Jul 24, 2009
Executives
David Hugley – Vice President, Corporate Counsel James J. Truchard – Chief Executive Officer Alexander M.
Davern – Chief Financial Officer John M. Graff – Vice President of Marketing
Analysts
[Anthony Lascrusi] - JPMorgan William Stein - Credit Suisse Rob Mason - Robert W. Baird Ajit Pai - Thomas Weisel Partners Mark Douglass - Longbow Research David Yuschak - SMH Capital
Operator
Good day and welcome, everyone, to the National Instruments second quarter 2009 earnings conference call. (Operator Instructions) With us today are David Hugley, VP, Corporate Counsel, James Truchard, Chief Executive Officer, Alex Davern, Chief Financial Officer, and John Graff, VP of Marketing.
For opening remarks I would now like to turn the call over to 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 expense management and manufacturing costs, expected inventory declines in the third quarter, revenue and earnings per share guidance, gaining market share and improvements in operating margin.
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 most recently filed annual report on Form 10-K and quarterly report on Form 10-Q filed May 7, 2009.
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 turn it over to the Chief Executive Officer of National Instruments Corporation, Dr.
James Truchard.
James J. Truchard
Thank you, David. Good afternoon and thank you for joining us.
Operating conditions remained very difficult in Q2, resulting in a 28% year-over-year decline in our revenue. Despite this weakness we believe that the worst may be behind us.
The PMI, while still indicating contraction, has improved through Q1 and Q2 from the record low in December. Likewise, we saw a 1% sequential increase in our Q2 orders over Q1 and a partial reemergence of our traditional end-of-quarter surge in large orders.
We believe our business model again proved its strength and resilience in Q2 as we were able to make significant reductions in operating expenses without cutting strategic investments and new product R&D. In our call today Alec 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.
Alec?
Alexander M. Davern
Good afternoon and thank you for joining us today. Today we reported quarterly revenue of $152.2 million, a 28% year-over-year decline.
Net income for Q2 was $4.4 million, with fully diluted earnings per share of $0.06. Non-GAAP net income was $8.3 million, with non-GAAP fully diluted earnings per share of $0.11.
A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. While Q2 was a very difficult quarter, there are some clear positives to take away.
Firstly, with the quarterly average for the global PMI having hit an all-time record low of 36 in Q1, we saw significant improvement in Q2, with the PMI averaging 44.7. While still indicating sequential contraction, it did make a significant move back towards the breakeven level of 50 during the quarter, ending the quarter at 46.9 for June.
Second, our visibility has improved, which allowed us to give guidance. Third, while our revenues are down 4% sequentially from Q1, our orders in the quarter were actually up 1% sequentially, resulting in a $6 million sequential increase in the backlog of orders during the quarter.
Fourth, while we did not see the full traditional end-of-quarter surge in larger orders, we did see an encouraging improvement in large orders closing at the end of June compared to both December and March. Lastly, our expense management efforts kicked in fully in Q2, allowing us to reduce our non-GAAP expenses by 16% year-over-year and by $10 million sequentially.
This allowed us to significantly increase our non-GAAP earnings per share from Q1, increasing our non-GAAP operating margin from 2% in Q1 to 5.5% in Q2, with non-GAAP net margin of 5.4% in Q2. Looking forward, it now appears increasingly likely that Q1 will be the low point in non-GAAP operating margin for this cycle.
This forward-looking statement is subject to the risk factors I will mention later. From a product point of view our instrument control revenue saw a 46% year-over-year decline in Q2, with revenue from the rest of our products being down 26% year-over-year.
From an order point of view we saw a modest sequential decline in instrument control orders offset by sequential growth for compactRIO and our PXI and modular instrument products. We saw the impact of the industrial recession across all regions.
During Q2 year-over-year revenue growth in U.S. dollars was minus 35% in Europe, minus 25% in Asia, and minus 23% in the Americas.
In local currency terms revenue is down 25% year-over-year in Europe and 17% in Asia, giving an overall local currency decline of 21%. Now looking at the income statement in more detail, non-GAAP gross margin in Q2 was 74.2% compared to 75.2% in Q2 of last year.
Our ability to maintain very stable gross margins in Q2 despite a 28% year-over-year revenue decline is attributed 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. Total headcount was 5,135 as of June 30, up 5% year-over-year.
