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Here's What Happened With Cognex's First Quarter

By Lee Samaha - May 1, 2018 at 1:30PM

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The machine vision company stunned investors with weak guidance for the rest of the year.

There are very few companies that grow without hiccups, and Cognex Corporation (CGNX 1.81%) definitely had one in the last quarter. The machine vision company's first-quarter results were no more than satisfactory, and management's outlook for the rest of 2018 was disappointing. That said, management expressed confidence in its long-term outlook, and outlined how the total addressable market (TAM) for its solutions had expanded. Let's look at the earnings presentation for the company.

a haphazard pile of dozens of smartphones

Capital investment in smartphone production was at the heart of Cognex's disappointing guidance. Image source: Getty Images.

Cognex's first quarter: The raw numbers

Here are the headline numbers from the quarter:

  • Revenue grew 22% to $169.6 million, coming in below the midpoint of the guidance range of $165 million to $175 million.
  • Gross margin of 76% was in line with guidance.
  • Non-GAAP adjusted diluted earnings per share of $0.18 were flat year over year.

As you can see above, Cognex's revenue performance was slightly disappointing, particularly as CEO Rob Willett had described current market conditions as "the best we have ever experienced" on the last earnings call a few months ago. 

However, the news from the earnings presentations isn't really about the first-quarter earnings; it has more to do with management's guidance for the rest of the year.

What Cognex said about the rest of 2018

The highlights from Willett's guidance:

  • Second-quarter revenue is expected to be in the range of $200 million to $210 million, representing growth of 15% at the midpoint.
  • Revenue from consumer electronics is now expected to decline in 2018.
  • Cognex's revenue for the next three quarters is forecast to be flat year over year.

To put the quantitative guidance in context, Cognex's revenue for the last three quarters of 2017 was around $610 million, so if 2018 sees a repeat of the performance, then full-year revenue growth looks likely to be around $750 million -- flat to minimally up on 2017. What happened?

The problem centers on Cognex's consumer electronics end market. It's Cognex's largest industry vertical and responsible for 40% of the company's business, Willett said on the earnings call. "It appears this year we'll see lower investments from about half a dozen large customers in the OLED and smartphone manufacturing part of the business," he said. 

What it means for Cognex

For reference, Cognex's most important quarters are typically its second and third, as its consumer electronics customers often make capital equipment purchases ahead of ramping production in readiness for the Christmas period. As Willett outlined on the conference call, Cognex usually has "nine to twelve months' visibility" into the projects that large consumer electronics companies "would like to implement with us."

In other words, Cognex's guidance means there is little chance the company can improve matters much for 2018 in consumer electronics. Naturally, analysts were concerned that this could be some sort of ongoing structural problem for the company. Cowen and Company analyst Joe Giordano asked about this, and Willett replied that it wasn't a structural problem but rather came down to the timing of capital investment on manufacturing smartphones with OLED displays.

In support of Willett's commentary, it's worth noting that Cognex has had growth hiccups before, notably in 2015

Two good points from the quarter

On a brighter note, there were two positives from the earnings presentation. First, the automotive end markets delivered growth "significantly above our expected 10% or so long-term growth rate," according to Willett. This is good news, particularly as slowing growth in global automotive production is a potential threat to Cognex -- the automotive industry is a core market for the company.

The company upgraded its estimate for its TAM to $3.5 billion, a 20% increase on its previous estimate -- driven by logistics and 3D machine vision.

Where next for Cognex?

Now that management has dampened expectations for 2018, investor focus will probably shift to three things:  Automotive revenue needs to hold up as expected in 2018, the company still has the opportunity to sign logistics deals, and there is always the possibility of a large long-term deal in consumer electronics.

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