On August 3rd, Cognex (CGNX) published its second quarter results ending July 5, 2015 and recorded a historic winning second quarter for the corporation, ranking the second highest for any quarter in its history. The revenue from continued operations amounted to $143.8 million in the past three months, a 56% growth from the year ago quarter and a 42% sequential increase from Q1 2015. Income from continuing operations from last year and the previous quarter rose 92% and 123% respectively. This quarter’s revenue and income calculations excluded sales from the discontinued Surface Inspection System Division (SISD) operations, which generated $11.2 million in revenue in Q2 of 2015. With the strategic sale of its surface inspection business in early July, Cognex plans to sharpen its focus on automating discrete manufacturing applications with the high-margin yielding machine vision and ID product lines. You can read more about our thoughts on the acquisition here. RD&E and SG&A expenses grew 8% from the previous quarter due to new product development costs and legal fees related to Cognex’s recently-resolved patent dispute with Microscan.
Despite global currency exchange rate fluctuations, Cognex’s operational margins rose to 36%, a 14% increase from the prior quarter. Factory automation revenue contributed $137 million or 95% of total quarter two revenue; majority was accounted by the large volume orders from the consumer electronics industry. Cognex has experienced much success in the European market in the past few quarters; this continued in Q2 with Europe’s consumer electronics sector making significant investments in the company’s factory automation solutions (both machine vision as well as ID products). Asia, excluding Japan, witnessed another solid quarter. The company continues to see success in China, despite the economic woes that the country is presently facing. Cognex is doing particularly well in consumer electronics and electronic components manufacturing industries and is fully committed to generating growth in the long-term. However, from VDC’s perspective, it is the company’s performance in and outlook for the Americas that is most disturbing for the broader investor community. The company is now seeing much lower-than-expected growth from the region with customers pulling back on their factory automation-related investments. Reasons for this “stagnation” as outlined by the company include a strong US dollar, macroeconomic uncertainty, and company-specific considerations especially with “large postal and parcel providers getting pushed out for financially-driven reasons”.
In other not-so-good news, contrary to the company’s growth trajectory in the past few quarters, Cognex has set conservative guidance below market expectations for Q3 2015. Revenues are estimated to be between $106 million and $109 million, a range notably trailing both Q3 2014 (and Q2 2015) figures as well as Wall Street analyst expectations for $144 million. The company also expects a slight decline in gross margin percentage to the mid-70s due to a higher percentage of services-related revenues, consistent with its guidance for Q2 2015 as compared to Q1. Operating expenses will decrease 5% sequentially, helped by the Microscan resolution and lower internal employee-related overheads.
Unimpressive revenue growth in the Americas, timing fluctuations of large projects, and the related uncertainty has some investors questioning the long-term growth potential of the company, leading to a sharp decline in its stock price on August 4th, the day after its earnings call. Cognex’s growth in the logistics vertical in Europe, a relatively undeveloped market territory, has also been deferred to 2016 due to timing and financial drivers. Demands for factory automation in non-automotive industries are forecasted to decline in the Americas.
While factory automation investments are typically soft in Q3, it is important for Cognex to not be overly reliant on a few large customers to meet its growth and profitability targets. From VDC’s perspective, it is important for this leading machine vision solutions vendor to diversify its offerings and further expand its presence in non-electronics markets that have a lower tendency to exhibit massive cyclical fluctuations. What Cognex certainly has going for it is its strong competitive positioning and its market leadership in this space from a product development innovation standpoint. The company is actively looking to acquire – with a focus on enhancing its technology expertise and product feature set, which help keep its gross margins high in an industry that is inundated with vision-based options for automation. Interesting times up ahead for Cognex as it grapples with a certain loss in investor confidence but seeks to build it back with its innovation, new market focus (including life sciences), and potential acquisition(s).
(With Jenny Hai, Research Assistant)