The primary focus for headcount additions this year has been in R&D and field sales. Now turning to the balance sheet, similar to Q1 inventory decreased by $7 million during the quarter as we made further progress on realigning our production to the lower level of business.
We will continue to monitor our production schedules and we expect to see inventories decline again in Q3. As of June 30 the company had $251 million of cash and short-term investments, up $9.2 million from March 31st.
This cash balance is net of $9.3 million in dividends paid during the quarter and $5.7 million used to repurchase 249,000 shares of NI's common stock at an average price of $22.97 per share. We also announced today that the Board of Directors approved a quarterly dividend of $0.12 per share payable on August 31st to shareholders of record on August 10th.
Now I'd like to make some forward-looking comments concerning our strategy to deal with the current economic environment. As I discussed earlier, while the global industrial economy was still declining sequentially through June, the rate of decline has slowed considerably.
As a result, it is becoming increasingly likely that global industrial production will turn positive in the near term; however, when it does turn positive, the industrial economy will be dealing with significant amounts of excess capacity which will take a considerable period of positive growth to absorb. Given that assumption, I wanted to reiterate our business strategy to manage the threat created by this situation but to also 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 sound financial management by building strong cash reserves and maintaining profitability.
Key to this is maintaining stable gross margins and optimizing our operating expense cost structure through variable costs and thoroughly reviewing discretionary expenses while maintaining very strong employee productivity. At our investor conference at NI Week on August 4th we will translate this strategy into spending targets for 2010 and 2011.
These targets will not be absolute but will be relative to a number of possible revenue scenarios that we will present. This will give a clear picture of our strategy for driving operating leverage during the recovery.
Now to the opportunity. We believe the severe recession is creating major shifts in the market positions of many of the players in industries that we serve.
Some will not survive and some will have to scale back investments so dramatically that they may never be able to catch up. The bottom line is that similar to the tech crash of 2001 to 2003, we believe 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 the 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 and system engineering resources, to acquire key new talent, which has traditionally been very hard to hire, and to enter large, new, adjacent application areas during this recession.
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 or core strategy of expanding the percentage of our revenue coming from large application areas that are new to NI but which heavily leverage our technology and our competitive position has allowed us to outperform our competitors through this recession and should accelerate our revenue growth when the industrial economy recovers.
Now before I turn to forward-looking guidance, let me remind you that the third quarter of last year is a tough compare. It was the highest revenue quarter in the history of the company, with 17% year-over-year growth.
Looking to Q3 this year, we currently expect revenue to be up sequentially and to be in the range of $158 million to $158 million. We currently expect GAAP fully diluted earnings per share will be in the range of $0.04 to $0.12 for Q3, with non-GAAP fully diluted earnings per share expected to be in the range of $0.09 to $0.17 per share.
These are forward-looking statements; I must caution you that actual revenues and earnings 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 and foreign exchange fluctuations. So in closing, I believe we have been both strategic and prudent in our business planning and our reaction and execution in this downturn has once again demonstrated that our business model is solid.
With that, I'll turn it over to John Graff, Vice President of Marketing.
John M. Graff
Thank you, Alec. As the rate of decline of the industrial economy slowed in Q2, we did see some bright spots in our business that reflect the strength of our long-term strategy.
While companies remain cautious about large expenditures, we did see a partial reemergence of our traditional end-of-quarter surge in large orders. During our June update call we mentioned that orders over 20,000 were down 30% year-over-year while we saw this number improve in the last three weeks of Q2, to end the quarter down 26% year-over-year.
Our smaller transactional orders were down 24% year-over-year in Q2 and the average order size increased sequentially to $3,360 for the quarter. Despite the challenge of the current economic situation, we did see growth in some areas of the business.
Sales to academic institutions were up in Q2 and represented 13% of our quarterly revenue. We continued to see increasing support within the academic community to work more closely with NI to introduce students to the latest technologies and better prepare them for industry.
In Q2 we released a new version of our educational Laboratory Virtual Instrumentation Suite or LVIS, for short. LVIS integrates 12 different instruments together and is designed to help connect theory to real world applications.
The new version adds support for several add-on boards that expand teaching capabilities and in new areas, including wireless communications and mechatronic systems. One add-on board that was released in Q2 was a joint collaboration between NI and Xilinx, the world's largest supplier of programmable logic devices.
