Cognex Corp (CGNX) 2018 Q3 法說會逐字稿

Greetings, and welcome to Cognex Third Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Curran, CFO. Thank you. Please begin.

Thank you, and good evening everyone. I'm John Curran, Cognex' CFO, and I would like to welcome you to our third quarter earnings conference call. With me on today's call is Rob Willett, Cognex' President and CEO. Dr. Bob Shillman, Cognex' Chairman, won't be joining us this evening. He sends his regards, and he looks forward to talking with you on our next call. Please note that our earnings release and Form 10-Q are available on the Cognex website at www.cognex.com. Both contain highly detailed information about our financial results.

During the 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. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release. 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 can change, however, and actual results may differ materially from those projected or anticipated. You should refer to our SEC filings, including our most recent Form 10-K for a detailed list of these risk factors.

With that, I will now turn the call over to Rob Willett.

Thanks, John, and hello, everyone. Thank you for joining us today. I am pleased to report our results for the third quarter of 2018. We have a tough comparison to the exceptional record-setting results that we reported in Q3 of 2017. Other than that comparison, this year's Q3 results were very good. We reported the second-best revenue, net income and EPS from continuing operations in the company's 37-year history.

Revenue in Q3 was $232 million, down 13% from last year's record-setting performance and up 10% on a sequential basis. It was also slightly above our guidance for the quarter. Gross margin in Q3 was slightly higher both year-on-year and sequentially, mainly attributable to a favorable mix towards higher-margin products.

We continued to invest in sales and engineering for our long-term growth. Although the rate of increase has slowed in recent quarters, we're committed to delivering industry-leading vision and ID products to our growing customer base. We believe that we invest more in industrial machine vision and barcode-reading technology than any company in the world, and it is that investment that will continue to drive our growth and profitability over the long term.

In Q3, operating margin expanded on a sequential basis to 34%, demonstrating the substantial leverage that incremental revenue has on our business model.

During the quarter, Cognex performed well in many end markets. Of course, one significant exception was consumer electronics, which is our largest market. As we expected, revenue in Q3 from consumer electronics was substantially below the extraordinary level reported a year ago. Excluding consumer electronics, revenue grew in mid-single digits year-on-year.

Looking at our performance in our second and third largest markets, revenue from automotive was flat year-on-year in Q3 after growing much faster than expected in many quarters. Demand softened in our major regions during the summer months. Since then, we've seen a sequential improvement in the Americas and Europe.

In logistics, our Q3 comparisons do not reflect the strength we see for Cognex products. Best reviewed on an annual basis, revenue from logistics has grown more than 50% in the first 9 months of this year.

At this point in the year, I've spent a lot of time in the field with our sales force, visiting large customers and prospects to understand their requirements and their plans for automation in 2019 to 2020. This year, I came back more excited than ever about how Cognex machine vision and ID will improve quality and delivery and drive down costs.

Many large retailers are now planning to follow the example of the world's largest e-retailers in automating their distribution centers. That should mean a lot more business for Cognex in the years to come. Interest is particularly high for our AI-based deep learning vision. Cognex deep learning vision technology allows manufacturers to perform inspection tasks that were previously very difficult or impossible for a rule-based machine vision. Many of our AI customers are now moving from trials, where they train our deep learning tools, to factory floor deployment in industries such as medical devices, automotive and consumer electronics.

The development of our sales force continues to be a critical part of our effort to broaden and grow our business. In the third quarter, we recruited, trained and equipped many salesnoids that will build the capacity we need to drive future growth. We've made good progress in increasing the reach of our sales channels to access new and growing markets for machine vision and develop closer ties with customers.

I will now turn the call over to John for financial details from of the third quarter.

Thank you, Rob. As we go through the financials, please note that our results reflect the retroactive adoption of the new revenue standard that took effect on January 1 of this year. The sale of certain accessories that we historically reported on a net basis are now reported on a gross basis. This has not changed our gross margin dollars on our gross margin percentage has decreased from historical rates by 1 to 2 percentage points.

