National Instruments Corp (NATI) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to the National Instruments third quarter 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 P.M. central time today and end at midnight central time on November 1st, 2009. With us today are David Hugley, Vice President, General Counsel and Secretary, Alex Davern, CFO, Dr. James Truchard, President, CEO and Co-Founder and John Graff, Vice President, Marketing and Investor Relations. For opening remarks, I would like to turn the call over to Mr. David Hugley, Vice President, Corporate Counsel and Secretary, please go ahead sir.

Good afternoon. During the course of this conference call, we should make forward-looking statements regarding the future financial performance of the Company including statements regarding opportunities to grow and gain market share, our strategies, gaining future operating leverage, our revenue and earnings per share guidance and expected tax rates. We wish to caution that you 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 and Exchange Commission including the report filed today and our annual report on form 10k. 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 is over to the Chief Executive Officer of National Instruments corporation, Dr. James Truchard.

Thank you, David. Good afternoon and thank you for joining us. Our are key points for today are strong sequential revenue growth, strong operating leverage in Q3 and we are guiding for strong sequential growth in Q4. While Q3 continues to be a challenging economic environment, I was pleased with our ability to deliver strong sequential revenue growth with great operating leverage. Our business model allowed us to continue making strategic investments through the recession and I believe these investments and innovation and new product development have further differentiated National Instruments from other players in the markets we serve. And will help drive our future growth.

In our call today, Alec 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. Alec?

Good afternoon. Today we are pleased to report Q3 revenue of $165 million, which is in the upper end of our guidance provided on September 9th, and is the strong 8% sequential increase over Q2. The sequential increase in revenue in Q3 is approximately 20 times the average Q3 sequential change that we have seen since the IPO in 1995. Orders were also strong sequentially and our end of quarter backlog increased by $5 million in Q3. With Q3 last year representing the highest revenue quarter in the history of the Company, we had a tough compare this quarter and revenue was down 23% from a year-over-year perspective. Income for Q2 was $10 million with fully diluted earnings per share at $0.13. NonGAAP net income was $15.4 million, with nonGAAP fully diluted earnings per share of $0.20. In Q3, the GAAP to nonGAAP net adjustment was $0.07 per share, $0.02 per share greater than the $0.05 per share we had anticipated in our guidance. The differences related to the impact on our effective tax rate over the significant increase in our profit expectations for the year. I will discuss the impact of this on Q4 in more detail during the guidance section of my comments.

A reconciliation of our GAAP and nonGAAP results is included in our earnings press release. While Q3 is a difficult quarter from a year-over-year perspective, there's some clear positives to take away. First the quarterly average of the global PMI has improved from its record low of 36 in Q1. At Q3, quarterly average of 52 indicates that the industrial economy expanded sequentially in Q3. Second, while we did not see the full traditional end of quarter surge in large orders, we did see an encouraging improvement in large orders closing at the end of September. Third, our expense management efforts continue to pay off in Q3, allowing us so reduce our nonGAAP expenses by 16% or $20 million year-over-year, which includes a $2 million credit to patent litigation expense. Fourth, strong sequential revenue growth combined with prudent expense management have allowed us to increase our nonGAAP operating margin from 2% in Q1 to 5% in Q2 and now 10% in Q3. Our guidance contemplates a further significant sequential revenue in Q4 with continued operating leverage.

From a revenue point of view, our instrument control business saw a 28% decline in Q3, while revenue from our virtual instrumentation and graphical design declined 23% year-over-year. After four quarters of sequential decline, we saw a greater than 20% sequential increase in instrument control revenue. Traditionally, our instrument control revenues have been highly correlated to the overall test and instrument industry and the current trends indicate that the industry may have bottomed Q2 and begun a sequential recovery in Q3. Revenue for all other products continued to sequential increase that had begun in Q2. We saw the impact of the industrial recession across all regions. During Q3, year-over-year growth in US dollars was minus 30% in Europe, minus 16% in Asia and minus 22% in the Americas. In local currency terms, revenue was down 20% year-over-year in Europe and 13% in Asia giving an overall local currency decline of 19%.

