Jul 27, 2010
Executives
Dr. James Truchard - President and CEO Alec Davern - SVP and CFO David Hugley - VP, General Counsel and Secretary John Graff - VP, Marketing and Customer Operations
Analysts
Anthony LeGree - JPMorgan Mark Douglass - Longbow Research William Stein - Credit Suisse Richard Eastman - Robert Baird Ajit Pai - Stifel Nicolaus Chuck Murphy - Sidoti & Company
Operator
Welcome to the National Instrument second quarter 2010 earnings conference call. Today's call is being recorded.
You may refer to your press packet for the replay dial-in number and passcode. With us today are David Hugley, Vice President, General Counsel and Secretary; Alec Davern, CFO; James Truchard, CEO and Co-Founder and John Graff, VP or America Sales and Marketing.
For opening remarks and introduction, I would like to turn the call over Mr. David Hugley, Vice President Corporate Counsel and Secretary.
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 future revenue growth, improving gross margins, the continued recovery in the industrial economy, transfer expense management, new products and our revenue and earnings per share guidance.
We wish to caution you that such statements are just predictions and that the 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 Form10-K filed February 17, 2010 and our most recent quarterly report on Form10-Q filed May 6, 2010.
These documents contain and identify important factors. That could cause our actual results to differ materially from those contained in our forward-looking statements.
With that, I will now turn it over to the Chief Executive Officer of National Instruments Corporation, Dr. James Truchard.
Dr. James Truchard
Thank you, David. Good afternoon and thank you for joining us.
Our key points today are record second quarter revenue, record second quarter operating profit and the very strong gross margins. This time last year, we were in the middle of one of the most challenging financial periods in the company history.
I am very pleased to see us return to record revenue for the second quarter. The fact that we reach record revenue so quickly that can be attributed not only to the broad based recovery in business, but also to our commitment to strategic investments throughout the downturn.
We continue to innovate, acquire key talent and strengthen our customer relationships and I believe our outstanding Q2 results validate our commitment. I continue to be very optimistic about our position in the industry and I believe these investments will continue to act as a catalyst to our growth as we continue through 2010.
I would like to take a moment to congratulate John Graff on his new position as Vice President in Americas Sales and Marketing, John as serve as Vice President of Marketing in the Investor Relations for many years and we thank him for his contributions. In our call today Alec Davern, our CFO will review our financials; John Graff, our Vice President in Americas will discuss our business and I will close with a few comments before we open up for your questions.
Alec?
Alec Davern
Good afternoon. Today we reported Q2 revenue of $212 million which is an increase of 39% year-over-year, and a new record for second quarter.
Net income for Q2 is $24.6 million with fully diluted earnings per share of $0.31. Non-GAAP net income was $28.3 million with non-GAAP fully diluted earnings per share of $0.36.
Operating income was a record for the second quarter and operating margins improved significantly year-over-year. However our earnings results were $0.02 per share below the mid point of our guidance due to $2.2 million loss on foreign exchange.
This loss was primarily due to the weakness of European currencies in May and June which have not been factored into our Q2 guidance. The reconciliation of our GAAP and non-GAAP results is included in our earnings press release.
With record revenue our business has built momentum in Q2 and there are some clear positives to take away. First we had record revenue for the second quarter over 39% year-over-year growth.
Second, we continue to drive strong gross margins and third we delivered 17% non- GAAP operating margins. From a revenue point of view our Instrument Control business saw a 54% year-over-year increase in Q2, while revenue from our Virtual Instrumentation graphical system designed products grew 38% year-over-year.
Instrument control revenue has made a strong recovery from the very significant declines, we saw during the recession. However, in Q2 were still down 17% over two years since Q2 of 2008.
Traditionally our Instrument Control revenues have been highly correlated to the overall test and measurement and the current trends indicate while the industry continued its recovery in Q2, it has not yet recovered to pre-recession levels. This makes our record second quarter revenue all the more impressive.
During Q2, year-over-year revenue growth in US Dollars was 28% in Europe, 66% in Asia and 32 in new markets. Now looking at the income statement in more detail.
Non-GAAP gross margin in Q2 was 77.6% compared to 74.2% in Q2, 2009. This increase gross margin is attributed to the intense efforts, made to improve our operating model during the recession.
