Cognex - Q4 2013
February 13, 2014
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Cognex fourth quarter 2013 earnings call. At this time, all participants will be in a listen-only mode, but 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. And as a reminder, today's conference is being recorded. And now I would like to turn it over to your host, CFO Rich Morin. Please go ahead, sir.
Rich Morin (CFO)
Thank you, and good evening, everyone. Earlier tonight, we issued a news release announcing Cognex's earnings for the fourth quarter of 2013, and we also filed our annual report on Form 10-K. 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 1 of the earnings release, and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit 2.
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. Rob Shillman.
Rob Shillman (Chairman)
Thanks, Rich, and hello, everyone. I'd like to welcome each of you to our year-end conference call for 2013. As you can see in the news release issued earlier, we reported outstanding financial results for the fourth quarter and for the year. Right now, I'm in San Diego. Everyone else is suffering the weather in our Natick headquarters. But even with that distance, through the miracle of modern science, I can still hand the microphone over to my partner, Cognex's CEO, Rob Willett. But before I do that, I want to spend some time telling you about a recent decision that we made about what we'll be talking about, or more accurately, what we won't be talking about in this call and in future conference calls and investor presentations.
Those of you who have followed us for many years know that Cognex has always prided itself on being a very open company. We have always provided our investors and analysts and shareholders a great amount of detail about our business. We openly discussed our plans for new products and for the expansion of our sales teams around the world. We told you our plans to increase headcount in engineering and in sales, and we described the new markets that we plan to enter, and I know that many of you found that detailed information to be helpful. However, unfortunately, our competitors also found it helpful.
In the past, Cognex focused on relatively small market niches and had very few competitors in them, and all of those competitors were small and thinly financed, so disclosing details of our business to you didn't have any risk, even if they were listening. But now we're addressing very large markets with breakthrough technology, where we have significant entrenched international competitors who are defending their turf with older products. The business plans that we've been providing to you are battle plans for them. We will continue to hold conference calls and attend investor presentations to talk about our successes and the challenges that we face, but we won't go into nearly as much detail as we have in the past. Following our prepared remarks today, I'm sure that you'll still ask those detailed questions, but I hope that you'll now understand why we won't be giving detailed answers.
With that, I'll now hand the microphone over to my partner, Rob Willett. Rob, the microphone is yours.
Rob Willett (CEO)
Thank you, Dr. Rob. Good evening, everyone. Earlier tonight, Cognex reported its fourth consecutive year of record revenue. Revenue for 2013 was $354 million, which represented an increase of 9% over 2012. This growth came from the factory automation market, where revenue increased 16% year-over-year to set a new annual record in absolute dollars. We've been investing in new product development and sales initiatives to drive growth in this market, and we were pleased to see those efforts deliver for us as the year progressed. In the second half, factory automation revenue growth picked up, growing 23% year-over-year. From a product standpoint, our leading performer was ID products, with growth in excess of 30% for the year.
From an industry perspective, consumer electronics and automotive, both early adopters of vision on the factory floor, were important contributors to growth in 2013. We also saw good momentum in verticals that are newer users of machine vision, such as logistics, consumer products, and medical devices. Every geographic region contributed to the record annual revenue that we reported tonight, with the exception of Japan, where we saw moderate growth, but it was obscured by currency exchange rates. Gross margin was strong at 76% for the year, a 100 basis point increase over 2012. This came from a number of factors, including a higher percentage of revenue from factory automation, the most profitable part of our business, higher unit volumes, and cost reductions through purchasing improvements. We were highly profitable in 2013, even with our investments in engineering and sales.
We reported an operating margin of 24% and a net margin of 21%, which, excluding stock option expense, was 23%. The year ended on a strong note, with record revenue reported for the fourth quarter and at the high end of our expected range. In addition, reported earnings were $0.23 per share for Q4, which was $0.01 above the Thomson Reuters First Call consensus estimate. Let's turn now to the details of the quarter. In factory automation, revenue was a record $79.8 million in the fourth quarter, and accounted for 83% of total revenue. This level is an increase of 28% year-on-year, and 11% higher than the prior record set just last quarter. Looking at factory automation from a geographic perspective, our best performing region was the Americas, where we reported record revenue in Q4.
The Americas was our fastest growing region, both year-on-year and sequentially, and the largest contributor in absolute dollars to factory automation growth. We saw particularly strong performance in consumer products, automotive, and ID. Factory automation revenue from Europe also set a new quarterly record in Q4, helped by the favorable impact of foreign exchange rates. It was the second quarter in a row where factory automation revenue from Europe grew both year-on-year and sequentially. This may be an indication that our prospects in Europe are improving after a period of slower growth. In Asia, excluding Japan, fourth quarter revenue increased substantially year-on-year due to our strong execution, particularly in China. As expected, revenue declined from Q3 to Q4, due to what we have found to be the seasonal nature of consumer electronics demand in China.
