National Instruments Corp (NATI) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the National Instruments first quarter 2010 earnings conference call. (Operator Instructions). You may refer to your press package for the replay dial-in number and pass code.

With us today are David Hugley, General Counsel; Alex Davern, CFO; Dr. James Truchard, President, CEO, and Co-Founder; and John Graff, Vice President, Marketing and Investor Relations. For opening remarks and introductions, I would now like to turn the call over to Mr. David Hugley. 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 future revenue growth, gross margins, a strong economic recovery, future operating leverage, new products, and our revenue and earnings per share guidance.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents the Company files regularly with the Securities and Exchange Commission including the Company's most recent quarterly report on Form 10-K, filed February 17, 2010. 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 Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Thank you, David. Good afternoon, and thank you for joining us. Our key points today are record first quarter orders with 25% year-over-year growth; strong growth of large orders; and gross margins at the highest level since the IPO in 1995.

This time last year, we were experiencing one of the most challenging financial periods in the Company history. I am pleased that 2010 began with an all-time record for orders in the first quarter, and I believe this is a validation of the strength of our business model.

Throughout the downturn, we've strayed true to our long-term vision in that we were able to sustain profitability while continuing to invest in strategic initiatives that keep us at the forefront of innovation. I continue to be very optimistic about our position in the industry, and I believe these investments will allow us to take further advantage of the recovery as we continue through 2010.

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

Good afternoon. Today we reported Q1 revenue of $191 million, which is an increase of 21% year over year and a 5% sequential decrease from Q4. As discussed in our press release, the sequential decrease in revenue was exaggerated by a shipping error on March 31st which resulted in $5 million of shipments not meeting the cutoff time for revenue recognition in Q1.

The error occurred because certain product shipments which were processed throughout the day on March 31st were not transferred to the Company's freight carriers until two hours after the Company's revenue recognition cutoff time due to a delay in completion of export documents. As a result, these shipments were not recorded as revenue on Q1 -- in Q1 financial results.

This is an embarrassing error, and we are taking steps to ensure it's not repeated. The related revenue and profit will be recorded in Q2.

Despite this timing issue, Q1 was a good quarter with orders up 25% year over year, in line with the mid-point of our revenue guidance range for Q1 and up 1.5% over Q1 2008. So while we did not have a first-quarter record for revenue in Q1, we did have a first-quarter record for orders.

Net income for Q1 was $18.4 million with GAAP fully diluted earnings per share of $0.23, matching a first-quarter record the Company set in Q1 of 2007. Non-GAAP net income was $22 million, with non-GAAP fully diluted earnings per share of $0.28, matching a first-quarter record the Company set in Q1 of 2008.

The approximate impact of the March 31st shipping error on our reported earnings per share was approximately $0.05 per share. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Our business built momentum in Q1, and there are some clear positives to take away. First, we had record orders for our first quarter, with 25% year-over-year growth. Second, we continued to drive strong gross margins. And third, we generated $42 million in cash flow from operations, a new first quarter record.

From an orders point of view, our instrument control business saw a 50% year-over-year increase in Q1, while orders from our Virtual Instrumentation and Graphical System Design products grew 24% year over year. After the very significant declines we saw in instrument control during the recession, instrument control orders made a strong recovery and in Q1 were down only 15% over the two years since Q1 of 2008.

Traditionally, our in-store control revenues have been highly correlated to the overall test and measurement industry, and the current trends indicate that the industry continued its strong recovery in Q1. Orders for our Virtual Instrumentation and Graphical System Design products continued their growth and are now back over Q1 2008 levels.

During Q1, year-over-year order growth in U.S. dollars was 22% in Europe, 33% in Asia, and 22% in the Americas.

Now looking at the income statement in more detail, non-GAAP gross margin in Q1 was 77.9% compared to 74.8% in Q1 2009. Our ability to increase our gross margins year over year is a tribute to the intense efforts made to improve our operating model during the recession.

Total headcount was 5,121 as of March 31st, down 1.4% year over year.

