Oct 27, 2015
Executives
David G. Hugley - Secretary, Vice President & General Counsel James J.
Truchard - President, CEO, and Cofounder Alexander M. Davern - COO, CFO, and Executive Vice President John M.
Graff - Vice President-Corporate Marketing
Analysts
Patrick Newton - Stifel, Nicolaus & Co., Inc. Brandon S.
Wright - Stephens, Inc. Richard C.
Eastman - Robert W. Baird & Co., Inc.
(Broker) Kristen Owen - Oppenheimer & Co., Inc. (Broker)
Operator
Good day everyone, and welcome to the National Instruments Third Quarter 2015 Earnings Conference Call. Today's call is being recorded.
You may refer to your press packets for the replay dial-in numbers and passcodes. With us today are David Hugley, Vice President, General Counsel and Secretary; Alec Davern, our Chief Operating Officer; John Graff, our Vice President of Marketing; and Dr.
David Hugley, our Vice President and General Counsel and Secretary. For opening remarks, I'd like to turn the call over to Mr.
David Hugley, Vice President, General Counsel and Secretary. Please go ahead, sir.
David G. Hugley - Secretary, Vice President & General Counsel
Good afternoon. Also, I'd like to say that Dr.
Truchard, our CEO, is here with us today. Good afternoon.
During the course of this conference call, we shall make forward-looking statements, including statements regarding our ability to gain market share, the impact of our acquisition of Micropross and our guidance for fourth quarter 2015 revenue, earnings per share and effective tax rate. 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 19, 2015, and most recent Quarterly Report on Form 10-Q filed July 31, 2015. 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 J. Truchard - President, CEO, and Cofounder
Thank you, David. Good afternoon, and thank you for joining us.
Our key points for Q3 are continued revenue growth, sustained gross margins, and disciplined expense management. In Q3, we saw continued core revenue growth across most product areas despite the challenging PMI and increased weakness from our energy customers.
This core growth, together with disciplined expense management, has allowed us to maintain a non-GAAP operating margin for Q3 at last year's level. The strength of our business model has allowed us to recover from the currency-driven decline that we saw in our Q1 operating margin and bring our non-GAAP operating margin for the first nine months to 13%, flat with last year.
Also, today, we announced the acquisition of Micropross, an industry leader in the supply of test solutions for Near Field Communication and Wireless Charging. We welcome the Micropross team and look forward to leveraging their industry-leading technology through the NI brand and sales channel.
In our call today, Alec Davern, our Chief Operating Officer, will review our financial results. John Graff, our Vice President of Marketing, will discuss our business.
And I will close with a few comments before we open up for your questions. Alec?
Alexander M. Davern - COO, CFO, and Executive Vice President
Good afternoon, and thank you for joining us today. Today, we reported Q3 revenue of $300 million, down 4% year-over-year.
Core revenue, which we define as GAAP revenue excluding the impact of our largest customer and the impact of foreign currency exchange, was up 5% year-over-year. To help investors better understand these underlying trends in our business, we've added an additional slide to the Investor Presentation which shows a comparison of global PMI to NI's core revenue growth.
During Q3, we completed the reorganization of our regional operations into three regions to drive greater scale and operating efficiency. The three new regions are the Americas, Asia Pacific and EMEA.
EMEA represents Europe, the Middle East, India and Africa. In U.S.
dollar terms, revenue was down 3% in the Americas, up 2% in EMEA and down 14% in Asia. The vast majority of the year-over-year decline in Asia is related to our largest customer.
Historical data showing the revenue from the three regions is available at our Investor Relations website. Non-GAAP gross margin in Q3 was 75.4%, flat with Q3 last year.
Total non-GAAP operating expenses were $183 million, down 4% year-over-year, primarily due to the impact of the stronger dollar. For Q3, our non-GAAP operating margin was 14%, flat with last year.
Our non-GAAP effective tax rate in Q3 was 30%, compared to a negative effective tax rate last year of minus 4%. As you may remember, in Q3 of last year, we released $14 million in tax reserves as the result of the conclusion of an IRS audit.
This increased our fully diluted earnings per share in Q3 of last year by $0.11 per share. The Q3 net income was $23 million with fully diluted earnings per share of $0.18 and non-GAAP net income for Q3 was $30 million with non-GAAP fully diluted earning per share of $0.24.
