Apr 30, 2008
Executives
David Hugley - VP 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 & Co Mark Moskowitz - J.P. Morgan John Harmon - Needham & Company Terence Whalen - Citigroup Richard Eastman - Robert W.
Baird & Company, Inc. Ajit Pai - Thomas Weisel Partners David Yuschak - Sanders Morris Harris
Operator
Good day, everyone, and welcome to the National Instruments Corporation First Quarter 2008 Earnings 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 P.M.
Central Time today and will end at midnight Central Time on May 6th, 2008. With us today are Dr.
James Truchard, President and Chief Executive Officer; Alex Davern, Chief Financial Officer; and John Graff, Vice President of Marketing. For opening remarks, I’d now like to turn the call over the David Hugley, Corporate Counsel.
Please go ahead.
David Hugley - Vice 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, revenue growth, earnings per share, growing sales force, identifying large opportunities, evolving toward larger orders system level business, and positioning in an economic recovery.
We wish to caution you that such statements are just predictions and 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 Form 10-K for the year ended December 31, 2007.
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 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 double-digit year-over-year revenue growth, strong sales in key product areas, and continued large systems success. We turned in another quarter of double-digit revenue growth in Q1 in spite of continued weakness in the global economy.
Large system sales again drove much of our growth and we saw a strong sales in our key product areas, including software, USB data acquisition, distributed I/O, PXI, and RF Modular Instruments. In our call today, Alex Davern, our CFO will review our financials; John Graff, our Vice President of Marketing will discuss our business, and I will close with a few comments before we open it up for your questions.
Alex?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Good afternoon. Today we reported first quarter revenue of $193 million, a 12.4% increase over Q1 2007.
GAAP fully diluted earnings per share for Q1 was $0.22, non-GAAP fully diluted earnings per share for Q1 was $0.28 per share at the mid point of our guidance for Q1. Net cash provided by operating activities was $30 million for the quarter.
We are pleased with the continued double-digit growth of the company despite a significant weakening of the global industrial economy since Q4 of 2006. The success of our sales force in driving large orders in new product areas has been the key to this growth and validates our strategy of investment in R&D and the field sales force.
We are committed to our goal of doubling the field sales force by the end of 2010 and I believe that this will position as well for the eventual recovery in the global PMI. Our virtual instrumentation and graphical system design products, which now represent over 90% of our product portfolio, had 15% year-over-year revenue growth.
This represents another quarter of strong revenue growth for these products despite a significant decline in Global Purchasing Managers Index since Q4 of 2006. Our growth in Q1 was driven by the success of our new products, especially in the areas of software, USB data acquisition, distributed I/O, PXI, and RF Modular Instruments.
Additionally, we booked a $3.6 million sequential increase in deferred revenue on the strength of continued strong software sales in Q1. In contrast, sales of our instrument control products were down 5% year-over-year in Q1 compared to 6% year-over-year growth in Q4.
This decline is in line with the weakness of the Global PMI in Q1 and our guidance in January. Instrument control now represents 9% of our revenue, down from 11% in Q1 last year and 28% in Q1 2000.
The ability of our overall revenue growth to resist the decline in our instrument control revenues is a significant event for NI on our path to becoming a multibillion-dollar company. During Q1, we saw growth in all regions.
We are pleased to see the Americas returned to growth in Q1 with a 7% increase in revenue after being flat year-over-year in Q4. This improvement came despite a drop in the U.S.
PMI below 50 during the quarter. Asia continued its strong performance with another quarter of over 20% year-over-year revenue growth.
Europe also saw a continued growth this quarter, up 14% year-over-year. In our guidance, we had set the expectation of the shift of Easter from Q2 last year to Q1 this year would have a negative impact on revenue in Q1 with a corresponding positive impact in Q2.
We clearly saw that impact with a significant slowdown in European bookings in the second half of March offset by the benefit of a very easy compare in Europe in the first half of April. Now, looking at the income statement in more detail.
Non-GAAP gross margin in Q1 was 76%. Non-GAAP total operating expenses in Q1 were $122 million, up 17% year-over-year.
As a result of continued investment in sales and marketing and R&D, a significant decline in software development costs capitalized and the weakness of the U.S. dollars.
As we start 2008, I think it's useful to review how the company has evolved so far this decade. Among the major changes since 2000 are that our relatively exposure to instrument control is now one third of what it was.
The percentage of our employees in emerging countries has increased by a factor of ten helping to lower our cost base. The percentage of our revenue coming from emerging economies has more than tripled and a percentage of our revenue coming from key new product areas of modular instruments, PXI, and distributed I/O has also more than tripled.
The core of our strategy this decade has been to expand the percentage of our revenue coming from application areas that are new to NI, but which heavily leverage our technology and our competitive position. The intent of this strategy is for NI to be able to grow through moderate industrial slowdowns, preserving our investments and to then accelerate our revenue growth when the industrial economy recovers.
We believe that doubling our sales force by 2010 will reinforce this strategy. On March 31, the company had $238 million of cash and short-term investments and as disclosed in our 10-K, $8 million of auction rate securities have been reclassified as long-term investments during Q1.
Also, during the quarter, the company paid $9 million in dividends, $17 million for the acquisition of microLEX and paid $49 million to repurchase 1,833,000 shares or 2.3% of the company's common stock at an average price of $26.77 per share. Today, the company announced that the Board of Directors has approved a new share repurchase plan, increasing the number of shares that the company is authorized to repurchase to 3 million shares.
