NATI National Instruments Corporation

Net Income up 49% for First Half of 2017

Q2 2017 Highlights

• Revenue of $319 million, up 4 percent year over year with core revenue up 7 percent year over year
• GAAP gross margin of 74 percent
• Non-GAAP gross margin of 75 percent
• Fully diluted GAAP EPS of $0.19 and fully diluted non-GAAP EPS of $0.27
• GAAP net income of $25 million
• Non-GAAP net income of $35 million, a record for a second quarter
• EBITDA of $46 million
• Cash and short-term investments of $368 million as of June 30, 2017

National Instruments (Nasdaq: NATI) today announced Q2 2017 revenue of $319 million, up 4 percent year over year with core revenue up 7 percent year over year. The company’s definition of core revenue is GAAP revenue excluding the impact of NI’s largest customer and the impact of foreign currency exchange. A reconciliation of the year over year change in GAAP revenue to the year over year change in core revenue is included with this news release.

In Q2 2017, NI received $12 million in orders from its largest customer compared with $18 million in orders from this customer in Q2 2016. Excluding NI’s largest customer, the value of the company’s total orders was up 8 percent year over year for the quarter; orders under $20,000 were flat year over year; orders between $20,000 and $100,000 were up 1 percent year over year; and orders above $100,000 were up 42 percent year over year.

GAAP net income for Q2 was $25 million, with fully diluted earnings per share (EPS) of $0.19, and non-GAAP net income was $35 million, a record for a second quarter, with non-GAAP fully diluted EPS of $0.27. Included in NI’s GAAP net income for Q2 is $4 million related to restructuring charges. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, was $46 million for Q2.

In Q2, GAAP gross margin was 74 percent and non-GAAP gross margin was 75 percent. Total GAAP operating expenses were $208 million, up 3 percent year over year. Total non-GAAP operating expenses were flat year over year at $194 million. GAAP operating margin was 9 percent in Q2, with GAAP operating income of $29 million, up 5 percent year over year. Non-GAAP operating margin was 14 percent in Q2, with non-GAAP operating income of $44 million, up 15 percent year over year.

“I am pleased with our Q2 performance and execution as we continue to drive toward our revenue and profitability goals with record revenue for a second quarter and 26% year over year non-GAAP net income growth for the first half of 2017,” said Alex Davern, NI president and CEO. “We believe alignment of our product and channel investments toward the growth opportunity in 5G communications, semiconductor test, the connected vehicle, and the Industrial Internet of Things continues to move our platform closer to our users’ challenges, which increases our impact within these applications.”

Karen Rapp, NI CFO, said, “We are encouraged by the strong order growth and improved trends in the industrial economy. Our leadership team is focused on executing to the updated leverage model shared at our recent investor day. We are going to do this through deliberate decision making and discipline in managing our expenses. We believe this focus will keep us on the right path as we strive to meet both our growth and profitability goals this year and in 2018.”

Geographic revenue in U.S. dollar terms for Q2 2017 compared with Q2 2016 was up 6 percent in the Americas, down 1 percent in APAC and up 6 percent in EMEIA. Excluding the impact of foreign currency exchange, revenue was up 6 percent in the Americas, flat in APAC and up 10 percent in EMEIA. Historical revenue from these three regions can be found on NI’s investor website at www.ni.com/nati.

As of June 30, 2017, NI had $368 million in cash and short-term investments. During the second quarter, NI paid $27 million in dividends. The NI Board of Directors approved a quarterly dividend of $0.21 per share payable on Sept. 5, 2017, to stockholders of record on Aug. 14, 2017.

The company’s non-GAAP results exclude the impact of stock-based compensation, amortization of acquisition-related intangibles, acquisition-related transaction costs, taxes levied on the transfer of acquired intellectual property, foreign exchange loss on acquisitions, and restructuring charges. Reconciliations of the company’s GAAP and non-GAAP results are included as part of this news release.

