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National Instruments Corporation (NASDAQ:NATI)

Q4 2012 Earnings Call

January 31, 2013 5:00 p.m. ET

Executives

David Hugley - Vice President and General Counsel

Alex Davern - Chief Operating Officer

James Truchard - President and CEO

Eric Starkloff - Vice President of Marketing

Analysts

Mark Douglass - Longbow Research

Stephen Stone - Sidoti & Company

Anthony Luscri - JPMorgan

Patrick Newton - Stifel Nicolaus

Richard Eastman - Robert W. Baird

Operator

Good day, everyone, and welcome to the National Instruments' fourth 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, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO and Cofounder; and Eric Starkloff, Vice President of Marketing.

For opening remarks, I would like to turn the call over to Mr. David Hugely, Vice President, General Counsel and Secretary. Please go ahead, sir.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding significant future orders from a very large customer, other large applications sales, our goal of $2 billion in annual revenue, our GAAP operating margin target and our guidance for first quarter revenue and earnings per share. 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 Form 10-Q filed November 6, 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.

James Truchard

Thank you, David. Good afternoon and thank you for joining us. Our key points for 2012 are, record annual revenue and 10% year-over-year revenue growth on a non-GAAP basis. Strong growth in orders over $20,000 and continuous execution on a long-term vision of graphical system design. Despite difficult economic conditions throughout 2012, I am pleased with our company’s disciplined execution which allowed us to deliver all time record revenue. While we remain cautious in the short-term due to the uncertain economic conditions, I am optimistic about the long-term position in the industry through its sustained differentiation we delivered to our customers to graphical system design.

This approach to measurement and control systems provides higher performance, better integration and lower cost while enabling unique testing approaches not possible with traditional equipment. In our call today I would call today, Alex Davern, our Chief Operating Officer will review our results. Eric Starkloff, 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?

Alex Davern

Good afternoon and thank you for joining us today. Today we are pleased to report a new quarterly revenue record with revenue of $300 million in Q4, exceeding the high end of our guidance range. This represents 7% year-over-year organic growth. For Q4 net income was $21 million with full diluted earnings per share of $0.17 and non-GAAP net income for Q4 was $35 million with non-GAAP fully diluted earnings per share of $0.29, at the high end of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Despite the weak start to the quarter we were pleased to see strength return in November and December. For Q4, our orders excluding the large applications that I would discuss later, were up 9% sequentially. While this is below our ten year historical average, sequential growth rate in Q4 of approximately 11%, we believe it is a good performance given the weak PMI which averaged 49.5 during Q4. Today we also reported a new annual revenue record with non-GAAP revenue for 2012 of $1.14 billion, up $102 million or 10% year-over-year. We delivered this revenue growth despite the weakest annual global PMI since 2009.

Non-GAAP gross margin in Q4 was 76% of 40 basis points from Q3. From a year-over-year perspective non-GAAP gross margins in Q4 and 2012 were down 100 and 130 basis points. These declines are primarily due to the proportion of revenue coming from the large application that I will discuss later. Total non-GAAP operating expenses were $183 million, up 7% year-over-year in Q4. Our year-over-year growth in non-GAAP operating expenses in Q4 was slightly higher that we had anticipated when we gave guidance to the variable compensation being higher than expected.

For the full year our non-GAAP operating expenses were up 10% in line with our revenue growth. This decrease can be broken down into 15% year-over-year expense growth in the first half of the year and 5% year-over-year growth in the second half. As we were successfully absorbing the significant investments we made in 2011. For Q4, our non-GAAP operating margin was 15% with non-GAAP operating income of $45 million, up $5 million sequentially. For the full year, non-GAAP operating income set a new record at $165 million.

This represents a non-GAAP operating margin of 14.4%, down from 15.7% in 2011. While the significant investments we made in 2011, combined with a weak PMI put pressure on short term operating margins, we believe that they have positioned us well for long-term growth. Let's take a look at revenue by order size. In the accompanying investor relations presentation, we have expanded our analysis of orders to breakout the value of orders over $100,000. In Q4, we saw a 6% year-over-year growth in our orders between $20,000 and $100,000, while orders over $100,000 grew 37%.