Now for our Q3 highlights. As Rob noted, Q3 revenue was $232 million, a decrease of 13% year-on-year. This decline is primarily attributable to the exceptional growth we achieved in Q3 of last year across our business, led by consumer electronics. Gross margin of 75% was up slightly year-on-year and within our long-term target range.

Operating expenses totaled $95.5 million for the third quarter, an increase of 10% year-on-year. Our spending was slightly above guidance, mainly due to the higher-than-expected revenue in the quarter. While we continue to be prudent in terms of discretionary spending, investing for the future remains key to our success. This includes maintaining our strong commitment to engineering and the continued expansion and development of our sales team.

Turning to our new ERP system, we successfully implemented SAP in Q3 and used it to close the quarter. There is still more work to be done to fully implement the new system, but we believe it provides an excellent foundation for future growth.

Operating margin in Q3 was 34%, an increase of 4 percentage points compared with Q2 of 2018 and driven primarily by the higher revenue level. The 8-point decrease in operating margin from a year ago mainly reflects last year's record-breaking revenue and our previously mentioned investment in engineering and sales.

Moving next to taxes. If we exclude discrete items, our tax rate was 16%, as expected. Our discrete items in the quarter fell into 3 categories, with the largest related to the Tax Cuts and Jobs Act of 2017. Finalizing our 2017 tax returns, we recorded a net benefit of $7.7 million, based on new regulatory guidance for the 2017 Tax Act. We also recorded $2.8 million in benefits associated with the exercise of employee stock options and $1.7 million in benefits primarily related to the release of tax reserves. On a GAAP basis, we reported earnings of $0.45 per share for Q3 of 2018. This compares with $0.57 per share in Q3 of last year.

Looking at revenue year-on-year from a geographic perspective. In the Americas, revenue increased over Q3 of 2017, due to growth in several end markets, including logistics, automotive and life sciences. Internationally, revenue declined because of this quarter's substantially lower contribution from consumer electronics. Lower spending by large customers in OLED display and smartphone manufacturing was most noticeable in Europe and, to a lesser extent, in our other Asia region. It is partially offset by growth in automotive and other industries. Also impacted by lower OLED smartphone-related revenue was our Greater China region.

Moving on from the income statement, our balance sheet remains very strong. We exited the quarter with $809 million in cash and investments and no debt. We continue to have sufficient capital to support our organic growth objectives, our M&A plan and for sharing our ongoing success with our shareholders through stock buybacks and dividends.

In that regard, we repurchased nearly 400,000 shares of Cognex stock in Q3, and we plan to continue to buy back stock in Q4, subject to market conditions and other factors. As announced tonight, the board has authorized a new $200 million stock repurchase program, which will begin once our current $150 million plan is completed. About $53 million remains available under the existing plan. Also, our Board of Directors has increased the quarterly cash dividend to $0.05 per share. This is payable on November 30 to all shareholders of record on November 16.

With that, I will turn the call back to Rob.

Thank you, John. In terms of guidance, we expect that fourth quarter revenue will be between $180 million and $190 million. At the midpoint, that range represents a slight increase year-on-year. We expect a $15 million headwind from last year's high level of investment in OLED display and smartphone manufacturing. We will be glad to have those tough comparisons behind us as we move into next year.

Excluding this OLED smartphone reduction, we expect year-on-year growth in Q4 of approximately 10%. That's slower than we'd like, due to softness we are seeing in China, where customers are becoming more cautious and slowing their spending plans.

Gross margins for Q4 is expected to continue to be in the mid-70% range and lower than we reported tonight for Q3. Operating expenses are expected to be roughly flat on a sequential basis. Lastly, we expect the effective tax rate will be 16%, excluding discrete tax items. We will now open the call to questions.

Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Jim Ricchiuti with Needham & Company.