In addition, the Board of Directors approved a quarterly cash dividend of a $0.11 per share. Now, I would like to make some forward-looking statements concerning our expectations.
For Q2, 2008, we currently expect revenue to follow the seasonal pattern of being up sequentially from Q1 and to be in the range of $198 million to $210 million. This is equivalent to revenue growth of between 10% and 17%.
We currently expect that GAAP fully diluted earnings per share will be in a range of $0.24 to $0.33 per share for Q2 with non-GAAP fully-diluted earnings per share expected to be in a range of $0.30 to $0.39 per share. This non-GAAP EPS guidance is consistent with that given in January.
These are forward-looking statements, I must caution you that actual revenues and earnings could be negatively affected by numerous factors, such as any decline in the global economy, delays in new product releases, expense overruns, manufacturing inefficiencies, effective tax rates, and foreign exchange fluctuations. Entering 2008, we expected a continued weakening in the industrial economy.
Now, we focused on achieving double-digit revenue growth while also investing to double our field sales force by the end of 2010. We're very pleased with the progress we've made in Q1.
Our strong competitive position and our long-term investment strategy have allowed us to take the current global industrial slowdown, now six quarters old in stride. And we expect our expanding sales force to drive incremental benefit from the eventual recovery into Global PMI.
As a reminder, I will be presenting at the Credit Suisse Conference in Boston on May 13th, The Baird Growth Conference in Chicago on May 14, and the JPMorgan Technology Conference in Boston on May 21st. With that, I will turn it over to John Graff, Vice President of Marketing.
John Graff - Vice President, Marketing and Customer Operations
Thank you, Alex. We achieved another quarter of double-digit revenue growth in Q1 in spite of difficult economic headwinds, while the Global PMI dropped during the quarter to its lowest level since 2003, we were pleased to deliver 12.4% revenue growth which was above the midpoint of our guidance and on par with the past six quarters.
Much of this growth was driven by continued strong sales of large systems. Orders over $20,000 were up 34% from a year ago and now account for 37% of total revenue.
This success translated to an increase in average order size to $3,480, up 13% from Q1 2007. This continued strong growth of large orders was driven by our R&D investments in strategic system level platforms and further validates our strategy of investing to grow field sales resources.
Much of our success at identifying, winning, and supporting large systems can be attributed to the competitive advantage that our technical direct field channel provides. We remain committed to our goal to double the field sales force by 2010 and believe that this will position us very well to benefit from an eventual recovery of the global industrial economy.
In Q1, our material instrument control business saw a modest decline consistent with the weakness of the Global PMI during the quarter. In contrast our virtual instrumentation and graphical system design products, which now account for over 90% of revenue saw revenue grow at 15% during the quarter.
We had strong revenues in many key product areas including software, USB data acquisition, distributed I/O, PXI, and RF modular instruments. We were very pleased with an increase in software orders that outpaced company growth in Q1.
This was driven by continued growth of LabVIEW Development Systems and particular Developer Suite, which packages together several of our core software products. LabVIEW version 8.5 continue to see strong adoption as its inherent parallelism has proven to be a strong differentiator in programming, in running a multi-core processors.
During the quarter, we joined The Multicore Association with Intel, Freescale, and others to develop standards to shorten time to market for products that involve Multicore implementations. In addition, we announced last month a joint initiative with Intel to deliver free hands-on Multicore programming workshops.
These workshops will visit 34 cities around the globe, to teach attendees how to leverage software design and development strategies to program Multicore processors with LabVIEW. We also saw a strong growth in our software services business in Q1.
A focus area for the company has been to develop LabVIEW user expertise and increase the number of certified LabVIEW developers. We made progress towards this goal during the quarter, with customer education showing strong attendance and revenue growth from paid courses.
We have also seen a significant increase in the number of LabVIEW users registering for and completing LabVIEW developer certification. Q1 was another strong quarter for our data acquisition products.
But much of the growth coming from continued strong sales of our USB-based devices and systems. In addition, the strong USB unit growth, the average selling price continued to increase as we introduced more high-end USB data acquisition devices, including new high-resolution devices that use an 18-bit analog-to-digital converter.
We also saw another strong quarter for CompactDAQ, our modular USB system based on our C Series modules. As it enters its third year on the market, CompactDAQ continues to see very strong revenue growth in addition to a large percentage of sales to new customers.
In Q1, we also introduced several new USB-based instruments, including two digitizers, a 6½-digit digital multimeter, and an RF power meter. All of these devices are powered by the USB bus for improved portability and benefit from the fast set of time and ease of use that USB provides.
PXI was again a revenue growth driver for the company in Q1, despite the continued weakness of the global manufacturing climate. PXI modular instrument revenue was led by strong sales of PXI high-speed digitizers and high resolution DMMs, as well as record revenue for RF modular instruments.
These record RF results followed a very strong Q4 last year and were driven by continued success in spectral monitoring applications and in consumer electronics test. Also during the quarter, we released our first PXI source measure unit in addition to the industry's highest density PXI switches.
These products have seen strong early sales in precision DC applications such as semiconductor parametric tests and electronic device and component validation. As test engineers continue to face the challenge of testing increasingly complicated designs or shrinking timelines and budgets, we see greater opportunity for the latest technologies including PXI spreads, FPGAs and Multicore processors to develop high performance test systems that can meet consumer demand for higher quality products.
