Cognex - Q1 2013
April 29, 2013
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Cognex first quarter 2013 earnings call. At this time, all participants will be in a listen-only mode, but later there will be a question and answer session, and instructions will be given at that time. If anyone should require audio assistance, you can press star, then zero, and an audio operator will assist you. As a reminder, today's conference is being recorded. Now, I would like to introduce your first host for today, Richard Morin.
Richard Morin (EVP and CFO)
Thank you, and good evening, everyone. Earlier tonight, we issued a news release announcing Cognex's earnings for the first quarter of 2013, and we have also filed our quarterly report on Form 10-Q. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results. During tonight's 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. For your reference, you can see the company's income statement as reported under GAAP in Exhibit one of the earnings release, and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit two.
I'd like to emphasize that 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, 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 Cognex's chairman, Dr. Bob Shillman.
Bob Shillman (Chairman)
Thanks, Dick, and good evening, everyone. I'd like to welcome each of you to our first quarter conference call for 2013. As you can see in the news release that we issued earlier today, we reported very good results for the first quarter. Right now, I'm in our R&D center in San Diego, and the team is at our Natick headquarters for this call. For details of the quarter, therefore, I'm going to hand the microphone over to my partner, Rob Willett, who is our President and Chief Executive Officer. I will be on the call until the end and available to answer any questions that you have for me at that time. So now I'm just going to pass the microphone over to Rob Willett in our headquarters at Natick, Massachusetts. Go ahead, Rob.
Rob Willett (President and CEO)
Thank you, Dr. Bob. Good evening, everyone. I'm pleased with the results we reported tonight for the first quarter of 2013. It was a good start to the year. Revenue, net income, and earnings per share all set new first-quarter records. Revenue grew 4% over the first quarter of 2012, driven by record quarterly revenue for factory automation. Asia, excluding Japan, was our top performer. From a product standpoint, the lion's share of growth came from ID products, which increased 23% year-on-year. Gross margin was strong at 76%, reflecting the substantial percentage of revenue that comes from high-margin factory automation sales. Operating margin was 22%, even with our investments in new product development and sales force expansion.
We reported earnings of $0.35 per share, which is $0.02 per share higher than the $0.33 reported for the prior year's first quarter. Let's turn now to the details of the quarter. Revenue from the factory automation market set a new quarterly record at $63 million and accounted for 78% of total revenue. Factory automation grew 7% year-on-year and 2% on a sequential basis. This is surprisingly good news, given that Cognex typically experiences a revenue decline in factory automation from Q4 to Q1. Looking at factory automation from a geographic perspective, Asia, excluding Japan, continued to be our best-performing region in terms of percentage growth. In the first quarter, factory automation revenue from Asia grew 24% year-on-year and 20% over the prior quarter.
Growth was led by strong sales to consumer electronics customers in Korea and China. In the Americas, factory automation revenue increased 7% over the first quarter of 2012. On a sequential basis, it decreased 2% from the record revenue reported in Q4. The underlying trend in the Americas is improving. Factory automation revenue from Europe increased 4% year-on-year and decreased 1% sequentially. This was a solid performance in what are proving to be difficult market conditions. Sales to the Japanese factory automation market decreased 13% from the first quarter of 2012, and 5% from the fourth quarter due to currency exchange rate fluctuations. In constant currency, Japanese factory automation was flat year-on-year and grew 7% sequentially. Revenue from the semiconductor and electronics capital equipment market was $7 million in the first quarter.
That level represents an increase of 4% year-over-year and 27% over the prior quarter. This is the first quarter in two years that semi revenue increased both year-over-year and sequentially. It's too soon to say if that signals the beginning of a market recovery, as it was mainly due to higher orders from a limited number of customers. In the surface inspection market, first quarter revenue was $10.5 million. This represents a decrease of 9% year-over-year. It's also a decrease of 27% from Q4, which was the second highest revenue quarter ever for that segment. Surface inspection revenue can be uneven due to the timing of deliveries and installations and the impact of revenue deferrals. Demand for our surface inspection systems in the first quarter was good. Those orders will turn into revenue later in the year.
Turning to operating expenses, the combined total of RD&E and SG&A increased in Q1 by 6% year-on-year. This increase is due to our investments in new product development and in our sales channel that are targeted at longer-term initiatives. We expect that they will provide significant returns in the future. From a technology standpoint, Cognex is now developing and introducing new products at a faster rate than ever before. We believe that the highly advantaged, disruptive products that we launched in Q1 will quickly increase our share of the markets we serve. The initial success of the DataMan 503 high-performance ID reader should accelerate our growth in the logistics market. New capabilities of the DataMan 503 include high-speed barcode reading on wide conveyor belts and in situations where there are large variations in package height.
The DataMan 50 marks our entrance into the high-volume, lower-priced portion of the ID market. Feedback is excellent, and the initial adoption by machine builders is encouraging. The DataMan 50 has already won major accounts away from the competitors' laser barcode readers. Our new DS1100 Displacement Sensor signals our entry into the highly profitable market for 3D vision. Measuring features such as height, volume, and tilt, the DS1100 expands our product offering to existing customers in the automotive, consumer electronics, and food and beverage industries. Two of our competitors have significant sales and profits in this area, and we've been interested in it for some time. We expect that our advanced vision tools, faster speed, and ease of use during setup and calibration will enable us to compete very effectively in this important new market segment. On the sales front, we continue to invest heavily in our sales channel.