Guidance

NI currently expects Q3 revenue to be in the range of $304 million to $334 million, which would be a new Q3 record at the midpoint. Based on current exchange rates, the company expects that the impact of foreign exchange on dollar revenue will be minimal in Q3. The company currently expects that GAAP fully diluted EPS will be in the range of $0.16 to $0.30 for Q3, with non-GAAP fully diluted EPS expected to be in the range of $0.22 to $0.36. Included in the company’s Q3 2017 GAAP EPS guidance is approximately $1 million of restructuring charges. For the full year, NI estimates the restructuring charges impacting net income to be approximately $7 million to $8 million. For 2017, NI estimates its non-GAAP effective tax rate to be approximately 21 percent.

Non-GAAP Presentation

In addition to disclosing results determined in accordance with GAAP, NI discloses certain non-GAAP operating results and non-GAAP information that exclude certain charges. In this news release, the company has presented its year over year change in core revenue, gross profit, gross margin, operating expenses, operating income, operating margin, income before income taxes, provision for income taxes, net income and basic and fully diluted EPS for the three-month and six-month periods ending June 30, 2017 and 2016, on a GAAP and non-GAAP basis. NI is also providing guidance on its non-GAAP fully diluted EPS and expected effective tax rate. The company is not able to provide guidance on its GAAP tax rate or a related reconciliation without unreasonable efforts since its future GAAP tax rate depends on its future stock price and related information that is not currently available.

When presenting non-GAAP information, the company includes a reconciliation of the non-GAAP results to the GAAP results. Management believes that including the non-GAAP results assists investors in assessing the company’s operational performance and its performance relative to its competitors. The company presents these non-GAAP results as a complement to results provided in accordance with GAAP, and these results should not be regarded as a substitute for GAAP. Management uses these non-GAAP measures to manage and assess the profitability and performance of its business and does not consider stock-based compensation expense, amortization of acquisition-related intangibles, acquisition-related transaction costs, taxes levied on the transfer of acquired intellectual property, foreign exchange loss on acquisitions, and restructuring charges in managing its operations. Specifically, management uses non-GAAP measures to plan and forecast future periods; to establish operational goals; to compare with its business plan and individual operating budgets; to measure management performance for the purposes of executive compensation, including payments to be made under bonus plans; to assist the public in measuring the company’s performance relative to the company’s long-term public performance goals; to allocate resources; and, relative to the company’s historical financial performance, to enable comparability between periods. Management also considers such non-GAAP results to be an important supplemental measure of its performance.

This news release discloses the company’s EBITDA for the three-month and six-month periods ending June 30, 2017 and 2016. The company believes that including the EBITDA results assists investors in assessing the company’s operational performance relative to its competitors. A reconciliation of EBITDA to GAAP net income is included with this news release. This news release also discloses the year over year change in the company's core revenue for the three-month period ending June 30, 2017. The company believes that including its year over year change in core revenue assists investors in assessing the company’s operational performance. A reconciliation of its year over year change in GAAP revenue to its year over year change in core revenue is included with this news release.

Conference Call Information and Availability of Presentation Materials

Interested parties can listen to the Q2 2017 earnings conference call with NI management today, July 27, at 4:00 p.m. CT at www.ni.com/call. Replay information is available by calling (855) 859-2056, confirmation code 41457332, shortly after the call through July 30 at 11:59 p.m. CT or by visiting the company’s website at www.ni.com/call. Presentation materials referred to on the conference call can be found at www.ni.com/nati.

