Apr 29, 2009
Executives
David Hugley – Vice President, Corporate Counsel Dr. James J.
Truchard – Chief Executive Officer Alexander M. Davern – Chief Financial Officer John M.
Graff – Vice President of Marketing
Analysts
Antonio Antezano - Macquarie Research Equities William Stein - Credit Suisse John Harmon - Needham & Company Ajit Pai - Thomas Weisel Partners David Yuschak - SMH Capital
Operator
Good day everyone and welcome to the National Instruments Q1 2009 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 7:00 PM Central Time today and will end at midnight Central Time on May 3, 2009.
With us today are Mr. David Hugley, Corporate Counsel; Mr.
James Truchard, Chief Executive Officer; Mr. Alex Davern, Chief Financial Officer; and Mr.
John Graff, Vice President of Marketing. For opening remarks and introductions I would now like to turn the call over to Mr.
David Hugley, Vice President Corporate Counsel. Please go ahead sir.
David Hugley
Good afternoon. During the course of this conference call we shall make forward-looking statements regarding the future financial performance of the company, including statements regarding the following, daily order rates stabilizing, stable gross margins, declining inventories, and eventual recovery; gaining market share, profit growth in a recovery, reducing operating expenses, and expanding into new application areas.
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, 2008.
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 J. Truchard
Thank you David. Good afternoon and thank you for joining us.
Q1 proved to be a very difficult operating environment in which the global PMI declined sequentially for the seventh consecutive quarter and our revenue saw an 18% year-over-year decline. We continued, however, to fare better than others in the industry, gained market share and gained other traction in new growth areas for the business.
The diversity and adaptability of our products and channel proved once again to be a powerful asset for the company and despite the economic challenges, our business model again proved its strength and resilience. 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 up for your questions.
Alex?
Alexander M. Davern
Good afternoon and thank you for joining us today. Today we reported quarterly revenue of $158 million, an 18% year-over-year decline.
Net income for Q1 was $400 thousand, non-GAAP net income was $3.1 million with non-GAAP fully diluted earnings per share of $0.04. Given the record low global PMI in Q1 our 18% year-over-year revenue decline while disappointing was a very good relative performance.
Our performance was slightly worse than the 16% daily bookings decline we discussed on our March 9 update call. On that call we did not give specific guidance for Q1 as we were concerned that the economic situation would seriously weaken the quarter end surge in larger orders.
This proved to be a valid concern, as John will discuss later. From a product point of view our instrument control revenue saw a 42% year-over-year decline in Q1, with the rest of our products being down 16% year-over-year.
Our instrument control products are the most economically sensitive portion of revenue, and given the tougher revenue compares in the next two quarters we expect the revenue trend in instrument control to continue to deteriorate and to be down approximately 50% year-over-year in Q2 and Q3. Q1 represented the lowest quarterly revenue for our instrument control products since 1994 and they are now down to only 6% of revenue.
This decline is consistent with several T&M players seeing our lowest revenue since the 1990s. This data plus the very negative news recently announced in the industry suggests a very severe contraction in the test and measurement industry during Q1, especially in the semiconductor ATE segment.
The better performance of the rest of the business during Q1 was helped by our modular instruments PXI, software and compactRIO products which performed well in light of the industry contraction. Within modular instruments our RF test products were a standout performer with double digit revenue growth in Q1.
We saw the impact of the industrial recession across all regions. During Q1 year-over-year revenue growth in U.S.
dollars was minus 16% in Europe, minus 21% in Asia and minus 18% in the Americas. In local currency terms revenue was down 14% year-over-year in Europe and 15% in Asia and the Americas, giving an overall local currency decline of 15%.
We believe that our performance in Europe was helped by the shift of Easter from Q1 last year to Q2 this year, and that this will have a corresponding negative impact on Europe in Q2. Now looking at the income statement in more detail, non-GAAP gross margin in Q1 was 74.9% compared to 75.1% in Q1 2008.
Our ability to maintain our gross margins despite the significant year-over-year revenue decline is a tribute to the variability we have built into our manufacturing cost structure and to the very high level of differentiation we have designed into our products. R&D expenses were down 2% year-over-year in Q1 and SG&A expenses were down by 6%.
As a result, total operating expenses for the quarter were down 5%. This reduction exceeded our expectations and illustrated a very strong fiscal discipline that has been shown throughout the organization in response to the unprecedented downturn we have seen for the T&M industry.
Now turning to the balance sheet, inventory decreased by $5 million during the quarter as we made progress on realigning our production to the lower level of business. We’ll continue to monitor our production schedules and we expect to see inventories decline again in Q2 and in Q3.
