James Truchard - President & CEO
Alex Davern - CFO, COO, and EVP
Eric Starkloff - VP, Product Marketing System Platforms
Pete Zogas - SVP, Sales and Marketing
National Instruments Corporation (NATI) Analyst Day Call August 7, 2012 11:30 PM ET
We can start now. I know we're running a little late. These exciting demos really took a bit, but that was really fantastic, wasn't it? To see all those incredible things folks are doing with our products and the new products there, vector signal transceiver. So, we remind you that there's risk associated with investment, including ours. But I'd like to share about our technology and the outlook for what we're doing, the core differentiators.
As an company, we've grown steadily and that's the goal of the company, to be a growth company, primarily organic growth. But we acquire companies from time to time. Last quarter, we've had $292 million in revenues. We sell to some 35,000 different companies across a very, very broad range of industries. We work hard to create -- National Instruments is a great company to work for. We've won awards all around the world, including a top award of one of the top 25 companies in the world to work for, something we're very proud of because one of the key assets of the company is the intellectual capacity of the staff. So that's a very important point.
Strong cash position, as we weathered through this previous downturn and in a position to stay strong financially. We work hard to enable innovation and make scientists and engineers more productive across the whole spectrum of science and engineering. Now our goal is to as we talked about in the keynotes abstract whenever possible, but still make it possible to dive down when needed to solve the detailed problems and enable reuse, create a platform-based approach.
We have seen how effective the Apple [IOS] ecosystem is. We work hard to be an ecosystem, a platform that reuse technology across the spectrum. You have heard of reuse from control design in doing PA amplifier test for example. That we just doing -- cutting right across industries in this platforms that can move across to get the right technology at the right place. We want to reduce costs with a high-volume platform so that you can reuse the many, many different applications.
We get out costs down to create a very, very differentiated competitive position. We want to use Moore's law. And by having the standardized platform, the innovation that we do overtime is quite different than what can be done with discrete instruments, typically designed by small teams, isolated from the rest of the design activity into one-off design and then some 8 to 10 years later, they will design a new instrument.
Our approach is in combining all the resources of a company on to a standardized platform, so we are getting a lot closer to achieving the full performance of Moore's law to give us a differentiation that you saw today in that demonstration. Early in the 1990s I was very anxious to see that we could continue to build the culture we had created in the beginning. So we really looked at the key points about quality systems and how we should operate as a company.
And I say that these two triangles, one is what I call the success triangle because I think in modern societies it is very important understand that the employees understand that they are stakeholders and their relationship with those stakeholders, that can be confusing if they don't. and we saw on the Wall Street how the imbalance of stakeholders can do some really not good things.
So we want to have a very balanced view and get everybody on board to drive the company forward. But the success of our stakeholders is very important between the role of shareholders, how they support the ecosystem in a big picture way. Our suppliers, partners as well and of course the customers that we want to make more successfully. You saw some examples today with both the wireline test device and the medical system among others and the power systems as well.
Where time to market and the success of our customers is created by the differentiation we see with our products. So some strategic goals is to drive organic revenue growth sustaining efforts on R&D, working hard to achieve a very high efficiency of our investments, broaden and deepen our customer relationships and expand their service to a complete product offerings, both directly and through our partners.
And then also work hard to optimize our operating expenses, deliver strong profitability, maintain good gross margins and drive the efficiency of the resources that we are doing.
Now I would like to share some about our technology. You saw some of our most advanced technology today. And I have been framing it in terms of this relationship between design and test. And with our CompactRIO systems, we are implementing design. On one side you saw today how our new vector signal transceiver works both ways. CompactRIO works both ways.
So we have this idea that we can do both, typically lower volume designs obviously we won’t be implementing this whole smart mobile phone with this approach that there are many, many applications that can use this. And then the whole philosophy, even the high-volume devices like smart mobile devices can benefit from this reuse of technology.
So this is a traditional design curve and how it's been used traditionally. And with our simple devices it could be used simply with as we heard today not too much connection between design and test, not much reuse. But as things get a lot more complicated, it's get more and more important that we have that fraction and that we can drive reuse from the design to test phase.
And that's what we are working hard to do. You saw the example where we are working with a University on 5G wireless. So we are working to get ahead of the curve, so in the future we will be right there. And the test kind of flows automatically from the design process, so that is very important to us and we want to work at different levels of test. And I use of phrase cyber physical -- taking it from National Science Foundation's terminology. It's a system level, but computers and real world I/O and real time computations and hardware in a loop that is typically used for a variety of things especially ECUs.
But we are expanding the concept into wireless and other areas and protocol aware simply is much more efficient way to test than the big iron ATE that's been traditionally used. So whenever possible you want to use these because they are at a higher levels of abstraction, they are faster and get more productive testing on the factory floor which is very, very critical as we get more and more complex systems.
But we are also investing and you probably see some of that on the showroom floor and the component level with techniques more like traditional big iron ATE as well. So that whenever necessary that kind of testing be done as well.
So it is about Moore's Law and that's really what is used to drive your software, got more productive software, higher performance software, smaller form factors. We have seen this in computers from the many computer areas to the PC eras, to the tablet era. Continued performance improvement through Moore's law. You look at instruments they stayed about the same size. They have crammed more functionality and one of the challenges traditional box instruments has, they have to put everything they can think of into that one box. With software you don't do it that way. You don't run – you don’t have to have a 1000 buttons on this thing. You have about 800,000 apps now or something like that. You can change the app and you change what shows up on the screen. So you don't have to have all the functionality hardcoded in. It can be added as if needed. That's a totally different philosophy and you can get a lot more functionality and a much smaller form factor as we demonstrated today with our new vector signal transceiver.
So basically I by taking advantage of software based approach, we can change the functionality in software rather than trying to package it all in to a canned design. So if you look at as I mentioned today we see software as the era we are in. So it's really very clear that there is a high differentiation by making a standardized platform that would standardize ecosystem that we can build our systems with and so that's our strategy and our strategy for the last quarter of the century.
Now it's really bringing home with the latest products like the vector signal transceiver for example. So software is at the heart of our instrumentation. I used it to really capture in one picture our philosophy and the way we are looking at the system design. At the top it's all the things that we can do and we did it today by rotating around different applications.
We want to serve time to engineers very broadly and with literally thousands and thousands of algorithms they have at their fingertips as software in wherever I like to say we like to go where the money is. If we see smart grid is where the money is or smart mobile where is where the money is, we want to be there. We want to be there very nimbly as the market is staying and we can service the markets with a platform-based approach. All this is built around our software. LabVIEW is the most important one of these and then the choice of hardware that gets that gets the right functionality.
Scientists and engineers do many, many different things so we need a lot of different kinds of ideal capability as we need signal processing and analysis capability to really serve the scientists and engineers in the way they want to be served. So we sometimes talk about user defined instrumentation. So this platform of design for both design and test and in the common set of hardware and software to give very high productivity and reuse of the technology.
So here we see the example that Apple ecosystem and certainly Apple’s been a role model for us. We started out on the Macintosh back in 1986 and six years on the Macintosh we've spent many hours and late night parties with Apple and going to their introductions and so they have always been a role model in the way they have operated.
As you can see many, many apps and I think the number is actually outdated there (inaudible). So looking at our history and the history of what we've done with the real or FPGA technology, it started some 15 years ago with a audit presentation, a technology demonstration with our FPGA technology.
Our first products came out in the early 2000. They used a with plug in board, we had good success with them. Next we came out with our CompactRIO and that's really, really been highly differentiated and if you go on the showroom floor you will find CompactRIO is all over in our partners booth and our booth and all the incredible things folks have been able to do that with that and then that's kind of experimental products, IFRIO which was our first RF based FPGA products. We had lead users and I think that was one user in the example of the [passive] radar that we saw today used for antenna testing of smart mobile devices.
So they had good success, but it's bandwidth wasn’t as wide as it was needed for some applications. So we would be visiting that in this timeframe later.
Then we came out with FlexRIO and FlexRIO made a very flexible platform that you can plug modules in to it. So it made a more open ecosystem for our partners and our customers to use our FPGA technology you heard some introductions there.
That’s been very, very successful for interfacing custom protocols like and often eliminates the need for an expensive ATE pin driver, much simpler to use and so far lower cost, but that’s been very successful as well. And now, I believe vector signal transceiver will be one of our most successful products ever.
Building on this long timeframe of doing investing in the design of FPGA technology, exceptionally high speed streaming technology where because of the reuse investments that we make, we get some of the highest performance now that we see in the market place. So this is really a progression in what we’re doing to really redefine instrumentation. And here we see the facts you saw today. You saw some applications upto 6 giga hertz which covers most of the high volume applications and wire LAN and LTE and the like.
According to latest standards with three channel MIMO, very small footprint, far smaller than anything else that’s ever been done and of course the RIO architecture for that allows you inside with the FPGPA bidding a high level differentiation, the same architecture that we had before so that IP that we have created over the last 10 years or so can be reused on this platform as well to create only our customers can imagine all the things they will be able to do it.
Which is the key point of an ecosystem, that's been done with the IOS for example things that nobody had ever imagined when it first evolved. But we have invested heavily in both field sales and R&D and now these kind of products that will give us the opportunities out there for these larger sales systems where this investment is needed to continue to grow our business and R&D size we are going to continue to invest in these high performance platforms that give us answers we need.
So basically a strong history and track record of growth and profitability and we have invested to continue that. You see new products that definitely can help us do that, so we are continuing on our long-term deal. This is the slide I presented the first time we met with the investors in 1995. We wanted to assure everybody that we were taking the long term approach. So we added a 100 year plan and the 100 year plan is really about the (inaudible) the environment, the decision making approach.
We some times call it the NI way where the core value and cultures included and then ten years this has been in progression of our vision over the last four decades to expand every capability to serve scientist and engineers, five year levels, interesting markets like the smart grid, energy, smart mobile devices and like and then of course one year planning. So longer term things from start to planning and this a approach that we believe gives us a really good way to make long-term decisions. So I'd like to thank you for joining us. Yes?
You've hired a lot of employees for the last year too, can you just talk about your plans for hiring in the next year too and also the geographic mix?
I will let Alex take a first crack at that and then I will add on.
Yeah so I mean obviously we were deliberately very aggressive last year to try to drive a significant increase in our new product output and some of the products you saw this morning are the fruit of that labor and we'll be talking about more about it when Eric is discussing with you later. We are really in the process now of absorbing that, increasing the head counts that we did last year. We are continuing to do modest increases in headcount as we go through 2012. From a regional point of view, I will be addressing that question later in my section this afternoon.
Our focus is to make sure that everybody we hire productive. Any other question? Thank you.
Thank you Dr. (inaudible). Hello everyone, I am Eric Starkloff, Vice President of Marketing. Let me just get a sense of how many people were at the keynote this morning. I'm going to, okay, just about everyone. Okay well I want to kind of give you some of the same themes, but obviously that was targeted at an engineering audience, our customer base.
But I want to give you some of the -- I guess color on some of the products that we are releasing and the market opportunities that we are pursuing and give you some more insight into that. So I will go through a few slides like Dr. Truchard and then I will leave plenty of time for your questions.
First I need to get my slides that I put up there. We saw a lot of cool things as far as bringing that up. You know obviously we are particularly excited in this timeframe. As Alex said our investments are kind of that we've been doing over the last several years are coming to market and the stable of products that we have we believe is one of the richest stable of products and most differentiated, and that's one of the things I am going to give you a sense of.
It's also really personally exciting for me and other NI employees to see what our customers are doing with the product. I mean they really pull off some amazing applications and you will get to see more of your time here than (inaudible).
Okay. My key points as I go through the slide set here, as I showed this morning, our focus is really distinct from other companies in the markets we serve. We have one common platform that serves these very, very different type of applications and what are traditionally viewed as very different markets.
We have -- I want to give you a little sense, I'm going to start in the embedded space and talk about our value proposition in embedded systems. I think that's a part of our business that's maybe a little bit less understood, how we approach that and differentiate, but I will spend some time on test and measurement where we see some of the dynamics of that market changing and we see opportunities for disruption and particularly based on modular instrumentation in the RF space and obviously that's an area that we've been targeting.
This is the visual we use to talk about this platform based approach. Single software environment, lots of different hardware options which we need because one difference between us and Apple is in the applications that are we serving, everyone needs a little bit different types of IO. But we can't have one hardware device to serve all these different applications, but we map them in, in a common way in to our software and create different modules with different types of capability and on different hardware platforms and address a huge variety of different applications.
