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Executives

Alex Davern - Chief Operating Officer

Analysts

Brian - Deutsche Bank

National Instruments Corporation (NATI) Deutsche Bank 2012 Technology Conference Transcript September 11, 2012 11:10 AM ET

Brian - Deutsche Bank

Welcome to the National Instruments presentation here at the Deutsche Bank 2012 Technology Conference. With us today, Alex Davern, he is the Chief Operating Officer for National Instruments. He has been with the company for at least 18 years, almost from the founding. So he knows it well.

They're a leader in computer-based testing and automation, their record revenues in Q2. The company is very broad-based. They're in the test and measurement space. There's a lot of players in this space. One thing we like about this area is its stability but also its profitability is an area of our industry that tends to be very profitable.

So, Alex is going to talk a little bit about the company, then we're going to jump right into Q&A. Alex?

Alex Davern

Thank you very much, [Brian]. I wonder if we could close out the door at the back. Thank you very much. Appreciate it. So I was going to do three or four introductory slides. I recognize some of the faces in the room. So you may have seen the presentation before and then we’ll switch to Q&A which I enjoy much more than repeating these slides I have to say.

So as Brian said, National Instruments is a leader in computer-based measurement and automation. We crossed over $1 billion in revenue last year. It’s a very much an organic growth for company. We have global operations, over 6,000 people, half of which are engineers. So we invested tremendous money into intellectual property of our people.

Very broad and diverse customer base, you can see from our revenue profile here we’ve had a tremendous success in long-term sustained growth at very high gross margins, approximately 78% gone all the way back to the IPO, back in 1995.

We saw two dips in revenue, in the history of the company. One in 2001 when the technology bubble burst, some of you guys are old enough to remember that one, and obviously, in 2009, when we went through the great recession. But we rapidly recovered in 2010, had major new record in 2011 and we are on a run rate right now in Q2 to hit about $1.2 billion in revenue in 2012.

A very broad customer base over 35,000 different companies bought from us last year. Our average order size is about $4,600. So it’s a fairly low ASP and that results in about a quarter of a million purchasing decisions by our customers around the world each year. And that gives us a lot of diversity and allows us to be able to ride through some of the disruptions that you see in the market occasionally.

No industry is more than 15% of revenue academic, what our software penetration to acquire new users for our core application software is the largest revenue source for us from an industry point of view. It’s about 12% of revenue.

And as half of our talent is, half of our employees are engineers and NI is a very high intellectual property company as a software player. We are very focused on culture. We have been fortune 100 best companies to work for in America for the last 12 years, one of only four technology companies that have survived since 2000 on that list.

We retained control of our business by retaining a strong cash position. So we have a stable business. We invest aggressively in it and we retain sufficient cash to ensure that we control the decision making during the downturns that we see occasionally like we did in 2001 and 2009.

Now simple cliff notes on what we do? We are essentially disrupting the intrench industry of box instrumentation. If you are familiar with companies like Teradyne, Agilent, Keithley, Rohde & Schwartz, et cetera, you understand that the engineer in the world today has been served for many years by this fixed function expensive devices, where the incumbent suppliers will define the functionality of an instrument and deliver the computing and the instrumentation measurement science in one closed device.

National Instruments for last 20 years has been ripping that industry apart. Our approach this industry is to provide scientist and engineers with modular approached instrumentation.

We put the measurement science on the plug-in board, that can plug into a PC or an industrial PXI system and we allowed the engineer to build his own instrument through software, and its our software position that revolutionize the industry combining our software and hardware with general purpose technology to provide a much faster, cheaper and smaller solution for the customer.

We are targeted two primary growth areas, one is test and measurement. It’s about a $21 billion market. It is the origination of our market position. NI has a very, very strong position in general purpose test. We are the leader in the application software for designing measurement systems. We are the leader in the networking communication technology for integrating measurement systems and we are the leader in computer-based measurement.

