National Instruments Corp (NATI) 2011 Q2 法說會逐字稿

Good day, every, and welcome to the National Instruments second quarter 2011 earnings conference call. (Operator Instructions).

Today with us are David Hugley, Vice President, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO and Co-Founder; and Pete Zogas, Senior Vice President of Sales and Marketing. For opening remarks I would now like to turn the call over to David Hugley, Vice President, General 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 financial impacts of our recent acquisitions,growth in radio frequency product sales, long term growth prospects, future products, and our revenue and earnings per share guidance. We wish to caution that such statements are just predictions and that actual events or results may differ.

We refer you to the documents the Company files regularly with the Securities Exchange Commission including the Company's most recent annual report on Form 10-K, filed February 18, 2001, and our most recent quarterly report on Form 10-Q, filed April 29, 2011. These documentscontain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that I'll 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 quarterly revenue, record operating profit for a second quarter, and continued execution on the 2011 investment plan.

I'm extremely pleased to report continued strong revenue growth and an all-time record revenue in Q2. Our ability to also deliver a record operating profit for a second quarter, while significantly increasing our R&D investment and field sales force is a validation of the strength of our business model and our ability to execute. We continue to focus on our long-term vision, and I believe our strategic investments and innovation and customer adoption are key to our future growth. And I continue to be optimistic about our position in the industry. In our call today, Alex Davern, our Chief Operator Officer, will review our results, Pete Zogas, Senior Vice President of Sales and Marketing, will discuss our business, and I'll close with a few comments before we open it up for your questions. Alex.

Good afternoon. Q2 was a very successful quarter and there are some clear positives to take away. First, we had record revenue with strong year over year growth in orders over $20,000. Second, we are successfully executing on our 2011 investment plan, and third we hadrecord operating and net income for a second quarter.

Revenue for Q2 was $253 million, up 20% year over year. Non-GAAP gross margin in Q2 was up 90 basis points year over year at 78.5%. Our ability to significantly increase our gross margins is attributed to the success we have had in driving down component costs, improving manufacturing efficiency, and to the high value and differentiation we deliver to our customers.

Non-GAAP operating expenses were up 23%year-over-year in Q2, as we executed on our planned investments, especially in R&D and field sales. Overall headcount was 5,862, up approximately 390 people, or 7% since March, and up 15% year over year. This includes approximately 150 personnel from the AWR and Phase Matrix acquisitions. We believe these investments give us the ability to fully leverage the strategic advances we've made in our PXI and CompactRIO platforms, and are necessary to drive our long term growth.

Operating income was an all-time second quarter record. GAAP operating income was $33 million, an 8% increase over Q2 2008. Non-GAAP operating income also set a new record at $41 million, up 14% over Q2 2010. This represents a non-GAAP operating margin of 16%.

I would like to thank all of our employees for the hard work they have contributed to this very strong result. Net income for Q2 was $26.5 million, with fully diluted earnings per share of $0.22, which includes a $0.01 per share impact from the transaction costs related to closing the AWR acquisition. Non-GAAP net income was $32.2 million, with non-GAAP fully diluted earnings per share of $0.27, at the midpoint of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

As we look to the second half of 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 the first half of 2006. Increasing first half revenues by 56%,non-GAAP gross margins by 65% and non-GAAP income by 81%. We have also stayed true to our long term strategy over the last five years, increasing our R&D personnel by 64%, 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 first half gross margins by approximately 410 basis points which has allowed us to deliver great profit growth while making the strategic investments necessary to sustain the long -term growth of the Company.

Now I would like to make some forward looking statements . While the trends of the global PMI continued to be positive in Q2, averaging 53.4 for the quarter, we did see the significant decline between March and June that we had anticipated. We anticipate continued weakness in Q3, and we will be watching closely to see how the global business environment exits Q3. However, encouraged by the scale of the long-term opportunity open to us we plan to continue to execute on our 2011 investment plan, which includes adding approximately 400 incremental personnel in Q3 and approximately 100 in Q4. Should the global economy see some incremental weakness this year, then these investments will likely have an adverse impact on margins in the short term but we are confident that they will significantly advance our long term position in the industries we serve.

