National Instruments Corp (NATI) 2012 Q2 法說會逐字稿

Good day, everyone and welcome to the National Instruments second quarter 2012 Earnings Conference Call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and pass code. With us today are David Hugley, Vice President and General Counsel and Secretary; Alex Davern, Chief Operating Officer; James Truchard, President, CEO, and co-founder; and Eric Starkloff, Vice President of marketing. For opening remarks, I would like to turn the call over to Mr. 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 including statements regarding our future revenue growth opportunities, our revenue goal by 2016, guidance for your Q3 revenue and earnings per share, expected revenue growth in Q4, moderation of our operating expense growth, and success in large accounts.

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 10-Q, filed April 30, 2012. 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'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, strong growth in large orders, and record quarter for PXI products through a highly differentiated approach with graphical system design. I am pleased to report continued strong revenue growth and an all-time revenue record in Q2.

We believe the resilience of our business despite a weakened global economy is validation of the value we deliver to our customers through a graphical system design approach to measurement and control. The strong growth in large orders and the record quarter for PXI products illustrate the mainstream acceptance of our technology, and I remain optimistic about our position in the industry. In our call today, Alex Davern, our Chief Operating Officer, will review our results. Eric Starkloff, 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, and thank you for joining us today. Revenue for Q2 was a new all-time quarterly record at $292 million, up 15% year-over-year in US dollars and up 18% in constant currency terms. Our revenue growth this quarter comes despite the significant weakening of the global industrial economy and the strong 20% year-over-year growth we delivered in Q2 last year. During the quarter, AWR and Phase Matrix acquisitions contributed $10 million of revenue on a non-GAAP basis. As we have now passed the one-year acquisition of AWR and Phase Matrix, we will no longer be disclosing their revenues separately going forward. Orders for Q2 were up 24% year-over-year, and as a result, backlog increased by $16 million and short term deferred revenue increased by $5 million in the quarter. Non-GAAP gross margin in Q2 was 77%, down 1% sequentially from Q1. Gross margin was negatively impacted by the weaker Euro as well as the lower-than-average gross margin on a large order I'll discuss later. Total non-GAAP operating expenses were $179 million, up 14% year-over-year.

Non-GAAP operating margin was $44 million, a new record for second quarter. It was up 7% year-over-year and represented an operating margin of 15%. Net income for Q2 was $26 million with fully diluted earnings per share of $0.22, and non-GAAP was $33 million with non-GAAP fully diluted earnings per share of $0.27. The reconciliation of our GAAP and non-GAAP results is included in our earnings press release. We believe the diversity of our business, the evolution of the field sales force, and the strength of our product portfolio have been the key drivers of our sustained growth.

This can clearly be seen by the strong growth we have delivered over the last five years in our systems used in high performance tests and embedded applications. Despite the significance weakness of the global PMI in Q2, we saw strong growth of our orders over $20,000, which grew approximately 40% year-over-year. Our average order size reached a new all-time record of approximately $5,300, up 20% year over year. Orders over $20,000 accounted for 54% of our business in Q2, and we believe the success of our large orders reflects enhancements we have made in our product and service offerings, our excellent network of system integrators, and the performance of our outstanding sales teams. As we discussed last quarter, a significant contributor to the success for us in Q2 was winning the largest application sale in the history of the Company.

This application involves the use of LabVIEW and the NI PXI platform to rapidly develop a production test solution which offers the customer outstanding performance and accuracy at a very low cost of test per unit. Our graphical system design platform with tightly integrated hardware and software across multiple instruments goes well beyond the performance that can be achieved by traditional instruments or even big RNATE. In H1, we received $40 million in orders for this application. $25 million of this was recognized in revenue in Q1 and Q2, and we anticipate recognizing the remainder in Q3. We believe that approximately 85% of the test market is still served by traditional rack-and-stack instruments, and this application win clearly demonstrates the opportunity to convert this market to PXI. This $40 million success for PXI replaces what would have previously have been a lower performance, higher cost, traditional instrument sale.

