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National Instruments Corporation (NASDAQ:NATI)

Q1 2013 Earnings Call

April 25, 2013, 05:00 pm ET

Executives

David Hugley - VP, General Counsel & Secretary

Alex Davern - EVP, COO & CFO

James Truchard - President, CEO & Cofounder

Pete Zogas - SVP, Sales and Marketing

Analysts

Patrick Newton - Stifel Nicolaus

Chris Godby - Stephens

Mark Moskowitz - JPMorgan

Stephen Stone - Sidoti & Company

Mark Douglass - Longbow Research

Richard Eastman - Robert W. Baird

Operator

Good day, everyone, and welcome to the National Instruments’ First Quarter 2013 Earnings Conference Call. Today's call is being recorded. You may refer to your press-pack 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 Pete Zogas, Senior Vice President of Sales and Marketing.

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.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements, including our guidance for our second quarter revenue, gross margins, operating expenses and earnings per share and statements regarding receiving orders from our largest customer, taking corrective action on expenses and getting back on plan. 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-K filed February 19, 2013. 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 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 are, record revenue for our first quarter, record Q1 orders for LabVIEW, PXI, CompactRIO and CompactDAQ. However we exceeded our spending plan and are taking corrective action.

While we delivered record revenue for first quarter our expenses ran ahead of plan. We are disappointed in our expense overrun in the first quarter and now are taking corrective actions. We are focusing our efforts on activities that have proven successful in growing our large order of business in addition to our proven approach for broad based business.

In our call today Alex Davern, our Chief Operating Officer will review our results; Pete Zogas, our 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?

Alex Davern

Good afternoon and thank you for joining us today. Today, we are pleased to report a new first quarter revenue record with revenue up $286 million at the midpoint of our guidance range and up 10% year-over-year. We were pleased to see revenue growth continue in Q1 despite the challenges we faced from the weak global economy, the sequestration process in the United States and the dramatic drop in the value of the yen.

For Q1, net income was $19 million with fully diluted earnings per share of $0.15 and non-GAAP net income for Q1 was $26 million with non-GAAP fully diluted earnings per share of $0.21; $0.03 below the midpoint of our guidance range. A reconciliation of our GAAP and non-GAAP results is included in our earnings press release.

Given our relatively strong revenue performance, we were very disappointed to fall short of the midpoint of our earnings guidance in Q1. This shortfall came as a result of $0.01 per share loss on foreign exchange primarily due to the major decline in the value of the yen in Q1 and $0.02 per share as a result of expenses being ahead of plan.

For Q1, our total orders were up 8% year-over-year and we received $17 million in orders from our largest customer, up from $12 million in Q1 last year. Excluding this customer, our orders from all other customers are up by 7% year-over-year.

From a regional point of view, revenue was up 4% in Europe, 12% in the Americas, 37% in emerging markets and only 3% in East Asia. In East Asia, we saw a significant negative impact from the disruption caused by the dramatic decline in the value of the yen to the US dollar in Q1 with orders from Japan in Q1 being $7 million below plan for the quarter.

Non-GAAP gross margin in Q1 was 76.6%, up 60 basis points from Q4 due to a shift in our customer mix. From a year-over-year perspective, non-GAAP gross margins in Q1 were down 110 basis points, mainly due to mix in the incremental overhead caused by the ramp up of our new manufacturing facility in Malaysia. Total non-GAAP operating expenses were $190 million, up 12% year-over-year.

Our non-GAAP operating expenses in Q1 were $3.6 million or 2% higher than we had anticipated when we gave guidance and this reduced our EPS by $0.02. We are taking corrective actions to control our spending in Q2 and for the rest of 2013. For Q1, our non-GAAP operating margin was 10.3% with non-GAAP operating income of $30 million, down 16% year-over-year.