We typically see higher revenue in the second and third quarters as manufacturers set up production for holiday shopping. Factory automation revenue from Japan increased on a sequential basis in Q4. While the weaker yen negatively impacted reported revenue from Japan throughout the year, we were pleased to see improvement in the underlying business from that region. Revenue from the Semiconductor and Electronics Capital Equipment market, or SEMI, as we call it, was $5.2 million in the fourth quarter. That level represents a decrease of 6% year-on-year and 9% from the prior quarter. In the surface inspection market, fourth quarter revenue was $10.7 million. That level was below our expectations because we deferred revenue related to a new software release. Our surface inspection products are large, sophisticated systems, where the final testing of new functionality must be performed at customer sites.
That timing issue aside, surface inspection ended 2013 with annual bookings growth, and we continue to do well in this market. Turning next to operating activities. We made significant investments in our business during 2013 to enable growth in the years to come. We invested in our long-term product portfolio, spending more on RD&E than in any year in our history. RD&E was $48 million in 2013, an increase of $6.5 million, or 16% over 2012. This will result in new product launches, which will drive our growth in 2014 and the years to come. In addition, in the sales area, we significantly broadened our market reach during 2013, both in terms of adding resources and partners and in the development of our sales force.
In summary, we had a very successful year in 2013. We reported record financial results. We introduced innovative new products, which we believe further strengthened our leadership position. We expanded the sales force that sell those products, and we have an exciting lineup of product launches scheduled for 2014 and beyond. In regard to guidance for Q1, we expect that revenue will be in the range of $88 million-$91 million. This is a decrease from the record revenue reported tonight for Q4, which is typical given the normal decline that we see from Q4 to Q1. Operating expenses are expected to be relatively flat on a sequential basis. The effective tax rate, excluding discrete tax items, is expected to be 19%. Now, let's open the call up for your questions. Operator, we are ready to take questions.
Operator (participant)
Okay, ladies and gentlemen, at this time, if you do have a question or comment, you can 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 at this time. And we'll give everyone a moment just to think of questions. So again, I will remind everyone, if you do have a question, you can press the star followed with the one key at this time.... Okay, and we do have some questions coming in. So we'll take our first question from James Ricchiuti from Needham & Company.
James Ricchiuti (Analyst)
Hi, good afternoon.
Rob Willett (CEO)
Hey, Jim.
James Ricchiuti (Analyst)
Okay, well, let's see which questions you're not gonna be answering. Can you give us the revenues for the ID products business?
Rob Willett (CEO)
I think we've decided not to share that data anymore.
James Ricchiuti (Analyst)
Right.
Rob Willett (CEO)
I think we did tell you that growth, you know, for the year was over 30%, and the ID products continue to do well, but they're reported as part of FA overall.
James Ricchiuti (Analyst)
Okay, any chance, rather, of giving us the year-over-year increase in Q4 in that part of the business without giving the dollar amount?
Rob Willett (CEO)
I think, no, I think we're just gonna say it was more than 30%.
James Ricchiuti (Analyst)
Yes.
Rob Willett (CEO)
Yep, yeah.
James Ricchiuti (Analyst)
Okay, can you talk a little bit about the Factory Automation business in China? You alluded to the fact that, you know, this, you're seeing seasonality in that business. I think you have more experience in it in Q4 versus Q3. How is it year-over-year? And what are you seeing thus far in Q1, just given the concerns people have about China?
Rob Willett (CEO)
Yeah, you know, I'd say we're very positive about our business in China, in factory automation. You know, so we've seen sequential growth in regularly in all quarters recently. And you know, I think we're very positive and optimistic about you know growth in China. You know, inevitably, it's a strange time, Jim, to ask that question because of Chinese New Year.
James Ricchiuti (Analyst)
I know, I know.
Rob Willett (CEO)
Timing of Chinese New Year. But, you know, I think taking that noise aside, I would say, yeah, we're, we're looking forward to, I think, what will be a very strong growth year for us, in China.
James Ricchiuti (Analyst)
Okay, I have one more question. I'll jump back in the queue. The system business declined in 2013. I think that's the first decline in recent memory. And some of it you alluded to in Q4, what some of the issues were. But how should we think about that business in 2014?
Rob Willett (CEO)
Yeah. So, we're feeling good about the surface inspection business. It's. You're right, it did decline last year, and, you know, revenue for the year was $46 million. But really, you know, it really comes down to the fourth quarter, where we didn't see the kind of growth we were expecting, purely as a result of this software release, you know, working on it with customers. So, that was what drove it. On the underlying booking situation is good. We're seeing growth, and we do expect the business to grow in 2014.
James Ricchiuti (Analyst)
Okay, thanks. I'll jump back in the queue.
Rob Willett (CEO)
Thanks.
Operator (participant)
Okay, thank you. Our next question is from Ben Rose, from Battle Road Research.
Ben Rose (President)
Good evening, gentlemen. Dr. Rob, I guess you're not regretting your move to San Diego at this point?
Rob Willett (CEO)
No, it was timed properly.
Ben Rose (President)
Yes, it was impeccable timing, I must say. Just a few questions. You know, regarding China, which I know you say fell sequentially, somewhat due to seasonal reasons. Can you just walk us through a little bit, how seasonality plays into things? And I guess sort of an add-on to that is, to what extent is the business driven by the product cycles of your customers there, particularly in consumer electronics?
