National Instruments' Management Presents at 14th Annual Needham Growth Conference (Transcript)

| About: National Instruments (NATI)

National Instruments Corp (NASDAQ:NATI)

14th Annual Needham Growth Conference Call

January 11, 2012 4:10 pm ET


Alex Davern – Executive Vice President, Chief Financial Officer and Chief Operating Officer

Unidentified Analyst

Good afternoon. Welcome to 14th Annual Needham Growth Conference. My name is [Mark Solovey]. I’m with Needham’s West Coast sales team. Today we have Alex Davern, COO and CFO of National Instruments. I’ll let him have the podium.

Alex Davern

Thank you, Mark and thank you to Needham for I believe this is my 11th consecutive Needham Growth Conference. So, I appreciate the invitation. 11 years of representing National’s. My name is Alex Davern. I am the CFO and COO at National Instruments. I joined the company back in 1994, just before the IPO and I’ve been with the company to the evolution that you can see on the screen behind me.

I’ll endeavor to move through the story pretty quickly and leave someone room for questions towards the end. And I appreciate your time and attention late in the day, in a busy day at the conference as we reached the end. So, hopefully we can look through this and engage in a good interactive discussion.

National Instruments is the leader in computer based measurement and automation. We fundamentally are focused on the premise of disrupting the trenched industry of test and measurement. And then leveraging the technology we’ve developed in the test and measurements space into the emerging market of embedded industrial and embedded applications.

But we sell that same core technology to machine builders. We’re using core test and control technology to build machines and I’ll discuss that as we go through.

We had a reasonably tough fourth quarter, as many of you will be aware, especially in Europe in 2011. But when we look at the whole year, 2011 is a very good year for the company. All time record hit revenue, we had 19% revenue growth came in at $1 billion and $40 million. If we hit the point of our preliminary numbers will also have an all time record profit year.

During the year, we were very aggressive in our investment and very focused on continuing our long-term growth, and I’ll dig into that as we go.

So what do we do? National Instruments is focused on leveraging commercial technology to bring modular solutions to scientists and engineers to build sophisticated measurement and controlled substance. Especially what we do is we try to put the measurement technology, the analog to digital conversion of physical phenomena into a digital value. We put that technology on a plug-in board. We couple that plug-in board with industry standard PC technology, and we sell very advanced sophisticated application software to allow the customer to build a measurement system from these core elements.

Our vision as a company is to empower scientists and engineers to build a specific measurement instrument that they need using their own to main expertise and leveraging commercial technology.

The core to our franchise is a product called LabVIEW. LabVIEW is a graphical programming technology that was released on the Macintosh back in 1986. It’s been in market now for 25 years. It is the predominant application software that scientists and engineers use to build measurement systems globally. It spans all the way from the very, very simple and easy to use in very high volume.

As it’s most simplistic, it’s OEMed by LEGO [Detroit] Company. They use it as the engine behind their LEGO MINDSTORMS robotics building kit for children. So it’s very, very easy technology to use for a broad based and engineers in building technology systems, and it leverages all of that to the biggest instrument under planet, which is the Large Hadron Collider, the particle accelerator in CERN in Geneva, seeking to unlock the secrets of the universe. So we span from the very simple to the very complex and that’s a core part of our overall strategy.

We want to be able to reach the broad base of engineers with very, very simple systems. We want them to understand that our products will not run out of horsepower and that they will be able to scale up to more and more sophisticated systems as their applications grow and develop. The simple way to think about LabVIEW in an analogy is that LabVIEW is to scientists and engineers what the spreadsheet is to financial professionals. It’s a ubiquitous prerequisite tool for productivity for scientists and engineers in the world today.

Our evolution as a company can be broken down roughly into three phases of the company’s history. This company was founded in 1976, three professors from the University of Texas, each took $10,000 out of their Texas Teacher Retirement fund, started the company in 1976 developing network cards to control the traditional instruments. That’s how we’d sell a $500 network card that will be used to control multiple box instruments from different vendors. That’s all the company focused on for the first 10 years.

