Cognex Corp (CGNX) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Cognex Corporation first quarter 2010 earnings conference 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 call, Mr. Richard Morin, Chief Financial Officer.

Thank you and good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the first quarter of 2010. 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 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 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 risk factors.

Now, I'll turn the call over to Bob Shillman.

Thanks, Dick. Well, even though the weather here in Boston is horrible -- it's gray, rainy and about 80 degrees and humid -- and even though you can't drink the water here in Boston anymore, I'm still in a very positive mood because of our Q1 results.

As you can see from the press release that we just issued, we reported revenues of $59 million and earnings of $0.22 a share. These results represent a significant increase over the first quarter of 2009, and they also represent a very solid growth over the prior quarter. This is especially good news given that it goes against the trend that we typically experience at the start of a new year. For eight of the past ten years, revenue and earnings have declined from Q4 to Q1, while this year was an exception with both lines increasing on a sequential basis. Gross margin, operating margin, and net margin increased substantially in the first quarter as compared to both the first quarter of 2009 and the prior quarter. While the lower stock option expense and the tight rein we maintained on spending helped in that regard, our strong earnings were primarily a reflection of the substantial leverage that incremental revenue has on our profitability.

The increase in revenue in the first quarter of 2010 was due to higher demand from customers in the two markets that are served by our Modular Vision Systems division.

First, in the Semiconductor and Electronics Capital Equipment market, or SEMI as we call it, revenue from SEMI was approximately $9.4 million in the first quarter, which represented a 274% increase year-on-year and 49% on a sequential basis. We saw improvements in all geographic regions as our customers responded to a pickup in demand for their equipment, which is used to make semiconductor chips and to assemble printed circuit boards.

In our second market, Factory Automation, revenue turned up at $41.7 million in Q1, and as those of you who follow Cognex may recall, the first quarter of 2009 included $4.4 million of revenue that had been deferred until a single customer contract was completed. Excluding that revenue, Factory Automation increased by 47% year-on-year and 24% over the prior quarter. Moreover, this increase was broad-based. Each geographic region contributed to the growth -- that's the Americas, Europe, Japan, and Asia -- and each of our primary product lines that we sell in the Factory Automation market also contributed to the growth. And those are machine vision systems, ID products, and machine vision software.

In the Surface Inspection market, which is the third market that we serve, revenue was $7.8 million in the first quarter. Now, revenue from this market can vary from quarter to quarter quite dramatically, depending upon the timing of customer deliveries and system installations. It's also impacted by revenue deferrals. That lumpiness was apparent in this first quarter, where revenue from Surface Inspection customers increased by 11% year-on-year yet decreased 31% from the prior quarter. However, I want to point out that the prior quarter was a record revenue for that division. Demand in the paper industry for our Surface Inspection systems continues to be solid. In particular, we received orders totaling more than $1.5 million from two paper manufacturers in Japan. Both are existing customers for Cognex in an industry that is continuing to invest in plant upgrades and retrofits.

Now, as you look at our business, we see a number of drivers for revenue growth, and I'm going to take a moment to discuss some of those growth drivers right now. The first is improved productivity at existing lines. Now, those of you who follow Cognex may recall that in the past, most of our factory floor vision systems were purchased by customers who were expanding their manufacturing by adding new lines and, therefore, the sales of our products to that market depended on rather large capital projects. But things have changed for the better for us in that regard. Today, a greater number of customers are retrofitting Cognex vision on their existing lines in order to improve the quality of the products that they're manufacturing and to decrease both scrap and rework.

I'll give you an example. A leading manufacturer of consumer products -- and I'm sorry I can't give you the name. We're under non-disclosure by some of these customers in particular. They don't want their competitors to know that they're using Cognex vision to increase their productivity. So this leading manufacturer of consumer products has been adding Cognex In-Sight vision to its production lines. Up till now they weren't using any automated method to ensure that their oral care products were free of contamination, nor were they using vision to check that the packages were properly filled and sealed. We received the initial order in Q1 to install Cognex vision into existing lines of certain plants in the United States, and we expect significant follow-on orders over the next year and a half as this initiative is rolled out worldwide.

Then, regarding the ecology and energy production, we see growth coming from the sale of products to the solar industry. We've been building our customer base, and we're now benefiting from investments being made in solar cell and solar film manufacturing around the world. Many companies currently describe their environment in Europe, for example, as stagnant, but Cognex is seeing growth in that region. That's probably due to our efforts to expand into the solar industry. Orders in the first quarter from that industry in Europe were about $1.5 million, which is a million dollars higher than Q4 levels.

