Apr 28, 2011
Executives
David Hugley – Vice President, General Counsel and Secretary Dr. James Truchard – President, Chief Executive Officer and Cofounder Alex Davern – Chief Financial Officer, Chief Operating Officer and Executive Vice President Eric Starkloff – Vice President
Analysts
Ajit Pai – Stifel Nicolaus & Company, Inc. Richard Eastman – Robert W.
Baird & Co., Inc. Rahul Chadha – Credit Suisse Anthony Luscri – JPMorgan Mark Douglass – Longbow Research Charles Murphy – Sidoti & Company
Operator
Good day, everyone. Welcome to the National Instruments First Quarter 2011 Earnings Conference Call.
Today’s call is being recorded. You may refer your press packet for the replay dial-in number and passcode.
With us today are David Hugley, Vice President, General Counsel, and Secretary; Alex Davern, Chief Operating Officer; Dr. James Truchard, President, CEO, and Co-Founder and Eric Starkloff, Vice President of Product Marketing.
For opening remarks I’d now like to turn the conference over to 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 expectations, our expected operating expenses and earnings per share guidance.
We wish to caution you that such statements are just predictions and that 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 annual report on Form 10-K filed February 18th 2011.
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 revenue for first quarter, record profit for the first quarter and we successfully executed on our 2011 plan. I am extremely pleased 2011 began with a record revenue for the first quarter.
We believe that the fact that we have reached record Q1 operating profit for our first quarter is the validation of the strength of our business model and our ability to execute. We continue to execute on the long-term vision while significantly growing our investments in R&D and the field sales force.
I believe that our strategic investments in innovation and product development during 2011 are the key to our long-term future growth and I continue to be optimistic about our position in the industry. In our call today, Alex Davern, our Chief Operating Officer will review our results.
Eric Starkloff, Vice President, Product Marketing will discuss our business, and I will close with a few comments before we open up for your questions. Alex?
Alex Davern
Thank you. Good afternoon.
Today we’re pleased to report that revenue was a new Q1 record of $238 million, up $47 million or 24% year-over-year. Non-GAAP gross margin in Q1 was up 60 basis points year-over-year and 78.5%.
Our ability to significantly increase our gross margins is attributed to the success we’ve had in driving our component cost and improving our manufacturing efficiency and to the high value and differentiation that we delivered to our customers. Operating income was an all time first quarter record.
GAAP operating income was $36.5 million, an 87% increase over Q1 2010. Non-GAAP operating income also set a new first record at $42 million, up 67% over Q1 2010 and up 59% over the previous Q1 record set in Q1 of 2007.
I’d like to thank all of our employees for the hard work they have contributed to this very strong results. Net income for Q1 was $30.5 million with fully diluted earnings per share of $0.25 and non-GAAP net income was $33.9 million with non-GAAP fully diluted earnings per share of $0.28.
A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. Q1 was a very successful quarter and there’s some clear positives to take away.
First we had record revenue for our first quarter with strong year-over-year growth in orders over $20,000. Secondly, we had record gross margins, and third, we had record operating and net income for the first quarter.
From a product point of view, revenues for our instrument control products were up 18% year-over-year in Q1 while revenues for our graphical system design products were up 25% year-over-year. Now, turning to the balance sheet.
Inventory increased by $16.6 million during the quarter as we prepared for potential growth later in the year and reacted to the supply concerns raised by the recent tragedy in Japan. Cash flow from operating activities continued to be strong at $41.6 million for the quarter.
And as of March 31st the company had $385 million of cash in short-term investments. As we set our 2011, I would like to take a moment to reflect on our expectation through the last five years.
Despite the worst recession in modern history, National Instruments has delivered strong results during the five years since Q1 of ’06, increasing revenues by 54%, non-GAAP gross margin by 64%, and non-GAAP net income by 110%. We also stayed true to our long-term strategy over the last five years increasing our R&D personnel by over 50% and our field sales force by 80% and releasing hundreds of new products that have expanded our ability to serve customers in the diversity of new application areas.
Key to enabling this performance has been our expanded gross margins. Over the last five years we expanded our gross margins by approximately 500 basis points, allowing us to make the strategic investments necessary to sustain the long-term for the company while delivering great profit growth.