I am going to get to that. I am going to talk about how we think of that? The question was do we think of revenue that way. Kind of gets to this point and for that I will answer for you right here. That's fine. So these are kind of two traditional markets that we serve.
At least certainly test and measurement is one you are all pretty familiar with. Embedded systems I will describe how we kind of look at the different opportunities within that, but this is the point. We have common products that cut across all of these applications. I know we always get the question from you about well how much you know, of X products gets sold into embedded and how much of wired products get sold into test and measurement and it’s the honest answer from us that it's not possible to answer that question.
You know I showed an example this morning, a video of that radar system. That was an embedded application. It is a deployed radar that has our technology inside out of it.
It is a PXI system, which is also the same products that are used at the end of the production line for manufacturing sets and on a validation test base. So it's far too qualitative to go through and dissect which application is embedded and which application is in testing measurement, as there are products that cut across all of them and that’s by design. And we tried to show you some examples this morning where the fact that these products cut across these different applications actually benefit for customers part of the core value of the company.
So I am going to start with embedded, like I said I think this is a little bit may be less understood opportunity we address we can’t break it down and with these three phases, these are programmable automation control that’s what PAC stands for that’s kind of a traditional industrial automation phase, custom design in the center I will come back to and then SBC a single board computer embedded computing space and we really do kind of the center of that custom design is really what the front and center and then there is other opportunities we serve but they are little bit more (inaudible) our core value proposition is primarily to this custom design space. And what we fundamentally offer is really an alternative for how people are currently designing those systems.
Custom design means you literally build your own hardware PCB board select your own components and completely design the embedded software. The alternative that we offer is a common hardware platform that you buy off the shelf and our LabVIEW software which is used for a higher level of programming interface to that hardware.
And we showed let me talk about the value proposition I will give you a couple of examples. And we showed some of the data this morning, this is fundamentally our value proposition. By using an off-the-shelf platform, you can use a smaller team of engineers because you are not doing all that customs design and you can get the market quicker. You can see the data from this study that we found it in a key note is a study that’s done by a magazine, a publishing company in the US that does a broad set of service a broad set of embedded systems designers, they do this every year and that’s what's on the right, we actually ask them to do the same survey to our customers and that’s the data on the left.
So followed as a team half the time and on schedule more often than late and that is completely really confirming evidence to us of what we see anecdotally every day. We talk to you there is everyday that is a half the time, a quarter of the time, a third of the time and we solve some examples in the [keenness].
Now because that’s our primary value proposition, our platform in embedded systems hence they get used more and industries and applications where times to markets are highly valued. Fundamentally, we are offering a time to market advantage, you can build this whole custom design you can prototype a system and then deploy that same hardware into a deployed system and you can beat your competitors to markets.
We saw a couple examples of that here in the key note and I just want to show one of them in a different example. So this is, what you saw from Dynapower, so Kyle Clark will be the first guy we have on stage in the embedded section and they are restoring a lot of these energy application, so the device that they make is a big thing up there in the keener stage that’s called power inverter and it is used to inter phase something that is creating energy or using energy to the grid and this is big high powered electronic. And now we basically offer is the brain for that thing. All the power electronics and everything else is what Dynapower is expert in.
In the past and still most people today they also design a custom embedded system to do all the control and as there is been more alternative energy techniques used the controlled system has gotten a lot more sophisticated. He was describing some of that there this morning about all the sophistication and how they have to convert voltages and put data on the grid and pull data off the grid and so forth.
And so we offer is off-the-shelf platform for doing the brains of that system based on our RIO platform in LabVIEW, and like many of our customers they started with CompactRIO which is a package if you have seen hold that up before and once they went to deployment as they are starting to ramp up in volume, we offer a board level software compatible version of that same product.
And so they are actually putting that board inside of their inverter box that goes in where solar interface specific grid where (inaudible) interface the grid charging stations and the like. Another example that's a little bit more to the left side of those three boxes I showed which is sort of the more industrial part of the embedded opportunity is from a company called Lime Instruments here in Texas. So these guys are doing industrial application that is controlling and monitoring our pumps or pumping hydraulic fluids, pumping fluids rather and their primary opportunity base is oil and gas, and in particular their pumps are used a lot for natural gas, hydraulic fracturing type of businesses.
That's been a big boom over the last few years and so again in their kind of industrial applications they had a need for what's on the market. They were trying to get these pump control systems to market before their competitors because they so assumed starting to happen in the natural gas space.
But that curve on the bottom is basically they are sort of an OEM supplier and they build this pumping system and then they sell the oil well, you know to servicing companies and so forth and so that blue line is their growth as they basically got the first to market advantage and such a substantial part of the market and we were designed in and this is one of our CompactRIO systems that's been industrially rugged. Again it's not the brains of the monitoring the control system of these pumps.
And again just like we saw Kyle said it went from a year and a half, half a year where the last examples. These guys went from two years to a couple of months because they are not designing a bunch of custom hardware, they are sticking to the part of the system that they add value in. So there's a couple of examples embedded to help me give, you know put a little bit on understanding how we’re approaching this market, what our customers are doing and how are they using our platform.
Now I want to talk about test and measurements. So we look at the test and measurement opportunity in these different application spaces, electronics that’s kind of the bulk of lot of the box instruments and it perhaps RF everything else. The RF market opportunities is quite large, now spend some time on that. We also address opportunities in area of structural physical test. So these are large channel count systems that are used to do mechanical test systems, things like aircraft component and full aircraft measurement systems as shown in the picture, they are doing structural test of the structured airplane.
Real time test is we also showed you in the Keno, this is type of test that is effectively testing embedded software. It calls real time test because in order the test embedded software. You can just use traditional measurements, you have to basically emulate the world around that device. So one of the classic examples that’s not the only part of this market but an engine control unit that’s a computer that's in your car.
In order to test that engine control unit, you basically have to emulate the other components of the engine at the same timing that normally happen in order to verify that the software in your EPU is operating correctly and that’s one of the example that we showed and that’s become the growing opportunity because as I mentioned this morning, more and more of these embedded systems are becoming and lots and lots of lots of [comfort] inside of them and engineers have been through the quality of that. So they have to do more testing in order to do that.
And then in the semiconductor market I talk to you about before. We for a long time served a verification and validation. We’re also starting to have our products adopted in ATE systems production test of semiconductor device.
So I wanted to talk about the dynamics. I mentioned the changing dynamics of test and measurement and of course one of the most important changing dynamics is the growth of modular instruments as compared to traditional standalone boxes which is what serves the majority of the space.
So on the left that’s the current market share breakdown by Frost & Sullivan of traditional instruments and modular instruments. So really those left two buckets on the slide I just showed that are traditional test and measurement market. The key point there are one, A equals to 85% of the market is still served by box.
As you can see as I project out of 2014 the growing part of the market, disruptive part of the market is indeed modular systems growing significantly faster than the rest of test and measurement and this is the part that we have a leadership position. The other key point is that the red part of that curve, the traditional instruments, we serve quite a few of those customers actually most of those customers are already NI and most of those users are already NI customers through our software and instrument control position our GPIB product which serves that market for the entire history of the company.
So our real opportunity ahead of ourselves to basically show our modular systems and the advantage of these modular systems to largely existing customers that already in our National Instruments as an instrument control company.
Now, if you look at our modular market breakdown there is a few different standards that are used, these are a couple of different modular instrumentations standards CXI, VXI and there is one called AXI and this is again Frost & Sullivan's projection of the relative size and growth of those different standards. Business as we served VXI market that’s been a long time of standard in our industry, we are one of the early companies in that and we sell most of the embedded controllers, the PCs basically that are used in the PXI market. It’s a declining standard though; it's been in the industry since ’87.
PXI is obviously a big, big focus for us. We have a leadership position in that according to Frost & Sullivan, I believe, they put us at two-thirds [retail] of that space, that's their number and then its growing and I think a lot of that growth is driven from the needs of the customers, I talked about Moore’s law and the increasing performance in these systems and then frankly our own investments.
We are investing to basically grow this standard and this opportunity. You can see that it's going over $1 billion by 2017. Okay and obviously this is the big news over the last couple of years in this PXI stage. Agilent sort of officially joining and bringing products out in PXI. And this has been really important for us.
So for years one of the biggest barriers that we saw in adoption of PXI by our customers was the leading company in terms of measurement hasn't embraced the standard, right. So we use this. This is kind of marketing goal for us. We use this as a hey, now it’s a very safe choice, all major companies have adopted it as one among others and so that's been a real opportunity for us to grow the modular instruments space but also again we are focused on the other 85% of the market that doesn't currently use PXI.
And then [article] from Frost & Sullivan you know, about our leadership position in the market. I want to give you a sense of strategies that we are employing and why we believe we will continue to be highly differentiated in our approach in this market and some of the technology and various [entry] that’s exist. So this is really the highlight. So obviously we had a little fun and unveil this for some fanfare here this morning. I want to explain why we think that this is so important and beyond the technology which we’re all pretty excited about as well.
So this is a device that addresses really the RF test and measurements and what it does is it really highly integrate the high performance RF hardware with our differentiating (inaudible) and that’s a key takeaway and then I want to show you a little bit about why that matters to the customers.
Here is kind of neat animation I showed we are basically inside, this is a chip, a FPGA chip and all of the firmware that's running down inside that device is written in large chip and its open towards to customer. So they have all flexibility and they can customize and our partners can customize, we can create an ecosystem around that and really define the functionality of the instrument itself.
And that’s fundamentally a completely different approach from instrument center, its fundamentally the firmware is the key part of their (inaudible). They closed that down, if you want a specific function, you have to wait for a new buy. So it's a different approach and it’s the approach that we are uniquely in a position to provide.
We’re the only ones with a software environment that can scale from instrument control on a host computer and simply embedded firmware programming in FPGA chip. There is no other capability in the market that does that. We’re uniquely in a position just to scale that and you saw some examples of the value that brings from our customers, and I am going to highlight those as we go through. So what it actually means for us and for customers, so for us there is some leverage on our R&D investments. So that’s the one platform view. The FPGA and the ability to program that FPGA and LabVIEW scaled across all of our application. The example I showed with Lime Instruments on the pumping application and they program the FEJ with LabVIEW to control the pump. Dynapower is the one that was on stage that’s a FPGA LabVIEW application to control the invertors. Obviously the vector signal transceiver uses the same technology that we have been investing in for 15 years to pull that off, and it is difficult to pull on.
(inaudible) as I mentioned really the only tool that can be used in this way and programmed on the host computer and FPGA and then the benefit that our users get is huge increases in performance and dramatic decreases in costs. And we think that is pretty critical and I will talk a little bit about the dynamics of the wireless requirements and wireless test for our customers and I think that is pretty critical in that timeframe and its right for the disruption.
So here was a basically in slide that we showed this morning, we showed a demo of it some of the slides and here is the key points, so again those two boxes on the right those are the gold standard RF test and measurement boxes by Agilent and this is our new device on the left.
So the key point here is that first one there that performance that is one of these the lower is better number, you want to be lower plus kind of noise that’s basically a measure of how good your RF performance is. We have a significantly better performance than this gold standard box. So test time, we obviously showed lots of examples of that, what does that mean, we are trying to show that in keener test time is effectively a way for a customers to lower their cost.
You think of a manufacturing line, if it takes you longer to test you have to put more testers they are going to flow down the line testers. If you test it faster, you put less testers and it is a significant cost saving for our customer. You can see that this device provides better hour performance more than 10 X production and test times and its about half the cost of those two boxes there at the right.
This is significantly a deliberately disruptive price point involved. Yeah, let me give you the sense, the question was how significant is that performance difference? Yeah, let me give you a little sense to that.
We are being pretty conservative there. We showed the demonstration on the keener the actual running demo was 4 DB you know about 4 DB to 5 DB. You are going to hear 3 DB it’s a logarithmic scale. 3 DB is twice as good. So 3 DB is twice as good. So we are on average we are going to expect we are about 3 DB and (inaudible) it's kind of depends on which measurement but on average we are about twice as good to RF measurement performance. It's very significant.
In this case it's significant enough that we talked about 802.11ac. That's a pretty interesting market opportunity, it’s a new standard, it's not even out yet, the devices are starting, they start to come out and be tested. It’s a challenge to test, either 802.11ac this is kind of you get to be at Wi-Fi, its very high bandwidth and it takes a lot of RF performance.
People are going to need to essentially retool 802.11ac their validation in production systems. You can use the same equipment you use. And one of the reasons you can because you need better RF performance, you need a few DB more RF performance. So a few DB is enough that you won't use your old RF [box] to test this new standard.
