Cognex Corp (CGNX) 2012 Q3 法說會逐字稿

Thank you for standing by and welcome to the Cognex third-quarter conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session.

(Operator Instructions)

Please be advised that this conference is being recorded today, November 1, 2012. I would now like to turn the call over to your speaker today, CFO, Richard Morin. Please go ahead.

Thank you, and good evening, everyone.

On Monday this week we issued a press release announcing Cognex's earnings for the third quarter of 2012, and we also filed our quarterly report on Form 10-Q on that day. For those of you who have not yet seen these materials, both are available on our website at www.Cognex.com. They contained 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 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 will turn the call over to Cognex's Chief Executive Officer, Rob Willett.

Thanks, Dick, and hello, everyone. Welcome to our third-quarter conference call for 2012.

I know most of you are used to hearing Cognex's Chairman, Dr. Bob Shillman welcome participants to our earnings call. Dr. Bob won't be joining the call this evening. He has been stranded in New York City since the weekend due to Hurricane Sandy and is just now in the process of, as he put it to me, escaping from New York by plane to San Diego. He sends his regards, and he looks forward to talking with you in our next call.

As you can see in the press release issued earlier this week, our results for Q3 of 2012 were good. Revenue for the third quarter was $80 million which was within our expected range in what is typically a seasonally soft quarter for Cognex. Growth year-on-year in factory automation was offset by unfavorable exchange rates and lower revenue from the semiconductor and electronics capital equipment market, or SEMI as we call it. On a sequential basis revenue decreased 5% primarily due to SEMI.

IED products, our number one growth initiative, continue to perform well. Revenue from IED products in the third quarter increased 21% year-on-year in constant currency offsetting the decline in SEMI.

Another bright spot was greater China where the investments we made to build our team continued to show strong results. China factory automation increased 50% year-on-year in the third quarter and 18% on a sequential basis.

We were highly profitable in the third quarter reporting margins that tracked at or above our long-term targets. Gross margin was strong at 76%. Operating income equaled 27% of revenue and net income 22%. These percentages are in line with our reported results for last year's third quarter. This is despite more difficult operating conditions and the incremental investments we have made in new product development and sales force expansion.

Reported earnings for the quarter were $0.41 per share exceeding the Thomson Reuters First Call consensus estimate of $0.36 per share. This was primarily due to lower than expected operating expenses and a benefit from discrete tax items.

Let's turn now to the details of the quarter. Revenue from the factory automation market was $61.4 million and accounted for 77% of our total business. This represents an increase of 4% year-on-year. The increase was 9% excluding the negative impact of currency exchange rates.

On a sequential basis factory automation revenue was flat with the prior quarter. This was better than we expected. Factory automation typically declines in the third quarter due to the summer seasonal slowdown, especially in Europe. Our best performing vertical industries in the quarter were consumer electronics and medical devices.

Looking at factory automation from a geographic perspective, Asia continued to be our best performer in terms of percentage growth. Factory automation revenue from Asia grew 42% year-on-year and 12% over the prior quarter, setting a new quarterly revenue record of $12.6 million. Growth in greater China led the way in the third quarter. Our long-term view of China remains very good, but there is more uncertainty near-term.

In the Americas slower spending and project delays have moderated growth. Factory automation revenue increased 9% year-on-year and 6% sequentially helped by $1.3 million of service revenue related to a single customer contract.

Factory automation from Europe decreased 11% year-on-year and 10% from the prior quarter. In constant currency European factory automation revenue grew 2% year-on-year and declined 5% sequentially. While growth in Europe has slowed in recent months, our team is executing well there in a tough environment.

In Japan the factory automation market continued to weaken resulting in a revenue decline of 13% year-on-year and 11% from the prior quarter. Our bright spot was IED products which is starting to gain traction in Japan particularly in automotive.

