Yahoo Finance Cognex Corporation (NASDAQ:CGNX) Q1 2024 Earnings Call Transcript
Cognex Corporation (NASDAQ:CGNX) Q1 2024 Earnings Call Transcript May 2, 2024
Cognex Corporation beats earnings expectations. Reported EPS is $0.11, expectations were $0.08. Cognex Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Cognex first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. I will now turn the conference over to your host, Nathan McCurren, Head of Investor Relations. You may begin.
Nathan McCurren: Thank you Schmali. Good morning everyone, thank you for joining us. Our results were released earlier today. The press release, earnings presentation, and quarterly report on Form 10-Q are available on the Investor Relations section of our website. Both the press release and our call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release. Any forward-looking statements we made in the press release, the accompanying presentation posted to our website, or any that we may make during this call are based upon information that we believe to be true as of today. Our actual results may differ materially from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and our Form 10-Q filed this morning for Q1 2024.
On today’s call, Rob Willett, Cognex’s President and CEO will discuss our first quarter results. I will then provide additional detail on the financials, and Rob will conclude with an update on our strategic initiatives and our outlook. Laura McDonald, our Corporate Controller and interim Principal Financial Officer, has also joined us in the room for the Q&A portion of the call. With that, I’ll turn the call over to Rob.
Robert Willett: Thanks Nathan. Hello everyone and thank you for joining us. Our first quarter results reflect a challenging but stable business environment. Revenue was above the high end of our guidance range as we saw order volumes slightly higher than we had expected. Revenue excluding the contribution of Moritex increased sequentially from the fourth quarter but remained down year-on-year across most of our factory automation end markets. While customers remain cautious with their capex investments, I’m encouraged by the early indications of recover we have started to see in certain end markets. We also expect the slight improvement in macro leading indicators, such as the PMI, in many of our most important geographies to be a tailwind for our business.
This year, we have taken important steps in executing against our strategic initiatives. We expanded the application of our edge learning technology by launching the In-Sight L38, the world’s first AI-enabled 3D industrial vision system. Our 2023 cohort of emerging customer Salesnoids entered the field and began actively calling on customers, and we operated the Moritex business for a full quarter and advanced its integration. We remain on track for this acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024. I would like to take a moment to welcome Dennis Fehr, who we announced this morning will become our new Chief Financial Officer, effective tomorrow, May 3. Dennis will lead the company’s global finance and information technology organizations.
Dennis brings over 20 years of experience, spending the last six years as a CFO, most recently as the CFO of 6K Inc. Dennis joined 6K after spending five years as the CFO of Fluence Energy, which he led through an IPO in 2021. Prior to Fluence Energy, Dennis was Vice President of Finance at Siemens, where he spent the first 15 years of his career. Dennis brings broad international experience to Cognex. This includes time living and working in China, Mexico, Germany and Indonesia. This knowledge will be of great value to Cognex as we continue to execute on our global growth strategy. You will hear from Dennis on our Q2 earnings call. Before I go into further commentary on the business and outlook for Q2, I’d like to turn the call back over to Nathan to walk you through more of the results.
Nathan McCurren: Thank you Rob. I’ll walk through our financial highlights, which you can see on Page 4 of our earnings presentation posted to the website this morning. First quarter revenue of $211 million increased by 5% year-on-year, with the contribution from Moritex of just under 8% of total revenue. Excluding Moritex and foreign exchange effects, revenue declined 3%. Turning to margins, adjusted gross margin was 68.8% in Q1, in line with guidance and down from 71.8% a year ago. Gross margin included a two percentage point dilution effect from a full quarter of Moritex. There was also 1.6 percentage points of unfavorable one-time events in the quarter, primarily the strategic logistics project with future recurring revenue that we mentioned on our last call.