Accounts receivable days outstanding were down five days from Q4. Cash flow from operating activities was $25 million in Q1 and the company had $241 million of cash and short term investments at the end of the quarter, up $6 million from December 31.
This cash balance is net of $9.3 million in dividends paid during the quarter and $9.2 million used to repurchase 489 thousand shares of NIs common stock at an average price of $18.77 per share. We also announced today the board of directors approved a quarterly dividend of $0.12 per share, payable on June 1 to shareholders of record on May 11.
Now I would like to make some forward-looking comments concerning our strategy to deal with the current economic environment. In Q1 the quarterly average for the global PMI reached record lows, indicating that the industrial economy was still declining rapidly through the end of March.
Therefore it is unlikely that global industrial production will turn positive in the near term. In addition, when it does turn positive it is clear that the industrial economy will be dealing with significant amounts of excess capacity and that it will take a considerable period of time to absorb that excess.
This challenging environment has had a significant impact on our revenues, with a rapid 25% decline in revenue between Q3 last year and Q1 this year. While it appears that the period of very rapid decline is past, and that our daily order rate in absolute dollars is stabilizing, we are anticipating that conditions in our served markets will remain weak throughout 2009.
Given that assumption, I wanted to lay out our business strategy to manage the threat created by this situation, but also to take advantage of the long term opportunity it creates. In dealing with the threat, our primary goal is to maintain the financial strength of the company.
Our strategy for achieving this goal is to practice prudent financial management by building strong cash reserves and maintaining profitability. Key to this is maintaining stable gross margins by having a flexible manufacturing cost structure, by leveraging our strength in this economy to achieve lower component costs, and by having a very differentiated product offering.
The other key is optimizing our operating expense structure through variable costs and by thoroughly reviewing discretionary expenses, while maintaining very strong employee productivity. If we can achieve our goals then we will be in a very good position to generate significant positive operating leverage when we see revenues recover.
Now to the opportunity. We believe this severe recession is creating major shifts in the market positions of many of the players in the industries we serve.
Some will not survive and some will have to scale back investment so dramatically that they may never be able to catch up. The bottom line is similar to the tech crash of 2001 to 2003, this will create an opportunity for a permanent shift in long term industry leadership.
Given this opportunity, our goals are to gain market share, maintain that share during recovery, and use this as a platform to drive strong profit growth in the recovery. Our strategies to achieve this goal are to strengthen our R&D investment, to deepen our customer relationships by expanding our field sales channel, to acquire key new talent which has traditionally been very difficult to hire, and to enter large new adjacent application areas during this recession.
We believe this will create a path to long term sustainable and profitable growth for NI. In the slides accompanying this presentation on the web, you can see the track record of our execution of this strategy since the last recession and the resulting gains we have made relative to other test and measurement companies, together with insight into our budgeted additions in R&D and field sales for 2009.
We believe we are very well positioned to execute on our strategy and that this will generate significant shareholder value over the long term. Now turning to specific guidance, the current economic uncertainty has limited our visibility for Q2 and as a result we’ve decided not to give revenue and EPS guidance for second quarter at this time.
Instead we have scheduled a business update call for Tuesday, June 9 when we can expect to have a clearer picture of Q2. On the expense side, we will continue to be very prudent in managing our expenses.
We’ll sustain our strategic investments in R&D and field sales while reducing discretionary expenses elsewhere. Given our expectation that there is unlikely to be any meaningful recovery in 2009, we have reduced our spending plans for the full year of 2009 by a further $25 million in order to better position the company to deal with the extended economic uncertainty.
As a result for the full year 2009 we are now budgeting for a 10% year-over-year reduction in non-GAAP operating expenses compared to a 14% increase in 2008. For Q2 we are currently budgeting for a year-over-year decrease of approximately 11% in total non-GAAP operating expenses.
As these are forward-looking statements I must caution you that actual results and expenses could be negatively affected by numerous factors such as any further decline in the global economy, delays in new product releases, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates and foreign exchange fluctuations. So in closing I believe we’ve been both strategic and prudent in our business planning, and our reaction on execution in this downturn has once again demonstrated that our business model is solid.
I would also like to let you know that in May and June I will be presenting at the Baird Conference in Chicago, the Credit Suisse Conference in Boston, and the Thomas Weisel Partners Conference in Baltimore. With that I will turn it over to John Graff, Vice President of Marketing.
John M. Graff
Thank you Alex. The historically low global PMI average in Q1 of 36 clearly evidenced the severity of the economic headwind that we faced to start 2009.
The instrument control portion of our business was down 42% in the quarter, which we believe is in line with results from others in the test and measurement industry and points to a severe contraction of the industry in Q1. While disappointing, the 16% decline of our virtual instrumentation and graphical system design products appears to be markedly better than others in our industry, and suggests that we continue to drive market share gains in the face of these downward forces.
