2020-03-03-NATI - OQ-RBC Capital Markets-National Instruments Corp - Prepping For The Test Initiati... - 87712556

RBC Capital Markets, LLC
Robert Muller, CFA (Analyst) Michael Murray (Senior

(212) 905-5816 Associate)
robert.muller@rbccm.com (212) 548-3117
michael.murray@rbccm.com
Sector: IT Hardware
March 3, 2020
Sector Perform
National Instruments Corp NASDAQ: NATI; USD 40.31
Prepping for the Test; Initiating Coverage at Sector Price Target USD 45.00
Perform Scenario Analysis*
Our view: We believe NATI is well positioned to benefit from growth in Downside Current Price Upside
5G testing as well as secular automotive shifts into electric vehicles and Scenario Price Target Scenario
advanced driver-assistance systems (ADAS), all of which we expect to 36.00 40.30 45.00 50.00
provide multi-year growth opportunities. That said, we believe the current 8% 14% 27%
valuation reflects the growth opportunity sets and the potential uplift *Implied Total Returns
from market share gains. Initiating coverage at Sector Perform with a $45 Key Statistics
price target. Shares O/S (MM): 131.9 Market Cap (MM): 5,316
Dividend: 1.04 Yield: 2.6%
Key points: Avg. Daily Volume: 721,640
Riding the waves. We believe that 5G represents NATI’s best growth RBC Estimates
avenue, as we expect a multi-year opportunity set with sub-6 GHz and FY Dec 2019A 2020E 2021E 2022E
mmWave testing likely to ramp at separate times. mmWave, in particular, Revenue 1,353.2 1,401.6 1,484.2 1,568.9
offers the potential to ramp beginning in late 2020 with a multi-year EPS, Ops Diluted 1.64 1.66 1.80 1.92
runway. In addition, we expect mmWave technology to prompt new P/E 24.6x 24.3x 22.4x 21.0x
equipment purchases given the testing needs of the new spectrum. As Revenue Q1 Q2 Q3 Q4
the use cases behind 5G continue to grow, and as new spectrum comes 2019 311.1A 334.2A 340.4A 367.5A
into use, we expect increasing testing needs, which should benefit NATI. 2020 322.1E 346.1E 352.7E 380.7E
Overall, we expect this segment to account for ~32% of NATI’s growth over 2021 341.0E 366.4E 373.6E 403.2E
EPS, Ops Diluted
the following three years. 2019 0.30A 0.35A 0.44A 0.56A
2020 0.29E 0.37E 0.46E 0.55E
It’s electric! NATI is poised to benefit from the shift toward both electric 2021 0.32E 0.39E 0.49E 0.59E
vehicles and ADAS; however, the growth will likely come at the expense of All values in USD unless otherwise noted.
traditional combustion engine testing. Overall, we estimate that NATI will

need to grow its electric-testing business by ~25–30% in order to offset
declines from traditional autos, which may be aggressive. That said, we
expect ADAS (and autonomous vehicles longer-term) to require extensive
testing capabilities given the high-stakes nature of the product, which we
view positively for NATI.
Growth depends on market-share gains; portfolio at the whims of

macro, in our view. We estimate that ~20–40% of NATI’s growth targets
depend on the ability to take share from competitors. In addition, NATI’s
largest segment, Portfolio, accounts for >50% of its revenue and is highly
correlated with global macro conditions. We are more conservative in our
estimates and forecast Portfolio growth with only slight share gains. For
NATI overall, we attribute ~15% of our growth forecast to share gains and
anticipate the rest to be more closely tied to industry.
Initiating coverage at Sector Perform with $45 price target. We apply a

25x P/E multiple to our 2021 EPS estimate, which we believe adequately
reflects NATI’s growth and margin profile. Risks/pushback: (1) Market
share gains fail to materialize or, conversely, competitors take share. (2)
Macro pullback could constrain growth in NATI’s largest segment. (3)
Accelerated declines in traditional combustion engine market could more
than offset growth in electric/ADAS. (4) mmWave testing projections do
not materialize.
Disseminated: Mar 3, 2020 00:40ET; Produced: Mar 3, 2020 00:20ET Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Conflicts Disclosures, see Page 27.
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National Instruments Corporation
Target/Upside/Downside Scenarios Investment summary

Key considerations: (1) 5G is key to unlocking growth.
Exhibit 1: National Instruments Corporation
National Instruments stands to benefit tremendously from the
125 Weeks 11OCT17 - 02MAR20 growth in 5G. Given the different applications and industries
57
52
that it will affect, we believe 5G will drive growth for years.
UPSIDE
47
50.00
(2) Automotive evolution. Electrification of automotive and
TARGET 45.00
growth in autonomous technology are growth levers for NATI.
42
CURRENT 40.30 However, traditional transportation (combustion engines)
37
DOWNSIDE 36.00
declines will weigh on overall segment growth. (3) Macro
still driving majority of revenue. ~50% of NATI’s revenue
32 comes from its Portfolio segment, which comprises ~35,000
8m
6m
customers. This segment tends to ebb and flow with the
4m
2m Global Purchasing Managers Index (PMI), though there can be
2017 2018 2019 2020
O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M Mar 2021 deviation as systems-level business increases.
NATI US Rel. S&P 500 COMPOSITE MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target Potential catalysts
Price target/base case • Improvement in the broader economy, driving additional
We derive our base-case price target of $45 by applying a 25x growth in the Global PMI.
multiple to our CY21 non-GAAP diluted EPS estimate of $1.80. • Faster-than-anticipated ramp of mmWave testing
Our target multiple is slightly higher than NATI’s peers, which equipment.
in our view is justified by NATI’s growth opportunities in 5G • Market share gain in the sub-6 GHz automated validation
and electrification/autonomy of automotive. and production market.
• Acceleration in growth of ADAS.
Upside scenario • Acceleration of electrification of automotive, offsetting
We derive our upside price of $50 by applying a 28x multiple declines in traditional transportation.
to our CY21 non-GAAP diluted EPS estimate. This scenario
assumes that mmWave ramps more quickly than anticipated Risks to our thesis
and growth in electrification/autonomy offsets the decline in • Macroeconomic slowdown leading to a pause/reduction in
traditional automotive at a greater pace than in our base case. Portfolio business.
• Declines in traditional automotive testing offset
Downside scenario transportation growth areas.
We derive our downside price of $36 by applying a 20x • NATI’s mmWave projections do not materialize.
multiple to our CY21 non-GAAP diluted EPS estimate. This • Increased competition in sub-6 GHz and mmWave causes
scenario assumes a broad macro decrease in PMI, continued NATI to miss revenue growth targets.
decline of traditional automotive, and delays in 5G mmWave • Reduced government (A&D) spending.
technology adoption by service providers.
March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 2

