Apr 23, 2008
Executives
David Hugley - President and General Counsel, Secretary Dr. James Truchard - President, CEO, and Co-Founder Alex Davern - CFO, Sr.
VP, Manufacturing and IT Operations John Graff - VP, Marketing and Customer Operations
Analysts
Antonio Antezano - Bear Stearns Mark Moskowitz - J.P. Morgan Ajit Pai - Thomas Weisel Partners Richard Eastman - Robert Baird Terence Whalen - Citi Investment Research David Yuschak - Smh Capital John Harmon - Needham & Company
Operator
Good day everyone and welcome to the National Instruments Corporation's Fourth Quarter 2007 Conference Call. Today's call is being recorded.
You may refer to your press packet for the replay dial-in number and pass code. The replay will be available from 7 PM central time today and will end at midnight Central Time on February 7th, 2008.
With us today are Dr. James Truchard, President, Chief Executive Officer; Alex Davern, Chief Financial Officer; and John Graff, Vice President, of Marketing.
For opening remarks I would now like to turn the call over Mr. David Hugley, Corporate Counsel.
Please go ahead, sir.
David Hugley - President and General Counsel, Secretary
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 our expected revenue and earnings per share, impact to stock-based compensation and Amortization of acquisition related intangibles, major future product releases growing the sales force, improving revenue growth, increasing geographic bandwidth, identifying large opportunities and accelerating the growth of software margin instruments embedded and industrial applications.
We wish to caution you that such statements are just predictions and that actual events and 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 Form 10-K for the fiscal year ended December 31, 2006 and our quarterly report on Form 10-Q filed October 2007.
These documents contain and identify important factors that 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 President and CEO of National Instruments Corporation, Dr.
James Truchard.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you, David. Good afternoon and thank you for joining us.
Our key points today are, record quarterly revenue up 13% year-over-year. Record quarterly net income and continued validation of our long-term investment strategy.
We turned in a strong quarter in Q4 delivering record revenue growth and strong operating leverage with record sales in key areas including USB data acquisition, distributed I/O, modular instruments and the PXI platform. In our call today, Alex Davern, our CFO will review our financial; John Graff, our Vice President of Marketing, will discuss our business; and I will close with a few comments before we open up for your questions.
Alex?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Good afternoon. Today, we reported record quarterly revenue of $205 million, a 13% year-over-year increase and our best revenue growth quarter of the year.
This was in the middle of our guidance range of $200 million to $210 million. As discussed in detail in our press release, included in both GAAP and non-GAAP results for Q4 are an $18 million tax credit from the release of evaluation allowance and pre-tax operating expense charges of $2 million.
These items net to approximately $0.21 per share for both our GAAP and non-GAAP results. Net income for Q4 was a new quarterly record of $46 million, with fully diluted earnings per share of $0.56.
Non-GAAP net income was also a new quarterly record of $50 million, with non-GAAP fully diluted earnings per share of $0.62. Excluding the $0.21 per share for the items discussed earlier, non-GAAP net income for the quarter increased by 18% year-over-year.
A reconciliation of the GAAP to non-GAAP results is included as part of our earnings release. Looking at the full year, for 2007, we delivered another record year with record revenue of $740 million, up 12% and record GAAP and non-GAAP net income.
In 2007, we delivered outstanding cash flow from operations of $145 million, up almost 50% from 2006. This demonstrated a very strong cash return that we can generate on the net capital that is invested in operating the business.
As we close out 2007, I think it is useful to review how the company has evolved so far this decade. Among the major changes since 2000 are that our relative exposure to instrument control is now one-third of what it was.
The percentage of our employees in the emerging countries has increased by a factor of 10, helping lower our cost base and a percentage of our revenue coming from emerging countries has more than tripled. As a result of these changes, we anticipate that our annual operating margins will be less volatile during industrial slowdowns going forward.
Now looking at Q4 revenue in more detail, our virtual instrumentation and graphical system design products, which represent the vast majority of our product portfolio had another strong quarter with 14% year-over-year revenue growth. Additionally, in Q4, we saw a record $6 million sequential increase in deferred revenue on the strength of record software orders.
This compares with a net increase in deferred revenue of $3 million in Q4 2006 and $14 million for all of 2007. Sales of our instrument control products were up 6% year-over-year in Q4.
We believe the modest improvement in our instrument control sales is related to the easier compare we faced in Q4. Given our assumption of a further weakening of the global PMI, we expect these products to see a meaningful year-over-year revenue decline in Q1.
While our instrument control products remain sensitive to the global PMI, they now represent only 9% of revenue compared to almost 30% in 2000. On a regional basis, during Q4, year-over-year revenue growth was 24% in Europe, 26% in Asia, and flat in the Americas, giving overall growth of 13%.
We believe that our performance in the U.S. was impacted by the significant decline of the U.S.
PMI, which ended the year at 47.7, a negative reading for the industrial economy in the U.S. This was lower than we expected and a full 5 points below its 10 year average.
Our performance in Asia was helped by growth in Japan during Q4. Now, looking at the non-GAAP income statement in more detail, non-GAAP gross margins in Q4 was 76.2%, up from 75.4% in Q4 last year and was at its highest level since 2000.