Now taking a look at revenue by order size; we saw a 6% year-over-year growth of our orders between 20K and 100K, while orders over $100,000 grew by 43%. Our average order size was up 13% year-over-year in Q1 to approximately $5,000. Our ability to continue to drive large over growth across a large number of customers was key to growing our business during the quarter when many test and measurement players saw significant declines.

As I referenced earlier, we received $17 million of new orders from our largest customer in Q1, related to three different applications that we serve for them. Each involved the use of LabVIEW and the NI PXI platform to rapidly develop production test solutions which offer the customer outstanding performance and accuracy at a very low cost of test per unit.

So far in Q2, we have received additional orders from this customer for $7 million bringing the total for the year to $24 million. The majority of these orders relate to a new application in a highly competitive state that we have not served for this customer before. But we are significantly reducing both test times and cost, delivering significant value to the customer.

This is a classic case of early market disruption, where disruptor effectively shrinks the market and the incumbents have to respond good price. As a result, in this timeframe the margins are significantly below our corporate average and this one have an impact on our gross margins in Q2. In Q1, we recognized $4 million in revenue from this customer.

Looking forward, while we have continued to deliver great value to this key customer, we have significantly reduced our expectations earlier in the year. We now believe it is likely that the total value of their orders may be lower than last year.

In Q1, we increased our inventory of this component as we prepare to meet the higher level of expected demand and in Q2 we will now be working to reduce our inventory inline with our reduced expectations. This inventory adjust in process will have the impact of reducing our production volume and our gross margins in Q2.

These are forward-looking statements and their execution risks related to doing business with this customer and as a result that can be no assurance that we will 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 in Q1, but these orders now are at 1% year-over-year.

Now turning to cash management; inventories increased by $19 million in the quarter primarily due to the ramp-up in inventory in service the higher anticipated needs of our largest customer as well as the increased need to support a smooth expansion of production from our Hungarian facility to our new Malaysian facility.

In addition, we paid $17 million in dividends during the quarter and paid $5 million to complete the funding of our new Malaysian facility. As a result, cash and short term investments decreased by $8 million. As of March 31st the company had $327 million of cash and short term investments.

In summary, Q1 was the difficult quarter for the industrial economy and especially in Europe and Japan. These challenges were exacerbated by the sequestration process in the US and a large fall in the end, but despite these challenges NI was able to deliver 10% year-over-year revenue growth to set a new Q1 revenue record of $286 million.

On the profit side, we failed to deliver on our anticipated profitability as spending being over-prime for the quarter and we are working hard to correct this issue.

I would like to make some additional forward looking statements. The continued weakness of the PMI and reduced forecast from our largest customer make us conservative in planning for Q2. As a result, we currently expect revenue for Q2 to be in the range of $290 million to $320 million, at the midpoint this represents 5% year-over-year growth over the strong 15% year-over-year growth we delivered in Q2 of 2012. Gross margins are expected to be down significantly in Q2 due to customer mix and lower production levels.

Total non-GAAP operating expenses are expected to be $193 million, plus or minus $2 million. We currently expect GAAP fully diluted earnings per share will be in the range of $0.09 to $0.21 for Q2 with non-GAAP fully diluted earnings per share is expected to be in the range of $0.16 to $0.28. While we expect the Q2 will be a painful adjustment quarter, we are taking corrective actions to adjust our expenses and we expect this to result in an improved operating performance as we move into the second half of the year.

As these are forward-looking statements I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, rescheduling of customer orders, expenses overruns, manufacturing inefficiencies, foreign exchange fluctuations and effective tax rates. I would also like to mention National Instruments will be attending several conferences in May and June including Jefferies and Stevens in New York; Baird in Chicago and Bank of America in San Francisco. We look forward to seeing you there. With that I will turn it over to Pete Zogas, Senior Vice President of Sales and Marketing.

