National Instruments Corp (NATI) 2011 Q1 法說會逐字稿

Good day everyone, welcome to the National Instruments first quarter 2011 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and passcode. With us today are, David Hugley, Vice President, General Counsel, and Secretary, Alex Davern, Chief Operating Officer, Dr. James Truchard, President, CEO, and co-Founder, and Eric Starkloff, Vice President of Product Marketing. For opening remarks, I would now like to turn the conference 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 shall make forward-looking statements regarding the future financial performance of the Company, including statements regarding future revenue expectations, our expected operating expenses, 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 Annual Report on Form 10-K filed February 18th 2011. 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 revenue for a first quarter, record profit for a first quarter, and we successfully have executed on our 2011 hiring plan. I am extremely pleased 2011 began with a record revenue for a first quarter. We believe that the fact that we have reached record Q1 operating profit for a first quarter is a validation of the strength of our business model, and our ability to execute. We continue to execute on our long-term vision, while significantly growing our investments in R&D and the field sales force.

I believe that our strategic investments in innovation and product development during 2011 are the key to our long-term future growth. And I continue to be optimistic about our position in the industry. In our call today, Alex Davern, our Chief Operating Officer, will review our results, Eric Starkloff, our Vice President of Product Marketing will discuss our business, and I will close with a few comments before we open for your questions. Alex.

Thank you. Good afternoon, today we are pleased to report that revenue was a new Q1 record at $238 million, up $47 million, or 24% year-over-year. NonGAAP gross margin in Q1 was up 60 basis points year-over-year, that is 78.5%. Our ability to significantly increase our gross margins is attributed to the success we have had in driving down component costs, improving our manufacturing efficiency, and to the high value and differentiation that we deliver to our customers. Operating income was an all-time first quarter record. GAAP operating income was $36.5 million an 87% increase over Q1 2010. NonGAAP operating income also set a new first quarter record at $42 million, up 67% over Q1 2010. and up 59% over the previous Q1 record, set in Q1 of 2007.

I would like to thank all of our employees for the hard work they have contributed to these very strong results. Net income for Q1 was $30.5 million with fully diluted earnings per share of $0.25, and nonGAAP net income was $33.9 million, with nonGAAP fully diluted earnings per share of $0.28. A reconciliation of our GAAP and nonGAAP results is included in our earnings press release.

Q1 was a very successful quarter, and there were some clear positives to take away. First, we had record revenue for a first quarter, with strong year-over-year growth in orders over $20,000, second, we had record gross margins, and third, we had record operating and net income for a first quarter. From a product point of view, revenues for our instrument control products were up 18% year-over-year in Q1, while revenues for our graphical system design products were up 25% year-over-year.

Now turning to the balance sheet. Inventory increased by $16.6 million during the quarter, as we prepared for potential growth later in the year, and reacted to the supply concerns raised by the recent tragedy in Japan. Cash flow from operating activities continued to be strong at $41.6 million for the quarter, and as of March 31st, the Company had $385 million of cash and short-term investments.

As we start out 2011, I would like to take a moment to reflect on our execution through the last five years. Despite the worst recession in modern history, National Instruments has delivered strong results during the five years since Q1 of 2006, increasing revenues by 54%, nonGAAP gross margin by 64%, and nonGAAP net income by 110%. We have also stayed true to our long-term strategy over the last five years, increasing our R&D personnel by over 50%, and our field sales force by 80%, and releasing hundreds of new products that have expanded our ability to serve customers in a diversity of new application areas.

Key to enabling this performance has been our expanded gross margins. Over the last five years, we have expanded our gross margins by approximately 500 basis points, allowing us to make the strategic investments necessary to sustain the long-term growth of the Company, while delivering great profit growth. As we discussed on our Q4 2010 earnings call, we plan to continue this investment strategy in 2011 and in Q1 we successfully executed on our hiring plans increasing our global headcount to 5,476. Up approximately 200 people, or 4% since December 31st.

Now I would like to make some forward-looking statements. While the trends of the global PMI continue to be positive in Q1, we have seen some reasons for concern develop in March and April. The terrible tragedy in Japan, the spike in oil prices, and the US Federal budget issues, all had an impact on global business conditions. The drop of the new order element of the global PMI from 59.5 in February to 55.1 in March, reflects these concerns. So while we are pleased to see year-over-year order growth of over 20% in April, we do see reasons for concern. We will be watching to see how the global business environment, and especially the automotive sector responds in Q2.

