Cognex - Q3 2015
November 2, 2015
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Cognex third quarter 2015 earnings call. At this time, all participants will be in a listen-only mode. Later, there will be a chance to ask questions, 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'll turn it over to your host, Chief Financial Officer, Dick Morin.
Dick Morin (CFO)
Thank you, and good evening, everyone. Earlier today, we issued a news release announcing Cognex's earnings for the third quarter of 2015, 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 a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.
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)
Yeah, thanks, Dick, and hello, everyone. I'd like to welcome each of you to our third quarter conference call for 2015. As you might have seen in the news release that we issued earlier today, we reported the third highest quarter in the company's history for revenue, for net income, and for earnings per share from continuing operations. But even though it was the third highest quarter in our history, unfortunately, those results also represent a significant decrease from Q3 of 2014 and Q2 of 2015 due to those prior quarters being our first and second highest quarters in our history, respectively. Right now, I'm at our R&D offices in San Diego. Everyone else on the call is in our Natick headquarters.
For details of the quarter, I'm going to hand the microphone over to my partner, Rob Willett, President and CEO, and I will be available at the end of the call to answer any questions that you may have for me. Rob, the microphone is yours.
Rob Willett (President and CEO)
Thank you, Dr. Bob. Good evening, everyone. As Dr. Bob said a moment ago, revenue of $107.6 million represents a substantial decline from both the third quarter of 2014 and the prior quarter. Both of those quarters included more revenue from large projects than in this year's Q3. Of course, we love large projects, but they do cause this kind of unevenness in our quarterly results. Gross margin was 76%, slightly lower than in the prior quarter due to product mix and higher support services. Operating margin was 26%. While most companies would be pleased with such a high level of profitability, we are not, because it was below our 30% long-term target. Earnings per share from continuing operations were $0.29, which included $0.02 per share from favorable discrete tax items.
Turning to the details of the quarter, factory automation revenue was $102.6 million and accounted for 95% of total revenue. Looking at our factory automation business year-on-year from a geographic perspective, we had another strong quarter in Asia, excluding Japan. In fact, factory automation revenue from Asia set a new record. Growth was led by Greater China, where we continued to make strong progress in the broader automation market. Although we are confident about the long-term prospects in this region, we see uncertainty in the near term. In the Americas, lower demand and project delays have slowed growth since the beginning of the year. Spending by U.S. manufacturers in most industries we serve was disappointing in Q3, and we don't expect to see any meaningful change this year. As expected, factory automation revenue from Europe declined significantly year-on-year.
Europe reported a remarkable quarter in Q3 of 2014 due to large orders from the consumer electronics industry. In 2015, more large orders came earlier in the year, while others were delayed until 2016. The weaker euro also contributed to the decline, reducing factory automation revenue from Europe by $4.2 million. In Japan, revenue from the region's factory automation market continued to disappoint. Revenue from Japan declined year-on-year, both on a constant currency and reported basis. In the semiconductor and electronics capital equipment market, revenue was $5 million in the third quarter, or 5% of total revenue. Demand from semi follows the market's cyclical trends. Because of that, our expectations for growth in this small piece of our business continue to be low.
In summary, revenue was as expected in Q3. However, we were disappointed that demand softened as the quarter progressed, notably in Greater China and among our automotive customers globally. Slower demand from these two areas, combined with modest growth in the Americas, led us to focus on tightening expenses and increasing productivity. We continue to hire employees and invest in our business, but the rate of increase will be significantly slower than in the past several quarters. In regard to operating expenses, RD&E and SG&A totaled $52.8 million for the third quarter, representing a significant decrease from both Q3 of 2014 and the prior quarter. Meaningful savings came from lower bonus and commission accruals, lower expenses related to patent lawsuits, and a reduction in discretionary costs. Turning now to our outlook, we expect revenue from Q4 for Q4 to be in the range of $94 million-$97 million.