I wonder if you could talk a little bit, Rob, about the business, ex consumer electronics, which is clearly going to be more volatile. But just -- I wonder if you could talk about what you're seeing in the market, just in light of some of the concerns, the concerns being some slowing in the automotive market. And it looks like that cuts across geographic regions as well as potential implications from the trade tariff issues in China, as it may relate to demand in some of your other regions.

Jim, you're asking a pretty broad question there, but I'll start answering it and perhaps during your follow-up, you can go to specific areas. I'd say, in Q3, we performed well in most end markets against some tough comparisons. We had some good growth in America from logistics. Automotive grew, but not as quickly as it has been from life sciences. And in Europe, I think we saw some slowing down in automotive. Greater China, we saw broad slowing down and -- but I think, really, Europe, China and Asia in Q3 were down year-on-year a lot due to the declining consumer electronics. So I think when we strip that out, we saw general growth across all of our major regions, with the exception of China. So that's kind of a bit about the industry overall. You asked a little bit, Jim, about automotive, so let me kind of speak a little to automotive. So automotive was slower than normal in the Americas and Europe, and it's always slower in summer in Europe, but it was slower this year. But what we've seen in both Americas and Europe is that it has improved in recent weeks. I think Europe may have been slower in automotive through the summer, partly to do with some of the new emissions regulations that I think was causing a bit of a bottleneck in automotive production and probably spending and work in automation. So we saw that happening. We've seen a lot of growth in automotive over the years, over the last few quarters I should say. In the long run, we expect it to grow at 10%. And it's been growing faster than that, but in the last quarter, it grew more slowly than that. So I would say in the long run, though, automotive isn't showing any signs of saturation, I think it's just more tentativeness among customers. So then, Jim, if I turn to sort of Q4 outlook and we think about markets, we still have, obviously, as I've talked about, lingering headwind from some OLED smartphone, and you were asking specifically not about that. I think other than China, we expect a decent, but not exceptional growth among many of our end-user markets. And I think, as we said, excluding that smartphone OLED business, we would expect about 10% business -- growth for the rest of the business. And I think we're going to see slowing in China, so you can think better than that across the other regions in general. So I don't know if that answers your question.

No, that's helpful, Rob. I have one follow-up because you suggested, I think, the logistics portion of the business, you might have experienced somewhat slower growth than normal in Q3 and yet if I heard you correctly, you're expecting that to pick up again. And I'm just wondering what occurred in Q3 that was somewhat unusual relative to recent quarters.

Yes. I don't -- I want to be clear that our logistics business is growing really quickly, and we just happen to have a lower revenue quarter in Q3. Really, it was a matter of timing. It's not to do with the overall growth. The business in logistics is growing very, very quickly. It has grown more than 50% in the first 3 months -- sorry, 3 quarters of this year, and we expect it to grow on very -- go on growing very rapidly.

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Just need to follow-up on that question. I think, probably lower visibility in auto and consumer electronics more broadly than when we entered the quarter. You mention some tough comps in auto, but I think the industry dynamics there have maybe changed a little bit more recently in terms of willingness to spend, some production misses. Maybe same thing on the consumer electronics side, we've seen a bit more weakness there than just the tough comps. When you guys look out into, I guess, beyond 4Q and kind of the next year at large, would you say your visibility is at a normal place or maybe a little tighter than usual? Because I'm just trying to understand how much of the blip we're seeing here is tough comps versus a bit more of a macro deceleration.

Sure, Josh. And you'd like me to talk about both auto and consumer electronics in that regard?

I think that's probably where we've seen the most demand interruption, so -- and are clearly important markets for you guys, so those would be helpful, Rob.