We are recruiting, hiring, and developing sales engineers in areas where we see the highest potential for growth, particularly in ID products in China. Technology and process improvements are being made to increase productivity. There's also the cost of equipping our sales force with our new products. We're making these investments today with an eye towards long-term growth. In summary, Cognex had a good start to 2013. We expect revenue for the second quarter will be between $83 million and $86 million. This range represents an increase of 3%-6% over the revenue reported tonight for the first quarter. Operating expenses are expected to increase by approximately 3% on a sequential basis, and the effective tax rate, excluding discrete tax items, is expected to be 19%.
Looking at Q2, we expect to report very good results, but comparisons to Q2 of 2012 will be difficult for the following reasons. Market conditions were much stronger a year ago in Europe's automation market and in semi. We're making good progress on our strategic initiatives, although again, the full benefit of that work is not flowing through yet. And Q2 of 2012 included approximately $1 million of investment gains that are not expected to repeat this year. Now, let's open the conference up for your questions. Operator, we're ready to take questions.
Operator (participant)
Okay. So at this time, ladies and gentlemen, if you have a question or comment, press the star followed with the one key, and you'll be placed into a question queue. So again, for any questions or comments, press the star followed with the one key, and you'll be placed into a question queue. So we'll give this a few moments before we take questions. Again, if you would like to ask a question, press the star followed with the one key.
Speaker 10
Bill, you go to quiet for this.
Operator (participant)
Okay, so we'll take our first question from Tom Hayes.
Speaker 11
Hi, great. Good morning or good evening, gentlemen.
Rob Willett (President and CEO)
Hi, Tom.
Speaker 11
I guess two questions. One, you called out some of the increased R&D spending tied to accelerating the product development. I was just wondering if you could talk about or provide some color on how quickly that can accelerate the product development cycle for you guys?
Rob Willett (President and CEO)
Sure, Tom. Yeah, so we're a technology company. We're developing products all the time. We've been investing, particularly in process improvements to get products out of engineering and into production more smoothly and consistently. So, you know, obviously, by putting in better processes, a more rigorous phase gate process around product introduction, investing in manufacturing engineering to get products scaled and into our contract manufacturers, can bring forward our time to market, you know, by a number of months, we believe some of the processes we're doing. And when we're spending, obviously, you know, the significant amount, $42 million a year, last year on R&D, and some of these new products deliver substantial growth for us, that's very real in terms of the benefits it brings.
Speaker 11
Okay. I guess staying on that theme a little bit, you mentioned obviously the China and the ID market as a beneficiary of some of the extra spending. Could you just maybe provide a little bit more color on, you know, some of the specific market segments you're targeting in China?
Rob Willett (President and CEO)
Oh, in China? Sure. Yeah. So, our business in China today is largely concentrated on electronics, you know, and we do a substantial amount of business in consumer electronics, which is the industry that's typically adopted our technology first. And we see a lot of good traction in that market, and we continue to see it, but we're really looking to China to diversify the base of business over the longer term. Specific end user markets we're interested in, you know, and we see a lot of growth potential is, well, automotive. And, you know, automotive is our largest vertical market globally, but not in China. And we see a lot of growth occurring in the Chinese automotive market.
In the first quarter of this year, it accounted for 20% of our China factory automation business. So we're certainly starting to see some traction there in investment. But other markets, particularly consumer products, food and beverage, we see a lot of growth opportunity, and specifically also ID, where we're seeing very high rates of growth in that market going forward in China. You know, some of the drivers there are, you know, increased wealth among the Chinese population, where there's greater concerns about safety and product quality, and you know, ID is a great means for tracking products from manufacturer out to consumer. So we see a lot of traction in that area, and we have a lot of growth plans around delivering.
That's China-specific, but of course, you know, our ID products themselves are great growth drivers on a global basis, and that kind of plays through in a multiplied effect in China.
Speaker 11
Great. Appreciate the color. And one more, if I may. Obviously, you provided the indication that we should expect OpEx up about 3% sequentially. Should we kind of think about not the 3% growth, but kind of the rates we saw in Q1 as kind of proxies for the balance of the year, considering your increased spending?
Rob Willett (President and CEO)
Well, I think we told you Q1 OpEx, and we told you we expect Q2 to increase 3% sequentially. You know, and I, we don't really give guidance beyond that.
Speaker 11
I thought I'd just try. Sorry.
Rob Willett (President and CEO)
Yeah, sure, sure. You know, I mean, we feel good about our business and where we're taking it, and we feel very good about the initiatives we're investing in, new product development and, you know, engineering and sales force expansion, particularly around ID and around China. So yeah, I think you can expect us to go on doing that, providing we see the kind of trends looking positive.
Speaker 11
Appreciate it. I'll get back in queue.
Rob Willett (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question is from Chris Goode. Chris, please go ahead.
Speaker 12
Good afternoon, everyone. Congrats on the quarter.
Rob Willett (President and CEO)
Thank you, Chris.
Richard Morin (EVP and CFO)
Thank you.
Speaker 12
You mentioned that the overall trend in the Americas is improving. Can you talk a little bit about what you're seeing there and what's giving you more confidence in the region?
Rob Willett (President and CEO)
Sure. So, well, you know, obviously, we look at our funnel of business, you know, and what we see in our pipeline, and we see a lot of good things occurring. We're seeing signs of improvement ourselves, particularly in automotive and ID products. But I would say that, you know, to temper that a little, customers are still cautious given the low growth economy that we're in. So I think particularly, you know, by vertical industry, automotive, it looks, you know, fair in terms of its commitment to investment in automotive and in terms of in automation, I should say, and ID.
