National Instruments Corp (NATI) 2015 Q3 法說會逐字稿

Good day everyone and welcome to the National Instruments third quarter 2015 earnings conference call. Today's call is being recorded. You may refer to your press packets for the replay dialing numbers and pass codes. With us today are David Hugley, Vice President, General Counsel and Secretary, Alex Davern, our Chief Operating Officer, John Graff, our Vice President of Marketing and Dr. David Hugley our Vice President and General Counsel of Secretary. For opening remarks I would like to turn the call over to Mr. David Hugley, Vice President, General Counsel and Secretary. Please go ahead, sir.

Good afternoon. Also I would like to say that Dr. Truchard our CEO is her with us today. Good afternoon. During the course of this conference call we shall make forward-looking statements including statements regarding our ability to gain market share, the impact of our acquisition of Micropross and our guidance for fourth quarter 2015 revenue, earnings-per-share and effective tax rate. We wish to caution you that such statements are just predictions. That actual events or results may differ materially.

We refer you to the documents the Company files regularly with the Securities and Exchange Commission including the Company's most recent Annual Report on Form 10-K filed February 19, 2015 and most recent Quarterly Report on Form 10-Q filed July 31, 2015. 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 point for Q3 are continued revenue growth, sustained gross margins and disciplined expense management. In Q3 we saw continued core revenue growth across most product areas despite the challenging PMI and increased weakness from our energy customers. This core growth together with discipline, expense management has allowed us to maintain our non-GAAP operating margin for Q3 at last year's level.

The strength of our business model has allowed us to recover from currency-driven decline that we saw in our Q1 operating margin and bring our non-GAAP operating margin for the first nine months to 13% flat with last year. Also today we announced the acquisition of Micropross, an industry leader in the supply of test solutions for near field communication and wireless charging. We welcome the Micropross team and look forward to leveraging their industry-leading technology true to MI brand and sales channel.

In our call today Alec Davern, our Chief Operating Officer, will review our financial results, John Graff, our Vice President of Marketing, will discuss our business and I will close with a few comments before we open up for your questions. Alex.

Good afternoon and thank you for joining us today. Today we reported Q3 revenue of $300 million, down 4% year-over-year. Core revenue, which we define as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange, was up 5% year-over-year. To help investors better understand these underlying trends in our business we have added an additional slide to the Investor Presentation which shows a comparison of global PMI to NI's core revenue growth.

During Q3 we completed the reorganization of our regional operations into three regions. To drive greater scale and operating efficiency. The three new regions are the Americas, Asia-Pacific and EMEA represents Europe, the Middle East, India and Africa. In US dollar terms revenue was down 3% in the Americas, up 2% in EMEA and down 14% in Asia. The vast majority of the year-over-year decline in Asia is related to our largest customer. Historical data showing the revenue from the three regions is available at our Investor Relations website.

Non-GAAP gross margin in Q3 was 75.4%, flat with Q3 last year. Total non-GAAP operating expenses were $183 million, down 4% year-over-year primarily due to the impact of the stronger dollar. For Q3 our non-GAAP operating margin was 14% flat with last year. Our non-GAAP effective tax rate in Q3 was 30% compared to a negative effective tax rate last year of minus 4%. As you may remember in Q3 of last year we released $14 million in tax reserves as the result of the conclusion of an IRS audit. This increased our fully diluted earnings per share in Q3 over last year by $0.11 per share.

The Q3 net income was $23 million with fully diluted earnings per share of $0.18 and non-GAAP net income for Q3 was $30 million with non-GAAP fully diluted earnings per share of $0.24. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. Taking a look at order trends. For Q3 the value of our total orders was down 2% year-over-year. Included in that total is $6 million in orders received from our largest customer compared to $12 million in Q3 last year. Revenue from our largest customer was $6 million in Q3 this year compared to $17 million in Q3 last year.

Breaking down our order values, excluding our largest customer we saw a 2% year-over-year decline in our orders with a value below $20,000 while orders with a value between $20,000 and $100,000 increased by 3% year-over-year and orders with a value over $100,000 grew 4% year-over-year.

Turning to cash management. During the quarter we paid $25 million dollars in dividends and used $64 million to repurchase 2.2 million shares of NI common stock at an average price of $28.94 per share. Today we also announced the acquisition of Micropross, an industry leader in the supply of test solutions for near field communications and wireless charging. The addition of Micropross will strengthen NI's position as a global leader in the design, prototyping and testing of RF and communication systems allowing us to provide comprehensive coverage for the most common wireless standards found in modern wireless consumer devices.

