Jul 27, 2012
Executives
David Hugley – Vice President, General Counsel & Secretary Alexander M. Davern – Chief Financial Officer, Chief Operating Officer, Executive Vice President & Treasurer James L.
Truchard, Ph.D. – President, Chief Executive Officer & Co-Founder Eric Starkloff – Vice President of Marketing
Analyst
Analyst Zach Larkin – Stephens, Inc. Patrick Newton – Stifel Nicolaus Mark Douglas – Longbow Research Anthony Luscri Robert Mason – Robert W.
Baird
Operator
Welcome to the National Instruments second 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 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 Marketing. For opening remarks I’d now like to turn the call over to Mr.
David Hugley, Vice President, Corporate Counsel and Secretary. Please go ahead sir.
David Hugley
During the course of this conference call we shall make forward-looking statements including statements regarding our future revenue growth opportunities, our revenue goal by 2016, guidance for our Q3 revenue and earnings per share, expected revenue growth in Q4, moderation of our operating expense growth, and success in large accounts. 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 & Exchange Commission including the company’s most recent quarterly report on Form 10Q filed April 30, 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.
James L. Truchard, Ph.D.
Our key points today are record quarterly revenue, strong growth through large orders, and record quarter for PXI products through a highly differentiated approach with graphical system design. I am pleased to report continued strong revenue growth and an all time revenue record in Q2.
We believe the resilience of our business despite a weakened global economy is validation of the value we deliver to our customers through a graphical system design approach to measurement and control. The strong growth in large orders and a record quarter for PXI products illustrate the mainstream acceptance of our technology and I remain optimistic about our position in the industry.
In our call today Alex Davern, our Chief Operating Officer will review our results; Erick Starkloff, Vice President of Marketing will discuss our business; and I will close with a few comments before we open up for your questions.
Alexander M. Davern
Revenue for Q2 was a new all time quarterly record of $292 million up 15% year-over-year in US dollars but up 18% in constant currency terms. Our revenue growth this quarter comes despite the significant weakening of the global industrial economy and the strong 20% year-over-year growth we delivered in Q2 last year.
During the quarter AWR and Phase Matrix acquisitions contributed $10 million of revenue on a non-GAAP basis and as we have now passed the one year anniversary of our acquisitions of AWR and Phase Matrix we will no longer be disclosing their revenues separately going forward. Orders for Q2 were up 24% year-over-year and as a result backlog increased by $16 million and short term deferred revenue increased by $5 million in the quarter.
Non-GAAP gross margin in Q2 was 77% down 1% sequentially from Q1. Gross margin was negatively impacted by the weaker Euro as well as the lower than average gross margin on a large order I’ll discuss later.
Total non-GAAP operating expenses were $179 million up 14% year-over-year. Non-GAAP operating margin was $44 million, a new record for second quarter.
It was up 7% year-over-year and represented an operating margin of 15%. Net income for Q2 was $26 million with fully diluted earnings per share of $0.22 and non-GAAP net income was $33 million with non-GAAP fully diluted earnings per share of $0.27.
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 used in high performance test and embedded applications. Despite the significant weakness of the global PMI in Q2, we saw strong growth of our orders over $20,000 which grew approximately 40% year-over-year and our average order size reached a new all time record of approximately $5,300 up 20% year-over-year.
Orders over $20,000 accounted for 54% of our business in Q2 and we believe the success of our large orders reflects the enhancements we have made in our product and service offerings, our excellent network of system integrators, and the performance of our outstanding sales teams. As we discussed last quarter a significant contributor to the success for us in Q2 was 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 which offers the customer outstanding performance and accuracy at a very low cost of test per unit. Our graphic system design platform with tightly integrated hardware and software across multiple instruments goes well beyond the performance that can be achieved by traditional instruments or even big-iron ATE.
In H1 we received $40 million in orders for this application. $25 million of this was recognized in revenue in Q1 and Q2 and we anticipate recognizing the remainder in Q3.
We believe that approximately 85% of the test market is still served by traditional rack and stack instruments and this application win clearly demonstrates the opportunity to convert this market to PXI. This $40 million success for PXI replaces what would have previously been a lower performance higher cost traditional instrument sale.