Our average order size was up 9% year-over-year to approximately $5000. As I referenced earlier, a significant contributor to the success for us this year was wining the largest application sales 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.

In Q4, we received additional orders for this application, bringing the total for the year to $59 million. Looking forward, we have continued to deliver value to this key customer and are actively engaged with them in multiple application opportunities. We received approximately $72 million in revenue from this customer in 2012, or about 6% of our total revenue. We currently believe we will receive significant future orders from this customer primarily in the first half of 2013, with revenue currently expected to be recognized primarily in the second half.

We also anticipate an increase in our inventory levels in Q1 as we prepare to meet this expected demand. These are forward-looking statements and there are execution risks related to closing this business and as a result there can be no assurance that we will successfully meet the customers’ expectations and realize these orders order-related revenue.

Turning now to revenue from orders under $20,000. These orders have historically been more directly affected by the economic conditions in the global industrial economy and we continue to see a weak performance in this area with these orders down 1% year-over-year in U.S. dollars for Q4 and for the full year. In summary, 2012 was a difficult year for the industrial economy, especially in Europe and Japan with the global PMI averaging just 49.9 for the year. This made conditions difficult for the test and measurement industry but despite these challenges NI was able to deliver 10% year-over-year revenue growth having $102 million in annual revenue to set a new record of $1.14 billion.

We also successfully absorbed in the significant investments we made in 2011, setting a new record non-GAAP operating profit. As we look to 2013, I would like to take a moment to reflect on our execution through the last five years. Since the last recession started in the U.S. in 2007, the global PMI has averaged 50. Growth in industrial production and in the emerging economies has been offset by significant net reductions in industrial production in the U.S., Europe and Japan. Despite these challenges we have delivered strong results increasing our revenue by 55% and making significant investments to help our future growth.

Much of this increased investment came in 2011 and I believe that these investments when fully leveraged will be critical to achieving our goal of $2 billion in annual revenue. Now I would like to make some forward-looking statements. The continuing political uncertainty in the U.S. and Europe, coupled with our anticipation of a weak PMI through Q2, makes us cautious in funding for 2013. As a result we currently expect revenue for Q1 to be in the range of $276 million to $296 million. We currently expect that GAAP fully diluted earnings per share will be in the range of $0.12 to [$0.22] for Q1 with non-GAAP fully diluted earnings per share expected to be in the range of $0.19 to $0.29.

These are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, adjustments to acquisition earn-out accruals, effective tax rates and foreign exchange fluctuations. In summary, despite the weak industrial economy, we are very pleased with our execution in 2012. Our goals for 2013 are to continue to leverage the investments we have already made to drive sustained revenue growth and to continue to drive towards our long-term non-GAAP operating margin target of 18%.

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

Eric Starkloff

Thank you, Alex. We were very pleased with our ability to achieve a new all time high for annual revenue despite the channeling economic environment we faced in 2012. We believe our innovative product offerings of LabVIEW, PXi, CompactRIO, and data acquisition continued to deliver significant cost and time to market advantages to our customers. Over the past several years, a significant growth driver for our business has been our systems used for high performance test and embedded applications. These systems deliver high value to our customers and have been a driver of our increased average order size over this timeframe.

In 2012, our orders over $20,000 served approximately 3500 unique companies across many industries. We believe this diversity in large orders demonstrates that LabVIEW along with our system platform such as PXi and CompactRIO, are achieving broad-based acceptance and that the investments we made in our services in support to complement these systems are creating a competitive advantage. In 2012, our software and support products achieved record revenue as more customers realized the value that NI software brings to their applications.

LabVIEW is at the heart of graphical system design which promotes problem solving, accelerates productivity and empowers innovation for our customers. LabVIEW seamlessly integrates with NI PXi, CompactRIO and data acquisition hardware. This is not only a compelling advantage to our customers but also a capability that differentiates us from our hardware competitors. Our data acquisition products experienced record annual revenue in 2012 which was driven by strong growth in our CompactDAQ products. The seamless LabVIEW integration with our data acquisition product continues to lower the barrier of entry for customers to use NI hardware and software while delivering quick and easy plug and play measurements for a wide breadth of measurement types.