Now turning to specific guidance for Q3. We currently expect revenues for Q3 to be up year over year, and to be in the range of $257 million to $273 million. Due to the impact of the acquisition accounting for the AWR transaction, which required us to write down AWR's historical deferred revenue to fair value, we're also including guidance for non-GAAP revenue. The amount of the write down, approximately $7 million, would have otherwise been recognized over a period of approximately 12 months. As a result, in Q3 we expect non-GAAP revenue to be in the range of $260 million to $276 million. Looking out further, we expect the non-GAAP revenue adjustment in Q4 to be approximately $2 million and for the Q1 2012, and Q2 2012 adjustments to be approximately $1 million.

Starting in Q3 of 2012 we do not expect to continue to report non-GAAP revenue. Included in our non-GAAP guidance for Q3 is $9.5 million of revenue, and $6.5 million of expenses related to the recent AWR and Phase Matrix acquisitions. As we discussed in our call announcing the acquisitions in May it would not be until 2013 to 2014 that we expect to realize the full benefit of these strategic acquisitions.

While we expect the acquired entities to be profitable on a non-GAAP basis for the rest of this year it will be at a level below the Corporate average operating margin. In Q3, we expect their impact to be to reduce our average non-GAAP operating margin by 30 to 40 basis points.

Given our aggressive 2011 investment plan and our recent acquisitions, we expect to see a significant increase in non-GAAP operating expenses in Q3 to approximately $170 million plus or minus $2 million. In Q4, we are budgeting for a very modest sequential increase in expense, as the 2011 investment plan is closed out.

Looking out to 2012 and assuming a normal economy, we expect to return to a plan of growing revenues faster than expenses. We currently expect a GAAP fully diluted earnings share will be in the range of $0.16 to $0.24 for Q3, with non-GAAP fully diluted earnings per share expected to be in the range of $0.23 to $0.31.

Please remember that in Q3 the GAAP to non-GAAP adjustments will include an incremental $0.03 per shareadjustment related to the acquisitions of AWR and Phase Matrix. 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 and foreign exchange fluctuations.

In summary we are very pleased with our record second quarter revenue and profit. Our goals for 2011 remain, to invest aggressively and to continue to drive towards our 18% non-GAAP annual operating income target. Now I'll turn it over to Pete Zogas, Senior Vice President of Sales and

Thank you, Alex. We are very pleased with our strong year-over-year growth and record quarterly revenue. We believe our performance is a testament to the strength of our business model and validates the investments we have made in key product areas, like CompactRIO and RF modular instrumentation, both of which outpaced the overall Company growth rate.

Through Q2 we successfully executed on our 2011 hiring plans, with an emphasis on growing our field sales and R&D head count. We believe these investments will allow us to continue to deliver world class products as well as give us the expertise in the field to penetrate large accounts.

In Q2 our orders over $20,000 grew 39% year-over-year and our average order size reached a second quarter record of approximately $4,440, which is up 17% year over year. It was the expansion into new application areas which was demonstrated by our strong growth and orders over $20,000 which allowed us to overcome the impact of the weakening global PMI on our more traditional business. We believe the success reflects the enhancements we have made in our product and service offerings, the excellence of our network of integrators and the performance of our outstanding sales teams.

As we continue to expand our software offering, we see a significant opportunity as more engineers are turning towards software based test systems because their products and systems are evolving faster than ever. LabVIEW, a tool that has delivered value to engineers and scientists for more than 25 years, led our software business to year-over-year revenue growth this quarter. Our continued investments in LabVIEW have delivered significant productivity gains by allowing our customers to build their applications in a matter of days or weeks instead of months or years.