On the expense side, our non-GAAP operating expenses were up $5 million sequentially and by 23% year-over-year. The main drivers of this sequential increase were up full quarter of salary reinstatement and increase in variable pay and commissions related to the very year-over-year revenue growth.
For the first half of the year, our revenue was up 30% year-over-year and our non-GAAP operating expenses are up 15% inline with the plan we detailed at our investor conference at NIWeek of last year. Some additional items of note in Q2 were that deferred revenue increased by $3.5 million during the quarter and total headcount was 5,103 as of June 30.
Now turning to the balance sheet, as of June 30, the company has $316 million of cash in short-term investments up $21 million from March 31. Also, during the quarter the company paid $10 million in dividends.
We also announced today that the board of directors approved their quarterly dividend of $0.13 per share, payable August 30 to shareholders of record on August 9. Now I would like to make some forward-looking statements.
The trends of the Global PMI continued to be strong in Q2, averaging 56.7 for the quarter. But it appears likely that Q2 was the peak of the Global PMI for this cycle.
Moving forward, we expect that the Global PMI will now revert towards its historical mean. The profit recovery and investment plans we laid out at NIWeek last year anticipated the strong recovery followed by the necessary moderation.
As a result, we have seen a significant rebound in revenue and we have been very disciplined in increasing our expenses at approximately half the rate of revenue growth. This has resulted in a dramatic rebound in profitability with non-GAAP operating margin increasing from 4% in the first half of 2009 to 15% in the first half of 2010.
Non-GAAP operating margin in Q2 was 17%, 1% higher than Q2 of 2008 and operating income for Q2 was an all time record for the second quarter. Similarly, operating income for the first half of 2010 exceeded the first half of 2008.
We have been able to deliver this record performance while still investing for the long-term, by increasing our R&D and field sales account over the last two years by 8% and 20% respectively. This record performance plus our guidance for Q3 gives us confidence that we will be able to deliver record annual revenue and record annual profitability in 2010.
As the Global PMI takes a logical path and reverse towards its historical means. We remain confident about NI's growth prospects given a very lean inventory levels globally we believe that industrial economy is well positioned to deal with the moderation of the PMI and then NI's position to grow through this moderating trend.
In addition, we have made tremendous progress in delivering profitability, with non-GAAP operating margins in the first half exceeding those for the first half of 2008. In NIWeek last year, we laid out our goal of driving operating leverage by raising expenses at a rate of approximately 50% of the revenue increase up until the point where we returned to record revenues.
Now that we are back to record revenue and record operating profit, we will be revising our focus at our Investor Conference in NIWeek this year to one that more closely follows our long-term business model. As the global economy remains uncertain, we will continue to focus on gross margins and careful expense management, while growing expenses at a rate a closer to our gross revenue growth rate going forward.
We were making investments we believe are necessary for sustained growth of the company while continuing progress towards our goal of 18% non-GAAP operating margins. Our approach will be prudent and disciplined and with the careful eye to the ongoing developments in the global industrial economy.
Now turning to specific guidance for Q3, we currently expect revenue to be in the range of $206 million to $220 million. We currently expect the GAAP fully diluted earnings per share will be in the range of $0.27 to $0.37 for Q3 with non-GAAP earnings per share expected to be in the range of $0.32 to $0.42 per share.
As these are forward-looking statements I must caution you that actual revenues and earnings could be negatively affected by numerous factors such as any further fluctuations in the global economy, rescheduling of customer orders, expense overruns, effective tax rates and foreign exchange fluctuations. In summary, we are very pleased with the strength of our business in Q2 and a dramatic recovery in our profitability.
Our goals are to invest in sustained revenue growth and to continue to drive towards our 18% non-GAAP operating income target. Now I’ll turn it over to John Graff, Vice President of Sales and Marketing for the Americas.
John Graff
Thank you, Alec. We are obviously very pleased with the strong year-over-year growth and record revenue in Q2.
We believe our ability to exceed peak revenue levels that we saw in 2008, at this point in the recovery, as a testament to the strength of our business model and validates the strategic investments we have made in key product areas like CompactRIO for industrial embedded applications and RF modular instruments for test and measurement applications, both of which have experienced significant growth over the 2008 levels and record revenue for a second quarter. We continued our investments in field sales and R&D, growing the field headcount by 20% and R&D by 8% over the past two years.