We believe the recent validation of PXI standard by some of the biggest names in traditional instrumentation is encouraging more customers to consider PXI. The contest in the industry will now be to see who gets the remainder of the market which is not yet served by PXI solutions. While we're excited about the performance of our large orders business, revenues from orders under $20,000 has historically been more directly affected by the economic conditions in the global industrial economy. This business up was 1% year-over-year in Q2, reflecting the significant decline in the global PMI in Q2.

During the rest of 2012, we'll be increasing our efforts to grow this business to further the broad-based adoption of our platforms by scientists and engineers worldwide. So despite the weak industrial economy, we executed well in Q2. There are some clear positive to take away from our results. First, we had a record revenue quarter. Second, we had strong gross margins; and third, we had a recording operating income for a second quarter. Now turning to cash management, during the quarter, we had a number of significant draws on our cash position totalling approximately $45 million. This includes $17 million we paid in dividends, $7 million related to the construction of our new manufacturing and R&D center in Penang, Malaysia; $12 million for the final settlement of the dispute with the GSA that we had accrued for in Q3 of last year, and $9 million in income tax payments. As a result, our cash and short-term investments declined by $27 million during the quarter. Now, I would like to make some forward-looking statements.

We're concerned by the continued weakness of the global PMI in Q2 and especially with the significant drop below 50 in June. Of on-going concern is the drop of the new order element of the index to below 48 in June. It is now at the lowest level since Q2 of 2009, and this drop suggests that the overall index may continue its decline in July. We believe that this trend, coupled with the recent fall in the Euro, will restrain revenue growth in the test and measurement industry in the second half of the year. Despite the economic backdrop of currency head winds, we do expect continued year-over-year revenue growth in Q2 as a result of the success we have achieved in growing our system sales this year.

Also, as we continue to absorb the significant investments we made in 2011, we expected our year-over-year growth in non-GAAP operating expenses will be in the mid to high single digits in Q3, down from 14% in Q2. As a result, we currently expect revenue for Q3 to be in the range of $272 million to $302 million. We currently expect a GAAP fully diluted earnings per share will be in the range of $0.14 to $0.26 for Q3 with non-GAAP fully diluted earnings per share in the range of $0.20 to $0.32. Also in our guidance is a 1 cent per share loss on foreign exchange due to the fall of the Euro in July.

We expect revenue in Q3 to benefit from a reduction in backlog as we complete shipment of the large system order discussed earlier, and as a result, we expect sequential revenue growth in Q4 to be below our historical seasonal average. 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 weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing and efficiencies, adjustments to acquisition and accruals, effective tax rates, and foreign exchange fluctuations. In summary, despite the weak global economy, we're pleased with our execution in Q2.

Our goals are to leverage the investments we made in 2011 to enable sustained revenue growth toward our target of $2 billion in revenue in 2016. And to continue to drive toward our long-term, non-GAAP operating margin target of 18%. I would also like to remind you we'll be hosting our annual investor conference in conjunction with NI Week on Tuesday, August 7th, 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 there. With that, I'll turn it over to Eric Starkloff, Vice President of Marketing.

Thank you, Alex, and good afternoon. We're pleased with our record quarter despite a weakened economy. We believe our performance indicates that our innovative platforms are achieving mainstream acceptance and validates the investments we've made over the past decade in both our field sales organization and in key areas like LabVIEW, PXI, CompactRIO, and ourdata acquisition products. 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 and new application areas. At the heart of graphical system design is LabVIEW, which promotes problem solving, accelerates productivity, and empowers innovation for our customers. LabVIEW is unique in providing a high-level design tool that seamlessly integrates with NI PXI, CompactRIO, and data acquisition hardware.

When our customers use LabVIEW, they're plugging into a vast ecosystem of developers who share code and best practices. A marketplace of add-ons in the LabVIEW tools network, and access to support from more than 10,000 different types of hardware devices from both NI and third parties. This widespread adoption of LabVIEW has resulted in a strong long-term growth opportunity for our company. As our software products continue to bring the latest technologies to measurement control applications, this quarter, we introduced mobile apps for iPhone, iPad, and Android devices that support LabVIEW and NI hardware connectivity,helping engineers integrate the latest mobile technology into their applications. By combining the portability, ease of use, faster start-up time and longer battery life of mobile devices with the power of LabVIEW, engineers can more productively access measurement data from data acquisition and embedded monitoring systems. Our distributed IO products continue to see growth, achieving record revenue for the second quarter. The growth was led by our CompactRIO platform built on the LabVIEW architecture.