Pete Zogas

Thank you, Alex. As we mentioned earlier we are pleased to achieve record first quarter orders in LabVIEW, PXI, CompactRIO and CompactDAQ demonstrating the value we delivered to our customers. Attributing to the successful adoption of software this quarter was the growth in enterprise wide license agreements. In Q1 these license agreements helped drive a new first quarter record in orders for LabVIEW.

Also in Q1 CompactDAQ was adopted in applications such in vehicle date acquisition, asset monitoring and distributed test helping lead to record orders for first quarter. For example one customer selected CompactDAQ and LabVIEW to research and test battery technologies because of its flexibility to adapt to new designs. As an industry leader in data acquisition, we continue to successfully serve the needs of a broad base of scientists and engineers. We also continue to solidify our leadership position in PXI and in Q1 we received our record first quarter orders for PXI as more engineers transition away from rack and stack instruments to a modular approach using PXI.

With over 15 years of investment and the largest portfolio of modules available and eyes at the forefront of delivering the benefits of PXI to engineers and scientists worldwide. Helping drive strong growth in PXI this quarter was the rapid growth in RF orders, which also had a record quarter. The continued adoption of the vector signal transceiver contributed to the success we saw in RF and we are extremely pleased with the reception of the vector signal transceiver being used in a wide array of applications ranging from R&D through academia to high volume production test. A few example of these successes include in R&D design engineers at an electronics company switch to the vector signal transceiver because they could modify the existing firmware and stay ahead of the technological curve.

Engineers at a high volume mobile device manufacturers selected the vector signal transceiver because of its small form factor and ability to test multiple wireless standards in a single instrument saving space and providing benefits of high performance at a competitive price. And in aerospace and defense applications for software defined radio, the vector signal transceiver displaced incumbent technology because it outperformed the existing equipment.

Several semiconductor companies making RF power amplifiers used the existing IP and LabVIEW FPGA and the vector signal transceiver to dramatically reduce test times and deliver significant cost savings. And many universities around the world adopted the vector signal transceiver to prototype next generation wireless standards because they could target the user programmable FPGA with LabVIEW to help them accelerate their research. Like test systems embedded measurement and control systems require rapid innovation.

In Q1 CompactRIO saw record orders for the first quarter gaining traction in areas like asset monitoring, machine control, power inverters and the smart grid. For example, CompactRIO and LabVIEW displace what would have been a traditional solution for controlling complex machines because we're better able to meet this customer stringent performance requirements. Customer also selected CompactRIO and LabVIEW to monitor wind and traditional power turbines because our platform enabled them to develop and deploy their system for a much lower cost than building their own custom solution.

Earlier, Alex discussed the dynamics of our largest customer and the importance of the diversity of our business to sustain growth. I want to reiterate that our Q1 record average order size was driven by a large number of customers using our products in high performance test and embedded measurement and control applications. In fact, in Q1 we received more than 2,300 orders over $20,000, which served many companies across a large number of industries. We believe this diversity and large orders demonstrates that we are achieving broad-based acceptance and that the investments we made in our services to support that complement this systems are creating a competitive advantage.

Finally, I wanted to mention our NI week user conference coming up during the week of August 6, in Austin, which brings together thousands of engineers and scientists from several industries. Our annual investor conference is held in conjunction within NI week and provides investors with premium access to executive management, customers and partners so that you can talk to them directly about their use of NI technology. We hope you will be able to join us on August 6. With that I will turn it over to Dr. T.

James Truchard

Thank you, Pete. I am pleased to deliver the record first part of revenue in a difficult environment. However, I am very disappointed to miss on our profitability target because we exceeded our spending plan. When we founded NI, I was looking to create a job that I would enjoy, as well as create a business with a financial agent that could scale to support sustainable growth and profitability. While we believe we have many long term growth opportunities ahead of us, we understand the importance of effectively managing our cost. Throughout 2013, we plan to refocus our efforts on ways; we believe we can most successfully scale our business. An important factor in scaling our business is building on our vision of graphical system design, which integrates software and hardware for measurement and control systems.