Forward-Looking Statements

This release contains “forward-looking statements” including statements regarding driving towards our revenue and profitability goals, belief that alignment of our product and channel investments will move our platform closer to our users’ challenges which increases our impact within these applications, being encouraged by the strong order growth and improved trends in the industrial economy, being focused on executing to the updated leverage model, deliberate decision making and discipline in managing our expenses, that this focus will keep us on the right path as we strive to meet both our growth and profitability goals this year and in 2018, expecting Q3 revenue to be in the range of $304 million to $334 million, that the impact of foreign exchange on dollar revenue will be minimal in Q3, expecting GAAP fully diluted EPS will be in the range of $0.16 to $0.30 for Q3, with non-GAAP fully diluted EPS expected to be in the range of $0.22 to $0.36, expecting about $1 million of restructuring charges in Q3, that restructuring charges impacting net income will be approximately $7 million to $8 million and that non-GAAP effective tax rate to be approximately 21 percent for 2017. These statements are subject to a number of risks and uncertainties, including the risk of adverse changes or fluctuations in the global economy, foreign exchange fluctuations, fluctuations in demand for NI products including orders from NI’s largest customer, component shortages, delays in the release of new products, the company’s ability to effectively manage its operating expenses, manufacturing inefficiencies and the level of capacity utilization, the impact of any recent or future acquisitions by NI, expense overruns, adverse effects of price changes or effective tax rates. Actual results may differ materially from the expected results.

The company directs readers to its Form 10-K for the year ended Dec. 31, 2016, its Form 10-Q for the quarter ended March 31, 2017 and the other documents it files with the SEC for other risks associated with the company’s future performance.

About NI

Since 1976, NI (www.ni.com) has made it possible for engineers and scientists to solve the world’s greatest engineering challenges with powerful platform-based systems that accelerate productivity and drive rapid innovation. Customers from a wide variety of industries – from healthcare to automotive and from consumer electronics to particle physics – use NI’s integrated hardware and software platform to improve the world we live in. (NATI-F)

National Instruments, NI and ni.com are trademarks of National Instruments. Other product and company names listed are trademarks or trade names of their respective companies.