This quarter, NI introduced new wireless IO product that give engineers new capabilities to address applications and environmental monitoring, industrial measurement and controls, and energy. A recent customer successfully deploying CompactRIO is Siemens, who developed an application for Denver RTD, a bus and light rail service provider, in order to prevent light rail car failure due to high-voltage transience. LabVIEW and CompactRIO were chosen due to the flexibility of the reconfigurable FPGA hardware, the ability to accommodate a variety of centers and protocols, and extend and remote operations. The Siemens team started as a first-time LabVIEW user, and thanks to various service and support offerings, including our LabVIEW training course, they completed and tested their software applications in under six months. Our PXI products also saw all-time record sales this quarter experiencing very strong year-over-year growth. This growth was driven by adoption in high volume application, which we believe is a clear indication of mainstream acceptance of PXI.

Since pioneering the PXI platform in 1997, NI has propelled PXI to be a well-accepted industry standard and the premiere solution for meeting increasingly complex test requirements at a fraction of the size and cost of traditional solutions. Our LabVIEW RIO architecture, which gives our customers the ability to program FPGAs on NI PXI products with LabVIEW has been a strong driver of differentiation and growth. This capability is unique in our industry and has enabled PXI to deliver drastically improved performance over traditional solutions as well as serve new applications like Protocol-Aware ATE and Real-Time Test. Building on 15 years of innovation and developing the PXI standard, and our more than 500 NI PXI modules, this year we'll announce how we plan to redefine instrumentation again through one of the biggest PXI product launches in the history of the Company.

NI continues to expand our investment in our RF product portfolio which reached an all-time record in revenue. This quarter, we attended the International Microwave Symposium, or IMS, where we announced our first major codevelopment with AWR. New connectivity between LabVIEW system design software and the AWR visual systems simulator for RF and microwave system design. This connectivity will help address the significant need engineers face for including real world measurements in their design flow, helping overcome the time-to-market constraints that they face. Overall, IMS was a significant opportunity for NI to showcase its latest RF capabilities to our customers. Our increased brand recognition in this industry was demonstrated by the fact that we received double the number of leads this year versus the 2011 IMS and quadruple the number of leads since 2010. We attribute this success in leads to our strategic focus on building industry-leading expertise in RF product development and field sales, along with our acquisitions of Phase Matrix and AWR, both of whom already had strong brand recognition in this application space. NI Week has grown to become one of the premiere technology events in our industry.

Despite the weakened economy, this year's NI Week event registration is on track with last year's record attendance, and we expect a strong increase in press attendance from trade publications across the globe. Some of the highlights from this year's NI Week will include innovative customer solutions and interactive demos that demonstrate the value of NI product in a breadth of application areas, significant new software and hardwareproduct releases, attendance from our global sales force and companies in our alliance partner network who will be collaborating closely with the thousands of engineers attending the event, and finally, an up-close look at our significant new developments in wireless tests and how we plan to redefine instrumentation in that space. We hope to see you all at NI Week. And with that, I'll turn it over to Dr. T.

Thank you, Eric. I was pleased with our performance in Q2 as we delivered record quarterly revenue despite a weakened economy. I believe these results are indicators of the long-term stability of our business to weather changing times in the microeconomy as well as the sustained differentiation we delivered to customers through a graphical system design approach that accelerates their productivity. I would like to thank our employees for their hard work as we drive toward our goal of $2 billion in revenue by 2016. As we transition away from the era of rack-and-stack instruments in automated tests to the next era of software-defined instrumentation, the modular approach which PXI continues to gain market acceptance as the most flexible platform available with over 1500 products from over 70 vendors. This quarter was another record for NI PXI product, and we believe it is evident that we are gaining share in the 85% of the test and measurement industry that's still served by the traditional approach.

