Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard Morin - CFO

Robert Shillman - CEO

Rob Willett - President of MVSD

Analysts

Richard Eastman - Robert W. Baird

Antonio Antezano - Macquarie Research Equities

Chuck Murphy - Sidoti & Company

Jim Ricchiuti - Needham & Company

Jim McCrery - Newburger Burman

Cognex Corporation (CGNX) Q1 2009 Earnings Call May 4, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Cognex First Quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions). I would now like to turn the call over to Richard Morin, CFO. Please go ahead, sir.

Richard Morin

Thank you, and good evening, everyone. Earlier tonight, we issued a press release announcing Cognex's earnings for the first quarter of 2009. For those of you, who have not yet seen this report, the copy is available on our website at www.cognex.com. The press release contains detailed information about our financial results and because of that we are not going to repeat most of that material.

During tonight's call, we may use a non-GAAP financial measure, if we believe it is useful to investors or if it we believe will help investors better understand our results or business trends. For your reference, you can see the company's income statement has reported under GAAP in Exhibit 1 of the earnings press release and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit 2.

I'd like to emphasize it any forward-looking statements we made in the press 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, and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings including our most recent Form 10-K for a detailed list of these risk factors. Now I'll turn the call over to Bob Shillman.

Robert Shillman

Thank you, Dick, and good evening everyone or if you’re on the West Coast, where I am, good afternoon. I'm here now in our office in San Diego. Joining me is my partner and President of MVSD, Rob Willett; who will take some of your questions as well. Well, as you can see from the press release or if you don't have it in front of you, we reported revenue of 42 million for Q1, which resulted in a loss of $0.09 per share. These results represent a significant decrease from the results we reported for the first quarter of 2008 and the prior quarter, and the results are due to the very difficult business climate.

Looking at the top line, we experienced significant declines in revenue year-on-year from both the semiconductor and electronics capital equipment market or SEMI as we call it, and the factory automation market. Revenue from both of these markets also declined on a sequential basis as did the revenue from the third market we serve, which is Surface Inspection.

The highlights, or in this case the lowlights for each market are as follows; in SEMI, bookings were approximately $500,000 for the month of March. The setup is just basically dead. In the Surface Inspection market, for quite a while our business seemed fairly resistant to the economic environment. However, that changed at the end of the first quarter when we saw a softening in actual orders booked. And unfortunately, that trend has continued so far in Q2.

Our salesmen tell us that the [Libra] product is still there and we have won a number of projects. However, the funding is being held up at the Board of Senior Management level as those customers are just waiting to see, what are the impact that the economic conditions is going to have on this specific business.

Finally, in factory automation, which is the third and largest market segment that we served, was helped in this quarter by 4.4 million of deferred revenue that we recognized upon completion of the single customer contract.

Excluding this deal, revenue in all four of our primary geographic regions declined on both the year-on-year and on a sequential basis. The largest decline on absolute dollar within Europe, where business has held up fairly well through the end of '08 but dropped off significantly after the New Year.

That's the end of my prepared remarks about revenue. It's just frankly too depressing to talk about it any further. If you need more details, we’ve provided various revenue breakdowns in Exhibit 4 over the earnings press release that we've just issued. And of course, we're happy, not happy, but we're certainly willing to address your questions during the Q&A session.

Now I'm going to switch the discussion to things that we can control. At the top of that list is managing expenses. Over the past six months, we've taken steps to more closely align our costs to the lower level of business. The cuts that we made were primarily in our marginal businesses division, which is the area of our business that has experienced the sharpest decline. Those cuts were deep, but we did not go so far as curtailing, or delaying those projects that we believe are crucial for our long-term success.

The initial benefits were apparent in Q1, excluding stock option expense, the combined total of RD&E and SG&A declined 2% year-on-year and 6% from the prior quarter. We expect RD&E and SG&A to further decline over the next two quarters as the actions we've taken work their way onto the P&L.

Our most recent cost reductions were announced two weeks ago, and they include the following areas: we eliminated approximately 85 employees and contractors; we made cuts in certain executive salaries; we cancelled most current open positions; we added additional days to our mandatory shutdown schedule; we'll be reducing leased office space; we lowered our 401K contribution match; and made cuts in discretionary spending.

