Jan 25, 2011
Executives
James Truchard - President, CEO and Co-Founder David Hugley - Vice President, General Counsel and Secretary Alec Davern – COO Pete Zogas - Senior Vice President of Sales and Marketing
Analysts
Anthony Luscri - JPMorgan William Stein - Credit Suisse Sven Eenmaa - Stifel Nicolaus Richard Eastman - Robert W. Baird Chuck Murphy - Sidoti and Co Derek Joise - Longbow Research
Operator
Good day everyone and welcome to the National Instrument Fourth Quarter 2010 Earnings Conference Call. Just a reminder, 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, Chief Operating Officer; Dr.
James Truchard, President, CEO and Co-Founder; and Pete Zogas, Senior Vice President of Sales and Marketing. For opening remarks, 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 our plans and budget for 2011, our future revenue growth and operating leverage being well positioned for growth 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 most recent quarterly report on Form10-Q filed November 3, 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.
James Truchard
Thank you, David. Good afternoon and thank you for joining us.
Our key points today are record revenue, record profits and continued strategic investments in 2011. I am extremely pleased with our performance this quarter as we set a new record for quarterly and annual revenues.
While the recent recession was one of the most challenging financial period in the company history, our ability to outpace the growth of many of our peers and reach record revenue so quickly can be attributed not only to the broad based recovery in the business but also to our commitment to strategic investments throughout the downturn. We continue to invest in R&D and our field sales force which has produced a pipeline of innovative few products and strengthen relationships with key customers.
I believe our outstanding results validate our strategy and I continue to be very optimistic about our position in the industry. In our call today, Alec Davern, our Chief Operating Officer, will review our results.
Pete Zogas, our Senior Vice President of Sales and Marketing, 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 are pleased to report that NI set new quarterly and annual revenue records in Q4 and 2010.
Fourth quarter revenue was $250 million, up $48 million or 24% year-over-year, and was up $30 million or 13% sequentially. 2010 annual revenue was $873 million, up 29% year-over-year and backlog at December 31, 2010 increased by $5 million from September 30.
Non-GAAP gross margin in Q4 by 50 basis points year-over-year to 78%. Our ability to significantly increase our gross margins is attributed to the success we have had in driving down component costs, improving manufacturing efficiency into the high value and differentiation we delivered to our customers.
Fourth quarter GAAP and non-GAAP operating income were all-time quarterly records. GAAP operating income was $46.6 million, a 30% increase over Q4 2009.
Non-GAAP operating income was $52 million, a 24% increase over Q4 2009. This represents a non-GAAP operating margin of 21%.
For the full year, our non-GAAP operating margin was 17.3% and I would like to thank all of our employees for the hard they have contributed to this very strong results. Net income for Q4 was $38 million with fully diluted earnings per share of $0.48 and non-GAAP net income was $42 million with non-GAAP fully diluted earnings per share of $0.53.
Please recall that in 2009 the company incurred a $21.6 million non-cash tax charge that reduced both our GAAP and non-GAAP earnings per share by $0.28 in Q4 2009. EBITDA or earnings before interest, taxation, depreciation and amortization was also a new all time record at $56 million or $0.71 per share for Q4, and for the full year it was $165 million or $2.08 per share.
Reconciliation of our GAAP and non-GAAP results is included in our earnings press release. Q4 was a very successful quarter and there simply are positives to take away.
First, we saw a strong growth in large orders closing in Q4. Second, our strong performance resulted in an all-time quarterly record for operating income with non-GAAP operating margin increasing to 21% in Q4.
Third, the global PMI improved in Q4 with a quarterly average of 54.2 indicating that while global industrial production is still down significantly from its all time highs it did see a strong sequential expansion in Q4. Turning to the balance sheet, inventory increased by $16 million during the quarter and inventory days were relatively flat as revenues surged.
Cash flow from operating activities continued to be strong at $145 million. As of December 31, the company had $351 million of cash and short term investments.