The question was, are all the NI products that use LabVIEW by definition open for us? This is, there's a couple of points there so I want to, I know it’s a subtle point, so our approach has always been to give more programmability to the user. So, we have always said, we'll give you as much as possible with our instrumentation and [raw] data and on the host computer, you can do your own analysis and presentation of that data.
So that’s always been the distinguishing characteristics. What's different about this device is that now that extends down into the embedded firmware of the device and that’s what's happening for the first time. We’ve never been able to do that and no one has able to actually let you program the firmware of the device. Now what does that really mean? We showed you some examples today but it opens up new application that you couldn’t do or you certainly couldn’t do it at the performance by just doing it on the computer.
You can actually do it very close to where you are actually acquiring the signal and you get huge performance gain. One of the key is that you knew every possible way that you can get all these performance gains you could say why not just build all that into the firmware. Well it's not that simple. Many of these are very application specific.
The performance gains we got at QualComm were general purpose capability. They were very unique to Falcon's specific application. So we couldn’t have our priority known exactly what capability put down in that. They knew, and this is actually another interesting example that I have seen already unfolding. We’ve been working with quite a few lead customers with vector signal transceiver and many of them start with just laying it for this reason. Its smaller, it's faster its significantly less expensive, combines a bunch of capabilities into the one. That’s not too difficult to sell on that value proposition.
But what happens is they get it and then they start to understand the power of being able to program that firmware. That was the case of Falcon. Once they got it, they discovered this ability to put the control of their chip down in the FPGA so that they could be very closely and a very fast timing controlling their chips in parallel with doing these RF measurements. That’s what gave them this dramatic performance improvement and it’s not something we could have predicted before him. So the programmability of the firmware is that she cannot --
Unidentified Company Representative
Okay, let me I am going to I will take the audiences question and then I will get through, there are few more slides and then I will open it back up for questions. But the question was about the market opportunity, fundamentally this is part of a portfolio of product in our RF portfolio and those RF products address that $5 billion markets.
Now this we believe gives us a significant differentiated position for validation of semiconductor chip and devices, for production tests, for its speed is paramount, those are a large part hundreds of millions of dollars of that market opportunity that we think this puts us in a very, very good position a disruptive position and so I will come back on some of those points in more detail.
So let me just walk you through this QualComm example again. So I think it’s significant. Now not the only lead customer that we have been working with in the development of this product as you might imagined in the space confidentiality is very, very important to our customers and many of them view it as a competitive advantage that they are using our product.
Now QualComm has been gracious enough to join us on a keener stage and share but most of the other ones have not. So but here was their story and it’s similar to other applications that we see of course like everyone they are originally using boxes and I thought a really key point that Doug made in the key note is that when they move to I should mention they were using LabVIEW and GPIB from us for years. They have been customer for years. In 2007, what basically happened here is there was it looks very subtle at the top 802.11n came out the end version of the standard. And they needed to repool the test equipment for and because as Doug showed the complexity of these devices had grown so much, if they kept using our existing test equipment it would have taken two or one they would have still had to upgrade their test equipment to the RF performance needed but if they kept using boxes it would have been too slow because they had 10 times as many functions.
So the stellar point Doug made was they got 10 to 20 times faster here that was actually just enough to keep up. If they have stuck with the original approach what would have happened is they test someone have got 10 times slower and that is unacceptable because we paid the same thing for 802.11n and we should get the exact next version.
So then what happened is the next last year and this year AC comes out another need for reach hold of test system and we started working with them on the products that we actually commercially released today. So we've shipped quite a few of these and now it is available today on our website. So if anyone wants, you can go order it. But what happened as I said, they used the FPGA to get this very specialized and proprietary communication with their chip and that's what basically gave them another order of magnitude, increase in performance or decrease in test.
And so for their (inaudible) their characterization lab and for them that means a couple of things, one is there is a time-to-market issue here. He described weeks of testing that happened over here and literally you know minutes over here because not only is it 200 times faster but he was describing it as either of approximation early and they only got a few data points and they had that sort of calculate some things and run a different set of test routines and calculate them more.
On that picture, he showed with those blue lines, they just do a sweep like that and they get all of the data they could possibly get off their tips. That also gives them a competitive position because they know operating mode. When you describe operating mode that's basically how their customers use the chip. Their customers need that performance curve to understand how to design that [fulcrum] chip into their devices and the more resolution they can give on that curve the more their customers can push it through its limits which is obviously what you want to do when you are trying to optimize the power, getting the right indications they know and all the things to make a competitive wireless device.
Let me come back around, so we are going to have the microphone passed on to all those then and then I am going to open up for questions. So anyway that's the key takeaway of what's, how they got that performance improvement, also that's a validation application. Clearly, another big opportunity is in production, yes; where similarly performance gains like that are test on production; it’s very, very valuable to people doing that production test.
Okay, I'm going to spend this last section here talking about a little more about our RF investment. Obviously, that product is a part of it, but this has been the story that's been playing out over the last five years. We've talked to you about how we really decided strategically to focus on this opportunity. We saw I think early on some dynamics in the RF, that's the measurement space that we bought for opportunities for disruption and they frankly are value propositions to place very, very well.
We started investing so that we can have the capability to do so. We built up our internal R&D group significantly. We went to where the talent was. We built development centers in Bangalore, Santa Rosa and of course here in Austin. We did a couple of acquisitions over the past couple of years in this space, Ettus Research, AWR and Phase Matrix all added critical mass to our own organic investments. And then we really scaled off our sales and support efforts as well. They are pretty complex, many of them are pretty complex applications and so we've gotten people with expertise in RF and communications systems and our system engineering group and specialized sales resources around the world.
Now one of the effects of this investment and some of these acquisitions is also to really build our brand in this space. Now this is one of the challenges that there is pretty strong incumbency in the space with 50 year old brands and NIS is relatively new to all the RF part of test and measurement.
Now as I said, we typically sell to these customers as instrument control, but they are RFs and it's important to build our brand and credibility. I mentioned in our last earnings call, that picture there in the left is a really important RF ratio for us. It was the International Microwave Symposium happened up in Montreal this year, a couple months ago and one of the key points here is that AWR, which is an RF design tool has huge amounts of credibility in this space of RF system designers and the combination of AWR and NIS has propelled us from a pretty small player at this trade show to one of the big companies and that was one metric that kind of through point of that is you know, we measure leads basically, how many people we meet at the show.
And this year was double, last year and quadruple the year before that, so that’s the kind of growth trajectory we are in terms building our brands in RF and obviously this launch that we did today of vector signal transceivers is a big part of that as well as lot of focus. We believe we’ll have significantly more RF kind of engineers this year at NIWeek, we have dedicated a summit for them, tons of technical content in these product releases. So we are really quite a bit focus on that opportunity.
And this is fundamentally why. And this I think is sometimes a misunderstood the point. With all of the excitement around mobile devices and there is good reasons for that, there is a big role happening on smart mobile devices and there is a lot of wireless testing opportunity on those and we are pursuing that. But the other thing is that wireless isn’t just that industry, what makes wireless such an important business opportunity for NI is it’s everywhere, everything has wireless, thermostat that’s actually these are all real wireless that I said the pill bottle that has known for the -- in the past of the pill bottle, everything is wireless. And you really you can’t charge more for wireless, needs to be specialized capability, you could charge more for it, now it’s expected in all of the devices we have and you don’t pay anything extra for it.
And so what happened is in test and measurement the same thing, kind of be able to justify very expensive dedicated equipments and what happened is if you to take something like that thermostat there that’s nice little cool round things is a thermostat. What happens is that it cost you way more to test a little WiFi chip capability on that thermostat and to test everything else; it doesn’t cost that much to put wireless into device, so very, very little actually. But testing is a huge cost, and we don’t believe that’s sustainable; and wireless is everywhere and people are not going to pay for they need to lower their test costs and that’s fundamentally some of the value that we are bringing.
Also another important point here is that wireless is integrated with all these other capabilities, so we fundamentally believe a platform approach where you can integrate RF along with the audio test and video and all the other things that these devices have is where the market is going.
So last point I want to make is our approach of a platform is also (inaudible) of an ecosystem and how we certainly look and the things the Apple’s on and building an ecosystem and learn from that and I think that’s another differentiator for NI. The ecosystem that we have built is very unique in our industry, and yesterday we had our alliance partners here and there were 560 companies that basically had build businesses around still being part of our ecosystem’s complimentary product integration and so forth.
And I think as you hear at NIWeek, you get a sense of really of a tangible sense of this ecosystem, so this is conference is really all about; it’s about developing the ecosystem allow the programmers and complimentary product partners and all of these people building around the common platform and that is a pretty powerful force in terms of our customers being able to build whatever system they need.
Okay, so just a quick summary, single platform for multiple market opportunities for that. We will see a lot of value of bringing in the embedded market and you’ll see more of that rolling out at NIWeek, so dynamics are changing in test and we think that’s in our favor. So again PXI and modular instrumentation and RF and wireless is a pretty exciting market opportunity and obviously the combination of the last two is here with our software position has been a lot of the focus in the launch that we did today.
So with that, I’ll go ahead and open it up for your questions. Yes.
Yeah Eric, turning back, could you go back to the low comp price feature?
This slide is absolutely very impressive, so it says 200 times faster; is there traditional hardware, lets say offered by Agilent or some other peers that can offer a similar performance, but may be at a much higher price, but may lack of flexibility or so this is the only solution that Qualcomm can get and depends on?
Yeah, that’s a key question. So here is the thing, in general, the answer is, the guys that made the boxes here, the boxes on left really, the way they are designed with a very slow interface path of a computer, in general there's always an advantage of a modular system with a very high feedback frame in the latest front.
Now, it is possible and that middle bucket, we've always had an advantage. It is possible for other companies to get maybe to that end 10 times faster that we did in 2007. Other companies are building PXI to potentially get back kind of system improvement. What’s really unique and this 200 times faster, that really requires programmable FPGA. Qualcomm is the programming of the FPGA to get back on the performance improvement; that was NI.
So this open software environment that goes all the way down into programming the hardware was required to get that kind of performance gain. But the answer to your question on that is that no one else is capable of doing the performance improvement on the right hand side.
That's fantastic; I mean out of lots of excitement, I recall the (inaudible) is like one and half hour intense high entertainment. Could you summarize in some example for those of us who are not technologists by training, what are the most important three announcements you've had to certainly-- and also the implication, sort of if you could go down to the markets or the revenue that would be even better?
I’ll do that; so this is obviously, the top one is whole ration in the vector signal transceivers; I do want to make that kind of belabor the point, but I do want to make one more point on that and that is that its kind of back to your last question, any one can put an FPGA in an instrument. Lots of things at FPGA and the person who design the thing is a specialist in FPGA design system, very thick, somewhat down in the FPGA.
We are very unique in the ability to provide an FPGA to user and program. And in an environment that they are used to programming and building automated test systems in, that same environment programming the FPGA; that’s why I wanted to emphasize the point that it’s the user that got the 200 times improvement in performance utilizing that FPGA. So we think that’s very significant.
As I mentioned the keynote it’s significant not just for market opportunity of the vector signal transceivers, although we do see that as a very important part, maybe the center piece of our RF portfolio that’s addressing that RF marketplace. But it’s also significant because we see it as a first of a kind. The idea of putting programmable FPGAs and coupling our LabVIEW products with high-performance instrumentation is we believe a trend that the market wants and that we can be highly differentiated. That’s important.
Highly coupled with that, obviously you know, we released a new version of LabVIEW and that is always a big deal. And you know LabVIEW is really like I said the center piece of what we do. LabVIEW and its new capabilities are what enabled that vector signal transceivers to beat, so differentiated and are disruptive. And LabVIEW has also enabled all of our other products. So we continue to invest significantly to make sure that LabVIEW is on the leading edge of being able to program and design these kinds of systems, which is a few of the features that are dominant down and stay at that level. And that’s how because everything we do, in lab research everything we do.
And then last one, there are lots of other products everything, but I do want to point out this, we talked about the standalone CompactDAQ and our data acquisition is really a core market for us and its where a lot of our volume come. We have talked a little bit before about kind of where our business model works, so we have these lots of products that sell hundreds and thousands of scientists and engineers, our software tools and our data acquisition and our instrument control.
Most of our new customers get introduced to National Instruments through those products and the dynamics of our business is such that once they start using those products there is a high probability that as their needs evolve overtime they will purchase more products from us and often more system level products at higher price points.
