Cognex Corp (CGNX) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex fourth-quarter 2014 earnings call. (Operator Instructions) As a reminder, today's conference is being recorded.

And now I would like to turn the program over to your CFO, Dick Morin.

Thank you and good evening, everyone.

Earlier today, we issued a news release announcing Cognex's earnings for the fourth quarter of 2014, and we've 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 a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release and in the Form 10-K.

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 hello, everyone. I'd like to welcome each of you to our year-end conference call for 2014.

As you've seen in the news release that we issued earlier today, we had an outstanding year in 2014 in which we set new records for revenue, net income and earnings per share, and we achieved a remarkable after-tax margin of 25% for the year. Right now, I'm at our R&D office in San Diego. Everyone else on the call is at our native headquarters. Now, for further details, I'm going to hand the microphone in a moment over to my partner, Rob Willett, our President and CEO.

I will be available at the end of the call to answer any questions that you might have for me. But before I hand the microphone over, I want to point out that as required by the SEC, we disclosed the name of our largest customer in 2014 in our Form 10-K. However, the strict nondisclosure agreement with that customer remains in place and because of that, we will not and we don't intend to provide any details about their specific projects or how our products are used in their manufacturing process.

Having said that now, the microphone is yours, Rob.

Thank you, Dr. Bob. Good evening, everyone.

I'll begin my remarks with an overview of last year. I'm pleased with Cognex's outstanding performance in 2014.

Our team's ongoing efforts in new product development and sales force expansion delivered great revenue growth and higher levels of profitability. Growth in 2014 came from the factory automation market where new annual revenue records were set in Europe, the Americas and Asia, excluding Japan. Revenue from surface inspection also set a new record.

IED products continue to grow well above our 30% long-term target. In addition, we saw very strong performance from our vision products, which also grew in excess of 30%.

From an industry perspective, consumer electronics, automotives and logistics were important contributors to growth in 2014. Gross margin remained strong at 75% despite volume pricing and higher support costs for our largest customer.

Operating margin expanded to 30% and net margin to 25%. Both represent significant increases over 2013 reflecting the substantial leverage that incremental revenue has on our business model. We delivered earnings of $1.36 per share setting a new annual record that is 65% higher than the prior record of $0.83 per share set in 2013.

Now for details of the fourth quarter, we ended 2014 on a strong note. Revenue for Q4 was $117 million, which exceeded the high end of our guidance.

This was the result of better-than-expected demand from the factory automation market. Revenue from factory automation in Q4 was $93 million, representing our second highest factory automation revenue quarter of all time. Growth for factory automation as reported was 16% year-on-year and 20% in constant currency.

Looking at factory automation from a geographical perspective, we were pleased to see double-digit revenue growth over Q4 2013 in three of our four geographic regions. Asia, excluding Japan, was our best-performing region in terms of percentage growth increasing more than 30% year-on-year. An important contributor was greater China, where we continue to expand and diversify our business into many industries, different applications and new customers.

In Europe, factory automation revenue grew in excess of 20% over Q4 2013 even though it was negatively impacted by a weaker euro. Strong performance across several industries including automotive, consumer electronics, medical devices and food drove factory automation growth in this region.

Factory automation revenue in the Americas set a new quarterly record in Q4. Revenue grew in the low teens over Q4 2013, which had been particularly strong because of substantial revenue from our package delivery company.

In Japan, the factory automation market continued to struggle and unfavorable currency exchange rates further hurts results. Our revenue from this region, as reported, declined 27% year-on-year or 17% in constant currency.

Moving on, revenue from the surface inspection market was also above our expectations. Service inspection revenue was a record $18.7 million in the fourth quarter, which is a substantial increase both year-on-year and sequentially. We continued to perform well in surface inspection and demand remains at a high level.

In the semiconductor and electronics capital equipment market, revenue was $5 million in Q4. Semi revenue softened considerably at the end of 2014 following several quarters of growth. That fact combined with news from the field leads us to believe that we passed the high point in semi sales for this cycle.

Turning next to operating activities, based upon the confidence we have in our strategies and the opportunities we see, we continue to make significant investments in our business during 2014 to drive growth in the years to come.

We invested heavily in engineering spending $60 million on IED in year 2014, an increase of $12 million or 25% over 2013. That investment helped launch more new products in 2014 than in any year in our Company's history. And we have additional major products slated for introduction in 2015. We expanded our sales channel and significantly broadened our market reach.

Activities included adding a significant number of people to our sales and marketing organization, increasing sales force productivity through systems upgrades and process improvements and investing in our service infrastructure to support large customers and logistics and other high-growth markets.