Today, the board of directors have declared a 3-for-2 stock split to be effected as a stock dividend of one share of common stock for every two shares of common stock outstanding payable February 21, 2011 to shareholders of record on February 4. All per share numbers included in this conference call today are on a pre-split basis including the company cash dividend and the company’s dividend and guidance of Q1 2011.
We also announced today that board of directors approved an increase in the quarterly dividend to $0.15 per share payable on February 21 to shareholders of record on February 4. As we close our 2010, I would like to take a moment to reflect on our execution through the last five years.
Despite the worst recession since the 1930s, National Instruments has delivered over the last five years. We have increased revenues by 57%, non-GAAP operating income by 81% and non-GAAP net income by 84%.
In the five years between Q4 of ’05 and Q4 2010, instrument control revenues from 12% of revenue to 7% and our virtual instrumentation and graphical system design products have delivered 66% revenue growth. We’ve also stayed true to our long-term strategy over these five years.
Increasing our R&D personnel by almost 50% and our worldwide field sales force by more than 70%. Key to enabling this performance has been our expanded gross margins.
Over the last five years, we’ve expanded our gross margins by over 300 basis points allowing us to make the strategic investments necessary to sustain the long-term growth of the company while delivering great profit growth. Now, I’d like to make some forward-looking statements.
The trends at the global PMI continue to be positive in Q4, averaging 54.2 for the quarter. This combined with our strong Q4 results gives us increased confidence in planning for ’11.
We plan to continue to make the investments necessary to drive our long-term growth, and we are budgeting to make significant personnel additions in both R&D and field sales during 2011. We are budgeting to increase R&D personnel by 19%, and our field sales force by 24% during 2011.
Overall headcount is budgeted to increase by 17%. However, the incremental cost of these additions will be partially offset by an expected reduction in our variable compensation in 2011.
Turning to specific guidance for Q1. We currently expect revenue for Q1 to be up significantly year-over-year and to be in a range of $230 million to $244 million.
We currently expect that GAAP fully diluted earnings per share will be in the range of $0.33 to $0.41 for Q1 with non-GAAP fully diluted earnings per share expected to be in the range of $0.38 to $0.46 in Q1. These are forward-looking statements, I must caution you that actual revenues and earnings can be negatively affected by numerous factors, such as any weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, effective tax rates and foreign exchange fluctuations.
I also wanted to mention that Dr. Truchard and John Roiko, our Vice President of Finance will be attending the Stifel Nicolaus Technology Conference on February 10th in San Francisco.
In summary, we are very pleased at our record revenue and profit in 2010. Our goals for ’11 are to invest aggressively in sustained revenue growth and to continue to drive towards our 18% non-GAAP operating income target.
I will turn it over to Pete Zogas, Senior Vice President of Sales and Marketing.
Pete Zogas
Thank you, Alec. We were extremely pleased with our ability to close out 2010 with a new all time high for quarterly revenue.
We believe our efforts to grow and evolve our field sales force and product portfolio to meet the needs of system-level opportunities contributed significantly to our results in Q4. We have increased field sales headcount by more than 230 people in the last five years and as a result of the world-class execution from our sales teams, we saw strong year-over-year growth in all regions in Q4.
Additionally, we have continued to invest in strategic R&D initiatives and increased R&D headcount by almost 500 people in the last five years. In Q4, we were pleased to see record revenue in many areas of the business and we saw especially strong growth from our industrial, embedded, and PXI modular instrument products.
In Q4, our orders over $20,000 grew more than 40% year-over-year and our average order size reached an all-time high of approximately $4,470, up 17% year-over-year. We believe this success reflects the enhancements we have made in our product and service offerings, the excellence of our network of integrators and the performance of our outstanding sales teams.
Our software products set a quarterly revenue record in Q4 as more customers realized the value of NI software for their applications. LabVIEW software has been used by hundreds of thousands of engineers and scientists to develop sophisticated measurement, test, and control systems.
It is scalable across multiple operating systems and provides hundreds of built-in libraries for advanced analysis and data visualization for creating virtual instrumentation. When customers buy LabVIEW, they are plugging into a vast ecosystem of developers who share code and best practices, a marketplace of add-ons, and access to support for more than 10,000 different types of hardware devices.
