Cognex Corp (CGNX) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Cognex fourth quarter 2005 earnings call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, CFO, Mr. Richard Morin. Sir, you may begin.

Thank you and good evening everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the fourth quarter and full year of 2005. For those of you who have not yet seen this report, a copy is available on our website at www.Cognex.com. The press release contains detailed information about our financial results, and because of that we're not going to repeat most of that material.

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 most recent Form 10-K for a detailed list of these risks factors. And now I would like to turn the call over to Bob Shillman.

As all of you can see from the press release we issued a short time ago, 2005 was a very good year for Cognex. We reported revenue of $217 million, which is an increase of 7% over the 202 million in 2004. And we reported earnings of $0.74 a share.

The revenue growth that we reported today for 2005 is the net effect of a number of factors. First, on the negative side sales to our customers of the semiconductor and electronics capital equipment industries declined by 33% year-on-year, which of course negatively impacted revenue for 2005. As many of you know, this market is highly cyclical, and 2004 was a growth year that was followed by a down year in 2005.

The good news is that in the fourth quarter of this year of 2005, we have seen a tick up in business with some customers in this area, primarily those in the back end of the chip making process.

The first of several positive impacts on revenue for 2005 was our acquisition of DVT Corporation in May, which added 19 billion to our top line. DVT has been a good acquisition to our factory automation business, which is where we currently see the greatest potential for growth.

Factory automation revenue, excluding DVT, grew 22% from 85 million in 2004 to a new record for Cognex of 104 million in 2005. This increase was primarily due to higher sales of our In-Sight family of products. I'm very pleased to report that in 2005 In-Sight once again set new bookings and revenue records.

In total, In-Sight revenue increased by 20% year-on-year to $67 million. However, that figure includes the In-Sight Wafer ID Reader which is sold to semiconductor capital equipment customers, and which is therefore susceptible to the cyclicality of that industry. Excluding sales of the In-Sight Wafer ID Reader, sales of In-Sight to the factory automation market grew by nearly 30% year-on-year to $53 million. We knew that this product line was going to be a winner for us, and now we have the data to prove it.

Lastly, in 2005 we set new bookings and revenue records in the surface inspection market. Revenue from SmartView, our surface inspection product, was 34 million in 2005, which represents an increase of 22% over 2004, and is a new record for Cognex. The growth was due to higher sales to the metals and plastics industries. In the metal industry the increase in the price of metal over the past year has enabled manufacturers to make higher than normal investment in their plants following several years of under investment.

And in plastics industry, we experienced a significant increase in business as we sold into new applications such as inspection of [buy in] films, which are used both in the consumer electronics products such as LCD screens for TVs, and also medical x-ray film. The investments we made in new product features and functionality at SISD not only helped us gain market share, but also expanded the market for our products.

We reported reasonable revenue growth in 2005, a bit over 7%, and pretty good net income at 16% of revenue, which by the way, increased to 18% of revenue if you back out the $3 million non-cash amortization costs related to the DVT acquisition. But no matter how we look at it, or how you look at it, our profits declined year-on-year by about 5% due primarily to a steep decline in the semiconductor business from a peak in 2004.

Now many people would say that net income at 16% of revenue is good, and it is. But we have a saying at Cognex, good is not good enough, excellence is expected. So we will continue to work hard and work smart to get our net income to 20% of revenue on a consistent basis.

In view of our confidence of doing that and our belief in Cognex's long-term potential, we are a buyer of Cognex stock -- we were during the fourth quarter. In total we paid out nearly $12 million to repurchase about 384,000 shares. The average price turns out to be about 30.45 per share. And of course we're going to intend to -- we intend to review opportunities for additional purchases in the future.

Now we will open the call up for any questions you may have for myself, Dick or his team. Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Jed Dorsheimer.

A quick question here. I was wondering if you could maybe elaborate or provide a little bit more caller -- if we look at the semi market, back end in particular, some of the results that we are seeing for Q4 and outlook are very positive. I'm just wondering I guess if you could give us a little color on the competitive environment that you're seeing in the marketplace? And that would also mean are you starting to see your customers going with internal solutions, or why aren't you seeing is similar type results or -- and in the outlook?

That is a good question. About four years ago -- I think it was about four years ago -- we sensed a change in the semiconductor capital equipment business. The suppliers of capital equipment were being pushed for price. Their products have become I think to some degree commoditized. Also many of them are manufacturing products now in China. So price became an issue more than performance or features became an issue. And we don't do very well when the only issue is price. Cognex does exceptionally well on solving hard problems, serving those customers at the leading edge, sometimes the bleeding edge, who pay for our expertise embedded in those products.

But if customers are happy with the performance that they're getting elsewhere or that they can obtain on their own, and don't need new features and functionality, then price becomes the dominant issue. And of course when that becomes a dominant issue we look around and look for other businesses. And that is what we have been doing in the past few years.

The competition that we see is not merchant vision competitors. The competition we see, and have seen for a few years, are the OEM engineers themselves who are directed by their management, appropriately so, to do whatever they can to design and manufacture their own products that they have been buying -- that they have been outsourcing. And machine vision was pretty close to the top of their list, given it was a very expensive item, and given that they have over the years learned how to design their own vision systems that function very well for those limited applications at each OEM.

Just in summary, I don't see anything improving for us. Things at best will be stable in that piece of our business. And even those customers who continue to buy from us, we see that we have to make price concessions. We are able to hold the margin by redesigning the product, but that is on a percentage basis of course. On a dollar basis it is bound to be a declining business for our Company.

That is very helpful. Thank you. Maybe as a follow-up to that, could you give us a breakdown on gross profit margin by product, DVT and services?

I think if Dick can do that, it is up to him whether he wants to do that.

Yes, the DVT product line on average has a gross margin of around high 70s. I think it is around 78 or so after considering the amortization of the intangibles. Our service margin is probably around 35% or so.

That is helpful. And then lastly, an update on Checker -- I didn't hear if you mentioned that during the scripted portion.

No, we didn't happen to say anything about Checker, but I can tell you that December was a fabulous month. The bookings were substantial and the run rate is somewhere around $5 million a year. And so we are entering at a very fast run rate, and it was ramping up from there.

I think just a follow-up comment or whatever, the sales of Checker in Q4 increased about 70% over the Q3 level.

Jim Ricchiuti of Needham Capital.

I wonder how would you characterize the bookings for the quarter in general?

Not spectacular. They were up slightly.

Just to give a little bit of color, factory automation grew quarter-on-quarter, but not as much as we had seen in prior years. Prior years we would see a pop -- normal growth in the fourth quarter plus a little extra pop as people were spending their remaining capital budgets. We really didn't get the kiss that we normally did get in Q4, although Q4 was higher than Q3. Semi was quite a bit higher than it was in Q3. But the Surface Inspection division, much as we had expected because they had three record quarters going into the fourth, their bookings level fell in Q4. But on an overall basis bookings did increase quarter-on-quarter.

Was the book to bill above 1?

It varies by the different groups. Let me see. As I look -- I think it was above 1 in the semi. It was right around 1 in the factory automation, and it was below 1 on the SISD.

So overall --.

We're not going to tell you, but thanks for asking.

On the factory automation, the discrete factory, it was -- you pointed out you didn't get the pop that you expected in Q4. In order to -- sales it looks like revenues were up modestly sequentially. How much of that is just the weaknesses we saw in the automotive market?

It is hard to quantify that, but as we take a look Q4 of this year versus Q4 of last year, the total automotive bookings was down. So it has had some effect. It was still at a decent level so a lot of the suppliers to the automobile manufacturers are still looking at improving their quality and their processes to get their costs down.

I will add that on an ongoing basis in the future we're going to have more and more difficulty identifying the market segments that we sell -- that are products go into, because more and more of our product is going through distribution.

Fair enough. One final question. Bob, if you could just given an update, or Dick, on the orders that were pushed out, where do they stand?

The two orders that were pushed out, the one that was on MVSD factory automation is scheduled to ship in February. And the SISD system order is scheduled to ship in March.

Dick, tax rate, should we assume that kind of a rate that you're giving for Q1 to carry forward for the year?

Yes, I think we're looking at a rate of about 26% in cash for fiscal 2006.

(OPERATOR INSTRUCTIONS). [Karen Eng] of Bear Stearns.

This is Karen Eng calling in for Antonio Antezano of Bear Stearns. I was wondering after a strong 2005 what is your outlook for surface inspection business in 2006? What do you think the growth drivers might be next year -- this year?

Some of the growth drivers are going to be in lower-priced products sold into the film market that I mentioned in my press release -- in my comments. In addition, sales will also depend on if metals are going to be making money this year; whether the metal companies are indeed going to be able to price their product at a higher level. We are hopeful that we can grow SISD this year, but the growth if anything will be moderate.

And also, you have so much cash now, what are your plans for this cash?

We get this question quite frequently. It is lower on our list of priorities to wonder what to do with the cash. We're driven to service our customers, to increase products and gross margins and to increase sales were from worldwide, and the effect of that, of course, if you do it profitably, as we have done in 70 of the past 74 quarters I think, is to accumulate cash. So it is just a positive benefit of the way we run our business.

We don't generally worry about how much is there because we have plenty. Having said that though of course we want to earn as much money as we can on the cash or do whatever is appropriate with it, and thus we take the input from our shareholders seriously. Shareholders, when we went to them about two years ago and talked about dividends, even though high-tech companies at that time were not giving dividends, they were very positive about it, and we started giving quarterly dividends. Other shareholders talked about buying back shares at appropriate prices, and we have done that. I think to date we purchased approximately 70 -- somewhere between 70 and $80 million worth of stock back.

What we would really like to do is to grow the business. Of course, we would like to reward shareholders with buybacks and also with dividends, but growing the business is our primary concern. And in that regard we are constantly searching for acquisitions. As a matter of fact most of my time and Dave Schatz’s -- who is our VP of Corporate Development -- time is spent traveling around the world and trying to get deals done.

But we have a very high criteria for acquisitions, and I think that that has stood us very well. We have done I think 10 -- 9 or 10 to date. And we are very happy with every deal that we have done. Now those have been small deals, other than the DVT deal which divvied up $115 million, I believe. That would be -- that is our preferred way of using up the cash. We don't think about using cash, we think about doing things that will grow the business. Some of those don't take cash and some of them do. I can tell you that we expect to -- I haven't spoken to the Board about the dividend, but I expect that that will be continuing. And I expect that we will be buying stock back. It appears to be accretive to our P&L at this point, and given the interest rate and the price of our stock. Does that answer your question?

Definitely. Thank you.

Shao Wang of Lotus Investment Management.

Two questions. One, relative to the success in Checker, for some reason I was under the impression that Checker's success was, at least initially, going to be in the automotive industry, given what has happened there. I'm wondering if I am remembering wrong, or if you could help explain that a little bit further?

And secondly, my recollection is that post the DVT acquisition all the distribution efforts were consolidated into DVD and into DVT. Is there any quantification on either a cost side or how that might help from a strategy perspective?

I will answer the first one and part of the second one and Dick can take on more of the distribution of DVT. Checker was targeted for the discrete manufacturing industry, any industry that makes discrete products, items that you can pick up that are defined one from another, whether it is cell phones or pens or attaché cases or TV monitors.

Having said that, the automotive industry certainly is a dominant player in buying discrete parts. And that would be a logical target for us, but not the only target. We certainly -- we sell the product to consumer products companies that manufacture everything from detergent to water -- bottled water and stuff. We didn't have any particular percentage that we expected to sell into the automotive industry. And Checker is now going through -- exclusively through distribution. And that is going to be the one that is toughest for us to report to you on where it is being so successful.

I expect that much of it is in the Midwest, but there's a lot of manufacturing in the Midwest, not just automotive. So I'm sorry, I just can't answer it better than that because I just don't have the data, and we probably never will.

On the distribution side, yes, we have consolidated the distribution. And I wouldn't say that DVT is running the distribution. There is no entity called DVT anymore. There's a product called DVT. And Dick can talk more about how many distributors we have, where they are managed from. But I can tell you the distributions are run by our North American sales team that is housed in Natick, Massachusetts.

On the distribution side we presently have about 181 distributors. They right now are -- the management of the entire distribution network is being done by the personnel in Duluth, Georgia that came with the DVT acquisition. They had been running a distribution network for many years and were well-prepared to do that. So now the former distributors that we are covering aren’t carrying only the DVT products, they now carry those products as well as Cognex products, including In-Sight and Checker.

Use of the distribution system will allow us to penetrate additional markets and market areas that we couldn't handle through a direct sales force. So in that regard we would expect that revenue should be able to increase at a faster clip than our selling expenses.

Is this distribution channel what is causing the success of Checker in 4Q?

No, I think I would say it is the product that is causing the success of Checker.

In two of the --.

Let me rephrase that. I'm assuming most of Checker's revenues are going through this distribution channel?

That's correct.

That's correct.

Finally, my recollection is you opened an office in China in '05. Was it in Shanghai? How is it doing? Any updates?

Yes, we opened a small office in Shanghai, just to get a foothold and as a base of operations to see how things are going. And we have not yet decided whether or not to put a lot of effort into the China business. Of course, we are selling product in China now. And a lot of the product that we sell around the world ends up in China of course, if it is specified for equipment or for factories that are called transplants and they use it. But we don't have a large effort underway yet to expand our direct selling or even distributors selling in China. That is for the Modular Vision Systems division. For the Surface Inspection division we have had a fair amount of success selling these large web inspection systems.

One last question. Did you have a headcount number?

No, we didn't. Dick can do that.

(multiple speakers) into 4Q.

750 or so I would say.

Headcount at the end of the year was 740.

740. Any guess as to what you think headcount might be at the end of 4Q '06?

It will probably increase by -- another 10 or so, I think.

I think it was more than that.

Oh, is it?

I think so. I don't have the number in front of me. I thought it was --.

No, I'm sorry. I was looking at the wrong number. No, it is closer to 40 -- increase by about 40. I apologize.

That's fine.

My guess is we're going to end up with 30 more. That is my guess.

(OPERATOR INSTRUCTIONS).

Okay. I'm happy that there are no more questions because that indicates that the press releases and the assorted information that we make available to our shareholders fills that need. And I just want to say thank you very much for attending the conference call and for your continued interest in Cognex. We will be talking to you either on the road or the next quarterly call. Good afternoon.

Thank you. This does conclude today's Cognex fourth quarter 2005 earnings call. You may now disconnect and enjoy your evening.