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Edited Transcript of CGNX earnings conference call or presentation 27-Apr-20 9:00pm GMT

·49 min read

Q1 2020 Cognex Corp Earnings Call NATICK Jun 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Cognex Corp earnings conference call or presentation Monday, April 27, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Paul Todgham Cognex Corporation - Senior VP of Finance & CFO * Robert J. Shillman Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer * Robert J. Willett Cognex Corporation - CEO, President & Executive Director * Susan Conway Cognex Corporation - Senior Director of IR ================================================================================ Conference Call Participants ================================================================================ * Andrew Edouard Buscaglia Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Jairam Nathan Daiwa Securities Co. Ltd., Research Division - Research Analyst * James Andrew Ricchiuti Needham & Company, LLC, Research Division - Senior Analyst * Joseph Alfred Ritchie Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst * Joseph Craig Giordano Cowen and Company, LLC, Research Division - MD * Joshua Charles Pokrzywinski Morgan Stanley, Research Division - Equity Analyst * Ka Wing Lau Gordon Haskett Research Advisors - Research Associate of Industrials * Nicholas Francis Amicucci UBS Investment Bank, Research Division - Equity Research Associate of Industrials * Paul Coster JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies * Richard Charles Eastman Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Cognex First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Susan Conway. You may begin. -------------------------------------------------------------------------------- Susan Conway, Cognex Corporation - Senior Director of IR [2] -------------------------------------------------------------------------------- Good evening, and thank you for joining us. I'm Susan Conway, Senior Director of Investor Relations. I hope everyone is faring well and staying healthy. Joining us today are Cognex' Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham and his team. I'd like to point out that our earnings release and quarterly report on Form 10-Q are available on our Investor Relations website at www.cognex.com/investor. Both contain highly detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 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. Things often change, however, and actual results may differ materially from those projected or anticipated. For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and our Form 10-Q filed tonight for Q1. Now I'd like to turn the call over to Dr. Bob. -------------------------------------------------------------------------------- Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [3] -------------------------------------------------------------------------------- Thanks, Sue, and hello, everyone. Welcome to our first quarter of 2020 earnings calls. Tonight, Cognex announced results for Q1 of 2020, which are pretty good, but one quarter doesn't tell the whole story. After a challenging year in 2019, we were looking forward to improved macroeconomic conditions in 2020, but all of that has changed in recent weeks. And like many other companies, we are now preparing for difficult days and perhaps months ahead due to the restrictions that governments around the world have placed on travel and on their businesses and on their citizens. At a time like this, our strong balance sheet, with $845 million in cash and investments and having no debt, provides us with the breathing room and flexibility that many other companies just do not have. And because of that, we will be able to continue our long-term product development efforts, which should enable us to emerge from this crisis in even a stronger competitive position than we held in the past. Right now, we are all participating remotely on this call. For further details on the first quarter and for a high-level view of our plans in the current challenging environment, I'll turn the call over to my partner, our CEO, Rob Willett. Rob, the microphone is yours. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [4] -------------------------------------------------------------------------------- Thank you, Dr. Bob, and good evening, everyone. Our results for the first quarter of 2020 were in line with our expectations. Revenue and gross margin were delivered at the high end of our expected ranges. Operating expenses and the tax rate were lower than anticipated. The team did a good job managing the supply chain despite some component shortages from Chinese suppliers that had postponed delivery dates. We now see many of those manufacturers successfully ramping up production as China goes back to work. We also were able to successfully accommodate an unusually high number of requests to either accelerate or, in some cases, delay order deliveries in March. In recent weeks, conditions have become more challenging in most regions of the world, most notably in Europe and the Americas. Many customers are locked down or operating with reduced capacity, and that's impacting our ability to engage with them and get new orders. Particularly hard hit is the automotive industry, which was our largest end market last year. There's a long-term potential for growth as the market transitions from internal combustion engines to electric vehicles, but the near-term outlook has deteriorated significantly. Many customers have suspended production and are not allowing our sales engineers into facilities to help with previously planned automation projects that are now on hold. In consumer electronics, we have found that it's too early to predict the timing and magnitude of this year's investment cycle, which we typically have insight into by now. Our largest customers are asking for -- in fact, counting on us to be ready with product shipments and on-site support for their advanced automation initiatives. However, we recognize that there were risks around both the timing and the size of those automation projects given the current situation. The best end market for us right now is clearly logistics, which was our third largest market in 2019. Online e-commerce sales are accelerating as a result of COVID-related restrictions. As the recognized leader in machine vision and barcode reading for e-commerce, Cognex is well-positioned to capitalize on this trend. E-commerce companies and retailers with e-commerce presence are continuing to implement Cognex vision and ID products to increase both productivity and capacity. Our technology has become even more valuable in this crisis as our (inaudible) and are better able to maintain social distancing in their distribution centers. In the immediate view -- I'm sorry, in the immediate future, our priorities are supporting our customers at a time like this and helping Cognoids be healthy, safe and productive. Cognex is primarily a software company. We have the processes and systems in place for Cognoids to work quite effectively from their homes. Most Cognoids are now doing that, working hard to maintain product development schedules, making video sales calls and product demonstrations and remotely supporting our customers' critical (inaudible). We have taken measures to maintain a safe environment for those employees who are on-site at Cognex facilities supporting essential business functions. We