Market Overview

National Instruments Reports Record Revenue and Record Net Income for a Second Quarter

Share:

Value of orders up 11 percent year over year in the second quarter

Q2 2018 Highlights

  • Revenue of $341 million, up 7 percent year over year
  • GAAP gross margin of 76 percent
  • Non-GAAP gross margin of 78 percent
  • Fully diluted GAAP EPS of $0.23 and fully diluted non-GAAP EPS of $0.34
  • GAAP net income of $31 million, up 23 percent year over year
  • Record Non-GAAP net income of $45 million, up 49 percent year over year
  • EBITDA of $51 million
  • Cash and short-term investments of $428 million as of June 30, 2018

H1 2018 Highlights

  • Revenue of $653 million, up 6 percent year over year
  • GAAP net income up 28 percent year over year through first six months
    of 2018
  • Non-GAAP net income up 47 percent year over year through first six
    months of 2018

National Instruments (NASDAQ:NATI) today announced Q2 2018 revenue of
$341 million, up 7 percent year over year.

In Q2 2018, the value of the company's total orders was up 11 percent
year over year; orders under $20,000 were up 6 percent year over year;
and orders over $20,000 were up 16 percent year over year.

GAAP net income for Q2 was $31 million, with fully diluted earnings per
share (EPS) of $0.23, and non-GAAP net income was $45 million, with
non-GAAP fully diluted EPS of $0.34. EBITDA, or Earnings Before
Interest, Taxes, Depreciation and Amortization, was $51 million for Q2.

In Q2, GAAP gross margin was 76 percent and non-GAAP gross margin was 78
percent. Total GAAP operating expenses were $222 million, up 7 percent
year over year. Total non-GAAP operating expenses were $212 million, up
2 percent year over year. GAAP operating margin was 11 percent in Q2,
with GAAP operating income of $37 million, up 29 percent year over year.
Non-GAAP operating margin was 16 percent in Q2, with non-GAAP operating
income of $55 million, up 52 percent year over year. Through the first
six months of 2018, GAAP operating expenses were $431 million, up 5
percent year over year, and non-GAAP operating expenses were $418
million, up 2 percent year over year. GAAP operating income through the
first six months of the year was $65 million, up 28 percent year over
year, and non-GAAP operating income was $94 million, up 46 percent year
over year.

"We have made tremendous progress toward our profitability goal over the
last 18 months. I am proud of what our team has accomplished," said Alex
Davern, NI president and CEO. "Looking forward we plan to continue to
align our investments and our business behind our new Core Strategic
Vision with the goal of driving improved revenue growth while
maintaining the discipline needed to hit our long-term operating model."

Karen Rapp, NI CFO, said, "We had great performance in the first half of
2018. I am encouraged by our focus on growth and profitability. We
remain committed to our operating model that we shared at our investor
conference on May 22, 2018 and the leverage it provides. National
Instruments is focused on gaining market share and delivering structural
excellence in our operating profitability."

As of June 30, 2018, NI had $428 million in cash and short-term
investments. During the second quarter, NI paid $30 million in
dividends. The NI Board of Directors approved a quarterly dividend of
$0.23 per share payable on Sept. 4, 2018, to stockholders of record on
Aug. 13, 2018.

Geographic revenue in U.S. dollar terms for Q2 2018 compared with Q2
2017 was up 7 percent in the Americas, up 5 percent in APAC and up 9
percent in EMEIA. The impact of foreign currency exchange had a positive
impact in Q2. Historical revenue from these three regions can be found
on NI's investor website at ni.com/nati.

The company's non-GAAP results exclude the impact of stock-based
compensation, amortization of acquisition-related intangibles,
acquisition-related transaction costs, restructuring charges, and
capitalization and amortization of internally developed software costs.
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 $325 million to
$355 million, which would be a new Q3 record at the midpoint. The
company currently expects that GAAP fully diluted EPS will be in the
range of $0.20 to $0.34 for Q3, with non-GAAP fully diluted EPS expected
to be in the range of $0.32 to $0.46.

NI has not completed its accounting for the tax effects of the Tax Cuts
and Jobs Act (the "Tax Act"). NI previously made a reasonable estimate
of the effects of the Tax Act and expects to finalize its analysis in Q3
2018. NI's guidance does not include any estimate related to the
finalization of this calculation.

