NATI

National Instruments Corporation (NATI)

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National Instruments Corp. (NATI)

Q2 2010 Earnings Call

July 27, 2010 05:00 pm ET

Executives

Dr. James Truchard - President and CEO

Alec Davern - SVP and CFO

David Hugley - VP, General Counsel and Secretary

John Graff - VP, Marketing and Customer Operations

Analysts

Anthony LeGree - JPMorgan

Mark Douglass - Longbow Research

William Stein - Credit Suisse

Richard Eastman - Robert Baird

Ajit Pai - Stifel Nicolaus

Chuck Murphy - Sidoti & Company

Presentation

Operator

Welcome to the National Instrument second quarter 2010 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; Alec Davern, CFO; James Truchard, CEO and Co-Founder and John Graff, VP or America Sales and Marketing. For opening remarks and introduction, I would like to turn the call over Mr. David Hugley, Vice President Corporate Counsel and Secretary. Please go ahead, sir.

David Hugley

Good afternoon. During the course of this conference call, we shall make forward-looking statements regarding the future financial performance of the company, including statements regarding future revenue growth, improving gross margins, the continued recovery in the industrial economy, transfer expense management, new products and our revenue and earnings per share guidance. We wish to caution you that such statements are just predictions and that the actual events or results may differ materially. We refer you to the documents the company files regularly with the Securities and Exchange Commission, including the company's Annual Report on Form10-K filed February 17, 2010 and our most recent quarterly report on Form10-Q filed May 6, 2010. 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 today are record second quarter revenue, record second quarter operating profit and the very strong gross margins.

This time last year, we were in the middle of one of the most challenging financial periods in the company history. I am very pleased to see us return to record revenue for the second quarter. The fact that we reach record revenue so quickly that can be attributed not only to the broad based recovery in business, but also to our commitment to strategic investments throughout the downturn.

We continue to innovate, acquire key talent and strengthen our customer relationships and I believe our outstanding Q2 results validate our commitment. I continue to be very optimistic about our position in the industry and I believe these investments will continue to act as a catalyst to our growth as we continue through 2010. I would like to take a moment to congratulate John Graff on his new position as Vice President in Americas Sales and Marketing, John as serve as Vice President of Marketing in the Investor Relations for many years and we thank him for his contributions.

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

Alec Davern

Good afternoon. Today we reported Q2 revenue of $212 million which is an increase of 39% year-over-year, and a new record for second quarter. Net income for Q2 is $24.6 million with fully diluted earnings per share of $0.31. Non-GAAP net income was $28.3 million with non-GAAP fully diluted earnings per share of $0.36. Operating income was a record for the second quarter and operating margins improved significantly year-over-year. However our earnings results were $0.02 per share below the mid point of our guidance due to $2.2 million loss on foreign exchange.

This loss was primarily due to the weakness of European currencies in May and June which have not been factored into our Q2 guidance. The reconciliation of our GAAP and non-GAAP results is included in our earnings press release. With record revenue our business has built momentum in Q2 and there are some clear positives to take away. First we had record revenue for the second quarter over 39% year-over-year growth. Second, we continue to drive strong gross margins and third we delivered 17% non- GAAP operating margins.

From a revenue point of view our Instrument Control business saw a 54% year-over-year increase in Q2, while revenue from our Virtual Instrumentation graphical system designed products grew 38% year-over-year. Instrument control revenue has made a strong recovery from the very significant declines, we saw during the recession. However, in Q2 were still down 17% over two years since Q2 of 2008. Traditionally our Instrument Control revenues have been highly correlated to the overall test and measurement and the current trends indicate while the industry continued its recovery in Q2, it has not yet recovered to pre-recession levels.

This makes our record second quarter revenue all the more impressive. During Q2, year-over-year revenue growth in US Dollars was 28% in Europe, 66% in Asia and 32 in new markets.

Now looking at the income statement in more detail. Non-GAAP gross margin in Q2 was 77.6% compared to 74.2% in Q2, 2009. This increase gross margin is attributed to the intense efforts, made to improve our operating model during the recession. On the expense side, our non-GAAP operating expenses were up $5 million sequentially and by 23% year-over-year.

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