This widespread adoption of National Instruments software and hardware has resulted in strong long-term growth for our company. We expanded our software offering in Q4 as engineers continue to turn towards software-centric test systems because their products and as a result, their test systems must react quickly to market dynamics like time-to-market and pricing pressures.
In both Q4 and in the full year 2010, sales of our PXI modular instruments reached record levels and outpaced the company’s growth. In particular, our RF and FlexRIO products continue to grow rapidly and set new revenue records in Q4 and in 2010.
In Q4, we announced the latest result of our investment in RF instruments for mobile devices, the NI LTE measurement suite. Based on NI automated test software and PXI modular instrumentation, the LTE measurement suite provides a flexible and accurate solution for engineers developing automated validation and products and test systems for the latest generation of smart phones and mobile devices, while performing automated testing up to five times faster than traditional instruments.
We believe the success of our PXI modular instruments and our more than 13 years of investment in PXI has catalyzed a shift in automated test applications away from traditional rack and stack instruments towards a software-defined modular instrumentation approach. Traditional rack and stack instrument solutions can’t offer the same level of synchronization, system level software integration and reduced factory footprint and power consumption and are no longer competitive in many automated test applications.
An example of a customer who saw significant benefits using our PXI modular instruments was Texas Instruments. TI replaced a traditional RF instrument test bench with an NI PXI system for characterizing the FM transmitter portion of an RF chip.
Using the PXI system, they were able to reduce test time by almost six times, system cost by nearly half and calibration down time by more than 80% all while improving measurement quality. NI PXI modular instruments were also successful in many other application areas.
Orbis Incorporated, an engineering services company used NI software and PXI modular instruments to develop a compact test system for military submarine system components. Using NI PXI Modular Instrumentation, LabVIEW and TestStand, Orbis developed a compact high-performance tester to replace a legacy BME-based functional tester used by the military, significantly reducing size, complexity and cost.
This allows the Navy to place the test system at strategic locations and reduce the overall maintenance and logistic cost of supporting their submarine fleet. In Q4, our data acquisition products experienced strong year-over-year growth and saw record quarterly and annual revenue.
Q4 data acquisition growth was led by our C-Series based devices. Recently, a division of Kimberly-Clark used our USB data acquisition products and LabVIEW to develop a system to research ways to overcome age-triggered tactile-sensory loss, which can impact a person’s quality of life.
The LabVIEW and USB data acquisition based system save time by automating control functions for the researcher adding flexibility and easing system upgrades while making the testing more consistent and repeatable. Our distributed I/O products also saw a strong year-over-year growth achieving record quarterly and annual revenue.
Our CompactRIO products saw record revenue this quarter and drove this growth. The CompactRIO platform has been a key investment area and we are pleased to see success in many diverse industries including energy, oil, gas, biomedical, automotive and transportation.
One customer who saw a success using our CompactRIO products was Analysis and Measurement Services Corporation. Using CompactRIO and LabVIEW, AMS developed an online monitoring solution for nuclear reactors which allows for remote monitoring of equipment that is otherwise hard to access in hazardous location.
Additionally, the online monitoring solution reduced monitoring equipment cost and provided access to additional data needed for maintenance work during refueling outages. To close, we have built the world-class product portfolio, an outstanding sales force and service offering and a strong alliance partner network, which helps us serve an immense diversity and scale of applications.
In addition, the strategic R&D investments that we’ve continued to make to produce highly differentiated products such as RF Modular Instrumentation and CompactRIO have enabled us to grow rapidly in large application areas where our products are highly differentiated from the incumbent technology. We are pleased to see our continued investment lead to a very strong Q4 performance and return to record annual revenue, and we look forward to future growth from this continued commitment to innovation.
With that, I’ll turn it over to Dr. T.
James Truchard
Thank you, Pete. I was extremely pleased with our performance in 2010 as we delivered to highest revenue and profit in the company history.
