Cognex Corp (CGNX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You have joined the Cognex first quarter 2011 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 be given at that time. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Mr. Richard Morin. Sir, you may begin.

Thank you, and good evening, everyone. Earlier today we issued a press release announcing Cognex's earnings for the first quarter of 2011. And we have also filed our quarterly report on Form 10-Q. For those who have not yet seen a copy of these reports, both of them are available on our website, www.cognex.com. They contain detailed information about our financial results, and because of that we are not going to repeat most of that material. During this evening'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 one of the earnings press release and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit Two.

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 Cognex's Chairman, Dr. Bob Shillman.

Thanks, Dick, and hello, everyone. I would like to welcome each of you to our first quarter conference call. I'm in Cognex's office in San Diego, California, and Dick and Rob Willett and his team are in Boston.

As you can see in the press release issued earlier today, Q1 of 2011 was a very strong quarter for Cognex that exceeded our expectations.

Now, I will be available at the end of the call to answer any questions you may have of me, but otherwise, here to give you the details on the results, is my partner and Cognex's Chief Executive Officer, Rob Willett. Rob, the microphone is yours.

Thank you, Dr. Bob. Good evening, everyone. I'm very pleased with the result we've reported tonight for the first quarter of 2011. Revenue of $74.4 million represents a significant increase over Q1 of 2010. It's also higher than the guidance we gave to investors in February. This is due to our broad based strength across our three primary markets -- factory automation, semi, and surface inspection. Gross margin, operating margin, and net margin increased significantly year-on-year, reflecting the substantial leverage we have in our business model.

The effective tax rate was 23% in the first quarter. This lower than planned rate is due to our international business increasing faster than expected. And with reported earnings of $0.32 per share we were highly profitable while investing in engineering and sales to drive future growth.

Now, let's turn to the details of the quarter. In the surface inspection market, revenue in the first quarter was $9.6 million. This represents an increase of 23% year-on-year, and a decrease of 25% from the record level reported for the prior quarter. Surface inspection revenue is lumpy due to the timing of deliveries and installations, and the impact of revenue deferrals. Demand for our surface inspection systems remains solid in both of our main vertical industries, metals and paper.

Revenue from the semiconductor and electronics capital equipment market was $12.7 million in the first quarter. Semi revenue increased by 35% year-on-year, and 10% from the prior quarter. This sequential increase was a positive surprise for us. The order rate softened considerably in Q4, leading us to believe the semi market was in the early stages of a downturn. However, the decline did not continue in the first quarter, as we had anticipated.

In factory automation, revenue increased by 25% year-on-year to $52.1 million. This increase was driven by manufacturers striving to improve quality and lower cost through automation. More and more customers are turning to Cognex Machine Vision to help them accomplish these important tasks. On a sequential basis, factory automation revenue declined by 14%, primarily due to $6.5 million of service revenue from one customer in the prior quarter that did not repeat. Excluding this deal, revenue decreased by only 4% from Q4 due to the seasonality we normally see the at the start of a new year.

From a geographic prospective, sales of Cognex products in the factory automation market were solid in all major regions during the first quarter. Asia, including China, was our best performer. Factory automation revenue from Asia increased by 55% year-on-year, and 9% from the prior quarter. While the revenue base is small relative to our overall business, these increases demonstrate that our investments to expand our sales and distribution network are positioning us well in this fast-growing region.

Sales to the factory automation market in Europe were stronger than planned. We experienced particularly strong momentum in both the automotive industry and in new areas that we are targeting, such as solar. The Americas was strong as manufacturers invested in Cognex Vision to increase the productivity of their existing lines. And our factory automation business in Japan held up surprisingly well despite the disaster that struck that region in March.

In regard to Japan, the earthquake and tsunami have had very little direct impact on our business to date. First and most importantly, our employees and their families are safe. In terms of revenue, the disaster occurred late in the quarter and the orders in backlog at the time were from customers outside of the affected areas. Certain customers did request that orders totaling approximately $800,000 scheduled for Q1 be pushed to Q2. Cognex does not manufacture in Japan. However, we do have a distribution center there that serves our factory automation customers in Japan. That facility was offline for a few weeks but is now once again shipping product. And our key suppliers who are based in Japan have told us that they are up and running, subject, of course, to power blackouts. Cognex has a policy of maintaining strategic inventory reserves of critical components. We've also taken action since the earthquake to secure additional inventory. For this reason, we do not expect any significant supply disruption for at least the next couple of quarters.

