2005 Annual ReportTo Our Stockholders
Our Mission Our vision is to revolutionize the measurement and automation industry through virtual instrumentation, an innovative approach NI pioneered and continues to lead. With virtual instrumentation, we combine off-the-shelf, mainstream computer technologies with our own innovative modular hardware and software products, such as our flagship National Instruments LabVIEW product family, to create powerful and flexible solutions for design, control, and test applications. Our approach empowers customers to easily build open, flexible, user-defined solutions rather than rely on closed, fixed-function, vendor-defined traditional instrumentation. With virtual instrumentation, our customers can save time and money, easily integrate a wide variety of devices for their unique application needs, and improve their design and development productivity. Our Product Mix We were very pleased with the strong growth in our virtual instrumentation products resulting in record revenue in 2005. The cornerstone of virtual instrumentation is software, and, in 2005, we continued to see strong adoption of our software platforms with record software revenue. Our award-winning LabVIEW graphical development platform is recognized as the leading software for measurement and automation. In 2005, we continued to see growth in LabVIEW development systems, and were especially pleased with the growth and penetration into large accounts. With LabVIEW Real-Time and LabVIEW FPGA, we have leveraged our strong graphical design platform into new application areas such as industrial control and reliable test. We were also pleased with the results in 2005 for our NI TestStand test management software as well as our DIAdem data management software. On the hardware front, data acquisition, PXI, modular instruments, distributed I/O, industrial communications, motion control, and machine vision all delivered record revenue in 2005 as virtual instrumentation achieved further penetration in measurement and automation. PXI continued to show its strength as a market-leading modular test platform with record revenue in 2005. We finished off a strong year in which we sold more than 50,000 PXI devices, a 31 percent increase over 2004. This tremendous success, combined with the PXI devices shipped from the more than 60 other PXI vendors, shows that PXI has become an extremely successful industry-standard, modular platform for measurement and automation. PXI, which saw success across a diverse set of application areas, was adopted by both small and large companies as they recognized the benefits of coupling powerful test software with modular hardware. Our success in automated test for design, validation, and production was enhanced by our modular instrumentation products. These devices leverage the inherent advantages of our modular architectures, such as PXI, and the flexibility of our software tools to provide higher-precision and higher-frequency measurements at a lower cost for applications in military avionics, consumer electronics, communications, and more. In 2004, we introduced the latest generation of our plug-in data acquisition products, the National Instruments M Series, and, in 2005, we saw very strong adoption of these products. NI M Series delivers more performance, more I/O capabilities, and more value to our customers than our previous-generation data acquisition products. The new M Series devices not only lower the cost per I/O channel by more than 30 percent, they also reduce overall system costs by minimizing setup time through advanced development tools included in NI-DAQmx driver and measurement services software. We were pleased with the strong success and customer adoption of our tools in the industrial control space as more customers used our programmable automation controller platforms for reliable and deterministic control and system design solutions. With our family of rugged I/O products such as National Instruments Compact FieldPoint and CompactRIO combined with our portfolio of powerful software such as LabVIEW Real-Time and LabVIEW FPGA, customers can graphically design their control systems at lower costs with improved productivity. We are seeing our innovative approach not only meet customer needs that traditional industrial devices cannot fulfill but also offer a lower-cost solution than custom embedded design. The benefit for our customers is the ability to more quickly design, prototype, and deploy their industrial, machine control, and embedded design systems. During 2005, National Instruments welcomed Electronics Workbench, Measurement Computing Corporation, and IOTech, Inc., to our global family. I would like to thank the employees of these companies for joining the NI family and working across many functional areas to ensure a successful integration of the companies with National Instruments. I look forward to the increased opportunities we all have by combining the strengths of these companies with the strong NI global presence and software leadership. Our New Products When we invented LabVIEW 20 years ago, our goal was to dramatically reduce the software development time needed to design and develop measurement systems. In 2005, we introduced LabVIEW 8, a significant release that leverages the latest advances in computing, networking, and embedded technology. LabVIEW 8 has more than 100 new features, including new Express technology for increased ease of use, professional project-based development for large-scale applications, and new system design tools for managing the development of processes running across distributed systems. We are very pleased with the initial interest in LabVIEW 8 and the significant industry recognition it has received. We are pleased with the strong adoption of our PXI and modular instruments platforms, as customers adopted our PC-based approach for test in a wide range of applications. In 2005, NI introduced the new flexible-resolution digitizer, which was recently recognized as Test Product of the Year by Test & Measurement World magazine. This device is a universal instrument that provides the most flexible combination of resolution accuracy and frequency sampling rate available from any instrument on the market. With this one device, design and test engineers can now use a single modular instrument to make a wide range of dynamic measurements, replacing many traditional instruments such as A/C voltmeters, audio analyzers, frequency counters, and spectrum analyzers at a fraction of the cost and size. National Instruments has a long history of using commercial technologies to further expand the capabilities of virtual instrumentation. One of the latest PC advancements is the high-speed bus known as PCI Express, an exciting next-generation technology developed by Intel and other PC component vendors, which delivers an order of magnitude speed improvement over the current-generation bus. In 2005, we released the industry's first PCI Express data acquisition products, and the PXI Systems Alliance, the multivendor organization that maintains the PXI Specification, announced and approved the Express specification. This new specification will pave the way for higher-performance PXI modules to take advantage of the dedicated high-speed bandwidth of PCI Express technology while maintaining compatibility with today's PXI systems, modules, and software. We expect to release the first PXI Express products in 2006, furthering the growth and penetration of PXI into higher-frequency and higher-channel-count applications. Another key success in 2005 was our growing family of USB data acquisition devices. USB has become very popular because of