Revenue from the semiconductor and electronics capital equipment market was $6.8 million in the third quarter. This represents a decrease of 23% year-on-year and 30%, or $3 million, on a sequential basis. Going into the quarter SEMI appeared to be recovering from the market downturn that began in mid-2011. This pick up proved to be unsustainable. The turnaround that the industry hoped for in the second half of 2012 is not materializing.

In the surface inspection market revenue for the third quarter was $11.8 million. This is a decline of 1% year-on-year and 8% from the prior quarter. Service inspection revenue is lumpy due to the timing of deliveries and installations and the impact of revenue deferrals. Demand for our service inspections systems remains solid in metals, one of our two mean vertical industries. Paper appears somewhat softer, and we're making good progress in glass which is a newer vertical for us.

Turning next to Cognex innovation, we recently launched the DataMan 9500 hand held mobile computer. The DataMan 9500 is a powerful ID reading device for challenging 2D Direct Part Mark codes. The integrated data terminal provides visual feed back to the operator and enables interaction with the factory network while moving about the factory floor. The DataMan 9500 opens new applications for Cognex [at] automotive and aerospace manufacturers, for supply chain management and in the consumer products and other industries for problem of counterfeiting and diversion.

The DataMan 9500 is our fourth significant product launch in 2012. Now we have a strong pipeline that includes some major products coming out in the next six months.

As we look at our business we see pockets of strength in areas such as IED products in China, however, slower global growth and economic uncertainty are expected to continue to weigh on our results in the near term. For the fourth quarter we expect revenue to be between $78 million and $81 million. Gross margin should continue to be in the mid- 70% range. Operating expenses are expected to increase by up to 5% 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.

We will now begin the question-and-answer session.

(Operator Instructions)

Zach Larkin from Stephens.

First off you touched upon medical being strong and the factory automation segment, I wondered if you could give more color on that the types of applications you are seeing. And what your expectations are for that vertical as we move forward.

Cognex has long saw a vision into the medical device industry, whether a lot of demands for the management of pieces in the process using barcodes, but more often than not precise measurement and alignment as part of the manufacturing process. Many or even most of the major medical device companies in the world use Cognex Vision. And I think we reported tonight a particular contract in the medical device industry, and we have a series of those on an ongoing basis with them with particularly one very large medical device company. And we have an ongoing relationship with them specifically concerning a product of theirs and a number of products of theirs where we are doing some very sophisticated things with Machine Vision.

You asked about the outlook for the industry. Medical devices I think is generally a pretty stable part of the Cognex business, and we see that continuing. There has been some softness I guess in medical devices reported perhaps around some tax credits for R&D and other things. But, generally, I would say that is not from our perspective affecting the rate of investment that we see for Machine Vision in medical devices, and we expect this vertical to be a decent grower for us in the long-term.

Great. Thanks for that. One quick follow-up on Asia. You mentioned the potential for maybe a little bit more caution going forward.

Are you seeing any changes in order rates? I know there is some concerns over there with the Premier change and other things causing some potential pauses, but I wondered what you guys are seeing with feet on the ground?

Yes. We've had a great last couple of quarters in greater China particularly and very strong in Korea. But we are noticing some kind of moderation in that growth rate as we come into the fourth quarter particularly in China. It's hard for us to tell at this point whether that's more to do with just the various waves of investment, particularly in electronics which is our biggest market there. Or whether it is some more caution related to the things you are talking about, the macroeconomic changes around the leadership change.

I think the point that is really important to bear in mind is that we have been investing strongly in China, and we see China as a very good long-term growth area. So shorter-term we might see some bumps in the road on levels of investment. Longer-term we think it's going to be very good for us and continue to be very good.

A final point I will make is we have been very heavily weighted toward electronics in greater China, particularly. But more recently we are starting to make a lot of ground in the automotive space, and we are very bullish about automotive growth for us in China over the medium to long-term, and we're starting to see it already.

Thank you very much.

Tom Hayes, Thompson Research.