Large system level orders which were key to our growth in 2008 did not see the quarter end surge in Q1 which had been the historical pattern. Orders over $20 thousand were down 17% in the quarter, only slightly better than our orders less than $20 thousand which were down 20%.
This led to an average order size of $3,200 in Q1, down 3% from Q1 2008. While the economic headwinds challenged all areas of the business, we did see bright spots in Q1.
Sales to academic institutions were positive, as we won several opportunities to help at teaching labs with LabVIEW and our USB based Measurement hardware. Also at quarters end we had 49 schools worldwide participating in the LabVIEW Academy, where students take courses geared at preparing them for an exam to become certified LabVIEW application developers.
In aggregate, universities around the world are our largest customer group. In fact, the continued growth in sales to academia in the midst of an industrial decline, sales to academic institutions accounted for 12% of our revenue in Q1.
While this is a departure from our longstanding trend of no single industry accounting for more than 10% of our revenue, we view this as a positive development for the company. In addition to benefiting from the financial consistency and stability of academic institutions, we are also positioned well in the near term to benefit from investments in science and engineering, teaching and research stemming from global government stimulus spending.
In the longer terms, teaching science and engineering students how to make measurements and design systems using LabVIEW and NI hardware should pay off as these students graduate and take jobs in industry. Last week was a testament to the headway we’ve made to expose students to graphical system design with LabVIEW.
We participated in the FIRST Robotics Championships in Atlanta, where 30 thousand students, coaches and industry mentors converged to compete in a series of robotics challenges. The most challenging level of the competition required teams of high school students to build a compactRIO based robot to complete a series of challenges while collaborating and competing with other robot teams.
The teams had only six weeks to design, prototype and deploy their robot, requiring them to quickly learn and develop advanced sensor measurement and motion control systems, in addition to sophisticated algorithms for traction control. One industry mentor from Bell South was quoted as saying, “With LabVIEW the kids can now focus on solving a mission rather than spending all of their time writing code.”
Our participation in the FIRST competition exemplifies our focus on teaching future scientists and engineers the power of graphical system design. We plan to continue to invest in building this strong base for our future and believe that doing so will provide a foundation for long term success.
In addition to strong interest from our academic customers, we were also pleased with continued strong activity and interest from customers across the diverse set of industries we serve. For example, while overall attendance at industry trade shows may be down, NI continues to see year-over-year growth of sales leads as customers look for low cost solutions for their test, design and control applications.
The web in particular has allowed us to more efficiently reach a large base of customers and prospects to drive interest in our virtual instrumentation and graphical system design products. Our web presence continues to see high levels of activity, and we are pleased with the response to our many web specific initiatives, including for example a recent green engineering webinar series.
In Q1 we saw continued growth in sales of C series DN acquisition, compactRIO and RF products, all areas that have been focal points of our R&D investments. Our C series based WiFi DN acquisition devices, which released at NI week last year, were stand out performers.
Through Q1 they had surpassed our sales forecast set last summer prior to the economic fallout, and earlier this month they were named by Test and Measurement World Magazine as Test Product of the Year. The award nominees were chosen by the magazine’s editors and voted on by readers.
We are continuing to focus new product R&D in this area, and during the quarter we added six additional wireless and Ethernet devices to this product family, in addition to specialized enclosures enabling the devices to operate in remote, harsh environments. Our SPGA based compactRIO systems also had a strong quarter, with double digit growth in Q1 as the new single board RIO systems released at NI week last year provided a significant lift to year end growth.
These embedded systems leveraged the same C series module and FPGA technology as the rest of the compactRIO family, but at simplified mechanical packaging geared at higher volume deployments. We were also pleased with the strong relative sales performance of PXI products and modular instruments in Q1, led by double digit in RF product sales.
During the quarter we announced a new wireless LAN test solution that can generate and analyze RF signal measurements up to 10 times faster than traditional box instruments. These systems are representative of our success at developing new software to work with our very successful RF modular instruments to expand in the new measurement categories and application areas.
Our strong investments in R&D since the last economic downturn have kept our product pipeline very healthy, and we are as excited about plans for NI week this year in August as we were with the products introduced at NI week last year, including new RF and wireless DN acquisition products, single board RIO and a new version of LabVIEW. We believe these disciplined investments and new products geared at new application areas have enabled us to outperform the market even during economic contraction, and provide a strong position for us to take advantage of the eventual recovery.
With that I’ll turn it over to Dr. T.
Dr. James J. Truchard
Thank you John. Q1 was indeed one of the most challenging periods in the history of the company.