Next initiative is the Mitsubishi one, which continues to make progress by selling Cognex vision systems in Japan. In the first quarter of 2010, 74 Mitsubishi sales engineers completed our rigorous training program, and they are all now certified to sell Cognex vision. The orders that we've received from this channel since the beginning of 2010 are just about at the same level that we booked the entire year of 2009, so substantial growth. Later this month, I will be traveling to Japan to meet with Mitsubishi's top distributors, and I'm going to thank them for the progress they've made and I'm going to investigate how we can even accelerate our efforts even more to get a greater return.

Then, another area for growth is expanding into new geographic regions. We're expanding our presence in developing countries. In Latin America, we're seeing opportunities in both Brazil and Mexico. Particularly in the automotive, consumer goods, and food and beverage industries. Orders for our Factory Automation products from Latin America were $2.8 million for all of 2009, and we've already booked half of that amount in just the first quarter of 2010. We're also investing in China and India. Revenue from the Factory Automation market in Asia in the first quarter increased by nearly 200% year-on-year as new salespeople that we've been adding have gained traction.

Next area for growth is in the area of consumer safety. Consumer safety, and unfortunately concerns over product liability, are another growth driver for Cognex. Here is an example. A leading manufacturer of food products has recently mandated the use of Cognex vision on all of their packaged meat product lines in the United States. The customer was concerned about the possible allergen issues that could occur if mislabeled meat products were purchased by consumers. To eliminate this potential problem, they're adding Cognex In-Sight vision systems to their manufacturing process to inspect each package after the meat is inserted to ensure that it's correctly labeled. This initiative began in 2009. We received an additional order in Q1 of 2010. We expect follow-on orders over the next year. The potential here is about $600,000.

In new markets, in addition to expanding our business geographically, we're also expanding our business by entering totally new market areas for machine vision, areas where we have never been before. One example is in the life sciences and clinical chemistry areas. This market consists of manufacturers of specialized machines that, for example, run tests on blood and other bodily fluids. Many of these machines require an automated method of reading the codes that are on the vials or other containers. And some of these machines also need other vision functions to check, for example, the level of the fluid or the color and placement of the sealing cap and other aspects. Cognex already has in its libraries machine vision software that can meet all of the needs of those OEM customers, but we didn't have vision hardware that could fit into those machines. So in response, we have designed and recently introduced a new line of product that we call the Cognex Advantage Image Engines. This family of high-performance devices combines our 1D and 2D code-reading capabilities with all of our vision tools, in a package that is about a third of the size of an iPhone. This is an OEM product that we'll bring to market using our own OEM sales force under the leadership of David Gantt, an industry veteran who we have recently hired to lead that effort. We don't expect significant revenue from this product -- from this new market -- for a few years, but we're very bullish about the opportunity for Cognex vision over the long term. And, by the way, the potential market for machine vision into that area is about $150 million a year and growing.

To summarize, our existing business is doing very well so far this year, and as you can see from my remarks, we see a number of growth opportunities ahead. Nevertheless, we intend to continue to manage our expenses tightly, given the uncertainties in the global economy. Regarding looking ahead, we are now comfortable to predict that revenue for Q2 is likely to increase by 5% to 8% over the revenue that we just reported for Q1. I'm going to leave it up to the rest of you to calculate the likely effect that this increase will have on our bottom line.

Now, that is the end of my prepared remarks. And the team is here to take any questions that you may have.

Thank you. (Operator Instructions)

I guess we answered all the questions.

You have a few questions. One moment, please.

Chuck Murphy of Sidoti & Co.

Good afternoon, guys.

Hi, Chuck.

Hi, Chuck.

Nice quarter.

Thank you.

Just wondering, in terms of Factory Automation's strength -- it was up quite a bit sequentially -- just wondering if there were particular end markets or products that stuck out for you?

All of them. Yes, there was nothing in particular that stuck out. Really led by In-Sight but also because of the SEMI pickup. We saw a dramatic increase in vision software.

Okay.

I can tell you it's across the board and across geography. It's very surprising.

Yes. Pretty much as I'm looking we can see it in automotive, consumer products, document processing, electronic equipment, electronic assembly, industrial equipment. It's pretty much broad-based.

