Cognex Corp (CGNX) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Cognex Corporation first quarter 2008 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions on how to participate will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference, Mr. Richard Morin. Sir, you may begin.

Thank you, and good evening, everyone. Earlier tonight we issued a press release announcing Cognex' earnings for the first quarter of 2008. 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 are not going to repeat most of that material.

During tonight's call we intends to discuss our financial results as reported under GAAP. However, it is possible that we may use a non-GAAP financial measure, if we believe it is useful to investors, or if we believe it will help investors better understand our results or business trends. For your reference, you can see the Company's income statement as reported under GAAP in Exhibit 1 of the earnings press release, and a reconciliation of certain item in the income statement from GAAP to non-GAAP in Exhibit 2.

I'd 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 risk factors. Now I will turn the call over to Bob Shillman.

Thanks, Dick. Good evening everyone. Well, actually it's almost evening here in Natick, except at Cognex where it's rather bright. As you can see from the press release, we just reported revenue of $60.5 million, and earnings of $0.20 per share for the quarter. As expected, these results are down from the prior quarter, but they represent a substantial increase over the first quarter of 2007.

First quarter revenue increased by 19% year on year, and we essentially doubled the EPS reported for Q1 -- versus Q1 of '07. These increases are occurring despite our semi business which is still in an industry downturn. Revenue from the semiconductor and electronics capital equipment market, which we call semi, was $13 million in the first quarter, but it was down 12% from Q1 of 2007, and flat on a sequential basis. Demand in semi continues to be soft in Q1, and the timing of a pickup remains uncertain which is typical for this market.

Next in the Surface Inspection market, which is the second of the three primary markets that we serve, revenue was $6 million in the quarter. As we have said in the past, Surface Inspection is a very lumpy business, and that was particularly apparent in Q1 by the swing in revenue. Revenue for Q1 increased 8% year on year, but decreased nearly 50% from the fourth quarter 2007, which is the record high level. But that's revenue, and there are also some complications between bookings and revenue, and frankly, this is a bookings business. And I want to tell you that bookings in Q1 were substantially above plan. And business in general in Surface Inspection is quite good, particularly in the metals industry, where we are winning new business at mills in China and elsewhere in Asia.

The largest increase in revenue, moving on to our third piece of business, is in the Factory Automation segment, which is our third and largest market segment. Factory Automation revenue increased by $11 million, or 36%, from the first quarter of 2007, and even more impressive is that we set a new record for quarterly revenue in Q1 of $41 million, beating the old record of $40 million just at last quarter.

In Factory Automation we have four product categories, which I am going to describe to you now. The first is called Vision Software, which is our general purpose software library that a customer, who is typically a system integrator or machine builder, purchases from us, and then incorporates into other equipment on the factory floor. The Vision Software runs on a PC, which is also built into the equipment. Customers purchase the other hardware, such as cameras, framegrabbers and PCs, either from us or from a third party supplier. The Vision Software category includes the VisionPro products family.

The next segment that we talk about -- our next product line that we talk about combined -- is called Vision Systems. Vision Systems combine our general purpose software library with a camera and processor, into a single rugged package for the factory floor. In addition, the user interface is simple and flexible enough for less technical users. The Vision Systems category includes our In-Sight and DVT product lines.

The third category is called Vision Sensors. Vision Sensors is a very simple low cast alternative to additional photoelectric sensors, and they provide more reliable inspection for error proofing and part detection. We currently offer the Checker 200 Series for checking presence/absence of parts and features.

The last product category is called ID Products, and that reads and verifies 1D and 2D codes, that have been applied or directly marked on discrete items, during the manufacturing process. The ID products category includes an In-Sight product made specifically for ID, as well as the DataMan product line of hand-held and fixed mount ID readers.

Each of these four factory automation product categories increased year on year. Our fastest growing product category was ID Products, which increased 71% over Q1 of '07. It was followed by Vision Sensors which was up 59% year on year, and by Vision Systems which increased 33%. Vision Software showed the smallest software increase at 8%, which actually is not too bad considering that many of our customers for that product line are in consumer-- in the consumer electronics industry, and they are experiencing the same challenging industry issues that we see in our Semi market.