R&D expenses were up 16% year-over-year in Q4. Software development expenses capitalized in the quarter amounted to $500,000, down from $1.1 million in Q4 2006 and $1.7 million in Q3 2007.
Also during the quarter, $2.4 million in previously capitalized software development costs were amortized to cost of goods sold. Now turning to the balance sheet.
As of December 31, the company had $289 million of cash and short-term investments, up $13 million from September 30. This cash balance is net of $8 million in dividends paid during the quarter and $12 million used to repurchase 370,000 shares of NI's common stock at an average price of $31.87.
For the full year, our cash and short-term investments were up by $38 million. This is net of $27 million paid in dividends and $80 million used to repurchase stock at an average price of $29.20.
We also announced today that the Board of Directors approved a 10% increase in the company's quarterly dividend to $0.11 per share payable on March 3rd to shareholders of record on February 11. Now I would like to make some forward-looking statements.
As we've discussed previously, our business plan for 2008 through 2010 is to focus on our long-term model while accelerating the annual growth in our field sales resources with a goal of doubling our technical sales headcount by the end of 2010. Given the current economic uncertainty, our guidance is deliberately conservative and assumes that we will see a further meaningful deterioration in the global PMI during Q1.
This conservative assumption means that for 2008, we will be investing in R&D and field sales while being cautious with headcount growth in other areas. It also means we expect to see operating margins in 2008 which are below our long-term target.
In addition, because of our turns business, we are also assuming that similar to 2005, the shift of Easter to Q1 this year from Q2 last year will have an approximately $5 million negative impact on revenue during Q1, primarily in Europe. We expect a corresponding positive impact in Q2.
As a result, for Q1 the company expects revenue to be in the range of $182 million $196 million, equivalent to year-over-year revenue growth of 6% to 14%. GAAP fully diluted earnings per share for Q1 is expected to be in the range of $0.18 to $0.28 per share and non-GAAP fully diluted EPS for Q1 is expected to be in the range of $0.23 to $0.33 per share.
We are expecting our non-GAAP effective tax rate for 2008 to be approximately 20%. For Q2, the company is currently expecting revenue to be in the range of $194 million to $208 million, equivalent to revenue growth of 8% to 16% year-over-year.
GAAP fully diluted earnings per share for Q2 is currently expected to be in the range of $0.25 per share to $0.34 per share with non-GAAP EPS in the range of $0.30 to $0.39 per share. As these are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any greater decline in the economy, expense overruns, manufacturing inefficiencies, tax credits and foreign exchange fluctuations.
In summary, we delivered a very good operating performance in 2007. Our focus in 2008 is to continue to generate strong profitability and strong cash flow while accelerating the growth of our field sales resources with the goal of doubling their headcount by the end of 2010.
We believe this will position us well for the eventual recovery in the global PMI. With that I'll turn it over to John Graff, Vice President of Marketing.
John Graff - Vice President, Marketing and Customer Operations
Thank you, Alex. We turned in a good performance in Q4 in a difficult economic headwind.
While the global PMI dropped in December to its lowest level in the past two-and-a-half years, we saw our strongest revenue growth of the year in Q4 with revenue up 13%. For the full year, we delivered record revenue up 12%, our 30th year of revenue growth in our 31-year history.
We also delivered a strong operating performance for the full-year and made significant gains towards our long-term goal of 18% operating margin. In Q4, our material instrument control business saw a modest gain, but growth was again driven by our virtual instrumentation and Graphical System design products, which now account for over 90% of revenue.
Growth of our virtual instrumentation and graphical system design products came in at 14% for Q4. We had record revenue in many key product areas including data acquisition, distributed I/O, PXI and modular instrument.
Large system sales, especially PXI and CompactRIO, once again had a very strong growth in the quarter and helped drive our average order size to a record $3616, up 12% from Q4 last year. We were very pleased with strong software orders that outpaced company growth in Q4.
LabVIEW version 8.5 released in August had seen strong early orders and adoption from both new users and customers upgrading from previous versions. In particular, LabVIEW 8.5's ability to fully leverage the performance of multi-core processors has generated very strong response from accounts and industries that have historically focused on traditional text based programming languages.
LabVIEW 8.5's enhanced support for hardware targets such as FPGAs and touch panel PCs generated software growth in new applications particularly in the industrial and embedded space. We saw a strong software growth in academia as well as through large multi-seed LabVIEW license agreement.
Q4 was another strong quarter for our data acquisition product line. During the quarter and throughout 2007, we introduced new high-end data acquisition devices that improved the average selling price and gross margin of the product line.
Our USB products continued to be a strong growth driver for us with our CompactDAQ system based on C Series technology closing the year with a very strong Q4. We had our fifth consecutive quarter of record PXI system sales in Q4, continued success of the low-cost integrated PXI chassis and controller helped drive record unit sales, while revenue growth was driven by strong sales of our new PXI Express chassis and controllers that provide very high bandwidth for multi-instrument and data streaming applications.
PXI Modular Instruments had record revenue in the quarter led by a Dynamic Signal Analyzers for sound and vibration measurement, high-speed digitizers and RF instruments. We continue to see strong sales of our RF modular instrument into applications such as spectral monitoring and testing of the emerging wireless standards, which benefits from the flexibility of our software-based approach to measurement and signal analysis.
