Q4 2019 Earnings Call
Greetings.
Welcome to the Cognex fourth quarter 2019 earnings conference call.
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Question and answer session will follow the formal presentation.
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I'll now turn the conference over to our host Susan Conway Senior director of Investor Relations. Thank you you may begin.
Thank you and good evening everyone.
Susan Karlix senior director of Investor Relations.
With us today, our Cognex is chairman Dr. bought children.
President and CEO, Rob Willett.
<unk>, President and corporate controller Mcdonald.
Cognex is treasurer Chris.
I'd like to play Doh <unk> earnings release in core deliveries in our annual report on form 10-K are available on our Investor Relations website at Www Dot com.
Well, we slashed investor.
Oh, it can change highly people information our financial results.
[music].
During the quarter, we made you the non-GAAP financial measure if we believe it useful to investors.
Are we believe it will help investors better understand our business.
So.
You can see a reconciliation of certain items from GAAP to non-GAAP and exhibit you would be earnings release.
Any forward looking statement that we made in the earnings release already that we may make during this call are based on information that we believed to be true today.
Things, all can change or whatever and actual results may differ materially from those projected RMBS.
You should refer to our SBC filings, including our most recent form 10-K right detailed list these risk factors.
With that no would like to turn the call over to Dr. Bob.
Thanks, Sue and Hello, everyone welcome to our fourth quarter up 29 team yearend earnings conference call.
You know normally I'd say I was pleased to report record fourth quarter net income earnings per share.
But this time records and net income many P.S. were only achieved because of a substantial discrete tax item in Q4 that combined number of them to benefit net income by $61 million.
Unfortunately without those discrete items Q4 revenue.
Net income at E.P.S. all decreased.
Both year on year and sequentially due to ongoing weaknesses in many of the industrial markets that we sure.
Oh, no I'll turn the call over to my partner and Cognex CEO, Rob Willett.
Who will provide details on our 2019 results.
Rob the microphone is yours.
Thank you Dr., Bob and good evening everyone.
Looking back at 2019 annual revenue declined by approximately $80 million for 10% due to like simultaneous reduction in spending by customers in our two largest markets consumer electronics and automotive.
Which together represented approximately oh about revenue.
As we discussed on previous calls German 2019 customers in consumer electronics reduced and defer it investments on large automation projects that included machine vision.
Remember LIBOR late you choose smartphone manufacturer.
In particular that no significant new technology, all form factors small buttons and hit the market in any major way in 2019.
As a result revenue from consumer electronics contract is by about 30% year on year.
[noise] automotive revenue declined by approximately 10% from 2018.
This pockets manufactures scaled back and delayed capital spending in response to just reinforces.
Changes in consumer trends cooling off cocktail and evolving product roadmaps.
Automotive was also impacted by a lack of business confidence related to trade uncertainty, particularly in China.
Despite lower revenue gross margin remained consistent with 2018.
74%.
We reported growth in newer high potential markets for cognex products, including logistics, which was our largest market in 2019.
We also saw gross and medical related applications and in food and beverage.
Revenue from applications that utilize our deep learning technology nearly doubled year on year.
Well deep learning represents a small percentage of revenue today, we believe it wouldn't get has the potential to be a major contributor to growth in the future.
[noise] consumer electronics, and automotive large markets that machine vision that we believe will be used unit growth in the future. It's I'm clear however, when we will see that increase.
These markets are between major technology shifts can seem attack consumer electronics is transitioning from fourg to fiveg and automotive from combustion engines to electric vehicles.
Manufacturer is onto expected to meaningfully expand that capacity as they wait for these changes.
Revenue for Cognex is expected both from the building up new lines and trend the upgrading up existing lines in order to increase both productivity and product quality.
Oh, the two markets consumer electronics is the foster moving market and we believe it will recover more quickly.
Cognex is technology and Salesforce can be applied across many markets.
We have prioritizing new frontiers spend machine vision and cleaning logistics, which is a market that's undergoing a major transformation due to the rise of online shopping.
Traditional brick and mortar retailers and now the fastest growing segment, but call it makes and logistics, reducing our concentration of revenue from E. Commerce companies that weather early adopters that machine vision.
Our customer base is also broadening geographically where receiving larger orders from several companies in Asia.
And revenue from logistics is beginning to diversify into more applications, including package dimensioning and inspection.
Now I want to give you some details about logistics.
We have ambitious plans to grow revenue from logistics I, that's how I get rate of 50% over the long term and to do so at high gross margin.
However growth can be volatiles by shorter periods. For example, our logistics revenue grew by only 15% in 2019.
The slower growth rate and logistics was the result at the major customer focusing more on facility upgrade in 2019, then on new build outs, where we play a larger role.