Speaker 12
Okay, great. Thanks, thanks for the color. And then thinking about the logistics opportunity, last quarter, you mentioned that you have several large end user customers who are currently using your products on a trial basis. Are you seeing any movement towards full adoption there with any of those customers?
Rob Willett (President and CEO)
Yes, we are. Yeah, we're seeing a lot of, you know, we're undergoing a lot of very active trials, and the DataMan 503 certainly helps kind of round out our product range. You know, one large postal supplier, you know, has sucked us in, and we expect to see orders flowing through for the rest of this year. And another large, you know, very, very large e-retailer is in a similar situation. So I'd say we're, you know, seeing a lot of positive movement in that market.
Speaker 12
Okay, great. That's great color. And then last but not least, just a cleanup item. Can you give us the total for ID products in the quarter for revenue?
Rob Willett (President and CEO)
Yes, we can. Just make sure we got our data correct here. Sure. I think it was $20.6 million. Dick, can you just confirm that?
Richard Morin (EVP and CFO)
Yes, it's about $20.6 million.
Rob Willett (President and CEO)
Right?
Richard Morin (EVP and CFO)
Yep.
Rob Willett (President and CEO)
Represents 23% growth year-on-year and 3% sequentially.
Speaker 12
Perfect. Great, thanks for the color, guys.
Operator (participant)
Okay, thank you. Just one moment for our next question. Our next question comes from Jim Ricchiuti from Needham & Company.
Jim Ricchiuti (Senior Analyst)
Thanks. Good afternoon.
Rob Willett (President and CEO)
Hey, Jim.
Richard Morin (EVP and CFO)
Hey, Jim.
Jim Ricchiuti (Senior Analyst)
Was the ID business strong in each geography?
Rob Willett (President and CEO)
So it was, you know, it was very strong in some geographies, and, you know, slightly less strong in others. You know, it's generally good overall. I'd say where we saw some lesser growth was in Europe-
Jim Ricchiuti (Senior Analyst)
Right.
Rob Willett (President and CEO)
which I think reflects kind of the lower growth environment that we see, that we see there at the moment. But I would say, you know, our execution is certainly going very well in the Americas and in China, and that's where you'll see some of the better, better growth. Japan, also, you know, yeah.
Jim Ricchiuti (Senior Analyst)
Rob, I mean, looking at Europe, the rate of decline seems to be slowing, but what's your sense? Is that market beginning to stabilize at least, or is it, you know, do you potentially have another leg down?
Rob Willett (President and CEO)
Well, I'd, I'd actually say our, our results in Europe have been relatively good. You know, when I look at our peer and peers and where I look at, you know, the, our level of performance in Europe relative to our business overall. So I'd say we've been surprised, you know, in, if we look back over the last few quarters, how our own results seem to be better than what we were reading in the news. And you know, I think we have a very good team there and a lot of good growth drivers. So however, I would say, you know, there's some increasing softness as we look out at that business and we look out at the sales funnel.
So I think it looks likely to be our, you know, perhaps our lowest growth region overall as we look forward in percentage terms. But, you know, we're still, you know, we're still feeling that we can grow in Europe this year, and I'm not really seeing necessarily it getting softer or stronger right now, but, perhaps a little more difficult to call. I would also say, you know, the automotive industry there, which is our biggest end user market, it looks to be holding up relatively well in Germany, and in Northern Europe, and obviously less well in Southern Europe. And that's a, that's also a little bit of the leading indicators that we're watching in that market.
Jim Ricchiuti (Senior Analyst)
In the Americas, was the Systy business the main issue for the slower growth in terms of...? And do you see the Systy business snapping back in the June quarter? It sounds like it'll be up sequentially.
Rob Willett (President and CEO)
Yeah, so, our surface division business is doing really well. It's a surface business, in general, and, you know, the order trends there are good. And, yeah, but it matters. The issue that you're referring to is more the timing of revenue and the lumpiness of that. So it was a low revenue quarter in Q1, but that's not indicative of any underperformance at all from our perspective. It's really a matter of timing. So yeah, we will see it come back. We expect to see it come back in the second quarter quite nicely.
Jim Ricchiuti (Senior Analyst)
Okay. Is, and I know you don't give guidance, but if, if we think about that business, is it, is that a, Do you think Systy has the potential to be up year-over-year in, in, for the full year?
Rob Willett (President and CEO)
Yeah, that's, certainly that's our expectation.
Jim Ricchiuti (Senior Analyst)
Okay.
Rob Willett (President and CEO)
We look at that business being something we expect to grow in the mid-single digits over the long term. And you know, we think this will be another growth year for Cognex. We're seeing a lot of good things going on.
Jim Ricchiuti (Senior Analyst)
Okay, thanks. I'll jump back in the queue.
Rob Willett (President and CEO)
Thank you.
Operator (participant)
Thank you. And our next question is coming from Ben Rose, from Battle Road Research.
Ben Rose (President)
Good afternoon.
Rob Willett (President and CEO)
Hello, Ben.
Richard Morin (EVP and CFO)
Hey, Ben.
Ben Rose (President)
How are things going?
Rob Willett (President and CEO)
Good.
Ben Rose (President)
Okay. Of all the new products that have been introduced in the last three or four months, which would you say have the potential to be the highest revenue contributors in 2013?
