Cognex Corp (CGNX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex second quarter 2012 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 be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Richard Morin, Chief Financial Officer. Sir, please go ahead.

Thank you and good evening everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the second quarter of 2012 and we also filed our quarterly report on Form 10-Q. For those of you who have not yet seen these 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 1 of the earnings press release, and a reconciliation of certain non-items in the income statement from GAAP to non-GAAP in exhibit 2.

I 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.

Hi, thanks Dick, and hello, everyone. I'd like to welcome each of you to our second quarter conference call for 2012. As you can see from the press release issued earlier today we reported very good results for the second quarter. Right now, I'm in our R&D center in San Diego, so for details of the quarter I'm going to hand the microphone over to my partner, Rob Willett, who is our Chief Executive Officer. I'll be available at the end of the call to answer any questions that you may have of me. Rob, the microphone is yours.

Thank you, Dr. Bob. Good evening everyone. I'm pleased to with results reported tonight for the second quarter of 2012, which include the second-highest quarterly revenue and the highest quarterly profit in Cognex's 31-year history. Unfortunately, we don't expect to see records like these in the near term because of slowing manufacturing spending over concerns about Europe's debt crisis and weakening global economy. Getting back to the quarterly results, revenue increased 1% over a very strong second quarter a year ago and that increase includes a 3% negative currency impact.

Growth from the surface inspection market was partially offset by lower revenue from the semiconductor, electronics and solar industries due to a market downturn that began in mid 2011. From a product standpoint, ID products continue to be our leading performer, increasing 24% year on year in constant currency. Gross margin was a strong 76%. Profitability was high with an operating margin of 28% despite continued investments in new product development and sales force expansion. Reported earnings for the quarter were $0.45 per share which exceeded expectations, primarily as result of lower than planned operating expenses and gains on investments.

Let's now turn to the details of the quarter. Revenue from the factory automation market was $61.7 million and accounted for 73% of our total business. Reported factory automation revenue was flat year-on-year as growth was offset by a substantial decline in revenue from solar manufacturers and unfavorable currency exchange rates. Backing these two items out, factory automation grew 9% over the prior year's second quarter. On a sequential basis, factory automation revenue increased by 4%, while a nice increase, the order rate was slower than expected during the quarter, especially in Europe.

Looking at factory automation from a geographic perspective, Asia continues to be our best performer in terms of percentage growth. Factory automation revenue from Asia grew 7% year-on-year and 18% over the prior quarter. While the consumer electronics slowdown hampered growth year-on-year, spending in that market picked up during the second quarter, particularly in greater China. In Europe, factory automation declined 1% year-on-year and increased 3% over the prior quarter. On a constant currency basis European factory automation grew 8% year-on-year. Strong performance in automotive, consumer products and food and beverage offset lower revenue from solar. Factory automation revenue from the Americas increased 3% year on year and declined 1% from the prior quarter. We experienced slower spending in the second quarter and projects took longer to close. Sales to the Japanese factory automation market decreased 13% year-on-year and were flat with the prior quarter. Similar to Asia, the consumer electronics slowdown negatively impacted revenue year-on-year. Furthermore, we are not seeing the growth we expected in Japan following last year's tsunami, largely as a result of many customers shifting production to their facilities in Korea, Taiwan, and China.

Revenue from the semiconductor and capital equipment market was $9.8 million in the second quarter. While the market downturn that began in mid-2011 resulted in a 13% decline in revenue year-on-year, semi increased 47% sequentially, as demand came back more strongly than we expected. Surface inspection continues to perform very well with second-quarter revenue of $12.8 million. This represents an increase of 21% year-on-year and 11% over the prior quarter.

Moving onto new product development, we are pleased with the productivity innovation of Cognex engineering. During the second quarter we added POWERLINK real-time Ethernet connectivity to In-Sight, giving us functionality that is very important to our OEM customers in the factory automation market. We also added liquid lens technology to our very successful DataMan 300 ID reader, which opens up new opportunities for us in manufacturing and logistics. And we upgraded our Cognex Explorer operating environment, making it easier for manufacturers to monitor, manage and maintain a full range of Cognex Vision and ID products on their production lines. More recently we launched an entry-level In-Sight Vision system with integrated auto focus lens and lighting to address the lower end of the vision systems market, a segment we have not served in the past. This powerful, easy-to-use product is ideal for value conscious manufacturers who require a simple solution, particularly those in emerging markets. We expect these products to continue to expand our served market.