It is these challenging times, however, that we are reminded of the importance of our consistent, long term approach to growing and operating a company built to last. During the formative stage of the company, we faced the recession of 1980 to ’82.
Those difficult years ingrained in our culture and operating model the importance of wise expense management, focus on our cash flows and continuous innovation. During the last recession we made the difficult decision to take a short term reduction in operating profit to fund strategic investments in R&D.
Those decisions resulted in an introduction of new products that fueled much of our growth for the past several years, including compactRIO, modular instruments, RF and many enhancements to LabVIEW. We’re now faced with similar challenges as we work to preserve our investments in R&D and field sales while gaining leverage in other parts of the business.
I have seen our organization prove that these challenges can be a catalyst for innovation. Our ability to quickly adjust our spending plans as economic conditions deteriorate is a testament to this, and I’d like to again thank our employees for their efforts in this area.
Our marketing and sales channels have been quick to respond to opportunities in markets where our capital is flowing. A clear example is the government funded institutions, including universities and research labs.
As John mentioned previously, our education channel provided revenue growth in Q1 in addition to exposing the concepts of graphical system design to hundreds of thousands of students around the world over the past year. This base of new scientists and engineers will provide us a foundation for our long term success.
I believe this recession is creating an opportunity for National Instruments as it has and will continue to force our competitors to retrench while we continue to innovate. I believe this will create major shifts in the market positions of many players in the industries we serve.
Some will not survive and some will scale back investments so dramatically that they may never be able to fully recover. Ultimately this will create an opportunity for a permanent shift in industry leadership similar to what happened in the tech crash of 2001 to 2003.
Given this opportunity, our goal is to gain market share throughout this economic cycle and leverage our market and financial strength to drive strong growth, a profit growth in the recovery. To accomplish these goals we will maintain a strong level of investment in R&D, exploit market weaknesses by acquiring key new talent in areas such as RF, leverage our field sales channel to deepen our customer relationships, and continue our focus to grow share in new application areas.
In summary, while Q1 proved to be a very difficult economic environment, I remain convinced that we continue to navigate it better than others in that industry, gain market share, and continue to make headway in strategic new growth areas for the business. We remain in a strong strategic and financial position which enables us to fund investments through this economic cycle in key areas including software, industrial embedded and RF.
I believe we are making appropriate decisions to operate efficiently through this downturn while retaining the resources and establishing the foundation to support growth as conditions recover. Thank you.
We will now take your questions.
Operator
Thank you. (Operator Instructions) Your first question comes from Antonio Antezano - Macquarie Research Equities.
Antonio Antezano - Macquarie Research Equities
I wanted to if you could provide more color on your activity during the quarter. I mean you mentioned in the last business update an order of decline, 20% in January, 12% in February.
I was wondering what happened in March and also so far in April?
Alexander M. Davern
Okay, Antonio, good question. So we – our daily order rate through about March, I think it was March 8th or 9th when we did the update call was at minus 16% on the daily rate.
We did have a day less in Q1 this year from Q1 last year. So if you net that out it’s roughly about minus 18 at that point in time and it was fairly consistent for the quarter.
We were minus 20 for the month of March in total if you take it just on a calendar month. On an absolute dollar basis from a positive side we did see the daily rate improve from January to February to March, as you went through each month.
And you know we talked in the conference call about stabilization that we’re starting to see at this point in time. And the key behind that really is we’re seeing April business now be a very similar level to January, and that’s a significant improvement over the dramatic drop that we saw between October and January.
Antonio Antezano - Macquarie Research Equities
And then I guess regarding the new cost or I would say reduction in the spending which seems to be very significant, what specifically you are doing to get to that target that you have? I mean [inaudible] is more on SG&A or somewhere else or where you can provide examples of initiatives you are taking to get to that?
Alexander M. Davern
Sure. A couple of areas around that as we talked in the call we have chosen to reduce our budgeted spending plan for 2009 by about $25 million from the plan that we outlined back on March 9.
The main factors driving that are we are reducing our net hiring for the year. When we were on the call on March 9th we were anticipating about 110 additions, net additions for the company this year and we have reduced that to about 15 net additions.
We will see attrition in some departments offset by above that increases in areas like R&D and in the field. So reduced hiring is number one.
And we have taken a hard look at travel and entertainment expenses across the company and that’s an area where we’re going to make a significant increase in our use of the web as a communication vehicle with our customers. And so travel is an area we took a hard look at.
And then reduced discretionary expenses across other areas of the business, really to make sure we’re focusing on the highest value, most productive use of our cash in this timeframe. I do want to take a minute here to thank the employees and the organization across the whole company, in all regions have taken a very, very realistic and rapid look at exactly how the financial situation in the broader economy has affected our business.