In a recent processing solving report, industry analyst Kiran Unni said, "the adoption of tools such as PXI is an indicator that companies recognize the benefits of moving towards software-defined instruments." In Q1, we continued to see success in industrial and embedded applications, driven by another quarter of strong CompactRIO revenue growth.
CompactRIO based on our FPGA technology and C Series modules has helped us win business in new, high-growth areas such as civil structural monitoring and alternative energy system monitorings. One such example is at Meazza Stadium in Milan, home field of the AC Milan soccer team, engineers recently installed a network of CompactRIO systems in the stadium to monitor vibrations during events, as well as corrosion of the structure.
With new research funding and municipal budgets for monitoring highways, bridges, and dams, we see structural health monitoring as an expanding opportunity for NI hardware and software. The C Series modules used in CompactRIO, CompactDAQ, and other modular systems have been a very strong growth driver in the past few years.
NI now offers more than 40 unique modules for measuring electrical, physical, acoustic and mechanical signals as well as controlling actuators and digital protocols. This does not include the dozens of modules designed and supplied by partner companies.
In Q1, we released a new C Series dynamic signal analyzer module and three new C Series based devices for USB. We are also very pleased with strong sales in Q1 of our new family of smart cameras that released late last year.
The first two smart cameras integrate an image sensor and a power PC processor that can run LabVIEW in a recognized package suitable for harsh industrial environments. The smart cameras are already helping us finding close large opportunities, including key design wins with industrial machine builders.
In summary, we were pleased with our performance in Q1 in a tough environment for the industry. We are particularly upbeat about the continued growth of large system sales.
Our increased order size is a result of strong R&D execution, since the last economic downturn, which has put us in a very strong competitive position. We now believe that our strong product portfolio will allow us to gain sufficient leverage in the long term as we accelerate the growth of our field sales channel.
As I mentioned previously, we remain committed to our goal of doubling our field resources by the end of 2010. And we believe this will position us well to take advantage of the eventual recovery in the global industrial economy.
As a final note, the National Instruments Investor Conference will be held in conjunction with our Annual NIWeek User Conference on Tuesday, August 5th. We look forward to seeing you there.
With that, I'll turn over to Dr. T.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you, John. I am pleased with the resilience we demonstrated in Q1 in a challenging industrial environment.
I believe that our solid results in the quarter substantiate the viability of our long-term financial model and goals. We were able to achieve double-digit revenue growth while accelerating our investment in the field sales channel.
We continue to execute toward our vision of graphical system design and made especially strong progress in the area of industrial and embedding. Two weeks ago, we attended and exhibited at the Embedded Systems Conference, North America's largest show for the embedded design market.
We were excited to see how much the level of awareness, interests, and usage of National Instruments products has improved from just a few years ago. This was evidenced by the awards and recognition we received this year at the show.
EE Times magazine awarded National Instruments with the Medium Sized Company of The Year Award. In addition, EDM, a magazine awarded NI CompactRIO with the Industry Innovation Award.
Receiving these accolades at the Embedded Systems Conference was especially rewarding, considering that National Instruments was a newcomer to this space just a few years ago. Last month, we also announced that the FIRST Foundation Robotics Competition selected CompactRIO and LabVIEW as the embedded controller technology platform for the next five years, beginning with the 2009 competition.
Each year, more than 40,000 high school students aspiring to become scientists and engineers will learn how to program FPGA-based control systems using National Instruments tool as they participate in the International FIRST Competition. This is another example of our commitment to enhancing engineering and science education worldwide by providing educators and students with powerful graphical system design software and hardware to connect the curriculum with the real world.
Our industrial and embedded products also continue to see strong adoption and deployment in applications for Green Engineering as environmental and energy-related investments continue to buck the trend of the current economic cycle. As I discussed in our last quarter, I believe that are...
there will be significant investments made in improving the environment that National Instruments is uniquely suited to serve and benefit from this movement. As with any design challenge, scientists and engineers must be able to measure and characterize the problem before they can correct it.
Our hardware and software are being used to both measure the environmental impacts of products and processes as well as to improve them. One example is that Nucor Steel, North America's largest steel recycler, steel recycling is incredibly energy intensive and controlling process [inaudible] such as amount of electricity required to heat a batch of steel had historically been a manual operator driven process.
At Nucor's Marion, Ohio facility, LabVIEW and CompactRIO were installed to measure the amount of steel being recycled and precisely calculate the amount of electricity required to process the steel. Dave Brown at Nucor Steel said "by programming with NI hardware and LabVIEW versus programming with PLC's and ladder logic, we have seen a tenfold increase in efficiently...
efficiency and drastically reduced the cost of facility automation." I believe that Nucor's success demonstrates our value proposition to the very large industrial and embedded markets and that Green Engineering initiatives such as Nucor's power saving process will provide additional growth opportunities for National Instruments.
To close, I was pleased with our performance in Q1, large systems sales again drove much of our growth in the quarter, and I believe that our investment to grow our field sales channel is key to continuing and accelerating this trend. Our strong product portfolio in addition to growth of our field sales channel will position us well to benefit from the eventual economic recovery.
Thank you. We will now take your questions.