Along with these investments NI continued to penetrate into large accounts by building out our service offerings and focusing the industry experts in key growth areas. In Q2, we saw a large system orders drive the average order size to a new second quarter record of approximately $3,800, and orders over $20,000 grew 46% year-over-year, exceeding Q2 2008 levels.
As an indication of the recovery in business investment, Intel and Microsoft both reported record revenues, highlighting a surge in demand for PCs for business as a contributing factor. In addition, Windows 7 was reported to be the fastest selling version of Windows following its release last year.
National Instruments has long seen a positive relationship between new computer and operating system purchases in our business, particularly, for our volume based software and hardware and this quarter was no different. Software products and services had continued order growth in Q2 and our low cost state acquisition products experienced strong year-over-year order growth led by our C series based devices.
In Q2, we introduced our first family of PXI Express data acquisitions modules with integrated signal conditioning for scalable high performance, temperature strain and high voltage measurements. The new family delivers increased accuracy, high data throughput and best-in-class synchronization.
In addition, the new family can scale from a few channels to thousands of channels within the same platform and can be applied in a variety of applications which is structural, fuel cell or automotive test. In Q2, we also experienced year-over-year growth in our sales for academic institutions, an area that has seen strong performance both through the recession and in the recovery.
Academia continues to be a focus area as we believe students who are thought engineering and science with NI products will take their experience in the industry. Our distributed I/O products also saw large year-over-year growth, achieving record quarterly revenue.
This growth was led by our innovative CompactRIO platform which is built around LabVIEW and the FPGA technology. CompactRIO continues to be one of our key investment areas and we are pleased to see success in many diverse industries, including energy, oil and gas, biomedical and automotive and transportation.
In Q2, the number of plug-in modules available for CompactRIO surpassed 100, an exciting milestone for this quickly growing platform. We were especially pleased by this achievement because almost half the modules were developed by third parties, a powerful testament to the flexibility and growing acceptance of the platform.
With NI and third party modules, customers are more quickly and efficiently building sophisticated systems with commercial off-the-shelf technologies, compared to traditional custom design approaches. One example of a customer who was successful using CompactRIO, was Whitfield Solar, a company that develops innovative solar arrays with greater energy yield than conventional arrays.
Whitfield needed to create a remote environmental monitoring system to more easily and cost effectively evaluate solar energy product development. Using CompactRIO, they saved thousands of dollars, reduced their development time and decreased the environmental impact of their operations by minimizing the need for site visits.
Our PXI and modular instrument products also saw record revenue for the quarter. One significant benefit of PXI based systems is that the customer can upgrade the modular components in the system, giving them greater flexibility, as well as the ability to improve overall system performance.
This quarter, NI announced the industry’s first PXI Express Quad-Core Controller which features Intel’s new Core i7 processor. By combining the latest technology from Intel and advancements in the PCI Express bus, the new controller can help significantly reduce test times for applications that require intensive data processing, which is RF protocol testing and hardware in the loop or HIL simulations.
Within our modular instrumentation products, RF helped drive growth in the quarter, validating our continued investment in this area. This quarter, we expanded our RF protocol software offering in the area of Wireless LAN Test.
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. Using PXI modular instruments, one of our customers SolRayo Incorporated recently developed a system that determines the energy storage power rating and internal resistance of energy storage devices such as batteries, capacitors and fuel cells.
Many of the existing systems currently available in the market have steep learning curves and complex software. However SolRayo’s system is based on LabVIEW and PXI instrumentation, it meets or exceeds the speed and accuracy of existing commercial devices while providing a user friendly interface that greatly improves the usability of the device.
In summary, we believe our ability to return to 2008 levels and many areas of the business was simply outstanding, and we look forward to seeing our strategic investments continue to drive value for our customers. We are excited about our NIWeek Conference next week, where you will see announcements of a number of new innovative products that will continue to expand the application areas we serve.
At our Annual NIWeek Investor Conference on August 3rd, we will discuss the evolution of our product portfolio and sales force, as well as our spending intentions as we seek to drive long term growth. We hope to see you there.
With that, I’ll turn it over to Dr. T.