As we discussed on our Q4 2010 earnings call, we plan to continue this investment strategy in 2011 and each year we want to be successfully executing on our hiring plans, increasing our global headcount to 5476, up approximately 200 people or 4% since December 31. Now I would like to make some forward-looking statements.
While the times as a Global PMI continue to be positive in Q1, we have seen some reasons for concern, develop in March and April. Terrible tragedy in Japan, the spike in oil prices, and the U.S.
federal budget issues all have an impact on global business conditions. The drop of the new order element of the Global PMI from 59.5 in February to 55.1 in March reflects these concerns.
So what we are pleased to see year-over-year order growth of over 20% in April, we do see reasons for concern. We will be watching to see how the global business environment on the specialty automotive sector response in Q2.
However, encouraged by the scale of the long-term opportunity open to us, we are executing on our investment strategy and expect a 17% increase in our global (inaudible) in 2011. As a result of these investments and the recent weakness of the U.S.
dollar, we’re anticipating a significant sequential increase in total operating expenses in Q2. The risk factors associated with this plan and should the global economy see more incremental weakness in coming quarters and these investments will likely have an adverse impact on margins in the short-term.
We are confident that they will significantly advance our long-term position in the industries we serve. Now, turning to the specific guidance for Q2.
We currently expect revenue for Q2 to be up year-over-year to be in the range of $241 million to $255 million. We currently expect the GAAP fully diluted earnings per share will be in the range of $0.19 to $0.27 for Q2 with non-GAAP fully diluted earnings per share expected to be in the range of $0.23 to $0.31.
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 weakness in the global economy, rescheduling the customer orders, expense overruns, manufacturing inefficiencies, effective tax rates, supply chain disruptions and foreign exchange fluctuations. We’re very pleased with our record first quarter revenue and profit.
Our goals for 2011 remain, to invest aggressively in long-term growth and to continue to drive towards our 18% non-GAAP operating income target. I also wanted to mention that I will be attending the Baird Growth Stock Conference in Chicago on May 11 and the Jefferies Global Technology Conference in New York on May 12.
I hope to see you there. Now, I’ll turn it over to Eric Starkloff, Vice President of Product Marketing.
Eric Starkloff
Thank you, Alex. We are extremely pleased to see a new Q1 revenue record this quarter with revenue from our LabVIEW, PXI and CompactRIO products driving this growth.
We believe that our commitment to investing in innovation and growing relationship with our customers will continue to drive product adoption across our business. In Q1, we increased our total worldwide headcount by approximately 200 employees, with R&D and field sales experiencing the majority of the headcount growth in order to support key applications in the regions that are vital to the sustain growth of the company.
During the quarter our orders over $20,000 grew more than 29% year-over-year and represented more than 40% of our business. In addition, our average order size was approximately $4000, up 12% year-over-year and a new Q1 record.
Our software products set a new Q1 revenue record as engineers and scientists around the world realized the value NI software can bring through to their applications. Our LabVIEW software platform is used across all the applications we serve.
Providing support for more than 10,000 hardware devices from NI and third parties, as well as hundreds of add-on libraries. We continued be pleased with the adoption of LabVIEW and the tremendous productivity improvement our users experience over traditional tools.
One recent example that shows the productivity LabVIEW delivers results the National Ignition Facility or NIF at large – national libraries. Engineer and scientists at NIF created an automated maintenance process for the world highest energy laser.
A team of just three people was able to prioritize, develop and deploy the final version of the application using LabVIEW and PXT modular instrumentation in only 15 months. Achieving a productivity increase of three – over the teams estimates for the traditional textbased tools.
On the academic front a great example of how institutions are benefiting from our platform was at the Massachusetts Institute of technology, where they recently adopted LabVIEW and CompactRIO that it is also a curriculum that helps student to design and analyze control systems at part of their feedback control system course. Using LabVIEW and CompactRIO for this course enable the students to quickly switch between stimulation and real-world implementation, which has been very difficult to achieve at traditional tools.
In the first quarter, we continued to see great success with our PXI and modular instrument products and reached significant product milestones resulting from our strategic investments in this area. We introduced a new PXI, RF vector signal analyzer or VSA which delivered best in class RF measurement accuracy and speed at a significantly lower cost compared to the current gold standard rack and sack RF instruments.
