Investors in machine vision specialist Cognex Corporation (CGNX -1.33%) have gotten used to seeing the company exceed expectations, and the recent first-quarter results were no exception. In a previous article on Cognex, I outlined seven key things to look out for, and the company managed to report favorably on most of them. Let's look at them in more detail and learn more about Cognex's prospects.

Cognex reports strong earnings
Here are the seven key indicators, and how they looked this quarter:

  • First-quarter revenue of $113.4 million, versus guidance of $108 million to $111 million and analyst estimates of $109.7 million.
  • First-quarter diluted EPS of $0.23, versus analyst estimates of $0.22.
  • Gross margin of 75%, versus internal guidance in the mid-70% range.
  • A 9.4% increase in operating expenses from the fourth quarter, versus guidance for a 6% increase.
  • ID product revenue growth at or above the 30% annual target rate.
  • The signing of significant new deals.
  • Second-quarter revenue guidance of $152 million to $157 million, versus analyst estimates of $129 million.

Piecing it together
In a nutshell, Cognex beat revenue and earnings expectations in the first quarter, and management's revenue guidance for the second quarter clearly indicates an expectation to ship some large orders in the coming months. Gross margin was in line with expectations, and guidance given on the earnings call for second-quarter gross margin to be "slightly lower" than the first quarter is also good news.

Gross margin, however, is coming under pressure as Cognex signs larger and larger deals. This point was emphasized in the earnings release: "The decline year-on-year was due to volume pricing discounts on certain large orders and a shift in mix to relatively lower margin maintenance and support services." 

Source: Cognex Corporation presentations.

Moreover, management decided to increase investment in the first quarter to support future growth. "Our confidence in Cognex's growth prospects led us to make substantial investments during what is typically our lowest revenue quarter of the year," CEO Rob Willett said in the earnings call.

Indeed, operating expenses came in higher than expectations in the first quarter. Willett went on to outline that operating expenses will increase 5% sequentially in the second quarter.

The good news is that gross margin is still in line with guidance, and EPS is ahead of estimates, despite the margin pressure that's coming from signing large deals.

More Apple deals?
Cognex's management isn't disclosing much about the large deals, so don't get too excited about finding out who its customers are. In fact, management disclosed only that Apple Inc. is its largest customer after being forced to do so in its 2014 10-K filing.

Moreover, speaking on the earnings call, Chairman Bob Shillman argued that confidentiality and competitive issues made management inclined not to reveal much about order flows: "Bottom line is that going forward we may not tell you about large orders at all, and if we do, we will only speak about them in very general terms."

Nevertheless, long-term investors will be pleased by the ongoing development in the company's ability to expand its customer base.

Product ID growth
Turning to specifics, Cognex continues to significantly grow its product ID revenue at its targeted 30% growth rate. Willett confirmed as much during the earnings call: "So certainly it's achieving that 30% compound annual growth rate that we've been seeing and continue to expect from that very strong growth initiative of us." He later outlined how Cognex is gaining share in an overall market that's "maybe growing mid-single digits."

The takeaway
All told, Cognex delivered a strong set of results, and the underlying trends in its business remain on a favorable track. Margins are holding up well, given the pressure on them from winning and servicing large deals, and revenue generation is growing strongly. Cognex has a lot to offer in 2015.