We have continued to demonstrate our ability to release innovative products that are ahead of the industry. In RF, we announced collaboration with the Technical University of Dresden to explore new 5G mobile wireless systems and help determine the direction of future global standards by using LabVIEW system design software. Working with the leading research institutes such as TU - Dresden, NI is proud to accelerate the development of future technologies that will ultimately impact everyone who uses a cell phone. At SpaceX, who designs and manufactures and launches some of the world's most advanced rockets and spacecraft, NI technology has been used to help launch the first commercial rocket to orbit the Earth. SpaceX uses LabVIEW and NI hardware to control launchpad equipment and command and monitor Falcon 1 and Falcon 9 launch vehicles in its Dragon spacecraft. This quarter, SpaceX made history when its Dragon spacecraft became the first commercial vehicle in history to successfully attach to the International Space Station.

And in physics research, NI was honored to host Dr. Rolf-Dieter Heuer, general director of CERN to give a keynote address at our NI Days in Switzerland to discuss CERN's search for the elusive Higgs boson particle. At the beginning of July, scientists at CERN announced evidence suggesting that the H-like particle has been found, resulting in one of the most monumental discoveries in science in this generation. CERN uses NI PXI and LabVIEW RIO architecture to control equipment that guides the smashing of protons in the Large Hadron Collider,the world's largest particle accelerator. Over 120 NI PXI systems with NI RIO modules controlled its process with millisecond resolutions which enables monumental gains in scientific discovery. Many of these examples of innovation will be on display during our annual NI Week Users Conference, August 7-9, when thousands of engineers will hear about new products and see exciting demonstrations from our R&D and product marketing teams.

We will also be hosting graphical system design achievement awards, which showcase how our customers tackle some of the world's most significant scientific and engineering challenges. In summary, while we continue to face uncertainty in the macroeconomy, I'm pleased to see our investments in field sales and R&D lead to a solid performance this quarter. We believe that the diversity of our business, the mainstream acceptance of graphical system design, and our ability to continue to revolutionize instrumentation will create sustainable differentiation for NI and our customers, partners, suppliers, and shareholders.

I am optimistic that we're well positioned with a strong foundation to support future growth and profitability, and I would like to thank our employees for their commitment to innovation, prudent expense management, and their unwavering focus to serving our customers. We will now take your questions.

Today's question-and-answer session will be conducted electronically. (Operator Instructions). Your first question comes from Zack Larkin with Stephens Incorporated.

Good afternoon, everyone. This is Chris Godby in for Zack Larkin. Thanks for taking my call.

No problem, Chris. How are you today?

Good. Thanks. First of all, can you give us a little bit more color on what you're seeing geographically? What areas are driving growth and what are your expectations in the near term?

Sure, you know. We certainly saw some challenges in some of the regions in the second quarter, and it is a bit of a continuation of the trend we saw in Q1. Europe in particular, obviously saw revenues down 4%. That is somewhat impacted by currency. It is difficult market conditions for our teams in Europe. and I think. given how weak the economy and the PMIs are there, they did an excellent job to deliver modest local-currency growth despite the challenging economy. Frankly, I don't see any immediate prospects of improvement in the market in Europe. Looking out for the next couple of quarters, I think that's probably unlikely. And that coupled with the weakness of the Euro currency itself against the dollar, obviously that creates a headwind that we have to battle as we go into the second half of the year.

In the US, we had strong growth last year in Q2, so it was a tough compare for our business in the US, and you know, another concern point as we talked to the call, there was a pretty dramatic drop in the PMI in the US between March and June; and that traditionally has had an impact on our broad-base business. We saw some of the impact in the second quarter. In Asia, tremendous success, obviously a lot of high volume test in Asia. We've invested a lot in the region of Asia and the emerging markets over the course of the last decade. Teams are continuing to execute very, very well. So strong growth in that region. We anticipate that Asia will continue to grow as a proportion of our business overall and starting to invest with that expectation as we go forward.

Great. Thank you very much. Then also, can you talk a little bit about the industrial embedded market? What key opportunities are you currently focused on right now and what do you need to do strategically to continue to penetrate those markets?