However encouraged by the scale of the long-term opportunity open to us, we are executing on our investment strategy, and expect a 17% increase in our global headcount during 2011. As a result of these investments and the recent weakness of the US dollar, we are anticipating a significant sequential increase in total operating expenses in Q2. There are risk factors associated with this plan, and should the global economy see more incremental weakness in coming quarters, then these investment will likely have an adverse impact on margins in the short-term, but we are confident they will significantly advance our long-term position in the industries we serve.

Now turning to specific guidance for Q2, we currently expect revenue for Q2 to be up year-over-year and to be in a range of $241 million to $255 million. We currently expect that GAAP fully diluted earnings per share, will be in the range of $0.19 to $0.27 for Q2, with nonGAAP fully diluted earnings per share expected to be in a range of $0.23 to $0.31. 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 weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates, supply chain disruptions, and foreign exchange fluctuations.

So we were very pleased with our record first quarter revenue and profit, our goals for 2011 remain, to invest aggressively in long-term growth, and to continue to drive towards our 18% nonGAAP operating income target. I also wanted to mention that I will be attending the Baird Growth Stock Conference in Chicago on May 11th, and the Jefferies Global Technology Conference in New York on May 12th, I hope to see you there.

Now I will turn it over to Eric Starkloff, Vice President of Product Marketing.

Thank you Alex. We were extremely pleased to see a new Q1 revenue record this quarter, with revenue from our LabVIEW, VXI, and CompactRIO products driving this growth. We believe that our commitment to investing in innovation and growing relationships with our customers will continue to drive product adoption across our business.

In Q1, we increased our worldwide headcount my approximately 200 employees, with R&D and field sales experiencing the majority of the headcount growth, in order to support key applications in regions that are vital to the sustained growth of the Company. During the quarter, our orders over $20,000 grew more than 29% year-over-year, and represented more than 40% of our business.

In addition, our average order size was approximately $4,000, up 12% year-over-year, and a new Q1 record. Our software products set a new Q1 revenue record as engineers and scientists around the world realized the value NI's software can bring to their applications. Our LabVIEW software platform is used across all of the applications we serve, providing support for more than 10,000 hardware devices from NI and third parties, as well as hundreds of add-on libraries. We continue to be pleased with the adoption of LabVIEW and the tremendous productivity improvement our users experienced over traditional tools.

One recent example that shows the productivity that LabVIEW delivers was at the National Ignition Facility, or NIF, at Lawrence Livermore National Laboratory. Engineers and scientists at NIF created an automated maintenance process for the world's highest energy laser. A team of just 3 people was able to prototype, develop, and deploy the final version of the application using LabVIEW and PXI modular instrumentation in only 15 months, achieving a productivity increase of 3X over the team's estimates for the traditional text based tools.

On the academic front, a great example of how institutions are benefiting from our platform, was at the Massachusetts Institute of Technology, where they recently adopted LabVIEW and CompactRIO to develop a curriculum that helps students to design and analyze control systems, at part of their Feedback Control Systems course. Using LabVIEW and CompactRIO for this course, enabled the students to quickly switch between simulation and real world implementation, which has been very difficult to achieve with traditional tools.

In the first quarter, we continued to see great success with our PXI and modular instrumentation products, and reached significant product milestones resulting from our strategic investments in this area. We introduced a new PXI RF vector signal analyzer, or VSA, which delivers Best-in-Class RF measurement accuracy and speed, at a significantly lower cost compared to the current gold standard rack and stack RF instruments. In addition, because the new VSA combined software defined measurements with modular hardware, engineers can now use the same instruments to test wireless LAN, GPS, GSM, LTE, and other wireless standards, while performing these tests up to 10 times faster than with traditional RF instruments.

In addition this week, we began shipping the industry's highest bandwidth PXI digitizer, codeveloped with Tektronix, the world's leading manufacturer of oscilloscopes, the new digitizer employs Tektronix enabling technology to achieve up to 5 gigahertz of bandwidth, and 12.5 gigasample per second sampling rate, making this digitizer ideal for applications in automated production tests, semiconductor ACEs, and high energy physics measurement systems. We are very excited about the work with Tektronix, to jointly develop a product that combines the strengths of both companies -- Tektronix high bandwidth design capability and NI's software defined modular instrumentation expertise.