Our PXi and modular instrumentation products also achieved a new annual revenue record in 2012, which was led by strong growth in our RF products. Since inventing the PXi standard in 1997 and founding the PXi systems alliance in 1998, National Instruments has been at the forefront of delivering the benefits of PXi to engineers and scientists worldwide. Over the past five years alone, our PXi and modular instruments revenue has nearly doubled and we have delivered over 250 new PXi modules which have set the pace for the test and measurement industry.

During those same five years, we believe that the T&M market has grown minimally as indicated by the total revenue of the major companies serving that space. Engineers continue to transition away from rack and stack instruments to a modular approach for automated tests. This is seen in not only the overall growth of our PXi products, but in the adoption of PXI by major customers in critical applications, such as the large application success we saw in manufacturing tests in 2012 that Alex mentioned previously.

Since our NIWeek Conference back in August, the industry reception to our latest RF product, the NI Vector Signal Transceiver, has been very strong. This groundbreaking technology has already received numerous industry awards including Electronics Products, product of the year; Microwaves and RF’s top products of 2012; Electronic Design’s best electronic design; and EDN’s hot 100 products of 2012 among others. The Vector Signal Transceiver sets a new price and performance offering that tightly integrates with our LabVIEW platform delivering very high differentiation to our customers.

Our CompactRIO product also reached record annual revenue in 2012. Where rapid innovation is a necessity, we see engineers using a graphical system design approach with LabVIEW and CompactRIO to design a diversity of embedded system due to the unique time to market advantages of the LabVIEW RIO architecture. For example, one area of innovation where we have seen significant traction with CompactRIO, is in energy applications. Including areas such as smart grid technology, asset monitoring and hydraulic fracturing. Opportunities in these areas have continued to grow and in Q4 NI technology was selected over traditional solutions by a leader in the oil and gas industry. A potential investment of tens and millions of dollars in NI equipment over the next decade.

In another large opportunity, NI was chosen to supply one of the largest regulated utility companies with our hardware and software to make a significant advancement in how utilities monitor critical equipment condition and improve the reliability of their systems. We believe design wins of this magnitude are a testament to the value that NI technology delivers to customers designing embedded systems versus major incumbents serving this industry.

To close, while we remain cautious, we were able to deliver record annual revenue in 2012. Through the efforts of our entire organization and our global network of partners, I am confident in our ability to continue to deliver time to market advantages to our customers through our innovative products. With that I will had it back to Dr. T.

James Truchard

Thank you, Eric. Despite the economic headwinds in the global PMI, we have executed well throughout 2012. I would like to thank our employees for their tremendous discipline in these uncertain economic times. Since we founded the company in 1976, the role that NI technology has played in building measurement systems has evolved substantially to best fit the changing needs of our customers.

Our motivation for creating LabVIEW in the 1980s was to deliver productivity to our customers by designing a programming environment that emulates the way engineers think. We continue to believe that graphical systems design approach with LabVIEW is fundamentally a better way to design systems than traditional text-based approaches and allows us to deliver more productivity gains to our customer. When combined with our highly differentiated PXi and CompactRIO hardware platform, engineers now have unprecedented flexibility and performance capability in designing everything from next generation wireless protocols, to control and monitoring systems for the smart grid.

While we have built our platform for graphical system design, they has been a significant change occurring in the test and measurement landscape. The industry has been moving away from rack and stack instruments and approach to automated tests that hasn’t evolved significantly in the past 14 years. Instead, the move towards a software based measurement approach through modular instrumentation is gaining traction. Our customers are well-positioned to reap the performance benefits of the NI platform for test and measurement applications well into the future.

Looking back over the past five years, we have stayed true to our vision of delivering a platform-based approach to the broad base of scientists and engineers while harnessing and scaling effect of Moore's law for both high performance test and embedded system applications. During that timeframe, we have innovated with our CompactRIO products with the introduction of our single-board RIO, expanded on our CompactDAQ offerings with our wireless data acquisition devices and broadened our PXi products with the new vector signal transceiver, all of which are powered by LabVIEW.

Our collaboration with LEGO has grown over the last five years as we extended our vision of graphical systems design from kindergarten to rocket science. At the beginning of January, LEGO announced EV3, its newest evolution in their LEGO MINDSTORMS robotics platform. This software is based on LabVIEW. LabVIEW has been used is scientific breakthroughs and engineering advancements such as space, exploration, the discovery of the Higgs boson, research into 5G wireless technology and highly capable electric vehicle tests.