This board provides students hands-on experience with field programmable gate array or FPGA technology. As you know, FPGAs have been a significant focus area for NI in recent years since [inaudible] enables domain experts to take advantage of the performance benefits of FPGAs without having to learn complex embedded design languages.
In software revenue in Q2 was helped by growth in our volume license agreements or VLAs. Growth in VLA orders is an indicator of the growing number of companies that recognize the value of providing greater access to NI software and the efficiencies it delivers during the development cycle.
Complementing the large orders we saw in software, we saw strong relative performance this quarter in our lower-cost highly transactional data acquisition products, which are commonly sold through the web. Our focus on building the web channel for transactional products during the past few years has allowed our field sales force to increasingly focus on system sales and in the current economic climate this has allowed the field to pursue opportunities in areas such as education and government, where stimulus and other funding has made capital more readily available.
Our position in the industrial embedded space continued to expand as we saw another quarter of year-over-year revenue growth for NI compactRIO products, which continue to see success in prototyping applications as well as deployments for machine control. The combination of LabVIEW and compactRIO helps engineers quickly try out and modify new designs using the graphical system design approach to achieve faster time to market.
Our single-board RIO products, which we released last year, provide a cost-effective option for higher unit volume deployments for OEMs, allowing them to use the same software that they develop during the prototyping stage in their final product and thus further accelerating their time to market. One example of a customer who has fully embraced the NI platform throughout their development cycle is Silicon Renewable Energy, a company that manufactures solar panels.
After using LabVIEW and NI hardware during their design and validation, they also deployed LabVIEW and FPGA-based hardware for silicon purification and characterization of their solar modules during manufacturing. In the end they were able to achieve better accuracy in their measurements while at the same time significantly increasing their test throughput.
Another area where we continue to see strong relative performance is with our PXI and modular instrument products, especially with our RF offering. While we continue to rapidly increase our investment in hardware development, we have also been significantly increasing our investment in software for RF standards.
In Q2 NI released a measurement sweep for WiMAX applications and another for GPS simulation. With software defined PXI RF measurement systems engineers can reduce their cost of equipment by using a single set of hardware to test WiMAX, wireless LAN, GPS, GSM, WCDMA and many other wireless standards while performing these same tests up to 10 times faster than traditional RF instrumentation.
A specific modular instrument's success story this quarter was with Sony, who chose the PXI platform to perform production testing of their Blu-ray disc player products. Sony was experiencing slowdowns in their production schedule due to inefficient testing, but by using PXI and LabVIEW they were able to meet their cost and performance requirements while improving their test throughput by 33%.
We hear similar stories from many of our customers, who are being tasked with growing efficiency in test engineering with the same or decreased budgets. And Sony and others are realizing the benefits they can achieve by moving to the NI platform.
We're also very excited about our announcement last week that National Instruments and Tektronics would be unveiling a joint product initiative at NI Week. Martyn Etherington, Vice President of Marketing for Tektronics, describes the collaboration as one that, quote, "brings together two leading brands with one goal of enabling our joint customers to innovate and bring products to market faster," end quote.
We are excited about this collaboration that will enhance customers' productivity, combining the expertise of Tektronics in high performance measurements and the expertise of National Instruments in software, instrument control and modular instrumentation. We will discuss more details of this initiative at NI Week.
In summary, we were pleased with our ability to sustain investments in new product R&D and expand our field sales force while significantly reducing our overall operational expenses. We are excited about the NI Week conference in two weeks, where you will see announcements of a number of new innovative products that will continue to expand NI's addressable markets.
At our annual investor conference we will discuss these products and examples of customer successes, as well as our approach to the opportunities that NI has in test and industrial-embedded applications. We hope to see you there.
With that, I'll turn it over to Dr. T.
James J. Truchard
Thank you, John. Despite the continued weakness in the global economy, I was once again pleased by the strength and resilience that we showed in Q2.
Our strong business model has enabled us to sustain profitability while continuing to make strategic investments throughout this downturn. It's through these challenges that we are reminded of the importance of our consistent long-term approach to growing and operating a company built to last.
