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Cognex Corporation Repeats a Recurring Theme

By Lee Samaha - Feb 11, 2016 at 11:15AM

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The machine vision company reported results in line with what other industrials have said about the fourth quarter, but it still has growth potential from its relationship with Apple.

Machine vision company Cognex Corporation (CGNX -1.12%) delivered a pretty good fourth-quarter earnings report under the conditions of a deteriorating industrial economy. Management's commentary and guidance were muted -- probably a good thing after a year in which Cognex's second-half growth proved a lot less than it had expected at the start of 2015. Let's take a look at the results and what to expect in 2016.

Cognex Corporation's fourth-quarter results: The raw numbers
The key figures:

  • Fourth-quarter revenue of $97.8 million declined 1% year over year, but came in ahead of management guidance for $94 million to $97 million.
  • Gross margin of 76% declined from 78% in the same period last year, but was in line with management expectations.
  •  Fourth-quarter operating income of $19.1 million declined 24% from last year, and margin similarly declined to 20% from 25% in last year's fourth quarter.
  • Operating expenses increased 4.6% compared to management guidance of 5%.
  • Adjusted diluted EPS of $0.22 declined 15% from last year's fourth quarter. 

What happened with Cognex Corporation's fourth quarter
The numbers make grim reading, but don't be too alarmed. In 2015, Cognex came up against a very difficult comparison due to a standout 2014 in which it signed a major deal with Apple -- more on that later.

However, the second half of 2015 saw growth slowing as the large deals -- particularly in consumer electrics and logistics -- that management had been expecting to sign didn't come to fruition. Cognex's machine vision solutions are a play on the secular increase in automation in manufacturing and logistics, but they are also subject to cyclical capital spending trends. In other words, when the industrial economy slows -- as it did through 2015 -- manufacturers will hold back on spending plans.

You can see these themes play out in CEO Robert Willett's commentary on regional performance:

  • Americas: "spending, by U.S. manufacturers in most industries we serve, continued to disappoint. Q4 reflected the first year-on-year decline in Americas quarterly revenue since Q3 of 2009"
  • "Factory automation revenue from Europe declined significantly year-on-year due to the slower economy and the weaker euro."
  • Asia ex-Japan growth slowed from the first half but "continued to outperform our overall business," and in Japan, "revenue from the region's factory automation market showed modest improvement"

Willett also disclosed that Cognex's growth came "primarily from Greater China, where factory automation revenue set a new annual record," with the largest contributions coming from the automotive and consumer electronics industries.

In a nutshell, Cognex's growth slowed due to the downturn in the industrial economy, but the company was still able to generate some secular growth from increasing automation in China. Moreover, the recurring theme of earnings in the industrial sector in the fourth quarter (consumer-facing business outperforming business-facing) was repeated as consumer electronics and automotive (a sector responsible for around 25% of revenue) outperformed for Cognex.

Guidance
The key fgures:

  • First-quarter revenue for $91 million to $94 million, representing a 7% to 10% decrease from last year's first quarter
  • Gross margin in mid 70% range
  • Operating expenses expected to increase 5% year over year
  • More "muted" business tone in the quarter, with starting backlog of $27 million compared to a starting backlog of $36 million at the start of 2015

The guidance looks weak, but it's no more than can be expected in the current environment.

Looking ahead
There are four things to look out for with Cognex in 2016:

  • A possible pickup in the industrial economy
  • Growth in China
  • If the global consumer remains strong, then consumer electronics and automotive could continue to contribute to growth.
  • Apple is Cognex's largest customer, representing 18% of revenue in 2015, and the iPhone maker plans to ramp up capital expenditures in 2016. 

The first three points are obviously macroeconomic considerations, but Apple's orders are a company-specific concern. For obligatory reasons, Cognex's management can't disclose a lot about its relationship with Apple, and this creates some downside and upside risk for investors.

On one hand, Cognex is exposed to having such a significant portion of its revenue from one customer. But, on the other hand, Apple is known to be increasing capital expenditures and could sign further deals with it in 2016. Despite tough end markets, there is still some upside potential. Just don't expect too much too soon.

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