Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

National Instruments Corp (NASDAQ:NATI)

Q32012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

David Hugley - Vice President, General Counsel, and Secretary

Dr. James Truchard - President, Chief Executive Officer, and Cofounder

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

Peter Zorgas - Senior Vice President of Sales and Marketing

Analysts

Zach Larkin - Stephens Inc.

Mark Douglass - Longbow Research

Patrick Newton - Stifel Nicholas

Anthony Luscri - J.P. Morgan

Richard Eastman - Robert W Baird

Stephen Stone - Sidoti & Company

Operator

Good day, everyone, and welcome to the National Instruments' third quarter 2012 earnings conference call. Today's call is being recorded. You may refer to your press packet for the replay dial-in number and passcode. With us today are David Hugley, Vice President, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO and Cofounder; and Pete Zorgas, Senior Vice President of Sales and Marketing.

For opening remarks, I would like to turn the call over to Mr. David Hugely, Vice President, General Counsel and Secretary. Please go ahead, sir.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding our opportunity to convert customers PXi, our guidance for fourth quarter revenue and earnings per share and moderating our operating expense growth. We wish to caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you to the documents the company files regularly with the Securities and Exchange Commission including the company's most recent quarterly report on Form 10-Q filed August 3, 2012. These documents contain and identify important factors that could cause our actual results to differ materially from those contained in our forward-looking statements.

With that, I will now turn it over to the Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.

Dr. James Truchard

Thank you, David. Good afternoon and thank you for joining us. Our key points are, we delivered record revenue and non-GAAP operating income for the third quarter. We continue to build a highly differentiated platform and we remain very cautious in the short-term and have continued to manage expenses carefully. Despite difficult economic conditions I am pleased with our company's disciplined execution which allowed us to deliver record revenue and non-GAAP operating income for the third quarter.

While we remain cautious in the short-term due to uncertain economic conditions, I am optimistic about our long-term position in the industry from the sustained differentiation we delivered to customers through graphical system design. This approach to measurement and control systems provides higher performance, better integration and lower cost: while enabling unique testing approaches not possible with traditional equipment.

In our call today Alex Davern, our Chief Operating Officer will review our results, Pete Zorgas, our Senior Vice President of Sales and Marketing will discuss our business and I will close with a few comments before we open up for your questions. Alex?

Alex Davern

Good afternoon and thank you for joining us today. Revenue for Q3 was a new all-time record for third quarter at 290 million, up 7% year-over-year on a non-GAAP basis and up 11% in constant currency terms. Our revenue growth this quarter comes despite the significant weakening of the global industrial economy and the strong 23% year-over-year revenue growth we delivered in Q3 last year.

Non-GAAP gross margin in Q3 was 76%, down 1% from Q3 last year. Gross margin was negatively impacted by the weaker Euro as well as a lower than average gross margin on a large order I will discuss later.

Total non-GAAP operating expenses were $179 million, up 4% year-over-year. Non-GAAP operating income was $40 million, a new record for the third quarter. It was up 10% year-over-year and represented a non-GAAP operating margin of 14%, up from 13% in Q3 last year.

GAAP net income for Q3 was $24 million with fully diluted earnings per share of $0.20 and non-GAAP net debit income was $32 million with non-GAAP fully diluted earnings per share of $0.26. A reconciliation of our GAAP and non-GAAP results in included in our earnings press release

We believe the diversity of our business, the evolution of our field sales force and the strength of our product portfolio have been the key drivers of our sustained growth. This can clearly be seen by the strong growth we have delivered over the last five years in our systems used in high-performance tests and embedded applications.

Despite a significant weakness of the Global PMI in Q3, we saw continued growth of our orders over $20,000 which grew approximately 11% year-over-year and our average order size was up 7% year-over-year. A significant contributor to the success for us this quarter was winning the largest application sale in the history the company.

This application involves the use of LabVIEW and the NI PXi Platform to rapidly develop a production test solution which offers the customer outstanding performance and accuracy at a very low-cost of test per unit. Year-to-date, we received $53 million in orders for this application. $41 Million of this was recognized in revenue through Q3 and we anticipate recognizing the remainder in Q4. Excluding the impact of this application our orders over $20,000 would have been by 2% year-over-year.

