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National Instruments Q3 2007 Earnings Call Transcript

October 25, 2007 | about: NATI

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National Instruments Corp (NATI)

Q3 2007 Earnings Call

October 25, 2007 5:00 pm ET

Executives

David Hugley - Corporate Counsel

James Truchard - President & CEO

Alex Davern - CFO

John Graff - VP of Marketing

Analysts

Antonio Antezano - Bear Stearns

John Harmon - Needham & Company

Anthony Wesley - JP Morgan

Terence Whalen - Citi Investment Research

Ajit Pai - Thomas Weisel Partners

David Yuschak - SMH Capital

Richard Eastman - Robert W. Baird

Presentation

Operator

Good day, everyone and welcome to the National Instruments Corporation Third Quarter 2007 Conference Call. Today's call is being recorded. You may refer to the press packet for the replay dial-in number and passcode. The replay will be available from 7:00 pm Central Time today, and will end at midnight Central Time on November 1st.

With us today are Dr. James Truchard, President and Chief Executive Officer; Alex Davern, Chief Financial Officer; and John Graff, Vice President of Marketing.

For opening remarks, I would now like to turn the conference over to Mr. David Hugley, Corporate Counsel. Please go ahead, sir.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements regarding the future financial performance of the Company, including statements regarding our expected revenue, revenue growth, GAAP and non-GAAP net income, non-GAAP gross margin, non-GAAP net margin, expected earnings per share, impact of stock-based compensation and amortization of acquisition related intangibles, recently introduced products and expanding opportunities for growth.

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 Annual Report on Form 10-K for the year ended December 31, 2006, and our quarterly report on Form 10Q filed August 7^th, 2007. 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 President and CEO of National Instruments Corporation, Dr. James Truchard.

James Truchard

Thank you, David. Good afternoon and thank you for joining us. Our key points for Q3 are record revenue up 12.4% year-over-year, very strong growth of our C Series products and platforms, and the introduction of a new version of our LabVIEW software platform.

We turned in a strong quarter in Q3 delivering record revenue growth and strong operating leverage, but record sales in key product areas including USB data acquisition, distributed I/O, modular instruments and the PXI platform.

In our call today, Alec Davern, our CFO will review our financials; John Graff, our Vice President of Marketing will discuss our business, and I will close with a few comments before we open up for your questions. Alec?

Alex Davern

Good afternoon. Today, we reported record quarterly revenue of $184.4 million, a 12.4% increase over Q3, 2006. Net income for Q3 was $21.5 million, up 15% year-over-year, with fully diluted earnings per share of $0.27. This is above the mid-point of our guidance of $0.24 to $0.29 per share.

Non-GAAP net income was $25.8 million, up 17% from Q3 2006 with non-GAAP fully diluted earnings per share of $0.32. This is also above the mid-point of our guidance of $0.29 to $0.34 per share.

For Q3 2007, non-GAAP operating margin was 16.3%, with non-GAAP net margins up 14%. A reconciliation of GAAP to non-GAAP results is included as part of our earnings release.

In reviewing Q3, we are particularly pleased by the success of our system level platforms has enabled us to deliver record revenue and solid earnings growth, despite the significant decline in the Global PMI during the quarter.

For the first nine months, we have delivered record revenue and strong operating leverage, which has allowed us to report of 25% increase in non-GAAP net income in what has been a challenging year for the industry so far. This builds on the outstanding operational performance of the Company and all it's employees over the last four years, and positions us well to make significant progress towards achieving our goal of 18% annual non-GAAP operating margin.

Now, looking at revenue in more detail. Our virtual instrumentation and graphical system design products, which represents a vast majority of our product portfolio, had 14.3% year-over-year revenue growth in Q3. This represents another quarter of strong year-over-year revenue growth driven by our success in the areas of software, data acquisition, distributed I/O, modular instrument and the PXI platform.

Additionally, we saw a $2.1 million sequential increase in deferred revenue on the strength of good software sales in Q3. In contrast sales of our instrument control products, which now represent less than 10% of our revenues were down 3% year-over-year in Q3. We believed at that time in our instrument control sales is related to the weakness of the Global PMI during the quarter and reflects the challenges faced by the industry in Q3.

On a regional basis, during Q3 we saw a growth in all our regions. Year-over-year revenue growth was 20% in Europe, 15% in Asia and 7% in the Americas, giving overall growth of 12.4%. Our worldwide growth was, again, affected by year-over-year decline in our sales in Japan. This decline was similar to what we saw in Q2, and was reflective of the weak Japanese PMI during Q3.