We are branching out rapidly into four additional layers in the test and measurement space. The semiconductor space which has traditionally been served by companies like Advantest, LTX-Credence, Teradyne, et cetera, and into the wireless communications which has traditionally been served by companies like Anritsu Wiltron in Japan and Agilent here in the United States.

Real time test for testing devices that go inside of cars, inside airplanes, and then structural test for monitoring health of bridges and other structures that need measurement, a high precision to monitor their health.

We are also leveraging our investment in high-speed measurement and control into the area of industrial and embedded. This is a completely new space for us which we started our first product back in about 2005. It now represents about 25% of our overall revenue and as per our measurement science is used inside of machine and example of this would be optical surgery devices for doing laser procedures on the human eye, are devices for treating subsurface tumors with frozen hydrogen. We are using our measurement science inside the medical device in order to control that medical device and enable its operation.

We have a very focus determined effort on investment. You will notice as we invest in our field sales resources over the course of the last decade and more. Through both downturns we continue to be an aggressive investor in our business. That’s one of the key elements that allowed us to rapidly drive back to record revenues in 2010, 2011 and here in 2012.

In R&D, you see the same story. We take a very long-term view to the health of this business. In our industry, it takes five to six years to get a major new product to market in a new market area.

So you have to be determined. You cannot let your plans be upset by the short-term movements of the broader economy. You have to be very, very focused and if you deliver that integrated solution you then get a very high reward.

Look at our operating model, going back to the IPO in 1995, our target is 18% operating income. We went and successfully post-IPO delivered very good growth and very good profitability. We then hit in the 2001 timeframe, when we saw the first tech bubble bursting in technology sector in ’01.

And as a young fairly small technology company we have to make a pretty tough decision, do we focus on short-term profit in this first major recession since we went public, or do we focus on long-term growth.

We made the decision in that circumstance to raise R&D spending from 12% of revenue to 16%. We have sustained that ever since. We took a little bit of hit on operating profit for while. We are able to rapidly adjust rest of the business model to drive back profitability hitting very close to our target in 2008 before we saw the Lehman Brothers collapsed, rapidly recovered in 2010.

Typically our operating margin are lowest in the first half of the year, you can see Q1 and Q2 here, and highest in the second half of the year. We typically have the seasonal pattern where revenue falls sequentially from Q4 to Q1, which reflects the budgetary buying cycle of our customers and in Q4 as usually the peak quarter for our business and peak profitability for our business as well.

So in short, our objectives are pretty straightforward, drive organic revenue growth. We have had record revenues over the last several years and look forward to the same again this year, as well as $1.2 billion run rate in Q2, and we are very focused on driving strong profitability to sustain a strong profitable business that can enable our view of long-term investment that’s desire to drive value in this industry.

To put this in perspective, when you look back over the last 10 to 15 years, when we went public back in 1994, we came public at a split adjusted $2.43. And so while the industry that we serve does go through some ups and downs, when you look at the long-term return, our approach has delivered, I think, our shareholders have been very satisfied.

With that, I’ll be happy to take your questions.

Question-and-Answer Session

Brian - Deutsche Bank

Thanks Alex.

Alex Davern

Thanks Brian.

Brian - Deutsche Bank

So what are your -- who is your, looking at your customer base, is it inside the R&D, obvious the industry that you serve that is primary buyer, and who is the primary buyer? How should we look at you from the standpoint of budgets, what are your key drives like in regard to industries are you inside of labs and carriers as an example, are you inside of box vendors, are you inside the R&D labs of…

Alex Davern

Sure. Good question.

Brian - Deutsche Bank

… just talk more about that?

Alex Davern

So I’d put a landscape out again just to remind at $4,500 average order size, we primarily sell to engineers, that’s an engineer to engineer sale.

Brian - Deutsche Bank

Okay.

Alex Davern

Overtime our larger orders, which large is a relative term, we refer to as orders over $20,000 have been increasing as a proportion of our revenue, and we are progressively moving up from the engineer, to Engineering Manager, to Engineering Director, to Vice President of Engineering and even in cases up to areas of the COO, CFO, CEO, so it’s been a progression of moving up as we’ve increased our value.