Okay. Okay. Good to hear. Then next one was what kind of run rate should we assume for options expense for next quarter and the remainder of the year?

Well, yes, we had -- as you can see, we had a significant credit in this quarter. We are planning on issuing our annual option grants here in the second quarter. Not sure exactly at this point in time what that valuation is going to result, but I would expect that going forward our option expense would be more in the $1.5 million to $2 million per quarter expense level.

Okay. All right. And then, lastly, in terms of the sales guidance you gave for the second quarter, what does that assume for each of the segments? Will Surface Inspection bounce back?

Yes. In that regard, Surface Inspection -- we expect Surface Inspection will get up to a level that is more commensurate with what they had in the fourth quarter, and we expect that Factory Automation and SEMI will continue to do well. SEMI probably won't increase at the same level in Q2 as it did in Q1 over Q4. That was to a certain degree a little unexpected.

Okay.

And probably reflects some inventory buildup or needs or whatever that some of those manufacturers have.

Got you. Okay. That's all I have. Thanks.

Thank you, Chuck.

Our next question comes from Jim Ricchiuti of Needham and Company.

Hi. Good afternoon.

Hey, Jim.

Hey, Jim.

Congratulations on the quarter.

Thank you.

Thank you.

The tone of business in April, Bob, how would you characterize it? Are you seeing the same kind of momentum as you saw in Q1?

It continues. I review with the team the bookings every Monday, and I have a copy in front of me, and it's incredible. Every product line except for the DVT which is being replaced, of course, by other product lines, is up. Every product line across the board.

And --

It's Obama. It's Obama.

And with respect to the SEMI side, can you talk a little bit about the kind of visibility you have there? I know normally you don't have a whole lot. But maybe you could talk about that.

We no longer have these long-term contracts with our customers, so I can't tell you. But my assumption is it's not going to continue to increase. We would be happy if it stayed at this level.

On the Factory Automation side of the business, can you tell us what kind of revenues you generated in the ID product area?

Sure. This would be the sum of the DataMan and In-Sight.

Right. Yes. ID was approximately nine -- identifiable ID was about $9 million in the quarter. But there is some ID that probably got -- is buried in just regular In-Sight or whatever.

And also when distributors buy our product -- buy In-Sight -- it has all of the tools.

Right.

So we don't know. But it's doing very well. Now that includes DataMan and In-Sight --?

DataMan and In-Sight Industrial ID, does not include Wafer ID.

Wafer ID, right.

Okay. And --

I think the question was Factory Automation.

Got it. And with respect to Mitsubishi, you've got a little bit more experience now with this relationship. Any sense as to roughly a range of revenues that it might be able to generate for you this year?

Yes. I think we've said in the past and it's on target to slightly exceed our $5 million figure.

Okay. And then the last question, I wonder if you could give us an update on some of the newer product there is that you're working on, including Vision System on a Chip.

Well, I'm going to be traveling with John McGarry, who is our Senior Vice President of R&D and the architect of this chip and the product, on a tour of Japan to visit major potential OEMs. We have a working model already of a product that is tiny. It's about the size of a wristwatch. And it's going to be -- I'm not going to say exactly the functions that it's going to be, but we think it's going to be a very important function and capability for OEMs in the pick-and-place business -- those are the companies that make mounters, SMD mounters. And that is one of the opportunities. And we're going to be visiting a number of customers to explore that and other opportunities for Vision System on a Chip.

I did mention that later this year it's going to go into a particular product that's already designed, and in that particular product it's going to give it some unique capability that can't be done any other way, and I haven't yet told the application for competitive reasons. We know that competitors are often on the call. But the chip is doing well. The software team is on schedule and will be visiting Japan with a working machine to demonstrate a Vision System on a Chip, a complete system on a chip.

Bob, with the turn of the business, are you moving up or accelerating any of the other R&D projects you're working on? Can we expect R&D to go up as well?

Slightly. We have some openings. We're looking for some key people, about four people, perhaps, that we would like to have in the United States. I just put some objectives in front of John. I want him to be hiring more people in San Diego. But very small number of people. We're looking for a certain type of key individuals, a small number of them. So I would say that you won't even see the difference. Is that right, Rob?

Yes. Small increase.

Small increase in R&D that you would barely notice.

Okay. Thanks a lot.

You're welcome.

(Operator Instructions) Our next question comes from Rob Mason of Robert W. Baird.

Yes. Good afternoon.

Hello, Rob.

