National Instruments Corp (NATI) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the National Instruments third-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 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 Pete Zogas, Senior Vice President of Sales and Marketing. For opening remarks, I'd like to turn the call over to Mr. 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 including statements regarding our opportunity to convert customers to PXI, our guidance for fourth-quarter revenue and earnings per share and moderating our operating expense growth. We wish to caution you that the statements are just predictions and that actual events or results may differ materially. We refer you to the documents the Company files regularly with the Securities and Exchange Commission including the Company's most recent quarterly report on form 10-Q filed August 3, 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 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 are -- we delivered record revenue in non-GAAP operating income for the third quarter. We continued to build a highly differentiated platform and we remain very cautious in the short term and continue to manage expenses carefully. Despite difficult economic conditions, I am pleased with our Company's disciplined execution, which allowed us to deliver record revenue and non-GAAP operating income for a third quarter. While we remain cautious in the short term due to uncertain economic conditions, I am optimistic about our long-term position in the industry from the sustained differentiation we delivered to customers through graphical system design. This approach to measurement and control systems provides higher performance, better integration and lower cost volume, enabling unique testing approaches not possible with traditional equipment.

In our call today, Alex Davern, our Chief Operating Officer, will review our results; Pete Zogas, Senior Vice President of Sales and 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 Q3 was a new all-time record for the third quarter at $290 million, up 7% year-over-year on a non-GAAP basis and up 11% in constant currency terms. Our revenue growth this quarter comes despite the significant weakening of the global industrial economy and the strong 23% year-over-year revenue growth we delivered in Q3 last year. Non-GAAP gross margin in Q3 was 76%, down 1% from Q3 last year. 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 4% year-over-year. Non-GAAP operating income was $40 million, a new record for a third quarter. It was up 10% year-over-year and represented a non-GAAP operating margin of 14%, up from 13% in Q3 last year. GAAP net income for Q3 was $24 million with fully diluted earnings per share of $0.20 and non-GAAP net income was $32 million with non-GAAP fully diluted earnings per share of $0.26. A reconciliation of our GAAP and non-GAAP results is included our earnings press release.

We believe the diversity of our business, the evolution of our 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, and our systems used in high performance tests and embedded applications. Despite the significant weakness of the global PMI in Q3, we saw continued growth of our orders over $20,000, which grew approximately 11% year-over-year and our average order size was up 7% year-over-year. A significant contributor to the success growth this quarter was the winning the largest application sale in the history of the Company. This application involves the use of LabVIEW and the NI PXIe platform to rapidly develop a production test solution, which offers the customer outstanding performance and accuracy at a very low cost to test per unit. Year-to-date, we received $53 million in orders for this application, $41 million of this was recognized in revenue through Q3, and we anticipate recognizing the remainder in Q4. Excluding the impact of this application, our orders over $20,000 would've been up by 2% year-over-year.

We believe that approximately 85% of the test market is still served by the traditional rack-and-stack instruments. This application win clearly demonstrates the opportunity to convert customers to PXI. This success of PXI replaces what had previously been a lower performance, higher cost traditional instruments set. This is a great example of the business advantages that our platform brings to our broad base of customers who value the NI platform for its smaller footprint, its lower cost, its higher performance and its ability to more rapidly leverage Moore's Law. Revenue from orders under $20,000, which were weak in Q3, have historically been more directly affected by the economic conditions in the global industrial economy. In Q3, orders under $20,000 were down 4% year-over-year in US dollars and flat in constant currency terms, reflecting the significant decline in the global PMI in Q3. Going forward, we will continue our intensity on these sales to further the broad based of adoption of our platforms by scientists and engineers worldwide.

Despite the weak industrial economy, we executed well in Q3, and there are some clear positives to take away from our results. First, we had record revenue for a third quarter, second, we had strong gross margin and third, we had record non-GAAP operating profit for a third quarter. Now, turning to cash management. Cash equivalents increased by $13 million during the quarter to $364 million at September 30, and during the quarter, we had a number of significant draws on our cash position totaling approximately $32 million. This includes $17 million we paid in dividends and $15 million related to the construction of our new manufacturing and R&D center in Penang, Malaysia.