A reconciliation of our GAAP and non-GAAP results is included is our earnings press release. Now taking a look at order trends.
For Q3, the value of our total orders was down 2% year-over-year. Included in that total is $6 million in orders received from our largest customer, compared to $12 million in Q3 last year.
Revenue from our largest customer was $6 million in Q3 this year compared to $17 million in Q3 last year. Breaking down our order values, excluding our largest customer, we saw a 2% year-over-year decline in our orders with a value below $20,000, while orders with a value between $20,000 and $100,000 increased by 3% year-over-year, and orders with a value over $100,000 grew 4% year-over-year.
Turning to cash management. During the quarter, we paid $25 million in dividends and used $64 million to repurchase 2.2 million shares of NI's common stock at an average price of $28.94 per share.
Today, we also announced the acquisition of Micropross, an industry leader in the supply of test solutions for near field communications and wireless charging. The addition of Micropross will strengthen NI's position as a global leader in the design, prototyping and testing of RF and communication systems, allowing us to provide comprehensive coverage for the most common wireless standards found in modern wireless consumer devices.
This acquisition directly aligns to NI's growth strategy through further penetration into target growth markets. We plan to leverage the leadership position and technology of Micropross to accelerate our time-to-market and drive revenue growth through the differentiated brand, sales channel and manufacturing scale of NI.
The acquisition closed on October 23 and value Micropross at €95 million, including net debt assumed, 90% of which was paid in cash and 10% in shares of NI common stock. Micropross is a very successful software leader in this space and the transaction values Micropross at approximately six times 2015 estimated revenues and approximately nine times estimated 2015 EBITDA.
The acquisition officially deploys a portion of NI's offshore cash and is expected to be accretive to non-GAAP earnings in 2016. Please see the slides attached to the Earnings Presentation for more details.
Now I'd like to make some forward-looking statements. Given the current trends, we are assuming in our guidance that the global PMI will continue to be weak in Q4, and as a result, we're guiding for total revenue in Q4 to be in the range of $315 million to $345 million.
At the midpoint, this represents core revenue growth of 5% year-over-year. We currently expect revenue from our largest customer to be $5 million in Q4, down from $7.5 million in Q4 last year.
We currently expect GAAP fully diluted earnings per share will be in the range of $0.21 to $0.33 for Q4, with non-GAAP fully diluted earnings per share expected to be in the range of $0.27 to $0.39 per share. I'd also like to spend a minute on taxes.
Our Q4 guidance assumes that our non-GAAP effective tax rate will be approximately 34% this quarter. This is higher than the 30% we had previously guided for the full year.
This 4% effective tax rate difference is equivalent to approximately $0.02 per share in Q4. On a year-over-year basis, the expected increase in the Q4 non-GAAP effective tax rate from 21% last year to 34% in Q4 this year is expect to reduce our non-GAAP EPS by $0.07 per share.
Our guidance for non-GAAP effective tax rate in 2016 remains in the range of 21% to 23%. In summary, while Q3 was a challenging quarter due to the strength of the U.S.
dollar and the sequential decline in the global PMI, with September posting the lowest PMI in two years, we continue to execute well and positioned ourselves for future growth. While we will continue to experience a drag on our revenue from currency headwinds in Q4; entering Q1, we expect to have more favorable compares, which should allow the strength of our broad-based business to show proof.
As these are forward-looking statements, I must caution you that our actual revenues and earnings could be negatively affected by numerous factors such as any weakness in the global economies, fluctuations in revenue from our largest customer, foreign exchange fluctuations, expense overruns, manufacturing inefficiencies, adverse effect of price changes and effective tax rates. I'd also like to mention that we will be at the Stifel Conference in Chicago on November 12 and the NASDAQ Conference in London on December 1.
With that, I'll turn it over to John Graff, Vice President of Marketing.
John M. Graff - Vice President-Corporate Marketing
Thank you, Alec. In Q3, we felt the effects of broad headwinds, notably continued impact from the strength of the dollar; the decline in the global PMI; and weakness in PC sales.
Additionally, our embedded business was challenged by a significant drop in oil and gas spending, which reduced our total revenue by approximately 2% year-over-year. However, as Alec stated, we saw a core growth across much of our portfolio despite these headwinds.