We believe the recent validation of PXI standard by some of the biggest names in traditional instrumentation is encouraging more customers to consider PXI. The contest in the industry will now be to see who gets the remainder of the market which is not yet served by PXI solutions.
While we are excited about the performance of our large orders business, revenue from orders under $20,000 has historically been more directly affected by the economic conditions in the global industrial economy. This business was up 1% year-over-year in Q2 reflecting the significant decline in the global PMI in Q2.
During the rest of 2012 we’ll be increasing our efforts to grow this business to further the broad based adoption of our platforms by scientists and engineers worldwide. So despite the weak industrial economy we executed well in Q2.
There are some clear positives to take away from our results. First, we had a record revenue quarter; second, we had strong gross margins; and third, we had record operating income for second quarter.
Now, turning to cash management; during the quarter we had a number of significant draws on our cash position totaling approximately $45 million. This includes $17 million we paid in dividends, $7 million related to the construction of our new manufacturing and R&D center in Penang Malaysia, $12 million related to the final settlement of the dispute with the GSA that we had accrued for in Q3 of last year, and $9 million in income tax payments.
As a result our cash and short term investments declined by $27 million during the quarter. Now, I’d like to make some forward-looking statements.
We are concerned by the continued weakness of the global PMI in Q2 and especially with the significant drop below 50 in June. Our ongoing concern is the drop in the new order element of the index to below 48 in June.
It is now at the lowest level since Q2 of 2009 and its drop suggests that the overall index may continue its decline in July. We believe that this trend coupled with the recent fall in the Euro will restrain revenue growth in the test and measurement industry in the second half of the year.
Despite the economic backdrop and currency headwinds we do expect continued year-over-year revenue growth in Q3. As a result of the success we have had, we have achieved in growing our system sales this year.
Also, as we continue to absorb the significant investments we made in 2011 we expect that our year-over-year growth in non-GAAP operating expenses will be in the mid to high single digits in Q3 down from 14% in Q2. As a result, we currently expect revenue for Q3 to be in the range of $272 million to $302 million.
We currently expect that GAAP fully diluted earnings per share will be in the range of $0.14 to $0.26 for Q3 with non-GAAP fully diluted earnings per share expected to be in a range of $0.20 to $0.32. Built into our guidance is a $0.01 per share loss in foreign exchange due to the fall of the Euro in July.
We expect revenue in Q3 to benefit from a reduction in backlog as we complete shipment of the large system order discussed earlier and as a result we expect sequential revenue growth in Q4 to be below our historical seasonal average. 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 acquisitions [inaudible] accruals, effective tax rates, and foreign exchange fluctuations.
In summary, despite the weak global economy, we are pleased at our execution in Q2. Our goals are to leverage investments we made in 2011 to enable sustained revenue growth towards our target of $2 billion of revenue in 2016 and to continue to drive towards our long term non-GAAP operating margin target of 18%.
I would also like to remind you that we will be hosting our annual investment conference in conjunction with NIWeek on Tuesday, August 7th where we will discuss our business model, our differentiated software and hardware, as well as our financial results and future investments. I hope to see you there.
With that I’ll turn it over to Eric Starkloff, Vice President of Marketing.
Eric Starkloff
We are pleased with our record quarter despite a weakened economy. We believe our performance indicates that our innovative platforms are achieving mainstream acceptance and validate the investments we have made over the past decade in both our sales field organization and in key areas like LabVIEW, PXI, CompactRIO, and our Data Acquisition product.
We believe these investments will allow us to continue to deliver world class product as well as give us the expertise in the field to penetrate large accounts and new application areas. At the heart of graphical system design is LabVIEW which promotes problem solving, accelerates productivity, and empowers innovation for our customers.
LabVIEW is unique in providing a high level design tool that seamlessly integrates with NI PXI, CompactRIO and Data Acquisition hardware. When our customers use LabVIEW they are plugging into a vast ecosystem of developers who share code and best practices, a marketplace of add ons in the LabVIEW tools network, and access to support from more than 10,000 different types of hardware devices from both NI and third parties.
This wide spread adoption of LabVIEW has resulted in the strong long term growth opportunities for our company. As our software products continue to bring the latest technologies to measurement and control applications, this quarter we introduced mobile apps for iPhone, iPad and Android devices to support LabVIEW and NI hardware connectivity helping engineers integrate the latest mobile technology into their applications.
By combining the portability, ease of use, faster start up time, and longer battery life of mobile devices with the power of LabVIEW, engineers can more productively access measurement data from Data Acquisition and embedded monitoring systems. Our distributed I/O products continued to see growth achieving record revenue for second quarter.
This growth was led by our CompactRIO platform which is built on the LabVIEW RIO architecture. This quarter NI introduced new wireless I/O products that give engineers new capabilities to address applications in environmental monitoring, industrial measurements and controls, and energy.
A recent customer successfully deploying CompactRIO is Siemens to develop and application for Denver RTD, a bus and light rail service provider in order to prevent light rail car failure due to high voltage transient. LabVIEW and CompactRIO were chosen due to the flexibility of the reconfigurable FPGA hardware, the ability to accommodate a variety of sensors and protocols, and extended and remote operation.
The Siemens team started as a first time LabVIEW user and thanks to various service and support offerings including our LabVIEW training course, they completed and tested their software application in under six months. Our PXI products also saw all time record sales this quarter experiencing very strong year-over-year growth.
This growth was driven by adoption in high volume applications which we believe is a clear indication of mainstream acceptance of PXI. Since pioneering the PXI platform in 1997, NI has propelled PXI to be a well accepted industry standard and a premier solution for meeting increasingly complex test requirements at a fraction of the size and cost of traditional solutions.
Our LabVIEW RIO architecture which gives our customers the ability to program FPGAs on NI PXI products with LabVIEW has been a strong driver of differentiation and growth. This capability is unique in our industry and has enabled PXI to deliver drastically improved performance over traditional solutions as well as serve new applications like Protocol Aware ATE and real time test.
Building on 15 years of innovation in developing the PSI standard and our more than 500 NI PXI modules, this year we will announce how we plan to redefine instrumentation again with one of the biggest PXI product launches in the history of the company. NI continues to expand our investments in our RF product portfolio which reached an all time record in revenue.
This quarter we attended the International Microwave Symposium or IMS where we announced our first major co-development with AWR. New connectivity between LabVIEW system design software and the AWR Visual System Stimulator for RF and microwave system design.
This connectivity will help address the significant need engineer space for including real world measurements in their design flow helping overcome the time to market constraints that they face. Overall, IMS was a significant opportunity for NI to showcase its latest RF capabilities to our customers.
Our increased brand recognition in this industry was demonstrated by the fact that we received double the number of leads this year versus the 2011 IMS and quadruple the number of leads since 2010. We attribute the success in leads to our strategic focus in building industry leading expertise in RF product development and field sales along with our acquisition of Phase Matrix and AWR both of whom already had strong brand recognition in this application space.
NIWeek has grown to become one of the premier technology events in our industry. Despite the weakened economy this year’s NIWeek event registration is on track with last year’s record attendance and we expect a strong increase in press attendance from trade publications across the globe.
Some of the highlights from this year’s NIWeek will include innovative customer solutions and interactive demos that demonstrate the value of NI products in a breadth of application areas, significant new software and hardware product releases, attendance from our global sales force and companies in our alliance partner network who will be collaborating closely with the thousands of engineers attending the event. Finally, an up close look at our significant new developments in wireless tech and how we plan to redefine instrumentation in that space.
We hope to see you all at NIWeek and with that I’ll turn it over to Dr. Truchard.
James L. Truchard, Ph.D.
I was pleased with our performance in Q2 as we delivered record quarterly revenue despite a weak economy. I believe these results are indicators that the long term stability of our business can weather changing times in the macro economy as well as the sustained differentiation we deliver to customers through a graphical systems design approach that accelerates their productivity.
I would like to thank our employees for the hard work as we drive towards our goal of $2 billion in revenue by 2016. As we transition away from the era of rack and stack instruments in automated test to the next era of software defined implementation, the modular approach which PXI continues to gain market acceptance as the most flexible platform available with over 1,500 products from over 70 venders.