So continuing to invest in our data acquisition is important part of our strategy; that standalone CompactDAQ kind of basically takes our CompactDAQ system which has been hugely successful on the desktop and it made applicable to embedded data logging application. So instead of this at your desk, filing some data on a prototype it can now be deployed into in the vehicle data logging or field logging over wireless connections and so forth. So that’s an expansion of our data acquisition division.
Other questions, yeah you, [Scott]?
Yeah so Eric I guess on a vector signal transceiver, you discussed I guess Qualcomm alluded to speaking some deliveries in the second quarter, do they also take some deliveries in the first quarter?
We have been working with key customers for a number of months on this product. We are not going to breakdown exactly when we recognized revenue for that particular product, but we certainly have been working with them for most of this year, but we work with them as a customer and many of these other customers for long time, so this wasn’t like the new part of our relationship with them; their validation labs used in our products extensively as we showed.
And I think the darker piece of this could be the most exciting product release ever and you alluded this from the market opportunity previously, so you have gone through some examples where this product can be used at the chip level, with wireless LAN, can you help us understand that the push on the power amplifier market also push into actually handset. I mean what are the limitations pertaining RF market as to what it is compared?
That’s a good question. It’s a tough one because the whole idea of the product is to be open enough to address lots of different applications, but I will touch on a few. So the one we showed at Qualcomm is basically silicon verification test and they are in the wireline space, so it is a limited speed; that scenario where lots of test equipment is being purchased in this timeframe because as I said there is an upgrade cycle happening and so that’s a significant market opportunity.
You mentioned PAs, power amplifiers; these are chips that are in all of our wireless devices. That’s a growing opportunity and the example we showed of [server-link] is a very compelling capability for people doing PA test. Everyone has to do that server-link and we showed that’s the one we showed 900 times performance improvement. So that’s very significant. That also requires the FPGA and some custom logic that goes down along the FPGA.
The product is rolling at device level as well to handsets and other wireless devices that are in verification labs, but also on the production floor. So the test time reduction, but also the size and I should probably emphasize that we’re talking about a 60 watt light bulb, the thing empowers a 60 watt light bulb and it’s this big. I mean when you are doing a production test application, floor space is at a real premium and because of the combination of the test feed and the size in traditional systems, these production lines stand out the tons of testers and their size and they are because of the flow and then their size picks a lot of factory floor space and so this provides a significant better, so that’s another target area for us.
So these are the main ones, but then you know part of what we are trying to show as well as that part of the flexibility of the product is the ability to address lot of other opportunities and you know the example we showed of a channel model, there is a whole set of systems that are sold as channel model and that’s almost a whole application space into itself and that’s one that we will be doing a little bit of pioneering work in this timeframe, but ultimately that’s a market opportunity as well.
You asked us the lab or the verification regarding the demand, I mean this product can be used to throughout; it’s certainly test time reduction. There is no sizeable verification all the way through production, that’s we get a lot of value in reducing test time; it’s obviously a compelling for those applications. And that’s a big RF space of $5 billion to applications I just is described are very large part of that RF opportunity. There is a question back here, yeah.
Eric, may be the extension of that, so as the RF market opportunity is $5 billion and I saw a portion today after you announced this new product?
So let me describe it, the way I view it, coming up to the third portion first and I’ll come back to that. So when we look our served portion of that $5 billion RF market for example, we take in a couple of things into effect. One is we generally view our opportunity as the automated portion of that right, so our products are used in places we are automating instrumentation as opposed to completely using it in interactive use, and those are verification labs and production tests and so forth; that’s roughly 30% of P&M is our estimate, sorry 33% of P&M that is automated and in RF it tends to be a little bit more than that, because the complexity of the measurement necessitates automation more often than in some other class of instruments.
Then the other factor we apply is how much of the functional capability we address. So in RF a big part of that is frequency range. So how many devices are in the 3 gigahertz, 6 gigahertz, 26, 40 and so forth. The vast majority of the market is under 6 gigahertz, all the consumer electronics everything used is under 6 gigahertz. Higher frequencies are primarily getting in the miller, radar and those types of applications.
And then the last factor we apply is we apply a reduction in the cost of each system. Right, so we are coming in at half the price of the traditional vendors. So when we talk about our addressable market opportunity that's also factored in as well and I think that's an important one because for us, it’s all, these are all new applications. It’s on roof for us. But the incumbent is it’s pretty difficult when you have a majority market position to compete and cannibalize yourself and asset. That's the important factor.
So $5 billion in total, with all of those factors apply, no I don't breakdown our addressable market in each one of those buckets; I wanted to give you the logic that I applied, but its a significant portion of that $5 billion, many hundreds of millions of dollars and its obviously much, much larger than the current portion of business that we have in that space and really what the vector signal transceivers does is more addresses our competitiveness than our differentiation in that space, it makes us much more compelling combined with the rest of our RF products that is really like I said before kind of now the center piece of our RF portfolio of products to address that market.
And maybe just a clarification as well on the slide that shows the split between traditional and modular instruments, the 84%, 16%, which portion of the overall $21 billion market is that 16% or is that 21%?
You are right. So in general, let me go back, I do want to explain that and that is all public information. So that survey is available from Frost & Sullivan, so I want to make sure I' reference that and you should check the exact numbers.
But in general, this picture here, I usually talk about those left two are kind of classic P&M, usually when like guys like Frost & Sullivan do a test and measurement market study, its typically those two on the left are at least the large subset of the two on the left. So, it’s mainly addressed there, but I think it’s a little smaller portion to that when you actually add up the numbers. I don’t have the actual numbers, there but they are in; that’s Frost & Sullivan report; you can see there. That’s the absolute numbers if you could do the math on 14% is the next target.
Just as a quick follow up to that, Frost & Sullivan is forecasting 18% and the growth will be what it is, you don’t know. But given that you are almost two-third of that market, would you expect to grow faster than that 18% or could you be behind that 18%?
Well, I guess we’re looking at our growth a little bit different. We don’t look at our growth as growing within that red band there. We look at our growth as we’re the ones driving that 16% to 20% there to be frank. We’re the ones driving the innovation and disruption of modular instrumentation. Our market opportunity is in what that blue piece of the pie grows that and this is their prediction, but obviously that’s what we’re focused on is not just extending our leadership position in PXI, but growing PXI to disrupt more of the traditional test and measurement market.
So are you comfortable with that 18%.
You know I think I'm not going to comment on Frost growth projection. I mean I will say that's significantly faster than the test and measurement market and we have talked about over the last number of quarters that our PXI business and our RF business is significantly faster than the rest of our company.
So we continue to see lots of opportunity and it continues be a growth engine for sure.
It seems like an argument if you will it is going to shift it from an evangelistic approach to modular instrumentation to you should do this to, the market really accepting yeah this is really the way it is going to go and but within that how do you expect a competitive response and have you seen the empire strike back and what are you doing to prepare for their counter-attack?
So no, I think you got it exactly right. I mean we're in a timeframe when I was kind of what I was talking about, about how that Agilent going forward helps us. I mean acceptance of the modular instrumentation in our marketplace has become mainstream and that is you know very beneficial for us in terms of gaining our share versus the other part of that marketplace. You know certainly as it becomes mainstream, other people will build more PXI products and you are seeing that with Agilent. They have announced their entry into PXI. They have announced and they have released a few products over the past couple of years, but still have a pretty thin portfolio.
But I expect companies will continue to really see PXI products. I think what's key for us is taking that opportunity of the growth of PXI. So they are combining it with continuing to differentiate our own position and that's where the timing you know I think couldn’t be better for us to release this new vector signal transceiver or talk about software design instrumentation because we are really upping the game in terms of what it takes to have compelling modular products and changing the expectations of the market place and we are doing it with the technology that we think is very differentiated.
And it's one that we have been working on for 15 years. And so we understand how difficult it is to get the position of software that can do, what LabVIEW can do and program on the host, but then also program the firmware at the site. So we are confident in how unique we are in that respect.
How difficult is it for software engineers to program LabVIEW on the FPGA on a firmware level and is the amount of software engineers you can do that kind of a limited factor, guys who can work with LabVIEW or engineers who can work with LabVIEW and is it different than traditional system design tests with LabVIEW?
So programming in FPGA with LabVIEW is very much the same, similar to programming with LabVIEW for instrument control on a whole and so that looks really unique. But what you touch on is the traditional way of programming in FPGA I kind of alluded to it this morning is using a language called HDL, hardware description language and it's actually what I did before joining and so I was a chip designer.
Few write HDL, you are not a software engineer, you are a chip designer and it is a pretty small group of people that have the capability to design chips and write HDL. So it's a very small universe of people. I alluded it through at this morning as 100,000 people in the world that know how to do HDL and so LabVIEW's position is much larger than that and quite a few more people that know LabVIEW and so you kind of really hit it on the head. That gives the ability for any one that can program in LabVIEW which is you know a large percentage of people in science mentioned here, it is a very intuitive language.
So they can now program an FPGA. You know one of the most amazing things that we've had this RIO is what we call LabVIEW RIO architecture is the FPGA based product and as just for 15 years as Dr. Truchard mentioned and I can't tell you how many times, I've had a customer that is doing an amazing application, using this tool.
And you ask him about HDL, he would say oh gosh you know it's something about HDL, they don't even know what that acronym stands for. They have no idea. They are totally transparent. They just know that LabVIEW, when I put it down here, it runs faster and can do much more determinants to control. They don't have to be an expert, I mean that's fundamentally the value proposition and so what was what I mentioned before. Anyone can put an FPGA on the device, opening up that FPGA for the broader set of scientists and engineers, we are the only ones doing it.
And Eric, NI is absolutely the leader in the PXI space, could you give us some sense what kind of the market share you have, that's number one. Number two is well the other guys who are participating in the same game yet using PXI as a modular instrument, what kind of a language do they use to program it. They don't obviously use LabVIEW, do they have something similar to LabVIEW and what kind of functionality is comprehensive with and the robustness of their software language compared to LabVIEW?
So market share in PXI, I'm going to refer you to that Frost & Sullivan data. I have the number off the top of my head, it's about two-thirds of the market but I will refer to that to get the exact number.
What are the other people in PXI use, actually they generally use LabVIEW. So if you go to Agilent and buy a system those support a couple of different environments, but top of the list will be LabVIEW.
So most people are using PXI even if they are not purchasing it from National Instruments are using LabVIEW to program their system. Now if they don't use LabVIEW there are other general purpose programming languages that are C and environments like that and those are really made for general purpose software engineers and don’t have a lot of the capabilities specific to test and measurement, but that’s really the alternative.
There is really not an alternative in our space that’s actually targeted at these types of systems other than LabVIEW
Let's say that Agilent is using LabVIEW to program their PXI modular offering. Do they actually have to license LabVIEW to use and pay NI some of kind of either royalty or --
Yeah let me explain that. So a couple of things and I want to come back to (inaudible). So they would have their user by LabVIEW, probably it would be the most likely scenario, so that user will buy LabVIEW directly from us. We don’t resell LabVIEW through Agilent or anyone.
So the users buy directly from us, the key point. And just forgot the second part. You just asked about pardon me –
Yeah I wanted to make the point that they don’t have the ability to use LabVIEW FPGA, so that’s the key point I want to make. That’s only work on NI hardware. No one else can do that and then I also want to make the point to kind of get back to your first question, but I didn’t put a big emphasis on this because I think we’re going to cover it later in the day, but a big part of our differentiator in PXI is also our channels. Being able to configure any flexible software design system is very, very different kind of sales and support process than a fixed functionality box.
And you know, that is the focus of our channels. Our sales people, our support people and marketing, they are focused on modular software defined systems and we think that’s actually a pretty big differentiator as well in addition to the actual technical product capability and so forth.
Given the tremendous improvement, the performance improvement they have been able to generate with the new product. In your initial feedback from potential customers, what are some of gating factors towards adoption obviously could be inertia, just don’t want to I mean the performance improvement seems compelling. So can you walk us through further reasons why may not fit with certain customers?
So good question I will make some comments and then part of this we don’t yet because we work with a few key customers, but it’s only commercially. The rest of the world just found out today. Right so the pretty measured number of key customers because we were very sensitive to the confidentiality of the product.
But I won’t say in general and it’s our estimate we know that in these complex applications, we are still in a position where we have to prove it to our customers. I mean that’s part of being the newer disruptive player. People don’t generally buy. It’s much less expensive in the traditional system. It’s still a $45,000 product. That's the list price for one module.