I believe that these results demonstrate the strength of our business model, and validate our long-term strategy. I believe the significant headcount increase in our R&D department and field sales force over the last five years gives us the manpower to fully leverage the strategic investments we’ve made in our core platforms of PXI and CompactRIO.
During those five years, we have greatly increased the footprint of both platforms establishing them as key enabling technologies in their application areas. The PXI platform has seen tremendous adoption over the last decade.
In 2009, the PXI Systems Alliance estimated that more than 100,000 PXI systems with over 600,000 modules were deployed in the last decade. In addition, the biggest companies in the test and measurement industry including Agilent, Teradyne, and Rohde & Schwarz have joined the PXI Systems Alliance and we believe that their endorsement validates our software approach to automated test and will help convert more customers to our view of PXI Modular Instrumentation.
I believe this shows that PXI has the adoption, longevity, and grow to be the mainstream industry platform for automated test and National Instruments is the leader in PXI products, with more than 13 years of experience in more than 400 modules available. However, the success of PXI in the larger trend toward modular software design time in systems is not only based on the hardware benefits, modular and flexible PXI hardware is vital to achieving the benefits we offer customers for automated test applications, but highly effective software and hardware inter option is critical in the customers ability to leverage the benefits of the software-defined approach.
At a keynote presentation at the International Test Conference, I described how the graphical system design approach is creating significant differentiation from traditional approaches to automated tests. LabVIEW is an intuitive graphical programming environment that helps engineers quickly develop test software, leveraging the latest technologies including multi-core processors and FPGAs.
The software helps integrate he various components of a test system, while enabling engineers to customize the system for the specific application. The community built around LabVIEW includes tens of thousands of developers, integrators, and partners worldwide is a testament to the value of our software that our software brings in helping to quickly and efficiently design system.
With the CompactRIO platform, we applied the same vision of software-defined progressing using LabVIEW. We simply use more customizable modular hardware to enable a different set of applications.
With CompactRIO, our customers use graphical systems and design to build sophisticated systems using off-the-shelf technologies more quickly and efficiently compared to traditional custom design approaches. The key to success for National Instruments and the customers we serve is that we have invested thousands of person years in the platform that leverage both internal and external technologies to take advantage of Moore’s Law.
These platforms provide consistent software and hardware form factors and the flexibility to evolve enabling engineers and scientist to build their applications in the matter of days or weeks instead of months or years. In the end, our customers use our tools because we can fundamentally provide a more productive way for them to work.
With NI platforms, we’re helping to solve some of the world’s most significant scientific and engineering challenges, including next generation green energy research, improvement of urban infrastructure, earlier cancer detection, and providing access to clean water. In summary, I was extremely pleased with our performance in 2010 as we returned to record annual revenue and profit.
I believe that diligent execution of our long-term strategy has enabled this significant success. As we focus intense effort to improve our operating model during the recession and to continue to invest in our innovation, in our field sales force, I believe we are well-positioned with a strong foundation to future growth and profitability.
I would like to thank our employees for the air of commitment to innovation, prudent expense management and unwavering focus on serving our customers that makes this possible. Finally, I would like to thank and congratulate our employees for National Instruments being named the Fortune 100 Best Places To Work for the 12th consecutive year.
We will now take your questions.
Operator
Ladies and gentlemen, today’s question-and-answer session will be conducted electronically. (Operator Instructions).
Our first question comes from Anthony Luscri, JPMorgan
Anthony Luscri - JPMorgan
The question is on operating profit incrementals. Over the last two years, you put up 34% and 41% respectively.
I’m wondering given the increased expenditures around headcount and increasing revenue at the same time what you’re looking for in 2011?
Pete Zogas
In general terms, Anthony, obviously as you went through the downturn we continued our aggressive investment and that’s paid off for us handsomely. We did obviously see a decline in operating income in ’09 and then a very rapid recovery in 2010.
Some of the keys to that were obviously the new products that we were bringing to market to help us penetrate. Then the expansion of our field sales force has really allowed us to capture a lot of new opportunities through the recession and then leverage those as we came through the recovery.