This quarter was another record for our NI PXI product and we believe it’s evidence that we’re gaining share in the 85% of the test and measurement industry that’s still served by the traditional approach. We have continued to demonstrate our ability to release innovative products that are ahead of the industry.
In RF we announced collaboration with the Technical University of Dresden to explore new 5G mobile wireless systems and help determine direction of future global standards by using LabVIEW system design software. Working with the leading research entities such as TU Dresden NI is proud to accelerate the development of future technologies that will ultimately impact everyone who uses a cell phone.
SpaceX, who designs and manufacturers and launches some of the world’s most advanced rockets and space craft, NI technology is being used to help launch the first commercial rocket to orbit the earth. SpaceX uses LabVIEW and NI hardware to control launch pad equipment and command and monitor Falcon 1 and Falcon 9 launch vehicles and its Dragon space craft.
This quarter SpaceX made history when its Dragon’s space craft became the first commercial vehicle in history to successfully attach to the international space station. In its physics research NI was honored to host Dr.
Rolf-Dieter Heur General Director of CERN to give a keynote address at our NI Days in Switzerland to discuss CERN’s search for the illusive Higgs boson particle. At the beginning of July scientists at CERN announced evidence suggesting the Higgslike particle had been found resulting in one of the most monumental discoveries in science in this generation.
CERN uses NI PXI and LabVIEW RIO architecture to control equipment that guides the smashing of protons in the large hadron collider, the world’s largest particle accelerator. Over 120 NI PXI systems with NI RIO modules control this process with millisecond resolution which has enabled monumental gains in scientific discovery.
Many of these examples of innovation will be on display during our annual NIWeek users conference August 7th to 9th where thousands of engineers will hear about new products and see exciting demonstrations from our R&D and product marketing teams. We will also be hosting graphical system design achievement awards which showcase how our customers tackle some of the world’s most significant scientific and engineering challenges.
In summary, while we continue to face uncertainty in the macro economy, I am pleased to see our investments in field sales and R&D lead to a solid performance this quarter. We believe that the diversity of our business, the mainstream acceptance of graphical system design and our ability to continue to revolutionalize instrumentation will create sustainable differentiation for NI and our customers, partners, suppliers, and shareholders.
I am optimistic that we are well positioned with a strong foundation to support future growth and profitability and I would like to thank our employees for their commitment to innovation, prudent expense management and their unwavering focus to serving our customers. We will now take your questions.
Question-And-Answer
Operator
(Operator Instructions) Your first question comes from Analyst for Zach Larkin – Stephens, Inc.
Analyst Zach Larkin – Stephens, Inc.
First of all, can you give us a little bit more color on what you’re seeing geographically? What areas are driving growth right now and kind of what are your expectations in the near term?
Alexander M. Davern
We certainly saw some challenges in some of the regions in the second quarter and a bit of the continuation of the trend we saw in Q1. Europe in particular, obviously you saw our revenues down 4%, that’s somewhat impacted by currency, it’s difficult market conditions for our teams in Europe and given how weak the economy and the PMIs are there, they did an excellent job to deliver modest local currency growth despite the challenging economy.
Frankly, I don’t see any immediate prospects of improvement in the market in Europe looking out for the next couple of quarters, I think that’s probably unlikely. That coupled with the weakness of the Euro itself against the dollar obviously that creates a headwind that we have to battle as we go into the second half of the year.
In the US we had strong growth last year in Q2 so it’s a tough compare for our business in the US. Another concern point as we talked through the call, there was a pretty dramatic drop in the PMI in the US between March and June and that traditionally has had an impact on our broad based business and we saw some of that impact in the second quarter.
In Asia, tremendous success obviously a lot of high volume production tests in Asia. We’ve invested a lot in the region of Asia and the emerging markets over the course of the last decades and our teams there continue to execute very, very well so strong growth in that region and we anticipate that Asia will continue to grow as a proportion of our business overall.
We’re certainly investing with that expectation as we go forward.
Analyst Zach Larkin – Stephens, Inc.
