Cognex Corp (CGNX) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cognex fourth quarter 2002 earnings release conference call. Today's call is being record.

At this time, I would like to turn the call over to Mr. Richard Morin, Cognex's chief financial officer. Please go ahead, sir.

Thank you very much, and good evening, everyone.

Earlier tonight we issued a press release announcing Cognex's earnings for the fourth quarter and full year of 2002. Following discussions we had after our last call and the poll conducted by Dr. Bob, we decided to include more information about our results in the press release in an attempt to answer some of the questions that are asked each quarter. For those of you who have not yet seen this report, a copy is available on our website at www.cognex.com.

I would like to emphasize that any forward-looking statements we made in the press release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings for a detailed list of risk factors.

And now I'll turn the call over to Bob Shillman.

Thanks, Dick. And good evening to everyone.

I would like to welcome to you Cognex's fourth quarter 2002 earnings conference call. My script now says, as Dick just said, now why would I just repeat something Dick just said? I know. It's - I know, there is an asterisk here it says, for those on the phone with attention deficit disorder. So as Dick just said, we announced our results for 2002 earlier this evening. Revenue for the year was $114 million, which unfortunately was down 19 percent from 2001. And unfortunately, we reported a loss of $6 million or 14 cents per share.

After excluding unusual items in both 2002 as well as in 2001, we would have had a loss of $2.1 million or 5 cents a share in 2002 compared to net income of $8.3 million or 18 percent per share in the prior year. There were, however, some positive developments in 2002. We have record orders and record revenue at our surface inspection systems division, which is called SISD. Orders in that division increased 16 percent over the prior year primarily from market share gains. In particular, we have been gaining share in the metals industry and our market share is now more than 50% of the total metals market worldwide.

In 2002, we set new bookings and revenue records for Insight (ph), our family of low cost vision sensors. Insight orders increased 40% over the prior record, which was set in 2001, and we returned to profitability at both the operating line as well as at the bottom line in Q4. We are feeling a bit better as we head into 2003 than we did at the beginning of 2002. We're entering 2003 with $26 million in backlog, which is a 63% increase over the year ending back log of 2001.

And we made additional cost-cutting measures in 2002 to more closely align it to our current business level. Our operating leverage is quite high and we can grow the top line without needing to increase expenses to the same degree. In 2002, we added more than one thousand new accounts to our customer list including a record of 960 new end users. In the fourth quarter, we signed 256 new customers of which 233 were end users and the remaining were 23 of OEMs.

Of these new customers signed in Q4, six of them represent significant customers, and we define that as customers we expect to generate more than $100,000 of ongoing annual revenue. And four of those six significant customers are buying Insight. Insight continues to do very well in the marketplace. One example is we had a recent win at a large manufacturer of pharmaceuticals. This company is a new customer to Cognex, it recently purchased 12 Insight devices to replace existing competitive systems on their factory floor. That customer was so impressed with Insight as well as the support that Cognex provided that they have now included Insight in their automation plans for their new drug manufacturing plant in which Insight will be on every production cell in this new facility and at every stage of the manufacturing process, where it will be reading information either in bar codes or other codes that are on pharmaceutical containers.

This is very good news for Cognex in the ID area and we expect this customer to purchase approximately 100 units in 2003. The strong - the success stories for Insight are not limited to the end user market by the way. We also have had a number of wins at OEMs for the Insight 1700 wafer ID reader. With the transition to 300 millimeter wafers, chipmakers must track these large and very expensive wafers as they go through the fabrication process.

In order to track each wafer individually, each piece of chip-making equipment in the front end of the process needs a wafer reader to read the codes as it enters the equipment. The Cognex is an exciting opportunity for incremental revenue in the OEM market. Due to the transition of 300 millimeter, many of our current OEM customers are now buying Cognex's wafer reader in addition to the vision systems that they have been buying for alignment and other tasks on their equipment.

Plus, a number of large successful equipment suppliers who previously did not need machine vision for alignment are now buying the Insight 1700 from Cognex for reading and identification purposes. Just yesterday, we released a press release announcing one new OEM customer, that's Excelus (ph). They selected the Insight 1700 for their next generation ion implanter. (inaudible) transition to 300 millimeter did not need vision at all.