When we started NI, we envisioned a central role software would play in instrumentation. Nearly 40 years later, we see LabVIEW continue to revolutionize the way engineers approach a diversity of applications. Most recently an RF design and test, where the vector signal transceiver delivered the next step in our long term vision. Also helping to scale our business is our ability to support on customers’ needs. A strong R&D and sales teams produce new product and build relationships that help us address some of the customers greatest challenges. As our customer demands continue to increase, our alliance partner network plays an integral role meeting these scaling demands through system integration services, add-on products in that NI software and hardware and training services.

Finally our strategic partnerships with universities and other organizations help future generations of scientist and engineers by improving stem education. One of these partners shift (inaudible) first a non-profit organization that inspires elementary to high school students to take interest in science and engineering. This year first programs are projected to reach nearly 300,000 young people through robotics competitions and LEGO leagues. This week at the St. Louis Rams Arena thousands of high school students are using LabVIEW and CompactRIO to compete in the first robotics championship. We are proud to support the development of future engineers and scientists around the world.

In closing through the dedication of our employees, we were able to set another first quarter revenue record. However we must work hard to get back on plan for 2013. I believe we have the resources to focus on the right opportunities to achieve our long term goals and I am confident our employees will rise and successfully meet this challenge.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Patrick Newton of Stifel. Your line is now open.

Patrick Newton - Stifel Nicolaus

Several questions for you, I guess number one is that if I run through the mid point of your guidance I calculated an implied gross margin of about 75%. So I want to see if that is bull park of the significant decline you are referring to on year-over-year basis, and then along the same lines on the gross margin topic with more or large orders in larger kind of customers kind of results from its gross margin pressure are we looking at a structural shift in your gross margin profile or should we see this pressure as being somewhat temporary as you’re just ramping your business?

Alex Davern

We've got by significant I mean somewhere in the roughly 200 basis points decline sequentially from Q1 to Q2. So that would give you some help put your model on that. On the second question in terms of large orders, let me step back a little bit and try to address that and perhaps (inaudible) comment as well. I would separate I think our growth successive growth of large orders across a broad range of industries and customers over the last six, seven, eight years from this specific highly competitive application we are talking about for Q2.

In general as we've grown our large order business, we have been successful at improving our gross margins in concert with that as we’ve gained leverage from the scale. And the application we are talking about on the call specifically that will have some significant revenue in Q2 and will have the biggest impact on our margin, that's a very competitive specific application where you know for our penetration in this market space, we are early on in competing in some of these large scale applications. And it’s a different margin profile of that specific particular opportunity than we see for the rest of our large orders. So I wouldn't take that one opportunity as a reflection on the margin profile of our future large orders as we continue to scale that.

Patrick Newton - Stifel Nicolaus

Seeing as you are going to have revenue ramp in 2Q and you are talking about orders for this large customer being down on a year-over-year basis possibly, I would interpret that to mean that we should see a relatively decent improvement in the margin profile of the company through the back half of the year?

Alex Davern

That is our assumption.

Patrick Newton - Stifel Nicolaus

Okay. And then pertaining to the three different applications orders with this large customer, are they all consumer electronic driven and then when you say that you are serving a new space for this customer that has not been -- that they have not competed in before, I assume it’s also fair to say that they have not competed in before I assume its also fair to say that this is new space for you?

Alex Davern

Yes, to both questions. There are consumers, they tested our high volume production test systems for consumer electronics and yes for this particular customer, this is the first time we serve this particular application.

James Truchard

You know historically -- this is Jim Truchard, we've used high gross margins to evangelize new business areas, an alternative way to use that margin is to aggressively go into new stages on the high volume applications as well.

Patrick Newton - Stifel Nicolaus

Perfect, okay. And then I guess on the -- given the increased exposure that you are seeing to the consumer electronic end market, should we see any type of shift in the seasonality of your revenue you know that typically peaks in Q4 on somewhat of an industrial budget falls or pulls back in March, should we see more of potentially a peak in the September quarter or lesser growth from on a sequential basis September to December as a result?

Alex Davern

I think it remains to be seen Patrick. I think the underlying seasonal pattern of our core business is still very much intact. We did see a little bit of a change to that last year rather than Q2 because of some other very large orders we saw spike in our order volume in Q2. So I don't think we have enough history with that yet to see, but certainly there is more exposure to consumer electronics and some of these big orders that we’ve had in the past.

Operator

Our next question comes from Chris Godby of Stephens. Your line is now open.

Chris Godby - Stephens

Good afternoon. Thanks for taking my call. You talked a little bit on your release and during the call about your plans to put a cost control program in place, what steps are you taking to control cost over the remainder of the year?

Alex Davern

Yeah, so we are particularly disappointed I think Dr. Truchard mentioned it and I said it myself several times. I mean, for Q1, we did hit our revenue number dead on, we had very good gross margins and so we're personally very disappointed to miss the profit number based on being over planned on spending. We're in the process of adjusting our plans right now. We're adjusting our hiring plans as we look out at the rest of the year and we're looking very closely at other areas of expense that we can reduce to try to get back on plan for the year.

James Truchard

We invested in to the area of getting to large orders and we have done as you've heard. We're doing that now and so we can keep the idea that work and move on with the ones that didn’t. So through that process, we can (trim our) expenses while maintaining the activity that’s given us the revenue.

Chris Godby - Stephens

Okay, great. Thanks for the color. And then could you give us a little bit of detail on how your business is doing by end market, what end markets are performing well for you right now and which ones are lagging?

Alex Davern

We had good growth from all regions. We had a 13% increase from the Americas.

Chris Godby - Stephens

And then I guess not really in particular by geography but more by end markets such as consumer electronics?

Alex Davern

Somewhat articles that we look at, right?

Chris Godby - Stephens

Correct.

Alex Davern

So, academic was -- we had a fairly strong quarter for academic really all over the globe. Our defense and aerospace was also fairly strong. Transportation was strong. A little bit weaker was research and our big physics area and we think some of that might come from, might be due to the sequestration and the flowing of funds, but that’s the color I gave you on the verticals.

Operator

Thank you. Our next question comes from Mark Moskowitz of JPMorgan. Your line is now open.

Mark Moskowitz - JPMorgan

A couple of questions if I could, just follow-up on the OpEx average, was any of this related to the large customer was early sort of give me pull forward where you live on time mix, you had all the [ducts] to really serve this one customer or was a broader in scale?

Alex Davern

Fundamentally it was broader in scale. Undoubtedly, Mark, we are making large investments for this customer, that is a core part of our success there to build up relationship and deliver that capability. But in general, our average is broader in scale.

Mark Moskowitz - JPMorgan

Okay. And then as far as the commentary around government sequestration, it's really to see now, I don't know there is a lot of concern about during the March quarter but really it's starting to head now or so, do you see actually incremental downside risk to your end markets now because of this?

Alex Davern

I definitely think it's a concern, I mean it's really difficult for us to be able to pinpoint and dollar figure even impact on Q1 and it's even more difficult looking at into Q2 to try to figure out exactly what that dollar impact would be. And fundamentally in this quarter given that we missed Q1 EPS and PMI appears to be headed down and we have adjustments to make an inventory spending, I think it make sense for us to be pretty conservative in this timeframe.

Mark Moskowitz - JPMorgan

Okay. And then just one last follow-up this in the OpEx piece, I guess still kind of just in terms of how it happened or you have this over planning?

Alex Davern

Sure, Mark. We were about 2% over budget overall. When we look at, it's a fundamentally tie to our hiring plan and so we are little bit ahead on people now where we want to be and how we are going to be adjust that as we go over to next several quarters.

Operator

(Operator Instructions) Our next question comes from Stephen Stone with Sidoti & Company. Your line is now open.

Stephen Stone - Sidoti & Company

Good afternoon. I guess my question here is on adjuvant, they are making a bigger portion to the market here, as they start to do this, are you seeing them price a lot of PXI against you or what are you seeing as their entry?

Pete Zogas

Alex, I will take this one. When we look at the entry adjuvant into the market as they have been in, I guess in PXI about 2.5 years we view their entry is very positive for the overall market growth is an endorsement. PXI is a standard. We have seen that will be helpful to us and numerous accounts where we are able to leverage the broadening of the standard and bring in our very full portfolio of products and 14 years of experience and leading the PXI market space. So we view that as a very positive thing for both the PXI market and for National Instruments. We haven't seen any noticeable impact on our pricing today at all from that entry.

Stephen Stone - Sidoti & Company

Are you selling against them in most of these applications or something to that effect?

Pete Zogas

In these large applications we are talking about this customer for example, it’s generally box instruments that we are competing that we are competing against.

Stephen Stone - Sidoti & Company

Okay. And then can you I can guess provide color for the region for the decrease in the larger order, I guess did you budget more than expected or you’re little optimistic?

Pete Zogas

Yeah, I think we were little bit optimistic. So given that these are standard components we felt on our customers we had buffered the forecast that we got to allow us to be in a position to deliver on upside that we had anticipated to their forecast. And in hindsight that was a mistake, but they reduced their forecast which was a bit of a double whammy for us and now we have to move through the adjustment process.

Operator

Our next question comes from Mark Douglass of Longbow Research.

Mark Douglass - Longbow Research

First of all Alex can you remind us what were the total orders shipments from the large customer in ’12.

Alex Davern

So in Q1 of 2012 we had $12 million of orders from this customer. In Q2 we had $17 million and in revenue for Q1 of ’12 we had about $4 million and it was about $4 million in Q1 of ’13. Did you get that Mark?

Mark Douglass - Longbow Research

Yes, but for full year ’12?

Alex Davern

Yeah, full year in ’12 we had $76 million in orders, $72 million in revenue.

Mark Douglass - Longbow Research

Okay. And some of those orders, some of those I assume that the $4 million in orders fell into the 1Q.

Alex Davern

The $4 million actually went towards deferrals, some part of that revenue is deferred to couple of future services.

Mark Douglass - Longbow Research

Okay, okay, and the…

Alex Davern

We did not finish’12 really with any backlog.

Mark Douglass - Longbow Research

So, I noticed your guidance is a larger spread than normal, is that due to uncertainty in deliveries to the larger customer or is it also related just to the uncertainty in the macro.

Alex Davern

I think it’s everything wrapped up in one and haven't missed our profit number in Q1. I'm just generally being more cautious for guidance.

Mark Douglass - Longbow Research

Okay, and then I guess what was the benefit of R&D tax credit in the quarter.

Alex Davern

Yeah, we talked about that in the Q1 call as part of our guidance it was about $0.03 a share roughly.

Mark Douglass - Longbow Research

So it was $0.03 within your expectations.

Alex Davern

Yeah, it was pretty much exactly what we had expected when we gave guidance in January.

Mark Douglass - Longbow Research

Okay and then the acquisition related adjustment just kind of housekeeping that was a benefit that you backed out in non-GAAP and what was the investment.

Alex Davern

Yeah, we had made a pretty big adjustment to the earn out accrual of one of our acquisitions late last year and we just fine tuned it a little bit here in Q1.

Operator

Our next question comes from Richard Eastman of Robert W. Baird.

Richard Eastman - Robert W. Baird

Alex what did the acquisitions the three small ones you made in the fourth quarter, what did acquisitions add to revenue in this quarter.

