Cognex Corp (CGNX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex fourth quarter 2013 earnings call.

(Operator Instructions)

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

And now, I would like to turn it over to your host, CFO Dick Morin. Please go ahead, sir.

Thank you, and good evening, everyone.

Earlier tonight, we issued a news release announcing Cognex's earnings for the fourth of quarter 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 would 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 will turn the call over to Cognex's Chairman, Dr. Bob Shillman.

Thanks, Dick, and hello, everyone. I would 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 am 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 will 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 are 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 have 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 am sure that you will still ask those detailed questions. But I hope that you will now understand why we won't be giving detailed answers.

With that, I will now hand the microphone over to my partner, Rob Willett. Rob, the microphone is yours.

Thank you, Dr. Bob. 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-on-year to set a new annual record in absolute dollars. We have been investing in new product developments 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-on-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 a 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 reduction 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 service 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 to $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 call up for your questions. Operator, we are ready to take questions.

(Operator Instructions)

So we will take our first question from Jim Ricchiuti from Needham & Company.

Hello, good afternoon.

Hello, Jim.

Okay. Well, let's see which questions you are not going to be answering. (Laughter). Can you give us the revenues for the ID products business?

I think we have decided not to share that data anymore. I think we did tell you that growth for the year was over 30%, and the ID products continue to do well. But they're reported as part of SA overall.

Okay. Any chance, Rob, of giving us the year-over-year increase in Q4 in that part of the business, without giving a dollar amount?

I think we are just going to say it was more than 30%.

Yes.

Okay. Can you talk a little bit about the factory automation business in China?

You alluded to the fact that you are seeing seasonality in that business. I think you had 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?

Yes, I would say we are very positive about our business in China in factory automation. We have seen sequential growth regularly in all quarters recently, and I think we are very positive and optimistic about growth in China.

Inevitably, it is a strange time, Jim, to ask that question because of the Chinese New Year.

I know, I know.

The timing of Chinese New Year. But I think, taking that noise aside, I would say, yes, we are looking forward to what I think will be a very strong growth year for us in China.

Okay. I have one more question, and I will jump back in the queue.

The SISD business declined in 2013. I think that is 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?

Yes. So we are feeling good about the Surface Inspection business. You are right, it did decline last year; and revenue for the year was about $46 million.

And 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 -- working on it with customers.

So that was what drove it. And the underlying bookings situation is good. We are seeing growth, and we do expect the business to grow in 2014.

Okay, thanks. I will jump back into the queue.

Thanks.

Okay. Thank you. And our next question is from Ben Rose from Battle Road Research.

Good evening, gentlemen.

Dr. Bob, I guess, you are not regretting your move to San Diego at this point? (Laughter).

No, it was timed properly.

Yes, it was impeccable timing I must say.

Just a few questions. Regarding China, which I know you say fell sequentially somewhat due to seasonal reasons. Can you just walk us through a little bit on 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?

Yes, Ben. So I think as I said to Jim previously, 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 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.

And that really has to do with the design cycle of our customers, particularly in electronics in that market, where generally they are specifying their new products now and testing products.

And they are placing large orders on us in Q2 and Q3, so that they can ramp up production for the holiday season, which for the world is December outside of China or for China is right now, around Chinese New Year. So that is the kind of cycle that we see.

And added color I might put on that is we are going see similar cycles related to logistics, which is becoming a more important market for us again where our customers invest in capacity in Q1, Q2 and Q3, and generally they are not investing in Q4 because are trying to get as much product out the door on time as possible.

Okay.

On the ID products, relating to the retail and logistics market, are you seeing increased interest on the part of, let's say, multiple e-commerce spenders and logistics spenders?

I didn't see any press releases I guess, in the last few months. But maybe you could just get some update there.

Sure. So we are on a journey into the logistics market. It is going very well. We have real advantaged technology in that space in terms of its performance.

And we really saw our business pick up substantially in the second quarter of last year, and we did report two very major customer wins.

And we are seeing substantial follow-on orders from those, and many new customers, big names in the industry, placing initial orders. And we expect them to grow too, substantially.

So we are very positive and optimistic about what we are doing in logistics, and we are reporting it as part of our overall ID business, which is growing in excess of 30%. And we expect to go on doing so.

Okay. Thank you very much.

Sure.

Okay. Thank you. Our next question comes from Richard Eastman from Robert W. Baird. Please go ahead, Richard.

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 am curious as to 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 is maybe more than seasonally one would expect.

And I am just curious if the upside came in the product ID side of the business, or if you saw some good traction on the non-ID factory automation -- the inside products?