    National Instruments Condensed Consolidated Balance Sheets (in thousands)         June 30, December 31, 2017 2016 (unaudited)   Assets Current assets: Cash and cash equivalents $ 263,150 $ 285,283 Short-term investments 105,284 73,117 Accounts receivable, net 230,958 228,686 Inventories, net 186,155 193,608 Prepaid expenses and other current assets   52,568         53,953   Total current assets 838,115 834,647   Property and equipment, net 256,761 260,456 Goodwill 261,411 253,197 Intangible assets, net 120,327 108,663 Other long-term assets   28,700         39,601   Total assets $ 1,505,314       $ 1,496,564     Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 54,214 $ 48,800 Accrued compensation 36,672 27,743 Deferred revenue - current 120,212 115,577 Accrued expenses and other liabilities 15,341 32,997 Other taxes payable   28,743         34,958   Total current liabilities 255,182 260,075   Long-term debt 25,000 25,000 Deferred income taxes 35,561 45,386 Liability for uncertain tax positions 12,438 11,719 Deferred revenue - long-term 31,665 29,752 Other long-term liabilities   7,420         10,413   Total liabilities   367,266         382,345     Stockholders' equity: Preferred stock - - Common stock 1,305 1,292 Additional paid-in capital 800,774 771,346 Retained earnings 359,088 376,202 Accumulated other comprehensive loss   (23,119 )       (34,621 ) Total stockholders' equity   1,138,048         1,114,219   Total liabilities and stockholders' equity $ 1,505,314       $ 1,496,564       National Instruments Condensed Consolidated Statements of Income (in thousands, except per share data, unaudited)             Three Months Ended Six Months Ended June 30, June 30, 2017 2016 2017     2016   Net sales: Product $ 289,817 $ 278,530 $ 561,328 $ 537,963 Software maintenance   28,792     27,575     57,386     55,319   Total net sales 318,609 306,105 618,714 593,282   Cost of sales: Product 79,153 75,194 154,349 149,404 Software maintenance   3,307     2,314     4,635     4,250   Total cost of sales 82,460 77,508 158,984 153,654         Gross profit   236,149     228,597     459,730     439,628   74 % 75 % 74 % 74 % Operating expenses: Sales and marketing 124,414 116,361 241,674 229,568 Research and development 56,913 59,839 115,175 119,179 General and administrative   26,191     25,130     51,933     49,770   Total operating expenses   207,518     201,330     408,782     398,517     Operating income 28,631 27,267 50,948 41,111 9 % 9 % 8 % 7 % Other income (expense): Interest income 509 258 852 511 Net foreign exchange gain (loss) 447 (1,285 ) 529 (711 ) Other (expense) income, net   (235 )   53     197     (2,353 )   Income before income taxes 29,352 26,293 52,526 38,558   Provision for income taxes   4,197     6,493     9,223     9,460     Net income $ 25,155   $ 19,800   $ 43,303   $ 29,098     Basic earnings per share $ 0.19   $ 0.15   $ 0.33   $ 0.23   Diluted earnings per share $ 0.19   $ 0.15   $ 0.33   $ 0.23     Weighted average shares outstanding - basic 130,197 128,282 129,820 127,938 diluted 131,117 128,746 130,619 128,429   Dividends declared per share $ 0.21 $ 0.20 $ 0.42 $ 0.40     National Instruments Condensed Consolidated Statements of Cash Flows (in thousands, unaudited)     Six Months Ended June 30, 2017     2016   Cash flow from operating activities: Net income $ 43,303 $ 29,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,915 38,217 Stock-based compensation 13,726 13,497 Tax expense/(benefit) expense from deferred income taxes (875 ) (2,927 ) Net change in operating assets and liabilities   (7,284 )   2,659   Net cash provided by operating activities   84,785     80,544     Cash flow from investing activities: Capital expenditures (15,727 ) (20,970 ) Capitalization of internally developed software (24,816 ) (15,406 ) Additions to other intangibles (1,124 ) (689 ) Acquisitions, net of cash received - (549 ) Purchases of short-term investments (52,807 ) (5,008 ) Sales and maturities of short-term investments   21,017     31,734   Net cash used by investing activities   (73,457 )   (10,888 )   Cash flow from financing activities: Proceeds from revolving line of credit - 15,000 Principal payments on revolving line of credit - (12,000 ) Proceeds from issuance of common stock 15,407 14,830 Repurchase of common stock - (5,635 ) Dividends paid (54,595 ) (51,273 ) Tax benefit from stock option plans   -     -   Net cash used by financing activities   (39,188 )   (39,078 )   Impact of changes in exchange rates on cash 5,727 3,554   Net change in cash and cash equivalents (22,133 ) 34,132 Cash and cash equivalents at beginning of period   285,283     251,129   Cash and cash equivalents at end of period $ 263,150   $ 285,261      

The following tables provide details with respect to the amount of GAAP charges related to stock-based compensation, amortization of acquisition-related intangibles, acquisition-related transaction costs, restructuring charges, foreign exchange loss on acquisitions and taxes levied on the transfer of acquired intellectual property that were recorded in the line items indicated below (unaudited) (in thousands)