These actions are in addition to those that we announced in November of last year, and our estimate of the combined savings from these new cuts plus those that we took in November is approximately $21 million on an annualized basis.

Next on the list that we can control is prioritizing our objectives. Despite our cost reductions, we'll continue to invest in the ongoing strategic initiatives that we believe hold the greatest promise of our future growth. And there are three of them that I'm going to talk about. The first one is Mitsubishi, which we believe will increase our sales for factory automation in Japan, which is the world's largest factory floor market for machine vision.

In March, we introduced the Cognex In-Sight EZ product line to Mitsubishi's distribution network at a joint press conference, and it was received very well by the media and by the distributors who were in attendance. We're in the process of training and certifying these distributors, and I'm happy to say the three have passed all of our tests, which are rigorous and we'll be distributing our products very shortly.

On the engineering side, a project that is very important to us is the development of our vision system on a chip, VSOC and we just got word from the fab that the yield is above our expectations, so things are really on schedule and that we're very pleased with that project.

Next, we rolled out several new products since the beginning of 09. We introduced DataMan 200, which has Ethernet connectivity and also liquid lens to our DataMan line of industrial leaders. Ethernet connectivity is unique to our product in an [IV reader] of that size. It enables easier integration and faster communication between the reader and thee plan controllers and the information networks. DataMan 200 is also the only fixed mount reader currently using this new technology called liquid lens. This lens greatly reduces setup time and maintenance.

More importantly, it increases the distance from which a (inaudible) can be read. Excuse me, which has been a limitation on image-based readers. In far more applications now, DataMan 200 will be able to match the reading distance of laser-based readers, which are the predominant means of reading codes today in which we expect to be displaced by image-based readers in the near future. We introduced the new product of Checker called the Checker 3G, which is the next generation of our Checker.

It enables users to set up and change jobs right on the line and have them running in a matter of minutes all without the use of a personal computer. This will save manufacturers time and money and it can be quickly and easily done even by a novice user. And we added features to our VisionPro software product such as color capabilities, and In-Sight Micro product lines also have color now to broaden the product offering and to bring out the incremental revenue.

The third area that we can control is our culture; we are very careful when identifying cost savings, not to cut those areas that would affect our culture, which is one of our unique spreads. We'll continue to host events such as Cognex Night at the Movies, Ask the President, and we'll continue to give President's awards to our top achievers and run President's Club for our top salesmen.

Employee morale has always been a key focus of mine and my partners, and it's even more important today given the downturn. Just being happy to have a job is not good enough. We're working hard and fast on important goals, and we need a team that is energized and motivated in order to achieve those ambitious goals.

The fourth item that we have some control over is the preservation of our cash. In addition to the cost cutting measures that I just described, our Board of Directors today cleared a quarterly cash dividend of $0.05 per share, lowered by $0.10 to the $0.15 we paid in the prior quarter. Of course, our shareholders are disappointed by this in particular, especially myself, being the largest shareholder, who has very little other income, certainly no salary.

Nevertheless, this is unfortunately is necessary because the current level of business simply does not support 15% share dividend. This step alone, cutting the dividend, will save us approximately $4 million per quarter. We're in an enviable position of having a strong balance sheet with a large cash reserve, and it's prudent for our long-term success to maintain that reserve.

Overall business conditions today are dismal. Customer demand continues to decline, visibility remains limited, and I don't see any sign of sustained improvement in the near future. Given those facts, we're not going to give revenue or earnings guidance for Q2 other than to say that we expect revenue to decline both year-on-year and sequentially in Q2, and that we believe, we now believe we will report a loss for that quarter.

In fact, unless there is any kind of improvement at our current run rate, it's unfortunate, but it's likely that we'll report a loss for the entire year. We've seen tough times before, nothing quite like this, but we've managed through them very well. We are confident that with our leading-edge technology, our aggressive sales force, our trained distributor, our strong balance sheet that we're in a very strong competitive position and there is no question that we're going to weather even a very long economic downturn.

That's the news from here. Even though it's sunny outside here in California, the economic climate continues to be dismal. And we hope to report better news to you sometime in the future. At this point, I'll wrap up our prepared remarks and open the call for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Richard Morin

I have a question, operator?

Operator

Go ahead.

Richard Morin

Where are the questions?