Sure, Rick. Yes. So the answer is we saw significant traction in both sides of the business. ID was very good, as was the big vision part of our business in factory automation.

I think that was very encouraging to us; and we have seen, I would say, sequential strengthening as we have gone through last year in the vision part of our business.

Particularly in the Americas, where we saw a lot of business we have been working on for a long time, some of it years, really. Customers started to place substantial orders and then wanted those orders before the end of the year. So we were very encouraged by that.

And it wasn't just ID; it was certainly vision systems and vision software and the whole part of our factory automation business.

Is there one or two industries that you could single out?

I think you had mentioned some earlier. But I am not sure if you were suggesting logistics, consumer products, med devices. Was that for the year, or was that kind of a fourth-quarter uptick?

It is really both. Those all performed well, yes -- logistics, consumer products --

Okay. Okay.

Yes.

Rob, it is one thing not to answer the questions. But when you do answer them, I have got to have something here.

Great, go for it.

How about the R&D? Maybe I will throw this one at Dick and see if he will slip up. (Laughter).

Wait, Rick, before you do --

I am going to get you in trouble.

Before you do --

Yes?

Do you want to talk about backlog? (Laughter).

No. Well, I could ask.

No, it is in the 10-K. I mean, it is something that is disclosed at year end.

Okay. Well, I will read that -- I will find that then.

Okay.

But in R&D investment, should we expect in 2014 that that tracks 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?

Yes, I don't think at this time that we are expecting the R&D to grow at that high a level. We are going to continue to invest in new product development.

But we are expecting that our R&D growth and expenses, as well as in the sales expense, will be quite a bit less than what we expect for topline growth.

Okay. Okay. And just one more question on the factory automation side of the business. A chunk of that non-product ID stuff goes into distribution.

And did you get any sense in the fourth quarter that -- was distribution stronger, the sell-in to distribution stronger than you might have expected?

Well, I think when you say sell-in, Rick, I think it is important to know that generally our distributors don't hold any product. They don't hold inventory.

And we saw equivalent strength in both sides of the business in factory automation. In factory automation, it is two-thirds distribution, one-third direct. And we saw strength with some large strategic customers, but also broadly through distribution.

And that demand was clear, and there is no kind of sell-through issue in our business. It all moves, and our distributors don't hold inventory.

Okay. And just a last question then on the SISD business.

Can you just give us a sense from a percentage standpoint of how much of the surface inspection business ends up in Asia, particularly China? I mean, is it a third? Is it --?

Let's see, roughly -- I am trying to -- give me a couple seconds here, as I -- (Multiple Speakers).

Because the follow on question'll just be that obviously we have heard much and seen much in the way of build out of infrastructure, especially in steel. I presume in paper as well.

Are you seeing any of that, any sluggishness or downturn in demand just specifically out of China, given where their spending priorities have shifted?

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 are still seeing -- there is a lot of business in metals in China these days for surface inspection.

Both steel and aluminum, as we are seeing that because 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 are now requiring a better quality of the steel and aluminum that is going into their production. So we are seeing opportunities in the various suppliers there.

I will fill out that answer, which I think it is important to understand that we are serving kind of the higher specification part of the metals market, as Dick said, like aluminum, et cetera.

I think among broader steel companies, Rick, probably what you are seeing is there is over-capacity, and there are challenges in that part of the market.

But in our part of the market, which is more stainless steel and aluminum for automotive, et cetera, I think we still think there is pretty -- and we are seeing pretty healthy demand.

Does there tend to be a retrofit market there?

On that?

On that capacity in particular?

Yes.

Yes.

Absolutely, and fitting surface vision systems to existing lines that didn't have surface inspection systems before.

I see. Okay, very good. Well, thank you.

Sure.

Okay. Thank you. And we will take our next question coming from Shawn Lockman from Piper Jaffray. Shawn, please go ahead,

Thank you. Good evening.

As we look at your revenue by geography for 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 China as you spoke about.

But is the shift to America something that we should continue to kind of see as a greater mix of your revenues? Or is this something that you expect to adjust back to kind of to more traditional levels?

And if you could, talk about factors there that could impact that kind of revenue mix by geography.

Sure. I think we have 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 have invested a lot, and done very well in that market as the year has gone on. I think our ID business and our logistics business here are particularly strong and successful in the Americas.

It is sort of a newer market for us. I think because it is our home market, we have been successful there.

So I think that is great. But I think to answer the second part of your question, longer term we think the overall growth rate of Machine Vision in Asia \and for Cognex in Asia is going to outstrip other regions.