The organization’s been very pragmatic and responding very well I think to innovation and new ways in which we can reach customers and get our job down at a lower cost. I will also tell you that we are leveraging, you know, our market position is a relatively stable customer in this timeframe to also leverage our vendors as a way to look for significant cost savings on the pricing side with our vendors.
And the combination of all those is allowing us to take a significant reduction in our total expenses this year while at the same time, maintaining our fundamental increase in investment in R&D and in the field. In the slides accompanying the webcast we show the net headcount additions we’re anticipating in the budget this year for field sales force and R&D.
So I think we’ll be able to sustain our long term investments while also responding to the realities that we’re seeing with the record low PMI.
Operator
Your next question comes from William Stein - Credit Suisse.
William Stein - Credit Suisse
First if you could quantify the impact of Easter, and then also inventory trends. We’ve seen inventory increase on a days basis, you know, fairly significantly over the last few quarters and I’m wondering what the long term plans are maybe on either dollars or days basis?
Thanks.
Alexander M. Davern
Sure, William. I’m going to take the inventory question first.
Obviously we as I said on the call we reduced inventory about $5 million in Q1. We do anticipate inventory in absolute dollar terms to decline again in Q2 and Q3.
Normally we do see the days of inventory increase in the first quarter. Obviously with the first quarter also being the first real quarter of impact from the decline in the economy we saw an outsized increase in our days of inventory in Q1.
We do expect that directionally to turn around quite significantly in Q2 and Q3 and to move towards a more normal situation by the fourth quarter. In terms of Easter, it’s a difficult one to actually put a dollar figure on.
We’ve traditionally seen a couple of weeks before and after Easter Sunday where we see an impact in our European business. That was a slight positive to us in Q1 and we believe it’s a slight negative to us in April, but to put an exact number on it is pretty difficult.
I would guesstimate it and strictly on a nonscientific basis somewhere around $4 million as a rough guess.
Operator
Your next question comes from John Harmon - Needham & Company.
John Harmon - Needham & Company
Ordinarily, you know, the seasonality of the June quarter would be up sequentially but certainly looking at the PMIs I see that manufacturing is still contracting. You could certainly make a case that the June quarter would be down from the March quarter.
I’d like to hear your comment on that. And being sequentially down with the cost figure you gave us, we’re kind of getting towards breakeven and so what is your breakeven level for Q2?
Would you continue your dividend? And I guess that’s my two questions.
Alexander M. Davern
I think you got in more than two there, John, but we won’t call you on it. Let me take the second question first.
We estimate given our current costs profile that the breakeven level for the company in terms of revenue is somewhere below $150 million, probably around $147 to $148 million. We do intend to continue with the dividend at this point in time.
Obviously that’s a decision made by the board, you know, each quarter. But at this point in time it’s management’s intention to continue with the dividend.
The company is in a very, very strong financial position. The business has responded very well to this downturn and I really believe that we’re as we go through this timeframe, I’m becoming more and more confident that we’re going to be able to take advantage of this significant opportunity that this recession is going to create in this industry space and use that as an opportunity to drive a significant amount of long term shareholder value.
And that’s the way we’re going to be approaching it as we go forward. In terms of the June versus March quarter as you commented, PMI continues to be very weak.
Obviously it’s good at least that after reaching an all time low in the month of December, it has increased each month in January, February and March, although at fairly modest rates. So that’s certainly a positive sign.
I think that’s likely to continue in Q2 is my guess, although I also think it’s unlikely to get back over 50 in the second quarter. I think that’s pretty unlikely.
So having said that, you know, it is possible that the June quarter could be down from the March quarter. I certainly wouldn’t rule it out.
However, what we see at this point in time is after a very rapid deterioration between October and March, we feel like we’re seeing significant signs of stabilization at this point in time. And despite the fact that Easter was in the month of April, to see this quarter start out with bookings rate similar to the March quarter gives us an increasing level of confidence that we are seeing stabilization in our market.
Having said that, you know, the economy is a tough thing to predict so I can’t give you any guarantee that we won’t see a decrease in Q2.
Operator
Your next question comes from Ajit Pai - Thomas Weisel Partners.
Ajit Pai - Thomas Weisel Partners
Just looking at software, the percentage of your overall revenues I think usually it’s around 20% of your orders but when I look at your reported results for the year the way you break it up, you know, the products and then software maintenance I see that while your products were down 21% year-over-year your software maintenance is up 29%, and the gross margins over there are 91%. So can you give us some color as to what changed?
Was it the volume? You know, what that software maintenance comprises and as a percentage of your overall revenues where the software has increased materially, especially with the drop off on the product side?