Then also can you talk a little bit about the industrial embedded market, what key opportunities are you currently focused on right now and what do you need to do strategically to continue to penetrate those markets?
Eric Starkloff
Yes, as we said before the embedded market continues to be a very attractive long term market for us and it’s one that has been growing faster than the company average. The opportunities there are in a number of different industries and I’ll give a few here to answer your question but I’ll also point to the fact that we’ll be diving pretty deep on a number of these at our investor conference at NIWeek in a couple of weeks.
But certainly, opportunities in life sciences applications have been strong. We’ve seen a lot of opportunity over time in energy both traditional and alternative energy and in transportation applications like the one I mentioned in the call with Siemens which is basically a transportation kind of monitoring application based on our CompactRIO platform.
Operator
Your next question comes from Patrick Newton – Stifel Nicolaus.
Patrick Newton – Stifel Nicolaus
I guess my first question is on the large order side, I think even when I normalize large orders by removing the sales that you imply from the large application sales, I’m still calculating that you’re over $20,000 orders exceed 50%. I guess can you discuss if this deterioration it the macro conditions could actually accelerate trends towards PXI long term given the value proposition?
I guess what I’m trying to discern is the scrutiny that we’re hearing for customer for higher costs [inaudible] platforms could actually benefit you guys longer term given your value proposition?
Eric Starkloff
Certainly, and we’ve seen this trend play out before, part of our value proposition is very competitive cost of test and we achieve that both by lower cost equipment in PXI as well as faster test time which ultimately for our customers means less test equipment. I think in the long term that dynamic definitely plays in our favor and I think our platform in PXI is very, very competitive from a cost of test point of view.
Alexander M. Davern
I’d add a comment to that. Traditionally, a lot of global industrial recession are not necessarily good for our business overall but from a market share gain point of view, I’m going to completely agree with Eric that we tended to accelerate our gain in market share during a downturn while in the absolute it can create a headwind.
Patrick Newton – Stifel Nicolaus
On your large application order that your received in the current quarter, it looks like you had a follow on order of about $23 million compared to the originally expectation of about $10 to $15 million. So I guess, do you have any opportunities for additional follow on orders from this customer and have you received any inquires from this customer’s competitors for similar applications?
Alexander M. Davern
Maybe a comment on the scale first; obviously, we had announced that we had booked I think, $17 million if I remember correctly, on the last call and gave an expectation of an extra $10 to $15 million which would put the midpoint of our guess at the time at $27 so they obviously came in at $40 which I guess is almost 50% more than that. So we do anticipate some follow on orders from this customer for sure.
There’s also other applications that this customer would like to serve. Obviously, we’ve kept the nature of the application highly confidential so I’m not sure any of their competitors, hopefully none of them are aware that we’re servicing the customer in this way.
But, certainly as we look at the broader market that we’re engaged in here we see the opportunity for a significant amount of business that might be available in this overall market space in the next couple of years.
Operator
Your next question comes from Mark Douglas – Longbow Research.
Mark Douglas – Longbow Research
More on the big order application, thanks for the clarification that there could be some follow on orders, do you think there are more in the pipeline? $40 million is pretty large but some really big opportunities that you’ve identified over the next year that you think you can bid on?
Is it possible to even expect orders like this in the next year or two again not necessarily with the same customer just in that space?
Alexander M. Davern
As we commented on the last call, it took us 35 years I guess to get the first $40 million applicant success. I think it would be fair to say we would expect it wouldn’t take another 35 years before we see the second one.
But having not had a large volume up to now it’s tough to get statistical about forecasting. So I would say, as we’ve talked many times here and at our investor conference, NI is very clearly moving up the value chain in test and measurements and embedded without a shadow of a doubt.
As Eric said, we’re seeing PXI become much more accepted as a mainstream platform for large deployments and so certainly it is in our absolute intent to try and capture other large opportunities like this, I’m just not prepared to predict them at this point in time. But, we will certainly be trying hard to make major penetrations into these big application successes over the coming years.
Mark Douglas – Longbow Research
With the RF products can you say roughly how fast your RF products grew in the quarter and what you think that was relative to the market?
