Q2 2019 Earnings Call
Greetings and welcome to Cognex second quarter 2019 earnings Conference call.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms., Susan Conway Cognex second.
Senior director of Investor Relations.
Thank you Ms. <unk> you may begin.
Thank you and good evening, everyone with US today are Cognex is chairman Dr., Bob Shillman, President and CEO , Rob Willett.
Vice President corporate controller at Mcdonald's in Cognex is treasurer, Chris died now.
I'd like to point out that our earnings release and quarterly report on Form 10-Q are available on the Investor information section of our website.
At Www Dot com net dot com.
Both contain highly detailed information about our financial results.
During the call we may use a non-GAAP financial measure if we believe it is useful to investors.
Are we believe it will help investors better understand our results or business trends.
You can see a reconciliation of certain items from GAAP to non-GAAP in exhibit two of the earnings release.
Any forward looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today.
Im talking change however, actual results may differ materially from those projected or anticipated.
You should refer to our FCC filings, including our most recent Form 10-K .
For a detailed list of these risk factors.
With that I'd like to turn the call over to Dr. box children.
Thanks, Sue and hi, everybody thanks for joining us.
Overall, our Q <unk> Q2 results were in line with our expectations.
Yeah, we were highly profitable.
However, it's very frustrating to report a year over year decline in both revenue and profits as a result of the current downturn in both consumer electronics and automotive markets.
Even so we're confident about the future of cognex and the role of machine vision and automation and.
Turns out the distribution remains strong logistics.
Right now I'm in San Diego and everyone else is at our Natick headquarters so for more details I'll turn the call over to my partner Rob Willett.
And I'll remain on the call for any questions you may have.
Rob the microphone is yours.
Thank you Dr., Bob good evening, everyone.
As Dr., Bob said, our Q2 results were as expected with revenue at the talk about guidance range.
The lower spending by customers in consumer electronics, and the automotive sector in the Americas, We discussed last quarter played out as expected.
However, a broad factory automation market in Europe was considerably softer than we anticipated in Q2 and the impact of this will be more noticeable in our Q3 results.
Demand from many end markets is declining notably in automotive, which is one of our largest markets in Europe .
Customers.
Particularly those that are exposed to the slowdown in greater China are reducing and deferring large projects.
Asia has both a weekend.
This is due to a continuation of the challenges that we have been experiencing broadly across China.
And just softness observed in industrial markets elsewhere in Asia.
[laughter]. These dynamics obscure our continued strong performance in logistics and that market, a growing and broad base of well known E retail and traditional retail companies are investing in automation to improve the speed and the efficiency that fulfillment operation.
And they are turning to Cognex machine vision as a key enabling technology in that distribution centers.
We also continued to make strong progress in other industries. We serve that are currently relatively small but growing quickly.
Putting it together consumer electronics and automotive two largest markets that combined have recently been responsible for more than 50% of our revenue both contracting simultaneously. The first time in many years.
Broadly speaking, it's due to a widespread lack of business confidence I mean fully demand changes in customer preferences, and the timing of transitions to new technology.
Heightened uncertainty and the distractions around trade tensions are also a problem.
However, we're confident in our business strategy and keeping a long term perspective.
We continue to fund our engineering projects and the development of impressive new products continues to plan.
We are reallocating resources toward faster growing areas, such as logistics and deep learning and markets, where the adoption of machine vision is still in its infancy.
The skill set of our engineers and sales knowing the highly transferable I can be applied to a variety of opportunities.
Before we move on to the details of the quarter as you may know more actively recruiting to fill the CFO role.
In the meantime, we're especially fortunate to have Loren Mcdonald setting as our principal financial and accounting officer.
Laura It's a 25 year Cognoids and has led Cognex is finance accounting and reporting teams as vice President and corporate controller since 2007.
Laura.
The microphone is yours.
Thank you Ron and Hello, everyone.
Revenue in Q2 with 199 million.
Representing a decline of 6% year on year due to a reduction in revenue from the consumer electronics and automotive market.
The decline was 3% in constant currency.
Logistics continue to be a strong performer and offset much of the decline in the manufacturing sector.
Gross margin of 74% was consistent with Q2 18, despite the lower revenue.
And what about one percentage point from Q1 90.
