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National Instruments Corp. (NASDAQ:NATI)

Q4 2011 Earnings Call

January 31, 2012 05:00 p.m. ET

Executives

David Hugley – Vice President, Corporate Counsel and Secretary

Dr. James Truchard – President, CEO, and Cofounder

Alex Davern – CFO, COO, and Executive Vice President

Eric Starkloff – Vice President, Marketing

Analysts

Mark Douglass – Longbow Research

Anthony Luscri – JPMorgan

Ajit Pai – Stifel Nicolaus & Company

Rick Eastman – Robert W. Baird

Operator

Good day everyone and welcome to the National Instruments’ Fourth Quarter 2011 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 Co-Founder, and Eric Starkloff, Vice President of Marketing.

For opening remarks I would now like to turn the call over to David Hugley, Vice President, Corporate 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 future revenue growth opportunities, guidance for our Q1 revenue and earnings per share and success in large accounts. 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 annual report on Form 10-K filed February 18, 2011 and our most recent quarterly report on Form 10-Q filed October 27, 2011. 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 National Instruments Corporation, Dr. James Truchard.

James Truchard

Thank you David. Good afternoon and thank you for joining us. Our key points for 2011 are, record annual revenue of $1 billion, record non-GAAP annual profits, and record annual revenue for LabView, PXI, and CompactRIO products.

Despite recent economic challenges we executed well this quarter as we set a new record for quarterly and annual revenue and past the $1 billion annual revenue mark for the first time in our company history.

In 2011 we stayed through to our long term vision, improved our capacity to deliver new technologies to our customers and balance our long term investments with strong annual revenue growth. Despite the slowing global economy I continue to be optimistic about our ability to stay at the forefront of innovation and drive long term growth.

In our call today, Alex Davern our Chief Operation 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. Today before I start with the quarterly numbers I’d just like to take a moment to celebrate 2011 as the year that NI crossed $1 billion mark in revenue. Very few companies ever get to this point and we are proud of the hard work of all our employees past and present, which has allowed us to not only pass this milestone, but to do it in a way that positions us for continued sustained growth. Now, back to numbers.

Our revenue for Q4 was a new quarterly record at $278 million, up 11% year-over-year. Non-GAAP revenue was $280 million, up $30 million or 12% year-over-year. Acquisitions contributed $11 million of non-GAAP revenue in the quarter, and our organic revenue growth rate was 8% year-over-year.

The new quarter deferred revenue was up by $7 million. Today we also reported a new annual revenue record with non-GAAP revenue for 2011 of $1,042 million up, $169 million or 19% year-over-year. Acquisitions contributed non-GAAP revenue of $22 million for the year, and our year-over-year organic revenue growth rate was 17%.

The strong organic revenue growth is all the more impressive as it comes on top of a 29% year-over-year organic revenue growth we generated in the recover year of 2010. Deferred revenue was up $18 million for the full year. Non-GAAP gross margin in Q4 was 77% flat for Q3, from a year-over-year perspective non-GAAP gross margin was down 1% due to a drop in the proportion of revenue coming from Europe and a reduction in our inventory days during the quarter.

For the full year our non-GAAP gross margin was a new post IPO high at 77.7%. This is a real tribute to the focused investments we have made in sustainable differentiation. Total non-GAAP operating expenses were $171 million up 20% year-over-year in Q4. As we adjusted to lower unexpected revenues, our year-over-year growth in non-GAAP operating expenses moderated from 30% in Q3 to 20% in Q4.

For the full year non-GAAP operating income also set a new record at $164 million up 9% year-over-year. This represents the non GAAP operating margin at 16% down from 17% in 2010. While our investments in 2011 have put some pressure on short term margins, we feel confident that we have positioned us well for long term growth.

Net income for Q4 was $24.3 million with fully diluted earnings per share of $0.20 and non-GAAP net income was $32.5 million with non-GAAP fully diluted earnings per share of $0.27. Our reconciliation of our GAAP and non GAAP results is included in our earnings press release.

Despite the economic challenges 2011 was a very successful year for National Instruments, and there are some clear positives to take away. On a non-GAAP basis we had record revenue, record gross margins, record operating income, and record net income.

Now, turning to cash management, we paid $12 million in dividends during the quarter, while cash and short term investments increased by $30 million. Cash flow from operating activities continued to be strong at $170 million for the year, up from $145 million in 2010. As of December 31st the company had $366 million of cash in short term investments.

