Results from machine vision company Cognex Corporation (NASDAQ: CGNX) are rarely short of surprises, so it's worth taking a step back and preparing yourself for what's about to come. As ever with small companies in their high-growth phase, revenue and orders can be highly volatile, so let's take a closer look at three things to look out for when Cognex reports second-quarter earnings on Aug. 1.
Key end markets
It's been a curious 18 months for the industrial sector. Consumer-facing businesses have outperformed industrial-facing ones, while non-energy-related businesses have trumped energy- and heavy-machinery-oriented companies. Cognex sells to a range of industries, and its earnings and orders have been affected accordingly, both positively and negatively.
The automotive sector -- a leader in the use of robotics and machine vision -- traditionally contributes about a quarter of Cognex's revenue, and so far in the earnings season, the automotive sector looks to be on track in 2016. For example, Alcoa maintained its full-year outlook for the automotive sector, while Illinois Tool Works also reported good organic growth in its automotive segment. The latter also saw good organic growth in electronics and food equipment -- two sectors that Cognex is trying to expand into.
In short, Cognex's end markets (I'll focus on Apple (NASDAQ:AAPL) and consumer electronics later) look stable, and there is cause for optimism going into the earnings report.
Expanding Cognex's total addressable markets
A key part of the company's growth prospects is expanding the industry verticals sold into; in particular, logistics is seen as a big growth opportunity. Usage of machine vision technology to ensure the functioning of automated processes is obviously beneficial to logistics providers, and Cognex has been expanding its total addressable market (TAM) in the sector.
For example, Cognex previously estimated its TAM in logistics was around $250 million. Fast-forward to the last quarter, and this was expanded by $550 million to $800 million thanks to the company's entrance into the rugged mobile terminal market. Cognex's mobile terminals offer the advantage of data collection (bar-code reading) at the point of activity. Moreover, management outlined how the company was entering the $50 million market for bar-code reading of airline baggage.
Investors will want to hear about any progress in getting orders signed in these markets.
Consumer electronics and Apple
Due to the information restrictions placed upon Cognex by its largest single customer, Apple, there is always an element of surprise inherent in Cognex's report. It's hard for management to specifically signpost future orders, or even discuss upcoming add-on deals. However, Apple investors should follow Cognex's results in order to pick up on any nuances or order announcements -- they can be useful indicators of Apple's production plans.
In truth, it's hard to know what to expect from Cognex regarding its consumer electronics segment, particularly as last quarter's outlook was a bit confusing. For example, in the first-quarter earnings release, CEO Rob Willett referenced "a significant sequential increase in revenue and substantial margin expansion due to an expected concentration of large orders in the consumer electronics industry."
However, his full-year outlook "is not any more bullish than it was a few months ago," and in response to a question from CLSA analyst Jeremie Capron on the earnings call, Willett said that management's outlook for "consumer electronics, specifically, [is] a little less bullish than we were when we came into the year."
In other words, although Cognex will recognize large consumer electronics orders in the second and third quarters, management isn't as positive as they previously were for the full year.
Aside from looking out for any possible Apple orders, one way to gauge consumer electronics trends is to see if management expects third-quarter consumer electronics revenue to be stronger than in the second quarter. Previously, on the first-quarter earnings call, Willett said, "I would think we would probably expect Q2 to be a little higher than Q3, although that's not a certain thing."
Cognex's second quarter
All told, Cognex looks well placed for the second quarter, with its automotive, logistics, food and beverage, and consumer businesses seemingly on positive trends. In addition, there is always a potential kicker from Apple and/or consumer electronics deals, and investors will eagerly await any update on progress with new products that help expand the company's TAM.
Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Cognex. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.