Q3 once again brought our NIWeek user conference to Austin. This year, we hosted over 3,000 attendees, as well as over 18,000 attendees who watched the live stream of the key notes online.
The content and presentations at NIWeek are the foundation for a series of global events called NIDays, where we expect to host around 25,000 attendees in 42 cities around the world over the coming months. NIWeek serves as a look into the future through the eyes of industry thought leaders, executives of key customers and NI leadership.
This year, we look beyond the hype of the Internet of Things and focused on the challenges and business opportunities tied to a more connected data-centric world, leveraging what we refer to as Big Analog Data. While industry pundits have talked about these emerging trends for years, the foundational technologies underpinning these trends are now in place.
Our rich history of measurements acquiring Big Analog Data and our software-based platform position us well to take advantage of a movement to add more intelligence to devices and systems across a broad range of industries. At NIWeek, we highlighted our involvement in advancing new communication standards like 5G that will be key to fully enabling the Internet of Things.
We also demonstrated examples of how our platform is enabling the industrial Internet, both through the work we are doing with industry consortiums, as well as actual customer examples including smart grids, smart machines and smart factories. NIWeek also serves as the launching point for many new products.
This year, we expanded our platform with significant releases across our entire portfolio including new performance points for compactDAC and CompactRIO controllers; and expansion of the PXI platform to include the latest processor and bus technologies. We also released a new software design instrument based on PXI in the NI vector signal transceiver called the Wireless Test System that comes equipped with the suite of tools that enable device level testing of wireless protocols.
For software, we released LabVIEW 2015, which enables faster code development for programmers, as well as highlighting the recent release of LabVIEW Communication System Design Suite which offers the design environment closely integrated with NI software defined radio hardware for rapidly prototyping communication systems. We're excited about the new capabilities these products bring to our platform and the new opportunities they open up for our customers and our business.
Looking at product performance, our broad-based software and data acquisition product saw modest core growth year-over-year. Hardware growth was driven by CompactDAC, which had several large wins in consumer electronics and white goods test.
Our instrument control products which are used to connect third-party box instruments to the PC were down significantly year-over-year indicating relative weakness in the broader T&M market. Instrument control now represents less than 4% of our revenue.
For our flagship product, LabVIEW, we saw growth in new seats driven by strengthening in enterprise agreements. Despite economic headwinds, academic products continue to grow with strong performance of teaching products.
Highlights include, strong revenue growth in China and a large win for our controls lab at a top UK engineering school. These wins illustrate the unique value that NI hardware and software platform brings to teaching advanced engineering concepts.
We continue to build on our leadership position in PXI with core growth despite economic headwinds. As more engineers transition away from rack-and-stack instruments through a software-defined modular approach using PXI, we believe the strength of our product portfolio and leadership from 17 years of investment in PXI will continue to serve us well.
In RF and wireless, NI continued to execute on our strategy to serve the entire wireless value chain, from wireless prototyping to manufacturing test. In wireless prototyping, we continue to drive significant revenue growth of software-defined radio products through our software-centric approach based on LabVIEW Communications.
NI has partnered with wireless innovators such as Nokia Networks, Samsung and others, and demonstrate groundbreaking 5G technology using NI products. In addition, we are continuing to build on the success of our vector signal transceiver by using it as an underlying technology for test systems targeting vertical application such as the semiconductor test system and the wireless test system.
These application-oriented systems have already achieved several key design wins for high-volume manufacturing tests; and the opportunity pipeline remains healthy. Moreover, the addition of Micropross strengthens NI's position in wireless communication and further supports our strategy to serve the entire wireless value chain.
Although revenue growth for our embedded products has been facing headwinds from the decline in spending in the oil and gas industry and the decline in global PMI, we see immense opportunity that provide the foundation for the industrial Internet of Things with CompactRIO and LabVIEW. CompactRIO ties measurements, control, computation and communication together with a flexible system-designed software, enabling our partners and customers to build smarter systems and make better decisions.
For example, at NIWeek this year, Dr. Francis Fomi Wamba of AREVA Wind showed how they use CompactRIO as the foundation for the online monitoring solutions of offshore wind turbines to inform predictive maintenance processes and reduce downtime.
The large scale of industries like power generation, transportation and electronics manufacturing, means that small gains in efficiency from better insight in the processes can have large impacts to the bottom line of our customers. In summary, as the vision of a smarter connected world becomes a reality, NI is well positioned to provide the platforms to accelerate the development and adoption of these new technologies.