Moving to new product development, I believe we continue to outperform. During the first quarter, we launched the DataMan 500 ID Reader. This is our first product for the $150 million barcode reading segment of the logistics market, a market that we have not served in the past. The market response has been fantastic, and DataMan 500 is exceeding our expectations. We're very pleased with the early results. As some of you may have seen, we already issued press releases announcing two substantial orders from providers of automation systems to the logistics market. New features and functionality were also added this quarter to our In-Sight, VisionPro and Checker product lines that are focused on expanding the use of Cognex Vision in the general factory automation market.

Two strategic growth areas for Cognex in 2011 are the faster introduction of new products and the expansion of our market presence in high potential geographies. In this regard, we are investing in engineering talent and in salespeople. However, operating expenses increased by only 2% over the prior quarter, which reflects our focus on expense management. Further headcount additions are planned for 2011 and we intend to continue our disciplined approach to investment.

Our business outlook is even more optimistic today than it was just a few months ago. This momentum should translate into strong performance in the second quarter. For the second quarter we expect that revenue will be in the range of $79 million to $82 million. This is an increase of 6% to 10% over the revenue reported tonight for the first quarter. Operating expenses are expected to increase by less than 3% on a sequential basis. And the effective tax rate is expected to remain at 23%.

Now, let's open up the conference call for any questions you may have. Operator, we are ready to take questions.

(Operator Instructions) Jim Ricchiuti of Needham.

Congratulations on the quarter. You gave some detail on the factory automation growth in Asia. I wonder if you would be able to give it in Europe. It sounded like it had a stronger quarter. What was the increase, Rob, in Europe, if you have that handy? And then maybe to round it out, if you can give us the increase in the Americas as well.

Factory automation in Europe in revenue was about 26%. And Jim, you had something else you were interested in.

I was just curious in the America -- what's was the increase in the Americas?

Yes, 27%.

What was your question specifically? Are you comparing to Q4 or Q1, Jim?

That's a good question, Dick. I think you said in the prepared remarks that Asia was up 55% year-over-year. So just to be consistent, what was the increase in Europe year-over-year?

Yes, let me try again. I'm sorry, Jim. Yes, Europe, factory automation we're up over Q1 a year ago about 32.5% and Americas up 23.5%.

Got it, that's helpful. And just with respect to the strength you saw in Asia, is there anything you can point to? Was it very heavily focused in China? And perhaps you can give us a little bit of color on some of the end markets that you are seeing momentum in the factory automation business.

Yes, I would say strength is pretty broad based. Obviously, China is performing extremely strongly but also we're investing more in India. And on a percentage basis the growth there has been very good recently also. And I think probably, as you've seen, Korea is obviously a market that's pretty responsive at the moment. Of course, electronics is very important but also automotive, solar. A number, a pretty broad-based area, in general, of growth.

Now, with respect to where you see the business today versus a few months ago, it sounds like you see a stronger environment. Clearly, it appears that semi is stronger than you expected. Is that also true of the other businesses as well?

Let me clarify, Jimmy, you mean --

Other, being the factory automation in general. And maybe you can also comment if you're seeing stronger conditions in surface inspection going forward, as well.

Sure. So, generally, the outlook of our factory automation business is stronger now than it looked even a few months ago. We've seen pretty strong performance by automotive, as we mentioned. And also some of the markets we're targeting. I mentioned solar but I will also mention medical devices, food and beverage, pharmaceuticals. All of that pretty strong in terms of demand for Cognex's Vision.

Surface inspection, yes. I think in general we talk about that being a business that we expect to grow in the long run 5% or so. And I think our current performance that we're seeing in that market is in-line with that expectation. Jim, I'll comment on ID, as well. Obviously, that's an area that's a key focus for us there, and that's an area, obviously, that is continuing to outperform in terms of growth.