Now looking at the income statement in more detail. NonGAAP gross market in Q3 was 75.3%, compared to 75.2% in Q3, 2008. Our ability to modestly increase our gross margins year-over-year in Q3, despite a 23% year-over-year revenue decline is a tribute to manufacturing cost structure and to a very high level of differentiation of National Instruments design into our products. Total head count was 5,169 as of September 30, up 3% year-over-year. The primary focus this year has been an R&D and field sales which are up by 49 people this quarter.

Now, turning to the balance sheet. Similar to Q1 and Q2, inventory decreased by $7 million during the quarter. We will continue to monitor our production schedules and expect to see inventories start to flatten out in Q4. With the expected increase in revenue in Q4 contemplated in our guidance, we expect to see our inventory days return to a much more normal level in Q4. This is a forward-looking statement and subject to the risk factors discussed by David. Cash flow from operations continue to be very strong at $90 million for the first nine months of the year. As of September 30, the Company had $276 million of cash and short-term investments, up $26 million on June 30th. This cash balance is net of $9 million in dividends paid during the quarter and $3.3 million used to repurchase 131,000 shares of common stock at an average price of $25.09 per share. We also announced today that the Board of Directors approved a quarterly dividend of $0.12 per share, payable on November 30th to shareholders of record on November 9th.

Now, I'd like to make forward-looking comments concerning our strategy in the current economic environment. While global industrial production turned positive in Q3 and capacity utilization has started to improve, it is clear the industrial economy is still down dramatically year-over-year and that there continues to be a lot of excess capacity. Given this situation, at a recent investor conference, we laid out our plans to continue to be disciplined on managing expenses through this recovery. Our intent is to continue to drive operating leverage until NI revenues recover to the record levels seen in 2008. We believe that the strong sequential growth indicates the beginning of an apparent recovery in our business. Based our order flows so far in October and visibility opportunities, our guys anticipate another quarter of strong sequential growth in Q4 which would well exceed the Q4 seasonal increase. Well it appears that a recovery has begun, it is also clear that the test and measurement industry will not just return in the same way it has been before. This recession has caused many companies to rethink where the competitive advantage comes from. For the test and measurement industry, this means that things will look different after the recovery. With a greater acceptance of modern lower cost more productive approaches to tests. We believe this will favor NI and allow us to continue to gain market share and achieve our goal of record revenues in future quarters, seems much closer than a process we could have imagined six months ago.

Turning to specific guidance for Q4. We currently expect revenue for Q4 to up sequentially and to be in the range of $190 million to $200 million. We currently expect a GAAP fully diluted earnings per share to be in $0.22 to $0.30 for Q4 with nonGAAP fully diluted earnings per share expected to be in the range of $0.30 to $0.38. Our guidance assumes the nonGAAP effective tax rate approximately 30% for Q4, which is significantly greater than the overall 2009 effective rate as the Company now expects Q4 profit to be significantly greater than was anticipated earlier in the year. The increase in Q4 profit expectations results in a greater than anticipated concentration of NI's tax charge in the fourth quarter. For 2010, there are currently anticipating that our nonGAAP effective tax rate will be in the range of 18% to 22% and we are internally using 20% to model our expected results for 2010. In Q4, the GAAP to nonGAAP net adjustment is also expected to be elevated due to the high effective tax rate and the adjustment is estimated to be $0.08 per share. In Q1, 2010, we anticipate that the GAAP to nonGAAP adjustment will return to a more normal level of approximately $0.06 per share. These are forward-looking statements and I must caution you the actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, delays in new product releases, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates, and foreign exchange fluctuations. Given the improvement we is seen in our visibility, we will not be holding a business update call during Q4. On December 2, Dr. Truchard will be presenting in the Credit Suisse annual technology conference in Arizona and I will be presenting at the NASDAQ OMX investor conference in London. We hope to see you this.