On the expense side, our non-GAAP operating expenses were up by $10 million sequentially and by 8% year over year. The main drivers of the sequential increase were the reversal of the temporary cost-saving measures adopted during the recession such as the salary reinstatement and the increase in variable pay and commissions.

However, this has been a rapidly changing environment, and our operating expenses were approximately $2 million higher than we had expected when we gave guidance due to medical benefits and some other costs we had not anticipated. Apart from the shipping issue, this was the main deviation from the mid-point of our guidance.

We are expecting a modest increase in spending in Q2, as we'll have a full quarter of the salary reinstatement, and we will see higher variable pay as a result of the higher year-over-year growth rate expected in Q2.

Some additional items of note in Q1 were that deferred revenue increased by $4 million during the quarter, twice the expectation, due to a strong software mix. And we had a $1 million credit to patent legal expenses offset by a $700,000 foreign exchange loss.

Now turning to the balance sheet, as of March 31, the Company had $296 million of cash and short-term investments of $7 million from December 31st. Cash flow from operations continued to be very strong at $42 million, a new Q1 record. During the quarter, the Company paid $10 million in dividends and used $31 million to repurchase 1,014,000 shares of NI's common stock at an average price of $30.50 a share.

We also announced today that the Board of Directors approved a quality dividend of $0.13 per share payable on June 1st to shareholders of record May 10th.

Now I would like to make some forward-looking statements. The trends of the global PMI continued to be more positive in Q1, averaging 56 for the quarter. Given that the global PMI averaged only 46.6 for the last six quarters, and with industrial capacity utilization still at very low levels, there will have to be sustained strength in the global PMI if global GDP is to recover to 2008 levels.

The Company has seen very strong year-over-year order growth so far this quarter with April on track to approximately match April 2008. If order growth remains strong, then given the rapid resurgence in large orders and their historical concentration towards the end of the quarter, NI will likely see backlog rise in coming quarters, and this would adversely effect NI's revenue pattern in Q2 and Q3.

Our Q2 guidance anticipates strong year-over-year revenue growth, strong gross margins, and strong operating margins. We are planning our investments both to take further advantage of the recovery and to deliver strong profitability as the global economy moderates after the initial recovery.

As we laid out at our investor conference in August, our intent is to continue to drive operating leverage until NI's annual revenues recover to the record level seen for 2008, and as a result we will be cautious about adding fixed costs in 2010. However, we are seeing good opportunities to continue to expand investments focused on large system orders, and we will be selectively committing dollars to these opportunities.

Now turning to specific guidance for Q2, we currently expect revenue for Q2 to be up significantly year over year and to be in the range of $200 million to $214 million. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.28 to $0.38 for Q2, with non-GAAP fully diluted earnings per share expected to be in the range of $0.33 to $0.43.

As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further fluctuations in the global economy, disruptions of European logistics, rescheduling of customer orders, expense overruns, effective tax rates, and foreign exchange fluctuations.

In summary, we are very pleased with the strength of our business in Q1 despite the continued weakness in industrial capacity utilization. Our goals are to maintain these gains and to focus on delivering significant operating leverage through this recovery.

I also wanted to mention that John will be at the Credit Suisse Electronics Supply Chain conference May 13th in Boston, and I will be at the Baird Growth Conference May 19th in Chicago. We hope to see you there.

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

Thank you, Alex. We were pleased to strong year-over-year order growth in Q1, and also to that orders in many areas of our business approached or even exceeded 2008 levels. In Q1, orders in the key investment areas of CompactRIO and RF modular instrumentation were not only up year over year, but were up 60% and 37%, respectively, over their 2008 order levels. This validates the investments we have made and demonstrates the large opportunity we continue to see in these areas.

Our continued investment in strategic R&D initiatives and expansion of our field salesforce to grow our larger system level orders have resulted in a Q1 average order size of approximately $3,600; setting a new record for a first quarter.

Our large orders business experienced a strong resurgence in Q1, with orders over $20,000 experiencing 40% year-over-year growth.