After building adequate capacity this customer that delayed the delivery of large orders for new sites at yearend.
We have most of those orders in hand, and we expect to deliver them. This summer.
Excluding that major customer revenue from logistics grew by approximately 50% year on year, which is on long term targets.
Now, let's talk about deep learning.
We see strong potential any application about deep learning based software to automation.
I'm pleased to report that the integration of Silver Lab Korea based deep learning company that we acquired in October is going well.
Well its revenue contribution in 2019 with small the acquisition tripled the size of the cognex team dedicated to developing and applying deep learning technology to industrial applications.
Hi, joining the combined team and so two weeks ago, where we reviewed our progress formalized our plans for deep learning.
The advantage technology that Sewell that brings the classification and the application of conversational neural networks to industrial machine vision allows us to so I have presentation deep learning application.
This will enable us to accelerate our product roadmaps and to address new areas at the market.
I want to together in the first three months and the similar labs teams embracing of Cognex culture validating the assumptions that we made when we acquired the business.
[noise] Cognex is engineering relationships with customers and the additional tools and technology, we acquired with people that are expected to be a powerful combination.
We're in the process of introducing cognex customers to Sewell labs technology, and demonstrating how we can improve manufacturing process through its implementation.
We've already hosted multiple engineering teams from world, leading technology companies.
He also plans to evaluate and implement the combined called next to OLED technology.
Moving onto a new products, we have significant introductions planned in the coming months under 2019, among other products, we introduced to high performance snapshot sensing platform spent three D vision market.
The Cognex Treaty, a 1000 dimensional logistics and a threed 85000 for general manufacturing.
And Max three D. A breakthrough pot locating vision tool for our entire three d. product range.
Well so new in 2019 with a line of data man Threeseventy fix Mount barcode readers for reading different sized and challenging codes on packages inside high volume logistics scanning tunnels.
Before I pass the microphone to Laura the details from the fourth quarter I'd like to update you on our new CFO.
That's an ounce Tonight I'm pleased to report that Paul talked him will join Cognex in early March.
Who is joining us from Levi Strauss in company, where he was the senior Vice President of Finance.
He will be a great partner and will be joining me on future calls.
I want to take this opportunity to thanks, Laura for serving as our principal financial and accounting officer on the interim basis.
Following pools Onboarding she'll continue as our vice President and corporate controller.
Laura the microphone is yours.
Thank you, Rob and Hello, everyone.
Revenue in Q4, with 170 million, which is about a top end of October guidance.
As expected revenue declined year on year due to the timing of celebrity online orders and majestic and lower volume from automotive and consumer electronics.
On a sequential decline is due to the seasonal timing of revenue from customers in the consumer electronics industry.
Despite lower revenue gross margin of 74% increased slightly over Q4, 18 and was consistent with Q3 19.
Operating expenses increased by 13% year on year.
Over the past year, we have added Cognoids in engineering and sales.
They were also incremental employee expenses and other recurring costs related to the Sue allowed acquisition.
Compared to our guidance for Q4, we reported higher than expected expenses related to our incentive compensation plan.
That included expenses related to stock option as well as sales commissions, resulting from the better Q4 revenue performance.
Operating margin in Q4 was 10% representing a decline both year on year and sequentially due to the lower revenue level and higher expense.
Regarding the tax provision, we recorded a net discrete benefit of 61 million or the equivalent of 35 cents per share in the fourth quarter, which consisted of two major elements.
The first I'm involves changes to our corporate tax structure, which came about because of legislation passed by the European Union.
For that we recorded a net benefit of 88 million.
The second item relates to our decision to move acquired to allow technology out of Korea to align with our corporate tax structure.
That resulted in 29 million of additional tax expense.
Excluding discrete tax items the tax rate was 18% in Q4 19 compared to 16% in Q3 19. The increase would you choose non deductible tax expenses incurred in Q4.
Looking at the change in revenue for Q4 year on year from a geographic perspective.
<unk> increased by mid single digits because of revenue from consumer electronics, some of which was previously reported in our Europe region.
Revenue from the rest of Asia grew mid single digits over Q4, 18 also due to consumer electronics.
In the Americas revenue declines by high single digits, primarily due to delayed shipments in logistics that were previously discussed.
The impact of this quarter's lower contribution from automotive and consumer electronics with most noticeable in Europe, where revenues declined by roughly 30% year on year.
As mentioned the decline in Europe, what has been less extreme if not for revenue from certain customer purchases that shifted to China from Europe.
Turning to our balance sheet, we ended the quarter with 845 million and cash and investments and no debt.