Since the last recession and throughout the current one we have pursued a unique strategy which has proven to be a disrupter within the traditionally served markets. I believe we are re-defining instrumentation through our ability to leverage technology such as FPGAs and multicore processors with LabVIEW and that these unique capabilities have established a significant competitive advantage.
These technologies, combined with the strength of our field sales force, are allowing us to take on some of the world's most significant scientific and engineering challenges that previously would have required highly customized solutions. The benefits of our graphical system design approach have become even more pronounced in this environment of tighter budgets and shorter design cycles, as engineers look to do more with less, so I believe we have an opportunity to gain market share not only because of our strategic research and development investments and expanding field sales force but also because of our core strategy of combining hardware and software can lead to significant performance improvements for our customers.
As we mentioned previously, I believe this recession is creating an opportunity for National Instruments as we've seen our competitors cut costs and retrench while we continue to innovate. I believe this will lead to major shifts in the market positions of many players in the industries we serve and that we are creating an opportunity for a permanent shift in industry leadership.
I believe that National Instruments is very well positioned to benefit from these dynamics and that our management through this downturn will allow us to leverage the economic recovery. I've seen our organization prove these challenges can be a catalyst for innovation.
An example is the progress we've made in expanding our vision to include industrial-embedded applications. Our ability to quickly adjust our spending plans as economic conditions deteriorated is also a testament to this, and I'd like to again thank our employees for their efforts in this area.
In summary, while Q2 proved to be a very difficult economic environment, we see evidence that the worst may be behind us. We have remained profitable even as we have maintained our strategic investments in new product research and development and expanded our field sales force, leading to opportunities that we previously would not have had access to or the products to address.
Throughout the recession I am pleased that our business management has allowed us to avoid compromising our long-term strategic vision while allowing us to further differentiate ourselves from other players in the market we serve and providing a strong foundation to support growth. I am excited about our new products and plans to release it at NI Week this year, in addition to our recently announced collaboration with Tektronics.
I hope to see you here in Austin in two weeks. Thank you.
We will now take your questions.
Operator
Thank you. (Operator Instructions) Your first question comes from [Anthony Lascrusi] - JPMorgan.
Anthony Lascrusi - JPMorgan
Can you talk a little bit more about your ability to provide guidance for the September quarter? What has changed and how has your visibility improved?
Alexander M. Davern
In a number of ways, Anthony. Certainly, you know, we've obviously went through a period of fairly rapid decline, not only in the global economy, the global PMI starting last fall that really came to a trough in December at some really record low numbers, and then obviously we've seen a rate of decline in the broader economy slow down as we're heading through Q1 into Q2.
That gives us some confidence that the likelihood is pretty strong that industrial production globally will probably turn positive some time in the next few months. Now that, combined with the behavior of our customers, we're seeing a change or we saw a change in the behavior pattern, especially in the last three or four weeks of June, on a large order front to what we've seen both in December and in March.
In December and March we saw very, very reluctant customers relative to larger orders and we saw that free up noticeably at the end of the June quarter. That allowed us, obviously, to add about $6 million in backlog during the June quarter and the combination of those factors, with the traffic pattern we're seeing in our more transactional orders and the stability we have seen there, has given us confidence that we're in a position now to give guidance here for the September quarter.
Anthony Lascrusi - JPMorgan
Okay, by follow up would be the large orders that you saw in the June quarter, do you believe those to be sustainable and what vertical, if you could be specific, are you receiving those orders from?
John M. Graff
In terms of sustainability, I guess we have to see. It's still subject to capital purchasing patterns in the end markets.
But after not seeing it in Q4 and in Q1, we were pleased to see some reemergence of that pattern. In terms of the verticals, I mean, again, it's a variety.
The diversity of our business has been one of our strengths. Obviously, the large orders are smaller in quantity, but we saw successes in large orders for RF and communications tests.
I know we saw some large orders for industrial-embedded machine-type applications. So I think it's nice execution by our field sales force to identify, manage and close these opportunities.
Alexander M. Davern
Following up from John, Anthony, is that we define large orders as any order over $20,000, so for a lot of companies that would be considered maybe a smaller order, but in the NI business we regard them as [inaudible]. So you're talking about a fairly significant number of orders, not just one or two customers.
Operator
Your next question comes from William Stein - Credit Suisse.
William Stein - Credit Suisse
Following up on that last one about the predictability here, you're guiding September up about 7% sequentially and I think kind of average seasonality in September is up 1, so it's pretty clear you're putting the guidance in line with your comment that the worst is behind us. Can you remind us how big the backlog is typically?
How much of the September number is driven by what's kind of already in the bag as opposed to what we expect to get from transactional business or bigger orders later in the quarter?
Alexander M. Davern
Sure, Will. I mean, we're very much a turns business, so the vast majority of our revenue in any quarter comes from orders booked within that quarter.
Typically we've seen our backlog range anywhere from 1 to 4 or 5 days' worth of order volume, so relatively small by capital equipment standards. In terms of looking at guidance it's not really a reliance on backlog.
Certainly increasing backlog during Q2, it was nice to be able to do that; that gives us certainly a little bit more visibility into Q3. But fundamentally our confidence in terms of our guidance is really coming from the activity trends that we're seeing both in the transactional orders and in the over 20K orders during Q2 and then obviously into July.
William Stein - Credit Suisse
Then just a follow up on the cost side. You beat the margin expectation.
By my model it looks like much of that came from R&D, although that's clearly a focus for the company in order to provide future revenue growth, so I'm wondering if you can talk a bit about whether there were incremental cost savings in R&D and then also whether there are more savings to come in the September or the December quarters or are we kind of done with all the cost savings actions?
Alexander M. Davern
Perhaps I'll address the second part first. At this point our focus, as we said in the June call, is going to be on growing the business.
The company and the whole economy is kind of reset to a new point here. Our focus is going to be growing the top line from here as we continue to push forward investment in R&D.
Our overall headcount in R&D is up in the mid single digits year-over-year and in the field sales force it's up in the high teens. So we're going to continue to push forward on that investment and we do not have any plans at this point in time for any incremental cost saving initiatives on the operating expense side.
We are continuing to work with our vendors both on the material cost side and elsewhere to drive pricing benefits where we can. We have a pretty strong business in terms of a steady repeat customer and we're continuing to leverage that to make sure we're getting good market pricing from our vendors.
That's where we'll be focusing continuing cost reductions, but in terms of the broader operating expense we do not have any current plans to expand that beyond what we've already put in place. Now in terms of R&D, you're pretty well aware, Will, that we have typically a fairly large software capitalization number in the second quarter that's been traditional the last number of years built around the anticipation of a major software release at NI Week.
The last number of years that has obviously been a new release of the LabVIEW platform. That was obviously a factor again here in Q2 of this year, and software capitalization year-over-year was up about $600,000 or $700,000.
So a modest impact on the year-over-year number, but obviously it has a significant impact on the sequential pattern of R&D. We would expect that to revert upwards now as we move into Q3 and those products that are in beta would hopefully be released here at NI Week in 10 days.
Operator
Your next question comes from Rob Mason - Robert W. Baird.
Rob Mason - Robert W. Baird
Alex, I just wanted to stick on the cost theme a second. I think it was last quarter or maybe the update call that you had mentioned that you had implemented a mid single digit pay reduction for the work force.
Is that correct?
Alexander M. Davern
That is correct, yes, effective March 1st.
Rob Mason - Robert W. Baird
So does your guidance assume that that's remaining in place here through year end?
Alexander M. Davern
Obviously, we've only given guidance for the third quarter, but it does assume that that remains in place for Q3. And I'd like to take this opportunity for the employees that are on the call that, you know, one of the things that I think has been remarkably positive about the impact of this economic downturn on NI is our ability to rally the whole employee base and stay very, very focused with a very high level of productivity on executing against our goals.
And the employee base, while no one is happy about a pay reduction, I have seen it build a stronger company and make the company more unified and seen employees respond as well as you could possibly hope, so I want to take this opportunity to thank the employee base for that commitment to the future success of the company. I think that's just an example of the strength of the NI culture and one of the key elements that will help to carry the company forward and we believe improve our leadership in this industry over the course of the next decade.
Rob Mason - Robert W. Baird
A question on the traditional instruments business. It looked like perhaps that finished a little bit better than it was tracking at your update call.
As you've moved into July utilization rates are up, granted still much excess capacity, but are you seeing any hint that that business might have bottomed yet for you?