We added new offices and expanded facilities around the world including our operations facility in Cork, Ireland, to ensure adequate capacity for higher levels of business. We feel good about our ongoing investments and we believe that they are important to address the growth potential we see for our Company.

In summary, we've afforded outstanding financial results for 2014, the result of the team's strong execution on our long-term strategies. With the excellent progress we made during 2014, we believe that 2015 will be another record year for Cognex on both the top and bottom lines.

Here's the specific guidance for Q1 of 2015. We expect revenue of between $108 million and $111 million. This range represents growth of 19% to 22% year-on-year even with an expected unfavorable impact from a stronger US dollar.

Gross margin is expected to be in the mid-70% range. Operating expenses are expected to increase by up to 6% from Q4. We are gearing the organization for a higher level revenue expected in subsequent quarters.

In addition, we see an increase in stock option expense and incremental fees related to our patent lawsuits against Microscan. The effective tax rate is expected to be 19% excluding discrete tax items.

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

Ben Rose, Battle Road Research.

Yes, Hi, Rob. Hi, Dick.

Couple questions, the machine builders in Europe have traditionally been a strong customer segment for Cognex particularly in the machine vision business. And can you give us your sense, Rob, of the current strength in that market?

Yes. Well, we see continued strength [induction] in machine vision by machine builders in Europe. In contrast to maybe what you read about the broader market, we certainly see exporting machine builders seem to be continuing their strength and growth.

Another factor that we see among European machine builders is vision is becoming less expensive and easier to use and easier to integrate. And that's allowing us to penetrate machine builders in markets that in the past haven't had the sophistication to apply machine vision.

I'm thinking particularly food and beverage, pharmaceutical type machine builders. So we see continuing strength currently and some nice market dynamics playing in our favor among -- in that market.

Okay. And then just a question on the outlook in the Far East. I know that in the past you've noticed -- that you've noted some seasonal weakness in China due to the Chinese New Year. Could you just maybe update us with your thoughts on the outlook there?

Well, Chinese New Year certainly happens every year in the first quarter. But that's no new news there.

Okay.

But I would say if you take that out of both sides of the equation last year and this year, we think we see continued strength and growth in our business in Asia. And we do -- we saw a strong finish to last year and a strong start to this year in the underlying business.

Okay. Thanks a lot. I realize there are probably -- there are definitely quite a few questions behind me, so I thank you for your answers

Okay. Thanks, Ben.

Thank you. Holden Lewis, Oppenheimer & Co.

Great, thank you. Good evening.

You talk about the amount of money you're going to be spending in the most recent year as well into Q1 for these opportunities as you move through the year of 2015. Can you talk about maybe where we are with a couple of these opportunities? I would imagine that you're talking about new product launches.

You may be talking about maybe additional large orders coming through kind of like maybe what you had last year and then sort of just run rate growth. I'm just sort of curious about your spending. Is it going to all three of those things and kind of what the status of those items might be at this stage?

Sure. I think -- Hi, Holden. I think if you look at what we said, there is some kind of specific things related to Microscan lawsuits and stock options. But if we peel those away, really the major areas of increase in spend are around gearing up for business we see coming later in the year and that we expect, and it is in all of the areas really that you talk about.

We do have some large customer opportunities that we're looking to execute on and we think can bring substantial revenue to the business in subsequent quarters.

In addition to that, we are bringing a lot of important new products to market. And obviously investing in getting those out of the door and the sales force supplied with them as part of what we need to do to sustain significant growth we see in factory automation.

And I just go back to what I said earlier about large opportunities we see in large customer opportunities, I think we see those coming both in consumer electronics, but also in logistics. And gearing up our organization to support those are expenses we're taking now and we expect to see significant revenue come in future quarters.

Okay. And just to follow-up, I mean, those large customer opportunities, have you seen since sort of doing the first one in Q3 of 2014, has that been a bit of an eye-opening event for other customers in as much as having done that, you're seeing pipeline of maybe not semi million dollar orders, but your pipeline of $20, $30 million types of opportunities?

Are you seeing that begin to fill up meaningfully or is it still just one or two customers here and there? How's that evolving?

I think it's a bit early to speculate on that or to talk about the largest customer in terms of how they're going to play out in terms of more business. But I would go back to what I'd say is I think we do see large opportunities in consumer electronics and logistics.

And obviously, there's a lot more of those and a lot more sizable at Cognex today than there was two years ago.

Yes, thank you

Thanks.

Jim Ricchiuti, Needham & Company.

Thank you. Well, just on that last point that you made if we go back to the order that you received from that large customer last year, I believe you got it in the spring and it shipped in Q3 obviously.