In addition, because of the new VSA combined software refined measurements with modular hardware, engineers can now use the same instrument to test wireless LAN, GPS, GSM, LTE and other wireless standards while performing these tests up to ten times faster than with traditional RF instruments. In addition, this week we began shipping the industry’s highest bandwidth PXI digitizer.
Co-developed with Tektronix, the world’s leading manufacturer of oscilloscopes, the new digitizer employs Tektronix’ enabling technology to achieve up to 5 gigahertz of bandwidth and a 12.5 giga sample per second sampling rate, making this digitizer ideal for applications and automated productions tests, semiconductor ATE and high energy physics measurement systems. We are very excited about work with Tektronix to jointly develop a product that combines the strengths of both companies.
Tektronix high bandwidth design capability and NI software defined modular instrumentation expertise. One customer that has seen significant success with our software and the PXI platform is TriQuint Semiconductor, a leader in RF components through wireless communications.
TriQuint needed to reduce the characterization time of increasingly complex lower power amplifiers or Pas. Using LabVIEW and NI PXI modular instrumentation, TriQuint developed a PA characterization system that improved test group by 10 times while reducing capital equipment costs, power consumption and physical space.
This system ultimately shorten the characterization time of the their PA from two weeks using a previous rack and sack RF test system to just 24 hours. Our data acquisition products also saw strong year-over-year growth in Q1 led by our USB and C Series devices.
We also continued to see strong performance from SC Express data acquisition products for high performance sensor measurements, which we released last year. These devices target high channel applications such as structural test and provide signal conditioning to significantly improve measurement accuracy.
Our CompactRIO products experienced significant year-over-year revenue growth as NI continues to invest in this highly differentiated platform. We are particularly pleased with this growth as it comes on top of revenue growth in both 2009 and 2010 for the scale of CompactRIO have increased dramatically over this period.
The CompactRIO platform continues to see success in industries such as renewable energy, oil and gas, biomedical and transportation. The combination of LabVIEW and CompactRIO allows engineers in these industries to quickly prototype new designs to get their ideas to market sooner.
One customer who was recently successful using CompactRIO is NexGEN Consultancy Limited, who developed a smart grid energy monitoring system for a large power utility company in India. This system provides accurate visibility in monitoring of the grid as CompactRIO systems are used to make measurements at each substation and distribution network to ensure uninterrupted power services to their end users.
Due to the complexity and size of network this can be very costly. However, using LabVIEW and CompactRIO, NexGEN was able to integrate measurements, status monitoring and reporting in a single platform.
And iTechnology has significantly reduced their development time and allow delivery of a reliable and cost effective solution for India’s power sector. To close, we’re very pleased with our record revenue for the first quarter as we continue to scale our world-class R&D and field sales organizations to create innovative new products for our customers and help them solve a large diversity of applications.
We also continue to invest in our core platforms of LabVIEW, PXI and CompactRIO and we believe they will continue to deliver increased value to our customers in both the test and measurement and industrial embedded markets. With that, I will turn it over to Dr.
T.
Dr. James Truchard
Thank you, Eric. I was extremely pleased with our performance in Q1 as we delivered record revenue and profit for the first quarter.
I believe these results demonstrate the strength of our business model, validate our long-term strategy and clearly show the significant investments we have made in the R&D and the field sales force that differentiated us in the markets we serve. Since the introduction of LabVIEW, engineers and scientists have been reaping tremendous productivity gains as a result of lab usability to serve a diverse range of applications using graphical system design.
LabVIEW delivers an open software platform that scales across many instrument types and measurement tests utilizing 9000 instrument drivers created by National Instruments and third parties. Additionally, our customers were able to reuse LabVIEW codes across innovative CompactRIO and PXI hardware platforms giving them the flexibility and scalability to meet their application requirements.
Our long-term investment in LabVIEW is a great value to our customers as we continue to improve performance, add valuable features and preserve the investments that have been made in developing their software applications in LabVIEW.
This week in St. Louis, hundreds of student teams are using LabVIEW and CompactRIO to compete in the FIRST robotics championships.
This year FIRST programs are projected to reach nearly 250,000 young people. National Instruments is proud to support the development of future engineers and scientists around the world.