One customer that has seen significant success with our software in the PXI platform is TriQuint Semiconductor, a leader in RF components for wireless communications. TriQuint needed to reduce the characterization time of increasingly complex cellular power amplifiers, or PAs. Using LabVIEW and NI PXI modular instrumentation, TriQuint developed a PA characterization system that improved test throughput by 10 times, while reducing capital equipment costs, power consumption and physical space. This system ultimately shortened the characterization time of their PAs from two weeks using their previous rack and stack RF test systems, to just 24 hours.

Our data acquisition products also saw strong year-over-year growth in Q1, led by our USB and C Series devices. We also continued to see strong performance from our SE Express data acquisition products for high performance sensor measurements which were released last year. These devices target high channel count applications such as structural tests, and provide signal conditioning to significantly improve measurement accuracy. Our CompactRIO products experienced significant year-over-year revenue growth as NI continues to invest in this highly differentiated platform.

We are particularly pleased with this growth as it comes on top of revenue growth in both 2009 and 2010, so the scale of CompactRIO has increased dramatically over this period. The CompactRIO platform continues to see success in industries such as renewable energy, oil and gas, biomedical, and transportation.

The combination of LabVIEW and CompactRIO allows engineers in these industries to quickly prototype new designs to get their ideas to market sooner. One customer who was recently successful using CompactRIO is NexGEN Consultancy Limited, who developed a smart grid energy monitoring system for a large power utility company in India. The system provides accurate visibility and monitoring of the grid, as CompactRIO systems are used to make measurements at each substation and distribution network, to ensure uninterrupted power services to their end users.

Due to the complexity and size of networks, this can be very costly, however using LabVIEW and CompactRIO, NexGEN was able to integrate measurements, status monitoring, and reporting in a single platform. NI technology has significantly reduced their development time and allowed delivery of a reliable and cost-effective solution for India's power sector.

To close, we were very is pleased with our record revenue for the first quarter, as we continue to scale our world class R&D and field sales organizations, to create innovative new products for our customers and help them solve a large diversity of applications. We also continue to invest in our core platforms of LabVIEW, PXI and CompactRIO, and we believe they will continue to deliver increased value to our customers in both the test or measurement and industrial embedded markets.

With that, I will turn it over to Dr. T.

I was extremely pleased with our performance in Q1, as we delivered report revenue and profit for a first quarter. I believe these results demonstrate the strength of our business model, validate our long-term strategy, and clearly show the significant investments we have made in R&D and the field sales force, have differentiated us in the markets that we serve.

Since the introduction of LabVIEW, engineers and scientists have been reaping tremendous productivity gains as a result of LabVIEW's ability to serve a diverse range of applications using graphical system design. LabVIEW delivers an open software platform that scales across many instrument types and measurement paths, utilizing 9,000 instrument drivers created by National Instruments and third parties.

Additionally, our customers were able to reuse LabVIEW code across our innovative CompactRIO and PXI hardware platforms, giving them the flexibility and scalability to meet their application requirements. Our long-term investment in LabVIEW is of great value to our customers, as we continue to improve performance, add valuable features, and preserve the investments that have made in developing their software applications in LabVIEW.

One way National Instruments is helping to shape the future generations of engineers and scientists is through partnership with FIRST, a non-profit organization that inspires elementary to high school students to take interest in engineering and science through robotic competitions. This week in St. Louis, hundreds of student teams are using LabVIEW and CompactRIO to compete in the FIRST Robotics Championship. This year the FIRST program is projected to reach nearly 250,000 young people. National Instruments is proud to support the development of future engineers and scientists around the world.

In industry, while our modular hardware platforms are a critical part of our value proposition to customers, the hardware is only part of the story. It is only though our significant investment in our software that our customers can unlock the potential of our hardware and fully realize the benefits of graphical system design. This software helps integrate the various components of a system, while enabling engineers to customize the system hardware for their specific application. In this hardware/software interoperability that enables engineers and scientists to build their applications in a matter of days or weeks, instead of months or years. With PXI hardware and LabVIEW software, our customers can reap significant benefits, but only in so far as they are able to define their test system and software.

National Instruments has more than 14 years investment in PXI, and optimizing LabVIEW to realize the benefits that PXI hardware can provide. In addition our sales force has equivalent experience in understanding how to make sure our customers are successful in developing PXI test systems. Growing customer relationships as trusted consultants and finding new opportunities as our products deliver significant benefits to organizations.