Dr. James Truchard
Thank you, John. I’m extremely pleased with our strong Q2 performance that reflects our industry leadership.
Our flexible business management allowed us to avoid compromising our long term strategic vision while allowing us to further differentiate ourselves from other players in the markets we serve. The severe recession forced many of us, including our customers to look at new approaches to address their engineering challenges.
During this time, NI has remained committed to investing in R&D to deliver products, but also investing in our sales force in order to deepen our relationships with customers. For the past decade, NI has consistently invested approximately 16% of annual revenue in R&D to provide the product platforms and services necessary to keep pace with the fast changing needs of test and measurement and automation systems.
NI was founded on the preeminence of leveraging computer based technologies in order to deliver a unique ecosystem of highly integrated software and hardware product that increased performance while lowering the cost and the complexity for our users. Our ability to leverage Moore's Law enables us to benefit from increased PC performance and deliver products based on the latest technologies such as multicore processors, FPGAs, PCI Express and Microsoft Windows.
One example of this innovation is CompactRIO, for high performance, high channel count platform that maintains low power, size and cost. The key to success for NI and the customers we serve is that we have invested thousands of person years in platforms that leverage both internal and external technologies to fully take advantage of Moore's Law.
These platforms provide consistent software, hardware form factors and the flexibility to evolve and enabling engineers and scientists to build their applications in a matter of days or weeks instead of months or years. Many of these solutions will be on display during the Annual NIWeek User Conference next week, where thousands of engineers will hear about the new products and see the exciting demonstrations from our customers as they tackle some of the world's most significant scientific and engineering challenges.
Additionally, my key note address will cover how innovation can drive impactful results, highlight our integrated product offerings in powering engineers and emphasize we are making the future investments in IP, RF and FPGA. I hope to see you there next week.
In summary, I am very pleased with our performance for the quarter as we have achieved record revenue in operating products, profits for the second quarter. I believe our disruptive approach will allow us many investment opportunities.
We plan to continue to execute on our long-term vision exercising discipline expense management while maintaining a strategic investments in R&D and to fuel sales force to drive future growth. I believe our strategic approach has served us well through tough economic times and that I would like to thank our employees for their hard work and innovation and making this possible.
We will now take your questions.
Operator
Thank you. (Operator Instruction) We will go first to Anthony LeGree with JPMorgan.
Anthony LeGree - JPMorgan
I want to see since you sighted the peaking of the Global PMI, I wanted to ask if you have seen similar trends in your order rates. Did you see any disruptions in the quarter and what are you expecting going forward?
Alec Davern
No, we saw a very strong Q2 obviously in our record for the second quarter. The proportion of orders that came in June was very consistent with long-term trends and no change there.
Obviously we are guiding to our midpoint of 29% year-over-year revenue growth for Q3, and I am sure to conclude we have seen very strong year-over-year order growth in the month of July. So just wanted to make kind of more general observations that when we were at our investor conference this time last year and we talked about this, it's inevitable given the scale of the drop in the global PMI that there would be a rapid recovery to very high levels, and that would need to be followed logically by a reversion to the mean.
We are now at that stage where the logical next step I think is for a reversion to the mean. At the same time capacity utilization is coming up and they are getting these offsetting factors as well and we just want to acknowledge and recognize as we are looking at our future investment decisions, it would be foolish for us to consider that the PMI will stay at this super elevated level for a sustained period of time.
We need to look at the long-term trends and recognize the realities of how that works. We feel very confident in our ability to grow through that process and moderation as we did in the past.
Anthony LeGree - JPMorgan
Okay, thanks for that and then you clearly seeing good growth across a number of different verticals. Can you talk a little bit more about academic or your republic exposure?
What percentage of revenues was that in the quarter and do you see continued momentum in your academic related revenues?
John Graff
Yes, we’ve highlighted I think quite a few in the last quarters. Our sales in academic institutions has continued to be strong, we sold this last year as the recession hit kind of general industrial economy.
As a percent of our business, as we mentioned many times we have no, one vertical that’s more than 15% of the revenue. Academic is up there in that low teens or I should say, low double digits.
So it's kind of the largest and we are pleased to see this growth on top of growth. It's a very strategic area for us and not only does it represent a lot of revenue as we also mentioned in the call.