I'll jump back in the queue. Last question from me. I was just curious if you have the percent of revenue outside of semi that ID represented in the quarter?

Yes, give me two seconds here. Identified ID, which includes the entire DataMan product line and In-Sight that we know goes specifically to ID, was approximately 17% -- no, that's on the bookings side. Revenue side it's probably -- yes, probably about 17%.

Richard Eastman of Robert W. Baird.

Yes, good afternoon. This is a follow-up, perhaps. On the factory automation side, the strength, comparing to the 25% year-over-year, was the strength similar in both the direct and the distribution channel?

I've got that. I would say that the growth was probably slightly higher on the distribution side than it was on the direct.

Okay. On the direct side?

Yes.

Okay. And then at the beginning, Robert, I think you identified this $800,000, $1 million-ish of deferrals into the second quarter. Was that all FA?

It was a mix of FA and semi.

And did that ship?

No, these were orders that customers asked to have delayed because of the earthquake.

I guess the question is has it shipped yet?

Did it ship in April? I'm just curious if it was deferred out.

No, it's gone.

It did ship, okay.

It's been a few weeks.

I think Rob just misunderstood. You were looking to see whether or not we've been able to ship it in Q2 and we have.

How do you feel at this point in time about Japan? There's maybe a thought process that suggests that the worst of Japan weakness or demand destruction maybe from the earthquake will be more of a third quarter event. I'm not asking you to predict it but do you think at this point that you're out of the woods there or do we just see some impact mid year? Are you still pretty cautious about that or how do you summarize that?

Yes, I would say we've considered the current situation in Japan in giving our Q2 guidance. And we do expect some negative impact over the next couple of quarters as a result, in terms of demand to come, although we haven't seen it yet. And then I think in the longer term, we feel we've secured our business pretty well. Very well, in fact. In terms of our ability to look after customers and manufacture and ship our own products. I think even our own customers we have a pretty good handle on them in the nearer term. But to go to your point, I think it's harder to predict the second and third order effects of what might it have on our end user market later on in the year. So, I think there we think it's still too soon to say what the situation is.

And would you expect that to slant towards the semi OEM business if there is any demand destruction in the short-term? Would it be logical to be more impactful in the semi OEM business for you?

Not obviously, no. As you can see, we're seeing a lot of strength in the automotive business at the moment. And I'm sure you, like me, read articles about their ability to produce. One point I would make is our automotive business is not particularly strong in Japan relative to the rest of the world. So Japan automotive is less than 1% of our total business overall.

Ben Rose of Battle Road Research.

Rob and Dick and Dr. Bob, with regard to the automotive business, as best you can tell, is the strength coming from OEMs or their suppliers?

We deal principally with tier one suppliers to the auto industry so that's where we're seeing most of this growth.

Okay. And looking out into the second half of the year, when you think about the prospects for the relatively new DataMan product, do you think that most of the strength will continue to come from the logistics industry or are there some other industries that you think are in the process of evaluating the product near term?

Certainly we're targeting the logistics industry and we expect to see a continued growth through the year in that segment. And a lot of major logistics companies are in the process of evaluating the product, and I hope building it into their capital plans. But to answer your other question, yes, we do see application for the DataMan 500 in our regular factory automation business. And, in fact, we're already seeing quite substantial orders in that space, also, where we might be doing such things as very high-speed barcode reading.

Chuck Murphy of Sidoti & Company.

Good afternoon. Just a couple of questions for you. First, before you had mentioned a goal of getting to about $10 million in annual sales for DataMan by the end of this year. Where are you tracking relative to that goalpost?

So to clarify, what I said was I expected us to get to a run rate of $10 million as we exited the year. And at the moment I see us tracking ahead of that.

Now, would you go as far as to adjust the goal for the year? Is it now $12 million or $14 million, or are you sticking with $10 million for now?

No, I think what I've said is a run rate of $10 million as we exited. I'm going to say we're going to do better than that. Little too early to say exactly what that would be.