So, in summary, we are pleased with how our business progressed in Q3 and from a broader perspective, we are pleased that the industrial economy is starting to show meaningful sequential improvement. With that said, we remain cognizant that the economy remains well below product levels and NI will continue to focus on gaining market share and driving profit recovery.

For now, I'll turn it over to John Graff, Vice President of Marketing.

Thank you, Alec. We are pleased with the strong sequential growth we saw in Q3 as we continue to execute on our long-term strategy of expanding our revenue coming from large application areas that are new to NI, and which heavily leverage our technology and competitive position. While we did not see our full traditional end of quarter surge in large orders, we did see encouraging improvement closing at the end of September and our Q3 average order size increase 4% sequentially to about $3,480. At our annual NI week user conference in August, we announced a host of new products, delivered over 200 technical sessions and set a new attendance record. A testament to the value our customers see not only in the event but also in our product platform. We were particularly excited to announce the release of LabVIEW 2009. LabVIEW 2009 harnesses key technologies such as multi-core processes, FPGAs, wireless platforms and realtime map to empower innovation and key opportunity areas such as infrastructure, environmental monitoring and biomedical devices. We are pleased with the positive, early response we have received for LabVIEW 2009 including several industry awards.

Continuing the trend of the past few quarters, we saw strong performance in our sales to academic institutions in Q3. There's been increasing interest from the academic community to grow the relationship with NI in order to introduce students to the latest technologies and better prepare them for industry. While NI products are used across a myriad of different applications in academia, robotics applications have been a recent focus for the academic team.

We also held a robotics summit during NI week that was attended by some of the most influential figures in both academia and industry. One of the most influential voices in the field of mobile robotics was a speaker at the Summit and gave the NI week closing keynote address. Dr. David Barrett from Olin College described robotics as a fundamentally disrupted technology with applications and growth potential in numerous industries. And he outlined the primary needs for the industry to evolve. One such need is a richly supported software development system. He highlighted LabVIEW support for a multitude of sensors, the ability to execute complex control algorithms and architecture that enables focus as characteristics that make LabVIEW well suited to robotics applications. We are seeing many robotics success stories as universities begin to realize the benefits of the NI robotics platform. For example, using LabVIEW and NI data acquisition hardware, the university of Belize is developing a safe and reliable rehabilitation system to aid people recovering from a stroke to regain arm mobility. The modular nature of LabVIEW was ideally suited in prototyping and developing the system.

Our industrial embedded products also had a strong quarter in Q3 with record quarterly revenue from our FPGA based CompaqRIO products, which continue to see success in prototyping applications as well as higher unit volume developments. The combination of LabVIEW and compact CompaqRIO helps engineers quickly try out and modify new designs using the graphical system design approach and achieve a faster time to market. One use case that demonstrated this benefit was at [Anamage], a start up company, where they quickly prototyped and deployed an embedded imaging system for small animal veterinary practices. According to Anamage, using LabVIEW and CompaqRIO products saved them about 3 man years in development time and $300,000 in labor costs compared to a custom designed approach.

There's optional wireless for monitoring applications is growing, yet engineers and scientists have struggled to find an integrated solution that can provide the required measurement quality, power management, and reliability hardware for long-term remote deployments. We are excited this quarter to release the NI wireless sensor network platform, which provides the ability to quickly and easily configure and deploy wireless sensors in a wide range of applications. Our data acquisition products saw sequential growth this quarter with help from our usb and c-series-based products. At NI week, we released 16 new data acquisition boards for the pci express and pxi express buses. These new boards leveraged the latest semi conductor technology and implement a new design to lower manufacturing costs, increase reliability and improve performance.

Another closely watched technology in our data acquisition business is the release of Windows 7. When Microsoft released windows Vista in 2006, it did not see the wide adoption of previous Windows updates, however with Windows XP starting to show its age and the economy affecting pc purchases, there appears to be pent up demand for improvements. Windows 7 promises increases in performance, security and data throughput which may entice engineers and scientists on older operating systems to make the switch. We have been testing and running Windows 7 for months prior to its recent release to ensure our products are supported, and we believe it will have a positive impact on our hardware and software business in 2010.