Now, looking at the non-GAAP income statement in more detail. Non-GAAP gross margin in Q3 was 75.4%, up from 74.7% in Q3 last year. The modest seasonal decline from Q2 is related to a shift in the regional mix as a result of the summer pause in Europe. Additionally the cost of transitioning our U.S shipping operations to Hungary had a slight negative impact on margins in Q3. We expect non-GAAP gross margin to be approximately 76% in Q4.

R&D expenses were up 15% year-over-year in Q3. Software development expenses capitalized in the quarter amounted to $1.7 million, down from $3.6 million in Q2. This reduction in software development cost capitalized is equivalent to 1% of revenue and relates to the release of LabVIEW 8.5 in Q3. Also during the quarter $2.2 million in previously capitalized software development costs were amortized to cost of goods sold.

Now turning to the balance sheet. As of September 30, the company had $276 million of cash and short terms investments, up $35 million from June 30th. This cash balance is net of $8 million in dividends paid during the quarter. For the full year our cash and short term investments were up by $26 million, and this is net of $68 million used to repurchase stock, and $19 million paid in dividends during the first nine months.

Now I would like to make some forward-looking statements concerning our expectations for Q4 and the full year.

Currently the company expects revenue for Q4 to be a new quarterly record, and to be in the range of $200 to $210 million. GAAP fully diluted earnings per share for Q4 is expected to be in the range of $0.34 to $0.40 per share. And non-GAAP fully diluted earnings per share for Q4 is expected to be in the range of $0.39 to $0.45 per share.

With non-GAAP gross margins of approximately 76% and non-GAAP operating margins of between 19% and 22%. For the full year of 2007 we are expecting to report record revenue approximately 76%, non-GAAP gross margin, non-GAAP operating margin of between 17% and 18% and non-GAAP net margin of between 14% and 15%.

In Q4, the company expects a combined impact of stock-based compensation and the amortization of acquisition-related intangibles to be approximately $0.05 per share.

As these are forward-looking statements, I must caution you that actual revenues, gross margins and earnings could be negatively affected by numerous factors, such as any decline in the global economy, delays in new product releases, expense overruns, manufacturing inefficiencies and foreign exchange fluctuations.

In summary, Q3 was a good quarter with record revenue growth and non-GAAP net income growth of 17% year-over-year.

Before I turn it over to John Graff, Vice President of Marketing, I want to let you know that I will presenting at the Bear Stearns conference in New York on November 13^th and the Credit Suisse Technology Conference in Scottsdale on November 29.

I look forward to seeing you there.

John Graff

Thank you, Alex. We turned in a strong performance in Q3 with record revenue up 12.4% year-over-year. Growth was driven by key product areas, including USB data acquisition, distributed I/O, modular instruments and the PXI platform.

Our investment in new product R&D over the last five years, continue to play a significant role in our revenue growth in Q3. With strong adoption of LabVIEW software and very strong growth of our FPGA based CompactRIO systems.

Our mature instrument control business was slightly negative in Q3, inline with the broader test and measurement market, while the rest of our business saw better than 14% revenue growth.

Our system level business had another strong quarter in Q3 led by PXI and CompactRIO systems sales. We saw a record number of orders over $20,000, which accounted for over 35% of bookings in the quarter. This led to a record average order size of nearly $3,400.

These results are attributable to the success of our modular PXI and C-series based CompactRIO platforms, as well as, our increased focus on building and leveraging expertise in our field sales channel. Growing our field sales channel will a focus of investment moving forward to better identify and pursue large opportunities.

A key highlight in Q3 was our annual NIWeek Conference, where we announced several key new products, including the nearest version of our LabVIEW platform, LabVIEW 8.5. We saw a record attendance in NIWeek this year, with over 2,500 customers, partners, trade editors and investors joining us from 5,300 countries around the world. We had very strong attendance at our product and technology sessions, including over 900 people in the RF and wireless session, and over 1,000 people in the graphical system design sessions.

In addition, a record number of companies exhibited at the NIWeek Expo, which continues to transform NIWeek from a user conference into a comprehensive global industry event. Much of the excitement at NIWeek this year, was centered on the release of LabVIEW 8.5. This new version is optimized for use on new multicore processors that are common on today’s PCs. The inherent parallelism in graphical nature of LabVIEW 8.5 makes it uniquely suited for development on multicore machines, allowing users to benefit from parallel processing with little to no change in their code. This is not possible with traditional programming tools.