We continue to see success in industrial and embedded applications driven by another quarter of triple-digit year-over-year revenue growth of our FPGA based CompactRIO systems. CompactRIO has been instrumental in helping us win business in new application areas including robotics and autonomous vehicle control.
One example is a team of engineering students at Virginia Tech that used LabVIEW and CompactRIO to win third place from a field of 89 competitors in the DARPA Urban Challenge. A government sponsored program was focused on autonomous ground vehicles that had to navigate traffic and other obstacles in a marked city environment.
The team used CompactRIO to perform throttle break and steering control and the vehicle and LabVIEW running on two quad-core servers to process several high-end machine vision algorithms. In addition to being used as a prototyping platform to design embedded systems, CompactRIO has also have been deployed as the measurement and control system in sophisticated machines and in a high-end automation applications.
To better serve this space, we released a new low cost integrated CompactRIO chassis and controller during the quarter. This system provides OEM customers with the lower price point to serve deployments in higher volumes.
In November, we released a new family of Smart Cameras aimed at helping us better serve industrial test and inspection applications. The first two Smart Cameras integrated image censor and a power PC processor that can run LabVIEW in a ruggedized package suitable for harsh industrial environments.
Early sales results have been very positive. Before closing, I would like to take a moment to review the significant changes we have seen in our business over the past four years.
We have continued to grow as a truly global company with 55% of revenues in 2007 coming from sales outside the United States. We have transitioned from being a transaction focused PC peripheral and software company, to now operate in a platform-based business that also includes large system sales to high-end test, industrial and embedded applications.
While we have seen instrument control dropped only 9% of revenue, our PXI modular instrumentation revenue has tripled to become one of our larger product areas. We believe that our unique software based and customer defined approach to instrumentation has disrupted the traditionally served instrumentation market and provided us continued growth opportunity in automated tests.
Since 2003, our distributed I/O revenue has tripled as well. New technologies introduced in that time including LabVIEW FPGA and CompactRIO have presented an opportunity to address the historically underserved custom design space and expand our available opportunity in industrial and embedded applications.
The success of PXI and CompactRIO over the last four years at system level platforms has dramatically changed our business in other ways. As mentioned earlier, our average order size at the end of 2007 was slightly over $3600 compared to approximately $2900 at the end of 2003.
This was driven by a greater percentage of our orders being larger system level sales. Orders over $20,000 were 35% of our business in 2007 compared to only 25% of our business in 2003.
Looking at what has transpired for NI over four years clearly demonstrates that the investments we made in R&D during these past four years have paid-off. And the products those investments produced have gained scaled and contributed to our growth.
The fastest growing areas of the business included embedded machine design, RF and digital test, where we have relatively low market share. I should also point out that what we have accomplished over the past four years was also during a period where we delivered strong operating leverage, taking our non-GAAP operating income from 9% in 2003 to 17% in 2007.
Our direct field sales force has a tremendous competitive advantage in helping identify, develop, close and support the larger opportunities made available by our system level platforms. Given the tremendous progress R&D has made with our new platforms and the major product releases we expect in 2008, we believe now is the right time in our product cycle to aggressively expand our sales team to leverage this R&D investment.
In closing, we were pleased with record revenue in Q4 and for the full year despite a difficult economic climate. We look forward to new opportunities for growth in 2008.
With that, I will turn it over to Dr. T.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you, John. I was pleased with our performance in Q4 and for the full year as we again delivered record revenue and record net income, turning in our 30th year of revenue growth in our 31-year history.
We also delivered a strong operating performance for the full year and made significant gains toward our long-term goal of 18% operating margin. These efficiencies gained in 2007 and over the past four years have been a direct result of the commitment and dedication of our employees.
I would like to take this opportunity to congratulate our employees on National Instruments being named for the ninth consecutive year to Fortune Magazine's 100 best companies to work for. This honor is something we can all be proud of and is a testament to our long-term approach to growing a company build to last.
During the year, we made significant progress towards our vision of graphical system design. We continue to produce innovative new products to drive our new business into new areas such as LabVIEW 8.5 for multi-core Processors, PXI Express modular instruments, and higher performance and lower cost CompactRIO systems.
These new products combined with solid execution of our sales force fueled very strong growth of large system sales. We plan to further invest in our systems level business in 2008 to support our success in industry such as military, aerospace, and energy.
One of the significant strengths that emerged in 2007 was the intensified focus on green technology and environmentally friendly design. Looking to 2008 and beyond, we believe there will be significant investments made improving the environment and we believe that National Instruments is uniquely suited to benefit from this movement.
While we have taken steps to reduce the environmental impact on our campus and of our products, our real strength has been how we empower researchers to measure environmental condition and arm designer tools [inaudible]. Even with climate change at the top of the global agenda, I believe that progress will be somewhat a voyage of discovery.
Scientists and engineers must be able to measure and characterize that problem before they can correct it. But are there software and hardware abstracts the complexity we’ve had the and embedded monitoring researchers can utilize NI tools with little or no expertise in complex instrumentation or control design.