      Three Months Ended     Six Months Ended June 30, June 30,         2017 2016 2017 2016 Stock-based compensation Cost of sales $ 650 $ 539 $ 1,226 $ 1,087 Sales and marketing 2,884 2,851 5,509 5,787 Research and development 2,170 2,369 4,224 4,718 General and administrative   1,620     935     2,844     1,843   Provision for income taxes   (3,344 )   (2,016 )   (5,020 )   (4,110 ) Total $ 3,980   $ 4,678   $ 8,783   $ 9,325     Amortization of acquisition intangibles Cost of sales $ 1,556 $ 2,980 $ 3,146 $ 6,022 Sales and marketing 486 820 964 1,639 Research and development 267 278 531 539 Other income, net   -     -     -     -   Provision for income taxes   (556 )   237     (1,110 )   458   Total $ 1,753   $ 4,315   $ 3,531   $ 8,658     Acquisition transaction costs, restructuring charges, and other Cost of sales $ 574 $ 74 $ 909 $ 179 Sales and marketing 4,024 42 6,399 99 Research and development 1,182 153 1,581 411 General and administrative 419 190 596 220 Foreign exchange gain (loss) 1 - - - 94 Other income (loss), net2   -     -     -     2,475   Provision for income taxes   (1,870 )   (160 )   (2,934 )   (1,202 ) Total $ 4,329   $ 299   $ 6,551   $ 2,276     (1) Foreign exchange losses on acquisitions were $0 and $94 for the six month periods ended June 30, 2017 and 2016, respectively (2) Taxes levied on the transfer of acquired intellectual property were $0 and $2,475 for the six month periods ended June 30, 2017 and 2016, respectively     National Instruments Reconciliation of GAAP to Non-GAAP Measures (in thousands, unaudited)                 Three Months Ended Six Months Ended June 30, June 30, 2017 2016 2017 2016   Reconciliation of Gross Profit to Non-GAAP Gross Profit Gross profit, as reported $ 236,149 $ 228,597 $ 459,730 $ 439,628 Stock-based compensation 650 539 1,226 1,087 Amortization of acquisition intangibles 1,556 2,980 3,146 6,022 Acquisition transaction costs and restructuring charges   574     74     909     179   Non-GAAP gross profit $ 238,929   $ 232,190   $ 465,011   $ 446,916   Non-GAAP gross margin 75.0 % 75.9 % 75.2 % 75.3 %   Reconciliation of Operating Expenses to Non-GAAP Operating Expenses Operating expenses, as reported $ 207,518 $ 201,330 $ 408,782 $ 398,517 Stock-based compensation (6,674 ) (6,155 ) (12,577 ) (12,348 ) Amortization of acquisition intangibles (753 ) (1,098 ) (1,495 ) (2,178 ) Acquisition transaction costs and restructuring charges   (5,625 )   (385 )   (8,576 )   (730 ) Non-GAAP operating expenses $ 194,466   $ 193,692   $ 386,134   $ 383,261     Reconciliation of Operating Income to Non-GAAP Operating Income Operating income, as reported $ 28,631 $ 27,267 $ 50,948 $ 41,111 Stock-based compensation 7,324 6,694 13,803 13,435 Amortization of acquisition intangibles 2,309 4,078 4,641 8,200 Acquisition transaction costs and restructuring charges   6,199     459     9,485     909   Non-GAAP operating income $ 44,463   $ 38,498   $ 78,877   $ 63,655   Non-GAAP operating margin 14.0 % 12.6 % 12.7 % 10.7 %   Reconciliation of Income before income taxes to Non-GAAP Income before income taxes Income before income taxes, as reported $ 29,352 $ 26,293 $ 52,526 $ 38,558 Stock-based compensation 7,324 6,694 13,803 13,435 Amortization of acquisition intangibles 2,309 4,078 4,641 8,200 Acquisition transaction costs and restructuring charges 6,199 459 9,485 909 Foreign exchange loss on acquisitions - - - 94 Taxes levied on transfer of acquired intellectual property   -     -     -     2,474   Non-GAAP income before income taxes $ 45,184   $ 37,524   $ 80,455   $ 63,670     Reconciliation of Provision for income taxes to Non-GAAP Provision for income taxes Provision for income taxes, as reported $ 4,197 $ 6,493 $ 9,223 $ 9,460 Stock-based compensation 3,344 2,016 5,020 4,110 Amortization of acquisition intangibles 556 (237 ) 1,110 (458 ) Acquisition transaction costs, restructuring charges, and other   1,870     160     2,934     1,202   Non-GAAP provision for income taxes $ 9,967   $ 8,432   $ 18,287   $ 14,314       Reconciliation of GAAP Net Income, Basic EPS and Diluted EPS to Non-GAAP Net Income, Non-GAAP Basic EPS and Non-GAAP Diluted EPS (in thousands, except per share data, unaudited)                 Three Months Ended Six Months Ended June 30, June 30, 2017 2016 2017 2016   Net income, as reported $ 25,155 $ 19,800 $ 43,303 $ 29,098 Adjustments to reconcile net income to non-GAAP net income: Stock-based compensation, net of tax effect 3,980 4,678 8,783 9,325 Amortization of acquisition intangibles, net of tax effect 1,753 4,315 3,531 8,658