Eric Starkloff
RF has continued to be one of the fastest growing product areas of the company growing significantly faster than the company average and so we saw that continue again in Q2. I’ll just keep it at that, it’s at a significant pace over the company’s growth.
We’re continuing to invest in that space. It’s a very large market opportunity, we believe we have a strongly differentiated position, and as I alluded to, we have some products in the pipeline, some of which will be announced at NIWeek and we think that’s going to be pretty exciting news in the marketplace as well.
Alexander M. Davern
NIWeek will be a very interesting milestone in the history of NI’s penetration into the RF market.
Operator
(Operator Instructions) Your next question comes from Anthony Luscri.
Anthony Luscri
You mentioned in your prepared remarks you were increasing your efforts on orders under $20,000 as they’ve been negatively impacted by the macroeconomic conditions. Can you talk about those activities and the impact to our operating expense profile?
Alexander M. Davern
As we have traditionally seen in the past it’s not uncommon unfortunately when there’s a rapid drop in the PMI for the broad based of our transactional business to see an impact from that. We still saw it in positive territory in Q2 despite the currency headwinds so I think in general performance was relatively good given the economic circumstances.
This is a real strategic area of our business because it broadens the platform opportunities for our systems business as well. So we do and have been planning since earlier in the year increased investment in terms of marketing events and sales activity here and that is baked into our expectation on expense guidance that we gave in the second half of the year.
Just to dwell on that for a second obviously, we went through a significant investment phase last year and especially in the Q2/Q3 timeframe which is the window for a lot of the recruiting that we typically do and we’ve seen our operating expense drop from 30% year-over-year in Q3 last year to 20% in Q4, 17% in Q1, and 14% in Q2 and are expecting mid single digits in Q3. So I think we’ve got a pretty good handle on the expense side and we see a room to get a good economic return on this incremental focus on our broad based business.
James L. Truchard, Ph.D.
First off the investment we made last year in people would be starting to apply in this timeframe as they become trained and ready to serve this broader space. Typically the younger engineers will focus first on the broader marketplace before specializing in some area.
So we’ve invested to this point and as Alex said we expanded the role for seminars and some of the market activities earlier so that we could now start working on these areas like Data Acquisition product and the like.
Anthony Luscri
In the quarter you were impacted negatively by currency by three points. What’s your assumption going forward?
Then, if you could remind us what is your seasonal revenue growth in the fourth quarter just given your volatility over the last couple of years?
Alexander M. Davern
We got a hit on the revenue side of 3%, it’s almost $9 million so it’s quite significant. That obviously has a gross margin impact because we typically don’t change pricing internationally during the quarter and so that did have an impact on our gross margins as well.
Then we had a $0.01 per share loss so that’s below the operating margin line. So that weakness of the Euro certainly is not good for our business as we go through a particular quarter.
As we look out we’ve seen the Euro continuing to weaken in July so in our guidance, as I said on the call, we are anticipating another $0.01 a share loss on foreign exchange on our net unhedged receivables in the third quarter should the Euro kind of finish up where it is now. We’ll be looking at pricing internationally as we go through Q3.
Then on the issue of normal sequential growth historically our average sequential revenue growth in Q3 to Q4 has been somewhere in the 11%ish range and that can vary depending on the economic circumstances. It’s been pretty consistent with the exception of Q4 of 2008 when we saw a significant impact on our Q4 revenue.
Then last year in Q4 we saw quite a bit of impact as a result of the Euro crisis in Europe itself. Now, we do anticipate at this point in time we’ll shipping the rest of that large application order here in Q3 and that will be coming out of backlog and that may elevate our Q3 revenue.
Given that and my personal expectation that the PMI is going to continue to fall through the third quarter, I’d be a little cautious on assuming a normal seasonal pattern in Q4.
Anthony Luscri
Last question is you mentioned that your large orders typically negatively impact your gross margin profile. Can you highlight is it mainly a pricing issue or is there added services or other items that are weighing on that gross margin profile that we should be aware of?