Yes. So I think our automotive market, we had a long -- we have lots of tight customer relationships with major brand owners and Tier 1 automotive parts suppliers in automotive, so we have a pretty good view out 3 years. What we tend not to be able to call so well are shorter-term interruptions, whether it's around regulatory things or some of the dislocation we've seen around emission standards, diesel problems, even supply chain parts' shortages and interruptions that have been going on in that market. So that's why I think our business can perform more or less well in a given quarter. I think in the long run, assuming kind of a reasonably stable trading environment, we expect that business to grow 10%. And I think your question was more about next year and beyond. I mean, that's how we overall think of market in general. I think if we then turn more to consumer electronics, it's almost like everything I've said but kind of more extreme and more volatile. There, we tend to see companies implementing and executing their roadmaps on a much shorter-term basis, more in a 6 to 9 months' kind of window. They may be planning a rollout of new production now that we'll be seeing in the market next spring and summer or fall, and we expect their investment in automation and in machine vision to be growing much more quickly than automotive. There, we think 20% long-term growth or above is what we expect in that industry, but the volatility in those markets can come from the readiness and the adoption of new technologies. So obviously, we've both spoken a great deal over the last few quarters about OLED technology. There was massive investment in there in capacity in 2017, really, for vision, anyway. And we're seeing a much slower year this year. It's a difficult call to say when the next round of capacity expansion and major investment would go on, but there's still a great deal of investment going on in yield to improve the yield of screen production, where there are still many people involved visually inspecting. So there's ongoing business in that area, but in terms of the volatility and the timing of investment, that's what can drive some to spend. And then obviously, in the smartphone market, where we serve, really, all the major players and, of course, the big ones, a lot can do -- have to do with the timing and the number of new products introduced in that space and the number of features, new technologically complex and difficult-to-manufacture features that go into those products. So again, that can drive what's going on in that space. And obviously, we don't comment on specific customers and their plans, but more features, more models, more changes to form factors or technology will drive higher growth for us. And we remain very confident about our growth potential in that market over the next few years.

Got it. And then just as my follow-up, Rob, you've added a lot of sales talent in the last, call it, 4 quarters. How do you view kind of the ramp time on those folks getting out there in the field? And are you starting to go a lot more direct maybe to mirror your big competitor a bit more in terms of the path to market?

We have been adding a lot of salesnoids, as we call them, over the last few years, and they allow us to reach more customers and particularly service larger, more sophisticated customers to better understand their needs. We see about 60% of our business going direct, although it may vary quarter-by-quarter, and about 40% through partners. Partners are very important to Cognex' go-to-market strategy. They allow us to -- some of them are systems integrators who have very sophisticated technology and application skills for our vision. And they do business that we, as a company, don't wish to undertake directly ourselves, particularly for small- and medium-sized customers. And in other cases, they serve regions or industries that they can serve better than we can. And thirdly, I would say, I mean we are a vision-specific company, but we sell products into a broader factory automation ecosystem. So very often, our products are sold with motion control robots, PLCs, and we have no intention of selling those products. So we may be selling only one vision system or sensor with a number of those other products, and those partners have the economies of scale and have the customer relationships to sell those into smaller accounts. So that works well. But our market is growing quickly, and we continue to invest in Cognex salespeople as we harvest all the great R&D product development that we're bringing to market, and they're allowing us to do that better and faster than we are able to perform.

Our next question comes from the line of Richard Eastman with Robert W. Baird.

Rob, you had mentioned earlier when you were kind of speaking of the fourth quarter revenue guide and kind of suggesting at the midpoint of that guide, call it, $185 million. Without the smartphone and OLED, the business would be up maybe 10% at the midpoint. And I'm curious -- so again, we tend to target 20%, and we talked a little bit about automotive, but it just -- so the general slowdown, if we're talking about 10% without the troublesome areas of smartphone OLED, is the thought is that automotive is still against tough comps? Or there's still tough comps in the underlying revenue number? Or are we just expecting somewhat of a drag on the macro industrial spend into Q4?