This enables researchers in fields such as biology and energy production to monitor environmental conditions and design more efficient alternatives faster and at a lower cost. One example is UCLA's use of CompactRIO in aerial suspended robotic sensors used to monitor global change indicators in the Costa Rican rain forest as well as biological [inaudible] ecosystems.
In addition researchers in industry and academia are using NI software and hardware to simulate prototype and monitor alternative energy systems including wind, solar, wave harvesting and fuel cells. These are just a few of the many examples of our customers using NI tools to improve the environment.
And I believe our continued investment in these areas will provide new growth opportunities for us moving forward. To close, I was pleased with our performance in Q4 and for the full year, I believe our long-term approach to aggressively invest in our system level platforms has been key to our continued growth.
I believe our long-term vision is sound and I look forward to continued strong execution in 2008 and beyond. Thank you.
We will now take your questions. Question and Answer
Operator
Today's question and answer will be conducted electronically. [Operator Instructions] Our first question comes from Antonio Antezano with Bear Stearns.
Antonio Antezano - Bear Stearns
Good afternoon.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hey Antonio, how are you?
Antonio Antezano - Bear Stearns
Good. It seams that you will remain committed to your plan to expand the sales resources by the slow down in the market.
And I was wondering first, I have two question on that, first is what kind of operating margins would you expect in these environment, I guess for the next couple of quarters where you have provided guidance? And secondly as the PMI start to recover in the future, what kind of sales or revenue growth targets you have in mind, given that for the last two quarters the global PMI index was inclined more growth [ph] of high single digit and you clearly have outperformed that.
So, I would argue then if the PMI start to recover, you might see more leverage on sales than what you've seen in the past so, can you comment on that?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure. Really what we are trying to do, obviously Antonio, is about balancing the short-term and the long term.
The short term were being conservative in our expectations for the market, we're be conscious on our hiring outside of strategic areas of R&D and technical sales. And I know as you're aware having almost doubled operating margin over the last four years as a percentage of revenue, we’ve made some very fundamental significant improvements in our cost base.
Another [inaudible] this period and we do expect to see some operating margin hit, as we are conservative in our expectations on the market and on revenue. We do intend to continue on the sales force expansion, but, looking out for the next two quarters, obviously we try to build that into our guidance and I'll use guidance as the best indicator for you of where we expect margins in the next couple of quarters.
On the long-term, we're very bullish. Our new platforms are doing very well.
We see lot of growth opportunities and we have some major product introductions coming so, we believe that this is the right time in our product cycle to ramp the sales force. And the decision to ramp the sales force is really based on the timing around our product evolution.
And when we get to 2009, 2010, we want our shareholders to be happy with the decisions we're making now. Clearly, the intent of ramping the sales force in the time frame is to get greater acceleration of revenue growth when the PMI recovers.
And with that, we would expect to see greater leverage during that recovery on profitability as well.
Antonio Antezano - Bear Stearns
Thank you.
Operator
We'll take our next question from Bill Stein with Credit Suisse. Mr.
Stein your phone line is open, if you check your mute button? And we'll check his line.
We’ll do our next question from Mark Moskowitz with J.P. Morgan.
Mark Moskowitz - J.P. Morgan
Yes. Thank you, good afternoon.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Hi Mark how are you.
Mark Moskowitz - J.P. Morgan
Feeling yourself?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Not too good to tell you the truth, my voice has given out I am afraid.
Mark Moskowitz - J.P. Morgan
Okay. I'll try to be brief.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
No problem.
Mark Moskowitz - J.P. Morgan
So, maybe a few questions here. Could you first, just budding up on Antonio's question as far as the OpEx and headcount velocity.
Can you give us a point of reference of where are you in terms of the field sales headcount now and how should, we think about that being rolled out over the next two quarters versus maybe the back half of '08?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure. Maybe a little...
I’ll start with a little bit of a hit if that's okay. During the late 90s and through 2000, we had grown our field sales force in high teens to 20% type of rate.
And during the last 4 or 5 years, as we were maturing our product platforms, and really getting to a platform completion stage, we've products like Modular Instruments and PXI and cRIO. We have restricted the growth of our hiring in the field to a level that's been significantly below our historical rate, as we've driven up profitability and really evolve those products.
Looking to our product roadmap going forward and where we stand right now we have about 370 or so technical field salespeople that are deployed globally right now. We did start the process of preparing for expanding the field in 2007 as you're probably aware our process of putting people into field is typically to recruit them into our application engineering ranks for about 12 to 18 months and then deploy them into the field as quota carrying salespeople.
We did ramp up our hiring of AE's in '07 and you will see the gradual increase in deployment of resources into the field throughout 2008. And we would expect the field to grow by more than 20% during '08.
And that will then continue on as we go into 2009 and 2010. In terms of the benefit, short-term, we believe that the pay back and then return on our investment and sales force is much quicker than that for R&D and really the hard heavy lifting from a product strategy point of view is largely been done.
I want to turnover to Dr. Truchard and John really to talk about how the sales force engage in these key platforms and where they drive value.
John Graff - Vice President, Marketing and Customer Operations
This is John. And as Alex mentioned, the field sales force plays a big role, especially as we're seeing traction with the system level platforms on large opportunities.