We believe that approximately 85% of the test market is still served by the traditional rack and stack instruments. This application win clearly demonstrates the opportunity to convert customers to PXi. The success of PXi replaces what would previously have been a lower performance, higher cost traditional instrument sale. This is a great example of the business advantages that our platform brings to our broad base of customers who value the NI Platform for smaller footprint, its lower cost, its higher performance and its ability to more rapidly leverage Moore's Law.

Revenue from orders under $20,000 which were weak in Q3 have historically been more directly affected by the economic conditions in the global industrial economy. In Q3 orders under $20,000 were down 4% year-over-year in U.S. Dollars and flat in constant currency terms reflecting the significant decline in the Global PMI in Q3. Going forward we will continue our intensity on these sales to further the broad-based adoption of our platforms by scientists and engineers worldwide.

But despite the weak industrial economy, we executed well in Q3 and there are some clear positives to take away from our results. First, we had record revenue for third quarter. Second, we had strong gross margins. Third, we had record non-GAAP operating profit for the third quarter.

Now turning to cash management. Cash and cash equivalents increased by $30 million during the quarter to $364 million at September 30. During the quarter we had a number of significant draws on our cash position totaling approximately $2 million. This includes $17 million we paid in dividends and $50 million related to the construction of our new manufacturing and R&D center in Penang, Malaysia.

Now I would like to make some forward-looking statements. We are very concerned by the continued weakness of the Global PMI in Q3 with the average for the quarter 48.5, being the lowest since Q2 2009. Of ongoing concern is the level the new order element of the index at 48 in September. Its drop suggests that the overall index may remain well below 50 in Q4 and into 2013. We believe that this trend will restrain revenue growth in the broad test and measurement industry for the Q4.

In the past, we have also seen this sort of deterioration in the industrial economy, coupled with a weak start to the quarter can result in a delay to large orders towards the end of the quarter, especially at year-end. As a result, we are taking a conservative approach and are assuming that we will not see the normal seasonal surge in orders towards the end of the quarter. Also, as we continue to absorb the significant investments we made in 2011, we expected our year-over-year growth in non-GAAP operating expenses will BE in the low single digits in Q4.

As a result, we currently expect revenue for Q4 to be in the range of $265 million to $295 million. We currently expect that GAAP fully diluted EPS will be in the range of $0.11 to $0.25 for Q4 with non-GAAP fully diluted EPS is expected to be in the range of $0.17 to $0.31. Given the uncertain economic environment we plan to host a business update call for investors after the market closes on December 10.

Now these are forward-looking statements. I must caution you that actual revenues, operating expenses and earnings could be negatively affected by numerous factors such as any further weakness in the global economy, rescheduling of customer orders, large one time customer orders, expense overruns, component supply, manufacturing inefficiencies, adjustments to acquisition or net accruals, effective tax rates and foreign exchange fluctuations.

In summary while we are pleased with our execution in Q3, we remain concerned with the short-term prospects for the industrial economy. We will be focusing on prudent expense management and delivering solid profitability.

With that I will turn it over to Pete Zorgas, Senior Vice President of Sales and Marketing.

Peter Zorgas

Thank you, Alex. Despite a weakened economy we were pleased to deliver year-over-year revenue growth and continued to build on our highly differentiated platform. Our graphical system design approach as well as our innovation and strategy have allowed us to disrupt traditional instrument based systems. We have continue to develop products that lower cost, reduce risk and shortened design cycles which is a great benefit to our customers facing budget constraints. These products, combined with the expertise of our field sales force and alliance partner network, help enable cost savings for our customers which in turn uncovered new long-term opportunities for NI.

As Alec mentioned earlier, our products serve a diverse and broad customer base. For example, this quarter our team in Mexico saw great success in an academic application. The team worked with technical universities, government officials and department chairs across the country to standardized 35 mechatronics labs on LabVIEW and data acquisition laying a foundation of engineering excellence for years to come. We believe this standardization effort was a testament to the value that a graphical system design approach brings to engineering education in preparing the next generation of engineers and scientists to enter the work force and drive innovation.