Software products and services had strong year-over-year order growth in Q1. Growth was driven primarily by volume license agreements and by our Developer Suite products, a subscription program that combines NI software and support services for our customers.

One closely watched technology within our software business is Windows 7. Interest in Windows 7 continues to grow, especially compared to what we saw with Windows Vista. We have worked with Microsoft on several marketing initiatives, since they see NI as a Company that is well-positioned to help them reach engineers and scientists. And we have seen a strong response from customers considering using Windows 7 in new systems as they look to NI as a thought leader in how the technology will affect them.

One customer who saw significant benefits using NI software to drive efficiency was Siemens Wind Power. Siemens is using the NI Graphical System Design approach to test their wind turbine control systems in both the development and deployment phases. Using NI's software and hardware, they were able to create a control system that is both flexible and scalable, allowing them to meet the growing requirements of rapidly evolving wind energy technology.

One of our large growth areas over the past few years has been in sales to academic institutions, and Q1 was no exception with another quarter of significant year-over-year growth in this area. Academic institutions continue to be a strategic focus area for NI, as they provide a stable and profitable revenue stream across our business.

Longer term, we believe that teaching science and engineering students how to make measurements and design control systems using LabVIEW and NI hardware will help drive future growth as these students graduate and enter industry.

The University of Ghent in Belgium is one recent example of an institution that adopted the NI Educational Laboratory and Virtual Instrumentation Suite, or NI ELVIS for short, used in one of their lab courses. The platform, which provides a basic electrical engineering instrument lab suite in a compact and portable form factor and has not only enabled the department to more quickly develop new exercises and experiments, but also provides a better real-world experience for the students.

Our low-cost transactional data acquisition products experienced strong year-over-year order growth, led by our USB, wireless, ethernet, and C Series-based devices. We also saw strong growth from our plug-in, PCI Express and PXI Express data acquisition boards, which we released at NI Week last August.

We also announced a new, low-cost USB device to simplify temperature measurements. This new device lowers the barrier of entry to use NI hardware and software while delivering a quick and easy plug and play setup that enables customers to take temperature measurements within minutes of unpacking the device.

Our distributed I/O products also saw large year-over-year order growth, achieving their second highest all-time quarterly orders. CompactRio continues to see success in industries like energy, oil and gas, biomedical, and automotive and transportation. The combination of LabVIEW and CompactRio allows engineers to quickly prototype new designs and achieve a faster time to market.

One biomedical customer who realized the value of the CompactRIO platform was Dynatek dalta, a company that manufactures instruments to test implantable cardiovascular products for products, including stents, artificial hearts, and a variety of other devices. Each of their eight cardiovascular testing machines previously had its own unique control interface based on a variety of different hardware and software platforms, which led to higher costs and lower efficiency.

Using NI's single board RIO, they developed a single hardware platform for controlling all of their instruments, achieving a 73% reduction in size and a 40% reduction in costs.

In the area of clean-tech, or green engineering as we call it, a small company called Wavebob Limited is using LabVIEW and CompactRIO for prototyping an energy converter for wave farms, which harness the continuous energy created by waves. The company needed to develop a control and data acquisition system for a wave energy converter to efficiently extract power in varying sea conditions. They chose the NI platform because of the rapid prototyping capabilities of NI software, which tightly coupled with our compact, rugged, and modular hardware.

Our PXI and modular instrument products also experienced significant year-over-year order growth for the quarter. Within NI modular instrumentation and the PXI platform, customers can create software defined test systems with increased throughput and flexibility.

As a great example of the flexibility of NI's software-based approach to test, in response to the volcano eruption that disrupted air travel last week, a German aerospace research center used a PXI and LabVIEW-based system onboard a survey aircraft that control a laser scanner, acquire measurement data on the extent of volcanic aerosol layers, and visualize the data in real time during the flight.

