Cognex Corp (CGNX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex first-quarter 2013 earnings call. At this time, all participants will be in a listen-only mode. Later, there will be a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

And as a reminder, today's conference is being recorded.

And now, I would like to introduce your first host for today, Richard Morin.

Thank you, and good evening, everyone. Earlier tonight, we issued a news release announcing Cognex's earnings for the first quarter of 2013, and we have also filed our quarterly report on Form 10-Q. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results.

During tonight's call, we may use a non-GAAP financial measure, if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. For your reference, you can see the Company's income statement as reported under GAAP in Exhibit 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. Bob Shillman.

Thanks Dick, and good evening, everyone. I'd like to welcome each of you to our first-quarter conference call for 2013. And as you can see in the news release that we issued earlier today, we reported very good results for the first quarter. Right now, I'm in our R&D center in San Diego, and the team is at our Natick headquarters for this call. The details of the quarter, therefore, I'm going to hand the microphone over to my partner, Rob Willett, who is our President and Chief Executive Officer. I will be on the call until the end and available to answer any questions that you have for me at that time.

So now, I'm just going to pass the microphone over to Rob Willett in our headquarters in Natick, Mass. Go ahead, Rob.

Thank you, Dr. Bob. Good evening, everyone. I'm pleased with the results we reported tonight for the first quarter of 2013. It was a good start to the year. Revenue, net income, and earnings per share all set new first-quarter records. Revenue grew 4% over the first quarter of 2012, driven by record quarterly revenue for Factory Automation. Asia, excluding Japan, was our top performer.

From a product standpoint, the lion's share of growth came from ID Products, which increased 23% year-on-year. Gross margin was strong at 76%, reflecting the substantial percentage of revenue that comes from high-margin Factory Automation sales. Operating margin was 22%, even with our investments in new product development and sales force expansion. And we reported earnings of $0.35 per share, which is $0.02 per share higher than the $0.33 reported for the prior quarter's first quarter. I'm sorry, the prior year's first quarter.

Let's turn now to the details of the quarter. Revenue from the Factory Automation market set a new quarterly record at $63 million and accounted for 78% of total revenue. Factory Automation grew 7% year-on-year and 2% on a sequential basis. This is surprisingly good news given that Cognex typically experiences a revenue decline in Factory Automation from Q4 to Q1. Looking at Factory Automation from a geographic perspective, Asia, excluding Japan, continued to be our best performing region in terms of percentage growth. In the first quarter, Factory Automation revenue from Asia grew 24% year-on-year, and 20% over the prior quarter. Growth was led by strong sales to consumer electronics customers in Korea and China.

In the Americas, Factory Automation revenue increased 7% over the first quarter of 2012. On a sequential basis, it decreased 2% from the record revenue reported in Q4. The underlying trend in the Americas is improving. Factory Automation revenue from Europe increased 4% year-on-year and decreased 1% sequentially. This was a solid performance in what are proving to be difficult market conditions. Sales to the Japanese Factory Automation market decreased 13% from the first quarter of 2012 and 5% from the fourth quarter due to currency exchange rate fluctuations. In constant currency, Japanese Factory Automation was flat year-on-year and grew 7% sequentially.

Revenue from the Semiconductor and Electronics Capital Equipment market was $7 million in the first quarter. That level represents an increase of 4% year-on-year and 27% over the prior quarter. This is the first quarter in two years that Semi revenue increased both year-on-year and sequentially. It's too soon to say if that signals the beginning of a market recovery as it was mainly due to higher orders from a limited number of customers.

In the Surface Inspection market, first-quarter revenue was $10.5 million. This represents a decrease of 9% year-on-year. It is also a decrease of 27% from Q4, which was the second-highest revenue quarter ever for that segment. Surface Inspection revenue can be uneven due to the timing of deliveries and installations and the impact of revenue deferrals. Demand for our Surface Inspection systems in the first quarter was good. Those orders will turn into revenue later in the year.