Question and Answer
Operator
[Operator Instructions]. Our first question will come from Antonio Antezano with Bear, Stearns.
Antonio Antezano - Bear, Stearns & Co
Good evening.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hey, Antonio how are you?
Antonio Antezano - Bear, Stearns & Co
Good. I was wondering regarding large orders whether you could tell us what product or you could single out actually what product is the biggest contributor to this growth, that you are experiencing in larger orders or maybe the [inaudible] or maybe some particular markets?
John Graff - Vice President, Marketing and Customer Operations
Antonio, this is John. Really there is a variety of our system-level platforms that are behind the success with large orders, examples include about our PXI platform that we’ve now had in the market for ten years.
As we fill that platform out with modular instrumentation and RF instruments, we have seen a lot of success in increasing our average order size and to a lot of automated test application. So this is part of our initiative we've talked about that increased our share of wallet and those types of applications.
Another system-level platform is CompactRIO. That's now been in the market just over four years.
It's another one where we continue to see very strong growth. Again it has a Modular architecture.
It's highly coupled with our software, especially our LabVIEW FPGA and LabVIEW Real-Time software. And these platform is really taking us into a lot of industrial and embedded opportunities.
So those platforms that in the R&D investment in them over the last number of years has really kind of fuelling the strong success of our sales team as they go out and identify and close these large businesses.
Antonio Antezano - Bear, Stearns & Co
Okay. And then on the expansion of field sales you mentioned your target to double by 2010 and I was wondering if you could share where you are at this point and whether you have to start to deploy some of the application engineers that I believe you started to hire last year.
John Graff - Vice President, Marketing and Customer Operations
Right. Antonio, it's John again.
So as you mentioned and we've mentioned in a call in Q4, we did started hiring of application engineers in the second half of '07. We started to see the deployment of those resources into the field in Q1.
So as we ended the quarter, we have approximately 415 technical field sales representatives. That's our global number.
That was approximately an 18% increase from a year ago and that compares to a growth rate in our sales headcount 12% for all of 2007. So I think it's a good example of that acceleration that we talked about and we are very excited to start to get those feet on the street.
The representation was pretty evenly distributed globally, kind of on par with revenue breakdown between Americas, Europe and Asia.
Antonio Antezano - Bear, Stearns & Co
And if I may very quick one, I notice your R&D spending was higher this quarter and I was wondering is it just a relation or there is something else. It was 17.6% of sales, I believe, if we excluded the stock compensation.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Antonio, it's Alex here. As you are familiar, Q1 is obviously always the seasonally lowest quarter of the year.
So we tend to see an aberration across the board in the business model where every element of the business model is at its highest level as a percentage of revenue as we have our lowest operating margin typically or historically in the first quarter. And then, usually obviously in the fourth quarter we'll see our highest operating margin historically and those numbers tend to come down.
Additionally, this year we did see about a 40% reduction in software capitalization in Q1 of '08 versus Q1 of '07. That also did bump up the year-over-year growth in R&D while it doesn't reflect a real spending level form a GAAP point of view.
You see that portrayed in the income statement numbers.
Antonio Antezano - Bear, Stearns & Co
Thank you. I will go back to the queue.
Thank you.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you, Antonio.
Operator
Our next question will come from Mark Moskowitz with J.P. Morgan.
Mark Moskowitz - J.P. Morgan
Yes. Thank you.
Good afternoon.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hi, Mark. How are you?
Mark Moskowitz - J.P. Morgan
Good. Thank you.
Yourself?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Good, good. Beautiful day in Texas today.
Mark Moskowitz - J.P. Morgan
Great. A couple of questions if I could.
One, last quarter you guys were willing to give out two quarters of guidance and I want to get a sense with that because of the Easter effect or is it because you're still going to figure out what sort of impact you may have from new products that could be introduced in conjunction with NI week?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
No, that was primarily because the Easter effect and obviously we are glad now to be able to increase our revenue guidance for the second quarter and obviously we are standing steady with the earnings guidance we gave in January. But that was really to try to illustrate that dynamic from Q1 and Q2.
And so we're glad to see our revenue accelerate even a little bit more than we anticipated as we look into the second quarter.
Mark Moskowitz - J.P. Morgan
Okay. And then, can you give us any sense in terms of, what percentage of total revenues now come from manufacturing test versus R&D test environments versus other?
John Graff - Vice President, Marketing and Customer Operations
Mark, this is John. It's hard for us to quantify the breakdown especially within tests.
If you look at our products, for example like PXI and the Modular Instruments and LabVIEW, we can easily sell those products into research validation tests as well as obviously a lot of success in the production environment. So, I really can't give you data on that.
The other question that comes up a lot has been our growth into new marketers like industrial and embedded. And again, review what we see as key growth opportunities for us.
We continue to be very excited about increasing our share wallet in automated test applications. That's where we're a seeing a lot of success as well as continued penetration in the newer market opportunities in the industrial and embedded.
And that includes getting designed into industrial machinery, machine condition monitoring and new application areas that we haven't previously served.
Mark Moskowitz - J.P. Morgan
And if I can just follow up on that, John, I appreciate the color. As far as those two later points in terms of where you are seeing the strength, in terms of ATEs and embedded, how should we think about that revenue stream longer term?
Is there a greater hook in that type of business, where you develop a really good relationship where you can estimate a construction of a recurring revenue stream, perhaps?
