Cognex Corp (CGNX) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex fourth-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. And now it's my pleasure to announce your host for today, Chief Financial Officer, Dick Morin. Dick, please go ahead.

Thank you and good evening, everyone.

Earlier today we issued a news release announcing Cognex's earnings for the fourth quarter of 2015 and we have also filed our annual report on Form 10-K. 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 a reconciliation of certain items from GAAP to non-GAAP in exhibit 2 of the earnings release.

I'd like to emphasise 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'll turn the call over to Cognex's Chairman, Dr. Bob Shillman.

Thanks, Dick, and hello everyone. I'd like to welcome each of you to our year-end call for 2015.

As you might have seen in the news release issued a few minutes ago, we reported our fifth consecutive year of record revenue from continuing operations. We also reported the second highest annual net income and earnings per share. But that's the bright part of the story. If you look at it more carefully, the second half of 2015 was substantially slower. That slowdown has continued and therefore, unfortunately, our prospects in Q1 of 2016 are lower then we had hoped.

Right now I'm at our R&D offices in San Diego, California. Everyone else on the call is at our Natick headquarters. For details of the fourth quarter in 2015, I going to hand the microphone over to my partner, Rob Willett, our President and CEO and I will listen intently and be available at the end of a call to answer any questions that you might have of me.

Rob, the microphone is yours.

Thank you, Dr. Bob. Good evening, everyone.

Looking back at 2015, we are pleased that revenue increased over a tremendous year in 2014 that many that would be difficult to beat. Growth came primarily from greater China, where factory automation revenues set a new annual record. The largest contributors from an industry standpoint were consumer electronics and automotive.

Good progress was made on our growth initiatives. Demand for Cognex's 3-D displacement sensors, while still small, grew significantly over 2014. Penetration at the life science market began to bear fruit. Our first customer purchased about $3 million of Cognex vision in 2015 as their machine containing our Advantage engine was introduced to the market. We see continued progress with other potentially large life science accounts that are designing as into their equipment.

Important new products and software tools for introduced for both our In-Sight and DataMan product lines in 2015. The most important product launch of the year was our family of next-generation DataMan fixed-mount ID readers. The DataMan150, 260 and 360 high-performance readers run the latest Cognex software to achieve the highest possible read rates. They extend our product leadership in the mid-ranged fixed-mount barcode reading market. PatMax RedLine further Cognex's leadership in vision algorithms for pattern matching, a critical first step in most vision tasks. PatMax RedLine runs on three new five-megapixel In-Sight vision systems, delivering higher resolution at extremely fast acquisition speeds for demanding vision applications.

Also new to our In-Sight vision systems family is the In-Sight 2000 sensor, a highly competitive product for simpler vision applications. We expect its ease-of-use and affordability to expand the market for our products to customers who are more price sensitive. During 2015, we exited the market for surface vision by selling the Surface Inspection Systems Division. In addition to realising an after-tax gain of $78 million, the sale sharpens our focus on our core business where we see stronger long-term growth potential.

In summary, 2015 was a good year for Cognex and I'm proud our accomplishments. However, I'm disappointed that second-half revenue was not as high as we initially thought it would be. Several factors contributed. As you all know, the entire global economy appears to be slowing. More specifically to us, some large projects that we expected from consumer electronics and logistics customers were pushed out because of changes in their product road maps and demand on their engineering resources.

Demand in the Americas industrial market was weak and the strong US dollar reduced our growth rate by 5 percentage points. Revenue grew 11% in constant currency, but increased only 6% on a reported basis. The lower than planned revenue for the year, combined with continued investments in engineering and sales, brought our operating and net margins below our targeted range. The outlook for 2016 continues to be uncertain, but nothing we see changes our view of the long-term potential for machine vision. It is important to note that our investments to bring new technologies to market and to help large customers implement sizable vision projects remain intact. We expect margins to improve over time as our investments drive revenue growth.

Let's turn now to details of the fourth quarter. Total revenue was $97.8 million, which was modestly above our expected range. Several reasons contributed to that, including the completion of certain projects before year end. In factory automation, revenue was $93 million and was flat year on year on a reported basis but up 5% in constant currency.

