For the fourth quarter in a row, machine-vision company Cognex Corporation's (CGNX 3.41%) revenue growth exceeded management's expectations. In a nutshell, Cognex is seeing stronger growth in consumer electronics than originally expected at the start of the year. It all adds up to a strong year for the company, during which management has managed to outperform a struggling industrial automation market while expanding the Total Addressable Market (TAM) of its machine-vision solutions. For a closer look, let's take a closer look at the third-quarter results.
Cognex Corporation results: The raw numbers
Starting with the headline numbers from the third quarter:
- Revenue grew 38% to $148 million, a figure above management's forecast range of $142 million to $147 million.
- Gross margin came in at 78%, compared to a forecast in the mid- to high 70% range.
- Net income from continuing operations per share increased 110% to $0.61.
The results were (as previously noted) ahead of expectations, but don't get too excited by the dramatic revenue and income increases. As CEO Rob Willett explained on the earnings call, last year the company saw large electronics orders recognized mostly in the second quarter, whereas this year they were split between the second and third quarters. The result is a far easier comparison in the third quarter, hence the very strong increases.
Turning to the outlook for the fourth quarter:
- Revenue is forecast to be in the range of $115 million to $118 million, implying a growth rate of 18% to 21% compared to the same period last year.
- Gross margin is expected to be in the mid-to-high 70% range.
- Operating expenses are forecast to be flat on a sequential basis.
- Effective tax rate should be 18%.
Despite the expectation for a strong yearly increase, the revenue forecast may appear light compared with the third quarter, but it's largely because management doesn't expect the "large customer deployments" inherent in the third quarter to be repeated in the fourth.
Cognex Corporation's growth continues
No matter: Cognex is performing well. At the start of the year management had sounded a cautious tone on growth prospects, particularly with regard to consumer electronics. After all, in 2015 management was forced to backtrack on predictions of large orders after they failed to appear in the second half.
Fortunately, 2016 has been a year of outperformance. At the time of the first-quarter results, management outlined how it intended to expand its products' TAM by $500 million by entering the rugged mobile terminal market, and by $50 million by expanding into the barcode-reading market for airport baggage. Of course, those are more like long-term initiatives, but Cognex has also had significant near-term success.
For example, the second-quarter results in August saw Willett calling demand "stronger than anticipated across several industries including consumer electronics, automotive, and logistics." Fast-forward to the third quarter, and the "strong performance was helped by our ability to deliver on large opportunities in consumer electronics."
In a nutshell, Cognex has seen a gradual improvement in its consumer-electronics end markets, even as the overall industrial sector has weakened in 2016.
What management said on the earnings call
When pushed on the matter of growth prospects in the fourth quarter, Willett outlined his expectation for a "further large order revenue from logistics expecting to hit in Q4." On a less positive note, China's factory-automation revenue is expected to show its usual seasonal slowing in the next two quarters; the outlook "near-term ... is cautious" for Europe. Meanwhile, Willett described spending by U.S. manufacturers on factory automation as "lackluster" -- even though Cognex's factory-automation revenue in the Americas increased by high single digits.
Despite the expected seasonal slowing in China, Asia is the main cause for optimism, with factory-automation revenue growing more than 20% in the quarter. Moreover, the large consumer-electronics order from Europe -- the region which made the largest contribution to growth in the quarter -- was actually for products used on assembly lines in China.
Turning back to the large logistics order expected to hit in the fourth quarter, Willett disclosed that it was "a market we are still learning about, and it doesn't appear as seasonal as we thought it was, and we are learning that large orders can land in any quarter."
In other words, don't be surprised if management is taken aback by the cadence of future logistics orders.
In order to feel confident regarding CGNX's future, investors need to see revenue from its logistics order book hit in the fourth quarter, as well as additional evidence that consumer electronics spending on Cognex's factory-automation solutions is holding. Meanwhile, the company continues on its long-term march toward expanding sales in its TAM. It was a good quarter for Cognex Corporation, and management continues to exceed expectations in 2016.