Also within our modular instrumentation products, RF and communications continue to be a key investment area. This quarter, we expanded this product offering with RF products for multiple input, multiple output -- more commonly known as MIMO -- applications. These new products are ideal for prototyping and testing MIMO wireless devices such as those built for WiMax, LTE, wireless LAN and other next-generation wireless communications standards, while performing the same tests up to ten times faster than traditional RF instrumentation.

One recent example where a customer achieved significant benefits using LabVIEW and NI RF modular instrumentation was at Red Wolf Technology, where they developed a compliance solution to ensure that new, wireless devices do not interfere with licensed radar bans. While certification labs must often put together a bulky, non-automated system to perform these tests for a host of wireless -- different wireless devices, Red Wolf was able to use NI hardware and software to create a fully integrated solution that delivers higher testing efficiency, lower total test time, and sophisticated reporting to ensure compliance while achieving a very cost-effective price point compared to alternative solutions.

In summary, we were pleased to see strong year-over-year order growth and a quick return to 2008 order levels throughout many areas of the business. Our ability to continue investing in new product R&D and expanding our field salesforce throughout the recession speaks to the strength of our business model, and we look forward to seeing these strategic investments and our continued commitment to innovation pay off and drive future growth through the economic recovery. With that, I'll turn it over to Dr.T.

Thank you, John. I am very pleased with the start of our 2010 and our strengthened position in the industry. Throughout the recession, we continued to execute on our long-term strategy, innovating in strategic investment areas, acquiring key talent, and strengthening customer relationships. And I believe this commitment has positioned us well to take further advantage of the recovery and to deliver strong profitability as the global economy moderates after initial recovery.

Our investments in new product R&D are delivering significant benefits to our customers as we help them lower costs, reduce risk, and shorten design cycles. One exciting area that National Instruments is helping customers solve from the world's most significant scientific and engineering challenges is in the area of energy technology, which is expected to be a multi-trillion dollar market that impacts billions of people around the world.

Entrepreneurial engineers and scientists around the world are capitalizing on private and government funding that promises to transform buildings, vehicles, and energy grids to cleaner, smarter, and more sustainable technologies. National Instruments is providing cutting edge tools for tests, control, and monitoring that are giving innovative companies a competitive edge in delivering their ideas to market.

You heard from John about a couple of our customers who are driving innovation in the exciting area of green energy. Additionally, thousands of engineers around the world are addressing a number of today's most pressing issues and making a positive impact on our global ecosystem using NI products. Another exciting area where NI is helping make an impact on the future of engineering and science was clearly seen two weeks ago at the FIRST Robotics Championship in Atlanta, where tens of thousands of students, coaches, 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 navigate a course and complete a series of challenges. The team had six weeks to design, prototype and deploy a robot, requiring them to quickly learn and develop advanced sensor measurement and motion control systems in addition to single processing algorithms for autonomous control.

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 a strong base for our future, and believe that doing so will provide a foundation for long-term success.

In summary, despite the shipping challenge that we experienced at the end of the quarter, I am very pleased with our performance for the start of 2010, as we achieved record orders for first quarter. We executed on our long-term strategic vision throughout the recession, and we remain dedicated to delivering highly differentiated new products to drive growth into new application areas where deepening customer relationships and loyalty through our field salesforce. I believe that the investments we made during this time are now starting to reap benefits, and I believe success will only grow as the recovery continues.

We will now take your questions.

Thank you. (Operator Instructions). Our first question will come from Anthony Luscri from JPMorgan.

Hi, good afternoon. Thanks for taking the call.

Hey, Anthony, how are you?

I'm well. I was wondering if you could add a little color to your commentary regarding large order sizes and backlog increasing, therefore impacting revenue adversely in 2Q and 3Q. Are you seeing any sort of manufacturing or supply capacity issues that are driving this commentary?

Anthony, it's a good question. I mean, a number of things going on here. Obviously, we had a shipping issue at the end of Q1, which was unfortunate. That will obviously turn into revenue here coming into Q2, which obviously from a shipping point of view we had a record billing day on the 1st of April.