Turning to operating expenses, the combined total of RD&E and SG&A increased in Q1 by 6% year-on-year. This increase is due to our investments in new product development and in our sales channel that are targeted at longer-term initiatives. We expect that they will provide significant returns in the future. From a technology standpoint, Cognex is now developing and introducing new products at a faster rate than ever before. We believe that the highly advantaged disruptive products that we launched in Q1 will quickly increase our share of the markets we serve.

The initial success of the DataMan 503 high-performance ID reader should accelerate our growth in the logistics market. New capabilities of the DataMan 503 include high-speed barcode reading on wide conveyor belts and in situations where there are large variations in package height. The DataMan 50 marks our entrance into the high-volume lower-priced portion of the ID market. Feedback is excellent, and the initial adoption by machine builders is encouraging. The DataMan 50 has already won major accounts away from the competitors' laser barcode readers.

Our new DS1100 displacement sensor signals our entry into the highly profitable market for 3D vision. Measuring features such as height, volume and tilt, the DS1100 expands our product offering to existing customers in the automotive, consumer electronics, and food and beverage industries. Two of our competitors have significant sales and profits in this area, and we've been interested in it for some time. We expect that our advanced vision tools, faster speed and ease of use during setup and calibration will enable us to compete very effectively in this important new market segment.

On the sales front, we continue to invest heavily in our sales channel. We are recruiting, hiring and developing sales engineers in areas where we see the highest potential for growth, particularly in ID Products in China. Technology and process improvements are being made to increase productivity. There is also the cost of equipping our sales force with our new products. We are making these investments today with an eye towards long-term growth.

In summary, Cognex had a good start to 2013. We expect revenue for the second quarter will be between $83 million and $86 million. This range represents an increase of 3% to 6% over the revenue reported tonight for the first quarter. Operating expenses are expected to increase by approximately 3% on a sequential basis. And the effective tax rate, excluding discrete tax items, is expected to be 19%.

Looking at Q2, we expect to report very good results, but comparisons to Q2 of 2012 will be difficult for the following reasons. Market conditions were much stronger a year ago in Europe's automation market and in Semi. We are making good progress on our strategic initiatives, although, again, the full benefit of that work is not flowing through yet. And Q2 of 2012 included approximately $1 million of investment gains that are not expected to repeat this year.

Now, let's open the conference up for your questions. Operator, we are ready to take questions.

Okay.

(Operator Instructions)

We will give this a few moments before we take questions.

(Operator Instructions)

Tom Hayes.

I guess two questions. One, you called out some of the increased R&D spending tied to accelerating the product development. I was just wondering if you could talk about or provide some color on how quickly that can accelerate the product development cycle for you guys.

Sure, Tom. So, we are a technology company, we are developing products all the time. We have been investing particularly in process improvements to get products out of engineering and into production more smoothly and consistently. So, obviously, by putting in better processes of a more rigorous phase gate process around product introduction, investing in manufacturing engineering to get products scaled and into our contract manufacturers, can bring forward our time-to-market, by a number of months, we believe, some of the processes we are doing. And when we are spending obviously a significant amount, $42 million a year last year on R&D, and some of these new products deliver a substantial growth for us, that's very real in terms of the benefits it brings.

Okay. I guess staying on that theme a little bit, you mentioned obviously the China and the ID market as a beneficiary of some of the extra spending. Can you maybe provide a little bit more color on some of the specific market segments you're targeting in China?

In China, sure. Yes, so, our business in China today is largely concentrated on electronics. We do a substantial amount of business in consumer electronics, which is the industry that has typically adopted our technology first. And we see a lot of good traction in that market, and we continue to see it, but we are really looking to China to diversify the base of business over the longer term. Specific end-user markets we are interested in and we see a lot of growth potential is well, automotive, and automotive is our largest vertical market globally, but not in China. And we see a lot of growth occurring in the Chinese automotive market. And in the first quarter of this year, it accounted for 20% of our China Factory Automation business, so it is certainly starting to see some traction there in investment.

But other markets, particularly consumer products, food and beverage, we see a lot of growth opportunity. And specifically also ID, where we're seeing very high rates of growth in that market going forward in China. Some of the drivers there are increased wealth among the Chinese population where there are greater concerns about safety and product quality. And ID is a great means for tracking products from manufacturer out to consumer. So, we see a lot of traction in that area, and we have a lot of growth plans around delivering. That is China specific, but of course our ID Products themselves are great growth drivers on a global basis, and that plays through in a multiplied effect in China.