Unfortunately, even the high end of our expectations is lower than the $98.5 million reported for last year's Q4. While this is disappointing, recall that we just finished 24 months of growth that was nearly double our long-term target. Q4 will also be the only quarter this year that we don't see any large shipments contributing over $2 million of revenue. Gross margin for Q4 is expected to be in the mid-70% range. Operating expenses are expected to increase by approximately 5% from Q3. The effective tax rate is expected to be 17.5%, excluding discrete tax items. Now, let's open the call up for your questions. Operator, we are ready to take questions.
Operator (participant)
Okay, so ladies and gentlemen, you can press the star followed by the one key on your touch-tone telephone, and that will place you into a question queue. So we're going to star followed by the one key, and we'll take any questions. So our first comes from Bobby Burleson. Bobby, your line is open.
Speaker 10
Thank you. I wasn't expecting to be first. You know, I think, you know, just to kick it off here, I'm wondering, on China, you mentioned things slowing down there, and I'm wondering if you have a sense for whether or not it's, you know, end-demand related or some type of inventory reduction at customers, and then also kind of what your sense is for when you can expect to see some firming or a bottom. Thanks.
Rob Willett (President and CEO)
Yeah, hi, Bobby. So, you know, I spent quite a lot of time in China last month. I mean, what I observed there is that the pace of growth in China, you know, has slowed notably during the quarter, and it seems that, you know, tighter credit has become an issue. Also, I think it's pretty well documented the sort of overcapacity that we see in the automotive industry in China. So, you know, we expect our business in China to continue to grow, but it's clearly a growth rate that's slowing down based on those factors.
Speaker 10
Okay, thank you. Just one more quick one. I'm wondering, competitive environments, you have some competitors based in Germany and Japan. I'm wondering if, you know, the strong USD is leading to any maybe pricing action that those guys are taking, you know, any heightened competition based on FX and kind of relative currencies. Thanks.
Rob Willett (President and CEO)
We don't notice, you know, specific competitors trying to take advantage of, you know, the strength of the dollar or weakening currency to drop price, I would say. So, you know, generally, we have, you know, one competitor that we consider our main competitor in the market, Keyence, a Japanese company. It's a very well-managed company and one that reports very high gross margins. And, you know, I don't think their strategy is to try to take share with lower price. So, generally, I would say we don't see that. However, of course, you know, we're pricing locally in euros and in renminbi in China. So, we do take a hit to price when we maintain our local prices as we have been doing in those markets.
Speaker 10
Thank you.
Operator (participant)
Okay, thank you. So we'll take our next question from Ben Rose from Battle Road Research.
Ben Rose (President)
Good afternoon. Rob, I wondered if you could comment on what you're seeing in terms of demand, both in the U.S. and abroad, in terms of other industries outside of automotive. I know you mentioned automotive in your remarks, but is there any additional color you can provide there? Noticing that the U.S. was up modestly year-over-year, I guess a follow-up would be, again, relating to the duration, what's your sense of the North American outlook?
Rob Willett (President and CEO)
Yeah, hi, Ben. So, in general, you know, we've had a very strong year in automotive, and we've been reporting, you know, very strong quarters in our strongest quarters ever, really, this year as we've moved through. But now we're starting to see that growth rate slow down. You know, we're still seeing growth, but we're seeing it slow down in automotive. In other industries, you know, we're seeing in the U.S., I think we're seeing, you know, very broad base of, you know, slow growth or no growth across many of the industries we serve. And I think that's due to a number of factors that are pretty well documented, you know, by other companies at this point, including the strength of the US dollar. So, I would say it's a broad-based slowdown.
I think affecting our U.S. growth rate is the fact we haven't seen the kind of large orders we expected in America from logistics companies that generally have been seem to have been delaying some of their spend, whether it's postal or e-retail companies, which may be reprioritizing or just deferring spend based on the current conditions. But you are sort of more broadly, and I would say, you know, in Europe, you sort of see the flip side of that where you think, I think the weak euro has really helped a broad base of industries report growth so far this year. So, in Europe, we saw growth, you know, excluding large orders, factory automation revenue from Europe in Q3 grew double digits year-on-year in local currency, and growth came from a range of industries, including automotive, pharmaceutical, food, and logistics.