At the end of that decade, we’ve developed a market share leading position in the industry and then the inspirational of the spreadsheet came out in the early 1980s. The company spend the next three, four years developing LabVIEW as a graphical programming environment brought us in market in 1986 and move it up to value chain. Evolving from being a pure network supplier to the test and measurement industry to now also to become a dominant supplier of the application software used to program the instruments at the other end of the network. That was the second phase of the company’s history moving up our average over size.

In the third phase of the company’s history, we were able to leverage commercial technology that came to market as a result of the telecom billing, the digital telecom bill, the availability broad-based analog to digital converter chips. We’re now able to take that technology, put it on the plug-in board.

We’re now able to build the instrument inside the PC. We no longer have to reach out with a cable to control a box instrument sold by somebody else. We can actually take the core measurement technology bring it into the PC framework and deliver that as an integrated solution.

Now the whole world of measurement as here represented on one-shot and we’ve been evolving our capability over the course of the last 20 years.

On the horizontal access, you have the frequency of the signal that you may be seeking to measure. On the vertical access you’ve got the accuracy of the signal. You’re seeking to measure expressed in bits of resolution.

The orange line running down through the curve here is the state-of-the-art today of the box instrument competition. So the guys who have been the traditional instrument suppliers. They can measure any combination of frequency and accuracy underneath that orange line.

When we first started out in our first measurement product in 1989, we were somewhat laughed at by the industry. It was not very accurate. It was not very fast. But it was relatively inexpensive and it worked well with LabVIEW on the Macintosh, and so what we’ve seen is kind of a toy.

But it was very attractive to academia, because academia wanted to use the Macintosh. They wanted to teach concepts through a more focused on conceptual knowledge than precision and it was inexpensive. So we got a really good foothold in academia in the late 1980s.

When Windows came out in 1991, we were able to port to the PC. We had a real advance in technology for a graph of a [Portland] point of view. By 1995, we had the dominant software standard in the industry. We’re then able to leverage the rapid advance of PCs and cellular technology to rapidly enhance our measurement capability. And over broader as it is a spectrum today; we have the highest performance most accurate devices on the planet

In recent years, we’ve been progressively moving into the RF domain that is, signals above 1 gigahertz radio frequency signals. This is roughly half the overall T&M industry. it is the highest gross margin portion of the T&M industry. And this is an area where we've been steadily increasing our capability and we’ll continue to do so as we bring new products to market over the course of next several years. This opens up progressively more and more market that we can address with our core technology servicing our core customers.

When you break the overall test and measurement industry down, it’s roughly to $17 billion industry made of the several different segments, and the big pressure here is the last decade has been a relatively tough decade for test and measurement. Most T&M vendors have not had record revenues since 2000. the overall industry today is smaller than it was in 2000. NI has been rapidly getting market share.

We represent part of the reason that the market has been shrinking, because we’re servicing the market at a much lower price with disrupted performance. and the thing is quick look at our kind of opportunity from a customer point of view. When we look at the challenge of testing a modern cellphone today, modern smartphone, the capabilities incorporated in the cellphone today is just unbelievable. Whether it's high-speed video, whether it’s GPS, satellite navigation I mean, it is incredible how much technology is packed into that phone. The traditional approach to testing a device like this is to join a test of battery. You have one box to do that. If you want to test, the audio here another box with that, you want to test a GPS signal, you got a third box.

So it’s an amalgamated collection of boxes from the diversity of customers, our company’s reckoned together cable into your PC right from the software to automate the execution of those devices. Now the challenge with that is most of these boxes are redesigned every five or six years. They have a couple of years design cycle. So the computing technology contained in these devices is obsolete.

So you got a power supply screen, hard driver processor, memory, network bus, all of these devices contained inside the instruments are typically obsolete when they come to market when you compare with the commercial technology.