Sure. Hi, Chris, this is Eric. I'll take that one. As we've said before, the embedded market continues to be a very attractive long-term market for us, and it is one that has been growing faster than the company average. The opportunities there in a number of different industries, and I'll give a few here to answer your question, but I'll also point to the fact that we'll be diving pretty deep on a number of these at our investor conference at NI Week in a couple of weeks. Certainly, opportunities in life sciences applications have been strong. We've seen a lot of opportunity over time in energy, both traditional and alternative energy. And in transportation applications. Like the one I mentioned in the call with Siemens which is basically a transportation kind of monitoring application based on our CompactRIO platform.

Great. Thank you very much and thanks for taking my call.

Next we'll hear from Patrick with Stifel Nicolaus.

Good afternoon, Dr. T., Alex, and Eric. Thanks for taking my question.

Hey, Patrick.

My first question is on the large order side, I think even when I normalize large orders by removing the sales you imply from the large application sale, I'm still calculating that you're over-$20,000 orders exceed 50%. Can you discuss if this deterioration in the macro conditions could actually accelerate trends toward PXI long-term given the value proposition? I guess what I'm trying to discern is if the scrutiny that we're hearing from customers for higher-cost TNM platforms could actually benefit you guys longer term given your value proposition.

I'll take that, Patrick. Yeah, I think certainly, and we've seen the trend play out before our value proposition. Part of our value proposition is very competitive cost of test. We achieve that both by lower cost equipment in PXI as well as faster test times, which ultimately for our customers means less test equipment. I think that in the long-term, that dynamic definitely plays in our favor; and I think our platform and PXI is very, very competitive from across the test point of view.

Alex. I'll jump in here and maybe add a comment to that, Patrick. Traditionally, while the global industrial recessions are not necessarily good for our business overall, from a market share gain point of view, I going to completely agree with Eric. That tended to accelerate our gain in market share during a downturn, while on the absolute, it can create a headwind.

Okay. Thanks. That's what I was hoping to get at. I guess, Alex, on your large application order that you received in the current quarter, it looks like you had a follow-on order of about $23 million compared to the original expectation of about $10 million to $15 million. Do you have any opportunities for additional follow-on orders from this customer, and have you received any inquiries from this customer's competitors for similar applications?

Well, maybe a comment on the scale first. Obviously we gave -- we had announced that we had booked $17 million, if I remember correctly, on the last call. And we have an expectation of an extra $10 million to $15 million, which would put the midpoint of our guess at the time at $27 million. We obviously came in at $40 million, which I guess almost 50% more than that. We do anticipate some follow-on orders from the customer for sure. There is also other applications that this customer would like to serve. Obviously, we've kept the nature of the application highly confidential, so I'm not sure any of their competitors -- hopefully none of them are aware that we're servicing the customer in this way; but certainly as we look at the broader market that we're engaged in here, we see the opportunity for a significant amount of business that might be available in this overall market space in the next couple years.

All right, thank you for taking my question.

Thanks, Patrick.

From Longbow Research, we'll hear from Mark Douglass.

Hi, good afternoon, gentlemen.

Hey, Mark.

So more on the big order, that application, thanks for the clarification there that there could be some follow-on orders. Do you think there are more in the pipeline, maybe not -- $40 million is pretty large, but certainly some big opportunities that you've identified over the next year that you think you can bid on? Is it possible to even get -- expect orders like this in the next year or two again? Not necessarily the same customer, just in that space?

You know, as we commented, Mark, on the last call, it took us 35 years, I guess, to get the first $40 million application success. I think it would be fair to say we would expect it wouldn't take another 35 years before we see the second one. But having not had a large volume up to now, it is tough to get statistical about forecasting, so I would say, as we've talked many times here in our investor conference, NI is very clearly moving up the value chain in test and measurement and embedded without a shadow of a doubt. As Eric said, we're seeing PXI become much more accepted as a mainstream platform for large deployments. Certainly, it is our absolute intent to try to capture other large opportunities like this. I'm just not prepared to predict them at this point in time. We'll certainly be trying hard to make major penetrations into these big application successes over the coming years.

Okay. With the RF products, can you say roughly how fast your RF products grew in the quarter and what do you think that was relative to the market?

