Cognex Corp (CGNX) 2009 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Cognex Corporation fourth quarter 2009 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Richard Morin, Chief Financial Officer. Sir, you may begin.

Thank you and good evening, everyone. Earlier tonight we issued a press release announcing Cognex' earnings for the fourth quarter of 2009. For those of you who have not yet seen this report the copies are available on our Web site 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 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 items 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'll turn the call over to Bob Shillman.

Thanks, Dick, and good evening everyone. I'd like to welcome each of you to our fourth quarter conference call for 2009. As you can see from the press release that we just issued, we reported revenue of $51 million for Q4 of '09, then earnings of $0.01 per share. Excluding stock option expense, and also excluding a modest restructuring charge and tax adjustments, earnings were $0.08 cents per share. These results of both GAAP and non-GAAP are higher than our expectations and are due to higher than anticipated order levels for the quarter.

More good news is that bookings for the fourth quarter increased over both the fourth quarter of '08 and the prior quarter. This is the third quarter in a row where orders increased on a sequential basis. Even more encouraging is the fact that Q4 represents the first quarter since the global economic downturn began to impact our business where orders increased year on year. The result of all this is that we ended 2009 with $31.5 million in orders of backlog which is $1 million higher than the level we had in backlog at the end of '08.

The improvement in business that we experienced in Q4 led to sequentially higher revenue in each of the three markets that we served that I'll describe now. Revenue from the semi-conductor and electronics capital equipment market, or SEMI, as we call it, was approximately $6.3 million for the quarter. That represents an increase of 59% or $2.4 million on a sequential basis. And we saw improvements in all geographic regions. In the surface inspection market, revenue in the fourth quarter was $11.2 million which is the second highest revenue level ever reported for our service inspection systems division. Revenue for the fourth quarter increased 34% over the prior quarter due to higher demand from the paper industry which we first experienced in North America in Q3, and later in Q4 in Korea and Japan. In particular, we received an order for more than $1.2 million from one paper company in the US, and an order of $800,000 from a paper company in Korea, and a multiple system order totaling $1.8 million from a large paper manufacturer in Japan. These were competitive wins in an industry that recently began to invest in plant upgrades and retrofits after holding spending quite low for a few years.

To capitalize on this trend, we plan to introduce a new product, named SmartSystem, for the paper industry by the end of Q1 which combines our SmartView surface inspection system with our recently acquired SmartAdvisor web monitoring system. This integrated product should enable Cognex to win both new customers and also retrofit business in the paper industry.

In the third market that we serve, which is factory automation, revenue was $33.7 million in Q4. This is an increase of 17% over the prior quarter, and each geographic region reported a sequential increase. Europe is turning around more slowly than the other regions. The business trends we are seeing in North America are encouraging and we are making good progress in Asia and Japan which are two regions which we have been investing resources in over the past couple of years. The increase in factory automation revenue over the prior quarter was primarily due to higher sales of our In-Sight product line through our distribution network. However, there was also one large order from a new customer for DataMan ID readers that we received in Q3 and most of which were shipped in Q4. While the pricing on this order was discounted more heavily than normal, it was an important win for Cognex because it provided significant incremental revenue and, more importantly, additional gross margin dollars. In addition, when we closed that deal, we believed that there was the potential for future business with that customer, and I'm pleased to report that we just received a substantial follow on order from that customer in January.

We reduced our cost structure during 2009 which gives us the potential for excellent operating leverage. This was apparent in our fourth quarter results as we reported operating income that was $2.4 million higher than a year ago on slightly lower revenue. As we focus on revenue growth we are laying the groundwork in several key vertical markets where we believe there will be strong demand for Vision in the future and I am going to talk about those now.

One of the markets is the pharmaceutical industry which is in the early stages of adopting, in anticipation of government mandated requirements, the use of serialized codes on all levels of packaging throughout the supply chain from manufacturing all the way through to the pharmacy. In the coming weeks we will roll-out a new product that's called Track and Trace that will provide for item level identification and data validation. This product should enable us to increase our revenue in the pharmaceutical industry as manufacturers move to comply with the new global traceability standards.