People don’t usually buy a $45,000 product completely on faith and so we have to prove it and so that’s where we have been putting our investments in our dedicated system engineers that basically will go and do benchmarking on site, help people get up and running because that tends to be the biggest barrier to get adoption. Okay, that was the last question. So thanks, enjoy the rest of the conference.
Welcome to NI week. This is our special time if you noticed that any of us have the bags under our eyes at about this time, it’s because actually NI Week is the third phase of the party that we have here. The first phase is we have the worldwide sales conference, so we had probably 60% to 70% of our worldwide sales organization that comes back here prior to NI Week.
And then Monday is our partner day. So we transition from just the sales conference and then a partner event and now of course Tuesday is the first day where we have everybody, the whole family is here and then the sales people start disappearing and the partners and customers stay till Thursday.
And then life is wonderful, so you heard that we have record attendance this week which is fantastic for all of us involved in what we are doing to see those sheer numbers. Then on the hand you saw that Eric said that our market is filled with a hundred million engineers and scientists. So 3400 people coming to NI week, all of a sudden seems like a fairly small number when you think of how many really now we now have to reach with these new products in our platform.
So that's really what I wanted to do with the time that I had giving idea of how we go to market, how we actually try to efficiently and effectively touch our entire market with the limited investment that we have. So I also want to make sure that you know as we evolve the company, expand the company that we are pretty good stewards of this cost of sale.
So we are very conscious of how as we expand into these adjacent markets, as our system design platform addresses more of the market that we also want to make sure we are investing wisely and watching that cost of sale. So with that I want to title this leverage from our investment.
So we are looking for force multipliers, we have a direct operation throughout most of the world. We had some small distribution to get into some of the far remote corners of the planet. But for the most part we have a very direct sales organization, direct to partners to the end users.
So key points, large global footprint of sales and support are these 100 million customers, their prospects, they are all over the world. So we've got to be wherever engineers and scientists are being created and going through schools learning how they are going to eventually solve the grand challenges.
Arguably the world’s best modular instrumentation sales force on the planet and I'm pretty proud of that group of people that are out there representing our graphical system design and taking it to the customers. I'm going to talk a little bit about how we actually do reach all of these people very efficiently with our events and our sales tactics and marketing programs driving successive large opportunities.
Those of you that have been with us for years have seen our average order size is increasing and as the portfolio of products expand, it gives us a lot of opportunity to solve larger impact, larger systems and so we continue to see the opportunity in serving these larger and larger and larger deals.
And then finally I want to talk about our value added partner and the ecosystem which is a very important point in our channel to maintain that for small player efficiency so that we can keep the cost of goods that is our cost of sales at a nice steady model-based plan.
So you've seen this, I flipped it. You've seen at this morning maybe with the R&D on the right hand side and the sales investment on the left hand side, but I usually look at it from left to right where the R&D investments, these are our core investments. So the R&D investment is to follow the vision of graphical system design and turn it into reality by creating these elements, components, sub systems, rapid prototyping environment and then that becomes then these elements that need to get out into the marketplace which then you have to sell that is following that lead and getting it in to the market place.
So we have footprint all around the world. The way that we take our 15,000 plus skews and line items that can be ordered off our systems and make any kind of sense to the other side of the extreme which is over 30,000 customers that we’re supplying. So you can imagine the number of contact [split] points when you trying to reach back and forth, not only trying to get the new product information to all of the people that need to know it or the feedback coming from the market place that’s there is an almost an infinite number of contacts thing through that opportunity.
So we typically look at this thing from our graphical system design and we find these beachhead applications, some of you have seen those if you were at the keynote this morning, picking on some of the very visible challenges and applications out there and our customers tend to line up in industries where they network and find best practices and work with common challenges and that’s how we organize through this maze and get some efficiency to represent this graphical design.
Now to our sales organization, it’s a very common theme. So even though we’re addressing a huge diversity of customers within our territories, so everything to us looks like the common platform of LabVIEW and our hardware is the fundamental core platform elements that can go out there and solve it.
So we just have to translate their system requirements back in to our product portfolio. And so it is a fairly efficient way to sell 15,000 elements through this common singular platform. So these are pretty efficient as we go out there and work.
We spend quite a bit up of time and energy in resources to put on these type of grand events around the world. So you saw the numbers from this morning. It’s over 3,400 people come to Austin, but we are also putting on these events around the world. Then we are getting over 1,000 people at places like Brazil and France. China we have two events actually that pull in that kind of number.
I mentioned France and Germany is not quite at a 1,000 but they are close. So that's one of the ways where we can efficiently bring in multiple industries, lots of engineers and very efficiently tell them about what we're doing and what kind of markets, we are going after, what kind of applications that we now control with these new products.
So geographical expansion and coverage is a number one goal of our sales organization. We have been reporting to you revenue on our three major markets which is Americas, Europe and then the third one was Asia, rest of the world. And I want to tell you that moving forward, beginning in the fourth quarter 10-Q or actually it’s going start showing you and exposing four regions.
So we are taking Asia, rest of the world and we are going to split and we are going to put a new Vice President in one of those territories because of the keen focus and opportunity that, that markets, Asia and the emerging markets are giving us. So we want to make sure they are resourced very well. They have a seat at the table at the leadership level. And so let me walk you through a little bit of that.
So first of all if we look at engineers data. In Asia, rest of the world including Russia, India, Arabia, China, et cetera. You can see the numbers. So we can see where the graduating engineers are and this is our raw talent that is our future customer base. So this is giving us an eye towards hey there's a lot of activity going on over there. This is a chart that shows you a decade of R&D expense trend. So you could see the black is data back in 1996, the blue is 2009.
And I talked about these areas and what kind of R&D investment is happening and you can see certainly a trend there and how much R&D expenditures are showing up now in being invested in the Asia Pacific end of the world and in these emerging countries.
But that's not the R&D, it is not our only opportunity, the R&D budget. We tend to service both R&D budgets and also the operations, the production. Those are our two primary budgets in our customers that we are out there to help optimize.
So when we look at potential from around the world, we can take a look at some published data from these various countries on both the R&D side and also on operations. So here's a few of them that we put into our analysis.
First, number of R&D personnel, the number of patents to R&D expenditures. So that represents the opportunity selling into the R&D needs of the world. The other one on the operation side, you know industrial production, purchasing manager indexes.
And then fixed investments which tend to represent how much of our customers or where in the world are these expenditures that we can go out there to support the manufacturing and production in. So we can put these into analytics. We can weigh them according to what we believe our opportunity is serving the design side or serving the test side and then we can do some benchmarking on where do we feel like we are closer to our expected market share.
And then compare that with where maybe we are with the rest of the world. When we line it up and look at our potential, we can put our revenue which is in blue compared to a weighted average against these indexes.
And so once again we see a lot of opportunity in Asia and rest of the world which is leading us and then the last one of course is taking a look at our competitive landscape. So those public companies that are publishing data on these geographies, you can also see that we aren’t the only ones that are seeing opportunity and realizing opportunity in Asia and rest of the world.
So when we, how are we going to go and split this. We've got two regions now that are going to emerge. One is East Asia which is greater China. So there is China, Hong Kong, Taiwan, Japan and Korea. And we now have new leadership.
So if you inspect the room, (inaudible) is here, so that is mouthful but is waving at us. Ajit will be residing over in the territory now and so we pick those. They’ve similar -- they’re very close from a proximity standpoint, very tight connections with the west.
Of course when we look at our sales teams and how they’re working with multi-national deals signed here, deployed there, it's no surprise that there is a lot of link between the west design front and then the East Asia manufacturing front.
So it was similar in industry's trade link and proximity that led us to group that East Asia territory and then that leads the emerging markets, Asia which there just happens to be our fastest growing actually area, lots of diversity and complexity from a standpoint of languages and business practices and things like that. So we have a Victor Mieres who has been leading Asia and rest of world in its entirety is our VP of sales for that region.
And so when we pack these up, this is a preview of how we are now going to project our results to you moving forward. So you see the purple is the emerging rest of the world. So it's starting at a smaller level, but it's again the one that's growing the fastest.
And one of the things we do is looking to decade timeframe, so over the time when we look at our existing CAGR and project that forward a whole decade you are going to see these territories are probably going to be equal at that time if they shape up the way that we are expecting.
So anyway that’s the geographical footprint. I want to talk now about leveraging at or accounts that we are serving. I mentioned we are serving a lot of accounts that we are already doing business with most companies out there somewhere, whether it is a transactional elements, selling them a GPID interface board or selling them a state acquisition data logger and there is a lot of opportunity to continue to drive in as they grow or they expand or in R&D we can expand the manufacturing and for supporting manufacturing we need to get into R&D.
So there is a lot of repeat business. This a survey that we did to our own existing customer base and I am not surprised by the output by any means. So let me walk you through, first of all about 80% of our customers say we are going to buy, we are going to buy as much or more from you going forward. And then we got 3% that says I don't think we are going to buy anymore and I think this is a little bit of showing some validity to the data because I think if we weren't reaching out there and getting a portion of people that maybe we are extending a little bit beyond our means, I think that maybe we wouldn't be exposing ourselves or moving fast enough into these markets and then there are 17% that don't know.
And I'm hoping that at least some of that representation was in the audience today seeing some of the new products but that represents a fourth part of our population that we just have to commit to creating new products, create the new price performance points, create new functionality that will make through that we are servicing our customers.
So with that, we want to move from being a just a product supplier to our customers to becoming a platform partner to them. And move from a single point solution to them thinking like we do that this is a platform that they can optimize many different aspects of their business.
So I'll walk you through an effort that we've been underway with for the last several years to try and raise our value proposition from just you can technically solve to what does it look like from a business impact when you adopt graphical system design? And we have all kinds of anecdotes for that. This is an effort to process some large customers who have made big investments in National Instruments and get them to explain in their own terminology what kind of benefits that they receive. So this one is Phillips Home Healthcare Solution, a bridge from the message that you heard from Don, this morning at QualComm, and telling you how important it is to have text coverage and have text coverage within a short amount of time so that they can meet time-to-market.
Well, this is in healthcare and you can imagine there is quite a bit of testing that they need to do prior to launching their solution. So this is accelerated product development, regulatory quality compliance and productive test platform themes but we go through this exercise, we do a whole 360 with them, we talk to BCs on both their design and production side, all the middle management and we try and help them come up with their own way of describing what kind of business impacts that we have.
So you can see on the left hand side, we usually talking to their business, people that’s in this case Vice President of Quality and Regulatory Affairs and then on the right hand side, you see some of the amazing results that we’re helping our customers achieve. So, 86% reduction in embedded software [defects] after cost. So this place is phenomenal when companies and reduce the cost that it's taking them to get out all of their errors in their system prior to going to market.
You can see three months payback period were incredible when you look at those and these are coming from our customers and you are panned out. Another one is (inaudible) this is more in the defense line. The industries that we serve again, validation is very important. If we’re putting these things on into the avionics or into the radios that they are supplying so 92% decrease in its verification test time.
They are able to the third bullet down a 100 times more design variance tested. Again this is a common theme that you hear from QualComm is that as complexity grows in our customers' systems, it increases the number of test that they have got to run to validate their design, and their time-to-market is not getting any longer to compensate for that, so they really have to look for this productivity.
And then finally, this one is high volume production this is [Hella] major component supplier to automotive, so I will think that electronic wise anything on the body electronics survey automobile and you can see here we are not necessarily validating design in the R&D labs qualifying it, ready for production and this is actually production throughput. So you see 57% increase in production that’s throughput, 62% decrease in production test fares inventory, so remember in a modular approach bearing is also disrupted because we don’t have to take our whole system down, we can isolate through a fuel [replaceable] model that has taken a whole box outside referring to boxing.
So our customers are also seeing productivity and efficiency even in up time and serviceability of the modular based systems. Okay, so those are some of the examples we have more that are posted online and we will continue to produce those. I want to transition into another leverage point that we have and that is selling larger systems and it’s not just our sales force trying to configure larger systems and selling up it’s actually that our platform has now enabled our customers to serve or to help them solve larger and larger mission critical application.
And we are seeing incredible growth on these things where it is because the platform is there and products are there and its because we have this loyalty in our customer base, so that we have permission to continue to serve them at greater level, their expectations are going up and as a credit to our channel that is able to go and sell at a different level piece together the metrics of relationships within an account in order to close now these fields that are tens of millions of dollars and higher.
And so you can see it has been a growth driver for us. It's a little bit as business as usual, again because we are out there helping customers configure systems whether they are small, medium and large to us, it's all again LabVIEW based graphical systems design platform.