Your second part of the question, Ben, asked, you know, the sort of duration that we expect the slowdown to last for. I think that's very difficult to call, but I would say I don't think we see any change really in the environment until after Chinese New Year. So, I think we're in a period as our guidance gives you that impression that we're not optimistic about the near term, and I think we'll see how things progress as we move through the first quarter.
Ben Rose (President)
Okay, thanks very much for the thorough answer.
Operator (participant)
Okay, thank you. And our next question comes from Jonny Wright from Nomura.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Good evening, guys. This might have gone down kind of a dead end, but on the large projects, and you're talking about the fact that there was none of these $2+ million projects in the 4Q guide. I know you don't like to give much detail around the large projects. Could you frame either what you might have expected three months ago in terms of large projects in 4Q, or, you know, what a typical run rate might be for a quarter without mentioning any specific projects, obviously?
Rob Willett (President and CEO)
Yeah, so I think, you know, I think as we came through the first half of this year, you know, we saw, you know, a lot of significant revenue coming from larger orders, specifically in the consumer electronics industry. And I think, and also we saw opportunities in our funnel of significant size in logistics. And I think we would have expected those to keep playing out, you know, into the second half of the year, but what we saw is generally projects got delayed for a variety of reasons, some of which included delays in product roadmaps, perhaps due to changes in company strategy or due to the availability of engineering resources and other priorities. And in other cases, I think we saw customers trying to cut their spending, you know, based on the environment that they saw.
So, as a result, you know, we went from, you know, significant revenue in the first half from those large kind of orders. I'm not sure I want to put a specific number on that, but then really drying up into much less in Q3, and as we said, nothing over $2 million in Q4. And I think, you know, perhaps preempting your second part of a question you might ask would be, when do we think that's going to change? And I think it's the same answer I just gave Ben Rose, which is really not until after Chinese New Year at the soonest.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Okay, great. And given that comment on kind of the near-term bearish outlook, you know, I think you talked about the still adding headcount to support the business growth, but at a slower rate than before. I mean, should we consider to continue to think that SG&A goes up in 2016, or is this, you know, time to manage the cost base in advance of a relatively tough year?
Rob Willett (President and CEO)
Well, I think it's a little early to start giving, you know, guidance on 2016, but I would say in general, you know, that Cognex is a growth business, even though, you know, this has been a challenging second half of the year, you know, we're still going to report, you know, in the midpoint of guidance, you know, we'll report mid-single digit growth for the year after having grown on the order of 40% last year. So, we're a company that believes in our technology, believes in our market, and believes in our growth prospects. So, you know, we're going to continue to invest and develop the business, not try to, you know, cut our way to greatness as we go forward.
But that said, yes, we're going to try to make sure that particularly, you know, our R&D spend, which for the first time in a while popped up over 15% of revenue, you know, is controlled within the rate of long-term revenue growth that we expect to see as the year plays out. And, you know, we'll be keeping an eye on those costs carefully as, you know, certainly through this period of slower growth.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Great. Thanks for your time.
Rob Willett (President and CEO)
Thanks.
Operator (participant)
Okay, thank you. Our next question comes from Holden Lewis from Oppenheimer.
Holden Lewis (Managing Director of Equity Research)
Great, thank you very much. Perhaps shifting over a little bit to sort of the gross margin question, I guess in the absence of any sort of large orders in Q4 and in the absence of any SISD in the business now, I mean, it seems like that would be an environment that you would expect to see a higher than mid-70s operating margin. I mean, you know, you were certainly reporting, I think, high 70s on the factory automation business standalone before the split. So, I'm just sort of curious why we're looking at that mid-70s still instead of something closer to the factory automation norm in fourth quarter.