Operator

The first question comes from Richard Eastman from Robert W. Baird.

Richard Eastman - Robert W. Baird

Hi. Just a couple of things. One, Dr. Bob, the VSoC product as it makes its way yields good coming out of the fabs, is there a ready market there for that product? Do we have anything contractual established? Are there any revenue volumes or is it basically going to be piloted at this point into various products?

Robert Shillman

Thanks Richard. That's a very good question. The first use of VSoC is planned in one of our own product. It's going to be in one of our readers, I don’t want to give too much detail on this. But the ID group is already designing a product, it will take VSoC. Other than that, we do not have any contractual commitment with anyone yet, and we didn’t expect to have any.

We are holding discussions with some potential high-volume users, but I believe that is going to probably two or three quarters away before we can have an announcement. Then, I believe it's partly based on those customers and I'm really assuming this, because I haven't spoken with them on their interest in the technology and what they've seen, but they want to wait and see, if we can produce this chip in volume.

Richard Eastman - Robert W. Baird

Okay. Also on the factory automation side of the businesses $4.4 million of deferred revenue, I wasn't aware that you had that type of project in MVSD, [our Congress] assuming to see something necessity? But is that at unusual or will that recur where we are differing revenue?

Robert Shillman

Well. It's highly unusual and it's due to what I believe are ridiculous rules and requirements for revenue recognition. We’ve been shipping this product, I think for over a two-year period, and had shipped probably 90 or 95% of the product in 2008, yet the auditors, because of a strict interpretation of the rule and the way the first set of auditors were interpreting the rules, we had to follow that and we weren't allowed to recognize a penny of revenue until that last 1% was shipped.

This is a problem with the revenue recognition rules and that's what I can tell you. I think we're facing one more. There's one more on our books where we’ve shipped just about everything, but a very strict reading of the contract and the customer says hey we're all set and they paid us for everything. We haven't recognized it yet. It's one of the largest (inaudible) too many bureaucrats get involved.

Richard Eastman - Robert W. Baird

Is that one of the largest single pieces of business you had in factory automation?

Richard Morin

Let me put a little bit of additional explanation on that particular thing. This happened to be a very special contract with a customer wherein we provided custom-type product. Not anything that we sold on a normal business and because there was a combination of software and hardware under the accounting rules, we did not have what is considered vendor specific objective evidence of the various pieces in the contract. As a result, here at MVSD, we had to wait until the contract was completed, which Bob mentioned we began shipping I believe it was midway through 2000 and 2007.

Richard Eastman - Robert W. Baird

Okay.

Richard Morin

We have at least one other similar contract where it is another situation where we are providing customer-specific software updates or whatever. We're selling both software and hardware. Again, we do not have the required vendor-specific objective evidence for all for this multi-part contract, and therefore, we have had to defer revenues. That second piece, we will not be, recording unlikely that we'd be recording any revenue in 2009. It'll be 2010, the earliest that we can record a revenue on that one.

Richard Eastman - Robert W. Baird

Okay, all right. Very good, and the one last question. Just on the gross profit margin I know this would be in your queue, but the MVSD gross margin must have declined substantially and is that just again a function of throughput, assuming SISD was about the same?

Richard Morin

Now, SISD had a decline during the quarter as well. Well, part of the overall decline is, SISD represented a greater percentage of total revenues.

Richard Eastman - Robert W. Baird

Understand, yes.

Richard Morin

Secondly, SISD gross margin declined. A couple of the larger orders that went out where we had a lower product margin on those due to competitive situations. We also had some inefficiencies in the service area. We started up a new service agent in China, so we had some inefficiencies.

On the MVSD side, we had two things that really affected the MVSD gross margin, one of which Rick, as you mentioned was the lower level of throughput. Secondly, we also had incrementally, an increase in the charge for excess and obsolete inventory in the quarter.

Operator

The next question comes from Antonio Antezano from Macquarie.

Antonio Antezano - Macquarie Research Equities

Hi, I was wondering, in your guidance for sequential declining revenues, given the stabilization some of the market area that we've seen and some other companies talking about a [bits] in some of the micro data that we've seen and some other companies talking about a bit, probably more stable business in the second quarter. What areas do you see a sustained weakness that is driving this guidance for a sequential decline in revenue?