With that, I will turn it back over to Dr. T.
James J. Truchard - President, CEO, and Cofounder
Thank you, John. I am pleased with our execution during Q3 in a difficult market.
We maintained strong gross margins, reinforcing the value our customers see in our products and managed our expenses. We have built and continue to run a company for the long-term sustainable growth.
Over the course of several decades, we've successfully managed the business through various economic and currency cycles and have always exited those cycles in the position of strength. The strength of our business model has allowed us to recover from the currency-driven decline that we saw in Q1.
Our focus has always been to provide a software and a hardware platform that leverages commercial technology to increase performance and lower cost. This disrupts and shrinks the market we serve, while also providing opportunity to grow our business through differentiated products with high gross margin.
Each year at NIWeek, I enjoy seeing how our tools are driving innovation and discovery, while enabling our customers to solve some of the world's toughest engineering challenges. For many years, we have been serving applications now considered part of the growing trend of Internet of Things with our approach of big analog data.
The elements driving and enabling this trend include sensing, data analysis, data fusion, intelligent control and connecting disparate systems and datasets. These have been areas of core competence for NI for decades and we are focused on staying at the forefront of these trends.
Alexander M. Davern - COO, CFO, and Executive Vice President
Allergies are bad here in Austin this season, so here Dr. T.
a chance to take a drink of water.
James J. Truchard - President, CEO, and Cofounder
Beginning with GPIB, NI revolutionized how our engineers and scientists connect to instruments and interact with data. Rather than simply viewing a screen on a traditional instrument, make a judgment call with limited set of data, we could use the power of a PC and the flexibility of software-based systems to correlate measurements from multiple instruments over time.
We could perform complex computations and analysis that use the information to make automatic decisions. In the nearly four decades since the release of GPIB, the sources and type of data have scaled exponentially.
Today, our customers use our hardware and software to produce, collect, store vast amounts of analog and digital data. Our software-defined approach allows them to find exactly how this big analog data is consumed and utilized, from the pins of the FPGA, to the cloud, and every step in between.
In closing, I would like to thank our employees for their concerted effort to deliver innovative new products to drive our growth while managing expenses, as we continue toward our long-term profitability goals. I am confident that we are building the new product pipeline, channel and operational excellence to drive the long-term growth and profitability of the company.
Thank you. We will now take your questions.
Operator
Thank you. Our first question comes from the line of Patrick Newton with Stifel.
Your line is now open. Please go ahead.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Good afternoon, Dr. T, Alec and John.
Thank you for taking my questions. I am going to ask my housekeeping question to start off, just if you could inform us of your number of employees exiting the quarter and your average order size?
Alexander M. Davern - COO, CFO, and Executive Vice President
Sure, Patrick. Exiting the quarter, we had three – sorry 7,370 people; and the average order size, $5,063.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Great. And then just diving into the Micropross acquisition.
I guess if you could help us understand a little bit more about how it fits into the National Instruments profile. It seems like the accretion – commentary of accretive in 2016 given – I'm calculating an EBITDA margin of like 67% – it would seem that it's immediately accretive.
Could you help us understand when the deal closed and what's built into the current guidance? And then also talk about the TAM of NFC and Wireless Charging, so several Micropross questions there.
Alexander M. Davern - COO, CFO, and Executive Vice President
All right. Patrick, maybe I'll take a pass at the valuation and guidance and then I'll let John dive in on the kind of business and market strategy.
Yeah, obviously, it's a very profitable software business; and that's one of the reasons the valuation obviously comes out to where it does. It is accretive, we believe, for 2016 for non-GAAP.
I do anticipate that it will be accretive at some scale in Q4, but it's going to be a couple of months, November and December only. Obviously, the acquisition for a small company like Micropross can be a disruptive process, the acquisition itself; and that's probably going to have some impact on revenue in the next few weeks or months until they can recover from going through that process.
So we feel very good about the business and definitely expect it to be accretive as we go into next year. I think the impact, overall, from a couple of month's worth in Q4 is going to be relatively de minimis and it is included in guidance.
John M. Graff - Vice President-Corporate Marketing
Patrick, this is John to talk about kind of the business strategy with Micropross. As you're aware, we invested aggressively in our RF platform and wireless test capabilities over the last few years and we've seen tremendous results.
