Machine vision company Cognex Corporation (CGNX 3.64%) released guidance that trumped earnings, with management signaling more growth to come. As ever with relatively young and fast-growing companies, Cognex's growth rate will fluctuate, but right now performance is ahead of expectations. Moreover, management is doing a good job of opening up new markets. Let's take a look at what happened in the quarter.
Automotive is an early adopter of machine vision technology and remains a core end market for Cognex Corporation. Image source: Getty Images.
Cognex Corporation's second quarter: The raw numbers
Starting with the headline numbers:
- Revenue of $147.3 million came in significantly ahead of guidance of $135 million to $140 million.
- Gross margin of 76% compared to guidance of mid-to-high 70% range.
- Operating expenses increased 5.9% from the first quarter, compared to guidance for an increase of 4%.
Investors might not want to dwell on gross margin coming in toward the low end of guidance, or on the operating expense increase, because Cognex's margin tends to move around in relation to its order flows and sales mix. The key metric to focus on is the revenue increase -- more on that later.
Turning to third-quarter guidance, Cognex expects its good form to continue.
- Revenue expected to be in the range of $142 million to $147 million.
- Gross margin forecast to be in the mid-to-high 70% range.
- Operating expenses expected to be flat on a sequential basis.
Why Cognex beat its revenue guidance
CEO Robert Willett said on the earnings call, "Demand was stronger than anticipated across several industries including consumer electronics, automotive, and logistics." Of course, these are the three key end markets for Cognex, so if they are performing well then it's hardly surprising that revenue exceeded the high end of guidance by 5%.
With regard to consumer electronics -- where Cognex's largest customer is Apple (AAPL 0.63%), responsible for 18% of Cognex's total revenue in 2015 -- management had some good updates for investors.
- Total consumer electronics revenue grew sequentially, and so did non-Apple consumer electronics revenue.
- Consumer electronics business is now expected to grow for the full year, contrary to previous management commentary.
In short, demand came in stronger than anticipated and Willett spoke of "winning account share in the market."
As usual, analysts tried to ask around the question of potential orders from Apple, but Cognex's management didn't give any subtle suggestions as to any significant future orders.
Logistics and automotive
Cognex has been aggressively expanding its total addressable market (TAM) in logistics, and Willett spoke of a substantial pickup in its logistics business in the Americas, with Europe also strong. The logistics market --particularly in high-growth areas like e-commerce-led package deliveries -- has good long-term growth prospects for Cognex.
In the previous quarter, management outlined how it was expanding its logistics TAM by $550 million (from around $250 million) by entering the rugged mobile terminal market. Willett disclosed that Cognex has received its first order (worth around $100,000) for its new rugged mobile reader and indicated progress to come. However, it's early days, and the initiative is not expected to contribute materially in 2016. Willett also spoke of its new airport baggage handling products as being "recognized and adopted by a number of major airports around the world."
In automotive, it's a case of growth being stronger than expected for Cognex -- particularly in Asia and Europe. The Americas region grew slower for Cognex, even though the company reported its best-ever quarter in U.S. automotive-based sales. The question is how demand for Cognex's products will remain if automotive production rates slow in the future.
Looking ahead
The second-quarter results made management's previous guidance look too conservative. In a sense, some caution on guidance is understandable given that last year Cognex made investments for growth that ultimately didn't occur -- particularly in consumer electronics and logistics. The good news is that results have been exceeding expectations in 2016, and Cognex's long-term expansionary plans in logistics and consumer electronics are progressing well.
Editor's note: A previous version of this article mistakingly referred to CEO Robert Willett as "Richard." The Fool regrets the error.