Hi, Rob.

Dr. Bob, is there any way to quantify in your reference to the retrofit or productivity project pickup that you've seen, any way to quantity what percent of the Factory Automation business falls into that category versus new capacity? Are you seeing any new capacity related sales right now?

Well, the first part of the question is if the retrofit business mainly is occurring in consumer products and food and packaging, which is where people see the biggest return or the ability to lower their liability, I suppose. And I don't know how to quantify it. Can you quantify it? I can just tell you it's in those sectors.

Okay.

This is Rob Willett now.

Rob, the only other color I'd put on it is obviously we're seeing a lot of new lines in Asia where there is a lot of growth in our business. But I think where we saw stronger than expected growth was in the US. And I think more than we had anticipated came from existing lines.

Okay. Is there any -- as you look at your bookings as it came in in the quarter and I guess as they've continued to come in in April, can you detect that these are leads that have been worked over the last 12 months or is this more reflective of an uptick in real short cycle demand?

That's a good question. I don't know the answer to that.

I would say it's clearly both. There are projects that we've had in our funnel for a long time that we're seeing getting funded now. But also we're seeing some pretty quick turning projects also. So it's both.

Okay. Is there a distinction to be made between your channels in the quarter just in terms of how sales from distributors performed versus your own direct sales efforts?

I just looked at those charts and they seem to be pretty constant. Vision Systems about 60% are direct. Vision Sensors about 30% are direct. And it didn't seem very much from that.

Okay. That's all I have. Thank you.

You're welcome.

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

I was curious how you're doing with the acquisition in the (inaudible)business, the SmartAdvisor web monitoring. Are you seeing any traction from that?

Directly, no. As a matter of fact, I would say that the bookings and web monitoring have been very low. Very low. Perhaps because they emptied the well or we were able to empty the well in Q4.

However, I would say that just having the web monitoring system helps us sell the web inspection system products, and we expect to introduce this quarter what is called the SmartSystem, which is a combination of both together so they're totally fully integrated. And probably people will buy both, I imagine. But we have a model of about what percent they're going to buy of both and what percent they're going to buy of one. But a little disappointing, the web monitoring system in the past quarter.

Did any of that Bob the anticipation of the new product or have you guys kept this pretty close to the vest?

I didn't hear the first part of the question.

I was just going to ask you if maybe the slowing that you saw in orders was related to the new product introduction?

Oh, I don't think the customers know about the new product introduction. Maybe now they do.

Okay.

Regarding other acquisitions, I can tell you we have an active plate. We have the two or three deals that we're working on very actively, and it all depends how many we're going to close. Maybe zero. It all depends on how rational the entrepreneurs are of these companies. All three of them, two or three of them, are rather small. They're $30 million and under and various different applications of machine vision. They are machine vision, of course. That's the only thing we do. And I just hope that the entrepreneurs recognize that tax rates are never going to be lower than they are today. A deal closed today is going to be a lot more profitable than a deal closed in 2011.

Are these potential acquisitions, Bob, taking you into any newer markets or are they extending your reach into your existing?

All three are in new markets.

Okay. And on the solar side, would you be willing to share with us roughly how many customers now you've sold into?

No.

I have no idea.

We don't know? We should --

I don't have the information here.

The answer is we would be happy to share it with you if we knew.

Okay.

Right. I think it's a small number of customers. I think it's probably three.

No, no. We have some very sizeable customers in that station and we have a long tail of other customers who use vision for applications sometimes right in the manufacturing end of it. Others right up in the crystal pulling end of it.

Oh, that's true.

Yes. So I would say over 20 customers, some of them very substantial in size.

Any chance as to how big this business could be for you if we look at over the next year? I mean, this is all fairly -- from a revenue standpoint it was fairly immaterial, I guess, last year.

The question is how big is the -- how big potentially is the solar system --

Could be for us -- how big could it be.

Yes, certainly I think we could see it in the range of $6 million to $10 million for the year.

Okay. Thanks very much.

This year.

Yes.

(Operator Instructions) We'll pause one moment to see if there are any further questions.

That's about a moment.

I'm not showing any further questions.

All right. Well, given that situation, I think that's very good the fact that there are a lot of people who listened and don't have questions, which means we probably addressed most of the issues. I want to thank everyone who is still on the line for attending and for continuing to be interested in Cognex and we hope -- and we fully expect to report great results for you for Q2. That's it. Signing off. Bye bye.

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