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Key questions
Our view
1. What are NATI’s 5G opportunities? We believe that 5G will be a multi-year cycle for NATI as sub-6 GHz and mmWave
ramps should occur at separate times. NATI believes the sub-6 GHz automated
validation and production ramp is currently under way and will continue through
2020. The sub-6 GHz does not present the best opportunity for 5G, however, as
customers can refit and reuse the equipment they used for previous standards.
NATI management believes that the mmWave automated validation and
production ramp will be even larger, starting in late 2020 and lasting beyond 2022.
In addition, we view mmWave as a bigger opportunity, as it should drive
customers to purchase new equipment to handle the new spectrum.
2. How is the electrification of National Instruments has provided services to OEMs and Tier 1 automotive
automotive/increase in autonomy suppliers for many decades. The shift from traditional combustion engines to
affecting NATI? electric is a challenge for all the companies in this space, including NATI. NATI is
working with its traditional customers to pivot and provide more electric test
systems. In addition to this, the advancements of automation in Advanced Driver-
Assistance Systems (ADAS) and the increase in the number of Engine Control Units
(ECUs) per vehicle should be a growth driver. We estimate that NATI
transportation revenues are close to 70/30 traditional/growth areas (electric &
ADAS), though it could be as high as 80/20. NATI is targeting the high-growth
pieces, but the decline in traditional automotive will weigh down the segment.
We estimate that NATI will need to achieve a 25–30% CAGR through 2022 to
offset a 3% decline in traditional automotive in order to achieve a 10% growth
rate, the low end of its target 10–12%.
3. Why is systems-level business National Instruments uses orders larger than $20k as a proxy for systems-level
growth important? business. This segment has grown at a 10% CAGR for the last 10 years, largely
driving NATI’s revenue CAGR of ~5% during that same period. Management also
believes that this segment is less correlated with the PMI compared to the <$20k
segment. A few years ago, NATI changed its sales orientation from geography-
based to customer-based, which we believe likely played a role in increasing
systems-level business, as we think that the companies were then more likely to
implement NATI’s equipment across the entire organization rather than for
specific use-cases. Systems-level business is now ~60% of NATI’s revenue, after
being 50% a few years ago and 40% 7–9 years ago. Management hopes that in the
next five years systems-level business will represent 80% of NATI’s revenue.
4. Is macro still the primary driver? As 2019 may indicate, we believe so. While there are high-growth areas (5G and
electrification of auto), we believe that ~50–55% of NATI’s revenue (Portfolio) is
still tied to the overall macro environment and an additional ~15% is tied to the
defense budget (Aero/Def/Gov). NATI is working to limit this dependence by
shifting toward more systems-level (>$20k) business. However, we note that, as
this segment grows, it will still likely follow the larger economy. We use PMI as
the primary leading indicator for the Portfolio BU, which comprises >50% of
revenue. Beyond the macro, market share gains will be a key driver behind
whether NATI can achieve its overall growth targets.

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Table of contents
Key investment considerations...................................................................................... 5
5G and Semiconductors represent best growth driver, in our view ............................... 6
Automotive evolution a double-edged sword ............................................................... 9
Portfolio and A&D and Government closely tied to macro environment ..................... 13
Valuation ..................................................................................................................... 16
Financials .................................................................................................................... 17
Risks to rating and price target .................................................................................... 21
Company overview ...................................................................................................... 22
Management team ...................................................................................................... 25

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Key investment considerations

We are initiating coverage of National Instruments Corporation (NATI) with a Sector Perform
rating and a $45 price target. We base our rating on National Instruments’ expanding growth
opportunities driven by 5G, primarily in the automated validation and production process for
sub-6 Ghz and mmWave, and continued growth in electrification of automotive, partially offset
by the dependence on the macro environment and market share gains.
 5G and Semiconductors a primary growth avenue. National Instruments stands to

benefit from the growth in 5G. Given the different applications and industries that the
technology will affect, we foresee a multi-year growth opportunity. The segment that
we expect to benefit the most is Semiconductors, which NATI has grown at ~18% CAGR
for the last three years (2016–18) while the market has grown at only a 6% CAGR. We
expect this outsized growth to continue as sub-6 GHz and mmWave enter the
automated validation and production process, which is where NATI receives 85% of its
total segment revenues.
 Automotive evolution a double-edged sword. Electrification of automotive has allowed
NATI to grow the Transportation segment at a 9% CAGR for the last three years (2016–18)
while the market has grown at only a 3% CAGR. Growth in automation should also benefit
NATI as advanced driver-assisted systems (ADAS) become commonplace and increase in
complexity. We believe that this trend will continue as customers become accustomed to
new features that enhance safety and the driving experience. Safety regulations in the US
and Europe are mandating that all vehicles be equipped with autonomous emergency-
braking systems and forward-collision warning systems by 2020, which could help boost
near-term results.
 Macro likely to drive the majority of portfolio. Approximately 50–55% of NATI’s
revenues are in its “Portfolio” business, which comprises ~35,000 customers. Because
the segment has such a diverse customer base, it tends to ebb and flow with the Global
Purchasing Managers Index (PMI). In addition, ~50% of this segment’s revenue is from
orders <$20k, or non-systems business. NATI targets growth of 5–6% for this segment,
but it has lost share in the last three years, growing at a CAGR of 2% while the market
grew 3%. NATI’s growth within its Portfolio business will be highly dependent on share
gains, in our view, which leads us to temper our forecasts. We estimate that ~20–40%
of NATI’s growth target depends on gaining market share, which we believe may be
overly optimistic.
What could lead us to reconsider our rating, that is, upgrade to Outperform:
 Operating margin expansion that exceeds our expectations. NATI has an operating
margin target of 18% through a cycle. Given that it achieved 19% in a tougher FY19, we
are optimistic that NATI can hit this goal. If NATI can achieve and maintain higher margins
than this, we may revise our estimates and valuation multiple higher.
 Semi and Transportation exceed expectations. While we model in growth in both
Semiconductors (10%) and Transportation (9%), these BUs could see upside if adoption of
5G/ADAS exceeds our expectations. With NATI’s high-margin profile, an increase in
revenue has a larger effect on the bottom line.
 Aero/Def/Gov and Portfolio uptick. These two BUs represent ~65–70% of NATI’s
revenues but do not have an obvious catalyst to drive growth, in our view. If these BUs
can even modestly outperform the market, this would have an outsized impact on our
estimates.

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5G and Semiconductors represent best growth driver, in our view

We expect 5G to drive NATI’s Semiconductors segment growth, as it has in the past. Given the
different applications and industries that 5G will affect, we expect a multi-year growth horizon.
We expect to see the technology migrate to a number of different downstream markets as
new capabilities are discovered. For instance, automotive and IoT are industries that stand to
benefit in the next few years as 5G enables new applications, such as autonomous cars and
smart cities.
Exhibit 2: Semiconductor Growth Opportunity
Source: National Instruments’ 2019 NI Week Investor Presentation; Yole, Wood Mackenzie, Strategy Analytics, Frost and Sullivan, and NI estimates
After early work prototyping the standard, we are now seeing semiconductor technology
R&D, which enables 5G automated validation and production. Within this, the production
opportunity is larger for NATI than the validation opportunity, but NATI customers often use
NATI’s equipment for both. Instruments for validation feature analog and high-performance
computing capabilities while production equipment features STS (Semiconductor Test
Systems), which are factory-ready, commercial automated test equipment. We believe
there is value in streamlining the process by using National Instruments equipment when
moving from validation to production, which in turn should reduce time-to-market and
operational redundancies.
The 5G Test and Measurement market is broken down into two very different sub-categories:
Sub-6 GHz is more of an enhancement to existing standards and companies often do not
require new equipment. NATI customers can reuse hardware that they used for other
standards, helping legacy customers to meet their time and quality requirements more
quickly. Also included in this sub-segment are Wi-Fi, 4G-LTE, and some mid-band (C-Band
frequencies are 3.7–4.2 GHz for downlinks and 5.925–6.425 GHz for uplinks). This sub-segment
has been the primary driver of the Semiconductors segment’s growth.
Millimeter Wavelength (mmWave) is the larger opportunity for NATI, as it should drive a
reinvestment wave in validation, characterization, and production tests. NATI management
believes this market will be more spread out in time than other versions of the standard for a
variety of reasons, namely that it is new technology with more technical risk as well as all of
the different use cases for it. Given the variety of applications for which it can be used, NATI