So this is where also we need forced multipliers so that we as a sales cycle increases as the complexity increases on these mission critical larger orders. It helps to have these partners. So we have 700 partners in our program, we continue to recruit and also we continue to evolve that program so you saw IBM on the space. So now this is one of the largest consulting organizations on the planet now who is getting aligned with our channel and our sales processes going into deep areas within our customers.
So the complexity of course is all of the options on the system design side and then in the end what the customers want is a fuller working solution before they are happy and in the middle is a lot of room for value add. So we deal directly with end users who are building their own and typically when we get involved with our own application engineering and customer support.
We have a following of these integrators and consultants that we spend a lot of time focusing on targeting, making sure that their networked and building relationships with our field personnel, so that as soon as our fields recognizes that this is something that is a little bit beyond what that customer can do and yet the opportunity is there, they do some matchmaking and they bring that consultant and integrator in.
We also have opened up and renewed our investment in the schools network that you will see. We have an incredible footprint with our LabVIEW community out there and it is using third party an opportunity to add on to that. So we have a tools network which is very easily accessible from within the product itself. So you can buy third party add on that you can add to our elements that's coming off the shelf of National Instruments and then of course I mentioned the AEs application engineers, system engineers and our service personnel to go out there and assist. Everything again took driving it from these elements and subsystems into working solutions.
You saw this morning. This is very indicative of what's happening in our marketplace is the expansion complexity user requirements and its driving to start every industry weaker from over communications, automotive to defense to life sciences. I don't think there's anything that's not being touched by some smart software based features that are driving up the complexity for design. So they need a platform to help them get time-to-market while these things accelerate through and then also efficiency in the production.
And I mentioned the alliance partner it’s a little bit of an evolution process but from day one, we realized that we needed a strong following, a strong supplement to our direct sales operation to make sure that we can again get leverage all the way from small to the large and in every corners of the world.
So you will feel alliance partners here in the shell from all reaches of the globe. I don't know if you’ve seen this but I wanted to again impress upon you the sheer number of elements that we have in the ecosystem.
I mentioned the number of alliance partner, but we have (inaudible) in the back of the room, he heads up our marketing as it relates to our outbound marketing under his leadership is our web team, we have a large investments in the web and he just told me this morning that we are up to 8 million visitors per quarter on that. So, again serving a 100 million engineers and scientist become a little bit more manageable if you can build that kind of infrastructure to communicate with your customer. But you just see, not only are they coming for a catalog pricing configuration health but we have registered user group, 450 plus registered user group going on around the world, each in their different languages and maybe in different networks or communities.
So this was a big part of our expense and our building of the infrastructure that support an ecosystem to give us that, again to give us that forced multiplier. And back on the large sale, I want to give you a little bit of color to what this kind of how we pursue these things.
So this one particular case study is (inaudible). So all things in your dashboard I mean our automobile is pretty much in the end going to be a rolling smartphone people are [long] and there is a lot of opportunity of course for that OEM and if you gone and bought a new car lately you realize how expensive and how much value that OEM is placing on that (inaudible) system. It’s high value add for them and of course you can see in the bottom picture it’s going to offer them a lot of ways that they can service you and get you continue to invest in their platform.
So that too is getting very complex just like the mobile phone lots of things happening in your car and not only it doesn’t have to be a smartphone but it also has to integrate with everything else that’s going on your car.
Doors, if you walk up now and you immediately the light on the handle comes on before you are even at the handle, you touch handle and it opens up, so all of that is sensors, actuators signaling and to get that completely integrated in with the automobile requires software, it requires regression testing, so that when you touch the handle the engine doesn’t start for instance and it’s amazing again, as we heard this morning, you change a line of code and you don’t know what that effect it’s going to have on the rest of the system until you test it again.
So in this case rapid evolution of standards is affecting them time-to-market again that’s the time-to-market again constraints is there. Automotive gives us global development designed here, deploy many challenges out there and exploit our global footprints and then in that case too subcontractors is very key to the efficiency of the automotive industry. And so the OEM, who wants to own your user experience with them, has to translate all those requirements down to their suppliers and the complexity is such that they can’t print a document anymore and just say this is your requirements documents. They almost have to sell them with a simulator what they want you deliver and so our system design platform is almost a communication mechanism between and the OEM and the suppliers, they are passing their requirements down through goals like this.
So in this case, again it maps exactly into our number one value proposition and we have all those complexity, we break it into the various signaling elements, we visualize it in a LabVIEW programming model and then we work through our customer to fix the right hardware element that's going to match their particular configuration whether it's size, whether it is power or whether it is somewhere on that frequency, sampling rates and dynamic range curve and then what kind of software of what kind of protocol do we need GSM, do we need Cellular, do we need in this case we needed to look at there and wireless video standards that exists and so we piece these things together both with elements from our technology and our product line and also in this case we had to reach out to four partners who has product and software that we can mix and match and bring in and in the end it was seeing integrated by a other large multinational integration partner of ours.
So in the end, why NI in this case? One, we are in that mode of managing both the OEM who had these specifications and we are able to work with the partner independently to make sure as we are going to proof of concept and going through the proposals that it was a corporative effort and it made sense to the customer. It looks like a single point of contact, etcetera, multi-continental coordination of opportunity to span two geographies and so we are very capable of getting us a worldwide sales team instinct with an opportunity manager and the rest of the resources all working together in concert and then the confidence of, [I] was held up because of our ability to really quickly prototype an element of the system and show in a very short amount of time how they were going to benefit from the automation of these things.
So the productivity doesn't just help our customers, it also helps our sales process because we are faster to some kind of demonstrable impact than our competitors are. And you can see that this prototype, the audio we built the subsystem form, we are able to reduce their test time through automation drastically, which really opened them up to the next round of investments with let's say multimillion dollar deal. It wasn't a big deal.
So if I can question on that. And then the strength of our platform, single hardware and software platform capable of testing this wide variety of that. And then in the end, I mentioned that as we expand into adjacent markets as we move from just transactional to transactional plus large system, large scale opportunity and sales cycle and as we continue to work the emerging markets as well as develop world we are being on continued (inaudible) of our expense maintaining a pretty stable cost of sale model.
So that's what I had for you this morning. I will be willing to entertain any questions that you might have.
Just on this chart here, being a good steward of the capital but did it get any real leverage at some point?
As a percentage of revenue (inaudible)?
At this point, I am going to talk, I will hand it over to Alex as far as the investment model. You know, I guess the leverage is we do see an ability to actually decrease then you had grown the revenue beyond that. I think at this point we're following a plan. I think the leverage is coming from our ability to really react and respond to this new round of hardware and these new adjacent markets with pretty much the same talent without necessarily retooling or doing any large new investments that we're able to retool or able to reorganize, redistrict and still maintain but right now. I will turn it over to Alex for future investments [questions] you had.
We can talk about that in a few minutes.
Unidentified Company Representative
Alright. Okay, thank you.
These are a busy day, busy week; we've done a lot of talking. And I am impress with these voices holding up as well as it is. Anytime my hands have been [crushed] about a thousand times in the last five days. Okay, my name is Alex Davern. I welcome you all to National Instruments NI Week. For those of you joining us on the web that missed the opportunity to see an absolutely fantastic key note this morning, I encourage you to take the opportunity to watch on that on the web it should be available later today. For those of you shareholders on the web and who really wonder are we making good use of the R&D dollars we are investing back in the business. There is no better representation I can give them, the key note from this morning so I would encourage you watch it. Those of you who came in person again thanks for making the effort to come to travel to Austin Texas in August when it’s 100 degrees and middle of vacation period, and I often get asked the question that why do we do NI Week in the middle of August, and the primary reason because it’s a great time to take our field sales force out of the field.
It’s pretty inexpensive time to bring them to Texas and it’s a time when the markets are not as active because lots of our customers are on vacation. So Pete mentioned that stewarding and managing the business to be optimal and the use of our assets is another example of how we do that.
So as I said may name is Alexander, I am the Chief Operating Officer here at National Instruments, I joined the company 18 years ago just shortly before the IPO and I am going to walk through a little bit of our financial history and our business philosophy of how we are trying to operate the business.
It’s pretty consistent with what many of you have been in the past and that’s very deliberate, our approach is consistent, it’s very much (inaudible) and very persistent. And you saw from today, a number of things I want to reiterate Dr. Truchard obviously saw the key note day maximum amount of innovative technology, coming to market at a time when it’s going to provide a significant amount of disruption and a significant amount of growth opportunities for National Instrument. So also coming to market at a time when the field sales resources that we brought into the company in 2011 are starting to ramp up the speed, they are starting to become effective in the field.
And if you know we added a lot of people in the field last year, it was also partially knowledge of the product portfolio that was going to come to the market at NI Week in 2012 and it’s going to come to market over the course of the next 12 and 18 months. That gave us the confidence to want to do that investment in the field because we see the leverage that will come from the [marrying] of the world’s best modular instrument sales force with the best technology needs modular instrument.
Dr. Truchard this morning talked about the unique vision that National Instruments has had and how he wants to change the world for scientists and engineers, and the business philosophy that we brought to operating a business like National.
Eric talked to you about the specific opportunities being created by the products that we are announcing today and not only today but the products that we are going to bring into the market over the last several years. In particular, he talked about the vector signal transceiver, a revolutionary product offering a massive disruption in terms of performance and value to our customers in a pretty large market.
This unique differentiation comes from LabVIEW FPGA. As he said at the end of his presentation, LabVIEW FPGA provides a unique opportunity for National because LabVIEW FPGA application only worked when targeted at National went hard way. That gives us a unique value proposition that no other company in the industry can begin.
This is a very high value, major leaders in the market as you saw today from QualComm. At 200 times improvement in their ability to characterize their devices and a massive improvement in their ability to be able to reduce their cost of test to make these enabling technologies we all want to use cheaper for us.
He talked to you about the unique differentiation we have in our field sales force. We have the world’s largest best qualified graphical system design enabled service and it is a massive differentiator in our ability to take our products to the market. And there's no one in the industry that has the capability that comes close to the skill that our engineers bring, the building measurement systems from hardware and software combined from user defined application software where they can work with their customers to build unique applications tuned exactly to our customer needs.
I am going to change topics now, a little bit of just talk about business philosophies. I want to first off start talk about what it is we’re trying to do with the company and most companies really are trying to establish a direction, I wanted to be very clear about who is inside your tent, who are your constituents, your stakeholders that you care about and who are not. And then our objective as a business is to grow in a sustained manner and drive sustained profitability. Those are our two fundamental business objectives.
And we’ve chosen as our stakeholders, our customers, our shareholders, our suppliers and partners and then our employee’s right at the heart. NIS has been one of the Fortune 100 best companies to work for in United States for the last 12 years and it’s for very deliberate reason that we do that. The company employs over 3,000 engineers out of our 6,400 employees. Their intellectual property, their dedication, their enthusiasm, their excitement for the solutions that we deliver is widely important to our dynamism in the market, our ability to be competitive and we want to be sure that we retain that talents and we can continue to recruit best and brightest engineers from all over the world.
And we look at our stakeholders and while we’re aligned and our customers need us to be grown and be profitable because they want to know that they can develop intellectual property on our tools today and they will be able to deploy that IP on the future technologies tomorrow, five years from now, ten years from now. And they want to know that their IP is protected, they are able to use it in a way that’s sustained and reusable overtime and that’s a very, very high value proposition to our users. We have a tremendous reputation in the marketplace for continuity. We are sustaining and supporting our software applications over multiple decades and many, many generation of processing technology.
Our shareholders want us to grow and be profitable for obviously reasons. They take a risk in investing in National Instruments. They want to earn a good return and since the IPO, National Instruments has provided a very good return to our shareholders.
Our suppliers and partners want us to grow and be profitable because they want to grow their business with us. NIWeek is not only a forum for our customers, our alliance members, our academic supporters, but also our suppliers many of which are here today. It’s convenient that many of our suppliers are also customers. It’s nice to have money go in both directions to create a line up. And we also get very good access to emerging technologies. We are able to immediate returns, such as always they call it overtime.
I often get questions about why we have so much cash and I am sure I am going to get it today so I am just going to answer them. We deliberately excluded from our set of stakeholders; bankers. We want to make sure that we retain control of decision making, realign all of our stakeholders are on the timeline that’s important for this industry.
The VST wasn’t start off four months ago designed and developed and released and then be in the market for six months. You see the evolution of LabVIEW FPGA started with the first beta version back in 1997. This is not an industry in which you invest for the short-term; most of our products survive in markets for 15 years and they have a very, very long life and it’s very important that we match the timeline of our stakeholders with the timeline of our business. And so we deliberately exclude any stakeholders who might have a fundamentally different timeline and could impact our decision making at critically important strategic times such as the great recession in 2009.