Now, I would like to make some forward-looking statements. We're very concerned by the continued weakness of the global PMI in Q3, with the average for the quarter of 48.5 being the lowest since Q2 of 2009. Of ongoing concern is the level of the new order element of the index at 48 in September. (Inaudible) suggest that the overall index may well -- may remain well below 50 in Q4, and into 2013. We believe that this trend will restrain revenue growth and a broad, test the measurement industry in Q4. In the past, we have also seen that this sort of deterioration in the industrial economy, coupled with the weak start to the quarter, can result in a delay to large orders towards the end of the quarter, especially at year-end.

As a result, we are taking a conservative approach, and are assuming that we will not see the normal seasonal surge in orders towards end of the quarter. 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 low single digits in Q4. As a result, we currently expect revenue for Q4 to be in the range of $265 million, $295 million. We currently expect that GAAP fully diluted EPS will be in the range of $0.11 to $0.25 for Q4, with non-GAAP fully diluted EPS expected to be in the range of $0.17 to $0.31. Given the uncertain economic environment, we plan to host a business update call for investors after the market closes on December 10.

That these are forward-looking statements, I must caution you that actual revenues, operating expenses and earnings could be negatively affected by numerous factors. Such as any further weakness in the global economy, rescheduling of customer orders, large one-time customer orders, expense overruns, components supply, manufacturing inefficiencies, adjustments to acquisition or non-accruals, effective tax rates and foreign exchange fluctuations. In summary, while we are pleased with our execution in Q3, we remain concerned with short-term prospects for the industrial economy. We will be focusing on prudent expense management and delivering solid profitability.

With that, I will turn it over to Pete Zogas, Senior Vice President of Sales and Marketing.

Thank you, Alex. Despite a weakened economy, we were pleased to deliver year-over-year revenue growth and continue to build on our highly differentiated platform. Our graphical system design approach, as well as our innovation and strategy, have allowed us to disrupt traditional instrument based systems. We've continued to develop products that lower cost, reduce risk and shorten design cycles, which is a great benefit to our customer facing budget constraints. These products, combined with the expertise of our field sales force and Alliance Partner Network helped enable cost savings for our customers, which in turn, uncovered new long-term opportunities for NI.

As Alex mentioned earlier, our products serve a diverse and broad customer base. For example, this quarter our team in Mexico, saw great success in an academic application. The team worked with technical universities, government officials and department chairs across the country to standardize 35 Mechatronics labs on LabVIEW and data acquisition, laying a foundation for engineering excellence for years to come. We believe this standardization effort was a testament to the value that a graphical system design approach brings to engineering education in preparing the next generation of engineers and scientists to enter the workforce and drive innovation.

There is no better place to see the impact of our broad reach than our annual NI Week User Conference where we introduced over 40 new products and delivered more than 200 technical sessions to a record crowd of approximately 3,600 engineers and scientists. NI Week illustrates our commitment to customer success, serving as a catalyst for high-value technical and business discussions, connecting thought leaders across the industry including designers, developers, editors and industry pundits from around the world. This year, the NI Week Conference included several forums between entrepreneurs and engineers to address key technologies in the areas like physics, energy, RF, aerospace and defense. Among the new products introduced during NI Week were LabVIEW 2012 with design templates and sample projects for customers, the vector signal transceiver, the world's first software designed instrument, and the stand alone NI CompactDAQ system with a built-in dual core processor and onboard storage.

With LabVIEW 2012, we introduced enhancements for developing application architectures, accelerating user productivity, and helping to ensure our customers have the tools to be successful as applications scale in both complexity and size. We believe our long-term investment in LabVIEW is a great value to our customers as we continue to improve performance, add valuable features and preserve the investments that they have made in developing their applications in LabVIEW. 25 years ago, we redefined instrumentation with the introduction of LabVIEW, and at this year's NI Week, we continued to revolutionize the industry with the world's first RF vector signal transceiver or the VST.