But as you look at some of the opportunities that you see out there with other potential large deals, are these -- do we have that kind of a lead time where we'd have -- you would have to see these orders earlier in the year to potentially ship them in the back half?

Hi, Jim. I would say the kind of lead times that you see in different markets are different, right?

I mean, automotive tends to be a larger, slower market in terms of three-year product road maps being implemented. And you tend to have more visibility about how business will play out more gradually in those markets.

But I think in the two markets we were discussing, logistics and consumer electronics, they can be very significant deployments and at relatively short notice. Sometimes things can be in our funnel and close within -- a booking in one quarter can close in the next and so it can move quite quickly I would say.

I think it's too early to speculate about big order volume specifically or the timing of orders in logistics and electronics at the moment. But obviously when we tell you we expect top-line growth and we expect bottom-line growth for this year on top of the excellent year we had last year, you can see that we're certainly expecting continued strong growth in factory automation. And continued -- excluding those large opportunities and certainly some large opportunities to materialize as we move through the year

Can you comment on the strength of the SISD business that -- can you talk about where that's coming from and just generally what the outlook looks like for that business in 2015?

Sure. Yes. So I said the profession business had an outstanding quarter in Q4 as you rightly note and the team executed very well.

There was a significant increase both year-on-year and sequentially. We're seeing growth in such areas as specialty metals like aluminum. I mean, certainly you read a lot about the adoption of aluminum in automotive.

That's an area that our team excels in and where we're generally recognized as the gold standard for inspecting aluminum going into car bodies. But I don't want to give you the impression that the outstanding growth is purely around that. It was pretty broad based both in paper and in metals.

And broadly speaking, revenue for surface vision was strong in most regions of the world. In addition, I would say Q4 is traditionally the strongest quarter for surface vision.

So potentially you will see that slip back and we know it's very uneven business, but it sounds like you feel like there's a decent -- reasonable pipeline of opportunities for that business as well and 2015?

Sure. I mean, demand in surface vision remains at a very high level, but you're right. We don't expect to be close to that record revenue we saw in Q4 as we move into Q1.

Okay, thanks a lot

Jeremie Capron, CLSA.

Thanks, and good evening, everybody. I wanted to go back to the outlook for this year and you seem to be very confident in your ability to grow both the top line and the bottom line.

I wonder if you could give us some color on margins. Obviously, we've seen a major increase in operating margins this year. Do you expect costs to trend up at similar pace as revenue this year?

Hi, Jeremie. Overall, we expect revenue to grow faster than expenses over the year. But not in the first quarter as I told you in the guidance.

Clearly as I've also told you, we expect to see revenue grow as we move through the year. Traditionally, the first quarter is the lowest revenue quarter at Cognex and we expect that to be the case this year as well.

So I think if we peel it back, revenue growing faster than expenses, gross margin in the mid-70s, I think that can give you a sense of where we expect things to land as the year goes forward.

There's going to be headwind from currency obviously and I think it's too early to speculate about the big order volume or timing of big orders in logistics and electronics. Of course, we'll be updating you on all of that as we move through the year.

Okay. And what end markets do see driving growth for 2015?

Well, as we look across our markets, we see growth in almost every market that we serve with the exception of semi. We do expect every market this year to grow.

Traditionally, our large markets, automotive, we see a good, steady adoption of vision and factory automation in automotive. But that's probably going to be a smaller growth market on a percentage basis.

Consumer electronics has been a great growth market for us in recent quarters and we would expect it to continue to show growth in that market this year. In fact, in 2014 consumer electronics actually was a larger market than automotive for the first time in 25 years at Cognex or more.

Then we come to a whole series of other industries where we're seeing the adoption of machine vision around the dynamics I sort of discussed earlier in the call where machine vision is becoming less expensive, easier to integrate, higher performance. And that's driving its introduction into many verticals that haven't used machine vision extensively in the past.

And I'm thinking of markets like food and beverage, consumer products, tobacco, for instance, pharmaceuticals, medical devices. Those markets, although they're still relatively small, all of those less than 10% of our overall revenue, we do expect those markets to grow at a high percentage rate. They did last year and we do expect them to do so again next year going into 2015

Thanks. And maybe lastly, going back to your guidance for gross margin in the mid-70%s for this year, I mean, I understand in 2014 you had large volume orders that probably weighed on the gross margin in Q3 in particular.

Should we read your guidance as basically no change in the mix when it comes to large orders versus the regular small orders that you historically have been booking?

Well, I would say gross margin in the mid-70%s is kind of where we see the picture shaping up at the moment.