Richard Morin

Well, the first thing that's going to happen, Antonio is, in factory automation we're not going to have the $4.3 million of deferred revenue on that particular contract that we recognized in Q1. So right away, you can wipe that off the board. What we've seen so far is that our bookings on the factory automation side are lower than where we were in Q1. At this same period in time, SEMI continues to be soft. We do expect that SISD revenues in the second quarter will be higher than they were in Q1. But the combination of factory automation being down and loosing the on just the straight bookings level and not having that 4.3 million of deferred revenue, I think that will more than offset the increase that we're expecting on SISD.

Antonio Antezano - Macquarie Research Equities

Right. And then, regarding the savings of, I expect to save 21 million. How should we think that in terms of timing, when should we get to that run rate?

Richard Morin

Well, the entire 21 million being a run rate that is what we expect it to be, that we'll see in 2010. What you'll have in Q2, we do expect that our total operating expenses will, if you exclude the one-time charge that we're going to have, the restructuring charge that we're going to have for severance that we have to pay during the quarter, and certain lease termination costs, other than that, we do expect that OpEx will decline quarter-on-quarter, second quarter from the first.

Antonio Antezano - Macquarie Research Equities

Final question, Dr. Bob, if you could comment on the departure of Eric Ceyrolle from the company?

Robert Shillman

Yes. Eric was a very, is, or was a very valued employee. He had been with the company 18 years. He was trained by my partner and currently Board member Pat Alias. And a great sales leader, a very enthusiastic individual, a very hardworking and he had told us about a year, year and a half ago that he wanted to do something else, he wanted to return to Europe, both he and his wife like Europe.

They prefer their lifestyle in Europe than in the United States and although we were able to keep Eric onboard for longer than he initially told us. It wasn't going to last. He is ready to go back to Europe. He wants to sail the world. You may not realize this, but the social benefits provided by, France and other such socialistic countries don't give you much incentive to work.

I believe, I won't say the number. But for a number of years, they continue to paying salary or very close to your salary without you having to do anything. So, it's hard to compete in a world where people are paid to not work.

Antonio Antezano - Macquarie Research Equities

All right. Thank you. I'll go back to the queue.

Operator

The next question comes from Chuck Murphy from Sidoti & Company.

Chuck Murphy - Sidoti & Company

How should we think about cost savings, the breakdown between cost to goods and then OpEx?

Robert Shillman

I'm sorry, Chuck, that's a great question for Dick to answer. I just want to expand a little on Antonio's question. Although, we're losing a great guy, he had built, he and Pat had built a superb sales management team that knows how to manage direct salesman and also distribution.

Although, we’re ultimately going to replace Eric put someone in that role. Right now, Rob has decided he wants to get more involved with the sales leaders around the world to get a handle on who is the best person out there and what they are up to and what customers are up to. So we're seeing this as an opportunity for Rob to get more closer to the customers than the sales force, so he'll be able to make a decision.

So we do have people that we think can fill the role, but Rob doesn't want to put anyone in that role quite yet, but I think that all the entire company is very confident although Eric's departure is unfortunate and we'd love him to stay that he is built a great organization and we've spoken to all of them and there is stability in house and we're going to be able to do quite well. Chuck if you can repeat that question for Dick and he'll take it.

Chuck Murphy - Sidoti & Company

Dick, just kind of the breakdown between cost to goods and OpEx for that $21 million in savings?

Richard Morin

That's a little difficult to do but I would guess that out of OpEx, the biggest, out of COGS rather the biggest savings will come from having shutdown the manufacturing and distribution center in Georgia and out of the $21 million when I look at that plus other savings that we're getting in other parts of our manufacturing operations that's probably $3.5 million to $4 million worth of the total savings and the rest comes out of OpEx.

Chuck Murphy - Sidoti & Company

Okay. As far as the first quarter's numbers go, just trying to get kind of a run rate for the business; if I just exclude that million for the intangible write-down and then the restructuring of 300,000, I mean is everything else kind of normal?

Richard Morin

Well, we would expect that our operating expenses would decline from the first quarter simply by some of the cuts that we've just announced. Of course, the restructuring charge in the second quarter will be significantly larger, in that it will include some of the remnants that came through from what we did in November.