An industry while our modular hardware platforms are a critical part of our value proposition to customers, the hardware is only part of the story. It’s always true our significant investment in our software that our customers can unlock the potential of our hardware and fully realize the benefits of graphical system design.
The software helps integrate the various components of the system while enabling engineers to customize this system hardware with their specific application. In this hardware-software interoperability that enables engineers and scientists to build their applications in the matter of days or weeks instead of months or years.
The PXI hardware and LabVIEW software our customers can reap significant benefits (inaudible) able to define their test system and software. National Instruments has more than 14 years investment in PXI and optimizing LabVIEW to realize the benefits that PXI hardware can provide.
In addition our sales force has equivalent experience in understanding how to make sure our customers are successful in developing PXI test systems. Growing customer relationships as trusted consultants and finding new opportunities as our products deliver significant benefits to our new stations.
In the end, our customers use our tools because we can fundamentally provide a more productive place for them to research and deploy embedded systems. By combining our hardware platforms with powerful software, we’re helping to solve some of the world’s most significant engineering and scientific challenges.
One example is the challenging field of medical imaging where our products are contributing to the research and development of OCT or Optical Coherence Tomography. OCT is a non-invasive imaging technique with superior resolutions to MRI or head in medical images.
One example of this is on the research side (inaudible) where they use LabVIEW and flexible FPGA to design the world’s first real-time 3D OCT medical imaging system with a goal to detect cancer done in medical checkups without requiring the patient undergo the severe stress of a biopsy. The design was extremely complex requiring the integration of multiple cutting-edge technologies, yet using LabVIEW and NI hardware the team was able to deliver innovative solutions by avoiding a time-intensive challenging custom design process.
The same technology is also used for deploying systems by Santec Corporation that used our LabVIEW and our FPGA hardware to deploy a novel portable OCT system. Santec was able to create an OCT system that achieved a 4X imaging speed increase over the previous design, while significantly reducing the size of the system.
Our product success is attributed to our employees that help design, manufacture, market, sell, and support our products. I want to thank our employees for their strong execution during this time, especially our employees in Japan and the Middle East, who in a face of ongoing disaster and conflict continued to show resilience as a community as well as relentless dedication to serving our customers.
In summary, I was extremely pleased with our performance in Q1 as we delivered record revenue and profit for the first quarter. Our investments in R&D and field sales force are critical to our strategy and we are successfully executing on our hiring plans.
We remain committed to this long-term strategy and believe these key investments in our key platforms, in personnel, and geographies will drive future revenue growth and differentiate us from other players to markets we serve. I also like to invite you to our Annual National Instruments NIWeek Investor Conference on August 2 where 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. We will now take your questions.
Operator
(Operator Instructions) The first question will come from Ajit Pai with Stifel Nicolaus.
Ajit Pai – Stifel Nicolaus & Company, Inc
Yes. Good afternoon.
Dr. James Truchard
Hey, Ajit. How are you?
Ajit Pai – Stifel Nicolaus & Company, Inc
Good. And you?
Unidentified Company Representative
Excellent.
Ajit Pai – Stifel Nicolaus & Company, Inc
So two questions, one question and one follow-up. The first one is about the new digitizer with the high specs in collaboration with Tektronix.
Could you give us some idea as to how an agreement like that works and the impact on the gross margins of a business if that becomes a material part of a business over time?
Eric Starkloff
Let me take the first part of that. Ajit, this is Eric.
So it’s a joint development project. Effectively the project leverages the sort of key technology strengths of those companies, some of Tektronix had been with the expertise and our expertise in module product design in software.
The product will be sold or is being sold exclusively by National Instruments. It really will be an NI product and now have an ingredient brand of Tektronix enabling technology.
Ajit Pai – Stifel Nicolaus & Company, Inc
So you will pay them a royalty on each one sold or how does the agreement work?
Alex Davern
Well, I don’t think we can disclose this kind off specifics in the agreement. Ajit, it’s Alex here, but just as Eric said that this product development to marketing really leverages the strengths of both companies very, very well.
I think the business arrangement also fits the business model of both companies very well. We would not anticipate any noticeable impact on our gross margins as a result of this arrangement.