Non-GAAP Presentation

In the quarter ended June 30, 2018, NI began moving toward more frequent
releases for many of its software products. Specifically, for many of
its software development projects, NI started applying agile development
methodologies, which are characterized by a more dynamic development
process with more frequent and iterative revisions to a product
release's features and functions as the software is being developed. Due
to the shorter development cycle and focus on rapid production
associated with agile development, NI expects that for a significant
majority of its software development projects the costs incurred
subsequent to the achievement of technological feasibility will be
immaterial in future periods and it expects to record significantly less
capitalized software development costs than under its historical
software development approaches. NI also expects amortization of
previously capitalized software development costs to steadily decline as
previously capitalized software development costs become fully amortized
over the next four years.

As a result, beginning with its non-GAAP metrics for the three months
ended June 30, 2018, NI will exclude the net effects of capitalization
and amortization of software development costs from its non-GAAP
operating results, along with its previously excluded non-GAAP items,
and will provide a reconciliation of such non-GAAP results to its GAAP
results. NI believes these changes will be useful to investors as they
will provide greater comparability between its R&D spend in future
periods. NI will also make available on its website its historical
non-GAAP results, excluding the effects of software capitalization and
amortization together with other applicable non-GAAP adjustments, for
the fiscal quarters ended March 31, 2005 through June 30, 2018. No
changes are being made to NI's previously reported GAAP results.

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 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
and six months ended June 30, 2018 and 2017, on a GAAP and non-GAAP
basis. NI is also providing guidance on its non-GAAP fully diluted EPS.

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, restructuring charges, and
capitalization and amortization of internally developed software costs
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 and six
months ended June 30, 2018 and 2017. 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.

Conference Call Information and Availability of Presentation Materials

Interested parties can listen to the Q2 2018 earnings conference call
with NI management today, July 26, at 4:00 p.m. CT at ni.com/call.
Replay information is available by calling (855) 212-2361, confirmation
code 1498595, shortly after the call through August 2 at 10:00 p.m. CT
or by visiting the company's website at ni.com/call. Presentation
materials referred to on the conference call can be found at ni.com/nati.

Forward-Looking Statements

This release contains "forward-looking statements" including statements
regarding tremendous progress toward our profitability goal, plan to
continue to align our investments and our business behind our new Core
Strategic Vision with the goal of driving improved revenue growth while
maintaining the discipline needed to hit our long term operating model,
being encouraged by our focus on growth and profitability, remaining
committed to our operating model shared at our investor conference on
May 22, 2018 and the leverage it provides, being focused on gaining
market share and delivering structural excellence in our operating
profitability, expecting Q3 revenue to be in the range of $325 million
to $355 million, expecting that GAAP fully diluted EPS will be in the
range of $0.20 to $0.34 for Q3, with non-GAAP fully diluted EPS expected
to be in the range of $0.32 to $0.46, and expecting to finalize its
analysis of the effects of the Tax Act in Q3 2018. 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 large customers, 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 or the impact of the Tax Act. Actual results may differ materially
from the expected results.

The company directs readers to its Form 10-K for the year ended Dec. 31,
2017, its Form 10-Q for the quarter ended March 31, 2018 and the other
documents it files with the SEC for other risks associated with the
company's future performance.

About NI

NI (ni.com) empowers engineers and scientists with a software-defined
platform that incorporates modular hardware and an expansive ecosystem.
This proven approach puts users firmly in control of defining what they
need to accelerate their system design within test, measurement and
control. NI's solution helps build high-performance systems that exceed
requirements, quickly adapt to change and ultimately improve the world.
(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,
2018 2017
(unaudited)
 
Assets
Current assets:
Cash and cash equivalents $ 217,619

$

290,164
Short-term investments 210,804 121,888
Accounts receivable, net 249,910 248,825
Inventories, net 193,417 184,592
Prepaid expenses and other current assets   56,740     48,621  
Total current assets 928,490 894,090
 
Property and equipment, net 249,834 249,715
Goodwill 263,796 266,783
Intangible assets, net 121,270 123,293
Other long-term assets   30,349     32,553  
Total assets $ 1,593,739  