Even with cash payments of approximately 171 million in Q4 to acquire school out we have enough capital to support our growth objectives, and just share our ongoing success with our shareholders through stock buybacks and dividends.
Now I'll turn the call backdrop.
Thank you Laura.
Moving next to guidance, we expect revenue for the first quarter will be between 155 million at $170 million.
This range represents a decline both year on year and sequentially due to continued weakness in the broader factory automation market led by automotive.
Outside of logistics deep learning and other new markets for all products our outlook is cautious.
We are concerned about what's happening in China around the Corona virus outbreak. Our Q1 revenue guidance includes an estimated 10 million dollar impact.
We also why didn't dollar range to account for this uncertainty.
We'll continue to monitor the situation closely.
Gross margin for Q1 is expect to be in the mid 70% range similar to the gross margin reported for Q4.
Visible in Q1 will be the high operating expenses, we expect for Twentytwenty.
We believe operating expenses in Q1, 20 will increase by approximately 10% over Q1, 19 and will be approximately flat with Q4 90.
The increase year on year is the result of.
And you will reset of company bonus and other incentive compensation plan.
The Cognoids, we added over the past year in engineering and sales and the impact the suing lab acquisition.
Higher expenses the stock based compensation will also contribute to the increase.
For the year, we estimate that the reset of incentive compensation and incremental expenses related to a full year of owning silver lab will add approximately $25 million of operating costs in twentytwenty, assuming our financial results for the year our as planned.
The effective tax rate is expected to be 19%, excluding discrete tax items.
The increase from 16% in 2019 is due to changes in our corporate tax structure and the expectation that more of the company's profits will be and untaxed in higher tax jurisdictions.
With that we will open the call for questions. Operator. Please go ahead.
Thank you.
At this time will be conducting a question and answer session.
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Our first question comes from Josh Pokrzywinski with Morgan Stanley. Please state your question.
Hi, good evening.
Hi, Josh.
Oh.
Well the first question on me on the logistics business, Rob If you wouldn't mind just kinda.
Level setting up so yes, 50% growth over the long term you will have some revenue shifting from 19 to 20 should we expect then that 20 kind of looks like a 50% plus just given that there's some revenue transferred or are you more comfortable with starting it kind of a 50% growth rate, we'll see how the airplane.
[laughter] I think the first thing to point out as we don't give you know annual guidance and and we don't give guidance by specific segments, but let me kind of add some color on all logistics business helped propel so think about it. So you know logistics in the early stages of adopting machine vision and we've seen.
Okay, great growth in that market and we continue to see great prospects, we haven't ambitious plans to grow the revenue, it's 50% over the long term right.
I think as we look at about what's going on in the business I just got some of the changes in my prepared remarks by a major customer delayed launch water, but new sites at the end of 2019 update achieving meaningful improvements.
From earlier implementation.
Lunch result, I think a work we've done with them I called mix.
Most of the delayed orders we have from then our in backlog and we expect to deliver on them. This summer.
And.
That major customer did play substantial on his first in 2019, but nevertheless, they represented less than half about logistics business overall, excluding that major customer revenue from logistics grew by about 50% year on year say, there's lots of good underlying gross.
Push but I think what I would point out is growth in this market can be volatile it can be large customer deployments and specific customers can deliver between 10 and $20 million of revenue at a specific quarter. So sometimes quite hard as you've seen from us over the last six months to to kind of commit.
Two or give you solid guidance on the timing of revenue over longer periods.
Got it that's helpful context, and I guess for a for for those of US who have picked through the 10-K a little bit.
Just as a follow up I noticed we no longer have they.
Material customer that that needs to be reported so you know one kind of dropped off the radar. There I guess anything you would comment on from a share perspective or anything that you think could be an impediment to getting back she prior peak revenues with somebody your larger.
Tronics customers as the function of product cycles or anything else to changing I see yep.
Weve see you know $100 million of revenue cost come off from one customer because Oh, you know what's happened in the cycle or what's happened with product cycles are the comedy is there anything preventing you from getting back to that are exceeding that overtime.
Thanks.
[noise] well you I complement you on your speed reading of our 10-K I'm amazed at how you guys them into bad to dissect a lot of information very quickly, but you're absolutely right.
No customer accounted for more than 10% of Cognex is revenue and in 2000.
19, and you know and never candidates I think as we started out the year in both electronics and logistics that might have made that but I'm reminded about 2016 annual report featuring Sherlock Holmes and I'm reminded that destroy the dogs that Didnt Buck and you know there was no particular customer that made it above.
That level.
Last year, so you're right we've had large custom, particularly one large customer in the past that had revenue of $150 million you know in a specific year and done and things that really drive that I think got big changes and investments in technology and growth plans right now we see the potential for those.
