No one said investing in growth companies came without volatility in revenue and earnings growth. Case in point: the recent results from machine vision company Cognex (NASDAQ: CGNX). The market has known for a while that the company's consumer electronics and automotive markets, two of its largest industry verticals, were slowing, and China's slowdown has also been affecting the company.
With all that in mind, let's look at the earnings report to get some color on what to expect in 2019.
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Cognex fourth-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Revenue grew 6% to $193 million, compared with guidance of $180 million to $190 million.
- Gross profit grew 1.5% to $140.5 million as gross profit margin declined to 73% from 75% in the same quarter last year.
- A 6.7% increase in research and development costs combined with a 9.6% rise in selling, general, and administrative costs led to an operating income margin of 23%, down from 28% in last year's fourth quarter.
- Operating income declined to $45.2 million, from $50.8 million last year.
In short, revenue growth has stalled and declines in gross and operating margin led to lower operating income in the quarter. Moreover, guidance for the first-quarter of 2019 calls for more of the same:
- First-quarter revenue is expected in the range of $165 million to $175 million, the midpoint of which represents flat growth from last year's first quarter.
- Gross profit margin is expected to be similar to the 73% reported in the fourth quarter.
- Operating expenses are expected to increase slightly on a sequential basis -- recall that operating expenses grew strongly in the fourth quarter.
What happened to Cognex's growth?
Cognex is wrestling with weakness in its key industrial verticals -- consumer electronics and automotive.
The auto industry has long been an early adopter of automation and so represents around a quarter of Cognex's revenue. CFO John Curran disclosed that automotive revenue was flat in the fourth quarter, compared with high-single-digit growth for 2018. Cognex's expectation is for long-term growth of 10% a year for its automotive revenue.
CEO Robert Willett spoke of a broad-based slowdown in spending in China and also noted that "we are seeing delayed spending and project push-outs by our customers in the American automotive market." The North American automotive market represents half of Cognex's total Americas region sales.
In truth, there's nothing surprising here, because a slew of companies have reported weaker automotive capital spending conditions. For example, Rockwell Automation (NYSE: ROK) recently lowered expectations for its sales to the industry in 2019.
For consumer electronics, sales to the industry "declined, as expected, in Q4," Curran said on the earnings call, because of "lower revenue from large customers in OLED [organic light-emitting diode] display and smartphone manufacturing." Investors have known about this matter since the first-quarter earnings call in the spring, so no surprises there.
Investors will have to wait until the next quarter's results to get an outlook for 2019. Cognex's customers typically ramp up production in anticipation of the fourth quarter, so its second and third quarters are usually its largest for orders and revenue.
Aside from the impact from those "large customers," Curran said, "revenue grew in the mid-teens over Q4 '17, led by strong performance in logistics, which nearly doubled." Logistics represents around 10% of Cognex's revenue and is expected to grow at 50% a year.
Investors will be looking forward to the next set of earnings to get some color on the outlook for consumer electronics spending because that's the great unknown for 2019.
Cognex's automotive-based sales are clearly slowing, along with a general slowdown in light-vehicle sales and production. Elsewhere, Cognex continues to generate strong growth, notably in the logistics market. Investors will be hoping it's one of the industry verticals that can offset any weakness elsewhere this year.
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