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expects different deployment timing that will spread out the opportunity over many years.
NATI released its mmWave testing product in May 2019 and expects mmWave to begin
ramping in the second half of 2020. Management believes this is a ~couple hundred million
dollar total available market.
Exhibit 3: 5G Timeline and Deployment Expectations
Significant opportunities for NATI
Source: National Instruments’ 2019 NI Week Investor Presentation
Early-phase R&D is typically done manually (not automated) with box instruments. Traditional
radio frequency (RF) T&M companies typically see sizable revenue increases before automated
companies like National Instrument. Management has outlined, in the following exhibit, how
companies like Keysight, Fortive, and Rohde & Schwarz have tended to grow quickly in the
early stages of the wireless cycle, while National Instruments experiences more revenue
growth after these companies.
Exhibit 4: Test and Measure Market Share
Source: NI Week 2019 Investor Presentation
In 2019, Keysight Technologies and Fortive grew their revenues 11% and 13%, respectively.
We view the recent revenue strength of competitors positively, as we believe it demonstrates
strength in the overall market, which should drive near-term growth for NATI.
Semis: Current market conditions

The automation validation and production ramp for sub-6 GHz is currently under way, and
NATI reported that its Semiconductors segment saw high-single-digit growth during 2019 with

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Q4 growing double digits. The sub-6 GHz market opportunity is not as large because customers
can refit and reuse hardware from previous standards; however, we believe NATI should
continue to see some continued uplift in 2020 from sub-6 GHz. NATI’s growth in the sub-sector
occurred despite a difficult year for the semiconductor industry, with the market down low
double digits in orders.
We anticipate an uptick in revenue growth for the semiconductor sub-sector in the second half
of 2020 and 2021 as mmWave testing products begin to ramp. However, the exact timing
remains uncertain, with management noting that the Huawei restrictions and Intel’s exit from
the 5G modem business somewhat delayed the timeline.
Importantly, NATI’s mmWave Vector Signal Transceiver (mmWave testing equipment) uses
the same platform (same software and hardware) for both validation and production. By using
identical hardware for both processes, customers are able to reduce time-to-market and
overall cost. National Instruments’ open-sourced architecture is well suited for mmWave
because it has the ability to support additional mmWave bands when they become available.
NATI released the mmWave Vector Signal Transceiver in May 2019 and reports that its
reception by early adopters of the technology has been very strong.
Exhibit 5: Semiconductor Revenue
$80 20%
Management guidance: 10-15% CAGR
$70
18%
% of NATI total revenues

$60 Our estimates: 10% CAGR
Mgmt commentary:
18% CAGR (2016-2018) 16%
$ in millions
$50
$40 14%
$30
12%
$20
10%
$10
$0 8%
1Q16A 1Q17A 1Q18A 1Q19A 1Q20E 1Q21E 1Q22E
Semiconductor Revenue (RBCe) Semis as % of total (RBCe)
Source: RBC Capital Markets estimates

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Automotive evolution a double-edged sword

We are currently witnessing two major shifts within the automotive industry: (1) the transition
from combustion to electric engines (electrification of automotive); and (2) the increase in
autonomy. While there is overlap between these areas, we believe that each shift is taking
place independently of the other. We view these shifts as an overall net positive for NATI,
although we recognize that the decline in combustion engines is a near-term negative.
Exhibit 6: Transportation Growth Opportunity
Source: National Instruments’ 2019 NI Week Investor Presentation; Yole, Wood Mackenzie, Strategy Analytics, Frost and Sullivan, and NI estimates
Electrification of automotive. Vehicle manufacturers are transitioning away from combustion

engines to electric engines and have reduced their investments in traditional areas. In terms
of where we stand in the transition, NATI management believes there are “probably another
four years or so” to go. Many traditional car manufacturers have already announced when
they will produce their last engine or last combustion drivetrain. According to a recent
presentation by Aptiv, citing IHS, the total addressable market for high-voltage electric
powertrains is expected to grow at a 35% CAGR through 2022.
Exhibit 7: High-Voltage Electrification Addressable Market Growth
Source: Aptiv 4Q19 earnings presentations, IHS production data, and internal Aptiv CPV estimates

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Exhibit 8: Light-Vehicle Production Powertrain Mix
Source: Magna OEM Fleet Analysis December 2019, Magna 2020 Outlook (January 16, 2020)
Netting the growing electrification of automotive segment with the declining traditional
transportation segment, NATI was able to grow the Transportation segment at a 9% CAGR for
the last three years (2016–18) while the market grew at a 3% CAGR. Electrification of
automotive aligns with semiconductor companies such as Texas Instruments, Analog Devices,
and NXP Semiconductors, while traditional auto tends to follow the Auto PMI. As
electrification and advanced driver-assistance systems (ADAS) grow for NATI, we expect to see
more deviation from the auto PMI.
Exhibit 9: Global Light-Vehicle Sales Forecast
Source: LMC Automotive- Electrification, Global Hybrid & Electric Vehicle Forecast (January 2019)
Increase in autonomy. Customers are demanding that car manufacturers put more ADAS into
cars. These features include lane keeping, park assist, adaptive cruise control, emergency
braking, and many others (essentially level 1 and level 2 autonomous driving levels). We
believe that this trend will continue to grow as customers become accustomed to new features
that enhance safety and the driving experience. It is important to note that both the US and
EU are mandating that all vehicles be equipped with autonomous emergency-braking systems
and forward-collision warning systems by 2020.

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Exhibit 10: ADAS Increases Complexity for Customers
Growth of ADAS and ECUs has ramped in recent years due to breakthroughs in technology.
ADAS is extremely complex, allowing vehicles to essentially “think and react” in real-time. It
relies on multiple systems, such as automotive imaging, LIDAR, radar, image processing, and
computer vision, working together to determine which actions to take. According to a recent
Magna presentation, by 2025 only 23% of cars will not have any autonomy. Aptiv, citing its
internal analysis and BCG estimates, believes that the total addressable market for active
safety will grow at a 20% CAGR through 2022.
Exhibit 11: Autonomy Will Continue to Proliferate
Source: Magna OEM Fleet Analysis December 2019, Magna 2020 Outlook (January 16, 2020)
We believe that growth for NATI will accelerate further once we reach level 3 and level 4
autonomous driving, but we are likely years away and do not incorporate this into our
forecasted period (through 2022).
Traditional combustion declines may make growth targets difficult to achieve

Given the projected decline in traditional automotive, which we believe represents 70–80%
of NATI’s transportation segment, we view NATI’s transportation target as aggressive, albeit
achievable. We estimate that in order for NATI to hit its growth target of 10–12% CAGR,
assuming traditional auto declines at 3% and accounting for 70% of revenue today, NATI
would have to grow the other part of its automotive segment, electric and ADAS, at a 25–
30% CAGR. If we start at an 80% contribution from traditional, the required sub-segment
growth is even higher.

