Cognex Corp (CGNX) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to this Cognex's third quarter of 2003 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Richard Morin, Cognex's Chief Financial Officer. Please go ahead, sir.

(technical difficulty) announcing Cognex's earnings for the third quarter of 2003. For those of you who would not yet seen this report, the copy is available on our website at www.Cognex.com. The press release contains detailed information about the quarter, and because of that, we're not going to repeat most of that material here tonight.

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, including our 2002 Form 10-K, for a detailed list of these risk factors.

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

Thanks, Dick. And good evening everyone. Welcome to our third quarter 2003 conference call. Today we reported revenue -- and I'm repeating some of this for those of you who may not have a press release in front of you or the web. It is unlikely, so in the future we won't repeat this.

Today we reported revenue for the third quarter of 38.7 million, and net income of 5.1 million, which is 11 cents per share. These results compare favorably to both the third quarter of last year and to the prior quarter of this year. Revenue increased 22 percent over Q3 of 2002, and 6 percent over the prior quarter.

Net income increased 558 percent year on year, and 55 percent on a sequential basis. This is the second quarter in a row that we have reported year on year and sequential increases at both the top and bottom lines. Business, indeed, has been improving since the beginning of 2003, and we expect this trend to continue in the fourth quarter as well.

Overall business is better today than it was at the beginning of the year. Orders at our Modular Vision Systems Division increased on a sequential basis in the third quarter, even though bookings slowed somewhat during the summer months. I'm happy to say that the order rate picked up again in September, and that the trend has been good this far in October.

The sequential increase in business at MVSD during Q3 was with both OEM and end-user customers. In the end-user market this was somewhat surprising given that the third quarter tends to be seasonably soft. The increase was due to a number of volume orders that we received for In-Sight, our very successful family of low-cost vision sensors. This is the first time in several quarters that we received orders for multiple units of In-Sight from a number of different customers.

Although manufacturers' purse strings are still tight, opportunities for volume purchases are slowly starting to emerge in North America. And we're optimistic that this is an indication that business conditions in the end-user market are starting to improve.

In the third quarter, orders for In-Sight increased 32 percent over Q3 of 2002, and 12 percent over the prior quarter of this year. Although In-Sight is typically an end-user product, we're all happy to say that it is a very successful -- that it is has also opened up new opportunities for Cognex in the OEM market as well. For example, we will soon be issuing a press release announcing one new OEM customer for In-Sight.

This customer is leading provider of automated solutions for the packaging industry. And it has decided to integrate In-Sight into two models of its inspection machines. These specialized machines inspect packages for consumer products such as dish soap bottles and laundry detergent boxes as they are being made. Package inspection is a very demanding high-speed application that requires a great deal of experience as well as robust vision software. And by partnering with Cognex's, this customer will rely on In-Sight for their core vision capabilities, thus allowing their own engineers to focus on what they know best, which is solving unique challenges of the consumer packaging industry. And incidentally, this customer has, prior to Cognex, for many years rolled their own when it came to machine vision. So this is an large account that we have been chasing for many years. And we're able to close it because of In-Sight.

In the OEM market orders increased on a sequential basis in Q3. And in September, we're at the highest level of any month so far this year. The increase in business was coming from customers in North America and Japan, and in both the semiconductor and electronic industries. Visibility remains limited, and we have no proof that this growth will continue, but it is encouraging that the order trend in the OEM market is positive, and that our customers themselves are becoming more optimistic about the future.

Regardless of the rate of the recovery of the economy, Cognex is well positioned for future growth. We have nearly, as you can see from the balance sheet, nearly 300 million of cash and investments, and not a a penny of debt. And we generate cash in both good times and bad times. As a matter of fact I just ran a calculation that in the last quarter, in Q3, we generated 18.3 million of cash. And that came out from cash flow from operations, as well as stock option exercises, less 2.6 million that we paid in dividends. So the net cash was 18.3 positive.

Our cash and investment balance increased by over 22 million since the end of 2002, despite spending 7.6 million of cash to buy Siemens wafer ID business in Q2, and despite paying 2.6 million in Q3 for our first ever dividend. With this exceptionally strong balance sheet, we can afford to continue investing in our Company for growth as well as to provide additional yield to our shareholders in the form of a cash dividend. And with our confidence that business is improving, I would propose to the Board of Directors in the coming week that they approve another dividend for this quarter when they meet.

After paying this dividend, we will still have plenty of cash on hand for acquisitions. That is, if they approve the dividend. And in that regard, progress with reference to acquisitions, progress is moving ahead quite nicely on two acquisitions that I have commented on in a prior conference call. And I now expect both those acquisitions will be closed in this Q4.

As is our current practice, we have included a lot of detailed information about our financial results in the press release itself. So rather than reiterate that information that you can more readily read for yourself, we're just going to open up the conference call now for any questions that you may have for me, or my partner Dick Morin, or his team of analysts who are here with us.

(OPERATOR INSTRUCTIONS) Stuart Muter, Adams, Harkness & Hill.

A couple of questions, Bob. Did you say that the Modular Vision Systems Division's orders were up sequentially in Q3?

Yes, they were. As a matter of fact, I can tell you that they were up, and I'm not going to give the specific booking numbers, but I will tell you direction. They were up from Q4 to Q1 very slightly. They were up from Q1 to Q2. And they were up from Q2 to Q3.

Could you provide some color on bookings by geography?

Somebody here can.

I think if you take a look -- do you have a copy of the press release?

I didn't see bookings.

I'm sorry. Bookings by geography for the quarter, roughly 36 percent was in North America, 33 percent in Japan, 26 in Europe, and the balance, Southeast Asia would be about 5 percent, I guess.

Right. And one more question, if I can sneak it in. Bob, you talked about lower cost In-Sight products coming down the road. I'm wondering if you could provide an update on that?

Yes, we are about to introduce two additional In-Sight products. We haven't disclosed the nature of them. They're both going to be increased power at the same price, so they will be higher performance divided by price. More performance for the same price. In addition, we're developing another set of sensors which are considerably lower cost, but I don't want to go into that in more detail quite yet.

Jim Ricchiuti, Needham & Company.

Bob, earlier in the year you were pretty cautious about the recovery. I wonder how would you characterize it now, based on what you're seeing in the semiconductor and electronic markets?

Cautiously optimistic. Though I will still say that I don't believe that the OEM part of it is going to be, of our business or even the capital equipment for semiconductors, will be in the next few years. I don't believe it is going to be high-growth.

Is there any change with respect to the business outlook that you saw, say, earlier in the year in Japan versus what you're seeing today? Are you any more optimistic about -- or surprised at all at the way that business has improved?

Yes, I am surprised. In particular, our business with the SMD area, these machines has improved far faster and to a much higher level than we had thought. And also in the wire bonding area, it looks pretty good.

What is your sense on what is driving that?

Don't know.

I just wanted to switch over to China. What can you tell me about your business there?

Well, currently we do have an office in China. That is a very small office. We just a started our effort in China. A lot of our equipment ends up being in China, in particular for electronic assembly ends up in China. That is pick and place machines and discrete printers the alike. Our product ends up there because our OEMs sell into China. But our business in China is quite small right now.

As you look at that, Bob, over the '04, '05 timeframe can you give us a sense as to how you see that developing?

Well, there a couple of scenarios. One scenario is that our end-user business could increase quite dramatically in Japan because -- I am sorry in China -- because there are many factories being built in Japan, and they're going to be automated factories. The problem that, to be frank that we worry about, is if the product is that successful that perhaps somebody will rip it off and try to clone it. And so those are worries that we are trying to address. It would be a nice thing to be that successful, that people want to copy us, but it would not be a good thing to the be copied.

What other question, if I may. On the Surface Inspection business this tends to be somewhat lumpier.

Very lump.

And you did have a couple of very strong quarters. What is the outlook for Q4? Do you see another kind of sluggish type quarter or do you see that picking up?

Frankly, Q3 was down with respect to Q2 on bookings for Service Inspections, and the current expectation is that Q4 will be up.

Q3 was down for a couple of reasons. We don't feel that we lost any projects or any business or any competitors. Q2 ended up being stronger than we thought because some projects, the POs were cut a little bit earlier. We had anticipated the POs being cut in the third quarter. We got them in the second, so that helped the decline further. And now it seems that a few other projects are being delayed. Some of the capital projects people wanted to get them spent, I think, early in the year before anybody could then go back and cut them or whatever. But we do expect an increase in Q4 over Q3.

(OPERATOR INSTRUCTIONS) Richard Eastman, Robert W. Baird.

I just had a question. Could you add some clarity to the comment that you had in the press release about pricing pressure, where that was, and perhaps if there's a particular competitor threat there?

I think the comment dealt with, we did see from a couple of OEMs. They were looking for some price relief. And it had to do with some of our legacy products. We did, in fact, discount some of those products to them during the quarter, with the commitment as they were looking -- they're committing to go next generation with Cognex for their next piece of equipment. So we gave them a little bit of relief during the quarter on some of our old legacy systems.

Was the impact measurable in basis points on the gross margin line?

It created a slight decrease in the standard margin for our MVSD product, but it was not a major cause of a change in the margin during the quarter.

And then secondly, in terms of the OEM business, if we just focus in the semiconductor portion of that, could you give maybe a little color on the back end versus front end there? Maybe X the Siemens acquisition, which probably influenced the front end growth rate?

I am sorry. I wasn't paying attention. I apologize. Can you repeat the question?

Just in the semiconductor piece of your business, could you give some color on the growth rate on the back end and the front end?

Sure. I think I can, as a matter of fact. I happen to have some front-end numbers. Front-end numbers look flat relative to Q2 of 2003, sequentially up very slightly, but down relative to Q3 of 2002. The back end is -- there is no subtotal on the back end, is there? Oh, here it is. We should add those up for back end. Let me see if I can do it. I am going to tell you in a minute. Yes, the back end, which includes probers -- there's always a question where to put probers, okay? Where would you want to put probers?

I would put them in the back end.

You would put them in the back end? Okay. So if I put them in the back, we are up quite substantially relative to Q2 2003, and down from Q3 2002.

Is there a message in that? I'm a little bit surprised that both those businesses are down year over year, but obviously rebounding. Is that, again, the trend on the rebound, or acceleration would continue from here?

No, but I would tell you on electronics, electronics are up year over year. And that is where our OEM business has substantially picked up.

And then just one last thing. Just to clarify, the book to bill in the quarter in the MVSD business, was that greater than 1 in the total business?

(multiple speakers) I don't know if we want to talk about that. Because if we give him book to bill, he already has bills, and then he will have book.

We did say that (multiple speakers)

It was less than 1 in the press release, I believe.

Yes, in total.

In the total business? But I mean, it is obvious that the Service Inspection business was down in orders as you are working off the backlog there. But I'm just curious if the balance of the business was greater than 1?

The book to bill on the MVSD side with just slightly under 1.

And, Dr. Shillman, I will turn the conference back over to you for any additional or closing remarks.

Well, we're happy to see that there were a number of callers. And we're happy to see that there are very few questions, which means that we do provide, in written form or electronic form, all the information that you may need.

If there are any other questions, feel free to call Sue Conway. She will be available all day tomorrow to answer your calls. And I just want to thank you very much for attending. And I look forward to another very good quarter in Q4.

Thank you. Thank you for participating in today's conference. There will be a replay available beginning at 9:30 PM Eastern time tonight, and ending on the 17th of October 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 7537853. (OPERATOR INSTRUCTIONS) Or you may listen to it on the Internet by going to www.Cognex.com. Once again, that web site was www.Cognex.com. Thank you.