So, as you naturally would expect field and specially trained and experienced technical field resources play a key role in identifying, working, closing and servicing these large opportunities. So, as we look at the momentum we have on our system level platforms, we think this investment starting first with application engineers, but as they roll into the field over the next one to two years can really have a positive impact on continuing the momentum with the large system business.
We expect some benefit this year, but again as Alex said, where we would probably see most impact, most return will be the 2009, 2010.
Mark Moskowitz - J.P. Morgan
Okay. That's helpful and then maybe if we can tackle the...
more of the near-term environment obviously notwithstanding the PMI. maybe we could look at Japan versus the U.S.
Can you maybe just give us a little context around the ease of products the verticals or even certain types of customer profiles that are running to both the strength as well as the weakness
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure. I think we...
I let John to address the products and the customer segments, and then I'll perhaps suggested you a correct geography, areas Mark. We're very pleased with Japan in Q4 actually, after two quarters of negative growth our decline in revenue, with the drop in the PMI we saw some modest recovery in the Japanese PMI in Q4, and we saw return to growth at our Japanese operation with almost 10% year-over-year revenue growth in dollars in Q4, and we actually saw...
as you saw from the overall numbers, accelerated revenue growth from the rest of Asia as well during Q4, so we have great execution there, also good execution in Europe as you saw during the quarter. The thing that's making me cautious on guidance, obviously the U.S.
PMI for December came in below the lowest point of all, I think 52 our expectations that were out there, so clearly came in at a level much lower than anybody had anticipated including ourselves. And certainly the Fed's decision to cut rate 75 basis points, also engender some caution to me in terms of looking out at the environment, we are likely to see over the next couple of quarters.
As I said short term, we deliberately being pretty cautious, about what we expect to see. We will see how that plays out over the course of next couple of months of PMI data as whatever being adequately cautious or perhaps overly cautious.
Mark Moskowitz - J.P. Morgan
And then just lastly you mentioned..
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well on that question Mark, John is going to address the question you had on products...
Mark Moskowitz - J.P. Morgan
Okay sure.
John Graff - Vice President, Marketing and Customer Operations
Just briefly on products, I mean first of all, as you know we don't break out product line revenues, but I can tell you that if you look at regions like Americas, primarily U.S. compared to Japan, there is not a significant variations in the product mix.
Software has been stronger our platform worldwide, Japan has done an outstanding job with relying [ph] our software platform over last years. So, no significant change in terms of product mix and like Alex said we would say, we are very pleased to see Japan come back to growth and we've had some outstanding execution by the team there.
Mark Moskowitz - J.P. Morgan
Okay thanks John. Just lastly you mentioned, maybe more product or major product announcements in 2008, how should we think about that, is that going to be more on the RF side, the embedded piece or can we even see maybe a souped up type of a maybe then a stethoscope type instrument down the road?
John Graff - Vice President, Marketing and Customer Operations
Well we look forward to seeing you at NI Week where you might find out if some of that’s true.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
And obviously Mark, what we are doing is we are going to be reinforcing success and that's where the bulk of our R&D resources are focused.
Mark Moskowitz - J.P. Morgan
Okay thank you.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Thank you.
Operator
We'll take our next question from the Ajit Pai with Thomas Weisel Partners.
Ajit Pai - Thomas Weisel Partners
Yeah good afternoon.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Hi, Ajit.
Ajit Pai - Thomas Weisel Partners
Couple of the quick questions, the first one is the new sales engineers, can you give us some color as to where they are going to be deployed in terms of geography?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Certainly, we will be obviously deploying an increase across the globe. We will be focusing on the regions where we are seeing the fastest growth which is clearly in the emerging countries at this point in terms of absolute headcount, while we continue to see lot of good opportunity for our new product platforms in the developed world as well and so we will be growing our fields in the Americas, in Europe and in Asia.
Ajit Pai - Thomas Weisel Partners
And proportionate, like how many would be in North America?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
I would... look at the rough force as relative to revenue to give you a good guide of the distribution.
Ajit Pai - Thomas Weisel Partners
Got it, and then when you are looking at the... at your head count at the end of the quarter and the end of the year, what was it?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
It was 4647. And its up about 500 from this time last year, we had about 60% of it or so coming in the emerging countries of the increase.
Ajit Pai - Thomas Weisel Partners
Got it. And then when you're looking at the share buybacks that you did this quarter above $30 could you give us some color as to how you're thinking about share buybacks right now?
What sort of made you increase your dividend going forward and what are the other uses for cash?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Certainly well, I need not start by reiterating our long-term strategies we have laid out is quite clearly the number one priority for cash is dividend. We view that as a very tax efficient way to return cash to shareholders and obviously we increased the dividend 10% a year.
The Board increased the dividend 10% in January and a little over 50% over the last 12 months. Buybacks are our number two priority for cash and our strategy there is opportunistic.
Based on our expectations of the long-term value of the company and our strategy will continue to be opportunistic as we look forward. And then on acquisitions, we are always looking at acquisitions but we are cautious to make sure that we really see real value and to be honest in the last couple of years we haven't done any acquisitions because pricing in my view has not been realistic.