There is some hit to gross margin sometimes on larger orders like the ones we discussed in logistics or consumer electronics where they require more in-depth engineering and service support from us. So it's possible that we'll be slightly dilutive to gross margins, but then I think the overall growth we see in the base factory automation business where margins are higher should be accretive to gross margins. And then surface inspections certainly is dilutive to that 75% number.

So all those factors are kind of at play. So that's how I'd answer the question.

Okay. Thanks very much and congratulations on this great year

Thank you

Richard Eastman, Robert W. Baird

Yes, good afternoon Very nice quarter.

Thank you

Could I just ask, Rob, I think at the beginning of your comments you had talked about the factor automation sales in the quarter exceeded plan. Could you just speak to maybe which end markets maybe were measurably above plan in the fourth quarter, if possible?

Well, yes. I mean, I would say actually the performance was very broad based, so it wasn't like this was one end-user market. I'm talking about factory automation here, so we saw enough strong end to the year in automotive.

In general ID products, we saw a lot of strong end to the year. There's a dynamic around logistics basically not trending up to purchase in the fourth quarter because they're gearing up to support the year-end Christmas Chinese New Year type rush. So, in fact, that market wasn't a contributor --

Okay.

-- particularly to the kind of growth in the fourth quarter. So obviously the large customer revenue you'll have observed really occurred in Q3.

Yes.

So sequentially that in the consumer electronics space was down sequentially, but still above our expectations. My answer really is very broad-based in general, solid factory automation growth.

I think coming into the quarter, Rick, just to answer your question a different way, this time instead of 13 weeks ago, we were a little more concerned about the macro situation and some of what we were reading out of Europe and China. I think as we went through the quarter, that didn't really materialize and we saw more just general strength and we saw our sales force executing very well at the back end of the year in a broad-based sense.

I see. Okay. Then towards the front of the K, the backlog at year end was plus 25% year-over-year and there's just a reference to factory automation and a reference to SISD, but the shippable backlog in the MBSD business as well as the SISD business is significantly different.

And I'm curious, does the 25% growth in backlog -- would you apply that growth rate year-over-year similarly to the two pieces to MBSD as well as to SISD or is one or the other stronger?

I think, Rick, the MBSD backlog at the end of the fourth quarter this year is significantly higher than it was last year and there's been a decrease in the SISD backlog as a result of -- as you may recall we had some deferred revenue at the end of 2013 on SISD. Backlog includes both orders expected to ship plus any deferred revenue.

I see.

So SISD was a little bit higher than normal last year and we're seeing an increase this year in MBSD due to a little bit of deferred revenue. And simply because we did have a strong bookings quarter in Q4, some of which shipped and some of which we expect will ship here in the first quarter.

Okay. And you would attribute -- could you attribute the MBSD backlog growth more to the transactional business versus any large customer stuff?

I think one of the big increases was we did see -- we have -- at the end of each particular quarter, we have some deferred revenue at both divisions. And I think this particular year because of some deliverables that weren't done by year end, I think we've seen an increase in the deferred revenue at MBSD, more so than what we had seen in the past.

I see. Okay.

And just -- and can I ask just, you know, there's just been a reference to larger pieces of business both consumer electronics and logistics, and we're gearing up on the field service. I think you've made that known as well that we have to have -- there's a tail on the service side, but is there a service revenue tail to these larger orders? Does it matter which customer?

But do we sell these with a service contract, these larger pieces of business? How does that work?

Whoops. I'm sorry. You want to finish the rest of your question?

I'm just curious how we sell these larger pieces of business if they have a service contract with a revenue stream for a year or two?

The answer to that is no. There's no revenue stream going out a year or two.

It might be a quarter or two relative to making sure that our vision system's up on the production line -- are up and working appropriately giving not only the start-up of the cycle. But for some number of months afterwards, but clearly not more than like a six-month period, so that's not a one- or two-year tail.

I see. So utilization of your field service just comes with overlapping contracts essentially?

Correct

I see. Okay. Very good.

Well, great finish to the year and a fantastic year. Congrats.

Thank you.

Ben Rose, Battle Road Research.

Okay. I'll just ask a quick follow-up question. This would be for Rob.

It looks like [Keyox] is at least upping its game a little bit with its CDX line, which includes 3-D inspection. Could you give your technical assessment of their market position at this point?

Yes, Ben, so your question is around their 3-D vision displacing sensing product?

Yes, the CDX line.

Right. So the displacement sensing area of vision is a market that Keyox has been in for some time in the Cognex has entered over the last 18 months.

And it's a market we see as high potential for Cognex, but still early in terms of our penetration. But we have launched -- we have developed and launched some pretty significant products into that space over the last year and go on doing so.