There is no better place to see the impact of our broad reach than our Annual NIWeek User Conference where we introduced over 40 new products and delivered more than 200 technical sessions to a record crowd of approximately 3,600 engineers and scientists. NIWeek illustrates our commitment to customer success, serving as a catalyst for high value technical and business discussions, connecting thought leaders across the industry including designers, developers, editors and industry pundits from around the world.

This year, the NIWeek Conference included several forms between entrepreneurs and engineers to address key technologies in the areas like physics, energy, RF, aerospace and defense. Among the new products introduced during NIWeek were LabVIEW 2012 with design templates and sample projects for customers, the Vector Signal Transceiver, the world's first software designed instrument and the standalone NI CompactDAQ System with a built-in dual core processor and onboard storage.

With LabVIEW 2012, we introduced enhancements for developing application architectures, accelerating user productivity and helping to ensure our customers have the tools to be successful as applications scale, in both complexity and size. We believe our long-term investment in LabVIEW is a great value to our customers as we continue to improve performance, add valuable features and preserve the investments that they have made in developing their applications in LabVIEW.

25 Years Ago, we redefined instrumentation with the introduction of LabVIEW and at this year's NIWeek we continued to revolutionize the industry with the world's first RF vector signal transceiver or the VST. This new PXi module builds on our established leadership position in modular instrumentation and delivers a new class of software designed instrumentation. This software centric architecture represents a new era where engineers and scientists can use LabVIEW to transform the VST into a new instrument or enhance its existing functionality. The VST provides industry-leading performance for testing the latest wireless standards such 802.11ac and LTE and it can replace multiple traditional instruments at a fraction of the cost and size while delivering measurements more than 10 times faster.

One customer who has already realized the benefits of the new VST is Qualcomm Atheros, a leading provider of wireless technologies. According to Doug Johnson, Director of Engineering at Qualcomm Atheros, the NI VST provides the freedom and flexibility in the way Qualcomm develops their 802.11ac solutions for customers and has significantly improved their test throughput. The previous rack and stack approach took weeks of regression testing but by leveraging the new VST Qualcomm Atheros improved their characterization test times by approximately 200 fold.

Our data acquisition products continued to expand NI's measurement platform capabilities with CompactDAQ. During NIWeek we released the standalone NI CompactDAQ which offers a high-performing flexible standalone system for embedded measurements and logging applications. Using LabVIEW engineers can build measurement and logging applications with over 850 LabVIEW analysis functions and over 50 C-Series modules that cover a vast array of measurement types. Data acquisition applications can span from researching tornado phenomena to monitoring the structural health of bridges.

One recent application is from the Red Bull Stratos team whose daredevil Felix Baumgartner recently dove from the Earth's stratosphere successfully breaking the sound barrier and setting the world record for speed. His suit equipped with sensors and recorders measured everything from his speed to his heart rate. Back at mission control, his team used LabVIEW to monitor various I/O like altitude, pressure and oxygen levels. In the future such equipment could prove useful in future space missions.

Our CompactRIO product revenue continued to grow this quarter reaching a new third quarter record. Combined with LabVIEW, CompactRIO provides customers with a strong value proposition by leveraging FPGAs for an off-the-shelf solution which simplifies development and shortens time-to-market for advanced measurement and control systems. During NIWeek, we extended our CompactRIO products to address smart grid power conversion systems. Using LabVIEW with the standard RIO architecture customers can significantly reduce the cost and risk of designing embedded systems.

A Customer who is already seeing productivity gains with this technology Dynapower Corporation who recently developed a line of smart grid power converters. Dynapower needed to create a unique power converter to fully realize the benefits of smart grid storage. Using the standard RIO Architecture and LabVIEW, Dynapower reduced their development time from one to two years to under six months.

To close, while we remain cautious due to the weakened Global PMI, we are pleased with our ability to deliver record revenue for our third quarter. Based on key forward-looking economic indicators, we expect the global economy to remain very weak and as a result we will carefully manage expenses in the upcoming quarters. Despite these headwinds, we continue to deepen and expand our customer relationships and are well positioned with our differentiated product offerings, our world-class direct sales and service organizations and our strong alliance partner network.