Great, appreciate the color. And one more, if I may. Obviously, you provided the indication that we should expect OpEx up 3% sequentially. Should we think about not the 3% growth, but where would the rates we saw in Q1 as proxies for the balance of the year considering your increased spending?

Well, I think as we told you, Q1 OpEx and we told you we expect Q2 to increase 3% sequentially. And we don't really give guidance beyond that.

I thought I'd just try, sorry.

Sure. We feel good about our business and where we are taking it, and we feel very good about the initiatives we're investing in, new product engineering and engineering, and sales force expansion, particularly around ID and around China. So I think you can expect us to go on doing that providing we see the kind of trends looking positive.

Appreciate it. I will get back in queue.

Chris Godby.

Congrats on the quarter. You mentioned that the overall trend in the Americas is improving. Can you talk a little bit about what you're seeing there and what is giving you more confidence in the region?

Sure. So obviously we look at our funnel of business and what we see in our pipeline, and we see a lot of good things occurring. We are seeing signs of improvement in our sales pipeline particularly in automotive and ID Products. But I would say that to temper that a little, our customers are still cautious given the low growth economy that we are in. So I think particularly by vertical industry, automotive looks fair in terms of its commitment to investment in automotive -- and in terms of automation, I should say, and ID.

Okay. Great. Thanks for the color. And then thinking about the logistics opportunity, last quarter you mentioned that you have several large end-user customers who are currently using your products on a trial basis. Are you seeing any movement towards full adoption there with any of those customers?

Yes, we are. Yes, we are seeing a lot of -- we are undergoing a lot of very active trials, and the DataMan 503 certainly helps round out our product range. One large postal supplier has specked us in, and we expect to see orders flowing through for the rest of this year, and another large, very large e-retail is in a similar situation. So I would say we are seeing a lot of positive movement in that market.

Okay great, that is great color. And then last but not least, just a cleanup item. Can you give us the total for ID Products in the quarter for revenue?

Yes we can. Just make sure we have our data correct, here. Think it was $20.6 million. Dick, can you just confirm that?

Yes, it's about $20.6 million.

It represents 23% growth year-on-year and 3% sequentially.

Perfect. Great. Thanks for the color, guys.

Jim Ricchiuti, Needham & Company.

Was the ID business strong in each geography?

So, it was -- it was very strong in some geographies and slightly less strong in others. Generally it is good overall, I'd say. Where we saw some lesser growth was in Europe, which I think reflects the lower growth environment that we see there at the moment. But I would say our execution is certainly going very well in the Americas and in China, and that's where you will see some of the better growth. Japan, also, yes.

Rob, was the -- looking at Europe, the rate of decline seems to be slowing, but what is your sense, is that market beginning to stabilize at least or is it -- do you potentially have another leg down?

Well, I would actually say our results in Europe have been relatively good. When I look at our peers and when I look at our level of performance in Europe relative to our business overall. So I would say we've been surprised if you look back over the last few quarters how our own results seem to be better than what we were reading in the news. And I think we have a very good team there and a lot of good growth drivers.

So, however, I would say there's some increasing softness as we look out at that business and we look out at the sales funnel. So I think it looks likely to be perhaps our lowest growth region overall as we look forward in percentage terms. But, we're still feeling that we can grow in Europe this year, and I'm not really seeing necessarily it getting softer or stronger right now, but perhaps a little more difficult to call. I would also say the automotive industry there, which is our biggest end-user market, it looks to be holding up relatively well in Germany and in northern Europe and obviously less well in southern Europe. And that's also a little bit of the leading indicators that we are watching in that market.

And in the Americas, the SISD business, was that the main issue for the slower growth in terms of -- and do you see the SISD business snapping back in the June quarter? It sounds like it will be up sequentially.

Yes, so, our Surface Division business is doing really well with the SISD business in general, and the order trends there are good and, yes, we -- but it matters, the issue that you're referring to is more the timing of revenue and the lumpiness of that. So, it was a low revenue quarter in Q1, but that's not indicative of any under performance at all from our perspective. It is really a matter of timing. So, yes, we will see it come back, we expect to see it come back in the second quarter quite nicely.