Rob Willett (CEO)
Yes, Ben. So I think, you know, I think as I said to Jim previously, you know, we see strong underlying growth in our business in China, and year-on-year quarterly growth is pretty regular and strong in the Cognex business in China. What I referred to in my prepared remarks was that, you know, we do see some seasonality in our business in China, and generally, what we see are very strong quarters in Q2 and Q3, and then slower quarters, relatively in Q4 and Q1.
It really has to do with the design cycles of our customers, particularly in electronics in that market, where, you know, generally they're specifying their new products now and testing products, then they're placing large orders on us in Q2 and Q3 so that they can ramp up production for the holiday season, which is, you know, it's for the world, is December, you know, outside of China, or for China is, you know, right now, around Chinese New Year. So that's the kind of cycle that we see.
You know, and added color I might put on that is, you know, we’re gonna see similar cycles related to logistics, you know, which is becoming a more important market for us again, where our customers invest in capacity in Q1, Q2 and Q3, and generally, they’re not investing in Q4 ’cause they’re trying to get as much product out of the door on time as possible.
Ben Rose (President)
Okay. And on the ID products relating to the retail and logistics market, are you seeing, I think, increased interest on the part of, let's say, multiple e-commerce vendors and logistics vendors? I didn't see any press releases, I guess, in the last few months, but maybe you could just get some update there.
Rob Willett (CEO)
Sure. So we're, you know, on a journey into the logistics market. It's going very well. You know, we have real advantage technology in that space in terms of its performance. And, you know, we really saw our business pick up, you know, substantially in the second quarter of last year, and we did report two very major customer wins. And, you know, we're seeing substantial follow-on orders from those and many new customers, you know, big names in the industry, placing initial orders, and, you know, we expect them to grow, too, substantially. So we're very, very positive and optimistic about what we're doing in logistics, and we're reporting it as part of our overall ID business, which is, you know, growing in excess of 30%, and we expect to go on doing so.
Ben Rose (President)
Okay, thank you very much.
Rob Willett (CEO)
Sure.
Operator (participant)
Okay, thank you. Our next question comes from Richard Eastman from Robert W. Baird. Please go ahead, Richard.
Richard Eastman (Managing Director and Analyst)
Thank you. Can I just maybe double back for a minute? The factory automation year-over-year growth rate, the 28% that it works out to, can I just dig into that a little bit without any added color on product ID? I'm curious as to, you know, how the underlying base factory automation business did, and could you at least maybe suggest total revenue of $80 million was more in the quarter than we had anticipated, and it's maybe more than seasonally one would expect. And I'm just curious if, you know, the upside came in the product ID side of the business, or if you saw some good traction on the non-ID factory automation or the In-Sight products?
Rob Willett (CEO)
Sure, Rick. Yeah, so the answer is we saw significant traction in both sides of the business. ID was very good, as was, you know, the big vision part of our business in factory automation. And I think, you know, that was very encouraging to us, and we, you know, we've seen, I would say, sequential strengthening, as we've gone through last year in the vision part of our business. You know, and particularly in the Americas, where we saw a lot of business we've been working on for a long time, some of it years, really, you know, customers started to place, you know, substantial orders and then wanted those orders before the end of the year.
So we were, we were very encouraged by that, and it, it wasn't just ID, it was, it was certainly vision systems, and vision software and, you know, the, the whole part of our factory automation business.
Richard Eastman (Managing Director and Analyst)
And is there one or two industries that you could single out? I think you'd mentioned some earlier, but I'm not sure if you were suggesting, you know, logistics, consumer products, med devices. Was that for the year, or was that kind of a fourth quarter uptake?
Rob Willett (CEO)
It's really both. You know, those all performed well. Yeah, logistics, consumer products.
Richard Eastman (Managing Director and Analyst)
Okay. Okay.
Rob Willett (CEO)
Yeah. Yeah.
Richard Eastman (Managing Director and Analyst)
Rob, it's one thing not to answer the questions, but when you do answer them, I gotta have something here.
Rob Willett (CEO)
Great!
Richard Eastman (Managing Director and Analyst)
Um,
Rob Willett (CEO)
Go for it.
Richard Eastman (Managing Director and Analyst)
Hey, how about the R&D? Maybe I'll throw this one at Rich and see if he'll slip up.
Rich Morin (CFO)
Wait a minute, wait a minute, Rick, before you do-
Richard Eastman (Managing Director and Analyst)
I don't want to get you in trouble.
Rich Morin (CFO)
Before you do.
Richard Eastman (Managing Director and Analyst)
Yeah.
Rich Morin (CFO)
Do you wanna talk about backlog?
Richard Eastman (Managing Director and Analyst)
No. Well, I thought I could ask,
Rich Morin (CFO)
No, it's in the 10-K. I mean, it's something that is disclosed at year-end.
Richard Eastman (Managing Director and Analyst)
Okay. Well, I'll read... I'll find that then.
Rich Morin (CFO)
Okay.