Operating margin in Q2 was 26%.
Down from 30% in Q2 18.
On a sequential basis operating margin increased by nine percentage points.
Due to seasonal growth in revenue and prudent management of discretionary expenses.
The effective tax rate for the first six months of the year was 16% before discrete tax items.
Oh from our expected rate of 15% due to a shift of income from lower to higher tax jurisdiction.
The true up of the tax rate reduced net income for Q2 by approximately $925000.
Excluding all discrete tax items.
Earnings per share were 27 cents in Q2 19.
Compared with 31 cents in Q2, 18, <unk> up from 17 cents in Q1.
Looking at revenue from a geographic perspective.
The Americas performed the best of any region, increasing by high single digits year on year.
Strong growth continued in logistics and was partially offset by lower revenue from the automotive sector. We're spending continues to be filed.
Revenue from Europe declined by mid teens year on year and that includes a six percentage point negative impact from currency exchange rates.
Consumer electronics declined substantially as expected.
We also saw growth softened in the factory automation market.
In greater China revenues declined by low teens year on year also do consumer electronics, and a negative impact of six percentage points from currency exchange rates.
Manufactures across our customer base and China continue to cut back their capital spending plans.
Revenue from the rest of Asia declined by mid single digits, principally due to reduced spending and the electronics and Saudi market.
Which are dependent on demand in China.
Turning to our balance sheet Himax continues to have a strong position.
We ended the quarter with 862 million in cash and investments and no debt.
During the quarter cash provided by operations was 59 million.
We repurchased shares of Cognex stock totaling 62 million.
And we paid 9 million in dividends to shareholders.
Inventory decreased 6 million or 8% probably end of Q1 as expected.
As noted last quarter, we probably affected we adopted a new lease accounting standards. This year, which resulted in a balance sheet grows out of assets and liabilities of approximately 18 million at the end of Q2.
Now I'll turn the call back to Rob.
Thank you Laura.
Moving next to guidance revenue for the third quarter is expected to be between 175 million and $185 million.
Compared to $232 million reported in Q3 of 2018.
The decline is due almost entirely to substantially lower revenue from consumer electronics.
As discussed last quarter, this is particularly related to smartphone manufacturing.
Otherwise, we believe that continued growth in logistics and a few small lot high potential markets that are performing well will be offset by decreased revenue from the automotive sector and other industrial markets.
We expect gross margin for Q3 will be in the mid 70% range and slightly lower than the 74% gross margin we reported for Q2.
Operating expenses are expected to be relatively flat with Q2.
The effective tax rate is expected to be 16%, excluding discrete tax items.
And with that we will open the call for questions. Operator. Please go ahead.
[noise] [noise].
[noise].
[noise].
At this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You mean press star two if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Cameron Lu of Gordon. Please proceed with your question.
Yeah, Hi, good afternoon, everyone, Rob you mentioned logistics and it's still growing at a pretty healthy pace. There were some other companies that called out some push out your life large projects I guess over the course of past few months I guess I can't comment on you know the growth rate you're seeing in Twoq, you and why you are expecting in Threeq you any of you are not seeing any if you're seeing any push on projects in your pipeline.
Yeah, Hi, Thank you Karen call logistics business continues to be very healthy, where we're growing at a good clip and a week and baked into our Q3 guidance. There is a continued growth right around that 50% growth rate that we're targeting so we haven't you know a week there is a fair bit of seasonality in logistics and as we get into this market more and understand it better generally what we tend to see is higher.
Revenue quarters for us in Q2, and Q4 and lower revenue quarters in Q1 and Q3.
But the growth rates were seeing.
Continue to be.
Very strong and we expect that to continue.
Thanks.
Yes.
Right. Okay. Thank you.
Either effect as I can go to in more detail if that's of interest.
Yeah sure I guess is do you think that's a function of you have been adding so much more resources in that market that you know that allows you to grow that market or you somehow just you know more penetrated in like smaller project. These days so.
Any kinda differently and lock in the larger project areas doesn't affect you as much.
Yeah, I mean, I would we were where we knew ish to this market and we have you know some very advantage technology that were bringing and certainly the technology leaders in this market, particularly in the e-commerce space recognize that and I'd say, we're I would say, we're being very much recognize as technology leaders.