Now when you break it down in terms of the, let say, the application space, broad term to use, we take about, 20% of our revenue comes from government funded initiatives, things like education, the National Research Laboratories like Los Alamos, NASA, et cetera around the world.

About 40% of our revenue comes from commercial R&D. So research labs the companies like Nokia, Boeing, Ford, Pfizer, across the perspective. So it’s a very broad industry base.

And then about 40% of our revenue comes from production test, end of line production test. So it’s in -- in the advanced research 20%, 40% in the development of products and then about 40% in the actual production process of products. I think that answers…

Brian - Deutsche Bank

Okay. And then kind of slicing it another way in terms of end markets that you serve, obviously you mentioned government is about 20%. What are the other major end markets, medical?

Alex Davern

So, well, it’s again comes back to the diversity, you want to think about National Instruments having an opportunity to sell wherever there is an engineer trying to design something or build something, whether it’s an aircraft or cell phone or semiconductor chip or an automobile component or medical device.

So wherever engineers are and so it could difficult for buy side analyst to really get a grip on the drivers of our overall business and from many, many years, I’ve tracked our revenue performance, I didn’t have enough room in the slide presentation today, but if you go to our website Investor Relations you’ll see it.

We track our revenue performance compared to the global Purchasing Managers' Index, the Manufacturing PMI. And when you look at that element, our objective there is to outperform the PMI. But our business is correlated fairly highly to the trends in the overall global industrial economy. And that’s fundamentally because we sell to people who design things and build things. And so the competitive business is to better our businesses and so forth.

Today, the PMI is well below 50. It’s around 48 at the global level. We’ve continued to drive good revenue growth to 50% growth in Q2, regarding to double-digit revenue growth as we look for the full year. So we’re typically have been able to perform well when the economy is weak, better when the economy is strong. So we have a very definite correlation with the overall broad industrial economy.

Brian - Deutsche Bank

And then one of the things I have noted like with [XC] and other companies, we’ve been involved with on the testing side as we tend to call them canaries in the coal mine. Speaking of your index or whatever the economic connectivity you want, we tend to see them doing better in the early stages of an investment cycle i.e. when we’re coming into the development of say 4G, they will start slacking because people have to buy, develop ahead and then when you start seeing slowing, they are generally the first to see it. Do you have that same correlation?

Alex Davern

Yeah. I mean, I do -- compare it with [XC]. I think, it’s useful because again many people on the investment side, there is a lot of telecom test companies with people who can get -- try to pigeonhole national means they are kind of like these guys who are like the Teradyne guys. So I’d encourage you again to come back to the broad diversity of our business. No industry is more than 10% except academic.

So certainly we play in that space. But the concentration of our revenue is much lower. We typically don’t sell to network providers. So we are not in the network managing side of the telecom infrastructure. We’re in the device side, design and test. So the wireless device that would be on the network as oppose to the network itself.

Brian - Deutsche Bank

Then you mentioned the way that you design your equipments that are software driven. Talk a little more about that. Why is -- what is unique about that? We’ve seen obviously Agilent and others and used that equipment when it works in terms of electronics. We use a lot of Agilent gear. It was always very specific to what we’re testing. It was really Java navigation system, limits of that were specific to testing (inaudible) or whatever.

In knobs and connectors and very similar, very specific to the assess we are engaged in. Can you talk a little bit about what does the box look like. When you’re building and you’re testing that is mainly not more computer-oriented anyway. So there is the -- less of a need for physical interfaces. Can you talk a little bit about that?

Alex Davern

Certainly, so if you look at the instrument industry, there are three things you need to make a measurement. You need an analog to digital converter, so you can convert on analog signal, whether it’s electrical current or pressure or temperature whatever it might be into digital bit stream. So you got to convert the real world into digital.

You need a computing engine to be able to process the ones and zeros. And then they need some software or firmware in order to interpret them to tell you it’s an FFT, tell you what the peaks are, whatever it is you’re trying to understand. The box instrument guys for the last 50 years have combined all three elements into one fixed function device.