We also saw sequential growth in our pxi and modular instrumentation products. We were pleased this past quarter to announce a joint development project with TechTronics to release the industry's fastest pxi digitizer combining industry leading signal acquisition technology with National Instruments' expertise and modular instrumentation and software. While NI and TechTronics have collaborated on various projects for more than 20 years, this digitizer represents the first joint hardware development project between the two companies. At NI week, we also highlighted a significant semi conductor test success of analog devices, for one of their new high volume [mems] microphones. Adi chose to use LabVIEW and pxi at their test platform because of its low cost, small size and flexible configuration. According to ADI, their pxi-based system is less than one-tenth the cost, and it uses a fraction of the power and floor space compared to the previous traditional ATE solution. ADI intends to install more of these systems around the world as production demand grows and they project millions of dollars of savings of capital costs alone.

In summary, we are pleased with our ability to continue investing in new product R&D and expanding our field sales force throughout this recession. Or ni conference this year was a significant success with over 55 new products released, a new attendance record and customers coming together to share and learn how NI solutions are solving big challenges and delivering significant business results. We look forward to seeing these new products and our continued commitment to innovation drive future growth as the economy recovers.

With that, I'll turn it over to Dr. T.

Thank you, John. Although we're still operating in a difficult economic environment, I am pleased with how the Company continues to execute on our long-term strategy. It is a testament to the strength of our business model that throughout this downturn, we've been able to sustain profitability while continuing to invest in the strategic initiatives that keep us at the forefront of innovation. I believe this recession has created an opportunity for National Instruments as we've seen our competitors retrench, while we continue to innovate and invest. I believe that National Instruments is very well positioned to benefit from these dynamics and that our business management through this downturn allows us more fully leverage the economic recovery. I have described in the past how our commitment to innovation has allowed us to disrupt many of the traditional markets reserve and how we're redefining instrumentation with our graphical system design approach. We are helping our customers solve some of the world's most significant scientific or engineering challenges through our ability to leverage the latest technologies like multi-core processors and FPGAs.

The impact we're having on the challenges was seen at NI week during the graphical system design achievement awards. This year, we have more than 120 submissions from over 25 countries throughout the world. The applications submissions range from developing a system to teach premature infants how to feed, to developing a portable intelligent greenhouse to explosive detection system used at the airport checkpoints. The winning submission came from Ford using LabVIEW, pxi, CompaqRIO and our controlled defined products, they developed an electronic control unit for a fuel cell system that has the potential to provide a potentially greener option to convention internal combustion vehicles.

While we continue to invest in new innovative products, we've also taken advantage of market weakness to acquire key, new talent that has been traditionally been very hard to hire ensuring future innovation. As we continue to develop products that lower costs, reduce risks and shorten the design cycles, our loyal customer base is growing as more engineers understand the capabilities of our products and recognize our field sales force as trusted consultants. These deep customer relationships and our focus on enabling cost reduction have helped us uncover new opportunities that will continue to help us in the recovery.

In summary, I am pleased with our business management treated out through this recession, which has enabled us to continue executing on the long-term strategic vision. We have remained profitable even as we maintain our strategic investments and new product R&D and expanded our field sales force. I would like to again thank our employees for their commitment to innovation, prudent expense management and unwaivering focus on serving our customers. I believe our continued investment in innovation throughout this recession has further differentiated National Instruments from other players in the markets we serve and will provide a strong foundation to support future growth and profitability. We will now take your questions.

(Operator Instructions). We'll take our first question from the site of David Yuschak. Your line is now open.

Congratulations, guy on the quarter. The question I got for you, is there anything you've seen all of the macros been improving here quite a bit. Is there anything from your micropoint of view as you see orders coming in that kind of suggest that this is more of a sustained potential we've got for 2010 instead of just kind of an inventory blip, so to speak if you want to determine an inventory demand curve improvement here?

