2010 Annual Report

To Our Stockholders

Throughout the past 34 years, National Instruments has established a track record of strong revenue growth and profitability built on a foundation that enables us to be a stable supplier, business partner, employer, corporate citizen, and technology leader. In 2010, the strategic investments National Instruments made during the downturn were clearly validated. We have delivered a rapid recovery in revenue and profitability, reporting record annual revenue of $873 million and record annual net income. Our quick return to record revenue is a strong testament to the value of the R&D and field sales force investments we made throughout the recession. We significantly invested in R&D to strengthen our product portfolio, especially in strategic areas for the business including NI LabVIEW software and RF and industrial embedded hardware. In addition, we made strong investments in our sales force, which drove continued success across many key areas of the business, including LabVIEW, NI CompactRIO hardware, RF, and PXI modular instruments.

Our Products and Application Areas

National Instruments transforms the way engineers and scientists around the world design, prototype, and deploy systems for test, control, and embedded design applications. By using NI open graphical programming software and modular hardware, customers can simplify development, increase productivity, save money, and dramatically reduce time to market. The diversity of our product portfolio combined with the enhancements we have made in our service offerings, the excellence of our network of integrators, and our outstanding sales force has allowed us to expand into new application areas. The breadth of our product portfolio helps us serve a diversity of customers, and this diversity is a key factor in our long track record of growth and profitability. Last year, we sold products to more than 30,000 companies in over 40 countries around the world. No single industry accounted for more than 15 percent of our revenue.

NI delivered more than 170 products to the market in 2010, including the latest version of our LabVIEW software platform, LabVIEW 2010; new PXI modular instruments; and new products based on our reconfigurable I/O (RIO) architecture. LabVIEW 2010 delivers an optimized compiler that executes code an average 20 percent faster than previous versions and allows for the integration of any third-party field-programmable gate array (FPGA) IP into LabVIEW applications. When customers buy LabVIEW, they are plugging into a vast ecosystem of developers who share code and best practices, a marketplace of add-ons, and access to support for more than 10,000 different types of hardware devices. LabVIEW 2010 strengthens the rich LabVIEW ecosystem by providing thousands of developers the opportunity to expand the platform and take advantage of the significant differentiation of our product portfolio.

As the pace of innovation continued to speed up and engineers were forced to evolve their test systems ever more rapidly in 2010, we saw an increase in the number of engineers who turned toward software-centric test systems. As evidence of the growing role of modular software-defined test systems, we saw record revenue in our PXI modular instruments in 2010, specifically our RF and NI FlexRIO products. With more than 13 years of investment in developing software-defined PXI instrumentation and with our more than 400 orderable PXI modules, we have a clear leadership position in automated test. We reinforced this position in 2010 by releasing more than 40 PXI modules. One of these modules – the industry's first PXI vector network analyzer, or VNA – is the latest result of our efforts to meet RF customer needs. It represents a significant milestone for test engineers who need performance- and price-optimized VNA measurements.

We continued to demonstrate our leadership in data acquisition with the release of USB, wireless, Ethernet, and C Series-based devices, including the PXI Express optical sensor interrogator that can take physical measurements, such as temperature and strain, using a standard optical fiber in place of copper wire. This allows us to address new applications in extreme environments and helps our customers reduce the size, weight, and complexity of their measurement systems so they can take measurements over long distances.

We continue to see industrial embedded application success with our FPGA-based CompactRIO products. Customers are using these products in prototyping applications and higher unit volume applications in industries including oil and gas, biomedical, automotive/transportation, and military/aerospace. We were pleased that our CompactRIO products delivered record annual revenue in 2010 and that the number of C Series modules for CompactRIO surpassed 100. More than half of these modules were developed by third parties, a powerful testament to the flexibility and growing acceptance of the platform. NI RIO products are increasingly being adopted in system-level applications that require high-channel counts, intensive processing, and distributed I/O. To better serve these applications, we released new high-channel-count expansion chassis, which, combined with the LabVIEW FPGA Module, give engineers the flexibility of high-speed and customizable I/O timing, inline processing, and control. The combination of LabVIEW and CompactRIO continues to help engineers quickly test and modify new designs using the graphical system design approach and achieve a shorter time to market.

To introduce engineering students to the latest technology and better prepare them for industry, the academic community continued to show strong interest in NI technology, with record revenue from sales to academic institutions. In 2010, we were excited to extend our support by providing engineering students the opportunity to gain hands-on experience with the release of NI myDAQ, an affordable, portable lab that fits in students' backpacks. Many of the nation's top engineering schools have already adopted NI myDAQ, a USB measurement device roughly the size of a smart phone and priced similarly to an engineering textbook. We believe teaching science and engineering students how to take measurements and design control systems using NI products will provide strong returns in the long term as these students graduate and enter industry.

We have built a world-class product portfolio, an outstanding sales force and service offering, and a strong National Instruments Alliance Partner network, which help us serve an immense diversity and scale of applications. In addition, the strategic R&D investments that we have continued to make to produce highly differentiated products, such as RF modular instrumentation and CompactRIO, have enabled us to grow rapidly in large application areas where our products are highly differentiated from the incumbent technology.

A Company Built to Last

The company's commitment to our strategic investments in R&D and the field sales force combined with our employees' unwavering focus on serving our customers demonstrates the success of our 100-year plan to be a stable company. This view balances the long-term NI vision and culture with short-term business needs. Over the past decade, we have transformed from a transaction-focused PC peripheral company to one that continues to find better ways to serve our high-volume, transactional customers while closing large system sales in high-end test, industrial, and embedded applications. Annual PXI modular instrument and CompactRIO revenue levels set new records in 2010. The success of these system-level platforms has led to a shift in our business and sales model, as evidenced by our average order size increasing to an all-time high of approximately $4,470 USD in Q4 2010, a 17 percent year-over-year increase. In addition, our large order business, which we defined as orders over $20,000, grew more than 40 percent in 2010 and ended the year at more than 44 percent of all orders.

We are also extremely honored that National Instruments was named to the Great Place to Work Institute's best places to work list in several offices around the world, including the corporate office in Austin, which was named to FORTUNE magazine's "100 Best Companies to Work For in America" list for the 12th consecutive year. This landmark achievement further illustrates the success of our 100-year plan, and I am proud of our open environment that empowers employees and customers to improve everyday life and address many of the challenges that our world faces today. These efforts along with our commitment to drive shared value for employees, suppliers, customers, and shareholders as a responsible corporate citizen will be showcased in our third-annual citizenship report, which will be published in April 2011.

Looking Forward

The year 2010 was truly exceptional for National Instruments as we set new records for revenue and profitability, made significant enhancements in our product portfolio, and saw market leaders endorse our software-defined, modular instrumentation approach to automated test. Key to our success are the thousands of person-years we have invested in developing platforms that leverage both internal and external technologies to take advantage of Moore's law. These platforms provide our customers with consistent software and hardware form factors and the flexibility to evolve, which enables engineers and scientists to build their applications in a matter of days or weeks instead of months or years.

Our customers use our tools because we can fundamentally enhance their productivity. With NI technology, our customers are helping to meet some of the world's most significant scientific and engineering challenges, including next-generation green energy research, urban infrastructure improvement, earlier cancer detection, and access to clean drinking water. Our direct field sales force and excellent network of integrators work closely with our customers as trusted advisers to help ensure their success with the NI platform. In 2011, we intend to continue to concentrate on driving sustained revenue growth through focused investments in high-potential regions and application areas while working toward our long-term goal of an 18 percent non-GAAP operating margin.

Our commitment to the long-term success of our stakeholders allowed us to quickly reach record revenue and profitability after the recent recession. We believe our focus will allow us to continue our strong legacy of growth, profitability, and technology leadership. We are pleased to see our continued investments lead to a very strong Q4 performance, and we look forward to future growth for the company and thank our employees for their continued commitment to innovation.

Best regards,

Dr. James Truchard,
President, CEO, and Cofounder

This letter contains forward-looking statements as defined under applicable securities laws and such statements are intended to be covered by safe harbor provisions of the Securities Act of 1993, the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. These forward looking statements including our intent to continue to focus on driving sustained revenue growth through focused investments in high potential regions and application areas while driving toward our long-term goal of an 18 percent non-GAAP operating margin, allowing our focus to continue our strong legacy of growth, profitability and technology leadership, and looking forward to future growth for the company. Our actual results could differ materially from those predicted in our forward-looking statements as a result of a number of risks and factors including future changes in the global economy and customer ordering patters, 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, currency exchange fluctuations, the outcome of any current or future litigation involving intellectual property or other matters, and our ability to successfully identify and execute any acquisition transactions. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for information on additional risks.