We are getting these future engineers and scientists trained and familiar with graphical system design we believe has long-term benefits.
Operator
We'll move onto Mark Douglass with Longbow Research.
Mark Douglass - Longbow Research
Fine, I know you wanted to discuss it more at the Investor Event. But why, give me a little more rational, why are you adjusting your operating expense model now, well ahead of 2011 to be a double debt?
But I mean what’s given you the idea to start going after this now increasing expenses relative proportion to the revenues?
Alec Davern
Sure now, we need to be clear, and make sure if everybody understands us exactly what we are talking about is we move forward from here is that the rate of increase in expenses will more closely match the rate of increase in revenue as we go forward. We are not talking about increasing expenses faster than revenues.
We are still pushing towards that goal of 18%. But obviously, haven’t quadrupled our operating margins from the first half of last year to the first half of this year.
If we continue at this 15% level quadrupling operating margins going forward doesn’t make sense for the long-term growth of the company. So we need to recognize, we’ve gone through this transition phase, we talked a lot at NIWeek last year that the temporary cost saving measures were temporary.
We have now reversed those fully and Q2 is the first quarter where you saw the complete reversal of those. Obviously, we also had some cost in there for an accelerated or increased variable compensation for employees on the back of very, very strong revenue growth numbers.
So what we are talking about here is the selective increase in investments in key areas in the field sales organization targeted at particular key accounts and particular significant new application opportunities and key areas in R&D to support those segment initiatives and support those accounting issues, and also to continue to flush out our platforms to take us into new markets. So the scale of what we are talking about is not that dramatic relative to the scale of the expense pool we have right now, but I wanted to make clear to people as we transition out and pass the recovery phase that a growth rate of expenses that 50% of revenue growth is not a sustainable long-term execution now that we are back to record revenue and record profit.
In terms of looking forward, I would say well we are very cognoscente that there is quite a bit of economic uncertainty out there we are very optimistic about the long-term future for National Instruments. Over the course of last two years we have done a tremendous amount of optimization.
I think we have improved our prioritization process dramatically, we have structurally improved our gross margins and I would say that the list of opportunities in front of us that we have not had resources to execute against opportunities that would lead we believe the future has grown to the point where I think it would foolish for us not to try to fund those investments in order to continue to create the opportunity for future growth. Perhaps Truchard may have some follow-on comments that you would like to share.
Dr. James Truchard
Well, we worked to spend the money wisely in the downturn and we want to continue those practices while we make various strategic investments to get the kind of growth we like to see.
Mark Douglass - Longbow Research
Okay that’s helpful and then switching gears Asia obviously incredibly strong any particular markets or products that drove the performance or regions that were better or worse than others and then is China concern with its PMI dropping significantly?
John
Mark this is John. Maybe to take part of that and then Alec can jump in obviously we are extremely pleased with the execution by our Asia-Pacific operations, we have had an outstanding quarter.
It was broad based, obviously there’s little more exposure into production and manufacturing in Asia and specifically the growing economies over there and we are really pleased with strong sales or platforms and products in those kind of manufacturing and production applications. At the same time, I know they’ve had some tremendous success in some of these newer industrial embedded areas.
So, I really say there is success much like the success for the whole company was pretty broad based across a variety of verticals, across a variety of our products in both the large orders and volume based business.
Graff
Mark this is John. Maybe to take part of that and then Alec can jump in obviously we are extremely pleased with the execution by our Asia-Pacific operations, we have had an outstanding quarter.
It was broad based, obviously there’s little more exposure into production and manufacturing in Asia and specifically the growing economies over there and we are really pleased with strong sales or platforms and products in those kind of manufacturing and production applications. At the same time, I know they’ve had some tremendous success in some of these newer industrial embedded areas.
So, I really say there is success much like the success for the whole company was pretty broad based across a variety of verticals, across a variety of our products in both the large orders and volume based business.
Alec Davern
On your question on the PMI mark obviously we watch the PMIs globally quite carefully as you are aware when we look at the transition in the Chinese PMI good portion of that I think will be related to what’s going on in the real estate sector and apparent desire pretty obviously from the government to try to cool that down. But the Chinese economy is going through transitions and it's clear that Chinese government is pushing the transition and the Chinese economy from my point of view towards more higher value, more domestic demand and things like a major, major new investment in healthcare for example.