David, good question. It's Alec here. Really, our customers don't to a very large extent don't inventory our products. So with very few exceptions, it is a turns business for us and for them. I don't think we're seeing any real dynamic relation to the inventory of our products at our customer site. I don't think it has any impact on it at all.

I was really shooting for the idea that all this recovery seems to be just more people getting back to business on inventory and you getting inventory stacked.

I think there's two elements on that. If you look at the broader macro perspective, you know, industrial production globally in the first half of this year was down. Some around 20% year-over-year. When global GDP was down below 2%, so you have industrial production globally was massively underserving actual end of mat. I think you've got two things going on here. Probably in the broader industrial economy. You've got a stopping of reduction inventories and factories are moving up to just meet and demand. I think that's going to lead to, in my opinion, sustained year-over-year growth in industrial production at least probably through the first half of next year.

In terms of our business, we're seeing a change in the industry where people are shifting and look at opportunities to lower the costs. As we have always said when it comes to recessions, NI tends to gain market share at a more rapid rate during a recession despite the fact that it's painful. So we're looking forward to the goal we have trying to retain that market share and a recovery. And what we've seen so far in October and the opportunities, as I said, in the call that we see going forward gives us a fairly high degree of confidence that we're going to see a very strong sequential result in Q4. That's very encouraging for us. If we are at the midpoint or above in Q4, we'll have recovered a revenue drop from our previous record. That's certainly a very encouraging sign if we're able to deliver on that.

As far as we're hearing, how Asia and the far east has been the real driver of this recovery. Are you seeing and taking maybe as you look at the next 12 months that international may become more important than particularly the far east as far as revenue mix is concerned.

Sure. Asia has been an important growing part of our business. We've had very good execution from our management and overall sales team in Asia over time. One of the issues I think in this current quarter we're seeing Asia outperform the rest of the business. Excuse me in Q3. Partially because Asia really got hit with the downturn quarter around the western world. So we saw Asia start to see the significant reduction in the rate of revenue growth in Q3 of last year while the Americas and western Europe continue to have strong growth in the third quarter last year. So I do think Asia's likely to lead it as we come into the recovery as well.

Okay. Thanks. I'll check back in the queue.

Thanks, David.

We'll move next to the site of Mark Douglass. Your line is now open.

Good afternoon.

Hi, Mark. How are you?

Fine, how are you?

Excellent.

Good outlook. Can you go into a little bit of where the sequential strength is coming from? Any markets in particular or is it pretty broad based?

Yes, Mark, this is John. Talk about the kind of the vertical industries. In Q3, area where's we saw strong growth again, we mentioned on the call or sales of academic institutions continued to be strong as we're seeing the last few quarters. We also saw strong relative growth in biomedical energy and electronics. A couple areas mentioned was actually in semi conductor and communications, which that kind of intuitively makes sense in terms of the dynamics in the macro world. On the flip side where we saw some weakness year-over-year, included automotive industry and instruments in ATE as well as sales in the computing and process industries. So again, the diversity across all those industries has been one of the key strengths for National Instruments over the long term. I think you saw that kind of plan out once again in Q3.

Okay. Thanks. Can you break down the sales of large versus small in the quarter?

Yes. They both did about the same terms of about the sequential so ride a line about this 8% that Alec mentioned that we saw sequentially, the breakdown between the large orders being over $20,000 still about the same as last quarter were in that 35% to 40% range.

You have the slide on the webcast, Mark. You can see the data there directly.

Oh, okay. Great. Then, what are your expectations for fourth quarter on gross margins, operating margins? Obviously, you're expecting big uptick. I'm looking at something like 18% nonGAAP operating margins. Is that about right? That giving you a feel for where you're going gross margins, operating margins?

Obviously, the net margin depends on where we are in that revenue curve. I'd rather not get specific. In terms of gross margin, I feel pleased about the execution across the whole Company in terms of maintaining gross margin this year. We also had a 1% uptick between Q2 and Q3 as we see production ramp back up again in our own facilities in Q4. We would expect to see a sequential uptick in gross margin in the fourth quarter, but the whole Company has delivered very, very well on ensuring we maintain from obviously designing innovative products, a very effective sales and marketing force that can sell our differentiation and back end through manufacturing and the rest of the operation and be sure we drive the lowest possible cost. And I think we did an excellent job in this downturn of ensuring we get the best possible pricing. And we hope to see that give us sustained benefit as we go into 2010.