Looking at factory automation trends from a geographic perspective, growth from Asia, excluding Japan, continued to outperform our overall business. Although the growth rate has slowed from earlier in the year, we are confident about long-term prospects in greater China. In Japan, revenue from the regions factory automation markets showed modest improvement, both on a reported basis and in constant currency. In the Americas, spending by US manufacturers in most industries we serve continued to disappoint. Q4 reflected the first year-on-year decline in the America's quarterly revenue since Q3 of 2009. And factory automation revenue from Europe declined significantly year on year due to the slower economy and the weaker euro.

In the semiconductor and electronics capital market, revenue was $4.7 million in the fourth quarter, down 8% year on year. Demand from semi follows the market cyclical trends. Our expectation for growth in this small piece of our business continue to be low. In regard to operating expenses, we continued to invest in our business, but at a slower rate than in recent quarters. RD&E and SG&A for the fourth quarter totalled $55 million, up 5% on a sequential basis, as expected. Incremental costs related to additional engineering resources, new product development activities and our sales and support organization.

Turning now to our outlook, we expect revenue for Q1 of 2016 to be in the range of $91 million to $94 million. Unfortunately, even the high end of that expected range is below the $101 million of revenue we reported for Q1 of 2015. Unlike last year the tone of business is more muted today. You can see that reflected in our starting backlog of $27 million which is substantially lower than the $36 million we had in backlog at the beginning of 2015. Gross margin for Q1 is expected to be in the mid-70% range. Operating expenses are expected to increase by approximately 5% year on year, mainly due to our investments in engineering. The effective tax rate is expected to be 18%, 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.

Thank you and good evening. In the press release, Rob, and your prepared remarks, you noted the slow down in industrial markets, kind of implying that most markets had slowed down. Could you speak specifically about the automotive market, both in China and -- or around the rest of the world and also whether any of the verticals that you do serve are holding up better than others in this environment?

Yes. Hello, Ben. Automotive is a large market for Cognex and it had a very strong year in 2015. It is our second largest vertical market representing more than 25% of our total revenue. I think what we saw as we moved through the second half of the year is that although business remains at a high level, spending has become slower and our outlook is more cautious. It is difficult, frankly, to predict how the market will play out over the next few quarters. Automotive customer road maps are quite lengthy, going out normally around three years that we are involved with. From the plans shared by our larger customers, we expect continued growth from automotive over the medium to long term but certainly we are seeing a slowdown in the nearer term.

You asked about other markets. I think we expect our consumer electronics business to grow this year. We see a lot of good activity in that space that we think is positive for us as we move into the year. And I would say overall we do expect some growth for Cognex but there are no particularly strong markets. I would say overall all of our markets seem that they're showing some general weakening as we move through time, not anything that's particularly stand out in terms of a strengthening trend.

Okay. And then if I may, just one follow-up question. I noted in the 10-K that your largest customer in 2015 was up from 2014 as a percentage of sales and given that particular company's intention to substantially increase their capital expenditures this year, do you think that Cognex will participate in that spending?

As reported in our Form 10-K, that customer represented about 18% of our revenue in 2015, up from 16% in 2014. We feel our relationship with that customer is excellent, and they and many other large manufacturers see the value of our vision technology and our ability to solve problems. I am very limited, really, under legal obligation what I can say beyond that, only that we have had a positive relationship and we see large consumer electronics opportunities continuing for Cognex with, I hope, multiple players in the industry over time.

Okay. Thank you. Thank you very much.

Thank you for your question. Jim Ricchiuti, Needham & Company.

I just wanted to ask about the planned increase in engineering expense in the quarter up 5% year over year. In the past, when you have made investments like that, it has been in anticipation of, at least in the more recent past, of projects, larger projects. Is that the case here, that you anticipate some potentially larger deals in the near term?

Hi, Jim. I think you are right in that you see an increase in our engineering expense at Cognex. It is really for two reasons, I would say. One is that we have some very exciting technology that we are working on developing and we will be bringing to market over the coming quarters and regardless of what we see externally, we are very committed to bringing that to market, and we think it is key to the future of the Company. The second is, though, we have been investing more in engineering resources to support larger customers and generally those tends to be in the consumer electronics and logistics space. Certainly we have gone on investing in those areas and that's driving up some of our engineering expense in the near term because we do expect to see substantial revenue from those types of opportunities here in the coming quarters.