And that is where we have been growing more on a percentage basis. That is where we see more and more adoption and investment.

I think it is some of the trends that you see in automation, particularly in China, around China's increasing sophistication; its population change, where there are fewer people entering the workforce; and the increase that you see in labor costs. They are all driving what are wonderful conditions for factory automation and specifically for vision.

So we are investing there, and we are optimistic. And that is where we probably expect to see the largest percentage growth over the long run.

Europe is a great market for machine builders. Some of the greatest machine builders in the world are in markets like Germany and Italy. And they are great consumers of Vision, and the German automotive industry is also a great market.

But I don't think we are going to 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 that is a more challenging market for us. We are executing there much better than we have probably at any time in the last few years. But I think there is strong competition for us there, and the growth rates and the relative size of our business there is smaller.

Okay. That's very helpful, and you headed off a question I was going to ask on Japan.

Obviously, you are kind of dealing with some currency effects there. But it sounds like that your execution has 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 toward the Americas and Asia longer term?

That is how it looks from here. Yes, yes. And our Japan business has been executing much better in recent quarters than it has for a while. So, yes, yes.

Okay, great. And I notice you don't want to give us specific guidance for 2014. But just kind of want to get a sense of what you do see ahead maybe in a qualitative sense?

And between these longer-term opportunities that you talk about and maybe even what we are seeing in logistics, is it fair to assume that growth rates for the Company could exceed what we have 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-state growth? I guess we'll focus here on revenues?

Yes. So I think we think 2014 will be a growth year for Cognex. 2012 was, we reported minimal growth; 2013 increasing growth.

And as we moved through 2013, we saw increasing levels of year-on-year growth as we moved through the quarters. So we do have some good momentum moving into this business.

We have been investing a lot in new product development and in sales force expansion. We think that puts us in a very good position.

I think if you kind of tick through the businesses, Semi, I think we are not that optimistic about that business, it has been kind of --

It declined year on year and --

Right.

Probably won't decline any further.

Right. I think as we said, surface inspection we do expect to grow this year.

And then, factory automation, we target a 20% growth rate in that business. That is ambitious, and I think a lot of people have questioned whether that is achievable.

But certainly in the last two quarters in the second half of the year, we have been exceeding that growth rate. And based on our investment and what we see, we are optimistic about the factory automation business, which is a very large part of what we do.

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-a-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 topline results as well.

That's great color. Thank you, gentlemen. That's all for me.

Okay. Thank you, sir. And we will take our next question coming from Holden Lewis from BB&T.

Thank you, good afternoon.

Hello.

A couple of things.

First, as it relates to the revenue guidance -- you sort of have put out a range that I think is consistent with historical seasonality. But when I think about some of the things that you kind of talked about in terms of ID products I would assume that it grew sequentially. I assume you expect it is going to grow sequentially again, based on contracts.

It sounds like in the SISD business that you had some deferrals, that I assume pushes out into the beginning 2014. It sounds like -- maybe this is just sort of general momentum -- it just sounds like perhaps we should have been expecting not quite the typical seasonality out of the revenue side. And that is kind of what we got.

Am I missing something from the standpoint of timing or anything of that sort?

I think 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.

It has to do with a slower 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.

And so, I don't think you should expect sequential growth in SA in general or even in ID from Q4 to Q1. Semi, 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 flat year on year in Q1. So that is kind of how it is looking for us.

But I think it is 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 we are pretty much in-line with that, even with the kind of record revenue that we reported here in Q4.

Right. I guess I will just say it seems like there are some things, like the deferral of some revenue on the surface inspection, and sort of the -- I would assume the sequential growth out of the logistics business, for instance, that had good rates.

But I just thought that might have had the potential to dampen that normal seasonality?

I think we expect the surface vision revenue deferral to unwind as we go through the year and not necessarily see a lot see a lot of it come in, in Q1.

I think also 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 we are feeling strong about where we are. But we don't think we are going to somehow buck the trends of both Q4 to Q1 that we have pretty much always seen.

Okay. And then, I guess, a similar question about gross margin, only in the sense that talking about mid-70% is kind of the boilerplate language.

But as your volumes have gone up the last couple of quarters, you have kind of moved into 76.5% in Q3, 76.8% in Q4 I mean, you are really knocking on 77%. It is getting to the point where 75% to 77% is kind of a big difference from a guidance standpoint.

I guess what I am 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?

Well, to the extent that the revenue levels stay up or whatever, most of the growth coming from the MBSD side, yes, you can expect that the gross margins will stay at a higher level. However here, we are expecting that the revenue level will, in fact, decrease in Q1 from Q4.