Good afternoon. Tom Hayes here. A quick question, you had mentioned some project delays in the American market, I'm wondering if that is an occurrence you had not seen before or just some new larger project delays you saw this quarter?

No. We have been noticing project delays over the last number of quarters, so and I think perhaps we all started to see some slowing down in the economy. We are seeing the same thing now, perhaps a little more than we were in previous quarters, but it's not a step change in what we are observing.

Great. Thank you. And then just as a follow up, you had mentioned on the last call you were starting to see some nice wins in the logistics market. I was just wondering if you could give an update on what you are seeing in that market?

Yes. Logistics we think is a great long-term market for Cognex, and logistics companies are starting to recognize the value of ID products and they're in the early stages of adopting our technology. We have been launching products into the logistics space for about the last year and a half, and they are starting to get some real traction.

We have seen, and I mentioned it in the last call, a very nice win in the postal market which is part of that market, and that will play out in revenue over the next five quarters or so. But we are also in line to get specked into some other I think pretty major projects over the next six months with some very major names in logistics and retail. And where we are starting to see smaller orders now, we are expecting to see bigger orders next year and to be part of that CapEx plan for next year.

I think as I mentioned over a number of recent quarters in discussions with you, the move into that industry has been a little slower than we expected. It's sort of more conservative as an industry I think than we thought going into it. Our products are clearly advantaged in this space, and we have some even better ones in the pipeline coming along here. So we are very positive, and we're starting to be really recognized by the big players in that market. So I think it will be a major growth driver for Cognex over the next few years.

Great. Thank you for the color.

Ben Rose, Battle Road Research, LTD.

Just quickly on China, can you refresh our memory as to what percentage China is of total Asia?

Yes, we can.

About half I think.

We talk about greater China and our revenue for greater China factory automation in Q3 was a little more than $8 million in the quarter. So it is on track to be a little more than $30 million this year. That is in a region that's doing -- that will do around $50 million this year. And I'm talking now really about the about the MVSD business so on top of that the SISD business which would be on the order of $10 million to $12 million.

Okay. And on the ID products, can you talk a little bit about the performance of the DataMan 500 verses 300 in the quarter? I would gather that 300 was a stronger contributor to growth?

Yes. We are very pleased with the performance of the DataMan 300. When we launched that product at the start of the year, we had a stretch goal for ourselves to sell about $6 million into the industry, and we now look like we are in a position to well exceed that. So that's performing very well, and it is really a very versatile general-purpose product, right? And it leverages a lot of the Vision System on a chip technology that we saw a year and a half ago coming in the DataMan 500.

The DataMan 500 in contrast is a very, very high-performance single function product for reading 1D barcode. What looks like picket fences as opposed to say crossword puzzles which might be 2D barcodes. So it's more of a specific product. DataMan500 is a great door opener for us and a great performer pulling through a lot of business, but definitely the DataMan 300 and other products we will be launching into those spaces are going to be bigger in the long run.

Okay. And then finally on Europe, which I know is weak this quarter, and you certainly warned of that last quarter on the conference call. Given your experience, Rob, at Cognex, what do you think is similar and what is different vis-a-vis the downturn in 2009? Do you have any sense of what the duration of the weakness might be in that particular geography?

I'm going to say no, I don't. I think these are questions that relate a lot to European macroeconomic policy and the world economy overall.

What I would say is factory automation revenue in Europe exceeded our expectations in Q3, and it's really currency exchange rates that hurt us. We are outperforming the underlying market in Europe in factory automation because of our continued strong execution by a European sales organization, really one of the best teams at Cognex. Our channel into factory automation includes OEMS -- they give us a lot of stability and then ID products is gaining traction. And automotive is performing relatively well especially in Eastern Europe where we are seeing growth.

I think what I would say is the kind of pressure -- downward pressure we see this time around in Europe is a lot less. I think it's going to have a lot less impact on our business than what we saw in 2009.

Okay. Thanks very much.

Jagadish Iyer, Piper Jaffrey.

Two questions, please. First, if you look at your factory automation market, and you set out a goal of double-digit growth for this year, I was wondering you're not probably going to grow on a year-over-year basis for this year. Where do you think this segment really fell short and where was it up to your expectation? And how should we thinking about 2013?

Yes, great, Okay. Factory automation is a great growth driver for Cognex in the long term. In the quarter it represented 77% of our total business, and it grew 9% year-on-year in constant currency. In the long run, we expect it to grow 20% year-on-year in constant currency, and I think the reason -- there are a few reasons it's not doing that right now.

Reason number one is the macroeconomic environment. And I'd say you might figure it like this there's about 10 points downward pressure at the moment on our growth rate in factory automation and in ID. If you like, ID grew 20%; we expect it to grow 30%. Factory automation grew 10% in constant currency, and we expected it to grow -- we expect it to grow 20% in the long run.

And I don't think much changed about that. We think it's a great market where vision has a lot to play.

We spoke, and I don't really enjoy going on speaking about the solar market but that certainly has been a major headwind to us, on the order of $10 million this year of downward pressure as well. I think what I would encourage you to do is take a longer-term view of factory automation and see that it is delivering some okay growth rates right now. It has delivered great growth rates, and we expect it to go on. If I -- some data I looked at recently said over the last three years, for the first nine months of the year, we have reported compound annual growth rate in factory automation of 26%, including the first nine months of this year.

If you look back over 5 years, that is closer to 13%. This is definitely a strong growth driver, and those rates of growth have probably accelerated over more recent periods if you exclude this year.

The other point I would make is if you think about factory automation, of course, ID is an increasingly large part of factory automation for us, and ID is a wonderfully fruitful area for growth at Cognex. So we are replacing outdated technology and lasers with vastly superior disruptive tech knowledge in vision. And you kind of think about that the change we have all seen in the world from analog to digital. It went on with tape, it is going on with phones, and it's going on with everything around the world.

And we are kind of riding that same kind of trend, and last year our ID business was around $60 million. And we are on track to have some great growth again this year in ID, and we think that is going to go on giving us a lot of growth because, we are still relatively unpenetrated in the industrial ID market. There are a lot of bigger players who were outperforming, and we expect to go on taking share, and we're investing a lot in that space.

So, it's a long answer, Jagadish, but I think what I'm saying is we're very positive about the long-term growth prospects of FA, and we don't see that changing based on anything we have seen recently. It is just a little caught up with macroeconomic situations and delayed capital spending and caution we see at our customers at a broad level.

That's very helpful. Just as a quick follow up, I wanted to understand, can you give us some kind of color in terms of what is your overall exposure in the automotive segment? And can you break it down by geography between US autos, European autos, Asian autos? That would be helpful, thanks.

On kind of a high level, our automotive business globally is between about $80 million and $100 million, and it is our largest vertical market, and it has been delivering great growth this year. Year-to-date revenue in that market is up around 4%.

You asked about where is it? It is really in Europe and America. In Europe we are very, very well penetrated, and that represents a large part of the revenue, and the other large part is the Americas. We are relatively or very unpenetrated in Japanese automotive, and still the spend that is going on in Chinese automotive is a very small part of our business, also. But that is growing, and that's really about vision getting adopted in country in China, and we're seeing a lot more of that starting to happen.

Thanks so much.

(Operator Instructions)

Jim Ricchiuti, Needham & Company.

Robert, I wonder if you could comment a little bit more about the softness in the Japanese market. Is it more toward consumer electronics? Is it more broadly based?

I've been to Japan twice in the last 13 weeks. I've been spending a lot of time there and spend a lot of time with customers, so I feel I can probably answer your question. I feel the overall -- what I heard was the overall factory automation market is very weak in Japan right now. A lot of particularly end user electronics is leaving Japan and going to markets like Korea or Thailand, even I started to hear about of Indonesia as a market where it's moving.

And then I would say the markets that are perhaps a little stronger are automotive, where we are very underpenetrated, I would say. And then electronic components, so the sort of finished pieces of electronics that go into things like smart phones. Those businesses are holding up better but still not good.

Overall it is a relatively bleak picture in that market. Part of our strategy is our relationship with Mitsubishi and the distributor channels that we have there. While our overall business is shrinking relatively significantly in Japan, that part of our business is pretty flat. I'd say that part is probably outperforming the rest of the business and the market, but overall Japan doesn't look good.

And Mitsubishi overall, though, if you look back versus where you thought it might be a year ago, is it safe to say that is coming a little under your expectations because of the macro environment?

Yes.

Correct.

But, as you see some of these Japanese companies moving to other parts of Asia, Korea, Thailand, Indonesia, I would assume that those are also opportunities for you, aren't they?

Absolutely. I think -- can't break it our for you, but I think that is part of the reason we reported such excellent growth in the rest of Asia, certainly in Korea and of course in China.

Okay. Dick, I wasn't sure, did you actually give a percentage for ID? Or, Rob, I'm not sure if you -- you said it was up 21% in constant currency. What percent of your revenues is it now?

Hang on while I look through a couple of pages here. Okay, so our ID business this past quarter was approximately 44% -- no, wrong thing, I'm sorry. ID is about 21%, I think.

21% of overall revenues. Okay.

Total revenues, yes.

Total revenues, got it. And the strength that you are seeing in the ID market in China, where is that coming from, because you don't have a major presence in automotive or it is still relatively small? So where are you seeing it? More in the electronics area?

Yes. Electronics is our biggest market and a major user of ID. But also a lot in other good markets for ID for China would be consumer products and food markets like that where there is increasing use of bar coding and also track and tracing to have supply chain security. It's going to be a good long-term market for us, perhaps, but to answer your question, number one electronics still for ID in China.

Within China, Rob, I'm not sure how well developed and mature is the laser barcode market. Or are they making -- are you seeing more of these verticals making the leap to vision base?

I'm speaking more from 15 years of experience in the coding and marking product identification market. China is pretty undeveloped in the use of bar codes and they are definitely adopting vision rather than starting out with lasers, in the industrial space.

Okay, right, got it. SISD -- is there anything further that you could say about that? It would seem like that would be more sensitive to the macro environment, and yet it seems like it is kind of performing relatively well in this environment. But how concerned are you of a slow down? Is there anything you could say about order activity there?

SISD, surface vision business is relatively stable part of our business, and in many cases there is a lot of backlog that works its way through, so it's more immune to kind of short-term changes. As I mentioned in my opening remarks, we still see very good demand in metals, and we are penetrating some new markets now like glass that is starting to help raise our revenue where we have been underpenetrated in the past. And even plastic films around a touch panel displays in markets like the touch panels for cell phones or tablets. These are markets that look good. And, as I mentioned, weaker markets for surface inspection, paper -- it's a big part of our SISD business, and it's looking a little less strong.

If I look out to the next quarter, we think -- we expect SISD to have a very good quarter, not to the level of the record $16 million quarter they had in Q4 of last year but above what they reported in Q3. We're feeling good about that business.

Your question was why is it doing so well? We have got an excellent management team in there now. They are executing well, and we are strongly represented in that market and I would guess gaining share.

If you were to aggregate let's say the SISD business in plastic films and in glass, is it -- you did about $12 million in revenue in SISD, what does it represent of that? And is that -- what did that account for last year? Is that a bigger part of the revenue stream, or is still relatively small?

I'm not really clear on your question.

If I look at the SISD business, I think in the past, I've thought about it as more metals and paper. But some of these newer opportunities, inspection of plastic films, glass, is that now a meaningful part of the business? Is it 10% of the SISD business, 20%?

The combined glass and plastics for the third quarter was less than 10% of their total business.

Okay, and Dick, a year ago, rough terms, I'm curious is that an area or revenue stream that didn't -- wasn't all that meaningful at all in SISD a year ago or had it been in that range?

I think -- we started in glass last year, and it's probably been in about that same range. Plastics varies a little bit, but, like I said, it's not yet up to 10%.

Jim, I'm looking more forward in the remarks I made earlier about that, where we are seeing some of the growth you will see in coming quarters offsetting any softness we're seeing in paper.

The last question for me, going back to -- I think it was your investor day you talked about the total available market in logistics, and I think you had sized it at the time at around $150 million. Is there anything you see now that makes you think that that opportunity is bigger for you?

No, I think that is still a good number, and that's still how we size the available market for what we have today. There are additional pieces in logistics that vision can address beyond that, but those are not necessarily markets that we are yet in. Generally I would say, no. I think you're $150 million number is still a good number we're holding to.

Thanks a lot.

Ben Rose, Battle Road Research, LTD.

Just a follow-up question with regard specifically to the automotive market in the US. Are you seeing any trends regarding more intensified use of Machine Vision for new production lines versus retrofitting of various different car lines? And then I had a question about competition as well.

It's an interesting question, I would say not particularly pronounced in that way. I think the mix is probably similar.

When we were back in 2009, we definitely saw a lot of retrofitting of lines going on and then through the big growth we saw in 2010 into 2011 we saw more new projects. And I'd say we kind of have a balance of both going on right now. Certainly plenty of new projects and investments going on in automotive and that applies to both America and Europe. It's the timing of those investments I think that is having an effect on growth and our expected growth.

Okay. And then from a competitive standpoint, do you still see Keyence as your strongest across-the-board competitor? And, if so, are you seeing any change in their behavior either by way of increased or decreased investments in the US and in Europe?

Okay, Keyence, we still consider it our number one competitor in the vision space. You sort of said across the vision space.

To be a little picky about it, Keyence doesn't really play across the vision space. They don't have surface vision business. They don't have PC or software -- vision software, so they are really selling a narrower range of products. However, in our biggest markets, vision systems and in ID, they are certainly our strongest competitor.

To your point what do we see changing? We see them following a consistent strategy for what they've been following. Recent changes would be though we see them cutting back their investments in Japan actually reducing their feet on the street they have in Japan selling vision. And, alongside us, continuing to invest pretty strongly in the greater China market. We also see them like us on a small level investing in sales people in other emerging markets, Brazil, India, where they have recently opened subsidiaries a number of years after we have been present in those markets.

Okay. Thanks, that's very helpful.

Jagadish Iyer, from Piper Jaffrey.

Just a quick follow-up on a housekeeping question. How should we be thinking about the OpEx going forward for next year, please? Thanks.

I think it is probably too soon to talk about what level of increase we expect in 2013 in operating expenses, but we don't expect -- we certainly don't expect double digits. We don't expect to see any major increases in headcount or new offices unless there is an improvement in the overall environment.

I think in how we are thinking about 2013 is we certainly don't expect to see clarity on the growth picture until some way into the year. We think we're probably going to see continued challenging environment in Q4 and Q1, but I think if then some of these macro issues get behind us, we will start to get back to the growth rate we expect for automation with luck at the back end of the year. We are going to manage our operating expenses tightly to be in line with our growth through that -- through those kinds of cycles and changes, but it's too soon to give you a specific number.

Thanks.

There are no further questions at this time. Mr. Robert Willett, please continue.

Okay. To wrap up, we are pleased with our third quarter performance in light of the global economy's dampening effect on our growth rate. Machine Vision continues to be a promising space, and the Cognex team continues to execute well.

We are enthusiastic about the opportunities we see for our products over the medium to long-term. Thank you for joining us tonight. Goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.