So increasing operating margin in ’10, I should say, the 17.3% for the full year was really outstanding performance, well ahead of our original expectations as we entered the year. As we said, NIWeek a couple of months ago and at the earnings call back in October, as we’re getting closer to our target of 18% and operating margin we’re getting also more focused on what else we can do to drive the long-term top-line growth.
So, the goals we have going into ’11 are to continue to grow revenues faster than expenses, but they will be more closer aligned than they were in the last two years and the primary goal behind that is to try to fulfill our visions to scale the company in the next number of years well beyond the $1 billion in revenue.
Anthony Luscri - JPMorgan
Given the higher revenues alongside the expansion of products that you have in the pipeline, can you talk to the manufacturing capabilities that you have?
Alec Davern
We are proceeding forward with the completion of the design of the Malaysian manufacturing facility. We are looking to hopefully break ground there sometime in the second quarter and all the indication is now we’re still on track for commencement of production in Q3 of 2012 to Q3 of next year.
We feel comfortable we have sufficient capability until the new plant orders.
Operator
Next up we’ll hear from William Stein, Credit Suisse.
William Stein - Credit Suisse
Just kind of following up on that, I mean, you guys have given us a view that the headcount will grow I think you said 17% in the call and in the press release and because it will be offset somewhat by lower incentive or variable compensation. Can you give us an idea of what growth you’re expecting for the coming year or said in another way, what will be the offset to cost growth of that 17% headcount?
Alec Davern
One of issues will be obviously the reduction in variable pay which is a pretty significant offset. Other issues there will be some change in the mix of employees, which will allow us to scale the company at a rate of expense growth that’s less than the rate of headcount growth.
So, as we look into next year what I wanted to give an insight into the investment community is a number of things. One, we are planning to be aggressive in ’11.
Two, we are playing to grow revenues faster than expenses in ’11 and so even though we’re budgeting for significant headcount increase, we have planned out the cost of that and anticipate growing revenues in excess of that. In terms of a growth outlook for the whole year, right now obviously we are just giving guidance for the first quarter, the midpoint of our revenue range from Q1 is 24% same as what we had in Q4 2010.
Our competitors do get a little bit more difficult as we go through the year but we built into our plan an ability we think to deliver on the investment and also grow revenues in excess of our overall expenses. So, you are looking at an expense rate that’s several points below the headcount increase as we look at the next year.
William Stein – Credit Suisse
Just a follow-up if I can actually on a slightly different topic. You discussed the LTE measurement suite, are using meaningful sales into the 4G or LTE market at this point?
Can you maybe describe your view as to NI’s growth opportunity in that market over the next year or two?
Pete Zogas
This is Pete. We see a lot of activity in LTE and we see some sales in that application area.
So it’s pretty exciting there is a lot of course dynamic specification development, validation of silicon, validation of product that we have a large opportunity to build with our software-defined instrumentation. So we’re seeing quite a bit of activity; it is in all regions of the world and we hope with our investment in our field that we can capture the opportunity that’s presenting itself to us.
Operator
(Operator Instructions) Our next question comes from Sven Eenmaa, Stifel Nicolaus.
Sven Eenmaa - Stifel Nicolaus
First, I wanted to ask in terms of the hiring next year. What is your expectation in terms of when your allocation of that process?
Also, in terms of the revenue seasonality, what is your expectation?
Alec Davern
Sven, it’s Alec here. Our revenue seasonality has been pretty distinct over the years with exception I will say clearly of the post Lehman Brothers space from Q4 of ‘08 through probably the first quarter ’10.
Outside of that time period, typically what we’ve seen is a drop of somewhere in the 4% to 6% range sequentially from Q4 to Q1. This is an average over a long period of time.
An increase in Q2, a modest increasing Q3 and biggest sequential increase has typically come in the fourth quarter. If you look at the period from ’03 to Q3 of ’08 you’ll see that pretty consistently repeated.
If I understood the first part of your question, it was to do with the distribution of the headcount increase as we went through each quarter of the year, was that the question? Our biggest recruiting periods typically tend to be the first quarter and the third quarter, which coincides with graduation of a lot of talent that we’re looking for out of engineering schools.