What you'll have is the remaining people in Georgia that will be let go the lease termination costs, et cetera, with that facility. That will all hit in Q2. Plus you'll have the severance, et cetera, that we're paying, and lease termination costs that we're paying in Q2 so that the restructuring charge we anticipate will probably be somewhere, $4 million to $5 million in the second quarter.

Chuck Murphy - Sidoti & Company

Okay. A question for Bob; in the past you've talked about the SEMI business being cyclical declining. I mean, I have to imagine that this very low level that at this point is probably more of a cyclical issue, or is there something more serious that it could still go down from here?

Robert Shillman

Well, it's hard to see how it can go down [by time], it's very depressing. It's down for three reasons; number one, SEMI was in its cycle, in its downcycle, that’s the first reason; the most serious reason is that fabs are running way below capacity what I understand and they are not buying any capital equipment, because of the slowdown in the economy.

The third reason is that most of the customers that we have or had in the past even have switched from buying a mix of hardware and software from us, to just buying software, which is a much lower, has a higher margin, but much lower cost or much dollar value. So the combination of those three is not a pretty picture.

It's fortunate that we have other opportunities for machine vision and data collection that that they do have significant upsides to them. I don't think we will, certainly if the economy recovers or when it recovers, it always will, we'll see better revenue than we have now. But it's never going to be, I believe more than 10% or 15% of Cognex's business ever in the future.

Chuck Murphy - Sidoti & Company

Okay. My final question, regarding the dividend, any thoughts on when you might be able to take it back up or is that even the plan in the future if things improve? Or would you be looking for different opportunities at this point?

Robert Shillman

No. The plan is always to adjust the dividend consistent with the economic climate and the cash flow and frankly it look when we started with the dividend, maybe be four years ago, my suggestion was that, let it be more of a profit sharing plan. But the argument of the time was, no, people who buy dividend stocks, want a dependable amount of money.

I think of a profit sharing plan makes more sense, but if that's not what the world wants, that's not what the world wants. But to answer your question, when business improves and it will, none of the things down stay down and it's our job to make sure it improves somehow of its level and we will increase the dividends. The shareholders buy this, and invest in Cognex after two reasons.

Potential upside on the stock and for the rate of return, and so I'm sure that we could use the money, so I'm always in favor of increasing the dividend subject to it being the right thing to do for the company.

Operator

Your next question comes from Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

The $4.4 million not to be the dead horse I'm just wondering did any of that, was it concentrated in one geographic region or was it spread across a few?

Richard Morin

It is with one customer, one particular contract, and in one very specific geographic region being Japan.

Jim Ricchiuti - Needham & Company

Okay, and that's helpful. What I'm wondering is it, the rate of decline has clearly slowed, it looks like in the Americas. Do you guys see much of a bottoming there?

Robert Shillman

I assume, I can tell you that. I study these charts on a daily basis. We get very detailed reports in charts. It seems to me that we are approaching a bottom in factory automation both in factory automation and in the SEMI, well in SEMI it's hard to go any lower with the number.

But factory automation appears to be bottoming. That doesn't mean it's going to increase very quickly though. I'm not, the kind of guy who's going to say that boy, that's a glimmer of hope just because we're falling slower. So it is not glimmer of better times ahead. But it is a sign, I'm interpreting it, we talked to our Head of North American sales, who has told us that in his business things have reached a bottom and bottom doesn't mean zero.

Jim Ricchiuti - Needham & Company

Okay. Bob, you alluded to some of the dynamics affecting the SEMI business, some structural. Do you see any of that at all in any segments of this factory automation business. Just what I'm getting to is we are clearly seeing some dire headlines in the automotive market and in that supply chain. Do you see any lasting damage done to that segment of the business?

Robert Shillman

I’ll have to say, yes, but we'll make up for it elsewhere because the world is going to buy a certain number of cars. What they buy, cars may with a GM or Chrysler nameplate or Toyota nameplate doesn't matter for Cognex, so long as we're still in those factories and the Mitsubishi and the deal with Mitsubishi offers us only upside with regard to Japan and factory automation. So I'd say that it's a shame for those particular companies and employees that are on hard times, and I believe that the world is going readjust.