The slowdown, as we kind of size it out, is a $15 million headwind around over OLED and smartphone, and then we're going to get to at the midpoint, as you say, about -- we would see about a 10% growth rate net of that slowdown. Why is that not 20? The biggest single reason would be China. We're seeing slowdown in the business in China, really, across all industries in that space. It's not like -- it's not like we can point to electronics or automotive as the main part. It's a broad slowing down in that market. And I would point out, as you look at Cognex and you look at other companies, that we really sell and have close relationships on a direct basis with our end users, even if we sell through partners. So generally, we know where well north of 90% of all of the business we sell goes, and so we have a pretty good sense of the funnel playing out. And I think other companies that may be reporting are more insulated from that end-user position as a factor of distributors buying and holding inventory. So slightly, my take on there is we may have a better view about what's going on in China than some of the other automation players reporting who rely on partners and don't see end-user business. So I think, going back to your question, the $15 million OLED headwind, there's -- and then there's the China situation driving a lot of our slowdown.

And do you think that the China situation, was there any pull forward of business relative to any concerns over tariffs kicking in kind of in the fall, speaking to China in particular? Because we had second quarter 50 -- if my memory serves me right, 55% growth in auto in China. And so is it your sense -- I mean we all saw the PMI slowdown in September in China. I mean, it's been slowing, but it hit the 50 mark. But I'm curious if you -- is there any way to tease out, is that tariff a benefit? And did you benefit from any kind of pull forward in sales relative to tariff concerns in China?

I think as I said, we don't have a situation where customers, and particularly partners, pull forward and hold inventory that we don't -- they don't sort of stock up and destock. It would be hard, though, however, to know whether our customers were buying ahead of tariff issues. It's possible that they may have been. I was with the China sales force. We did kind of drill into and discussed those types of issues. So I think the answer is possibly, but not something I can say definitively to you.

I understand. And just lastly just to finish off the thought -- train of thought. But if -- again, with some of these concerns, whether they're auto, whether they're CE, whether they're OLED, if trends continue through the fourth quarter and you're looking at '19, where perhaps maybe we get off to mid- to high single-digit type of revenue growth rate, are you prepared at this point to just slow investment in the business, just to accommodate if that pause is short term, midterm or longer term?

Well, your question, Rick, relates to 2019 outlook, and I think it's a little early to call that one. But we're going to meet as a leadership team for a bottoms-up detailed review of our product line and geographic plans for next year, and where there's opportunity for us to prioritize investments into faster-growing areas, certainly, and to taper investments into some slower-growing areas. At the moment, that's kind of how it looks to me as sort of a steady state, but we'll be watching very closely to see how the outlook is and what goes on in the meantime. So we've successfully managed through turbulent times in the past and I've had a lot of experience with that, both at Cognex and before. But our revenue at Cognex has grown organically in 9 of the last 10 years. So we're certainly not heading for the bunkers at this point, but you can see, as you look at our sequential spending patterns over the last few quarters, that we have been slowing down and matching more closely expense rate growth to revenue growth. That said, Cognex is a technology and growth company. We're bringing a lot of really exciting technologies and products to market over the next year, 1.5 years. So we don't want to inhibit the growth and adoption of those technologies based on hitting some sort of shorter-term expense growth constraints. So we're bearing all that in mind, I guess, is what I would say. And you can bet we're going to think very carefully and act on it.

Our next question comes from the line of Matt Summerville with D. A. Davidson.

Couple of questions. First, can you comment on your inventory levels coming out of Q3? You mentioned that some of that was the result of perhaps some safety stock in advance of this standing up of the SAP ERP system and talk about kind of what you think about potential timing of drawdown? And then I have a follow up as well.

Sure. Thanks, Matt. So our inventory balance at the end of Q3 included some strategic purchases we made for our ERP implementation that were really not needed in the end because it went smoother, I think, than we were expecting in that regard. And then we also have some fair amount of inventory related to new product introductions that we will be seeing this quarter and next quarter, so where we're building up product in-house, rather than through a subcontract manufacturer, so we're building that. That's really -- that's why it went up. And we do expect to see inventory balance come down in the fourth quarter, so we do expect to report lower inventory balance at year-end than you saw at the end of Q3.

And just a follow-up on China, can you maybe talk about when during the third quarter you started to see your business there -- outside of consumer electronics, so when you started you see year business tail off? And do you feel that it's now stabilized at a lower level? Or is it still in the process of rolling over?