We are very excited about the potential to leverage our backend technology with the technology of Tektronix enabling technology, as Eric said, and believe this will significantly aid us in our penetration into certain accounts in certain markets as we move forward.
Ajit Pai – Stifel Nicolaus & Company, Inc
Okay. And then the second question is just the changes you’re seeing, March and April, a little bit of increased caution in main market.
Is that changing the timeline for your Malaysian deployment at all or there is no change as far as that goes?
Dr. James Truchard
Obviously it was a very good first quarter as we have a record Q1 as you know. Bookings in April, as we talked in the press release, were up over 20% year-over-year.
But there is enough noise out there and enough bad news. It’s difficult for me to believe that it is not going to have some follow-through impact and so we’re being cautious as we look at Q2.
At this point in time, we don’t anticipate any change to our plan for the Malaysia plants. Our intention is to go forward and break ground in June-July timeframe and to open up the facility in the third quarter of 2012.
So no change to that plan at this time.
Ajit Pai – Stifel Nicolaus & Company, Inc
Got it. I’ll get back in queue.
Thank you.
Dr. James Truchard
Thank you.
Operator
We’ll go next to Richard Eastman with Robert W. Baird.
Richard Eastman – Robert W. Baird & Co., Inc.
Yes. Could you just maybe give little bit of a color on the academic side of the business?
I mean did we see meaningful growth there and did that keep pace with the overall growth rates just in that particular market?
Dr. James Truchard
Yeah I can take that sir. It did keep pace with the overall scale of the business.
Our academic market has been strong for a number of years. It’s been a very steady business for us.
It’s been strong in the difficult years of 2009. And I think as we highlighted at that time and it continues to be a strong, steady business for us at this time as well.
Richard Eastman – Robert W. Baird & Co., Inc.
Okay and then Alex could you just define what you said what NATI sales into Japan as piece of that Asian business?
Alex Davern
Yes, sure. We haven’t specifically told that.
I’m going to tell you that it’s in the single digits. So Japan is a very important market for us.
Its not as bigger percentage of our revenue as it used to be in prior year is obviously. We have tremendous sympathy for the terrible events that have happened in Japan.
It really been a body blow to the country. I do want to think a minute out and eco what Dr.
Truchard said on the call, the resilience of our team in Japan has been very impressive in terms of continuing to strive hard to aid our customers in that country, provide support and the products that they need going forward. But we definitely did see an impact in March business in Japan and that’s carried on and certainly we’ve seen a more significant impact on our business in April than we did in March.
I would imagine that’s going to be a factor for the rest of this quarter and probably into next quarter. So as I said it’s single digits of our total revenue and its certainly an important market for us.
Richard Eastman – Robert W. Baird & Co., Inc.
Good. And then just a last question, in terms of the guidance it implies again a significant ramp sequentially in operating expense maybe to the tune of $10 million or so.
Is that a number that we should be annualizing here? Any reason not to?
Alex Davern
I’m not sure I quite I understand the context of the question in terms of annualizing. I mean what I put it this way is that Q2 is a very significant hiring timeframe for National Instruments.
A lot of the university graduates that we hire will come out of university in the May-June timeframe. So this is probably the most significant from an incremental headcount point of view in the second quarter.
And you won’t see that same kind of sequential increase in headcount in Q3 and Q4. So I wouldn’t anticipate that scale of sequential increase each quarter going forward, if that’s your question.
Unidentified Company Representative
No, but you can annualize that operating expense number because they will be on board.
Alex Davern
They will be on board for the full year that is correct. So Q2 is our most significant quarter.
This year we’re also ramping back up quite significantly our interim program and we’ll have approximately a little over, a couple hundred interims at the company starting in that timeframe as well as. So there will be significant hiring activity, not only for this year, but pre-hiring and qualifying candidates and incurring expense related to that for hiring from next year.
Richard Eastman – Robert W. Baird & Co., Inc.
Next year, okay. Okay.
Very good. Thank you.
Dr. James Truchard
Thank you.
Operator
We’ll take our next question from William Stein with Credit Suisse.
Rahul Chadha – Credit Suisse
Good afternoon. This is Rahul Chadha on behalf of William.
I just wanted to dig a little deeper into why the company is guiding 14% to 20% growth as the range when the order growth in the April is 20%. Is it because of any specific shortage and supply or any demand shortfall just coming up?
Alex Davern
Rahul, it’s Alex here. So I’ll take that question.
At this point in time we don’t see any supply issues affecting our revenue stream in the second quarter. So it’s not related to that.
There is no known demand issues at this time to part from. We’ve obviously seen some direct impact in our business in Japan in the month of April.
But nonetheless, overall as a company we did see bookings growth over 20% in April. The concern really relates to the ripple effects that we’re going to see in May, June, perhaps July from the events that we saw in March and April.
I’ve learned over the years that when bad things happen they usually have consequences. And so, it’s an expectation of some impact from those events as we go over the next few months.
Rahul Chadha – Credit Suisse
Okay. And then based on your end market exposure in Japan, does the rebuilding present any opportunity, sort of longer term?
Alex Davern
Well, obviously the business we are focused on, anything we can do to help the people of Japan recover from this tragedy. We will be endeavoring how to do that.
At this point in time we are really focused on supporting our existing customers and certainly looking at opportunities where we can assist in that rebuilding effort. I think it’s a little bit early at this point to comment on the likely impact to that on us.
Rahul Chadha – Credit Suisse
Okay. And just one small follow-up.
Was there any impact from foreign exchange on revenues in the quarter?
Alex Davern
Year-over-year I believe the impact of foreign exchange was actually negative, a little bit less than 1%. So our local currency growth in Q1 year-over-year was slightly higher than our U.S.
dollar growth in Q1.
Rahul Chadha – Credit Suisse
And could you provide us that number sequentially?
Alex Davern
From Q4 to Q1? Perhaps we can come back to that at the end of the call.
If you want to get back in the queue and we’ll get the data for you.
Rahul Chadha – Credit Suisse
Okay, great. Thank you.
Operator
We’ll go next to Anthony Luscri with JPMorgan.
Anthony Luscri – JPMorgan
Hi. Thanks for taking the question.
Just a follow-up on the weakness you’ve seen in Japan. Has that stretched into other regions or other verticals, meaning you highlighted the automotive sector as a potential weakness.
Have you seen it outside of Japan?
Dr. James Truchard
At this point we haven’t seen any identifiable impact elsewhere. But certainly from what you read in the paper it’s hard to believe that these events won’t have an effect on the automotive sector outside of Japan as we go through Q2 into early Q3, but nothing that we could point specifically to at this time.
Anthony Luscri – JPMorgan
All right. And then regarding component supply constraints potential, are you buying ahead?
How are lowering the risk here? And also what do we see for an impact to gross margin if there is a potential higher component cost into the backhalf if there happen to be constraint?
Alexander Davern
On the component cost side, let me address that first. I mean there has been some notable increases in certain commodities.
The exposure of NI to those commodity products is really pretty de minimis. At this point in time I don’t anticipate any real noticeable impact on gross margin.
On the availability point of view, we certainly have taken advantage of our purchasing power and our ability to keep deep inventories to increase our safety stocks of components that we were concerned about during the month of March that’s somewhat continuing here into April and May. One of the huge advantages we have from the depth of our inventory position, which obviously we maintained, and show a very rapid delivery to our customers were really well positioned typically to deal with situations like this.
Whether it is a result of a tragedy in Japan or to certain constraints on supply early last year. So at this point in time for Q2, we don’t anticipate any material impact on our revenue.
Anthony Luscri – JPMorgan
Okay, thank you.
Alexander Davern
No problem.
Operator
We’ll take our next question from Mark Douglass with Longbow Research
Mark Douglass – Longbow Research
Good afternoon, gentlemen.
Dr. James Truchard
Mark, how are you?
Mark Douglass – Longbow Research
Fine. How are you?
Dr. James Truchard
Good.
Mark Douglass – Longbow Research
Good. I would like to ask about the defense markets.
What are you seeing in defense? Are you also anticipating some pull back in defense or I mean do you have much exposure in the defense markets right now?
Eric Starkloff
Yes, this is Eric. If you look at from an industry point of view, we saw kind of strength across and growth in all the industries that we serve by the strongest growth is in semiconductor and energy sectors.
One of the weakest areas in the quarter was in areas tighter government spending including military and aerospace and also some of the government labs. So I think it is reasonable kind of going forward that we will continue to expect that to be a little below the average or weaker compared to the other industries that we serve, and that is built into our expectations.
Mark Douglass – Longbow Research
Okay. That’s helpful.
But going forward I mean like that they renew the budget proposal for fiscal year ’11 so that kind of weakness you saw here was already kind of expected. Anybody anticipating if there is a cutback in fiscal ‘12 that it might do a little worse?
Dr. James Truchard
It’s pretty tough to know exactly how to play out. Certainly the chaos that was in place in federal budget in the month of March was not helpful to business kind of across the board.
Obviously there’s will be lots of debates about spending into next year and that’s to the extent that we’re exposed on the government side. We will have some exposure to how that plays out.
From a global point of view, obviously the U.S. is becoming a smaller portion of our overall revenue and we have a very diversified broad base of business around the world, but it does reflect the U.S.
government is going to cut back spending. And obviously in the aggregate, I think for our business that’s probably not a bad thing.
Mark Douglass – Longbow Research
Okay. And finally we mess quite the (inaudible) priorities right now for the cash and would you consider a special dividend absent other options?
Alex Davern
Obviously we continue to generate significant amounts of cash despite the fact that we’ve been raising our dividend and our priorities continue to remain very similar. Our static was what they’ve been over the last number of years.
Our number one priority in this point in time is the dividends, and number two is strategic acquisitions and we are continually looking to try to find value, but really we have a very, very clear leverage point. And then number two is opportunistic stock repurchase.
Number three is acquisitions. And that strategy continues to be the same as we look forward.
At this point in time we are not contemplating a special dividend.
Mark Douglass – Longbow Research
Okay. Thanks.
Operator
We’ll take our next question from Chuck Murphy with Sidoti & Company.
Charles Murphy – Sidoti & Company
Good afternoon, guys.
Alex Davern
How are you?
Charles Murphy – Sidoti & Company
All right. Just one kind of big picture question for you.
I’m just wondering if there is kind of anything you can do from a technology standpoint to drive kind of a new step function in the adoption of your virtual instrumentation versus conventional instruments or is it just kind of matter of getting new sales guys out there pound in the basement and it’s going to gradually convert new users?
Dr. James Truchard
Sure. Obviously our Q1 was very strong and with a better common need.
But also because our technology has really proven its ability to solve very difficult problems and redefine the way solutions are created about in the test and measurement space and this industrial embedded space where we’re able to, with a standardized platform, solve problems all the way from alternative energy solutions to higher speed production tests of the latest mobilephone devices. So obviously, we have had lot of success with a platform that integrates both our technology and our partners and alternative suppliers into one platform in a way that we create a highly differentiated position.
Charles Murphy – Sidoti & Company
But this is not something as you look at the platform that you say, gosh, if we could just tweak this it’d really open a whole new realm of possibilities.
Dr. James Truchard
Obviously there is enough opportunity that we are making significant investments in this time to add to the platform in a way that we do achieve a very good long-term growth and growth opportunity.
Alexander Davern
We’re looking at that question all the time. And we are constantly looking at new technologies coming available from the mainstream, PC industry, from the FPGA vendors, on the software side.
So that is a constant endeavor on our side.
Charles Murphy – Sidoti & Company
Got it, but there is little kind of golden goose that you have in mind so to speak.
Dr. James Truchard
Well, there is lots of golden geese and we (inaudible) I think is another way of looking at it. I think we have some compelling products that came out in Q1 and as usual we will have fleet of new product capability that will be unveiling.
So we think there is a lot of different angles, as Alex said, we are investigating and investing in quite a few different technologies all the time.
Charles Murphy – Sidoti & Company
Got it. Thank you.
Operator
We’ll take a follow up from Richard Eastman with Robert W. Baird.
Richard Eastman – Robert W. Baird & Co., Inc.
Just as a follow up question, if you look at the business in pieces and are no better than the actual size of these pieces. But industrial embedded versus maybe the virtual instrumentation side of the business, I’m curious if you see any difference in growth rates such that an industry and embedded, are you comfortable we’re participating in the increased industrial spend or CapEx budgets, CapEx cycle, investment cycle.