Okay. And then the other thing was, at the analyst day in the fall, you mentioned trying to get in some new products like the life science market, for example. Any update you can give us there?

Yes. We're targeting the life science equipment market. So, as an example, a test tube of blood going into a life science machine for analysis. We're targeting that with our product called the Advantage Image Engine. And I think as we've said all along, the product life cycle in that industry is long. It's a design process that occurs, and then the machine is designed, and then has to go through FDA approval, in many cases. So the name of the game for us at this point is to get peck specked into new products that are being designs. We are making very good progress on that. We're having many, many discussions and in the process of getting designed into a number of machines. So, I would say we're pretty happy with the progress we're making. But as we said all along, don't expect to see substantial revenue this year on that.

(Operator Instructions) jim Ricchiuti from Needham & Company.

Looking at the tax rate should we just assume a 20% rate going forward beyond Q2?

Yes, as we had indicated when we gave our guidance back in February, we thought the tax rate would be 25% of the year. But two things that we found during the quarter, the actual experience and the forecast going forward. Semi has not declined as much as we had expected. And most of our semi business is outside of the United States. And the strength in factory automation, as Rob mentioned, is really stronger, the percentages are better outside of the United States than within. So that allows us to take advantage of the lower international tax rate. So right now we are expecting to be at 23% for the year absent any of those discrete items that might occur.

Got it. And the margins, gross margins, were very strong, and I assume that's a function of the top line, the mix. But was there anything unusual that benefited gross margins in the quarter? Any reason why we won't see margins remain at these levels?

The one thing, if you take a look, if you compare it to Q4, we had two major things occur that drove the margin up. First off, Q4 had that $6.5 million worth of service revenue that was at approximately a 50% gross margin. And you'll also notice that the surface inspection portion of revenue declined by roughly $3 million quarter on quarter. So what we essentially did is the $10 million or so revenue that we lost was all at 50% margin. So the only thing that should really occur going forward, maybe, because we don't have another $6.5 million service contract, is just dependent upon the lumpiness of the surface inspection business quarter on quarter.

Okay. And do you happen to have the headcount at the end of Q1?

859.

I'm sorry 859?

8-5-9. Yes.

Got it. And going forward you're going to be adding some folks. Any sense as to what the headcount might look like towards the end of the year?

Greater than 859.

Okay. One final question is, it does appear that Japan has not had a significant impact on you. I wonder if you could perhaps talk a little bit about the relationship with Mitsubishi and how that is progressing.

Yes, definitely. I actually will be in Japan next week for a meeting with the senior management team at Mitsubishi that's been scheduled for some time. We continue to be very positive about our relationship with Mitsubishi in the long-term. We're seeing tier one distributors continue to ramp up and learn about our products. And as you know about Vision, products take time to learn how to sell, and they're certainly investing their efforts and moving up the curve in terms of competency. I think there's likely to be a short-term slowdown in orders in Japan. And I said we'd considered that in our guidance. But I think in the long term we continue to be very positive about what that relationship is bringing to us and to them. And we're also starting to work and starting to sign up and train Mitsubishi distributors in China. And Mitsubishi has a very strong position in their factory automation in China which they're helping us to leverage into Vision sales. So, continue to be very positive. In the near term I think we're anticipating some challenges just as a result of the situation on the ground in Japan.

Richard Eastman of Robert W. Baird.

Is there any deferred revenue accumulating in either piece of the business, either on the systy side or the factory automation side of the business, of any consequence in the quarter?

No.

Okay. And then I wanted to see, if Dr. Bob is on, just from the standpoint of, you had mentioned quarters ago about potentially looking at internal developments on the Vision side in 3D.

Yes, I did do that.

Is there any progress there? Is that still an avenue that we're looking at?

We don't always like to tell the world exactly what we're doing. But there are certain aspects of Vision that we are not really involved in. One of them is 3D. Another is color measurement, for example, where we do some basic color measurement to tell if the birth control pills, the blue and the pink ones are in the right cells. But we don't do anything in detail in color, and that's an area of Machine Vision. There are a number of different technologies and products out there, and markets, that we're not yet in. We continue to look at those where we can make money.

Jim Ricchiuti of Needham & Company.

Given the success that you're seeing so far with DataMan 500, and the activity that you're seeing in the logistics market, I wonder if you'd comment as to whether we might see some additional new product aimed at that market this year?

Again, I think it's a little too early to say that. Yes, we're developing our channel and we're developing the DataMan 500. I think you can expect to see products in the future from us targeting that market. But I think beyond that, that's as much as I want to say.

I'll say a little bit more, Rob. Every time that we go into a new market, in particular, with a product, customers say -- Well, gee, that's pretty amazing. And I have to tell you, the DataMan 500 is truly amazing. It truly is a breakthrough. And I'm not just saying that. But the 30 or more customers, large, sophisticated customers, that we brought it to, have said that. But any time we bring a new product to a new market, customers say -- Gee, if you can do that, can you do this? So there are some very interesting and profitable applications in logistics that we had no idea existed because we weren't talking to those customers. And now we do know they exist. And we look at those and see how long it's going to take to develop a product to fit that need. We believe we can, by the way, the particular, larger application that they've asked us for. And we still discuss what the ROI's going to be.

Rob is very analytic. And before he goes off and assigns engineers to design a product, he insists, and he's right, to do a market analysis. How many units are we going to sell, over what time frame, what it's going to cost, who are the competitors. And he is doing a very good job in that. And I predict we will have -- it won't be this year, we might start development, though, of another product for logistics this year but we won't be booking any revenue from it.

The good news is there's lots more problems to be solved and lots more markets for us to enter into. And every time we enter into a market customers ask more questions, can you do this, can you do that. And generally the answer that we have is yes, but. Can we do it -- it's a matter of technology. We pretty much have a large basket of technology, a large engineering staff with multiple talents. And for those technologies that we don't have, we could go out and acquire them and we're looking at some things in that area. So the question when customers say can you do this, the answer's always yes. It's followed by a but -- But should we do it. And that is really what made Cognex quite unique over 30 years. Now our current competitors are also business savvy, but in the first 25, 20 years, they weren't. And they would say yes and they would go do it and lose money on it. What kept us in business and at the top of our game was always being positive about the yes but there was always a but connected to it. And the but depended on profitability and you've seen over the number of years since we've been public, '89 I think it was, our gross margins have been in the 70%s. And that's not by accident.

Thanks. Rob, you called out solar as being one of the areas where you saw some nice traction. Is there anything further you can say about that market? Do you feel like you've reached an inflection point where it's going to become a more meaningful revenue stream?

We've been talking about solar for a while now. I'd say for the last 18 months or so we've been targeting it as a key vertical market that we wanted to progress in. We saw our sales from memory broadly triple last year in solar to sales of, I think we had in our annual report, actually, of around $12 million. And we do expect to see continued strong growth again this year. So we think it will probably help our growth rate beyond that 20% that we target for factory automation. On a long term basis we expect to see more growth out of the solar industry. I could talk at length about investments going into both thin film and solar wafers. We participate in both parts of that, and we have some pretty substantial machine builder and OEM customers, particularly in Europe and in Asia, who we work with in that market. And we're right from the front end in terms of crystalline wafers and preparing base material right to the end where we're doing final inspection. So, it's a very good market for us and we think it will continue to be.

I'm going to editorialize on that a bit. Nothing to do really with Cognex's ability to attack that market -- and we do. We have the right products and we will be developing more. Many people, including myself, question whether solar would ever be economically feasible without the huge government subsidies. So, although we're responding the to market, the market wants to build solar panels, God knows where those solar panels are going to end up. And God knows how many or how few of them will be needed. We are not -- I just want to make it clear -- although we're opportunistic about it and we do come up with products for it, this is, in my view, not a long-term growth prospect for the Company.

Thank you. As there are no further questions in queue, I would like to turn the call over to Chairman Dr. Bob Shillman for closing remarks.

Thank you very much, Latiffe, you did a good job. I want to thank all of you who participated in the call. And we look forward and hopefully giving you equally good or even better results for Q2. Goodnight, everybody.

Ladies and gentlemen, that does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.