This new PXI module, built on our established leadership position in modular instrumentation, and delivers a new class of software designed instrumentation. The softer centric architecture represents a new era where engineers and scientists can use LabVIEW to transform the VST into a new instrument or enhance its existing functionality. The VST provides industry leading performance for testing the latest wireless standards, such as 802.11ac and LTE, and it can replace multiple traditional instruments at a fraction of the cost and size while delivering measurements more than 10 times faster. One customer who has already realized the benefits of the new VST is Qualcomm Atheros, a leading provider of wireless technology. According to Doug Johnson, Director of Engineering at Qualcomm Atheros, the NI VST provides the freedom and flexibility in the way Qualcomm develops their 802.11ac solutions for customers, and has significantly improved their test throughput. The previous rack-and-stack approach took weeks of regression testing, but by leveraging the new VST, Qualcomm Atheros improved their characterization test times by approximately 200 fold.

Our data acquisition products continued to expand NIs measurement platform capabilities with CompactDAQ. During NI Week, we released the standalone NI CompactDAQ, which offers a high-performing, flexible standalone system for embedded measurements and logging applications. Using LabVIEW, engineers can build measurement and logging applications with over 850 LabVIEW analysis functions and over 50 C-series modules that cover a vast array of measurements types. Data acquisition applications can span from researching tornado phenomena to monitoring the structural health of bridges.

One recent application is from the Red Bull Stratos team, whose daredevil, Felix Baumgartner recently dove from the earth's stratosphere, successfully breaking the sound barrier and setting the world record for speed. His suit, equipped with sensors and recorders, measured everything from his speed to his heart rate. Back at Mission Control, his team views LabVIEW to monitor various IO, like altitude, pressure and oxygen levels. In the future, such equipment could prove useful in future space missions.

Our CompactRIO product revenue continued to grow this quarter, reaching a new third-quarter record. Combined with LabVIEW, CompactRIO provides customers with a strong value proposition by leveraging FPGAs for an off-the-shelf solution, which simplifies development and shortens time-to-market for advanced measurement and control systems. During NI Week, we extended our CompactRIO products to address smart grid power conversion systems. Using LabVIEW with the standard RIO architecture, customers can significantly reduce the cost and risk of designing embedded systems. A customer who is already seeing productivity gains with this technology is Dynapower Corporation, who recently developed a line of smart grid power converters. Dynapower needed to create a unique power converter to fully realize the benefits of smart grid storage. Using the standard RIO architecture and LabVIEW, Dynapower reduced their development times from one to two years to under six months.

To close, while we remain cautious due to the weakened global PMI, we are pleased with our ability to deliver record revenue for a third quarter. Based on key forward-looking economic indicators, we expect the global economy to remain very weak, and as a result, we will carefully manage expenses in the upcoming quarters. Despite these headwinds, we continue to deepen and expand our customer relationships, and are well positioned with our differentiated product offerings, our world class direct sales and service organizations and our strong Alliance Partner Network. With that, I will turn it over to Dr. T.

Thank you, Pete. In these difficult times, it takes disciplines to balance the short-term demands of business and the long-term objectives of building a company that is built to last. I would like to thank our employees for their diligent efforts, which resulted in record revenue and non-GAAP operating profit for a third quarter. Achieving revenue growth that outpaced expense growth is a testament to the discipline, execution, from our business teams. I see the long-term opportunity to disrupt the test and measurement embedded industries with our differentiated graphical system design approach. In test and measurement, we have an opportunity to accelerate the industry shift to launch a modular approach with PXI.

When we started our Company, we envisioned the central role software would play in instrumentation, and we are now truly seeing LabVIEW revolutionize the way engineers approach RF design and test. The new VST is another step in delivering on our vision of revolutionizing how test systems are designed through our high-performance FBGA-based real platform.