Rob Willett (President and CEO)
Sure, Holden. Yeah, so I think as you point out, with the sale of SISD, our gross margin target has been adjusted upwards to the high 70% range. The reported gross margin can move depending on a number of factors, including volume. Obviously, in this case, I think as we see lower revenues, volume is important. The amount of service that we provide to large customers. So, we may have, in the case of this year, big deployments that we did earlier in the year where we're now having service to support those deployments, which will be at lower than, you know, fleet average gross margin. And, of course, the impact of currency exchange rates on revenue is another reason. So, I would cite those as the main factors that we're forecasting or projecting gross margin to be lower than our current high 70% target.
Holden Lewis (Managing Director of Equity Research)
Okay, but Forex is fairly stable here sequentially over most of the last three or four quarters. And, you know, we're sort of several quarters now beyond the placement of those orders in Q2. You know, so, is it primarily just a volume issue and those other two things are sort of out in the wash, or, you know, is there something that's really sort of lingering and dragging on for some reason?
Rob Willett (President and CEO)
Yep, yep. So, I think a number of factors. One includes volume, as you said. I think also mix, you know, of our products. So, in quarters like in Q2, we had a higher amount of software-specific deployments, which come with higher gross margins. And then that amount of service revenue, the amount of service revenue that we report, can also be dilutive, right? So, I would say these are sort of quarter-specific in nature, and that's what you're seeing in Q3 and Q4.
Holden Lewis (Managing Director of Equity Research)
Okay. And then just as my follow-up, the, you know, so clearly things have slowed down at an increasing rate as we've gone into Q3 and then into Q4. And I know you don't guide for 2016, but I mean, normally you expect that the first quarter 2016 revenue would be somewhat below the fourth quarter revenue from the previous year. Is there any reason that we wouldn't expect that to happen? I mean, do you think that the sort of the Chinese New Year passing would have that big an impact, or have these logistics customers said, "Look, we just need to turn the calendar, then we're spending," or is there any reason to think that the issues that you're citing in Q3 and Q4 are really going to be relegated to this, or does this feel like a broader, longer economic slowdown to you?
Rob Willett (President and CEO)
Yeah, it's difficult to call. I would say, you know, I'd say we're cautious based on what we're seeing right now, you know, and particularly the news out of China, you know, in terms of that market. So, I think when is that going to turn and how does that relate around that period up to Chinese New Year is difficult to say. So, you sort of said what could turn it, yeah, sure, you know, we could see improvements in some of our end markets, and we could see larger orders, you know, hitting and coming in. But I think we're not currently feeling that, you know, it's an environment to expect that based on the kind of macro envelope that we see. But, you know, it's too early to be giving you guidance on Q1.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Okay, great. Thank you, guys.
Rob Willett (President and CEO)
Thank you.
Operator (participant)
Okay, thank you. Our next question comes from Jim Ricchiuti from Needham & Company.
Jim Ricchiuti (Analyst)
Rob, I was wondering, how would you characterize the ID business overall, the ID products business in the quarter?
Rob Willett (President and CEO)
Yep, so our ID products business continues to perform well. I would say I would characterize it as performing very well in Q3, even with the delay in large logistics orders. So, I think within our ID, we have our base business in ID, and then we have logistics. The base business is performing very well at the moment, and logistics less well in the Americas based on deferred orders, deferred large orders that we've seen. We've launched a number of very important new products in our ID business this year. We launched the DataMan 150 and 260, which reasserts our technology leadership in the mid-range fixed mount part of our business, which is very significant and is really our core market. So, you know, we continue to be optimistic.
Now, in logistics, some projects that we expected to see this year in the Americas were pushed out due to customers juggling multiple priorities in advance of their peak shipping season. But in Europe, traction has come along nicely. There's a large long-term potential in China as well for logistics that continues to make us very optimistic about the long-term prospects for ID. So, generally, we continue to be very positive about our ID business.
Jim Ricchiuti (Analyst)
Is the base business growing 20% or better?
Rob Willett (President and CEO)
I don't think we give specific outline on that, but I would say it's definitely performing at our expectations right now, even in the current environment.
Jim Ricchiuti (Analyst)
With respect to the projects that were pushed in the Americas, are you getting any further sense from those customers how they're looking at potentially 2016 in terms of getting re-engaged in that process?