So I think that's you know that's the reason we think we can keep growing we have been and we think we can keep growing this market is 50% growth rate over the long term.
So I think I see that continuing we're also introducing some exciting new products. We introduced the three D.A. 1000 differ dimensioning on which will be very advantaged over time, the flight and laser based dimensioning systems that are currently in that market and we're reallocating resources as you note to make sure we have the.
The capacity to go on to bone growing services.
If there's a silver lining to this very disappointing market situation, we're seeing in automotive and electronics, it's that we're able to reallocate those cognoids to some very exciting growth opportunities, notably logistics and deep learning.
Okay, great. Thank you for the color.
And then just on consumer electronics can you update US first this is down why is there an expectation that you had going into the year. What is your expectation now for that market.
Well I would say you know, we don't really want to be giving.
Annual guidance every time, we meet we're not really changing our our kind of.
Approach to that however, I will say things haven't really changed a lot in our outlook in that market since we last spoke.
So.
You know our guidance in Q3 reflects the $50 million a year on year decline in revenue from consumer electronics, that's the big.
Change, where you know.
We expect to see and we're going to go on seeing so as you try to you know understand our Q3, it's really not so much in electronics story I think that's what you know it's similar to what we had told you previously.
It is much more a story of softening in and that in automotive and in Europe , and the overall market, we see in China.
Okay understood and then just lastly, I guess more broadly on E.
Realize holly's not probably not a big customers of yours or you know you've said that it's not that material of an impact, but I'm just curious the whole episode of the ban and the ongoing trade tensions does it does it impact your confidence or will it impact your ability at all to participate.
And future smartphone capex cycle, given that I guess, a lot of the infrastructure, but as manufacturers machine only Oems or are a lot of them are you know in China right. So doesn't impact I guess does this whole trade tension impact your longer term.
Outlook in Seattle.
Yes, it's it's a difficult call to make longer term I mean, and obviously as you rightly noted we don't talk about specific customers.
Cognex does supply all of the major manufacturers of smartphones, whether directly or indirectly through contract manufacturers and.
The current market and trade conditions make it more difficult to work with particularly some more than others.
As you've said and some of the ones, it's hard for us to work with perhaps one of the ones that are showing the most growth would have been in recent quarters. So that that is that's a challenge for us certainly.
But you know certainly our guidance contemplates that situation.
And are you I think I think we will have to see how it's going to play out from a government and trade talk point of view.
Okay understood I'll leave it there thank you.
Thank you.
At this time I would like to update all of all participants.
We ask that you please limit yourself to one question and one follow up question prior to getting back in the queue.
Our next question comes from the line of Andrew Buscaglia of Baron Berg. Please proceed with your question.
Hi, guys.
You know I'm curious from a high level you made some comment that you know you haven't seen in quite a while a consumer electronics and auto detracting simultaneously.
You also have the straight thing going on which could be impacting things further.
Yeah, I've just given you guys have a long history in the space and the experience in here.
Can you talk about how this compares to other downturns.
This is this something you think is going to be prolonged.
Or do you do you know based on your history and experience do you see.
You know do you get the sense that things could turn quickly if we do get some sort of resolution in the trade agreement or any other factors just curious your thoughts on that.
Yeah, Hi, Andrew its you know.
It's not easy to kind of prognosticate on these kind of things, but I would say a few things. One is I think the consumer electronics market concern quite quickly right. So I think particularly around these issues. So I think that one essentially is one that could come back more strongly I think the automotive market tends to be more of a kind of a longer term player in attempts to take them longer to.
Decelerate and accelerate around.
Around around changes that go on.
So I think I make that point of view.
I also think.
I can't quite remember exactly I want to say 2015, you know, we certainly saw some contraction in consumer electronics, but we didn't see the same thing going on in automotive for the second time, so thats a little bit different and I think all of US know that cognex has grown its topline every year consecutively for the last nine years and were not growing this year. So this is a different situation that we're seeing.
And I think it has to do with a number of factors that have.
Some of which we've talked about the automotive industry itself is oversupplied at the moment and if it's between.
Kind of.
The fact is it's between having compressed combustion engine cars into many of the manufactured and perhaps not as competitive for consumers as they need to be but not yet having geared up on a on electric vehicles that are coming but not yet really in the face of major investment in automation. So so were in that situation there and in consumer electronics I think.