Example you gave of [aeronautical], I’m not sure exactly what the application was but you’ll find that the guts inside most instrumentations are fundamentally the same. The expression in the instrument company lets you see is limited to that particular test are trying to sell you that product for.

But in many cases, the actual technology inside the instrument is capable of making vastly more measurements than are exposed to the engineer. Because it’s ones and zeros, you are trying to digitize the signal at a certain frequency with the certain level of accuracy.

So at National Instruments, we do is we are trying to leverage Moore’s law and I have been doing that successfully for the last 20 years. Instrumentation hasn’t changed for 50 years. If you look at the world of computing and you look at the world of software and you look at the world of networking, the amount of value that there is in that overall ecosystem to the engineer is enormous.

So we allow our customers to use the latest computing power. We provide entities to them, expose the technology to them, allow them to build the instrumentation themselves in software providing a very, very high level of productivity tool. So that they can use an iPad if they want, they can email the results if they want. You can leverage the rest of the ecosystem to deliver a very differentiated value proposition.

Now, the other secret to what we do is that the instrument companies sell you the computing power inside the instrument. We encourage you to go buy it from HP, Dell, Lenovo, whoever it may be.

When they redesign their instruments every five or six years, we’re leveraging the latest computers every day. So we’re able to take advantage of commercial technology that comes to market years in advance of what the instrument companies are able to do. And as a result, we’re able to deliver much higher performance and a much smaller form factor at a much lower price.

And when you look at our business model and you compare it to the traditional instrument companies, the first thing you’ll notice is gross margin. They are down in their 50s, we’re up almost in 80.

And the reason for that fundamental difference is we have outsourced the delivery of the computing, power, the processing, the hard drive, the memory. We’ve outsourced that to the people who could do it at the absolute lowest price in the highest volume, and that’s the computer industry. That’s the fundamental difference between the business model of the two companies.

Brian - Deutsche Bank

So that’s not a -- to me, that’s a thing that would be a barrier for them to doing that and why haven’t they done it. What is the -- what keeps an Agilent in the mode they are doing, just kind of the way that they sell their gear. What’s the lock-in here in terms of (inaudible).

Alex Davern

There is three fundamental barriers to taking our approach. Number one, if you are instrument company, you got to chose to give away half your revenue, if you want to choose to compete with National Instruments. So we give away the computing side of the whole house to the general purpose industry and so we don’t get revenue from that.

And a first challenge that any public company has, if you want to introduce any business into their business that results in cutting their business in half, that’s a pretty difficult thing to do. The second challenge is the core technology in software and the best way to understand National Instruments is we have an OEM relationship with a company called LEGO, the toy company. The most successful product in history of Lego is the product called LEGO MINDSTORMS.

If you have young kids in grade school area, you may see it in their classrooms. It’s robotics building tool for children. They can build automated robots. That’s our software technology OEM to a toy company to teach eight-year olds how to build autonomous robots.

If you think about the power of that opportunity, it’s a tremendously powerful, very easy use tool that allows the domain expert, in this case a child to build the robotics toys that they want to build themselves.

Now, if you try and take that up to the engineer and the scientist, we give that same power to the engineer and scientist. LabVIEW used in the market are core application software for 25 years, came out on the Macintosh pre-windows back in 1986. It’s massively patented. It has an enormous install base. It’s why academic is our number one industry and so it’s next to impossible to replace that market position in software in anything less than a decade. So those are the first two points.

The third point is the channel that enables to sale. Our channel is a consultative engineering channel. All of our 700 field employees are all four-year degree engineers. They are all experts in LabVIEW and modular instruments. They enable their customer to build their own device and so it’s just a completely different ecosystem. It’s a totally different vision of how you approach the market. It’s a completely different product.

Brian - Deutsche Bank

It’s really more of a software company -- software design kits.

Alex Davern

Yeah. I mean we enable -- that's a good way to look at it. We enable the engineers and scientists in software to design the exact instrument they want for their application. Some of their value that is interesting, so LabVIEW not only programs on a PC level, it will program on a Mac or on Windows but it also will program down to a real-time operating system to offer very high reliability. Vast majority of instruments have the real time operating system inside. And LabVIEW is also an FPGA programming tool.

So we enable our customers on a desktop at LabVIEW to deploy their application direct down to an onboard FPGA from Xilinx on our measurement hardware. That means a number of things they can customize their instrumentation down into their firmware level which is very valuable. They can protect their intellectual property. We have many customers who want to get a measurement device for the product they bring into market.

They don’t want to go to the box instrument guys and teach him how to do the measurements so that they will build a box that they will sell to them. Because they know they’ll then turn around in a semiconductor space in particular, in wireless space also and they’ll sell that to all of their competitors.

They want to keep their core IP internal. So they want the building blocks. They want the core elements provided to them and then they won’t be able to tweak it at their own IP and retain it in their own -- inside their own company and now have that technique get shared by some box guy to the rest of the world.

Brian - Deutsche Bank

Any questions (inaudible).

Unidentified Analyst

(Inaudible)

Brian - Deutsche Bank

We have a microphone there. Thank you.

Unidentified Analyst

When you were talking about those barriers entry, first one I understand, if the company having to get away half it sales is a pretty strong barrier for you from our perspective. The software and core technology that’s always a little more difficult from our side too. So we’re just kind of talk about it and then you mentioned -- you talked about the consultative sales for -- so could you just talk a little bit more about -- how that would compare to your competitors and why they wouldn’t be able to do some thing like that. You had listed that as one of your barriers. So please elaborate on that?

Alex Davern

Absolutely. It’s a very good idea. So if you look at the tools that we provide. Let me think of a good analogy that would help you understand. We teach people to fish. We don’t give them a fish, that’s -- I guess, you are familiar with that euphemism.

Our whole methodology is to teach them to build the instrumentation themselves. The typical methodology in sale in the box instrument company is you go to the customer, you drop off the box, you give him the manual and they will turn it on and they will press the button and they will be able to make their measurements.

Our sales force is much more deeply engaged with the customer. In a learning experience of exactly what the customer wants. They are teaching about our technology. They will be helping him to build the application. And that raises the cost of sale in one dimension but it makes our applications then custom designed to the needs of that particular customer and it makes us very, very sticky for that customer.

They’ve taken the time and energy and effort to build their own intellectual property into their measurement system. Now, it’s theirs. It’s much more personal to them, much more attuned to exactly what they need. There is nobody else on the planet that will sell an instrument that does exactly that because this engineer designed it for his own custom need himself.

And so that creates a very strong barrier to entry. And I think the best way to look at it, I don’t have the slide here with me unfortunately but if you look at our investor slides, you take a look at our gross margin, over the course of the last 15 years, you will see how incredibly stable and steady that gross margin has been in that timeframe. I think definitely the best evidence I could point you of strong barriers to entry. I apologize. I’m going to switch this thing off. It keeps ringing there. I want to just make sure that I answered your question.

Unidentified Analyst

Yeah. You’re correct.

Unidentified Analyst

On the gross margins, most companies that have an 80% gross margin and a software model have an operating that’s nearly twice what yours is. Is that a function of the relative maturity of your business or is it -- it just such a sales intensive business that’s the operating margin that’s comes with model you have?

Alex Davern

I think the real point is from our point of view is the function of our ambition to grow. I would tell you quite clearly and I get pressure on this reasonably frequently from the investment community about this operating profit element. And I think it’s a very, very reasonable question. In our space, the forward investment required to drive the business is quite significant over quite a period of time.

Our goal in the shorter term here is to get $2 billion in revenue organically in 2016. And to be in the position, when we get to 2016 we have a lot of momentum to continue to grow. So we view things in a very, very long-term frame. I mean I think there is no doubt, if we wanted to dramatically drive up operating margin, in the short-term, we could.

But I think it would be at the sacrifice of long-term growth. And we believe fundamentally in our industry organic growth is going to be the greatest driver of shareholder value. And so that’s why we put our focus.