The other problem that we have is that, each box contains its own computing platform. So when you rack 12 devices together to build a test system, you’re buying 12 sets of obsolete computing technology while you’re also getting access to the measurement capability. So our competitors deliver a monolithic solution. Computing technology married tightly to measurement technology, you can’t separate the two. Our approach for the market is to disaggregate the solution.

So we reach into that box and we pull out the analog-to-digital conversion technology and we put it on a plug-in board. We then provide the customer with one open PC compatible environment where they can build a multi-instrument system inside the PC framework. Wherever the leverage that would in an embedded controller and an embedded [wintel] computer that’s upgradable. Today, we sell an octal core Intel-based controller when we bring out – I’m sorry, a set of quad core Intel-based controller. When we release an octal-based controller you can take out your prior processor system and replace it and upgrade your system.

So we’re able to eliminate the redundant obsolete hardware. We’re able to give the customer a path to frequent upgradability to improve performance of the devices. We’re able to improve the speed and performance of the system, because you’re embedding the management capability within the back plan of the PC. So we’re able to sell a much physically smaller less expensive higher performance device leveraging commercial technology. And obviously this disrupts the market because we eliminate a lot of the redundant value that customers currently have to buy in order to get access to that measurement technology.

Now in the last seven or eight years we’ve also been advancing our position in the industrial embedded market. This is a fairly large market and the simple way to think about it is, people who need to build a machine, that needs to make a measurement, and needs to respond to that measurement and I’ll start with (inaudible) easiest way to understand it.

This is a bio medical device, it’s been approved by the FDA and it’s in use today for using liquid nitrogen to kill subsurface skin tumors.

Now National Instruments knows almost nothing about cryogenic surgical devices, that’s not our area of expertise, but we’re a very small team leveraging their own domain knowledge leveraging our core general purpose technology to able to build the device rapidly, deploy it into the fields, certify and put it into using in the field leveraging commercial technology. And the alternative approach to this in the past would have been to develop custom electronics from scratch to enable the execution of this device. That well require the development of a custom ASIC, which has significant lead-time and very significant costs.

We provide our engineering customers with a kit of cards, if they are building a packaging machine, we don’t know much about packaging of the company. If they are building a wind turbine diagnostic measurement device, we don’t know a lot about the physics of wind. What we know a lot about is how to enable standard measurements as module pieces. We provide an application software environment with LabVIEW that allows the customer to leverage the IP that we made available as individual components and then they take their domain knowledge and leverage our commercial technology to build a custom solution.

We sell the same core technology into biomedical, that we do into green energy applications. We do into transport applications. So with standing a standard off-the-shelf set of components that have core measurement capabilities that can be reused in a multitude of industries. The differentiation is brought by the customer and that differentiation by the customer is expressed in software that they can then download and drawn on as own except (inaudible). So that’s the leverage and macro position we’re going to that opportunity.

Now in terms of our business model overall we have a very diverse business, no industry is over 15% of revenue. The largest industry concentration we have right now is in academic, which is about 12% of revenue.

Academia has been a core strategy of the company since the release of LabVIEW and Macintosh back in 1986. LabVIEW is taught as the science of measurement in about 7,000 different universities around the world. We have very close established relationship in the high school and the elementary schools through (inaudible).

And our fundamental proposition in Academia as we want young scientists and engineering’s to learn the science of measurement through LabVIEW as a tool. So when they come to market as professional engineers who are familiar with our technology. They help us drive penetration into the market space.

No other industry is over 10% of revenue outside of academic. And that gives us a fairly high degree of diversity and stability. It also means because we’re very diverse. We tend to follow the broad macro economy as opposed to any one vertical market indicator.

When I take a look at our track record from a revenue point of view, from the founding of the company in 1976 through 2000, we had consecutive double-digit revenue growth over the course of those 25 years. We did see an impact from the technology bubble bursting in 2001. Return to growth in ’02, made a decision to invest aggressively in R&D to sustain that growth.

Once the economy stabilized in ‘03 we then went on to double the size of the company between ‘03 and ‘08. We saw certainly an impact from 2009 as the broad economy was impacted heavily by the economic disruption in late 2008. But more rapidly returns to revenue growth. So new record revenue in ‘10 and a significant record revenue, record in ‘11.