$

1,566,434  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 52,769

$

49,733
Accrued compensation 43,200 43,309
Deferred revenue - current 125,451 120,638
Other current liabilities 14,795 23,782
Other taxes payable   32,013     31,793  
Total current liabilities 268,228 269,255
 
 
Deferred income taxes 37,381 33,609
Liability for uncertain tax positions 10,938 10,158
Income tax payable - long-term 74,015 81,515
Deferred revenue - long-term 31,550 33,742
Other long-term liabilities   5,949     10,134  
Total liabilities   428,061     438,413  
 
Stockholders' equity:
Preferred stock
Common stock 1,322 1,310
Additional paid-in capital 864,314 829,979
Retained earnings 316,607 313,241
Accumulated other comprehensive loss   (16,565 )   (16,509 )
Total stockholders' equity   1,165,678     1,128,021  
Total liabilities and stockholders' equity $ 1,593,739   $ 1,566,434  
 
 
National Instruments
Condensed Consolidated Statements of Income
(in thousands, except per share data, unaudited)
             
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018     2017
 
Net sales:
Product $ 306,780 $ 289,817 $ 587,139 $ 561,328
Software maintenance   34,229     28,792     65,767     57,386  
Total net sales 341,009 318,609 652,906 618,714
 
Cost of sales:
Product 79,806 79,153 152,122 154,349
Software maintenance   2,353     3,307     4,560     4,635  
Total cost of sales 82,159 82,460 156,682 158,984
       
Gross profit   258,850     236,149     496,224     459,730  
75.9 % 74.1 % 76.0 % 74.3 %
Operating expenses:
Sales and marketing 127,138 124,414 247,255 241,674
Research and development 66,908 56,913 128,751 115,175
General and administrative   27,892     26,191     55,170     51,933  
Total operating expenses   221,938     207,518     431,176     408,782  
 
Operating income 36,912 28,631 65,048 50,948
10.8 % 9.0 % 10.0 % 8.2 %
Other income (expense):
Interest income 1,290 509 2,305 852
Net foreign exchange gain (loss) (2,105 ) 447 (1,126 ) 529
Other (loss) income, net   (1,095 )   (235 )   (1,613 )   197  
 
Income before income taxes 35,002 29,352 64,614 52,526
 
Provision for income taxes   3,948     4,197     9,292     9,223  
 
Net income $ 31,054   $ 25,155   $ 55,322   $ 43,303  
 
Basic earnings per share $ 0.24   $ 0.19   $ 0.42   $ 0.33  
Diluted earnings per share $ 0.23   $ 0.19   $ 0.42   $ 0.33  
 
Weighted average shares outstanding -
basic 131,877 130,197 131,504 129,820
diluted 133,054 131,117 132,838 130,619
 
Dividends declared per share $ 0.23 $ 0.21 $ 0.46 $ 0.42
 
 
National Instruments
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
   
Six Months Ended June 30,
2018     2017
 
Cash flow from operating activities:
Net income $ 55,322

$

43,303

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 35,098 35,915
Stock-based compensation 17,936 13,726
Deferred income taxes 1,766 (875 )
Net change in operating assets and liabilities   (11,270 )   (7,284 )
Net cash provided by operating activities   98,852     84,785  
 
Cash flow from investing activities:
Capital expenditures (19,764 ) (15,727 )
Capitalization of internally developed software (11,344 ) (24,816 )
Additions to other intangibles (3,936 ) (1,124 )
Purchases of short-term investments (137,275 ) (52,807 )
Sales and maturities of short-term investments   47,634     21,017  
Net cash used by investing activities   (124,685 )   (73,457 )
 
Cash flow from financing activities:
Proceeds from issuance of common stock 16,622 15,407
Dividends paid   (60,575 )   (54,595 )
Net cash used by financing activities   (43,953 )   (39,188 )
 
Impact of changes in exchange rates on cash (2,759 ) 5,727
 
Net change in cash and cash equivalents (72,545 ) (22,133 )
Cash and cash equivalents at beginning of period   290,164     285,283  
Cash and cash equivalents at end of period $ 217,619  

$

263,150

 
 
 
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, capitalization and amortization of internally developed
software costs, and restructuring charges that were recorded in the
line items indicated below (unaudited) (in thousands)
             
