National Instruments Suffers From the Industrial Slowdown

Image: National Instruments.

Giving industrial companies the testing and diagnostic tools they need is National Instruments' core business, and the company serves a vital role in helping customers in the industrial, scientific, and engineering sectors meet those needs. Yet when those customers experience a cyclical downturn, it can have an impact on National Instruments as well. Coming into Thursday's first-quarter financial report, National Instruments investors were prepared for modest declines in revenue and adjusted net income, and for the most part, the company was able to meet the challenges of a tough environment and look forward to improving conditions in the future. Let's look more closely at how National Instruments fared and whether it can make good on its potential.

The latest from National InstrumentsNational Instruments' first-quarter results showed the impact of the sluggish economic environment. Revenue did indeed fall slightly from year-ago levels, posting a 1% decline to $287 million. That was only slightly less than most investors had expected. On the bottom line, National Instruments produced adjusted net income of $20.3 million, which was down 11%, but the resulting adjusted earnings of $0.16 per share was a penny better than the consensus forecast among investors.

Looking more closely at the numbers, some of National Instruments' results were more positive. Core revenue climbed 3.4%, which excludes the impact of currency fluctuations as well as the order flow from the company's largest customer. During the quarter, that large customer doubled its orders to $6 million, but apart from that, total order growth was down 1%. Mid-sized orders between $20,000 and $100,000 were up 2% from the year-ago quarter, but both smaller orders and large-sized orders fell 2%.

From a segment perspective, National Instruments' businesses performed roughly in line with each other. Core product sales fell 0.8%, while software maintenance revenue was down 0.7%. Gross margins fell a tenth of a point to 73.5%, and a substantial gain in sales and marketing and general overhead expenses ate into operating income. Acquisition-related expenses hit National Instruments' GAAP results harder than what showed up in its adjusted results.

The Asia-Pacific region was the saving grace for National Instruments, with revenue climbing 11% even including a seven-percentage point hit due to currency impacts. Sales fell 6% in the Americas and 3% in the Europe/Middle East/Africa segment, but on a currency-neutral basis, Europe picked up 6%.

CEO James Truchard put the results in perspective. "While it's clear that the industrial economy, especially in the U.S., experienced a slowdown in Q1," Truchard said, "we believe the diversity of our business and the solid execution of our sales force allowed us to continue to gain market share." The CEO also pointed to its cost-containment discipline as a vital step in keeping the company moving in the right direction.

Can National Instruments bounce back?The future will hopefully be better for National Instruments, and the company is optimistic. As Truchard said, the company will keep "working to ensure that our highly differentiated platform and broad ecosystem continue to help engineers and scientists address their test, measurement, and control needs." COO Alex Davern also weighed in, saying that "in light of the uncertain outlook for the industrial economy, we plan to leverage the strategic investments we have already made while managing expenses carefully."

Yet investors can't really be certain exactly how things will work out. Even the company's own guidance had extremely broad ranges, reflecting the difficulty in forecasting in the current environment. National Instruments gave guidance for the second quarter for revenue of $287 million to $323 million, and adjusted earnings should come in between $0.16 and $0.32 per share. Although those ranges include the consensus forecasts for both figures, they're so wide as to make drawing conclusions from them difficult at best.

National Instruments stock has been stuck in a fairly tight range over the past year, and nothing in the report suggests that the holding pattern won't continue. Investors need to wait until the industrial economy recovers before they can expect National Instruments to break out and start performing as well as they hope.

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