Cognex Corp (CGNX) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Cognex fourth quarter 2011 earnings call. At this time, all participants will be in a listen-only mode. Later we will conduct a question and answer session, which instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. Now I would like to introduce your host for today, Richard Morin, Chief Financial Officer of Cognex.

Thank you, and good evening everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the fourth quarter of 2011, and we also filed our Annual Report on Form 10-K. For those of you who have not yet seen this materials, both are available on our website at www.Cognex.com. They contain highly detailed information about our financial results. 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 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 will turn the call over to Cognex's Chairman, Dr. Rob Shillman.

Thanks, Dick, hello everyone. I would like to welcome you to our year-end conference call for 2011. As you can see from the press release that we issued earlier today, we had an outstanding year in 2011, in fact, it was another year of breaking records. Here to give you the details on our results is my partner and Cognex's Chief Financial Officer, Rob Willett, and I will be available at the end of the call to answer any questions you have for me. Rob, take it away.

Thanks Dr. Bob, and hello everyone. I am delighted to report our financial results for 2011. Highlights of the year include record revenue, net income, and earnings per share. The strong financial performance was driven by a record revenue from customers in factory automation, which is the largest market that we serve. Revenue from the surface inspection market also set a new record in 2011. From a product standpoint, ID Products continue to be our leading gross driver, increasing 38% over 2010.

Reported margins for 2011 tracked at or above our long-term targets. Gross margin was very strong at 76% for the year, reflecting the value that Cognex's customers recognize in our technology. The 250 basis point increase over 2010 is due to significantly higher unit volumes with minimal change in overhead costs. Also contributing were improved surface inspection margins, resulting from lower costs sourcing initiative, higher average selling prices, and operational improvements.

Operating margin was 27%, as compared to 26% in 2010, despite our investments in new product development, and expanding our sales team to drive future growth. We also felt the impact of unfavorable foreign exchange rate fluctuations and higher stock option expense. We delivered net income equal to 22% of annual revenue, and in a year when we significantly stepped up investments in both engineering and sales, our reported earnings per share for 2011 were $1.63, which exceeded EPS of $1.52 in 2010.

Now turning to the quarter. We ended 2011 on a very good note. Revenue for the fourth quarter was $84 million, which exceeded our guidance. In the factory automation market, revenue was a record $63 million, and accounted for 75% of total revenue. This level represents an increase of 7% year-on-year if you exclude the $6.5 million service revenue recorded in 2010, from a single customer that had been deferred for several years until the contract was completed. Factory automation revenue increased 6% over the prior quarter.

Looking at the business geographically on a sequential basis, our best performing region was the Americas, which reported record revenue in the fourth quarter. The Americas was the largest contributor in absolute dollars to factory automation growth, helped by strong performance with automotive and ID customers. In Europe, factory automation revenue increased over the prior quarter, and was at its second highest level ever, despite the negative impact of foreign exchange rates. European factory automation revenue increased 3% sequentially, but on a constant currency basis, that growth was 9%. Factory automation revenue from Japan increased on a sequential basis for the first time following the earthquake and tsunami. We are optimistic that this is an indication that business there is coming back. Good forward momentum in the broad factory automation market in Japan and elsewhere in Asia, including China, continue to be overshadow by a slowdown in the electronics industry.

Turning next to surface inspection. Revenue in fourth quarter was a record $16 million, this represents a substantial increase of 27% year-on-year, and 35% over the prior quarter. Our surface inspection division obviously had an outstanding revenue quarter, with the paper industry accounting for most of the growth. The higher revenue along with cost initiatives, translated into significant margin expansion for surface inspection products. Revenue from the semiconductor and electronics capital equipment market was $5 million in the fourth quarter, this represents decreases of 55% year-on-year, and 41% from the prior quarter. Customer demand in semi is as you know highly cyclical, and the quarter-on-quarter decline in semi revenue continued throughout 2011.

Moving on to operating expenses. Our investment in engineering produced tangible results. We launched a record number of new products in 2011, and we have a strong pipeline of products slated for introduction in 2012. In the fourth quarter, new features and functionality were added to our Checker product lines, that expands its use in factory automation applications. The Cognex Vision library is now compatible with Linux-based factory equipment, which means more machine builders can use Cognex software, and we added a wireless version to the DataMan 8000 series of handheld ID readers, making it the only industrial direct part mark reader to support Wi-Fi.