Rob Willett (President and CEO)
You know, I think their need for what we do is still considerable, and, you know, certainly, you know, we have lots of engagement with those large customers. So, we believe that, we're still very optimistic about the long-term prospects and the prospects as we go into 2016 for logistics business in America.
Jim Ricchiuti (Analyst)
If you look at the logistics business in the Americas, we know you have your core customers that you've been selling to, and then potentially some new e-commerce or traditional brick-and-mortar retailers that are expanding into doing more e-commerce. How do you look at that market opportunity? Are you seeing some of those newer customers hesitant, or are they still, do you feel, moving forward with plans?
Rob Willett (President and CEO)
No, we see sort of those base of new customers coming in, you know, who are placing, you know, $50,000-$200,000 orders with us. We see plenty of new customers coming over to Cognex, and these are, you know, names that are all famous to all of us, particularly in the retail space. So, that part of the business looks strong and developing well. I think where we've seen, where we've seen, you know, being disappointed in our growth this year has been more around the very large customers that we've been bringing along and have seen business from in prior quarters where they seem to have been deferred or delaying projects based on some of the issues I outlined.
Jim Ricchiuti (Analyst)
One final question, if I may, just on the new product front, it looks like you're keeping a pretty healthy level of R&D. Is, you know, it's early yet, but, you know, how active a year is it going to be in terms of new products 2016?
Rob Willett (President and CEO)
Well, first of all, you're right. This year has been, you know, been important. We've introduced some really breakthrough technology in terms of PatMax RedLine. You know, so much of Cognex's technology is based around machine vision tools, and a PatMax RedLine is a feature location technology that reinvents PatMax with tremendously more speed and performance on the same hardware. So, that's exciting, and it's the kind of tool that you see from Cognex, and it's really outperforming everybody else. We've also introduced two important hardware platforms, In-Sight 5700 series, which is a very, you know, high-performance, high-resolution product range, and then our new DataMan 150 and 260. But you're also asking about next year. Again, it's early to talk about next year, but we have a, you know, very full and vigorous pipeline of new technology and products we're bringing to market.
I think you may also hear us talk about even some new markets we'll be entering next year to broaden our served market. I think as you'd expect from Cognex, the technology leader and the company that's investing most in this space, you know, we've got a pretty fulsome pipeline that we'll be looking forward to sharing with you next year.
Jim Ricchiuti (Analyst)
Thank you.
Operator (participant)
Thank you. And our next question comes from Richard Eastman from Robert W. Baird. Richard, please go ahead.
Richard Eastman (Managing Director and Senior Analyst)
Sorry, good afternoon. Robert, could you just speak to a minute or two about maybe your sales in China? Can you just, you know, with maybe two or three buckets, just give us a sense of where your end market exposure is there? So, in other words, you know, in China, you know, is auto, you know, approximately half the business or more? And then I'm just curious about a couple other end markets that you have exposure to there.
Rob Willett (President and CEO)
Yeah, sure, Rick. So, you know, consumer electronics traditionally is Cognex's largest market in that space, or, you know, electronics broadly, including contract manufacturing, electronic components, and consumer electronics in general. So, that would be our largest market, and that would be, you know, let's broadly say approximately half of our business. And then automotive is our second largest market. We've seen a lot of growth in the automotive space, and that might be approximately a quarter of our overall business there. And then the rest is very broad-based, and particularly we see a lot of growth more in machine builders serving a broad range of industries in all kinds of markets like food and consumer products.
Richard Eastman (Managing Director and Senior Analyst)
Okay. And when you go to market in China and you have the auto exposure there, are you going to market through the traditional, you know, robotics or automation vendors, or are you basically marketing your products in China directly to the end user?
Rob Willett (President and CEO)
Right. So, you know, domestically in China, we go to market much as we do everywhere else in the world, which is we have a direct sales force that sells to strategic accounts and, you know, large businesses. And then we have a pretty well-developed network of distributors and machine builders. And broadly speaking, the direct is a little less than 50%, and the rest of the business is a little more. The partners are a little more than 50%. And that gives us, you know, great coverage across what is a, you know, very large market.