The early response for LabVIEW 8.5 from trade editors and the readers has been very positive. Journalists from leading technical trade publications that feature LabVIEW 8.5 in articles about the benefits of multicore programming in test industrial and embedded applications.

Mark David, Group Editorial Director for Electronic Design magazine reported “LabVIEW 8.5's, it’s multithreading capabilities are particularly powerful, and NI particularly Prescient in taking this approach, as we move into the era of multicore processing.”

After seeing a demonstrational LabVIEW 8.5, Eric Heikkila embedded systems lead analyst for VDC Corporation said, "As per multicore programming LabVIEW is far ahead of the curve. Many tool vendors still have to take time to address and organize how they will achieve effective multicore programming in their environments, while these tool providers are still figuring that out, LabVIEW has already solved it".

The release is already benefiting customers as well. The Max Planck Institute in Germany is using LabVIEW 8.5 with their Tokamak system for fusion research, and has realized dramatic performance benefits by leveraging a multicore system. Lead researcher Dr. Louis Giannone, said "in the first design stage of our control application program of LabVIEW, we have obtained a 20 times processing speed-up on an auto-core processor machine over a single core-processor".

In addition to strong software growth in Q3, many of our key hardware products, including, our products and platforms based on C series architecture had a very strong quarter as well. Our C series technology was first to introduced with our Compact RIO platform in 2004. Since then we've added many new C series products including USB data acquisition devices, our Compact DAQ USB data acquisition system in 2006, as well as several new C series modules. The C series architecture has given us not only great technology leverage across a broad range of products but also significant revenue growth.

Our USB data acquisition devices including the C series based Compact DAQ system had record revenue in Q3 and continue to sell to a higher percentage of new customers than the company average.

We continue to talk with new users with the release of seven new USB data acquisition devices in the quarter, broadening our offering to a total of 45 devices to address the wide-range of bench tops and portable measurement needs. The addition of these new USB data acquisition devices further increased the average selling price for USB data acquisition in Q3.

PXI revenue reached in all time record in Q3 as we saw the record number of PXI systems for the fourth consecutive quarter. Growth of PXI systems benefited from continued strong sales of the new low-cost integrated chassis controller, as well as strong early sales of new PXI Express chassis and controllers.

PXI modular instruments also had a record revenue in the quarter, driven by very strong growth of high-speed digitizers and dynamic signal analyzers. In it's 10th year, PXI continued to be a growth driver for the Company and continued to expand in the new opportunities and applications addressable at PXI Express.

At NIWeek we announced the new PXI Express embedded controller with a dual core processor, in addition to new high density hard drives for data and bandwidth intensive test applications. Together, our multicore processor based controllers, PXI Express chassis and new high-density hard drives enable PXI to serve very high-speed data streaming applications, that previously were only possible with dedicated proprietary systems.

In describing how a company benefits from the latest PXI technology, Mark Jewell Wireless Business Development Manager at AmFax said, "With LabVIEW and a PXI dual core embedded controller, we are achieving a 5x speed savings versus our previous generation, GPIB racked instruments for testing RF modules and cell phones."

Our industrial and embedded business had another strong quarter in Q3, driven by record revenue for FPGA based CompactRIO systems, as well as, new embedded design wins. One recent CompactRIO design win was Sanarus medical, where designers developed a medical machine to treat non-benign breast tumors with a novel minimally invasive procedure. Their machine uses CompactRIO to control a cryogenic breathing process to destroy and remove affected tissues.

Engineers at Sanarus chose CompactRIO over a custom outsource design to speed time to market while minimizing development risk. In our FPGA based hardware and software are also controlling one of the world’s most complex scientific experiments.

The European organization for nuclear research, more commonly known as CERN is the world’s largest particle physics laboratory, and is nearing completion of the large Hadron Collider. Build as the most powerful instrument ever built, the Particle Collider is 27 kms in diameter, and produces a proton beam with as much energy as a 400 ton train traveling at 200 miles per hour.

When operation begins in May 2008, researchers will use the Collider to recreate and study the conditions in the universe immediately after the big bang. CERN will use more than 100 PXI chassis for running LabVIEW real time, and FPGA based control modules to monitor and control the particle beams.