And I know you don't give guidance, but if we think about that business, is it -- do you think SISD has the potential to be up year-over-year and for the full year?

Yes, certainly that is our expectation. We look at that business being something we expect to grow in the mid single digits over the long-term, and we think this will be another growth year for SISD. We're seeing a lot of good things going on.

Okay thanks. I will jump back in the queue.

Ben Rose, Battle Road Research.

Of all the new products that have been introduced in the last three or four months, which would you say have the potential to be the highest revenue contributors in 2013?

Yes. Well, I would say the DataMan 50, which is a lower price point barcode reader. We see a lot of potential for that product, and we see it ramping pretty fast. It is replacing a lot of laser barcode readers that are used by machine builders and by small purchasing customers on a broad basis. Certainly that looks like a winner for us, although still early.

And then the DataMan 503 certainly is a very powerful product for the logistics market. And I think it depends on how quickly that is adopted, but it would also -- we expect it to be a large seller. I think the other product I discussed in the call, the displacement sensor, the 3D vision product, we think that will be a slower ramp. That is our first entry into what is a very exciting market for us longer-term, technically quite complex. And we're probably going to be addressing some of the most rigorous and difficult applications in that market initially, where the served market itself is probably relatively small, and we are bringing a pretty powerful advantage product in learning about that market. But I think longer term, we expect that to be a big revenue generator for Cognex, but not this year.

Okay. And then on the 3D laser profiling system, which I understand is your first full-fledged 3D vision system. You cited three end-user markets, automotive, electronics, and food and beverage in the initial press release. I was just curious where you see the -- at least on a near term basis, the largest opportunities within those industries?

Well, certainly automotive we think is an obvious product -- an obvious market for us to target that product, it is a market we know very well, and where we see opportunities in that specifically. So, certainly in that with Tier 1 suppliers and end users, for precise 3D measurement of parts is going to be a good market for us. It is good because it's a channel and it's an industry we understand very well. So that I expect to be the best markets over the medium term for this product. Consumer electronics, though, I think can be a very good market for this product also, specifically where you are looking at a vision problem where parts may be seated, perhaps components on a circuit board, and you want to see whether they are correctly seated and correctly in position. That is a difficult problem for 2D division, it is a great problem for this product and one that we understand how to sell into very well. So I would say automotive one, consumer electronics two.

Okay. Thanks very much.

Richard Eastman, Robert W. Baird & Company.

Rob, could you just talk for a second -- and I'm sorry, this may be in the Q. If so, just say so. But the -- geographically, other Asia was plus 27%. Is that -- how much of that is China? How did China actually perform in the quarter?

Yes, so Dick will look for some numbers specifically, but here's what I can tell you. In Factory Automation in China was over $6 million in the quarter, which was up 23% year-on-year and --

Okay.

Any other color you want to add?

No great --the rest of Asia also includes like Korea and India or whatever, which we don't break out all of those pieces separately.

But I did point out that Korea and China were both very strong performers in that market in the first quarter.

Obviously, over the 27% then. And was Japan -- the minus 4% in Japan, is that -- that's not an LC number, is it? I would think currency would hurt you there?

Well, I think what I did say when I was talking about Factory Automation was in constant currency, Japanese Factory Automation was flat year-on-year and grew 7% sequentially. There is quite a lot of currency effect in that. Is that your question?

Yes, it's just when I'm looking at overall Cognex for the quarter, you had given the numbers. Japan was off 4% year-over-year, but was that up in local currency? Was Japan up in LC?

Oh, I see. In -- well, you've got to take both -- if you take a look at both Semi and Factory Automation together, Japan was up in total over 2012, but the biggest, let's see, where is it here? Japan, our partner -- if you take a look in grand total because SISD had a strong quarter in Japan.

Okay.

So, you have operationally, if you exclude FX, Factory Automation was essentially flat.

Yes.

There was a slight decrease in Semi, but there was a good pickup in the SISD business.

