Q3 2021 Cognex Corp Earnings Call
Zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Susan Conway Senior director of Investor Relations. Thank you Ma'am you may begin.
Yeah. Thank you good evening, everyone welcome to our third quarter earnings Conference call with US are Rob Willett, Cognex, as president and CEO and Paul Todd Young our finance Chief Financial Officer.
We'll start with prepared remarks, and then we'll open the call for questions I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available on the Investor Relations section of our website at Www Dot Cognex Dot com forward Slash investor.
Both contain detailed information about our financial results.
During the call you may use a non b menu and non-GAAP financial measure if we believe it is useful to investors. We think it will help them better understand our results or business trends.
You can see a reconciliation of certain items from GAAP to non-GAAP in exhibit two of the earnings release.
Any forward looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today.
However, things can change and actual results may differ materially from those projected or anticipated for.
For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K, and the Form 10-Q, we filed Tonight for Q3.
Now I'll turn the call over to Rob.
Thanks, Sue and Hello, everyone. Thank you for joining us.
As shown in today's news release Cognex reported the highest quarterly revenue in our 40 year history for the third quarter of 2021.
Demand for Cognex products is high worldwide as manufacturers implement machine vision to improve the throughput and the quality of their products.
Revenue grew by 13% over a high growth quarter in Q3 of 2020.
It was at the midpoint of the range, we gave as guidance in August.
Logistics was again, our largest end market in Q3, and the biggest growth driver.
We reported another record revenue quarter in logistics, beating the prior record set last quarter.
Demand continues to be strong, particularly in the e-commerce sector, where cognex is widely recognized as the technology leader for machine vision.
E Commerce and Omnichannel retailers are investing in automation and cognex is industry, leading products to help them fulfill orders rapidly reliably and cost effectively.
The gross margin to 70% in Q3.
While many companies would applaud is 70% gross margin where it is satisfied given the high value software content in cognex products.
We view, the lower margin business associated with the customer and and logistics as a one quarter phenomenon.
However, we anticipate the supply situation will continue to be a drag on our gross margin for the next several quarters.
We've taken mitigating actions, including new product designs and pricing initiatives to offset incremental costs happy operating income level.
Supply challenges notwithstanding there are macro trends underway that we believe will benefit cosmetics for years to come.
These include the rise of the comments to transition to electric vehicles and the shortly fly chain.
Coupled with today's cost pressure and labor shortages market conditions are favorable for automation and machine vision.
The excitement was apparent last month's at Division show a major machine vision trade show held in Stuttgart, Germany.
<unk> is booth was busy and well attended the show had a more European centric attendants this year, reflecting challenges of travel to and from the Americas in Asia.
We heard very favorable feedback from many manufacturers and automation leaders about deep learning products. They are enthusiastic about the power and performance that cognex is industry, leading technology provides them as they seek to improve their productivity and product quality.
We believe this underscores the value of a long term development and investment in our D N E.
Cognex is industry, leading vision and Ivy technologies key differentiator for us in solving our customers most challenging application.
Implement automation.
Now I will hand, the call over the pole for details of the quarter.
Thanks, Rob Hello, everyone.
Revenue for Q3 with $285 million.
As Rob mentioned, that's a new record for quarterly revenue, surpassing the prior record set last quarter.
As expected the growth rate moderated in Q3 from the 30 plus percent pace that we reported for the previous four quarters.
We delivered revenue at the midpoint of are expected range and a difficult supply environment.
It's worth noting that revenue with 55% above the pre COVID-19 period of two years ago.
Two of our three largest and market logistics and automotive made strong contributions to year on year growth.
Other sectors also grew at a good clip, including life Sciences and semi.
As expected consumer electronics with a substantial headwind in the quarter.
Okay.
We also experienced the unfavorable impact from currency exchange rate fluctuations.
Operating margin was a healthy 31% in Q3 of 2021.
Even so it compares unfavorably with an exceptional 38% in Q3 of 2020 and 34% in the prior quarter due to this quarter's lower gross margin and higher operating expenses.
Regarding the tax provision, we recorded substantial discrete tax items in all periods that made comparisons difficult.
In Q3 of 2021 discrete items combined for a net benefit of $6 million.
The effective tax rate, excluding discrete tax items was 18% in both Q2 and Q3 of 2021 and in Q3 of 2020.
Reported earnings were <unk> 44 per share in Q3, compared with 49 in Q3 of 2020 and 43 in Q2 of 2021.
On a non-GAAP basis earnings were <unk> 40 per share in Q3, compared with 47 in Q3 of 2020 and 43 in Q2 of 2021.
Excluding discrete tax items and restructuring and other charges that we remove for comparison sake.
Looking at the.
Change in revenue for Q3 from a geographic perspective.
Revenue from the Americas increased by over 30% year on year and delivered the largest contribution in absolute dollars due to growth in logistics.
In Europe revenue increased by 8% and that includes a one percentage point contribution from currency exchange rates.
Strong growth in logistics automotive consumer products and other industries in Europe broad factory automation market was largely offset by a decline in revenue from consumer electronics.
Revenue from Asia increased by 1% year on year.
Continued growth in automotive logistics semi in the broader market plus a five percentage point contribution from currency exchange rates was offset by lower revenue from consumer electronics.
Turning to the balance sheet Cognex continues to have a strong cash position with $985 million in cash and investments and no debt.
We spent $27 million to repurchase cognex stock in Q3, and a total of $48 million year to date.
We plan to continue to buy back stock in Q4 at a regular pace, while maintaining flexibility to be more opportunistic.
Yeah.
And logistics, we expect a low growth quarter, primarily because customers are digesting large deployments to cognex products as they turned their attention to fulfilling orders for the upcoming holiday season.
Another factor we considered in our revenue guidance was the supply environment.
We believe the situation will continue to be challenging and constrained revenue growth in queue for.
We expect to exit the year with a substantial backlog.
Looking at gross margin, we believed the higher supply chain costs. We've we're incurring the components and freight will continue to flow into cost of goods sold as a result, we believe gross margin in queue for will be in need low 70% range.
I want to point out that we have not changed our long term gross margin target from the mid 70% range in the near term, we expect our pricing actions to roughly offset the gross margin dilution at the operating income level longer term, we expect our gross margin will return to a mid 70% target range.
<unk> as the higher costs to expedite component deliveries receipts.
We expect operating expenses will increase by mid single digits on a sequential basis, we expect higher spending around there is growth initiatives within cognex. This includes adding resources in engineering and sales further in new product development, and increasing sales and marketing activity.
Lastly, we expect the effective tax rate will be 18%, excluding discrete tax items.
Now we will open the call for questions. Operator. Please go ahead.
At this time they'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tunnel indicate your line isn't the question queue. You May pass star too if you would like to move your questions on the queue for participants using speaker equipment, and maybe not to therapy.
Pick up your handset before pressing the star keys, Please limit yourself to one question and one follow up prior to getting back in the queue. One moment, while I pull for questions. Our first question comes from the line of Josh Polka Lynskey with Morgan Stanley You May proceed with your question.
Conditions in logistics. So again it was it was small it was sort of a moderate impact, but it was a modest benefit against other decreases and ability to supply customers as quickly as we'd expected.
Got it that's super helpful color and then we've just heard from some of your distributors that you know the model there is maybe changing a bit more direct.
Anything from like a corporate level that you guys are doing differently with respect to your distributors and kind of.
Direct sales force.
As you guys.
Can you kind of expand the business, sometimes some of these new markets.
Yeah.
No I don't think there's anything radical to two two to communicate there I would say about 70% of our business currently is moving through direct sales overall.
And certainly every year, we evaluate our distributors and we are looking for those who can provide more value added and are investing in that business. So it's a continual process of.
As evaluating those relationships going forward, but I don't think.
Major change we have some great partners.
<unk> products.
<unk> locations and into industries that they serve very very well and they're very important part of our model.
Excellent I appreciate the color best of luck.
For new smartphone technologies, and new capacity for online learning and remote.
Work demands.
There's a market that can.
Cycle and so often in the past after lower year, we have.
More higher periods of investment it's too soon to make that call currently.
But manufacturers tend to us to help them bring new products to market and to realize productivity and quality game. So example of things that we would do for them and help them as a miniature eyes products and how they bring new technologies that are challenging to assemble such as wireless charging stations.
Microalgae displays smartwatches virtual an augmented reality headset.
As they look to eliminate cosmetic defects and as they implement implement automation and it will just labor shortages and.
Desirable jobs and health concerns around the world and I see demand for those continuing to be very strong for a long period, it's more of a matter of how they play out and investment cycles. This year was a down cycle after a pretty good upcycle last year.
Okay, that's awful.
<unk> quickly.
Okay bargain dynamics over the next several quarters C. As in clearly it sounds like you're not really putting through any surcharging and and at this juncture.
I'm feeling it in the margins for all the increase logistics cause he is there maybe potentially going to be like a change of philosophy going forward given given you know what what you are seeing from afraid perspective, and then secondly, gross margins over the next several quarters will it will we be kind of in the low seventies for.
For the next few quarters because of the secret place for your cough.
You have any I'll I'll take it up it's rather than I'll older bipolar the comment that so and so we've taken the price pricing action that we implemented happy is getting the latter part of last quarter, which we think of being pretty well received in the marketplace and.
<unk>.
Pleased with how we've implemented then we think an adult level, it's gonna offset that the.
The gross margin deletion, we're seeing from supply chain costs that are hitting us.
Margin in the near term you can build a simple model of it but essentially you offset about a third of your gross margin impact, but you also had 100% at the operating income dollar level.
Got it.
And then maybe you can find one on.
You have some reasonable visibility in a given year on your electronics growth rate.
For the year it typically around the March April timeframe, I guess, just given the supply chain issues with that.
That specific end market is experiencing.
I don't know how do we think about 2022 isn't it.
In your conversations with your customers do you think youre going to have reasonable visibility by then or is it too early to tell at this point.
I would expect we'll have a good sense of how things are shaping up by the time, we talk with you.
And it's early May yes.
We're really part of their implementation plans we have.
Very long and.
And deep relationships with many of the major players in that industry, and we will be able to give you I think I expect visibility at that point.
Okay, great. Thank you.
It's helping actually helping give us visibility so we can supply them reliably.
But that but that was not an end of the quarter phenomenon.
Okay.
And then just one more thing just just on a deep learning at that that you mentioned just is that still on track to.
Be around your aspirational go over 100% growth this year and how does that kind of looking.
I don't think we're going to give specific forecasts byproduct area I would say, we're very pleased with that technology and Alex performing on the thing.
Extraordinary and strong growth in that area.
The areas, where it may not be growing as quickly as we would aspire to would be in consumer electronics were deployment of it.
Somewhat correlated to the slightly down here, we're seeing in that industry, but that's a long term play for us and we're very pleased with the progress we're making with the technology.
That's great. Thank you so much.
As a reminder, if you would like to ask a question. Please pass a star one on your telephone keypad.
Our next question comes from the line of Andrew This hungry with Bamber capital markets. You May proceed with your question [laughter].
Good evening, guys Uhm, so automotive last quarter perked up the first time in a while without your fastest growing segment again, and then you mentioned my sciences picking up what exactly drove that.
Yeah, Hi, so so I.
I think we're seeing a strong year for automotive.
And it certainly was another strong quarter.
Think I mentioned earlier the logistics really is.
Fastest growing market, certainly and I think I'm right in saying that it was our fastest growing market last quarter also.
But we've seen a really nice strong rebound in order to notice this year, which.
He is very is very pleasing.
Automotive was accretive to our growth rate in the quarter, but didn't compare with the grocery heightened logistics and the dollar contribution of logistics.
And then turning to your question about like life Sciences like.
Life Sciences as a market weeping.
Working away at hard for a very long period ended instead of Ah.
<unk> market, where one is specified into life science.
Machine builders.
Big names in the medical and lifestyle swirled, and we measure our success internally by design when.
That would be two year show it.
Germany called the vision show it it's kind of the industry get together I would say, where it's a lot of technology companies coming as well and so.
It's a great venue in which to see the industry.
You know I was pretty pleased with what I saw there in terms of how our plans are resonating with customers and with the other technology iced tea at other companies in the industry and we had a lot about deep learning capabilities. We we we need with some of the most sophisticated customers and is very engineer.
And focus to come to that.
<unk> and I, certainly heard a lot about the power of our tools, how they're getting easier to implement and how they fit into overall product roadmaps from for big automotive companies cheer, one automotive suppliers, the electronics companies, particularly but a whole range of a machine builders and.
How they are seeing.
Seeing those technologies rollout and their Roadmaps and again it was it was.
It was pleasing to hear them say that they see this as an area where.
They plan to invest and where they see us as the strong technology leader in the industry.
So it was certainly certainly that and then you had a second part to your question.
Carrying revenue, yeah, I think I need it.
Yeah, Yeah, yeah, yeah, so I.
<unk>.