With that I will turn it over to Dr. T.

Dr. James Truchard

Thank you, Pete. In these difficult times, it takes discipline to balance the short-term demands of business and a long-term objective in building a company that’s built to last. I would like to thank our employees for their diligent efforts which resulted in record revenue and non-GAAP operating profit for the third quarter.

Achieving record revenue growth that outpaced expense growth is a testament to the disciplined execution from our business team. I see the long-term opportunity to disrupt the test and measurement and embedded industries with a differentiated graphical system design approach. In test and measurement, we have an opportunity to accelerate an industry shift towards a modular approach with PXi.

When we started our company, we envision the central role of software on client instrumentation and we are now truly thing LabVIEW revolutionize the way engineers approach RF design and test. The new VST is another step in delivering on our vision of revolutionizing how test systems of designed through our high-performance FPGA-based RIO platform.

In industrial embedded, we deliver value to our customers by providing them with tools to develop next-generation control and monitoring system and ultimately reduce their development costs. A recent embedded productivity study reinforces this value proposition showing our customers use design teams half the size complete their projects in half the time and more often complete their projects on time or ahead of schedule compared to alternative approaches.

At NIWeek in August, our customers continued to raise the bar for innovation as they showcased their applications across all areas of science and engineering highlighted by the Annual Graphical System Design Achievement Award. The University of Leeds won the ambitious Application of the Year and Humanitarian Award. Using LabVIEW and CompactRIO they created the mechanical heart simulator which is pivotal in researching new ways to address heart disease.

We continue to be amazed at our customers' creativity and how they use graphical system design to solve some of the world's toughest problems. The NI approach to graphical system design is redefining how systems are built leveraging the performance of Moore's Law in both design and test applications. A great example of this transformation is visible in cyber physical systems which are distributed computing systems connected with the physical world to address some of the most difficult and engineering problems. These systems take advantage of Moore's Law across various architectures that include a combination of processor and FPGA configurations all of which can be programmed with LabVIEW. This unique capability of the NI platform delivers the economic benefit of high-volume to the unique needs of our diverse base of customers.

I have often stated that when we found up NI, I was looking to create a job that I would enjoy. It quickly became clear, for that to happen we would have to create a business that continued to expand into new long-term growth opportunities. We believed the fundamental drivers of our long-term sustained growth in new product R&D and a strong sales force. Over the past years, we have invested aggressively in research and development, without being new products that open up new business opportunities, similarly with our strategic investments in developing a strong sales force, we are positioned to help our customers find ways to lower their cost, improve their productivity and help them bring their own innovative products to market quickly.

In summary, because we have remained very disciplined in our execution, we delivered record third quarter revenue and non-GAAP operating profit. While we remain very cautious about the short-term uncertainties in the industrial economy, I remain optimistic that our differentiated approach to graphical system design, our focus on driving shareholder value through long-term organic growth and our ongoing commitment to customer success continues to set National Instruments apart from our peers.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Zach Larkin with Stephens.

Zach Larkin - Stephens Inc.

First question, I wondered if we could maybe talk about the VST and some of the new products, in particular but mainly the VST. Now that it's out in the market, what's the market acceptance been like? And is it something that you have been able to start noticing impacting revenues or has the macro issues, maybe, put too much of a cloud on top of that?

Peter Zorgas

This is Pete, Zach. So obviously we had one of our biggest launches ever at this NIWeek with the VST. It's significant on many fronts, being the world's first software designed instrument. So it's getting a lot of attention. We have gotten the initial set success in the form of orders and we are very actively now taking the unit to these interested customers and there is a lot of activity in the worldwide sales organization.

Zach Larkin - Stephens Inc.

Then I think, last quarter, Dr. T might have mentioned that when we go through some of these drops and demand, or kind of tougher macro environment that there's the opportunity to actually go through and gain some share. I just wondered if there was anything going on now? Are you sensing a shift towards the NI product platform given the value proposition versus incumbent technologies?