I will say that our ability to deliver $2 billion revenue in 2016, the investment for that is substantially already made and a lot of what we are doing in the investment and scale up we doing in our R&D resources, for example, we had a 400 people in R&D last year. All that were in 2011 and if anyone listen to this call I apologize, but that were just costs. That additional 400 people in R&D didn’t drive any new product revenue. They won’t in the 2012 either.

That’s about revenue growth in 2014, 2015, 2016. And so its that bias towards long-term organic growth that influences that decision on shorter-term profitability. There is a question from gentlemen in the front. If you just -- she is going to bring you a microphone.

Brian - Deutsche Bank

Real quick, before you answer that question. So does that change at all or are you constantly looking at growth in other words, is there -- at what point that were -- those margins do start to grow?

Alex Davern

I think what scale, certainly there is an opportunity for sustained operating margin growth as we go forward. By now, we focused on hitting that 18% target and then as we scale towards the $2 billion and beyond, we will see the opportunity that comes at that point. But in the short-term, we are focus on getting to 18% and continue to drive double-digit CAGR.

Unidentified Analyst

Yeah. Thanks. I have the two-part question. First is stocks move on rate of change? The second derivatives to the question to you is what would be the near-term catalyst to the stock, because you mentioned you have a stable customer base, stable margins, stable everything is boring to stocks?

Alex Davern

I hope you don’t mind my answer here, but my answer would be fundamentally the stock price is a decision made by the people in this room. Our goal in the long-term is to drive long-term value. So, we focus on running the business. And honestly, I don’t focus on shorter term movements in the stock at all.

In the way, we take a look at -- I've been at the company for 19 years. The performance of the stock is relative to your timeframe. And so for those who look at in a shorter time we may have perform badly in the last six weeks or whatever it might be.

In terms of trying to drive a core technology building block for engineering science that has the ability to create a lot of shareholder wealth, the shorter term honestly. It’s fairly irrelevant.

Unidentified Analyst

And then the second part is a longer term question to your point. I mean I have used LabVIEW myself in graduate school.

Alex Davern

Cool.

Unidentified Analyst

So talking about barrier to entry, a friend of mine and I’ve pretty much wrote the LabVIEW module in C because we have two chip to offer National Instruments box. So I think my question is as we move to the world of cloud there is something fundamentally different which is historically a lot of your boxes were used to find products, you have a person and you have the instrument.

What the cloud gives you, it allows you to correlate or give you a view across thousands of millions of people and it gives you a lifetime database of information. So you can do things fundamentally different and so any thoughts on leveraging cloud scale?

Alex Davern

First of, you are absolutely right. I mean we have as well -- we’ll comment to the LabVIEW question first. We also have add-on tools for C as well, LabWindows/CVI to provide those libraries. And we tried very hard in university space. I mean the program we call Planet NI, in the emerging countries to make our technology available at very low price to small and medium sized companies in many emerging countries. So hopefully if we’re engaging with you now, we’ll find a way to avoid price being a barrier to young emerging company.

Now, on the issue of the cloud now, you are absolutely right as well that there is tremendous opportunity there. LabVIEW, we have the cloud enabled element there. We are providing and facilitating the hosting of LabVIEW data on the cloud. We see a tremendous opportunity for that, because it shifts the whole part on again way for box instruments towards software and data. And that is an emerging dynamic that we have pretty aggressive plans to leverage.

And for those who you can imagine that you have got remote sensors, let say, wireless if they’re in the rain forest, or you’re monitoring thousands of bridges in United States or whatever it might be. You want to able to aggregate that data, access it from anywhere, be able to mine it and that’s a very powerful application to move scientific data off at individual desktop and make it enterprise wide or global wide if it happens to be a philanthropic project available to the scientific community. And so there is a lot of power is that as a feature and as a new source of demand.