But looking out to the end of the quarter, we have seen, as John mentioned and I said earlier on, a significant resurgence in large orders over $20,000. I think one of the Company slides on the webcast will show you that growth rate at year over year 40%, and up to 40% of our revenue. They also traditionally do happen to have a bit of a higher concentration towards the end of the quarter.

And the combination of that resurgence and the timing can be somewhat problematic from a shipping point of view and can create some operational inefficiencies. So as we look out to the end of this quarter, if we see bookings continue at the rate that we've seen certainly in April, then we expect to see backlog increase at the end of the quarter.

Where is the pinch point in your manufacturing cycle? Is it utilization?

It's really a timing issue in terms of the receipt of large orders and trying to get those turned around by the end of the quarter. So it's more of a timing issue than anything else. And by having backlog increase at the end of the quarter, that will give us a little bit more operational efficiency and the ability to manage this as we go through future quarters.

Okay. Thanks very much.

We'll take our next question from Mark Douglass with Longbow Research.

Hi, good afternoon, gentlemen.

Hey, Mark.

So if we can talk about that some more. Was the shipping issue in 1Q because of unexpected large orders at the end, and it just -- you weren't ready to get the international papers set up?

It was totally human error. It basically constitutes our entire Americas shipments for the 31st of March. Everything that we boxed and packaged and shipped on the system for the whole day, and we unfortunately had a supervisor who went out very ill towards the end of the day, or the end of the evening, and that caused just a failure to get something done on time. And it's just a complete unintentional human error.

It was caught and then processed right after midnight on April -- or I guess early morning April 1. So it's just pure -- one of those things that happened; human error as a result of an illness of a shipping supervisor.

Okay.

Kind of a one-off thing. Obviously we'll be putting in place a backup to ensure that we don't have that situation again.

Right.

But it's just one of those things.

Right. Okay. We can talk about the operating expenses. We -- you anticipated and we anticipated that they would go up sequentially as you returned -- the salaries are made whole, et cetera. You said there was about $2 million higher of medical and other expenses?

Yes, as we said on the call, we've had about a $10 million sequential in operating expenses from Q4 to Q1. As you just said, a lot of that was restoring compensation.

But it's been a pretty dynamic recovery. Our business is up one-third from where we were just a couple of quarters ago. And so there's been some increase in expenses here in Q1 that we didn't anticipate.

One area was medical, which was over $1 million dollars of the total. We're self-insured and had a significant increase in large claims in the first quarter. So, just an actuarial thing.

And then we've seen the need and the opportunity to invest in certain opportunity-based initiatives that we decided to push forward on. And as a result, net-net we're $2 million over what I'd anticipated operating expenses would be back in January.

Now as we look into Q2, we are expecting a sequential increase in operating expenses in the second quarter. At this point, it would be primarily driven by a full quarter of reinstatements, because we reinstated salaries February 1st. So we had two months of that in Q1, and we'll have three months of that in Q2.

And with the mid-point of revenue guidance being around 36% year over year revenue growth in Q2, we will see an increase in our variable compensation for all employees across the world in the second quarter, which is tied to the year-over-year revenue growth rate.

Okay. That's helpful. I was going to ask about 2Q. And then the gross margins -- congratulations on those. On the software maintenance, I mean, those jumped quite a bit. And any explanation as to -- just a lot better absorption? I mean, they seemed to actually track down even though sales went up.

Yes. We're real pleased with the gross margin initiative. We've been really pushing hard from a manufacturing and R&D point of view, as well as for sales and marketing, to drive the value and sell the value of our products to our customers, to drive our software sales and our software maintenance revenues and also to drive down our costs.

And one of the goals we wanted to take out of this recession was to structurally improve our gross margin position. And we launched that initiative in the fall of 2008, and have been very successful in really driving costs down from a component point of view, ensuring that we're doing a much, much better job on designing [floor] costs, engineering costs out of some of our products, as well as leveraging our cost opportunity of our Hungarian facility.

Those strong benefits have been building over the course of '09. And as volume has recovered, they've allowed us to let that gross margin shine through.

