Cognex Corp (CGNX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex third quarter 2014 earnings call. (Operator Instructions).

As a reminder today's conference is being recorded. Now I would like to turn it over to your host, CFO Dick Morin.

Thank you and good evening everyone. Earlier today we issued a news release announcing Cognex's earnings for the third quarter of 2014, 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 as we believe it is useful to investors, or if we believe that it will help investors better understand our results or business trends. For your reference, you can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release and in the Form 10-Q.

I'd like to emphasize that any forward-looking statements we made in the earnings 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. Bob Shillman.

Thanks, Dick, and hello everyone. Welcome to our third-quarter conference call for 2014. And as you can see in the news release that we just issued today, it was spectacular; a spectacular third quarter. It's our best quarter ever, driven by revenue growth of 87% over the prior year's third quarter.

Right now I am at our R&D office in San Diego. Everyone else on the call is in Natick at the headquarters. For details of the quarter, in a moment I'm going to hand the microphone over to my partner, Rob Willett, our President and CEO. I will be available the end of the call to answer any questions that you may have for me.

But before I hand the microphone over to Rob, I want to remind each of you that we are not providing any details about the large customer that we referenced in today's earnings release beyond what's in that release. We have a strict nondisclosure agreement with that customer and we intend to fully stand by that agreement.

Having said that, the microphone is now yours, Rob.

Thank you, Dr. Bob. Good evening everyone. I am pleased to report that Cognex achieved the highest quarterly revenue, net income and earnings that have ever been recorded in our 33 years of business. Revenue was a record $169 million, representing substantial growth over both the third quarter of 2013 and the prior quarter.

This strong performance was driven by record revenue from the factory automation market, and includes $65 million of revenue from a single customer. Gross margin was 74%, slightly lower than in recent quarters. Volume, pricing and services in support of our largest customer were somewhat dilutive to our overall margin.

Operating margin expanded to 35% and net margin to 30%. Both represent significant increases year-on-year and sequentially, reflecting the substantial leverage that incremental revenue has on our business model.

We delivered earnings of $0.57 per share, setting a new quarterly record that is almost double the prior record of $0.29 per share, set just last quarter.

Turning to the details of the quarter, factory automation revenue was a record $146 million, which is a dramatic increase both year-on-year and sequentially. We were pleased to see an already strong quarter for factory automation made even better by the $65 million of revenue from our largest customer.

Let's now look at factory automation excluding that customer. Revenue increased 18% year-on-year, with growth in each major geographic region. Asia, excluding Japan, was our best-performing region in terms of percentage growth, increasing 30% year-on-year. Growth was led by China, where we continued our strong progress in the broad automation market.

In the Americas and Europe, factory automation revenue grew in the midteens over Q3 of 2013. Strong performance across several industries including automotive, logistics, consumer products and food drove factory automation growth in these two regions.

In Japan, we were pleased to see factory automation grow north of 20% in constant currency. On a reported basis, revenue continued to be negatively impacted by the weaker yen.

Moving on, revenue from the surface inspection market was $15 million in the third quarter, which is a substantial increase year-on-year. We continued to perform well in surface inspection and demand remains at a high level.

Revenue from the semiconductor and electronics capital equipment market, or semi as we call it, was $8 million in Q3. Semi increased year-on-year but declined on a sequential basis. That fact combined with news from the field leads us to believe that we have passed the high point in our sales at this cycle and that semi revenue will soften in Q4.

In regard to operating expenses, RD&E and SG&A totaled $65.6 million for the third quarter. This level of spending represents a significant increase over both Q3 of 2013 and the prior quarter. It is indicative of our commitment to innovation and our willingness to invest in our business for the long-term.

Some costs will fall off in Q4, but we intend to continue certain investments to realize the substantial growth opportunities we see in front of us.

During Q3 we added and trained new salespeople. We invested in our service infrastructure to support certain large customers in logistics and other high-growth markets. We also spent more on product development than in any other quarter in the Company's history.

While many of our investments are long-term initiatives, we were pleased to introduce a number of very innovative new products during Q3. We expanded our series of 3D displacement sensors, adding three new models that are for higher resolution and a larger field of view, robust new 3D vision tools, and an easy-to-use software for faster application development.

All can be bundled with the powerful new Cognex VC5 Industrial Vision Controller, making this technology more accessible to a broader range of customers.

We launched the next-generation DataMan 8600. These are high-performance handheld readers for part traceability in harsh environments. We announced Cognex Explorer Real Time Monitoring, which enables customers to improve their distribution processes by better utilizing the wealth of data provided by our ID readers.

Cognex Explorer RTM uses machine vision to automatically evaluate images of packages that can't be processed and determine the root cause of the problem. The system then categorizes them and stores the information in a database, allowing facility managers to access and analyze data for an entire facility from any Web-enabled device.

And, we introduced the In-Sight Micro 1500 for high-speed vision tasks on the fastest production lines, particularly in food, beverage and consumer products industries.

In summary, Q3 was a strong quarter made spectacular thanks to the $65 million of revenue from our largest customer. While that business will not repeat in Q4, factory automation continues to perform well. Our expected revenue range for Q4 is between $111 million and $114 million, somewhat negatively impacted by the weakening euro and yen, and softer semi market.

Gross margin is expected to be similar to our reported margin for Q3. It will reflect a higher proportion of revenue coming from service and surface inspection products. Operating expenses are expected to decrease by approximately 15% from Q3.

As just discussed, our investments took a step up in Q3. Some of those costs are expected to fall off in Q4.

The effective tax rate is expected to be 19%, excluding discrete tax items.

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

(Operator Instructions). Ben Rose, Battle Road Research.

A question for Rob and a question for Dick. For Rob, with regard to Europe there has been some rumblings from some vendors in the space that Europe looks to be slowing down a bit. I note that you noted currency impact potentially in Q4 and just wanted to see if there was anything else going on, and then a follow-up question for Dick.

We see a lot of good automation projects in the funnel in Europe and our European sales team is quite bullish. But we do see the recent strengthening of the dollar having the largest impact on our results, so our revenue guidance for Q4 was reduced by about $3 million to account for the weakening euro and yen, both of those, relative to the US dollar. But we see a good pipeline of business in Q3 in markets there such as automotive, logistics, food and pharmaceuticals.

Automotive is important to our business in Europe, and there we see business remaining at a high level, particularly driven by customers in Germany and Eastern Europe. We read the same things you do, but at the moment we're remaining pretty positive about the outlook for Cognex in Europe.

Okay, thanks, and then just a quick question for Dick; noticed in the balance sheet a pretty big rise in unbilled receivables -- I'm sorry, unbilled revenue -- and would assume that might be tied to the large customer. But in any event, is this an account that we could see decline in subsequent quarters as that's worked out?

You are absolutely right. It is tied to the large customer, and we would expect -- while most of the increase is tied to that large customer, we have always had some unbilled revenue tied to our surface inspection division. But clearly, we would expect a fairly significant decline in that number to occur here in Q4.

Okay, thanks very much.

Holden Lewis, Oppenheimer.

Was sort of curious about the guidance talking about Q4 gross margin coming in around the Q3 level. I guess, obviously, when you look at Q3 it is easy to understand why the gross margin was down. But if you step out of Q3 and look at the prior six quarters, you were pretty consistently in that high 75%, high 76% range.

Guess I'm just curious why, with the big order out, the gross margin is not going to return to the pre-big order levels.

There are a few things going on there. One is we are expecting a large surface inspection quarter, and our margins in that business are more in the mid-50s gross margins, right, so that's one aspect.

The second aspect is we do still have some service revenue related to the large customer relationships that will continue into Q4, and that will be about a few million dollars. Those are the main factors that are going to dilute the gross margin, I would suggest to you, on a temporary basis in Q4.

Okay, so, when we think about -- I know you don't forecast obviously 2015 or quarters or anything. But conceptually, we should think about entering 2015 and the same level of gross margin as we had seen previous to the order. Is it going to be all cleared out by that point?

Well, we say we expect gross margin in the mid-70s. We have reported some very high gross margins in the first half of this year, but I don't think the margin profile of Cognex is changing. Particularly, what may change is the mix of business related to how much spending is there, which is generally high gross margin; how much surface inspection is in the mix of any quarter; and then, how much large customer business where we may be given larger discounts or having more service related to it.

Those factors are all at play. It is too soon to say the mix we're going to see going into next year, but broadly I think our long-term guidance of mid-70s still applies.

Okay, thank you.

Jim Ricchiuti, Needham & Company.

Rob, I wonder if you can comment a little bit about the ID Products business. Is the growth rate -- is the growth that you are seeing in that market consistent with what you have seen in the past? I think you have talked in the past about 30% or so growth.

Yes, it is. We continue to perform very strongly in the ID market. Our long-term expectation, which we have been achieving now consistently for a number of years, is 30% growth. We see that as a large market, more than $900 million of addressable market that we are serving today. Our share is still relatively small, and our products are highly advantaged. We're certainly seeing that continue.

There are some very nice things going on for us, as you know, in logistics, where we really penetrating that market and that's driving growth. Also, as we told you in the past, we did have some revenue from the large customer also in the ID space. So, yes, we are seeing very strong performance from our ID business and we don't see signs of that changing.

Even excluding the revenue from the large customer that did ripple into this, you're still seeing that kind of growth rate?

Correct.

Just a question just regarding the overall level of demand in China, just in light of concerns folks have had about some slowing, what are you seeing in China?

Business in China is holding up very well. I am reading the same things you are, but as I said in my prepared remarks, our business in Asia grew 30% year-on-year in the quarter, led by growth in China. So we saw more growth than that even in China.

I think what one needs to bear in mind when thinking about Cognex's business in China is there are a lot of really great fundamentals that are driving the growth of our business. There is a big drive towards automation going on, where labor costs are rising and the number of people entering the workforce in manufacturing jobs is declining. Products are getting smaller and harder to manufacture.

These are some fundamentals that I don't think are really being impacted by whether the gross domestic product is growing 12, 9 or 7. I think there are really underlying themes that are essential for the evolution of Chinese manufacturing and where vision is center stage.

Will slowdown in the Chinese economy reduce our growth rate? Possibly, but it doesn't change the fundamental story that we see, where we are reporting more than 30% growth in this quarter.

The other thing to bear in mind, though, is the Chinese market, like a lot of our markets, is seasonal. Generally Q2 and Q3 are very strong, Q4 ahead of and then coming into the new year tend to slow down, ahead of Chinese New Year, so -- not necessarily you're going to see that growth every quarter. But year-on-year we're certainly very, very positive about that despite what we are reading.

Got it. Dick, tax rate for Q4, how should we think about the tax rate?

We think -- we had some discrete items in Q3 which occurred as we true up our estimated tax provision from last year compared to the tax return as filed, and also the statute of limitations expiring. But Q4 we would expect that -- our base tax rate to be at 19%, Jim.

Thanks. Congratulations on the quarter.

Richard Eastman, Robert W. Baird.

Just a clarification, on China in factory automation, does the business still skew pretty heavily towards consumer electronics?

Yes, the majority of our business today is still in consumer electronics. But the mix is changing, and the amount of consumer electronics proportionately is reducing. And we are seeing a much more diversity and breadth in our business there, particularly with automotive, IDs, medical devices and other verticals becoming increasingly important to the mix.

Okay, okay. Then, also, just in terms of the residual or tail on this large customer revenue as it extends into the fourth quarter here, you mentioned that it's service. And I presume that some of the cost of that service falls in the cost of sales line. Are these people?

It does fall into the cost of service line, yes, and some of them are people related, whether they are Cognoids or people we have retained as contractors.

Okay, and then, so, as we -- again, large project, large contract. We had some service that extends into the fourth quarter. Any indication, is there a tail on that business that would extend into 2015, or does the business that extends into 2015 -- would it be new contract business? I guess is there -- there isn't a one-year service contract or something that would extend out and give us some visibility into 2015 on the large projects like customer order, is there?

No, Rick, I think we said a few million dollars of service support into the fourth quarter. I think we are not ready to give any guidance beyond that, but anything that would occur wouldn't be significant.

Okay, fair enough. Then, Rob, you had mentioned in your commentary earlier about new products and introductions. Does the extension of this 3D product line, the displacement sensor, is the extension and the products that you introduced here, are they targeted at any -- a broader end market? That product was originally targeted, I think, maybe at the auto market. But does it extend the market breadth of your 3D products?

It serves many different end-user markets, Rick, but generally markets that are already served by Cognex. So, large verticals would include automatic and electronic, but extend into markets like food and medical devices and such as those, generally the customers that are called on by our salespeople.

I think what you're asking here -- does it take us into new markets? Possibly, but we don't think that's going to be a significant part of where this product is going to sell over the next few years.

And is there any product strategy on the 3D side, the sensor side, that puts you -- marketing that product at OEMs? In other words, more of as an embedded vision product?

Absolutely. We are seeing lots of opportunities at machine builders, or as you might call them OEMs, for those products where they are embedded into the product. Yes. Absolutely.

Understand, okay, thank you.

(Operator Instructions). Jeremie Capron, CLSA.

Question on in the Asia business; I'm trying to reconcile what you said earlier in year prepared comments, a 30% increase in revenues from that region. Yet when I look at the Q, it seems like the bulk of the increase in revenue came through Europe, while Asia was relatively flat. Trying to get my head around this.

Let me answer that, Jeremie. The revenue from the single large customer, that particular customer is located in Europe. And it has been our policy consistently that as we do report revenue by geography, we report the revenue in the geography where our customer is located.

You can imagine that as we sell to system integrators or distributors, we may not know where our equipment eventually ends up. So, in the past, we have always selected what we do know, which is the geographic location of the customer that places the order.

Building on that, too, the results we report tonight for Asia includes FA, semi and surface vision. The 30% number we put out there has to do with the FA business specifically in Asia.

Okay, okay, that's clear. Rob, if you could give us an update on your -- the situation for the ID business as it relates to logistics markets. Where are you in terms of trying to address the big customers in that market? Are you seeing increased penetrations across a large number of different customers? Or are we still fairly concentrated with just a few customers?

We are making very strong headway in that market, and we are seeing large increases of a number of customers that we are serving. The business is coming along strongly in the Americas, where I think we're building significant share. We're earlier in Europe, but in Europe our business is coming along nicely.

The markets that we serve there include postal services, career type businesses and then retailers. We're penetrating each of those different segments quite strongly in America, starting to get into them in Europe and we are very early on in China, but we do think China has huge potential for these products.

Every quarter we see the significant wins we are having, and there are many new famous High Street names or brands appearing as customers of Cognex for the first time as result of this foray into logistics.

Then I would also say that we see that market -- we had told you, I think, a year ago it was about $250 million. It slightly larger than that now and growing, and our share is approximately 10%. And we think we have a lot further to go, thanks to some highly advantaged products.

Okay, thanks very much.

Holden Lewis, Oppenheimer.

Just wanted to explore the 3D displacement process here a little bit; obviously, logistics has been a big success in 2014 in terms of the growth, because you are ready to really hit that market aggressively. I guess I am wondering, 3D displacement, I guess I assumed that would be more of a latter part of 2015 type of story, but it sounds like you are rolling out the next generation of products.

I guess I'm wondering to what degree will displacement -- 3D displacement products be a significant element of the story throughout 2015. Or are we still talking about that being more of a late 2015 event? Just trying to get a sense of the timing of that. You might as well comment on the advantage engine as well.

Yes, Holden, so, as we announced today and actually launched in the last month or so, we are now in the market with highly advantaged and very, I would say, easy to integrate displacement sensing 3D products. And that's certainly an advantage of our product set. They're fast; they have a lot of high-performance Cognex algorithms operating inside them. But they are also factory calibrated, which means they're a lot easier to set up and implement than most of the other products in the market today.

We're out there. We are making -- we are able to manufacture them in quantity and our sales force is well-equipped with internal equipment to go out there, and we have a large funnel of business building. Certainly I would expect us to sell a few, certainly, quite a few million dollars in the back end of this year, and the funnel building into next year.

In terms of the arc of our business, though, it may be similar to what we have seen in logistics over the next couple of years, and I don't think it's a second half of 2015 story. I think it's a story that should build sequentially as we move through the year.

Okay, and any comments on where we are with the Advantage engine?

Yes. So, yes, the Advantage engine, bit of a different kind of customer dynamic there, as I have spoken about in the past, which is the market there is for life science equipment builders who generally have about a three-year cycle in which we get designed in, and then a 8- to 12-year product life.

This is a long game, but when we get spec'd in, we may be seeing thousands of units bought and adopted into large machine builders' products for 8 to 12 years. And the price of those maybe for a few hundred dollars, but if they are buying thousands of units per year, it will be substantial.

Where are we in that process? We have had some design wins that we are recording. We are looking -- we are expecting more in the coming quarters. I think the revenue contribution next year will still be small, because we're still pretty early on, on that kind of S-curve that exists in that market. But I think it's going to be a very important part of Cognex's business overall if we look two or three years out.

Okay, and on 3D displacement, does your work in logistics streamline your ability to get with customers? Are they similar customers, the same customers? Has that groundwork been done from a marketing standpoint?

Generally, the displacement sensing products are going to get sold into our core factory automation business market, so automotive, electronics, medical devices, food, beverage, markets such as that. The logistics market is different in that way, and although there are some applications for displacement sensing in logistics, that is not going to be a big part of the story for us, certainly not next year.

Okay, great, thank you.

(Operator Instructions). I am showing no further questions, so I would like to turn it back to Dr. Bob Shillman for any closing remarks.

Thank you very much for assisting in this call, by the way, good job. Well, it's a simple thing to wrap up: the best quarter in the Company's 33-year history. I don't know how long that record is going to hold, but I think there is a pretty good chance we may beat it next year.

At any rate, I want to thank all of you for attending the call. And the team at Cognex starting from sales, marketing, engineering, finance, service, just did a spectacular job under Rob's guidance. We look forward to speaking with you again on our next quarter's call, at which time we will report our year-end results. Thank you again for joining us tonight.

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