Tuesday, July 30, 2013

Time to look at Cognex

With the half year results reported Monday evening, it’s time we took another quarterly look at the machine vision behemoth.

Eroding margins?

Dr. Bob put a positive spin on it, but I see little to celebrate when income (profit) drops while revenue (sales) grows. Surely incremental revenue gains should produce significantly larger growth in profit?

Well let’s take a look at the numbers, and then I’ll offer my perspective.

It’s my belief that the numbers for a single quarter don’t tell us much, but the half year is more informative. So, compared to the first half of 2012, Cognex grew revenue $5m to $167m, but income fell $1.6m to $32m. Okay, they’re still very profitable, but not quite as profitable as previously.

Costs are higher

Dr. Bob says this came about because of increased product development spending and expansion of the sales force. (Though by my calculations they’ve only added about $2m in cost, which works out at around a dozen machine vision hardware and software specialists.) I think we heard that at the end of the first quarter too, and while I understand you have to sow before you can reap, it would be good to see a few green shoots.

New products and markets

Besides a few references to the growth of ID readers (now 25% of revenue,) and a new retail customer using the Dataman in logistics, there’s not much in the formal report about where this will come from. But if you do like me and read the earnings conference call transcript, (available at www.SeekingAlpha.com and accessible through Yahoo Finance,) you’ll learn a little more

At that call CEO Rob Willet said he sees life sciences as a big potential market for barcode reading. And given all that’s happening in pharma with “Track and Trace,” that makes sense to me. Obviously there are regulatory hurdles to be overcome, but with that hint it doesn’t take much to see millions of “image engines” reading code sprinted on test tubes of blood and other fluids.

Also at that call, an analyst asked about the success of their 3D product. Willet replied that it’s going well with some wins in automotive, but he seemed more interested in the emerging opportunities in consumer products and especially food.

The future?

I got to know Cognex because of their capabilities in the industrial machine vision market. Increasingly though, it seems to me they’re moving away from inspection to focus on code-reading. That may well turn out to be a wise move, but I wonder if it’s also like when IBM got out of the PC business. We old-timers will look back and say “Do you remember when Cognex made vision systems?”

I guess time, and perhaps the Q3 results, will tell.

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