Rob Willett (President and CEO)
Mm-hmm. Well, I would say the DataMan 50, you know, which is a lower price point barcode reader. You know, we see a lot of potential for that product, and we see it ramping pretty fast. And it's replacing, you know, it's replacing a lot of laser barcode readers that are used by machine builders and by small purchasing customers on a broad basis. So certainly it's, That looks like a winner for us, although still, it's still early. And then the DataMan 503, you know, certainly is a very a very powerful product for the logistics market, and I think it depends on how quickly that's adopted, but it would also, we expect it to be a large seller.
I think the other product I discussed in the call, the displacement sensor, the 3D vision product, we think that'll be a slower ramp. That's our first entry into what's a very exciting market for us longer term, technically quite complex. We're probably gonna be addressing some of the most rigorous and difficult applications in that market initially, where the served market itself is probably relatively small. We're bringing a pretty powerful advantage product and learning about that market. But I think, longer term, we expect that to be a big revenue generator for Cognex, but not this year.
Ben Rose (President)
Okay. And then on that 3D laser profiling system, which I understand is your first kind of full-fledged 3D vision system, you cited three end user markets, automotive, electronics, and food and beverage in the initial press release, and was just curious where you see the, at least on a near-term basis, the largest opportunities within those industries?
Rob Willett (President and CEO)
Well, certainly automotive, we think is a, you know, an obvious market for us to target that product at. It's a market we know very well and where we see opportunities in that specifically. So, you know, certainly in that, with Tier one suppliers and end users, you know, for precise 3D measurement of parts, you know, is gonna be a good market for us. It's good because it's a channel and it's an industry we understand very well. You know, so that I expect to be our, the best market over the medium term for this product.
Consumer electronics, though, I think can be a very good product, good market for this product also, you know, specifically where you're looking at a vision problem where parts may be seated, perhaps components on a circuit board, and you want to see whether they're correctly seated, and you know, and correctly in position. That's a difficult problem for 2D vision. It's a great problem for this product and one that we understand how to sell into very well. So I'd say automotive one, consumer electronics two.
Ben Rose (President)
Okay, thanks very much.
Operator (participant)
Thank you. Our next question is coming from Richard Eastman from Robert W. Baird.
Richard Eastman (Managing Director and Senior Analyst)
Yes, good afternoon.
Rob Willett (President and CEO)
Hey.
Richard Eastman (Managing Director and Senior Analyst)
Rob, could you just talk for a second, and I'm sorry, this may be in the queue. If so, just say so. But geographically, other Asia was +27%. Is that how much of that is China? How did China actually perform in the quarter?
Rob Willett (President and CEO)
Yes. So, Dick will look for some numbers specifically, but here's what I can tell you. In factory automation in China was over $6 million in the quarter, which was up 23% year-on-year. And,
Ben Rose (President)
Okay.
Rob Willett (President and CEO)
Ever, any other color you wanna add?
Richard Morin (EVP and CFO)
Yeah, no, great, you know, the rest of Asia, you know, it also includes like Korea and India or whatever, which we don't break out all of those pieces separately.
Richard Eastman (Managing Director and Senior Analyst)
Good.
Richard Morin (EVP and CFO)
I did, I did point out that Korea and China were both very strong performance in that market in the first quarter.
Richard Eastman (Managing Director and Senior Analyst)
Obviously, over the 27 then. And was Japan the -4% in Japan? Is that, that's not an LC number, is it? Because I would think currency would hurt you there.
Richard Morin (EVP and CFO)
Well, I think, yeah, I think what I did say, and I was talking about factory automation, was in constant currency, Japanese factory automation was flat year-on-year and grew 7% sequentially. So yeah, there's quite a lot of currency effect in that. Is that your question?
Richard Eastman (Managing Director and Senior Analyst)
Yeah. So just when I'm looking at overall Cognex for the quarter, you commented, I think, you've given the numbers, Japan was off 4% year-over-year. But was that, was that up in local currency? Was Japan up in LC?
Richard Morin (EVP and CFO)
I think, in Well, you've got to take both. If you take a look at both, semi and factory automation together, Japan was up, in total, over 2012. But the biggest, if you, if you, let's see, where is it here? Yeah, Japan. Part, part-- now, if you take a look in grand total, because SISD, SISD had a strong quarter in Japan.
Richard Eastman (Managing Director and Senior Analyst)
Okay.
Richard Morin (EVP and CFO)
You have, operationally, if you exclude FX, factory automation was essentially flat.
Richard Eastman (Managing Director and Senior Analyst)
Yes.
Richard Morin (EVP and CFO)
There was a slight decrease in semi, but there was a good pickup in the SISD business.
Richard Eastman (Managing Director and Senior Analyst)
Okay. So that was up. Okay. And then just, Rob, in the factory automation business, can you just maybe talk to the end markets? I mean, we had sales up six and, you know, 6.7% or 7%. I'm gonna guess I'll assume there's not a lot of currency in there, but could be. But can you just talk to maybe the end markets that just in factory automation, that, you know, we're comping against real difficult comps? Because I think, you know, last year we were talking about solar being a tough comp year-over-year. Is this a situation where just when you look at your end market exposure, that you know all the end markets are grinding slower, or is there a tough comp or something, a couple tough comps in there?
Rob Willett (President and CEO)
Okay. So I think, you know, I think you're right in saying currency had a limited, it might have been 1 percentage point of headwind-
Richard Eastman (Managing Director and Senior Analyst)
Okay
Rob Willett (President and CEO)
on the growth overall. You know, it's, I think, you know, we serve a lot of different end user markets, so I think to look at one quarter, you know, might isn't necessarily that instructive. But what I will say in Q1, you know, year-over-year, you know, automotive was up a little bit more than factory automation overall. Electronics products, you know, consumer electronic products were up a lot, you know, we had very strong growth in those markets. And then, you know, kind of it's a mixed picture. There are markets for us that represent between 2% and 7% of revenue in any given quarter, and, you know, they can be up and down, and I'm thinking there of markets like pharmaceuticals.