Alexander M. Davern
Yes, sure. I mean, as a percentage of revenues as you said, Ajit, certainly we saw software and related maintenance increase as a percentage of the total in the first quarter.
As you might expect, software maintenance from a revenue recognition point of view and as a type of business tends to be more stable than product revenue, so it tends to be more resistant to, you know, short term economic moves. Perhaps a little bit like the academic thing that John talked about earlier on, certain pieces of our business are more stable while others see our end of line production test piece of our business tends to probably be the most volatile.
So that’s the fundamental reason why we see software as a percentage of revenue increasing in the quarter.
Ajit Pai - Thomas Weisel Partners
What about the 29% year-over-year increase? You know, that’s quite a material increase.
Is there something one time in nature there? Is it the higher volume sales on the software maintenance side?
Is it better pricing? I mean, what’s driving such a significant increase?
Alexander M. Davern
Well, we’ve been putting a significant focus on renewal rates on our software maintenance programs over the last couple of years, and I know we’ve had very good execution on that from our software team and our sales team over the course of the last probably three years. And that has built some momentum that, you know, has sustained itself through the first quarter.
John M. Graff
Ajit, this is John. I think if you also reflect back on our calls for the past year, you know we’ve talked about success in LabVIEW and software penetration and large accounts, where we’re seeing standardization efforts.
In almost all those cases there’s going to be a maintenance service agreement as part of it. We also saw some very strong software development system growth this past year, and again that’s going to reflect itself in some of those maintenance numbers you see now.
Dr. James J. Truchard
Of course as you know software is very strategic to our market position, so we’ve been putting a lot of emphasis on it.
Ajit Pai - Thomas Weisel Partners
It sounds like revenue is now approaching about 30% and the software maintenance is going up, and the rest of your packaged software is also, you know, I would imagine that it’s following suit with the rest of your products?
John M. Graff
Yes, 30% of the software in as a percentage of the total mix Ajit is up in Q1 relative to our normal mix, but I think Q1 is a pretty unusual quarter. So I would also caution that, you know, when we see a recovery and as we increase, you know, continue to push forward in this market and look to grow our way out of this downturn, I think it’s likely in the long term that software as a percentage of revenue will move back down towards our long term average.
Operator
Your next question comes from David Yuschak - SMH Capital.
David Yuschak - SMH Capital
Could you give us a sense, guys, on the system sales? Your orders were over 10 thousand.
What percentage of sales that may be and what kind of trends or anything interesting that may be coming out of that, given the soft first quarter?
John M. Graff
Yes, David, this is John. So in Q1 the orders over $20 thousand which we use as a reflection of our system level business, amounted to about 35% of revenues, which was effectively flat with a year ago.
And so as I mentioned in the call, the large orders were down 17% in the quarter which was close to the 20% we saw for the smaller transaction orders. You know, we continue to see a lot of uncertainty.
I think that reflected itself. And what we typically see is an increase in those large orders in the last weeks of the quarter, and we didn’t see that in Q1.
And we really believe that’s just a reflection of all the uncertainty that’s out there in the global economy. We continue to monitor and watch the opportunity pipeline.
Our sales force continues to be very active and very engaged in those large system level opportunities, but right now we’re pretty limited in our visibility of how those large orders will play out this coming quarter. Now having said that, we still believe we’re very well positioned, especially with our system level platforms like PXI and compactRIO and we believe long term that the system level orders will continue to grow at a much higher rate.
But exactly how that plays out in Q2, we’ll just have to wait and see.
David Yuschak - SMH Capital
Are there any particular industries or anything that’s kind of showing up as far as where the opportunities are then at this point?
John M. Graff
No. I mean, no significant difference than in the past.
So the uncertainty and the failure to see that uptick at the end of the quarter was really across regions and across the industry. So again I think it’s more tied to just the global uncertainty than any particular areas.
Now that does bring up just commentary on industry outlook, and as you would expect, you know, we did see some pretty significant weakness in the usual candidates. That’d be the semiconductor market and the automotive market.
But on the other side, we saw strong growth as we mentioned in the script in terms of the academic and university business, as well as our sales into research organizations.
Operator
Your next question comes from Antonio Antezano - Macquarie Research Equities.
Antonio Antezano - Macquarie Research Equities
Alexander M. Davern
Antonio, it’s Alex. I’ll take that question.
So it’s really a reflection of where the global PMI is now and it’s historical correlation. And also counting in the fact that we do have slightly tougher compares on the instrument control business in Q2 than we did in Q1.