In Q2 we experienced record sales to academic institutions which continue to be a focus area for NI. During the quarter we introduced two new software products geared toward K through 12 students, LabVIEW for LEGO Mindstorms, and LabVIEW for Education. We believe these tailored versions of LabVIEW will help increase the interest in science and engineering for tens of thousands of students each year, inspiring the future generations of engineers to take their experience of exploration and innovation from the classroom into industry.

Our data acquisition products experienced year-over-year order growth led by our USB, ethernet, [NC series based] devices. In addition we continued to see strong growth from our plug-in PCI Express, and PXI Express data acquisition boards, which is . A testament to the value we offer customers by leveraging off the shelf industry standard technologies such as the PCI Express bus.

Our distributed /O products saw strong year over year growth, achieving record quarterly revenue. This growth was led by our innovative CompactRIO platform, which is built around LabVIEW and FPGA technology. This quarter NI introduced two new CompactRIO products that, when combined with LabVIEW software, allows our customers to prototype and deploy custom embedded systems faster at a lower cost and without the need for large engineering design teams. The new integrated controllers extend the price performance options of the CompactRIO platform, and are suitable for higher unit volume deployment in industries such as energy, biomedical and robotics that require short time to market, advanced control algorithms and high performance I/O.

Our PXI modular instruments and products also saw record sales, and helped drive growth for the Company. With more than 400 PXI products and 14 years invested in supporting a modular approach to automated design, validation and production test, National Instruments is the leader in PXI modular instrumentation. Many customer applications show there is a significant need for including real world measurements from design to validation to production test because of the time to market and the time in market constraints they face.

For nearly a decade we have invested in expanding our product portfolio to meet the needs of RF customers and our strategic focus on RF products has led to growth in that area that outpaces the overall Company growth,validating our continued investments in RF hardware and software.

To continue our investment in expanding our RF portfolio, this quarter we announced the acquisition of Phase MATRIX and AWR. We believe these acquisitions enhance our ability to serve customers throughout the RF product development cycle and will accelerate the deployment of RF and wireless technologies to significantly improve customer productivity through increased connectivity between design, validation and production test functions.

With a strong track record of designing and manufacturing RF and microwave test and measurement technology and a highly talented employee base, Phase Matrix has the ability to speed NI's development and release of high performance RF and wireless products to our production test and R&D customers. AWR, a leader in design software for RF systems, brings a strong team and RF system design product portfolio that is highly complimentary to NI's hardware and software. We are very excited about the future opportunities that we will be able to address combining our expertise in RF with these two new additions to the NI family.

In summary we were pleased to see record revenue and strong growth in our strategic investment areas of CompactRIO, NPXI modular instruments. Our ability to drive organic growth through the expansion of R & D and our field sales force speaks to the strength of our business model.

We are excited about NI Week next week, which has seen 25% year-over-year growth in registrations to date. Some of the highlights from this year's NI Week include innovative customer solutions and interactive demos that demonstrate the value of NI products in a breadth of application areas. Significant new software and hardware product releases including enhancements to our service offerings and our ability to support our partners. Our global sales force will be collaborating closely with thousands of engineers attending the event to discuss industry best practices and better understand how NI products can meet their needs. And finally the NI Alliance partner network will celebrate 20 years of working closely with our field sales organization to provide integration services, turnkey solutions, products and consulting for our customers. We hope we see you next week at NI Week.

With that, I'll turn it over to Dr.

Thank you, Pete. I was extremely pleased with our performance in Q2 as we delivered record quarterly revenue. I believe these results demonstrate the strength of our business model and validate our long term strategy. And I would like to thank our employees for their hard work.

During Q2 we continued to execute on our 2011 hiring plan, and I believe that increasing our R&D department by 64% and our field sales force by 80% over the past five years will give us the power to fully leverage the strategic investments we've made in our core platforms of LabVIEW, PXI, data acquisitions and CompactRIO.