Richard Eastman (Managing Director and Senior Analyst)
Okay, okay. And then just as we, again, not to be specific on new products and opportunities for 2016, but are we, how do you feel about as we move into 2016 and through 2016, some of the new end-market opportunities or product opportunities that we've been talking about for a few years, like medical, maybe on the food side, can they drive some noticeable growth, I mean, points of growth next year? Do we have enough traction here late in, you know, 2015 to maybe deliver on some of these other opportunities in 2016?
Rob Willett (President and CEO)
Well, I would say, you know, whether we really outperform on growth next year is likely to be more a function of how successful we are within ID and logistics broadly, right, and how successful we are in electronics broadly, you know, based on, you know, some very significant opportunities that we see in those markets. You know, we're making a lot of progress in terms of percentage growth rates in some of those markets that you cited, you know, and we can have multi-million dollar customers in markets like food and pharmaceuticals. But in terms of really moving the needle, I would be cautious, you know, about saying that, you know, we're going to see a breakout year in those types of markets that would be noticeable on a dollar basis to you. It's more of a broad-based business.
Richard Eastman (Managing Director and Senior Analyst)
Okay. And just the last question, I'll toss this one at Dick, but I'm just curious, the accounts receivable number, it has come down sequentially. I think in the second quarter, the unbilled piece was rather large. Now, we didn't seem to disclose the unbilled. But is that tied to the tail end of your large customer? In other words, is the visibility on collections by year end, you know, very high there on the receivables?
Dick Morin (CFO)
Yeah, you're absolutely right that the big amount in unbilled revenues at the end of the quarter was tied, at the end of the second quarter was tied principally to a very large customer. All of that was essentially invoiced in Q3. Much of it has been collected, and we would expect that all of it would be collected by year end.
Richard Eastman (Managing Director and Senior Analyst)
Okay, okay. And one thought, in the Q, there's a bit of a disclosure on a really, really small acquisition, this Manatee Works. Just prospects there or potential there or interest there?
Rob Willett (President and CEO)
Yeah, so we did make a small acquisition in Q3. Manatee Works is a leader in the space for barcode reading on smartphone platforms. Great technology, wide customer base in terms of a network of systems integrators and solutions that they provide. So, you know, I think plans for that business, you know, complement broader technology and market work that's underway at Cognex. It's too soon to say more about that, but yeah, a nice, but as you rightly say, small acquisition for us.
Richard Eastman (Managing Director and Senior Analyst)
Understood. Okay, thank you.
Operator (participant)
Thank you. Our next question comes from Joe Giordano from Cowen. Joe, please go ahead.
Joe Giordano (Managing Director)
Hi everyone. Thanks for taking my question. When you look today at Cognex versus maybe six months ago on the heels of the large order, given the environment today, is there anything incremental that you've identified internally that you want to focus on or maybe where you want to pinpoint allocation of capital? Anything around those lines?
Rob Willett (President and CEO)
Hi Joe. You know, I would say, you know, Cognex, we have a pretty well thought-through long-term growth strategy or a set of strategies, and I would say those have not broadly changed over the last six months. You know, we're very well connected to our customers who are the most sophisticated, you know, manufacturing technology companies in the world. So, I think we have a good understanding of where they want to go and the importance of vision to their roadmaps and what we bring to the party. So, you know, we're not likely to be changing, you know, based on shorter-term macroeconomic headwinds or other things that are going on, but we are trying to be nimble in terms of where, you know, who the winners are and who's losing share.
You know, so in some cases, you know, we're certainly making sure that we're focusing our efforts perhaps in different regions or with different customers who we think have the highest potential and the highest appetite for our technology. But in terms of, you know, the growth platforms around ID, around kind of China and the long-term automation prospects there, around some of the opportunities we see in consumer electronics and automotive, those really haven't changed, and nor do I think will change over the next few quarters.
Joe Giordano (Managing Director)
Great, thanks for that. Are you getting the sense that any of your customers are maybe trying to like retool some of their existing lines, almost in excess, kind of recycling what they have in an attempt to avoid near-term spending, or is it more of just a, you know, we're just holding back and this is kind of truly more of a push-out?