I think we really began to see the slowdown as we came out of August and we moved into September, and we saw that continue into October. And the answer is no. We don't know what's going to happen now. We're watching it very closely, and I think we're trying to tailor off our internal forecast to what we're seeing in our sales funnel and spending patterns. But it's not -- I wouldn't say that necessarily it's settled, and I think it could go up or down relatively rapidly from -- on a week-to-week or month-to-month basis. I just want to revisit a point that -- I just want to revisit a question that Rick mentioned as well about -- concerning Q4 demand and our thoughts about Q4 demand. I think it's fair to say at the end of every year in industrial companies is what's referred to as the budget flush. We have, particularly in strong years, there's kind of a move to spend capital at the end of the quarter -- at the end of the year. And I would say in that regard, we're taking a relatively prudent view about what's going to happen at the end of this year. And certainly, at the end of last year, we saw a pretty significant budget flush and we had a lot of our salesnoids maxing out their quotas and booking a lot of business with customers who wanted to spend budget. So we don't expect that kind of wave of strength at the end of the year this year, based on what we're seeing in the marketplace.

Our next question comes from the line of Jairam Nathan with Daiwa Asset Management.

You guys mentioned consumer electronics being -- you have a long-term view of increasing the 20% range. I just wanted to kind of understand what are some of the drivers behind that. You're seeing smartphone sales kind of not growing too high -- too much, the features. Are there any specific -- the feature set is probably -- you're not seeing a lot of innovation that's coming from the smartphone manufacturers in the feature set. So I just wanted to try to understand what gives you the confidence, and I had a follow up.

Sure. Here, thanks for your question. So I think we all see that handset unit production rates and the increases in average sales price at the high end of the market. So we sort of see those dynamics going on, so I think we all have foresight into those. What really is going to drive Cognex vision sales, though, in the market, well, one, in the long term it's just a lot of labor still in the production of smartphones that the large manufacturers want to take out. So in many cases, the products are becoming too small for human hands to manufacture, and the yield and quality that can be achieved with human versus automation, and particularly, vision, makes vision a long-term focus of investment for their engineering teams. So that's certainly part of it. The other part of it is, and that's where I take issue with what you said, is I think there's still many features, advanced technology features being planned in -- for introduction in the smartphone market. So as we look across them, we really do deal with many of the large players in that market. Many of the players overall, certainly, there are technology features that are in their roadmaps that make the adoption -- which makes the use of vision in implementing them very important and give us the sense that we could see strong future growth from that market. And then we spoke also about the OLED screens and the investments in screens, which are very important to long-term roadmaps in that industry and very difficult and investment-intensive to manufacture. So all of those give us the sense under right -- our sense of why we expect long-term investment and growth in machine vision in that market.

And just finally on -- with regard to competition. As the -- as you're seeing the environment kind of getting a little more sensitive here, do you -- are you seeing customers being a little -- asking for more -- being a little -- a lot more price competitive? Or are you seeing kind of -- does that open up an opportunity for competitors or lower-cost competitors?

The answer to that is no. I mean, machine vision is very difficult to do, and the competitive advantage of advanced products from us and a few of our competitors is very substantial. So in general, this is not a market driven by price. It's a market still driven by technology. Of course, we could drop price to try to win share, but that's never been something that we've wanted to do. It's not what we're about as a company, nor I believe is it really what about our major competitors are about.

Our next question comes from the line of Paul Coster with JPMorgan.

I just want to follow up on Jim Ricchiuti's question from earlier on regarding logistics. There was -- although I take your point that year-to-date been very strong, there was something in your prepared remarks, Rob, that just alerted us to some recent change. What was the point of the interim remark on logistics?

Yes, Paul, I mean the point was really there was no point. It was just we've had -- it was just the revenue -- it was just the timing of revenue for logistics in Americas in the quarter was slower than we've seen, and it really had just to do with the timing and a few customers where bookings turned into revenue. Simple as that. The market is great and growing strongly, and we'll -- we have reported growth year-to-date in the first 9 months of over 50%, and we see no change in that profile going forward.