In this quarter, it had some growth. Medical devices, you know, can be up and down. In this quarter, it had some good growth. Other markets, you know, less strong, just in this case, pick out some others for you. Food and beverage. Well, food and beverage did okay. Consumer products, you know, where you might think of, Procter & Gamble type products, you know, not so strong in this quarter, but these are just kind of small sequential movements, you know, not necessarily indicative of how we see the market overall.
Richard Eastman (Managing Director and Senior Analyst)
Okay. All right. And then just one last question on the operating expense number. Just to double back to that for a second. The 3% sequential off of Q1 into Q2, you know, puts OpEx at around, you know, call it $45 million or so. Is that a level, a quarterly level that we flatten out at for the back half of the year, then?
Rob Willett (President and CEO)
Well, I would say in general, we don't, you know, we don't give OpEx guidance for the full year. I think we said we see it increasing, I think 3% sequentially Q2.
Richard Morin (EVP and CFO)
Yeah. Part of the increase in Q2, Rick, is the fact that our option expense will be a bit higher quarter-over-quarter, 'cause we did our annual grant in near the end of February. So we only had really one month worth of expense in Q1. We'll have a full three months in Q2. That's a part of, that's a part of the reason. And-
Richard Eastman (Managing Director and Senior Analyst)
Okay.
Richard Morin (EVP and CFO)
You know, going forward, that will, that will start to even out.
Richard Eastman (Managing Director and Senior Analyst)
Correct. Okay. Okay. Yeah, that would. Then it would all be in the second quarter as well as the third and fourth, so okay.
Richard Morin (EVP and CFO)
Correct.
Richard Eastman (Managing Director and Senior Analyst)
And then just one last thought, and I don't want to put you on the spot here, but I will, in terms of forecasting. But just the Semi OEM business, again, you know, surprised again, and Rob, you pointed out, kind of the first time in two years where we actually saw growth, both sequentially as well as year-over-year. But, you know, if you look at the Semi back end order number, you know, it did perk up a little bit. Is there just anything to the tone that you can suggest, hey, there's more interest, there's more bids? Anything that would maybe segment, separate this from, uptick from inventory build, say, or any better tone at all?
Rob Willett (President and CEO)
Well, okay, I'll make some general comments. I think, you know, Semi performed better than expected with, you know, each geographic region reporting an increase over Q4.
Richard Eastman (Managing Director and Senior Analyst)
Okay.
Rob Willett (President and CEO)
So that's, you know, that would suggest some broadness. Obviously, you know, we kind of had this situation about a year ago, where we had this kind of false dawn, I would say, in Q2. And, you know, we sold $10 million in Q2 of last year, compared to, I think, $7 million in what we just reported, so-
Richard Eastman (Managing Director and Senior Analyst)
Seven, yep.
Rob Willett (President and CEO)
So, you know, I don't expect, you know, necessarily to see that kind of level, so in Q2 of this year. So, you know, is that, does that connote a recovery? I'll, I'm not, I don't know.
Speaker 13
Yes. Okay.
Rob Willett (President and CEO)
The other color I'll say is that, you know, we did see some pretty strong growth out of a number of customers in Greater China, you know, and so I think some of the strong performance looks like a little uneven or regional, which also makes us less inclined to say that this is the start of a recovery per se.
Richard Eastman (Managing Director and Senior Analyst)
I see. Okay. Okay, great. Thank you.
Rob Willett (President and CEO)
Thank you.
Operator (participant)
Okay, and our next question comes from Jeremie Capron from CLSA. Please go ahead, Jeremie.
Jeremie Capron (Director of Equity Research)
Good evening, and thanks. Just a question on Japan, where I think we've seen rather weak first quarter orders from the Japanese automation companies, and it looks like you were flat. So I'm wondering, are you seeing any pickup in orders in Japan and maybe any color you could add around that?
Rob Willett (President and CEO)
Well, you know, I think we well, you know, generally, we don't speak to orders specifically. I think you know, I think there's some signs of slow improvement in the Japanese market on a you know, local currency basis in the factory automation market. But I think it's a little early to say specifically. And then also difficult to compare us with other companies is that we have some kind of growth drivers. I'm thinking specifically of ID, this case, where we're starting to see some better growth out of our Japanese business.
So, yeah, and then, you know, I think if you look, if you look at our competitors or other benchmarks, probably what you're doing, I mean, you're not seeing, seems like we're not seeing a lot of growth we have in over the past few quarters from Japanese companies in automation reporting, and I haven't seen that changing. So what would I say overall? It's like some signs of perhaps some slower recovery. I think if we do see something more major, like as you might expect from all the economic stimulus that's going on in Japan at the moment, what we're hearing is we wouldn't expect to see that until later in the year.
Jeremie Capron (Director of Equity Research)
Thanks, that's helpful.
Operator (participant)
Okay, thank you. Our next question is coming from Jagadish Iyer from Piper Jaffray.
Jagadish Iyer (Prinicpal)
Yeah, thanks for taking my question. Two questions. First, Rob, you had invested, if I, if I recall, last year, you had invested in, pretty, I would say, reasonable amount in China. Were you pleased with the revenue that came from the region? And can you help us understand, you did make a comment in your prepared remarks that you are hiring, so which geographies are you adding headcount? And then I have a follow-up, please.