Our continued commitment to innovation has enabled us to deliver a unique capability of integrating advance measurement and advanced control applications with a single platform. One customer who benefitted from this platform-based approach is Andrew Clegg, Industrial Systems and Control, who recently was recognized on the 2012 Graphical Systems Design Achievement Awards in the UK. They designed a complex control system with LabVIEW and CompactRIO to provide access to offshore wind farms with safely transferring engineers and technicians to and from the turbines where maintenance is vital.

Through increased operative safety, this technology has the potential to substantially reduce downtime, increasing the overall economics of building offshore wind farm. In closing, through the dedication of our employees, we were able to set another annual revenue record. I would like to take this opportunity to congratulate our employees on National Instruments again being named the top 25 international companies to work for in the world by Great Places to Work Institute and for reaching a high record number 35 for the 14th consecutive year on the Fortune 100 Best Places to work with. It is a testament to our long-term approach to growing a company built to last. While we remain cautious about the short-term uncertainties in the industrial economy, I remain optimistic that our differentiated approach to graphical system design continues to set National Instruments apart from others in the industry.

I would also like to mention that I will be presenting at the Stifel Nicolaus Conference in San Francisco on February the 5th. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Zach Larkin of Stephens. Your line is open.

Unidentified Analyst

This is [Chris Gaby] in for Zach. I guess first of all, and you touched on this to an extent, but could you go into a little bit more detail on how the new product introductions, particularly the Vector Signal Transceiver have been going and how it impacted revenue? And how should we think about this opportunity, particularly with RF and the VST in 2013?

Eric Starkloff

Sure, Chris. This is Eric. I will take that. So the way to think of this I think is really looking at our whole RF portfolio and our whole portfolio of PXi. You know the VST as I mentioned, the Vector Signal Transceiver has been very successful. It’s only five months in but it has exceeded our expectations in sales and also in the exposure that it’s gotten. And I think that’s important because really the goal is to sell a whole portfolio of products, the Vector Signal Transceiver is a very important part of that. That it’s one element. And so our RF business as a whole continues to outpace the company in growth. And it’s an area where we believe there continues to be a lot of opportunity going forward.

Unidentified Analyst

Great. Thanks a lot for the color. And then as a follow up, recently we have seen some improvement in PMI trends, particularly in China and on the global level. Also get a nice number on Chicago PMI today. So obviously very short-term trends there but have they made you any more optimistic at all. I know you said you are cautious but maybe a little bit more color there.

James Truchard

Sure, Chris. I think I would say it’s probably made me less pessimistic, would be the way I would like of phrase it. Certainly it’s good to see the PMI numbers coming back up over 50 in December and I think early indications are for the month of January it’s probably likely to be over 50 as well. However, when I look at other areas out there I see the recent GDP numbers in the U.S., obviously a significant amount of our business is tied up in government, aerospace, defense type applications. So that has an impact and that core cause of a slowdown in GDP in the U.S. obviously hasn’t been resolved yet. So we continue to watch that carefully.

The other things that concern me like everybody else, we know a lot of income was pulled into Q4 for tax reasons. And we know social security taxes going up in the U.S. in January. I think it’s also pretty clear that Japan and Europe I think hardly likely to have GDP contractions in Q4. So overall I would agree with you. The most recent data points have generally been more positive. But like I said in the call, my expectation is that we are not out of the woods yet. And that PMI will continue to be challenged through Q2.

Operator

Thank you. Our next question is from Mark Douglass of Longbow Research. Your line is open.

Mark Douglass - Longbow Research

So going back, you think there is going to be some challenges going into 2Q. And that’s really when a lot of the deliveries ramped for this large orders for the one customer. How were you thinking about the projected challenging comparison year-over-year, at least for a couple of quarters? You have identified more opportunities from this customer but some insight as to how you think is it possible to overcome that headwind and still see growth. I guess you are not giving guidance, but as much as you can say. Can you address that?