For more than 30 years, engineers and scientists around the world have used NI software and hardware to implement their world-changing innovations more quickly and efficiently. The key to success for NI and the customers we serve is that we've invested thousands of person years in platforms that leverage both internal and generally available technologies to take advantage of Moore's Law. Combined with productivity of graphical system design, these software and hardware platforms provide consistent form factors and the flexibility to evolve, and we believe this approach will be the future of instrumentation.

We continue to gain scale in our PXI platform, particularly in the area of RF, including new capabilities from our recent acquisitions of Phase Matrix and AWR. One example of cutting edge performance that will enable NI technology to scale is the analog front end technology from Phase Matrix, which provides industry leading performance for oscilloscopes.

Through our strategic investments in RF we hope to realize our vision of improving the integration between design and test for engineers.

In the area of renewable energy, NI is also leading an initiative to accelerate innovation through the NI Green Engineering Grant program, which helps remove technical barriers, providing access to the training and tools needed to bring smart grid and renewable energy solutions to market. One participating company is Windlift, which develops provides wind energy systems for use in reconstruction in disaster relief efforts. With the productive gain using LabVIEW, Windlift was able to progress from concept to prototype in just eight months.

Many of these products and solutions will be on display during our annual NI Week user conference next week, where thousands of engineers will hear about the new products and see the exciting demonstrations from our customers as they tackle some of the world's most significant scientific and engineering challenges. NI Week also attracts some of the world's leading experts in such areas as energy, big physics, wireless communication, who will headline sessions offered in our Summits. During my keynote address I will discuss the evolution of NI platforms over the past 35 years, and my view on the future of instrumentation.

We will also be hosting our annual investor conference in conjunction with NI Week on Tuesday, August 2, where we'll discuss our business model, our differentiated software and hardware as well as our financial results and future investments. I hope to see you at NI Week and our investor conference, where you'll learn more about how NI technologies are being used in these applications.

In conclusion we have successfully delivered on our investments over the past five years to build strong organic growth and are executing according to our plan in 2011 to recruit top talent and evolve our field sales and R&D teams. I feel our strong competitive position and innovative products such as LabVIEW, CompactRIO, data acquisition, and PXI modular instruments will allow us to disrupt the technology -- test and measurement industry for years to come.

We will now take your questions.

Thank you. (Operator Instructions). The first question comes from William Stein from Credit Suisse.

Great, thanks. First I have just a clarification. I think there were some comments about demand trends for the traditional smaller order flow versus order flow for some of the larger orders, I think $20,000 and above is how you separate those out. Can you review or clarify those, please?

Right, so we have a metric that takes our orders, our revenue that is coming from orders that are $20,000 and above, and then the business that comes from orders less than that. We call that transactional business versus system level or large orders. The large order is orders greater than $20,000. And we experienced 39% year-over-year growth from that order revenue bucket. And 10%, a little over 10%, from the business that's coming from the transactional level, orders less than $20,000.

Is that noteworthy? Is that a different trend from what we've seen in the past couple of quarters with the bigger deals growing faster? Or it just -- it seems to me that given both the beat and the raise in terms of the revenue guidance, that this doesn't seem so unique or noteworthy.

It certainly indicates what we're anticipating, what we're seeing with the business as we expand our product portfolio with PXI and CompactRIO system level platforms, if you will, we're getting involved with more and more mission critical applications which are tending to be higher volume, higher, larger orders. So we're fueling that, and we're meeting that need with this increased investment in sales, and we're getting the results by seeing that area of our business growing much faster as a component of the business.

I appreciate that. I'm wondering if we can also talk about end market strength and where the maybe relative weak points were as well. I think, Dr. T, you talked about strength in academic which was a bit of a surprise relative to what is going on with the budgets around the country. Maybe you could talk about, generally speaking, stronger and weaker end markets in the quarter and in the outlook.