Now we'll move next to the site of Richard Eastman. Your line is now open.

Could you just comment on Europe? Asia may be turned down first. People feel that Europe turned down last. I mean, how does your local currency decline a 20% there feel relative to the fourth quarter?

Well, you know when we look at what we delivered in this particular quarter, obviously, Asia was the best performance in terms of local currency growth. In Europe, we were minus 20%. And in the Americas, roughly minus 22%. So we see, kind of the western world moving somewhat in concert. Asia obviously saw the downturn early and their probably furthest out in terms of the supply chain. So it makes sense to me that they would see the empire earliest. For now, we see Europe and the US moving in a local currency point of view moving at similar rates. From a US dollar point of view, Europe's results appear a lot worse. Obviously, we've had a lot of movement in the dollar over the course of the last twelve months with the crisis. The dollar, I guess Euro is largely back to where it was roughly a year ago. That's local currency negative for Europe is probably not going to be effective for the fourth quarter. Then I think the true performance of the US and the Americas versus Europe will come into focus in Q4.

Okay. Then just as a follow-up question. When I look at the revenue guidance and I try to basically what you're saying, the 190, the 200 for the fourth quarter, trying to support that, your backlog was up, $5 million at the end of the quarter, which is obviously doesn't really is support a growth rate like that. Also the comment, I think both you and John made the comment about did not see the typical surge in orders but did see an improvement in orders. What I'm trying to -- are you making any adjustments on price given the weaker dollar? Is this anything in your guidance from price?

No. It's Alec here. That's no impact for the weaker dollar. What I would look, we look, as we look into this quarter. We saw, we are coming off sequential changes, you know, from April, May, June, July, August, September. September was a strong month for us. We did see, relative to the December quarter of last year the March quarter of this year, large order closeout rate was much better. The pushouts were a lot less significant. Then as we look at opportunities and we look at our order flow-through yesterday and the opportunities that are on the table for our sales force at the moment, those are the key drivers of our expectations on guidance. So it's not a backlog-driven optimism for Q4.

Now we'll move next to the site of Ajit Pai.

How are you doing?

Good.

Just managing your inventory and managing your production. Your built backlog again for the second time in a quarter. Has this backlog built more by design or is it just that the orders were so strong towards the that you couldn't ship them out in time?

It's been design.

Right. So then from this point on, start to maintaining a higher backlog primarily to manage the production or what's the purpose?

Well, I mean, the purpose is it certainly did help to be able to maintain a slightly higher backlog, certainly is an improvement in our efficiency. That certainly is one of the key reasons.

Got it. Just looking at the head count. You talked about R&D being the primary area and investment even today. Just given manufacturing it appears that that's not going to be an area where I need to be hiding for quite a while. The reminder is about Malaysia. At what point do you think what you see right now are likely to start coming online. Like a couple of years down the road or farther out?

Good question. Obviously, we added about 50 people to our R&D and field sales count this quarter. I know it would seem aggressive and certainly will probably be relatively unique in the industry that we've continued to persistent long-term focus, but as Dr. Truchard mentioned, it's really outstanding and we want to make certain that we take advantage of that to change the rules of the game going forward to help us open us new markets and fuel our future growth. In terms of manufacturing in particular and the expansion to third production site in Malaysia, our current expectation is we will now initiate production in the latter half of 2012. A roughly two-year delay from our original plan.

And now we'll move next to the site of Anthony [Lusgree]. Your line is now open.

Hi, good afternoon. You gave detail around the end markets in third quarter. It's more curious about the guidance for fourth quarter in terms of strengths, weaknesses, what you're looking for in terms of this big sequential revenue growth.