Alex Davern

Obviously for Q1 we are giving guidance, Mark. And in the first quarter certainly we do expect to see year-over-year growth at a broader business. It’s too early at this point to comment on Q2 and the timing and scale of the orders we anticipate from this customer is still uncertain. I would certainly be happy to update that for investors as we move through the various calls this year, we will keep everybody updated. We did also make a decision to split out the order size on revenue categories on the investor presentation that is on the web. So that investors can get visibility into orders over 100k and can have clear understanding of the, let's say lumpy nature of that business when it spikes up with this big order.

Having said that, we did see, I believe we delivered a tremendous amount of value to this customer. Our relationship with this customer is very good and we feel like there is a lot of future value that we can bring to bear. And certainly that would be a focus as we go forward. I would also tell you, when we look at the broader business, there is no doubt to us that there is lot of opportunity for us to gain market share, bring value to our customers. And as we see the PMI stabilize hopefully and hopefully improve into the second half, should that happen, obviously there is risks to that but should that happen we would anticipate a recovery and an acceleration of our broad-based business.

Mark Douglass - Longbow Research

Okay. And then going to RF wireless, can you comment on what you are seeing in the broader picture there? Is there still pretty good spend in RF wireless task? I mean I would try to think customer, obviously that’s a help. But just kind of the broader, do you think there is going to be a recovery because it seems like a lot of people have slowed down on their investments there, here more recently.

Eric Starkloff

Sure, Mark, I will take that. The RF market as I said before, that opportunity for us is a relatively broad opportunity that scales across all different types of wireless devices in addition to applications like signal intelligence and spectrum monitoring. We see opportunity across that spectrum and we see growth and we have seen growth in our RF business. As I mentioned it exceeds the company growth. So that’s been a broad success and we expect to continue to see opportunity. We believe that we have grown our share in that business.

James Truchard

It helps Mark to be a small percentage of a large market where the disruptive technology certainly positions us well.

Operator

Thank you. Our next question is from Stephen Stone of Sidoti. Your line is open.

Stephen Stone - Sidoti & Company

Just a quick question on the large application sale. Is this the end of this sale and can you comment a bit on the potential that you still see with this customer? Maybe a range or kind of what do you see there?

Alex Davern

Certainly we, as I said earlier on, we have developed a very strong relationship with this customer. We serve them in the large application as we have talked about several times on the call, but also in several other applications through 2012. We do anticipate several of those applications will continue to have follow-on orders in 2013, as well as potential new application areas. But as I said, the timing and scale of those orders remain uncertain and we will update investors at our next call and as we go through the year.

Stephen Stone - Sidoti & Company

Okay. Did you also talk about the competitive market here, competitors moving into PXi? How are you able to defend market share or kind of keep your leadership in PXi as everyone starts to move to modular instrumentation?

Eric Starkloff

Sure. I will take that Steven. As we have talked about before, as other companies introduced products in the PXi, it presents competition on the one hand but it also validates the standard which we view as a very -- a good thing overall. And then our differentiation really comes down to a couple of things. And one is our software position is very strong and integration of our hardware and software is differentiating. It delivers a lot of value to people that are putting these systems together. The other piece of differentiation for us is, I think our channel. And the ability to have a channel that’s really focused on putting together these configurable software defined systems.

And then the third one is having a complete portfolio. We believe that’s very important in this space. I mentioned during the call, the number of products in PXi we have released just over the last five years, 250. We have a very broad portfolio. And having all of those different pieces is really important to being able to build the systems that our customers need and have a critical math to solve their applications. So those are the points that really set us apart in the PXi market.

James Truchard

I would like to second that in terms of our investment over last quarter century in a very straight line to get a very very differentiated position with a very strong barrier to entry. We had a CompactRIO platform which sort of set the stage for what we would do in PXi and the FPGA. And with that technology, we can now achieve performance on the tasks in both the validation stage as we show at NIWeek and then on the production floor for very high speed tests.

Operator

Our next question is from Anthony Luscri of JPMorgan. Your line is open.

Anthony Luscri - JPMorgan

First question is clearly the business from the back of the quarter, given your mid-quarter update versus the results. Can you give us a little more specific in terms what changed in terms of GO vertical order size and do you think there was any budget flush impact here in your fourth quarter results.