Okay, got it. Right. And then you also mentioned that there's a new product cycle coming. Is it across the entire range of products? And is it a new feature set at the same price points? Or is it product extension? Or are you reducing prices here? Just give us some sense of what you're doing here. And what are you doing to mitigate the risks that, a, customers wait until the new products are available now; and/or that you have some execution challenges in bringing a product to market?

Yes. So we really don't talk about specific new product introductions that are coming up, but in general what they can say is we continue to invest significantly in R&D and we have products being launched pretty regularly in most quarters. So you can expect to see new products from us this quarter, next quarter, second quarter of next year are coming to market. We don't telegraph specifically what those are going to be, but when we do launch them, then we end of life other products, and that can lead to increased pricing and demand opportunities as well.

Our next question comes from the line of Joe Giordano with Cowen and Company.

Just a clarification. The $15 million headwind, is that -- that's OLED? Is it -- but is it also like the large customer spillover from 3Q into 4Q last year? Is that -- are those -- both of those numbers included in that $15 million?

Yes. So the $15 million is smartphone and OLED. So predominantly on the smartphone front.

Okay. And then on the fourth quarter guide, I'm just curious, as you look at what the trends that are happening, and particularly in China, how like haircut is that fourth quarter like? Are you holding conditions as of today flat or you're anticipating like a continuation of a downward trend into that guide? I just want to understand the baseline and expectation in there.

Generally, we'd never forecast specific regions and specific quarters in terms of growth. I think our message to you is we've seen a decline in that market. We look at our sales funnel, and we don't expect the kind of growth -- in fact, we don't expect growth in that market year-on-year in Q4, and we've baked that into our guidance. But other than -- second to the smartphone OLED piece, that's the second piece that is giving us headwind, meaning we won't be reporting 20% growth. We'll be reporting more like 10% growth net of the OLED smartphone piece.

And then I guess that kind of gets me to the follow-up. On the 20% longer-term view, what's like the baseline level of activity that you need to be able to drive that kind of growth? How do you -- how do we frame your ability to outgrow markets when you think about your most important regions? Like, do we need some sort of certain level of -- whether it's GDP or PMI in a region like China? How do you think about that?

Well, we'd see vision as technology that's expected to grow at about a 10% growth. The main vision markets that we serve, we expect them to grow at a 10% rate. And then we are the market leader investing and bringing to market the best technology, and we have the best brand. And then we have some specific market segments that we're in, logistics being a good example. 3D, life sciences, some of the new markets that we've entered, mobile terminals, that can bring our growth rate well above that rate, right. And obviously, historically looking back, our ID business has put up some awesome growth rates well north of that 20% goal over our life -- over the most recent years, and we would expect it to go on doing so. That's kind of one piece. The other piece is, if you look back over a 3-year period or a 5-year period, you see compounded annual growth rates of -- in excess of 20%. So we've been doing that and also investing in our sales force to the point where we can reach more and more customers and grow with the business. So what we've always said is we're not going to do 20% every quarter or every year. We're going to -- in some years, as you look back on our history, we ascended to have enormous years, like we had last year. And some years, slower growth. Although we have grown in 9 of the last 10 years. So that's how we think of it.

(Operator Instructions) Our next question comes from the line of Bobby Eubank with Chevy Chase Trust.

Can you update ViDi? I know you mentioned strength there and customers moving from training their models to deployment? Are we over the $10 million revenue market or expectations for that in 2019? And then if you could update on your acquisition pipeline. I know you guys haven't done any acquisitions this year, but is there any talent out there that you can find a more reasonable valuation or think could be complementary to your product set?

Great, Bobby. So your questions are really about deep learning and acquisitions. So we made a very important acquisition of technology in ViDi, in April of last year. And we've been introducing that technology to customers and making it easier to deploy by, most recently, putting it inside our VisionPro system of vision software. But this is very sophisticated technology that we continue to develop and make easier to use. And the reception has been very good for this technology, and it's allowing customers to perform machine vision tasks that were either extremely difficult or impossible for them to perform in the past. And the way I think about it is these are tasks that are more like human tasks, where, instead of rule-based vision, where one may be measuring something precisely as an angle of 90 degrees or 90.1 degrees, or is a hole the right width apart, or is the distance from another hole. These are the sort of tasks today that human beings inspect and we are good at seeing like is -- are these glue lines -- they may not be straight exactly because glue tends to glob and move around when it's dispensed, but are they continuous and are they in the right kind of areas. Are solder balls in an electronics application, are they generally the right size and in the right place, even though their makeup and size may look different to machine vision, or even chocolates, which may be being dispensed and don't have a regular form, if you think about them always particularly high end, but are generally correct or incorrect. These are just kind of accessible examples of what deep learning technology can do. We've been starting to see a lot of -- well, since we began to introduce the technology, we've seen a lot of customers taking our technology and looking at their problems with it. And it's an area that's getting a lot of attention. And we've seen a lot of just some training licenses, where our customers are becoming familiar with the technology. And now we're seeing it being deployed by many of our most sophisticated customers into their production. I'm not going to give specific growth numbers or dollar numbers out at this time, but it's certainly beating the expectations we have for growth when we acquired the company and it is many millions of dollars. Your second question has to do with acquisitions. We have made a significant number of acquisitions in '16 and '17. I think 6 acquisitions we made. And we haven't made acquisitions since then, but we continue to engage with potential targets and look for similar things that we liked in those companies we acquired: great technology, great engineers, great cultural fit, vision-related, good growth potential that we can integrate. So we've certainly engaged with and, in the end, decided not to proceed with a number of companies this year in that space. And then as you think of our -- cash on our balance sheet, certainly, some of that we would like to deploy to acquire some larger companies. And we continue to cultivate and engage them, but we haven't, and certainly in the last 2 years, been successful at convincing any of those companies to sell themselves to Cognex, but we continue to ask.

(Operator Instructions) Our next question comes from the line of Joe Giordano with Cowen and Company.

Just quick one on -- curious about the integration of ViDi into the In-Sight platform, and how much of that can be kind of combined. And where are you now, and where do you see that ultimately going?

I'll definitely talk about how we've combined it and where we see it now, but I'm not going to comment on where it's going, only in general terms, maybe. Okay, so when we acquired ViDi, they had -- we thought and still think they have the best deep learning technology for industrial applications that we'd ever seen. And we were really impressed with what they could do. They also had a number of rule-based vision tools that allowed them to do such things as find the objects that they wanted to work on, quickly. And these are things that we do exceptionally well at Cognex through a technology known as PatMax and PatMax RedLine. So when we bought those 2 technologies together and brought them up inside VisionPro, some of our vision tools helped the ViDi technology operate better. It was complementary. The other thing is, at Cognex, we have excellent user environment. We hear regularly from customers that they standardize and they really like our In-Sight and our VisionPro user interfaces and environment. So bringing ViDi into that environment also makes it more accessible to all the thousands of customers today who have standardized and used those user interfaces. So that's been sort of a quick and easy win for us. In the longer term, we think this technology has a long way to run as we make it easier to use and more accessible to more and more of our customers. And of course, the actual technology profile underneath that processor development and programming techniques around deep learning and plus our own experience of seeing more and more examples to train on, mean that our technology in that area is developing very, very quickly. So it's an exciting area. Perhaps one we'll give you more of a preview next year when you come for Analyst Day.

We have reached the end of the call. I will now turn it back over to Mr. Willett for closing comments.

Okay. Thank you for joining us this evening. We look forward to speaking with you next quarter. Good night from Boston, home of the world champion Red Sox, and happy Halloween. Good night.

This does conclude tonight's teleconference. You may disconnect your lines at this time, and thank you for your participation.