Alexander M. Davern
Certainly there's some significant signs of stabilization, without a doubt. And our instrument control business led the decline, if you like, in that it turned negative in Q3 of last year and really the whole company broadly didn't see a negative impact until the fourth quarter.
So it has easier compares, let's say in Q3 than the rest of the business, which will catch up in the fourth quarter. We saw a dramatic drop in instrument control from Q3 to Q4 to Q1 and then a very, very modest drop from Q1 to Q2.
So certainly some strong signs of stabilization there and we may see from a year-over-year growth rate point of view that business may change direction here in Q3.
Rob Mason - Robert W. Baird
But from a dollar standpoint?
Alexander M. Davern
From a dollar standpoint we're not anticipating any significant sequential increase in that business. Our expectations on sequential increase is coming from the rest of the company.
Rob Mason - Robert W. Baird
Maybe last thought on your geographies. Could you just speak to your three primary geographies, where you were seeing improved visibility and maybe any geographies where you were not?
Alexander M. Davern
I would characterize the visibility question and the shift in the pattern on the orders over 20K at the end of June as being relatively global. I don't think there's a discernable - this has been a highly synchronized global recession and I think the recovery, if and when it comes, is likely to follow that pattern.
There may be slight lags, but in general I would say that the improvement in visibility is fairly broad based. John may care to comment further on that.
John M. Graff
Yes, as we look at internally things like the order volume and the pipeline statistics for our larger system business, it's amazingly consistent across all three regions.
Operator
Your next question comes from Ajit Pai - Thomas Weisel Partners.
Ajit Pai - Thomas Weisel Partners
A couple of quick questions. I think the first one is just, you know, looking at pricing trends in the markets that you're serving.
You talked a little bit about how some competitors are going to find it difficult to compete and others are getting out of the business, but are you seeing some of the ones that are still in the business getting desperate and trying to compete more aggressively?
Alexander M. Davern
You know, from our point of view with dealing with this specific question and dealing with it in the midst of what we all know is the worst downturn in 70 years, it's good to be in the position of the disrupter and I'll let Dr. Truchard address that in a minute.
From our point of view in terms of discounts, we've actually seen our discount rates drop year-over-year and sequentially, so our discounts in Q2 on average globally were slightly lower than they were in Q2 last year and actually slightly lower than they were in Q1. That's somewhat a reflection of the OEM business and the larger orders obviously taking a bigger impact in the second quarter, but in general we've seen pricing for our business pretty consistent.
Now, I have heard some anecdotal evidence from talking to some of my peers at other companies that they are seeing some pricing pressure, but that has not today been a factor and it really comes down to design differentiation and a our position as a disrupter.
James J. Truchard
Our products tend to have a lot of differentiation; if they're designed in, they'll sell. It seems to be more a matter of whether people have money or not.
If they have money they buy, if they don't they don't. And that's why one of my explanations of why it's so uniform across the globe because it is a factor how the company that's a customer is actually doing financially.
Ajit Pai - Thomas Weisel Partners
And then what is the headcount at the end of the quarter?
Alexander M. Davern
I mentioned it in the comments. I believe it was 5,135, Ajit, up about 5% year-over-year, and then the biggest year-over-year increases have been in R&D and in the field sales force.
Ajit Pai - Thomas Weisel Partners
But down about 65 sequentially?
Alexander M. Davern
Yes, we've had obviously some natural attrition in some areas of the business outside of R&D and the field sales force, and that's something we traditionally will see during this time period. Some areas that are more volume related we've chosen not to backfill that attrition.
Ajit Pai - Thomas Weisel Partners
And then just looking at your European sales, you talked about sort of linearity over there and also the timing of Easter this year sort of shifting revenue from the first to the second quarter. Does that mean in the second quarter that you actually saw European sales strengthen right through the quarter?
Alexander M. Davern
In terms of absolute dollars the answer on a daily rate per month, if you like, that's definitely true. As we talked back in January, we expected the shift of Easter as we looked at this year to help us in Q1 and to hurt us in Q2, which is a flip of what happened last year.
And so that's what we saw. The European business was somewhat of an outperformer in Q1, somewhat of a laggard in Q2, if you look at it, and we believe Easter's a heavy, heavy part of that factor.
And certainly the business improved in absolute terms as we went from April into May and into June.