John Graff - Vice President, Marketing and Customer Operations
Well, first let me talk on the test side. Part of our success on test is predicated on the strong new product execution that we've highlighted.
But it's also based on relationships we've had with those accounts, for really 20 plus years in some case. I mean it goes back to our instrument control and our software position.
So, we've seen very good loyal, long-term customers. Now, as we go into the industrial and embedded, yes we do think there is some opportunity that as we get designed into some industrial machinery that there is the opportunity for perhaps more OEM business.
You get a design win that could help really pay off over many years and assuming they're successful with our products and platforms that can carry over into new designs, new equipment.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
I think historically we have proven, Mark, a very high repeated business level [inaudible], close to 90% of our revenue in any year comes from customer who did business with us the previous year. So, while we may have to win in combat with our competitors, one customer at a time, our ability to retain those customer for a long period of time is very strong.
Mark Moskowitz - J.P. Morgan
Thank you.
Operator
Our next question will come from John Harmon with Needham & Company.
John Harmon - Needham & Company
Hi, good afternoon.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hi, John.
John Harmon - Needham & Company
I guess, Alex, my first question is last quarter you're talking, you certainly anticipated this drop in the PMI and you said it would last for a couple of quarters. Has the drop been in line with your expectations, has anything changed in your outlook?
Did you expect the U.S. manufacturing to pick up in the second half?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, certainly, John it's a good question and one I thought a lot about coming into this call and I would re-categorize what we saw in Q1. Obviously we hit the midpoint of our guidance for the first quarter and we are leaving earnings guidance unchanged for Q2.
So, our categories that we saw in Q1 is very much in line with what we're expecting to see. My hypothesis or assumption on Q2 is that we will see another sequential decline in the PMI in the second quarter, in the global PMI.
And that's the assumption I am building into my expectations for the second quarter. In terms of the second half, it's a little hard to see.
I will say that from my point of view, the slowdown on the PMI now is six quarters old and if we do see another sequential decline in Q2 that'll make it seven quarters. So I'm no expert, I am no economist but it's getting a little bit longer to do.
And we will see when it turns around but I'm very confident it will turn around. And I believe that decisions we are making in terms of both R&D investment and scaling at the field as John mentioned as we continue to accelerate that deployment.
I think when we get to '09 and '10, I think we will feel very happy with the decisions we made in 2008.
Mark Moskowitz - J.P. Morgan
Okay, thank you. And then my second question is, you talked about strong growth in large system level orders.
Is that similar to just large orders in general and I apologize if you gave it but you have the average order size for the quarter?
John Graff - Vice President, Marketing and Customer Operations
Yes, this is John. The average order size in Q1 was $3480, which represents a 13% year-over-year increase.
Now it is down from the Q4 peak, but that's pretty traditional pattern we see. It's varied in line with capital purchasing patterns that we are seeing for a number of years now.
Again, it's driving the large system success, the execution on the new products in these system level platforms and then the field channel really plays a key role. I mean these new products and new platforms kind of fit right into the, I'll use the phrase the wheelhouse of our field sales because they can take them into these accounts where they have relationships and solve a greater portion of their test needs or some of the advanced control they need in industrial machinery application.
So, we're very excited and like Alex said this is what's predicating us to embark on next phase of our strategic investment to continue R&D and look to expand our field sales.
Mark Moskowitz - J.P. Morgan
Right. Thank you.
Operator
Our next question will come from Terence Whalen with Citi Investment Research.
Terence Whalen - Citigroup
Thanks for taking my question and--
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hi, Terence.
Terence Whalen - Citigroup
Good job on the results.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you.
Terence Whalen - Citigroup
So I have a couple of questions. The first is on currency, it looks like ex the effect of currency, revenue growth was about 7.7%.
Can you confirm that what ex-currency growth was? And then I have a follow-up.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure, Terence, as you know our strategy is to adjust pricing periodically over time as we see these shifts in exchange rates and obviously we focus more on the dollar number, but the number is approximately right around 7% to 8% local currency growth. We feel that unit volume growth will be a little bit higher as we have adjusted pricing overseas over the last year.
Terence Whalen - Citigroup
Okay. Then related to that what's the EPS impact of currency on the results?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, it's... I don't think it's really determinable just from looking at the top line and the expense level because we do compensate for currency also by price adjustment.
So I don't think that that's really a relevant metric to look at.
Terence Whalen - Citigroup
Okay. Great.
And then on operating margin, it seems like margins were down about 320 basis points to 350 basis points year-on-year. Is that a level we can assume going forward or will we narrow and have....
I guess for the full year what's your expectation for operating margin, will it decline by more than 150 basis points?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, we haven't given guidance for the full year, Terence, I can't answer that question directly. What I can tell you obviously EPS at a non-GAAP level was flat from Q1 last year to Q1 this year.
And there is a number of factors factored into that including obviously the Easter impact. We are guiding to re-acceleration of EPS growth in the second quarter.
So we do anticipate a recovery in margin as we go into Q2 and we certainly would not expect to see a 300-points drop in operating margin for the full year as we go out through the second half. We'd expect to see a result significantly better than that.
Terence Whalen - Citigroup
Okay. And then last one is regarding the European observation that you made.
I think you said you saw significant flowing in Europe, which you attributed to the Easter effect. I guess now that we are beyond that, what's the run rate look like in terms of European orders?