Okay, so that was up. Okay. And just, Rob, in the Factory Automation business, can you just maybe talk to the end markets? We had sales up 6.7% or 7%. I'm going to -- I guess I'll assume there's not a lot of currency in there but could be? But, can you just talk to maybe the end markets that -- just in Factory Automation -- that we're comping against real difficult comps. I think last year, we were talking about solar being a tough comp year-over-year, but is this a situation where just when you look at your end market exposure, that all the end markets are grinding slower, or is there a tough comp or something, a couple of tough comps in there?

Okay, so I think you're right in saying currency had a limited, it may have been 1 percentage point of headwind on the growth overall. And I think we serve a lot of different end-user markets, so I think to look at one quarter might -- isn't necessarily that instructive, but what I will say in Q1, year-over-year, automotive was up a little bit more than Factory Automation overall. Electronics products, consumer electronic products were up a lot. We had very strong growth in those markets. And then, it's a mixed picture.

There are markets for us that represent between 2% and 7% of revenue in any given quarter, and they can be up and down and I'm thinking they are at markets like pharmaceuticals in this quarter, it had some growth. Medical devices can be up and down; in this quarter, it had some good growth. Other markets, less strong, just in this case, pick out some others for you. Food and beverage, well, food and beverage did okay. Consumer products, where you might think of Procter & Gamble type products, not so strong in this quarter. But these are just small sequential movements, not necessarily indicative of how we see the market overall.

Okay. All right. And then just one last question on the operating expense number. Just, double back to that for a second. The 3% sequential off of Q1 into Q2 puts OpEx around call it $45 million or so. Is that a level, a quarterly level that we flatten out at for the back half of the year, then?

Well, I would say in general we don't give OpEx guidance for the full-year. I think we've said we see it increasing I think 3% sequentially Q2.

Yes, part of the increase in Q2, Rick, is the fact that our option expense will be a bit higher quarter on quarter, because we did our annual grant in -- near the end of February. So, we only had really one month worth of expense in Q1. We will have a full three months in Q2. That is a part of the reason and --

Okay.

Going forward, that will start to even out.

Correct. Okay. Yes, then it would all be in, in the second quarter as well as the third and fourth. So, okay.

Right.

And just one last thought here, I don't want to put you on the spot here, but I will in terms of forecasting. The Semi OEM business again, surprised again, and Rob, you pointed out the first time in two years where we actually saw growth both sequentially as well as year-over-year. But if you look at the Semi back-end order number, it did perk up a little bit. Is there just anything to the tone that can suggest there is more interest, there is more bids? Anything that would maybe segment -- separate this from uptick from inventory build, say, or any better tone at all?

Well, okay, I'll make some general comments. I think Semi performed better than expected with each geographic region reporting an increase over Q4. So that's -- that would suggest some broadness. Obviously, we had the situation about a year ago where we had this false storm I would say in Q2, where we sold $10 million in Q2 of last year compared to I think $7 million in what we just reported. So, I don't expect necessarily to see that kind of level in Q2 of this year. So, it's that -- does that connote a recovery, I don't know.

Yes.

The other color I will say is that we did see some pretty strong growth out of a number of customers in greater China. So I think some of the strong performance looks like a little uneven or regional which also makes us less inclined to say that this is the start of a recovery per se.

I see. Okay. Great. Thank you.

Jeremy [Katherines], CLSA.

Just a question on Japan, where I think we've seen rather weak first-quarter orders from the Japanese automation companies and it looks like you were flat. So, I'm wondering are you seeing any pickup in orders in Japan and maybe any color you could add around that.

Well, I think -- well, generally we don't speak to orders specifically. I think -- I think there are some signs of slow improvement in the Japanese market on a local currency basis in the Factory Automation market, but I think it is a little early to say specifically. And then, also difficult to compare us with other companies is that we have some growth drivers -- I'm thinking specifically of ID in this case -- where we're starting to see some better growth out of our Japanese business. So, yes, I think if you look at our competitors or other benchmarks, probably what you are doing, it seems like we're not seeing a lot of growth. We haven't over the past few quarters from Japanese companies in automation reporting, and I haven't seen that changing. So what would I say overall, it is like some signs of perhaps some slower recovery. I think if we do see something more major like, as you might expect from all the economic stimulus that is going on in Japan at the moment, what we are hearing is we wouldn't expect to see that until later in the year.