Rob Willett (President and CEO)
Your question is purely about China, Jagadish?
Jagadish Iyer (Prinicpal)
Yes, yes, yes.
Rob Willett (President and CEO)
Okay. Yeah, yeah. So, yep, so, you know, we, we've in factory automation in China, in Q1, we saw 23% growth year-over-year. And, we see, you know, particularly in consumer electronics, we've seen some pretty strong order trends in that area, you know, particularly in, in markets like for tablets and smartphones. You know, we see a lot of, a lot of demand for very high performance vision in those markets, which is driving a lot of growth. But to the second part of your question, and, and what I referred to a little earlier, is we, we see a lot of potential for broad-based investment in automation in China, and we've been seeing this for a long time.
You know, markets like automotive, ID, and consumer products and food and beverage, we see, you know, very good trends in China in those areas. In terms of geography, we have quite a large number. I believe it's seven offices in major Chinese industrial centers like Chengdu, Shenzhen, obviously Guangzhou, Shenzhen, Beijing, Shanghai. And you know, we continue to open new offices to support the growth that we see in those industrial markets. So I believe last year we opened three offices in cities across China, and you know, I think you can see us continuing to open additional offices this year.
Jagadish Iyer (Prinicpal)
Thanks for that. So then you had some positive comments about your logistics business. I just want to dive a little bit more detail into it. I just want to understand, how should we be thinking about the growth in the logistics business for this year? And, you know, you did make a mention that you have a position with an e-tailer there. I was just wondering, what is your position? Is it shared or you are being an exclusive vendor there? Just some thoughts on the overall growth rates of this business unit. And I just wanted to get some little bit more color on that, whether you have seen the tipping point for adoption here. Thanks.
Rob Willett (President and CEO)
Mm-hmm. Yeah, so, you know, I think logistics is a large, you know, previously adjacent market for Cognex, but it's really part of our ID business overall. So the, you know, some of the growth that we're seeing in logistics is now already and will continue feeding through into our ID growth numbers, because our business area is reading barcodes. And we, as, you know, as we introduce new products, we're serving larger parts of that market. So most recently with the 503, you know, very high speed applications on wide webs are allowing us to serve greater parts of it. You know, so it's a journey, you know, and the journey is going well, I would say. The timing of revenue, again, is a little more difficult to call.
We're seeing, you know, good signs and good trends, but quite how much that will flow through into revenue this year is something I think that we're still getting our arms around. To the question you asked about large e-retailer, this is, you know, a very large company that makes very, very substantial investments in logistics, so we're certainly not the only player, although we're being spec'd into many new applications on their lines. And, you know, we're competing really head to head with one other competitor who does a lot of business with them today. And, you know, like in many of the areas Cognex works in, or almost all of them, our products outperform. So it's a matter of how quickly we get adopted. That's difficult to know how quickly that will occur, but I would say it's going well.
Jagadish Iyer (Prinicpal)
If I just have a quick follow-up, if this particular e-tailer is starting to ramp more on the adoption side, would you expect other, you know, like freight companies and all of them to start even more aggressively adopting? Thank you.
Rob Willett (President and CEO)
Sure. Well, yeah, I mean, we have wins in postal. We have wins in e-retail. We have, you know, wins in standard retail, and we have wins in, you know, courier-type applications. And, you know, and we're, you know, in trials or discussions with most of the large players in those spaces. So, yeah, we're gonna see wins, and we're gonna see broader adoption. And I think it's the rate of adoption that perhaps becomes a little more difficult to call, partly because it's a relatively complex sale, and there are integrators, as well as end user customers. And in many cases, we're being preferred by the end user customer, but it takes time for the integrator to catch up.
Jagadish Iyer (Prinicpal)
Thank you.
Bob Shillman (Chairman)
Our next question is from Chuck Murphy from Liberty Park Capital.
Chuck Murphy (Portfolio Manager)
Hi, guys.
Rob Willett (President and CEO)
Hello, Chuck.
Richard Morin (EVP and CFO)
Hey, Chuck.
Chuck Murphy (Portfolio Manager)
Thanks for taking the questions. Just a couple regarding Japan. I guess first, just kind of curious, I was noticing how low your Japan sales have become as a percentage of the total, down to 12%-13%. Used to be more like 20%. I was wondering why that's been?
Rob Willett (President and CEO)
Mm-hmm. Well, I think if you look back over a period of time, you know, there's been a pretty major contraction in the automation market and the semi market, and, you know, in Japan, and we've referred to it in a number of calls over prior quarters, where we've seen a lot of business getting offshore from Japan into the rest of Asia.
Chuck Murphy (Portfolio Manager)
Mm-hmm.
Rob Willett (President and CEO)
In many cases, we've been able to, you know, to win that business, whether it was ours in Japan or not. So, you know, I would say that that's part of an overall trend that I see broadly, you know, and as I visit Japan, as I do fairly frequently, and talk to the factory automation kind of market leaders in that space, that's pretty consistent with what I hear from them.
Chuck Murphy (Portfolio Manager)
So, I mean, but with Japan now a relatively small percentage of sales, I mean, the decline, again, from a translation perspective, isn't as big of a deal as it might have once been. But what about from a competitive standpoint? I mean, you have the yen down 20%. I realize you don't really sell on price, but I mean, 20%'s a pretty big number. I mean, could your competitors not tell your customers, "Hey, just buy 20% more of our stuff, you get the same performance, and maybe you save a few bucks?
