Cognex Corporation (NASDAQ:CGNX) delivered a solid set of results for its second quarter, but its guidance for the third quarter was nothing less than a disappointment. In short, management's expectations for revenue fell significantly short of expectations. The news is all the more disconcerting because the company has been taking steps to gear up for growth in precisely the kind of orders and revenue that won't be appearing in the third quarter. What went wrong?

Cognex's second quarter
The Q2 numbers were pretty good:

  • Including the divested Surface Inspection Systems Division, or SISD, Cognex's revenue in the second quarter was $155 million, compared with previous guidance of $152 million to $157 million
  • Second-quarter EPS from continuing operations were $0.49, compared with analyst estimates of $0.47.

However, the real concern is with the guidance:

  • Third-quarter revenue is expected to fall in the range of $106 million to $109 million, compared with analyst estimates for $144 million, a significant shortfall even if SISD revenue -- around $11 million in the second quarter -- is factored in.
  • Gross margin is expected to be in the mid-70% range, significantly lower than the second quarter's 79%.

The reason for the shortfall in expected revenue in the third quarter? Here's CEO Robert Willett, quoted from the earnings release:

Based upon what we are hearing from our customers, we expect to see fewer large orders in the second half of this year. As a result, our revenue guidance for Q3 2015 is below both Q2 2015 and Q3 2014, as each of those quarters included substantial revenue from large projects. Our outlook is further dampened by the slower spending trends that we are currently experiencing in the Americas.

Large orders disappearing
The news is particularly disappointing for three reasons. First, the company appeared to be gearing up for growth in large orders. Indeed, part of the benefit of selling the SISD is the potential for management to focus on generating more large orders of the kind it did with Apple.

Second, as I wrote about earlier, investors have had to get used to some margin erosion because of the increased costs of servicing larger orders. In addition, Cognex's larger orders tend to come with lower margins because of volume pricing discounts. Third, while it's understandable that orders and revenue could get lumpier as Cognex focuses more on larger orders, up until now, the surprise has been on the upside.

What management said
On the earnings call, management put the weakness down to a pullback in spending from non-automotive customers in North America. Specifically, management mentioned that some large orders expected this year had been "delayed until 2016" and disclosed that it happened "across a few customers" in consumer electronics and logistics.

Incidentally, consumer electronics and logistics are precisely the kind of industries the company has been looking to expand its Product ID sales into. In a sense, the weakness was a continuation of the "tentativeness" and "softening in the Americas" that Willett spoke about on the first-quarter earnings call.

In answering analyst questions on the current earnings call, Willett gave a host of reasons the large orders were delayed, including things such as macroeconomic concerns, currency weakening, and a shift in the timing of product roadmaps among customers.

The takeaway
All told, Cognex delivered guidance significantly below analyst estimates. It appears that a few large customers -- in the industries where growth was expected, such as consumer electronics and logistics -- have delayed orders for a variety of reasons, and time will tell if the orders are eventually filled in 2016.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Cognex. The Motley Fool owns shares of Cognex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.