Ajit Pai - Thomas Weisel Partners
And then just in terms of the quality of your backlog, over the past five to seven years the mix of sort of higher-priced system sales, high ASP system sales has been increasing as a percentage of international instruments revenues and orders. Can you give us some color right now as to how that's changed?
You've always been a very high turns business, but can you give us some qualitative inputs on how to put your backlog - you know, some levels of where it could be right now and what percentage of the backlog will ship within three months and how much within six month?
Alexander M. Davern
Sure. I mean, we still continue to operate - and I want to stress this - we are very, very much a turns business.
We anticipate 80% of our orders received will ship within 48 hours and we carry inventory at a high level to be able to manage that. Our customers buy PCs and they want to add instrumentation, hardware and software, to the PC sales, so we manage our turns business very much like the PC.
Now having said that, typically we've had backlog anywhere from one to five days. We continue to be in that range; we're at the upper end of it now.
We made a decision to build up backlog at the end of June because we felt we had sufficient revenue to be able to meet the guidance in the second quarter, and so the backlog we have available at the end of June we would expect all of that to ship in Q3.
Operator
Your next question comes from Mark Douglass - Longbow Research.
Mark Douglass - Longbow Research
Can you please confirm I think you said earlier that the patterns you're seeing in July are similar to those you saw at the end of June?
Alexander M. Davern
I believe what I said, Mark, is that we factored in the pattern we've seen in July as part of the reason we feel confident in giving guidance.
Mark Douglass - Longbow Research
Can you discuss a little more detail as to what's going on in the various end markets? I know you said compactRIO is up year-over-year, but just in general what you're seeing in, say, the RF communications?
Which ones were weaker than others - general purpose test and measurement, was that the big dropoff? Just general electronics testing or if you can provide some details.
John M. Graff
So if we look at the kind of vertical segments, so this would be the segments or industries our customers are in, where we saw really significant declines would be areas you'd expect - automotive, instrument ATE business, and in the customer classification of communications we did see some weakness. Now I compare that to sales of our RF and wireless products, where we actually saw some very strong results.
We also saw strong results in sales to education and academics that we mentioned during the call, as well as sales into research and energy industries. So I think that kind of reflects, one, the diversity of our business.
You see areas where capital continues to flow, like education and government and research-related industries, we're able to capitalize on that business and that's part of the flexibility of our direct model.
Mark Douglass - Longbow Research
In the RF and wireless would you say it's a lot of defense for you or was it a broad mix?
John M. Graff
It's a mix. One of the strengths of our platform and our software-based approach is we can address a much wider set of applications, so some will be in classic kind of RF production tests, manufacturing tests, but we're also able to sell it into kind of signal intelligence, signal acquisition-type applications.
And, again, that's the flexibility of our software-based model. So that's one of the reasons we continue the aggressive investment in RF is that we see broad applicability of these products in a wide range of end markets and a variety of applications.
Mark Douglass - Longbow Research
And then finally, going back to the expenses and costs, I know before you had mentioned roughly a drop in overall expenses for the year of 10%. It could have been even a little bit better than that now.
Are you declining from commenting on that because you're giving specific 3Q guidance or what do you have in mind for the full year.
Alexander M. Davern
Your assumption is correct. As we're moving towards the confidence level to be able to give guidance a quarter out we're going to revert back to giving guidance on revenue and profitability.
Obviously, we've chosen to focus on expense management during a time period when, with the collapse of the industrial economy, it was very hard to give any guidance on the top line side, so our plan going forward as of today would be to revert back to quarterly earnings guidance.
Operator
(Operator Instructions) Your next question comes from David Yuschak - SMH Capital.
David Yuschak - SMH Capital
As far as the activity at the end of the quarter, in the last couple of calls you've indicated there's been a lot of interest coming out of field sales where guys haven't been able to pull the trigger. I'm kind of curious as you look at the activity at the end of the quarter, was there a lot more of those things that have been deferred that are starting to show up in those waters or are we seeing maybe a quicker decision by newer proposals that are being put into that order stream versus things you'd done in the past?
John M. Graff
From an activity and interest level we continue to see very strong interest. I think we talked about this last quarter in terms of response to our marketing programs, just activity on our website, leads and opportunity volume continues to be strong.
