Cognex Corporation (NASDAQ:CGNX) on Thursday gave earnings results after a trading session in which the stock spiked by nearly 6%. Clearly, investors anticipated a strong set of results, and Cognex delivered. Despite currency headwinds that reduced revenue growth by 4% year over year, the numbers came in easily ahead of internal guidance and analyst estimates. The machine vision technology manufacturer is firing on all cylinders, and management is gearing up for future growth. Let's take a closer look at the earnings report.

Logistics is a key growth market for Cognex's machine vision products. Source: Cognex Corporation.

Cognex Corporation reports record results
A brief look at how headline numbers matched up to expectations:

  • Fourth-quarter revenue of $117.2 million versus internal guidance of $111 million-$114 million and analyst expectation of $113.2 million
  • Fourth-quarter adjusted non-generally accepted accounting principles earnings per share of $0.33 versus analyst estimate of $0.26
  • Fourth-quarter gross margin of 75% versus internal guidance for "near" 74%
  • Guidance for first-quarter revenue of $108 million -$111 million versus analyst estimate of $105.9 million.
  • Guidance for first-quarter gross margin in the "mid-70% range."

Alongside the strong quarterly numbers and guidance, management is obviously excited about future growth prospects, as it said it would increase operating expenses by 6% to "support a higher level of revenue expected later in 2015." Frankly, it sounds like Cognex's management expects to sign some large deals in the next few months.

New deals?
If that is the case, these deals could be in the consumer electronics and logistics sector. Speaking on the earnings call, CEO Robert Willett mentioned "large opportunities in consumer electronics and logistics." In response to a follow-up question, he added: "In the two markets we were discussing, logistics and consumer electronics, there can be very significant deployments and at relatively short notice. Sometimes, things can be in our funnel and close within -- a booking in one quarter can close in the next."

However, he also cautioned against speculating on order volumes or timing.

Current trading strong
Cognex's earnings report suggests the company is on track to execute its long-term strategic plans. Fourth-quarter factory automation revenue (82% of revenue in 2014) grew 20% in constant currency on a year-over-year basis. Within factory automation, ID products revenue grew "well above our 30% long-term target" in the quarter, Willett said on the earnings call. Cognex no longer breaks out its ID products revenue, but it is surely a significant component of its factory automation revenue.

There was also some evidence that Cognex is diversifying its industry sales. The automotive sector -- usually early adopters of automated production processes -- has long been a core strength, but Willett spoke of diversifying into many industries in China, and discussed "strong performance" in Europe in automotive and other industries such as "consumer electronics, medical devices, and food."

Gross margin
The only slightly negative aspect is the gross margin guidance for the first quarter. CFO Dick Morin said on the previous earnings call that the fourth-quarter gross margin would be diluted "on a temporary basis."

This statement suggests gross margin should rise in the future -- particularly as in previous quarters it was in the 76%-77% range, as you can see in the chart below -- but guidance for the first quarter suggests a range of 74%-76%. For illustrative purposes, I've put the midpoint of first-quarter guidance in the chart below.

Source: Cognex Corporation presentations.

In answering an analyst's question regarding gross margin levels, Willett gave further support to the idea that Cognex could be about to sign some decent-size deals: "There is some hit to gross margins sometimes on larger orders like the ones, which we discussed in logistics or consumer electronics, where they require more in-depth engineering service support from us."

In other words, the gross margin guidance might factor in some improved order flow, albeit from lower-margin sources -- not a bad thing at all, because overall profits will increase.

Where next for Cognex?
All told, it was a strong report, and analysts are likely to raise estimates to more closely match Cognex's first-quarter guidance. Moreover, there is enough color on ID product revenue growth, sales diversification, and future deal flow to suggest Cognex is set for a strong year in 2015.