So you’ll see a reasonably sizeable increase in the first quarter, more modest in Q2, a significant increase in Q3 and much more modest in Q4. That again follows a pattern that was pretty steady as we went through the ’03 to ’08 timeframe.
Sven Eenmaa - Stifel Nicolaus
In terms of the headcount at the end of December quarter, could you give us the number please?
Alec Davern
At the end of December of ’10, total headcount -- I’m trying look at my numbers here, it was 5,280.
Operator
Next up we’ll take a question from Richard Eastman, Robert W. Baird.
Richard Eastman - Robert W. Baird
Alec, you may have said this, and I just didn’t catch it, but what percentage of sales were large orders in the fourth quarter as a percentage of total?
Pete Zogas
Yeah. Rick, this is Pete.
It was 45% of total revenue was from large orders.
Richard Eastman - Robert W. Baird
5%, okay.
Pete Zogas
45%.
Richard Eastman - Robert W. Baird
40, okay.
Pete Zogas
And our index is greater than $20,000 orders.
Richard Eastman - Robert W. Baird
Yes, correct. And then when we talk to the virtual instrumentation and graphical design piece of the business, first the instrument control.
I’m just can you give us a basis for the calendar year ’10. How much of that virtual instrumentation business was test product sales versus industrial embedded?
Some general slice to pie up a little bit.
Pete Zogas
Rick, this is a tough question for us to answer, and mainly because the honest answer is we don’t exactly know. As our products are used in a multitude of different applications, the same product maybe used in embedded, and it may also get used in test and it maybe used in board applications by the same customer.
So we do obviously have a view to certain products that are much more highly concentrated in the test market versus the embedded market, and our best guess internally is somewhere between 20% and 30% of our business is coming from this embedded space.
Richard Eastman - Robert W. Baird
Of total sales, okay. So the test business though in terms of -- I’m sorry, in terms of product applications, test is still much greater piece of the business than the industrial embedded, although presumably industrial embedded is growing quicker?
James Truchard
That’s right. This is Jim Truchard.
Richard Eastman - Robert W. Baird
I noticed in the US when we look at the sales, sequentially that sales declined a little fourth quarter versus third quarter, now you know that’s happened before, but I might have -- is there any message there in terms of how you know we finished the year strength of the domestic business or what would you attribute that to?
Pete Zogas
We had seen real strong results from our US sales team. As far as the business in the US, we’re getting involved with a lot of multi national opportunity, multi national customer relationships, and so we continue to increase our sales force to address design in one place, manufacturing in other, and there is a lot of design going into the US, lot of manufacturing going on in Asia, which is fueling some of the high growth from Asia.
So other than having a real strong year in US, I wouldn’t read much into that.
Alec Davern
It’s pretty typical to government end of the year that Q3 is normally the strongest quarter for the Americas. And then you know Europe end of the year, Europe Q4 is always the big quarter for the Europeans.
So it’s a little bit of seasonal, little bit of geography.
Richard Eastman - Robert W. Baird
Last question, Alec, when you talk about the going into or for calendar 2011 the variable comp cost will be lower, is that a function of where you are adding people?
Alec Davern
No, our variable compensation is based on two primary metrics: Number 1 is the year-over-year revenue growth and number 2 is the operating margins and these are set against particular targets. So, it’s designed quite simply to be honest with you to drop rapidly when we go though recession.
That’s what we saw in 2009, variable compensation drop to zero. The big benefit of that in the recession is we can maintain our employees without having to do things that other companies have done, because we have an automatic reduction to our expense, allows us to continue to invest during a recession.
It’s also designed to increase rapidly in a recovery. So with a 29% year-over-year revenue growth in 2010, and an operating income number very close to our target, we have the highest variable pay percentage in ’010 that we have had since the IPO back in 1995.
As we come into 2011, we anticipate dropping back -- you know we moved from our recovery year, 2010 was a recovery year to something that’s more likely to be not as high revenue growth, because we know these are easy compares, though we anticipate a pretty significant drop in variable pay this year in 2011, that allows us to be able to compensate, or if you like to offset the increase in headcount, sort of get a increase in payroll expense that’s much less than the increase in people.