And, again, we think that's a reflection of we have a very strong value proposition and in times like this a lot of people are going to be interested in ways they can save money. So we continue to feel strong about that.
In terms of what happened, obviously we're pleased to see some of that reemergence on the large orders but, again, caution you that we didn't see the full end of quarter surge that we typically see, so there's still some caution in the air of our large customers or large order customers.
David Yuschak - SMH Capital
But are you seeing some of those decisions, though, coming quicker as far as that? Even though it's down are they coming quicker from some people or are they just mainly the deferred stuff?
Alexander M. Davern
We obviously track this in our opportunity database. We have a set of opportunities that the sales force is working hard on and anticipate closing at the end of any particular quarter.
We saw a massive increase in the percentage of those opportunities pushed out in Q4, going into December in particular, and it stayed up at that very high level in the first quarter as we went into March. In the end of June we saw the percentage of those opportunities expected to close at the end of the quarter that got pushed out, that percentage came down noticeably and so you're starting to see some of those flow through.
Obviously, the field sales force has a large, active set of opportunities they're continuing to work and how customers will behave in September we'll have to wait and see, but certainly what we saw in June gave us confidence. We know we have one more tough compare on the large orders that we get through in September and then we'll start to have easier compares from a large order point of view once we head into the December quarter.
David Yuschak - SMH Capital
As far as some of the reasons for the guidance, from transactional order trends that you're seeing versus your opportunity database you talked about there earlier, what's more important in this increased confidence - is it seeing the sales coming out of systems or is it more the transactional model that suggests your reason for being able to give guidance?
Alexander M. Davern
It's really both. We've seen a very significant level of stability in the transactional business now for quite a few months and that's certainly confidence level there, the continuing drops which we'd seen in Q4 and Q1 are probably behind us.
And certainly what brings in variability into the equation at the end is going to be the larger system orders. While we continue to book and close a lot of those orders each week, certainly traditionally, as John has mentioned in his comments, we have seen a surge in those in the last three weeks of each and, while we didn't see a return to that in June we did see at least a significant improvement relative to December and March.
Those are certainly important and, as I said earlier on, we're anticipating behavior in September that's similar to what we saw in June at this point and we'll have to wait and see how that plays out.
David Yuschak - SMH Capital
So it's more on the transactional model, it's more just stability here than it is seeing some real growth?
Alexander M. Davern
Stability in that that trend appears to be relatively predictable at the moment.
Operator
Your next question comes from William Stein - Credit Suisse.
William Stein - Credit Suisse
I'm wondering first, just a housekeeping question, I think the tax rate was a little bit higher than expected this quarter. What do we expect it to be going forward non-GAAP?
Alexander M. Davern
As we've talked the last couple of quarters, when profit numbers are down significantly relative to the past, the tax rate number tends to be a little bit more volatile, so we would anticipate the number in Q3 to be somewhat similar to Q2. But I will caution you that in a lower profit environment that number gets a little more difficult to predict.
Obviously, our expectations are built into our guidance for the quarter.
William Stein - Credit Suisse
And going forward reverting back to approximately 15% non-GAAP? Is that a fair way to think about it?
Alexander M. Davern
You know, based on what we know now as we look out into 2010, if nothing was to change in terms of the legal situation and the tax law, we'd be somewhere between 15% or maybe a few points higher, but I would not want anybody to take anything as guidance at this point in time until we see how some of the actions in Washington may play out over the course of the next six months.
William Stein - Credit Suisse
And acquisitions is potentially part of the strategy? We see them once in awhile.
Any renewed activity there?
Alexander M. Davern
Certainly, this is an area of focus for us. You're well aware of our priorities for the use of cash are, number one, dividends, number two, opportunistic stock buybacks, and number three, strategic acquisitions, and that's an area of focus.
However, we're well aware of the difficulty in earning a good return on an acquisition, so we will continue to not chase them at high prices but to focus on where we can drive sustainable value for shareholders.
Operator
That is all the questions we have at this time. I'd like to turn the conference back over to you for closing remarks.
David Hugley
Thank you very much for joining us today. We will talk to you again on September 8th, to the broader audience, and we certainly hope to see a significant number of you guys at NI Week on the 4th of August.
Thank you very much. Bye, bye.
Operator
And that concludes today's conference. We thank you for your participation and hope you have a wonderful day.