I think it's more likely in 2008 that pricing is likely to be more realistic and that perhaps may give us an opportunity to find value in acquisitions in 2008.
Ajit Pai - Thomas Weisel Partners
Got it. And then lastly just on the strength you talked about in Japan, large number of other Companies haven't talked about any strength of theirs.
Is it any particular vertical that is driving the strength or is it very broad based? So, what are you seeing in that geography?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
I'd revert back to John's comment earlier on. We did see a recovery in the PMI in Q4.
Our product distribution is very uniform across the world. And we are seeing a great success in some of our USB platforms over there, which may potentially be a game changer in some of the spaces that we serve.
But beyond that it's a very homogeneous distribution that we typically have geographically.
Ajit Pai - Thomas Weisel Partners
Right. But you have also talked about in the past Alex that the PMI is more of a forward indicator than a coincident indicator.
So, is it fair to sort of assume that the help that you are seeing in Japan right now in the PMI would mean that the first half of the 2008 is going to remain healthy?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, if I could predict the first half of 2008 I wouldn't be doing this job. Our approach is we want to be fiscally prudent and we are going to, like I said, balance the short term and the long term.
With the Fed’s rate drop and really weak PMI in the U.S. for December that gives me enough information to choose to be pretty cautious at this point in time.
We will be like Ben Bernique [ph] here, we are going to react to data. And so we will evolve as we go through the quarter if the data comes in more positive then our conservative assumptions and I am certain to be happily surprised by that and we will take that as we go.
But we are going to be fiscally prudent and ensure that we protect the strategic investments in R&D and in the growth of our field sales force that we really believe are going to want to see done when we get to 2009 and 2010. Those are the things we are going to be want to be sure that we had done in '08.
Ajit Pai - Thomas Weisel Partners
Got it. Thank you.
Operator
We will go next to Richard Eastman with Robert Baird.
Richard Eastman - Robert Baird
Hi, just a couple of questions for John. John, with this investment in the field sales force, is the primary effort going to be towards the embedded industrial applications, I mean just given the basic definition of the business.
John Graff - Vice President, Marketing and Customer Operations
Well, I think as we talked about it in ’08 [ph] and we've mentioned in past calls, I mean there is two areas we see for growth and one is continuing to get share wallet and test and high-end test and RF platform that we talked about, digital test is another area where we are seeing some traction and the strong growth. But obviously industrial embedded is the key area for growth and more and more we are having a really significant success.
As we mentioned in the last call, that's probably the fastest growing area. We mentioned Distributed I/O, record revenue, CompactRIO, triple digit revenue growth and that's four years and into its existence as a product area.
So, we will invest, as Alex said, regionally as we see the opportunity for growth and the same kind of applies in terms of the investment in test versus in industrial and embedded. So as we see the opportunistic investment and the return on that.
We continue to expect that to be the best earning part of our business.
Richard Eastman - Robert Baird
That drives the average sale price higher presumably as well?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Exactly. These areas that John mentioned, they are the ones that are now gaining scale CompactRIO and our test systems, especially things like RF.
And both of these areas require higher-level system level support. So, we are investing where we can get them.
We see opportunity and the capability needed to accomplish that, keep gaining scale in these areas.
Richard Eastman - Robert Baird
Okay. And then could I just ask a question on this receivable write-off, that seems like a big number given your average order size, I mean is that...
how does that happen?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
That's a... it came as a bit of a surprise, Alex here, [inaudible] Americas that declared bankruptcy last week and they were a channel partner of ours and there is a lot of individual pieces of business going through.
It appears they got into trouble as a result of a failed acquisition. And they represent less than a quarter, 1% of our revenue and as we look forward, one of the number of our channel partners, we would expect going forward that the bulk of that revenue that was flowing thorough their channel will now divert to other channel partners who will service that business.
Richard Eastman - Robert Baird
Okay. And then just a last thing Alex just a detail question on the 2 million of restructuring, the receivable as well as the 600,000 of Ireland-Hungarian admin what line items did that hit?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
The receivable is in sales of marketing?
Richard Eastman - Robert Baird
It is. Okay.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
The restricting is in G&A.
Richard Eastman - Robert Baird
Okay. Very good, thank you.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Thank you.
Operator
We will take our next question from Terence Whalen with Citi Investment Research.
Terence Whalen - Citi Investment Research
Great. Thanks for taking my question.
This one is regarding headcount, can you just repeat what you said about the field sales, you say they would be up per head by 20% and then if you could also comment on the broader headcount, I think you said it was up about 12% this year. What would be your expectation for 2008?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
So certainly Terence, that the broader headcount was 4647, which is up 12% year-over-year and off that increase about 60% of it came in the emerging countries. When we look at the sales force, we have about 375 approximately technical sales people deployed globally.
The increase that we're anticipating for 2008 in that... in those numbers are somewhere North of 20% for 2008 and our goal is to roughly double that headcount by the end of 2010.
That is a significant acceleration in growth compared to last four to five years. And in terms of remainder of headcount in 2008 based on our conservative expectations for the first half, I would anticipate that our headcount growth in other areas will be less than what we saw in 2007.