I don't want to overly attribute that to just a seasonal vacation effect because if you look at PMI that's declining in Europe and other observations in terms of the economics in Europe aren't necessarily pointing towards positive indicators?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Well, we clearly laid out this impact because we've seen it repeatedly over time. As this has happened and it was crystal clear, as I look at the daily bookings rates from Europe and weekly, you could see we had very strong bookings growth through mid-March and then in the second half of March which exactly coincide with Easter, we saw a significant shift in the bookings rate.
And then when we got to the easy comparison in April, we saw the reverse. So we so very, very strong growth in bookings in Europe in the first half of April.
So, I have absolutely no doubt that the impact of Easter on a transactional business like NI is very definite and real. Certainly, obviously as we have started with a very strong half, first half of April our bookings growth rate in Europe for the month of April was significantly better than the average results for Q1.
So, that's the data I would give you but I would not rule out the impact of Easter on the European businesses... it's a very real element.
Terence Whalen - Citigroup
Okay. Thanks for the clarity and good luck.
Alex Davern - Chief Financial Officer
Thank you very much, Terence.
Operator
Our next question will come from Richard Eastman with Robert Baird.
Richard Eastman - Robert W. Baird & Company, Inc.
Just a couple of things, Alex could you give the head count number at the end of the quarter in total?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure, Rick. We are right at about 1400...
sorry, 4800 people.
Richard Eastman - Robert W. Baird & Company, Inc.
Okay. And then just Dr.
T, would you maybe just kind of talk to just for a second or two the microLEX acquisition strategy there and what that brings to the table?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Yes, so microLEX was a strategic partner of ours serving the audio and video space in mixed-signal test. They were using our products heavily and experts in the area of audio and video test and bring that expertise to NI along with a growing base of customers.
So, we are really excited about the acquisition. We believe it fits well with our strategy, our product line and we look forward to success with it.
Richard Eastman - Robert W. Baird & Company, Inc.
And so that would be more on the system side when you have a video test or an audio test?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Exactly, often doing production testing on the basis with audio and video.
Richard Eastman - Robert W. Baird & Company, Inc.
Okay. And then, Alex, just on the same talk, from a systems perspective, are we in a position yet given that we are almost at 40% of sales, their systems, large systems that we start to have some backlog at the end of the quarters that becomes at least a decent indicator for your following quarter sales guidance?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
At this point our strategy, Rick, is to not only be innovative on products and innovative on sales count, but be very innovative on manufacturing and distribution. So, we have a very efficient and an effective distribution model.
As you know, we are building 90% of our hardware now in Eastern Europe and we actually distribute direct into the U.S. and all of Western Europe and Japan, direct to the customers straight from the factory.
So, we have a tremendously effective and efficient logistic system and that has allowed us to offer a significant competitive advantage and being able to out-deliver our competitors for complete systems, assembled systems significantly faster would complete systems than anyone else, I'm aware that we compete with. So, we view that as a real competitive advantage and so we're going to endeavor to try to stay as efficient and effective and keep backlog down as much as possible.
So, at this point I don't anticipate backlog becoming a significant indicator. I think the velocity with which we can satisfy our customer needs is a real competitive edge for us and we would like to keep that going.
Richard Eastman - Robert W. Baird & Company, Inc.
Okay. And then just one last question rather than queuing back up again.
John, as you've added and you continue to add to the field sales force, did they also provide a service element for some of your industrial control and embedded applications? Will they… will they do follow up service if necessary?
John Graff - Vice President, Marketing and Customer Operations
To various extents, if the requirement were if it's extensive after the systems installed ongoing service. There are aspects of what NI will provide, often we'll work with our alliance channel and partners.
It’s often on those kind of systems, there will be a system integrator involved. We then also provide a level of post-sales service and follow-on support.
So, it really varies case-to-case, but you did bring up a key point that it is very different than our traditional transactional approach, where we shift the product and then we have world-class application engineers that will support over the phone, over the web. There is a little more handholding involved, but pre sales and post sales on these large orders.
Richard Eastman - Robert W. Baird & Company, Inc.
Yes. Okay.
And you will, in say, 90% of the time, you'll have an alliance partner or an integrator involved? Is that a good number, or is it less than that?
John Graff - Vice President, Marketing and Customer Operations
I don't think it's that high. It's actually less than that.
And again our... this is part of the investment in the field channel and we've talked about some of those resources are system engineers.
And those system engineers get involved in both that pre sales and post sales. Because again, we are not just going to ship the products to the gust room, so it get locked, we're going to make sure it gets installed, it's up and running successfully and meeting there the requirements that we set out on a particular proposal or opportunity.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Most, additionally our customers have in-house integration services, so they often integrate it themselves, so the times that we don't have alliance partners' usually in-house integration. We are beginning to offer some services that are more traditional after-sales service, and this is a newer area for us.
In general, we’ve either dependent on an alliance partner or an in-house integration service.
Richard Eastman - Robert W. Baird & Company, Inc.
Understand. Okay.
Thank you.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thanks, Rick.
Operator
Our next question will come from Ajit Pai with Thomas Weisel Partners.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hey, Ajit, how are you?
Ajit Pai - Thomas Weisel Partners
Good, how are you?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Excellent.