This acquisition directly aligns to NI's growth strategy through further penetration into target growth markets. We plan to leverage our leadership position and technology of Micropross to accelerate our time-to-market and drive revenue growth due to differentiated brands, sales channel and manufacturing scale of NI. The acquisition closed on October 23 and valued Micropross at EUR95 million including net debt assumed. 90% of which was paid in cash, and 10% in shares of NI common stock.

Micropross is a very successful software leader at this space and the transaction valued Micropross at approximately six times 2015 estimated revenues and approximately 9 times estimated 2015 EBITDA. The acquisition efficiently deploys a portion of NI's offshore cash and is expected to be accretive to non-GAAP earnings in 2016. Please see the slides attached to the Earnings Presentation for more details.

Now, I would like to make some forward-looking statements. Given the current trends we are assuming in our guidance that the global PMI will continue to be weak in Q4 and as a result we are guiding for total revenue in Q4 to be in the range of $315 million to $345 million. At the mid-point this represents core revenue growth of 5% year-over-year. We currently expect revenue from our largest customer to be $5 million in Q4 down from $7.5 million in Q4 last year.

We currently expect GAAP fully diluted earnings per share will be in the range of $0.21 to $0.33 for Q4 with non-GAAP fully diluted earnings per share expected to be in the range of $0.27 to $0.39 per share. I would also like to spend a minute on taxes. Our Q4 guidance assumes that our non-GAAP effective tax rate will be approximately 34% this quarter. This is higher than the 30% we had previously guided for the full year. This 4% effective tax rate difference is equivalent to approximately $0.02 per share in Q4.

On a year over year basis the expected increase in the Q4 non-GAAP effective tax rate from 21% last year to 34% in Q4 this year is expected to reduce our non-GAAP EPS by $0.07 per share. Our guidance for non-GAAP effective tax rate in 2016 remains in the range of 21% to 23%. In summary, while Q3 was a challenging quarter due to the strength of the US dollar and the sequential decline in the global PMI, with September posting the lowest PMI in two years, we continued to execute well and positioned ourselves for future growth.

While we will continue to experience a drag on our revenue from currency headwinds in Q4, entering Q1 we expect to have more favorable compares which should allow the strength of our broad-based business to show through. As these are forward-looking statements I must caution you that our actual revenues and earnings could be negatively affected by numerous factors such as any weakness in the global economies, fluctuations in revenue from our largest customer, foreign exchange fluctuations expense overruns manufacturing efficiencies, adverse affective price changes and effective tax rates. I would also like to mention that we will be at the Stifel Conference in Chicago on November 12th and the NASDAQ Conference in London on December 1st.

With that I will turn it over to John Graff, Vice President of Marketing.

Thank you, Alex. In Q3 we felt the effects of broad headwinds. Notably continued impact from the strength of the dollar, the decline in the global PMI and weakness in PC sales. Additionally, our embedded business was challenged by a significant drop in oil and gas spending which reduced our total revenue by approximately 2% year-over-year. However, as Alex stated we saw core growth across much of our portfolio despite these headwinds.

Q3 once again brought our NIWeek user conference to Austin. This year we hosted over 3,000 attendees as well as over 18,000 attendees who watched the live stream of the key notes online. The content and presentations at NIWeek are the foundation for a series of global events called NIDays where we expect to host around 25,000 attendees in 42 cities around the world over the coming months. NIWeek served as a look into the future through the eyes of industry thought leaders, executives of key customers and NI leadership.

This year we looked beyond the hype of the Internet of Things and focused on the challenges and business opportunities tied to a more connected data-centric world leveraging what we refer to as big analog data. While industry pundits have talked about these emerging trends for years the foundational technologies underpinning these trends are now in place. Our rich history measurements acquiring big analog data and our software based platform position us well to take advantage of a movement to add more intelligence to devices and systems across a broad range of industries.

At NIWeek we highlighted our involvement in advancing new communications standards like 5G and will be key to fully enabling the Internet of Things. We also demonstrated examples of how our platform is enabling the industrial internet. Both through the work we are doing with industry consortiums as well as actual customer examples including smart grids, smart machines and smart factories. NIWeek also serves as a launching point for many new products.