The last topic in my prepared remarks as our outlook for the third quarter, which calls for revenue to be between $79 million and $82 million. We are cautious for a number of reasons, first we believe that manufacturers will pull back spending further as a result of the uncertainties about Europe and global growth. Second, factory automation is typically soft during the summer. Lastly, currency exchange rates remain a concern. That said, we expect continued increasing demand in Asia, and solid performance from our surface inspection business unit.

Gross margin should continue to be in the mid-70% range. Operating expenses are expected to be essentially flat on a sequential basis. And the effective tax rate is expected to remain at 21% before discrete tax items. Now let's open up the conference call for your questions. Operator, we are ready to take questions.

(Operator Instructions)

Zach Larkin, Stephens.

Good afternoon, gentlemen. Thanks for taking my call. Mentioning your remarks, some of the changes or softness in order patterns, can you give a little bit more detail as to where you saw the biggest changes from what you might have been expecting earlier on in the quarter?

Yes, I would say that was really in Europe and the Americas specifically. And most in terms of where we saw order patterns softening, and particularly around the automotive market. In terms of strengthening, we saw our SEMI strengthen in the quarter in a way we had not expected.

And kind of dovetailing that onto SEMI, do you expect SEMI to remain strong or you think that might just have been a one quarter pickup in demand that might be soft as we -- given all the macro headlines?

Yes, I think we are not expecting it to get stronger as we go through the next couple of quarters, but I think on a year-on-year basis it is going to look pretty favorable for us.

Okay. Then one final question if I might is as you look at the ID products which you mentioned did quite well in the quarter, given UPS's broad commentary on being a little more cautious, have you seen any changes in your expectations for that segment and orders for ID products at all?

Well, okay, so ID serves a very broad market and factory automation is the main market for our ID products. But when you talk about UPS we would call that a logistics account, and that's a market we're relatively new in and we see a lot of interest in our products, which are relatively disruptive in that space. That said, it is a longer-term opportunity for us in logistic so I don't think nearer term trends in spending would affect our expectations for that market.

Okay, thanks very much.

Jim Ricchiuti, Needham & Company.

Thank you, just a continuation on the ID products questions. I may have missed it, Rob, did you give a percentage of what it represented of your overall revenues?

No, I didn't. I said it grew 24% in constant currency year-over-year, but we can give you that data if you give us a moment.

Sure. While you're looking for that data, with respect to Japan, it looked like you showed pretty good sequential growth, was that driven primarily by electronics? Because I thought you called out some weakness in the factory automation part of that business?

Yes. So I would say -- obviously we saw improvements in the SEMI market and kind of flowed through in the quarter so that was kind of-- we got help in that area. In terms of factory automation I think what we are seeing year-on-year is continued softness, and I think what we are also seeing is some of our customers moving production, or they have moved production offshore after the tsunami. So instead of reinvesting in lines in Japan we are seeing them investing in lines in Taiwan, Korea and China.

Got it. And how is the relationship going Rob, with Mitsubishi? Is that still somewhat slower to get the traction you anticipated?

Well, no I would say our relationship with Mitsubishi is very strong. I think we would all agree on that and we are now really about three, three and half years into the relationship and we've seen some very strong growth over those three years. So, but I would say our relationship with Mitsubishi is primarily to address the factory automation business in Japan, that market, and I would say that market to us looks relatively soft at the moment.

Okay, so with respect, when you see some of the customers possibly shifting offshore, that really doesn't have any effect on the Mitsubishi portion of the business?

No, I would say it possibly does because business that was what's going to be in Japan is now in other markets so it may not necessarily be through the Mitsubishi channel.

Got it. One final question. On the SISD business, it is somewhat surprising that it doesn't appear that you are seeing the effects of the global slowing in that part of the business. What's driving the strength -- continued strength in that business.

I would say it is a pretty a long order to sale cycle in service inspection, so we saw very strong orders through the back end of last year and into this year, and we are seeing that flow through in revenue now. I think it is more immune to short-term impact. But I would say, also, even in that market too, we are seeing some customers hesitate to write PO's in the current environment.

Okay, thank you.

Jim, just as you are asking further questions, our ID business year-on-year on a constant currency basis essentially grew 24%.

24%. And Dick, what was it, as a percent of revenues?

As a percentage of revenues in the current quarter it is about 20%, a little over 20%.

Thank you.

Jagadish Iyer, Piper Jaffray.

Hey, Jagadish.

Can you hear me?

We can now.

Okay, sorry. So two questions. First, if you look at your historical trend, you see the Q4 usually kind of picks up, so what needs to happen for the Q4 to really move up, compared to Q3?

Right. So you're right, Q4 and Q2 traditionally are our best order quarters. What tends to happen is bookings in factory automation market, particularly in Europe, slow down through Q3 in the summer then they come back in Q4. If I'm interpreting your question correctly, what has to happen for us to see sales come back strongly, or business come back strongly in Q4, I think it really is the funnel of business we have. And the opportunities we see in front of us have to turn into business, which is a matter of whether customers cut loose the projects for capital spend that we expect them to. It depends how hesitant they are about doing that given the current economic environment.

Just a quick follow-up on your commentary on China, I just was wondering how sustainable is China in the second half vis-a-vis the first-half? Thank you.

China is definitely a bright spot for Cognex in recent performance in Q2 and I think it was interesting, I think we seen a lot of companies saying they expect China business to start coming back now, and I think they haven't so much. But we really have, we really saw a lot of business come through in Q2. And we expect that to continue at a high level through the back end of the year. Where we are going to have some pretty favorable comparisons year-on-year as we look back. What's driving that particularly is the consumer electronics business in that market, particularly demand around smartphones and tablets. I think as those customers gear up for the end of the year holiday season push.

Did you call out the sales from China please?

Yes. We can do that. We don't have the detail by just China right here. I have total Asia, but not

Okay. But is it fair to assume that the bulk of the Asia comes from China? At least 75%, is that a fair approximation?

No, I do think it would be because Asia also, wait a minute, 75%?

We'd have to get back to on that.

That's fine. That's good, thank you.

Less than 75%, and I think a quarterly business in China would be approaching $7.5 million in the quarter.

Okay. That's good. Thank you.

Ben Rose, Battle Road Research.

Hi everybody. Question, Rob, regarding the DataMan product. Now that the DataMan 300 has the liquid lens technology, how are you differentiating the 500 versus the 300 in terms of customer engagements and selling situations?

So yes, the DataMan 500 is still the highest read rate performance of any barcode reader that we have, or any vision barcode reading product on the market today. Super fast, very high performance for 1-D barcode reading. The DataMan 300 is also very powerful and incorporates quite a lot of our technology, but it is more general-purpose and it is at a lower price point and serving a broader market in general. So that gives you a bit of a sense of where they are positioned.

Okay. And would you say the same is true for this new In-Sight 7010 model in terms of its price point relative to the rest of the In-Sight product line?

Yes. So you said 7000 series In-Sight that we've launched, is at a -- it is a very high-performance but easy to use vision system. We are targeting a lower price point in the vision systems market. Yes, it is very capable. Easy to use. More at an entry-level price point where typically we haven't played in the past. And where we see a lot of growing demand in emerging markets.

Okay. Then finally, if I may, on the automotive -- within the automotive segment, where your comments about some of the weakness you are seeing in automotive, was the only in Europe or was that also in the United States, and in Asia for that matter?

I think most of our automotive business is in the Americas and in Europe. Although the revenue numbers looked pretty good in the quarter, what we are seeing right now is some delays in capital spending plans at those customers. We are seeing that, particularly as you would imagine in southern Europe, in markets like Italy and France, but also to some degree in America, and even in Germany. And yes, for us it is interesting, and we're trying to understand what degree these are just the cycle of implementing the current projects, whether those are taking some time to digest, or whether this is a slowdown in capital spending plans as a result of the economic situation. I think we will know more about that after Labor Day.

Okay, great, thanks very much.

Richard Eastman, Robert W Baird.

Yes, just Rob, just a question on the slowdown in the Americas that you stated. I guess that's in orders currently, but you did imply that you saw some revenues slowdown in factory automation in the US. Did that slowdown come through quickest through distribution, or was that direct? Were you surprised at all by the distributor sell-in versus sell-through at all?

No. There's not a meaningful difference between the two in terms of what we saw. Something you have to understand about Cognex is our distributors really don't carry inventory. So, our read through is very clear.

Okay. And that's not a more direct channel to say North American automotive than your direct channel?

No. No.

Okay. Then if I'm correct, the solar sails comparison eases significantly in Q3 and is almost gone in Q4, is that right?

Yes. That's correct. Yes. Hopefully, you won't hear us talking about solar anymore after this quarter.

That would be good.

Only in a good way. (laughter). Probably not at all.

Then also just a question on the SEMI OEM just so I'm interpreting your comments, your trend line comment there correctly. Is the SEMI OEM business then is kind of stable, at this 10 million-ish level in the short and intermediate term?

Well, it would be difficult to predict. Basically we saw it come back quite strongly in the second quarter, but like you, we are hearing and we are seeing signs from the market that there some tentativeness to go on in investing on up the cycle as one normally might expect. So I think at this point we don't expect Q3 or Q4 revenues in SEMI to be any higher than we saw here in Q2. But it really is difficult to call.

Okay. All right, and just lastly, was the implication that the book-to-bill in SISD was less than one?

We don't particularly talk about book-to-bill, Rick.

I know, that's why I asked if it was the implication.

I know, you tried this last quarter too.

Let me put it that way, I will just state it as my interpretation of your comments was as less than one.

You can interpret anything you want.

Okay.

As you know, the SISD business is very lumpy. It is lumpy both in terms of when the booking comes in and when revenue actually gets recorded. But if you take a look over the last four to six quarters or whatever, they've done pretty well. This past quarter was an excellent quarter from them from the revenue prospective. I think it was their second-best ever.

Is there any noticeable contribution there? I know you guys entered the glass market a year ago, but is there any incremental revenue there year-over-year that's driving some of the growth?

There's a little bit, but I would say it is more result of share gain and good execution by the team we have in place there.

Okay. Great, thank you.

Thanks.

Jim Ricchiuti, Needham & Company.

Dick, do have the headcount as of the end of June?

I do. And it was 955 people.

Okay, in terms of what your plans are, you had been investing in sales and marketing, does that -- have you slowed down any of that in light of what you are seeing in the business?

Yes. I would say our plans for some time had been that -- we added a lot of salespeople over like the last two years, but less this year. And we see upside potential from sales productivity if the people we've added who are now really getting up to full performance. That particularly applies to China, and it's probably one of the reasons why we are seeing good performance out of our China business.

Okay. Thanks, Rob. How would you characterize the competitive environment? Are you seeing any changes out there? And follow-up on that is, can you talk a little bit about the potential pipeline for acquisitions? How would you characterize that?

I would not say we've seen a noticeable change in the competitiveness environment over the last quarter or since the start of the year. There have been some acquisitions in the ID space, the business DataLogic has made a number of acquisitions, but they would not rank among our top competitors.

You asked about acquisitions. We have an active process of reviewing acquisitions. We have a number of opportunities we are looking at, but we don't expect to close any acquisitions in the third quarter.

Okay, and lastly, can you talk a little bit about new products, and to the extent you see them potentially contributing in the second half, either from new applications or just what you think might be potential significant introductions? To the extent that -- I don't know if you can be specific, probably not.

Right. We don't talk about products we've yet to launch, but I would say we've launched some pretty exciting products and technologies this year. Which already are helping in terms of growth and we expect to continue helping. We launched new OCR, optical character recognition, algorithms and tools at the start of this year, and that certainly helped drive some growth for us in consumer products and pharmaceuticals. That's something we expect to go on delivering for a -- I talked at the start of the year about Hotbars, which is very innovative, really game changing technology in 1-D barcode reading. And that's really starting to gather momentum and we expect continued strong performance out of that.

The DataMan 300 that we referenced in the call. We are very pleased. That well exceeded our expectations in the high-performance mid-price barcode reading market. We've just recently launched a liquid lens and some other accessories for that product, which help expand what it can do. So that's some of what we have. Then we have a very full product, full pipeline of new product technology. Where you can expect to see from us over the next 12 months, and I think the rates of innovation and the rate of productivity out of our engineering team is very high and we expect to continue, if not improve, over the next 12 months.

Thanks, would you say you are satisfied with the progress you are making in the logistics market? I don't know if you want to break that out at all yet, but can you give us some sense as to how you are doing in the market?

Yes, let me speak to it. I would say the logistics market is a large and relatively entrenched market in terms of how it operates. There some large integrators who are very busy in the current environment integrating for grocery distribution, for retail distribution, for postal, and other markets. And we are making very good progress with them, but some of them -- they were looking at business in their portfolio that has been busy for the next year. So I think the rate of adoption of our technology is probably slower than we expected, but the amount of business we see out there is very significant. We do have some very good wins that we are noting. Just in the last few weeks we've had an important win at a major national postal supplier. This is a project that is expected to generate between $1 million and $2 million of logistics revenue over the next 18 months. There are many projects of that size currently in our pipeline, so in terms of how the product is being received, how we are executing, I think it is relatively good. In terms of the dynamics of the market I'd say it's a little more conservative and slow-moving than we had expected.

Thank you. That was helpful.

Russ Piazza, Front Street Capital.

My question has been answered and -- asked and answered. Thank you.

Ben Rose, Battle Road Research.

Thanks very much, just a quick follow-up. In terms of the acquisitions that you're taking a look at in the pipeline, Rob, would you characterize them as more being in our core market of machine vision or are there other sort of factory automation market adjacencies that you are looking at as well?

No, all the opportunities we look at are vision related. We are a vision company and we expect remain that.

Okay. Thanks very much.

Thank you.

(Operator Instructions)

Jagadish Iyer, Piper Jaffray.

Thanks. Two quick questions. First, on the buybacks, it looks like you have not purchased any stock back. Can you give us your take in terms of what are the mechanics in terms of the -- clearly the stock has kind of pulled back recently, and I was just wondering what are your thoughts on the buybacks, and then I have a follow-up.

Okay. During the early part of the quarter we were, the Company stock was trading pretty close to the 52 week high. And at that point we didn't feel it was an appropriate use of funds. The recent pullback occurred mainly when we've been in a blackout period. Clearly, this is something that we've -- we've seen the stock price go down and it is something that we will be taking a harder look in the next quarter.

Okay. Just a quick follow-up. I wanted to -- Rob your thoughts on, in terms of the automotive segment, where do you see that the automotive segment could spring a big surprise going forward, at least in the later part of this year, and into next year? Any thoughts here whether it could be Europe, or it could be the US, or Japan? Thanks.

Surprised, are you referring to upside or downside?

Upside.

Okay. So automotive is in a period of investment in automation. Particularly in vision, around some of the new technologies, such as hybrid technologies that they are bringing to market, and other pretty major changes. They are some way into a big capital spend kind of a period and they are Cognex's largest vertical market. Our business and automotive is growing this year, but not as much as we expected. Right? Where it could come good is if we see in Europe and/or America, and some of these large projects that we expect to come through actually hit and happen. So I think that's where we potentially could see some upside.

Thank you.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back to Dr. Robert Shillman for any concluding remarks.

Yes, thank you. Well, we had a very good first half of 2012 and our sales team continues to be very positive about the opportunities that they see for our products, but those are sales guys. So Management's outlook is cautious. We are keeping a very watchful eye on spending in light of -- maybe I should say in dark of, the current economic uncertainty. That's it for now, I want to thank you all for joining us tonight. I hope that we have more good news to report to you next quarter. Bye-bye.

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