So despite the fact that the recession of ‘09 was much worse than ‘01, we’ve been able to recover more rapidly and drive incremental growth more rapidly; fundamentally, because we’ve aggressively invested over the course of the last decade.

We did released preliminary results last week, a non-GAAP revenue $279 million, and new all-time record of 12%. And the rest, you can see here and it’s available in the press release.

Now I wanted to do fundamental features of our business model over the course of last decade has been a decision to aggressively invest to drive sustainable organic revenue growth. As we enter 2011, we anticipate the opportunity to be aggressive and to maintain our operating margin over the course of the year.

So we made a decision to aggressively invest putting our fuel cells resources in the R&D. we didn’t fully anticipate the weakness of the PMI that we saw late in the year. Now the overall global PMI was flat in the second half of 2011 and that’s put a little bit of pressure on overall operating margins, which I’ll talk about in just a second.

When we take a look at the mix of growth, I want to break our revenue growth down into orders under $20,000, which is our more transactional business, and then system level orders above $20,000, which represents the rate of growth of our new PXI and cRIO applications. You can see over the course of the last five or six years, we've seen consistent growth in the orders over 20K, they’ve become progressively larger portion of the companies business overall, gone from about a third of the business five years ago to about half the business today.

We were able to see sustained revenue growth in this business all the way through the first four quarters of the U.S. recession that started in Q4 of ’09. And we’re able to sustain that growth throughout the next year right up until the point where Lehman Brothers went bankrupt and you've got quite a bit of chaos in the financial markets that spread through set of broader economy. We saw downturn in early ‘09, rapid recovery to new record highs in terms of absolute revenue in ‘10 and on into 2011.

Now typically if you look at this curve, you’ll see from Q3 to Q4, we've traditionally seen a fairly significant jump in revenue from orders over $20,000. That has been led primarily from our European business in Q4. Q3 tends to be a relatively recorder for National Instruments in Europe, especially in the July-August holiday season and the majority of our sequential, historical sequential growth in Q4 has traditionally come from Europe. We did not see that trend repeat here in Q4 2011, on top of it more of that out in the second.

As I said early on our business is very diverse, we can just follow the broad based macroeconomic indicators, traditionally I found that global PMI, Purchasing Managers Index is one of the best broad based indicators of what’s going on in the industrial economy, that’s represented by the blue line on our slide, and the red line is national since revenue growth.

As you can see in the first half of 2011 was a pretty precipitous drop in the global PMI. Only to be compared with what we saw in early ’09 and what we saw in 2001. We then saw PMI take a left hand turn here in the fourth quarter, continue to be weak about what we saw weakness September, October, November, we did see it end on an uptick in Q4 in December, which we view as a positive for our business going forward.

We break our revenues down to our traditional business, which is this blue line, our instrument control business, which was the network cards that we started with 20, 30 years ago, that used to be about 40% of our revenue pre-IPO, it’s not much smaller portion of our revenues. This tends to be highly correlated with the overall T&M industry that business was actually down 15% year-over-year in Q4, having been flat in Q3.

So it’s our precision and perspective that the overall test and measurement industry saw a significant slowdown in Q4. Where we’re replacing those box instruments with our own module devices continue to see a new growth, and new all time record in the fourth quarter.

Now gross margin is a key indicator of any business, that’s a real indicator of pricing power of differentiation, of differentiated value that we bring to our customers. This is one of the most boring gross margin curves that you probably see. The company scaled a lot since 1993. We were less than $100 million back in that timeframe. We are over $1 billion today, we’ve been able to sustain and manage to improve our gross margins overtime. This comes from a very determined focus on sustainable differentiation to focus not on commodity segments at a market, but where we can deliver sustainable differentiation overtime.

If I take look at our operating model going back to the IPO, the blue line here represents our operating margin; non-GAAP going back to the IPO in 1995. The grey line represents our investment in R&D as a percentage of revenue.