And as we had said that essentially our surface inspection was going to stay relatively flat. A lot of that decrease is going to 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.

Got it. Okay. Thanks. I will jump back in the queue.

(Operator Instructions)

We will take our next question, a follow-up question, from Jim Ricchiuti from Needham & Company.

Your headcount, looking at the headcount from last year, it looks like it was up around 9%, and low double-digits in sales and marketing, and R&D and engineering. How should we think about headcount?

How should we think about the investments you are making in sales and marketing and R&D, just from a headcount perspective? Should we see those similar kinds of increases in 2014?

Well, so how you should think about headcount at Cognex is -- Cognoids are outstanding performers, and we are very able to attract very high-performing people from universities, from competitors, et cetera.

We have been adding quite a lot of headcount recently in two areas. One is really sales force, particularly in high growth markets; and the other is in engineering for new product development.

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 specific opportunities we see.

So we are always going to go on investing where we see opportunity, and we are thinking about the longer-term rather than the short-term. But we have certainly gone through a period of pretty major investment, and I think it has resulted in the kind of growth that we are seeing.

And that growth, whether it has to do with expenses or it is to do with headcount, we would probably expect to grow at a lower rate than revenue in 2014.

Okay. Rob, in the past I think you have talked about the opportunity within the logistics market; you have sized it. From where you sit today, do you see that opportunity expanding, the TAM that you have addressed in the past?

Yes, I think when you were here for the Investor Day, we sized the logistics market around $250 million that we serve. And I think obviously, we are selling into less than 10% of that today -- and that is our share and we think we are going to grow substantially as we go forward.

Now, there are adjacencies within logistics that 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 we are becoming recognized as able to serve that market. Not just being a niche player, but a full provider of ID products.

And along those lines, I am wondering -- you are 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? You can't predict what the competitors are going to do, but just in general how you view the environment.

Well, our two major competitors in that space are the German company SIGG and the Italian company Datalogic. And Datalogic has gone through an acquisition of an American company called Accu-Sort, that they bought from Danaher a little over a year ago, and I think is trying to integrate that business. And SIGG has a strong market share.

So we are targeting those companies. And I think one of the reasons we have seen such success in the US obviously is because that is our home market, and those are European companies who may struggle more here. So 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 bar code 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 is more expensive and takes longer to set up in these types of applications than our technology does.

So I think we are certainly in that market with disruptive technology. We see them trying to improve what they are doing. But we certainly think we are in years ahead in terms of our capability, and we are working hard to capitalize on that.

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 3-D vision and also with the Advantage engine that you talked about?

Yes. So we began the journey in 3D displacement sensing, launching our products in the spring of last year. We have been encouraged. That was just the first product, and we have been encouraged by the performance of that product.

We have 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 are building on that, and we do have ambitious product development plans in that area too.

It is a big market. We are serving just a little piece of it today, and we are looking forward to serving more of it in the future. And I would say our plans are on track.

In the life science and image engine industry, I think, as we explained, that is a very long sales cycle where customer's specing machines in many cases require regulatory approval. And that can be a three-year process between 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 major life science new products that are on deck for launch.

Again, we don't think we will see large revenue contribution from that business in 2014. But we do think it is going to be a nice contributor to Cognex in a couple of years from now, and we also think it is going to be nice and stable.

It is going to be less cyclical and volatile than the other industries we serve, just because of the nature of that OEM life science regulated business.

You alluded to some major wins with 3D displacement. I was just curious, can you say what verticals that those are coming in or came?

Yes -- Major wins, a couple of really good orders. Certainly, electronics, automotive.

But that product serves a very broad range of markets. But the two markets where we have seen some notable wins were electronics and automotive.

Okay. Thanks very much.

Did we leave out any other questions that you weren't going to answer? (Laughter).

Rich, you did a great job. This is Dr. Bob.

And I want to thank everyone for not probing as deeply as I thought. We were ready to be really tested on this, and I want to thank you for your understanding.

We would love to tell you everything, and we just can't anymore. We just can't. You will just have to see the results.

Okay. Thank you.

(Operator Instructions)

And we have another question from Holden Lewis from BB&T. Holden, please go ahead.

Yes, 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 number is a good one for this year.

In the past, without talking about specific numbers or quarters, I think you have talked about 30%-plus growth out of the logistics or the ID products. You have obviously done that the last couple of quarters. As the year goes on, comps get harder.

But much like factory automation at 20%-plus, do you think that 2014 is the year where you can still put up 30%-plus in the ID products, even as the comps get a little bit harder?