 
Three Months Ended Six Months Ended
June 30, June 30,
 
2018     2017 2018 2017
Stock-based compensation
Cost of sales $ 846 $ 650 $ 1,571 $ 1,226
Sales and marketing 3,617 2,884 6,956 5,509
Research and development 3,255 2,170 5,773 4,224
General and administrative 2,013 1,620 3,636 2,844
Provision for income taxes   (2,955 )   (3,344 )   (4,663 )   (5,020 )
Total $ 6,776  

$

3,980  

$

13,273  

$

8,783  
 
Amortization of acquisition intangibles
Cost of sales $ 846 $ 1,556 $ 1,747 $ 3,146
Sales and marketing 533 486 1,070 964
Research and development 28 267 56 531
Provision for income taxes   (178 )   (556 )   (370 )   (1,110 )
Total $ 1,229  

$

1,753  

$

2,503  

$

3,531  
 
Acquisition transaction costs, restructuring charges, and other
Cost of sales $ $ 574 $ 29 $ 909
Sales and marketing 3,033 4,024 4,678 6,399
Research and development 893 1,182 1,103 1,581
General and administrative 553 419 1,165 596
Other (income) loss, net 709 709
Provision for income taxes   (1,630 )   (1,870 )   (2,183 )   (2,934 )
Total $ 3,558   $ 4,329   $ 5,501   $ 6,551  
 
Capitalization and amortization of internally developed software
costs
Cost of sales $ 6,494 $ 5,196 $ 12,324 $ 10,176
Research and development (3,676 ) (13,192 ) (11,343 ) (24,816 )
Provision for income taxes   (592 )   2,799     (206 )   5,124  
Total $ 2,226   $ (5,197 ) $ 775   $ (9,516 )
 
 
National Instruments
Reconciliation of GAAP to Non-GAAP Measures
(in thousands, unaudited)
                 
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
 
Reconciliation of Gross Profit to Non-GAAP Gross Profit
Gross profit, as reported $ 258,850

$

236,149

$

496,224

$

459,730

Stock-based compensation 846 650 1,571 1,226
Amortization of acquisition intangibles 846 1,556 1,747 3,146
Acquisition transaction costs and restructuring charges 0 574 29 909
Amortization of internally developed software costs   6,494     5,196     12,324     10,176  
Non-GAAP gross profit $ 267,036  

$

244,125

 

$

511,895

 

$

475,187

 
Non-GAAP gross margin 78.3 % 76.6 % 78.4 % 76.8 %
 
Reconciliation of Operating Expenses to Non-GAAP Operating
Expenses
Operating expenses, as reported $ 221,938

$

207,518

$

431,176

$

408,782

Stock-based compensation (8,885 ) (6,674 ) (16,365 ) (12,577 )
Amortization of acquisition intangibles (561 ) (753 ) (1,126 ) (1,495 )
Acquisition transaction costs and restructuring charges (4,479 ) (5,625 ) (6,946 ) (8,576 )
Capitalization of internally developed software costs   3,676     13,192     11,343     24,816  
Non-GAAP operating expenses $ 211,689  

$

207,658

 

$

418,082

 

$

410,950

 
 
Reconciliation of Operating Income to Non-GAAP Operating Income
Operating income, as reported $ 36,912

$

28,631

$

65,048

$

50,948

Stock-based compensation 9,731 7,324 17,936 13,803
Amortization of acquisition intangibles 1,407 2,309 2,873 4,641
Acquisition transaction costs and restructuring charges 4,479 6,199 6,975 9,485
Net (capitalization) and amortization of internally developed
software costs
  2,818     (7,996 )   981     (14,640 )
Non-GAAP operating income $ 55,347  

$

36,467

 

$

93,813

 

$

64,237

 
Non-GAAP operating margin 16.2 % 11.4 % 14.4 % 10.4 %
 
Reconciliation of Income before income taxes to Non-GAAP Income
before income taxes
Income before income taxes, as reported $ 35,002

$

29,352

$

64,614

$

52,526

Stock-based compensation 9,731 7,324 17,936 13,803
Amortization of acquisition intangibles 1,407 2,309 2,873 4,641
Acquisition transaction costs and restructuring charges 5,188 6,199 7,684 9,485
Net (capitalization) amortization of internally developed software
costs
  2,818     (7,996 )   981     (14,640 )
Non-GAAP income before income taxes $ 54,146  

