Demand for Consumer Tech, E-Commerce Propel Cognex to 'Fantastic Quarter'
Strong earnings in consumer technology, logistics, and e-commerce, highlighted by Greater-China-based customers generating a three-month, year-over-year revenue increase of more than 150%, propelled Cognex to a strong third quarter ending Sept. 27. The machine vision developer and manufacturer reported sequential improvements in its automotive and factory automation markets despite the difficult business environment, on its way to a quarterly revenue of more than $251 million.
The company reported a year-over-year quarterly revenue increase of 37%. Cognex earnings per share (EPS) reached 49 cents, a year-over-year increase of 104%.
“Our results for [quarter three] were very good and above our expectations,” said Robert Shillman, founder and chairman of Cognex. “We reported the second-highest quarterly revenue, net income, and earnings per share from continuing operations in our company’s 39-year history. We were also highly profitable — reporting an operating margin of 38% in [quarter three] compared to 24% a year ago — due to the leverage in our business model.”
Large-customer deployments in the consumer electronics industry and strong performance in the e-commerce sector of logistics helped lift Cognex above both analysts’ and internal expectations, the company said.
“I think it was a fantastic quarter from the top down,” said Blake Gendron, senior analyst of industrial technology at Wolfe Research, a New York-based data and research firm.
“It starts obviously with the revenue beat, and that’s facilitated by strong consumer tech and e-commerce trends. [These are] things that they’ve been signaling for some time through this pandemic.”
Cost control, Gendron said, was also conducive to a solid quarter. Cognex successfully kept research and development and growth and administrative expenses largely within expectations against the revenue beat the company was able to generate.
A company such as Cognex that manufactures market-specific and higher-end products and technologies is not forced to increase its variable costs to meet increasing demand, Gendron said. “Typically, if it’s a low operating leverage company and there is a lot of variable cost versus fixed cost, you would expect to see a massive revenue beat also come with a massive upsizing in [operating expenses]. But that’s not the case for Cognex.”
The operating leverage of the company, evidenced by the strong quarter and referenced by Shillman, Gendron said, helped the company manage costs on the way down and capture upside on the way up — without needing to add much variable cost.
Research and development expenses were up 8% year over year to close the quarter.
“This is a company that clearly gets really great organic growth out of its R&D investment,” Gendron said. “To sustain R&D is really important. Even though [Cognex] has a massive competitive advantage in the machine vision market in which they operate, they have to deploy a fair amount of R&D capital to maintain [that] and also develop new products.”
Cognex acquired machine vision solution provider SUALAB in the fourth quarter of 2019, adding to its deep learning software capabilities. The specialized nature of that company, Gendron said, supports Cognex’s commitment and ability to grow through R&D investment.
“The acquisitions that they’ve done most recently were in the realm of deep learning software — so the SUALAB acquisition most recently — that’s really specialized and really powerful stuff.”
Cognex, in releasing its earnings, does not differentiate by business sector (for example, by consumer tech, and automotive). On its quarterly earnings call, though, company executives did expand on a robust quarter in consumer technology. In addition to smartphone applications, applications for other consumer technologies helped drive sales.
“We kind of knew that smartphone strength was going to sustain into the third quarter,” Gendron said. “What surprised was some of the nonsmartphone aspects of the consumer tech business for Cognex.”
Among other technologies Gendron — and Cognex itself — identified as contributing to rising sales in a work-from-home environment were applications for laptops and tablets.
Despite quarter-to-quarter improvements, the current pandemic situation has influenced the company’s largest industry in terms of revenue for fiscal year 2019: automotive. Along with factory automation, automotive is an area in which Cognex reported lower revenue, and, it said, is one that continues to be negatively affected by global economic conditions resulting from the COVID-19 pandemic.
“I think there are some competing forces at play in that realm of the market,” Gendron said, of factory automation. “On the one hand, you have an obvious need to automate…In a lower demand environment, you have to cut your cost. That’s why a lot of process manufacturing companies are adopting things like AI and automation — to drive that next [level] of cost out.
“The other competing headwind I would say is that a lot of manufacturing plants are downsized or shuttered just because of social distancing considerations. If you are Cognex, and you are sending salespeople to meet with various customers, it’s often tough to do that in this environment.”
Cognex also reported sequential revenue growth in industries in which the company has a smaller footprint, such as medical devices, pharmaceuticals, and life sciences.
Decreased revenue in the automotive industry partially canceled out higher revenue in logistics in the Americas, the company said. In Europe, the automotive decrease contributed to what Cognex called a “relatively flat” period. Though the automotive industry similarly affected revenue in Greater China, revenue in the region increased by 152% for the three-month period, and 52% for the nine-month period.
“In recent years, there has been a shift in procurement for certain electronics orders for Cognex products used on assembly lines in China,” the company reported in its quarter-end filings. “This procurement shift has resulted in an increase in revenue reported in Greater China that was previously reported in Europe.”
Except for Europe, reported revenue totals ultimately increased in Greater China, the Americas, and Other Asia. The figures represented three- and nine-month year-over-year improvements.
Cognex expects revenue in the fourth quarter to improve on a year-over-year basis; estimated totals released in the quarter-three earnings announcement range from $190 million to $210 million. Cognex cited higher expected revenue from consumer electronics and the e-commerce sector of logistics as contributing to that projection.
“The forward outlook is still better than what we previously expected for the fourth quarter and that’s what drives the stock, ultimately, is where expectations are relative to what they were before,” Gendron said. “They have a pretty wide range here, and there’s a lot that can happen between the election and the pandemic, so hopefully we’ll have a lot better visibility the next time they report in January because we’ll be on the other side of the election and maybe a vaccine will be in the offing.”
Cognex reported, “It is difficult for us to quantify the future impact of COVID-19 due to many factors beyond our control and knowledge, including changing governmental regulations and the scope and duration of social distancing and commerce restrictions, including access to customer facilities for on-site installations.”
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