In addition to each factory automation product category increasing year on year, each geographic region we served also increased over the first quarter of '07. The largest increase in absolute dollars was in Europe, where revenue increased by more than 50% year on year to $17 million. That was due to continued strong demand, our established and growing sales organization, and to a far lesser extent the impact of foreign exchange rates. In Japan revenue increased by nearly two-thirds to $6 million, which we believe is primarily due to our new sales leadership and the team there. Revenue from the Americas was up 7% year on year, which was slightly better than expected, and Asia excluding Japan, which is where we have been adding the most to our sales and marketing personnel, increased by a whopping 76%, making it our fastest growing region in percentage terms, although off of a very low base.

I'm pleased to say the positive trends in Factory Automation are continuing in the second quarter. Thus far in Q2, Factory Automation orders quarter to date are up by more than 30% over the comparable period in '07, and each Factory Automation product category in each geographic region is up as well.

In addition, I can tell you that quarter to date, on SISD is doing dramatically well, considerably above our plan. Given the strong demand that we are seeing in our Factory Automation market, which represents approximately two-thirds of our business, and also in our SISD market, our outlook for the company as a whole in Q2 is very positive.

We expect that the total revenue for Cognex will be in the range of $65 million to $68 million, which represents an increase of between 17% and 24% over the second quarter of '07, and between 7% and 12% on a sequential basis. At that revenue level, we expect that earnings will be between $0.20 and $0.24 per share, which is a significant increase over the $0.09 per share we reported in Q2 of '07. And, by the way, the $0.20 that we just reported in Q1, $0.02 of that was due to a $1 million of FX gain, which is not likely to recur in Q2. So our EPS estimate for Q2 that we just gave you, $0.20 to $0.24 per share, on an apples-to-apples comparison, will show nice growth, even at the low end of our estimated range for Q2. Now, I'd like to open up the conference call for any questions that you may have for myself or Dick, or the team that's with us today.

(OPERATOR INSTRUCTIONS). Our first question comes from Antonio Antezano, from Bear Stearns.

Good evening.

Hello, Antonio.

Given the significant growth in the ID business, I was wondering if you could provide more color on the growth rate for the ID business by geography?

By geography. I don't know if we have that. Well, Sue will tell me if we have it. We have it. We have everything. Except nice weather.

But we need the rain.

We need the rain. Got it. Okay. By geography, let's see, did I miss it? We will get back to you. Do you have another question while we get that?

Yes, regarding the Surface Inspection business, it's been very lumpy, but I was looking in your 10-Q, at the profitability, also has been very volatile, I think it's more loss this quarter. I was wondering, a couple of quarters ago, you mentioned that there was some initiatives to increase profitability for that business. I was wondering if there has been any changes, or any initiatives, recently to do that?

Well, I am going to answer overall, and then Dick can jump in with specifics. The reason that you see losses -- because the revenue recognition method is frankly, quite absurd, that we are forced to follow. So we may have a quarter, where we have $8 million in revenue, where we didn't even ship anything, because we have to defer revenue recognition. The rules don't make much sense, but we have to follow them. And the reason that we are seeing the loss of this quarter is that the revenue according to the rules was $5 million or $6 million.

It was $6 million, in all due respect, $6 million is not quite at their break even level to be able to support the level of operating expenses they have for the engineering development, and sales and marketing. If you go back to Q4 where they had approximately $12 million in revenues, you will see that the operating income turned out to be well in excess of 20% for that particular quarter. So while we have to defer the revenue, and we also defer the COGS that's related to that revenue, the operating expenses, they hit the P&L in that particular quarter. So what you really need to do is have a revenue level that at least gives you to the break-even point, which is probably somewhere around the $6.5 million level.

On average. We certainly do, we exceed that. So because of revenue recognition -- if we had opted at one point, for a method for -- partial completion.

Percentage of completion.

Percentage of completion, you wouldn't see that kind of revenue. I can tell you we receive more cash in SISD this quarter than we show as revenue. It's the strangest thing, the customer can pay us and accept the product, and we can't recognize the revenue until something else happens, it just drives you crazy. So it's a bookings business. If you look at bookings, ultimately that does turn into revenue -- not ultimately, in three months or six months. So we don't here -- the management here doesn't pay attention, frankly to the quarterly P&L for SISD.

And I was wondering if you can comment on the ramp up of the new products that you released early this month. Maybe you can just provide color on the new DataMan or the new micro line?