Ajit Pai - Thomas Weisel Partners
Quick question on the Asian revenues that you have, I think as a percentage of your revenues in dollar terms, it's probably the highest you've ever had in this quarter. Could you give us some color as to is that were a large chunk of your new headcount is going and also how you think about that particular market, because of the percentage of your revenues you're still far lower out of Asia than some of the folks in the electronic management industry?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
It’s a good observation. We typically see Asia, as a percentage of revenue tends to often be highest in the first quarter.
As you are probably well aware, the end of fiscal year for the Japanese economy is the end of March when they tend to have their big budgetary spending and that’s a historical trend we have seen in the past. However, we had seen a very steady march of our Asian business as a percentage of revenue has been increasing.
Basically, a percentage of revenue, one percentage point a year almost for the last ten or 11, 12 years, we have a... I think, tremendous execution by our Asian sales, marketing, and support staff, and we see lots of opportunity for continued growth there, and certainly as I have traveled around Asia extensively in the last few years, we've been doing site selection process for our [inaudible] facility, I have had a chance to see firsthand the available opportunity for growth there is in Asia.
So, I also... I am a firm believer that we are...
have a lot of room to run in Asia and relative to our competitors as you said, while we got started a little bit late in Asia relative to some of the older traditional companies. I think we have the opportunity to continue to significantly increase Asia as a percentage of the overall company, that’s certainly along the lines of my expectation.
So, we've had excellent execution there and I anticipate that we will be able to build on the strong staff we have in Asia and continue to see that scale as part of the company going forward.
Ajit Pai - Thomas Weisel Partners
Got it. And then just looking at the expense line and your operating margins, I think you mentioned that there was a certain number of folks...
actually a large chunk of folks that moved from having software being capitalized to actually hitting the expense line. Could you quantify that for us what the first quarter impact would be?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Sure. We did about...
there were $2.5 million in capitalized software in Q1 of '07 and about $1.5 million in Q1 of '08. So, that increase is...
if you like the year-over-year growth in R&D expenses by about $1 million.
Ajit Pai - Thomas Weisel Partners
Okay. So, just $1 million?
And the headcount that you're adding right now, do you have some kind of breakup as to... I know, the, it's mainly for the channel on the sales side, but which geographies you're adding them in primarily?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Actually Ajit, I don't have that data in front of me right now, but obviously we can talk a bit about it offline. I can tell you at a broad level, it's about 50% in the emerging countries and about 50% in the developed countries.
Ajit Pai - Thomas Weisel Partners
Okay. And is it fair to assume--
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
And in terms of the exact regions, I just don't have that at hand.
Ajit Pai - Thomas Weisel Partners
Okay. That should be fine.
And then in terms of the tax rate, is the 20% tax rate for '08 and... does the tax rate step up after that in '09 or does it stay...
it's relatively flat?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Well, as you know we've steadily reduced our tax rate over the course of last decade or so and we are giving guidance of non-GAAP tax rate of about 20% for this year. Next year...
it's a bit too early to determine at this point... obviously what happens in the U.S.
election, Ajit.
Ajit Pai - Thomas Weisel Partners
Okay. Thanks so much.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Thank you very much.
Operator
[Operator Instruction]. We’ll hear from David Yuschak with SMH Capital.
David Yuschak - Sanders Morris Harris
Hi, good afternoon gentlemen.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Hi, Dave.
David Yuschak - Sanders Morris Harris
On the gross margins, a couple of things, as far as the discussion on that... how much would have that gross margin been impacted by the shift in Europe because of Easter?
And then two, when you take a look at your numbers from this average orders as you had indicated in your press release that the... that was up 34% year-over-year, but...
your average order size was only up 13%, does that suggest that the… maybe your better gross margins are at that low ticket item and that really was one of the weaknesses in the quarter, was just that kind of pickup business that comes as a matter of course?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
David, it’s Alex here. So, let me try to address that.
Certainly the impact of the shift in revenue for Easter had a negative impact if you like on the operating business model all the way down through the P&L, and we would have seen... I think definitely better operating margin and business model results...
if we've had... hadn't had that seasonality.
But, that was anticipated and expected and so we were able to hit the mid point of our earnings guidance because we had planned for that. In terms of its impact, Easter's impact on the order size, if you take the average order...
the dollar value of orders over $20,000 was up in the 30% range and it's about a third of our revenues. So when you do that out, you see that the vast majority of our revenue growth is coming from large orders and the smaller orders are relatively flat, which I think is somewhat consistent, but we would expect to see given where we saw the decline in the PMI during the quarter.
So where we’ve introduced very differentiated products at very good system platforms we are able to clearly continue to take market share. We continue to deliver 76% gross margin, and we feel like we will see a rebound and obviously we are anticipating certainly higher level of guidance on the revenue front for the second quarter than we have guided for the first quarter.
David Yuschak - Sanders Morris Harris
So, is it kind of fair to say then that when you take a look at your company in this first quarter, seeing the strength that you have had in system sales, the over $20,000 item, the investor can kind of look at this in two ways one is, that the PMI’s really affecting your small dollar orders, where you have an increased success in large dollar orders in the face of PMI. Is that a fair assessment?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
I think that is a fair assessment. And I have tried to highlight in the call, I guess, I think that's a pretty significant development.
As I said our ability as a company to continue to show double-digit growth and pretty much unchanged growth despite a significant shift in the revenue pattern of our instrument control business going from plus 6% to minus 5%. For us to be able to absorb that change in instrument control, what really affecting our top line growth overall is a really significant change for NI.