Anthony, this is John. It's really tough for to us do that. As we mentioned, the diversity on an annual basis selling to 30,000 different companies, across all these vertical industries. So it's one of the strengths of our business model but to kind of project that out is tough. What we can look at is opportunities driven by our product platform and, as you heard us talk about at NI week, we continue really good about the R&D investments we made and new product opportunities and rf communications as well as new opportunities in industrial embedded applications. So those are areas we've been investing and continue to feel we have some strong opportunities in the future.

Okay. Maybe I could ask the question differently. If we could talk about the platform in terms of the fourth quarter sequential growth in terms of instrument control versus embedded industrial versus maybe the rest. Revenue guidance that you provided?

Again, I think we want to be careful in giving explicit guidance on products. We don't do that. I think to the commentary and Alec kind of touched on this instrument control after seeing some very severe sequential declines earlier this year, saw a very strong sequential uptick. We do think that is a sign of some recovery in the traditional test and measurement industry so that can expect that to kind of continue into Q4. Meanwhile, the broad base of our products virtual instrumentation and graphical system design, we started in Q2. We are seeing a sequential uptick. That's where we're investing in new products. That's the area where the investment field sales is going to pay off. So those are the areas where we look to control our own destiny and pursue opportunities and find opportunities.

The trend we saw currently in Q3, what's giving us the guidance we're giving here in Q4 is very similar to the pattern that we saw a very strong sequential revenue growth coming out of the last rea session in Q3 and Q4 of 2003 once the initial invasion of Iraq was over and confidence in business seemed to recover. We saw, an outsize relative to the average sequential growth in Q3 of that year and then into Q4, we saw very, very strong sequential growth. The pattern we have seen we're guiding to at this point in time is similar to second half of '03.

(Operator Instructions). Our next question will come from the site of David Yuschak. Your line is now open.

As far as -- seemed to be you guys, we've talked on other conference calls. You've had a lot of pipeline activity out there. Now that stuff kind of went away or canceled, but this was always this high level of interest. Is that kind of what we're seeing now? That high level of interest is starting to come back?

David, you're right. We've mentioned, you go back to the start of this downturn, Q4 of last year, Q1. We talked about seeing especially on the large orders, some of this business being pushed out. Now for the last two quarters, we haven't seen the full return in that kind of end of quarter surge. We have seen it partially return. Of course, we're very optimistic about that. We don't get feedback from customers that projects are canceled. So our sales force continues to feel good about the opportunities as you guys know, we talk about this a lot. We have an opportunity management system that the field sales up through management can use to kind of gauge the health of that the pipeline and we continue to feel really good about the opportunities that we are identifying and working. So that gives us some of the optimism that carries into not only the Q4 guidance. I think some of the optimism you heard us talk about in 2010. When you look at the investments we've made David, if you look at two year ago from September '07 to September '09, we've increased our field sales headcount by 40%. We're in a much, much better position today than we were two years ago. To take advantage and to work at a much more intimate level with our customers. Certainly we would expect to get a return on our investment which we're starting to see now in gaining market share, and we hoped that that plays out as we go into the recovery.

On the R&D spend in the quarter, sequentially up about $5 million or $6 million or so. Anything in there that is --

That's directly related to software capitalization. In Q2, we had a very large software capitalization tied to the release of LabVIEW 2009. As that product gets released and the number goes down, expense goes up very similar sequential change that we saw in Q3 of last year.

And we'll move next to the site of Mark -- excuse me, we'll move next to the site of [Anthony Lusgree].

Thanks for the follow up. I just wanted to ask about academic percentage of revenues during the quarter. They were greater than 10%?

I don't have that in front of me, but I would assume it's probably on the same par as the last couple quarters. So in that 10% to 15% range.

Obviously, academic is very important for us as we see more and more engineers train with our products and then going into industry and using the products in their new jobs.

And do you think that that's any stimulus impact through the academic strength that you're seeing recently?

It's kind of two sides. We were just talking about earlier. On one side, we are seeing some evidence of stimulus funding. On the other's the state budget that typically funding these universities are being hit pretty hard so on balance and we are hoping it all breaks even.