In the end, our customers use our tools because we can fundamentally provide a more productive way for them to research and deploy embedded systems. By combining our hardware platforms with powerful software, we are helping to solve some of the world's most significant engineering and scientific challenges. One example is the challenging field of medical imaging where our products are contributing to the research and development of OCT, or optical Coherence Tomography. OCT is a non-invasive imaging technique with superior resolution to MRI or PET medical images.

One example of this is on the research side, is Kitasato University, where they used LabVIEW and FlexRIO FPGA to design the world's first real-time 3D OCT medical imaging system, with the goal to detect cancer during medical checkups without requiring the patient to undergo the severe stress of a biopsy. The design was extremely complex, requiring the integration of multiple cutting-edge technologies, yet using LabVIEW and NI hardware, the team was able to deliver an innovative solution, while avoiding a time-intensive challenging custom design process.

The same technology is also used for deployed systems by Santec Corporation, who used our LabVIEW and our FPGA hardware to deploy a novel portable OCT system. Santec was able to create an OCT system that achieved a 4X imaging speed increase over their previous design while significantly reducing the size of the system.

Our product success is attributed to our employees that help design, manufacture, market, sell and support our products. I want to thank our employees for their strong execution during this time, especially our employees in Japan and the Middle East, who in the face of ongoing disaster and conflict, continued to show resilience as a community, as well as a relentless dedication to serving our customers.

In summary, I was extremely pleased with our performance in Q1 as we delivered record revenue and profit for the first quarter. Our investments in R&D and field sales force are critical to our strategy, and we are successfully executing on our hiring plans. We remain committed to this long-term strategy, and believe these key investments in our key platforms and personnel and geographies will drive future revenue growth and differentiate us from other players in the markets we serve.

I would also like to invite to you our Annual National Instruments NI Week and Investor Conference on August 2nd, where we will discuss the evolution of our product portfolio and sales force, as well as our spending and pensions, as we seek to drive long-term growth. We hope to see you there.

We will now take your questions.

(Operator Instructions). The first questions will come from Ajit Pai with Stifel Nicolas.

Good afternoon.

Hi Ajit, how are you?

Good, and you?

Excellent.

Two questions, one question and one follow-up, the first one is about the new digitizer with the high specs in collaboration with Tektronix, can you give us an idea of how an agreement like that works, and the impact on the gross margins of a business, if that becomes a material part of your business over time?

Let me take the first part of that, this is Eric, so it is a joint development project. Effectively the project leverage is the -- include the key technology strengths of both companies, some of Tektronix's high bandwidth expertise, and our expertise in modular product design and software, the product is being sold exclusively by National Instruments, it really will be an NI product. And it will have an ingredient brand of Tektronix enabling technology.

So you would pay them a royalty on each one sold, or how does the agreement work?

I don't think that we can disclose the specifics of the agreement, Ajit, this is Alex here, but just as Eric said, that this product development and marketing really leverages the strengths of both companies very, very well, I think that the business arrangement also fits the business model of both companies very well, we would not anticipate any noticeable impact on our gross margins as a result of this arrangement. We are very excited about the potential to leverage our back end technology with the technology of Tektronix, as Eric said. And believe this will significantly aid us in our penetration into certain accounts and certain markets as we move forward.

Okay. And then the second question, the change that you are seeing in March and April, with a little bit of increased caution in the end markets, is that changing the timeline for your Malaysian deployment at all, or there's no change as far as that goes?

Obviously we had a very good first quarter, Ajit, we had a record Q1 as you know, bookings in April as we talked in the press release were up over 20% year-over-year, but there is enough noise out there, and enough bad news, it is difficult for me to believe that it is not going to have some follow through impact. So we were being cautious as we look at Q2, and at this point in time, we don't anticipate any change to our plan for the Malaysian plant. Our intention is to go forward and break ground in the June/July timeframe, and to open up the facility in the third quarter of 2012, so no change to that plan at this time.

Got it. I will get back in queue. Thank you.

We will go next to Richard Eastman with Robert W. Baird.

Could you just maybe give a little bit of color on the academic side of the business? Did we see meaningful growth there, and did that keep pace with the overall growth rate, just in that particular market?