Now on our teacher class internally to emerging leaders in the company, I’ll call this period from 1995 after the IPO to 2000 I call that fact and happy period. The technology industry was really accelerating. We were growing very well. We were making a lot of profit and we were probably under investing in R&D at the time. And that really became obvious to us in 2001, but the tide that have been lifting all technology companies have been lifting us as well. And we weren’t you in enough new market penetration.

We made what at the time was a painful decision for a new public company. We made a decision that we were going to focus on long-term organic growth. And we’re going to make the commitment to R&D necessary to sustain that knowing that it would cause operating margin pressure for the next several years.

Internally, we view there is probably a three to four year timeframe for a return on R&D investment. As we hire new engineers into R&D, we don’t get a new product the next day. So for that to return to profitable status is about four years. In our field sales force, it’s about 18 months. So these decisions to scale up had the necessary implication of a shrinking of operating margins for a while.

Now over the course of the next several years, we move to optimize the non-strategic areas of the business. We move production into Eastern Europe. We moved a number of back office functions into Eastern Europe. We were able to rapidly grow the business from ’05 to ‘08.

Our operating margins return very, very close to their target level of 18%. In fact that in Q3 of ’08, I was pretty certain it’s going to hit 18 until Lehman Brothers have bankrupt, and we saw an impact in Q4. In ‘09 we saw some decline in operating margins, in terms of rapidly recover profitability ‘10 as we move down to some new records of revenue. This data point here represents the first nine months of 2011, now we've seen some decline year-over-year when you compare that at 12 months, nine months to nine months, our operating margins for the first nine months effectively flat with the first nine months of 2010. In Q4, with the weaknesses we saw in Europe, we will see operating margin be down year-over-year from Q4 2011. so in the aggregate at our preliminary results, we will be down about 1% in operating margins from the levels we saw in 2010. So the story for us to 2011 is the new record revenue, revenue up 90% significant investment in driving the long-term of our business.

A short-term impact from disruption in Europe in Q4 that’s caused overall operating margins to fall above one percentage point over the last year. Our plan for 2012 is pretty straightforward. We want to deliver strong profitability. we're very focused on managing our operating expenses to accommodate what we’re seeing in terms of real world developments and we're going to stay incredibly focused on driving long-term organic revenue growth. The primary goal of our focus on the company right now is to drive towards $2 billion in organic revenue in 2016.

And with that, we have 12 minutes and I believe we can do questions here. I will be repeating questions for the sake of the audience that’s on the webcast. So with that, I will turn it over to the audience for questions. Go ahead.

Question-and-Answer Session

Unidentified Analyst


Alex Davern

So the question is how do we expect seasonality out of Q1 in Europe? And that's a very good question. As I said early on, historically, we had a pretty steady pattern of 10 to 12-ish increase; percent increase sequentially from Q3 to Q4, 75% to 80% of that has traditionally been driven from Europe. The flipside of that is we typically have had a 5% to 6% decline sequentially in revenue from Q4 to Q1. the vast majority of which has also come from Europe.

And so that is the question foremost on my mind right now. Does the weakness in Europe in Q4 imply a smaller sequential decline in Q1? And the honest answer is I don't know yet. We’ll be releasing results at the end of the month, certainly feel better to see the overall PMI come positive in December, the U.S. in particular is quite strong. We saw our business in the Americas actually accelerate from the year-over-year revenue growth point of view from Q3 to Q4.

And as I talked on the call last week in Europe, we just saw a kind of a scary drop in the rate of growth between September and November. We have had year-to-date and Q3 growth of around 25%, 26% in Europe. and then by November, we were actually negative year-over-year from the order growth point of view in Europe. That was particularly selling in Southern Europe and not so much in Northern Europe.

Now in December, we saw a business in Europe on a year-over-year basis improve, and went back into positive territory and for the whole quarter, we ended up a plus three, but it is a pretty sharp drop from plus 25 to plus three in that period of time. That's not something we see would have some serious economic backdrop and certainly what I think we saw from an economic disruption point of view in Europe in November plays a part in that [tale].