Sequentially, adjusted gross margin stepped down due to Moritex and one-time effects. Adjusting operating expenses increased 3% year-on-year, as expected, driven by a full quarter of Moritex and increased investment in our emerging customer initiative. Excluding these strategic investments, adjusted opex declined 6% year-on-year. Sequentially, adjusted operating expenses increased 5% as expected. In addition to higher costs from the emerging customer initiative and a full quarter of Moritex, there was a reset in incentive compensation at the beginning of the year, as we mentioned last quarter. Adjusted EBITDA margin was 11.9% in Q1, down from 13.5% a year ago. This was driven by a lower gross margin and higher operating expenses related to emerging customers, partially offset by the positive contribution of the Moritex acquisition, which was accretive to adjusted EBITDA margin.
Diluted earnings per share on a GAAP basis was $0.07, down year-on-year due to lower operating margins, acquisition and amortization costs, and unfavorable discrete tax items. Sequentially, GAAP diluted EPS increased 7%. Adjusted diluted EPS was $0.11, down $0.02 year-on-year and flat sequentially. The adjusted effective tax rate was 16% in both Q1 of 2024 and Q1 of 2023. I will now go through our end market results, which you can find on Slide 5 of the earnings presentation. I’ll discuss the end market and geographic results excluding the contribution of Moritex. Markets have been mixed to begin 2024, as we have seen both continued weakness as well as pockets of positive signals. Starting with automotive, revenue was down year-on-year but flat sequentially.
EV battery revenue continues to be lumpy and in the first quarter, we saw customers delay some project spending as they faced uncertain near term demand. Moving onto logistics, revenue grew year-on-year but was flat sequentially. Much of the business remained stable, and we executed a sizeable strategic project in the quarter, driving year-on-year growth. Consumer electronics revenue was down year-on-year, although the rate of decline slowed compared to the back half of 2023. Rob will go into more detail regarding what we expect from consumer electronics for the full year. Semi had strong momentum in the quarter with year-on-year growth turning positive after four quarters of significant declines. From a geographic viewpoint, revenue growth was strongest in Asia outside of China, led by strength in semi and logistics.
Americas also grew in the quarter, driven by its higher logistics mix. Outside of logistics, Americas experienced continued softness across our factory automation business, as was also the case for Europe. China remained challenging as revenue in the region declined year-on-year for the sixth consecutive quarter. Turning to the balance sheet, Cognex continues to have a strong cash position with $557 million in cash and investments and no debt. Free cash flow in Q1 was $10 million compared to $22 million a year ago, reflecting lower GAAP net income and increased working capital investment as we continue to scale new supply chain initiatives. We returned $22 million to shareholders in the form of stock buybacks and dividends. Now I’ll turn it back over to Rob.
Robert Willett: Thanks Nathan. Let me spend some time discussing the progress we’re making on our strategic priorities. We are making strong progress introducing world-class AI to the field of industrial machine vision. Our latest example of this is our In-Sight L38 3D vision system, which combines AI, 2D and 3D vision technologies to solve a range of inspection and measurement applications. The In-Sight L38 greatly simplifies the process of configuring 3D systems, thanks to embedded AI technology that uses pre-trained models with domain-specific data. Cognex has captured these data through our long history of serving customers. The In-Sight L38 example-based training replaces complex programming steps previously required in vision application development and enables our technology to address a broad array of applications.
The In-Sight L38’s unique AI-powered 3D tools can be set up in minutes, requiring as few as five to 10 labeled images to automate a task. With a few simple point and click training examples, customers can guide robotic arms to locate items on a conveyer, measure glue to ensure its consistent application, or leave tire identification numbers on low-contrast black rubber material. Example-based learning solves 3D applications in a more intuitive and human-like way, enabling Cognex to expand its application where human inspectors or offline measurements have previously been the only viable option. I’ll shift now to give you an update on our emerging customer initiative. Our excitement continues to build for this initiative as it broadens our customer base and deepens our penetration into end markets such as packaging.