Yes, I can take that, it is Eric. It did keep pace with the overall scale of the business, our academic market has been strong for a number of years, it has been a very steady business for us, so it has been strong in the difficult years of 2009. I think as we highlighted it at that time. And it continues to be a strong steady business for us at this time as well.

Okay, Alex could you just define what NATI sales are into Japan, as a piece of that Asian business?

Yes, sure, we haven't specifically called it out. What I can tell you is it is in the single digits, so Japan is a very important market for us, it is not as big a percentage of our revenue as it used to be in prior years, obviously. We have tremendous sympathy for the terrible events that have happened in Japan. They have really been a body blow to the country.

I do want to take a minute out and echo what Dr. T said on the call, the resilience of our team in Japan has been very impressive, in terms of continuing to strive hard to aid our customers in that country, provide support in the products that they need going forward. But we definitely did see an impact in March on business in Japan, and that has carried on, and certainly we have seen a more significant impact on our business in April than we did in March. I would imagine that is going to be a factor for the rest of this quarter, and probably into next quarter, so as I said, it is single digits of our total revenue, and it's certainly an important market for us.

And then just the last question, in terms of the guidance, it implies again a significant ramp sequentially in operating expenses, maybe to the tune of $10 million or so. Is that a number that we should be annualizing here? Is there any reason not to?

I am not sure I quite understand the context of the question in terms of annualizing. What I would put it this way, is that Q2 is a very significant hiring timeframe for National Instruments. A lot of the university graduates that we hire will come out of university in the May/June timeframe, so it is probably the most significant, from an incremental headcount point of view in the second quarter, and you won't see that same kind of sequential increase in headcount in Q3 and Q4. So I wouldn't anticipate that scale of sequential increase each quarter going forward, if that is your question.

No, but you can annualize that operating expense number, because they will be onboard during the --?

They will be onboard for the full year, that is correct. So Q2 is our most significant quarter for hiring. This year, we are also ramping back up quite significantly our intern program. And we will have approximately a little over a couple of hundred interns at the Company starting in that timeframe as well. So there will be significant hiring activity not only for this year, but prehiring and qualifying candidates, and incurring expense related to that for hiring for next year.

Next year, okay, for this summer, okay very good, thank you.

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

Good afternoon, this is Rahul Chadha on behalf of William. I just wanted to dig a little deeper into why the Company is guiding 14% to 20% growth as a range when the order growth in April is 20%. Is it because of any specific shortage in supply, or any demand shortfall that is coming up?

It is Alex here, I will take that question, at this point in time we don't see any supply issues affecting our revenue stream in the second quarter, so it is not related to that; there's no known demand issues at this point, apart from we have obviously seen some direct impact in our business in Japan in the month of April. But nonetheless, overall as a Company, we did see bookings growth over 20% in April.

The concern really relates to the ripple effects that we are going to see in May, June and perhaps July from the events that we saw in March and April. I have learned over the years, when bad things happen, they usually have consequences, and so it is in anticipation of -- an expectation of some impact from those events, as we go out over the next few months.

Okay. And then based on your end market exposure in Japan, does the rebuilding present any opportunity sort of longer term?

Well, obviously, as a business, we are focused on anything we can do to help the people of Japan recover from this tragedy, we will be endeavoring hard to do that; at this point in time we are really focused on supporting our existing customers, and certainly looking at opportunities where we can assist in that rebuilding effort. I think it is a little bit early at this point to comment on the likely impact of that on us.

Just one small follow-up, was there any impact from foreign exchange on revenues in the quarter?

Year-over-year, I believe that the impact of foreign exchange was actually negative, a little bit less than 1%, so our local currency growth in Q1 year-over-year was slightly higher than our US dollar growth in Q1.

And could you provide us that number sequentially?

From Q4 to Q1? Perhaps we can come back to that at the end of the call, if you want to get back in the queue and we will get the data for you.

Okay, great. Thank you.

We'll go next with Anthony Luscri with JPMorgan.

Thanks for taking the question, just a follow-up on the weakness you have seen in Japan. Has that stretched into other regions or other verticals? Meaning you highlighted the automotive sector as a potential weakness, have you seen it outside of Japan?

At this point, we haven't seen any identifiable impact elsewhere, but certainly from what you read in the paper, it is hard to believe that these events won't have an effect on the automotive sector outside of Japan, as we go through Q2 and into early Q3, but nothing that we could point to specifically at this point.