So the combination of those two things I think is going to be quite challenging and I think while we will see, you know, a better performance in the rest of our business which hopefully will allow us to continue to gain market share, I think the overall T&M industry is going to remain under severe pressure, certainly out into the second quarter.
Antonio Antezano - Macquarie Research Equities
The gross margin then, based on some of the cost reduction initiatives, should remain stable. Would that be a reasonable assumption?
Alexander M. Davern
Yes. Best guess right now is pretty stable gross margins, at least out into Q2.
Operator
Your next question comes from David Yuschak - SMH Capital.
David Yuschak - SMH Capital
On the R&D spending, you know, it was 22% of sales in this quarter here and you mentioned about how much you’re cutting back on operating expenses. As far as an absolute level of R&D, are you going to continue to keep that at a relatively high level here as a percentage of sales as well as on an absolute basis maybe try in that cutbacks to find it in whether it’s marketing, sales and travel?
But the R&D number itself on an absolute basis will pretty much stay right around the run rate you’ve been running?
Alexander M. Davern
Perhaps it will help you, David, if you take a look at the slides on the web. We show you actual budget for R&D in terms of personnel going back the last 10 years including 2009.
So we will be adding about 10% or about 100 people into R&D this year. But we share where we do have you know a fairly significant amount of discretionary expenses and then also variable costs relative to our overall labor costs.
So we will not see R&D expenses over all increase at that kind of rate. I do expect a modest decline in total R&D expenses this year despite the fact that we will have an increase in headcount.
In Q1 I believe R&D expenses were down 2% and SG&A were down 6% and that kind of reflects I think the strategic decision making within the management team to keep a very strong focus on R&D going forward. So with the overall budget down minus 10, the majority of that drop is going to come in SG&A and the decline in R&D in dollar terms will be much more modest, while R&D in terms of people will also have the greatest increase in total headcount in 2009.
David Yuschak - SMH Capital
That’s what I was just kind of driving at. It looks like that’s going to stay up, at least a good high plateau.
Alexander M. Davern
Yes, and Dr. Truchard you’d probably care to comment on how we’re going to use those resources.
Dr. James J. Truchard
Sure. Right.
We’ve got very well defined plans and a lot of my time and effort goes into making certain we’re defining opportunities that will help us grow. And that’s certainly our goal in this timeframe, to see that we have products that will grow as we can attack new markets as we use our R&D resources to find the products and design the products.
Operator
Your next question comes from William Stein - Credit Suisse.
William Stein - Credit Suisse
In the prior downturn the company acquired some smaller technologies and I’m wondering if that’s part of the plan this time around? Is the company looking at anything technologies or maybe something bigger and if you can talk about the strategy there it’d be helpful.
Alexander M. Davern
As you know our strategy for dealing with this cash reserves have been pretty clearly laid out. Number one is dividends, number two is opportunistic stock buybacks and number three is strategic acquisitions and as we’ve talked the last few calls at the current valuation and pricing environment certainly elevates the focus on acquisitions.
And I think the constrained funding environment is also making some potential targets be a lot more concerned about long term future and looking for a larger company, perhaps, to make a combination with. So it’s starting to get a higher level of focus with us right now.
I think in terms of a large acquisition, which is part of your question, I think it’s unlikely that NI is going to do any acquisition that would be large relative to our market cap or total revenues during this downturn. But we certainly are looking at technology acquisitions.
I do have some concern that the management teams at quite a few companies have not fully come to grips with the realities of the valuations in the current market, so I’m not sure if that reality has fully set in yet but it’s something that we will be continuing to look at and work on over the next six months.
Dr. James J. Truchard
Other factors in this timeframe with distressed companies around, it’s also a very good time to acquire talent. We have well defined opportunities and well defined plans for what we’re doing in product development, so if we can hire the right kind of talent that can be very effective in expanding our capability to grow.
John M. Graff
That could be a lot less expensive and a lot less risky, too.
William Stein - Credit Suisse
Dr. James J. Truchard
Sure. Well we kind of mentioned the areas.
We have our RF area is a pretty wide open area. We’ve got a good base of technology.
We’ve got also opportunities in industrial embedded space where we’ve got a very well defined position with our embedded design approach with LabVIEW and additional instrumentation opportunities. So wireless is another area that we think we have a nice opportunity in, things like structural help monitoring and the like come into the fore.
So we believe we’ve got well defined opportunities that align very well with our LabVIEW platform and there are adjacencies that can be pursued without major shifts in the way we operate.
John M. Graff
So I’d encourage you to come to NI week this year in August. We believe it’s going to be a pretty exciting event this year, and I think that will give further clarity to the areas where we’re going to be launching new products to try and attack some of these adjacent markets where the incumbents may be a little disrupted at the moment.