Our initial Emerging Customer Sales cohort fully entered the field and began to sell at the beginning of this year. These Salesnoids have been demoing and selling to customers we have not previously called on. We’ve seen a lot of new applications with these customers. Some examples of emerging customer applications include inspecting the quality of food items like bread, pizzas and biscuits, detecting presence/absence of ceiling caps on air fresheners, verifying bottle caps are properly sealed, confirming the correct insertion of connectors for an electronics customer, and optical character recognition and the classification of parts for an automotive parts manufacturer. We are building a funnel of opportunities with this initiative and are encouraged by what we have seen.
We expect our Emerging Customer Salesnoids to make over 80,000 customer visits this year. We’ve had early success across geographies and end markets, and we continue to build this team towards delivering at least $15 million of incremental revenue in 2024. Early orders continue to reinforce our belief that this initiative will be gross margin accretive. We’re excited to grow this initiative by welcoming our second cohort or Emerging Customer Salesnoids on 2024. Let me now give you an update on our integration of Moritex. We made good progress on the integration in Q1. Our engineering teams are already collaborating on optics innovation and our sales teams are driving successful customer engagements. The experienced leaders who joined us from Moritex are now leading Cognex Japan.
While we expect Moritex products to be slightly dilutive to total company gross margin in the medium term, we continue to expect the acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024 and beyond. I’ll turn now to our outlook for the second quarter. In the second quarter, we expect revenue between $230 million and $245 million. This step up from the first quarter is in line with our typical Q1 to Q2 consumer electronics seasonality. I will remind you that Q2 of last year included $15 million of consumer electronics revenue that we originally expected in the third quarter of 2023. Adjusting for that baseline effect and excluding Moritex, this range implies revenue to be slightly down year-on-year. We expect the Moritex business to contribute 6% to 8% of revenue in Q2.
Gross margin continues to be below our long term targets, given volume deleverage and an approximately two percentage point dilution effect from Moritex. We expect the first quarter to be the low point for the year in adjusted gross margin. For the second quarter, we expect adjusted gross margin slightly above 70%, a sequential step-up as we move past the gross margin dilutive one-time events in Q1 and expect stronger revenues, as just mentioned. We expect adjusted operating expenses to increase low to mid single digits on a sequential basis due to additional investment in the Emerging Customer initiative and higher incentive compensation. As we disclosed last quarter, we expect an incremental $25 million of Emerging Customer opex for the full year, the timing of which should ramp throughout 2024 similar to the investment made in 2024.
We also expect incentive compensation to be a $15 million to $20 million year-on-year headwind, materializing mostly in the second through fourth quarters. Logistics has continued to be stable and we believe is well positioned to grow as automation penetration increases and ecommerce investment returns. For the full year, we expect logistics to grow as we start to see infrastructure investment plans materializing, so logistics growth this year will likely still be below the 30% growth we target long term in this market. Consumer electronics has positive long term trends, but the timing and revenue contribution can be lumpy. We do not expect 2024 to be a significant growth year for consumer electronics. For the full year, we expect revenue in 2024 to be approximately in line with 2023 with continued uncertainty of project size and timing.
We are seeing more tentativeness from EV battery customers driven by concern around near-term end user demand and political uncertainty. We started to see delayed projects result in a reduction in the pace of greenfield investments from our EV customers. We are still seeing customers invest in productivity improvements and product upgrades on existing lines, and we still expect our EV battery business to be a robust growth driver over the long term. The semi landscape is improving as leading equipment manufacturers have communicated more optimistic 2024 outlooks. We’re excited that Moritex gives us additional opportunities in this market, which looks well positioned for strong growth. We are encouraged by the positive macro signals we have started to see, and we believe the progress we are making on our strategic initiatives keeps us well positioned to capitalize on exciting industry trends as the operating environment begins to improve.
Now we will open the call for questions. Operator, please go ahead.
Operator: Thank you. At this time, we will be conducting a question and answer session. [Operator instructions] Our first question comes from the line of Damian Karas with UBS Securities. Please proceed with your question.
Damian Karas: Hi, good morning everyone. Can you hear me?
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