CERN engineers chose PXI due to its small size and lower cost then a traditional VME and PLC based systems, and the use of NI FPGA hardware enables CERN to avoid having to design custom controlled hardware.

We gained further traction in industrial and embedded space in Q3 with the release of new versions of LabVIEW FPGA and real time modules in addition to the new multicore capabilities in LabVIEW 8.5.

Last month, LabVIEW 8.5 was awarded the Embedded Systems Conference Best in Show Award from BBC. The award noted the National Instruments for “continue to draw interest from embedded development themes looking to rapidly build, optimize and debug designs based on increasingly complex multicore hardware environments.”

Winning this award at one of the world’s foremost conferences on embedded technology and design is a strong testament to NI’s early success and adoption in the embedded market, and illustrates the growing opportunity we have in this space for LabVIEW as a system design tool.

In closing, we were pleased with record revenue in Q3 with strong growth in our broad- based software and data acquisition business, as well as, record system level sales driven by our PXI and CompactRIO system platforms.

In addition to the release of LabVIEW 8.5 for multicore and FPGA based systems, help drive broad adoption of our software platform and further strengthens our position in the embedded market.

With that I’ll turn it over to Dr. T.

James Truchard

Thank you, John. When we first shared our vision of graphical system design three years ago, we described how graphical software-centric approach to test industrial and embedded design helps abstract complexity to make engineers and scientists more efficient.

As a result of this abstraction of complexity, LabVIEW is being used in a broad array of applications from 10-year old students programming LEGO Mindstorms robots to leading physicists that CERN programming the world’s most powerful instrument, and the award to study the origins of the universe.

Q3 marked another major milestone in the evolution of graphical system design with the release of LabVIEW 8.5, the inherent parallelism of LabVIEW makes it uniquely positioned to leverage multicore processors with little to no change in the way users develop their code. Unlike text based programming languages, that are serial in nature, LabVIEW lets users easily visualize and program parallel applications, so engineers and scientists with little and no programming background can spend more time problem-solving and less time writing code.

As Intel and others continue to advance processor technology by adding additional CPUs on a single chip, the benefit of LabVIEW’s intrinsic ability to target multiple cores should become even more compelling.

Graphical system design built on 20 years of success with virtual instrumentation by combining flexible graphical programming software with increasingly powerful technology, such as multicore processors and reconfigurable FPGAs. This unique approach allows us to further disrupt traditional test industrial and in embedded markets, while expanding our opportunities in these areas.

New products and technologies, such as PXI Express, modular instruments, a LabVIEW FPGA and CompactRIO, have helped us sell into very demanding applications, including experimental physics applications and the high end machine control, that previously required custom hardware design.

I believe that our graphical system design approach surpassed industrial embedded applications, as they find a unique and defensible position for National Instruments. With recent successes in semiconductor, RF and [No Error] test applications, as well as embedded successes with applications, search is on, our vision for graphical system design is being validated for both virtual instrumentation as well embedded.

I was pleased in Q3 with solid execution across all areas of our business which helped drive record revenue and strong net income growth for the quarter. Growth was led by record revenue in many product areas, including record revenue for USB data acquisition, distributed I/O, modular instruments and the PXI platforms.

Continued efficiency improvements over the last four years have allowed us to maintain a strong R&D investment, while improving our non-GAAP operating margin towards our goal of 18%.

In summary, I am pleased with record revenue and strong earnings growth in Q3 and believe we are well positioned for success in Q4 and into the next year.

Thank you. We will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Antonio Antezano with Bear Stearns.

Antonio Antezano - Bear Stearns

Good evening.

Alex Davern

Hi Antonio, how are you?

Antonio Antezano - Bear Stearns

Good. The first question is more market related, I guess, now that October is almost over, I was wondering, what is that you are seeing in the quarter, when we look at the Global PMI, it was September it was still declining and for this month the, the Flash PMI for Europe was very weak, again. So, I was wondering what is -- where you are seeing in, I guess, for your business in October and how confident in the quarter?

Alex Davern

Well, it’s Alex here. I will take a stab at that question. Obviously, you know, we’ve based our guidance on expectations and building in our expectation on the economic data that we have access too, and obviously we look at that PMIs, as you all are aware. And we have seen the Flash PMI for October. As we look out, we are also taking into mind the run rates of our business, the seasonal patterns we have seen in the past, and the trends we have seen in different product lines. And as always, we built all of that into setting our expectations for Q4.