Well, I think those are goals for us. So factory automation, our target is to grow the business at greater than 20%. It is not going to happen every quarter, but it has been happening in recent quarters.

And the same would apply for ID. Our goal is to grow greater than 30%, and that has been happening. I think we are very optimistic about the potential to grow on growing ID very quickly. And the real reason for that is, we are still very little penetrated into what is a pretty large market.

We sized the ID products market that we serve at around $900 million, and our share of that is not much more than 10%. Right? And we have highly advantaged technology.

So I think there is plenty of room for us to go on growing that over the long run. And 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 confidence that we're going to see some great growth there.

And then likewise in factory automation. We have invested, and we certainly saw those investments paying off nicely in recent quarters. I think there will be quarters I am reporting to you less than 20% growth and quarters that are more. But that -- with that said, we are expecting strong growth.

Yes. And then just lastly, semi's, obviously there is probably nothing in it for anybody to go overboard in enthusiasm over that market. But you are seeing book-to-bill, I think, getting better. for the capital equipment, we do have some other folks who are in that market that seem to think that it is at least getting better, coming after several years of a down market.

Are you just kind of saying you don't expect much because it is the easiest thing to say? Or are you hearing from your customers that, look, [finances] are not getting any better. Ignore that the data people are more optimistic.

I mean, how should we sort of think about that?

Yes. Well, I think there are a couple of things to point out here, Holden. One is that the part of the industry that we serve tends to pick up six months or so after what you may be seeing in the rest of the industry. I think that is one point.

Overall, I think we think of semi as a cyclical, slightly declining business for vision because, obviously, innovation leads to the need for less capacity in that industry over the long run.

But I think what is on the horizon is cyclicality around new designs, and specifically 450-millimeter wafers, which I don't think we are going to see a lot out of that in 2014, but it will come. It will likely be a pickup for Cognex, a cyclical pickup that we will be explaining to you both as a positive thing and a negative thing afterwards. So buckle yourself in for that.

Okay. All right, great. Thank you.

Okay. Thank you. And our next question coming from [Jeremy Kapoun] from CLSA. Jeremy, please go ahead.

Hello, this is Grace Lee sitting in for Jeremy.

Hello, Grace.

Hello. Thank you for taking my questions. I have two questions.

First one is, I think you have alluded a little, while answering previous questions. But I am wondering whether you can mention some of the verticals that you are seeing growth in China factory automation?

Sure. Yes. So I think we serve a lot of broad verticals. Our largest vertical in China is electronics, and we are seeing strong potential and existing growth in that market.

And another market that Cognex serves is automotive. I mean, it is one of our largest markets globally. And certainly China is, as you well know I am sure, the largest market in the world now for new automotive purchases.

And not only that, but there is a lot more in-country investment going on. So certainly we have been experiencing good investment 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.

We have noted that there might be some significant CapEx expansion in automotive sector in China in year 2014. I am wondering whether you see some of the stronger growth from automotive verticals, given the CapEx expansion?

Well, I guess the question would be the stronger than what? Increasing relatively? I would say, yes. I think there is a lot of investment going on in automotive. There is a lot of investment, particularly by domestic, well, and foreign automotive companies in China. So, yes, I would say we are seeing improvement in that area.

But that might be tracking, I would say, with the overall growth in investment that we see for Machine Vision in China. It is not an outstanding growth vertical. It is just part of an overall very good automation growth story for Cognex in China.

Okay. Sure.

And then the second question is, I guess, I have sensed that ID growth is mostly from North America, at least at this stage. I am wondering whether I am understanding this correctly?

And also, by which time frame do you think you that you are going to be penetrating ID products into regions outside US?

Well, I would say, the ID growth story is global for Cognex for sure. I think that we see strong growth pretty much in all markets that we serve with ID. And that's true.

I think perhaps what you are picking up on, is we had very strong logistics success in America with some big customers that we reported, and we do expect that growth to spread globally over the next few years for sure. But don't think that Cognex's ID story is an America story; it is a global story.

I see. Okay. Thank you.

Okay, thank you. I am showing no further questions. I would like to turn this back to Dr. Bob Shillman for any concluding remarks.

Sure. Thanks. Well, just to wrap up, what a great year. We had a fantastic year, 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 want to thank all of them.

I want to thank you, the analysts and shareholders and fund managers for joining us tonight. And although our calls won't be quite as detailed as they have been in the past, we do hope you will continue to attend those calls and our conferences. And I hope to see you at some of them.

Thanks again and good night.

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