Rob Willett (President and CEO)
Well, I think, you know, with managing this business over, you know, many years, you can see that there can be times when customers are more focused on retrofitting their existing lines and other times when they're building new lines, for sure. I would say, you know, though in our big end-user markets like consumer electronics or automotive, we don't really see a change in that environment over the last few quarters. You know, that tends to be more of a long-term strategy about when they're really introducing new innovative products or technologies and when they're in a year, perhaps when they're more in a sustaining mode. So, you know, I think that's well known to us, and I don't think there's a fundamental change in the dynamics of what's going on.
Joe Giordano (Managing Director)
Okay, fair enough. And then last one for me, is it a fair statement that Q2 would at least be the only Q of this year so far that contains an order with a magnitude that could potentially be, you know, a disclosure on a 10-K? Anything like outside of a normal kind of run rate type size?
Dick Morin (CFO)
Well, the 10-K disclosure isn't related to any particular quarter. It's related to any customer whose purchases from us where the revenue would exceed, you know, 10% of total revenues for the year.
Joe Giordano (Managing Director)
Sure.
Dick Morin (CFO)
This particular customer did in fact purchase from us in Q1, Q2, and Q3, but the most significant amount of those purchases were in fact in Q2.
Joe Giordano (Managing Director)
Okay, great. That helps. Thank you very much.
Operator (participant)
Our next question comes from Jonny Wright from Nomura. Jonny, your line is open.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Hi guys, just jumping back in. Can you give us an update on capital allocation strategy given the uptick in the share repurchase this quarter and the new authorization?
Dick Morin (CFO)
Well, we, you know, we in fact have been consistently buying back shares over the last couple of years. We want to make sure that we buy back all of the dilution that results from stock option grants, which are a very important part of our total compensation package here at Cognex and which we feel very strongly is something that we need to continue to do. We also took advantage of a lower price during the quarter and took an opportunistic approach relative to buying back some of our shares. Given that, we were left with only, you know, $16 million of authorization left, and the board felt it appropriate to increase that level by authorizing an additional $100 million for purchases as deemed appropriate in the future.
Rob Willett (President and CEO)
Jonny, just to expand on that answer, I think, you know, our number one, you know, priority for capital allocation is acquisitions, but we're highly selective in how we think about those. So we really want to buy, you know, only really companies that we consider an extraordinary fit and of high quality that we can integrate into the business of Cognex. So there are companies that are, you know, on our shopping list that are not necessarily actionable, but if they were and when they are, you know, that's a priority for capital allocation. Dick talked about share repurchases and, of course, you know, we continue to pay a dividend. So that's a little bit more on that.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Thanks. I mean, any sense of like a max net cash balance you guys would want to run, or is it just really going to be, you know, opportunity to sit on the buyback and see what acquisitions come along?
Rob Willett (President and CEO)
Yeah. No, there's no, I don't think there's any ceiling on our capital. You know, I think we consider our, you know, our cash to be the consequence of our success, you know, so we don't apologize for that. And we think it does give us a lot of strategic options going forward.
Jonny Wright (Equity Research Analyst and Head of US Industrials Research)
Great. Thanks again.
Operator (participant)
Okay, thank you. And our next question comes from Holden Lewis from Oppenheimer.
Holden Lewis (Managing Director of Equity Research)
Thank you very much. Just, you had called out sort of Europe and specifically European automotive as being fairly healthy. I guess along the lines of the conversation you just had on China, can you sort of give us a sense of how big automotive is in Europe, what your exposure might be to Volkswagen? And though things are strong now, are you seeing some of the issues in that industry over there, perhaps, you know, sort of causing that strength to fade? What kind of visibility do you have on that?