As we look out to Q2 of '10, as large orders grow rapidly -- or have grown rapidly through today -- we may see a little bit more increase in discounts as large orders becomes a bigger percentage of revenue. So we may see some modest movement on the gross margin sequentially in Q2, but I don't expect any significant movement.

On the maintenance side, we did have a big increase in deferred revenue in Q1 -- $4 million which represents almost $0.04 a share if it had gone into revenue. In Q1 last year, deferred revenue actually went down. So we're now rebuilding that deferred revenue pool that we had been building through '07 and through '08 that had flattened out, if you like, during the recession. And that provides a pool of revenue that we will be able to recognize going forward into future quarters.

Okay. And then the average --

We probably should let someone else come into the queue.

Okay.

Maybe you can circle back around.

Okay. Will do.

Thanks very much.

Thank you. We'll take our next question from Rob Mason with Baird.

Yes. Alex, I think we've heard from a number of companies so far this reporting season that business momentum built through the quarter and finished probably on a high note. And it sound like that was the case at National Instruments as well, just given your commentary around April's strength. Is that fair?

We haven't broken out Q1 at this point, Rob. But certainly we had obviously a lot of momentum in large orders in the first quarter, as we talked about, and definitely April has started very strong.

Now from a year-over-year point of view, obviously we had easier compares in April, so I don't want to mislead too much. But Q2 of 2008 was a very strong quarter for the Company. We grew 16% -- or 17% year over year in the second quarter of '08.

So, on a two-year basis we have a tough compare in Q2, and I'm very, very pleased to see our bookings through yesterday really track almost dead on to April of '08. That certainly is a very good start to Q2.

Well, maybe where I was going with that, just setting aside the shipment delay was there anything that stood out to you that set you back relative to the high end of your revenue guidance within the quarter?

Well, I mean, I can tell you when I was going to bed on the evening of March 31st, I was expecting that $5 million to show up. So that was a bit of a surprise to me when I came in the next day. So that was -- if you like, one of though random things that's not going to be repeated.

But we were focused on making sure we tried to hit the mid-point of our guidance, which was $0.34 a share. And really where we fell down on the issue that caused us to be shy of that by about $0.01 was on the expense side.

And as we're rapidly bringing the psychology of the Company from maybe a little bit of a bunker mentality this time last year towards a "make sure we're capturing our fair share of these large orders," we are seeing some costs creep back into the system. And I would say that relative to our goal of making sure we hit the mid-point of our earnings number, that's the issue that caught us in Q1.

Okay. But just trying to distinguish between the strength in large order, and obviously the year-over-year comparisons are big. But the underlying base transactional business, did that trend as you would have expected during the quarter?

That trended very well to me. John perhaps can weigh in a bit more detail on that. But certainly we saw good volume growth there also.

Yes, Rob, as you know, the business under 20K is made up of a large volume of orders that were processed on a daily rate. So we can look at the run rate on it right from the first few weeks of the quarter, and we were very pleased with how it performed all quarter.

And then like Alex said, we saw this end-of-quarter surge of large orders. We're really pleased to see that because that's what we were seeing back in 2008 when our business was growing strongly.

If you look at a two-year compare, the orders under 20,000 on a two-year basis are still about 6% short of Q1 2008, while the large orders are actually 13% above that level. So again, we think the investment in our new products, especially the platform like PXI and CompactRIO and RF, and the investment in our field sales is really paying off on those large orders.

Thank you.

(Operator Instructions). We'll take our next question to Ajit Pai from Thomas Weisel.

Yes, the question is just looking at the gross margins, very strong gross margins, and all the color you're providing, you're saying that these initiatives and enhancing your gross margins are going to continue. So can you update the model that you have now, the operating model, because your gross margin is running almost 200 basis points higher than what the previous model was targeting. And this is not even a fourth quarter, this is sort of the first quarter. So could you give us some color as to how that changes, whether you're altering your operating margin targets for the long run?

Sure, Ajit. And Operator, before I answer that, I think it's okay to let one follow-up question, as well. So we'll let Ajit take a follow-up question also.

