On the face of it, the record third-quarter earnings report from machine vision company Cognex (NASDAQ: CGNX) was little short of sensational. A combination of nearly 80% revenue growth and an around 90% increase in net income from continuing operations would normally be enough to thrill investors, but Cognex's management had already prepared them for a "monster" quarter.
In reality, the takeaways from the quarter are more nuanced than just the headline numbers, so let's take a closer look at them.
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Cognex third quarter: The raw numbers
The key figures from the quarter:
- Revenue of $259.7 million increased 76% from last year and came in at the high end of guidance of $250 million to $260 million.
- Gross margin of 76% was in line with guidance.
- Operating expenses of $87 million increased 15% from the second quarter, higher than guidance for a 10% increase.
- Net income from continuing operations of $102.3 million represented a 91% increase over last year.
Cognex's earnings were pretty much in line with guidance, although operating expenses were a bit higher than expected. Essentially, investors already knew that Cognex would report a strong quarter, as management had previously disclosed that revenue from large consumer electronics orders would hit in the quarter. As for operating expenses, they can bounce around from quarter to quarter as Cognex needs to ramp up expenses in order to service orders and/or future growth.
The most interesting parts of the earnings presentation were actually management's commentary and guidance. The outlook for the fourth quarter:
- Revenue in the range of $170 million to $180 million implies growth in excess of 30% compared to the $129.3 million reported in last year's fourth quarter.
- Gross margin in the mid-to-high 70% range.
- Operating expenses expected to decline in the low single digits compared to the third quarter.
There are three points to consider here. First, in case you're wondering why Cognex's revenue would drop so dramatically from the third quarter to the fourth, the answer lies in the fact that many companies -- particularly in consumer electronics -- ramp up spending on production in the second and third quarters in preparation for the fourth.
Second, the midpoint of the revenue guidance implies a subtle upgrading of management's expectations. For example, on the second-quarter earnings call, CEO Rob Willett's comments implied that fourth-quarter revenue could come in somewhere between $135 million and $173 million, whereas the current guidance is for $170 million to $180 million.
Third, the relatively small drop in operating expenses expected for the second quarter was discussed on the earnings call, with Willett outlining that his eye was on investing for the long term "rather than any short-term expense challenges."
It's clear from the earnings call that Cognex's revenue showed broad-based strength in the quarter. Willett spoke of "a continuing drive towards the need to replace literally hundreds of thousands of bodies who are involved and people who are involved in manufacturing products," a statement that highlights Cognex's exposure to the secular trend of robotics in manufacturing -- part of the reason that the stock commands a premium rating.
Willett also said that outside of consumer electronics (where the large deals took place), third-quarter revenue grew 30%, with logistics up 50% and automotive (a core market for Cognex) growing strongly in China. Willett believes that the logistics business (10% of Cognex's current revenue) can grow at 50% in the long term. Meanwhile, Cognex's strength in automotive-based revenue indicates that auto companies will still spend on automation despite slowing production growth.
The fourth quarter promises to be a relatively quiet one for Cognex, but all eyes will be on guidance for 2018 and developments with ongoing initiatives such as mobile terminals and airport baggage-handling solutions. Cognex has so far had a very strong 2017, and investors will want more of the same in 2018.
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