Thanks, that is helpful.

Jagadish Iyer, Piper Jaffray & Co.

Two questions. First, Rob, if I recall, last year you invested a pretty, I would say, a reasonable amount in China. Are you pleased with the revenue that came from the region? And can you help us understand -- you did make a comment in your prepared remarks that you are hiring, so which geographies are you hiring headcount? And then I have a follow-up, please.

Your question is purely about China, Jagadish?

Yes.

Yes, so in Factory Automation in China in Q1, we saw 23% growth year-on-year, and we see particularly in consumer electronics, we have seen some pretty strong order trends in that area, particularly in markets like for tablets and smart phones. We see a lot of demand for very high performance vision in those markets which is driving a lot of growth. But to the second part of your question, and what I referred to a little earlier, is we see a lot of potential for broad-based investment in automation in China, and we've been seeing this for a long time. Markets like automotive, ID, and consumer products and food and beverage, we see very good trends in China in those areas. In terms of geography, we have a quite a large number, I believe it is seven offices in major Chinese industrial centers like Chengdu, Tianjin , obviously Guangzhou, Shenzhen, Beijing, Shanghai, and we continue to open new offices to support the growth that we see in those industrial markets. So, I believe last year we opened three offices in cities across China, and I think you can see us continuing to open additional offices this year.

Thanks for that. So, then, you had some positive comments about your logistics business. I just want to dive a little bit more detail into it. I just want to understand, how should we be thinking about the growth in the logistics business for this year? And you did make a mention that you have a position with the e-tail up there, I was just wondering what is your position -- is it shared or you are being an exclusive vendor there? Just some thoughts on the overall growth rates of this business unit. And I just wanted to get some little bit more color on whether you have seen the tipping point for adoption here? Thanks.

Yes. So I think logistics is a large previously adjacent market for Cognex, but it's really part of our ID business overall. So, some of the growth that we are seeing in logistics is now already and will continue feeding through into our ID growth numbers, because our business there is reading barcodes. And, we -- as we introduce new products, we are serving larger parts of that market. So, most recently with the 503, very high speed applications on wide webs are allowing us to serve greater parts of it. So, it's a journey. And the journey is going well, I would say.

The timing of revenue again is a little more difficult to call. We are seeing good signs of good trends, but quite how much that will flow through into revenue this year is something I think that we are still getting our arms around. So the question you asked about large e-retailer, this is a very large company that makes very substantial investments in logistics, so we're certainly not the only player although we are being specked into many new applications on their lines and we are competing really head to head with one other competitor who does a lot of business with them today. And like in many of the areas Cognex works in or almost all of them, our products outperform. So it is a matter of how quickly we get adopted. And that is difficult to know how quickly that will occur, but I would say it's going well.

And I just have a quick follow-up. If this particular e-tailer is starting to ramp more on the adoption cycle, would you expect other freight companies and all of them to start even more aggressively adopting? Thank you.

Sure, we have wins in postal. We have wins in e-retail. We have wins in standard retail and we have wins in Korea type applications. And we are in trials or discussions with most of the large players in those spaces. So, yes, we are going to see wins and we are going to see broader adoption, and I think it is the rate of adoption that perhaps becomes a little more difficult to call, partly because it's a relatively complex sale and there are integrators as well as end-user customers. And in many cases, we are being preferred by the end user customer, but it takes time for the integrator to catch up.

Thank you.

Chuck Murphy, Liberty Park Capital.

A couple regarding Japan, first, just curious. I was noticing how low your Japan sales have become as a percentage of the total down to 12% or 13%, used to be more like 20%. I was wondering why that has been?

Yes. I think if you look back over a period of time, there has been a pretty major contraction in the automation market and in the Semi market. And in Japan, and we've referred to it in a number of calls over prior quarters where we've seen a lot of business getting off shored from Japan into the rest of Asia. And in many cases, we have been able to win that business whether it was ours in Japan or not. So I would say that is part of an overall trend that I see broadly. And as I visit Japan, as I do fairly frequently and talk to the Factory Automation market leaders in that space, that's pretty consistent with what I hear from them.