Richard Eastman (Managing Director and Analyst)
But hey, is it in R&D investment? Should we expect in 2014 that tracks you know up a similar percentage year-over-year, say, 15%? Or do we start to get some leverage out of that and maybe the growth rate in R&D declines a bit?
Rich Morin (CFO)
Yeah, I don't think at this time that we're expecting the R&D to grow at that high a level.
Richard Eastman (Managing Director and Analyst)
Okay.
Rich Morin (CFO)
We're gonna continue to invest in new product development. But we're expecting that our R&D growth in expenses as well as in sales expense will be quite a bit less than what we expect for top-line growth.
Richard Eastman (Managing Director and Analyst)
Okay. Okay. And just one more question on the factory automation side of the business. You know, a chunk of that, you know, non-product ID stuff goes into distribution. And did you get any sense in the fourth quarter that, you know, was distribution stronger, you know, the sell-in to distribution stronger than you might have expected?
Rob Willett (CEO)
Well, when you say sell-in, Rick, I think it's important to know that generally, our distributors don't hold any product. They don't hold inventory. You know, so we saw, you know, equivalent strength in both sides of the business in Factory Automation. In Factory Automation, it's, you know, it's two-thirds distribution, one-third direct. And we saw strength, you know, with some large strategic customers, but also broadly through distribution. And you know, that demand was clear, and there's no kind of sell-through issue in our business. It's all, it all moves, and our distributors don't hold inventory.
Richard Eastman (Managing Director and Analyst)
Okay. And just last question then on the Sisti business. Can you just give us a sense from a percentage standpoint of how much of the surface inspection business, you know, ends up in, in Asia, particularly China? I mean, is it a third? Is it...
Rich Morin (CFO)
Roughly, give me a couple of seconds here as I pull my quarter. Someone found it for me.
Richard Eastman (Managing Director and Analyst)
Because the follow-on question will just be that, you know, obviously, we've heard much and seen much in the way of, you know, build out of infrastructure on, you know, especially in steel, I presume in paper as well. Are you seeing any of that, you know, any sluggishness or downturn in demand, just, you know, specifically out of China, you know, given where their spending priorities have shifted?
Rich Morin (CFO)
... Well, if you take a look at our total SISD sales into Asia, which is Asia plus Japan, that was roughly 40% of the total SISD business during the year, with another 40% being in the Americas, and roughly 20% coming out of Europe. We're still seeing there's a lot of business in metals in China these days for surface inspection, both steel and aluminum, as we're seeing that because of the automotive market is growing over in China, and that there is a greater demand for quality, not only for some of the international manufacturers that have established facilities over there, but even from the local Chinese automobile manufacturers.
They're now requiring, you know, better quality of the steel and aluminum that's going into their production. So we're seeing opportunities in the various suppliers there.
Rob Willett (CEO)
You know, and I'll build on that answer, which is, I think it's important to understand that we're serving kind of the more higher specification part of the metals market, as Rich said, like aluminum, et cetera. I think among broader steel companies, you know, Rick, probably what you're seeing is there is, you know, there is overcapacity-
Richard Eastman (Managing Director and Analyst)
Yep.
Rob Willett (CEO)
There is, there are challenges in that part of the market. But, you know, in our part of the market, which is more, you know, stainless steel, aluminum for automotive, et cetera, there's... I think we still think there's pretty and we're seeing pretty healthy demand.
Richard Eastman (Managing Director and Analyst)
Does there tend to be a retrofit market there on that capacity in particular?
Rob Willett (CEO)
Yes.
Richard Eastman (Managing Director and Analyst)
Yes, okay.
Rob Willett (CEO)
Yes, absolutely. And, you know, fitting surface vision systems to, you know, to existing lines that didn't have surface inspection systems before.
Richard Eastman (Managing Director and Analyst)
I see. Okay. Very good. Well, thank you.
Rob Willett (CEO)
Sure.
Operator (participant)
Okay. Thank you, and we'll take our next question coming from Sean Langan from Piper Jaffray. Sean, please go ahead.
Speaker 9
Thank you. Good evening, guys. I just wanted to, yeah, I was looking, as we look at your revenue by geography, fourth quarter, a little over 40% in the Americas. So we've seen sort of a shift, and I assume that the Asian numbers are down just because of you know, China and as you spoke about. But, is the shift to Americas something that we should continue to kind of see as a greater mix of your revenues, or is this something that you expect to kind of adjust back to kind of more traditional levels? And if you could talk about factors there that you know could impact that kind of revenue mix by geography.
Rob Willett (CEO)
Sure. So I think, you know, I think we've seen some very strong demand and major success in the Americas market more recently as we went through 2013. I think that has to do with a number of factors. One is the execution of our sales force. Like we've invested a lot and done very well in that market as the year's gone on. I think our ID business and our logistics businesses are particularly strong and successful in the Americas. It's sort of a newer market for us, and I think because it's our home market, we've been successful there. So I think that's, you know, that's great.
But I think to answer the second part of your question, longer term, I think we think the overall growth rate of machine vision in Asia, and for Cognex in Asia, is gonna outstrip other regions. You know, that's where we've been growing more on a percentage basis. That's where we see more and more adoption and investment. I think it's some of the trends that you see in automation, particularly in China, around China's increasing sophistication. It's population change, where there are fewer people entering the workforce and the increase that you see in labor costs. They're all driving, you know, what are wonderful conditions for factory automation and specifically for vision.