And when companies like Paradigm and Agilent were laying off 25% of their employees, we were hiring. Why were we hiring? There was no better time to hire the brightest engineers in the best universities in America than 2009. Why? Because nobody else was. And you talked to Dr. T about that and he emphasized it over and over again. The people we hired in ‘81-‘82, the people we hired in 1990, 1991, the people we hired in 2001; tremendous talent we bring in the company during the recession. It is counterintuitive to shareholder community at some level, but its one of the secrets of how you build a great business. Talent is at the core of everything we do.
Okay, so moving on, what are our strategic goals for ’12? Pretty straightforward; drive organic revenue growth and deliver strong profitability. As we talked about here, last year in Q3 of 2011, our expense growth year-over-year in Q3 last year was 30% and it was modest level of concern among the community around the table as to why we were doing that and would we be able to make it pass.
We made that decision because we see the opportunity in this market space and there's a window here for us to really accelerate our leadership in the industry and we intend to take full advantage of that opportunity. We are grabbing it with both hands to make sure we maximize the potential and we've obviously to make sure that we grow into those expenses and absorb them as we go overtime. And as we shouldered around, our expense growth has since then come down, matching our revenue growth that we saw a recovery operating income in the second quarter.
Now take a look at our revenue curve. Going back to the foundation of the company back in 1977, although you can’t really see that with a lot of resolution, but you get the picture. We’ve come a long way in a very short period in the last 35 years. We’ve had two down years in the history of the company. Not much of a surprise; 2001 with the major tech crash, had an impact on our business and in 2009, with the great recession we saw similar events that caused our overall revenues to fall.
And we started out in two years we delivered record revenue every year sequentially. Now if you would bear with me I would like you do me a favor and just lean your head a little bit to the left. Let your head a little bit to the left and look at our curve and see that the consensus estimates for this year pretty much gets us back on-track for the growth number that was implied before the great recession in 2009. We not only came through that recession at a record revenue year in 2010, very strong growth in ‘11 and now we’re delivering growth for the first half of 2012.
Now you will notice that we didn’t do that after the 2001 recession. We kind of lost three years and we never got those years back. And when we look back in time and look back in history, we feel we weren’t seeing persistence and aggressive of an investment during the ’01 recession as we needed to be. So we made a very deliberate decision, throughout the last eight, nine, 10 years to invest efficiently in our ability to create new markets that we will be able to recover rapidly from any recession and get back on-track pretty quickly. So I take great pride frankly in the execution of the company through the great recession and onto record revenue.
Now if we take a look you know a topic I know is interesting to everybody, Pete showed you this slides a few minutes ago, this is the breakdown of our revenue by order size and the blue represents the total revenue from orders under $20,000 and the red represents revenue from orders over $20,000 and then green line represents the year-over-year growth of the larger category.
And then just to put it in perspective that red line in Q2 of 2012 is about 2,500 customer orders; it was not one or two; it’s 2,500. The blue line is about 56,000, 57,000 orders and these numbers start to get pretty staggering. Pete mentioned earlier on 8 million visitors in a quarter; we have roughly 100,000 people coming to our website every single day, a 100,000 engineers looking for technical support or pre-sales opportunity to qualify their design whatever it might be and roughly a 1,000 of those engineers everyday press the button to buy something from National, about a 1,000 orders a day, 1,000 engineers a day making a decision to buy a product, a 100,000 engineers a day using the resources of our community, of our web, of our support to help them do their job better or whether to learn a technique with LabVIEW; they want to try and see if they can share a code with somebody else they can solve the technical problem.
So I mean by that reason I emphasize it is the level of engagement of our customers with National Instruments ranges way beyond the pure buying methods. They rely on our tools and technology and on our community, our ecosystem to do their jobs in LabVIEW long after they have made the purchase, so they are very intimate with National Instruments. They drive a lot of value from National Instruments and that gives us a great brand and position in the industry when we do then bring to market a revolutionary technology like the VST; we have a very receptive audience who wants to engage more with National Instruments.
So we can look at this shift in the mix of our business and the truth is there is a pretty big difference between the business flow of the GPIB board that a customer might buy to integrate in a test system for a few hundred dollars and multi-million dollar opportunity for infotainment that Pete talked about earlier on. They have a different sales cycle; they have a much longer sales cycle. They require more intimate knowledge of the customer and they require much more heavy use of partners and they are much bigger orders and they are a little bit more lumpy. So that’s just a reality of that business.
Now if we had one or two of them that will be a problem; the goal is to get thousands of them; at 2,500 orders over 20K in a quarter we are dealing with a large volume. Our goal is to make our large order business statistical and smoothen out by having a lot of them and over the last five, six, seven years we have done a pretty good job of that. The number of orders we are getting from customers now are 20K is massively greater than it was just four or five years ago and overtime they will start to smooth out and that’s our goal as we look forward.
So driving leverage into recurring that we talked last year about gross margins overall and for those of you who remember we had 78% gross margin in non-GAAP last year, an all time high and for the first half of this year with 77% and we did see some impact from the fall of the Euro during the course of the last four or five months that has a negative impact on our gross margin and then a modest impact from the large order we’re talked about in the last call that’s slightly below company average gross margins.
But if you sit back with the accountants in a room this is a thing of beauty right; 78%, 77% gross margin persistent over the course of last almost 20 years, its tremendous execution. You see very, very few companies with gross margins [growing]. And its a result of very hard determined work that started all the way back with what Dr. Truchard said at the start of the day, a vision, a graphical system design that's highly software centric and highly differentiated from the competition.
And you can tell a few things from this gross margin line. We are very highly differentiated. We are a software company. We added tremendous amount of value to our customers for the dollars that they spend with us. And the ability to sustain that from a company that was about $50 million in 1993, all the way up to the company that's well past a $1 billion in 2012, I think shows the longevity of our ability to sustain differentiation.
And I think there's really nothing we've produced that has more differentiation than the VST you saw this morning, the vector signal transceiver. And probably has more differentiation build into anything else we've ever done. Because the only tool you can use to operate that is going to be LabVIEW FPGA and LabVIEW FPGA will only work on National’s department, a very, very, very highly differentiated technology that has a lag, that will be a sustainable differentiation that we look at into the future.
Please show the investment slide, I think Eric may have also shown the investment slide earlier on. We have been very persistent and determined in our pursuit of our vision. We were very aggressive deliberately through acquisition and through organic investment in 2011. We have moderated our sense coming into 2012, partially out of concern about what's going on with the global economy which I will talk about a little bit later and we are now in the process of absorbing those investments.
But I want to make a point that the great recession offered a great opportunity to National Instruments to narrow the gap and scale between National Instruments and the incumbents, the 84% of the market that Eric talked about early on. We use the great recession as an opportunity to invest forward when all of our competitors pretty much were scaling back and this has allowed us to really expand sales and expand our differentiation for the competition and has really well positioned to take advantage of the turn in the market and new standards such as (inaudible).
Now although we scaled up the company, we’ve also looked for ways to optimize on costs and the percentage of our people that are now in the emerging countries has continued to expand quite significantly. And this is a way for us to expand our capability or moderate cost impact of that and we have leveraged that power to tap in to a significant amount of very talented engineers around the world who are able to assist us and drive very low cost development overtime.
Now the main topic of the conversation at NIWeek Investor conference last year was this peak you see in our year-over-year operating expense growth in the third quarter of last year. And we had telegraphed at the end of 2010 that we are going to be aggressive in 2011. We’re going to see a peak in operating expense growth in the third quarter, because that’s when engineers graduate and then that would dissipate and we would absorb that overtime. And we’re now at the opposite side of that the hub.
So in our guidance, we’re guiding to mid-single digital expense growth in the third quarter and we’re excited to see numbers very similar to that from a year-over-year point of view in Q4, and as a counsel this year I would said that as a forward-looking statement subject to risks that Dr. Truchard mentioned this morning. So I think we’re very well positioned now not only to have been very aggressive to absorb that investment to deliver, obviously record revenue close to $300 million in revenues in Q2; record operating profit for second quarter, but we’re also positioned to see a significant moderation in that year-over-year expense growth as we see some weakening in the economy
Now if we take a look at how we balance revenue and expenses and people is the vast majority of our cost, probably somewhere around 65% to 70% of our operating expenses are the personnel of National Instruments. So it’s a good way to take a look at our trends and our philosophy. And if you look through the 2000 [tech] problem we would keep an expense growth and revenue growth and headcount growth very, very well matched.
And in 2001 we faced a fundamental challenge; we faced a pretty serious recession. It had an impact on our revenue growth and we really had to do a lot of introspection to make a decision on are we going to now as a fairly small, fairly new public company focused on short-term profit during a recession as we get pressured from investors to do that, are we going to (inaudible) done and make sure that we drive long-term revenue growth. And while we have got a lot of pressure in the time not to do it, we went ahead and accelerated our investments and we took the operating margin impact of that over the course of the next several years.
Now looking back 12 years later, I have absolutely no doubt that that was the correct decision to make. We have created far more shareholder value by being aggressive in that circumstance and we would have had we taken a different approach and that’s the philosophy we’ve applied. We then moved over to late 2000s to try to bring things back in balance and get our operating margins back towards our target of 18%; we are getting pretty close to it before the great recession of 2009 when we felt our strategy was well battle tested, we continued forward and in the last couple of years now we are bringing those two numbers very much back in balance looking to drive towards our operating income target of 18%.
And we look that from an operating margin point of view and keep hearing in contrast that R&D investments with our operating margin you can again see the same phenomena, big jump in R&D investments coupled with a drop in our operating margin fairly good recovery for the targets of 2008, a pause ‘09 and then as we started comeback in 2010. In ’11, we made a decision to be aggressive and we did see impact on our operating margin in ’11; we’ve seen Q1 and Q2 of 2012 so far and I think we are on-track to match our operating margin that we saw in ’11, typically our margins are higher in the second half of the year than they are in the first half of the year, so we’ll see how that plays out. We think we’re managing profitability very well while being aggressive in trying to capture the market opportunity that’s available to us.
Short update on NI Penang. This picture was taken about 10 days ago, so we are not quit finished with that facility yet; we do anticipate moving in some time in middle of October, so we are about ten weeks out from occupying the building and that’s subject to monsoon rains in Malaysia, so I don’t think that as an absolute given, but somewhere in that ballpark hopefully by the end of October. And then we will start early preproduction qualification in November and probably start a modest level of production some time early in December and that’s our current and I will take questions on that if anybody has when I am finished.
Take a quick look at our performance relative to the competition, the main say US public companies in Penang. We have been a steady capturing market share over the course of the last decade. In 2009, we certainly start to market suffer all the way back to where it has been almost in 2002; 2009 was a very, very difficult year. We have seen our market share steadily increase; it can vary a little bit during I think the downturn and bounce back of the recovery year, but a fairly solid upward trend at the right.
And on course that we believed is the commitments with the various companies are making and their ability to make investments in the industry. When you look at the overall R&D spend of the primary companies in test and measurements, NI is in the light blue and you can see, if you go back to 2000 we were just above the lower tier of the T&M companies in terms of scale. But we were dwarfed by these giants of R&D; Paradigm spent seven to eight times more than we did in R&D at that time. Agilent spent 15 times more than we did in R&D and the picture has changed dramatically over the course of the last decade.
You had a number of companies to scale back fairly significantly in R&D investment that don't have this capability within their business or the philosophy to sustain that. You've had a number of companies that are particular who scaled up through acquisition and then NI has been the most persistent organic investor in terms of driving our R&D capability. And we are now reaching a stage we've got three or four companies that really have the upper end of capability within R&D.
Our goal and expectation over the course of next five to 10 years is that we see our positions strengthen significantly in that timeframe. Its our intent to continue to drive the business forward from revenue to maintain our gross margins, to maintain strong profitability to be able to fund this investment, so that we can realize a division laid up by Dr. Truchard and that we can execute on gaining market share.
Now no presentations for me would be complete without a look at the purchasing manager’s index. I am going to spend a few minutes on that. For those of you who are veterans at NIWeek are talking to me will know that the purchasing manager’s index globally is a weighted average of the local purchasing manager’s index in about 22 countries around the world. We use it as a metric because we sell to people who make things, people who design things and make them.