Really, particularly and in that electronics, and a and logistics are going forward and I think the things that would drive those kind of implementations. So you know took kind of much growth opportunities with individual customers would be big investments in distribution and technology to.
To outperform in E commerce market around delivery all plans. They may have to compete on things like same day delivery, you know and Oh in different geographies in different segments that the market and yes, I see you know tremendous momentum in those areas with a number of custom.
And I'm, not saying, how how quickly what how big they can grow but there's certainly potential there I'm for that and I think the other area, where we could see large customers in electronics really grow to be very sizable again, and possibly more than 10% of our revenue.
Losses in the area, New technology implementations in electronics, and that specifically, becoming a fiveg becoming of other oh augmented reality type technologies.
Different screen technologies, and multiple screens and other things I think if those things, but really come together with a big new kind of technology rollout that has the potential to do that but it's very difficult to know and see gets them. When those technology changes are going to come and I've got a hit.
But certainly fiveg would be one I think that has the potential to drive a lot more momentum in gross back into a consumer electronics.
Got it thanks for the color up.
Thank you.
Our next question comes from Richard Eastman with Robert W. Baird <unk> Company. Please state your question.
Richard Eastman Your line is open.
Just a quick I think a quick follow up on that Rob.
When you when you look at the you know potential for Fiveg to be a driver.
You know given given that you know cognex is position would be Oh long production lines themselves and you know driving throughput.
How do you how do you feel about the timing of.
The business.
If I recall in the past you don't the anniversary year for for a big customer.
We saw that lead time, maybe be you know when the order of four months.
That would that still be the expectation or use there you know capacity that can be reuse for instance in a in the in the system itself.
Ill break to clarify if your question about kind of cognex or is it about how the timeline and the requirements of the market and the customers deployment.
Yeah, it's it's really but just a macro question, but obviously the position you play there is in the you know the production supply chain, if you will for content and components, but when what would be the timing Oh that oh orders relative to shipments there.
From your vantage point, given where you play in that in that ecosystem or supply chain.
Yeah, I think you know from from now five plus years of experience, what you're working with big players in that market. It does come together quite late and a you know we will be in a better position in April conference call to really give you a read on how the years consumer electronics.
You know market is is shaping up for Cognex, and then I think you're right. We could we can find does maybe a you know we get visibility, possibly four or five months before no major revenue. It's a piano I think something you know probably we're going to end up talking about during the conference call is the Corona virus in the.
Got to that but I think that's a challenge that where we may be working with customers in Asia, and particularly in China, who have plans to deploy but right now those plans are constitute forward as quickly as they need to because we need to.
We need in engineers working on problem solving to implement features door so problems within a within within a customers that ramp up plan. So I think you know it's not clear to me what the impact of that is going to be is that going to just push everything to the right is it going to me that certain features and plans for deployment.
I would occur this year and gets pushed out next year that was the kind of extra wildcard I'm seeing this year. In addition to just you know what the plans are rolling out different features a new technology that we and front every year as we look at that market.
Okay, and then just a quick question on the on the auto market.
Lots of.
Activity around E. These.
In Europe, some mandates going in place.
The kind of adopted the same cafe standards here that we have in the states [laughter], but I'm curious you know with the pause in the market and kind of this the shifting of of spending between either you send traditional hydrocarbon vehicles you Super Super dynamic there that can accelerate you know auto.
Investment.
In 2020, even if the Saar called stays fairly weak just kind of shift in spend towards GBS and.
Assembly, both on the battery side as well so vehicles.
[laughter], what I think.
I I think the issue with that with TV is made major investment I think it's still a little ways off you know, we certainly see no. Good really good growth that you know.
Nice pickup in our business that relates to battery manufacturer for sure and other features that relate to new models, the electric vehicles coming but it's definitely relatively small part of our business. Overall. So I think we do expect that to continue and like you know we definitely are in touch way than working with old.
Major battery manufacturer as and and electric vehicle manufacturer is on that plans I think so so I expect that to be kind of a lump along and good journey for cognex now, but the countervailing kind of wins in that situation general kind of legacy automotive.
Okay, you feel like and the what I do see is it really big challenges customers.
It does in tier one automotive and end users are facing on that so kinda back certainly I think offset any optimism one might feel in the near term about spend on.
On the electric vehicles, and I think got it so that need I don't wish to sound overly negative, but I think I think if we were expecting a rebound in automotive as we entered the year, we thought that might come later major in the year and I now think with the Corona virus I think the challenge that what's on on Pos manufacturers and I see.
Income that Chinese consumer being able to afford to kind of get back into the market and buying new cars makes any kind of recovery, we're going to see an automotive probably a longer term prospects and quite possibly pushing out into next year.