Yes, okay, this is Pete Zogas. I'll take that one. Regarding our vertical -- so academic was fairly strong from the standpoint of the quarter. Other strong verticals for us were mobile communications, so anything related to smart devices, smart phones, set top boxes, etc. Semi conductor was strong. Energy, big physics, things related to high-end research. And then [mill aero] was a little on the weaker side. It was strong last year at this time, but we did see a little bit of softening. Still growth but not quite as big. And then transportation was not as strong as the strongest, either. Still growing.

Next question we have is from Anthony Luscri from JPMorgan.

Hi. Thanks for taking the question. As a followup to the earlier question. The academic market you mentioned was fairly strong. Has the sequential order growth slowed there in any way?

I assume you mean -- it's Alex here -- and I assume you mean from a year-over-year point of view.

Well, I guess I'm trying to figure out, has the end demand slowed? Even though it has been a record quarter for you in terms of revenue, have you seen any softness in the academic market?

Not noticeable at this point. I would also like -- our academic business is very, very globally diversified. So it's one of our strongest business areas in the emerging markets. In some of the emerging market countries it tends to be a bigger percentage revenue than the developed countries. So the US budget issues have an impact on the academic business, but our investment in academic specific products and our investment in an academic sales force has really helped us continue to gain market share. And I think that has allowed us to off set some of the maybe overall budget constraints that are prevalent in the United States.

Okay, thanks. And then a follow up you mentioned more mission-critical applications and higher volume orders are driving your large-order flow. Can you speak to the applications that are driving that? Is it a mix of -- what is it skewed towards, production test or R & D? How should we view that market for you guys?

We're seeing as much diversity in the large systems as we do in our base level. They span from heavy industrial applications controlling frac sites, fracturing of natural gas shale, on the industrial side of things. We're seeing automated tests on the consumer electronics and automotive electronics. I wouldn't be able to pinpoint one particular vertical that is driving our large-order growth. I think we're seeing it across the board.

And in terms of -- as that large order mix flows to your revenue line and becomes a larger piece, does your business overall -- do you have a greater visibility versus your core transactional business going forward?

I think maybe a couple of ways to put some color on that, Anthony. It's Alex here. The transactional business, under $20,000, tends to be over time a little bit more correlated to the overall PMI. The large order business is naturally a little more lumpy or perhaps a little bit more volatile. It tends to respond more directly to the investments we're making in terms of platform completion and field sales resources. And we've certainly seen the benefits in that business from the investments we've made over the course of the last five years. And that's what encourages us to move forward with our investment plan this year. As that becomes a bigger part of our business and a much larger overall revenue, so from an absolute dollar point of view, the revenue coming from orders over $20,000 is much much bigger than it was five or six years ago. As that becomes a bigger group, then it starts to become a bit more statistical. And so that allows us to have a pretty good view into the overall pipeline so that we can have an assessment of what business looks like as we look out to the next quarter.

All right, we have a question from Mark Douglass with Longbow Research.

Good afternoon, gentlemen.

Hi Mark, how are you?

Good, how are you?

Not too bad.

Good. Alex, can you review the acquisitions for us? What were the purchased revenues and profitability? What's embedded in the 3Q guidance?

Sure. In the call I gave some specific commentary on this topic, Mark. So in Q3 guidance embedded to allow to you separate out is -- sorry. About $9.5 million in revenue in Q3. And about $6.5 million in expenses in Q3 guidance.

Okay, thanks. Yes, I missed the beginning of the call.

No problem.

And then so going forward, that's kind of the run rate we're expecting at this point.

I think that's the run rate you could be modeling to be able to separate the impact of organic versus acquisition.

Okay, great. Then can you review the status of RF test? And I'm really looking at communications providers and what do you see as far as their capital spending on T&M equipment?It seems that the COM spending on equipment is on a down tick here for at least a lot of other players. Are you going through that, or what are you seeing in your markets there?