A very important new product launched in January of 2012 was our DataMan 300 fixed mount ID reader. The DataMan 300 handles difficult to read 1D and 2D barcodes that are presented at any angle on a high speed line. This functionality will open new opportunities for Cognex in both market to manufacturing and logistics. The DataMan 300 features groundbreaking new technology named Hotbars, which was developed by Cognex co-founder and senior fellow, Bill Silver. We believe hotbars sets a new standard for 1D barcode reading, and will benefit Cognex for many years to come.

Our investment in sales and marketing also contributed to the bottom line. We saw tremendous growth in 2011 from the expansion of our market presence, particularly in China. Our growth rate slowed in the Chinese factory automation market in the second half of the year, but ultimately we believe we have a great strategy to capitalize on this high potential region for machine Vision. We have been gaining momentum over the past two years, and Cognex is now recognized as the number one machine Vision brand in China.

We plan to continue adding engineers and sales people in 2012. However, we do not expect to make the same level of incremental investment as we did in 2011. Of course, we intend to continue our disciplined approach to spending. In regard to our outlook, I believe Cognex is well-positioned to deliver on our strategic initiatives in 2012. Although we are expecting little revenue growth in the first quarter because of downturns in semi, electronics, and solar, we remain optimistic about growth for the entire year.

Now let's open the conference call up for your questions. Operator, we are ready to take questions.

Okay. (Operator Instructions). It looks like we do have a few questions in the queue at this moment. We will take our first question from Zach Larkin from Stephens Incorporated. Please go ahead, sir.

Good afternoon gentlemen, thank you for taking my call.

Hi, Zach.

Hi, Zach.

There has been a lot of discussion recently and news pieces out regarding automotive and the capital expenditures that are expected to go on there, and obviously was a good contributor this quarter. Can you maybe give a little bit more quarter about what your expectations are in auto in particular, maybe as we go into 2012?

Sure. You are right Cognex has seen a lot of very positive response to Vision products in automotive. We saw very strong growth out of that vertical market last year, and we do expect to see continued growth in automotive this year. We see a lot of projects, provision particularly in the US, but also in Europe and in Asia and Japan, where companies are investing heavily in vision. There are a lot of investments certainly in more fuel efficient drives, hybrid products as well, and so yes, we remain pretty confident about the outlook for automotive, certainly for the next quarter and beyond.

I was wondered if you could also touch on margins a little bit?Margins are still very robust, but did drop down a little bit Q-over-Q and we are looking for flat gross margins. Do you expect margins to tick up back to what we were seeing earlier in 2011 as we moved through 2012, or do you have any guidance or thoughts on that?

When you look at Cognex's margins, you need to think about the different parts of our business, so factory automation and semi both have very, very strong margins, and with great technology that is really recognized in the market. The SISD business generally has lower margins but we have seen some strong improvement in those margins. As you are thinking about our margin mix, going forward our margin position going forward, you have got to think about the mix of business there. I think obviously if you are seeing any deterioration in our margins, it is really do with semi and the reduction that we see in the high margin semi being replaced on a short-term basis anyway the SISD business.

Thanks, that is very helpful. One final question if I may. Wondering if you had any updates on the life science initiative, or if anything there that you can give us some color on?

Sure. I think the important thing to understand is that the life science market is a highly regulated market with a very long sales cycle, so it is a market that is very open and responsive to Cognex technology, where our image engine can be installed inside of a customer's machine, and they might be doing things like looking at test tubes of blood or other fluid, and they are tracking those through, and Vision can provide a lot of technology to that, whether it is simply reading barcodes or reading numbers, but also looking at the colors of stoppers on test tubes, or looking at the fill levels on test tubes, so we like that market a lot.

What is going on there is we are working on getting specified into new machines that are getting designed, and those machines get approved by the FDA, then they begin to scale up. We are in that process and we have had some design wins last year, and we expect to have more design wins coming through. Then we expect to see that turn into revenue for us. I wouldn't expect any substantial revenue this year, just basically the initial kind of sales of products, but then we expect to see it build over a longer period after that. I think the other point worth mentioning is the life of these machines is pretty long, and they are pretty regulated, so once we are speced into that machine, it should be some nice solid, consistent revenue for us in the future.

Alright, thank you very much, and congratulations on the quarter.

Thank you.

Okay, thank you, sir. We will take our next question from Jim Ricchiuti, Needham & Company.

Thank you. Good afternoon.

Hi, Jim.

I think you gave some figures for the ID business for the year as a whole. Do you have any detail on the ID business in the quarter, what it represented of revenues, and approximately what it was up for the year?

Yes. I think we said as you commented, but that we had 38% growth in ID for the year. Just looking here, Dick, if you can give us the quarterly ID growth number?

I have got to add a couple of numbers, Jim, give me a couple of seconds here.

Sure. Dick, make while you are looking for that, Rob, can you talk about the momentum you are seeing for DataMan in terms of the 800 in the logistics market? Any large wins? I know you can't always talk about customers, but can you talk a little bit about the success that you are having in terms of penetrating some larger customers?

Yes, Jim, let me clarify a question. You said the DataMan 8000, that is a handheld direct part smart reader, is that what you are asking about? Are you asking about the DataMan 500?

I actually meant the 500. I know you have been trying to go after the larger logistics customers. To what extent are you penetrating?

Sure, yes. We are very pleased with the progress that we have made in logistics and the DataMan 500 over the year. We launched that product at the beginning of last year. We have a large funnel of business that we are working on closing, particularly some large E-retailers, package delivery companies, and postal accounts. We expected to see that business kind of ramp as we went up through the year, and it did, but we have learned quite a lot about that market. I would say one thing we have learned is that big retailers and logistics companies generally don't make big capital investments right before the Christmas period. Although we saw the business build nicely, and we sold more than $6 million of DataMan 500 over the last year, we didn't see some of that business close at the end of the year, but we are now looking optimistic about closing some pretty significant business from some very major names through this year.

Okay. Is that business that you think you have a fair shot at closing in the first half of the year?

Yes, I would say closing, but I think these are going to be customers that will buy over quite a long period from us, certainly over multiple quarters. Yes, we expect to see some of that business coming in here the first half.

And Jim, to get back to your question on the ID Products. Revenue was approximately $16.8 million in the quarter, which is a 9% increase over Q3, and a 33% increase over Q4 of last year.

One other question, and I will jump back into the queue. With respect to the guidance, the sequential decline that you are forecasting for Q1. It would seem like the semi business was already pretty much at a bottom, same thing with solar. I guess what I am asking, are you seeing also some seasonality or some weakness in general in some other parts of the business, including factory automation?

Let me speak to that I think you are right in that the semi business declined sequentially quarter-on-quarter through last year. It was $13 million in the first quarter of last year, and by the end of the year it was at $5 million in fourth quarter, so I think that is certainly some headwind. Your question is about sequential. We are thinking that semi revenue is not likely to grow sequentially Q4 to Q1, but when you look at sequential trends in our own business, you have to remember that factory automation typically declines from Q4 to Q1, and we have no reason to believe that is going to be any different this year. Also it is worth noting that surface inspection is expected to be lower than the record $16 million that we recorded in Q4.

Okay, but the trends you are seeing the factory automation business Q4 versus Q1 appear to be more than normal seasonality, as opposed to any weakness you are seeing from some end markets?

Correct.

Okay, thank you.

Okay, thank you. Our next question comes Ben Rose from Battle Road Research.

Good afternoon, gentlemen.

Hey, Ben.

How's it going?

Great.

Okay, good. A few questions. Could you talk a little bit on the surface inspection side, it sounds like there may have been perhaps a large deal in the paper industry in this quarter, and I think you were kind of addressing this in the last question, but I guess the general question is, do we think that surface inspection can carry the day, while some of these other markets that you have pointed to might be a little bit soft in the first quarter?

Well, first thing to say is surface inspection generally has larger deal sizes, right, and if you look back we had great order momentum through the last three quarters of last year, but record bookings in Q2 and then we beat that again in Q3. Still very healthy in Q4. No one particular deal kind of skewing those kind of results. I think we are seeing that flowing through in revenue. We don't expect SISD to have higher revenue in Q1 than it did in Q4, for sure. We don't expect to see that. We expect FA, factory automation to continue to deliver nice growth, although on a sequential basis as I said, that is going to be down Q4 to Q1, as traditionally it always is. So then it really comes down to semi, and where semi is kind of down at the moment, $5 million in the last quarter, and we don't expect something significantly different in this first quarter. That is how I would characterize it.

Okay. Then just on the European situation. Is there anything that you can opine in terms of your general sense as to how things are going in Europe? What your outlook there is given all of what we read in the papers these days? It would be great to have your perspective on how strong you think the region is from a demand standpoint?

I think our European factory automation business is holding up well considering the region's economic news, but kind as you drill down on that revenue from Europe is struggling with semi, electronics, and solar downturn. Particularly if you look year-over-year, European factory automation revenue in Q4 increased 9% over Q3 excluding the negative impact of foreign exchange rate, and if you strip out the very large deal that we had a year ago that we recognized the $6.5 million of service revenue, some of which was in Europe, that growth would have been 11%.

The Euro obviously it is providing some headwind, so the Euro negatively impacted growth in Q4 by $1.4 million on a sequential basis, dollars that is. There is a little bit of headwind there too. Overall we still have a good funnel of business in Europe, and particularly ID and automotive continuing to look pretty robust, as do markets like medical devices and pharmaceuticals.

Okay, thanks very much.

Thank you.

Okay, thank you. We will take our next question from Richard Eastman from Robert Baird. Please go ahead.

Thank you. Just a question on the product ID side within FA, factory automation. Rick, can you give us a general sense, I think the target has been kind of a 20% growth rate for that category. We had some momentum with the DataMan 500, we have the 300 introduced. Is that still a decent target, is 20% or better growth in 2012 for FA?

Rick, traditionally what we have said is we expect ID to grow at 30% over the long-term, it did grow at 38% last year, and we continue to be very, very bullish about our ID business. We are replacing a lot of outdated laser technology, and we have just fabulous technology, and our rate of introduction is increasing, so if you look at the hotbars technology that we are just bringing to market now, the increase in our sales force, and their ability to sell in that market, we continue to be very, very positive about ID. Our ID business last year grew from around $43 million in 2010 to around $60 million last year, and we are expecting to see that good continued growth rate as we go into this year, so certainly well north of the 20% figure you were commenting.

This hotbars software, how does that get to market? Is that basically an upgrade to existing DataMan products, and is that again, is there an ASP benefit?

Yes. Hotbars is software, and it is our senior fellow and founder Bill Silver has designed it, and he really went back to basics on how we read 1D barcodes. That is the way we have been doing that, the world has been doing 1D barcode reading for more than 30 years, and he took it apart, and has rebuilt it from the ground up in a much better way. It runs on our existing hardware, so there is no incremental costs, but the performance is outstanding. So certainly we expect to be able to command a premium in terms of performance, and to see some margin expansion even as we get that rolled out to the market, but it is only for 1D barcode reading.

Okay, I understand. Can I ask on the SISD business, this may be in the K, I wasn't quick enough to read through that, but how does the bag log look in SISD year-over-year? Is that in the K, Dick?

No. The only thing that is in the K, Rick, is the total backlog. SISD, actually both divisions are entering the year with a higher backlog this year going into 2012, than they did in the prior year.

Okay. Do you venture to guess as to how much higher?

I can do better than that, but we don't disclose that, Rick.

We had strong orders in second and third. You mentioned orders grew, but maybe booked to bill in the fourth, so higher. Alright.

They had a hell of a revenue quarter in the fourth quarter doing $16 million. That is a business I think for the year we did mid-40's or whatever, and the fourth quarter was one hell of a run rate, and it was because of some of those orders in when we kept on saying that the orders were very strong, these were customers that were looking very specifically for deliveries in the fourth quarter. I think to a certain degree maybe they were making sure that they got their capital expenditures in the current fiscal year.

But nevertheless, even with that the backlog with that is still higher entering 2011?

Correct.

And the gross margin improvement what we have seen maybe from the second quarter through the third and presumably it sounds like fourth here as well in SISD, there is nothing in there that would not be sustainable, correct? In other words it, is sustainable at that level?

Yes. We have got a great management team in place now over at SISD, they have been in there about a year, and they are focusing on a lot of great stuff. Lower cost sourcing, we have moved some of our sourcing to Asia, and we are very pleased with the way that is going. Some really good pricing work, where we weren't being rewarded for what we were doing in the market and we are now improving that. Then just operating cost improvement through continuous improvement type activities that we have seen. Yes, we think those margins in that work is very sustainable going forward.

The one thing I would caution on is that they have relatively fixed manufacturing overhead costs, so to the extent that you push only $12 million of revenue through in a quarter versus $16 million, you will have those overhead costs getting spread over a lower revenue base.

Okay, understand. Fine. I just wanted to just direct one questionon the semi OEM side, I want to direct this at Robert, because I think I know Dr. Bob's response.

To go to zero.

That's exactly it, I know there is downside to zero, but would it be a general feeling, if that business kind of flatlines from Q4 to Q1, is it your sense, and if you look at semi back end orders, they kind of inflected in October, maybe I think four to five to six months later, I would think yours would bottom. Do you have any sense whatsoever, that we are kind of bottoming there, even if it stretches out a quarter or two?

We saw our revenue of $5 million in the fourth quarter and I think our general sense is it is going to be around that again in the first quarter. I think you are right, what we are reading out of the industry is they are seeing signs of a recovery. Normally in our business we won't see that come through for a number of quarters. You might say we are near or approaching the bottom, and we might possibly see a pick up later in the year to that business.

Okay. I am sorry, one last question. The operating expenses that you mentioned into the first quarter flat with the fourth quarter. Robert, you had mentioned some continued investments in sales and R&D. If you project out for the year, should we assume that maybe your operating expenses in total in R&D and SG&A included might be up like 6% to 8% with just the planned investments?

The rate, I think what we can say and I did say, the rate of increase is expected to be substantially lower in 2011. We are planning for let's say high-single digits as opposed to the double-digit increase you saw in expenses last year.

Okay, very good. Thank you.

(Operator Instructions). We will take our next question from Jim Ricchiuti from Needham & Company.

I think in the last call that we were discussing Mitsubishi, and Rob you may have said that you expected that relationship to yield revenues of $8 million to $10 million I think is the number you might have given. Where did you guys end up? What is the outlook for that business in 2012?

Obviously, a very difficult year for business in Japan in general with the earthquake, tsunami, the downturn in electronics, and then the Thailand memory situation that occurred, but even with that going on, our sales with the Mitsubishi channel grew more than by 30% in yen. We ended up the year at more than 750 million yen. Some really good progress in some pretty difficult operating conditions, and we do, assuming that the Japanese economy and the electronics situation continues to recover this year, we are expect going growth again this year through the Mitsubishi channel.

In terms of dollars, where did you guys end up?

783 million yen, and that was over the course of the year at various, a little under 10 million. It was definitely under 10 million.

Okay. So as you look at 2012, hopefully that business should presumably begin to really ramp up, shouldn't it?

We have a great relationship with them. We see some good growth coming, so our expectation certainly. It is a major growth initiative for us together with ID and with China. So yes.

Did you guys see any specific slowing in China in Q4? I think you talked about the second half. I wasn't sure if that maybe was a little more pronounced in Q4 in factory, in the FA business?

We had such a white hot pace in our business in the first half of the year in China, we were growing at more than 100% in that business, of course we saw some slowing down as we went through the back end of the year, but certainly the business overall, any quarter, any period you choose is still outgrowing the rest of our business essentially. Yes, we saw slowing, but we are very optimistic about continued growth in China, and we are investing substantially there.

Final question. Dick, what should we use--?

There was growth by the way in China, factory automation bookings Q4 over Q3. Still not at the level that we were seeing earlier in the year, okay?

Got it. Dick, tax rate for 2012, what should we assume?

I think what we put for the first quarter, which is also what we expect for the year at this particular point in time is a 21% tax rate.

Okay, thanks.

At this moment, I am show no further questions. I would like to turn the conference back to Dr. Shillman for closing remarks.

Thank you all for attending. We are going to go out tonight and have a couple of drinks to celebrate a fantastic 2011. Always when we look ahead, things are always cloudier of course, and uncertain, but we are going to celebrate 2011, and we are going to work hard to make 2012 as good a year or better. We need to see some growth. We may not see it in Q1, of course, but we have reasonable but positive expectations for 2012. We will be back on the horn with you in the next quarter, and look forward to reporting some excellent results to you at that time, and taking your questions. Thanks. That is it for tonight. Thank you again for attending, and good night.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.