I mean with Japan now a relatively small percentage of sales, the decline in the yen from a translation perspective, isn't as big of a deal as it might have once been, but what about from a competitive standpoint? You have the yen down 20%, I realize you don't really sell on price, but 20% is a pretty big number. Could your competitors not tell your customers -- hey, just buy 20% more of our stuff, you get the same performance and maybe you save a few bucks?

Well, I think one thing you said is definitely right that we sell highly advantaged, highly technology driven products, so it is not -- they are not particularly price-sensitive in terms of their sales. However, I would say the competitor we take more seriously in the world is [Keyan], and they are obviously a Japanese-based company and they have not seen a lot of growth in their own domestic market in recent times and they are investing outside. But I would -- at the moment, we don't see signs of them trying to use this currency advantage to price competitively with us, but if that changes we're certainly in a position to hold our own very well.

Yes. And to the point about buying 15% or 20% lower and getting the same or higher productivity, is that true at all? Can you just buy more for a lower price to get the same performance, or is it a matter of something software related or something?

Not sure I understand your question. What I was really saying is, we are introducing a lot of highly advantaged products, and a lot of times, that is software driven and it is really driving a lot of the value. So, we are certainly very well-positioned within our product range to make very good margins. So, but I'm not sure quite I got your question?

Let me say it this way. If the customer was planning on buying 100 Cognex vision systems, could Keyan say -- if you buy 110 or 115 from us, you'll get the same or better productivity --

Oh, no.

-- as Cognex's system and you can save some money since the currency has gone down20%?

No, our business doesn't really work like that.

It's Bob here, that question reflects a total misunderstanding of our products. If our product gets the answer right every time, and a competitor's product gets the answer right only 80% of the time, buying more of the competitor's product won't make up for the fact that it's getting the wrong answer.

Got you.

Okay. So, people pay more for our product because it delivers more value. We read more codes correctly then incorrectly. We measure things more accurately than others, and buying more of something that doesn't quite work well doesn't make up for the fact that it doesn't quite work well, you just get more errors if you bought more of them.

Yes.

Another answer to your question is -- Keyan is also a high gross margin company also. So our prices are not significantly different from Keyan's product. When we talk about a price advantage, it is in general over all of our competitors, but Keyan's is generally, if you look at their P&L, it's even more profitable than Cognex.

Got you. Do you guys manufacture anything -- I think you have a distribution facility there, but do you manufacture anything in Japan?

No, we don't.

If the currency were to stay down for a long extended period of time, would you consider moving some of your production over there to take advantage of that?

I very much doubt it.

Okay. All right. Thanks a lot, guys. Appreciate it.

Jim Ricchiuti, Needham & Company.

Rob, 2.5 years ago, you sized the TAM in the logistics market, I think at around $150 million. Based on where you are today, and with the products you have out there now, is it still in that range? Is there any update as to what -- I know it's folding into the ID business, but I'm just trying to get a sense as to whether it might be expanding?

Yes, no, we think it is -- yes, we would size it today more on the order of $250 million in terms of what we can address, but also we have seen some significant investment in growth back in that market relative to where it was a couple of years ago. Particularly driven by trends in e-retail and some other areas of investment. That market looks bigger in terms of what we can serve today than it was.

Okay, and when you refer to full adoption, and it sounds like there is a layer of complexity with the integrators, but can you give us a sense, when you talk about a large e-tailer or a larger postal supplier at full adoption, does that mean full adoption by the end of this year? Does it mean a process into next year?

Okay, so in that case, you're looking at specific accounts where we might be -- where we are getting specked in. Is that right?

Yes.

Right. So normally the way it would work is we are reviewing our technology with those companies. They are approving it and they are saying it is advantaged and they want to spec it in. And then they have specific projects that come along, let's say in a large courier company, they may have a couple of largest projects of a number of $1 million they are planning over this year and next year. So our expectation would be to win those projects. In some cases they may split the business between us and one of the competitors or they may give it exclusively to one.