In industrial embedded, we deliver value to our customers by providing them with tools to develop next generation control and monitoring systems and ultimately, reduce their development costs. A recent embedded productivity study reinforces this value proposition showing our customers that design teams half the size complete their designs projects in half the time and more often, complete their projects on time or ahead of schedule compared to alternative approaches. At NI Week in August, our customers continued to raise the bar for innovation as they showcased their applications across all areas of science and engineering. Highlighted by the Annual Graphical System Design Achievement Awards, the University of Leeds won this year's Application of the Year, and the Humanitarian Award. Using LabVIEW and CompactRIO, they created the mechanical heart simulator, which is pivotal in researching new ways to address heart disease. We continued to be amazed at our customers creativity and how to use graphical system design to solve some of the world's toughest problems.

The NI approach to graphical systems design is redefining how systems are built, leveraging the performance of Moore's Law in both design and test applications. A great example of this is the transformation that's visible in cyber physical systems, which are distributed computer systems connected with the physical world to address some of the most difficult engineering problems. These systems take advantage of Moore's Law across various architectures that include a combination of processor and FPGA configurations, all of which can be programmed with LabVIEW. This unique capability of the NI platform delivers the economic benefit of high-volume to the unique needs of our diverse base of customers.

I have often stated that when we founded NI, I was looking to create a job that I would enjoy. It quickly became clear for that to happen, we would have to create a business that continued to expand to new long-term growth opportunities. We believe the fundamental drivers that provide long-term sustained growth has been new product R&D and a strong sales force. Over the past years, we have invested aggressively in research and development, with the output being new products to open up new business opportunities. Similarly with our strategic investments in developing a strong salesforce, we are positioned to help our customers find ways to lower their costs, improve their productivity and help them bring their own innovative products to market quickly.

In summary, because we have remained very disciplined in our execution, we delivered record third quarter revenue and non-GAAP operating profit. While we remain very cautious about the short-term uncertainties in the industrial economy, I remain optimistic that our differentiated approach to graphical system design are focused on driving shareholder value through long-term organic growth. And our ongoing commitment to customer success continues to set National Instruments apart from our peers. We will now take your questions.

Today's question-and-answer session will be conducted electronically.

(Operator Instructions ).

Our first question comes from Zach Larkin with Stephens.

Good afternoon, gentlemen. Thank you for taking my call.

Thank you, Zach. How are you doing?

Doing not too badly. How about you? First question, I wondered if we could maybe talk about the VST and some of the new products, in particular, but mainly, the VST. Now that it's out in the market, what is the market acceptance been like, and is it something that you've been able to start noticing impacting revenues, or has the macro issues maybe put too much of the cloud on top of that?

This is Pete, Zach. So obviously, we had one of our biggest launches ever at this NI Week with the VST. It's significant on many fronts, being the world's first softer designed instrument, so it's getting a lot of attention. We've gotten initial success in the form of orders, and we are very actively, now, taking the unit to these interested customers and there's a lot of activity in the worldwide sales organization.

Okay, thanks, Pete, for that color. And then I think last quarter, Alex, you might have mentioned that when we go through some of these troughs in demand or tougher macro environments, that there is the opportunity to actually go through and gain some share. I just wondered if there was anything going on now where you're sensing a shift towards the NI product platform, given the value proposition versus incumbent technologies?

Certainly, we have seen, traditionally, when we've seen periods of downturn, we remain very deeply engaged with our customers. We've continued to bring innovative technology to market, and the value proposition of lower-cost, higher-speed, lower cost of test per unit becomes much more compelling in times when budgets are tight, as Peter, I think, mentioned in his earlier remarks. So historically, we have seen the ability to take market share, to get designed into new applications during this time period, and from that point of view, these kind of demand pauses or troughs tend to be strategically very good for National Instruments. Although practically, in the short-term, they still do have the impact that CFOs collectively start to rein in spending budgets, then we're going to get impacted by that along with the rest of the industry. Thank you for question, Zach.

Thank you. We'll go next to Mark Douglass with Longbow Research.

Good afternoon, gentlemen.

Hi Mark.

Alex, in the third quarter, the non-GAAP tax rate, it was certainly lower than what it had been the first half of the year. Anything special going on with taxes here, and what were you thinking here in 4Q?

So Mark, as you are probably aware, under that GAAP rules that we have to make provisions available for certain exposures on taxes, and we are required then to release those provisions for the statute of limitations relating to those tax returns expires. And that traditionally has happened in the third quarter, given the timing of tax return filing, and that's something that happened again this year. So for the last number of years, it has caused us to have a lower tax rate in Q3 and then it tends to move up in Q4. This year, Q4 will also be a little bit of a challenge on the taxes. As you know, Congress has not seemed fit yet to renew the R&D tax credit, and that's going to cause us to have an overall higher tax rate this year, in general, than we did in 2011, unless there is some diving catch made between now and the end of the year in Congress on the R&D tax credit.

So that like, 25% or 26% for non-GAAP in the fourth quarter?

You know, I think we are looking at numbers that are up there in the mid-20s, but it's going to depend on the overall profit level. But it's quite a bit higher than we have seen here in Q3.

Right, right. And then on the earnings guidance, is visibility getting progressively worse? Usually, you have like an $0.08 window. Last -- this quarter, it was $0.10 and now, for the fourth quarter, it's $0.14. Is that just indicative -- has it been getting progressively worse throughout the last three, six months?

I would say, certainly, the news and the overall tone of things in the last six months, the last two quarters has certainly darkened. I think there's probably, certainly a greater degree of uncertainty, in our opinion now than there has been at any time during the year. And so I'm trying to learn from past experience and reflect the reality of greater uncertainty in a wider range; that's basically what we are attempting to do.

Thank you. We will go next to Patrick (multiple speakers) Newton with Stifel Nicolaus.

Good afternoon, Dr. T, Alex and Pete. Thank you for taking my questions. Alex, one that's kind of a macro slash guidance; in your guidance, you allude to the weaken industrial environment potentially leading to delays in large orders. And I'm curious if you saw any push-outs or delays exiting 3Q that kind of gives you a taste of this, or if you are just incorporating prior history and conservatism into the basis of this guidance. And then I guess when we -- if you take that to the next step, and you are discussing a weak industrial outlook, potentially continuing to 2013, is there any time in the company's histories that you would point to that you believe represents a good comp to what you are seeing now. Is this just a repeat of 2012? Does it feel more like 2003 or hopefully not, but 2009?

So, you know, it's -- obviously, I can't predict exactly what's going to go on with the economy, Patrick, but I think this is the essential question that we face at the moment. I would say that the tone of business did soften a little bit as we went through the Q3 into September and into October, and I'm trying to figure out which model to follow here. We've got a number of historical parallels in late '04, early '05; Q4 of '04, Q1 of '05, we saw a real pause in large orders around the election time and transition. That then recovered pretty quickly in the second quarter of '05, and we have seen Q4 of '08, when things were really bad, stayed bad for quite a while. So it's not clear exactly which pattern this will follow, but I feel at this point in time, given the levels of the PMI and the tone of business generally darkening, I think the industrial economy is going to be pretty severely challenged from now through the middle of 2013. That's my personal opinion. Don't take that as guidance; that's just my personal opinion.

Okay, and then just to clarify on the order front, there were no push-outs thus far in 3Q; it's just more of an expectation for 4Q?

No is a very absolute active number, so I can't say that's the case. I would characterize it as a softening in sentiment, in general, as we went through September into October.

Okay, and then a little bit more on your thoughts on the geographic basis. I think previously, you had talked about Europe being unlikely to recover over the next few quarters; I'm assuming there's a change there. But I wanted to get a sense of whether you experience any change in business momentum in the US with a better PMI number in September, especially in your transactional business. And then I also wanted your thoughts on the sustainability of your high-volume production test still driving results in Asia over the coming quarters.

So yes, it's an interesting one. I'm a believer, actually, that the global economy is pretty well synchronized in the major markets. The European team certainly has had a tough time for the last 12 months going back to Q3 and Q4 of last year, and I am very proud of their execution, their persistence to continue to deliver excellent service to our customers. And although their revenues were down 7% year-over-year in US dollar terms, in local currency, they actually grew the business, despite these weak PMIs, so I really want to give hat's off to our team in Europe. If you look at local currency growth in all three regions, Europe, Asia and the Americas, and if you exclude the large order we talked about earlier on, all regions grew to about 3% or 4% local currency in the quarter. So that's pretty consistent globally, and I think what we're seeing here from a phenomena on the industrial economy -- the industrial economy is a pretty synchronized beast, so I think we're going to see fairly common trends across the three geographies.

Thank you. We will take our next question from Anthony Luscri with JPMorgan.

Hi, thanks for taking the questions. Gross margin, you mentioned two factors in the quarter that impacted gross margin. Can you give us the magnitude of the impact and what it would have been had those -- perhaps the large order hadn't been in place. And then the follow onto that is if large orders continue to come your way, or at least continue to become a bigger percentage of revenue, should we assume a structural shift down in a gross margin over time in your model?

So let me break it down, I guess. There's -- you can break the impact this year to 1% year-over-year drop; roughly sixty-forty weighted towards the large order. If you look at our gross margin excluding that order, we would have been up about 0.4% in gross margin year-over-year. So the core business continues to be very strong from a gross margin performance point of view. Obviously, in order of the scale of, I think, $53 million in business, that's a very valuable customer. We work very aggressively with that customer to deliver the highest value we can and to drive our cost to servicing that customer down as much as possible.

Orders of that magnitude or in that same ballpark, are going to, I think, objectively, come with lower gross margins than our normal business. That can still allow us to drive good operating margin and allows us to engage that customer at a very, very high value. In terms of our overall longer-term trend of growing revenue coming from orders over $20,000, as we've seen for many years, the last five, six, seven years. In general, the volume lift we get from that, and the differentiation we deliver to customers in our system business has allowed us to expand our gross margins over time. And so in general, our large order business, I think, is good for gross margins, and we are very happy to be very competitive on the really big business in order to deliver that value to customers, and still give return to the shareholders of National Instruments.

And one other question, how should we think about opportunity for share repurchase?

Certainly, our use of cash, as you guys are aware, is number one, dividends number two, stragetic -- I'm sorry, excuse me, opportunist repurchase, number three is strategic acquisitions. We continue to look at it in that order. We are very interested in what will happen with tax policy next year, and we'll be looking very carefully at the implications that that has for the desires of our shareholders as to how they would like to see National Instruments return cash to shareholders. So we will continue to watch that pretty carefully. Thanks for your questions, Anthony.

Thank you.

(Operator Instructions ).

We move next to Richard Eastman with Robert W. Baird.

Yes. Alex, is there any chance that you can provide a little bit of color on some of the end markets? Whether it be the large orders or just the transactional business?

Yes, this is Pete. We've had success across many different verticals, mobile devices, communications; the defense and aerospace had a very strong quarter for us. A little bit weaker was energy in Q3; so that's the color that I can add this quarter.

Is there anything discernible on the academic side?

Academic, our products lines in academic continued to show good growth, and that continues to be a strategic area for us for investment. You're concerned, I'm guessing, Rick, about budgets going into academia, both of the state level, et cetera? I know that there has been some questions about that as certain municipalities and states are pulling back. But the value we deliver to our academic customers is -- I think has allowed us to continue to drive penetration there, and we remain bullish on the long term opportunity for National Instruments in the academic field.

Okay, and then just on -- geographically, when I look in local currency, and this could be a comparison issue, but the area that saw the most slowdown, quite frankly, in the third quarter, was Asia. And I'm curious if that was the case, and secondly, maybe outside of this large order, is that coming in the test area or in the industrial embedded area?

So you're right. If you exclude the large order, you will see that our revenues in dollar terms in Asia were flat, up I think 3% or something like that local currency if you exclude that large order. And again, you're seeing countries like China, where the PMI has been under 50 for a year. We have quite a lot of manufacturing production tests, end of line business in Asia.

When you look at our portfolio of business, that can range from academic government-funded research-type areas, to commercial R&D, to production test -- end of line production tests. Traditionally, we have seen in the line production test, being most sensitive to shifts in the economy. And a lot of that is, as you know, going on in Asia, so that's providing a headwind there. And I think that the production test, amount of expansion that is going on, our production capacity has probably slowed down quite a bit in last six months. Thanks for your question, Rick.

Thank you. We will go next to Stephen Stone with Sidoti & Company.

Hi guys, thanks for taking my question. Just a question on the Malaysian plant; is this up and running? If so, what's the capacity, or kind of give the forecast, what are you guys seeing as far as this hitting the expense line and everything?

Sure, it's a good question. Obviously, we have been running to a point where as business was going earlier in the year, we were headed to reaching maximum capacity in our production facility in Hungary. Those guys have done a tremendous job over the last 10 years of driving value there. The Malaysian plant, we actually moved in on Monday, and built our first product this week. Our plans there is we will be shifting some production from the Hungarian facility to Malaysia over the course of the next year. We do anticipate that the incremental overhead, if you like, of operating a second facility as we effectively double our capacity from a facility point of view, we'll hit our operating margins in 2013 by about 30 basis points.

Okay, and then can you give a little more color on the expense management? Is it cost cutting? What you guys think you're going to do, as far as that?

Perhaps Dr. Truchard will care to comment here in a second, but NI has been through many ups and downs of the global economy over the course of the last 35 years, and we've adopted an approach to ensure that we deliver value to all of our stakeholders in this timeframe. That we understand where our core value is, and our primary focus is, as we go through a downturn will be to preserve our core investments and ensure we're driving innovation and preparing for a recovery. Be sure we are being a stable employer to drive the value that we obtain from the high intellectual value -- intellectual content that our employees bring to bear, and make sure we keep the operation very focused on efficiency. And so with that said, we will be looking at this time frame, if in fact, we do see that large orders don't see the same surge at the end of the quarter and our earnings guidance turns out to be accurate. You will see us shift to a stance where we will be restricting hiring pretty severely. We will be managing expenses very, very carefully to ensure that we continue to deliver solid profitability.

We will be focused on expense control and also, have been really seeing that we get the value from the previous investments we made in this time frame continue to drive growth.

Thank you, Stephen.

Thank you. Next, we will take a follow-up from Richard Eastman with Robert W. Baird.

Yes. I noticed the software maintenance revenue was up quarter-to-quarter kind of measurably. Is that related to the large order shipments?

It's more related to a trend as we shift to a business model where we are renegotiating and closing enterprise-type agreements with our best customers. We are looking at that as a business strategy that allows us to drive much broader adoption and penetration of our software platform, broadly across our best customers, and that's really more the key.

So just remote seats are just dispersed seats can all basically link in? Is that where the support comes in?

It's a philosophy of allowing very broad access and our best customers to our software for a fixed fee.

I see, okay. I understand. And lastly, what were the large orders as a percentage of sales in the quarter?

Hold on a second. We're going to get you an answer. I believe it was a little less than -- -- it was right at 51%, I believe.

Okay. All right, thanks again.

Thanks, Rick.

Thank you, and with no further questions, I would like to turn the conference back over to Alex Davern for any additional or closing comments.

Thank you for your time today. We want to remind you we will be at the Stevens conference in New York City on November 13, and we will look forward to seeing you then.

That does conclude today's call. Thank you for participation.