$

37,188

 

$

94,088

 

$

65,815

 
 
Reconciliation of Provision for income taxes to Non-GAAP
Provision for income taxes
Provision for income taxes, as reported $ 3,948

$

4,197

$

9,292

$

9,223

Stock-based compensation 2,955 3,344 4,663 5,020
Amortization of acquisition intangibles 178 556 370 1,110
Acquisition transaction costs, restructuring charges, and other 1,630 1,870 2,183 2,934
Net (capitalization) amortization of internally developed software
costs
  592     (2,799 )   206     (5,124 )
Non-GAAP provision for income taxes $ 9,303  

$

7,168

 

$

16,714

 

$

13,163

 
 
 
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,
2018 2017 2018 2017
 
Net income, as reported $ 31,054 $ 25,155 $ 55,322 $ 43,303
Adjustments to reconcile net income to non-GAAP net income:
Stock-based compensation, net of tax effect 6,776 3,980 13,273 8,783
Amortization of acquisition intangibles, net of tax effect 1,229 1,753 2,503 3,531
Acquisition transaction costs, restructuring, and other, net of tax
effect
3,558

 

4,329 5,501 6,551
Net (capitalization)/amortization of internally developed software
costs, net of tax
  2,226   (5,197 )   775   (9,516 )
Non-GAAP net income $ 44,843 $ 30,020   $ 77,374 $ 52,652  
 
Basic EPS, as reported $ 0.24 $ 0.19 $ 0.42 $ 0.33
Adjustment to reconcile basic EPS to non-GAAP
basic EPS:
Impact of stock-based compensation, net of tax effect 0.05 0.03 0.10 0.07
Impact of amortization of acquisition intangibles, net of tax effect 0.01 0.02 0.03
Impact of acquisition transaction costs, restructuring, and other,
net of tax effect
0.03 0.04 0.04 0.05
Impact of (capitalization)/amortization of internally developed
software costs, net
  0.02   (0.04 )   0.01   (0.07 )
Non-GAAP basic EPS $ 0.34 $ 0.23   $ 0.59 $ 0.41  
 
 
Diluted EPS, as reported $ 0.23 $ 0.19 $ 0.42 $ 0.33
Adjustment to reconcile diluted EPS to non-GAAP diluted EPS
Impact of stock-based compensation, net of tax effect 0.05 0.03 0.10 0.07
Impact of amortization of acquisition intangibles, net of tax effect 0.01 0.01 0.02 0.03
Impact of acquisition transaction costs, restructuring, and other,
net of tax effect
0.03 0.04 0.04 0.05
Impact of (capitalization)/amortization of internally developed
software costs, net of tax effect
  0.02   (0.04 )     (0.08 )
Non-GAAP diluted EPS $ 0.34 $ 0.23   $ 0.58 $ 0.40  
 
Weighted average shares outstanding -
Basic   131,877   130,197     131,504   129,820  
Diluted   133,054   131,117     132,838   130,619  
 
 
National Instruments
Reconciliation of Net Income to EBITDA
(in thousands, unaudited)
                 
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Net income, as reported $ 31,054 $ 25,155 $ 55,322 $ 43,303
Adjustments to reconcile net income to EBITDA:
Interest income, net (1,253 ) (313 ) (2,180 ) (399 )
Tax expense 3,948 4,197 9,292 9,223
Depreciation and amortization   17,662     17,246     35,098     35,915  
EBITDA $ 51,411   $ 46,285   $ 97,532   $ 88,042  
Weighted average shares outstanding - Diluted 133,054 131,117 132,838 130,619
 
 
Reconciliation of GAAP to Non-GAAP EPS Guidance
(unaudited)
    Three months ended
September 30, 2018
   
Low High
GAAP Diluted EPS, guidance $ 0.20 $ 0.34
Adjustment to reconcile diluted EPS to non-GAAP
diluted EPS:
Impact of stock-based compensation, net of tax effect 0.06 0.06
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
0.02 0.02
Impact of capitalization/amortization of software development costs,
net of tax effect
  0.03   0.03
Non-GAAP Diluted EPS, guidance $ 0.32 $ 0.46
 

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