Unidentified Analyst

(Inaudible)

Alex Davern

So, I cannot refer back to -- if you take a look at how I view our business. There is two ways to loot at it. How big is the opportunity it’s pretty massive. How we invest into capture that opportunity and I showed you early on our investment in both R&D and field sales resources. And then if you look at the people, who want to talk to me about one customer or one industry or one product, we have 15,000 products. We have 35,000 customers. We served almost any industry in engineer as in.

So unfortunately, I also have to give you that one there really isn’t anyone that’s really going to make a difference and move it in any noticeable act. That’s why again, I go back to look at it. If you look at our long-term growth, if you go back to that curve of revenue growth I showed early on -- (inaudible) per se, because I think this is a very important point to understand.

And I don’t have the comparison with the purchasing manager’s index but you can get their point from the slide. You see tremendously stable double-digit revenue growth with the exception of a broad global recession in 2001 and a broad global recession in 2009. And the exogenous factors that have affected that curve broad global recessions. I mean that’s the best -- I am sorry, I think. Question over here.

Unidentified Analyst

First of, clarification you said, embedded is now 25%.

Alex Davern

Approximately.

Unidentified Analyst

Total revenue or product revenue?

Alex Davern

Total revenue.

Unidentified Analyst

So then, if you look at your core market, the stuff that most people think to them. The things that companies use in the development products, so 35 years to get the $750 million in revenues and then over the last say 15 years the growth have been somewhat to get that 750, its been somewhat south of 10%. So, a lot of the incremental growth that’s got you above the 10% over the past decade or so has been from the embedded piece.

What products that high volume products that’s could potentially continue embedded piece and as you go from $1 billion to $2 billion is the expectation that the bulk of that incremental $1 billion is going to be on the embedded side, or it seems like -- you have the same story at least 15 years and the test and measurement side, it is great yeah. I can understand why you would keep the pass off on a relative growth rate Agilent or Teradyne, but it -- 35 years to get 750 and then I just don’t know how massive those markets, is it generationally going to take time to get over and I am hoping the embedded side potentially be the one to slice on.

Alex Davern

So, the embedded space for us is a very important market opportunity for number of reasons. Number one, it gives us a new growth opportunity to leverage our core technology. And number two, because we leveraging our core technology it allow us to invest more aggressively in the test base, because we can leverage it into a brand new revenue stream, which has been very valuable.

Number three, for us is internally it’s a LabVIEW sale. It’s a core application software sale. So we can use the same channel. Often selling to the same company, go from research and production test to be inside the device, so we’re already trusted source of measurement and we find a new application area that opens up a revenue stream that actually at a higher value proposition for the customer done our test.

In the test business, we’ve got multiple customers who can do the same thing and you get embed over speed and price, and philosophy. In the embedded space, we offer a programing experience and set of after shelf commercially available tools to build up embedded device. There is no competition other then an internally developed custom engineering project. So, there is really nobody as a third-party who provides the capability that we do in the embedded space.

And you notice over the last four or five years as embedded as a percentage of our revenue is being going up. Our gross margins are being going up. And so it’s got tremendous gross margin, tremendous value to the customer in that space.

As we look at over to next decade, our anticipation is the embedded space we will grow to be somewhere around about 50% of our revenue, not over five years but over the next 10 years, it got some of the very important source of National Instruments growth going into the future.

And as we’re roughly about a $1.2 billion run rate this year, it has grown now to be a quite substantial business for us with the ability to become self reinforcing. So it is a key part of our overall growth line.

Unidentified Analyst

(Inaudible)

Alex Davern

Things I talked about earlier one, so biomedical devices is a big element, areas like wind, for monitoring wind turbines, areas like packaging machines, so its going to be inside of devices that sell in the thousands or tens of thousand, its not going to be inside of device that sell in the millions, because people will design the custom ethic for that. I’m afraid I think we are out of time. We got it over.

Brian - Deutsche Bank

Thank you, Alex.

Alex Davern

I’ll be happy to take your question outside, if you want to continue to discuss it and thank you for your time and attention this morning.

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Source: National Instruments' CEO Presents at Deutsche Bank 2012 Technology Conference (Transcript)
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