National Instruments (NATI) 8-K National Instruments Reports Record Revenue and Record Net Income for a Second Quarter

Contact:	Marissa Vidaurri
	Investor Relations
	(512) 683-6873

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

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

AUSTIN, Texas - July 26, 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