I mean those areas are kind of leading our growth this year from a product perspective. Micropross brings a really strong technology and leadership position and competitive position in the areas of Near Field Communications, or NFC, as it's usually called, as well as Wireless Charging.
So what they bring is the ability to really strengthen and broaden the applicability of our platform to address more of the common protocols that are increasingly part of wireless devices, consumer devices. But also these are technologies that we see being broad-based showing up in the industries such as automotive and others.
And that plays to our strength of our platform and our brand and our sales channel to leverage this across many customers and many different applications.
Alexander M. Davern - COO, CFO, and Executive Vice President
So from a synergy point of view, Patrick, we expect the synergy here to come from growing revenue through leveraging, as John said, our brand, our channel and our manufacturing scale. And so we view this as a bolt-on acquisition and it should be accretive to earnings, but I think also an accelerator of revenue growth as we move forward.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
And any TAM assumptions that this is unlocking for you by chance? And then as far as the kind of revenue synergies, are you acquiring any customers that are meaningful in this or is this more, like you said, just a leveraging across your portfolio?
Alexander M. Davern - COO, CFO, and Executive Vice President
So their customer base is pretty diverse. It's not dominated by any one customer.
They've got a broad footprint in the early stage of this evolving aspect of the test industry, and that's one of the reasons they're particularly valuable to NI. And in terms of the TAM, I don't think we're really prepared to share a specific number at this point.
There's obviously some assumption that we have that the demand at the consumer level for Wireless Charging and NFC will be strong over time; and I think that's a pretty – we're pretty confident in that assumption.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Okay. And just last one, if I may, is on the buyback.
You've accelerated the buyback in the June quarter and I'm – I'm sorry, in the September quarter. And I'm curious if you could remind us again how much is remaining on your current share repurchase allotment and remind us again your philosophy on when you choose to acquire shares?
Alexander M. Davern - COO, CFO, and Executive Vice President
So the remaining buyback is approximately 1.5 million shares under the previously authorized repurchase that was authorized back, I believe, in 2010; need to double check that, but I think it was 2010. I think our strategy remains consistent.
Our number one priority for the deployment of cash is on dividends; number two, opportunistic stock repurchase; and number three, acquisition. Obviously, all three have played a part in our planning and deployment of cash in the last couple of months; and we feel that these are good investments and use of the company's cash in this timeframe.
Obviously, Micropross being an overseas acquisition gives us an opportunity to deploy a portion of the overseas cash to deliver a much higher return for shareholders than we've been earning in treasuries.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Great. Thank you for taking my questions.
Good luck.
Operator
Thank you. Our next question comes from the line from Ben Hearnsberger with Stephens, Inc.
Your line is now open. Please go ahead.
Brandon S. Wright - Stephens, Inc.
Hi. Thanks for taking my question.
This is Brandon in for Ben. Just curious on the acquisitions, what kind of incremental spend you'll have to take on to get this integrated?
And I've got a follow-up. Thanks.
Alexander M. Davern - COO, CFO, and Executive Vice President
The incremental spend of integration will be, I won't say it's trivial, but relatively small. We do anticipate that we'll be adding a number of technical support folks to help transition these products into our field over time; and then also at the engineering level to improve the integration between our software and the products from Micropross.
So I don't think it will be a noticeable number at the aggregate level of the company. We anticipate that this is an integration that we'll execute over the next 12 months to 18 months.
Brandon S. Wright - Stephens, Inc.
Understood. Thanks for that color.
And then my follow-up on your largest customer order size, what's leading the major deceleration here that you've seen in the quarter and in the guidance? Kind of how do you see this playing out in 2016?
Thanks.
Alexander M. Davern - COO, CFO, and Executive Vice President
Sure. Well, historically, this customer has been volatile and we've tried to make that very clear.
Over the last four years or five years where our business with this customer has ramped up, the concentration of their orders and revenue has tended to come in the second and third quarters and then to fall off in Q4. As we've talked in this call before, we had a smaller year in 2011; we had a big revenue year in 2012; and smaller year in 2013; and big revenue year in 2014; and we're having a smaller year here in 2015.
So what 2016 will bring is a little too early to say. We'll be in a much better position at the January call to comment specifically on our expectations for 2016.
Brandon S. Wright - Stephens, Inc.
