There was a fair amount of uncertainty going into Cognex's (NASDAQ:CGNX) third-quarter financial report. The machine vision specialist had warned that weak demand would weigh on its second-quarter financial results, and it's results for the rest of 2018, only to be greeted with the second-highest revenue growth in the company's 37-year history.

Investors were understandably skeptical when Cognex issued a similar warning for the third quarter, but it turns out that management wasn't crying wolf this time, and the results were much closer to its less-than-rosy forecast. Investors were not pleased, and the stock is down double-digits as of this writing.

Robotic arms assembling cars in a factory.

Image source: Getty Images.

Tough comps

Metric

Q3 2018

Q3 2017

Change (YOY)

Revenue

$232.2 million

$266.0 million

(13%)

Net income

$80.4 million

$102.5 million

(22%)

Diluted earnings per share

$0.45

$0.57

(21%)

Data source: Cognex's Third-Quarter Financial Report. YOY = year over year.

For the third quarter, Cognex reported revenue of $232 million, down 13% year over year, but beating both analysts' consensus estimates of $227 million and the high end of management's guidance at $230 million. Net income of $80 million resulted in adjusted earnings per share of $0.39, down 24% compared to the prior-year quarter, but ahead of analysts' expectations of $0.37. Gross margin of 75% was consistent with the company's target range.

The decline in revenue was the result of significantly lower revenue from the company's OLED display and smartphone manufacturing customers. Cognex pointed to higher-than-normal levels of investment and record spending in the third quarter of 2017 resulting in difficult comparisons.

The company also continued to ramp up spending in both its sales resources and in research and development (R&D), as Cognex is investing in both new products and its sales force, which the company believes will lead to long-term growth.

Even in the face of weaker results, Cognex sought to reassure investors with the announcement that it had raised its quarterly dividend to $0.05 per share, an increase of 11% compared to the $0.045 it paid in each of the previous four quarters. The company also announced a new share repurchase authorization of $200 million, designed to offset dilution related to the company's equity incentive plan.

"I am pleased with the substantial revenue growth and operating margin expansion that we achieved on a sequential basis," said Robert J. Willett, Chief Executive Officer of Cognex. "More importantly, we accomplished significant company objectives that are expected to set us up for long-term growth." Willet went on to say that the company had successfully implemented its new Enterprise Resource Planning (ERP) system and was on track with "key product development milestones."

What the future holds

For the upcoming fourth quarter, Cognex is expecting revenue in a range of $180 million to $190 million, which would be represent a gain of 2.5% year over year, at the midpoint of its guidance. The company pointed out that this is lower than its long-term growth target, the result of lower spending by customers in China and difficult comps due to last year's high level of investment by large OLED display and smartphone manufacturers.

Cognex is anticipating gross margin for the quarter to be in the mid-70% range, and for operating expenses to be approximately flat on a sequential basis.

It's not as if Cognex didn't tell investors this was coming; it just took an additional quarter to materialize. However, investors should see this for what it is: a speed bump in an otherwise long runway for a company that is the leader in producing transformational technology. There will likely be ups and downs going forward, but the trend is undeniably upward.

Buckle up, buttercup!

Danny Vena owns shares of Cognex. The Motley Fool owns shares of and recommends Cognex. The Motley Fool has a disclosure policy.