So I think we're very, you know, we're investing there, and we're optimistic, and that's where we probably expect to see the largest percentage growth over the long run. Europe, you know, is a great market for machine builders. You know, some of the, you know, greatest machine builders in the world are in markets like Germany and Italy, and they're great consumers of vision. And the German, you know, automotive industry is also a great market, but I don't think we're gonna see probably growth rates there that will be approaching Asia's and may, in the long run, be a little behind America. And then Japan, I think, you know, that's a more challenging market for us. We are executing there much better than we have probably at any time in the last few years.
I think there's strong competition for us there, and the growth rates and the relative size of our business there is smaller.
Speaker 9
Great. That's very helpful, and you headed off a question I was gonna ask on Japan. Obviously, you're kind of dealing with some currency effects there, but it sounds like that your execution's been relatively pretty solid there. Is that a good way to see it, or are there factors here that, as you mentioned, Japan will become less and less a mix of the business, and it will shift more towards the Americas and Asia, you know, longer term?
Rob Willett (CEO)
That's how it looks from here. Yep, yep. I mean, and our Japan business has been executing much better in recent quarters than it has for a while. So yes, yes.
Speaker 9
Okay, great. And I noticed. You don't want to give out specific guidance for 2014, but just kind of want to get a sense of what you do see ahead, and maybe in a qualitative sense. And, you know, between sort of the opportunities that you, you know, these longer term opportunities that you talk about, and maybe even what we're seeing in logistics, is it fair to assume that, you know, growth rates for the company could exceed what we've seen over the last year or two? Or is it something that you would expect to be kind of consistent and in line and that sort of steady, you know, safe growth, you know, in, I guess, you know, what we could see on revenues?
Rob Willett (CEO)
Yeah. So, you know, I think we think 2014 will be a growth year for Cognex. You know, 2012 was, we reported minimal growth, 2013, increasing growth. And as we moved through 2013, we saw increasing levels of, you know, year-on-year growth, as we moved through the quarters. So we have some good momentum, you know, moving into this business. We've been investing a lot in new product development and in sales force expansion. You know, we think that puts us in a very good position. I think if you kind of tick through the businesses, you know, you know, semi, you know, I think we're not that optimistic about that business.
You know, it's been, you know, kind of, but, you know-
Speaker 9
It declined year-over-year, and-
Rob Willett (CEO)
Right.
Speaker 9
Probably won't decline any further.
Rob Willett (CEO)
Right. I think, you know, as we said, surface inspection, we do expect to grow this year. And then, you know, factory automation, you know, we're targeting a 20% growth rate in that business. That is, you know, ambitious, you know, and I think a lot of people have questioned whether that's achievable. But certainly, in the last two quarters, in the second half of the year, we've been exceeding that growth rate. And, you know, based on our investment and what we see, you know, we're optimistic about the factory automation business, which is a very large part of what we do.
Rich Morin (CFO)
Yeah, and the other thing I would comment in the factory automation business with Japan, I think in Japan, we actually saw an increase year-on-year in our factory automation business in constant currency, or if you will, what we sold in yen. But the Japanese yen declined some 20% vis-à-vis the dollar. And I don't think any of us are really expecting a further 20% decline in the yen over the current year. So that should help the reported, you know, top-line results as well.
Speaker 9
It's a great call. Thank you, gentlemen. That's all for me.
Operator (participant)
Okay, thank you, sir. We'll take our next question coming from Holden Lewis from BB&T.
Holden Lewis (Managing Director of Equity Research)
Thank you. Good afternoon.
Rich Morin (CFO)
Hello.
Rob Willett (CEO)
Hi.
Holden Lewis (Managing Director of Equity Research)
A couple of things. First, as it relates to the revenue guidance, you know, you sort of have put out a range that I think is consistent with historical seasonality. But, you know, when I think about some of the things that you kind of talked about in terms of, you know, ID products, I assume that it grew sequentially. I assume you expect it's going to grow sequentially again, based on contracts. It sounds like in the SISD business that, you know, you had some deferrals that I assume pushes out into the beginning of 2014. It just sounds like, you know, and this is sort of general momentum, it just sounds like perhaps we should have been expecting not quite the typical seasonality out of the revenue guide, and that's kind of what we've got.
Am I missing something from a standpoint of timing or anything of that sort?
Rob Willett (CEO)
Well, I think, you know, if you go back and look at Cognex's business, pretty much almost always you see a decline from Q4 to Q1, and that has to do with it really does have to do with the seasonal nature of our markets. You know, it's to do with, you know, a slower kind of pickup in business at the start of the year with holidays and everything, and Chinese New Year and other aspects that tend to hold back growth. You know, so I don't think you should expect sequential growth in FA in general or even in ID from Q4 to Q1.