Alex Davern

Well, I think it was kind of across the board. We saw off to a very weak start to October and the first three week or so were quite concerning. And it’s interesting, I think a number of companies both in our space and in the broader technology industry I think saw similar trends. November was stronger, December was also quite strong and obviously each year you see some budget flush and I am sure we saw that again this year. So it was quite a change in the flow of business frankly between early October and the rest of the quarter. And we are glad to see that. That’s what allowed us obviously to exceed the high end our revenue expectations and meet the high end of our earnings expectations.

In terms of regional or geography or product side, I think it was very broad-based. It was really not also to call out and point any one thing that was of primary change.

Anthony Luscri - JPMorgan

Okay. And then the second question. Final question. As large order growth continues to become a larger piece of your revenue or your total business, does this dynamic require any sort of, I guess, fundamental change to your support or services functions that require folks in the field or any sort of aspect that may impact your OpEx profile? And then I guess the follow-on to that is how should we view your OpEx growth in 2013? You highlighted how it’s coming down in the back half of 2012. Should we view that continuing throughout 2013 and provide some leverage. Thanks.

Alex Davern

Sure, Anthony. Thanks. I would say it’s a little bit of the opposite. I think that our success in driving rapid growth in large orders is really as a result of the fact that we have got out to build the service capability over the last number of years to be capable of servicing the advanced need to these large customers. So we have gone very seriously and in very professional way to do that. And my congratulations to the teams involved in that because they have created a new capability for NI that’s allowed us to close this business and we intend to continue to build on that as we move forward.

In terms of OpEx growth as you correctly mentioned, we had roughly 15% OpEx growth in first half of the year, down to 5% in the second half. As we look into 2013 we will obviously be carrying forward into 2013 the full year impact of people we hired in 2012. Things like raises. And we have a modest expectation for recruiting in 2013. So I do anticipate continued OpEx growth in 2013. Our ambitions are much more modest than they were in 2011. And so we hope to see operating leverage, but obviously the top line will be a key determinant of that.

Operator

(Operator Instructions) Our next question is from Patrick Newton of Stifel Nicholas. Your line is open.

Patrick Newton - Stifel Nicholas

So I guess in your guidance last quarter, Alex, you build in the expectation of potential order push-outs and cancellations and I would assume because your revenue was at the high end or above the high-end of the guidance range that you saw zero push outs in cancellations. And I want to conform that. And I guess, secondly, given your continued concerns around global PMI and the macro environment, do you have any cancelations or push outs baked into this current guidance range.

Alex Davern

So I think, (inaudible) you could never say zero, because I don’t actually know that the number was zero. But certainly cancellations and push outs were not really the factor in Q4. I don’t have any evidence to indicate that they will be a factor in Q1 at this point in time. And my caution, I think is based on some of the fundamentals that are out there that seem to be fairly obvious. I know that the mood of the market can shift in a fairly short period of time. But when I look at the fundamentals, it’s I think likely to be a difficult six months until everybody absorbs the changes that have happened here in January.

Patrick Newton - Stifel Nicholas

All right. But no cancellations or push outs in the Q1 guidance built into that as expected?

Alex Davern

I wouldn’t say no, but I don’t think it’s a material factor at this point.

Patrick Newton - Stifel Nicholas

And I guess a question on, dovetailing off of the OpEx. So clearly no intention to invest as aggressively as 2011, but I think in the past you had alluded to incremental revenue driving a pretty solid contribution margin and the goal to push (inaudible) up to your target, assuming that we have a rising tied revenue environment as we moved sequentially through 2013. Is that still the management’s focus on delivering that leverage?

Alex Davern

Absolutely. We are very focused in this stage to leverage the investments we have already made. And that’s our goal and objective to change. We have seen obviously our operating margin on a non-GAAP basis come down in ‘011 and ‘012 for two reasons. One, the rapid drop of the PMI and the other being our significant investment. Obviously there is some indications that PMI maybe bottoming at this point and my personal opinion is I think we will see it improve in the second half. That could be and maybe not be accurate there but that’s my personal opinion at this stage. Looking at our investment level, we are looking at a roughly 3% increase in headcount in R&D in the field in 2013. And we have included in our slide set the budgeted headcount expectation for those two functions as well as the history. And you can see from that, our plans in 2013 are much more modest and our focus will be on, as we see or if we see incremental revenue growth, our focus will be on improving operating margin.

Patrick Newton - Stifel Nicholas

And what was your headcount Alex excluding the quarter?

Alex Davern

It was 6869.

Patrick Newton - Stifel Nicholas

Perfect. And then I guess just one more if I may, on your Malaysian facility. I think you previously stated it would be about 30 basis point drag on operating profit in 2013. Is that still the expectation and I guess could you walk us through some assumptions of utilization rates to get to that target. And then could you also walk us through, as you start to load that facility, what the tax implications are for National Instruments?

Alex Davern

Sure. So two things on that. One being that the 30 basis point, we expecting the gross margin that we talked about before still our expectation for 2013. We would expect that drag to moderate in 2014 and hopefully should we see steady revenue growth it’d become a positive adder to gross margin in 2015. On the tax front our expectations for our non-GAAP tax rate for 2013 is approximately 22%. And the tax impact of the Malaysian ramp is included in that number.

Operator

Our next question is from Richard Eastman of Robert W. Baird. Your line is open.

Richard Eastman - Robert W. Baird

Alex, you had mentioned that you had shipped or sold 72 million to this customer. Incorporated in that I believe is this large order that now sounded like it grew to 59 million. So is that the math. So the large order was $59 million, that customer was 72. And did we ship all of the 59 million, so that’s kind of an $18 million fourth quarter. Is that what you are saying?

Alex Davern

There was a few million dollars in backlog and deferred at the end of the year Rick. So it’s likely less than 18 but you are in the ballpark.

Richard Eastman - Robert W. Baird

Okay. So if I look at your first quarter guidance and I take the mid-point of the revenue, it appears as though it’s a seasonal, more typical seasonal fall off in the first quarter from the four. But you are incorporating, call it 16 million on this large order. So how exactly does that math work? I mean you don’t have the comfort level in the large business but that seems like a kind of an aggressive number relative to your conservative macro commentary.

Alex Davern

So, obviously Rick we have more than one customer that we serve. We are serving a number of large application opportunities as we go through time. So when we look at our overall guidance into next year, we factor in our pipeline, we factor in seasonal trends, we factor in backlog and changes to backlog. And obviously we also, as you are probably aware, did a number of acquisitions in Q3. And the revenue that will come from those acquisitions is included as part of our revenue guidance for Q1 and that is another factor that would bring up the mid-point for the first quarter.

Richard Eastman - Robert W. Baird

So the last part of this same question then. Can you just give us a sense -- you mentioned you are going to build some backlog for potential, in first quarter you are going to build some backlog or inventory, excuse me, for potential delivery on a follow up to this large customer. But as you look out into ’13, what would be just order of magnitude expectation as to the business that you would anticipate seeing for this customer. I mean what kind of inventory you are going to build against the potential order?

Alex Davern

So just to clarify one point earlier on as you are looking at sequential revenue, Rick. I estimate the impact of the new acquisitions on sequential revenue to be between $4 million and $5 million, just to help you with the math. As you look at that, working on your model. On the inventory front, we are anticipating a build in inventory in Q1. The final plans aren’t finalized at this point in time so we are certainly receiving more information over the course of next weeks and months. So I would say it will be meaningful, likely increase in inventory in the first quarter. And I will be happy to share more information on this evolution of the potential future orders on this customer at our next conference call.

Richard Eastman - Robert W. Baird

Okay. And is Signalion in that acquisition. Is that a....?

Alex Davern

There are a couple of acquisitions we did in the quarter. One was Signalion as you know, a German RF IP company, that will provide us in the future with critical IP to complete our platform for our RF portfolio. We did another small acquisition that was less than a $1 million, so it’s not really material for this conversation. And we also purchased a small but very strategic company in the hands-on learning space for academic, for engineering, that will have a contribution into revenue in Q1.

Richard Eastman - Robert W. Baird

So all together then, you are suggesting these three acquisitions are kind of a $20 million revenue run rate?

Alex Davern

That’s correct.

Operator

Thank you. And I am not showing any further questions in the queue, I would like to turn the call back over to management for any further remarks.

Alex Davern

Thank you very much for your time today. We look forward to seeing you at the Stifel Nicolaus conference in San Francisco next week.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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