Okay very good. Thank you thanks for the thoughts [laughter].
Our next question comes from Joe Giordano with Cowen. Please do your question.
Yes, good evening.
Good evening.
Just to start I, Rob you scaled logistics for US you said minus.
We were 15% in the in the year can you willing to give a similar kind of scale for auto and see.
So so just to be clear. So he said logistics grew 15% in the right and what yet so I just wasn't sure from your question. If you've been says to me. So then I think yeah I think in general a interval.
Well I think we've said the electronics Frank.
30, 30%, no and and and just give me a second here Youre concerned consumer electronics really represents.
About 25% about total revenue last year, and then automotive declined about 10% last year and it accounts for roughly 30% about total.
Perfect and then on the growing a virus you called out of 10 million dollar impact to one Q just curious about how you kind of calculated that is it mostly auto that's being impacted and.
How do you kind of way the the chances of that bleeding into into for later in the year past one to you and it is that already in your thought process.
Well, let's say you know its if it's.
The developing situation right and I think I think nobody knows the answer to you know how how long it how severe it's going to become but I'd like to give you a little color on it so.
So when.
So as you correctly pointed out for Q1 guidance reflects an estimated 10 million dollar reduction in revenue.
And we also put a wider range out there due to what we're seeing them.
I think we have pretty good visibility of things given the.
Hi, Shubra Cognoids, we have in China customers, we do within that market on the suppliers see supplies for that market, let me kind of break it down for you.
But the first to bring funding to say the air China based Cognoids that currently safe and most of our employees all working from home and we've we've asked cognoids outside of China to postpone traveled to and from China now so perhaps.
The first thing to say I think at intensive how this impacts revenue.
You know I think how quickly a production line and trying to get back up and running obviously will impact.
Revenue this year.
What we're seeing right most customers will not take sales visits from us at this time right. So really our cognoids are working from era that making sales calls that dealing with and things of electronic media et cetera, but that's certainly is you know it. It's a challenge you machine vision as a technology that off that needs to be.
Old.
And then engineering level it needs to be demonstrated an explained what the team of customer. So certainly that's the challenge and and there were also concerns you know that come out companies. We we set up and can see him as in China are going to face liquidity issues right, whether there will be able to afford buying new cogs as I talked to.
With that with Rick just earlier, you know and then obviously, making sure that.
They.
They that's still solvent supply us as well in the case suppliers.
Important, but I think some of those issues are likely to be a challenge for one of our automotive customers, both inside and outside China.
So I think there I'm talking about revenue and I think we'd probably side that and I said as we kind of move through the quarter. We took our guidance down specifically related to revenue by about 10 million. Let me talk about the supply chain, which I think as the other aspect that kind of does impact also on us. So so where we're consent to see odd.
China supply as pushing out delivery dates.
And now we haven't seen much much evidence of that but you know production delays could strain our supply chain.
Our next products and manufactured by a contract manufacturer based in Indonesia.
No not affected by this currently but at various custom components and electro mechanical and electronic components.
Of course from China, I supply is a concentrated mostly in the Guangdong province, with some men are there other cities and but none of located in the who had epicentral the Hebei province at lunch. So I think you know where we're feeling relative comfort you know, where we're not seeing specific supply challenges.
Currently, but and then what we observe and I think we all lips episodes, we see announcements from both customers and hunch that contract manufacturers and and from the company's that supply is saying theyre going to open on Monday.
I Love them said, they were going to open lots not too and we just see that shifting out and we're also concerned when they do open it doesn't necessarily mean and going to be scaling up maybe a small crew in there maybe people who are going there to go through quarantine. So they can stop production a week or more later so yeah, we're where we are watching this carefully and.
We think we've got its go to correctly, you know and Willie bleed into the second quarter in the third quarter I mean, I think the answer is quite quite probably.
Thank you.
Our next question comes from Jim Ricchiuti with Needham and company. Please state your question.
Jim Ricchiuti your line is open.
I'm sorry can you hear me now sorry.
We think about going here [laughter] hi, Rob.
If we think about the logistics business and 2020, given the fact that some of these larger shipments deployments with your large customer may not take place until the summer and it sounds like.
The.
Efforts, you're making in China, maybe get pushed out a little bit just given I assume that's one of the logistics applications in China are not going to come to fruition and the near term is there enough is there enough growth in the in the brick and mortar area, where you are seeing momentum to help that business show reasonable level.
Growth in the early part of 2020.
Yes, I think so Jim I think obviously most of our logistics business is really in the U.S. right I don't think it's it's not obviously impacted in the big way on from a from from the issues, we just discussed around China.