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Exhibit 12: Sensitivity Analysis Assuming 70/30 Split Between Traditional/Electric & ADAS
Tra di ti ona l a uto decl i ne % CAGR

8.8% (10%) (5%) (4%) (3%) (2%) (1%) 0%
20.0% 1.6% 4.3% 4.8% 5.4% 6.1% 6.7% 7.3%
Electric/ADAS growth
22.5% 3.3% 5.9% 6.4% 7.0% 7.6% 8.2% 8.8%
25.0% 5.1% 7.5% 8.1% 8.6% 9.2% 9.7% 10.3%
27.5% 6.9% 9.2% 9.8% 10.3% 10.8% 11.4% 11.9%
30.0% 8.8% 11.0% 11.5% 12.0% 12.5% 13.0% 13.6%
32.5% 10.7% 12.8% 13.3% 13.8% 14.3% 14.8% 15.3%
35.0% 12.7% 14.7% 15.1% 15.6% 16.1% 16.5% 17.0%
Note: Green represents a growth rate within or above management’s guidance of 10–12%; red represents a growth rate below management’s guidance
Exhibit 13: Sensitivity Analysis Assuming 80/20 Split Between Traditional/Electric & ADAS
Tra di ti ona l a uto decl i ne % CAGR

2.8% (10%) (5%) (4%) (3%) (2%) (1%) 0%
27.5% 1.3% 4.4% 5.0% 5.7% 6.4% 7.1% 7.8%
Electric/ADAS growth
30.0% 2.8% 5.7% 6.4% 7.0% 7.7% 8.4% 9.1%

32.5% 4.3% 7.1% 7.7% 8.4% 9.0% 9.7% 10.4%
35.0% 5.9% 8.6% 9.2% 9.8% 10.4% 11.0% 11.7%
37.5% 7.5% 10.1% 10.7% 11.3% 11.9% 12.5% 13.1%
40.0% 9.2% 11.7% 12.2% 12.8% 13.3% 13.9% 14.5%
42.5% 10.9% 13.3% 13.8% 14.3% 14.9% 15.4% 16.0%
Note: Green represents a growth rate within or above management’s guidance of 10–12%; red represents a growth rate below management’s guidance
We expect NATI to benefit from these secular trends within the automotive industry; however,
we temper our expectations slightly. That said, we still forecast robust segment growth of
~8.8% CAGR over the next three years.
Exhibit 14: Transportation Revenue
$80 Management guide: 10-12% CAGR 18%
$70 Our estimates: 9% CAGR 17%

Mgmt commentary:
% of NATI total revenues
$60 16%
9% CAGR (2016-2018)
$ in millions
$50 15%
$40 14%
$30 13%
$20 12%
$10 11%
$0 10%
1Q16A 1Q17A 1Q18A 1Q19A 1Q20E 1Q21E 1Q22E
Transportation Revenue (RBCe) Transportation as % of total (RBCe)

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Portfolio and A&D and Government closely tied to macro environment

Portfolio
Approximately 50–55% of NATI’s revenues are in its “Portfolio” business, which comprises
~35,000 customers. Because the segment has such a diverse customer base, it tends to ebb
and flow with Global PMI. In addition, 50% of this segment’s revenue is <$20k, or non-systems
business. NATI targets growth of 5–6% for Portfolio, but it has lost share in the last three years,
growing at a CAGR of 2% while the market grew 3%. Given the size of this segment, a small
increase in growth has an outsized effect on the company’s overall growth.
Exhibit 15: Portfolio Growth Opportunity
We see a few trends affecting this broad segment, such as IoT, data analytics, and 5G. Within
IoT, connectivity of wireless devices and integrating them into facilities increases in
importance. As the use cases for IoT grow, there should be an opportunity for automated
validation and production of new products that are developed. 5G should also help consumer
electronics, included in the Portfolio segment, reach high growth rates as the technology
begins to be implemented into handsets. Research and teaching, as well as maintenance and
monitoring, are also growth focus areas for NATI.

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Exhibit 16: Portfolio Revenue (RBC Estimates) vs. Global PMI
55 $200
RBC estimated Portfolio revenue

54 $190
53 $180
Global PMI index

52 $170
51 $160
50 $150
49 $140
48 $130
Jul-18
Jul-17
Jul-19
May-18
May-17
Nov-17
Nov-18
May-19
Nov-19
Jan-17
Mar-17
Sep-17
Jan-18
Mar-18
Sep-18
Jan-19
Mar-19
Sep-19
Jan-20
Portfolio revenue (right) PMI index (left)
Source: Factset, RBC Capital Markets estimates
Excluding the few areas of growth, we expect the rest of Portfolio to trend with the global PMI.
In 2019, management reported that the portfolio business was down mid-single digits.
Management cited the weaker global PMI as the primary reason for this performance but also
noted that we may be seeing stability in the market with orders up low-single digits for Q4.
While we are moderately positive on the macro given the Phase 1 trade deal and clarity on
Brexit, we believe the Presidential election could add to business uncertainty later in 2020 and
we note that ~40% of revenue is from Americas. In addition, there is uncertainty following the
outbreak of coronavirus, which we believe could hamper near-term business investment while
the situation sorts itself out.
Exhibit 17: NATI Share Price vs. Industrial Production Index*
$60 125
$55 123
121
$50
119
$45 117
$40 115
$35 113
111
$30
109
$25 107
$20 105
12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19
NATI share price (left) Industrial Production Index (right)
*Industrial Production Index (2010=100)

Source: Factset
Aerospace, Defense, and Government

The Aerospace, Defense, and Government segment has the least amount of influence on NATI
due to the size (~17% of revenues) and the growth rate (3% CAGR for the last three years vs.
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3% market growth over that same period). Interestingly, more than 60% of the revenues are
systems-level business. NATI plans to make major headway in this segment, targeting growth
rates of 6–9% vs. market growth of 3%.
Exhibit 18: Aero/Def/Gov Growth Opportunity
Source: National Instruments’ 2019 NI Week Investor Presentation; Deliotte, IHS Markit, US Department of Operational Test and Evaluation Annual Report,
and NI Assessments.
The areas of growth within this segment consist of Radio Frequency (RF), wireless, electronic
warfare, and other high-complexity applications with multiple measurements and frequencies.
The need for highly iterative development, long product lifecycles, and proprietary algorithms
in this space is well suited for NATI’s software-centric tools.
NATI considers LabVIEW, its graphical software tool, a differentiator in this field. It allows the
user to program the field-programmable gate array (FPGA) itself. The open software also
allows customers to program any custom protocols that they need. The PXI is an important
piece of equipment in this space. It is modular standard equipment by National Instruments
that is standardized across aerospace and defense, and management believes that many
government programs rely on it.
NATI reported that its Aerospace, Defense, and Government segment grew high-single digits
in 2019 and double digits in Q4. NATI believes that the diversity of applications and strength
of the platform were the reasons that it captured the uptick in defense spending that
occurred in 2019.

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Valuation
We derive our 12-month price target of $45, which supports our Sector Perform rating, by
applying a 25x multiple to our CY2021 EPS estimate of $1.80. Over the last several years,
NATI has typically traded between 33.1x and 42.3x and at an average of 37.7x, though this
varies significantly given the lack of analyst coverage. The NTM PE dropped significantly
following 4Q19 results, as analysts expect EPS to grow ~39% in 2020. We believe our
valuation is justified by the expanding growth opportunities driven by 5G, primarily in the
automated validation and production process for sub-6Ghz and mmWave, and continued
growth in electrification of automotive.
Exhibit 19: NATI Historical NTM Consensus P/E Multiple
53x
48x
43x
38x
33x
28x
23x
Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20
NATI NTM P/E Average = 37.6x -1 Std Dev = 32.8x +1 Std Dev = 42.4x
Source: RBC Capital Markets, FactSet
National Instruments trades at a premium to its closest peers Keysight Technologies,

Teradyne, and Fortive on a P/E multiple, though we believe the lack of analyst coverage for
NATI impacts comparability. We believe that NATI likely trades at a premium due to its high
gross margins (~77% vs. comp median and average of 59%) and revenue growth (FY21
consensus estimate 7.7% growth vs. comp median/average of 6.7%/7.3%). On an EV/EBITDA
basis, NATI trades in line with Fortive and slightly higher than Teradyne and Keysight.
Exhibit 20: National Instruments Comps

Price Current Market Cap P/E Multiple (consensus) EV/EBITDA Multiple (consensus) EPS Growth (consensus)
Ticker Company 03/02/2020 Yield ($ bn) 2018A 2019E 2020E 2021E 2018A 2019E 2020E 2021E 2020E 2021E 2019-2021 CAGR
NATI National Instruments Corp. $40.31 2.6% 5.3 34.7x 33.0x 24.0x 21.7x 20.5x 17.4x 15.0x 13.9x 37.7% 10.7% 23.5%
KEYS Keysight Technologies, Inc. $97.42 0.0% 18.3 27.9x 20.2x 17.9x 16.3x 26.1x 16.0x 14.2x 13.5x 13.0% 9.3% 11.1%
TER Teradyne, Inc. $60.49 0.7% 10.1 25.5x 21.2x 18.5x 16.4x 16.4x 15.2x 13.3x 12.1x 14.2% 12.9% 13.6%
FTV Fortive Corp. $70.65 0.4% 23.7 23.1x 20.3x 18.8x 17.3x 19.0x 17.4x 15.5x 14.7x 7.8% 8.6% 8.2%
6754-JP Anritsu Corp. $17.31 0.0% 2.4 90.3x 30.8x 26.0x 21.4x 16.8x 12.5x 10.9x 9.9x 18.4% 21.6% 20.0%
6857-JP Advantest Corp. $47.81 0.0% 9.5 51.3x 18.8x 29.9x 23.2x 15.3x 13.6x 12.4x 10.2x (37.2%) 28.9% (10.0%)
Average (excluding NATI) 0.2% 43.6x 22.2x 22.2x 18.9x 18.7x 15.0x 13.3x 12.1x 3.3% 16.3% 8.6%
Median (excluding NATI) 0.0% 27.9x 20.3x 18.8x 17.3x 16.8x 15.2x 13.3x 12.1x 13.0% 12.9% 11.1%
Source: RBC Capital Markets, FactSet

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Financials
RBC estimates vs. consensus
Exhibit 21: RBC Estimates vs. Consensus
FY2020E FY2021E
Consensus Revenue $1,418 $1,527
Y/Y Cha nge 4.8% 7.7%
RBC Revenue $1,402 $1,484
Y/Y Cha nge 3.6% 5.9%
Consensus Gross Income $1,086 $1,173

Y/Y Cha nge 3.4% 8.0%
Gros s Ma rgi n 76.6% 76.8%
RBC Gross Income $1,093 $1,158
Y/Y Cha nge 4.1% 5.9%
Gros s Ma rgi n 78.0% 78.0%
Consensus Operating Income $259 $284

Y/Y Cha nge 2.6% 9.9%
Opera ting Ma rgi n 18.2% 18.6%
RBC Operating Income $256 $275
Y/Y Cha nge 1.4% 7.5%
Opera ting Ma rgi n 18.2% 18.5%
Consensus Net Income $192 $219

Y/Y Cha nge (11.4%) 14.2%
Net Ma rgi n 13.5% 14.4%
RBC Net Income $217 $233
Y/Y Cha nge 0.4% 7.2%
Net Ma rgi n 15.5% 15.7%
Consensus EPS $1.68 $1.86

Y/Y Cha nge 2.5% 10.7%
RBC EPS $1.66 $1.80
Y/Y Cha nge 1.6% 7.9%
Source: RBC Capital Markets estimates, Bloomberg
National Instruments has a long-term goal of growing 4–7% more quickly than the market on
a five-year time frame while also delivering 18% non-GAAP operating margin through the
cycle.
Recurring revenue. Importantly, approximately 84% of purchases come from repeat buyers.
So even though these customers don’t have a subscription, they are purchasing new
equipment at a steady rate. Approximately 20% of total revenues are classified as software,
and half of these are subscriptions while the rest are perpetual. Enterprise agreements (EAs)
have a renewal rate exceeding 90%, signaling that NATI is seeing success in retaining these
customers.

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Exhibit 22: Systems-Level Business Driving Growth (RBC estimates Based on Company Reports)
400
350
300
Bookings in Millions (USD)
250
200
150
100
50
0
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19
Orders <$20k Orders >$20k
Source: Company reports, RBC Capital Markets estimates
NATI’s systems-level business continues to drive growth to the top-line. The systems-level
business is what has really allowed National Instruments to diverge from PMI, as the orders
<$20k generally move in line with the PMI. Systems-level business is now 60% of NATI’s
revenue, after being 50% a few years ago and 40% 7–9 years ago. Management expects that
in the next five years, systems-level business will represent 80% of NATI’s revenue.
Exhibit 23: Systems-Level Business Less Dependent on Market Growth
Looking at NATI’s sub-segments (Exhibit 24), we note that Semiconductors and Transportation
have largely carried the share gains, with Aero/Def and Portfolio lagging. Unsurprisingly, the
fastest-growing sub-segments are also skewed toward systems-level business.

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Exhibit 24: Industry Alignment

NI 2016-2018 Order Mix
Growth Goal Growth (% >$20k)
Semiconductor 10-15% 18% 85%
Transportation 10-12% 9% 65%
Aerospace, Defense, and Government 6-9% 3% 65%
Portfolio (all other industries) 5-6% 2% 50%
Source: RBC Capital Markets estimates, NI Week 2019 Investor Day Presentation
Management is looking to replicate Semis’ high growth through the reorganization of the
company into Business Units. This shift officially took place in early 2019, but the model started
in Semiconductors when customers began pulling in NATI to solve their other problems. The
customers saw that NATI’s capabilities could solve a different problem somewhere across their
organization. Semis and Transportation have been utilizing the Business Unit model the
longest and have shown the most growth. Management believes that growth will pick up in
the other sub-segments (Aero/Def/Gov and Portfolio) in time.
Margin analysis
We view strong gross margins as a testament to National Instrument’s software capabilities.
Despite many challenging macroeconomic environments, NATI’s gross margins have been
fairly consistent. Perhaps more importantly, as NATI has transitioned to more systems-level
business, the margins have actually increased despite investor concerns about customer
pricing power in larger deals.
Exhibit 25: Resilient Gross Margins
80%
Tech
78%
Bubble
76%
74%
72%
70% Global
Financial
68%
Crisis
66%
2010
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2011
2012
2013
2014
2015
2016
2017
2018
2019
Gross Margins %
NATI’s long-term goal is to achieve Non-GAAP operating margins of 18% through an economic
cycle. We view 2019 as a solid indicator of management’s ability to deliver on that goal, as it
achieved operating margins of 19% despite flattish revenue.

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Exhibit 26: Operating Margins
$300 20%
Tech Global
$250 Financial 18%
Bubble
Crisis
$200 16%
$ in millions $150 14%
$100 12%
$50 10%
$0 8%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Operating Income (left) Operating Margins (left) Target Margins
Source: Company reports and RBC Capital Markets estimates
Capital allocation
National Instruments has returned ~$1.5BN to shareholders since 2009 (through buybacks and
dividends) and has ~3MM shares remaining available for repurchase. Compared to National
Instruments’ ~$5.3BN in market cap, this represents a substantial return to shareholders. We
expect mid-single-digit dividend growth, with additional capital returns via buyback over the
coming years.
Exhibit 27: Capital Returned to Shareholders (FY16–22E)
$350 200%
180%
$300
160%
$250 140%
$ in millions
120%
$200
100%
$150
80%
$100 60%
40%
$50
20%
$0 0%
FY2016A FY2017A FY2018A FY2019A FY2020E FY2021E FY2022E
Dividends Share Buybacks % of FCF
Source: Company reports and RBC Capital Markets estimates

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Risks to rating and price target

The key risks to our rating, price target, and estimates include:
 Broad macroeconomic slowdown.
 Increased competition from traditional T&M competitors as they move into
automation systems.
 Presidential election uncertainty causing businesses to pause purchases.
 Declines in traditional automotive testing offset growth in electrification of vehicles.
 Increased competition in sub-6 GHz and mmWave causes NATI to miss revenue
growth targets.
 NATI’s Millimeter Wavelength projections do not materialize.

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Company overview
National Instruments Corp. designs and manufacturers test and measurement systems to
accelerate the research and development / production process. It provides a software-based
platform that automates many redundancies, reducing cost and time-to-market in the
validation and production testing of products. The company’s core strategic vision is to be the
leader in software-defined automated test and automated measurement systems.
Headquartered in Austin, Texas, the company has more than 7,000 employees worldwide.
Value proposition
NATI’s differentiated platform is a combination of software and modular hardware designed
with an open infrastructure that enables flexibility. The open platform allows customers to
define systems that are specifically needed in their testing, allowing them to accelerate
development and testing of new products. NATI’s software has interfaces for web and cloud
connectivity and integrates with Microsoft Visual Studio languages, The MathWorks, Inc.
MATLAB and Simulink software, and Python.
This open platform is critical to NATI’s sustained competitive advantage, offering distinct
advantages while being fundamentally different from other automated test and automated
measurement companies. Hundreds of thousands of active software developers build their IP
with NATI tools, while leveraging third-party ecosystems when required.
By using open-sourced software, customers are able to change and adjust their testing
approach. As new testing requirements occur, customers can seamlessly add a new software
routine to the test and essentially future-proof their systems.
Exhibit 28: “Software Stack” Competitive Barrier to Entry

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NATI prides itself on being a software company at heart. The software helps to drive hardware
sales from existing customers because the customers standardize their systems on it, which
increases switching costs. Management has expressed that strong software usage/adoption
gives it confidence in NATI’s long-term growth potential, more than any other metric.
Management has stated that accounts that use both hardware and software together
significantly outgrow accounts that use just hardware or just software. In short, increased
software usage makes a customer very sticky, in our view, and management believes this will
pay dividends in systems revenue down the road.
Automation is extremely important in T&M systems, as it can reduce costs and time-to-
market. For example, for development of a new silicon chip, the customer may run hundreds
of thousands of test cases to validate the performance of the silicon in different circumstances.
Having the ability to automate these tests is crucial in achieving a realistic time-to-market.
NATI achieves ~15% of revenue from Research, Design, and Simulation and ~85% from
Validation and Characterization, and Production Test.
Another critical component for customers is having a small footprint. Factory floor space is
very expensive and test systems have grown in size and complexity. National Instruments
offers zero-footprint testers, which allow the tester to fit within the handler without the need
for additional factory floor space. This allows customers more space to expand capacity
without being limited by T&M systems.
End markets
While NATI has only two reporting segments (Product and Software Maintenance), it focuses
on four major end-markets: Semiconductors, Transportation (Automotive),
Aerospace/Defense/Government, and Portfolio. Portfolio comprises the rest of the customers
(Academic, Consumer Electronics, Electrical Equipment, Energy, Other) and tends to grow with
the market. These end markets have different characteristics and growth opportunities
depending on technology disruptions / changing trends.
Exhibit 29: End-Market Exposure (Estimates)
~15%
~15%
~50-55%
~15%
Portfolio Semis Transportation Aero/Def/Gov

Change in sales structure

Two and a half years ago, NATI changed its sales channel orientation from geography-based to
account-based. This was a significant change for the company because it had used the
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geography-based orientation for more than three decades. As the company grew orders >$20k
and globalization continued, the geography-based orientation became a real constraint. With
the account-based orientation, each of the Tier 1 and 2 customers now has a single sales rep
to provide service across any geography. NATI management believes that we should continue
to see efficiencies in the coming years from the sales approach reconfiguration.
Exhibit 30: NATI Sales Channel Evolution
Services
National Instruments provides various levels of software maintenance services: standard
service program, Volume License Program (VLP), and Enterprise Agreements (EA). The VLP and
EAs receive account-level benefits designed to help effectively manage their software assets
and lower their total cost of ownership. Renewal rates for EA exceed 90%.
Industry alignment change

In addition to the change in sales orientation, at the start of 2019 National Instruments
implemented an industry-alignment change that organized the company into different
business units in order to better leverage industry trends, such as 5G and electrification of
automotive. NATI started this model with semiconductors and saw accelerated revenue
growth, increased market share, and higher profitability. This was because customers in that
area were pulling in NATI to solve their other problems (i.e., customers were replicating their
strategy across business units and could use NATI’s core capability).
Systems-level business is now 60% of NATI’s revenue, after being 50% a few years ago and
40% 7–9 years ago. Management hopes that in the next five years, systems-level business will
represent 80% of NATI’s revenue. While investors may have concerns that larger orders may
eat into NATI’s gross margins, its gross margins have actually expanded while the systems-level
business has grown.

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Management team
Eric Starkloff, President and Chief Executive Officer
Eric Starkloff became CEO on January 31, 2020. Prior to this, he was President and COO. He
also served as executive vice president of global sales and marketing. He has been with NATI
for 22 years.
Management has indicated that it is confident with its current structure, and we do not expect
to see a new COO in the next year or so.
Alex Davern, Former CEO, Board of Directors

Alex Davern, the first CEO since founder James Truchard retired in early 2017, stepped down
as CEO effective January 31, 2020. He remains on staff as strategic advisor to the CEO through
May and will continue to serve on NI’s Board of Directors. Mr. Davern spent 26 years with
NATI, serving as CFO, COO, and CEO. Under Mr. Davern, the company pivoted into its current
industry alignment.
James Truchard, Founder

James Truchard founded NATI in 1976 in his garage. He was the CEO for 41 years, growing the
company to a market cap of ~$4B. Under his leadership, NATI saw record revenues in 39 of his
41 years (revenues declined only in 2001 and 2009). On January 1, 2017, Mr. Truchard stepped
down as CEO.
Karen Rapp, Chief Financial Officer and Treasurer

Karen Rapp is the CFO and Treasurer and has more than 30 years of experience in the
technology sector. Prior to NATI, she was senior vice president of corporate development at
NXP Semiconductor.
Ritu Favre, Senior Vice President and General Manager of Semiconductor Business
Ritu Favre is the General Manager of NATI’s Semiconductor business, responsible for meeting
and anticipating the needs of NI customers. Prior to NATI, Ms. Favre was CEO of NEXT
Biometrics and was on Cohu’s Board of Directors. Prior to NEXT, she held senior management
positions at Motorola, Freescale Semiconductor, and Synaptics.
Ajit Gokhale, Senior Vice President and General Manager of Electronics, Electrical
Machinery, and Energy Business
Ajit Gokhale is the General Manager of NATI’s Electronics, Electrical Machinery, and Energy
business, responsible for driving growth across these categories. In his ~30 years with NATI,
Mr. Gokhale has held various leadership roles, such as senior vice president of global
marketing, vice president of sales and marketing in Asia-Pacific, and managing director of the
United Kingdom, France, and China.
Chad Chesney, Vice President and General Manager of Transportation Business

Chad Chesney is the General Manager of NATI’s Transportation business. In his 25 years with
NATI, Mr. Chesney held various leadership positions in sales, marketing, and applications
engineering in both the US and Asia.
Luke Schreier, Vice President and General Manager of Aerospace, Defense, and
Government Business
Luke Schreier is the General Manager of NATI’s Aerospace, Defense, and Government
business. In his 18 years with NATI, Mr. Schreier held various leadership positions in
applications engineering, product management, and marketing.

IT Hardware
National Instruments Corporation (NASDAQ: NATI) Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com
Fiscal year ending December
($ in MM USD except per share data) 1Q19A 2Q19A 3Q19A 4Q19A 1Q20E 2Q20E 3Q20E 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E 2019A 2020E 2021E 2022E
3/31/19 6/30/19 9/30/19 12/31/19 3/31/20 6/30/20 9/30/20 12/31/20 3/31/21 6/30/21 9/30/21 12/31/21 12/31/19 12/31/20 12/31/21 12/31/22
Revenue 311.1 334.2 340.4 367.5 322.1 346.1 352.7 380.7 341.0 366.4 373.6 403.2 1,353.2 1,401.6 1,484.2 1,568.9
COGS (76.1) (83.8) (85.9) (91.1) (79.7) (85.0) (86.6) (92.7) (83.7) (89.4) (91.1) (97.6) (336.9) (344.0) (361.8) (380.0)
Gross Profit 235.0 250.5 254.5 276.3 242.4 261.1 266.1 288.0 257.3 277.0 282.5 305.6 1,016.3 1,057.6 1,122.5 1,188.9
Non-GAAP adjustments 8.2 8.3 8.7 8.7 8.9 8.8 9.0 8.9 8.7 8.8 8.9 8.9 33.9 35.6 35.2 34.9
Non-GAAP Gross Profit 243.2 258.7 263.2 285.1 251.3 270.0 275.1 296.9 266.0 285.8 291.4 314.5 1,050.2 1,093.3 1,157.7 1,223.8
S&M (117.6) (120.9) (113.9) (121.1) (118.7) (122.8) (116.3) (121.7) (124.2) (128.7) (121.9) (127.6) (473.4) (479.6) (502.5) (526.6)
R&D (66.2) (68.3) (66.6) (71.5) (69.8) (72.4) (72.0) (73.1) (74.3) (77.4) (76.9) (78.1) (272.5) (287.3) (306.8) (327.8)
G&A (27.9) (29.0) (35.7) (30.1) (27.9) (28.5) (28.2) (28.5) (28.7) (29.4) (29.1) (29.4) (122.8) (113.1) (116.6) (120.0)
Other - - 26.8 - - - - - - - - - - - - -
Operating Income 23.4 32.3 65.2 53.7 26.0 37.5 49.5 64.7 30.1 41.5 54.6 70.5 174.6 177.7 196.6 214.6
Non-GAAP Operating Income 43.5 55.7 68.6 84.2 44.5 55.9 69.9 85.2 48.0 60.2 75.1 91.3 251.9 255.5 274.6 292.6
Interest Income 2.2 2.0 1.9 1.9 2.0 1.9 2.2 1.9 2.0 1.9 2.2 1.9 8.1 8.1 8.1 8.1
Fx (0.4) 1.6 0.4 0.2 - - - - - - - - 1.8 - - -
Other loss 0.0 (0.1) (0.7) 1.1 - - - - - - - - 0.3 - - -
Income taxes (2.8) (4.2) (15.8) 4.3 (4.9) (6.9) (9.1) (11.7) (5.6) (7.6) (9.9) (12.7) (18.4) (32.5) (35.8) (39.0)
Net Income 23.2 28.7 51.6 58.6 23.2 32.5 42.7 54.9 26.5 35.8 46.8 59.8 162.2 153.3 168.9 183.7
Non-GAAP Net Income 39.6 46.2 57.8 73.1 38.4 47.8 59.5 71.9 41.3 51.3 63.7 76.9 216.7 217.5 233.2 248.1
Weighted-average Diluted Shares Outstanding 133.4 133.0 131.9 131.4 131.0 130.8 130.6 130.4 130.1 129.9 129.7 129.5 132.4 130.7 129.8 129.0
Diluted EPS $0.17 $0.22 $0.39 $0.45 $0.18 $0.25 $0.33 $0.42 $0.20 $0.28 $0.36 $0.46 $1.23 $1.17 $1.30 $1.42
Non-GAAP adjustments $0.12 $0.13 $0.05 $0.11 $0.12 $0.12 $0.13 $0.13 $0.11 $0.12 $0.13 $0.13 $0.41 $0.49 $0.50 $0.50
Non-GAAP Diluted EPS $0.30 $0.35 $0.44 $0.56 $0.29 $0.37 $0.46 $0.55 $0.32 $0.39 $0.49 $0.59 $1.64 $1.66 $1.80 $1.92
Dividends/share $0.25 $0.25 $0.25 $0.25 $0.26 $0.26 $0.26 $0.26 $0.27 $0.27 $0.27 $0.27 $1.00 $1.04 $1.08 $1.12
Y/Y Revenue growth (0.3%) (2.0%) (1.6%) 2.0% 3.6% 3.6% 3.6% 3.6% 5.9% 5.9% 5.9% 5.9% (0.4%) 3.6% 5.9% 5.7%
Margins:
Total Gross 75.5% 74.9% 74.8% 75.2% 75.2% 75.4% 75.5% 75.7% 75.4% 75.6% 75.6% 75.8% 75.1% 75.5% 75.6% 75.8%
Non-GAAP Gross 78.2% 77.4% 77.3% 77.6% 78.0% 78.0% 78.0% 78.0% 78.0% 78.0% 78.0% 78.0% 77.6% 78.0% 78.0% 78.0%
Non-GAAP Operating 14.0% 16.7% 20.1% 22.9% 13.8% 16.2% 19.8% 22.4% 14.1% 16.4% 20.1% 22.6% 18.6% 18.2% 18.5% 18.7%
Operating cash flow 42.1 46.5 60.7 75.1 100.5 36.0 71.3 57.0 90.6 43.0 76.0 60.9 224.4 264.7 270.5 287.7
Capex (10.9) (15.1) (21.1) (13.7) (15.0) (15.0) (15.0) (15.0) (15.0) (15.0) (15.0) (15.0) (60.9) (60.0) (60.0) (60.0)
Free Cash Flow 31.2 31.4 39.6 61.4 85.5 21.0 56.3 42.0 75.6 28.0 61.0 45.9 163.5 204.7 210.5 227.7
Dividends (33.1) (33.0) (33.0) (32.8) (33.9) (33.9) (33.8) (33.8) (35.0) (34.9) (34.9) (34.8) (131.9) (135.4) (139.6) (143.8)
Share Repurchases (46.4) (46.0) (44.8) (34.1) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (20.0) (171.3) (80.0) (80.0) (80.0)
Cash and investments 480.1 439.7 432.2 432.6 462.1 427.3 427.8 414.0 432.6 403.6 407.7 396.9 432.6 414.0 396.9 392.7
Source: Company reports, RBC Capital Markets estimates

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Required disclosures
Conflicts disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,
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RBC Capital Markets, LLC makes a market in the securities of National Instruments Corporation.
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Underperform (U): Returns expected to be materially below sector average over 12 months.
Restricted (R): RBC policy precludes certain types of communications, including an investment recommendation, when RBC is
acting as an advisor in certain merger or other strategic transactions and in certain other circumstances.
Not Rated (NR): The rating, price targets and estimates have been removed due to applicable legal, regulatory or policy constraints
which may include when RBC Capital Markets is acting in an advisory capacity involving the company.
Risk Rating
The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes,
high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/
Outperform, Sector Perform, and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings
are not the same because our ratings are determined on a relative basis.
Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Dec-2019
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [Top Pick & Outperform] 765 51.97 225 29.41
HOLD [Sector Perform] 625 42.46 127 20.32
SELL [Underperform] 82 5.57 5 6.10

IT Hardware
Rating and price target history for: National Instruments Corporation, NATI US as of 02-Mar-2020 (in USD)
55
50
45
40
35
30
2017 Q1 Q2 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1
Legend:
TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; R: Restricted; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage;
NR: Not Rated; NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date
a security was removed from a recommended list; Rtg: Rating.
Created by: BlueMatrix
References to a Recommended List in the recommendation history chart may include one or more recommended lists or model
portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include
the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: ADR (RL 10),
and the Guided Portfolio: All Cap Growth (RL 12). RBC Capital Markets recommended lists include the Strategy Focus List and
the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on a
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Equity valuation and risks
For valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, please
see the most recent company-specific research report at https://www.rbcinsightresearch.com or send a request to RBC Capital
Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Valuation
We derive our base case price target of $45, which supports our Sector Perform rating, by applying a 25x multiple to our CY21
non-GAAP diluted EPS estimate of $1.80. Our target multiple is slightly higher than NATI’s peers, but in our view this is justified by
NATI’s growth opportunities in 5G and electrification/autonomy of automotive.
Risks to rating and price target

• Broad macroeconomic slowdown.
• Increased competition from traditional T&M competitors as they move into automation systems.
• Declines in traditional automotive testing offset growth in electrification of vehicles.
• Increased competition in sub-6 GHz and mmWave causes NATI to miss revenue growth targets.
• NATI’s Millimeter Wavelength projections do not materialize.
Conflicts policy
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To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
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how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A
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RBC Capital Markets, LLC

Robert Muller, CFA (Analyst) Michael Murray (Senior

traditional combustion engine testing. Overall, we estimate that NATI will

Growth depends on market-share gains; portfolio at the whims of

Initiating coverage at Sector Perform with $45 price target. We apply a

Target/Upside/Downside Scenarios Investment summary

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 2

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 3

5G and Semiconductors represent best growth driver, in our view ............................... 6

Automotive evolution a double-edged sword ............................................................... 9

Risks to rating and price target .................................................................................... 21

Company overview ...................................................................................................... 22

Management team ...................................................................................................... 25

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 4

Key investment considerations

 5G and Semiconductors a primary growth avenue. National Instruments stands to

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 5

5G and Semiconductors represent best growth driver, in our view

Exhibit 2: Semiconductor Growth Opportunity

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 6

Exhibit 3: 5G Timeline and Deployment Expectations

Significant opportunities for NATI

Source: National Instruments’ 2019 NI Week Investor Presentation

Exhibit 4: Test and Measure Market Share

Source: NI Week 2019 Investor Presentation

Semis: Current market conditions

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 7

Exhibit 5: Semiconductor Revenue

% of NATI total revenues

Semiconductor Revenue (RBCe) Semis as % of total (RBCe)

Source: RBC Capital Markets estimates

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 8

Automotive evolution a double-edged sword

Exhibit 6: Transportation Growth Opportunity

Electrification of automotive. Vehicle manufacturers are transitioning away from combustion

Exhibit 7: High-Voltage Electrification Addressable Market Growth

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 9

Exhibit 8: Light-Vehicle Production Powertrain Mix

Exhibit 9: Global Light-Vehicle Sales Forecast

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 10

Exhibit 10: ADAS Increases Complexity for Customers

Source: National Instruments’ 2019 NI Week Investor Presentation

Exhibit 11: Autonomy Will Continue to Proliferate

Traditional combustion declines may make growth targets difficult to achieve

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 11

Tra di ti ona l a uto decl i ne % CAGR

Tra di ti ona l a uto decl i ne % CAGR

30.0% 2.8% 5.7% 6.4% 7.0% 7.7% 8.4% 9.1%

Exhibit 14: Transportation Revenue

$80 Management guide: 10-12% CAGR 18%

$70 Our estimates: 9% CAGR 17%

Transportation Revenue (RBCe) Transportation as % of total (RBCe)

Source: RBC Capital Markets estimates

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 12

Portfolio and A&D and Government closely tied to macro environment

Exhibit 15: Portfolio Growth Opportunity

Source: National Instruments’ 2019 NI Week Investor Presentation

March 3, 2020 Robert Muller, CFA (212) 905-5816; robert.muller@rbccm.com 13

Exhibit 16: Portfolio Revenue (RBC Estimates) vs. Global PMI

RBC estimated Portfolio revenue

Global PMI index

Source: Factset, RBC Capital Markets estimates

Exhibit 17: NATI Share Price vs. Industrial Production Index*