its significant ease of use. Our new USB data acquisition products have seen not only significant revenue and unit growth but also success in introducing virtual instrumentation to new customers. In Q4 2005, we released a number of new LabVIEW instrument drivers for third-party USB and Ethernet instruments, bringing the total number of drivers for these PC peripheral buses to 350. These drivers join the more than 4,000 instrument drivers already on ni.com, furthering the LabVIEW position as the standard software platform for instrument control. I am extremely pleased with our global R&D execution in 2005. Several of the new platforms and architectures released in 2005 required many years to develop, and I know our engineers and developers are very proud of the early success of their products. We believe that the record new product output of the past three years gives us a strong foundation on which we can build our growth going forward. I look forward to further innovation and strong new product output in 2006. Our New Opportunities As commercial technologies continue to advance - from the increasing performance of semiconductors to faster and easier-to-use computer buses such as PCI Express and USB - the capabilities of virtual instrumentation continue to expand. With the rapid increase in wireless services available today, the RF spectrum is becoming more and more crowded. From automotive components to cellular technology to inventory control, wireless technology is everywhere. Our PXI RF products saw widespread acceptance as a low-cost alternative to traditional instruments for testing wireless protocols. Already, our products are being used worldwide by major telecom manufacturers for wireless base station testing, spectral monitoring, and cellular communication verification. LabVIEW has been used as a system design tool for nearly 20 years, and I am excited about the expanding role of LabVIEW as design engineers look to design prototypes and deploy their devices with graphical system design. We are excited with the early success in embedded design and control applications including biomedical instruments, industrial machinery, and automotive electronic design. With our portfolio of powerful software, such as LabVIEW Real-Time and LabVIEW FPGA, and flexible hardware platforms, such as CompactRIO and PXI that can handle a wide range of applications from very high-speed control to embedded board-level design to proprietary custom electronics, customers can graphically design their systems at a lower cost than traditional tools, improve productivity, and shorten design times. Going forward, we will continue to augment this platform to provide a more complete solution that I believe will result in more design wins with machine builders and device manufacturers in a wide range of industries. In 2005, we introduced significant new products that strengthened the future of virtual instrumentation in test, control, and design. Our Finances For 2005, we had $88.1 million in net cash from operating activities, and we finished the year with $176 million in cash and short-term investments and no debt. Given the record year for revenue and profits in 2005 and our very strong balance sheet, the Board of Directors has approved a 20 percent dividend increase to 6 cents per share for Q4 2006. Our Culture Our Future We were pleased with record sales of our core virtual instrumentation software and hardware platforms, which resulted in record annual revenue. We believe virtual instrumentation is a mainstream approach in automated test, and we are excited about its expanded use in areas that traditionally incorporated proprietary, custom-built hardware. In 2006, our primary goal is to increase revenue growth and further expand our operating leverage. We are excited about the success of our new products as we continue to fill out our product offerings and deliver more complete system solutions to our customers. We are determined to build on this success going forward. We will continue to invest strategically, expand our market opportunities, and execute on our core vision for virtual instrumentation. We are determined to continue to innovate, execute effectively, and deliver long-term value to our shareholders.
Dr. James Truchard, This letter contains forward-looking statements as defined under securities laws and such statements are intended to be covered by safe harbors created under the Securities Act of 1993, the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements related to our new products expanding the market opportunity for virtual instrumentation, planning to continue momentum to gain market share, new specification paving the way for higher-performance PXI modules, expecting to release our first PXI Express products in 2006, new products providing strong foundation on which to build our growth, further innovation and strong new product output in 2006, belief that we will get more design wins with machine builders and device manufacturers, focus on improving revenue growth, expanding operating leverage and moving towards an 18% operating margin, R&D being the best strategic investment, continuing to invest strategically, expanding our market opportunities, executing on our core vision and continuing to innovate, execute and deliver long-term value to our shareholders . Actual results could differ materially from those predicted in the forward-looking statements as a result of a number of risks and factors including future changes in the global economy, delays in the release of new products, fluctuations in customer demand for our current products and our new products, unexpected changes in expenses and labor costs and our ability to successfully identify and execute strategic transactions. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for additional risks. © 2006 National Instruments Corporation. All rights reserved. CompactRIO, DIAdem, FieldPoint, LabVIEW, National Instruments, NI, ni.com, and NI TestStand are trademarks of National Instruments. Other product and company names listed are trademarks or trade names of their respective companies.
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In 2005, we were pleased with the strong sales of our virtual instrumentation platform as we delivered record revenue of $572 million, an 11 percent increase over 2004. The company generated solid profitability and the 28th year of revenue growth in the company's 29-year history. A key driver to this growth has been our continued investment in R&D, which resulted in a record number of new products in 2005 - our third consecutive year of record new product output. We are very pleased with the initial sales of these products as they continue to strengthen our product platforms while expanding the market opportunity for virtual instrumentation. Another reason for our success is the diversity of our business - across geographies, industries, customers, and applications - which has been a key factor in our long track record of growth. For example in 2005, we sold products to more than 25,000 different companies in more than 90 countries around the world, and no single industry accounted for more than 10 percent of our total revenue. One of our goals in 2005 was to drive operating leverage in our business, and I am pleased that we managed expenses and delivered improved operating margin and record annual net income. As we look to 2006, we plan to continue this momentum to gain market share in established application areas while expanding our position in strategic new growth areas for virtual instrumentation, such as high-performance measurements, RF instrumentation, and industrial and machine control.