At one point, there was a need for three car companies to serve the whole world and it was GM, Ford, and Chrysler. Then it grew to far more companies and it unlikely that [swept] can afford three car companies. That doesn't mean that employment that auto-related employment or purchasing goes down. It just might mean that, it'll be Toyota manufacturing cars in Tennessee or BMW making in the South Carolina.

This whole concept of American car companies, I don't know I don't think there is such a thing anymore. Then who owns Toyota? Isn't it that mutual funds that own Toyota or BMW? These are worldwide companies and what should matter to America is jobs in America not whether it's a GM job or whether you check is as GM or whether it’s a Toyota. I don't think that matters.

For the government to flow at money at car companies have been losing at the game makes no sense to me, but just getting back to really your question, the world needs a certain number of cars and Cognex will be involved in building of those cars no matter what the nameplate of those cars is.

Jim Ricchiuti - Needham & Company

A question on the pricing environment; it sounds like there might have been a little bit of price competition in the SISD business. How is the factory automation business pricing? Is that holding up well?

Robert Shillman

We have not seen anything at all to change our gross margin assumptions. I will say, when I looked at Checker, I looked at some Checker numbers, and the gross margins had dropped quite a bit. Rob, who keeps his eye on these things in detail, got back to me immediately and he told me, that was only because we sold some demo kits.

We wanted to make sure our distributors had enough demo kits, which includes a case and lighting and all that, and that was a very low margin, we basically sold it across. So to answer your question, the factory automation margins are holding up very nicely. The only reason they may be falling is that a lack of absorption of the overhead -- but not on pricing, no. The products are very valuable, and by and large in the U.S. and Europe we don't have much competition.

Jim Ricchiuti - Needham & Company

Okay. Dick, quarterly revenue breakeven, is there a range that you might be able to provide? I know it’s mix-related and I'm just trying to get a sense where you might be.

Richard Morin

It's complicated. It's SISD revenue or MVSD it’s too hard to do. I could give you a whole spread number. If we look at whole spreadsheets that tell us under various conditions, but it’s too hard to say that, but we're not that far from breakeven, no, not that far.

Jim Ricchiuti - Needham & Company

All right. One last question Bob; I think in your last call the subject of acquisitions came up. Is that on hold at this point given the market or are you still pushing forward?

Robert Shillman

Oh, absolutely not. Now is a good time to buy. I hope it would be a very good time to buy. We're looking, there are one or two things, there’s one thing that's going to pop quite soon, very small enterprise, but it fits in very well, the product fits in very well with our existing product. I'm not going to tell you, which division it is or anything, but now we're very open to buying things. We have the money, we probably not do a huge acquisition because of the risks involved, but small acquisitions, which are typical of the things we've done. We're happy to do them.

Operator

The next question comes from Jim McCrery from Newburger Burman.

Jim McCrery - Newburger Burman

Hi, guys. I just was going to follow-up a little bit on Jim Ricchiuti previous question. Looking at the margin and maybe just asking, Bob, are you seeing a different basis for a competition in the marketplace? Are your customers evaluating the products in the same fashion as in the past? Is there any sort of that change taking place?

Robert Shillman

No. I'd have to say in SISD, there are some small things happening. We're missing a product here and there and we're going to fill that in. But, no, in our biggest piece of business there is no change in the dynamics, although then companies aren’t issuing purchase orders.

Jim McCrery - Newburger Burman

Yes. I know this is always a hard thing to get your arms around, but in terms of, and I know market share is a terrible word, but you’d feel like you're holding onto whatever business is out there, that your fair share at this point?

Robert Shillman

Yes, in Europe and North America, and parts of the, I'm not confident enough to speak yet about Japan, about Asia other than Japan. Japan we're holding onto a zero market share, and that's been the problem, upside there with Mitsubishi.

Jim McCrery - Newburger Burman

All right, good. Thanks, thanks guys. I appreciate it.

Operator

The next question comes from Richard Eastman from Robert W. Baird.

Richard Eastman - Robert W. Baird

I just want to circle back. Thanks Bob, is there any discernible growth in the product ID business? That had been holding up for you, fairly nicely or has it basically acted like the other product sales in factory automation?

Richard Morin

Thank you for the opportunity to talk about this. Rather than me doing it, I'd like to pass it on to my partner Rob Willett, who has a lot of experience in the ID aspect of the business. So, I’d like him to answer to that.