Alexander M. Davern
Typically the large order growth that we’ve seen over the last five, six, seven years has actually helped our gross margin profile because it’s allowed us to drive up volume, drive down costs, and improve our margins overall. Now, this $40 million application success was a bit of an exception to our normal business and so in that situation we’re dealing with gross margins that are below the company average.
But in general, our large order business is actually a real asset to the growth of our margins over time and has helped us stimulate them. So I would look at this a little bit up to now as an isolated exception.
Having said that, there’s plenty of leverage from that large order so from a net operating point of view it’s good business.
Operator
Your last question comes from Robert Mason – Robert W. Baird.
Robert Mason – Robert W. Baird
I wanted to circle back to the geographic color if I could. Europe I guess was up 1% in local currency but obviously I mean the weakness there is well documented.
What steps out to me is the US being down given that the PMI fell off later in the US. Obviously, it has weakened but later to do so and it seems the US also, or the Americas a bigger deviation in Q2 versus the normal seasonal pattern.
Again, if I kind of look at it like that, is that a fair premise? Did the US surprise you in weakness?
Alexander M. Davern
A little bit yes. I would point to the fact that there was a very precipitous drop in the PMI in the quarter from 55 to below 50.
That change in direction tends to have a pretty outsized impact on our transactional business so we’ve seen that many times. That I think is probably at core to it.
We did have some of our US resources that were focused on helping on some of these large orders as well that maybe shipped overseas and that was a little bit of factor as well. I would continue to watch this as we go forward.
As we said on the call, we’re focused on ensuring that we continue to penetrate these large account opportunities and make sure we put sufficient resources into our broad based business to ensure that we can continue to grow that business moving forward. Certainly, I think we’ll be looking for new products to be released at NIWeek also to give a lift to our business for the year.
Robert Mason – Robert W. Baird
How are your academic and I guess also your aerospace and defense markets holding up?
Eric Starkloff
Academic has continued to hold up well, we’re still seeing growth there. Not too surprisingly aerospace and defense has been a little weaker so it was close to flat in the quarter.
So I think that’s probably reflected in that overall market and I think relative to the market we probably did pretty well there but that’s been an area of a little weakness.
Robert Mason – Robert W. Baird
Maybe just last question, your order growth in large systems being 40% obviously, I’m assuming the one particular customer influenced that but if I try to remove that impact it looks like your growth there is still very strong?
Alexander M. Davern
It’s still very healthy, that’s right.
Robert Mason – Robert W. Baird
Could you just speak to though maybe the current order tone there as you went through the quarter and as you enter 3Q? I guess step back and look at the range of your guidance, the $30 million range, I certainly appreciate all the uncertainty out there but you do go into with a big level of backlog that you plan to ship, but could you just speak to I guess the current order tone in that large system area?
Alexander M. Davern
Maybe I’ll speak a little bit to experience having been on these calls and active as the CFO at NI now since 1997 I’ve learned a few lessons over the years about how these patterns tend to play out. When we look at where we are we’re a turns business as you’re well aware so we have significantly higher backlog coming into this quarter but it’s still only a tiny fraction of the revenue we hope to generate in the quarter.
So it’s roughly 10% or so, 11% of our revenue guidance for the quarter. My experience has been in this situation that you can have lots of conversations with sales about expectations for large deals, etc.
but predicting how revenues flow and orders my shift between one quarter and another in an environment like this where the economy is so uncertain it’s a very unpredictable situation. So I’ve learned through many bitter lessons over the year in this kind of situation to be pretty cautious and that’s fundamentally my approach.
Everything we know about how orders flow through so far is obviously built into our guidance.
Robert Mason – Robert W. Baird
Did you see any noticeable or did your field see any noticeable change in quoting activity on that large business bucket?
Alexander M. Davern
Activity doesn’t tend to change rapidly over one period or another. This is a warm judgment of what we see in the marketplace and then experience to guide what we realistically think might happen going forward.
Operator
Seeing no other questions at this time I would like to turn the conference back over to Alex Davern for any concluding remarks.
Alexander M. Davern
Thank you very much for your time and attention today. We look forward to seeing you at NIWeek in two weeks time.
Operator
Ladies and gentlemen that does conclude today’s presentation. We do thank everyone for your participation.