Rob Willett (President and CEO)
Yeah, hey Holden, you know, I spent some time, a few days with the European sales team last month and kind of looking at that. We have had a lot of strength and success in the European automotive business, which is, you know, last year was our second largest European market after consumer electronics. So in that market, I would say what we do see is some, you know, some caution creeping in among the industry in terms of their plans coming off a period of very high growth. It's difficult to say what degree that's kind of the impact of the Volkswagen situation or something more broadly, whether it also relates to China, you know, and the excess capacity that exists in China, because still significant manufacturing in Europe of luxury vehicles is for China, right? So there are those aspects going on.
I think an important thing to realize about, you know, our business with automotive is the majority of it is really with tier-one automotive suppliers, not necessarily end user brand owners. Those tier-one suppliers can be affected by changes by end users significantly. It's sometimes a little difficult to call whether one particular brand owner's problem will translate into less or more business for our tier-one customers. I think another thing to bear in mind is that, you know, sort of quality scandals and problems can often lead to good growth opportunities for Cognex, where, you know, whether there's problems around manufacturing quality or, you know, such as the airbag problem we saw earlier in the year, that often can lead to a lot of opportunity for machine vision to be installed.
I would say, you know, we're cautious about what's going on in Europe and in automotive, but we still, you know, think the long-term prospects are good, and it's a little bit difficult to see how that plays out over the next few quarters.
Holden Lewis (Managing Director of Equity Research)
Okay, thanks. And then lastly, can you talk a little bit about the month-to-month cadence during the quarter? Is this a case where, you know, obviously when you first gave guidance, you were into the quarter and things looked good the first couple of months, and then it was that, you know, big last month of the quarter that was weak, or did you see sort of just a, you know, softening as you went kind of thing?
Rob Willett (President and CEO)
I would say we've seen a softening as we've moved forward through the year in general, right? So that's what I would say we've seen.
Holden Lewis (Managing Director of Equity Research)
Okay, great. Thanks guys.
Operator (participant)
Thank you. So again, ladies and gentlemen, should you have a question, press the star followed with the one key. Again, for questions, press the star followed with the one key. And we'll take our next question from Jeremy Capron. Please go ahead, Jeremy.
Speaker 11
Hi, this is Grace Lee sitting in for Jeremy Capron. I have a question regarding the operating expenses guidance for fourth quarter. You were guiding for a 5% increase quarter-over-quarter, and that seems to put the operating expenses the highest in the fourth quarter in the past few years. Could you give us a color around what leads to an increase in operating expenses for 4Q guidance?
Rob Willett (President and CEO)
The guidance we gave was 5% up over Q3, which I don't know. I mean, so I think that's what I would point to. It probably does mean it's a higher Q4 expenses than we've seen in prior years. I would say, you know, that Grace, we consistently invest, you know, in innovation and in our sales channel to ensure that we're well positioned for the long term. Right now, we do have a stronger focus on discretionary cost management and productivity. Some of the savings that we saw in Q3 were around employee vacation times and lower bonus and commission accruals, and we won't have the benefit of all of those in Q4. So that's the sequential color on that overall. I think the overall, you know, color would be, you know, we consider ourselves a growth business. We're still growing this year.
We expect to go on growing, whether it's at the very fast growth rates we've shown you in recent years or the slower growth rates we currently are showing. You know, our view of the long-term growth prospects of Cognex for our factory automation business continue to be around 20%. So as long as we consider that the case, we're going to be investing with that prize in mind, and that's our strategy.
Speaker 11
Okay, that's very helpful. Thank you.
Operator (participant)
Okay, well, I'm showing no further questions in the queue. I'd like to turn it back to Dr. Shillman for any concluding remarks.
Bob Shillman (Chairman)
Oh, thank you. To wrap up, you know, we wish we had reported record-breaking results earlier tonight for the third quarter, but we didn't. And it looks like we won't be breaking many records for the next quarter either. Although our growth may be stalled, we are confident about the future of machine vision and of our company, which continues to be the world market leader in our business. And we will persevere just as we have during past slowdowns. We will continue to work hard, play hard, and move fast so that we'll be ready when conditions improve. I want to thank all of you again for joining us tonight, and we look forward to speaking with you on our next quarter's call. Good evening.
Operator (participant)
Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.