You know, SEMI, you know, it was, you know, it again, we don't expect to see much growth in that market in Q4. And then surface vision, we expect that to be probably around, you know, flat year-over-year in Q1. So that's kind of how it's looking for us. But I think, you know, I think it's important to understand that sequential nature of the business from Q4 to Q1. Perhaps go back and look at some of those trends and see that, you know, we're pretty much in line with that, even with the kind of record revenue that we reported here in Q4.
Holden Lewis (Managing Director of Equity Research)
Well, I guess I'm just saying that it seems like there's some things like the deferral of some revenue on the surface inspection and, you know, some of the what I would assume is sort of sequential growth out of the logistics business, for instance, at good rates. I just would have thought that that might have had the potential to dampen that normal seasonality.
Rob Willett (CEO)
Yeah, you know, I think we expect the surface inspection revenue deferral to unwind as the year, as we go through the year, and not necessarily see a lot of it come in in Q1. And yeah, and I think also, I think one has to bear in mind that we might see orders strongly coming in Q1, but often the actual revenue and shipments may occur more in Q2. So, you know, we're feeling strong about where we are, but we don't think we're gonna somehow buck the trend of a Q4 to Q1 that we've pretty much always seen.
Holden Lewis (Managing Director of Equity Research)
Okay. And then, I guess a similar question about gross margin, only in the sense that, you know, talking about mid-70s% is kind of the boilerplate language. You know, but as your volumes have gone up for the last couple of quarters, you've kind of moved into, you know, 76.5% in Q3, 76.8% in Q4. I mean, you're really knocking on 77%. It's getting to the point where, you know, 75%-77% is kind of a big difference from a guidance standpoint. I guess what I'm wondering is, is there something about mix or something else that might make the 75% sort of technical middle still in the picture here? Or as the volumes keep going up, we would expect that this sort of 76%-77% level is at least sustainable.
Rob Willett (CEO)
Well, to the extent that the, you know, the revenue levels stay up or whatever, most of the growth coming from the MVSD side, yes, you can expect that the gross margins will, you know, will stay at a higher level. However, here, you know, we are expecting that the revenue level will in fact decrease in Q1 from Q4. And as we had said, essentially our Surface Inspection was gonna stay relatively flat. A lot of that decrease is gonna come out of Factory Automation, which has the higher gross revenue. So we don't quite expect to be as high in our gross margin in Q1 as we were in Q4.
Holden Lewis (Managing Director of Equity Research)
Got it. Okay. Thanks. I'll jump back in the queue.
Operator (participant)
Thank you. So again, ladies and gentlemen, just to remind you, if you do have a question or comment, press the star followed with the one key at this time. And we'll take our next question, a follow-up question from Jim Ricchiuti from Needham & Company.
James Ricchiuti (Analyst)
Your, your headcount, looking at the headcount from last year, it looks like it was up around 9% in low double digits in sales and marketing, in R&D and engineering. How should we think about headcount? How should we think about the investments you're making in sales and marketing and R&D, just from a headcount perspective? Should we see those similar kinds of increases in 2014?
Rob Willett (CEO)
Well, so, I mean, how you should think about headcount at Cognex is, you know, we're, Cognex are outstanding performers, and, you know, we're very able to attract very high performing people from universities, from competitors, et cetera. We've been adding, you know, quite a lot of headcount, recently in two areas. One is really sales force, you know, particularly in high growth markets, and, the other, you know, is in engineering for new product development. You know, I would expect our rates of headcount probably not to keep growing at those kind of rates, as we go through the year, but it does depend on, you know, specific opportunities we see.
So, you know, we're always gonna go on investing where we see opportunity, and we're thinking about the longer term rather than the short term. But we've certainly gone through a period of pretty major investment, and I think it's resulted in the kind of growth that we're seeing. And that growth, whether it's to do with expenses or it's to do with headcount, we probably expect to grow at a lower rate than revenue, you know, in 2014.
James Ricchiuti (Analyst)
Okay. Robert Metcalfe, I think you've talked about the opportunity within the logistics market. You've sized it. From where you sit today, do you see that opportunity expanding, the TAM that you've addressed in the past?
Rob Willett (CEO)
Yeah, I think when you were here for the Investor Day, we sized the logistics market around $250 million that we serve. You know, and I think obviously we're selling into less than 10% of that today. You know, that's our share, and we think we're gonna grow substantially, you know, as we go forward. Now, there are adjacencies within logistics that you know, we certainly may find ourselves expanding into in the years to come, but there's certainly a lot of headroom right now. And our product range, I think, is broad enough right now where you know, we're becoming recognized as able to serve that market, not just being a niche player, but a full provider of ID products.
James Ricchiuti (Analyst)
Along those lines, I'm wondering, you're clearly on the radar screen of the other industry participants. Can you talk a little bit about the environment, the competitive environment, how some of the competitors may be responding to your inroads in the market, and generally how you see that over the next year or so? What, you can't predict what the competitors are gonna do, but just in general, how you view the environment.