Another new product that we are introducing is called VisionPro Surface. It's a software based product that is used to inspect the surfaces of materials for defects and surface consistency. VisionPro Surface is targeted at surface inspection applications in various emerging high technology markets such as solar thin films, LED displays and lithium ion batteries. These are completely new applications for Cognex in fast growing markets and we believe that they represent good long-term growth potentials for us. We have several beta units of VisionPro Surface already in the field that are functioning well. And this week we received our first production order.

Finally, I'd like to comment on our Vision System on a Chip, or VSOC which is scheduled to be introduced inside a Cognex product in the second half of 2010. This new product will be targeted at an $80 million market that Cognex has not yet previously served at all. This particular application, which I'm not going to go into for competitive reasons, has very demanding requirements which we believe cannot be served by existing machine vision technology, and that's why we had to invent VSOC. The speed and other capabilities of VSOC should enable us to quickly gain incremental revenue, profit and market share in a new area for Cognex.

In summary, our outlook for 2010 is positive. The pickup in demand that we experienced in Q4 has continued, so far, into 2010. And based on that. we expect revenue for Q1 of 2010 to increase by up to 5% on a sequential basis, and we expect earnings to increase at an even faster rate. This is good news because we typically experience a decline from Q4 to Q1. Although we continue to be cautious given the uncertainties in the global economy, we are planning for revenue in 2010 to increase over 2009 as we gain traction from our new product introductions and from our collaboration with Mitsubishi in Japan. Also, we intend to keep a tight rein on spending in 2010 and therefore a significant percentage of the revenue increase should flow to the bottom line.

That's my prepared remarks and now I'd like to open up the conference call for any questions you might have for the team that's here with me this evening.

Thank you. (Operator Instructions) Our first question comes from Chuck Murphy of Sidoti & Company.

Good afternoon, guys. Congratulations on nice quarter. Bob, could you talk a little bit about which end markets were the strongest? I realize the segments were all up but maybe drilling into factory automation, anything stand out?

The printing industry is one that stands out quite a bit for us. We received some substantial orders from customers that do fulfillment in that industry. In addition, a lot of our growth came through distribution and therefore we don't exactly know where the products ended up.

That was going to be one of my other questions, just about that DataMan order. Should we assume that's the printing industry?

That's correct.

And my other question was, can you walk me through how the accounting works for the purchase of the underwater option? Does any of that flow through the P&L?

Dick will handle that.

What flowed through the P&L relative to the purchase of underwater options, because what we did is we had an outside analyst help us work through what the current value of those options were which is what we offered so there wouldn't be any incremental charge. However, to the extent that people turned in unvested options, the option expense that would have been recorded over the remaining vesting period got accelerated and recorded in Q4. So we did have, I think it was roughly $2.5 million or so of expense that hit Q4 that would otherwise have been recorded at some point in, mainly, 2010.

Got you, okay. That's all I had. Thanks.

Our next question comes from Richard Eastman of Robert W. Baird.

Good afternoon. Just a couple questions. back to Bob, could you talk to the factory automation business and what percentage of that in calendar '09 would have been ID product sales, all the various DataMan products. Is it 30% or 40% or is it not that large?

No, it's not that high. We are looking it up now. We have a number of different products for reading codes and reading serial numbers. So I'm going to answer your question explicitly about the factory automation of that. Our business of reading semi-conductor codes, the codes written on semi-conductor wafers, has picked up quite dramatically. You want me to exclude that, I assume.

I just want to break factory automation down a little bit because obviously, as we roll into '10, it sounds like there's a pretty good assumption that that product ID business would by far be the faster grower.

First of all, that is correct, of all of our product lines the ID has been the fastest growth for the part two or three years. Dick, do you have the numbers?

Of the ID applications that we are able to identify, that accounted for about 15.5% of total consolidated revenues for the year.

Both MVSD and SISD.

That's correct. And the issue that you have there is, to a certain degree, some In-Sights that we sell can be used in ID applications. We don't know that for a fact.

It might be more.

Yes, it's definitely not less. And some of the items that we sell through distribution, In-Sight through distribution that might be used in an ID application, we don't know, as well. But the DataMan product line we know exactly what that is, so the DataMan and those In-Sight specific ID applications that we know about, and that totaled about 15.5% for the year.

What's the actual revenue number, do you have that?

It's bout $27.5 million.

It might be higher because, as Dick mentioned, when you buy the general purpose In-Sight, there are ID tools in that package so we just don't know.

I see. Okay. So $27.5 million on, say, $122 million. So it's maybe 22% of factory automation, just to be in the ballpark, and that piece, again, should grow faster than the Vision product that's in the factory automation. Fair?

It should, could, would, we think it will.

Okay. And can I also just ask you on distribution, and maybe just at year end just to get us oriented, how much of the product now is going through distribution in terms of percentage of total sales?

Do you mean the reader or any?

Just total sales, total Cognex revenue.

What percent of Cognex revenue.

22% according to Sue Conway. We have one of those magic eight balls here, too. We have calculators and the eight ball, so whichever works.

Is the agreement that you have in place that you talked to going forward in Japan with Mitsubishi, does that agreement start with any of the product ID product lines or is that more focused on the general Vision products?

No, the product that is specifically mentioned and called out is a configuration that we designed, we modified specifically for Mitsubishi that links to their HMI system and it's called In-Sight EZ. But once we started training their people, their distributors and salespeople started asking for more products. So we decided to allow them, if they are trained, appropriately trained and capable, to sell any of our products other than Vision software. Is that correct, we don't let them sell Vision software, that's too complex. So they do sell Checker and they sell the standard In-Sight, they sell Insight EZ and DataMan ID products.

Maybe just the last question, when I look at the quarter, obviously the strength was across the board whether it be by product line or end market, but where was the upside to your plan the most pronounced? Was it in the factory automation or SISD.

First of all, it was not across the board. We haven't seen the increase in the automotive sector at all. The next question was what was the lead in this? Can you just repeat it.

I was curious, when you look at the end market, the revenue segments that you break down, factory automation SISD, where was the upside in your plan in the fourth quarter the most pronounced? Was it in SISD where you can ship out of backlog or was it more in the factory automation, short turns business?

Actually the two pieces, where the larger pickup was and what we had expected, SEMI was a big pickup. The change, the increase from Q3 to Q4, I believe was some $2.5 million and that was quite a bit more than what we had expected. And SISD having its second largest revenue quarter was also a bit of a surprise. We didn't quite expect it to be that high.

Okay, great, thank you.

(Operator Instructions) Our next question comes from Jim Ricchiuti of Needham & Company.

Good afternoon. Congratulations, nice quarter. Looking at the Japanese market, it looked like you showed very strong sequential growth and it sounds like, is that mostly coming from the SEMI side, Bob?

Yes.

So the Mitsubishi agreement really hasn't contributed meaningfully yet.

That's correct. Things in Japan take a long time, a long time to get people's attention. We've gotten that. A long time to train people. But once you get them trained, this is going to be a very substantial long-term agreement with them. Our expectations are about $5 million in 2010. I don't know if we've disclosed, we are not going to disclose the bookings but it's on track to do $5 million. The growth in Japan in Q4 was not due to that, it was due entirely to the SEMI.

SEMI almost doubled from Q3 into Q4.

How have bookings been trending thus far in Q1 in SEMI? Do you see that continuing?

Yes.

And then with respect to Mitsubishi, you seem to have a pretty good relationship going and they are clearly taking on some other products. Is there some thought now to perhaps moving into some other geographies that they address?

Mitsubishi has expressed an interest in that and it's a complex area because we have existing distributors in many of the countries but we certainly are going to be their sole Vision supplier around the world.

Is that something that could occur this year, Bob?

Yes.

So looking out to 2011, the Mitsubishi related revenue stream could really begin to ramp, is that fair to say?

No, no. We are doing well in most territories around the world. We needed most help, a lot of help, in Japan where we just were not doing well because of significant local competitors who are (inaudible) and Amran, and we didn't have the name recognition on the factory floor. And more importantly we didn't have the feet on the factory floor. Mitsubishi does. In other parts of the world, Mitsubishi, unfortunately, is not the leader. If you look in various other geographies, there are other leaders, large corporations. But we do expect that there will be revenue through the Mitsubishi channel. Their customers need Vision. We expect that their distributors around the world will open doors for us and it will be incremental revenue that we are not seeing now. But I don't expect it to be as substantial as the revenue we are going to be getting out of Japan.

Thanks for clarifying that. Maybe you can clarify one other point. Going back to the last call, I thought you guys had talked about the ID business being potentially in '09 30 $30 million to $35 million, and, I don't know, maybe you're including some of the SEMI related ID in that.

First of all, I was a professor and I used to yell at people for not taking notes. Now I regret that. I will let Dick answer.

Part of the difference, Jim, has to do with revenue versus bookings. And the number that I gave earlier had to do with known revenue, what we actually recorded. Bookings were somewhat higher. They were just around the $35 million level.

Okay, thanks for clarifying that. Can we talk a little bit about some of these new products and maybe how you see them contributing this year, next year. The Track and Trace for the pharmaceutical market, and maybe also a little bit about the VisionPro Surface product.

Okay, it's time to introduce my partner and Cognex' new President, Rob Willett, who is intimately involved in these new product developments and give him the microphone.

Thanks, Dr. Bob. We are introducing a new product for the pharmaceutical industry which is based on the In-Sight platform. It's going to be called In-Sight Track and Trace. And we are seeing a lot of demand for that product, particularly in Europe, but also in other parts of the world. And we expect our pharmaceutical business to increase probably this year by a few million dollars based around that product line.

And then the second product we were talking about is VisionPro Surface which brings some of the line scan technology we have to play across surface inspection areas that are more for discrete products like pieces of solar glass or lithium ion battery substrate. And, as Dr. Bob, mentioned we are launching that product later this month and we have already taken our first order for that product from one of our initial customers. And we expect to see a good lift again, probably let's say in the $2 million to $6 million range this year, I would say, from customers of that product. And they will be in particularly solar, lithium ion battery type applications, which, as you probably know, are a very fast growing area for investment, particularly in Japan.

Can you say which of the verticals you took the first production order in?

It's solar.

This is Dr. Bob here. This is, I think, the first product opportunity that came about because of the synergy between our surface inspection have division and the modular vision systems division. We moved Marcoux over from MVSD to SISD and the first thing that he did was got some of the surface inspection software and technologies running on small platforms for narrow webs. And now we are seeing some of the fruits of that. These are not webs, of course, but they are in-process kind of technologies. They are discrete items but they are moving and the customer is very interested in looking at surface defects and flaws and the like, so we are quite happy about this and the margins are very good.

What's the competitive environment like in this area?

So far, there are about three companies that we know of. Two of them are from the surface inspection business starting to enter into this, I think following on to our disclosures. And those are the ones that I know about. I don't believe that there will be a play for the capital equipment makers such as Orbotech because these are in-process. So unlike the PCB inspection business where they have boards, and they put them into a machine, an Orbotech machine which has to convey them back and forth, these are products that are made in a continuous flow essentially, and are better served by Vision systems such as Cognex discrete vision systems using line scan technology.

Do you guys have a sense as to how big a market opportunity this might be? It sounds like it could be fairly large.

The current estimates that we have, but it's a brand new opportunity, but it appears that this could be a $20 million to $30 million business in five years.

Okay. And just on the pharmaceutical segment, how much are you doing right now in pharmaceutical inspection?

We are looking it up.

This product is, initially you are seeing some demand for this in Europe? Do you expect this will be in demand within the US as well?

We are already selling that product in the US, we have a number of large US pharmaceutical customers that we've been selling into the pharma industry for. The new product that we have will address much better than what we've been selling them in the past, particularly around this traceability issue. And the answer to the question about the --

It's about $6.7 million for the year, 4% of revenues.

But, again, I want to caution everyone that those are the ones we can identify. Increasingly, I forget what percent of our business goes through distribution, a lot of that could end up, it does end up at various opportunities which are not identified by us.

Okay. One final question, if I may. I just wanted to understand the comment that you made, Bob, about operating expense being flat in 2010 versus '09. Are you guys taking out the expense you incurred for the unvested options, underwater option expense?

No, what we did is we are taking a look at total expense excluding the restructuring charges and we are looking year on year and saying that it will be relatively flat.

So basically, Dick, on a GAAP basis or just excluding the restructuring expense?

Correct.

Okay. Terrific. Thank you.

(Operator Instructions) We do have a follow up from Jim Ricchiuti of Needham & Company.

I thought I would just lob one in about Europe. That seems to be the one market where the recovery appears to be lower. What's your sense as to when that might pick up and what particular parts of the business you might see it in?

It's been picking up. It's just that the rate of pickup in Europe is slower than what we are seeing in North America and Asia. It's not that it's declining or anything like that. It's just that it's not picking up quite as fast as the other regions, Jim.

Okay. And anything you can say about business in China at the moment?

The China market for Vision is small but growing very quickly. We see substantial growth off a pretty small base for us in China. But we are investing significantly there, adding a lot of sales and service people and management capability in the China market and we are very bullish on that.

Okay. And, Bob, one final question if I may. Acquisitions. Anything that you can talk about? Has the activity level picked up a little bit or maybe you can just comment on that?

Rob has put in place a very formal process. We have (inaudible) full time on acquisitions and we review that. As a matter of fact every two weeks now there's an acquisition funnel meeting that we have. And there are one or two companies that are attractive. Whether or not they can be purchased at prices that we consider to be fair is a question, but, yes, we've found a couple good sized companies that we would like to merge with Cognex. At this point I am not going to comment about the markets they are in. But the margins look quite good and the technology is stuff that we understand very well.

Okay. Thank you.

We do have one more question, Richard Eastman of Robert W. Baird.

I thought I would get back in the parade here. From a booking standpoint, just picking together the pieces here, you did mention the bookings were greater than sales, so book-to-bill was greater than one in the quarter.

Did we say that? We talked about the ID.

The only thing we talked about was comparing that the backlog grew year on year.

We were talking about the ID when somebody asked about the ID.

We haven't talked about bookings other than that, Rick.

Would you care to?

All right. You got us in a good mood.

I think I'm throwing you a softball but I'm not sure.

Book-to-bill is better than one.

Again, we have a first quarter that, again, suggests maybe it will be up sequentially about 5%. Is there anything, I'm just trying to think out for the balance of the year, one thing we haven't heard a lot from Cognex about as we've entered the new calendar year, has been really measurable new product growth. And again we've listed a few things on the pharma side, the VisionPro product. Is there a targeted new product revenue contribution number that you could offer to us so we can do a look back in six to nine months? Again, that feels better than entering calendar '10 and saying some of these end markets are rebounding. That's certainly a plus. But we have spent a lot on R&D. We've made a lot of progress on some of these products. Can we get to a point where we can generate 5%, 6%, 7% growth in '10 from new products?

Good question. Here's Rob.

The best thing is we don't have a formal vitality index or anything like that that we measure inside the Company. Maybe it's something we choose to put in place. But we do have a significant stable of new products we are launching. We've launched two already this year and I expect probably to launch another eight by the end of the second quarter. Which is probably more than we put out into the market. But some of those things will be incremental performance improvements to our existing In-Sight product range. Really, if you look at our largest selling product, which is the In-Sight line, we are continually upgrading In-Sight Explorer which is the software suite which really is the power that sits on that product line. One could make an argument that really almost all of our sales are coming from products that we've launched in the last 18 months.

Yes, that's kind of a dynamic with the business on the software side and more capability. But it's not easy to forecast that into, is Vision really penetrating the market in a greater way. Can we truly leverage up a market recovery with more Vision penetration into some of these examples. There's certainly, the new products you can do that. But much of your older markets, if you will, are just more mature markets. Is that Vision penetration story still there? Is that something we should be thinking about as we recover that we can recover faster than the market with penetration and on top of that layer some new products into some of these new markets?

I think it's an interesting question. It's one that we would probably be better able to answer when we are a bit further into the economic recovery. But I would say this, that we have, in terms of unit growth we obviously see that essentially going on inside our business, and we see a lot of new customers and new applications for Vision all the time. We have more than 150 seats around the world where people come in to learn about Vision and we train them. And these people are not really using Vision very much today and want to in the future. So there certainly is that dynamic, and I'm very, very confident about the base growth of the Vision market in the coming years. Okay, thank you.

That's it, Sue?

We are not showing any further questions.

Okay. I want to thank those of you who are still on the line for attending and we are looking forward to a rather good Q1 and we hope to be able to report good news to you in early Q2. Signing off, this is Dr. Bob from Cognex Corporation.

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