Rob Willett (President and CEO)
Well, I think you're, one thing you said is definitely right, that, you know, we sell highly advantaged, highly, you know, technology-driven products, so it's not, they're not particularly price sensitive in terms of their sales. You know, however, I would say, you know, the competitor we take most seriously in the world is KEYENCE, you know, and they are obviously a Japanese-based company, and they've not seen a lot of growth in their own domestic market in recent times, and they are, you know, investing outside. But I would, at the moment, we don't see signs of them kind of trying to use this currency advantage to price competitively, but it with us. But if that changes, you know, we're certainly in a position to, you know, to hold our own very well.
Chuck Murphy (Portfolio Manager)
Mm-hmm. And to that point about buying 15% or 20% more and getting the same or, or higher productivity, is, is that true at all? Like, can you just buy more for a lower price to get the same performance, or is it a matter of something software related or something else?
Rob Willett (President and CEO)
Yeah, I'm not sure I understand your question. What I was really saying is, you know, we're introducing a lot of highly advantaged products. You know, and a lot of times they're software driven, you know, is really driving a lot of the value. So, you know, we're certainly very well positioned within our product range to make very good margins.
Chuck Murphy (Portfolio Manager)
Mm-hmm.
Rob Willett (President and CEO)
You know, so, but, I'm not sure quite I got your question.
Chuck Murphy (Portfolio Manager)
Okay. Let me, let me explain this. So if the customer was planning on buying 100 Cognex vision systems, could KEYENCE say, "Well, if you buy 110 or 115 from us, you'll get the same or better productivity-
Rob Willett (President and CEO)
Oh, no.
Chuck Murphy (Portfolio Manager)
-than Cognex's system, and you can save some money since the currency's gone down 20%?
Rob Willett (President and CEO)
No, no, no, no. No, it just, our business doesn't really work like that. You know, there are specific-
Bob Shillman (Chairman)
No, this is Bob here.
Chuck Murphy (Portfolio Manager)
Hey.
Bob Shillman (Chairman)
That reflects, that question reflects a total misunderstanding of our products.
Chuck Murphy (Portfolio Manager)
Okay.
Bob Shillman (Chairman)
Right. If our product gets the answer right every time, and a competitor's product gets the right answer right only 80% of the time, buying more of the competitor's product won't make up for the fact that it's getting the wrong answer.
Chuck Murphy (Portfolio Manager)
Gotcha.
Bob Shillman (Chairman)
Okay?
Chuck Murphy (Portfolio Manager)
Okay.
Bob Shillman (Chairman)
So that's, you know, people pay more for our product because it delivers more value. We are more accurate—we read more codes correctly than incorrectly. We measure things more accurately than others, and buying more of something that doesn't quite work well doesn't make up for the fact that it doesn't quite work well. You just get more errors if you bought more of them.
Chuck Murphy (Portfolio Manager)
Gotcha. Okay.
Bob Shillman (Chairman)
Another answer to your question is, KEYENCE is also a high gross margin company also. So, our prices are not significantly different from KEYENCE's product. When we talk about a price advantage, it's in general over all of our competitors, but KEYENCE is generally, if you look at their P&L, it's even more profitable than Cognex.
Chuck Murphy (Portfolio Manager)
Mm-hmm. Mm-hmm. Do you guys manufacture anything there? I'm thinking of a distribution facility there, but do you manufacture anything in Japan?
Rob Willett (President and CEO)
No, we don't.
Chuck Murphy (Portfolio Manager)
Okay. Then, you know, if the currency were to stay down for a long time, extended period of time, would you consider moving some of your production over there to take advantage of the lower price?
Rob Willett (President and CEO)
I very much doubt it.
Chuck Murphy (Portfolio Manager)
Okay. All right. Thanks a lot, guys. Appreciate it.
Operator (participant)
Thank you. Our final question at the moment comes from Jim Ricchiuti from Needham & Company.
Jim Ricchiuti (Senior Analyst)
Thanks. Rob, two and a half years ago, you sized the TAM in the logistics market, I think, at around $150 million. Based on where you are today, and with the products you have out there now, is it still in that range? Is there any update as to what... And I know it's folding into the ID business, but I'm just trying to get a sense as to whether it might be expanding.
Rob Willett (President and CEO)
Yeah, no, we think it is, yeah, we size it today more on the order of $250 million in terms of what we can address, but also. You know, we've seen some significant investment and growth back in that market relative to where it was in, you know, in a couple of years ago, particularly driven by both trends in e-retail and some other areas of investment. So, yeah, that market looks bigger in terms of what we can serve today than it was.
Jim Ricchiuti (Senior Analyst)
Okay. And when you refer to full adoption, it sounds like there's a layer of complexity with, with the integrators. But, you know, can you give us a sense, what, when you talk about a large retailer or a large postal supplier, full adoption, does that mean full adoption by the end of this year? Does it mean a process into next year?
Rob Willett (President and CEO)
Okay, so in that case, you're looking at specific accounts where we might be getting spec'd in.
Jim Ricchiuti (Senior Analyst)
Yeah.
Rob Willett (President and CEO)
Is that right?
Jim Ricchiuti (Senior Analyst)
Yep.
Rob Willett (President and CEO)
Yeah. So, you know, normally the way it would work is, you know, we're, we're reviewing our technology with those companies. They're, they're approving it, and they're saying it's advantaged, and they want to spec it in, right? And then, and then they have specific projects that come along. Let's say, in a large courier company, they may have, you know, a couple of largest projects of a number of million dollars that they're planning over this year or next year. So, you know, we-- our expectation would be to win those projects. In some cases, they may split the business between us and one of the competitors, or they may give it exclusively to one.
