Cognex Management Discusses Q2 2012 Results - Earnings Call Transcript

Cognex (CGNX)

Q2 2012 Earnings Call

July 30, 2012 5:00 pm ET

Executives

Richard A. Morin - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance & Administration

Robert J. Shillman - Executive Chairman and Chief Culture Officer

Robert J. Willett - Chief Executive Officer, President, Chief Operating Officer, President of Modular Vision Systems Division and Director

Analysts

Zach Larkin - Stephens Inc., Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Ben Z. Rose - Battle Road Research Ltd.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Cognex Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today, Mr. Richard Morin, Chief Financial Officer. Sir, please go ahead.

Richard A. Morin

Thank you, and good evening, everyone.

Earlier tonight, we issued a press release announcing Cognex's earnings for the second quarter of 2012, and we also filed our quarterly report on Form 10-Q. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results.

During tonight's call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. For your reference, you can see the company's income statement as reported under GAAP in Exhibit 1 of the earnings press release and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit 2.

I'd like to emphasize that any forward-looking statements we made in the press release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings, including our most recent Form 10-K, for a detailed list of these risk factors.

Now I'll turn the call over to Cognex's Chairman, Dr. Bob Shillman.

Robert J. Shillman

All right. Thanks, Dick, and hello, everyone. I'd like to welcome each of you to our second quarter conference call for 2012. As you can see from the press release issued earlier today, we reported very good results for the second quarter. And right now, I'm in our R&D Center in San Diego. So for details of the quarter, I'm going to hand the microphone over to my partner, Rob Willett, who is our Chief Executive Officer. I'll be available at the end of the call to answer any questions that you may have of me.

Rob, the microphone is yours.

Robert J. Willett

Thank you, Dr. Bob. Good evening, everyone. I'm pleased with the results we reported tonight for the second quarter of 2012, which include the second-highest quarterly revenue and the highest quarterly profit in Cognex's 31-year history. Unfortunately, we don't expect to see records like these in the near term because of slowing manufacturing spending over concerns about Europe's debt crisis and weakening global economies.

Getting back to the quarterly results, revenue increased 1% over a very strong second quarter a year ago, and that increase includes a 3% negative currency impact. Growth from the surface inspection market was partially offset by lower revenue from semiconductor, electronics and solar industries due to market downturn that began in mid-2011. From a product standpoint, ID products continue to be our leading performer, increasing 24% year-on-year in constant currency. Gross margin was a strong 76%. Profitability was high, with an operating margin of 28% despite continued investments in new product development and sales force expansion. Reported earnings for the quarter were $0.45 per share, which exceeded expectations, primarily as a result of lower-than-planned operating expenses and gains on investments.

Let's now turn to the details of the quarter. Revenue from the factory automation market was $61.7 million and accounted for 73% of our total business. Reported factory automation revenue was flat year-on-year, as growth was offset by a substantial decline in revenue from solar manufacturers and unfavorable currency exchange rates. Backing these 2 items out, factory automation grew 9% over the prior year's second quarter. On a sequential basis, factory automation revenue increased by 4%. A nice increase, the order rate was lower than expected during the quarter, especially in Europe.

Looking at factory automation from a geographic perspective, Asia continues to be our best performer in terms of percentage growth. Factory automation revenue from Asia grew 7% year-on-year and 18% over the prior quarter. While the consumer electronic slowdown hampered growth year-on-year, spending in that market picked up during the second quarter, particularly in Greater China.

In Europe, factory automation declined 1% year-on-year and increased 3% over the prior quarter. On a constant currency basis, European factory automation grew 8% year-on-year. Strong performance in automotive, consumer products and food and beverage offset lower revenue from solar.

Factory automation revenue from the Americas increased 3% year-on-year and declined 1% from the prior quarter. We experienced slower spending in the second quarter, and project took longer to close. Sales to the Japanese factory automation market decreased 13% year-on-year and were flat with the prior quarter. Similar to Asia, the consumer electronics slowdown negatively impacted revenue year-on-year. Furthermore, we are not seeing the growth we expected in Japan following last year's tsunami, largely as a result of many customers shifting production to their facilities in Korea or Taiwan and China.

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