Richard Eastman - Robert W. Baird
I understand. In calendar 2010, essentially you don’t reset the budget target as the year enfolds and that’s how we end up with a higher comp number versus the original sales growth budget?
Alec Davern
The variable compensation formula has been in place for a decade and it has been consistent through out that decade.
James Truchard
Right, and I have to make up for loss compensation the year before.
Operator
Our next question today comes from Chuck Murphy, Sidoti and Co.
Chuck Murphy - Sidoti and Co
I was just wondering, obviously your total sales are at new highs, I was wondering if that same went for industrial embedded or if it was mostly being driven by test and measurement?
Alec Davern
We had a record for most of our product areas in Q4. I can’t give a specific number for industrial embedded, I can tell you know one of our core products there cRIO definitely had a new all time record in Q4 and we had record revenue in PXI, modular instruments, RF, data acquisition, a lot of our product lines saw new all time records.
Certainly our flag ship embedded product cRIO was a star performer.
Chuck Murphy - Sidoti and Co
The reason why I was asking is I guess kind of during the downturn I think you had mentioned that test and measurement was holding up a little bit better than industrial embedded, but it sounds like the environment is kind of back to normal for industrial embedded as well today?
Alec Davern
Actually, no. I am not sure if we have a misperception, Chuck.
The embedded – cRIO platform, it continued to grow in ’09, and it is growing again in ’10. So, the two year growth is very high.
Operator
(Operator Instructions). Next up, we will here for Mark Douglass, Longbow Research.
Derek Joise - Longbow Research
This is Derek Joise [ph] on for Mark today. I’ve kind of got a question regarding, you had two announcements, kind of returning value to shareholders, both the stock dividend and the cash dividend raise.
I was wondering if you could may be go into the thought process why now and why specifically the stock dividend at this time?
Alec Davern
Our strategy for return for cash has been to – our first priority has been for dividends and while they remain highly tax competitive, we have had pretty clear feedback from our shareholders that they appreciate a dividend and see that as a very effective method of returning cash to shareholders. We saw very large increase in our profit and cash flow obviously in ’010 and it seemed appropriate to raise the dividend.
It comes close to our target range somewhere in the 30%-ish range of profit has been kind of the goal we’ve been operating at since we introduced the dividend back in 2003. In terms of the stock split specifically, we have an interesting stock trading pattern in that, while we have a very large float relative to most companies, we tend to have a lower trading volume.
Many of our shareholders have asked us when it’s appropriate to continue to consider a split as a way to increase the trading volume.
Derek Joise - Longbow Research
On the plant in Hungary, I was wondering if you had any update on the capacity utilization levels there?
Alec Davern
Obviously production was at an all-time high in Q4 as you can imagine. Pete and team and the execution on the sales guys really all over the world from Europe, Asia, Americas has really driven a lot of demand on the manufacturing team, which did executing on very, very well.
As we look into 2011, we decided to make some capacity expansion in Hungary. We added a new production line in November.
That production line gives us roughly a $100 million of annual capacity and we will be examining that as we go through 2011 as to what we all make additional capital investments in Hungarian plant in order to meet capacity. The capital needs are fairly modest, first add about a $100 million of productive capacity in that facility is roughly speaking about $3 million of capital investment, and so something we can make without too much impact on the business model.
Operator
We will now take a follow-up from Anthony Luscri.
Anthony Luscri - JPMorgan
This is a follow-up to your prepared remarks regarding the increased focus on your competition on PXI actually endorsing the test method. Can you speak to what you have seen so far in the market since that massive product release and what you anticipate going forward?
Are your customers asking for the technology and I put this in context of the traditional test market is typically a sticky one and that’s been one of the barriers to the penetration of PXI in the more traditional sales?
Pete Zogas
Anthony, Pete here. We have been seeing for years an increased demand for PXI and modular instruments and we have been reporting strong growth over those years and taking advantage of our investments there.