We also announced today that the Board of Directors approved a 40% increase in the quarterly dividend to $0.14 per share payable on March 5th to shareholders of record on February 13th. This increase in the dividend reflects the progress we have made since the 2009 recession in strengthening our business model and investing in growth.

As we close out 2011, I would like to take a moment to reflect on our execution to the last five years. Despite the worst recession in recent history National Instruments has delivered strong results over the last five years, increasing our non-GAAP revenue by 58% and increasing our non-GAAP operating income by 56%. Much of this increased investment came in 2011. While we manage these costs carefully in 2012, I believe that these investments when fully leveraged will be critical to achieving our goal of $2 billion in annual revenue by 2016.

Key to enabling this performance has been our expanded gross margins. Over the last five years, we have expanded our non-GAAP gross margins by approximately 350 basis points, which has allowed us to make the strategic investments necessary to sustain the long term growth of the company. Now, let’s make some forward-looking statements.

The weakness of the global PMI in Q4 combined with the significant weakness that we saw in our business in Europe during Q4 makes us cautious in planning for 2012. In addition, an early Chinese New Year also makes forecasting Q1 more difficult than usual. As a result, we are taking a cautious approach to guidance for Q1.

We currently expect non-GAAP revenue for Q1 to be up year-over-year and to be in the range of $250 million to $270 million. We currently expect the GAAP fully diluted earnings per share will be in the range of $0.09 to $0.17 for Q1, with non-GAAP fully diluted earnings per share expected to be in the range of $0.16 to $0.24. This is the forward-looking statements and this 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 weakened economy we are very pleased with our execution in 2011. Our goals for 2012 over the leveraging investments we have made in 2011 to drive sustained revenue growth and to continue to drive towards our long term non-GAAP operating margin target of 18%.

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

Eric Starkloff

Thank you Alex. We are pleased with our ability to achieve a new all time high for annual revenue despite the challenging economic environment we faced in Q4. We believe the diversity of our business and the evolution of our field sales force and product portfolio contributed to our sustained growth.

In the past decade, a growth driver for our business has been our systems used in high performance test and embedded applications while our orders over $20,000 showed strong growth at approximately 30% for the first 9 months of the year through September, due to a weakened economy this growth flowed to 10% in Q4 and comprised 47% of our business during the quarter.

For the full year, our orders over $20,000 grew approximately 25% over 2010 and have grown 132% since 2006. These large orders accounted for 45% of our business in 2011 compare with only 31% in 2006. We believe that success in our large orders reflects the enhancements we have made in our product and service offerings, our excellent network of system integrators, and the performance of our outstanding sales teams.

Our software products delivered record revenue in 2011 as more customers realized the value that NI software brings to their applications. LabVIEW software is the heart of graphical system design, and it has been used by hundreds of thousands of engineers and scientists to develop sophisticated measurement, test, and control systems.

LabVIEW is unique in its ability to graphically program a system while harnessing the performance benefits of the underlying hardware architecture such as multi-core processors and FPGAs, which results in a significant productivity improvement to our users over traditional text based approaches.

When customers use LabVIEW they are plugging into a vast ecosystem of developers to share code and best practices, our market place have add-ons in the LabVIEW tools network and access to support for more than 10,000 different types of hardware devices. This widespread option of National Instruments software and hardware has resulted in strong long term growth for our company.

In 2011, sales of our PXI modular instruments reached record revenue levels. Helping to drive this growth were our RF and FlexRIO products whose growth rates outpaced the company average. Earlier this month National Instruments became the first company to deliver support for testing the new 80211ac wire LAN standard. Illustrating our continued investment in RF and the ability of our software based platform to quickly evolve to meet the requirements o f new standards.

In addition, a critical part of our RF strategy has been adding AWR and Phase Matrix to the NI family. We are very pleased with the initial success of these two acquisitions. Six months in both organizations are performing ahead of our plans, and I would like to personally thank the employees of these companies for their contributions to their success.

We believe the success of our PXI modular instruments and our more than 14 years of investment in PXI has created a shift in automated text applications away from traditional rack and stack instruments. The traditional instrumentation solutions can offer the same level of synchronization, system level software integration, and reduced factory footprint and power consumption, and are therefore no longer viable in many automated test applications.

Over the last few years some traditional instrument vendors have introduced new PXI products to market further demonstrating their support for PXI. We welcome their endorsement of the PXI standard and we feel this will more rapidly accelerate the shift in industry where it’s a software-defined modular instrumentation approach.