Antonio Antezano - Bear Stearns

Then, as we go forward, I guess, for next year the expectations are, again, market related: That the euro would slow down maybe, with some recovery in the US and Japan. But on under those assumptions, to what extent you can keep those profit margins, especially gross margin, because, I guess, to some extent there was a positive thing by the Pound strengthening in Europe this year.

Alex Davern

Well, I guess my answer to that would be two things, Antonio. First, you know, we have seen the industry and many of our peers have a pretty tough year this year. And we have managed to sustain our revenue growth and then improve our revenue growth as we have gone through the year, despite some of the noise that’s been out there around, you know some of our peered companies, and the PMI being up and down, etcetera, during the course of the year end where we really are focusing our attention is the success we have had in building our business especially around these new system level platforms that really validates the investments we’ve made in R&D over the last seven years and is giving us the ability as we did in Q3 to grow our business, despite the drop in the PMI during Q3.

So as we look out in the future, we are really focused on what we control. As we’ve talked about in our investor conference at NIWeek in August, we are focused on our buyers now as we come close to 18%, is to accelerate our investments in our technical field sales and marketing resources. And we believe we have a very rich product portfolio. And we will be continuing to invest in that, to try and take advantage of the opportunities we’ve opened up over the last couple of years, and that’s how we’ll approach next year.

Antonio Antezano - Bear Stearns

Thanks. Just one follow a very detail question, your G&A spending was a bit high from what I expected I think close to 8%. What is your expectation going forward or there was some any kind of one-time off there or?

James Truchard

We did have some restructuring charge in our G&A number for Q3 and for Q2, and that did cost some modest increase there. We would expect that rate of increase to weaken or ease off a little bit as we go into Q4 and then into Q1 next year.

Antonio Antezano - Bear Stearns

Okay. Thank you.

Operator

With Needham & Company, John Harmon has our next question.

John Harmon - Needham & Company

Sorry, how are you? Good afternoon.

James Truchard

Hey, John, how are you?

John Harmon - Needham & Company

Good. Just my two questions are, if you could just, similar to the last question, you made some pretty negative comments about the state of the test and measurement industry this year linking them to the performance of your instrument control cards which were down during the year, I don’t think things are quite that bad out there, is that really what you intended to get across? And my call, if you could, you spoke so quickly in the introduction if you could repeat your expectations for next year, please?

Alex Davern

Sure. Let me take the first part first. We have not given any specific expectations for next year, John. What we are saying is that we believe we’ve done a good job this year of sustaining our revenue growth especially in Q3 despite the downturn in the PMI. We have lot of new product platforms where we have a lot of room to run and good revenue growth, and we’ll be continuing to commit lots of resources behind those as we go into next year. We will be giving more detailed guidance about our expectations for next year in the January call.

In relation to state of our instrument control business and the overall market space. Even I judge our competitors generally on their order flow, and that’s how I look at the state and health of the market, and so I look at year-over-year relative order flow as a deciding factor.

Our instrument control business saw some improvement sequentially. We were minus 8% in Q2, minus 3% in Q3, which is we guided in our July call that we expected the year-over-year decline to moderate in Q3.

So we saw some sequential improvement in that, but from my perspective of looking at this industry and looking at the order flow, I think a number of companies have had a pretty tough time this year.

John Harmon - Needham & Company

Okay. Thank you.

Operator

Mark Moskowitz with JP Morgan has our next question.

Anthony Wesley - JP Morgan

Hi, this is [Anthony Wesley] calling in for Mark.

James Truchard

Hey, Anthony. How are you?

Anthony Wesley - JP Morgan

Good, good. Have a couple of questions here. First in terms of your business that you classified is the industrial embedded. I think you've spoken 25%, 30% of your business is related to that. What is the sales velocity of that segment? Should we assume it's above the 14% that you named for the virtual instrumentation and graphical system products?

John Graff

This is John. As you mentioned, you know, we estimate that the industrial embedded is approximately -- the range is 20 to 30. It’s hard for us to quantify it exactly by the nature of this. Some of the products like LabVIEW or PXI or CompactRIO are sold both in the test applications, as well as industrial embedded.

Having said that though, we do feel we are getting a lot of traction. We're newer in industrial and embedded applications. So to answer to your question, we do believe, it is at a higher growth rate, there is some velocity. We are seeing some design wins, which is the couple we mentioned in the call. And we believe there is a lot of potential for us, and so we continue to invest in the product development to fill out our platforms, by serving those applications, as well as some investment in sales resources to go after those opportunities.

Anthony Wesley - JP Morgan

So what are we going forward then? The swing factors for that segment, how should we look at the, for example your system order size, is that above or below the corporate average for that segment? How should we look at next year?

John Graff

Yeah. It’s again, we can't quantify it exactly, the nature of what I said earlier, but in aggregate, the order sizes are larger than the company average. And so those play a key role in driving that increase in record average order size and obviously they played the key role in the record revenues for the quarter.

Anthony Wesley - JP Morgan

Okay. And then, moving on to your instrument control products, can you talk a little bit about the impact of the semiconductor equipment market to that segment, as of this quarter and then what you are looking forward to next?

John Graff

Well, this is John. Sort of, we did see weakness obviously in the semiconductor segment. We have traditionally had an element of our instrument control business that fills into the semiconductor capital equipment, as well as the semiconductor test vendors. And so, obviously, we sell from weakness there in the quarter, and also on the year.

Anthony Wesley - JP Morgan

And, your view next quarter?

James Truchard

Yeah. We don’t relate to talk to breakout the expectations from a product line basis, but we did say, Antonio, or Anthony, in the July call, is that we expected the performance of instrument control business to improve in the second half of 2007, because we would get easier comparison. The downturn on the spending capital really started in the second half of last year, and we certainly saw that improvement come to fruition in Q3, and suddenly the comparison do get easier sequentially as we go into Q4. So, we’ll see how that plays out. What I would emphasis now, although it’s the most sensitive part of our business to the overall PMI, it is now a pretty small part of our business, and it's below 10%.

Anthony Wesley - JP Morgan

Okay, thanks. And then one last question, can you talk a little bit about the currency impact here, revenues and margins this quarter?

Alex Davern

Sure, our strategy and currency is being generally, we adjust pricing periodically to respond to exchange rates. And we did some of that as we went through 2007. On the headline rate, I think we were at about 10% local currency growth. So, about two point swing there and some of that is compensated by, for example, a decrease in pricing as we did in Europe, but we’ll tell you to focus on a dollar number but it's about a 2% differential.

Anthony Wesley - JP Morgan

Okay. Thank you.

Alex Davern

Thank you, very much.

Operator

We will now hear from Terence Whalen with Citi Investment Research.

Terence Whalen - Citi Investment Research

Thanks for taking my question and a good job in a difficult environment.

Alex Davern

Thank you, Terence.

Terence Whalen - Citi Investment Research

So my question relates I may have missed this, did you give a stock buyback number this quarter?

Unidentified Company Representative

No, we did not buy stock back during the third quarter, Terence.

Terence Whalen - Citi Investment Research

Okay.

Alex Davern

When I was going through the cash situation for the full year, I did mention the stock buyback for the full year.

Terence Whalen - Citi Investment Research

I see, I see. Okay, thanks.

Alex Davern

I should say, looks for the first nine months?

Terence Whalen - Citi Investment Research

Right. Inclusive of 1Q and 2Q. All right. Okay. Then the second question is one on seasonality, I think, that Europe is seasonally your strongest geography in the fourth quarter and growth maybe 30% sequentially sometimes, is that a sort of level of sequential growth that we could expect maybe based on your corporate growth of roughly 13%?

Alex Davern

Well, I guess, that's the question, Europe certainly has been, the key driver for sequential growth in Q4 over the years and we have seen, the pattern of revenue being double-digit sequentially in Q4, very steadily executed throughout the last ten years or so, even in 2001, for example, we saw that same pattern come to fruition. So the momentum that has built behind our pattern around the seasonal spending and yearend budgets spending has tended to be pretty strong. And through Q3, we certainly had no reason. And obviously, we are giving -- building into our guidance today, the expectation that will recur in 2007.

Terence Whalen - Citi Investment Research

Okay. Then, one last one, if I could. On Asia-Pacific, Japan, I think, you’ve mentioned in the past that Japan was over 50% of that region. Obviously, Japan is under growing Asia ex-Japan want to get an update roughly of what mix of business is Japan for overall revenue? Thank you.