I'll comment on that. So RF has continued to be one of the fastest-growing product areas of the Company, growing significantly faster than the company average, and so we saw that continue again in Q2. So I'll just keep it at that. It's a significant pace over the Company's growth. And we're continuing to invest in that space. It is a very large market opportunity. We believe we have a strongly differentiated position. As I alluded to, we have some products in the pipeline, some of which will be announced at NI Week, and we think that's going to be pretty exciting news in the marketplace as well.

So Tuesday of NI Week will be a very interesting milestone in the history of NI's penetration into the RF market.

Thank you.

(Operator Instructions). From JPMorgan, we'll go to Anthony Luscri.

Hi, guys, thanks for taking the call.

Hi, Anthony.

You mentioned in your prepared remarks that you're increasing your efforts on orders under $20,000 -- they've been negatively impacted by the microeconomic conditions. Can you talk about those activities and the impact to your operating expense profile?

Sure, Anthony. As we have traditionally seen in the past, it is not uncommon unfortunately when there is a rapid drop in the PMI for the broad base of our transactional business, to see an impact from that. We still saw it in positive territory in Q2 despite the currency headwinds. In general, the performance was relatively good given the economic circumstances. This is a real strategic area of our business because it broadens the platform opportunities for assistance business as well, and so we do and have been planning since earlier in the year an increased investment in terms of marketing events and sales activity here. That is baked into our expectation on expense guidance that we gave in the second half of the year.

Just to dwell on that for a second, obviously, we went through a significant investment phase last year and especially in the Q2/Q3 time frame which is the window for a lot of the recruiting that we typically do. And we've seen our operating expense goal drop from 30% year-over-year in Q3 last year to 20% in Q4 and then 17% in Q1 and 14% in Q2 and now expecting mid-single digits in Q3. So I think we've got a pretty good handle on the expense side, and we see room to get a good economic return on this incremental focus on our broad-base business. Dr. Truchard might care to comment about its strategic value.

Sure. First off, the investment we made last and people would be starting to apply in this time frame as they become trained and ready to serve this broader space. Typically the younger engineers will focus first on the broader market place before specializing in some area. So we continue to invest it in to this point. As Alex said, we expanded the role for seminars and for some of the marketing activities earlier so that we can now start working on these areas like data acquisition products and the like.

Thanks for that. And then in the quarter, you were impacted negatively by currency by 3 points. What's your assumption going forward? If you could remind us; what is your seasonal revenue growth in the fourth quarter just given the volatility over the last couple of years? I'm unclear what that is.

Can you repeat the last part? I think I didn't quite hear it.

What is your fourth quarter seasonal revenue profile?

The seasonal pattern historically?

Yeah. Yeah.

Sure. So we got a hit on the revenue side of 3%. It's almost $9 million. So it is quite significant. It obviously has a gross margin impact because we typically don't change pricing internationally during the quarter. So that did have an impact on our gross margins as well. And then we had a $0.01 per share loss of FX below the line, below the operating margin line, so that weakness of the Euro certainly is not good for our business as we go through a particular quarter. As we look out, we've seen the Euro continue to weaken in July. So in our guidance, as I said on the call, we're anticipating another $0.01 share loss on foreign exchange on our net on hedge receivables in the third quarter should the Euro finish up where it is now.

We'll be looking at pricing internationally as we go through Q3 and then on the issue of normal sequential growth, historically, our average sequential revenue growth in Q3 to Q4 has been somewhere in the 11%ish range. And that's varied depending on the economic circumstances. It has been pretty consistent with the exception of Q4 of 2008, when we saw significant impact on our Q4 revenue and then last year; in Q4, we saw quite a bit of impact as a result of the Euro crisis in Europe itself. Now we do anticipate at this point in time we'll be shipping the rest of that large application order here in Q3 and that will be coming out of backlog and then that may elevate our Q3 revenue. So given that and my personal expectation of the PMI is going to continue to fall through the third quarter. I would be a little cautious on assuming a normal seasonal pattern in Q4.

Okay. Thanks. Last question is, you mentioned that your large orders typically negatively impact your gross margin profile. Can you highlight -- is it mainly a pricing issue or is there added services or other items that are weighing on that gross margin profile that we should be aware of?