We of course look forward to discussing with you other new applications and OEM customers as the conditions seem to be improving.

I would like to give you a brief update. That's talking about the past. Now I'm going to talk about the recent past. January has been very, very encouraging. OEM bookings in January of this year compared to the prior year are up 95 percent. The OEM bookings of January compared to December are up 34 percent. End user bookings - that's NBSD end user -- January to January up 21 percent and on a sequential basis January compared to December is up 14 percent. And SISD is doing similarly as well. January to January bookings numbers are up 145 percent and the sequential December to January are up 36 percent. Now, of course, one month does not make a quarter and it certainly doesn't make a year. But things appear to be picking up at Cognex.

At this time, I would like to open the conference call to any questions that you have for me or the team that's put together here for you headed by Dick Morin.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us. Once again, that is star one if you do have a question. We'll pause for just a moment to assemble the roster.

And we have a question from Jim Raschutti (ph) with Needham and Company.

Yes, good evening. Bob, I want to just pursue the information you gave on the update. If you could talk a little bit about what you're seeing within each of these areas and among your OEMs what's your sense, where is this strength that you've seen in January that's coming from?

Yes, it's usually -- in the past when we've seen a pickup by the way, it's been -- the early pickups have been in the wire bonding area. This time it seems to be in the electronic assembly and wafer test area. I can't give you the customer names, but it's -- these are electronic assembly manufacturers and wafer handlers, wafer probers.

Where is it coming from, what region? Japan?

Japan. Yes, well -- but just about all of our OEM business is in Japan.

Okay. And you know, it's hard to tell, I know only one month into this but do you have any sense as to whether this is sustainable at this point?

No.

Okay. But -

Day to day.

Yes. Now, on the end user-

But I can tell you today was a good day, too. Is today the first day of February -- is the month over?

Not yet.

Our fiscal January ended this past weekend so we're now into fiscal February.

We're looking good.

You're off to a good start. Now, in some of the non-high-tech markets that you address, what do you see there? Where is the strength coming from? You alluded to -- certainly Insight has been very strong, but I was wondering if you can just talk a little bit about that, where you're seeing some of strength, you know, that's continuing in January.

Well, the steel and paper business seems to be doing rather well. That's surface inspection division, as I mentioned.

And that's market share gains, Bob, do you think?

Yes. Yes. The market is not growing nearly as fast as those numbers. We believe the market is around -- growing at about 10 to 15% in the surface inspection and these increases are quite a bit in excess of that. So I think it's gaining against ABB and another competitor.

Okay. Automotive, you know, I wonder -- this probably leads into the next question, I'm surprised it wasn't in the press release. We always ask it. But if you could, Dick, could you give us a breakdown on some of these markets?

I think it is in there.

I missed it. I apologize.

It's there?

It's there.

I missed it. I apologize. Okay.

I think if you go to the last page.

Last page of the press release it's called additional revenue information.

Oh, I'm missing that one last page, I will print it out. Thank you. And then if I could just one follow-up on Insight, could you give us a little bit of the profile of how that business is shaping up here, that product? Is it shifting more toward semi and electronics, Bob, or is it still pretty diverse?

No, Insight is rather diverse. We are happy to close some OEMs with Insight in the semiconductor industry, but most of the sales are in other industries.

Okay. That's it.

Consumer products, consumer products, and packaging and pharmaceuticals.

And the revenues, were they in excess of $30 million for the year?

We're looking that up.

Yes, hang on one second.

If not, they're very close -- $29 million.

Okay. That's it for now. Thank you.

You're welcome.

Once again, that is star one if you have a question.

We'll go to Fred Wolf (ph) with Adams Harkness and Hill.

Yes, Bob, considering the January strength you talked about, yet when you forecast your Q1 revenues you expect things to be sequentially down, could you sort of reconcile these things? Is there a drop off in some other businesses, and can you talk about the momentum in the end user business?

Yes, from what I can tell. All -- as a matter of fact, let me just tell you January to January bookings are up 65%. And January to December, this is total bookings -- are up 26%. So I would say that the projections that we've given -- if we've given any, I don't recall them -- but we tend to be -- they were right at the time. Now, if we're going to project, we would probably project a little higher, but as we pointed out one month doesn't make the quarter or the year.

(inaudible) Cognex expects revenues for the first quarter to also decline on a sequential basis to between $31 and $33 million?

Yes, we went into Q4 with a higher backlog and a higher schedule of log orders to be shipped in the quarter than we began this Q1 of this year, Fred.

Right. I'm getting the impression that it hadn't factored in much of the strength in January for these projections -- is that fair?

January for the -- yes, Q4 was very soft. We had expected that bookings would pick up a little bit. So it sort of has - you know, so far it's only like about four weeks into the quarter as to whether or not it's going to lead us to be higher than the upper range of the guidance that we gave.

Okay. And can you tell us about the end user business just so -- in your -- if we take the mid point like $32 million, what does that imply about the end user? Does that show growth there from Q4 to Q1 or do we have a seasonal issue there?

I think -- I don't have that in front of me but as I recall there was growth in the end user business Q1 over Q4, but there would have been a decline in the OEM revenues Q1 from Q4.

That's correct.

Yes.

Thank you.

We have Rick Aceman (ph) with Robert W. Baird.

Yes, could you just maybe talk to the end user of business in the fourth quarter? That number looks a bit weak and I'm just curious -- I know there was some carryover on the OEM side of the business from Q3 into Q4 so that maybe doesn't surprise me too much. But the end user business looked a bit weaker than it should have been. Is that timing or just the end markets?

I think it was principally timing and part of that was that there were -- 50 was down because a number of their customers, the surface inspection division, didn't launch shipments just before the end of the year. Probably they were shutting down at the year end time and didn't want to have the liability there. And they probably could have been some other end users on the MVSD side getting near the end of the year that had spent their capital budgets and were watching the amounts that were being spent.

Okay. And even though the numbers are small, the incremental gross profit margin in the fourth quarter if you look sequentially you must have had a reasonably rich mix.

Well, what happened in -- there were a couple of things is we had a pickup -- the entire pickup in the quarter was all in MVSD product revenue, which carries our higher margin. We also had reductions in variances. You have to recall that in Q3 we had a layoff, the level of business was lower so our manufacturing variances were higher and it also included the impact of laying people off and the severance that we gave, which did not recur in Q4.

I see. Okay. All right. That's fair. Just one last thought. As we talk about Insight heading into '03, two part question -- first of all, is there -- are there some product line extensions that add incrementally to that product offering? And then secondly, can you just give us a flavor for what kind of growth you expect in '03 out of Insight?

Yes, well, we are expanding the product line. We have a variety of Insights and be happy to tell you more about that in detail off line or look at our product brochures. But we are coming out with additional Insights that have integrated lighting on them, a smaller form factor, lower price but still higher gross margin.

Okay. And could we expect, you know, 30% growth, that type of a number?

That's what I would hope for.

Okay. Great. Thank you.

Yes.

And now we have Nick Moore (ph) with (inaudible)

Hi, guys.

Hi, Nick.

How are you?

Doing well, doing better.

Happy new year. I wonder if I could get a little more color on January. I think somebody asked this, I didn't quite get the answer, but -

The only thing more I can tell you about January is that it has 31 days.

Yes, and we're only -- well, we're most of the way through it, but are you comparing like January through yesterday to the whole month of January last year as sort of -

No, I'm comparing equivalent periods of time.

Equivalent days.

The financial month of January to the financial month of January.

Okay. That's part of it. And then so I got the idea from an earlier question or an earlier answer that it's pretty widespread across the industry verticals, is that right?

I actually haven't looked at the breakdown of the applications, but certainly the OEM was up, we're talking year to year January bookings, all the segments are up. But I have not looked at the particular application areas.

Well, I was tipping towards is it overwhelming with electronics, it sounds like it's quite a bit broader than just a lift in electronics.

I don't believe it's electronics. The OEM it is -- I'm sorry, the OEM it's electronics and semiconductor, of course.

Yes, of course.

But the end user, I just don't know. Dick is saying no, it is not.

I was wondering if there's a geographic tilt to it at all. I gather some people have had some orders pulled forward.

That is happening because -

China shutting down for their big national holiday.

You know, always, you know, salesmen can push orders, hold orders back for the next year and everything, but that would be true, but that would cancel out for the January to January comparisons.

Sure, it would. No, I was just curious if the month -- everybody who follows your company listens to -- and other calls. Seemed like they might have had a little more January in anticipation of less February just because of the timing of the Chinese new year.

No, no.

Nothing like that.

That could certainly apply to wire bonders, which are mainly purchased I think in Taiwan and China, but that would not apply to our business.

And the other question would be since we're getting towards the end of the Japanese fiscal year.

Yes.

And it would often at least be the case that they start ordering again if not taking delivery sometime in the March quarter. In terms of capital goods and I was just wondering if you have seen any pickup there or if you anticipate one later this quarter, just your best guess.

Yes, Japan is considerably ahead of target in our total OEM business. Considerably ahead of our target for the month.

Okay. Didn't seem like they were spending much of anything past about the middle of last year in the electronics sector anyway.

And as a matter of fact just today we got a substantial order, substantial order in the electronics space.

Well, damn glad to hear it. Well, I hope anyway the press release is right and it is a better year.

Thank you.

For all of us in every way.

Thank you, Nick.

Thanks, guys.

And we have a follow-up from Jim Raschutti.

Yes. If you exclude the electronics and semiconductor portion of your business, Bob, I think you talked about the other markets collectively, the potential that you see for growth at about 20 percent. Is that still the way you look at the business? I'm not talking about '03, but I'm just trying to get a sense of how you see the non-high-tech portion of the business?

Well, first of all, I'll tell you that in the last quarter, if we look at the revenue in the last quarter exactly 50 percent was non-semiconductor, non-electronics. That's across OEMs, geography, whatever -- 50 percent is non -- what we call the high-tech business. Now, the issue of growth in the company is we're often changing the model, but we believe that first of all, another thing I want to say is that our end user business is now two-thirds, about two-thirds versus one third OEM. And we believe that the OEM will never get back to where it was greater than the end user business. So it may increase beyond a third, but it's never going to get to 50 percent again. That's our view. Primarily because we're going to grow the end user business more quickly than the OEM is going to grow.

But regarding our model, we believe the company overall can grow 20 to 25% top line and bottom line in excess of 20%. The OEM business, I think in the short-term, in the next year or two, can grow faster than the long-term rate because it's such a low base now. So we think in the next year or two it could grow by as much as 20%, but after that, I think it's going to be somewhat slower, not just because our business is slow, but the growth in capital equipment spending will be somewhere around 10 to 15% in the semiconductor industry.

The end user business should on average grow between 20 and 30% and that's made up of the MVSD growth and a combination with surface inspection which grows somewhat more slowly. The Insight we expect 30 to 35% per year. There is some other end user business in addition to Insight, but surface inspection will drag that growth down because SISC we think is about 10 to 15%.

So overall, just repeat we are hoping for, and planning for and anticipating, top line growth of 20 to 25% and bottom line of 20%. We think that we can hold the margin somewhere between 65 and 75% of revenue and we think that the net income -- our model now is 15 to 20% of revenue, but that's only after revenue exceeds $150 million, and we're not there yet. But a very good sign, of course, is that we are profitable in the operating run. We've been profitable two quarters now in the bottom line. Now the challenge is to get it to the 15 to 20% that -- where we have always been in the past.

Okay. Bob, if you could on the end user business, looking at the vertical markets, if you put aside the issue of the sluggish economy in the past year, are there some of the vertical markets that you address. Are you -- maybe some markets more satisfied with the performance and less satisfied perhaps in other markets with the acceptance of the way some of the customers?

No. Unusual question. We have not pulled back from any particular market, Jim. Where we sell a product, you know, it works the same way. Whether it's looking at lug nuts at General Motors, or whether it's looking at pills at Tylenol. So there is no discreet industry where it doesn't work as well as other industries.

That's not what I was really trying to imply. I was just wondering, Bob, if some of the vertical markets if you see perhaps stronger growth opportunities.

Yes. That's a different question. I heard wrong. The strongest one right now is automotive where year on year for the fourth quarter -- is that fourth quarter?

Year on year for the year bookings are up 36% in automotive.

And as far as the driver to that, is it just the pressure on the automobile companies to, you know, just more tractability? Is it more just in terms of quality control? What's driving that?

The driver is that we finally have products and a sales force that's calling on those customers. I believe they always, well not always, but for the past five years, seven years, automotive companies have been - are highly automated and not just companies themselves, but their suppliers are highly automated. You know, when you're going to make millions of devices, or units, or whatever, you have to automate, and so they've been very well aware of automation in robotics and now we have a product that they can use. So I don't think it's a particular change in attitude of the automotive manufacturers.

Okay. And SISD, you think there is the opportunity -- sounds like you've got real good momentum in terms of market share gain, you feel you have further ground to gain there?

Oh, without question. We are -- we're tied or approximately tied with ABB, which we're somewhat larger than ABB in the paper space, and in the metal space, we are the major player, we expect to grow fast in the market because we are capturing share.

And just a final question on acquisitions. You talked about the possibility of some smaller acquisitions. I guess even there's some larger players out there that perhaps are struggling, I wonder if you could just give us an update on what you're seeing.

We have in our sights an active basis three acquisitions. One which is very active and for which a banker has been retained. The other two are pieces of existing large corporations that we're trying to pry out. I would expect that there might be a press release on the first one that I mentioned some time this quarter. I'm hopeful, but it really depends on the target agreeing to our price requirements.

Okay. And the others are -

The others are, I believe, one of the two others is a piece of a large multinational conglomerate and it's a price issue, and buying anything from a huge company takes time. They said we want to move quickly and I gave them my schedule and they said we can't move that quickly. I said I'll be there next Tuesday. So I can't tell you when that will happen. I'm quite confident of the one company that is a stand alone company. That will happen. I'm reasonably confident of the piece of this second multinational and I'm, too soon to say anything about the piece of the third multinational.

Okay. Thanks very much.

Fred Wolf has a follow-up.

Yes, just to clarify. Those January numbers when you said quarter to quarter, that was January versus October, is that correct?

No, January to January. I was giving you bookings ratios.

You said year to year.

I'm sorry. If I said that I made a mistake. I said year to year and then January to December.

Okay. So that's January to December.

Right.

Thank you.

If you want, Fred, I can repeat the numbers.

If you want.

Okay. I'll give you the total bookings January to January are up 65%, December '02 to January '03 are up 26% and I'll give you more detail on that. The OEM January to January are up 95%. The December to January is up 34% on OEM. The end user January to January are up 21% and then end user December to January are up 14% -- 50, January to January is up 145% and December to January is up 36%.

The end user is only the modular systems.

That's correct. That's correct.

Thank you.

And that concludes today's question and answer session. Gentlemen, I'll turn the conference back over to you for any additional remarks.

Well, I think this method of giving all the data ahead of time rather than you scribbling it and not hearing it quite right and us having to repeat it worked very nicely and it doesn't surprise me that therefore there aren't as many questions. For those of you who have additional questions, we're always here, but Sue Conway will certainly be here at her phone to answer any questions that you may have that you haven't otherwise asked. If they're very important then we will have to issue those in a press release.

Okay. Thank you very much, and I look forward to talking to you again at the end of Q1 and hopefully reporting to you some very good results.

Thank you for participating in today's conference. There will be a replay available beginning at 9:00 p.m. Eastern time tonight and ending on the third of February at midnight Eastern time. If you would like to listen to the replay you may dial the toll free line at 888-203-1112, or the toll line at 719-457-0820 and enter the pass code of 617503. Again, those numbers are 888-203-1112 for toll free and 719-457-0820 for toll or international using the pass cord of 617503. There will also be a replay available via the web at www.cognex.com. Again that website is www.cognex.com.

Once again, thank you for your participation and have a great day.