Alex Davern

Sure. Let met just make a correction there. The Asia/Japan business, of course, is our largest geography within Asia-Pacific, but it is not over 50%. It’s less than 50%. But it is the largest single country in Asia-Pacific for us. We saw some modest improvement in our sales from the year-over-year performance in Q3. We have seen a slight double-digit decline in Q2. And we saw high single-digit in Q3. So some modest improvement, despite the fact that the PMI clearly worsened in Japan in Q3. And so that was what we saw in the quarter. I can’t remember if there was a second part to your question that I missed?

Terence Whalen - Citi Investment Research

Just current proportion Japan of total RASB.

Alex Davern

We do not disclose by country. So the best I can tell you is that it is the largest country in the region but it is less than 50%. From a performance in the rest of Asia, and let me also say for our Japan team, you know, we have seen some pretty bad numbers from some of our peers in Japan. And I feel like our Japanese team is on a very good job of executing it in a very tough environment. And we are proud at the efforts of the team that it continued to execute going forward. And in the rest of Asia we've seen revenue growth above 20%, so that’s continued in Q3. And there certainly seems to be a lot of momentum in the emerging countries in Rest of Asia. And we will be continuing to expand our investment in those regions to take advantage of any opportunities to gain market share that we may there.

Terence Whalen - Citi Investment Research

Great, thanks and good luck.

Alex Davern

Thank you.

Operator

Ajit Pai with Thomas Weisel Partners has our next question.

Ajit Pai - Thomas Weisel Partners

Good afternoon.

James Truchard

Hi, Ajit, how are you?

Ajit Pai - Thomas Weisel Partners

Good. Couple of quick questions, the first one I think, John mentioned the metric I think orders of about $25,000 and was 35% of orders. You measure that in terms of number of orders or did you measure that in terms of the revenue in orders?

John Graff

That 35% was in the revenue.

Alex Davern

It was orders over 20,000, Ajit, not 25,000.

Ajit Pai - Thomas Weisel Partners

Okay. So that’s 20,000. Could you compare that metric that 35% relative to the prior quarter as well as the quarter a year ago and give us some color as to what that was about 3 years ago?

John Graff

Unfortunately Ajit, I don’t have that in front of me, but we could follow-up and we have shared that in the past calls.

Alex Davern

Yeah, year-over-year the average order size is up about 7% and we’ll have to check the two year number, but that’s those answers has been in past calls.

Ajit Pai - Thomas Weisel Partners

Okay. And then just some color…

Alex Davern

Ajit, I could probably tell you that the value of orders over 20K is a percentage of revenue that proportion is definitely been increasing over the last number of years.

Ajit Pai - Thomas Weisel Partners

Okay. And then just looking at CERN order that you talked about I think you mentioned 100 systems. So assuming that is over 20K is that the order of magnitude of that particular project somewhere between $2 and $5 million to a good low-end of the range towards the high-end of the range. And also how much of that has already been shifted and how much is going to be shifted and is there a services component to that as well?

James Truchard

So a lot of good questions there, Ajit. I just quantify with this business actually came to position in the first quarter, and we've been working with CERN on the ability to publicize it, and we’re talking about now as a public, and they are moving towards deployment, but we actually shift and recognize the revenue on this order back in the first quarter.

In terms of its value, it’s certainly a lot more than $20,000. It was one of the larger orders in history to company when we booked it and shipped it in the first quarter, and there is a services component.

And we’re very, very pleased and excited about the ability to publicize the success of a real lead user, building what is an incredible device and then certainly something will be highlighting in our marketing materials going forward.

Ajit Pai - Thomas Weisel Partners

Yeah. Just one thing Alex to clarify on that, I mean it was the 100^th system, so do you assume that each one of the systems has over $20,000, so which would sum up to over, you know, a couple of -- between 2 and 5 million.

Alex Davern

You know, I should -- I’ll let you add a lot of value and let you speculate if that’s okay.

Ajit Pai - Thomas Weisel Partners

Okay.

Alex Davern

But it certainly was one of the largest orders we have received as a company when we booked it…

Ajit Pai - Thomas Weisel Partners

Just one sort of housekeeping question, which is the non-cash compensation, are you going to breakdown of how much of it was in the cost of good sold in each of the expense line categories please?

Alex Davern

The cost of good sold breakdown is in the press release, Ajit, if you want grab it. On the rest of the expense categories, I don’t have, I mean right now, we can follow-up.

Ajit Pai - Thomas Weisel Partners

Okay. Thank you.

Alex Davern

No problem.

Operator

(Operator Instructions) And David Yuschak with SMH Capital has our next question.