are working with many customers in critical industries, including logistics, life sciences and medical-related businesses that have formally asked us to continue supplying them through the current crisis. Because of our move-fast culture, we're able to quickly come up with changes to our operations that allowed us to meet their needs. In terms of our supply chain, sourcing component parts and accessories for our products is a challenge. But thankfully, it's not a widespread issue for us today. We are managing well under the circumstances, and we continue to work closely with our suppliers to mitigate risks to our delivery schedules. In addition, our strong balance sheet, together with our conservative manufacturing philosophy, have enabled us to build a buffer of critical component inventory for times like these. Even so, we recognize the possibility of further closures and disruption down the road. Adding more uncertainty is the governments that have implemented and continue to implement restrictions on the movement of people and goods. These are indeed very challenging times for our business that has suppliers and customers around the world. Regarding our new products, early this month, we held a number of large-scale, live virtual meetings for our sales engineers and distributor partners. They received an in-depth look at our new products, including our [Ground Mod] camera featuring deep learning software, ID-recognized EasyBuilder interface, this product launch brings deep learning technology allows customers to solve complex visual and inspection tasks with relative ease. Also presented was the Cognex DataMan 475V. The V is for verifier. DataMan 475V is an in-line system that measures the accuracy and quality of a barcode based on globally recognized standards. Importantly, this is performed in line on high-speed production lines as the barcodes are being printed and used in industries, including automotive, life sciences, consumer products and logistics. Let's talk about Cognoids, our people. At a time like this, I feel very grateful to be leading such a committed, talented and creative group of people. Throughout this crisis, they have exemplified our strong culture, working hard and moving fast in this volatile environment. Our work-hard, play-hard, move-fast culture is a significant advantage on full display to all our stakeholders, our customers, our employees, our vendors, last, but not least, our shareholders. That advantage is for the year ahead and think about (inaudible) customers and reallocate our efforts to promising growth. Before we move on to the details from our first quarter, I'd like to extend a warm welcome to our new CFO, Paul Todgham, who joined Cognex in early March. To say that Cognex joined at an interesting time would be something of an understatement. Paul brings extensive experience leading financial teams and in strategic and operational planning after working at large-scale businesses over the past 20 years. We are very pleased to have him with us. Paul, over to you. -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [5] -------------------------------------------------------------------------------- Thank you, Rob, and hello, everyone. My first 2 months on the job have indeed been a unique adventure, but I'm very excited to be part of Cognex and to help drive our future. I'm particularly impressed with the people I've met, strong work ethic and Cognex' move-fast culture. I look forward to meeting many of you in the investment community in the coming months. And I hope all of you on this call and your loved ones are safe and healthy. Let's turn now to our financial results for Q1 of 2020. Revenue was $167 million, which is at the top end of our February guidance. As expected, revenue declined year-on-year and sequentially due to continued softness in automotive and the broad factory automation market. Compared to guidance, the decline in the manufacturing sector was partially offset by customers accelerating orders in March to buffer possible supply risks that they feared. Despite the lower revenue, gross margin of 75% represents an increase over both Q1 of 2019 and Q4 '19 as a result of a shift in revenue mix to higher-margin products. Operating expenses increased by 8% year-on-year and were down slightly on a sequential basis. Over the past year, we added employees and other recurring costs related to the Sualab acquisition, and we made investments to support our strategic priorities. These expenses were partially offset by lower travel and other discretionary expenses in the quarter. Operating margin was 13%, down from 17% in Q1 of 2019. On a sequential basis, operating margin increased by 3 percentage points as a result of the higher gross margin and lower operating expenses compared with Q4. The effective tax rate in Q1 was 17% before (inaudible) our expected rate of 19% due to a shift in income to lower tax jurisdictions. Excluding discrete tax items, earnings per share were $0.11 in Q1 compared with $0.17 in Q1 of 2019 and $0.11 in Q4. Looking at the change in revenue for Q1 year-on-year from a geographic perspective, Asia performed the best of any region as a result of higher revenue from consumer electronics. China increased in the mid-teens over a relatively weak quarter a year ago, despite business shutdowns, and the rest of Asia grew by approximately 20% in Q1 year-on-year. Revenue from the Americas declined by high single-digits year-on-year. This was primarily a result of the timing of revenue from logistics. The logistics sector, as Rob noted, continues to perform well for us. We're building a substantial order backlog to be delivered in the coming months when access to distribution centers is less restricted. In Europe, revenue declined in the high teens year-on-year, due primarily to softness in automotive. Unfortunately, we don't see many bright spots in Europe at the moment. Turning to our balance sheet, as noted by Dr. Bob, we ended the quarter with $845 million in cash and investments and no debt. Cognex has a history of consistent cash generation as well as a financially disciplined Board of Directors and management team. Uses of cash are primarily to support our long-term growth objectives. We also share our many years of success with shareholders through stock buybacks and dividends. In that regard, we repurchased 1.2 million shares of Cognex stock, totaling $51 million in Q1 and added a new $200 million authorization to our repurchase program. We are fortunate to have the ability to continue the buyback program and still have cash for acquisitions, if opportunities arise. We also paid nearly $10 million in dividends to shareholders. Now I'll turn the call back over to Rob. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [6] -------------------------------------------------------------------------------- Thank you, Paul. Those of you who follow Cognex know that we typically provide guidance one quarter out. However, given the current business shutdowns, widespread travel restrictions and potential disruptions we may face in our supply chain, there's too much uncertainty today for us to be overly specific. Our customers and vendors have shared some of their plans with us, but they are also facing uncertainties. I can say, however, that we believe both revenue and earnings per share, excluding discrete tax items, will decline in Q2 on both a year-on-year and sequential basis. Although we have performed reasonably well overall in April, demand in the overall factory automation market is deteriorating, particularly in Europe and the Americas. Gross margin for Q2 is expected to remain in the mid (inaudible) range, although lower than the gross margin reported for Q1. As for expenses, our leadership team has experience with severe economic downturns, and we are working together to aggressively manage costs. We expect to reduce operating expenses in Q2 by greater than 10% on a sequential basis. Savings include lower travel and discretionary expenses and a more restricted hiring plan. Lastly, the effective tax rate is expected to be 17%, excluding discrete tax items. Now we will open the call for questions. Operator, please, go ahead. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Jim Ricchiuti from Needham & Company. -------------------------------------------------------------------------------- James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- I wanted to just, if I could, go back to the comment you made about, Rob, that I think you made about an usually high number of requests to both accelerate or delay. Was the net effect of that more on the positive side? And was that tied more to the comment you made about consumer electronics in Asia? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [3] -------------------------------------------------------------------------------- Yes, Jim, thanks for your question. So what really, what I was referring to was right around the end of the quarter, we saw quite a few customers saying, asking to have their delivery dates moved in earlier. And we saw others say they wanted them pushed out. I would say, net, it was probably an increase, perhaps with a few million dollars, but it was both ways, and it wasn't really industry specific, I would say. -------------------------------------------------------------------------------- James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Got it. That's helpful. And it sounds like you're still see in pretty -- or at least the activity level on the logistics side is still encouraging. And I'm wondering, if I look at your traditional brick-and-mortar retailers, which, I guess, has been a fast-growing part of the business, how is this business holding up? I mean how would you characterize this? Is it holding up because you're aligned with some of the key players who seem to be doing better in this market, presumably? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [5] -------------------------------------------------------------------------------- Yes, Jim, I would say -- I would segment it like this. The customers who are -- have become proficient in e-commerce, whether they started there or they're moving coherently and aggressively into e-commerce, I'd say they're doing well. They see a lot of business and they moved their systems online, right? Those who haven't, I think we're seeing their businesses deteriorate. So I think e-commerce players, I think, are very well positioned to succeed as a result of what's going on. And Cognex, I think, will succeed with them. And I would say that's the part of logistics, obviously, where we're strongest and have the largest share. But then there are certainly those customers, more traditional e-commerce bricks-and-mortar players, who haven't automated their interactions with customers and taken them online. And then other companies, we consider part of our logistics business, maybe global post offices, airport baggage type businesses that I think are looking very, very weak at this time. So we would expect to see our business with them drop off. -------------------------------------------------------------------------------- James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- But the summer ramp from one customer, is that still on-track? And I'll stop there, let somebody else ask. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [7] -------------------------------------------------------------------------------- Yes, Jim. Certainly, I think the timing of it was -- the timing of some of the bigger logistics orders we have will depend on their ability to implement. A lot of these companies are operating at higher rates than they've ever operated at, at their highest peak moments in previous years. So the idea that we can go in, stop the line and do automation implementation at this time is obviously not happening. Although orders are coming in, I think, at a good clip in that market. So our ability to report that, as revenue, I think, certainly is a second half phenomenon for us at this point. And the timing will depend on a number of factors, one of which certainly is our ability to get access to their facilities and their engineers to implement these improvements. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question is from Joe Ritchie from Goldman Sachs. -------------------------------------------------------------------------------- Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [9] -------------------------------------------------------------------------------- I hope you're all well. Just -- maybe just touching on the China comments, I saw in the Q, China was up 15% this quarter. I'm just curious, like, you guys hit the high end of your revenue range for the quarter. It seems like it was fairly orderly, at least in Asia-Pac. As we're coming out of -- and things are starting to normalize in China, maybe talk a little bit about like what the order patterns look like as the quarter progressed? And if you could provide some more commentary around what really drove the strength in China this past quarter, that would be helpful. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [10] -------------------------------------------------------------------------------- Sure. Joe, we could give you some color on that. So yes, I mean, I think the interesting thing about running a global business is you've sort of seen this kind of a challenge kind of evolve around the world. And we saw it in January in Asia, and I was in Asia in January. And you saw the challenge that it was putting on supply chains and then China got into Chinese New Year, which is always slow, and then wasn't able to come back for a number of weeks after that. But they're ahead. And what we now see is that production from both the companies we source parts from, but much more importantly, really, I guess, in this case, our customers, is starting to come back. And I would say it came back in March quicker than we expected, mostly due to higher demand from customers really in the electronics ecosystem. And April continued to improve as a result of China production coming back. And we're seeing manufacturers have been pulling forward orders, in some cases, to reduce the risk of shortages in their supply chain. And so we've been, I think, very effectively managing this shifting demand at that time. But then there is, as we can all read, there's still shifting schedules on actually when production in certain large electronics businesses will ramp up. So certainly, that's somewhat in doubt as we look forward the timing of some of these things. But what we did see was a faster pickup in March than expected, continued ramping and then pretty aggressive action to make sure that companies were supplied coming out of this challenge. -------------------------------------------------------------------------------- Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [11] -------------------------------------------------------------------------------- Got it. That's helpful, Rob. And I guess maybe just following up on that comment and some of your prepared comments on consumer electronics, is it -- you said that your customers were -- wanted to make sure that you guys were ready when they were ready to kind of maybe turn the spigot back on from a CapEx standpoint. I guess at what point do you guys think you'll have visibility and what are maybe kind of -- what are some of the indicators you're looking for just from a timing perspective on when you think they'll be ready to make those types of decisions to really accelerate investment again? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [12] -------------------------------------------------------------------------------- Yes. It's a difficult question because normally, at this time of year, we have that visibility, and we don't have that at the moment. I think really the primary issue here is the ability to scale up manufacturing. And I think some -- and obviously, it's going on in multiple countries, so that's part of the challenge. But China, followed by probably Vietnam and Korea, are the key markets, and it's the ability for those markets to be ready to really scale up. And I do think it's not just a matter of getting people on site and processes on site, it's also a matter of their suppliers, sometimes who are our OEM customers, to be able to supply products to start-up, particularly what it would be large new products, which can be a big part of our business in this market. So I think it's going to happen. I'm very -- I'm confident of that. The timing of it and the magnitude of it, I think, are more in question. I sort of talked slightly about this at our last call when I said an issue can become as a window in which to implement certain new features, and if that window is shorter, it likely means fewer new features get included and new products that are launched. So any extension of that window can be helpful for Cognex. We can provide more engineering support and more technology and production. But obviously, it will mean the revenue that we're used to seeing in Q2 or Q3 is certainly going to be a second-half phenomenon for us this year. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from Karen Lau from Gordon Haskett. -------------------------------------------------------------------------------- Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [14] -------------------------------------------------------------------------------- Welcome, Paul. I want to ask on -- about project inquiry. I realize, in terms of sales, a lot of your -- it's impacted by your ability to deliver on site. I'm curious, when you look at your project inquiry from customers, are they still pretty robust across geography and end markets? It sounds like from a logistics standpoint, that's still pretty robust, but if you can provide some comments in terms of what you're seeing in terms of project inquiry. I'm just trying to gauge when things start to improve and these restrictions get lifted, how quickly can sales kind of bounce back, so... -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [15] -------------------------------------------------------------------------------- Sure. It's not really one answer, I'd sort almost go around the world and give you a range of answers here, Karen. I think, certainly in China, I think we've seen a very, as I hinted or talked about, we've seen a good ramping up of business activity in the last few weeks. And then in America, we actually saw decent activity until -- through March and even then we've seen that fall off quite significantly. And then Europe, a similar case to America, but more so, I would say, we saw really activity really fall off. So if one's to draw an analogy that Europe and America are like going to come back like Asia, we would see it start to come back as the market starts to open up. But of course, our businesses in these markets are very different. Asia is much more of an electronics business, so a lot of the demand there can be driven by ramping up of major electronics products that are slated for introduction around the holidays, right? While in Europe and America, it's much more of an automotive phenomenon. And certainly, the automotive industry, I would say, as I hinted out in my -- or as I mentioned in my prepared remarks, looks like it's much more seriously impacted at the moment than those others. So it's difficult to give you one answer. I would say we were perhaps a little surprised with how well demand in Europe and America held up through the end of -- in terms of activity through the end of March and even into April, but then we really started to see a decline and then the opposite picture in China coming out. We were quite, I think, surprised at how well activity seems to be picking up there post kind of loosening of restrictions. -------------------------------------------------------------------------------- Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [16] -------------------------------------------------------------------------------- Okay. Great. Appreciate the color. I guess -- and then on the project side, I was curious, are you seeing much push out and cancellation in projects across various sectors? So in other words, maybe as things start to improve, we start to see some pent-up demand come back, but a lot of these projects that we're in planning phase, they got halted. And so we're starting them with -- so it take time and that in turn creates some sort of an air pocket, whether it's in auto or logistics. Do you see -- are you seeing any kind of that like pause or cancellation right now that would give you maybe a bit of a risk of an air pocket down the road? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [17] -------------------------------------------------------------------------------- Well, again, it's a complex picture. I'll kind of go through the industries and kind of tick them up. You said, I think, correctly with logistics, I think we're seeing a lot of potential growth getting deferred later in the year and more intense interest. So we feel that's the best industry for us. In electronics, it's a difficult call, I think. I mean kind of how that's going to play out, certainly, second half phenomenon for us. I think in automotive, another way to sort of look at the automotive industry for us, which is a big part of our Americas and European businesses, MRO-type business, more maintenance, is really just very weak at the moment as plants are shut down and budgets are kind of put on ice. I would think that has to come back at some point as business starts to pick up. But then on the CapEx side, sort of the existing plants, also that, to me, looks pretty weak, relatively on-hold, awaiting plants to start-up. While strategic investments, I mean, things like new vehicles or electric vehicles, looks stronger, right? So I think that's probably the part of the business in automotive that is likely to be prioritized much as we prioritize most -- the most important long-term technology for us, I think we're going to see that in industries like auto as well. And then, yes, I think other industries, some of whom we deal with, we have a wide range of other industries like where we sort of might refer to them as packaging-type businesses in food and beverage, pharmaceuticals, medical devices. I think we might -- probably a phenomenon we see there is a slowing down of demand, basically, for the same issues that companies are operating under very restrictive situations where their workforce is very limited as what they can do. I think there -- those industries I would expect to be relatively strong whenever they start to come out of this situation because I think demand for them in some areas of their business is quite strong. We read about that consumer packaged goods strength, for instance, but -- and I think, therefore, we might see in that industry some pent-up demand where companies want to implement improved automation projects but just don't have the capacity to open their plants and bring us in and have us work with engineers when they're operating under social distancing. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question is from Joe Giordano from Cowen. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [19] -------------------------------------------------------------------------------- So I just wanted to make sure if I could square some of the commentary on consumer electronics. So you mentioned that China came back strong, electronics leading that, but also, at the same time, like, not having much visibility at all in terms of, like, the big builds from the major customers. So like what's driving that now? Is this kind of like ramp up of suppliers to those large players, like, you're getting them kind of ready for them to manufacture their parts? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [20] -------------------------------------------------------------------------------- Yes, Joe. I think we are all expecting 2020 to be a pretty strong year for electronics, particularly around 5G and other -- some of the other technologies that's planned for rollout. So I would say probably some of what we're seeing, the suppliers of those technologies gearing up production. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [21] -------------------------------------------------------------------------------- Got it. And then I just wanted to make sure I understood the comments on auto. So obviously, when these markets open up, there'll be -- car sales will go up, but obviously, that's not where you guys are. So talk about -- you mentioned the R&D type projects you expect that to come back, but not the traditional CapEx, maybe I misheard that. I was writing something down, so can you kind of go through that again? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [22] -------------------------------------------------------------------------------- Yes. Yes, I would -- I mean, I would say, if we segment it, this MRO-kind of maintenance business, right? If plants just shut down, that business is not really happening. Plants will open, that will probably come back, right? Then I think I would segment CapEx into 2 pieces. There's like existing plants, right? I think probably with the automotive industry in quite a lot of financial distress or challenge at the moment, CapEx in existing plants, I wouldn't expect that to come back very quickly. I think it will be challenged. Then there's other CapEx, which is really CapEx at -- on strategic projects, new vehicles and new technologies being implemented. Electric vehicles, of course, is one example of that. That business, I expect -- I see that remaining strong through this period. I think it's the future of the industry, and I don't think -- I think it's the things that companies will least want to compromise on. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question is from Richard Eastman with Baird. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24] -------------------------------------------------------------------------------- Welcome, Paul. Very -- just quickly to circle around and stick on the consumer electronics for a minute or two. Rob, the business in the first quarter were again strong in China and the rest of Asia stronger. Is your business there with some of the component vendors and assembly and some of the component vendors that were going to the final devices, given the applications that Cognex is involved in, and I'm thinking perhaps displays or some of those components that are going to end up in a logical place come fall, is that where the strength is, in particular outside of China? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [25] -------------------------------------------------------------------------------- Broadly speaking, Rick, yes. That's correct. So components, key components and technologies, particularly coming out of Korea and Vietnam, I'd say we've seen some strengthening of that in -- and we saw that coming, and it's continued. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26] -------------------------------------------------------------------------------- And just -- and related, does the scale up there, does it provide you with any sense of demand as you look forward towards the end of the year, given product strategies, product portfolios from your bigger customers? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [27] -------------------------------------------------------------------------------- Well, yes, it's difficult. Difficult call to make, really, I would say, because while one might say, yes, it seems like people are scaling up, experience working in this industry tells me that that's not necessarily the case, right? Some suppliers may be building capacity that won't be fully utilized, right? Others may see demand come on much stronger, and then we'll be hustling in the middle of the year to support increased throughput there. So I wouldn't necessarily draw a linear relationship between what we've seen at the beginning of the year and what we're going to see now at the back end of the year, but it has to be a positive sign. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28] -------------------------------------------------------------------------------- And just with the same kind of line of reasoning, did your COGS go down, given some Cognoids may be moving from traditionally from COGS over to your R&D? Is R&D up and COGS down because of your mix in the quarter? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [29] -------------------------------------------------------------------------------- , Paul, do you want to add this on to that? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [30] -------------------------------------------------------------------------------- Sure. Yes. No, really, I mean, the margin was mostly a product mix phenomenon. So we have a wide range of margins, all much healthier than my former employer, and that makes up our gross margin. It really was just a higher share of software revenue as well as revenue in consumer electronics, which comes in at higher revenue, higher margin generally. And then the revenue was also -- the share -- the margin was also improved in the quarter. That was really the big driver. I don't think there was a big difference in RD&E that hit OpEx versus hit COGS for the quarter. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31] -------------------------------------------------------------------------------- Okay. So in that -- with that reply then, the R&D from a dollar perspective, does it just run out pretty much at the current level. I mean run out quarterly? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [32] -------------------------------------------------------------------------------- Yes. I'd say broadly speaking, I mean, we have reduced our discretionary expenses. As noted in the call, we were down from Q4, and we expect to be down in Q2, and we think of that across all of our operating expenses. We don't do kind of line item differences in -- per se for RD&E versus SG&A. So we do expect them to be down sequentially, though, I would say, some of the factors are more likely to hit sales, such as reduced travel, for instance, in the quarter, is more likely to hit sales, let's say, than RD&E. But restrictions on hiring or discretionary expenses would be pretty broad-based, I'd say. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Next question comes from Nick Amicucci from UBS. -------------------------------------------------------------------------------- Nicholas Francis Amicucci, UBS Investment Bank, Research Division - Equity Research Associate of Industrials [34] -------------------------------------------------------------------------------- Welcome, Paul. Just a quick question. I just want to try and put a finer point on some of the commentary about the weak March month. Can we kind of get a magnitude of kind of the decline we saw in the U.S. and Europe, assuming China was a little bit better in March? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [35] -------------------------------------------------------------------------------- Sure. So your -- I think -- I'm not sure I'd describe March as weak necessarily, I think we were on the high end of guidance, but we did see a lot of both pulling in and pushing out of orders. So I might describe it more as noisy. And I guess it depends if you're measuring against our expectations as what we thought or whether you're referring to kind of year-on-year. So -- but I think in the Americas, for instance, we did see customers placing some investments on hold and canceling projects as a result of plant closures, distancing protocols, lower consumer demand. We certainly saw some of that. And we saw other industries in America holding up very well or even upping their demand from us, particularly in areas like life sciences and medical-related businesses, who obviously are seeing a lot of demand related to the current medical -- COVID situation. So -- but I'm not sure I necessarily answered your question. -------------------------------------------------------------------------------- Nicholas Francis Amicucci, UBS Investment Bank, Research Division - Equity Research Associate of Industrials [36] -------------------------------------------------------------------------------- Well, yes. I mean, I was just kind of looking at the U.S. and Europe, like, down double digits year-on-year, both geographic areas. So just trying to get a gauge of if that was kind of in the March month, just an order of magnitude, how it kind of was impacted by the shutdown? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [37] -------------------------------------------------------------------------------- Yes. I think if I'm to put -- give another explanation, another way of looking at it would be automotive, right? I mean I think we really saw a deterioration in automotive, which we didn't see in other parts of our business in Americas and Europe as we came through March and into April. -------------------------------------------------------------------------------- Nicholas Francis Amicucci, UBS Investment Bank, Research Division - Equity Research Associate of Industrials [38] -------------------------------------------------------------------------------- Okay, great. And then just kind of -- when thinking about the pushing and pulling, acceleration and delaying of orders, from the lanes, have you guys received any full on cancellations of orders? Or is it just kind of indefinitely delayed until we kind of get more clarity? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [39] -------------------------------------------------------------------------------- Certainly -- yes, certainly, we're seeing some cancellation of orders, not a large amount or anything, but it's -- certainly some customers have canceled orders and then definitely delays. And I described the delays as short-term delays. But literally, in a number of cases, we've shipped product out to plants and they've been -- and then when they arrive, the plants are closed, right? So they're coming back in some situations like that. And in other cases, as we mentioned, they're getting accelerated, really, where I think customers are worried about being able to maintain production and getting our product as soon as possible, perhaps concerned that companies like us won't be able to supply on a regular basis. We're not concerned about that. But I can see, among our customers, there is a sense that perhaps as we do in our own personalized, there's a hoarding phenomenon kind of going on and thinking that supply chain for electronics may be elongated, and they need to make sure they're getting theirs before lead times go out. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Andrew Buscaglia from Berenberg. -------------------------------------------------------------------------------- Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41] -------------------------------------------------------------------------------- I wanted a quick clarification on just gross margins going forward in that you -- it seems as though electronics is picking up, you're seeing some better mix. So you might have said this, I might have missed it, but just why is there a -- why a sequential decline in gross margins? And then presumably, if you -- if things improve towards the back half of the year for that segment, do you think you can grow them this year, year-over-year? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [42] -------------------------------------------------------------------------------- Sure. Yes. Andrew, this is Paul. Yes. So our gross margin of 75% in Q1 were obviously high and driven primarily by just the mix of business, higher electronics. And then even just particular subsegment mix within that, the mix of different products and so on as we have quite a range. Going forward for Q2, we do expect them to be lower. And again, that is largely a mix phenomenon. As we talked about some deferrals of logistics revenue, logistics is a strategic priority for us. It comes with improved margins over time but still dilutive to our base business. So as that continues to grow, we will see some margin pressure. But overall, we expect to be roughly in the sort of mid-70s range that we've been historically. -------------------------------------------------------------------------------- Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43] -------------------------------------------------------------------------------- Okay. Got it. Okay. And sort of a comment that a lot of people are making on throughout this whole crisis is the new normal once we emerge. Are you guys hearing anything around the trend towards reshoring that seems to come up as -- you'd be a long-term beneficiary of that, but curious if you had some conversations yet to date on that? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [44] -------------------------------------------------------------------------------- It's Rob here. I would say there are a lot of potentially very positive things for machine vision, kind of when we come through this crisis, but I wouldn't list the reshoring of manufacturing as very high on the list in terms of what we're hearing or in terms of -- my own views about it. Clearly, e-commerce fulfillment will benefit from this situation, right? And logistics will become increasingly automated and with more flexible operations. And even in the short term, I think people don't want to be sharing touched items like handheld barcode readers, and Cognex has the best fixed mount barcode readers in the world. And I think we're seeing more interest in them replacing handheld barcode readers. So those are kind of some things one sees. I think, certainly, visual inspections in manufacturing with large groups of people kind of sitting close together as you see in China, certainly, that's a phenomenon, I think, which is likely to play to automation and operator-free manufacturing. So basically where we're replacing eyes and brains in manufacturing with robots and automation. I'd say, obviously, medical applications I think probably will be a beneficiary of what we're seeing as well. We've been working for many years on the life science market. And it's been a long road for us, but one where we've developed a lot of really good customer relationships and a lot of important design wins. And we think there that, that will also be a market that will be better and better for machine vision and will benefit from what we can bring and where deep learning has a role to play, replacing kind of lab technicians and more quickly automating. So -- and I think probably, also, this is something we've all observed, living through this is that connectivity is really important. So whether it's 5G or what kind of electronics things we're seeing and the kind of drive we're seeing in the semiconductor industry right now is -- can only be, I think, accelerated as a result of all of that. So a lot of very, very positive things. I don't see a global movement towards reshoring as a result of this, but I would not claim to be an expert on that subject. And then obviously, to temper all of that, I think, automotive is likely in for a prolonged slowdown. And so I think that will be a drag on a lot of the very positive things we expect to see coming out of this situation. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question is from Paul Coster from JPMorgan. -------------------------------------------------------------------------------- Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [46] -------------------------------------------------------------------------------- The last question really kind of got to the point, I think, on the new normal. So many of my questions have been answered, Rob, but just a couple of things. You seem to believe the auto industry is going to take longer to come back, it's just -- is that simply a function of just how much stress there is on their balance sheets and that they'll be constrained in investing for a period? Or do you -- have you -- do you also believe that the (inaudible) to EV transition is going to take longer for some reason? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [47] -------------------------------------------------------------------------------- Yes. Well, I would say, what's making me say that conversations we're having with customers, certainly, Tier 1 suppliers and brand owners who were -- had a difficult year last year, and I think we're all expecting to see that business sort of turnaround optimistically in the back half of this year, and I think we no longer think that's going to be the case. So I think that's one factor. Another factor would be, I have to believe that consumers are going to have less cash to spend and less ability to take out loans to buy cars as a result of this. So I would imagine, and my sense is from the conversations I've had in the industry that that's got to be weighing on people's minds also. If there's a countervailing factor to that, though, it may be -- there may be government stimulus, and I have read certainly -- and there's no particular insight I have into this other than just reading and being in the industry is some major automotive businesses are pressuring governments to try to implement buying back of older cars and investing in stimulus around electric vehicles. So that's a general sense, but I really have no clarity on that subject for you. -------------------------------------------------------------------------------- Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [48] -------------------------------------------------------------------------------- All right. Got it. If this recession lasts for more than one quarter and is deep for more than one quarter, obviously, there could be very lasting consequences. But I mean, generally speaking, Cognex' view of its long-term growth opportunity, how much has it changed as a result of what we're going through at the moment? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [49] -------------------------------------------------------------------------------- Difficult to answer, but I would say it hasn't. It hasn't changed, we're still very strong believers in machine vision and the importance of automation and the growth of automation and the role we have to play in it. And those kind of -- those growth drivers that we discussed at Analyst Day and since things like deep learning, logistics, 3D, Industry 4.0, we think those are all intact. And I also think the strength of Cognex and our balance sheet and our willingness to invest for the long term ought to mean we're in a better position than most of the industry as we come out of this. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- And our next question is from Jairam Nathan from Daiwa Securities. -------------------------------------------------------------------------------- Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [51] -------------------------------------------------------------------------------- Just firstly on -- just going back to the SG&A expense a bit here, you mentioned in the Q that there was some reallocation to regions with higher labor costs. And at the same time, it looks like U.S. and Europe are probably -- you see lesser opportunities for growth there. So can you kind of explain that comment a bit more? And then I had a follow up. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [52] -------------------------------------------------------------------------------- Yes. Yes. Is your question about our expenses in those markets or how we're investing? Or -- I'm not quite sure what you're asking. -------------------------------------------------------------------------------- Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [53] -------------------------------------------------------------------------------- Yes. So in your Q, you mentioned for SG&A expense, you saw an increase, and some of that increase was related -- you said it was related to sales resources being shifted to higher -- to regions with higher labor costs. At this -- and so I (inaudible) -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [54] -------------------------------------------------------------------------------- No, no. I don't -- yes, thank you. I think, probably, I'm sorry if we confused you. So it's not necessarily sales resources moving geographically, it's moving functionally. So for instance, certainly, we've -- we're fortunate at Cognex to have a lot of very talented sales engineers who have deep knowledge of machine vision. So we're pretty used to reallocating them dynamically to areas where we see growth opportunities. So we might, for instance, have been -- we've been moving them towards logistics and away from automotive. That's -- I think that's probably what we were trying to get at. -------------------------------------------------------------------------------- Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [55] -------------------------------------------------------------------------------- Okay. Got it. And as a follow up, just wanted to understand, given the situation, are you seeing more favorable or attractive M&A opportunities, which, given your balance sheet, you can take advantage of? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [56] -------------------------------------------------------------------------------- I think it's probably too early to say that. But you're right, we have a very strong balance sheet, and we're not afraid to be opportunistic. And certainly, we spend a lot of time studying and thinking about acquisition opportunities in the market. But I think anyone who's covered Cognex for a long time knows that we're very selective about the companies we acquire. And some of those companies that I think perhaps have weaker balance sheets or might be challenged by the current environment not necessarily companies we would want to acquire there, they wouldn't fit well within our high gross margin, high-performance, move-fast kind of culture. So I wouldn't expect us -- to see us making any kind of large bolt-on acquisitions with many, many hundreds of people. That's -- if you look at the acquisitions we've made, it's more around technology companies with great engineering, great products, et cetera. There are plenty of those, but it's not clear to me whether they're becoming more actionable as a result of what they're seeing. But when -- if and when they do, you can bet we'll be looking at them. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- And our next question is from Josh Pokrzywinski from Morgan Stanley. -------------------------------------------------------------------------------- Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [58] -------------------------------------------------------------------------------- Welcome, Paul. Just a question on electronics. I guess with some of the -- some customers now telling you to be ready, presumably, it comes with a little bit of detail on kind of ready for what? Any sense, Rob, on how 5G or some of the other newer technologies add to Cognex' kind of area of opportunity or content in a plant? I know the ambition is to get more over time, and there's other stuff that can do that, but is there anything about this new product generation that's coming out that is another kind of step-function shift for Cognex, kind of like we saw with OLED back a few years ago? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [59] -------------------------------------------------------------------------------- Right. Yes, thanks for the question. I don't think our view about this topic has changed over the last 6 months in general. I mean I think we're very connected to the large players in the industry, and we see some of the challenges that exist with 5G or challenges around the power requirements of 5G technology, the danger issues around batteries, et cetera, handling those and inserting them the -- some of the new sensors and screens and foldable screens and all those things that we've been talking about for a while. So I sort of see those things as kind of making progress and automation kind of gearing up to be able to implement what's in product roadmaps. I think more of the issue changing coming out of this is the magnitude of that in the second half. That's maybe a more difficult thing to call. You have to think that -- I have to think consumers would be less ready to spend on high-end technology and new technology as a result of this, but I'm no expert on that. So I think we see quite clearly that machine vision has a key role to play in the implementation of 5G technology and new technologies coming into electronics. I think the question is the timing and the magnitude of that. The timing, clearly for us, is second half. The magnitude is still a little unclear. And I wish last year -- last few years, we've been able to give you quite a lot of clarity at this stage. And it's different this year as a result of what we're seeing in the global health situation. -------------------------------------------------------------------------------- Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [60] -------------------------------------------------------------------------------- Understood. And then just shifting over to auto. Rob, can you talk a little bit about customer diversity there? You mentioned kind of a more shallow recovery, maybe some challenges in the industry. I would imagine some smaller or weaker players might not survive. Clearly, in the last couple of years, there's been kind of an explosion of newer car companies, particularly in China, maybe not as impacted. But can you talk a bit about how well you feel like you're diversified? And if you do see some players go away, if that ends up being an issue or more of a temporary setback? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [61] -------------------------------------------------------------------------------- Yes. Cognex is very, very globally diversified in terms of dealing with really all the major Tier 1 suppliers and really all the major end-user brands. We're less well-penetrated geographically in Japan, as you might expect, but we have strong relationships and would be on the preferred supplier list of almost every automotive brand, OEM and Tier 1 supplier globally. So I think we're in good position there. I think if weaker companies fail, I am no expert, but I would say they may get acquired by other companies, and I think that, that should play out well for us, given what we've seen happen in the industry over the last few years. And then I think machine vision is a very important technology for manufacturing lithium ion batteries, right? And we all know that, that's a key enabling technology for electric vehicles. And capacity is growing very quickly, and costs are coming down very quickly. And it's a very intensive process, in some cases, 30 different steps, most of which involve machine vision. So those are markets, I think, that should be very strong for us. And I think that's a long-term phenomenon with at least 6 global players competing for process capability and technology to win. So I think that's a long-term phenomenon that we should be well positioned, and our industry should be well positioned to go on benefiting from for some years. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- And we have reached the top of the hour, therefore, we have reached the end of the question-and-answer session. And I will now turn the call back over to Dr. Shillman for closing remarks. -------------------------------------------------------------------------------- Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [63] -------------------------------------------------------------------------------- Thank you. As I've mentioned, our strong balance sheet, our culture and our focus on the long-term will enable Cognex to weather the current disruptions better than most companies. But business is not likely to improve until lockdowns end. In that vein, we urge governments to better balance the risks of COVID with the disastrous effects that lockdowns are having on our economies and on our lives. Thank you for joining us tonight. We'll speak with you again on our next quarter's call. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.