Acquisition transaction costs, restructuring, and other, net of tax effect

  4,329   299   6,551   2,276 Non-GAAP net income

$

35,217

$ 29,092 $ 62,168 $ 49,357   Basic EPS, as reported $ 0.19 $ 0.15 $ 0.33 $ 0.23

Adjustment to reconcile basic EPS to non-GAAP basic EPS:

Impact of stock-based compensation, net of tax effect 0.04 0.04 0.07 0.07 Impact of amortization of acquisition intangibles, net of tax effect 0.01 0.03 0.03 0.07 Impact of acquisition transaction costs, restructuring, and other, net of tax effect   0.03   0.01   0.05   0.02 Non-GAAP basic EPS $ 0.27 $ 0.23 $ 0.48 $ 0.39     Diluted EPS, as reported $ 0.19 $ 0.15 $ 0.33 $ 0.23 Adjustment to reconcile diluted EPS to non-GAAP diluted EPS Impact of stock-based compensation, net of tax effect 0.04 0.04 0.07 0.07 Impact of amortization of acquisition intangibles, net of tax effect 0.01 0.03 0.03 0.07 Impact of acquisition transaction costs, restructuring, and other, net of tax effect   0.03   0.01   0.05   0.01 Non-GAAP diluted EPS $ 0.27 $ 0.23 $ 0.48 $ 0.38   Weighted average shares outstanding - Basic   130,197   128,282   129,820   127,938 Diluted   131,117   128,746   130,619   128,429     National Instruments Reconciliation of Net Income to EBITDA (in thousands, unaudited)                 Three Months Ended Six Months Ended June 30, June 30, 2017     2016 2017     2016 Net income, as reported $ 25,155 $ 19,800 $ 43,303 $ 29,098 Adjustments to reconcile net income to EBITDA: Interest income (313 ) (78 ) (399 ) (141 ) Tax expense 4,197 6,493 9,223 9,460 Depreciation and amortization   17,246     18,785     35,915     38,217   EBITDA $ 46,285   $ 45,000   $ 88,042   $ 76,634   Weighted average shares outstanding - Diluted   131,117     128,746     130,619     128,429       Reconciliation of GAAP to Non-GAAP EPS Guidance (unaudited)   Three months ended September 30, 2017   Low High GAAP Fully Diluted EPS, guidance $ 0.16 $ 0.30

Adjustment to reconcile diluted EPS to non-GAAP diluted EPS:

Impact of stock-based compensation, net of tax effect 0.04 0.04 Impact of amortization of acquisition intangibles and acquisition accounting adjustments, net of tax effect 0.01 0.01 Impact of acquisition transaction costs, restructuring, and other, net of tax effect   0.01     0.01   Non-GAAP diluted EPS, guidance

$

0.22

  $ 0.36       National Instruments Reconciliation of GAAP Revenue Growth to Core Revenue Growth (unaudited)     Three Months Ended, June 30, 2017 YoY GAAP revenue growth, as reported 4.1 % Effect of excluding our current largest customer 1.5 % YoY GAAP revenue growth, excluding our largest customer 5.6 % Effect of excluding the impact of foreign currency exchange 1.4 % YoY Core revenue growth 7.0 %

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National InstrumentsMarissa Vidaurri, 512-683-6873Investor Relations