Terence Whalen - Citi Investment Research
Great. And then a follow-up, pretty straightforward actually, it looks like the midpoint of guidance for the next couple of quarters is going to be in the 10% to 12% area, and I understand there is a little bit of vacillation because of the Easter and $5 million change there.
But looking more broadly at the first half versus the second half, are you budgeting your capital budgets with an expectation of similar growth in the second half reduced growth or higher growth in that 10% to 12%? And I guess as a corollary, do you expect operating margins on a pro forma basis to increase or decrease in 2008?
Thanks.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
On the first question, our capital budgets are not going to be that heavily effected by a few percentage points change in revenue growth one way or the other. Our capital needs are quite modest.
I think we had about $24 million in capital to spend in 2007 versus about $36 million dollars in depreciation and amortization. So there might be some modest change because of the shift in revenue growth from the first half to the second half.
But I think it would have a de minimus impact on the dollars we would spend capital wise. In terms of your second question, I think if I interpret your question correctly is whether you expect to see higher operating margin in the second half of '08 from the first half of '08, if I'm interpreting your question correctly.
Is that go ahead Terence.
Terence Whalen - Citi Investment Research
Sorry. I guess to simplify, I apologize, would you expect higher growth in the second half on a revenue basis of the 10% to 12%?
And then also for the full year, I think for '07, you came in a little bit below your operating margin plan. Do you expect for the full year in '08 operating margins to increase or decrease?
And that's it, thanks.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure, well on the second question what we said on the call is based on our conservative expectation or deliberately conservative expectation. We are anticipating that we will not hit our operating margin target of 18% operating margin during 2008, as a result of the conservative expectation and a decision to ramp up the field sales force.
In terms of revenue growth in the second half, obviously we've given first half guidance. The second half at this point is just too far away to really comment.
What I can tell you is we would expect to see an acceleration in revenue growth when the global PMI shows a decent recovery.
Terence Whalen - Citi Investment Research
Okay. But on the question on whether operating margin for a full year is up or down?
I understand it's going to be under the 18%, but relative to '07 16.6%.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
I think if you work... if you use the guidance for the first half as a basis that should be able give you pretty good range for the year.
But we certainly expect to see operating margin levels that are much higher than we saw in the early 2000's but we are planning on, we have given conservative guidance and we are planning to have a fairly decent increase in both R&D head count and the sales force, and that will put pressure on operating margin.
Terence Whalen - Citi Investment Research
And so for the full year we could expect operating margin on a pro-forma basis to be down or up slightly from '07 16.6%?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
As such Terence, we aren't giving guidance out for the first half. So, at this point I am not in a position to give any guidance for the second half of the year.
Terence Whalen - Citi Investment Research
Okay, I appreciate it. I was just trying to tailor the model.
Thank you.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
No problem.
Operator
We'll take our next question from David Yuschak with Smh Capital.
David Yuschak - Smh Capital
Could you just revisit that a little bit on the EBIT margins for your... in your assumptions, Alex for the first half of this year, how much has it been conservative versus potentially the drag on building up the field sales force even they might be taken some on to some other places.
How much of that drag on assumptions on EBIT margin not able to get back there, is really equated to getting that part of the cost, and basically an investment in that area versus being more conservative about the outlook?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well I said, they are probably fairly balanced, David. In our strategy before we saw the fall off in the PMI in Q4 was to be able to hopefully hit 18% operating margin in 2008, while growing the field sales force and leveraging other areas of our business to delever that leverage needed to fund the sales force expansion.
As we looked at the new economic data that came in through to Q4 and obviously Q4 was our best quarter of the year. So 13% revenue growth, very good operating income, very good leverage.
But as we look at the data points that have recently come out, especially with the Fed's decision, we are choosing to be cautious because we want to be open about the data that's coming in as we see it, and we are committed to the sales force expansion, so I would say that those two elements are somewhat balanced in terms of their impact on EBITDA.
David Yuschak - Smh Capital
Now as far as what would... what kind of conditions because you obviously made the commitment here to ramp up the field sales force.
What if anything would be out there that would kind of help you do... discourage you from that or are you well into that already that no matter what happens that is imbedded in the numbers?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, we've already launched a key portion of this initiative as we ramped our application engineering hiring and in 2007 and as we discuss this plan to increase our sales force aggressively as we went through ‘07. The real key that is driving us and I hope everybody understands this from our comments in the call to trigger for driving the sales force expansion is really built around where we are, what our products and the platform completion we are reaching with our core new product platforms.
And that's the key trigger that has been driving our decision which we made quite a while ago to execute on the sales force expansion in this timeframe. The fact that we're seeing a downturn from the PMI point of view is more a coincidental and is happening at the same time but the core thing that’s driving our decision to increase the sales force is based on our product strategy and this is a plan we've put in place some time ago.
So in terms of executing on that we are very committed, we believe in 2009 and 2010 that our shareholders will be glad we made that decision and so based on what we know today that that’s where we are headed.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Another key point is the areas like CompactRIO is growing at a 100% and we would like to keep it growing at that rate. And so basically those investments will help keeping the most successful, hopefully help keep us growing more successful area for the business.
David Yuschak - Smh Capital
The sales cycles on some of these newer products, you are finding them to be a little shorter in duration because of the robust nature of them and that is what makes you committed to make this sales force expansion as aggressive it is, despite some of these concerns on the economic front?