And this is a pretty good way to look at the weighted average of the globe which is a pretty good reflection of our geographic distribution and you’ll know that if the PMI is above 50, that indicates that industrial production globally is likely to expand in the next six months and if it's below 50, then it’s likely to contract and you can see obviously going back to 2000 here , the recession of 2000, the events of 9/11, invasion of Iraq and so on all of the way up to the great recession and the scale of that decline and then this recent drop-off we’ve seen in the PMI especially in the month of July and down to about 48%.
Now we compared and contrasted our business, I am going to map that against the two elements of our business I showed earlier on. Our broad-based business of orders under 20,000 has historically been very highly correlated to the broad base industrial economy. I think everybody is aware of that and you can see that pretty clearly, graphically from this chart.
Our larger systems business, which is where we’ve been making our greatest fundamental investment, the platform is of LabVIEW, of CompactRIO, of PXI, manifested in the VST today, that’s where we see the greatest amount of separation between the performance of National Instruments and the PMI itself. It’s a little bit more choppy, but it fundamentally has been the same separation from the performance of the PMI. This is now over 50% of our revenue and that does change the flow of average order into the company which has increased significantly over the last five years. When we put those together and you look at everything together, you can get a kind of picture that shows you we came through the 2000 highly correlated to the PMI and that correlation has been somewhat dissipative overtime.
We’ve been able to drive better separation from the PMI, with the exception of the great recession over the last four of five years than we did in the previous second and we believe that’s a direct response to the stimulus we put into the system to ensure that we’re able to gain market share.
So I’ll close with our goals in 2012, the first flight to New York may be leaving soon so say good bye to these three gentlemen. Thank you for coming. The goal is to drive organic revenue growth very clear, drive strong operating margin in 2012 to enable us to continue to execute on the vision as you saw laid up by Dr. Truchard this morning.
To be able to drive good value for all of our stakeholders, our customers. As you saw there are thousands this morning, our shareholders which obviously are represented by many of the individuals in the room here today. Our partners of which as you go through this trade show floor you will see over a 100 of our partners displaying how they built their company by using our tool, how we enabled their careers to give them the chance to deliver their differentiated value to their customers.
And then by our employees where we are creating a career for thousands of the brightest young engineering minds in the world here at National Instruments. With that, for questions I will ask Dr. Truchard to come join me as well and I don’t know if you have got a mike, but you are certainly welcome to join us and we will be happy to take your questions. Thank you.
Hi, Alex when you consider the number of larger orders or the increase in the large orders are you talking about the total dollar volume or the number of individual orders?
So when I am showing that year-over-year increase on that chart that’s the dollar value, but the year-over-year increase in the dollar value of the aggregate of order is over 20,000. Thank you for your question.
Yeah Alex, I hate the doing this simplistic math, but when you put up the slide that there is $2 billion in revenue in 2016 I automatically poured over your CAGR and I am looking at a 14% revenue CAGR from 2011 levels. So am I to interpret that as you are backing off from your kind of 20% organic growth rate that is your long term target. I don't want to read between the lines too much.
No, that's an excellent and you are very good at math. Being an engineering company by every employee I presented they obviously do the exact same thing. Yeah we have in setting our targets, our goal as a company is to deliver sustained revenue growth of 20%. However we have to be cognizant of the reality of the economy we operate in.
The last five years we saw the worst industrial recession in modern history and that's pulled down our CAGR that we saw from 2007 to 2011 timeframe. And what we see right now is a pretty weak economy.
My personal opinion for anybody who may want to hear it is when we see the (inaudible) right now I think that the industrial economy is going to struggle quite a bit over the next 12 to 18 months. So that's factoring in a conservative view, a cautious view of how I think the industrial economy is going to play out.
Then so I guess given that 12 to 18 month kind of difficult demand environment or at least the expectation at this point, you talked about hiring statistics I believe on slide 12 kind of (inaudible) to a mid single digit year-over-year growth rate in Q3 and Q4. If we are in kind of the sustained lethargic environment from an industrial demand point of view, do you see any trend like 2011 where you aggressively invest in order to take advantage of weakness from peers or do you see the investments that you've made can largely sustain some of the traction and momentum that you have.
If you go back a little bit (inaudible) we moderated our growth ambitions a little bit in 2009 in the face of what we saw was a really, really tough economic time. We saw tremendous growth in 2010 and 2011 and we responded to that with investment. As we are coming into 2012 we were a little bit cautious about which way the industrial economy was going and that’s why we pulled back to moderate and absorb those investments we made in 2011.
So we will be responsive to what we see in the broader economy, but in the context of where we need core expertise to drive our platforms forward, we will probably be always be hiring. So we're going to have a very strong eye to the vision that we want to execute on and that five-year timeline, but we will moderate as you saw in the driving example today up on stage.
We will moderate the pedal based on what we see in a broader economy and I will ask Dr. Truchard will care to comment on. He has been through more recessions than I have been.
Well, we’ve invested and now my goal is to see that we get a return on the investments. I think that’s the right goal to have.
So on the long-term operating margin goal of 18% and you haven't achieved that in the last 8-9 years. So how long term is that goal?
That’s a very good question. You know, as we came through, as I described earlier on, as we came through much of the last decade, we’re very focused on building out the infrastructure necessary to be able to capture some market opportunity we saw.
In areas like RF test for example, the table stakes, the cost to be a player are quite significant. And in order to be able to penetrate in to that market, we had to make some pretty significant forward investment. Now as we look to the future, there is a number of areas where we hope to drive leverage.
In RF test, we believe we’re gaining critical mass, in the embedded space, I think we’re moving towards critical mass and so I think the opportunity is there, but you have to remember, in early 2000s, we launched on some pretty ambitious initiatives to take our market position in data acquisition and drive in to brand new market space in embedded, was no small undertaking.
We decided to become a major player in RF was no small undertaking. So we took on some very significant challenges but opportunities at the same time and as Dr. Truchard said having made the investment now we are looking for a return on that investment.
Can you discuss in terms of the vector signal transceiver. Is this the first time that you've offered such a compelling performance advantage over Agilent and/or any of the kind of rack and stack competition or is it a function that you were always able to get there about a lower price?
Although you have quite a number of products that are offered substantially for performance improvement, this one centers on a major market based RF communications test. So it really has the combination of the market space that has a lot of revenue in and real significant performance improvement in an area where these mission critical applications and in some cases you heard today. I guess the markets (inaudible) 802011 HC chip which is a big deal and then of course in the future with high volume production where again it's mission critical. So we see this is really having the kind of characteristic where we want our revenue opportunity on one side and a significant advantage from a performance point of view
Out the $1 million Alex, do you have a sense as to how much -- what percentage of that is from the R&D budget, the other what percentage is from investor production side. So that will be part one then I will have a quick follow up.
I'm going to see if (inaudible) wants to, he just joined us at the back of the room. If you care to give his thoughts on that.
Unidentified Company Representative
Yeah, I mean I think there's quite pretty evenly spread and we certainly feel a lot of opportunity in our test business and the production which kind of comes from that production part of the budget, but traditionally our broad based business and data acquisition and LabVIEW and much of industrial embedded business is coming from long term R&D spends and R&D budget.
So if you look at the other way you dissect that your business as a small order and a large order. Is there any, have you discovered a trend, maybe your large orders more tilted towards the one particular application meaning R&D or industrial applications. So just help us understand your business dynamics?
I can make a comment on that and (inaudible) jump into. So if I, clearly as I've talked about the thing about test and embedded are pretty different in this respect and both of them show up in those large orders. So PXI, automated test applications, some in R&D quite a bit and manufacturing and production are certainly a big part of our large orders.
The other part of our large order is our larger volume deployments of our embedded platform. So the average selling price of a single unit might be relatively smaller than PXI, so it gets deployed at higher volume. Back to your question I mean where that gets budgeted I guess it depends on the company and then on R&D expense. Then it's get procured as part of the deployed system.
So just as an example this year our two biggest orders, one was a high volume production test application, the other was an R&D invalidation application. So it's quite a mix across the two.
I asked John this last night, but I will ask you guys this as well, if you look at the industrial embedded market, I think the expectations are going to go from 20% to kind of 40% of total revenue. So we've got a quadrupling of revenue by 2016. How linear do you think that growth is going to be in that market versus more of a parabolic type growth as we move in towards the latter half of this period?
Certainly, our embedded platforms are seeing tremendous growth over the course of the last five years, over the course of the last 10 years. So I would expect them to lead the company and I think you’re going to see, logically if we are going to hit our overall numbers, you are going to see a bit more of a steeper curve as we get towards the latter part of that 5-year time.
Just back to Penang, as you ramp that facility (inaudible) what would anticipate the gross margin impact because that you scaled the Hungary a number of years ago, there was some gross margin, noticeable gross margin impact and still that was optimized. But given that you are a larger company now, what would you expect the impact to be?
Well, Hungary is an interesting experience for us. We’re now pretty (inaudible). We were when we did the Hungarian plant expansion. So we can have the capability to absorb the impact of that capacity expansion much more readily now than we did then.
But the other thing that happened when we brought the Hungary plant online, which was in October of 2001, as we’re going through a pretty bad recession at the exact same time and it was the impact of that additional capacity bill was exacerbated by a reduction in revenue right at the time that the business came online, right after 9/11.
So that had a noticeable impact. Our expectation going in to 2013, is that we’re looking at probably a $3 million to $4 million increase in fixed overhead beyond revenue. So you’re looking at a 30ish basis point impact on gross margin in 2013 from the expansion of the Hungarian or the Malaysian plant. So, it's there but it's relatively modest. It will take us much less time to absorb because the scale we are now versus when we did the expansion in Hungary.
And then just a follow up on the industrial embedded space. The big order, the eight figure deal was PXI. Going out in the future, can we expect eight figure deals related to your industrial embedded applications?
You got your $2 billion number, how is that. We will see, certainly we see a lot of opportunity in the embedded space. It’s taken us 30, 60 years to get to our first $40 million order. Hopefully we won’t wait 36 years before we get the second.
So we will be trying and I think the opportunity is there, we will have to wait and see what happens.
You going to have to forgive me for being so (inaudible) but I am still not latching on to why with your vector signal transceiver, it’s so special to be able to tinker with the code on FPGA because I thought that’s where you are already able to do in CompactRIO and that’s the whole point of making it faster. So try it again because I haven’t got it all.
So no, you are exactly right though. You have been able to that. Our customers have been able to that in CompactRIO exactly. For a class of applications that CompactRIO serves which is these embedded systems with relatively lower speed IO to choose an embedded system. So difference is taking that technology to high frequency RF measurement systems which significantly is a whole different business opportunity. It’s technically different in some ways as well. The same environment and it leverages a lot of our capability in LabVIEW.
It is significantly more difficult to basically run something at hundreds of megahertz versus hundreds of kilohertz, so there is quite a bit of work we did under the hood to scale that architecture into a very, very high performance application, conceptually the same.
Yeah, conceptually you are exactly right, conceptually it's the same thing just for a much higher performance application and a different market opportunity.
Any remedial question about the VST are welcome and understood. It's complicated, so if you have any questions that.
We have time for a couple more, anybody.
Just to ask maybe [Manish's] in a different way, we understand you won't potentially take 35 years to get another eight digit type of order, but I think there's some investor concerns that you have a big bogie that's coming through your P&L this calendar year and are you setting up very tough comps in the following years.
So could you help us understand is this the target rich environment of those types, maybe not a $40 million order but 8 digit types of orders, do you think that this is just the initial foray and there's significant opportunity out there, if you could help kind of feature it that way.
I mean, certainly if the question is there significant opportunity out there, the answer is absolutely yes. Did we expand that opportunity significantly today, yes. But I really don't want to speculate on the closure of large orders that might happen into next year. You know we look at the impact of that order. Some are in and around about, you know it's going to be about $20 million impacting Q2 and $20 million impacting Q3.
And so we understand the dynamics of that will play for next year, and certainly Pete and his sales teams will be looking at opportunity pipeline and we hope to see more orders of that scale, but we will just have to (inaudible)
Not much of our investment is also, what it takes to support large orders so we can look in the rearview mirror and see that we have been investing in services, calibration, all the elements that you would like to see for customers at this level.
I will say that in my 18 years at the company, we've probably broken through the largest order ever. I don’t know 15 times, in 18 years I have been here. So I would expect it will continue to break through that barrier many times as we go forward.
Okay, we will take one last question if anybody has one and then Julia is going to run you down on the rest of the itinerary.
Okay I think we are done. Okay, thank you very much for coming. Enjoy the rest of the day and I will hand it over to Julia to brief you on the remainder of the afternoon.