Okay thanks very much, congratulations on the quarter.

Rob, I think he was also questioning whether full adoption would mean that there would be purchase orders given to us, let's say, and then none would follow because they've adopted it fully. That is not what Rob meant by full adoption. We expect when these e-tailers or distribution centers or courier companies buy, they will continue to buy from us as their businesses continue to modernize or grow. So full adoption means that we would hope that we would win all the projects that are available that year or for the next two years and then there would be more projects coming.

Thanks, Dr. Bob. It is clear that it appears that you've reached an inflection point with some of the progress you're making with some of these bigger accounts.

It -- the future looks very bright in logistics and in code reading in general. The breakthrough technology that we have now means that machine vision is just down the line better than laser-based bar code readers and I expect in a small number of years you won't be even seeing anything except machine vision-based or camera-based readers. And our expectation, even on the low-end is that they will -- the majority of them will be Cognex, and that is what we are working for.

Thank a lot.

Richard Eastman, Robert W. Baird & Company.

Dr, Bob, could you just -- my line of question was around 3D and where in the lifecycle machine vision is for 3D apps, applications versus an established market for the laser technology itself?

Yes, well, I think we are in the early stages of we call it displacement sensing. A lot of people don't quite know what 3D means. What displacement sensing means to us is that you're measuring height of things from looking down on it, which in the past if you wanted to measure height using machine vision, you would have to have the camera looking at it sideways, for example the way you take a picture of a person, you could measure the height. You would not measure the height of a person looking down on a person typically. But the sensors that we are now coming out with give you both the 2D view of looking down on something so you could take all sorts of XY or height, width and length measurements on things, and also, even though you're looking down, you can measure the height of things. And this is technology that has been available for some time, but it wasn't possible until recently to offer these products at the same kind of accuracy and at the low price and ease of use.

So that is what our breakthrough is going to be. Very affordable price and ease of use to measure both the height, the width, and length of things. And again we've got this brand-new, this will be totally new incremental revenue for us. We've never been in this segment before. And it's selling to the same markets as Rob mentioned that we've been selling to, so it isn't going to incur any substantial additional sales costs to us and we have the distribution capability. So, were just adding a new product to our portfolio in a market segment that we weren't in that appears to be and that we know is for two of our competitors very profitable.

Could you just take a shot at the size of the market now at this point in time? Is it $50 million or -- ?

I think that Rob can better answer that question than I.

Yes, so, the initial product we are launching, some very specific applications at the high-end, and we think the served market for that product specifically that we launched is about $10 million. So, not a big market. The overall market that we expect to serve in future based on the developments we have underway, we size that a little more than $100 million.

Okay. All right.

And by the way, this does not include coordinate measurement machines, which is a whole different story, which measures things to an ultra-high accuracy, but do so in a laboratory setting or a quality control setting where you are taking one item off the line and measuring it carefully. Our focus has always been on the production line, where we are going to measure every product that goes by. It is a very different market than the coordinate measurement machine companies focus on.

Great, understand. Thank you.

Jagadish Iyer, Piper Jaffray & Co.

Just a quick follow-up. Dick, I was wondering whether -- did you have any buybacks in the quarter, and what are your thoughts on the buybacks, and how should we be thinking about in the big picture in terms of overall earnings growth as you make these investments on trying to roll out these new products into the marketplace? Thank you.

We did not do any buybacks during this past quarter, but we intend to be more active in that regard in the following quarters in 2013. Clearly, the investments we are making in some of the areas like the R&D and the sales area are designed to drive the top line growth, and with the kind of high margins that we drive, we expect that the pull through all the way down to the operating income and bottom line will be significant and will help increase our overall EPS and EPS growth.

Thank you.

That sounds like it is the last question, and I want to thank everyone for taking part in the call. We are excited about the new products and about the other steps that senior management under Rob is now taking to increase the productivity of both the engineering products, getting them into manufacturing quicker, and also in the sales force area to raise productivity in the sales force. And we hope, we fully expect those efforts are going to yield increases in EPS in the quarters to come. And that's about it for now, and I want to thank you again for taking part in the Cognex Q1 conference call. Good evening.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.