A customer example that demonstrates the software based test approach with LabVIEW and PXI is from Benetel. They recently developed a manufacturing test system for tablet devices that incorporates complex touch screen, accelerometer, camera, audio, and Wi-Fi requirements. The modular approach with PXI helped to future approve the test system design, so additional functionality or capacity can be easily added without requiring a costly redesign of the overall system which is very important given the fast moving phase of development in the wireless industry.

By using a common software platform based on NI technology, Benetel was able to successfully cut development time on each new project by up to 75%. NI PXI modular instruments were also successful in many other application areas. For example, Embraer, the Brazilian aircraft manufacturer, used 21 PXI systems and the NI real time testing platform to create a full aircraft simulator. This system allows Embraer to perform electronics system integration testing by connecting the complete electrical system of the aircraft to a simulation of the rest of the plane.

The PXI based system reduced development and testing time from 42 months to 30 months when compared to their previous airplane simulation approach. Sales of our distributed IO products have also been a growth driver. They reached record revenue for 2011 and have increased annual revenue threefold over the past five years. Instrumental in this growth are CompactRIO products, which continue to grow significantly faster than the company average.

The CompactRIO platform has been a key investment area and we are pleased to see success in many diverse industries including energy, biomedical, and transportation. For example, LIME instruments, an NI Alliance Partner, has used LabVIEW in CompactRIO to develop and deploy a measurement and control system for hydraulic fracturing, a rapidly growing technique for extracting natural gas to meet our growing energy needs.

The NI system is used to capture critical data in the oil field environment which requires a mobile and rugged platform that can meet the physical demands of the operation. LIME shows LabVIEW and CompactRIO because it met their application requirements while reducing their development time. Using a single developer LIME was able to develop the entire system architecture including real time control, FPGA processing, and the user interface of the application, where in a traditional environment using text based languages would have taken three or four times the engineering resources.

Our data acquisition products also experienced record annual revenue in 2011, 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, for delivering quick and easy plug and play measurements for a wide graft of measurement types.

To close we have built a world-class product portfolio, an outstanding sales force and service offering, and a strong alliance partner network. The strategic R&D investments we’ve made produced highly differentiated products in areas such as RF modular instrumentation and CompactRIO and have enabled us to grow rapidly in large application areas. We were pleased to see our continued investments lead to a solid performance in 2011 and we continue and we look forward to future growth for this continued commitment to innovation. With that I’ll turn it back to Dr. T.

James Truchard

Thank you Eric. Despite the weakened economy in the Europe we executed well in Q4 in delivering record revenue for the quarter. It gives me great pride to say our company reached a $1 billion annual revenue mark representing a key milestone in our company’s history. I believe we have reached a watershed moment in the test and measurement industry’s movement away from rack and stack instrumentation and towards software based instrumentation.

This achievement is a testament to both our talented employees around the globe and to our company culture that inspires innovative product development to meet the demanding needs of our customers. To that end, I’d like to take a moment to reflect on the 100 year plan, which is our framework for balancing our short term and long term goals for the company.

Starting with the long term horizon I am confident that our relentless commitment in building a culture of innovation will lever increased value over time to our customers, suppliers, partners, employees, and shareholders. Earlier this month, National Instruments was named one of fortune magazine’s 100 best companies to work for, for the 13th consecutive year.

This is becoming the worldwide standard across NI with numerous branches also receiving this award from the Great Place To Work Institute including France, Germany, Italy, Japan, the U.K., and Mexico. In addition to this honor we were extremely pleased to be named one of the top 25 multinational companies to work for in the world by Fortune at the New York Stock Exchange in October.

To have sustained placement on these lists requires a growing business with strong product differentiation and career path opportunity. Our solid business plan and long term focus helps us attract and retain top talent creating sustained value for all the stakeholders. But it’s not just our company culture and people that allow NI to stand out amongst our peers in the industry, another key element is our visionary approach to delivering value to our customer’s geographical system design.

Through our ongoing investment in the strategic platforms of LabVIEW, PXI, CompactRIO, and data acquisition, graphical system design offers our customers a highly differentiated approach combining graphical programming with modular hardware resulting in significant cost savings and shortened design cycles.

One customer who benefitted from graphical system design was Elseya [ph] the leading quick service restaurant operator in Latin America operating brands such as Dominos Pizza, Starbucks, P.F. Chang’s. Their challenge was to monitor and manage basic utility services at their restaurants while reducing the consumption. Using the flexibility of LabVIEW combined with CompactRIO, Elseya was able to successfully deploy an innovative energy monitoring system resulting in the reduction of energy consumption by 25%.

They are now deploying the same system in hundreds of restaurants throughout Mexico. Our opportunity has never been greater to help customers address the engineering challenges in emerging areas such as alternative energy, smart mobile, semiconductor, stage physics, and life sciences.

World renowned experts in various disciplines have adopted our products because they solve problems that weren’t possible with traditional approaches. One such expert is Dr. Jay Lee, Director of the Centre for Intelligent Maintenance Systems or IMS. Dr. Lee’s team is leading cutting edge research in area of machine condition monitoring. IMS recently released a set of predictive maintenance algorithms as a toolkit for LabVIEW called Watch Dog Agent Library, representing a breakthrough in research that will help engineers increase the reliability of their machines and sustain near zero breakdown performance.

In closing, we recognize the importance in delivering on both our long term and short term goals for the company. While the economy may prove to be difficult in 2012, I am confident in our ability to execute on our vision and to meet the immense diversity and scale of applications that we serve in the short term. NI has become a technology pioneer by not only investing in products, but also the people who make them. I would like to thank our employees for their tremendous efforts in maintaining our open and innovative corporate culture.

I believe the future is software based instrumentation and the NIs is in the forefront of the movement away from the rack and stack era of instrumentation. I am optimistic that we are well positioned with our strong foundation to support future growth and profitability.

I would like to thank our employees for their commitment to innovation, proven expense management, and their unwavering focus to serving our customers. I will be presenting at the Stifel Nicolaus Conference in California on February 8th and I hope to see you there. We will now take your questions.

Question-and-Answer Session

Operator

Thank you. Today’s question and answer session will be conducted electronically. [Operator Instructions] We will proceed in the order that you signal us and we will take as many questions as time permits. As a courtesy please limit the questions to one with one follow-up question. [Operator Instructions] We’ll go first to Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good afternoon everyone.

James Truchard

Hey Mark, how are you?

Mark Douglass – Longbow Research

Good, how are you?

James Truchard

Excellent.

Mark Douglass – Longbow Research

Good. Alex, your comment on getting back to an 18% non-GAAP run-rate over the long term, it’s kind of hard to look out in 2012, but do you think there is enough leverage to be near that run-rate. I mean your guidance is implying I think mid-point roughly 12% non-GAAP operating margin, if that’s correct. Can you give a little…

Alexander Davern

Mark, good question. Obviously given guidance here for Q1, and as I said coming into the call, we’re going to be somewhat cautious having missed the low end of the range in Q4, and seen some improving economic information, but still thinks a little shaky up there. We are choosing a cautious approach as we give guidance for the first quarter.

Now, we talked about this in the call earlier in January and late in October for us to be able to drive an improvement in our operating leverage in 2012, we will have to cover the cost that’s implied by the investments we made in 2011. So we did see a drop in our operating margin from 17% in 2010 to 16% in the non-GAAP level in 2011. For us to be able to drive that number north of 16 in 2012 we are going to need to see revenue growth that’s in the high single digits. That’s kind of the hill that’s before us to drive leverage. We are certainly going to do everything we can to achieve that goal, but at this stage in the year it’s a little early to predict that.

Mark Douglass – Longbow Research

Okay, and then follow-up. With the U.S. PMI actually we are doing, it looks pretty good there in November-December. Do you think there is going to be a lag? Are you starting to see that in 1Q or are you just being really prudent I think [indiscernible].

James Truchard

We are certainly choosing to be pretty cautious in this timeframe. Like you said the U.S. PMI has shown significant degree of strength in really October, November, and December and we saw our large order growth in the Americas continue strongly in Q4. We saw our actually year-over-year growth rate increase in Q4. We definitely see a response to that in the fourth quarter. As we look at here at Q1 we expect to see another decent good quarter from the Americas. So, that would certainly bake into our expectation, and while I'm being cautious I do certainly see some signs of hope. It does look from the preliminary PMIs, both for China and for the Euro zone in January, it does look like we’ve formed a clear bottom and are moving back up towards the breakeven point in those two data points. We will learn more about that tomorrow.

I think there is run for some cautious optimism that things have stopped getting worse and may have turned the corner, but like I said having missed earnings in Q4 we are taking a pretty cautious approach here to guidance in the first quarter.

Operator

We will go next to Anthony Luscri with JPMorgan.

Anthony Luscri – JPMorgan

How should we view the puts and takes to your gross margin profile heading into the first quarter and into 2012, and along those lines how should we view the impact of the Malaysian production ramp and the back half of that still planned?

Alex Davern

Sure. As we look into Q1 we would expect to see improvement in gross margins sequentially from Q4, that’s my expectation at this point in time. For the full year we had a very strong start last year, we were in a process of also ramping up on the inventory side which helped us and then made it tougher in the second half on the margin profile. I would look to see probably for a full year – I think it will be relatively flat, but I do think sequentially from Q4 to Q1 we will definitely see improvement.

On the Malaysian expansion, as we said before that’s really targeted as a capacity expansion and the timing of turning on the full production facility will be dependent upon our need to expand capacity. So our intent would be to start that operation fully into production at a time when we will be able to essentially absorb that incremental impact, and so I think it will have a very de minimus impact at the gross margin percentage level in 2012.

Anthony Luscri – JPMorgan

Okay, thanks. Then as a follow-up, on your preannouncement call you mentioned that business trends had picked up in the December timeframe. Beyond just PMI showing better numbers there, is your business seem that’s the more trend through January.

James Truchard

Obviously, seeing through January is built into our guidance that we gave today. But certainly commenting on the kind of distinct trends we saw in Q4 where we saw a significant weakness in the month of November and then some improvement in December, January is more like December than November, and so that’s obviously built in our guidance as were given. I think at the midpoint it’s 9% year-over-year growth.

Anthony Luscri – JPMorgan

Thank you.

Operator

Okay. We will go next to Ajit Pai with Stifel Nicolaus.

Ajit Pai – Stifel Nicolaus & Company

Yeah, good afternoon.

James Truchard

Yeah, Ajit, how are you?

Ajit Pai – Stifel Nicolaus & Company

A couple of quick questions. I think the first one is just looking at, you are increasing your dividend by 40%. So, just trying to figure out the implications of that. I think in your prepared remarks you say it’s about confidence in your business and prospects, but is that an indication that you actually expect growth for the – the growth side of the company, the 20% plus target that you have, you know, that to change eminently and you are now expecting the company to be much more of a cash cow than investing in working capital and the growth. Then the second would be the – when you have may be you can get the answer to the first one then I ask a follow-up.

Alex Davern

I think there are three questions on the first one, so let’s tackle that one first and then certainly welcome your second. Fundamentally when we look at the business it’s always been a pretty lean working capital business. So it doesn’t require a lot of capital to scale the business. That’s the number one thing. Secondly, I don’t think anybody could accuse us of not investing enough in driving long term growth so I think we have checked a box and been able to drive that element as well.

When we look at uses of cash we have really had three priorities. Number one being dividends, because we view them as an efficient, effective method from a tax point of view particularly to return cash to shareholders. Number two is an opportunistic stock repurchase and number three has been strategic acquisitions. We have leveraged all three in different timeframes. Obviously as we came through the 2009 recession, ’08-09, we were a little reluctant to scale dividends in line with our opportunity, and just because maybe we suffered a little bit of concern from that particular timeframe.

Now, as we look at our cash balance near an all time high, but a $170 million in cash flow from operations in 2011, we believe that we will over time be able to drive the long term growth of the company and generate a significant amount of free cash flow. That perspective is the fundamental decision behind the decision to raise the dividend here to about 40% of our cash flow from operations last year and Dr. Truchard might try to comment on the dividend question.

James Truchard

Sure. Well, in the end dividend is much of what company should be about especially in this timeframe when return from various investments are relatively low. We see it as an opportunity for shareholders to share in growth of the company and obviously we plan to maintain our long term perspective as well of the investing, as Alex mentioned we invested relatively aggressively in 2011 so we feel that’s well under way, obviously we’ve come through the severe economic downturn with enough cash and we were able to weather that quite well. Looking forward to – this just looks like a good way to return value to the shareholders.

Alex Davern

Your second question.

Ajit Pai – Stifel Nicolaus & Company

Yeah, so the second question was, just looking at the percentage of revenue between the different geographies, I think when you set up your plant in Debrecen in Hungary back in about a decade ago, we expected greater growth in Europe relative to other parts of the world. But you’ve had Asia grow very rapidly since then and the percentage of revenue in Europe has stayed somewhat static. Right now when you are setting up this plant in Malaysia, is there an expectation that you could actually see accelerated growth over there, or is it more like risk management?

Alex Davern

It’s fundamentally a reflection of our expectation of Asia will grow to become the largest portion of National Instrument’s revenue. When I joined 15, 18 years ago it was about 10% of revenue, today it’s the 30% of revenue. There is a tremendous opportunity for us in Asia. Most T&M companies have a companies that have a longer life than NI or longer history than NI typically have their largest portion of the revenue coming from Asia, so we have got a little bit of a catch up to do there. We anticipate significant growth from the Asia region, the number of engineers that are graduating in Asia, the amount of production that's being done in Asia. We have a very strong team executing over there. It’s a foundation element for what we believe will be the largest portion of our revenue probably by the time we get to 2016. We need to be certain that we can offer all of the services and capability, efficiency, timeliness, responsiveness in the Asia market that we are able to provide to our customers in the Americas and in Europe.

Ajit Pai – Stifel Nicolaus & Company

Got it. Thank you.

Operator

[Operator Instructions] We will go next to Rick Eastman with Robert W. Baird.

Rick Eastman – Robert W. Baird

Yes, good afternoon.

James Truchard

Hey Rick, how are you?

Rick Eastman – Robert W. Baird

Very good, thank you. Could you just repeat, I think you said earlier you were willing to give a growth rate on the data acquisition products and also on the industrial control in the quarter. Did I miss that or did you not give that?

Alex Davern

We talked about the instrument control perhaps and – well, I’ll let Eric.

Eric Starkloff

Yeah, I could comment Rick. We did have an all time record for our data acquisition products in the quarter. We did not comment on the growth rate. I did comment on both the instrument control growth rate which was significantly less than the company, it was at minus 16% for the quarter and instrument control and that kind of indicates an overall weakness in test and measurement, and then you may have also been referring to our distributed IO which grew faster than the company average, reached an all time record and in particular our growth of CompactRIO was very strong for the year and for the quarter.

Rick Eastman – Robert W. Baird

Okay. Then just – Alex, as we look at that average order size, I think the thing that steps out in the first quarter here, when you look at average order size year-over-year it’s up about 17%. It’s up quite significantly. Do you feel that going forward National Instruments’ revenue sensitivity will be greater to business cycles? And, to your point earlier about the PMI, does that sensitivity correlate tighter and is the variance greater?

Alex Davern

Well, let me put it this way Rick. We have seen so far through the last two cycles. Let’s say the ’08-09 downturn and this current slowdown, I'm not sure if we quite got to negative numbers yet, but we have seen certainly that the larger portion of the business does respond to a change in that PMI, but it typically has stayed at a higher level than the orders under 20K. In Q4 for example, we did see a significant deceleration in the growth of larger orders. It was still about 10% whereas the smaller orders were down into low single digit range. So I do you think while it does have some clear correlation with the overall PMI, it is a source for accelerating our overall growth in good times I think and in bad.

Rick Eastman – Robert W. Baird

Okay, so the transaction business in this quarter was kind of plus low single digits.

Alex Davern

Correct, yeah.

Rick Eastman – Robert W. Baird

Okay. The larger order size, again, I just want to stick with the theme for a second. Does it give us any suggestion or hint as to which end markets you are penetrating at a faster rate. In other words is a solution or a larger order, are there early adopters there in certain markets or?

Alex Davern

I think it’s very – with that simple data point Rick, I think it’s very difficult to answer that question from an external point of view. Obviously our average order size is still only $4600, so it’s still a very low number actually. We have a lot of larger orders but we have a ton of small orders. I think it would be very difficult for you to interpret that into a market vertical that we are penetrating in any meaningful way I am afraid.

Rick Eastman – Robert W. Baird

Okay.

Alex Davern

If you look at most of the verticals that were specifically targeting dedicated to resources to from a sales point of view, each of them has a pretty hefty proportion on the revenue coming from orders over 20K.

Rick Eastman – Robert W. Baird

Okay. Can you just tell us what those three might be?

Alex Davern

Well, I mean we’ve dedicated resources towards a number of key areas, I mean we’ve talked about this before but the mobile devices and semiconductor and big physics and life sciences and in energy we do have dedicated groups going after those particular market areas.

Rick Eastman – Robert W. Baird

Okay very good. Thank you.

Operator

It appears there are no further questions at this time. I would like to turn the call over to Mr. Alex Davern for any additional or closing remarks.

Alex Davern

Thank you very much for your time today. As a reminder Dr. Truchard will be presenting at this Stifel Nicolaus Conference next week in California. We hope to see you there. Thank you very much

Operator

This does conclude today’s conference we appreciate your participation, you may now disconnect.

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