Jim Ricchiuti (Senior Analyst)
Okay, thanks. Thanks very much. Congratulations on the quarter.
Rob Willett (President and CEO)
Thank you.
Bob Shillman (Chairman)
Rob, I think he also was questioning whether full adoption would mean that there would be purchase orders given to us, let's say, and then none would follow because they've adopted it fully. That's not what Rob meant by full adoption. We expect when these e-tailers or distribution centers or courier companies buy, they will continue to buy from us as their businesses continue to modernize or grow. So full adoption means that we would hope that we would win all the projects that are available that year or for the next two years, and then there would be more projects coming.
Jim Ricchiuti (Senior Analyst)
Thanks, Dr. Bob. I mean, it's clear that it appears that you've reached an inflection point with some of the progress you're making with some of these bigger accounts.
Bob Shillman (Chairman)
The future looks very bright in logistics and in code reading in general. The breakthrough technology that we have now means that machine vision is just down the line better than laser-based barcode readers. And I expect in a small number of years, you won't be even seeing anything except machine vision-based or camera-based readers. And our expectation, even on the low end, is that the majority of them will be Cognex. That's our—that's what we're working for.
Jim Ricchiuti (Senior Analyst)
Thanks a lot.
Bob Shillman (Chairman)
You're welcome.
Operator (participant)
Okay, thank you. I'm showing a couple more questions. Our next coming from Richard Eastman from Robert W. Baird.
Richard Eastman (Managing Director and Senior Analyst)
Hey, Dr. Bob, could you just. My line of question was around 3D and where in the life cycle machine vision is for 3D apps, applications, versus, you know, an established market for the laser technology itself.
Bob Shillman (Chairman)
Yeah, well, I think we're in the early stages of, we call it displacement sensing. A lot of people don't quite know what 3D means. So what displacement sensing means to us is that you're measuring height of things from looking down on it, which in the past, if you wanted to measure height using machine vision, you'd have to have the camera looking at it sideways. For example, the way you take a picture of a person, you could measure the height. You wouldn't measure the height of a person looking down on a person, typically. But, the sensors that we're now coming out with give you both the 2D view of looking down on something, so you could take all sorts of X, Y, or height and width, or width and length measurements on things.
Also, even though you're looking down, you can measure the height of things. This is technology that has been available for some time, but it wasn't possible until recently to offer these products at the same kind of accuracy and at low price and ease of use. That's what our breakthrough is going to be, very affordable price and ease of use to measure both the height, the width, and length of things.
And again, we've got- This is brand new. This will be totally new, incremental revenue for us. We've never been in this segment before, and it's selling to the same markets, as Rob mentioned, that we've been selling to, so it isn't going to incur any substantial additional sales costs to us, and we have the distribution capability. So we're just adding a new product to our portfolio in a market segment that we weren't in, that appears to be, and that we know is, for our two of our competitors, very profitable.
Richard Eastman (Managing Director and Senior Analyst)
Could you just take a shot at the size of the market now at this point in time? Is it, you know, $50 million or?
Bob Shillman (Chairman)
I think that, Rob can better answer that question than I.
Rob Willett (President and CEO)
Yeah. So, the initial product we're launching serves, you know, some very specific applications at the high end, and we think the served market for that product, specifically, that we launched, is about $10 million. So, you know, not a big market. The overall market that we expect to serve in future, based on the developments we have underway, we size at a little more than $100 million.
Richard Eastman (Managing Director and Senior Analyst)
Okay. All right.
Bob Shillman (Chairman)
By the way, this does not include coordinate measuring machines, which is a whole different story, which measure things to an ultra-high accuracy, but do so in a laboratory setting or a quality control setting, where you're taking one item off the line and measuring it carefully. Our focus has always been on the production line, where we're going to measure every product that goes by. It's a very different market than the coordinate measuring machine companies focus on.
Richard Eastman (Managing Director and Senior Analyst)
Understand. Great, thank you.
Bob Shillman (Chairman)
You're welcome.
Operator (participant)
Thank you, and we have just one final question coming from Jagadish Iyer. Please go ahead.
Jagadish Iyer (Prinicpal)
Yeah, thanks for taking my question. Just a quick follow-up. Dick, I was just wondering whether, did you have any buybacks in the quarter? Or what are your thoughts on the buybacks? And how should we be thinking about in the big picture in terms of overall earnings growth as you make these investments on trying to roll out these new products into the marketplace? Thank you.
Richard Morin (EVP and CFO)
We did not do any buybacks during this past quarter. But we intend to be more active in that regard in the following quarters in 2013. Clearly, the investments that we're making in some of the areas, like the R&D and the sales area, are designed to drive the top line growth. And with the kind of high margins that we drive, we expect that the pull-through all the way down to the operating income and bottom line will be significant and will help increase our overall EPS and EPS growth.
Jagadish Iyer (Prinicpal)
Thank you.
Bob Shillman (Chairman)
That sounds like it's the last question, and I want to thank everyone for taking part in the call. We're excited about the new products and about the other steps that management, senior management under Rob is now taking to increase the productivity of both the engineering products, getting them into manufacturing quicker and also in the sales force area to raise productivity in the sales force. And we hope we fully expect those efforts are going to yield increases in EPS in the quarters to come. And that's about it for now, and I want to thank you again for taking part in the Cognex Q1 conference call. Good evening.
Operator (participant)
Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.