Our RF business is very much diversified. The carriers, the traditional carriers are not a large portion of our business. In fact, they're a very small portion of our overall business. We tend to just sell to companies that are the design manufactures, the device manufacturers on the components that is go into those devices for R&D and for production test. It's a pretty diversified business. Certainly it's benefiting from the strength of smart phones but overall it's pretty diversified and not really tied to the carriers themselves.

Okay. But the overall market you're not seeing a softening there.

We had a very, very strong quarter for RF overall. Our [modular] instruments business had very strong growth in Q2, so we see continued, very encouraging signs. The RF market, test market, is a very large market. We're a recent entrant. We have a relatively small market share, and so there's a lot of market for us out there to chase.

We have a question from Richard Eastman with Robert W. Baird.

Yes, good afternoon.

Hi, Rick.

Alex, who was the percentage of revenue from large orders in the quarter?

It was I believe at 46%, which I believe is a new all-time high.

Okay.

And the data on that will be, if you look at the webcast slides, guys, you'll be able to see the trends in large orders and the year-over-year growth. There is a specific slide on that webcast.

Okay, and then just again trying to look at the split, I know Pete gave some color on the various pieces of the business, but trying to look at the split a little bit from an industrial embedded and a virtual instrumentation kind of split, and it looks like the key pieces, two of each were strong. So was there any difference in the growth rate on the embedded industrial, embedded side versus the more traditional tech side?

I'd say our traditional test business had a very strong quarter. The industrial embedded piece of our business continues to do very, very well also, but they're both pretty strong at the moment.

And so if you think growth rate total sales growth, I'm mean it's the same plus or minus a couple of points?

Yes, it's not a significant differential.

Okay, and then also just -- could you talk a minute or two about the Asia local currency growth rate? It appears to have slowed down. And I know at the back half of the -- or the back portion of the first quarter we were seeing Japan slow quite dramatically. So how did APAC fair in the quarter from a linearity orders perspective.

The business was pretty linear. The business overall for the whole Company was very linear in April, May, and June. We saw plus or minus 1% or 1.5% year over year growth in each particular month, in April, May, and June. So it was very steady. In Asia, you're looking at billings growth. This time last year in Asia we had a strong quarter. And in this particular quarter we had some increase in backlog in Asia at the end of the quarter. From a bookings point of view, from an order flow point of view, their local currency growth was a bit stronger, it was more like 15% or 16%. Definitely we saw some impact from the tragedy in Japan last quarter. They had a, certainly a recovery from what we saw at the end of the March, but certainly that market remains somewhat challenged. We look at it over the longer term, Asia has been an outstanding performance for the Company and we expect great things from Asia going forward.

(Operator Instructions). We'll go to Ajit Pai with Stifel Nicolaus.

Yes, good afternoon.

Hey, Ajit, how are you?

Good, and you?

Excellent. Are we going to see you next week?

Yes. Looking forward to it. So I have one housekeeping question and then one metric that caught my eye that I would like some color on. The first is your headcount. You said it's about 5,800 in your presentation, but do you have a specific number there at the end of the income.

Yes. 5,862.

The second question is, just looking at the expenses during the quarter, the $164.5 million, going back over the past 12 years I see that you have never had such a massive sequential up tick in expenses from the first quarter to the second quarter in any of the previous years. And even adjusting for the revenue, even adjusting for your head count, is there something else going on between the first quarter and the second quarter that we should be aware of on the expense line?

Yes, certainly one point -- one element you want to add in is the transaction expenses and some modest expenses from the acquisition of Phase Matrix, which closed in May. It was about $2.5 million to $3 million of expenses in the quarter at the GAAP level that were related to the acquisitions themselves.

And that's one time, not recurring?

Well obviously the transaction expenses is one time. Then we'll have in this upcoming quarter for Q3 about $6.5 million in expenses total for both acquisitions. And that will be an one-time jump. And obviously that's why we're guiding to such a big sequential increase in expenses between Q2 and Q3.

Now as I talked -- we went into the fall of last year and the spring of this year, particularly in April, our hiring strategy is significantly out of school, and the hiring time frame for that tends to be starting in the May, June, July time frame. And as we went through the down turn in 2009 and 2010 we backed off college recruiting. We continued to hire experienced talent, but we backed off college recruiting somewhat. So when we look at last year, one of the challenges you see is that last year was a great Q3 sequentially from Q2. We had strong revenue growth, and we hadn't yet ramped up our expense strategy in the third quarter of last year. We had not done a lot of hiring out of school. As we shifted to compensate for that in the fall of last year, now we're seeing those recruits come in, in the May, June, July, August time frame. And that's why you see this big, if you like, bulge of recruiting happening with significant hiring of staff in Q2, and then anticipating 400 additional staff coming on in Q3. That will then close out as we exit the 2011 investment plan and reduce to about 100 people in Q4. So we have kind of a bulge going through the system at this moment compared to -- a kind of a tough expense compare, if you like, for Q3 last year. As we go into Q4 we expect the revenue and expense growth to come a lot more in line from a year over year point of view.

Got it. And then just in terms of the head count that's being added. The vast majority of the head count that was being added when you talked about the head count growth was going to be folks in either low-cost regions or out of school. So the average cost should be significantly lower than the average cost per of the historical head count, is that fair?

I'm not sure if I quantify the significance, but it definitely will lower, without a doubt.

Okay.

The next question will come from Chuck Murphy with Sidoti & Company.

Ajit, did you want to come back in?I think you might have gotten cut off. If you want to come back in again, we'll take your question when you get back into queue.

Hi guys, I know you mentioned to Mark what the expected acquisition contribution is for the third quarter. Did you say what it contributed in the second quarter?

Chuck, sorry, could you repeat the question?

Yes, you mentioned what the acquisition contribution is expected to be for the third quarter. Did you say what it was for the second quarter?

For Q2 is pretty minor. The expense impact was somewhere around $1 million because we just had the -- one of the acquisitions done for a fairly short period of time.

Yes.

So it was very trivial.

Okay. What about the revenue contribution?

Very immaterial.

Okay. And then my other question was, Alex, you mentioned some caution regarding the PMI readings we've seen. Have you actually seen that show up in your orders recently or is that just kind of you looking at your macro-stuff and being aware?

We're watching (inaudible) personally do what's going on, on the macro-side, and it seems quite obvious to me that we'll see continued weakness in the PMI in the third quarter. I felt that way in April, and as we saw in Q2.

Yes.

We'll feel our way again here in July, and we'll see what we see in Q3. Now, when you look at our business overall, it tends to be the orders under $20,000 that respond to that --

Yes.

Where we tend to have a bit more influence over the outcome as in the system level business where we have a greater opportunity to gain market share. And that side, certainly so far, our investments in R&D and the field have really been successful in allowing us to deliver strong growth there. So we look at all of the factors available to us including obviously bookings and order growth through this morning in making our guidance decision.

Yes.

So our experience here in July is fully baked into our guidance for Q3.

Got you, okay. Thank you.

And Mr. Pai did queue back up. Your line is open, sir.

Thank you.

Mr. Pai, your line is open (inaudible -- multiple speakers.)

Yes, I had a question about Penang. Which is your -- you've broken ground in Penang already. The hiring over there, is it going to be expensed immediately? The folks that are coming online over there, or are you going to be capitalizing some of that and then expensing it only once the plant begins productions? And when do you expect that to happen?

Operating costs of staff, training, et cetera, et cetera, all will be expensed as incurred.

Got it. When do you expect the plant to start production?

Right now our current expectation is we'll begin production July of 2012. That's subject obviously to meeting the capacity. But our current plan is July of 2012.

Got it. Thank you.

All right. With no further questions in the queue, I would like to turn the conference back over to Mr. Alex Davern for any closing or continue --

Thank you very much for your time today. We look forward to a very exciting NI Week next week and thank you for your time.

Once again that does conclude our conference call for today, we thank you for your participation.