National Instruments Starts Turning the Corner

Businesses that serve the industrial sector are prone to cyclical ups and downs, and National Instruments (NASDAQ: NATI) has faced plenty of those business cycles in its history. The provider of testing and diagnostic tools for industrial, scientific, and engineering applications has gone through some tough times over the past year, and coming into Thursday's third-quarter financial report, National Instruments investors were hoping for just modest gains in sales and flat earnings.

What National Instruments did, instead, was to produce substantial growth in net income, and its future outlook generated optimism that the worst might be over for the company. Let's take a closer look at National Instruments and what could be next for the testing company going forward.

Image source: National Instruments.

How National Instruments turned things around

National Instruments' third-quarter results reveal some encouraging signs of a turnaround. Revenue grew 2.2%, to $306.4 million, which was slightly higher than the $305 million in sales that most investors were expecting. On the bottom line, National Instruments fared even better, with net income rising almost 6%, to $24.5 million. After allowing for some one-time items, adjusted earnings of $0.25 per share were $0.07 per share higher than the consensus forecast among those following the stock.

Taking a closer look at National Instruments' results, the trend of currency-related headwinds continued during the quarter. National Instruments said that foreign-currency exchange effects cost the company 3 percentage points of revenue growth. In addition, the company's largest customer produced slightly less revenue than it did in the third quarter of 2015, weighing on overall sales. Yet apart from that customer, orders above $100,000 were up 34%, and orders between $20,000 and $100,000 were higher by 2%, offsetting a 3% drop in orders below the $20,000 mark.

The businesses in National Instruments' two main segments showed some contrast. The key product segment saw sales rise 2.5%, and lower costs of sales helped boost gross margin figures. Software maintenance revenue, however, fell about 1%, and that held back overall revenue growth slightly.

Moreover, operating expenses rose by more than 5%, with research and development making up most of the rise. That pulled down operating income, and it took a sizable reduction in provisions for income taxes to produce growth on the bottom line.

Again, National Instruments had its strongest performance in the Asia-Pacific region, which saw 12% gains in sales. The Americas showed a solid 3% gain, but Europe, the Middle East, India, and Africa suffered a 6% decline in sales.

CEO James Truchard still thinks that National Instruments has what it takes to produce growth in the long run. "Over the past decade," the CEO said, "we have made the long-term strategic investments necessary to make NI a company built to last." Truchard also noted that strong product offerings and progress in key areas of the industry have National Instruments well-positioned for the future.

What's ahead for National Instruments?

The future looks even brighter for National Instruments in the eyes of some of its executives. Chief Operating Officer Alex Davern noted that he was "encouraged by our order growth this quarter and believe that the strong growth in orders over $100,000 reflects improving confidence among our larger customers."

National Instruments' guidance for the fourth quarter was quite strong. The company expects that revenue will fall within a range of $323 million to $353 million, and adjusted earnings should come in between $0.31 and $0.45 per share. Current predictions among investors put sales fairly close to the middle of the revenue guidance, but the earnings guidance would dramatically exceed current expectations for the bottom line.

Given how long National Instruments has had to deal with sluggish economic conditions, it's about time for the company to benefit from a reversal of those past trends. National Instruments isn't out of the woods just yet, but some favorable signs suggest that a turnaround could be in the works for the testing-equipment maker, and could continue to take shape for the rest of 2016 and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends National Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.