With the entry of some new players in there, I think it is doing nothing more than opening up more of the test and measurement market for opportunity. So, we are seeing people that normally would not have evaluated or thought about changing or upsetting their incumbent that they are now open for evaluation.
So, we feel good about our investment in the field because we feel poised and ready with people to go through the evaluation through the transition explaining where those benefits are and really showing off our 13 years of investment in 400 products, and we released 48 this year alone. So, we feel very good to take advantage of that increasing opportunity.
Anthony Luscri - JPMorgan
Are there any particular verticals that you can highlight that the increased focus from your customers on PXI opens up opportunities for you?
Pete Zogas
Really it is across the board. It is not any one particular vertical industry that is seeing it.
Obviously, manufacturing has comes to life again in 2010. so, when you get into anything being produced in volume where the cost and time in-market, time-to-market constrains are there, we are seeing some activity.
So, automotive, mobile communications, consumer devices, but also in the industrial side of things as well. So really, it is not one particular vertical industry, it’s a very broad-based product and had broad base appeal.
Operator
We will go back to William Stein.
William Stein - Credit Suisse
I am wondering if you can talk a little bit about the diversity of applications in end markets. Historically, you have stated that more than 10% of revenue in the end market and I see in the slide you distributed today is that number ratcheted up to 15.
Are you seeing more concentration in either academic or military and aerospace, or are there any trends there where you are seeing kind of the shift in growth for end market is accelerating versus the others?
Alec Davern
The application areas that we focus or we serve had been fairly stable from a percent of business. Academic seem to hold up header than our industrial certainly the manufacturing accounts that we served in 2009.
so, as a percent of business, we saw the sales to our academic institutions rise as a percent and it got up to 12%, 13%. Now with the rest of industry coming back from the recovery, we are getting much more to our traditional or legacy balance portfolio.
We see growth really in all industries at this point and certainly even in some of the slower growing. There is some transition.
There is some product turnover. Even in automotive space things going hybrid, things going electric, vehicle controls systems, validation systems really have to be retooled as they go through that process as well and that’s all opportunity for us.
William Stein - Credit Suisse
Cash balance is highest it’s been ever, even cash on a per share basis higher than ever notwithstanding the increased dividend you do that over so often as well, but we still have this cash building so, two questions from that. First, is the cash concentrated offshore?
Is your appetite for M&A any different today than has been historically?
James Truchard
Let me comeback to the priorities we have for cash and talk about M&A in that prospective and then we can talk about distribution. Obviously, we consider having cash adequate to be able to run the business through downturns is very strategic to NI.
That enables us to operate the business on the timeline that suits the industry we are in and we think that’s a real key ingredient in our ability to able to manage effectively through downturns that occur unexpectedly. Our priorities to cash is, number one, is dividends as you see that is the most effective way to return cash, and as I mentioned we are increasing the dividend pretty significantly this quarter and we will continue to review that as we go forward.
Number two is opportunistic stock repurchasing, which we have done a reasonably significant amount of over time depending on circumstance. Number three is M&A.
An M&A is probably the area were we’ve deployed the least amount of cash over the course of the public history of the company. We do continuously monitor the markets for opportunity, but we are really looking for leveraged opportunity.
We put the highest premium on organic growth and you can see the commitment we are making from the internal investment point of view that we also lead to significant organic growth going forward and that is our primary acquisition strategy. I know that many companies in the space right know that did not invest significantly in R&D and have not been able to drive organic growth and so, they are shifting the priority for strategic M&A as a way to deliver year-over-year revenue growth up their priority list.
Because NI has taken a different approach and invested significantly and created the opportunity for organic growth, we will keep M&A as number three on our list of uses of cash. In terms of the distribution of cash, it is roughly spilt about 50-50 offshore versus onshore, and that’s pattern has been relatively stable.
Operator
Ladies and gentlemen, at this time, there are no further questions in the queue. I would like to turn the conference over to Mr.
Davern for closing remarks.
Alec Davern
Thank you very much for taking the time to join us today and we will look forward to talking to you in April.
Operator
Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation.
Have a great day.