And as it makes that transition that will probably be beneficial to us in the longer-term we don’t sell a lot into the building industry but we do so quiet a bit into medical and green engineering. And so, as the Chinese economy goes through a number of transitions over the next 5 to 10 years, I think that will play true to our benefit overtime.
Our opinion is that the Chinese economy will see sustained GDP growth going forward the next couple of years. You may see short periods of slowdown, but I think a reasonably strong economic growth in China is on the table for the next several years.
Operator
We’ll go now to William Stein with Credit Suisse.
William Stein - Credit Suisse
I’m wondering if you can dig into the foreign exchange. I suppose it’s either a translation or a transaction effect in the quarter that earned EPS by $0.02.
My understanding was all the manufacturing is in Hungary today where I believe the local currency there is quite weak in the quarter, would have expected a potential benefit. Can you comment on that?
Alec Davern
Sure. Well, our exposure relates to our accounts receivable in Europe.
So we sold directly to end users as you know around the world and we have a large amount of sales directly into Europe and we translate that receivables into dollars at the end of each month and at the end of each quarter. And so, as we gave guidance at the end of April, the Euro was reasonably strong, but it obviously went through a major period of flux in May and June.
That caused us to write down the value of those receivables when we translated them into dollars. Now we have a hedge against that exposure, but it’s not perfect, and the $2 million or the $0.02 a share loss is directly related to the unhedged portion of our European receivables and the change in the currency value effectively between the first of May and the end of June.
Now, I see the Euro has strengthened a lot since the 30th of June. So that’s not something we anticipate, we are counting here in Q3.
William Stein - Credit Suisse
Okay. And then if I can just turn to another topic, RF products and demand for those.
You spoke a little bit about the, there’s so many products you have addressed in that market, one sub-market there is handset testing. I'm wondering if you can comment as to any success as the handset and base station manufacturers look to transition to a 4G product.
Are you seeing any early success in that market? Is it a target market for you?
Any kind of comments or update on that in that end market would be helpful.
John Graff
Well, this is John. Obviously, we’ve had tremendous success in growth with our efforts that have been a driver or leader through growth for us the last few years.
And we’ve invested aggressively, yeah, both in R&D, also some of the field sales expansion and some expertise to take our products into a variety of applications. And the success we’ve had has been broad-based.
I mean I think one of the benefits of our software based approach is we are not building solutions that are just for a specific application segment. We have the flexibility or the customer integrator has the flexibility to adapt our platform to wide variety of wireless and communications for signal intelligence applications.
So the answer is, yes, we’ve had some success, but it really broader than that. We are not just betting on any one area within RF.
I think next week, you will see good examples, not only to enter new products in this area that we will talk about, but I will talk more about some of the application successes and highlight those during the NIWeek.
Alec Davern
This is an area where, I'm sure you are well aware about the confidentiality on these topics is quite serious.
Operator
And Richard Eastman with Robert Baird has our next question.
Richard Eastman - Robert Baird
Alex, what percentage of sales were large orders in the quarter, over 20,000?
John Graff
Rick, this is John. In the quarter, 40% was orders over 20,000.
Richard Eastman - Robert Baird
And in the past, we talked about in particular the linearity of orders, large orders in any given quarter. That tends to be skewed a bit towards June.
And so, you prepared towards the last month of the quarter. And given the commentary earlier, is it fair to assume that there was pretty good linearity in that large order growth rate right through the quarter and into July?
Alec Davern
Yeah. Maybe I could give you some specific data that might be good here.
It’s Alec here. So, 38% of our overall orders were booked in the month of June and that’s right in line with the 10-year average.
So the overall linearity of the quarter was right in line with the 10-year average for Q2.
Richard Eastman - Robert Baird
And so, when you talk, and again not to pin you down too much, but the sales guidance for Q3, if you look at low end versus the high end, the low end actually sees some non-typical decline quarter-to-quarter in sales, what’s the wild card there, Alec? Is it just shipments of large orders or?
Alec Davern
I mean I wouldn’t really put this as a wild card. I mean the best way to do guidance from my point of view is we take a look at what the midpoint is we are targeting, and then give ourselves some range or buffer in order to mid-point the guidance, we are roughly in line with about a 1% sequential increase which is pretty much in line with the 10-year historical average.
I would look at it that way. And then, it’s just a range of cushion if you like or a range of possible outcomes.
Richard Eastman - Robert Baird
I understand.
Alec Davern
On the midpoint when you are trying to figure out versus seasonal averages.
Richard Eastman - Robert Baird
Okay. Was still really FX impact on the sales line from translation?
Alec Davern
Year-over-year certainly and sequentially, we had a certainly a small and negative impact sequentially, especially if you go later in the quarter into June. Yeah, we would have had a negative impact from currency from Q1 to Q2.
Richard Eastman - Robert Baird
But year-over-year, was it simply was it a negative?
Alec Davern
I believe those numbers are in the press release.
Richard Eastman - Robert Baird
Okay. Alright, I can probably wait.
Alec Davern
Yes, the local currency growth by region is on the second page of the press release.
Richard Eastman - Robert Baird
Okay. I can wait.
That’s fine. And then just maybe the last question.
In the second quarter did we get caught up on that $5 million of sales that carried over into the quarter from the first quarter?
Alec Davern
Yes, that $5 million did, that particular batch of orders obviously was recognized as revenue. I think I joked on the last call that we had a record billing day on the 1st of April.
Richard Eastman - Robert Baird
Okay. So that would get caught up.
Is there any component issues, Alec, any shortages on the purchase side that are concerned?
Alec Davern
Well, let me just clarify the earlier point. So as a result of that shipping here at the end of March, we did have an increase in backlog in Q1.
We did have a small reduction of backlog in Q2, but that was more than offset by the $3.5 million increase in deferred revenue. Does that make sense to you?
Richard Eastman - Robert Baird
Yes, okay.
Alec Davern
So I want to make sure people don’t get confused on what happened with that. And your second issue was around shortages, is that right?
Richard Eastman - Robert Baird
Yes. Obviously, there is nothing obvious on the cost of goods sold, but is there any shortages or pricing issues there on the component side?
Alec Davern
The approach we took and we talked a little about this in NIWeek last year looking at the trajectory of the PMI in particular, we stepped in front of the component issue and brought a significant amount of safety stocked around our longest lead time component starting in September of last year, and you saw our inventory of raw materials increase significantly in Q4 which was targeted deliberately to get well ahead of the component shortage issue. So, so far that hasn't been an issue for us.
We are reading in the paper about things like tantalum capacitor shortages, et cetera. At this stage, it's not a factor in our production process.
However, we continue to monitor that pretty carefully. The supply chain in electronics does look to be pretty tight globally and it's possible we may see some issues down the road.
We did increase our inventories a little bit here in Q2. As we look at it, if we have a seasonal performance off to the midpoint of our guidance for Q3, then we would expect to see a record all time record quarter for revenue in Q4, and we want to make sure we have adequate inventories to deal with that when we get to September-October.
Operator
Going on to Ajit Pai with Stifel Nicolaus.
Ajit Pai - Stifel Nicolaus
A couple of quick questions. I think the first one is just the changes with John Graff's role like sales and marketing for North Americas.
Are you changing the way you actually look at the sales organization and marketing organization or the way you are looking at geographies between sales and marketing? Or is this a just a change in position for John and not the way you look at the overall distribution of responsibility?
John Graff
Well, Ajit, this is John I guess I’ll start and these guys can clarify. Now fundamentally, we have looked at our sales and our customer relationships in a regional manner with Europe, Asia-Pacific and Americas.
So it's a new opportunity for me to look at the sales and marketing focused on Americas. It is the largest region, it's an opportunity I’m extremely excited about personally.
We have got a great team in place and so this momentum with the large orders, the momentum in areas like RF and industrial embedded I think there is a lot of opportunity over the next few years. So that's what I’ll be diving and to with my new focus.
Dr. James Truchard
We are really excited about John's new role. As we have matured as a company, the emphasis on sales, especially as you seen these large orders grow, we will be putting a lot of emphasis on this and this reflects that.
So we are looking forward to get things.
Ajit Pai - Stifle Nicholas
But there’s no change in the way you are looking at the overall sales and marketing responsibility with the way it has been structured over the past couple of years?