Rob Willett (CEO)
We, you know, our two major competitors in that space, the German company, SICK, and the Italian company, Datalogic. And you know, Datalogic's gone through an acquisition of an American company called Accu-Sort, that it bought from Danaher a little over a year ago, and I think is kind of trying to integrate that business. You know, and SICK is, you know, has a strong market share. So you know, we're targeting those companies. And I think one of the reasons we've seen such success in the U.S., obviously, is it is our home market, and those are European companies who may struggle more here. So I think, you know, I think we see that.
I think the real issue is that our technology is superior, significantly superior, in terms of its read rates, in terms of giving customers some of the attributes that they want in a barcode reader. And those companies use lasers, which are less reliable, have lower read rates, don't allow the customer to see what the reader sees, and take a lot longer to install. But they also sell line scan vision, which is a bit like the technology we sell in the surface vision side of the business, which you know is more expensive and takes longer to set up in these types of applications than our technology does.
So, you know, I think we're certainly in that market with disruptive technology. We don't... You know, we see them trying to improve what they're doing, but we certainly think we're years ahead in terms of our capability, and, you know, we're working hard to capitalize on that.
James Ricchiuti (Analyst)
Okay, thanks. And one final question, just on some of the newer areas that you've talked about. You alluded to the Investor Day. I wonder if you can give us an update on how you see the opportunities in 2014 in 3D vision and also with the Advantage engine that you talked about?
Rob Willett (CEO)
Yeah. So, we began the journey in the, you know, 3D displacement sensing, launching a product in the spring of last year. You know, we've been encouraged. That was just the first product, and we've been encouraged by the performance of that product. We've had a few major customer wins, and I think we outperformed our own expectations in that market in the first three quarters of its life. And we're building on that. You know, and we do have ambitious product development plans in that area too. It's a big market. We're serving just a little piece of it today, and we're looking forward to serving more of it in the future.
You know, I'd say our plans are on track. In the life science and image engine industry, I think as we explained, that's a very long sales cycle, where, you know, customers, specing machines, or in many cases, require regulatory approval. And that can be a three-year process between, you know, starting to design a machine to actually getting regulatory approval and launching it. But we are seeing success in that market, definitely getting specified into a number of life, of major life science, new products that are on deck for launch. Again, we don't think we'll see, we don't think we'll see large revenue contribution from that business in 2014, but we do think it's gonna be a nice contributor to Cognex, in a couple of years from now.
We also think it's gonna be nice and stable. You know, it's going to be less cyclical and volatile than other industries we serve, just because the nature of that OEM life science regulated business.
James Ricchiuti (Analyst)
Good. You alluded to some major wins with 3D displacement. I was just curious, can you say what verticals that, that those are coming in or can?
Rob Willett (CEO)
Yeah, you know, I mean, major wins. So a couple of really, you know, good, good orders. Yeah, well, certainly electronics, automotive, but that, that product serves a very broad range of, of markets. But the, the two, the two markets where we're seeing some notable wins were electronics and automotive.
James Ricchiuti (Analyst)
Okay, thanks very much. Did we ask, did we leave out any other questions that you weren't gonna answer?
Rob Shillman (Chairman)
Rick, you did a great job. This is Dr. Rob, and I wanna thank everyone for not probing as deeply as I thought that we were ready to be really tested on this. And I wanna thank you for your understanding. You know, we, we'd love to tell you everything, and we just can't anymore. We just can't. You'll just have to see the results.
Operator (participant)
Okay, thank you. And again, ladies and gentlemen, just one final reminder, if you do have a question, you can press the star followed with the one key at this time. And we have another question from Holden Lewis, from BB&T. Holden, please go ahead.
Holden Lewis (Managing Director of Equity Research)
Yeah, so we may not be done yet with the probing. I guess, you sort of talked about factory automation continuing to grow at 20%. It sounds like you think that that number is a good one for this year. In the past, without talking about specific numbers or quarters, you, I think you've talked about, you know, 30%+ growth out of the logistics or the ID products. You obviously have done that the last couple of quarters. As the year goes on, comps get harder. But, you know, much like factory automation at 20%+, do you think that 2014 is a year where you can still put up 30%+ in the ID products, even as the comps get a little bit harder?
Rob Willett (CEO)
Well, I think, you know, those are goals for us. You know, so Factory Automation, you know, our target is to grow the business at greater than 20%. It's not gonna happen every quarter, but it has been happening in recent quarters, and the same would apply, you know, for ID. Our goal is to grow greater than 30%, and that has been happening. You know, I think we're very optimistic about the potential to grow on growing ID very quickly. And the real reason for that is we're still very, very little penetrated into what is a pretty large market. You know, we size the ID products market that we serve at around $900 million, you know, and our share of that is not much more than 10%, right?
And we have highly advantaged technology. So, you know, I think, I think there's plenty of room for us to go on growing that over the long run. And the, the movement into adjacencies like logistics, which is part of the $900 million, but other adjacencies that we have on our radar screen gives us, you know, confidence that we're gonna see some great growth there. And then, you know, likewise in factory automation, we have, you know, we've invested, and, we certainly saw those investments paying off nicely in recent quarters. You know, I think, I think, I think there'll be quarters I'm reporting to you less than 20% growth and, and quarters that are more. But that's, you know, with that said, but we're, we're expecting strong growth.