Alex Davern

Just a second there Rick. So we added about $3 million from acquisitions this quarter, it was a little bit lower expectations of $4 million to $5 million. That’s really due to some timing issues with one of the acquisitions and we expect in Q2 that number to be a little bit higher in the $4 million range for Q2.

Richard Eastman - Robert W. Baird

And then Alex I just wanted to clarify on this large customer, I think the reference in the press release is that we are not likely to meet the same order number and we are more conservative now and we are talking about the full $76 million not the $57 million that you culled out as that one big project.

Alex Davern

Correct, we are talking about the total value for the customer in this year.

Richard Eastman - Robert W. Baird

So it will be less than $76 million, much less it sounds like but how does that from a revenue perspective we were only really tracking the 57 million, but what do these comps look like last year in terms of revenue recognition on that customer? It's 4 million in the first you said?

Alex Davern

I will play it out for you. It's 4 million in the first, roughly 23 in the second, 29 in the third and 16 in the fourth.

Richard Eastman - Robert W. Baird

Okay, and then also what was the FTE number at the end of the first quarter?

Alex Davern

It's 7,135.

Richard Eastman - Robert W. Baird

Okay, and then just the last question. Maybe I just need a little bit of clarification. We talked about the softness in Japan and it certainly showed up in sequential improvement in revenue there. The question is you know, I get the weak yen, does that basically make your products that much more expensive? I mean is that why or is why the demand fall off like it did?

Alex Davern

So, a couple things going on there, Rick? Number one, sequentially Q1 is always a big quarter in Japan because March 31 is the fiscal year end there. Japan in Q1 is normally our highest percentage of revenue that comes from Japan is at that time period. Why we saw that drop off in orders? Two things, obviously the value of the yen fell by almost 25% in Q1. We sell in local currency in yen and so the fall in yen directly translates in to a fall in our dollar revenue. We have local customers in competition in Japan. We don’t have the luxury unfortunately of raising prices, 25% local currency in a one quarter time period. So that’s the core part of the issue. Most of our cost of goods is in dollars. So it's not in yen.

Richard Eastman - Robert W. Baird

No, I understand, a couple of years ago we were having this conversation about how you can adjust your pricing, but I guess to your point, you can't do it that quickly.

Alex Davern

I didn’t predict on January 1, that the yen was going to collapse, I am afraid.

Richard Eastman - Robert W. Baird

Yeah, I got that. I understood, but the fact that the point is still the same though you should be able to adjust your pricing over some period of time there?

Alex Davern

Yeah. Over some period of time, 25% in one geography, in the short period of time where you look competition.

Richard Eastman - Robert W. Baird

Sure.

Alex Davern

That’s not a viable option.

Richard Eastman - Robert W. Baird

Okay. And then just the last question that I have is we bump into just basically a press release or an article, but basically NATI has on the drawing board here plans to build the new R&D center in Austin and how does that fit into this cost reduction effort that we would be looking for?

Alex Davern

The plans we have for new auditions and also the 10 year plan.

Richard Eastman - Robert W. Baird

Okay.

Alex Davern

Now as a growth company, we expanded in and build campus to accommodate our growth as a unified platform company, it makes sense to have core R&D in one location.

Richard Eastman - Robert W. Baird

Yes.

Alex Davern

And so that is the plan we have to expand over the course of next decade. As you know you have been following us on a long time, we are very committed to the long term growth of the company and we plan to add that capacity as when we needed, so that will be a thing we will be looking at over the coming years.

Richard Eastman - Robert W. Baird

Okay. Because in this article, I mean we didn’t talk about starting at this year, that subject to...

Alex Davern

I don't know which article you’re referring to specifically, but this is a long-term plan.

Operator

Thank you. And at this time, I am not showing any further questions. I would like to turn the call back to management for any further remarks.

Alex Davern

Thank you for your time today. We appreciate your questions. We hope to see you at some of the investor conferences upcoming in the next four or five weeks. Thank you.

Operator

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

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