We're hoping perhaps see more of that in the future than so far. It hasn't been overwhelming by any stretch.

Right.

Is there any better margins there? Any insight would be great? I'd appreciate it.

We don't break out gross margin by end market. We view the academic business not only as a strategic business but also as a profitable business.

Thank you.

And now we'll move next to the site of Mark Douglass. Your line is now open.

Thanks for follow-up. The litigation accrual reduction, I assume that's a one-time event at this point?

Yes.

Okay. What's the after-tax effect of that?

Rounds up to $0.02 a share. It's a little bit less than two.

Less than two, okay. Alec, you referenced the sequential uptick you saw in 4Q '03 in the last downturn. What are you thinking in the first quarter 2010. You think it'll return to typical kind of seasonality? Because back then, there was actually a sequential uptick, I believe.

Not really in a position to give guidance at this point for Q1 or Q2. As we look at the business, we're very pleased and this assumes we hit Q4 guidance. If we're in the midpoint or above on Q4, we will be varied at that point in time in terms of the rate of recovery of our business. I think that would indicate strongly to value customer's place on our Solutions. We know we're getting into application areas that we weren't in the past. So if we see a good recovery year-over-year in industrial production. That would be cause for optimism into the first half. It's too early at this stage to comment specific I had on revenue for Q4. I will say as we talked on the call, we feel like the time frame for returning to record revenue is a lot sooner than we would have imagined six months ago.

And our next question will come from the site of David Yuschak. Your line is now open.

On the tax rate for the fourth quarter, I was offline when you commented about it. Do you expect it to be to true it up for the whole year?

We guessed it's about 30% nonGAAP effective tax rate for Q4, David. That's obviously much higher for the whole year. That's coming down the profit for the year now is expected to be a lot higher than we had anticipated back in June and July. So that significant increase for profits in the second half pushes a lot into the third and fourth quarters. That obviously is something that is having a negative effect on the guidance we're giving. So that is factored into our guidance and hasn't had an effect obviously of bringing guidance down a little bit from what it otherwise would be. The other impact from a GAAP point of view is we'll have an impact on the reconciliation from GAAP and nonGAAP. The difference between those two numbers, expectation in Q4 is about $0.08 per share, which is much higher than normal. As we revert to Q1, we're anticipating for a rate for nonGAAP purposes between 18 and 22. Then we anticipate the differential between GAAP and nonGAAP earnings will drop back to a more normal $0.06 . It's all detailed in the press release, by the way if anybody on the line has questions. They can read the specifics in the press

We'll go next to the sign of Ajit Pai. Your line is now open.

Can you give us some color as to the Internet channel, whether that's been growing, whether that's been sort of more mature and isn't growing any more or growing much more rapidly?

We continue to see success with the web channel. Especially for the broad based and transactional smaller orders. Just a very efficient means to reach, thousands and thousands of engineers and scientists. So that as a channel performs better than our overall results. The efficiency we get by leveraging that is then part of what lets us turn around and make this investment in the field sales force, the 12% growth this past year and 40% over the last two years that Alec mentioned.

Your expectation is that should continue to grow faster than the overall company or is that coming close to sort of large numbers or high percentage that you're not going to see that grow much faster?

There continues to be opportunities. There's a lot of variety and different trends by geography. The adoption rate of the web obviously varies around the world and even specificly for e-commerce. So, here I'll give you one highlight just this past summer we turned on credit card order in Europe for the first time. That just provides some new efficiencies for that channel. Again, it helps us be more efficient in our sales efforts in Europe.

Most of our customers now are using the web to evaluate our products and look at applications and examples and the various communities. So it's serving a very important role for creating efficiency in our marketing process. And then of course we get to direct orders on the web.

And it appears that we have no further questions at this time. I'd like to turn the call back over to David Hugley for any closing remarks.

John?

Thank you for joining us. We look forward to seeing you at upcoming conferences. Thank you for your time.

This does conclude today's teleconference. You may disconnect at any time. Thank you for your participation and have a great day.