Thanks for the feedback.
Operator
Thank you. Our next question comes from the line of Richard Eastman with Robert W.
Baird. Your line is now open.
Please go ahead.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Yes. Good afternoon.
Alec, could you just follow up on the last comment with the large customer. I know we'll be better positioned to talk about orders.
But as you've kind of worked through their spec and bids, I mean, is there any general sense of what the tone will look like in 2016 from size purchases and also whether you're equally as well, I don't want to say entrenched, but that your product specs into whatever dollar amount of their needs would be in 2016?
Alexander M. Davern - COO, CFO, and Executive Vice President
The only comment I can make on that, Rick, is we have a very good relationship with this customer and we've delivered a lot of value. In terms of spec or their plans or intentions, I'm afraid I'm not at liberty to make any comments about that.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay. All right.
And then on the Micropross business, can you just give us a sense, Alec, of what the amortization would be on that purchase price and then also what you would amortize it over how many years?
Alexander M. Davern - COO, CFO, and Executive Vice President
It's a good question, Rick. We just closed the acquisition on Friday in France, so it's a little early yet to have resolved that both with the external valuation guys and with our auditors.
So I'm going to have to hold on answering that question specifically, I'm afraid, until we get a little further down in the process.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
But you would expect this to be GAAP accretive as well.
Alexander M. Davern - COO, CFO, and Executive Vice President
I think that's highly likely.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay. All right.
And then just a quick question for John. Could you just speak to the aerospace and defense market, how that performed?
And just I'm trying to get your sense maybe of is that market stable, still declining, recovering. Just maybe you could just address that particular end market?
John M. Graff - Vice President-Corporate Marketing
Sure, Rick. I mean, to answer specifically on aero/defense, I would say it's stable.
From a core growth standpoint, it was positive for us. But if you take into account some of the currency headwinds, obviously that was a drag.
To put it in the context of all the industries, we mentioned on the call, energy we saw significant weakness this year. That's played out as oil and gas spending has dried up.
And then on the plus side areas we've seen, core growth includes the mobile segment, mobile devices, automotive and transportation, and as I mentioned, the aerospace/defense.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay. So aerospace/defense was a contributor even after FX?
John M. Graff - Vice President-Corporate Marketing
Yes.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay.
John M. Graff - Vice President-Corporate Marketing
No, no, no, no, no. Let me clarify.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay. That's fine.
Yes.
John M. Graff - Vice President-Corporate Marketing
So subtracting the impact of FX, it was positive.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay, okay. And just when you look at the short turns business – this is just a series of follow-ups by the way, so I apologize – I even put a period after any of these, or a question mark after any of these questions.
But the short turns business being down 2% year-over-year and I presume currency is part of that, but what do you make of the continued weakness on the short turns side of the business? Is that highly energy related or is it just this sluggishness in that general test market?
Alexander M. Davern - COO, CFO, and Executive Vice President
Well, I think when you go back, if we were to adjust that for currency, you'd see it low-single digit. And I think that's pretty consistent with what you might expect to see in a market where we've seen the global PMI drop pretty steadily for the last 24 months.
So I think that's pretty consistent with what I might expect to see, given that decline in that broad-based macro indicator. And to just make a point, it's disappointing for us as a business to look at for the first nine months of the year revenues relatively flat and our operating margin is relatively flat.
But to put that in context, I think we've actually done a pretty good job to be able to sustain and hold our position on revenue and profitability despite going through three pretty big headwinds, from currency, or a big customer and energy, as well as or in addition to a decline in the overall PMI. To being able to offset 9 of those 11 points of the headwind, maintain our profitability I think sets us up well to deliver leverage in 2016 if we're able to see any kind of decent stable conditions and revenue growth.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
Okay. And is Micropross – is this business – do they sell software?
Are they selling the tool, the complete equipment? And is this kind of modular based?
Alexander M. Davern - COO, CFO, and Executive Vice President
They have a very complete solution for these two – for test in these two areas of NFC and wireless charging. They do have a modular architecture and we see ways that we'll be able to leverage that going forward.
Obviously, it's a hardware and software solution, but the primary value is in their software capability.
Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker)
I see. Okay.
Great. Thank you very much.
Alexander M. Davern - COO, CFO, and Executive Vice President
No problem.