I would think given where we are, Alex, I know you look at the PMI and the order component. Is that strength visible in your product mix?
Dr. James Truchard
Let me start and then Alex commence that too, but in U.S. the industrial embedded versus say maybe the test and measurement.
The fact is we said this before it’s effectively the same products that are sold into these two different spaces. And so we do make an estimate of how much of that goes into each space, but it is an estimate and we said about 20% to 30% of the business in industrial and embedded.
Now, one proxy that I can share with you is that we talk about our CRIO, CompactRIO platform and certainly that sells a lot into these embedded and industrial applications and that’s been growing very well. As I mentioned, it grew very well this quarter and it’s on top of growth in 2010 and growth in 2009.
So that platform is more than doubled in size since 2009, but that is an indication that our business in industrial embedded is growing faster that the company average, but it’s still I believe in that range. Now we’re also seeing very good strength on the test and measurement side of our business primarily around PXI.
Richard Eastman – Robert W. Baird & Co., Inc.
Great. Okay, thank you.
Operator
(Operator Instructions) We will go back to Ajit Pai with Stifel Nicolaus.
Ajit Pai – Stifel Nicolaus & Company, Inc.
Just looking at your orders over $20,000 and orders under $20,000 the chart in your presentation, you have the orders over $20,000 growing about 30% approximately in that chart, while overall you said that orders were growing about just over 20% which should mean that the rest of the business under $20,000 was likely growing just over 12% or 13% if I run the math right, based on the proportions between those two. Does that mean that there is something that’s going on in terms of share in your businesses where you compete under $20,000 because the test and measurement companies, your traditional folks that you are correlated with have had much stronger growth than that in the current quarter?
Dr. James Truchard
So Ajit, let me take a shot. So the growth at under 20k is 15% and 29% of it had in the orders over 20k.
So as we discussed over the last couple of years, the over 20k orders have been a growth driver, but we’re pleased with the growth on the under 20k orders as well. And we do think that’s inline.
We are seeing a lot of growth in a lot of the investments that we’ve made around our systems business which tend to fall more into the over 20k orders.
Eric Starkloff
The other point I’d make Ajit is I often had this conversations with investors and when I look at the shorter-term results on a year-over-year perspective on our competitors and it can be a source of some confusion, I think it’s better to look at these things on a slightly longer-term rate. A lot of the year-over-year numbers you see in this timeframe are highly related to the situation 12, 18 months ago.
And I think you have to take is slightly longer-term view in this to get to that.
Ajit Pai – Stifel Nicolaus & Company, Inc.
Yeah, but even revisiting it from that basis, if you look at your orders of a 20k expanding addressable markets and all the efforts you have been making in R&D and sales, but orders under 20k they are just getting back to slightly above these are early 2008 level, whereas if you look at your peers or some of the other test measurement companies, their orders are already well over the levels that they were at that point, you’re the only slightly over.
Dr. James Truchard
I should take a different view on that I have to say because I think very few of the T&M vendors are being back to the record at least they saw when you exclude acquisitions. So when we look at the business overall, you look at this on a five-year timeframe, our revenues is up over 50% over that period of time.
Ajit Pai – Stifel Nicolaus & Company, Inc.
We are only talking about the orders and the 20K, not the orders over 20K.
Dr. James Truchard
One other factor there is that the goal is to increase our share of wallet the number of instruments that go into PXI chassis and so as we do that the orders get larger from the same customer, the low 20 are being moving to the above 20 so that’s part of the explanation that you have a customer buying more, selling more slabs of their PXI system up with higher dollar items like RF technology, so that same customer now buy those.
Unidentified Company Representative
I think the other fact is that as you look at the industry, more of the industry is investing in more of the high end. And I just don’t have any comparable data that seem for many comparable company that breaks their orders out by value, so I don’t have any way to compare that.
Ajit Pai – Stifel Nicolaus & Company, Inc.
Got it. Okay, thank you.
Operator
And with no further questions in the queue, I would like to turn the call back to Alex Davern with any additional or closing remarks.
Alex Davern
Thank you very much for joining us today. As I said, in a couple of weeks time, we’ll be in Chicago and then in New York, we hope to see you there.
Operator
And this does conclude today's conference. We thank you for your participation.