NATI

National Instruments Corporation (NATI)

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National Instruments Corp (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

Presentation

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.

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