Alex Davern

Certainly we have seen traditionally, when we have seen periods of downturn we remained very deeply engaged with our customers. We have continue to bring innovative technology to market and the value proposition of lower cost, higher speed, lower cost of test per unit becomes much more compelling in times when budgets are tight. So Pete, I think, mentioned in his earlier remarks.

So historically, we have ability to take market share, to get design into new applications during this time period and from that point of view these demand pauses or drops tend to be strategically very good for National Instruments. Of our practically and short-term we still do the impact that CFOs collectively reign in spending budgets then we are going to get impacted by that along with the rest of the industry.

Operator

Thank you. We will go next to Mark Douglass with Longbow Research

Mark Douglass - Longbow Research

Alex, in the third quarter, the non-GAAP tax rate, it was certainly lower than what had been in first half of the year. Anything special going on with taxes here and what are we thinking here in 4Q?

Alex Davern

Mark, as you are probably aware, under the GAAP rules that we have to make provisions available for certain exposures on taxes and we are required to release those provisions when the statute limitations relating to those tax returns expires. That traditionally has happened in the third quarter given the timing of tax return filing. That’s something that happened again this year.

So for last number of years it has caused us to have a lower tax rate in Q3 then move up in Q4. This year, Q4 will also be a bit of challenge on the taxes. As you know Congress is not seeing it fit yet to renew the R&D tax credit and that’s going to cause us to have an overall higher tax rate this year in general than we did in 2011, unless there is some diving catch made between now and the end of year in Congress on the R&D tax credit.

Mark Douglass - Longbow Research

So is that like 25% or 26% for non-GAAP in the fourth quarter?

Alex Davern

I think that we are looking at numbers that up there in the mid-20s but it's going to depend on the overall profit level, but it's quite a bit higher than we are seeing here in Q3.

Mark Douglass - Longbow Research

On the earnings guidance, is the visibility getting progressively worse? Usually you have $0.08 window. This quarter, it was $0.10 and now for the fourth quarter it is $0.14. Is that just indicative, would it be getting progressively worse throughout the last three or six months?

Alex Davern

I would say, certainly the news and the overall tone of things in the last six months, the last two quarters has certainly darkened. I think there's certainly a greater degree of uncertainty, in our opinion, now than it has been at any time during the year. So I am trying to learn from past experience and reflect the reality of greater uncertainty and a wider range that's basically what we are attempting to do.

Operator

We will go next to Patrick Newton with Stifel Nicholas.

Patrick Newton - Stifel Nicholas

Alec, one, that's kind of the macro/guidance slot in your guidance alludes you the weak industrial environment potentially beginning the delays in large orders. I am curious if you saw any push outs or delays exiting 3Q that kind of gives you the taste of this or if you are just incorporating prior history and conservatism in to the basis of this guidance? If you take that to the next step and you are discussing a weak industrial outlook potentially continuing into 2013, is there any time the company's histories that you would point to that you believe represents a good comp to what you are seeing now? Is this just a repeat of 2012? Does it feel more like 2003? Or hopefully not, but 2009?

Alex Davern

So, as you know, I cannot predict exactly what's going to go on with the economy, Patrick, but I think this is the essential question that we face at the moment. I would say that the tone of business did soften a little bit as we went through the Q3 into September and in to October and I am trying to figure out which model to follow here. We have got a number of historical parallels.

In late '04, early '05, Q4 of '04, Q1 of '05, we saw real pause in large orders around the election time and transition that then recovered pretty quickly in the second quarter of '05. We have seen Q4 of '08 when things were really bad and stayed bad for quite a while.

So it's not clear exactly which pattern this will follow. My gut feel, at this point in time, given the levels of the PMI and the tone of our business generally darkening, I think the industrial economy is going to be pretty severely challenged from now through middle of 2013. That is my personal opinion. Don’t take that as guidance. That's just my personal opinion.

Patrick Newton - Stifel Nicholas

Okay, and then, just to clarify on the order front. There were no push outs thus far in 3Q. It was just more of and expectation for 4Q?

Alex Davern

No. It's a very astute number, so I can't say that that’s the case. I would characterize it as a softening in sentiment in general as we went through September in to October.