For the whole quarter, Northern Europe we’ve been to Scandinavian countries, the Germanic countries and Benelux were positive in Europe and the Southern European countries were negative. So that's kind of what we saw so far.

As I said, exiting the quarter, December was quite a bit better than November, carrying that as a direct predictor, I’d be very cautious and so we know more. We – release is also at the end of the month and I think that point will be in a much better position to answer that question. Thank you. That was a good question. Second question. Go to the back.

Unidentified Analyst


Alex Davern

So kind of our plan on investment ‘11 in contrast with ’12. So, let’s talk about it for a second. Coming into ’11, we made a definite decision believing we had room to be very aggressive on investment and continued to drive some operating leverage for the year.

We were in good shape on that right up till the end of Q3. And then in Q4, that came a little bit (inaudible) I’d say. So for the full year without record revenue, almost 20% of revenue growth, but we’ll see a one point drop in operating margin.

Now looking into 2012, certainly we are quite a bit more cautious than we were entering 2011. On a conference call in October, when we were giving guidance for Q4, I made this specific comment of concern about Europe in particular. We guided to a mid point of revenue growth sequentially in Q4 of 8%, well below the seasonal average of 12%. And so we where worried about Europe at that point in time.

We also talked at that time about moderating the rate of expansion in head count growth. And you’ll see that when we release full results for Q4 that operating expenses in Q4 would be slightly down from Q3, which is different than the pattern we’ve had in prior years.

We also talked on the call last week we expect operating expenses in Q1 to be flat or slightly down with Q4. So we’re definitely moderating the rate of expansion or response to some of the trends we see in the broader economy. But it’s also in response to we’ve been honestly very aggressive in ‘11 and we’ve moved from a period of capacity expansion. We’re really going to be focused in 2012 on efficiency ineffectiveness and the integration of that resources into the operation of the company to drive value as we go into ‘12 and ‘13.

So are we going to be focused on efficiency and integration in ’12 and our plan was for head count expansion or a quite a bit more modest than they were in 2011. Thank you for your question. Happy to take any other questions. Go ahead sir.

Unidentified Analyst


Alex Davern

Sure. I’ll repeat the question. So the question is, why would a customer use a competitor solution of ours is half the price, and that’s a very good question. There’s a number of fundamental reasons for that. Number one, we don’t cover the whole spectrum of measurement today. So there is some measurements we just specifically can’t do, that’s the number one reason.

Number two, there are a lot of applications out there where previous devices compared to other competitors are designed into the application and the application is then certified, perhaps an FDA at the certified medical device for example, or an aircraft, when that certification is done, that customer will continue to buy the exact same equipment, built to print for as long as they possible can. they will not change it unless they absolutely have to, because the cost of qualification is so high.

The third reason is one generally of [inertia]. we are trying to come into this industry even though we’ve matured as an industry player, modular instruments based on software is still very different from the traditional approach to solving problems in this market space. and so, we have to overcome that mind shift. We have to overcome the burden of proof against the incumbents. With the old story in 1980s is 1990s; nobody ever got fired for [braying] IBM. That same rule applies heavily in the test and measurement space.

so we have to win over customers one at a time, which is typically pretty heavy burden of proof. we have to prove that our measurement makes the same measurement as the box that used by. and then we have to overcome their inherent inertia against change. So it’s a process of driving a significantly different approach into a fairly conservative consumer price.

Engineers are generally very conservative especially where the brand of their company is at stake, on the quality in the production line or the life of an individual might be in stake in some mission-critical application. so it's a progressive process. Follow-up question.

Unidentified Analyst


Alex Davern

So the question is, if the industry overall is $17 billion what’s our addressable market. Today we estimate its round $5 billion roughly. It’s a very difficult number to be precise, but that is a rough estimate for today. We had another question. Go ahead sir.