Alright. And then regarding component supply constraints potential, are you buying ahead, how are you lowering the risk here? And also, what do we see for impact to gross margin if there is a potential higher component costs into the back half if there happen to be constraints?

On the component cost side, let me address that first, there has been some notable increases in certain commodities, the exposure of NI to those commodity products is really pretty de minimis, so I at this point in time, I don't anticipate any real noticeable impact on gross margin.

On the availability point of view, we certainly have taken advantage of our purchasing power and our ability to keep deep inventories to increase our safety stocks of components that we were concerned about during the month of March, and somewhat continuing here into April and May. One of the huge advantages we have from the depth of our inventory position, which obviously we maintained to ensure very rapid delivery to our customers, is we are really well positioned typically to deal with situations like this, where as a result of the tragedy in Japan, or to sudden constraints on the supply early last year, so at this point in time for Q2, we don't anticipate any material impact on our revenue.

Okay, thank you.

No problem.

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

Good afternoon, gentlemen.

Mark, how are you?

Fine, how are you? Good. I would like to and about defense markets. What are you seeing in defense? Are you also anticipating some pull backs in defense? Do you have much exposure to the defense markets right now?

Yes, this is Eric, if you look at from an industry point of view, we saw kind of strength across and growth in all of the industries that we serve. Probably the strongest growth was in semiconductor and energy sectors. One of the weakest areas in the quarter was in areas tied to government spending, including military and aerospace, and also some of the government labs, so I think it is reasonable kind of going forward that we will continue to expect that to be a little below the average or weaker, compared to the other industries that we serve, and that is built into our expectations.

Okay, that is helpful, but going forward, like I say, they renewed the budget proposal the appropriations for fiscal year 2011, so the kind of weakness you saw here it was already kind of expected, is anybody anticipating if there is a cutback in fiscal 2012 that it might do a little worse?

It is pretty tough to know exactly how it will play out. Certainly the chaos that was in place in the Federal budget in the month of March was not helpful to business kind of across the board. Obviously, there will be a lot of debates about spending into next year, and that is to the extent that we are exposed on the government side, we will have some exposure to how that plays out.

From a global point of view, obviously the US is becoming a smaller portion of our overall revenue, and we have a very diversified broad base of business around the world. But it does look like the US government is going to cut back spending, and obviously in the aggregate for our business, that is probably not a bad thing.

And finally, you have amassed quite a war chest. What are the priorities right now for the cash, and would you consider a special dividend, absent other options?

So obviously, we have continued to generate significant amounts of cash, despite the fact that we have been raising our dividend, and our priorities continue to remain very similar, or static with what they have been over the last number of years, our number one priority at this point in time is the dividend, and number two is strategic acquisitions, and we are continually looking to try to find value, but really where we have a very, very clear leverage point. And then number three, is opportunistic, excuse me, number two is opportunistic stock repurchase, number three is acquisitions, and that strategy continues to be the same as we look forward. At this point in time we are not contemplating a special dividend.

We will take our next question from Chuck Murphy with Sidoti and Company.

Good afternoon, guys.

How are you?

Alright. Just one kind of big picture question for you. Just wondering if there is kind of anything you can do from a technology standpoint to drive kind of a new step function in the adoption of your virtual instrumentation versus conventional instruments? Or is it a just a matter of getting your sales guys out there pounding the pavement, and you just kind of gradually convert new users?

Sure, obviously, our Q1 was very strong, with a better economy, but also, because our technology has really proven its ability to solve very difficult problems, and redefine the way that solutions are created, both in the test and measurement space and the industrial embedded space, where we are able to with a standardized platform, solve problems all the way from alternative energy solutions to high-speed production tests of the latest mobile phone devices, so obviously we have had a lot of success with a platform that integrates both our technology and our partners and alternative suppliers into one platform, in a way that we create a highly differentiated position.

But there is not something as you look at the platform, you say, gosh, if we could just tweak this, it would really open up a whole new realm of possibilities?

Obviously, there is enough opportunity that we are making significant investments at this time to add to the platform in a way that we do achieve, very good long-term growth and growth opportunity.

Chuck, I would say we are looking at that question all of the time.

Okay.

And we are constantly looking at new technologies coming available from the mainstream, PC industry, from the FPGA vendors, on the software side, so that is a constant endeavor on our side.

Got you, but there is no golden goose that you have in mind, so to speak?