Patrick Newton - Stifel Nicholas

Okay, and then, I guess a little bit more on your thoughts on a geographic basis. I think previously you talked about Europe being unlikely to recover over the next few quarters. I am assuming there's no change there but I wanted to get a sense of whether you experienced any change in business momentum in the U.S. with a better PMI number in September, especially in your transactional business. Then I also wanted your thoughts on the sustainability of your high-volume production test still driving result in Asia over the coming quarters.

Alex Davern

So, yes, it is an interesting one. I am a believer actually that the global economy is pretty well synchronized in the major markets. The European team suddenly has had a tough time for the last 12 months going back to Q3 or Q4 of last year. I am very proud of their execution, their persistence, they are continuing to deliver excellent service to our customers. Although the revenues were down 7%year-over-year in U.S. dollar terms, in local currency, they actually grew the business, despite these weak PMIs. So I really want to give a hats off to our team in Europe.

If you look at a local currency growth in all three regions, Europe, Asia and the Americas and if you exclude the large order we talked about earlier on, all regions grew at about 3% or 4% local currency in the quarter. Some pretty consistent globally. I think what we are seeing here from a phenomenon on the industrial economy, the industrial economy is a pretty synchronized beast. So I think we are going to see fairly comment trends across the three geographies.

Operator

We will take our next question from Anthony Luscri with J.P. Morgan.

Anthony Luscri - J.P. Morgan

Gross margin, you mentioned two factors in the quarter that impacted gross margin. Can you give some magnitude of the impact and what it would have been had those rest of the large order hadn’t been in place?

Then a follow-on to that is, if large orders continue to come your way or at least become a bigger percentage of revenue, should we assume a structural shift down in gross margin over time in your model?

Alex Davern

So let me break it down, I guess. You could break the impact this year to one percentage year-over-year drop, roughly 60-40 weighted towards the large order. If you looked at our gross margin excluding that order, we would have been up about 0.4% in gross margin year-over-year. So the core business continues to be very strong from a gross margin performance point of view.

Obviously, in order of the scale of $53 million in business, that’s a very valuable customer. We worked very aggressively with that customer to deliver the highest value we can and to drive our cost of servicing that customer down as much as possible. So orders of that magnitude or in that same ballpark are going to, I think objectively come with lower gross margin than our normal business.

That can still allow us to drive good operating margin and allows us to engage with that customer at very, very high value. In terms of our overall longer term trend of growing revenue coming from orders over $20,000, as we have seen for many years, the last five, six, seven years, in general the volume lift we get from that and the differentiation we deliver to customers in our systems business has allowed us to expand our gross margins over time.

So in general our large order business is good for gross margins and we are very happy to be very competitive on a really big business in order to deliver that value to customers and still get a good return to the shareholders of National Instruments.

Anthony Luscri - J.P. Morgan

One other question. How should we think about opportunity for share repurchase?

Alex Davern

Certainly, our use of cash, as you guys are aware, is number one, dividends, number two, opportunistic repurchase and number three is strategic acquisitions. We continue to look at in that order. We are very interested in what will happen with tax policy next year. We will be looking very carefully at the implications that that has for the desires of our shareholders as to how they would like to see National Instruments return cash to shareholders. So we will continue to watch that pretty carefully.

Operator

(Operator Instructions) We will go next to Richard Eastman with Robert W Baird.

Richard Eastman - Robert W Baird

Alex, is there any chance that you can provide a little bit of color on some of the end markets? Whether it would be the large orders or just the transactional business?

Peter Zorgas

This is Pete. We have had success across many different verticals, mobile devices, communications. The defense and aerospace had a very strong quarter for us. A little bit weaker was energy in Q3. So that's the color that I can add this quarter.

Richard Eastman - Robert W Baird

Is there anything discernible on the academic side?

Alex Davern

Our product lines in academic continue to show good growth. That continues to be a strategic area for us for investment.

Peter Zorgas

You are concerned, I am guessing, Rick, about budgets going into academia both at the state level, et cetera? I know there has been some questions about that. Certain municipalities and states are pulling back but the value we delivered tour academic customers has allowed us to continue to drive penetration there and we remain bullish on the long-term opportunity for National Instruments in the academic field

Richard Eastman - Robert W Baird

Okay, and just on geographically, when I look at local currency and this could be a comparison issue, but the area that saw the most slowdown, quite frankly, in the third quarter was Asia and I am curious if that was the case and secondly maybe outside of this large order. Is that coming in the test area or in the industrial embedded area?