Let me maybe correct something there, Anthony. Typically, the large order growth we've seen over the last 5, 6, 7 years has actually helped our gross margin profile because it has allowed us to drive up volume, drive down cost, and improve our margins overall. Now this $40 million success is a bit of an exception to our normal business, and so in that situation, we're dealing with gross margins that are below the average. In general, our large order business is actually a real asset to the growth of our gross margins over time and has helped us stimulate them. I would look at this a little bit up until now as an isolated exception. Having said that, there is plenty of leverage from that large order, so from a net operating point of view, it's good business.

Okay. Thank you.

With one question left in the queue, gale to Rob Mason, Robert W. Baird.

Good afternoon.

Hi, Robert.

I wanted to circle back to the geographic color if I could. So Europe, I guess, was up 1% in local currency; but obviously, I mean, the weakness there is well documented. What steps out to me is the US being down given that the PMI fell off later in the US. Obviously it has weakened, but later to do so. And it seems the US also -- or the Americas -- a bigger deviation in Q2 versus the normal seasonal pattern. Again, if I kind of -- look at it like that. Is that a fair premise? That the US -- did the surprise you in weakness?

A little bit, yeah. I would point to the fact that there was a very precipitous drop in the PMI in the quarter from 55 to below 50. That change in direction tends to have a pretty outside impact on our transactional. So we've seen that many times in the past. So that, I think, is probably a core to it. We did have some of our US resources that were focused on helping on some of these large orders as well that may be shipped overseas, and that was a little bit of a factor as well. However, we continue to watch this as we go forward. As we said in the call, we're focused on ensuring that we continue to penetrate these large account opportunities and make sure we put sufficient resources into our broad-based business to ensure we can continue to grow that business as we move forward. And certainly, I think we'll be looking for the new products to be released at NI Week to give a lift to our business in the US.

How are your academic and also your aerospace defense end markets holding up?

I'll let Eric address that one.

Sure. Academic has continued to hold up well, so we're still seeing a growth there. Not too surprisingly, aerospace and defense has been a little weaker. So it was close to flat in the quarter. So I think that's probably reflected in that overall market. I think, relative to the market, we probably did pretty well there; but that's been an area of a little bit of weakness.

Okay. Maybe just last question. So your order growth in large systems being 40%, obviously, I'm assuming the one particular customer influenced that. But if I try to remove that impact, it looks like your growth there is still very strong.

Still very healthy. That's right.

Could you just speak to though the current order tone there as you went through the quarter and as you enter Q3 -- I guess, step back and look at the range of your guidance, the $30 million range, certainly appreciate all of the uncertainty out there; but you do go into it with a big level of backlog that you plan to ship. Could you speak to the current order tone in that large system area?

Sure, I'll speak a little bit to experience, and having been on these calls, and acting as a CFO at NI since 1997, I've learned a few lessons on how these patterns tend to play out. When we look at where we are, we're a turns business as you're well aware, Rob. So we have significantly higher backlog coming into this quarter, but it is still only a tiny fraction of the revenue we hope to generate in the quarter, so it is roughly 10% or so, 11% of our revenue guidance for the quarter. My experience has been in this situation that you can have lots of conversations with sales about expectations for large deals, et cetera. But predicting how revenue flows and orders might shift between one quarter and another in an environment like this where the economy is so uncertain, it is a very unpredictable situation. And so I've learned through many bitter lessons over the years and this kind of situation to be pretty cautious, and that's fundamentally my approach. Everything we know about order flow so far is obviously built into our guidance.

Okay. But did you see any noticeable or -- did your field see any noticeable change in quoting activity on that large systems bucket?

Activity doesn't tend to change rapidly over one period or another. This is informed judgment of what we see in the market place, and then experience to guide what we realistically think might happen going forward.

Very good. Thanks for taking the question.

No problem. Thanks so much, Rob.

And seeing no other questions at this time, I would like to turn the conference back over to Alex Davern for any concluding remarks.

Thank you very much for your time and attention today. We look forward to seeing you at NI Week in two weeks' time.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.