Saturday, February 15, 2014

Digesting 2013 results from Cognex

On Feb 13th Cognex released some impressive full-year results, so why did the stock price dive 9% on the 14th?

I have a theory, but explaining it requires a quick look at the reported numbers:

For the full year, revenue grew 9%, to $354m, and income increased 8% to $73m.

Good numbers to be sure, but those of you who grasp the difference between fixed and variable costs might wonder why income grew less than revenue. Shouldn’t it have been the reverse?

The answer, in my humble opinion lies in the RD&E and SG&A percentages.

Taking RD&E (Research, Development and Engineering,) first, spend jumped 17% from Q4 ’12 to the same period in ’13. If you follow the job listings on LinkedIn this will not have been a surprise: it’s clear that Cognex has been growing their engineering strength for some months. This is clearly A Good Thing and hopefully will lead to some new products in 2014.

The 18% increase in SG&A (Sales, general and Administration,) I find a little harder to swallow. Apparently some of this resulted in higher commissions. Really? Aren’t commissions just a straight percentage of selling price? Why should they rise faster than revenue? And let’s not forget that Cognex sells mostly through distributors rather than having their own sales force, like say Keyence. Leaving aside the fact that this strategy is killing them in the Vision, as opposed to ID reader, market, why should costs rise with revenue?

Okay, so that point has me baffled, but why should the stock price drop?

Well here’s my theory: stock prices are driven by expectations of future growth. These are reflected in the price to earnings ratio, which at 46 is still sky-high, so it’s not like people are giving up on the company. Clearly though, more investors decided to sell than to buy.

There were some patches of bad news in the results. Surface inspection, Japan, and semiconductors are all struggling even though there’s lots of growth coming from ID readers. More interesting though was Dr. Shillman’s comment during the investor conference call. (You can find a transcript at

Dr. Bob said Cognex was going to stop talking about future product activities because they were giving away too much information to competitors.

Isn’t that interesting? R&D spend up, concern about competitors. This suggests the winds of change are blowing through Natick. Competitors are bringing some heat and Cognex have decided it’s time to up their game.

Good for them. I’m looking forward to learning about some great new products!

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