Gone through a period, where we have massive investment.
And it's a matter of when we're going to return to that as well I think as I think about this longer term, which is how we like to think about things at Cognex I think the story of the lost many decades really has been increased spending and innovation and in in automation in electronics and automotive right and as I look at.
Consumer electronics, I think I would I would certainly expect there will be future waves of innovation and investment coming.
And you can see that in in that in many areas and your Fiveg being one example, and that consumer electronics or.
Autonomous or semi autonomous vehicles and electric vehicles in automotive so I think its a matter when those come and how they play out and how much of a lift they bring to automation, but you know when I think could be millions literally millions of people involved in manufacturing consumer electronics, and the major investment and challenges and margin pressure on automotive to automate.
I'm very optimistic about the long term, but much less optimistic about this year.
Okay. That's helpful.
Maybe just turning to your balance sheet that you know that's something I asked last quarter. You guys have you know this this pile of cash.
Do you think is your appetite change in the last three months given some of your peers from your machine vision peers.
I'm, a little bit weaker now and also just curious maybe.
Second part of that question would you ever consider bertolli vertical integration with any specific pieces of your business.
So you know I would say, we have a long term strategy and some very strict and thoughtful criteria around acquisition. If you were getting at that so.
That that that doesn't really change based on short term considerations. We obviously have a lot of firepower and our balance sheet to make make acquisitions as and when they become actionable. So that that will continue I didn't really understand your vertical integration question, perhaps you can explain that to me.
Somebody some of your suppliers that you use there was or does it ever make sense or whatever you know thinking longer term.
Yeah on the camera side makes sense to bring those in house right.
So we Oh I now understand your question. Okay. So I think there's there are various them.
Technologies that we have cognex work with.
And you know as an example might be in the area of high performance liquid lenses.
So is it wonderful technology partner, we have in that space, where we've we've where weve used.
The our ability to invest to get some exclusivity around that technology without having to acquire the company, but it shows you what were willing to do where we find advantage technology that we want to secure and whether it's through exclusivity or acquisition, we would do that but I don't think you're going to see us acquiring what I would consider more commoditized businesses like cameras right.
As an example.
Okay, all right that's helpful. Thanks.
Yeah.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Hi, Thanks, good afternoon, everyone.
Okay.
So Rob just your comments on the on the auto market and electronics market. Notwithstanding you did also say that like you experienced a broad fact, the broad factory automation market, particularly in Europe slowing down and so I was just wondering like if there you can provide a little bit more color.
On what.
Really factored into that that comment and what you guys are seeing specifically in Europe .
Sure Joe I think.
I think it's pretty well known facts that.
The purchasing managers index RPM ice in manufacturing in Europe was recently fell to a number of 46.4, which is a 79 month low.
I think generally we are seeing.
Pretty under a confident.
Manufacturing environment broadly in Europe , right now, we we saw that.
And it's really kind of us after call European organization came back from sort of the Easter vacation time frame right right right right after.
The coal we had lost with you.
So I would say when we really noticed.
A lot of dropping to pulling back I would say on investment I think another thing that perhaps.
Mind if.
Crowded.
The view to that was I think in automotive.
We sort of saw Q4 of last year from memory will certainly the second half we didn't look very good it wasn't good last year in Europe .
And that was punched a bunch of that had to do with regulation right around emissions and some of the factors that they were dealing with which kind of held up demand.
In the end of last year, and then we saw that kind of break free and I think it may Q1 in Europe looks better than probably was on an underlying basis. So then we had to really try to recalibrate, where like really where are we as we came through into Q2, and we realized it was weaker than we were expecting.
And as I look around at other companies I see similar thing, particularly and in automotive I would point to.
The very large tier one automotive supplier Continental recently said they provide their view about the automotive industry. This year from being flat not their business, but the industry in total on a global basis, not flat, but down 5% and they provide that down at a similar time period.
I would say, we see that the other thing I think it's probably I know you. Many of you on the call cover many companies I'd say difference between Cognex and some of those companies is odd distributors don't really carry almost any inventory and that's kind of part of our supply chain model, we really like to work.