If you go back seven years ago, that sort of shift in our instrument control business would have had a dramatic impact on our top line and on our profitability. So I see this is a really important change.
We have been working towards this for the last seven years, and I think we will only be able to build on this going forward and we will expect to see the strength of our non-instrument control business continue to improve as we continue to both invest in R&D and in deploying people into field. So I think this is significantly misunderstood or under appreciated change in the business.
NI really is a very different company from seven years ago and the pattern with which we have absorbed I guess and responded to this significant drop in the PMI over the last six quarters is significantly better than how the business has responded to that kind of change historically. And so we feel very good about the strategy we have embarked on this decade and how we have executed it that this will make us a fundamentally much stronger company going forward.
David Yuschak - Sanders Morris Harris
But in addition to... just the instrument control stuff, are your other smaller orders, basically you got one third of your company really driving the business despite PMI and if you ever get the business turnaround some of the smaller orders including the instrument control stuff will...
should respond accordingly. So you...
that's how can you get to 15% plus on the revenue?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Historically, our business has responded very well to strengthening PMI and obviously we are accelerating our deployment in the field sales force, so that we can hopefully reinforce that trend when we see the PMI recover.
David Yuschak - Sanders Morris Harris
On the 20,000, you've talked to us in the past about order sizes over $50,000. How much of the...
over $20,000 average orders was the $50,000 levels? And what percent is that representative of the total 20?
John Graff - Vice President, Marketing and Customer Operations
David, we don't have that information in front of us. It was very strong, I believe it’s growth was even slightly better than that 34% that we say for over $20,000.
Again the key factors, the number of orders in this segment is really in the hundreds, and again this is why our field sales is such a critical component because these are all opportunities that they are touching, they are working, they are following up on. First is the transactional business where it's tens of thousands of orders.
And as Alex mentioned earlier, we watched the daily run rate on that part of the business. Go ahead.
David Yuschak - Sanders Morris Harris
So, I think you said finally just to wrap it up. It was...
you've got an 18% increase in your technical field sales force year-over-year and that will total that 415?
John Graff - Vice President, Marketing and Customer Operations
Yes. Correct.
David Yuschak - Sanders Morris Harris
Okay.
John Graff - Vice President, Marketing and Customer Operations
At the... as of the March, end of March.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
And obviously we are planning for that year-over-year increase to accelerate as we go through the year.
David Yuschak - Sanders Morris Harris
Okay. So long term users are expecting more and more because you are getting away from the transactional model towards the system that the PMI can go away as you seek the solutions for your customers.
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
That would be nice.
David Yuschak - Sanders Morris Harris
Okay. Thanks.
Operator
We'll hear a follow-up question from Antonio Antezano.
Antonio Antezano - Bear, Stearns & Co
Yes. Thank you.
Regarding end markets, I was wondering what ends markets have been doing good this quarter? What markets are probably softer?
John Graff - Vice President, Marketing and Customer Operations
Yes. Antonio, this is John.
Again as we've stated many times in calls the diversity of our business is another key part of our sustained success with no one in industry more than 10%. As I look at the key one data, I think it was very good example of that diversity.
Areas where we saw very strong results included biomedical, energy, industrial machinery, process industries, and also some slight growth in semiconductor and electronics. That was offset by some weakness we saw in the quarter in the [inaudible], automotive, and consumer electronics space.
So again I think the diversity of our business, the ability of the system level platforms to address a wide range of applications has been pretty key to the results we saw in Q1 and the results we've seen for many years.
Antonio Antezano - Bear, Stearns & Co
And a follow-up, this month you announced the introduction of low-cost PXI embedded controllers. And I was wondering what is your goal there from a business standpoint whether it does more kind of a regular kind of project introduction or you're trying to get into new segments of the markets?
Dr. James Truchard - President, Chief Executive Officer, and Co-Founder
Our basic strategy is a good, better, best one and so low-cost is, it certain that we serving the whole of the marketplace. Some customers want the highest performance, controller...
PXI controllers. Other cost is the issue, so we can serve both customers by a good, better, best strategy.
Antonio Antezano - Bear, Stearns & Co
And then just one final, I noticed your inventory levels have been trending up a bit in... over the past few quarters.
Is that related to the large system sales?
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Antonio, it's Alex here, that's certainly part of the investment there. We do tend to try to get inventories, I tried to run manufacturing fairly steady and as efficient as we can, it tends to be more efficient even though we see a drop in revenue in Q1.
It tends to be efficient to continue to run production at a fairly steady rate. So you will see the DSO typically increase in Q1 and it’s relatively consistent with Q1 of last year and you will see DSO tend to trend down as revenue picks up.
So it's really related to trying to run manufacturing as efficiently as possible.
Antonio Antezano - Bear, Stearns & Co
All right. Thank you.
Alex Davern - Chief Financial Officer, Senior Vice President, Manufacturing and IT Operations
Thank you.
Operator
And that's all the time we have for questions today. I'll turn the conference back over to our speakers for any additional or closing remarks.
David Hugley - Vice President and General Counsel, Secretary
Thank you very much for your time today and we look forward to seeing you at NIWeek in August.
Operator
Thank you. That does conclude today's conference call.
We thank you for your participation and have a great day.