So so I think I think thats very positive. We also see on a lot more about growth I should start by saying Oh logistics business. The majority of it has been around reading Barcodes and that continues to be a great at a strong growing business right for us on but increasingly we're seeing more and more applications in the vision area.
Yeah.
As I mentioned some of those you know we having a lot of success in various markets with those products. So that certainly helping to drive growth. We certainly we do expect all business to grow and logistics in the first quarter.
And yes, we're becoming less dependent.
On on large large ecommerce players and we're really seeing a lot of investment love investment plans from.
Launch very well known brick and mortar retailers, particularly in America, but also in Europe, and <unk> and some in Asia, who are really starting to invest more heavily so yeah, we're where we're very confident about the future and we do see some near term tribe is helping us than we do see those large orders teeing up for the summer So you know where.
We continue to be very very positive about what we see although it can be lumpy.
Got it and follow up question for me was just on the deep learning efforts, you're obviously very excited about the opportunities there.
How do we are from the outside really begin to.
To evaluate the progress you're making in this area are there any either applications or types of customer wins that you can maybe highlight for us that maybe help us understand why you are so excited about it.
Well I think you know the first thing first thing to point out is you know what what the comments I made really which as you know we've we've only been into deep learning market really for less than three years and we're already seeing you know we've seen phenomenal growth already in that market with the small team that we have as were applying the technology. It does it.
You do came on to our Investor Day, I think we certainly show you some of the technology in applications and we gave you a preview of some of the products that were planning to launch into that market, but you know where we're seeing them we're seeing.
Substantial contribution to the business from from deep learning.
And then what we observed with suing lab and certainly that customers gives us a lot of confidence that it's there.
In terms of application.
I mean, the applications a pretty broad based on I think if you go to a website definitely you can see examples where we're applying deep learning to automotive life Sciences to of course to electronics and if you there certainly material about I'm still have set LNG and how it's applied to replace human inspectors.
In that in visual inspection, particularly about electronics. So I think you know I think I think from a point of view, we see very positive things happening in that market. I think we'll just you'll see more of it as we continue to report in future quarters, and regardless of some of the issues that you're seeing in other parts of the business another way.
Yeah. It sounds like you still expect this business.
This year to be a pretty good growth opportunity regardless of some of the pressures you're seeing in some of the markets.
Yes, we do.
Okay. Thank you.
Thank you are next question comes from Karen Lau with Gordon Haskett. Please state your question.
Thank you good afternoon, everyone.
I appreciate your color on.
Potential impact on the krona virus, but I wonder if I put around a little bad and try to understand.
Hopefully all of these you know well pass at some point.
What do you see asset constrain to watch.
Supply chain the industry ramping back up to make to.
Hopefully maybe try to make up for a long time, you say that constrain us.
People engineering capacity, because there any putting aside that.
The marine back to automotive Theres still a lot of pulp and talk about like Fiveg implementation and whatnot and some people that do you expect project will fall right. So what do you see from your standpoint as to the constrained.
Hi, good supply chain to ramp back and forth all along those lines given what's going on with like labor shortage and certainty do you see automation machine vision actually playing I've seen if they go wrong or having additional opportunity because I've been because of this situation.
Conference calls, it's okay on hold its okay hi.
Hi.
Yes.
So I'm not sure who is who that was speaking, but Karen it's Robin Let me, let me speak I think I got your question. So so basically I think a lot of activity is just not occurring right now right on you know in that I've customers and with our suppliers. So I think it's a longer that goes on the more delay or is.
And the more stress companies come on very you know the more will suffer from liquidity challenges labor shortages problems right. So I think you I think I think it's as simple.
Is that in many cases.
And I think particularly when one thinks about the electronics timetable I mean, the way that this market works is extremely intense it's not like there's a lot of extra kind of slack time built in there so either products will get delayed or or features and other.
Capabilities at the product will will not be in this year's release. So I think that's kind of highlight I dimensionalize that issue.
In terms the supply chain.
Next we have a policy of caring quite a lot of component inventory strategic inventory so.
In a way I think we feel we're very well prepared to go on supplying customers around the world. If we can turn into short term get inventory from a Chinese suppliers.
But at some point you know that's the challenge to Eric if certain companies aren't able to manufactured components, we have to find other suppliers and get them ramped up to a level to suppliers. So that's a lot of it a challenge to do so but a longer that goes on and in a sophisticated business like cognex or I can only imagine with a large tier one automotive supply.
They faced similar problems that that's going to be a challenge for them. So I think I think I would as the that then I think that's part of your question was sort of long term. So I think if I'm.
Funds to draw our optimism you know from from what is obviously, a very bad situation. It's like.
It does and it does underscore the potential of machine vision really to two robotics and machine vision to replace human automation and to make human automation free if it's a geographical constraints.
Yes, that's definitely machine vision systems, and robots don't get occurring the virus right. So I think that's not lost on companies that they think about that supply chain and all the trade and terrorist situations Weve had where you know I I've always been pretty skeptical about you know.
Lots of manufacturing coming back on shore necessarily but these kind of things I think really do raise the potential more for that to happen and it's a much more automation to happen and I think automation is starting to get better and machine vision to the point, where much more of that as possible and economically. So so it makes me long term more even.
More optimistic about advanced automation and machine vision, but short time lot of challenges to overcome.
Okay I appreciate the color and then if I can I sneak one in for Laura I think opex. So what's the expected to be up mid to high single digit for the fourth quarter and that he was up 16% sequentially.
Realize that you know sales came in better than expected phase that the primary driver and can you remind us how much of that 25 million off opex increase year over year I expect it for 2020, how much of that is coming from saw that process just that core legacy operation.
Sure. Let me answer your second question question first because I think we said last quarter that are still out expenses run asked about 4 million a quarter and that includes the operating expenses and also amortization of acquisition related items.
So so that would be a 12 million delta on related to see labs and then your first question why was the expense is higher than our guidance. So yes, you hit on the higher than expect expected incentive compensation and we also accelerated certain product development efforts.
Or incentive compensation, you mentioned related to sales commissions, resulting from better Q4 performance and we also had some additional costs related to the exercise of stock options.
Okay. Thank you.
Thank you.
Our next question comes from Andrew Buscaglia with Ehrenberg. Please state your question.
Hey, guys are just want to be clear on something you do you do not anticipate any revenue from that logistics deferred order.
In Q1 I mean.
Yeah, Yeah, Yeah I agree. So your question is the fat. So so we had orders from large customer a large customer.
That would differ.
Last year, and I know, we expect to occur at midyear.
It's possible that a very small about like Mike makes that in earlier, but no nothing nothing really significant inflation compensation.
Yeah, Okay, I, just want to be going in that.
Secondly, so you know we're seeing.
Rick sort of touched on this in his question, but we're seeing you know positive comments out of a lot of the semiconductor companies you guys mentioned five gene and at some point being a driver.
In Europe.
Other green shoot.
You have a samsung coming out with new form factor type of phone.
And then you're you're seeing this trend of more auto electronics in vehicles. So it seems like there are a fair amount of things that could.
You know sort of swings one way or the other this year, but your <unk> your tone definitely sounds a little bit bearish. The why is that why don't you think you participate and some of these.
Green shoots that we're seeing.
Yes, yeah, thanks, what I am I.
I guess, we have a reputation cognex, saying like it is right and I think we're concerned that car currently what we're seeing in a in China. You know is that it is that I'm going to slow down two factors that are going on one as a consumer electronics build that will go on particularly around smartphone technology, which way.
But delay and reduce it and also the recovery instead general automotive business site. So I would say that that's probably what youre hearing we're trying to communicate here those things that you said and I say that by pullback. There are a lot a very strong growth driver is at cognex and they certainly.
Lead logistics include deep learning and the application of deep learning and there is you know we probably like other companies that you and we read about would we do see improvement in consumer electronics spend you know we did as we came through the end of last year and into the beginning of this year, but we're now concerned about.
The impact to that and the timing of that we do see.
Lots of strong investment in very large percentage growth rates and electric vehicles, particularly related to.
Mayan battery manufacturing that process and these that machine vision, there, but that's really relatively small I think even if that word to triple or quadruple. This year I think it's still a challenge it's not going to make up for.
Slowness in the automotive and consumer electronics industry, where that to continue.
Reduce <unk> would you account for auto electronics.
Under auto or would that be more with consumer electronics agent Yeah, No I when I talk about lithium ion batteries I'm, referring to its automotive business.
Generally, yes, that's where the big spend is particularly with Korean and Japanese and Chinese manufacturers that lithium ion battery.
Machines.
Right Okay.
Thanks.
Thank you. Our next question comes from Jonathan with Daiwa asset management. Please state your question.
Hi, Thanks, It said I've Securities just.
First question can you kind of tell us what would what drove the higher.
Hi than expected revenue for this quarter quote one foot.
Thank you.
And then I had a photo.
Yes, Yes, I think I think as I mentioned, we saw we saw some better or the bookings and business outside of electronics, I mean, I think pretty much I think some of the things. We would just discussing early I think we saw our goes then some some better conditions, but you see out of other Sami and.
Electronics manufacturer is related to potential implementation of new technology and that was trucks. So we thought that was that certainly one contribution I think our business in America performed relatively well.
I don't know Lora anything we want to things like the electronics.
That's the main driver yeah.
Okay, and and you mentioned, a increasing spend on engineering and sales.
In the past I think.
Last year, I guess, you guys mentioned given kind of.
Shifting resources from slower growing 80 us to higher growth areas and it doesn't look like that situation has changed.
From 26 significantly at least in 2020, so what was where are you investing which areas are you investing in terms of engineering and science.
Hey headcount increase.
Well certainly I think when we think about how we run called that's what we were taking cutting edge, new technology and machine division and were applying it to to new growth areas. So growth areas. So we see of of course deep learning is a major area, where we see huge potential and we are investing strongly to be the leader.
In the air in the market a three D. It's definitely you bet, we talk about the launch a new Threed products I certainly got you know in that bucket and then generally in logistics supply not technology to logistics. So those are all areas, where we've been increasing spend.
Okay, and finally, if I, if I could pick squeeze one more the the logistics shifting from a large player to.
To brick and mortar does it change do you need to spend more on application engineering.
And then with the large Claire and.
And could that impact gross margins.
It doesn't really relate to what where the customers kind of coming from I would say that they the way that they deploy machine vision a central air. So I'd say the answer is no. It would be the difference I would point out, though as some kind of leading E commerce companies up very engineering savvy and Capably quite often.
Thank God bless you can see as well some some companies that you know trying to make the transition from being bricks and mortar companies generally don't have that level of engineering expertise. So in that case, we may have to do more application engineering to help them or you know when developing over the last few years and we made a lot of progress last year, we're developing a network of.
Systems integrators, who can help them.
And our technology, that's that's key to our plans to be able to scale. This business over the long term.
Okay. Thank you that's going to.
Thank you. Our next question comes from Joe Giordano with Cowen. Please state your question.
Hey, guys. Thanks for taking my follow up real quick just.
Just curious Robert if you had an update on the mobile terminal business and is that largely concentrated into your like more brick and mortar focused customers and logistics.
Yeah. So yeah soon so a mobile terminal business I think again, we talked about this a little bit I'm certainly at the analyst day. Those of you who joined US is done we've focused that business now much more on logistics in E Commerce type companies see where who I think a much.
More receptive to a product, which relies on an integrated smartside and who are much more technically savvy. So that's why we focused and and wear and we're starting to see you know some some logic customers adopt that and and roll it out, but we think the potential for us in that bucket is it's smaller than we originally thought we think it's that.
200 million dollar market for us, we think that market is going to grow at 10% were seeing some nice growth, but it's certainly not as material to the businesses other areas like logistics or deep learning more three D.
Fair enough thanks, guys.
Thank you. Our next question comes from Bobby You Bank with Chevy Chase Trust. Please state your question.
Hi, guys. Thanks to the call. Your major competitor is seeing a little bit better order flow of and you guys can you talk maybe about the consumer electronics business and a share trends in the I think Richie spend was asking about better. We are just when I kind of clarify how you feel about market share. Thanks, so much.
Yeah, but oh.
Bobby.
Tim Bobby I. When you took about a major competitor competitor I think you know the other two kind of public companies that report that we keep an eye on so I think what you can send all Brian.
You know I think they owed.
When I look at their results. The first thing I'd point out is that that results you know a much broader went where a pure play machine vision company. So.
Hey may have more you know kind of other more resilient business as such as microscopes or Oh basic optical sensors. All plc is right that perhaps less volatile, but I I. The when I read that results both of them seem to be recording.
Declines in that business on the order of.
7% to 10% in recent group and they reported certainly slower business in Asia electronics as they looks back so I am I wonder when one considers backlog and other factors I I don't I think it's in the mix as to whether they are we are growing faster or is gaining market share that said we.
How about high expectations about sell for Cognex, we invest more in in R&D I'm certainly in the vision area than any other company that we compete with and our expectations are to outgrow all other competitors. So we're certainly not happy even to be drawing and I would say right now looks like.
Everyone's suffering in a generally similar amount.
Thanks.
Thank you.
We have reached the end of the call I will now turn it back over to Dr. Schulman for closing comments.
[laughter].
[laughter] Dr., Bob are you, possibly on mute.
Yeah. Thank you.
I'm sorry, while our results were clearly not what we hope for at the start of 29 team.
Based on the new products that we have rolling out dog based on logistics the potential vapid artificial intelligence deep learning, we still remain very confident in the future role.
Machine vision will play in manufacturing automation, and therefore for the long term prospects for our company.
Thank you all for joining US Tonight, and we look forward to speaking with you on our next quarterly call.
Thank you.
This concludes todays conference.
And you may disconnect your lines at this time. Thank you all for your participation.