Robert Willett

I wish, I would say you know, overall IDs been experiencing the same kind of market conditions that is the overall machine vision business has, but what we are seeing is a lot of activity and a lot of momentum around, a few verticals and few regulatory things that are going on.

Pharmaceuticals both in Europe and America are experiencing big demand for implementation of track and trace, traceability systems, that’s too big to regulation, particularly in Europe it's called GS1, in the United States its called e-Pedigree lower. Europe is kind of leading the way, so we're seeing very significant growth opportunities in pharmaceuticals.

In the longer-term, we're also seeing a lot of growth drivers and a lot more interest in ID around retail-type applications and also logistics, medical, medical device, and implementation of 2D barcodes for tracking and tracing products, also some very major growth drivers. So I would say a low demand has been a little sluggish, like other aspects of the business. We’re seeing some pretty good longer term growth momentum for vertical markets for ID.

Richard Eastman - Robert W. Baird

I would think the direct mark business, that's probably, in the same auto downdraft as you might think. Is that fair?

Robert Willett

Yes. Certainly automotive where Cognex Excels is reading 2D barcodes on hard metal parts in auto motives and aerospace-type applications, there is no one you can touch it in terms of readability and performance there, and yes we've seen some significant downdraft there.

Richard Eastman - Robert W. Baird

Okay. All right

Robert Shillman

The potential for growing Cognex, let's say the economy doesn't improve. We are going to enter areas where lasers have been used such as logistics and retail. We assume now that's going to be all image-based so we see a very good opportunity to grow of course from zero it doesn't matter, but there's a lot of revenue opportunity. Forget about percentage growth, which of course is large but there is a lot of dollar revenue growth in those sectors where we don't play at all and where we are intending to be a major player.

Richard Eastman - Robert W. Baird

Okay. Just one last question. Dick, can you just give us the currency impact at the top line in the quarter? To year-over-year.

Richard Morin

As compared to this year or compared to the quarter or compared to the prior year?

Richard Eastman - Robert W. Baird

Yeah. Just be negative

Richard Morin

Well compared to let's see if I go Q1 compared to Q4, the net impact on the top line was about 400k.

Richard Eastman - Robert W. Baird

That it? Well, okay compared to the fourth quarter. Okay.

Richard Morin

Compared to the first quarter of last year it was 440k the other way. Negative.

Richard Eastman - Robert W. Baird

Okay, and the top line. All right, thank you.

Richard Morin

One of the things, don't forget that the big order we got to record revenue in Q1 that was Japanese-based.

Richard Eastman - Robert W. Baird

Yes.

Richard Morin

Got recorded in, as part of Japanese revenue.

Richard Eastman - Robert W. Baird

Okay, thank you.

Operator

The next question comes from Antonio Antezano from Macquarie.

Antonio Antezano - Macquarie Research Equities

I wanted to follow-up on the potential growth in newer markets, because you mentioned that in your press release and you just talk about getting into retail and logistics, so you were referring to those markets when you mentioned that in the press release?

Robert Shillman

That's right.

Antonio Antezano - Macquarie Research Equities

Also, in terms of timing, how should we think about timing in these newer markets?

Robert Shillman

Well, I think we're going to get into retail via VSoC, discussing the use for VSoC in the retail market with a major players there, so I don’t think you'd see any, you won't see a press release until Q4 of this year and won't see any revenue until the end of ‘10 probably, would be my estimate Rob?

Robert Willett

Yes. You’re right.

Robert Shillman

Logistics is another story. We have handheld devices now. Our DataMan products that can read, if we can read the direct part marks then you can be sure we can read ink-on paper. The question is, how are we going to distribute those products into logistics, and we're talking to players that are now about distribution, so you might see some revenue there in Q4 of this year.

Antonio Antezano - Macquarie Research Equities

Okay, and then just quick follow-up again on the gross margin theme. Under steady conditions, how should we think about gross margins, understanding that, you mentioned, Dick that there could be some savings there from the restructuring going on. Should we assume then gross margin remain below between probably 65, 70% going forward?

Richard Morin

Yes.

Antonio Antezano - Macquarie Research Equities

All right. Thank you.

Richard Morin

Yes, as long as revenues are at this reduced level, and then once we get the revenue number up a bit higher we should be able to climb back into the 70s.