John Graff - Vice President, Marketing and Customer Operations
David, this is John. As we've seen the success with the large orders.
We’ve spent the last year or so really doing some in-depth analysis looking at what's been driving that success and one key factor is system platforms, CompactRIO, PXI being two examples. But the second thing that has been driving those has been the role of the field sales force.
And it was that knowledge and insight that naturally led us to look and say how do we continue the growth and possibly accelerate it in the future, is that investment in field sales. So as Alex mentioned that was part of the thinking that went into some of the decision making in 2007 and what gives us the opportunity to make this investment for long-term growth.
David Yuschak - Smh Capital
One just last question is PMI issue Alex, seeing the shortfall off in the U.S. this is part of the guidance to your concern that you might see that in overseas even though you have good experience out there or is it more that the mix on the conservative side is to skew to the U.S.
economy than it is international?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well it is a little bit of both David, our guidance we've given is based on a definite assumption that we assume that the global PMI will fall meaningfully in Q1 and that made through proved to be overly conservative, it may prove to not be conservative enough. We will have to see as we go through the next few quarters.
But we want to make certain that we are preparing for whatever circumstances may come along and that we are doing it in a way that guarantees that we can execute on the long-term investment strategy... that we feel is crucial to deliver good growth for the company in ' 09 and beyond.
So we are making it a definite call at this point in time in terms of giving guidance that we are assuming things get worse globally. And then we will let the data play out and see what it tells us as we go through to next three to four months.
David Yuschak - Smh Capital
Well, I'm not sure following the Bernique approach in reacting to data though what Alex pointed to and seeing how he is reacting instead of looking forward.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
But, we are trying to look forward, David, make sure we preserve our best investments and then we'll see as we go.
David Yuschak - Smh Capital
All right, thanks.
Operator
We will take our next question from John Harmon with Needham & Company.
John Harmon - Needham & Company
Hi, good afternoon.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Hey, John.
John Harmon - Needham & Company
I just first of all, I was wondering, if you could talk about your rationale a bit on the way you set your guidance. On one hand, you said your are conservative, but on the other hand, you said you widened the range and the range was [inaudible] $14 million, I think it was $12 million, the quarter before usually about $10 million.
Did you widen the range on the bottom end or on probably not on the top end? I guess in short how much did you subtract from your guidance and talk about this $5 million from Easter as Easter catch all for Easter and Chinese New Year and the Super Bowl and this and that or does Easter effect really that large in Europe.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, on Easter front, it's just one I was. So [inaudible] to bring up that's probably one of the reasons we gave guidance for two quarters out there, but in '05, we saw a real clear impact for when Easter shifted from Q2 to Q1 and we saw our revenues in the last week of the quarter in Europe, which is our second largest market dropping half in the last week of March.
And then be up almost 100% in the first week of April in that time frame as a result of that change. And that has a noticeable swing on certain number of million dollars.
We did factored that into our guidance this quarter and Q2 we wanted to make people aware of that as they were understanding the same goals that we were looking at... same metrics that we were looking at for the next two quarters.
In terms of guidance, obviously we did widen the range about $4 million, last quarter it was $10 million from 200 to 210 and obviously we came right in the middle of that range for Q4, which was our best revenue growth quarter of the year. As we look at first half of next year, certainly we are widening the range under down side from 6% to 14%.
That moves the midpoint down from I believe about 13% in Q4 to around 10% or so in Q1.
John Harmon - Needham & Company
And just last thing just kind of an observation, I thought that you raised your dividend, but looking to your balance sheet it looks like cash is piling up faster than you are able to find something to do with it. I assume you are talking about what level of cash you are comfortable with and your dividends, strategy and so on please?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure. We talked a bit earlier on the call on what we are...
our priorities for cash usage were but obviously as you noted, we have steadily increased our cash position this year, despite $27 million in dividends paid in '07 and about $80 million in stock buybacks during the course of that timeframe. And I think if you look back at our cash flow from operations at $145 million, which was significantly higher than a non-GAAP net income, heavily driven by that increase in deferred revenue, which is also obviously a deferral of profit.
So cash flow from operations was considerably stronger than non-GAAP net income during the course of the year and that's something we have seen in the past. In terms of our ideal amount of cash, obviously, I would feel right now that the company has certainly an adequate amount of cash and has some flexibility in terms of its physical resources.
Our priorities will remain the same for dividends, opportunistic stock buybacks and then it is not unlikely given the pricing dynamics we've seen in the market over the course of the last two months that acquisitions may be a more attractive proposition for us in 2008. As pricing is perhaps a more realistic than it has been with private equity firms in '07 and '06.
John Harmon - Needham & Company
Sure, that helps. Thank you.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Thank you.
Operator
That's all the time we have for question today. At this time, I would like to turn the conference back over to Mr.
Davern for any additional or closing remarks.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, thank you again for taking the time to join us today. As a remainder we will be presenting at the Thomas Weisel conference on February 15, in San Francisco.
We look forward to seeing you there.
Operator
That does conclude today's conference. Thank you, for your participation, you may disconnect at this time.