Is this something that we should consider could be several quarters of higher engineering expense or could the engineering outlays be lumpy over the course of 2016?

Well, I think overall we target engineering spend to be between 10% and 15% and I think in quarters of lower revenue, you can see a bump up over that higher level as you have seen and then in some cases where we see revenue really high on a percentage basis, it can pull. I do think that you are seeing engineering expenses run higher at the moment in anticipation of some larger opportunities and as those come to market, I think you will see engineering spend reduce as a percentage of revenue. And then I think obviously, a significant part of that engineering increase can be around supporting large customers and as we see those large customers come through, as traditionally they have, in Q2 or Q3, you can see spend continuing behind those. But as a percentage of revenue, probably lower than you have seen in recent quarters.

Okay. If I may, one final question on the logistics market. We go back to last year, it looked like you were anticipating some larger orders in that market. Sounded like multiple customers that didn't play out. Would you anticipate that some of those orders could come to fruition this year, in which case you would see deliveries in Q2, Q3, what is the pipeline like with your logistics customers?

Yes, I would say our journey into the logistics market continues to proceed well. We made progress during last year, graining traction in Europe, I'm seeing very significant growth in revenue there and winning systems integrators. We support a broader range of logistics customers in the US. There are substantial projects with large logistics customers in our sales funnel and we're off to a good start this year with one significant order set for delivery in the first half already booked. We're optimistic about growth in the America's logistics market following a difficult year last year where we didn't see, as you pointed out, larger orders from some of our previously larger customers that we had expected. We see the potential for those to come in, in 2016.

Okay. Thank you.

Okay. Thank you. Bobby Burleson, Canaccord Genuity.

Thanks for taking my question. I was just wondering in terms of the consumer electronics growth that you guys are expecting, and it sounds like you are gearing up for some potentially larger projects there. I'm wondering if the customer base for those types of projects is expanding somewhat this year, where you are going to be working on larger projects for multiple consumer electronics customers?

I think it is important to understand, Cognex is the world's leader in sophisticated vision technology, which is essential to automation in advanced production of consumer electronics. You can pretty much assume that most, if not all, of the major consumer electronics manufacturing processes that are going on, mostly in China, involve our products. The number of -- we are in at those customers. The question is to what degree they are rolling more ambitious plans with vision and to what degree they are utilizing our technology in some of the more difficult and demanding applications and they are gearing up capital spend around automation.

I think we have made progress in recent years where we are seeing larger deployments of vision at customers. Obviously, we have a very large customer in that space and we have other large customers as well that have the potential to invest very heavily in machine vision and automation and we're making progress but it is difficult to judge necessarily when -- which quarters those opportunities will come in and how significant they will be.

Great. And then you mentioned earlier that consumer electronics should grow for you this year. Overall, you are expecting growth, even though some -- all of your verticals are somewhat subdued. I'm wondering just, logistics demand this year or growth and logistics versus consumer electronics, are you expecting more growth out of logistics versus consumer?

Well, logistics percentage-wise, we would expect, yes, significant growth. We have said in the past that we expect over the long run our ID business to grow 30%. Obviously in the current market conditions, that is not likely to happen and then -- but that we have said logistics we will grow faster than our ID market overall. It is definitely a market where we see very significant opportunities for large percentage growth, but in terms of dollars, our consumer electronics represents more than 25% of our revenue and therefore growth in consumer electronics can add more on a dollar perspective to the Cognex top line.

Okay. And then just one last quick one. In terms of gross margin, is there any update on whether or not there is much of a difference between the gross margin for consumer electronics large projects versus some of these logistics projects that are potentially ramping? Thank you.

It really -- it can depend on the project, really. I think we can report very strong gross margins in both those fields. I wouldn't assume that our gross margins are higher in one particular market or type of deployment than another.

Okay. Thank you.

Thank you. Rick Eastman, Robert W. Baird.

Yes. Good afternoon. Robert, when we look at these engineering investments in support of the CE business, can you explain, maybe, is there much leverage there? Is this add a field engineer per x-million dollars of potential? I am maybe a little bit surprised that we cannot leverage the investments we have made to date relative to our near-term outlook.

Right. For some of our larger customers, particularly in consumer electronics but also in logistics, there are very sophisticated requirements and they need to scale up quickly. In order to do that, it does require significant engineering resources, and they look to our vision expertise to help them deploy that. So from our point of view, from an engineering spend, that is a lot of where we are investing and we are investing generally based on future opportunities that we see in those markets.

And then there is the support factor, which is less sophisticated but does involve application engineering type support for ongoing deployments. There is good potential for productivity improvement where we may have more engineers initially, but as we and our customers get more confidence about that, we are able to be more productive. I would say engineering investment around large customers does have leverage and generally where you see us investing more it's around future opportunities than perhaps new technologies that we are working with them to deploy and there is a productivity gain on the back end where we can deploy more systems with fewer people.

Okay. And then also, I did the math on the large customer as well, the 18% and the 16%. What is somewhat curious is the dollar amounts. It just works to $81 million versus $68 million. I'm maybe a little bit surprised at the dollar amount in 2015 exceeding 2014's. Was there any sizable amount of that revenue recognized in the fourth quarter? Because I think coming into the fourth quarter the thought was there was some trailing service revenue that might be accounted for. Was there a substantial chunk of that large customer business that was recognized in Q4?

I don't think we can comment on that specific quarter of revenue. Dick, did you want to comment?

We are limited as to what they can say about that particular customer. But I can say this, that there was -- most of the significant revenue occurred in -- most of it was in Q2 and then following in Q3, but no big tail in Q4.

I see. Okay. Just to maybe two last questions. One is on China, could you just maybe a little bit more specific in terms of -- how did China perform in the fourth quarter in constant currency and how did it perform for all of 2015? Just trying to gauge the slowdown there.

Yes. Yes. I think as I mentioned, revenue from China was up more than 40% from 2014 but we definitely saw a slowing going on in Q4. It is still growing but slowing to probably about half that rate in general. I think when we look at our business in China, not just last year but in any year, generally Q1 and Q4 are slower and Q2 and Q3 are stronger. But I think if we looked back year on year we would have still seen -- we did still see growth in our business in China in Q4, but at a slower rate and we see that rate slowing.

Okay. And just this last question. What would be the forecast -- can you help us a little bit with the forecast for options expense in 2016 relative to 2015? What would be the percent increase?

That's difficult to come up with at this particular point. Since we haven't granted the annual options yet. It will depend a lot on what the price is on the date that the options are granted. I would essentially say that because the annual grant, the exercise price will be lower than it was last year. I would expect that it would be relatively flat with maybe a slight increase.

Okay. All right. Fair enough. Okay. Thank you.

Okay. Thank you. Grace Lee, CLSA.

I was wondering whether you can give us an update on Life Science in terms of design wins and it this is already a meaningful contributor to the revenue?

Yes, hi, Grace.

Hello.

We've been focusing on this Life Science market for Cognex technology for a number of years now and we think is a very good market for Cognex because these machines generally stay in the market and are produced for 7 to 12 years. However, it's a long design cycle to get specified in so we were pleased last year to see our first real major customer deploy product into the marketplace and purchase approximately $3 million. We do have other smaller customers in that space. The revenue in that market for us is still not very large. It is certainly less than $10 million, but we do believe it will be a larger contributor in future years. I think we can expect it to kind of ramp in terms of an S-curve where we are still pretty early on and we think we can see as more and more customers deploy our product and more and more have our engines in their machines that we should see it kind of ramp nicely over the coming years, but it is still really not particularly significant.

Thank you. Another question was on the gross margin. In light of potentially incoming larger orders from consumer electronics, how should we think about the gross margin trajectory over the rest of, over 2016?

Yes, our gross margin target is in the mid- to high-70% range, and I think we have seen some dilution to gross margin, mostly around currency in the last quarter. I think we are holding to that idea that over the balance of the year we are still targeting the mid- to high-70% range. You shouldn't assume that large deployments dilute our gross margin. They don't necessarily do that. Sometimes when we are deploying more technology, we can see higher gross margins in some of those larger customers.

All right. Thank you.

Okay. Thank you.

(Operator Instructions)

Joe Giordano, Cowen and Company.

Hey, guys. This is Tristan for Joe today. If I could just go back and ask one more question about your largest customer, how would you address the concern that some people may have regarding the increasing importance of that particular customer to your business?

Hi, Tristan. Your question is how would we address the concern about the size of that customer?

Yes. The relative importance that it is gaining to your business.

Well, I would say we are -- as I mentioned, we work with some of the most sophisticated manufacturing companies in the world. We learn a great deal from working together with them and so it certainly enhances our business to work with large customers. I think that we bring a lot of value and we are not a components supplier. It is important to understand that we are a supplier of enabling technology for automation.

If one goes back over 10, 20 years with Cognex, we have had other customers in the past. I'm thinking of famous companies in the smartphone space or in the semiconductor space and we have been pretty successful in learning and leveraging from those customers and if they've gone on to grow, we have been successful to grow with them and when market share and other factors have changed in the industry, we've been able to find new customers. I think that is a part of being a technology supplier in automation and I think that is something we understand and expect to be able to face successfully in the future.

Okay. This is helpful. And then going back to the guidance for Q1 that you have on revenue, does this include any large orders? Those over $2 million or is it more of a run-rate level?

I think you should think of it more like a run-rate level. It is possible we may have some orders that turn into more than $2 million of revenue during that period, but when you think of our large quarters and where large orders have a significant impact on the quarter, that's more likely to happen in Q2 and Q3 at this point in the development of our business and not meaningfully in Q1.

Okay. Great. And then one last quick one. If you could just update us on the penetration of your displacement sensors?

Yes. We see the 3-D displacement sensor market provision as one of significant potential for Cognex, so we see the market as a $200 million market and we see ourselves as a very small player in that market. We might have an approximately 5% share today, but growing very quickly and we have some exciting plans in that space over time. But still, very small.

Great. Thank you.

Okay. Thank you. Rick Eastman, Robert W. Baird.

Robert, I was sifting through your commentary, your end-market commentary and there was just -- you had made the comment about most of your end-markets slowing and I'm trying to reconcile. Is that a statement on the consumer electronics market as well as your other markets? I think you kind of lumped them together with auto. I'm just trying to get a sense of -- the more of the consumer-driven markets. Are they still prime to grow some?

Well, as I said, I do expect Cognex to grow this year and I think we can expect slower growth from some markets, probably automotive is going to grow but less quickly. I think consumer electronics, it is kind of early in the year to say whether and how much that will grow but I think we see a lot of potential for growth in consumer electronics. I think my comment earlier really related to a declining rate of order growth that we saw through the back end of the year and into Q4 and I would say that kind of level of activity and spend is pretty muted at the moment.

So the growth -- the potential to grow in 2016, in theory, would come out of logistics, ID products, and consumer electronics. Those would be the best prospects to drive growth for the year.

Yes. And in addition to that, some of the new markets we've been getting into, such as 3-D, Life Sciences also helping with growth and then geographically. Although growth has slowed down from the 40% growth we saw last year in China, we do expect China to be a meaningful contributor to growth even in its current economic state.

I see. Very good. Okay. Thank you.

Okay. Thank you, ladies and gentlemen. That does conclude our Q&A session for today. I would now like to turn it back to Dr. Shillman for any concluding remarks.

Dr. Bob, are you on mute, I'm wondering?

How about now?

Now we can hear you.

Sorry about that, everyone. Yes, just to repeat, we had a very, very good quarter, record quarter in revenue and in earnings, but the growth has slowed down. Nevertheless, we've been here for a long time. We intend to continue to persevere. The Company is 35 years old and still acting and performing like a young, agile Company. We have many engineers working on very exciting projects that have not yet been announced, and we fully expect to continue to be the leader in this very important field, and to continue to impress both our customers and our shareholders. We will talk to you again and hopefully report to you better results than even we expect for Q1. That's it. Good night.

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