John Graff
Not dramatic, no there are some several changes as we go forward. I would also like to take the opportunity to thank Owen Golden who was the VP of Sales for the Americas for his many years of long service, tremendous job that he has done, and Owen continues at the company and he’s taking on a new opportunity, bit more focused towards the energy sector and we are excited about the opportunities that will bring not only for our Owen personally but for his team and for our business around the world.
Ajit Pai - Stifle Nicholas
Okay, the second thing is looking end uses of cash right now, say you are going to go back to record revenues, your cash flow generation has been tremendous, you have also initiated dividends over the past few years, but could you give us some color as to what’s happened now that you are approaching record revenues, what’s happening about the Malaysian plant? Is the timeline for that going to get pulled in?
Now you are back to where you were back in '08? Also are you changing the way you are looking at acquisitions warming to any right now?
Is there a pipeline there or you don’t see any additional acquisitions over the next couple of years?
Alec Davern
May be I’ll take the Malaysia question first, so right now we are continuing our process of the design work for the building in Malaysia. As you know, we had originally intended to start the process pretty intensely late already ‘09 and we finished and start productions in that facility in the third quarter of 2010.
As a result of the great recession, we put that on hold it’s a capacity expansion project, so we were able to put that on hold. We purchased the land as you are aware, we’re going through the design process on the building and we will reach a decision point sometime in the second quarter of next year of 2010, assuming 2011 to break ground, with a currently planned production to start in Q3 of 2012.
Now I will emphasize that it's a schedule, it’s not a committed plan. We will be continuing to evaluate prospects as business goes forward and we won’t make a final decision on that until sometime as I said in Q2 of 2011.
But in parallel to that we have gone forward with our initiation of our R&D operations. We have a reasonably sizable pioneer team here from Malaysia that are here in Austin that have been going through training and working on the culture and getting to know the company over the last 12 months.
That team will be returning to Malaysia in the next three or four weeks. We’ve been able to find tremendous talent there and in the areas of IT and in areas of R&D, we have continued with the original project on schedule and hopefully we will see the demand in our business and manufacturing will follow and catch up and initiate production in Q3 of 2012.
In terms of uses of cash, our priorities remain the same at number one is dividends, number two is opportunistic stock repurchases and number three is acquisitions. We are constantly looking at acquisitions, we did a small acquisition in Q1, but we are very selective as you know, we need to see the reality that one plus one will equal three, that needs to be leveraged.
That can be a significant risk in trying to integrate an acquisition into such a tightly integrated platform as NI brings to market. And so we are selective with that.
Operator
We will go next to Chuck Murphy with Sidoti & Company
Chuck Murphy - Sidoti & Company
Just had one quick question for you. I was just wondering if any particular end market stood out for better or worse in the quarter and I guess also in terms of your outlook.
John Graff
Chuck, this is John. In the quarter, well obviously with 39% year-over-year growth you can imagine we saw a pretty broad-based strong results across the industries, highlighting a few that we are really strong year-over-year, sales into electronics, communications and semiconductor, as well as a lot of year-over-year growth into industrial machinery.
But again, with the broad base of our business and no vertical over 15% as I mentioned earlier, it was a lot of success across the board.
Chuck Murphy - Sidoti & Company
Got you. And in terms of the outlook, kind of the same or?
John Graff
Yeah. That’s been one of the strengths of our model and our platform is that we can serve this broad base of customers and applications in the industry, so the pipeline still looks good in many areas.
Operator
(Operator Instructions) We will take a follow-up from Mark Douglass.
Mark Douglass - Longbow Research
Just real quickly, what’s baked into your guidance as far as that the tax rate? I know it can really bounce around a little bit, but what are you thinking about tax rate going forward?
Alec Davern
Well, we are looking for this year somewhere in the high teens. Mark, I mean it can be very variable from quarter-to-quarter.
So, I want to be a little hesitant to give specific guidance on a particular quarter, but for the year we are modeling in the teens.
Operator
And gentlemen, I’ll turn the conference back to you for closing remarks.
Alec Davern
Well, thank you for joining us today. We look forward to see you at our Investor Conference in Austin next week.
I think the forecast is for mid-90s. So, just remember the convention center has great air-conditioning, so be prepared for the variability in temperature inside and outside and we hope to see you there next week.
Operator
That concludes today’s conference. Thank you all for your participation.