Machine vision company Cognex Corporation (CGNX +0.96%) reported a pretty solid quarter of execution and made progress on some of its long-term objectives. After disappointing the market last time around with its outlook for spending by some of its consumer electronics customers in 2018, the second quarter saw the company return to form, and it looks on track for this year.
Let's look at the nuances in an interesting earnings report.
E-commerce fulfillment is a key growth area for Cognex. Image source: Getty Images.
Cognex Corporation second-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Revenue grew 19% to $211 million and came in ahead of management's guidance range of $200 million to $210 million.
- Gross margin of 74% came in at the bottom of the guidance range, with management citing an unfavorable revenue mix -- relatively more from "application-specific customer solutions" in the quarter.
- Operating income grew 6% to $63.5 million and EPS of $0.32 was flat.
CEO Robert Willett declared himself pleased with the second-quarter performance, calling it "slightly better than our expectations."
Turning to guidance for the third quarter:
- Revenue is expected to be in the range of $220 million to $230 million, representing a decline of 11.4% to 15.3% from the same period last year.
- Gross margin is expected in the mid 70% range.
Why guidance is so weak
To fully understand what's going on with Cognex this year, you have to go back to the first quarter, where management outlined that "half a dozen large" OLED display and smartphone manufacturing customers would be making lower investments this year. This is problematic because Cognex reported what management called a "monster" third quarter last year largely thanks to big deals in consumer electronics.
Willett still believes in the long-term prospects for OLED capital spending, but acknowledged that "investments in new technologies like OLED displays tend to come in phases."
From an investor's perspective, this means there is both upside and downside potential. It's hard to predict just what its smartphone and OLED display customers will do. But unfortunately for shareholders, this year they are seeing the downside. Nevertheless, Cognex's long-term growth looks assured.
What about the rest of Cognex's earnings
Elsewhere, Cognex reported good progress on several fronts. There are four highlights:
- Chairman Bob Shillman said, "Excluding consumer electronics, revenue in Q2 grew at a rate that was well above our long-term target of 20%." So underlying growth is strong.
- Cognex's second-largest end market (around 25% of sales) is automotive, and it's outperforming expectations this year. Given slowing light-vehicle sales in the Americas region, there was a reason for caution in 2018. Indeed, management expected it to grow more slowly than the overall business, with assumptions of 10% growth. But it's been "overachieving that by a good amount this year," according to Willett on the earnings call. He cited growth in China as well as automakers investing as they change vehicle model production.
- Willett confirmed that he expects the logistics end market (Cognex is focused on e-commerce fulfillment within logistics) to continue growing at a 50% rate over the long term.
- Cognex announced its first large order for its mobile terminals: around $1 million from a large company. It's a market that Cognex entered in 2016, and management believes the total addressable market is $500 million.
Looking ahead
Cognex will face headwinds for the rest of the year due to difficult comparisons with strong consumer electronics spending in 2017. However, the underlying business is performing well. Provided it stays on track with current expectations, it's likely that the market's attention will turn to what can be expected in 2019.