This year we expanded our platform with significant releases across our entire portfolio including new performance points for CompactDAQ and CompactRIO controllers and expansion of the PXI platform to include the latest processor and buzz technologies. We also released a new software design instrument based on PXI in the NI vector signal transceiver called the wireless test system that comes equipped with the suite of tools that enable device level testing of wireless protocols.

For software we released LabVIEW 2015 which enables faster code development for programmers as well as highlighting the recent release of LabVIEW Communications System Design Suite, which offers the design environment closely integrated with NI software defined radio hardware while rapidly prototyping communication systems. We're excited about the new capabilities these products bring to our platform and the new opportunities they open up for our customers and our business.

Looking at product performance, our broad based software and data acquisition products saw modest core growth year-over-year. Hardware growth was driven by CompactDAQ which had several large wins in consumer electronics and goods test. Our instrument control products which are used to connect third-party box instruments to the PC were down significantly year-over-year indicating relative weakness in the broader [P&M] market. Instrument control now represents less than 4% of our revenue. For our flagship product LabVIEW, we saw growth in new seats driven by strength in enterprise agreements.

Despite economic headwinds, academic products continue to grow with strong performance of teaching products. Highlights include strong revenue growth in China and a large win for our controls lab at a top UK engineering school. These wins illustrate the unique value that NI hardware and software platforms brings to teaching advanced engineering concepts. We continue to build on our leadership position in PXI with core growth despite economic headwinds.

As more engineers transition away from rack and stack instruments to a software defined modular approach using PXI, we believe that the strength of our product portfolio and leadership from a 17 years of investment in PXI will continue to serve us well. In RF and wireless NI continued to execute on our strategy to serve the entire wireless value chain from wireless prototyping to manufacturing tests.

In wireless prototyping we continue to drive significant revenue growth of software defined radio products through our software centric approach based on LabVIEW Communications. NI has partnered with wireless innovators such is Nokia Networks, Samsung and others and demonstrates groundbreaking 5G technology using NI products. In addition, we are continuing to build on the success of our vector signal transceiver by using it as an underlying technology for test systems targeting vertical applications such as the semiconductor test system and the wireless test system.

These application oriented systems have already achieved several key design wins for high volume manufacturing tests and the opportunity pipeline remains healthy. Moreover, the addition of Micropross strengthens NI's position in wireless communication and further supports our strategy to serve the entire wireless value chain. Although revenue growth for embedded products has been facing headwinds from the decline in spending in the oil and gas industry and a decline in global PMI, we see immense opportunity to provide the foundation for the industrial Internet of Things with CompactRIO and LabVIEW.

CompactRIO ties measurement, control, computation and communication together with a flexible system designed software enabling our partners and customers to build smarter systems and make better decisions. For example, at NIWeek this year Dr. Francis Fomi Wamba of Areva Wind showed how they use CompactRIO as the foundation for the online monitoring solutions of offshore wind turbines to inform predictive maintenance processes and reduce downtime. The large scale of industries like power generation, transportation and electronics manufacturing means that small gains in efficiency from better insight in the processes can have large impacts at the bottom line of our customers.

In summary, as a vision of a smarter connected world becomes a reality NI is well-positioned to provide the platforms to accelerate the development and adoption of these new technologies. With that I will turn it back over to Dr. T.

Thank you, John. I am pleased with our execution during Q3 in a difficult market. We maintained strong gross margins, reinforcing the value our customers see in our products and managed our expenses. We have built and continue to run a Company for long-term sustainable growth. Over the course of several decades we have successfully managed the business through various economic and currency cycles and always (inaudible) those cycles in the position of strength.

The strength of our business model has allowed us to recover from the currency-driven decline that we saw in Q1. Our focus has always been to provide a software and hardware platform that leverages commercial technology to increase performance and lower cost. This disrupts and shrinks the market we serve while also providing opportunity to grow our business through differentiated products with high gross margin. Each year at NIWeek I enjoy seeing how our tools are driving innovation and discovery while enabling our customers to solve some of the world's toughest engineering challenges.

For many years we have been serving applications now considered part of the growing trend of Internet of Things with our approach of big analog data. The elements driving and enabling this trend include sensing, data analysis, data fusion, intelligent control and connecting disparate systems and data sets. These have been areas of core competence for NI for decades and we are focused on staying at the forefront of these trends.