Robert Shillman

Yes, I want to be clear on this that except to a couple instances at 50, where the margin has fallen, the pricing has not fallen on MVSD. So this is not a trend, this is only due to the fact that revenue was so low that the absorption of the overhead.

Operator

[Operator Instruction]. The next question comes from Auguste Richard from Piper Jaffray.

Auguste Richard - Piper Jaffray

Thanks for taking my question. Bob, you've been through quite a few downturns at this point. Could you talk a little bit about, this one compared to other ones and which parts of your businesses you might expect to recover first and outside of orders, what early indicators you might get the things that are actually bottomed and getting better?

Robert Shillman

Complicated question and an intelligent question. A lot of question today were very good. We've been through downturns in the past, but they were mainly SEMI-related 1downturns. They were cyclical downturn and those were much easier to understand and much easier to get through, because you knew in another two quarters things were going to pick up. This is a very different. And this is why we decided to cut so deeply on our expenses. We don't believe that this is a short-term.

I believe that this is a structural change in certainly the U.S. economy and perhaps in the world economy that we lived for 20 years of growth, exuberant growth, and that is unusual. But people think we're going to go back to that, I think is wrong. We were going to go back to what was usual before in the 1960s and 70s. And that’s why we decided to scale the company back to where it now is, for a much slower growth around the world. The first thing that I think, will pick up will be factory automation.

I think we'll see other than a new markets and new opportunities of course which have a rapid rise because of lower base. I believe that we're not going to see a pick-up, even when the economy, or when the economy improves, there is so much, undercapacity, underutilization in the semiconductor industry that we're not going to see, that nobody is going to see a pick-up there, even when the economy improves probably for another year.

I talked to a friend of mine, and he said Bob, if you need some equipment, we have 10 of these XYZ testers in crates unopened. So there is a lot of stuff that’s been sold and that was anticipated to be used in '08 and '09 and still in crates. So, even if people start buying far more chips or different chips or whatever it’s going be a long time coming before capital equipment sales go up and therefore before Cognex's sales to those customers goes up.

So, the first thing that we'll probably pickup might be SISD actually, SISD because when the things pickup, people are going to build more things. They need more steel, more cars, so SISD and factory automation would be tied, I think, maybe factory automation sooner. Then the [laagered] would be the semiconductor industry. That's my view, but I welcome, Rob's.

Robert Willett

I would be (inaudible) I would agree with that.

Auguste Richard - Piper Jaffray

Great, all right, thanks so much.

Robert Shillman

You're welcome.

Operator

There are no further questions. At this time, I would like to turn the call back over to you.

Robert Shillman

Well, I just want to apologize to everybody for the results we're reporting. It is the first time in years, when we had gross margins under 70%. It's very, very disappointing. Nevertheless, when we look at our competition we’re doing far better than that.

So we can't compare ourselves to what we wanted to be, what we expected to be. It's as if the world was on steroids for 20 years or at least ten years and now the rules are changed. There's no steroids and you can't compare how hard we're going hit the ball or how many home runs to how hard we were hitting it and how many home runs we have that we are on steroids. We're going to start comparing ourselves to how our competitors and the other industries that we serve are doing.

In that regard, we're too long better. But doesn't mean I'm happy with it but we have to get our head around this. America has to get its head around the fact those hay days I fear are gone for quite sometime and we got to get back to work and doing the some basic things, get happy with a 5% growth and employing and keeping those people we have employed, happy and productive, and because if we can keep on looking back to say all well and the semiconductor will be 90% of our business again and the gross margins will be a 102%, you'll never be happy.

So that's my view of where we should be, where our head should be. It takes some time for people to adjust to this difference. Though we are not headed down the toilet here, America is not headed down the toilet. This is not heading toward a depression. Yes, unemployment will be higher I suspect that in the U.S. and around the world. Nevertheless, we are going to continue to have a profitable business in the near future and things are going to improve from the base where we are pretty close to the base now.

All right. That's it from here and I hope to have better news for you, though I don't anticipate it for Q2. But nevertheless you can count on us to keep on working hard and moving fast. Thanks for your attention.

Operator

Ladies and gentlemen, that does conclude the conference for the he day. Again thank you for your participation. You may all disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cognex Corporation Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts