Q3 2019 Earnings Call
It. It is now my pleasure to introduce Susan Collins Senior director of Investor Relations. Thank you. Please begin.
With us today are called mixers, President and CEO , Rob Willett.
Corporate controller.
In card, which is treasure Chris.
Relations website.
That's true Dot Cognex dot com.
Okay, how we feel the information about our financial results.
During the call we may use a non-GAAP financial measure we believe it's useful to investors.
We believe it will help investors better understand ourselves if its trend.
Can see a reconciliation of certain items from GAAP to non-GAAP exhibit to be earnings.
Any forward looking statements were made in the early earnings release.
And eat that we may make during this call based on information that we believed to be true as of today.
You should refer to our FTC filings, including our most recent Form 10-K for do you feel blessed that these risk factors.
With that no I'd like to turn the call over.
Rob.
Hello, everyone. Thanks for joining us today.
Most of you are used to hearing called mixes chairman Dr., Bob Shillman Welcome participants Twining opening school.
Dr. Bobby's unable to join us seeping due to a prior commitment. He sends his regards and he looks forward to talking with you on our next school.
Oh, that's still live into Q3 results in line with our expectation with revenue at the top end about your like Guy.
That said our revenue was down both year on year and sequentially as a result at the ongoing slowdown in manufacturing investment.
The decline can be almost entirely attributed to consumer electronics, which decreased by approximately $50 million roughly 50% from Q3 of 2018.
The automotive and the broad industrial sectors also continued to weaken due to persistent global economic uncertainty and trade conflicts, particularly in Europe and China.
That deterioration was partially offset by growth in logistics, which increased by approximately 50% year on year.
We have confidence and all logistics strategy and we believe we could continue to grow at that 50% rate over the long term.
And logistics, well known traditional brick and mortar retailers starting to invest heavily in logistics automation to compete more effectively would that e-commerce competitor.
Changing that supply chain and they're looking to cognex is industry, leading products to help them implement automation strategy.
It is rapidly reliably and cost effectively.
[noise] near term market conditions, notwithstanding the long term potential for machine vision and for Cognex is unchanged.
Our long term operating model remains intact and with a target of 20% compound annual growth mid Seventys gross margin and 30% operating margin.
[laughter] no I'd like to say a few words about our recent acquisition of steel.
Outstanding Technology company specializing in deep learning software to automate inspection tasks that are currently done by human visual Inspector.
So with that is the types of acquisition that we like to do it has an excellent engineering team I'll expand on this in a few moments and also it's a great cultural fit.
[laughter], we believe that deep learning technology will be a major growth driver for cognex in the years ahead.
But the first time machine vision is reaching a level of performance that allows it to replace tens of thousands of humans globally is what kids to perform highly repetitive visual inspection tasks to identify cosmetic floors and defects on products you're in that money back true.
The market, we serve today a machine vision using deep learning in factory automation is estimated at $100 million about annual revenue is growing rapidly we believe by 75% per year.
The largest and fastest growing segment of that market is the replacement of human inspectors in Asia, particularly electronic components and finished products were still a lab is well positioned.
The acquisition as to what I've not only extends our deep learning capabilities for inspection application.
More than tripled the size cognex team dedicated to developing and applying deep learning technology to industrial inspection tasks.
Upon closing we welcomed approximately 100 smart ambitious an energetic new employees, who share our passion for machine vision. The majority of who are in engineering departments at a highly skilled in both contemporary program in techniques and applying deep learning to inspection tasks in the manufacturing process.
Last by cofounder of some kind of young that's doing that engineering team will continue to operate from its headquarters in downtown so.
They will work closely with our team based in Cambridge, Massachusetts, which is led by right away a co founder BT systems, which we acquired in 2017.
The acquisition established a deep learning development.
The reason for our success in this area to date.
Here are a few more details on the acquisition that I loved your shared with you.
Purchase price was $195 million, we paid 171 million in cash at closing payment to the remaining 24 million is tougher until late to date.
Well, that's doing labs, rather he was modest devices is justified by the high value the company's substantial engineering team. Its core technology developed over the last six years and its experience applying that technology very large companies in Asia.
We expect technology acquisitions to be accretive within two years and it looks like some of that would fit within that model.
Moving on to the next topic, we have published an updated view about served market you can find it on our Investor Relations website at Investor Dod Cognex Dot com.
Our new estimate of Cognex total served market that machine vision is $4.2 billion.
This is a narrow definition of what we can say without current product offering.
This estimate is 20% higher than our previous estimate as a result of both gross in the underlying market and new opportunities that are now addressable with cognex products.
[laughter], despite near term challenging market conditions, we believe us up market will grow in the low teens over the long term and we expect to continues to outperform market growth as a result about superior technology and the strength about customer relationship.
No I will turn the call them, but still Laura full financial details from the third quarter, Laura microphone is yours.
Thank you, Rob and Hello, everyone.
Revenue in Q3 with 183 million at the high end of our expected range.
Revenue declined 21% year on year due to lower sales in consumer electronics, particularly smartphone manufacturing.
Revenue from automotive and the broader factory automation market also declined from Q3 18.
Partially offsetting the shortfall was growth in logistics.
Gross margin of 74% was down slightly from Q3, 18, and consistent with Q2 19, despite lower revenue.
Operating expenses declined from both Q3, 18, and the prior quarter, reflecting reduced expenses spread incentive compensation plans.
We continue to be proved with discretionary spending without changing product development plans.
Operating margin in Q3 was 24% representing a decline both year on year and sequentially due to the lower revenue environment.
Excluding discrete tax items earnings per share were 23 sites in Q3 19, compared with 39 cents in Q3, 18, and 27 cents in Q2 19.
Looking at revenue growth year on year from a geographic perspective.
The Americas was the best performing region increased a mid teens year on year due to strong growth and logistics.
The impact of this quarter's substantially lower contribution from consumer electronics was most don't is noticeable in Europe .
<unk> revenue declined by more than 45% year on year.
Customers in greater China continued to defer their capital spending plans.
I don't think and low double digit revenue declined year on year.
This decline what it's been greater in greater China, and less extreme in Europe , if not for procurement changes made by certain customers in consumer electronics shifting their purchases from China to China from Europe .
And the rest of Asia revenue was relatively flat with Q3 g.
Turning to our strong balance sheet, we ended the quarter with 918 million in cash and investments and no debt.
Even after purchase things through a lab, we have enough capital to support our organic growth objectives, and M&A plans and for sharing our ongoing success with our shareholders through stock buybacks and dividends.
In that regard our board of directors has increased the quarterly cash dividend by 10% to five and a half pence per share.
Dividend is payable on November 29 to all shareholders of record on November 15.
Now I'll turn call back to Rob Thank you Laura.
Moving next to guidance, we expect revenue for the fiscal fourth quarter will be between $155 million at $165 million, making it the lowest revenue generating quoted this year.
Compared with revenue of $193 million reported in Q4 2018.
Industrial markets are significantly weaker today and continued to deteriorate led by automotive.
Contraction, most pronounced outside the United States.
Particularly in business that relates to China.
Unlike Q3, we don't expect growth from logistics to offset the overall revenue shortfall in Q4.
Even though logistics revenue grew by approximately 50% year on year in Q3, we expected to decrease year on year. In Q4. This is the result of a major customers delaying delivery of large orders spending sites.
Gross margin for Q4 is expected to be in the mid 70 percents range consistent with the gross margin for Q3.
Operating expenses are expected to increase by mid to high single digits on a sequential basis.
Approximately four percentage points are attributable to incremental costs for the sooner that team estimated amortization of intangibles and expenses associated with the acquisition.
The effective tax rate is expected to be 16%, excluding discrete tax items.
I'd like to make you aware of two discrete tax items expected to be recorded in 2019.
The first item in both changes to our corporate tax structure, which came about because it legislation passed by the European Union.
Well that one we expect a discrete tax benefit of between 100 million and $125 million.
And a slight increase to our 16% effective tax rate, excluding discrete events going forward.
The second item is our decision to move acquired still a lot of technology out in Korea to align with our corporate tax structure. This is expected to result in a discrete tax expense of between $27 million and $33 million.
These items continue to be evaluated the because of that we do not have more detail at this time.
With that we will open the call for questions. Operator. Please go ahead.
Thank you we will not be conducting a question answer session. We ask that you. Please limit yourself to one question and one follow up prior to getting back in queue. If you like to ask a question. Please press star one on your telephone keypad.
I mentioned total indicate your line is in the question Q. Your first start to if you. Let your move your question from the Q for participants using speaker equipment, it maybe necessary to pick up your handset prior to pressing a stark. He is one moment please poll for questions.
[noise].
Thank you. Our first question comes from the line of Joe Giordano with Cowen and company. Please proceed.
Hey, guys good evening.
Rob could you size that big order that was that was bush and is it something that you. Just found out recently is that something that you have visibility into like just delivering it after the quarter or something I'm just trying to see how indicative is of the logistics environment in general or if this is just kind of a one off thing that gets fixed on a few weeks.
Yeah. So yes. It was it's a pretty substantial order, let me give me a bit of color on et cetera. So overall, our logistics farm was strong and growing but we expect lower revenue year on year from logistics in Q4 as a result of this major customers delaying delivery at lunch waters.
The new sites and the same customer did take substantial deliveries in Q4 last year.
So many of these always the runoff books awaiting delivery, which we now expect to result in revenue next year and not in Q4.
Our visibility of that is quite recent for us, but we see probably some major integrators I may have had some more specific I'm understanding of that situation earlier.
So we continue to see strength in our logistics business, particularly among a broad base of customers, who are growing very very well indeed.
And we remain confident confident that we can grow it 50% over the long run, but we now just don't expect to grow at that rate for the full year in 2019.
I just clarify I just clarify one thing there is that this is an order you have received this isn't the this is not in order that you thought you might get that didnt.
In order that you already.
So it's it's an order that's coming in and you know many many pieces, it's very substantial right. So we don't have all of it but we have many much of it.
Okay.
And then my follow up yeah.
Got it sort of stay there I think it's really to do with changes that the customer about their plans and the timing of their plans, which are which unfortunately for US is moving revenue out of this year and I'm just slowing down our overall gross weight in Q4 and for the full year for logistics.
Okay, and my follow up would be around China, obviously, a lot of talk around trade war and what a phase one agreement might do how much of this stuff.
Do you attribute like any of this weakness to that specifically.
If there is some sort of like he's one of three kind of deal coming out does that change anything on the ground for you guys do you think anytime and on the near term.
You know, it's it's difficult coal, but I have to say you know, yes, I mean that Leach China is a softest region at the moment after being you know a real engine of growth first for so many years.
Customers, there have a real wait and see mindset and they're very slow to place orders and they continue to reduce and delay capital expenditures.
So yes, that's that's what we're seeing and I think Laura pointed out well said it ready from China in Q3 benefited from purchases from set and consumer electronic customers that have started to purchase a products in in China. When previously they bought them out of Europe . So that's also maybe making on China numbers on the.
So you know that the situation in China look better and better than it really is.
Yes, so how quickly will that 10 right well my my friends with China in my experience with our business in general is that when things do change and the business can come back very quickly I've seen that on a number of occasions and I know you know I don't know whether this is really a different different of long term situation. Unlike what we've seen before but I do happen to think of competence kind of.
Return I'm, you know, we see momentum and the other direction, we could see a quick recovery, but you know I just have no way of gauging, if and when that will come.
Fair enough I have some others I'll jump. Thank you Doug thanks.
Thank you.
Thank you. Our next question comes from Richard Eastman with Robert W. Baird Echo. Please proceed.
Yes, good after a good afternoon.
Well could you.
But a little color around Sulabh, you know when we looked at their website. They have a pretty impressive customer list [laughter] and you know all the big majors on the consumer electronics side of it appears [laughter] and I'm curious.
With with very modest.
Revenue presently.
I wish there product deployed is it still kind of in a piloting phase or is it is deployed at a.
Central location or is it deployed on on a equipment itself or just kind of walk me through that maybe just a little bit.
And how quickly the you know the revenue expectations can can inflict.
Given the every occasion.
Sure so.
So that has is it has a business model so burberry like binney right. So they sell suing kit.
You know sophisticated deep learning machine vision software and they had very strong team of application engineers to help customers apply it.
Right. So the majority Abbas majority of that business today over the trailing 12 months is related to that right and but I think more excitingly I think what we see the potential is to take that technology and they're already working on this and to deploy a through through machine builders to help at scale.
Much in the way that we have in all consumer electronics business over the last five years or so and we of course have a great network as a machine builders and integrators, who can help speed that up and then they have some very nice application specific related products and their pipeline that we think will be I'm very powerful engine.
Changing this this market so as a base kind of business that I would describe very much like video very very good technology, which them relative strengths and and differences compared to city and then some very interesting opportunities to apply more application specific products free machine builders in a form that should be more scale.
A little in the coming years, and where we are very well positioned to help them.
Okay, Alright, and then just to.
Follow up on this this issue that you raised about but consumer electronics customer purchasing in China for China versus prior.
Was purchased product was purchased out of Europe , what predicated that switches it is that a currency issue or.
What why is there a shift there and where the purchases are occurring for presumably the same application.
Yeah, I'm sort of limited into what I can say, specifically about the internal workings of.
Large customers, but I think and certainly in that case and perhaps due to submit that trade situations were seeing a tax consequences and other things they've they would they decided they wanted to purchase from us locally in China, rather than out of a subsidiary in Europe .
It does it doesn't really change the nature of the work, we do know doesn't really change our profitability on the business. It generally speaking, but it just doesn't mean way you see it show up in region is different.
Okay and that what started this quarter.
Laura it materially this quarter yeah, okay. Okay very good thank you.
Thank you. Our next question comes or line of Josh Pokrzywinski with Morgan Stanley . Please proceed.
Hi, good evening, yes.
Hi, Josh just wonderful we'll follow up on on the logistics comment maybe some more color about some of the Lumpiness there I guess.
First of all you know can you talk us through kind of the concentration from a customer perspective in that case. It sounds like it was a large order that got pushed but it's just gonna be something kind of analogous to the electronic side with your large customer there, where we do see lumpiness just related to one customer early.
Driving kind of the quarter to quarter cadence.
Yeah, Okay seeks to question instead of.
That's kind of customer mix and logistics and how does that play out in terms of lumpiness in the business and.
Interest expense is today, we have a handful of lunch you know important customers right you can be ordering in a substantial amount from us.
On the order of $10 million to $20 million in a quarter would not necessarily be unusual I think in terms of how we see them playing out and those orders you know a based off and on their automation plans and how they roll them out right. So I think that that does have the potential to move revenue you know in and out of quarters and I think that's probably.
Got it become you know that it's probably a reality about logistics business going forward and then we have many many.
Smaller customers see might be buying you know very small amounts up to a few million dollars and that's a good base of that business that looks much more consistent overall and that business actually is when we look at it it's growing faster than than our overall business, we expect that probably to go on.
As our technology becomes easier to integrate more widely known and accepted and as we develop our own capability and integrate greater network to deliver it but any kind of answering your question. Yeah. We have a handful of customers and I think you know one week, we referenced not by name, but today and I can certainly think apart.
There is may mean that our revenue as it plays out in the coming quarters will be lumpy and logistics and we'll just try to give you a heads up to that we're really in this for the long term and I when we see a big change going on and a 50% long term growth strategy is based around that so I think where we're relatively comfortable with the bad.
That may change, but we really as we need to explain it to you as soon as we see it as we're doing now and sometimes that can can move.
Understood. That's that's helpful. And then just taking a step back from consumer electronics, obviously weakness there has been a you know perpetuated for a couple of reasons, obviously, the tough comp coming off some be yeah. The OLED Rollouts couple of years ago, and then your general weakness in electronics industry and 29 team, but yeah.
We are starting to see kind of select green shoots from from folks in the broader definition of capital equipment, maybe products that what can awful lot different from what cognex is supplying but you know some kind of early indicators that 2020 will be better yeah. I guess from from your perspective, you guys don't get a lot of that color until more that.
Q timeframe.
But is there anything you can share with us either on your kind of product roadmaps any kind of technology shifts that you see out there that would maybe help define you know important thing to watch for 2020 understanding now that you have kind of a couple years about comp starting.
<unk>.
Okay, Josh I think on.
Thanks, a few things, but these are really just reprising, what I've said before yeah, we really get a better view of our consumer electronics business in Q2, when we're reporting Q1.
Next year I think that's when we'll have a real read on how it's shaping up I'm always I would say at this stage. There's a lot of interesting stuff you know in the consumer electronics pipeline that we have some visibility on the question is that how well its funded and able to be implemented as we get into the year I mean, obviously obvious kind of thing.
That could really help.
Hello.
The big tailwind for the business overall next year at Fiveg is is a very obvious one to what degree that is implemented and you know the technical challenges around implementing yet there are ways. New features that we have a line of sight on you know coming in.
In India electronics market, so that can really.
Tried but again, it's interesting to see which ones make it in each year and then you know and then as you mentioned the rollout of Oh, let you know specifically as it relates to high end phones multiple screens, except Trina that that definitely has a life in it as I think you can see by reading the paper that some technology you know where.
There's a lot of value that cognex can add and then you know I think then headwind you know would remain in those still has now there is a what are the largest smartphone companies in the world is one we can sell too. So that certainly is an ongoing headwinds I mean, I'd like that situation that changed I think I would say, but at the moment that's.
A potential problem for us.
And just one final one Oscar I'd like to squeeze in there what are you doing business with a that company before and now you can observe anyway size kind of what that I've missed opportunity.
At all either.
Yeah, We know we don't really let's talk about customers.
My name specifically, but you know you can assume I mean, we you know is a leading machine vision manufacturer in the world. So any any company that's performing advanced discrete manufacturing is likely at cognex customer and you know you would expect big electronics company to be doing certainly be doing a few million dollars or more with us.
Understood. Thanks.
Thank you.
Next question comes your line of Joseph Ritchie with Goldman Sachs. Please proceed.
Thanks, Good afternoon, everyone.
Yep.
So Rob just so just a few quick ones maybe just following up on that question on electronics visibility in Fiveg I, how much visibility will you have as the year progressive and what do you think the timing of that visibility will be a I will be kind of like early next year.
Yeah, well you know by one Q just trying to transfer.
Timing and visibility.
Yes, I think we'll be in a position to give you a clear view of that as we have in past years. When we report Q1 results.
I guess that is end of April .
Right have yet to the end of April you know we may have is we'll probably haven't visibility earlier than that I think if my experience now having been through a number of cycles is there's a lot of stuff there in the funnel, but in reality the kind of.
The overall view of the market and what gets rolled out pretty doesn't crystallize until that kind of timeframe and that's very different than our other markets. We sometimes liken. It to you know that building the airplane as it's going down the runway in that industry. So we do have quite late visibility as to what really makes it into final built.
Yeah. That's that's that's fair enough and then just you know I know we've been now we've been talking about this this topic a little bit on the call already but that the customer delaying.
The decision on large orders to new sites can you can you maybe give us a little bit of color on on why there was a deferral.
HM.
It has to do with their plans to roll out automation, you know there automation plan and delays.
I changing that right and there was the delays related to that company now and their plans not to do not related to cognex vision and our ability to meet that demand, but again I would come get more into specifically, what what and where that customer is finding those issues.
Okay got it they I guess I was just trying to get a sense for weather with like you know liquidity issue from a customer perspective or whether it was just you know just managing too much and I'm, having not passing and all this out.
No no no. This is the buried yes, it's fairly substantial.
Company, It's no it's really much more about engineering and automation product rollout in plan.
Rather than anything to do with financial or anything to do with cognex his ability to fulfill those orders that we have on our books on are expecting to.
Complete on our books soon.
Got it Okay, and then 111 quick one I may have missed it earlier, but you mentioned on two alive the accretion within two years, what's the expectation then from a from a financial perspective for next year.
Got it I don't think we've set so generally have a policy of not talking about the fund at the the forecast for next year for the full year. So we're we're not currently disclosing that but obviously, we're looking for some significant growth from that.
Hi.
Obviously based on what I've said, you know it would be to lead us to US next year. Okay Gotcha. Thank you.
Yes, yes, and accretive and accretive in two years and you know I think we'll be in a better positioned to give you more detail on that and when we report the full year as well, it's still a relatively recent acquisition for us.
Thank you. Our next question comes from light of Paul Coster with JP Morgan. Please proceed.
Hi, This is Paul Chung on for costs are thanks for taking our question. So.
Just another follow up on this to a acquisition why now on this and is this kind of.
Customer driven demand or just.
Pardon me and for.
Capturing incremental offerings across your verticals and if you could also talk about some of your cross selling benefits here with their existing consumer goods.
A follow up.
Yeah, Yeah sure I mean, I think I think the right way to view it is.
Cognex, we we we pride ourselves on having a deep understanding about the technology and the applications for machine vision and we spent a great deal of time studying those than we we've we've talked about logistics and how we see that's kind of hitting it depends hit a tipping point, where there's a need for automation is changing.
There's another tipping point going on currently ANAC in the wells of machine vision and it has to do with.
The deep learning technology it is its progress than it.
Yeah huge technology development going on in that space and the potential it provides to replace human visual inspectors and electronics, a few of whom Mary you know tens of thousands in Asia and the technology is getting to the point, where it's really now at very attractive.
Market opportunity and a large customers really see that they're very interested to work with us. They faced one other challenges around finding people to stop.
Human visual inspection visual inspection not being very effective human visual inspector might be 85% effective in their work in fashion feedbacks well.
You know machine vision has the capability to be 99.9% effective says there's a very good return on investment.
I think pretty clear to to us and to the big electronics customers that we see in Asia. So I think I think that's the reason why why this is happening now and why we're so positive about it I think but also you know fortunate in that we acquired video two and half years ago, and we really have to.
Three who owning them to see the potential but seeing that potential also made us realize.
That we needed more engineers, and we needed more reach and engineering capability in Asia, where this market rally is so as we looked at that and we we worked on it we really realize that Sewell lab is really right into suites bought all of that and we got to know them I think we developed a lot.
Mutual respect for one another and we were so please see a fantastic cultural fit which for US is really important up cognex, because we don't we'd like to buy acquisitions, we like to buy companies that have great engineers in great growth potential and the amount and excitement that that creates in us and in them, it's something that looks pretty well for us and we did that with video.
We've done that was chiaro another acquisitions, we've made over the years. So the more we drilled the more we got to know each other when we understood the market. The more we talk to large customers in this space and saw aware so will that is working.
The the more exciting we got an easier it was in our minds to justify making this for us pretty substantial acquisition.
Okay. Thanks for that and then switching gears you know.
On free cash Shira.
Despite no material low revenues and earnings can you just talked about the puts and takes of what's driving your you know you're working cap conversion benefits this year relative to last.
Is this kind of you know temporary in nature or is there something more.
Structural going on and how you see working cap trends over the next six months. Thanks.
Yeah, No Laura's Mcdonald's on on stuff do you need more clarification on well, let me see if I can answer here. Let me now can be more clarification, but one of a noticeable changes our balance sheet. In fact, you find in our inventory balance, which it's come down in Q3, as we delivered on large opportunities and shipped we recently introduced in products then.
We've worked that down nicely from the ended the year. We believe we now have enough inventory balance at the appropriate level. So that was a one noticeable change in working capital is it's a does that answer your question.
Yes somewhat thank you.
Thank you.
Question comes from line of Matt Summerville with D.A. Davidson. Please proceed.
Hi, Thanks, maybe just two quick questions first with respect to the Americas can you provide a little bit more granular detail in terms of what you're seeing across the different end markets. There you mentioned logistics, but I I could have missed it just any more color in terms of what you're seeing there would be helpful.
Sure Hi, Matt Yeah. So.
Pretty much like all of our and regions the Americas region is soft.
Particularly in automotive and but I would say in a relative to other regions. I think we saw that helped US early this year and now it's more stable.
It's not you know we don't we're not seeing a declining rates were seeing elsewhere [laughter] the.
I think because we look at the market overall, you know, we're seeing a lot of uncertainty and delayed and automotive is our biggest market in Americas.
And we're not anticipating ace it as a significant budget flush in Americas or anywhere really that we might expect at the end of the year, So thats kind of baked into our guidance.
The Americas has relatively better growth profile than elsewhere also as a result of.
Hi, a weight in logistics.
You know its.
Who market, where we have relatively more business and logistics than anywhere else and that's a business that is growing very very strongly. So that's also helping our results in this region.
Other industries in the Americas, just out of interest you know that other industries that are holding up well.
Medical related business food and beverage and packaging now there will do it. Okay. You know there I think they're all growing.
Currently despite the difficult market conditions, but and logistics is growing well then suddenly automotive is that is much more challenging overall.
Got it and then are you able to parse out between what the year over year revenue changes would have looked like had that customer not changed [laughter] graphic I'll call. It procurement strategy just trying to bridge that instead of you know Europe being down mid Fortys, maybe what would that have been down instead of China being download.
Teens, maybe what would that have been down at that changed didn't happen.
Yeah, there's still still quite a lot of moving moving parts as we come through the end of the ended the quarter. So I don't I don't think we're going to try to do that per se Laura.
Great and that's kind of pro forma information that we haven't prepared to disclose yep yep. So we're not we're not really ready to give you read on that yet.
Okay got it thank you guys.
Thank you Hi next question comes on line of Karen Lau with Gordon Haskett. Please proceed.
Good afternoon, everyone.
Likewise.
I think you mentioned about 4.7 sequential increase is due to swallow lap, but you also mentioned there were some amortization there I just want to clarify how much of that would you say sort of one time that really continue into next year and how much we really put in the base number as we project forward.
Well I can answer that Karen so the four percentage points represents the you know Sewell lab team ongoing operating expenses. In addition to an estimate of amortization of intangibles, but our we're still in the process of finalizing the purchase price allocation. So we don't know exactly what those numbers.
We'll be but I can tell you that we expect the majority of [laughter] 70 million that we'll allocate to be assigned to goodwill. So you know that 4%. There was a small percentage that I would say is nonrecurring most of the 4% like 3% to 4% I'd say would be recurring.
And again, we expect most of the purchase price will be allocated to goodwill.
Got it so so parsing out that full points that sequential increase that you know related to fall at the core spending would be the remaining four points I notice that in the third quarter you in terms of Opex looks like you understand a little bit.
Right.
Yes, the sequential uptick more in a in the core opex spending more about timing issue or should we read into that as you know maybe some of that pent up.
You know a investment coming back or maybe your positioning for.
Projects next year, how should we think about that.
Yeah, I think what you saw us under spending a little on compared to the guidance in Q3 related primarily to adjustment to our incentive compensation plan.
Okay.
I guess, okay. Thank you and then just I guess, taking it more broadly into next year, Rob Yeah, Let's say for whatever reason you know, whether it's Steve I say Zhang.
Tronics.
Start to turn next year I would imagine you know you've been doing you guys have been doing good job and clinical cutting the crap, but also there is probably some.
End up spending that might have to come back at some point. So let's say at the end markets start to turn next year.
Would you expect sort of a normal type of incremental margins to be realized or do you think that given so many things have been kind of.
Investment and spending wise I've been delayed this year because of the environment. There is more sort of catch up spending that needs to happen next year, if things start to get better I'm, just trying to get a sense of the incremental that you would expect.
Yeah, Okay. What's it's an entry question Karen I am at the moment I'm, not expecting sort of that kind of a markets to recover very strongly going into next year of its obviously on and it's really too early to talk about next year, but here's what I can say I think we run cognex for the long term, so where we're not trying to cutting back on him.
And things that are essential to our three year growth strategies.
You know we go on investing in those things that we consider essential and I think through what is that obviously a much lower rated increased in spending we've been able to keep on new products on track and plans intact. So I'd say, that's the case now.
Then go back and I look at times when.
We have seen a big recovery in our markets or a big incremental step up in growth and I'm talking about use like 2010, 2014, 2017, where we had growth in excess that's 30% the pull through in those years. It's awesome right. You know what are given kind of gross margins and there isn't a great need to.
Add an additional incremental expense related to gross like that so I would expect you know if and when markets recover and if they come back strongly.
They had we should see very very good faltering I'm on incremental revenue.
There is no.
In a in spending that would have to be catch up you know kind of regardless.
Uh huh.
I could come back next year, well I think you know the thing to point out would be.
End of compensation right. So.
That is that this is a year, where it went up we not achieving our budget and you know weve food were 70 paying out much less incentive compensation. So if we went back to a normal year, yeah. It would be a step up and that it was about two and a strong year it'll be a significant step up in that.
Thank you.
Thank you.
Thank you. Our next question comes from the line of General Casualty with Needham. Please proceed.
Hey, guys. This is Mike she goes on for Jim Ricchiuti, Oh, just a couple of questions here the first coming back to the the lead shipments for this logistics customer wants to get a better sense. It sounds like this is one of your larger customers and I know you kind of go the large customers contributing as much as 10 to 20 million.
Dollars per quarter, nothing unusual a fair to assume that this customer coming in at the higher into that range.
And that $20 million bone.
It's we're not sure exactly where it would come in and you know, but perhaps you know pest order of magnitude and yet in a range of significance, probably south not not as much as 20, but.
Yes, and it all depends on how much of that waters, we would expect them to taken a particular quarter and I do we just wanted to clarify it wouldn't take that number and multiply by four to get the size if the customer I'd be just more like.
Customers have plans they roll out at a certain cadence and that May mean, a quarterly revenue for any particular customer that might be on that order of magnitude and that might be the kind of level of challenge that we're seeing in a headwind this quarter.
I see okay, and I guess, if you would said the logistics business.
Because it is Q4 ships.
It's not expected to grow 50% year on year.
Hello. This is a growing 29 team then based on what you currently have been in.
Yes, that's not a number when we're going to disclose at this time right. We've said we've told you Q3, when I sort of see how things play out in Q4.
Then we might have more I'll give you about a view of that when the year is over.
I see Okay, and then just one final question if I may on the gross margin front.
I was interested in hearing how you guys are able to maintain call. It is mid seventies percent gross margin versus Q3 on on the lower revenue base is part of that mix shift or is there anything else, we should be thinking about and that.
Yeah that was the result of the revenue mix in the quarter.
Great. Thank you guys.
Thank you.
Thank you. Our next question comes from line of Andrew Buscaglia with Aaron Berg. Please proceed.
Hey, guys quick question. So consumer electronics can you you kinda if that continued to get worse.
From Q2 sounds like autos somewhat stabilized but.
I would you characterize consumer electronics.
[laughter] well.
I would say can see much tronics, it's kind of played out as we expected this year.
Based on what we told you in April I.
I think.
I think back and you know, we we definitely or you know we were.
Unhappy to discover back at that time that the.
Our customers and consumer electronics, where we're looking at a very dry year, then I think we'd kind of.
He is on that and communicated to at that point and he's played out as we expected. So annual revenue from consumer electronics is on track declined by roughly one third.
Here.
And it represented 30% of our business in 2018.
And the units, particularly as result of smartphone manufacturing.
And the decline you will see as most notable in our European region, followed by China, and the rest of Asia, but it's certainly been a year of.
Okay.
Diminished investment.
Thank you know that that's as we as we expected.
And he and just to confirm you said it I think you said in the prepared remarks, it with down 50%.
A year over year.
So revenue for consumer electronics in Q3 declined by approximately 50% Eurone arrow nearly $15 million.
Do you, particularly smartphone manufacturing.
Okay.
Okay. Thank you.
Thank you. Our next question comes from line of Ben Rose with Battle Road Research. Please proceed.
Hi, Rob Lara and Susan.
Rob can you identify the industry of the customer and logistics for the would just IX product.
You know if it's a large customer about in logistics. So you can assume it's either e-commerce or weak or retail okay. Okay. I just I just wanted to be sure that okay. It's not it's not airport baggage handling more or so.
Which might be the other segments.
You can see from large chunks of business, but that's not what it is okay. And then just a question on Sewell labs.
Our the customers today.
Further product are they primarily the Korean.
OEM manufacturers do they have any penetration meaningful penetration thus far.
Outside of Korea.
Yeah that made the main markets are in Korea, and China and Vietnam.
Overall, and they're really with Chinese and Korean.
Electronics electronic components manufacturers doing inspection and but I night.
I think we like about them is there really you know they like us really have.
Close high level engineering relationships with with senior engineers at those companies. So it's not they're not trying to move their products through the OEM machine builder, it's being pulled by the end user who really many of them are employing.
Many thousands of visual inspectors and are looking to see better cost and performance out of that aspect of that business.
Okay, and sorry, just one one final perhaps have they have has the company actually validated.
The technology with you know the kind of reduction in visual inspectors that you mentioned earlier in the call.
In the order of hundreds or hundreds or thousands of visual inspectors being replaced by the technology.
Absolutely, yes, yes, I got the we would have a quiet the company.
Due diligence.
On that for sure right now there as we ourselves I'm Cognex before we met Sewell ABSSSI opportunities where are our our or electronics customers really I'm very interested.
And have been previously unable to replace those visual inspectors with a with machine vision and so we're seeing a lot of interest from them as.
As a result at this news.
Okay. Thank you.
Thank you Hi next question comes on line of Karen Lau with Gordon Haskett. Please proceed.
Hi, Thank for taking my follow up Robin just curious on consumer electronics, Oh, maybe broadly more in China. There's been stories about you know Chinese companies kind of future proofing their supply chain I don't know, if that's right where to your bag.
So in light of like Black Mustang or you know Sunday got cut off.
From there you asked suppliers.
I think that it's more concentrated in like kind of chip manufacturing, that's sort of thing, but I wasn't sure. If you are seeing any of that sentiment in areas that you participate in China, maybe you can talk a little bit about that.
Yes, Ken So the answer is you know, we're looking for that and we're really not seeing it among our customers I can really help me think of one instance that I bet up where you know a Chinese company you Didnt and it's not a company with any of US with no readily Didnt. You know is concerned I didn't want to do business with us because we were American.
That's not widespread and I think what you're reading about.
As much more.
Oh chip.
Gee in that way.
The other thing important to realize is similar to LNG basically your doesn't isn't own inside the U.S. or sold from from the U.S. per se right in terms of know how were recognized by customers I.
I think that will say somewhat insulated us from this but clearly what we've seen with a one of the largest.
Some companies, where you know we might become unable to sell to them that you know that if that was a real threat on a larger scale that would be a big problem for us.
Okay. So nothing beyond already that you're seeing that concerns you in terms of.
Chinese companies sourcing from suppliers from other geography.
Correct, Okay got it thank you.
Thank you.
Question comes from line of Jody Dano with Cowen. Please proceed.
Hi, Thanks for taking my follow ups here.
I will begin.
I understand.
The geographic presence that bringing the engineering capabilities.
Is this a fundamentally different products, then BD or is this something that you foresee overtime like one offering globally. That's integrated as whatever you guys my call it or is it one thing or is it too [laughter].
Yeah, Yeah, Hi, Joe and I should say some of this is a lot of question I think we had side for an 11 Oh.
I'll answer it so so.
A point from earlier I think I think you might have asked a question what do you want to we bring.
To see lab and I think what we do bring is is a lot of customer relationships and a big sales footprint in the market. So I think I just didnt want to make that point. This is on is very much complementary I think for both companies.
And.
Synergies on the growth side for both of Us working together.
But youre you.
Your your question.
Related to what can you repeat that again im sorry, like I used to fund fundamental fundamentally different things vd into a level or is this something that ultimately is like one even one integrated product that cognex, yes, I'm sorry, yes, so to the quite similar products. So deep deep learning something that could do various assumptions.
And we've developed with video certain functions.
That really relate more to our end markets, where we've been focused particularly automotive and bayside geographical presence right and and Sewell lab. No have has some strong tools and capabilities that relate to Asian visual inspection, so so similar but but.
Developed in different ways right I would.
I would say that and then because they have you know a big footprint of engineers that application engineers in that in Asia. They have the ability to help unlock a lot of potential that we see in that market, where we didnt have that capability. So they bring a lot of engineering application capability, which could.
Be applied to either be or to sue will that right and then we had a big sales network.
Where we have pent up demand that they can help unlock so that's kind of where the complementary lots of the business go by the product itself video and see what kit a quite similar there's quite a lot of overlap, but with quite a few complementary strengths around specific tools capabilities user interfaces and.
Another key elements.
That's very helpful. One if if if you don't mind just like a one you can enter into words that you want but the medical food and beverage and consumer at verticals that we don't spend a lot of time talking about you expect those to be up this year.
Yes, yes, we do.
Okay. Thank you.
Thank you.
Thank you.
We have reached the end of the call I will now turn it back over to Mr., Robert like for closing remarks.
Thank you so well results are not what we'd hope for the study. This year, we're confident in the future role that machine vision and in the long term prospects for cognex.
Thank you for joining US Tonight, we look forward to speaking with you on on next quarter's call. Good night.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
[noise].