So it is something we'll be giving some consideration to. It will be a good discussion point for us at the investor conference at NI Week in August. So I encourage people to come to that event or listen in on the web.

As we obviously have seen a dramatic recovery in revenue from the depths of Q2 of last year; a dramatic recovery in operating margin. And at the mid-point in our guidance for Q2 on a non-GAAP basis is pretty high relative to our long-term model and certainly high for a second quarter. We'll be giving that consideration, Ajit, on how we structure the Company going forward.

Our primary goal now is to make sure we drive as much operating leverage as possible in this timeframe while capturing these larger orders. And we will be continuing to focus on that 18% target that we had -- we have established for this long time.

Last NI Week, we also laid out our plan from the point of view of an investment of expenses relative to revenue, so we'll be looking forward to update that model in August this year. By that point in time, we'll have a pretty good idea of how the second half is going to play out, how the full year is going to look, and it gives us a good basis for setting kind of model-based expectations into next year.

Okay. And then the second question -- I mean, one housekeeping sort of item. And then the second question, which is your headcount at the end of the quarter. And then the second question is acquisitions. '05 you had three acquisitions, and after that things have slowed down. The environment is a fairly sluggish one for many areas. Your revenues are rebounding. Are there any opportunities you're looking at much more closely now or is that not really high up on the agenda?

So let me give you your data first (inaudible). Total headcount was 5,121 at the end of the quarter, down 1.4% year over year. On the acquisition front, you will probably notice if you look at the cash flow, we did do a small acquisition during Q1. It's a pretty strategic niche acquisition that we hope to leverage.

We have not disclosed the name or the terms of that acquisition. And we are continuing to look reasonably aggressively at a number of potential acquisitions. That continues to be a core part of our strategy to potentially deploy cash.

During the downturn, people really didn't want to sell. I think they thought pricing was very difficult to try to get some kind of alignment on terms. As we go through this recovery, I think that there will be more willingness on the part of sellers to look for an exit strategy, and we'll certainly be looking, either for whole companies or parts of companies, as acquisition targets for us.

Having said that, I would continue to reiterate the probability of a very large-scale acquisition is pretty low, just by nature of the size of those companies who are generally aligned with our strategy.

Got it. Thank you so much.

Thank you, Ajit.

(Operator Instructions).

Operator, if we have no more questions -- is that correct?

Actually, we do have a follow-up from Mark Douglass with Longbow Research.

I'll ask a follow-up.

Go ahead, Mark.

Okay. You repurchased some shares in the quarter. Just going forward, do you anticipate doing kind of more of the same, or is it more just to kind of offset dilution, or will you be a little more aggressive do you think?

Well, our fundamental strategy in cash management is number one for the last six or seven years, I guess, our number-one focus had been on dividends. And number two on opportunistic stock-based repurchases. And number three being around strategic acquisitions.

As we look forward, we'll be watching the debates in Congress pretty carefully on what happens on the whole tax code as we go forward. From a stock compensation point of view or stock repurchase point of view, we're going to stick with our strategy of opportunistic-based repurchases.

So we won't have a mechanical process. We'll be looking at the timeframes where perhaps the market perception diverges widely with management's view of the long-term value, and that will be more what informs our decisions.

Okay. And then just finally, what were the large and smaller order numbers in 1Q?

Mark, are you asking in terms of percent of the business?

Yes, percentage of business.

So the over 20K orders were approximately 38% of revenue in the quarter.

Okay.

And like we mentioned in the call, those grew at 40% year over year.

Right.

And then the under 20K is actually 62% of the business and came in at 20% growth.

Okay. Thank you.

Thanks very much, Mark. Any further follow-up questions, operator?

There are no further questions. I'll turn it back over to you for any additional or closing remarks.

Thank you, very much, for your time and attention. We hope to you either in Chicago with myself or in Boston with John. If not, at NI Week in Austin in August. Thank you.

Once again, ladies and gentlemen, this does conclude today's conference call. We thank you for your participation.