Operator
Thank you. We have a follow-up question from Patrick Newton with Stifel.
Your line is now open. Please go ahead.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Yeah. Thank you.
I guess, two more from me. Alec, you talked about guiding under the assumption that global PMI will continue to weaken.
I was wondering if you could provide us an expectation of what PMI will track to during the quarter that you've built your assumptions around?
Alexander M. Davern - COO, CFO, and Executive Vice President
Yeah. Sure.
I think what I actually said is that we expect it to continue to be weak. So we're assuming it stays relatively weak in this range.
Not to state the obvious and I know some of the analysts on the call who've been following the company for a long time have responded to that. If it weakens significantly from here, we would expect to probably be below the midpoint.
If it recovers from here, we probably expect to be above.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
And thanks for that, Alec. On the R&D side, that's one area that I guess two quarters in a row we've actually seen year-over-year declines.
It's a metric that on an absolute basis you've held relatively steady now for almost four years. Is that the area that we should expect to see the most incremental operating leverage potential from a top line perspective given the very aggressive investments from the 2009 through 2012 timeframe, or should we start to see R&D on an absolute basis pick up?
Alexander M. Davern - COO, CFO, and Executive Vice President
We've talked about this before obviously, so just to say it again, our long-term model for R&D as a percentage of revenue is to be at 16%. We did raise it considerably for a number of years for specific competitive and market reasons of products we wanted to bring to market.
Our long-term intention certainly is to bring that down over time back towards our long-term model.
Patrick Newton - Stifel, Nicolaus & Co., Inc.
Great. Thank you for taking my questions.
Alexander M. Davern - COO, CFO, and Executive Vice President
Thanks, Patrick.
Operator
Thank you. Our final question comes from the line of Kristen Owen with Oppenheimer.
Your line is now open. Please go ahead.
Kristen Owen - Oppenheimer & Co., Inc. (Broker)
Great. Thanks for taking my question.
This is Kristen in for Holden Lewis. Just wanted to add on to the operating margin discussion.
You've briefly talked about the 18% plus or minus goal. Given what you're seeing today with your global PMI expectations and the O&G spending headwinds that you've mentioned, is there anything else in the market that you're seeing today that would make that 18% goal more or less difficult to achieve?
Alexander M. Davern - COO, CFO, and Executive Vice President
Kristen, a good question. I would put it that the headwinds that we faced this year from significant currency and our large customer energy, these things are really timing factors.
They have slowed down effectively our march to achieve our operating goals, but they don't change the intent. And I don't think long-term they really change the ultimate attractiveness of this market for us as we look at it.
So we remain committed to those goals going forward. And obviously we've shared with investors our leverage intent for 2016 relative to a set of potential revenue scenarios, and we remain committed to that strategy.
Kristen Owen - Oppenheimer & Co., Inc. (Broker)
Okay. Great.
Thank you. And then if you could just touch on the impact of pricing in the quarter.
I know that you raised prices back in April, was that meaningful to the quarter?
Alexander M. Davern - COO, CFO, and Executive Vice President
When you look at where our intent or our goal as we talked about pricing was in response to shift in exchange rates, and our strategy is try to – we have about a 50% in natural hedge and we try to offset somewhere close to the remaining 50% un-hedged, if at all possible. And it's one of those great mysteries.
You know what price you change was really difficult to tell the net impact. So I would say it has helped us to offset the currency impact, but certainly not completely by any manner.
And I think one way to look at our effectiveness in this is to track our ability to maintain our gross margins over a long period of time.
James J. Truchard - President, CEO, and Cofounder
One other aspect is that it takes a while, because you have agreements with customers. So that will delay the impact.
Kristen Owen - Oppenheimer & Co., Inc. (Broker)
Okay. Great.
Thank you so much.
Alexander M. Davern - COO, CFO, and Executive Vice President
Thank you very much. If we have no other questions, I'd just like to again mention we'll be at the Stifel Conference in Chicago on November 12 and the NASDAQ Conference in London on December 1 and we look forward to seeing you there.
Operator
There are no further questions. I would now like to turn the call back over to Alec Davern for final remarks.
Alexander M. Davern - COO, CFO, and Executive Vice President
Thank you, and have a good day.
Operator
Ladies and gentlemen, this does conclude today's program. You may all disconnect.
Everybody have a wonderful day.