Our proprietary technology particularly around software algorithms allows us to be very competitive in that market. The Keyox I would say there advances tend to be around hardware and their experience of implementing in this market.

We've been talking to you about the 3-D displacement sensor market for some time. And I think previously you've heard me size the market at around $100 million, and the addressable part of it being relatively small for Cognex.

But now that we're out in that market and we're -- our salespeople are selling the products, we're now getting more visibility about the opportunities. And we recently revised upward our estimate for displacement centers of the market to $200 million, so twice our original estimate.

So we're still selling only a few million dollars in last year into that market, but we do think it's one that offers us a lot of potential growth and Keyox is the leader in that market. We'll certainly be going head-to-head with them for share in that market

Okay. Sorry. Just what caused you to increase the size of the market? What type of new I guess information was brought to your attention?

I think a lot more activity at the customer facing from sales interacting with customers and seeing applications and seeing current deployment of competitive products, we realized that the adoption of that technology is broader than we thought

Okay. Thanks and sorry. Just a quick question for Dick just in reviewing the balance sheet before the call, it looks like there was a pretty decent sized uptick in property, plant and equipment during the quarter. Could you maybe give a little bit of color on that?

Yes. The most significant thing that we did is we spent about 4.5 million euros to buy the facility in Cork, Ireland that we use as a distribution center.

We had rented roughly half the space there and we had rented a lot less than half, but over the last couple of years we've had to increase the amount that we lease because of the business growth. We spoke with the landlord. There was only one other tenant. That tenant moved and we decided to essentially double our capacity and so we purchased that building in December.

Okay, thanks very much

Yes.

Holden Lewis, Oppenheimer & Co.

Great. Thank you.

I just wanted to get a sense about the gross margin guidance where you talked about sort of the mid-70%s. That's fairly boilerplate language for you guys and I know that before you got into this large order, you were sort of running in a 76.5% and 77% type level.

And I guess my question is now that large order is out, you know, is that the kind of level that we should kind of build in to our models? Or is there something taking place within mix or what have you that would suggest that in fact the 76.5%, 77% level in fact should come down towards that mid-70%s range?

I think the factors at play here are going to be how much service support we're delivering to our customers and particularly that's in large deployments and logistics or in consumer electronics. And then the mix of the business, factory automation is going to have higher gross margins semi traditionally has high gross margins and surface vision's lower gross margins. So these are some of the factors that are playing out.

When you see a quarter that has business from large customers like we saw in the third quarter of last year and we have a lot of service behind it and you see quarters with high surface vision revenue, you're going to see lower gross margins.

I think when we say mid-70%s, we're thinking 74% to 76% is where we expect kind of gross margins to land going forward pivoting around those factors that I just discussed

Okay. But in Q1, which is where you give your guidance, there obviously is none of that large order in there. You haven't built any into revenue. You're presuming not building any gross margins, so that drag wouldn't be there.

So for Q1 if we assume that there's no large business, what is the fact that it gets you the 75% from the prior non-large business level of 76.5% to 77%? Do you see the mix between SISD and the SD shifting that much?

There's a little bit of that less semi, you know, more surface vision, generate factory automation, you know, will be we think strong in the first quarter certainly relative to a year ago. And then there will still be some service costs related to support of larger customers and also service costs that relate to gearing up for larger orders coming later in the year. So some of those can be -- will be -- may be dilutive in Q1 holding it back more to that 75% level.

Got it. Okay.

And then you mentioned on the balance sheet or I guess with respect to the buyback, historically you've always bought back stock to offset share creep. And you don't specifically site share creep when you talked about buyback and being in the market this time.

Are you still thinking that it's all about share creep? Or might you get more aggressive with share buyback in light of the continued expansion of the balance sheet at this stage?

I think we have indicated that most of our intent although we have been in the past has been to offset the share creep.

Clearly, we would take a look at any opportunistic event or whatever in order to buy back some additional shares should that occur at any point in time during the year.

Okay. But the sentiment towards buyback beyond share creep is no different from what's been in the past?

At this time, that is correct.

Okay, thank you

Bobby Burleson, [Newland].

All right. Thanks for taking my question. Congratulations on the strong results and outlook

Thank you

I think a lot of questions have been asked, but I just wanted to touch on the three Cs of logistics one more time. We look at the consumer electronics, etc., business that's materializing in China. Do you expect the customer base there to diversify in the back half of this year?

And then if you look just at large order potential generally is what's kind of waiting between the likelihood of more of this consumer-type business, consumer-electronics production type business versus logistics in the back half?

Hi, Bobby. I think we're obviously pretty limited as to what we can say about the largest customer, but [we're under] contractual obligations about what we can say with them. But we do expect to do more business with them in the future.

I think consumer electronics in general though is a great market for machine vision playing out over the next quarters and years, and I think there are some really great fundamental things that are driving it. Some of which include product road maps in that industry where products are getting smaller and more difficult to assemble by human hand. And costs are increasing at the point of manufacture in China where wages are rising quickly. And so a lot of factors -- and also robotics is coming more and more into play in terms of the process of assembly of those products.

So I think there's a pretty good rising tide for the adoption of the machine vision into the manufacture of consumer electronics that we discussed. So I think that's going on.

So I think you have to bear in mind Cognex is the world's leading machine vision company. So you can pretty much count on the world's leading consumer-electronics brand adopting our technology to greater or lesser degree. So it's not like where really one or two customers were really being adopted broadly and many customers and manufacturers in that market. I think as they accelerate their adoption of machine vision, we would expect to see more opportunities appearing and growth in that market.

You asked about logistics as well and there we're seeing very strong growth in logistics business we have seen for awhile. It's part of our ID business that has been growing at 30% regularly for many years now and continues to do so, growing faster than that even last year.

Logistics is a great market for us traditionally where we've been in that market a few years. We've seen a lot of strength in the Americas or in America, but last year we saw that strength spread to Europe. And then we would -- we do see lots of opportunities for Cognex in machine vision in China as logistics market becomes more automated from what is a pretty inefficient structure today.

So we do see lots of opportunities there. I think it's difficult to speculate though about the rate, the amount and the timing of large orders that we see in those areas.

Great. And then you did at one point I believe in the Q&A session say that strong demand would continue in 2015 potentially even without large orders. Did I catch that correctly?

We -- so we see in -- if we strip out the effect of the large order that we've seen when you look at our base factory automation business, we saw that grow around 20% last year. We saw it grow at a constant currency of 20% in the fourth quarter. And we've said for a long time now that we expect factory automation to grow over the long term at a -- we think we can grow that at the rate of 20%, and I don't see any difference to that now.

It's difficult to speculate though the effects of things like currency and the effects of customers who may be midsize customers today turning into large customers in future. But overall we continue to be very positive about our factory automation business, the underlying many thousands of customers that we serve in that market.

Great. And then just in a couple of keen instances, I think you have some competition that may be more vertically integrated maybe making some of its own cameras for more solutions.

Have you found your focus on the sensor to be an advantage in terms of maybe competitors needing to adjust to maybe not build their own cameras in the future? Has that been a source of differentiation or an advantage for you any way technologically? Thanks

Well, I think we see customers who want very flexible, highly deployable modular vision systems. That's what they want from us and they get it with products like insight, our biggest selling product which allows them to do a whole range of vision activities like guidance and inspection and engaging and identification all within a tiny and very powerful vision system.

So there are companies that sell only vision software and those are the more difficult to deploy. We sell it in some cases in vision software, but in general almost always with --deployed inside a piece of hardware that makes it easier for use by the customer.

So we have some smaller companies who want to sell vision software only and then they rely on systems integrators often to implement it. And then we have many custom companies also that are supplying vision systems in almost all cases less capable than ours. So I don't know if that answers your question.

I was just wondering in the cases where customers are actually manufacturing their own cameras as well as sensors rather than buying them from a third-party, do you think that's led to maybe some maybe less innovation in terms of the actual sensor and software technology they're selling?

Well, in our market there are many, many companies that supply cameras, so they supply cameras and then they integrate with the machine vision. They integrate with software which is where Cognex's core technology is. In most cases, we go to marketing them together with software inside our own proprietary camera. And other cases, we integrate other people's cameras.

There's lots of change going on in the sensor camera market. We've moved from CCD to CMOS space sensors. There's something certainly going on. The better optics that's being integrated also, these are things that we live every day and we're often leading in terms of lenses and optics and sensors that go into our products.

So we don't really see our companies going into cameras being -- that's not a concern of ours per se.

Okay, thank you

Thanks

Jim Ricchiuti, Needham & Company.

Rob, you mentioned that this is going to be a year for significant new products. Can -- how would you characterize the new product rollout versus prior year's?

And when you say significant, do you mean significant in the sense that these will be meaningful contributors to revenues? Or just significant in the sense that this will expand your market presence a year or two years out?

Hi, Jim. Cognex is a technology company and as I told you in my prepared remarks, we spent about $60 million last year on R&D, 25% more than the previous year. And so we have a big engine of technology development going on here.

Traditionally, a lot of our most powerful and capable technology is in the area of vision tools that are better than anybody else's at reading bar codes for instance. And we launched a technology called Power Grid and that is a textured-base algorithm to read significantly damaged 2-D codes. We launched that at the back end of last year and I think it'll give us a continued significant advantage in the ID in factory automation type markets.

So there with -- that's an example of the kind of products that we've launched. But then we've also launched 3-D displacement sensor that is a very sophisticated optical device that's getting us into that 3-D market also.

So that's another example and then we continued to launch products in ID and vision. I'm not going to speculate or tell you about what is proprietary plans to launch new products, but I think you can expect a lot of new products in a broad range of areas coming to market in 2015.

You kind of said what sort of contribution will they make to revenue. I think as we'll be replacing some of our older products with new products and we'll be launching products into new spaces.

Generally, when we launch products that replace our older products in those cases they can generate significant revenue in early years, but it's often cannibalizing existing business. And then when we launch new products, they can take time to get adopted into the market, so their first year revenue can be relatively small, but by the second year they can be contributing very significantly.

Okay. That's helpful. One final question if I may just on the logistics market, has the number of customers in the logistics market that you're serving increased meaningfully say between 2013 and 2014?

Yes, definitely. We -- some of our initial -- sorry -- excuse me -- into logistics we're where we were adopted by some very large players in the market who really saw the advantage of our technology and in many cases drove systems integrators to adopt Cognex vision in preference to other competitors. But then subsequently as word got out into the market about the advantage of our technology and we started to invest more in our sales force, we've seen a significant broadening of the customers we serve.

So now, yes, we see many, many more customers in logistics in 2014 than we saw in 2013. And if I -- when I look at the names of those customers broadly speaking, of course they're parcel delivery companies for sure.

A lot now of retail company names, sort of companies that you see at the mall and the high street. E-retailers, you know, we see a lot of those distribution centers being fitted with Cognex vision and then also postal services. So in all those areas we've seen a very significant increase and the addition of smaller businesses and integrators that we're able now to serve

Okay. Great. That's very helpful. Thank you and congratulations on a great year

Thank you

Jeremie Capron, CLSA.

Thank you. You mentioned stock compensation as a factor behind the increase in operating expenses in Q1. Does this relate to 2014 performance or stock comp has been up to a large extent in 2014?

It relates to a combination of factors, one of which is an increase in the number of some of the shares that were granted in 2014. And what we expect in our annual grant process which will occur here in early 2015.

We expect an increase in the number of shares. We've had a significant increase in our total headcount and all of those have contributed in. Plus we expect the stock price to be a little bit higher than maybe some of our former brands that are dropping off out of expense and with that higher stock price gives you a higher intrinsic value for the initial calculations

Okay. Thanks. And stepping back a little bit from results here in looking at the big picture for vision technology, it seems to me that we're seeing some very large investments in vision technology and research that are being made by leading US tech companies like Google and there's a lot of excitement around driving these costs, for example. My question is about Cognex's strategy here and are you exploring business opportunities beyond manufacturing, industrial and logistics markets?

Also, I'd like to know what the impact has been on in terms of your ability to recruit and the availability of engine and talent [in this] vision? Have you seen any changes as a result of these big companies moving into this space?

Yes, it's an Interesting question. Certainly, this is something we watch very carefully. I would say something that's important to understand is when you look at the work that some of the big technology companies that you describe are doing in machine vision, it tends to be different. It tends to be around self-learning, artificial intelligence where they're looking at huge libraries of images that are varied and tried to make sense of it like finding your photograph among 20,000 photographs on the web.

Generally, that kind of -- it's self-learning, artificial intelligence driven and its performance rate today is say somewhere around 60% effective. The vision that Cognex does very precise algorithms that perform at 99.9% performance and it's a very different type of technology and approach.

Then the market -- obviously, where we're applying that to is industrial machine vision manufacturing activities where there are very precise and difficult tasks that we have 30 years of experience working in. At the moment, we don't see any convergence between those two areas. And we see huge opportunities for growth in the markets we're in, industrial, but we do see adjacent markets and you've seen us kind of moving into adjacent markets.

Markets like logistics, like 3-D displacement sensing, like image engines for life science OEM equipment and areas like that. So I think you're going to see us watch those areas move into those kind of adjacent spaces as part of our strategy and I think you can expect more of those from us in years to come.

You're not going to see us kind of diversify into driverless cars or applications on cell phones for consumer-type applications.

Okay. And what about your ability to attract vision engineering balance?

That's a very good question. I think for people graduating out of graduate programs with a specialty in machine vision, Cognex is a company that's very attractive to them, and we do see a great flow of talent in that area.

I think for younger engineers coming out of programs, we have seen more competition from companies like the ones you mentioned in Silicon Valley who have a kind of universal brand name that does make it attractive for some young engineers to go to.

I think our philosophy though in general is Cognex offers like a great environment to work in machine vision over the longer term and those companies may be better for people to start out their career in. So our approach has been thinking that yes, in many cases those companies are going to kind of vacuum up the new graduates. And we're seeing more interest of people who want more of a stable long-term career in machine vision, and we have a good supply of those people coming to Cognex.

This is Dr. Bob. I want to jump in and add my point to it. What Rob said is absolutely right.

What we look for our engineers and scientists who actually want to see their products in customers' hands doing things. There's a lot of hype about driverless cars and other similar applications for using vision and ultimately they will be successful, not in our lifetime, but there will be driverless cars on the road.

But for the next 10 years or 15 years, those engineers who want to see their algorithms, their hardware, their software, their optics delivered to customers in the next quarter or next year, those are the engineers who come to Cognex.

And also I would say that it's very helpful that those big brand names are doing things in vision that gets more people -- more students involved in vision and majoring in machine vision. And it helps increase the pool of available talent. I would say that we are having no problem in attracting and retaining very, very high quality machine vision experts and we expect to continue to do that.

Well, thanks very much and good luck for 2015

Thanks

Thank you

Richard Eastman, Robert W. Baird.

Yes, thanks for taking the follow-up. Dick, could I ask you quickly there's a reference in the press release in the fourth quarter currency was impacted sales by a minus 4%.

What was the EBIT impact? How well hedged are you? This Cork facility was a distribution facility or manufacturing or --?

Well, it's a combination manufacturing and distribution facility, but the amount that we spent in Cork, that goes in the capital on the balance sheet. That's not --

Oh, no, I understand.

-- (multiple speakers)

Your costs there are impacted by the movement of the dollar as well and I'm just --

Right.

I'm trying to get the conversion to the EBIT line

Yes. What happens is you've got -- revenues are clearly in excess of expenses. And I would say that roughly about half of the -- of what we lose on the revenue side would fall to -- between 50% and 60% falls to the operating income line.

Really? Okay.

Yes.

Okay. If I project out, it looks like it's not linear, but it looks like the impact on 2015 at current at least euro rate to the dollar would be kind of a similar 4% for the full year. It's not linear, but does that kind of match up what you're thinking?

Yes. Well, the problem you have is that for most of the year the euro was running in excess of $1.30. It was close to $1.35 and then all of a sudden in September it started its crash.

And I guess what I ask you is what do expect the euro to continue to do? Because I've seen all kinds of -- from different banks, prognostications as to where we're going to end the year, and I think the worst that I've seen is parity. There's a bank out there that does believe that we're going to be at parity

I'm not that far out. I'm not thinking parity by year end.

Convention is look at today's exchange rate, if you run that out through the balance of the year, year-over-year it's -- the dollar is what -- 12%, 13%, 14% stronger?

I'm just doing that math and it would seem to come out about 4% for the year. Now, if the dollar keeps strengthening then we'll just -- it's going to be a bigger impact

Yes, that's about right. I mean, we're taking a look at it quarter-by-quarter trying to figure out where it's going to go

Or to catch up to it? Okay. All right. Well, thanks so much again.

Ladies and gentlemen, this does conclude your Q&A session. I'd now like to turn the program back to Dr. Shillman for concluding remarks. Dr. Shillman?

Thank you very much. Well, it was an outstanding year and we're very excited as we look forward to the rest of 2015 and see a significant growth and we're very hopeful that it's going to yet another record year.

This is our 34th year in business and I can tell you that the energy level in the Company is the highest that it's ever been, and that's not by accident. We're able to perform this well because of the great leadership of the Company, Rob Willett's leadership, and because of the team and the culture that we've built at Cognex.

We have a philosophy that when Cognex wins, we all win, and we've been able to achieve that through motivating our employees by giving them a sense of ownership in the Company primarily through employee stock options.

We don't pay top dollar to get people, but we give them the best economic package. If they work hard and if the Company succeeds, they win along with our shareholders.

I would ask you -- those of you who have the opportunity to influence the proxy departments in your firms to tell them to support what has been working so well for these 34 years, to treat our employees as owners as if they were shareholders of the Company because that's what stock options do. And I ask you to please have your proxy departments vote with management when it comes to issues concerning stock options.

Having said that, I look forward to speaking to you again on the Q1 conference call for 2015 and presumably reporting fantastic results again. Thanks for joining and thanks for your continued interest in Cognex.

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