Beginning with GPIB, NI has revolutionized our engineers and scientists connect to instruments and interact with data. Rather than simply viewing a screen on a traditional instrument, make a judgment call limited set of data we can use the power of a PC and the flexibility of software based systems to correlate measurements of multiple instruments over time. We can perform complex computations and analysis that use the information to make automatic decisions.

In the nearly four decades since the release of GPIB, the sources and type of data have scaled exponentially. Today our customers use our hardware and software to produce, collect, store vast amounts of analog and digital data. Our software defined approach allows them to define exactly how this big analog data is consumed and utilized. From the pins of the FBJ to Cloud and every step in between.

In closing, I would like to thank our employees for their concerted effort to deliver innovative new products to drive our growth while managing expenses as we continue toward our long-term profitability goals. I am confident that we are building the new product pipeline, channel and operational excellence to drive the long-term growth and profitability of the Company. Thank you. We will now take your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Patrick Newton with Stifel. Your line is now open. Please go ahead.

Good afternoon, Dr. T, Alec and John. Thank you for taking my questions. Got to ask my housekeeping question to start off just if you could inform us of your number of employees actually in the quarter and your average order size.

Sure, Patrick. Exiting the quarter we had three, sorry 7,370 people and the average order size $5,063.

Great. And then just diving into the Micropross acquisition I guess if you could help us understand a little bit more about how it fits into the National Instruments profile. It seams like the accretion commentary of accretive in 2016 given -- I'm calculating an EBITDA margin of like 67%. It would seem that it's immediately accretive. Can you help us understand when the deal closed and what is built into the current guidance. And then also talk about the TAM of NSC and wireless charging. So several Micropross questions there.

Alright. I will take a pass at the evaluation and then I will let John dive in on the kind of business and market strategy. Yes, obviously it's a very profitable software business and that's one of the reasons the valuation obviously comes out the way it does. It is accretive we believe for 2016 for non-GAAP. I do anticipate that it will be accretive at some scale in Q4, but it's going to be a couple of months, November and December only.

Obviously, the acquisition for a small company like Micropross can be a disruptive process, the acquisition itself, and that's probably going to have some impact on revenue in the next few weeks or months until they can recover from going through that process. So we feel very good about the business and definitely expect it to be accretive as we go in to next year. I think the impact overall from a couple of months' worth in Q4 is going to be relatively de minimis and it is included is guidance.

Patrick, this is John to talk about the business strategy with Micropross. As you are aware we invested aggressively in our RF platform and wireless test capabilities over the last few years and we have seen tremendous results in those areas are kind of leading our growth this year from a product perspective. Micropross brings a really strong technology and leadership position and competitive position in the areas of near field communications or NFC as it's usually called as well as wireless charging.

So what they bring is the ability to really strengthen and broaden the applicability of our platform to address more common protocols that are increasingly part of wireless devices, consumer devices, but also these are technologies that we see being broad-based showing up in industries such as automotive and others. And that plays to our strength of our platform and our brands and our sales channel to leverage this across many customers and many different applications.

So from a synergy point of view, Patrick, we inspect the synergy here to come from growing revenue through leveraging, as John said, our brand, our channel and our manufacturing scale. And so we view this as a bolt-on acquisition and should be accretive to earnings but I think also an accelerator of revenue growth as we move forward.

And any TAM assumptions that this is unlocking for you by chance? And then as far as the kind of revenue synergies are you acquiring any customers that are meaningful in this or is this more like you said just a leveraging across your portfolio?

So their customer base is pretty diverse. It's not dominated by any one customer. They have got a broad footprint in the early stage of this evolving aspect of the test industry and that's one of the reasons they are particularly valuable to NI. And in terms of the TAM, I don't think we're really prepared to share a specific number at this point. There's obviously some assumption that we have that the demand at the consumer level for wireless charging and NSC will be strong over time and I think that's a pretty -- we're pretty confident in that assumption.

Okay. And just last one if I may is on the buy back. You accelerated the buy back. In the June quarter and, I'm sorry, in the September quarter, and I'm curious if you could remind us again how much is remaining on your current share repurchase allotment and remind us again your philosophy on when you choose to acquire shares.

So the remaining buy back is approximately 1.5 million shares under the previously authorized repurchase that was authorized back I believe in 2010. I have to double check that, but I think it was 2010. And our strategy remains consistent. Our number one priority for the deployment of cash is on dividends. Number two, opportunistic stock repurchase and number three, acquisition.

Obviously all three have played a part in our planning and deployment of cash in the last couple of months and we feel that these are good investments and use of the Company's cash in this time frame. Obviously Micropross, being an overseas acquisition, gives us an opportunity to deploy a portion of overseas cash to deliver a much higher return for shareholders. And we have been earning in treasuries.

Great. Thank you for taking my questions. Good luck.

Thank you. Our next question comes from the line from Ben Hearnsberger with Stephens Inc. Your line is now open please go ahead.

Hi. Thanks for taking my question. This is Brandon in for Ben. Just curious on the acquisition. What kind of incremental spend you will have to take on to get this integrated? And I've got a follow-up. Thanks.

The incremental spend for integration will be, I won't say trivial but relatively small. We do anticipate that we'll be adding a number of technical support folks to help transition these products into our field over time and then also at the engineering level to improve the integration between our software and the products for Micropross. So I don't think it will be a noticeable number at the aggregate level of the Company. We anticipate that this is an integration that will execute over the next 12 to 18 months.

Understood. Thanks for that color. Then my follow-up on your largest customer order size. What's leading the major deceleration here that you have seen in the quarter and in the guide and kind of how do you see this playing out in 2016? Thanks.

Sure. Well, historically this customer has been volatile and we tried to make that very clear. Over the last four or five years where our business with this customer has ramped up the concentration of their orders and their revenue has tended to come in the second and third quarters and then to fall-off in Q4. As we have talked in this call before, we had a smaller year in 2011, a big revenue year in 2012, a smaller year in 2013 and a big revenue year in 2014 and we are having a smaller revenue year here in 2015. So what 2016 will bring is a little to early to say. We will be in a much better position at the January call to comment specifically on our expectations for 2016.

Thanks for the feedback.

Thank you. (Operator Instructions). Our next question comes from the line of Richard Eastman with Robert W. Baird. Your line is now open. Please go ahead.

Yes. Good afternoon. Alex, could you just follow up on the last comment with the large customer. I know we will be better positioned to talk about orders, but as you have kind of worked through their spec and bids, I mean is there any general sense of what the tone will look like in 2016 from size purchases and also whether you're equally as well, I don't want to say entrenched but, that your product specs into whatever dollar amount of their needs would be in 2016.

The only comment I can make on that, Rick, is we have a very good relationship with this customer and we have delivered a lot of value. In terms of spec or their plans or intentions I'm afraid I'm not at liberty to make any comments about that.

Okay. Alright. And then on the Micropross business can you just give us a sense, Alex, of what the amortization would be on that purchase price and then also what you would amortize it over how many years.

That's a good question, Rick. We just closed the acquisition on Friday in France so it's a little early yet to have resolved that both with the external valuation guys and with our auditors. So I'm going to have to hold on answering that question specifically I'm afraid until we get a little further down in the process.

But you would expect this to be GAAP accretive as well?

I think that's highly likely.

Okay. Alright. And then just a quick question for John. Could you just speak to the aerospace and defense market how that performed and just, I'm trying to get your sense maybe of is that market stable, still declining, recovering? Just maybe you could just address that particular end-market.

Sure, Rick. I mean the answer specifically on the aero defense I would say it's stable. From a core growth standpoint it was positive for us, but if you take into account some of the currency headwinds obviously that was a drag. To put it in the context of all of the industries we mentioned on the call, energy we saw significant weakness in this year that's played out. Oil and gas spending has dried up. Then on the plus side areas we have seen core growth include the mobile segment, mobile devices, automotive and transportation and, as I mentioned, aerospace defense.

Okay. So aerospace defense was a contributor even after FX?

Yes.

Okay.

Oh, no. No, no, no. Let me clarify.

Okay. That's fine.

So subtracting the impact of FX it was positive.

Okay. Okay. And just, when you look at the short turns business, this is it just a series of follow-ups by the way so I apologize. I haven't put a period after any of these or a question mark after any of these questions. But the short turns business being down 2% year-over-year and I presume currency is part of that, but what do you make of the continued weakness on the short turn side of the business? Is that highly energy related or is it just the sluggishness in that general test market?

Well, I think when you go back if we were to adjust that for currency you would see low single digit and I think that's pretty consistent with what you might expect to see in the market where we have seen the global PMI drop pretty steadily for the last 24 months. So I think that's pretty consistent with what I might expect to see given that decline in that broad based macro indicator. Just to make a point, it's disappointing for us as a business to look at for the first nine months of the year revenues relatively flat and our operating margin is relatively flat.

But to put that in context I think we have actually done a pretty good job to be able to sustain and hold our position on revenue and profitability despite going through three pretty big headwinds from currency or big customer in energy as well as, or in addition to, a decline in the overall PMI to being able to offset nine of those 11 points of headwind maintain our profitability I think sets us up well to deliver leverage in 2016 if we're able to see any kind of decent stable conditions in revenue growth.

Okay. And is Micropross, is this business -- do they sell software? Are they selling the tool that -- the complete equipment and is it, is this kind of quote "modular based"?

They have a very complete solution for these two -- for test in these two areas of NSC and wireless charging. They do have a modular architecture and we see ways that we will be able to leverage that going forward. Obviously it's a hardware and software solution but the primary value is in their software capability.

Interesting. Okay. Great. Thank you very much.

No problem.

Thank you. We have a follow-up question from Patrick Newton with Stifel. Your line is now open. Please go ahead.

Yes. Thank you. I guess two for for me. Alex, you talked about guiding under the assumption that global PMI will continue to weaken. I was wondering if you could provide us an expectation of what PMI will track to during the quarter that you have built your assumptions around.

Yes. Sure. I think what I actually said is that we expect it to continue to be weak so we're assuming it stays relatively weak in this range. Not to state the obvious and I know some of us on the call have been following the Company for a long time. I have responded to that. If we can significantly from here we would expect to probably be below the mid-point if it recovers from here we probably expect to be above.

Thanks for that, Alex. On the R&D side that's one area that I guess two quarters in a row we have actually seen year-over-year declines. It's a metric that on an absolute basis you have held relatively steady now for almost four years. Is that the area that we should expect to see the most incremental operating leverage potential from a topline perspective given the very aggressive investments from the 2009 through 2012 time frame or should we start to see R&D on an absolute basis pick up.

We talked about this before, obviously, so just to say it again that our long-term model for R&D as a percentage of revenue is to be at 16. We did raise it considerably for a number of years for specific competitive and market reasons of products we wanted to bring to market. Our long-term intention certainly is to bring that down over time back towards our long-term model.

Great. Thanks for taking my questions.

Thanks, Patrick.

Thank you. Our final question comes from the line of Kristen Owen with Oppenheimer. Your line is now open. Please go ahead.

Great thanks for taking my question. This is Kristen in for Holden Lewis. Just wanted to add on to the operating margin discussion. You have loosely talked about the 18% plus or minus goal. Given what you are seeing today with your global PMI expectations and the ONG spending headwinds that you have mentioned, is there anything else in the market that you're seeing today that would make that 18% goal more or less difficult to achieve?

Kristin, good question. I would put it that the headwinds that we face this year from significant currency and our large customer energy, these things are really timing factors. They're going to slow down effectively our march to achieve our operating goals, but they don't change the intent. And I don't think long-term they really change the ultimate attractiveness of this market for us as we look at it. So we remain committed to those goals going forward and obviously we have shared with investors our leverage intents for 2016 relative to a set of potential revenue scenarios and we remain committed to that strategy.

Okay. Great. Thank you and then if you could just touch on the impact of pricing in the quarter. I know that you raised prices back in April. Was that meaningful to the quarter?

When you look at where our intent or our goal as we talked about pricing was in response to shift in exchange rates. And our strategy tried to -- we have about a 50% natural hedge and we try to offset somewhere close to the remaining 50% unhedged. If at all possible. It's one of those great mysteries. You know what price you change it is really difficult to tell the net impact. So I would say it has helped us to offset the currency impact, but certainly not completely by any manner. And I think one way to look at our effectiveness in this is to track our ability to maintain our gross margins over a long period of time.

One other aspect is that it takes a while because you have agreements with customers so that will delay the impact.

Okay. Great. Thank you so much.

Thank you very much.

If we have no other questions I would just like to again mention we've got the Stifel conference in Chicago on November 12 and the NASDAQ conference in London on December 1 and we look forward to seeing you there.

There are no further questions. I would now like to turn the call back over to Alex Davern for final remarks.

Thank you and have a good day.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everybody have a wonderful day.