Alex Davern

You are right, if you exclude the large order, you will see that our revenues in dollars terms in Asia were flat, up 3% or something like that in local currency, if you exclude the large order. Again you are seeing countries like China where the PMI has been under 50 for a year. We had quite a lot of manufacturing production test, end of line business in Asia.

When you look at our portfolio of business, that can range from academic, government-funded research type areas to commercial R&D to production test, end of line production tests. Traditionally we have seen the end of line production test to be most sensitive to shifts in the economy. A lot of that is, as you know, going on in Asia. So that’s providing a headwind there and I think that the production test, an amount of expansion that is going of production capacities has probably slowed down quite a bit in the last six months.

Operator

We will go next to Stephen Stone with Sidoti & Company.

Stephen Stone - Sidoti & Company

Just a question, I guess, on the Malaysian plant. Is this up and running? If so, what's the capacity, Alec? Given the forecast what are you guys seeing as far as this kind of thing, the expense line and everything?

Alex Davern

Sure, it’s a good question. Obviously we have been running to a point where as business was growing earlier in the year, we were headed to reaching maximum capacity in our production facility in Hungary. Those guys have done a tremendous job over the last 10 years of driving value there.

The Malaysia plant, we actually moved in on Monday, and build our first product this week. Our plants there will be shifting some production from the Hungarian facility to Malaysia over the course of the next year. We do anticipate that the incremental overhead, if you like, of operating a second facility, as we effectively double our capacity from a facility point of view that we will hit our operating margins in 2013 by about 30 basis points.

Stephen Stone - Sidoti & Company

Okay, and then I guess, can you give a little more color on the expense management? Is it cost cutting? What do guys think you are going to do as far as that?

Alex Davern

Perhaps I could start and Dr. T, you could comment here in a second and I have been through many ups and downs in the global economy over the course of the last 35 years. We have adopted approach to ensure that we deliver value to all of our stakeholders in this timeframe. That we understand where our core value is and our primary focus as we go through the downturn will be to preserve our core investments, ensure we are driving innovation and preparing for a recovery, ensure we are being a stable employer, to drive the value that we obtained from the high intellectual content that that our employees bring to bear and make sure we keep the operation very focused on efficiency.

So with that said, we will be looking at this timeframe. If in fact we do see that large orders don't see the same surge at the end of the quarter and our earnings guidance turns out to be accurate, you will see shift to a stance where we will be restricting hiring pretty severely. We will be managing expenses very, very carefully to ensure that we continue to deliver solid profitability

Dr. James Truchard

We will be focused on expense control and also then really seeing that we are getting the value from the previous investments we made in this timeframe continue to drive growth.

Operator

We will take a follow up from Richard Eastman with Robert W Baird.

Richard Eastman - Robert W Baird

I noticed the software maintenance revenue was up quarter-to-quarter measurably. Is that related to the large order shipments?

Peter Zorgas

It is more related to a trend as we shift to a business model where we are negotiating and closing enterprise type agreements with our best customers. We are looking at that as a business strategy that allows us to drive much broader adoption and penetration of our software platform broadly across our best customers. That’s really more the key.

Richard Eastman - Robert W Baird

So just remote seats or just per seats can all basically link in? Is that where the support comes in?

Alex Davern

It’s the philosophy of allowing very broad access in our best customers to our software for a fixed fee.

Richard Eastman - Robert W Baird

Lastly, what were the large orders as a percentage of sales in the quarter?

Alex Davern

Hold on a second, we are going get you an answer. I believe it was a right at 51%, I believe.

Operator

Thank you and with no further questions, I would like to turn the conference back over to Alex Davern for any additional or closing comments.

Alex Davern

Thank you for your time today. I want to remind you we will be at the Stevens Conference in New York City on November 13 and we will look forward to seeing you then.

Operator

That does conclude today's call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: National Instruments CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts