Investors in Cognex Corporation (CGNX 0.93%) are getting used to their company blasting past its own guidance, and the recent results proved no exception. The solid set of fourth-quarter earnings capped off a very good year for the company, and management served notice that 2017 could be even stronger. Let's take a look at the details and commentary from the earnings presentation.
Cognex Corporation fourth-quarter results: The raw numbers
Starting with the headline figures from the fourth quarter:
- Revenue of $129 million came in significantly above the guidance range of $115 million to $118 million.
- Gross margin of 79% came in at the high end of the guidance range of mid-to-high 70%.
- Operating margin expanded to 31% from 20% in the same quarter last year.
- Diluted net income from continuing operations increased to $0.43 from $0.22 in last year's fourth quarter.
In short, a combination of strong revenue growth and what CEO Robert Willett called "the substantial leverage that incremental revenue has on our business model" led to a strong increase in profits. In a nutshell, Willett simply means that revenue increases tend to lead to even greater earnings growth.
As such, the guidance for the first quarter is encouraging. As a reminder, Cognex doesn't tend to give guidance more than one quarter ahead.
- First-quarter revenue guidance range of $122 million to $125 million, representing growth of 27% to 30%.
- Gross margin in the mid-to-high 70% range.
- Operating expenses to increase 10% on a sequential basis.
- Management expects an effective tax rate of 18%.
The guidance is impressive and reflective of the strength of Cognex's order book. However, the second and third quarters are usually the strongest for the company -- largely because customers are preparing for their key fourth quarters during those six months -- and the lack of specific guidance for that period means it's too early to definitively conclude Cognex will have another stellar year.
Image source: Cognex.
Core areas growing
That said, the indications from the earnings call are positive for three reasons. First, Willet spoke of "better-than-expected demand across a range of industries including automotives, consumer electronics, and logistics." For reference, the automotive industry is Cognex's historical core industry, and consumer electronics and logistics are the key growth areas for the company.
According to Willett, around 30% of 2016 revenue came from consumer electronics, with a similar figure from automotive, while logistics and consumer products contributed a "little less than 10%" apiece.
U.S. improving
Second, it looks like Cognex is starting to see some improvement in its factory automation revenue in America, an area of weakness in the last couple of years. Willett spoke of mid-teens revenue growth in factory automation in the Americas in the fourth quarter. Moreover, it came from a range of industries, and Willett confirmed "that improvement has continued into January," and he sees continued improvement in 2017.
Not just about Apple
Third, Cognex's largest customer is Apple (AAPL 0.01%), but the machine-vision company is no one-trick pony. It's difficult for management to disclose too much about its relationship with Apple, but according to Willett's comments on the earnings call, the strength in the quarter wasn't down to just one customer.
For reference, the large Apple deal involves sales booked in Europe for business to China. In this regard, Willett referred to Europe having "a terrific quarter in Q4, independent of consumer electronics business to China. It grew more than 30% year-on-year," with mention of strong performances in automotive and logistics.
Image source: Cognex.
Looking ahead
All told, it was another strong quarter for Cognex, and the company looks well-positioned for 2017. That said, look out for guidance in the next quarter in order to see if some of the deals the company has been working on are likely to close or not. According to management, the environment remains favorable, and investors will be hoping Cognex can continue to exceed expectations.
