have had backlog anywhere from one to five days. We continue to be in that range. We're at the upper end of it now. We made a decision to build up backlog at the end of June because we felt we had sufficient revenue to be able to meet the guidance in the second quarter, and so the backlog we have available at the end of June is we would expect all that to ship in Q3.

Got it. Thank you.

Next we'll hear from Mark Douglass with Longbow Research.

Good afternoon, everyone.

Hey, Mark.

Can you please confirm I think you said earlier the patterns you're seeing in July are similar to those you saw at the end of June?

I believe what I said, Mark, is we factored in the consistency that the pattern we have seen in July is part of the reason we feel confident in giving guidance.

Right. Okay. Can you discuss a little more detail as to what's going on in the various end markets? I know you said in CompactRIO is up year-over-year, but just in general what you're seeing in say the RF in communications, which ones were weaker than others, general purpose test and measurement, was that the big drop off? Just general electronics testing or if you can write details.

Mark, this is John. If we look at the vertical segments, so this will be the segments industries our customers are in, where we saw really significant declines would be areas you would expect, automotive, instrument ATE-business, and in the customer classification of communications we did see some weakness. Now, I compare that to sales of our RF and wireless products where we actually saw some very strong results. We also saw strong results in sales to education and academic that we mentioned during the call as well as sales into research and energy industries, so I think that kind of reflects one the diversity of our business, you see areas where capital continues to flow like education and government and research related industries. We're able to capitalize on that business, and that's part of the flexibility of our direct model.

And the RF in wireless, would you say it is a lot of defense for you or was it a broad mix?

It is a mix. One of the strengths of our platform, our software based approach is we can address much wider set of applications, so some will be in classic kind of RF production tests, manufacturing tests, but we're also able to sell it into kind of signal, intelligence, signal acquisition type applications, and again that's the flexibility of our software based model, so that's one of the reasons we continue the aggressive investment in RF is that we see broad applicability of these products in a wide range of end markets and a variety of applications.

Okay. And finally going back to the expenses and costs, I know before you had mentioned roughly a drop in overall expenses for the year, of 10%, could have been a little better than that now, are you declining from commenting on that because you're giving specific 3Q guidance or what do you have in mind for the full year?

Mark, it is Alec here. Your assumption is correct. We're moving towards the confidence level to be able to give guidance a quarter out we're going to revert back to giving guidance on revenue and profit inlet. Obviously we have chosen to focus on expense management during a time period when with collapse of the industrial economy was very hard to give any guidance on the top line side, so our plan going forward as of today would be to revert back to quarterly earnings guidance.

Okay. Fair enough.

Thank you very much.

Thank you.

(Operator Instructions). We will take our next gentleman, David Yuschak with SMH Capital.

Thank you. Good quarter, guys.

Thanks, David.

As far as the activity in the quarter, the last couple of calls you indicated there has been a lot of interest coming out of field sales where guys having been a little pull to trigger. Kind of curious as you look at the activity at the end of the quarter was there a lot more of those things deferred that are starting to show up in those orders or are we seeing maybe a quicker decision by newer proposals that are being put into that order stream versus things you have done in the past?

David, this is John. I guess to start and then Alec can add on. From an activity and interest level, we continue to see very strong interest. I think we talked about this last quarter in terms of response to our marketing programs, just activity on our website, leads and opportunity volume continues to be strong. Again, we think that's a reflection of we have a very strong value proposition, and in times like this a lot of people are going to be interested at ways they can save money. We continue to feel strong about that. In terms of what happened, obviously we're pleased to see some of that reemergence on the large orders, but again costing you that we didn't see the full end of quarter surge that we typically see, so there is still some caution in the error of our large customers or large order customers.

But are you seeing some of the decisions, though, coming quicker as far as that kind of even though it is down, are they coming quicker from some people or just maybe the deferred stuff?

David, it is Alec here. We obviously as we track this in your opportunity database, we have a set of opportunities that the sales force is working hard on and anticipates closing at the end of any particular quarter. We saw a massive increase in the percentage of those opportunities pushed out in Q4 going into December in particular, and it stayed up at the very high level in the first quarter as we went into March. In the end of June we saw that percentage of those opportunities expected to close at the end of quarter that got pushed out that, percentage came down noticeably. So you're starting to see some of those flow through. Obviously the field sales force has a large active set of opportunities that continue to work and how customers will behave in September we'll have to wait and see. Certainly what we saw in June gave us confidence, and we know we have more tough compare on the large orders as we get to September, and then we'll start to have easier compares from the large order point of view once we head into the December quarter.

As far as some of the reasons for the guidance, from a transactional order trends that you're seeing versus your opportunity database, you talked about there earlier, is what's more important in this increased confidence is seeing the sales come out of systems systems or is it more the transactional model that suggests that the reason for being able to give guidance?

It is really both. We have seen a very significant level of stability in the transactional business now for quite a few months, and that is certainly confidence level there, the continuing drops which we had seen in Q4 and Q1 are probably behind us, and certainly what brings in variability into the equation at the end is going to be the larger system orders. While we continue to book and close a lot of those orders each week, certainly traditionally as John mentioned in his comments, we have seen a surge in those in the last three weeks of each quarter, and while we didn't see a return to that in June, we did see at least a significant improvement relative to December and March. Those are certainly important and as I said earlier on we're anticipating behavior in September that's similar to what we saw in June at this point, and we'll have to wait and see how that plays out.

It is more on the transactional side, more just stability here than it is seeing real growth?

Stability and that trend appears to be relatively predictable at the moment.

Okay. Thanks.

We'll take a follow-up question from William Stein with Credit Suisse.

Thanks. First a housekeeping question, the tax rate was higher than expected this quarter. What do we expect going forward on GAAP?

It is Alec here. As we talked the last couple of quarters when profit numbers are down significantly relative to the past the tax rate number tends to be more volatile, so we would anticipate the number in Q3 to be somewhat similar to Q2, but I will caution you that in a lower profit environment it gets more difficult to predict. Obviously our expectations are built into our guidance for the quarter.

Going forward reverting back to approximately 15% non-GAAP, is that the right way to think about it?

Based on what we know now as we look out into 2010, if nothing was to change, in terms of the legal situation and the tax law, we would be somewhere between 15 or maybe I few points higher, but it is really I would not want anybody to take anything as guidance at this point in time until we see how some of the actions in Washington may play out over the course of the next six months.

And then on acquisitions, it is always potentially part of the strategy we see them once in awhile. Any renewed activity there?

Certainly this is an area of focus for us. You're well aware our priorities for the use of cash are number one dividends, number two opportunistic stock buybacks, and number three strategic dividends or strategic acquisitions, and that's an area of focus. However, we're well aware of the difficulty in earning a good return on an acquisition, so we will continue to not chase them at high prices, but to focus on where we can drive sustainable value for shareholders.

Thank you.

I think that's our last question, operator, is that correct?

That is all the questions we have at this time. I would like to turn the conference back over to you for closing remarks.

Thank you very much for joining us today. We'll talk to you again on September 8th to the broader audience, and we certainly hope to see a significant number of you guys at NI week on the 4th of August. Thank you very much. Bye.

That concludes today's conference. We thank you for your participation and hope you have a wonderful day.