Operator
Your next question comes from Ajit Pai - Thomas Weisel Partners.
Ajit Pai - Thomas Weisel Partners
Yes, just looking at competitor dynamics, you talked about certain folks being impacted quite severely and a lot of folks cutting back on investments and some not being able to make it. So in that kind of environment, you know, the opportunities that you see are you seeing them more in terms of entering new markets?
Are you seeing them as opportunities to pick up things from some of the competitors? Or pick up intellectual property?
And you know how soon do you think that strategically some of these players might have to, you know, get out of part of the operations?
Dr. James J. Truchard
Well, certainly one of the areas are that we’re looking at very actively is where we can pick up key talent to work in these new areas. We are also looking to in our marketplace with our present products to continue with our efforts and expansion of the sales area.
And also in system engineering where we’re able to take our products into these new spaces and as some of these other companies are spending less money, pulling back, we can define opportunity for ourselves.
Ajit Pai - Thomas Weisel Partners
And broadly, a bit more on the test and measurement space or is it more on the industrial automation space? Which side are you most attracted to right now in terms of technology acquisitions as well as fortifying your position?
Dr. James J. Truchard
Well, it’s both because I see we’re able to take LabVIEW into the mechatronics, robotics, industrial embedded space. And then we’re also taking it into the test and measurement where multi-core and SPGA technology give us some significant advantages over traditional test and measurement systems.
Operator
Your next question comes from David Yuschak - SMH Capital.
David Yuschak - SMH Capital
As far as your R&D efforts here and of course the last couple of years, you know, in past conference call you’d indicated like in normalized business a lot of your products that you roll out and begin to mature it’s like a two or three year cycle. If that’s correct, I mean, I was trying to think here as you put all this money to work here in the last few years, how do you evaluate the profitability of those things that you’re rolling out where you’ve been introducing them into a difficult market environment to know and test comfortably that that spending will be productive coming out, knowing this isn’t normalized conditions?
Alexander M. Davern
David, that’s a good point. We do tend to see new products tend to reach maturity in a two to three year timeframe.
That’s exactly right. Now we do have a significant number of products that have been coming out over the last couple of years and John mentioned several in his call.
I think one of the key things that’s been allowed us to continue to gain market share in this downturn, our ability to grow revenues in new areas like RF. John also talked about [CRIO] doing very well.
There’d been a wireless data acquisition stuff doing well. So it certainly gets more difficult, I won’t deny, in a severe downturn.
It gets more difficult to assess are we getting the return we expect from a new product introduction? But you have to look at it on a relative basis.
I think you have to be very aware and cognizant of the relative dynamics of what’s going on in that marketplace, and you have to adjust your expectations based on that. And I would say certainly in the areas I mentioned earlier on, especially in the RF arena where there’s probably been a very dramatic pullback, to be able to continue to grow I think is a very positive sign and I’ll hand it over to John.
John M. Graff
Yes, David, when we look at the return on investment in these new products that as Alex mentioned in this timeframe, some of the data can be cloudy, having said that we still do some pretty extensive analysis. And I mean we’ll track sales of new products into new customers into new applications, because we see that as an indication of good return.
We’ll also analyze what we call platform pull. So for an example like RF as we come out with new products with RF, what it does is actually pull the whole PXI platform.
We sell more chassis, more controllers, more of our [LPI] platform, which is enabled by those new RF products. So there’s a lot of different ways that we gauge the ROI and you know that’s what continues to make us feel bullish about that investment in R&D.
David Yuschak - SMH Capital
So if I’m to judge from your comments there about the testing, what you’re kind of saying is when you do get this recovery going, RF and industrial embedded could be two key areas in the market that really can accelerate the opportunities because of your initial success here. Is that kind of what we’re hearing?
Dr. James J. Truchard
That’s exactly right. And one thing in some ways that these areas get obvious because they’re the ones that are growing even when the economy is really tough.
The other thing is often when you’re attacking your marketplace, your resource limited to do so. And so the effect is, say the market that you’re attacking is 50% down and your resource limited, the impact of it being 50% down is less than if you had the resources to attack the whole market.
So in fact it can be a good situation for introducing and bringing new products to market.
Operator
And there are no further questions at this time. At this time I would like to turn the conference over to Mr.
Davern for any additional closing remarks.
Alexander M. Davern
Thank you for joining us today. Just to reemphasize we will be presenting at the Baird Conference in Chicago in May, at the Credit Suisse Conference in Boston also in May, and then at the Thomas Weisel Partners Conference in Baltimore in June.
If you’d like to schedule a meeting please contact our Investor Relations department. Thank you.
Operator
And that does conclude today’s conference call. We thank you all for your participation.