Unidentified Analyst


Alex Davern

Sure, a very good question. Our embedded business is an interesting one for us to try to quantify. We have a number of products that are specifically focused directly at that market and essentially that’s the only market they serve, and we have a number of products that serve both the T&M market and the embedded market, both so it’s quite difficult to put a precise number on it.

We estimate that about 25% of our revenue today comes in the embedded space. that has been growing overtime. It has been the better performing part of the business over the course of last six or seven years. Our long-term expectation is that that will emerge to be roughly half the business over the course of next ten years.

From an economic point of view, because we have a fairly low market share and we have a very, very high value proposition in that space. Up until now, it’s proved to be actually less economically sensitive, excuse me, less economically sensitive than our test business up till now.

From a gross margin point of view, which is another question I get quite frequently. As the embedded space has been growing as a percentage of revenue we’ve been able to leverage that very high value proposition and it’s been the calls of our margins improving slowly over time. We got one more question in the front. Okay, go ahead sir.

Unidentified Analyst


Alex Davern

In terms of the modular instruments and software combination, there are a number of small companies that have positions. We bought a couple of companies back in the mid 2000s that where the nearest competitors, but still very small. Over the course of the last of couple of years, the success that NI has proven in this space and slow, but steady conversion of the psychology of the industry away from boxes (inaudible) towards modular has prompted some of the bigger traditional instrument companies to enter this market space as well.

And so we’re seeing number of them make preliminary 4As into the space. we welcome that and we advertise and market in heavily. so the entry of the incumbents into the space to validate modular instruments as the future is the platform we play back quite aggressively. We’ll see other space out over time certainly there appeared to be making a shift, but they’re recognizing the value of modular instruments and (inaudible) value that could bring to market overtime.

Unidentified Analyst


Alex Davern

We try never to underestimate these companies. they typically have long categories been around for a very long time 40, 50, 60 years. Very good technology, very good brands. They’ve been at the heart of the technology industry in the world in United States in particular for a decade. so we definitely do not underestimate them. At the same time, the business and the method we serve this business is very, very, very, very different, it’s different in a number of dimensions.

The technology is fundamentally different. We don’t control the whole environment of a box instrument. We have to build within the PC constraints number one. Number two, it is a software problem primarily. so the vast majority of our investment goes into application software, driver level software, a very different skill set going to typically need it in a box instrument manufacturer.

The second problem is business model. In order to really choose to compete effectively with our approach in modular instrumentation, you have to choose as the box company to undermine your existing market position. So there is a massive cannibalization in fact that has to be borne.

And the number three is channel. Our 40 degreed engineers into the field are all software experts. They’re used to building systems from modular pieces, a very, very well trained with that, very comfortable at that. Most of the channels of the instrument vendors tend to be used to plugging in a box and pressing a button. So it's a very, very different selling process as well as development process.

And so, we’ll see all place that over time. We welcome the competition. We welcome the traditional instrument players adopting the modular approach. We welcome their help and converting the overall test and measurement industry. We’ve got time for one more question, and then I’ll have to step down.

Unidentified Analyst


Alex Davern

So the question is, in potential inflection points in our industrial embedded space in the future? I think certainly with our CompactRIO platform that’s very possible. We’ve seen growth in that platform over 50% in ’11. Continue to grow at almost 50% rate in Q4. So it did not see the slowdown that we saw in the test space. It’s clearly become the bigger part of the revenue overall, as to when we might see that accelerate as a decisive shift in that market space, it’s very difficult to predict.

Our definite expectation is that, that area of the business will significantly outgrow the overall team in space for the next five to 10 years. So that’s an area where we see focus. It’s much bigger market in T&M.

In the end, the test and measurement market won’t be big enough for our ambitious. It also gives us a tremendous economic advantage to be able to leverage a lot of our test R&D work that’s done is directly applicable to the embedded market, and it gives us that opportunity to invest and amortize that investment over two markets and that allows us the commission to invest more aggressively in a T&M space overall.

With that, the red light is blinking at me. So I’m going to thank you everyone for your time and attention and have a happy New Year.

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