Well, there are lots of golden geese, and we [really] all the time, I think is another way of looking at it. I think that we had some pretty compelling products that came out in Q1, and as usual, we will have a slate of new product capability at NI Week that we will be unveiling. So we think there are a lot of different angles, and as Alex said, we are investigating and investing in quite a few different technologies all of the time.

We will take a follow-up from Richard Eastman with Robert W. Baird.

Just as a follow-up question, if you look at the business in pieces, and I know better than to ask the size of these pieces, but industrial embedded versus maybe the virtual instrumentation side of the business, I am curious if you see any difference in the growth rates, such that in industrial embedded, are you comfortable we are participating in the increased industrial spend or CapEx budgets, CapEx investment cycle? Because I would think given where we are, Alex, I know you look at the PMI and the order component. Is that strength visible in your product mix?

Let me start, and then Alex can answer that too. But you asked first about the industrial embedded versus say maybe the test and measurement. The fact is, we have said this before, but it is effectively the same products that are sold into these two different spaces, and so we do make an estimate of how much of it goes into each space, but it is an estimate, and we said about 20% to 30% of the business in industrial and embedded.

One proxy that I can share with you, we talk about our CRIO, ContactRIO platform, and certainly that sells a lot into these embedded and industrial applications, and that has been growing very, very well. As I mentioned, it grew very well this quarter, and it is on top of growth in 2010 and growth in 2009. So that platform has more than doubled in size since 2009. But that is an indication that our business in industrial embedded is growing faster than the Company average, but is it still I believe in that range. Now we are also seeing very good strength on the test and measurement side of our business, primarily around PXI.

Right, okay. Thank you.

(Operator Instructions). And we will go back to Ajit Pai with Stifel Nicolas.

Just looking at your orders over $20,000 and orders under $20,000, the chart in your presentation, you have the orders over $20,000 growing about 30% approximately in that chart, while overall, you said that orders were growing about, just over 20%, which would mean that the rest of the business, under $20,000, is likely growing just over 12% or 13% if I run the math right based on the proportions between those two.

Does that mean that something that is going on in terms of share in your businesses where you compete under $20,000? Because the test and measurement companies, your traditional folks that you are correlated with, have had much stronger growth than that in the current quarter.

Let me take a shot. So the growth in under $20K is 15%, and 29% as I said in the orders over $20K. So as we discussed over the last couple of years, the over $20K orders have been a growth driver, but we are pleased with the growth on the under $20K orders as well. We do think that is in line. We are seeing a lot of growth in a lot of the investments we have made around our systems business, which tends to fall more into the over $20K orders.

The other point I would make, Ajit is, I often have this conversation with investors, when they look at the shorter term results from a year-over-year perspective of our competitors, and it can be a source of some confusion. I think it is better to look at these things under a slightly longer term, [rate]. A lot of the year-over-year numbers that you see in this timeframe are highly related to the situation 12, 18 months ago, and I think you have to take a slightly longer term view on this to get the --.

But even revisiting it from that basis, if you look at your orders over $20K and the expanding addressable markets and all of the efforts you have been making, R&D and sales, but orders under $20K you are just getting back to slightly above the early 2008 level, whereas if you look at your peers or some of the other test and measurement companies, the orders are already well over the levels that they were in like at that point. Yours are only slightly over.

Well, I should take a different view on that, I have to say, because I think very few of the T&M vendors are being back to the record peaks that they saw when you exclude acquisitions. When we look at the business overall, you look at this on a five year timeframe, our revenue is up over 50% over that period of time. I am quite confident that is--

No. We are talking only about the orders under $20k, not the orders over $20K.

One other factor there is that the goal is to increase our share of wallet, the number of instruments that go into PXI chassis, so as we do that, the orders get larger from the same customer, so the below $20k is -- are moving to the above $20k. So that is part of the explanation that you have a customer buying more, filling more slots of their PXI system up, with the higher dollar items like RF technology, so that same customer now will buy a lot more.

The other factor is that as you look at the industry, more of the industry is investing in more of the high-end. I just don't have any comparable data that is seen from any comparable company that breaks their orders out by value. So I don't have any way to compare that.

Got it, okay, thank you.

And with no further questions in the queue, I would like to turn the call back to Alex Davern with any additional or closing remarks.

Thank you very much for joining us today, as I said in a couple of weeks time we will be in Chicago and then in New York, we hope to see you there.

This does conclude today's conference, we thank you for your participation.