Holden Lewis (Managing Director of Equity Research)
Yeah. But then this last thing, you know, semis, obviously, there's probably nothing in it for anybody to, you know, to go overboard with enthusiasm over that market. But, you know, you are seeing book-to-bill, I think, getting better, for the capital equipment. You know, we do have some other folks who are in that market that seem to think that it's at least getting better, coming after several years of a down market. I mean, are you just kind of saying you don't expect much because it's the easiest thing to say, or are you hearing from your customers that, look, you know, budgets aren't getting any better? You know, ignore that the data seems a little bit more optimistic. I mean, how should we sort of think about that?
Rob Willett (CEO)
Yeah, yeah. Well, I think there are a couple of things to point out here, Holden. You know, one is that, you know, the part of the industry that we serve tends to pick up six, you know, six months or so after what you see in, you may be seeing in the rest of the industry. I think that's one point. Overall, I think, you know, we think of semi as a cyclical, slightly declining business for vision. You know, because obviously innovation really leads to, you know, the need for less capacity in that industry over the long run.
But I think, you know, what is on the horizon is, you know, is cyclicality around new designs and specifically 450 millimeter wafers, which I don't think we're gonna see a lot out of that in 2014, but it will come and, you know, it will likely be a, you know, a pickup for Cognex, a cyclical pickup that we'll be explaining to you both as a positive thing and a negative thing afterwards. So, you know, buckle yourself in for that.
Okay. All right, great. Thank you.
Operator (participant)
Okay, thank you. And our next question coming from Jeremie Capron from CLSA. Jeremie, please go ahead.
Jeremie Capron (Analyst)
Hi, this is Grace Lee, sitting in for Jeremie.
Rob Willett (CEO)
Hi, Grace.
Jeremie Capron (Analyst)
Hi, thank you for taking my questions. I have two questions. First one is, I think you've alluded a little while answering previous questions, but I'm wondering whether you can mention some of the verticals that you're seeing growth in China factory automation?
Rob Willett (CEO)
Sure. Yeah. So I think, you know, we serve a lot of broad verticals. You know, our largest vertical in China is electronics, and, you know, we're seeing, you know, strong potential and existing growth in that market. And another market that Cognex serves, you know, is automotive. You know, it's one of our largest markets globally, and, and certainly, you know, China is, as you well know, I'm sure, you know, the largest market in the world now for new automotive purchases. And not only that, but there's a lot more in-country investment going on. So certainly we've been experiencing, you know, good investment from new and from existing and even new Chinese customers in that market.
But like everywhere, our business is broad, and we serve a lot of verticals, and that would apply to China as well.
Jeremie Capron (Analyst)
Mm-hmm. We've noted that there might be some significant CapEx expansion in the automotive sector in China in 2014. I'm wondering whether you see some of these the stronger growth from automotive verticals, given the CapEx expansion.
Rob Willett (CEO)
So I guess the question will be stronger than what? You know, increasing relatively, I'd say yes. You know, I think, I think there's a lot of investment going on in automotive, a lot of investment, particularly by domestic, well, and, and foreign automotive companies in China. So yes, I would say we're seeing improvement in that area.
Jeremie Capron (Analyst)
Mm-hmm.
Rob Willett (CEO)
That might be tracking, I would say, with the overall growth in investment that we see for machine vision in China. It's not an outstanding growth vertical. It's just part of an overall very good automation growth story for Cognex in China.
Jeremie Capron (Analyst)
Okay. Sure. And then the second question is, I guess, I've sensed that ID growth is mostly from North America, at least at this stage. I'm wondering whether I'm understanding this correctly, and also, by which timeframe do you think that you're gonna penetrating ID products into, like, regions outside U.S.?
Rob Willett (CEO)
Well, you know, I would say the ID growth story is global for Cognex, for sure, and I think we see strong growth pretty much in all markets that we serve with ID. That's true. I think perhaps what you're picking up on is we had very strong logistics success in-
Jeremie Capron (Analyst)
Mm-hmm.
Rob Willett (CEO)
in America with some big customers that we reported. You know, and we do expect that growth to spread globally, you know, over the next few years, for sure. But don't think that Cognex's ID story is an America story. It's a global story.
Jeremie Capron (Analyst)
I see. Okay. Thank you.
Operator (participant)
Okay, thank you. I'm showing no further questions, so I'd like to turn it back to Dr. Rob Shillman for any concluding remarks.
Rob Shillman (Chairman)
Sure. Thanks. Well, just to wrap up, what a great year! We had a fantastic year for, virtually in every one of our businesses and every one of our product lines. And that success really was the direct result of the perseverance and the hard work and the creative work by the entire Cognex team. Everything from product design to shipping, to manufacturing, to, the sales force, the marketing team, credit and collections, just every department at Cognex, did an outstanding job, and, I wanna, you know, thank, thank all of them. And I wanna thank you, the analysts and shareholders and fund managers for joining us tonight.
Although our calls won't be quite as detailed as they have been in the past, we do hope you'll continue to attend those calls and our conferences, and I hope to see you at some of them. Thanks again, and good night.
Operator (participant)
Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.