Yes, thank you very much, we just shipped today -- I think today was the first day of shipping the new DataMan products, so I can tell you that the growth is phenomenal because the base was zero, amazing growth from zero to some number, I think we shipped 100 of them. Micro, from what I hear from the sales force, I don't have the numbers in front of me -- is exceptionally well-received by the sales force and we are just very bullish.

Okay, I can get back to you Antonio on --

(inaudible)

Okay. I am not going to split them out, but I will tell you which products I am talking about, I'm talking about the new Checker, it's called Checker 232, the new DataMan, the new micro and also Vision View, I am going to lump those together because there are competitors on the phone. In all of Q1 we shipped $1.5 million. In all of Q1. We already booked in the first month of Q2 that same amount.

Okay.

So $1.5 million in all of Q1 and we've already booked-- we've already booked that same amount year to date in just one month-- quarter to date, one month.

Antonio, the other question had you was relative.

The growth for ID by geography.

What I am going to do, is give it to you for DataMan, which is strictly ID, because there's some industrial ID on the In-Sight product that gets classified as -- when we don't know the exact application gets into In-Sight, and we don't know how much of it is ID, but what we specifically know relative to DataMan, you are looking at the first quarter of '08 versus the fourth quarter, or versus the first quarter of '07?

Year over year, yes, versus first quarter.

Okay, year over year in the U.S. the increase for DataMan was 78%. For Europe was 190%. Japan, 7%, and for Asia it was over 1000%. And that's only because it was a very, very, very low base. Okay?

All right. Okay. Thank you.

Next?

Our next question comes from Chuck Murphy.

Good afternoon, guys.

Hello, Chuck.

Just a quick question for you here. I know Bobby talked about the ID growth in large part being related to 2D. Is that 2D market is kind of that specifically direct part marketing -- or direct part marking, or is there something else involved there?

No, we started in direct part marking -- reading of direct part marks, which is the most difficult, and that's where our technology really outpaces all the competition. But as we went into plants and got the orders for this, the customers then asked us, many of them, they said well, you know, we'd like to use the product three feet down the line here reading labels, and we don't want to list up another one, do you have a product that you can sell us? And we said buy more of these, and they said no, they're are too expensive. So we came out with new more DataMan products, with varying capability, and decreasing capability and decreasing price.

They don't need that capability so they are not getting cheated. They are reading labels. We are selling --- we expect to sell a lot of them, and it looks very good. Those customers have said, yes, we are buying them, a major automobile manufacturer at least on one plant is standardizing on this product.

What is the price on that DataMan product versus your competitor? Ballpark?

I would say about $1,000, but I don't have it with me. The high-end sells for $2,000 to $3,000, and I believe it's less than $1,000.

Okay. All right. That's all I had. Thanks.

You're welcome.

Our next question comes from Jim Ricchiuti.

Hello, good afternoon.

Hello Jim.

You gave a number, I think for the North American Factory Automation business being up. Could you just repeat that, I wasn't sure if I got that, did you say up 7%?

You're fading a little bit, but I got the question, and I know where it is. Okay, 7% year on year.

Okay. And Bob, I was just wondering if you could talk a little bit about the strength you are seeing in maybe some of the vertical markets, just given the concern some people have about the economic slowdown. It seems like you are bucking the trend, but I was just wondering where you are seeing it from in the factory automation area?

I can tell you that although the doom and gloom, or there appears to be doom and gloom in the United States, that is not the case in other economies. So we are doing well in all areas. There's nothing in particular that --

Even in the U.S. we're ahead --

11% percent isn't bad.

And Q1 was ahead of Q4. So we are seeing good business opportunities here in the United States.

Now maybe we are seeing a lot of growth because last year was so poor for us, because we had a screwed up sales and distribution system. Not the people, of course, it's just the way we managed it.

But even there Q4 was ahead of -- Q1 was ahead of Q4, and by Q4 we had those issues resolved. I think -- we are seeing pick up in auto, and the food and beverage, or whatever -- those industries. We are not -- maybe if the gloom and doom wasn't apparent, maybe we would be doing even better, but we are seeing good business opportunities here in the United States at this moment in time.

The SISD business -- you had a good bookings quarter, how should we think about shipments just in terms of modeling? Is it going to pick up, the shipment levels pick up in Q2, or is it further back in Q3, Q4?

No, we do expect that there will be a significant increase in -- I'm going to call it reported revenues, not necessarily shipments, okay, because of the revenue recognition rules or whatever. But we do expect reported revenues in Q2 will be significantly ahead of what we reported in Q1.

And just given what you are seeing out there in the market, any plans to expand the sales force in any particular, either verticals or geography? You had talked about certainly expanding in China, I don't know if you're continuing to do that?

I thought I mentioned this last call, but maybe not, I believe we are opening an office in Hungary, and Romania, in Yugoslavia I think, and Vietnam. I told Eric, blank check to go higher. Because things are great out there. We have the money, we can now invest in the expansion of the sales force.

The particular verticals that look good to us are food and beverage and pharmaceuticals look very good to us right now. And automotive outside of the U.S.

Bob, activity on the acquisition front, or do you just see a lot of activity within the business, and that's more on the back burner?

I would have to say is we are looking at some companies, but there's nothing on the front burner right now.

Okay.

We are focusing on the business. But that doesn't mean we couldn't do acquisitions. We have one full time guy, (inaudible) based in Germany looking at acquisitions for us, and he's hitting the ground running, and there are some things in the ID space that we are looking for, and pharmaceutical space that we are looking at, but nothing is even on the middle burner yet. It's all on the back burner.

Thanks very much.

You're welcome.

Our next question comes from Richard Eastman.

Hello. Can I return for a second to the U.S. business? I think the numbers kind of suggest the U.S. was off a bit year over year, and with Factory Automation plus seven is -- then obviously SISD was down U.S.? You don't do much Semi OE, right?

No, that was done by the way.

Semi was --

Very small in the U.S.

Small there. So the SISD business must have been down in the U.S. I take it, in the quarter?

Hang on one second. It was down compared to both Q4 and Q1, yes.

That would be the difference? Okay. And then can I ask if the Factory Automation business in the U.S. -- how did the sales look, distribution relative to direct? Are the distributors in softer shape because of maybe some of the end market exposure in the auto and --

Actually let's see. During the first quarter from the -- let's see, bookings percentage over our crew distribution, they hit their highest point of bookings ever, since we've had the distribution network.

The percentage was the highest or the dollars?

The dollar was the highest, and the percentage is relatively the same as it has been last quarter, whatever. In the first quarter of '07 their percentage was somewhat higher because our direct sales force here in the U.S. wasn't doing as well. But the distribution network had in total bookings the highest dollar level in Q1 of '08.

Okay.

It looks like Eric [Sorel] who has taken over about a year ago, has done a tremendous job in shaping up both our direct sales organization and the management of the distributors to make sure they are happy and motivated and out there.

And then can I ask a similar question in Europe now? The gains you've shown, I don't know if you are in a position, but can you give us a currency number for the quarter? Total?

No, but I'll tell you this, because I know what you're looking for. The growth would have been instead of 50% in Europe, it would have been -- without the FX it would have been 40%. So we expected that question.

That's growth year on year in MVSD revenues. One of the problems that we have is the reported revenues for SISD compared to shipments or whatever, and the FX rates at the different times, it's nearly impossible to be able to track the impact on revenue.

Okay. But you're suggesting perhaps in Europe, about ten points of currency growth?

That was year on year in Factory Automation, yes.

Okay. And in Europe, are we seeing the same pull through on the product ID, or by verticals, or is there anything of consequence there that you can delineate in terms of growth rates in verticals, in Europe?

No, well, the only thing I can tell you is that European auto industry has been very strong the last couple of quarters.

He's asking ID specifically.

ID, I'm sorry. Is that correct?

I was actually trying to get to the verticals, but I didn't know if it was easier for you on product side, I'm just trying to get some sense of what -- if the growth is skewed either by product or by vertical, just trying to get a sense.

I can tell you that all product lines are growing, every one of the products except semi, is that correct? Semi --

Semi is.

Okay, okay.

Every product line.

And lastly, the options expense number, does that -- I know some were forfeited here, and that number was about 1.1 million. Does that jump back up to a $3 million quarterly run rate? Did you issue more during the quarter that would take that up, or does that stay at this run rate now for the balance of the year?

It won't stay at this run rate because what we had in Q1 is we had -- because of the way that you have to true up your forfeitures on the anniversary dates of the vesting grants, we had a significant credit in Q1 because last year we had -- we had the departure of Jim Hoffmaster, the COO, and we also had a couple of other VPs leave on the sales side. And so we had a significantly greater catch-up, if you will, on the forfeitures in Q1. But we do expect that Q2 will go up to somewhere around the $2.4 million to $2.5 million level, not up to the $3 million.

And then just stay at that rate for the balance of the year, quarterly?

Yeah, pretty much. It will be right around there. It will be impacted to a certain degree, if we have any new hires or whatever that come through. But it should be pretty close to that same level. Because we do our most significant option grants in the first quarter when we do the annual grants for all employees.

And then just lastly, maybe bigger picture question, from an export standpoint, pure exports out of the U.S. to either Europe or Asia, has that business changed much or, again, is your growth coming out of Ireland, is that -- ?

We do very little exporting because we do have the operation in Ireland that handles most of the product deliveries to Europe, Asia, and Japan.

I understand. Okay. Great. Well, thank you.

Our next question comes from Ben Alexander.

Yes, good afternoon. Congratulations and a very nice quarter.

Thank you, and we are looking forward to a better one next quarter.

Sounds good to me. I want to ask you, what is your philosophy in terms of share repurchase? It looks like you've been more aggressive.

I was just going to say, the only people who are unhappy about the good news and the prospective good news, are people who are trying to purchase stock. That half of my brain says we are going to have trouble purchasing stock. The philosophy is that we should be out there purchasing stock if we have no better use for the money other than acquisitions and dividends. And -- but it all depends on the volume and the price, that's what it comes down to. So the general sentiment is if its accretive, one should generally go forward and buy stock.

Just had another question on the CEO search, is there anything you wanted to share in terms of how that's coming along?

There was never a CEO search. There was a search for a senior executive to help run the company, a President COO, and I can tell you it's going okay. We expect to have some news in a couple of quarters, we're fine tuning that.

Okay. Good. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Our next question comes from Antonio Antezano.

Thank you, just a quick follow up on new products. Now that you launched several new products, should we expect more in the balance of the year?

No.

And commercial products -- a while ago you said you were also working on commercial products. I was wondering if you could share any update on that?

I can share the eulogy for the commercial products. The first commercial product that we were hoping to introduce was called DoorMan, and we have since discovered that we can't do it and make money, so we stopped the development of that product, and unfortunately -- and severed the relationship with that prospective OEM.

Just final question on OEM, we were looking at the bookings data on back end semi in North America. It seems like it's getting more stable, and I was wondering if now that you have almost one month in Q2, whether you see any recovery or any early sign of recovery in that business?

Yes, the recovery that we are seeing so far in Q2 is principally located in Japan, not in the U.S. In the U.S. most of our Semi OEM happen to be front end related, as opposed to back end, Antonio. But we are seeing -- we are seeing a little bit of light, if you will, in Japan.

I can tell you that year to date -- quarter to date, versus prior quarter to date, the bookings are up 25%.

Right.

But they are still down year on year. Quarter to date, versus 2007 quarter to date. So some slight recovery.

All of that increase, though, is coming from Japan.

Thank you.

Our next question comes from Jim Ricchiuti.

I just had a follow-up question with respect to Checker. Are you, you get the sense that you've turned the corner with Checker, the product is a little bit more established, maybe a little bit more mature, and you are starting to get the traction in the market you anticipated?

No, it's not that it's more mature. We've made some changes the customers suggested, and either that, or the time that we spent explaining it, have really helped. Year to date we are up 68% bookings on Checker. And it looks like this will be a $10 million year or more for Checker. So I will be vindicated.

Bob, is most of this going through distribution at this point?

I don't have the answer to that. I don't know. Nobody here knows.

We can try and find out.

We have the data, just not with us. But I don't know. I would say yes. That would be my guess, but it's a guess. But at any rate it looks great. I'm looking down the chart here, and every single product line is just doing great. Except, again, anything to do with Semi.

Congratulations on the quarter.

Thanks.

Our next question comes from Stephanie [Divect].

Hello Stephanie? Well, that's an easy one. How about the next one?

I'm seeing no further questions on the phone.

Well, that makes for a short meeting, and a lower conference call bill. So again I want to thank whoever is there for attending the call, and hopefully report to you even better results in Q2. See you down the road.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.