Cognex: Will Q2 Be the Bottom?

Cognex Corp. (CGNX - Analyst Report, Hold) recently reported its Q1 fiscal results, which were dismally poor and provided no specific guidance going forward. Moreover, the company indicated that Q2 is expected to be down sequentially, and a loss from continuing operations is likely.

Cognex is a leading provider of machine vision products which capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. A lot of manufacturing equipments require machine vision because of the increasing demand for speed and accuracy in manufacturing processes.

Q1 revenues of $42.3 million were down 30% from a year ago and down 18% sequentially. The company experienced significant year-over-year and sequential declines from both the Semiconductor and Electronics Capital Equipment (SEMI) market and the factory automation market.

The SEMI industry continues to be in its down cycle. Fabs are running below capacity and customers are not buying any capital equipment because of the slowdown in the economy. Most customers in this industry have switched from buying a mix of hardware and software from CGNX to just buying software at a lower value.

Management stated that the business for the Surface Inspection market was fairly resistant to the economic downturn for quite some time. However, the company saw a weakness in actual orders booked at the end of the reported quarter, and expects the trend to continue.

The company's factory automation segment, roughly 77% of its revenues, were down 21% year-over-year. Stabilization in activity in North American factory automation is key to the company's recovery in the quarters ahead, given its revenue exposure to this segment. Moreover, it appears that CGNX may have reached a limit to its cost-cutting efforts and is not likely to make further cuts at the expense of growth once the economy recovers.