Apr 26, 2012
Executives
David Hugley – Vice President, General Counsel and Secretary Dr. James Truchard – President, Chief Executive Officer, and Cofounder Alex Davern – Chief Operating Officer Pete Zogas – Senior Vice President, Sales and Marketing.
Analysts
Zach Larkin – Stephens Anthony Luscri – JPMorgan Richard Eastman – Robert W. Baird Mark Douglass – Longbow Research Patrick Newton – Stifel Nicolaus
Operator
Good day everyone and welcome to the National Instruments' First Quarter 2012 Earnings Conference Call. Today's call is being recorded.
You may refer to your press packet for the replay dial-in number and pass code. With us today are David Hugley, Vice President, General Counsel and Secretary; Alex Davern, Chief Operating Officer; Dr.
James Truchard, President, CEO, and Cofounder; and Pete Zogas, Senior Vice President of Sales and Marketing. For opening remarks, I would like to turn the call over to Mr.
David Hugely, Vice President, Corporate Counsel and Secretary. Please go ahead sir.
David Hugley – Vice President, General Counsel and Secretary
Good afternoon. During the course of this conference call, we shall make forward-looking statements, including statements regarding future revenue growth, guidance for Q2 earnings per share, operating expenses, and future success in large accounts.
We wish to caution you that such statements are just predictions and that actually events or results may differ materially. We refer you to the documents that company files regularly with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K filed February 7, 2012.
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 – President, Chief Executive Officer, and Cofounder
Good afternoon and thank you for joining us. Our key points today are record first quarter revenue, strong revenue growth in PXI and CompactRIO, and largest sale in our company's history.
Despite a challenging global economy, I am pleased that 2012 begin the first quarter record revenue. Our customers continued to demonstrate their preference for software design modular instruments as evidenced by strong growth in our PXI and CompactRIO products.
Over the past five years, we have continued to make strategic investments by significantly increasing our R&D head count. We believe these continued investments in revolutionary products builds around the graphical system design approach will strengthen our position in the industry.
In our call today, Alex 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. Alex?
Alex Davern – Chief Operating Officer
Good afternoon and thank you for joining us today. Revenue for Q1 was a new first quarter record of $261 million, up 10% year-over-year.
Orders were up 13% year-over-year with backlog increasing by $6 million in the quarter. During the quarter, the AWR and Phase Matrix acquisitions contributed $9 million of revenue on a non-GAAP basis.
Our revenue growth this quarter comes despite a weak global industrial economy and the strong 24% year-over-year growth we delivered in Q1 of 2011. Non-GAAP gross margins at Q1 was 78%, up sequentially from 77% in Q4.
The total non-GAAP operating expenses were $169 million, down $2.5 million sequentially and up 17% year-over-year. Net income for Q1 was $19 million at fully diluted earnings per share of $0.15, and non-GAAP net income was $27 million with non-GAAP fully diluted earnings per share of $0.22.
A reconciliation of our GAAP and non-GAAP results is included in our earnings press release. We believe the diversity of our business, the evolution of our field sales force, and the strength of our product portfolio have been the key drivers of our sustained growth.
This can clearly be seen by the strong growth we have delivered over the last five years in our systems use in high-performance test and embedded applications. After a pause caused by the weakness of the global PMI in Q4, we saw recovery in growth of our orders over $20,000, which grew approximately 25% year-over-year in Q1.
These large orders accounted for 47% of our business in Q1. We believe the success of our large orders reflect the enhancements we have made in our product and service offerings, our excellent network of system integrators, and the performance of our standing sales teams.
Another great success for us this quarter has been winning the largest application sale in the history of the company. This application involves the use of LabVIEW and the NI PXI platform to rapidly develop a production test solution for a very high volume electronics device.
This test solution offers the customer outstanding performance and accuracy at a very low cost of test per unit. This application is now gearing up for high volume production, and year-to-date, we have received $17 million in orders for this application.
We anticipate receiving an additional $10 million to $15 million over the rest of the year. Only $3 million of this has been recognized in revenue in Q1 and we anticipate recognizing the remainder over the coming quarters.
We believe that approximately 85% of the test market is currently served by traditional rack-and-stack instruments and this application when clearly demonstrate the opportunity that we create by converting this market to PXI. This $17 million success for PXI replaces what would previously have been a lower performance, higher cost traditional instrument sale.
We believe the recent validation of the PXI standard by some of the biggest names in traditional instrumentation encourages more customers to consider PXI. And the contest in the industry will now be to see who gets the market opportunity, which is not yet served by PXI Solutions.
Now, turning to the base level business of orders under $20,000, Q1 last year was a strong quarter for orders under 20K, with 15% year-over-year growth. In Q1 this year, the total value of orders under $20,000 was flat year-over-year, which reflects this compare as well as the continued weakness of the global PMI and the general weakness in the test and measurement industry.
During the rest of 2012, we'll be increasing our efforts to grow this base level business, but despite the weak industrial economy, we executed well in Q1 and there are some clear positives to take away from our results. First, we had record first quarter revenue.
Second, we had strong growth of our PXI and cRIO products. Third, we had strong gross margins.
And fourth, we made significant strides in building our solutions capability. Now, turning to cash management, we paid $17 million in dividends during the quarter while cash and short-term investments increased by $11 million.
As of March 31, the company had $377 million of cash and short-term investments. Now, I’d like to make some forward-looking statements.
We remain concerned by the continued weakness of the global PMI in Q1, and especially the early evidence from China and Europe that this weakness has continued into April. Despite this, we do expect continued year-over-year revenue growth in Q2.
Also as we continue to absorb the significant investments we made in 2011, we expect that our year-over-year growth and non-GAAP operating expenses will continue to moderate through Q3. We currently expect revenue for Q2 to be in the range of $270 million to $290 million.
We currently expect the GAAP fully diluted earnings per share will be in the range of $0.15 to $0.25 for Q2, with non-GAAP fully diluted earnings per share expected to be in the range of $0.22 to $0.32. 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 weakness in the global economy, rescheduling of customer orders, expense overruns, manufacturing inefficiencies, adjustments to acquisition, earn out accruals, effective tax rates, and foreign exchange fluctuations.
In summary, despite the weak global economy, we are very pleased that our execution in 2011. Our goals for 2012 are to leverage the investments we made in 2011 to enable sustained revenue growth and to continue to drive towards our long-term non-GAAP operating margin target of 18%.
I will be presenting at the Jefferies Conference on May 9 in New York; the Baird Conference on May 10 in Chicago; and the JPMorgan Conference on May 16 in Boston. I look forward to seeing you there.
Now, I’ll turn it over to Pete Zogas, Senior Vice President, Sales and Marketing.
Pete Zogas -- Senior Vice President, Sales and Marketing
Thank you, Alex. Despite the weak industrial economy, we achieved record revenue for first quarter and I would like to recognize the efforts of our global sales marketing and R&D teams for their commitment to customer success.
A key factor in NI's ability to whether these challenging economic condition is the strength of our direct sales force and alliance partner network, which help faster close relationships with our customers across the globe. We believe that these close customer relationships along with the unwavering R&D commitment to innovation through our strategic platforms of LabVIEW data acquisition, CompactRIO, and PXI continued to drive product adoption across our business.
Our software and services product, solid growth in Q1 as engineers and scientists continue to adopt LabVIEW within their organization. These customers chose LabVIEW to accelerate productivity and seamlessly integrate with measurement and control hardware.
LabVIEW delivers performance benefits to organization by allowing engineers to efficiently develop applications that were run on the latest multi-core processors and FPGAs, which significantly speeds up applications when code is executed in parallel. Developers can leverage an ecosystem consisting of an online community of over 200,000 registered users, instrument drivers for over 9,000 devices and over a 100 certified add-on libraries available through the LabVIEW Tools Network to drastically reduce integration time when developing large application.
Key to product adoption efforts are NI's academic products. We saw a strong year-over-year revenue growth in Q1.
Graphical system design enable students to apply an integrated software and hardware approach, and taking concepts learned in the classroom to the real world. Two recent examples come from MIT and the University of Manchester.
At MIT, professors in the mechanical engineering department are integrating NI software and hardware into 14 Mechatronics, Robotics manufacturing control and design courses over the next five years. The professors are seeing significant benefit using LabVIEW and NI hardware to go from design to simulation to implementation.
And at the University of Manchester, faculty implemented NI educational tools to significantly improve students satisfaction and learning experience. One senior lecturer commented that using NI tools in their undergraduate courses produces post-graduate research students, you can deliver practical instrumentation control and communication solutions from the first day.
Our PXI and modular instrument products had record first quarter revenue led by strong growth in our RF products. Overall, PXI product revenue grew by greater than 20% year-over-year in Q1.
Since inventing the PXI standard in 1997 and founding the PXI system alliance industry consortium in 1998, National Instruments has been at the forefront of delivering the benefits of PXI to engineers and scientists worldwide and now offers more than 500 modules, which is more than any other company. With growing sophistication of systems like mobile devices, companies need to find a flexible solution to adapt to the increasing complexities of test.
The automated test industry is seeing a fundamental shift away from traditional rack-and-stack instruments towards PXI. Traditional instrumentation solutions can offer the same level of synchronization, system level software integration, and reduce factory footprint and power consumption as modular instruments and are therefore no longer viable in many automated test applications.
Using flexible, modular hardware with productive graphical software can lower development costs and reduce time to market, a necessity in these highly competitive segments. For example, one of our alliance members helped the mobile device OEM move to a softer design, modular instrument platform for testing mobile phones that utilize wireless standards such as GSM, CDMA, and SCDMA.
For each mobile phone product line, the customer replaced two inflexible box instrument test systems with one new test station based on NI PXI and LabVIEW. In addition to reducing the physical test station footprint, the throughput of the tested devices almost doubled on each product line.
Our data acquisition products continued to deliver increased measurement capabilities to our customers led by our USB and C Series devices. Our CompactDAQ product showed strong customer adoption delivering revenue growth of 20% year-over-year during the quarter.
One customer success comes from (Ronsberg), a global leader in designing and manufacturing electrostatic finishing equipment. In order to test their next generation finishing product, they needed to decrease test labor while ensuring product quality.
Using NI CompactDAQ and LabVIEW, they were able to combine multiple measurements and do a single solution increasing throughput six times that over their previous data acquisition approach. Sales of our NI RIO hardware products have reached a first quarter record led by CompactRIO as NI continues to invest in this highly differentiated platform.
Unit growth of RIO products grew by greater than 20% during the quarter. One customer taking advantage of our embedded technology this Diverse Energy Limited who developed an off-grid base station to deliver mobile phone coverage in rural areas of Africa.
Using LabVIEW and CompactRIO, Diverse Energy was able to reduce the amount of custom hardware needed. We use LabVIEW code for their next generation system and work with smaller design teams to ultimately lower cost and accelerate their time to market.
NI's culture of innovation as a result of the inspiration we get everyday from the founders of the company. This quarter, we were extremely proud when our CEO, Dr.
T and Cofounder and technology fellow Jeff Kodosky were recognized with the Lifetime Achievement Award by UBM Electronics, the owner of EE Times and EDN Magazine. The award recognizes these two leaders whose efforts have had a significant impact on electronics technology advancements for more than 30-year.
Since 1976 under the leadership of Dr. T, NI has grown to a multinational organization with more than 6,300 employees and has seen 33 years of growth in our 35-year history.
During that same period, Kodosky who is known as the father of LabVIEW has earned 68 LabVIEW related technology patterns and garnered 100s of 1000s of loyal LabVIEW users. To close, we achieved record revenue for the first quarter in the midst of weekend economy and through our world-class R&D and field sales organization we continue to deliver innovative products to customers to help them solve a large diversity of applications.
We believe our core platforms of LabVIEW, data acquisition, CompactRIO, and PXI will continue to deliver increased value to our customers and test and measurement and industrial embedded application. With that, I'll turn it over to Dr.
T.
Dr. James Truchard – President and Chief Executive Officer
Thank you, Pete. In the midst of a challenging economy, we delivered record revenue for the first quarter, which I believe validates the strength of our business model and our long-term strategy.
As we drive toward our goal of $2 billion in revenue by 2016, the key element that will help us achieve its goal will be our growth in large orders and the value we delivered to our customers through our strategic platforms of LabVIEW, data acquisition, CompactRIO, and PXI. NI offers differentiation to our customers through an integrated platform approach, which combined highly intuitive software with modular hardware, and I'm optimistic this will continue to drive future growth as engineers reap the benefits of user-defined flexibility.
In automated test, I believe is that, we are transitioning away from the era of rack-and-stack instruments to the next era of software defined instrumentation. Commercial technology has developed to a point where modular instrumentation is a very credible alternative to traditional instruments.
Traditional instruments providers are now helping in the transition of the industry to modular software design instruments. In contract with traditional instrumentation and modular approach with PXI has proven to be the most flexible platform available with over 1,500 products from 70 vendors.
We believe that really opens up the opportunity to significantly gain market share in the 85% of the test and measurement industry that still serve by the traditional instrument approach. But the modular hardware loan does not provide an integrated platform, which is why LabVIEW is so important in making our customer successful through software design modular instrumentation.
For over 25 years, we have been investing in LabVIEW, which allows our customers to increase their productivity over text-based languages, when building test system. As Moore's law continues to hold true, we believe LabVIEW can take advantage of the evolving processing capabilities such as Multicore processors and FPGA delivering increased performance to our customers.
That's why companies like ST Ericsson have seen a 10x improvement over previous box solutions, when performing semi-conductive characterization using the latest RF standard. Our embedded customers are designing next generation control and monitoring systems in and rapidly innovating industries, such as energy, industrial control, life sciences, and transportation.
We believe that embedded design teams are getting smaller while embedded systems are becoming more complex. To achieve their design goals, embedded design teams need to leverage and integrated hardware and software platform to quickly implement and realize new ideas.
LabVIEW and CompactRIO provide a complete pattern of platform for designing, prototyping, and deploying embedded control and monitoring systems. For the first time, these technologies make is possible to create systems that can have both advanced measurements and advanced control in one platform.
Our innovation strategy is centered around finding the best and brightest R&D talent around the world. Our products serve a very broad range of customers-compliance technology, engineering, and math students in high schools, colleges, and technical universities with some of the world's most sophisticated and complicated client's project such as the large CERN – Large Hadron Collider.
We worked closely with colleagues and technical universities worldwide to help educate next generation of engineers and sciences. Some of which we expect to become the next generations of leaders within NI.
NI is also helping to shape the future generation of engineers and scientists through a partnership with first, a non-profit organization that inspires elementary to high school student to take interest in science and engineering. This year, FIRST programs are projected to reach nearly 300,000 young people to robotics competition and LEGO League.
This week in Missouri at the St. Louis Rams football stadium, 1000s of high school students are using LabVIEW and CompactRIO to compete in the first robotics championship.
National Instruments is proud to support the development of future engineers and scientists around the world. Finally, I want to mention our annual investor conference coming up August 7 in Houston.
The investor conference is held in conjunction with our NIWeek User Conference, which will showcase tremendous innovation from our customers as well as demonstrate the latest revolutionary technology from NI. The investor conference provides investors with great access to over 3000 of our customers and key partners so they can talk directory to them about the uses of NI technology.
In closing, I'm inspired by the bold initiatives to our customers and future engineers who are solving some of the world's most difficult problem with our LabVIEW, data acquisition, CompactRIO, and PXI products. I'm optimistic that our platform based approach, which combines highly productive software with modular hardware will continue to drive growth and allow customers to future proof their investments through user-defined flexibility.
We will now take your question.
Operator
(Operator Instructions) Our first question comes from Zach Larkin with Stephens.
Zach Larkin – Stephens
Hey, good afternoon, gentlemen. Congratulations on the quarter.
Thanks for taking my call.
Dr. James Truchard
Thank you, Zach. How are you doing today?
Zach Larkin – Stephens
I am doing alright. Hey first question, I wondered if you could maybe give us a little bit more color on what you're seeing from a geographic basis and given the overall macro uncertainties.
We surprise it all with the strength that you saw in Europe and Asia and as you kind of take continued macro concerns. Are you expecting any changes and what drives the growth as we move into 2Q?
Dr. James Truchard
Sure. The good question, Zach, I mean we look at the distribution of revenue growth by regions.
It's fairly evenly spread were up 7% in Europe, 10% in America, 13% in Asia. From the execution of our teams worldwide, I think across the world especially in Europe, where we are seeing very difficult economic data over the last six months and also in regions in Asia like China we're seeing the PMI be below 50 now for six to seven months.
We're very proud of the execution of our sales teams in that circumstances to continue to drive strong growth for the company overall. Looking forward that the most recent data is not particularly optimistic.
The flash PMIs for China below 50. Again in Europe, we are seeing the flash PMI dropped quite a bit in the month of April and the new order element is particularly concerning.
So, as we said in guidance, we're cautious about the macro economy. At the same time, we see a tremendous opportunity for NI to continue to disrupt this industry we see significant opportunities for both our PXI and cRIO products and platforms.
And we are very excited about the new products we have coming at NI. So, as we look forward we see opportunity for NI to continue to grow despite these tough economic times.
Zach Larkin – Stephens
Thanks. And then maybe on the follow-up, I wondered if on the large orders obviously very strong growth in that segment.
How much of the growth in large orders was driven by existing customers making more large orders within the quarter versus new customers kind of moving up to value chain and falling finally into the large order category?
Dr. James Truchard
Well, certainly the majority of that revenue growth is coming from existing customers who are continuing into deploy more systems, and as they have success with our technology defined new application areas, but we are also constantly bringing new customers into the fold. As we expand our capability, in particular, we are now able to solve problems.
We want to able to solve before and that gives us a tremendous opportunity to transition our existing GPIB or instrument-controlled customers on to the PXI platform. Certainly, the endorsement of PXI by some of the traditional instrument players in recent times really encourages more and more customers to consider looking at PXI and once they make the decision to look at PXI, NI is inevitably where they are going to seek, look to seek further solutions.
Pete, would you want to comment anything on that?
Pete Zogas
I think you said it. I think we are having a high leverage going after existing customers who we've been serving for years.
And the opportunity to penetrate further into their business, into their test operations and transitioned from rack-and-stack into PXI, that’s where our opportunity and that’s where we are seeing results.
Operator
We’ll take our next question from Anthony Luscri with JPMorgan.
Anthony Luscri – JPMorgan
Hi guy. Thanks for taking the question.
Dr. James Truchard
Hi, Anthony. How are you today?
Anthony Luscri -- JPMorgan
Great. How about yourself?
Dr. James Truchard
Good, good.
Anthony Luscri -- JPMorgan
Given your comment in the prepared remarks regarding moderating year-over-year expense growth in the second half? How should we view the timing of the productivity gains from the 2011 investment plan and how do you view the need for another burst of hiring in say the 2013 timeframe and let’s assuming the world economic environment stays about the same between now and then?
Dr. James Truchard
So, I guess, I mean just the first part of your question first. Our general rule of thumb is that the investments we make in sales, particularly in field sales have roughly about an 18-month time period before they start to payoff and obviously significant chunk of that hiring happened in the Q2, Q3 timeframe of last year, but there is still sometime to go on that.
From an R&D point of view, we really expect that investment to take several years to payoff dividends through product introduction and then ramp up in terms of meaningful revenues. So, we tend to think in terms of the R&D return as a three to five-year timeframe and obviously we have a considerable business to go on to return for that particular investment.
But from a profitability point of view and a management of expenses point of view last year, we saw very significant sequential expense growth between Q1 into Q2 and into Q3 as we made a significant ramp up in hiring, and then that started to moderate in Q4. So, as we look through this year, we’ll see a little bit of the reverse.
We’ll see the rate of year-over-year growth and operating expenses declined as we go from Q1 to Q2 to Q3. And that certainly will be a significant help to our relative profitability as we get into the second half of the year.
Anthony Luscri – JPMorgan
Okay, thank you. And then as a follow-up, can you give us a little more detail or color around the large application sale that you mentioned.
What market does that address and maybe you can give us some metrics around comparative cost of ownership or cost advantage you are providing there? And then I guess finally the expected revenue timing of that order rollout?
Thanks.
Dr. James Truchard
Sure. I think I'll share with you what I can.
Obviously, most of our large customers do business with us under MDA. So, I can’t, I’m afraid to tell you anything more about the application and we put in the press release.
The basic transition here is or the basic business cases for us to transition, but would have been a traditional instrument sale, this customer sees the opportunity to leverage LabVIEW and our PXI (indiscernible) to dramatically improve their economics of test. And that’s I think a tremendous success for the whole company.
As we look in terms of revenue recognition going forward, this is a significant order and we are working through the production delivery schedule as we speak and we'll be over the course of the next several quarters, our expectation for delivery in Q2 is built into our Q2 guidance.
Operator
(Operator Instructions) We'll take our next question from Richard Eastman with Robert W. Baird.
Richard Eastman – Robert W. Baird
Yes, good afternoon.
Dr. James Truchard
Hi, Rick.
Richard Eastman – Robert W. Baird
Could you just – I just want to follow-up on the large order may be Dr. T or Pete.
I'm just curious as to what is the sales cycle look like on that, I mean, how long have you been trying to develop this opportunity and if this $70 million order was that I think the way of reading the press release that was received year-to-date. Does that essentially mean that $70 million of orders came in, in the first quarter?
So sorry, lot of questions.
Pete Zogas
Yeah, Rick, this is Pete so, let me talk about the sales cycle and I'll pass all the revenue recognition over to Alex. But regarding sales cycle, there is no doubt that in order of the size is a lot longer sales cycle than going in there and demoing LabVIEW and back to a smaller application.
So, we – in this end of our business, the sales cycles are longer. They can be up to a year.
By the time, we worked together with our customers to prove the proof of concept and generate the benefits that we are committing to, that's really where we do get the return of this increase investment in our field and so yes the sales cycles are longer in this range, we are investing in field sales to accommodate that and you can see the results as our average orders continuing to increase and we set records on order size.
Dr. James Truchard
Short answer to the second part, Rick is that the majority of this order has actually been booked here in the month of April. We did see a chunk of it both in Q1 and that was definitely contributed to the increase in backlog at the end of the first quarter.
Richard Eastman – Robert W. Baird
And then just maybe since I didn't put a period behind any of those three questions, I'll ask my follow-up. Alex, what was the mix or the percentage of sales in the first quarter on the traditional instrument side?
Alex Davern
The instrument control side of the business was actually had a pretty tough quarter. It was down over 20% year-over-year in Q1.
We had some good size orders in Q1 last year so, that skews it a little bit, but it reflects the weakness that I think has been seen across some of the traditional instrument players in the first quarter. As a percentage of revenue, I think it's down to somewhere round about 5% – 5% or 6%.
Operator
We’ll take our next question from Mark Douglass with Longbow Research.
Mark Douglass – Longbow Research
Good afternoon, gentleman.
Dr. James Truchard
Hey, Mark. How are you?
Mark Douglass – Longbow Research
Good, how are you?
Dr. James Truchard
Beautiful day in Houston, so we are enjoying the spring.
Mark Douglass – Longbow Research
Good, it's ugly here in Cleveland. I wish I could be there.
Can you talk a little bit about the RF and wireless business? How was your penetration into that market and then because of the follow-up to that the addition of AWR how important is that to the future – to your future success in RF?
Pete Zogas
Sure. If you look at whole of test and measurement, RF and communication is a big part at the marketplace.
So, as a vendor in that space, we viewed as very important that we invest for that area as well. And so, that's something we have been doing.
We have expanded our investment over the last five years and it's a area we have seen very good growth in. The acquisition of Phase Matrix and AWR give us the kind of technology we need to be a leader in the space.
We mentioned before that, for example. the front end of the LeCroy oscilloscope is actually designed and manufactured by PMI, one of ex-acquisitions.
Some of our competitors in the test and measurement space used the AWR software to design their instruments. So, all these things are things we see has given us opportunities to continue to grow and build our presence in the RF and communication space.
Mark Douglass – Longbow Research
Will you be at the very high-end oscilloscopes too, given the…
Pete Zogas
That we certainly have, at this timeframe, we certainly have good technology to continue expanding in there. However, we are focused first on the ones that best continue to fill out the platforms in PXI and move us upscale with time.
Operator
(Operator Instructions) We'll take our next question from Patrick Newton with Stifel Nicolaus.
Patrick Newton – Stifel Nicolaus
Yeah, good afternoon, gentlemen.
Dr. James Truchard
Hey Patrick.
Patrick Newton – Stifel Nicolaus
I guess my first question for Alex. If we look at the revenue growth in the difficult end market, gross margin that continues to be maintained and has been maintained for a significant amount of time over a year long-term targeted, and then a commentary talking about kind of a deceleration and OpEx growth rates.
Is it reasonable to think that in the back half of 2012 and into 2013 that your 18% operating margin target is not only conservative, but potentially could be exceeded?
Alex Davern
Well, obviously Patrick we're just giving guidance out into the second quarter. So, I don’t want to comment to you specifically on numbers beyond that timeframe.
We do have concerns about the broader industrial economy now plays out later in the year. So, I would just echo some comments you made their – that we do anticipate a deceleration of expense growth as we observe and lap the expense increases we made into last year and that creates an environment that gives us a better opportunity to be able to improve our operating leverage.
So, we certainly are looking towards are goal of 18% operating margin on a non-GAAP basis that continues to be a serious target for us as we look at longer term. In the shorter term while we have a good fix on our expanding plan, we will unfortunately on a revenue side.
The broader economy will continue to have some impact on that. That's why we are little hesitant to give guidance out beyond the end of June.
Patrick Newton – Stifel Nicolaus
Alright, that’s helpful. And I guess for either Dr.
T or for Pete, kind of a bigger picture question on the industrial embedded market. I was wondering if you could talk a little bit about progressive that you're continuing to make in that market.
If you could discuss some of the applications, our end markets were – you are gaining the most traction and if we look at your goal of growing revenue added 20% clip. How important is this embedded market to drive meeting that goal?
Dr. James Truchard
Fortunately, in this space, we are able to use much of the same technology that we have been using in test and measurement. Our LabVIEW plays a key role as we said in the call.
We now can have very advance measurements in the same platforms for very advance control. We’re seeing good success and big physics for example where that technology is really used well.
We also seem success in the area of the energy. I think in the previous calls, we talked about some of these applications in the oil and gas industry and monitoring a power and the light energy savings and so these are all area that we see our customers making investments and we see opportunity continue to expand our role in that space.
Operator
It appears there are no further questions at this time. Mr.
Davern, I'd like to turn the conference back to you for any additional or closing remarks.
Alex Davern – Chief Operating Officer
Thank you very much for joining us today. We hope to see you at the investor conference in Houston on the 7th of August and thank you very much.
Operator
That concludes today's conference. Thank you for your participation.