In a situation, where we tell our distributors will supply you quickly and we don't want you tying up your cash holding cognex inventory. So as a result, we have a pretty clear line of sight with what's going on in the marketplace.
So I think while other companies might be later to see that were on the kind of sell through of inventory may make may make cloud that in some ways anyway, though those my own views about what's going on in European manufacturing and automotive.
That's really helpful commentary and if I just could ask a follow on there.
I guess you as you think about the Capex cycles that you guys are tied to and how decisions are made.
You referenced project deferrals earlier, I guess, how do we think about the timing on when.
We could see an improvement in Capex as you were halfway through the year this year.
We'll budgeting decisions continue to be made this year or is this kind of more of like we'll get that further insight.
Fine on an improving.
Business condition as we had.
Really come towards the end of the year.
Well, that's a very good question [laughter].
What I'm sure I can answer all that well I'll give you my views, which are I think I don't think we're going to see improvement in the situation. This year right, although its possible right as they start to budget next year. There are going to be some factors that are going to change things I think one factor is this just.
Very significant momentum and investment around electric vehicles and.
A hybrid electric vehicles and autonomous features.
With very many new models plan to come to market in the next three five years and at some point I think there is going to be a race to get those products to market into gear up in automation. When does that begin I think is that is it is a critical question of course, we are seeing investment in lithium ion batteries and capacity in that space and that is a good market, it's growing well for us at the moment.
But I think we have to see more of those products.
Those new cars come into production and I think we'll have a better view of that probably as we exit the year.
Okay. Thank you.
Our next question comes from the line of Joe di Giordano of Cowen and company. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
Hi, Joe.
Rob You mentioned something I think you said.
In CE and auto something about changes in customer preferences and I. Just wanted you to clarify exactly what you meant there and related to that are you seeing any sort of noticeable shifts in in market share for what you guys do in markets that are impacted this much whether it be just market dynamics or trade or is that having any impact on who's supplying in now.
Well.
Yes, I was alluding to I think factors that we probably mentioned, but let me try to sort of wrap them up at the group I think so so I think and in automotive we have this back to where we are.
Globally companies are produced a lot of combustion engine cars and consumers really.
On a less interested in buying those and you see that particularly in markets like China right.
Capacity, particularly for foreign automotive companies is that no.
Is a fraction of that.
Of utilization, so say see those kind of trends going on which means that really.
No pun intended slamming on the brakes.
But then then you have that.
And yet and yet as I was.
Saying just just previously the.
The electric vehicle investments on already flowing through in automotive, yes, I think I think those changes we see coming in some of the government incentives and some of the trade sounds like that's going on is isn't helping that situation. Okay. So those those are those factors there I think in consumer electronics, what we see as we've seen waves of investment and we saw our major wave obviously in 2017 around overly detailed LNG and new sensors and many new products right now we're seeing overall sales of units slowdown but.
That will be more.
Features and technology coming and the most obvious example, there I think is fiveg.
Right.
I think I think there's a lot of virtual reality and other sensor technology that we can expect to see coming in future right and I think inevitably there will be also new form factors, you case technology, new new products targeting new.
Geographies and markets that have the potential to grow.
As an example markets like India, and Indonesia or end markets, such as that so I think all of those.
Give me give us.
Competence that we will see a return to investment in growth again, but none of that appears to be coming in the short term.
Are you seeing any evidence.
Material evidence of your customers and looking to retool outside of China, given whats going on whats happening there.
And starting to build out production bases and other in other parts of the world.
What I would I would say that that's been something that I think many many companies we work with particularly in consumer electronics have have have had under consideration or happiness activating on for quite a long time now certainly.
Some of the larger Korean manufacturers in the smartphone space and others.
Certainly have scaled up manufacturing I know producing lower.
Price point models and India as an example, so that's not new I'm, certainly hearing rhetoric around the ability to accelerate that and contract manufacturers say that they are able to pivot into that space. Beth I don't have anything specific to tell you.
Okay. Thanks.
Our next question comes on the line of Richard Eastman of Robert W. Baird and company. Please proceed with your question.
Yes, good afternoon.
Robert just.
Follow up on the last the kind of comments that you made there.
One of the things that we have been seeing is just.
Again in the smartphone market this movement of production.
Outside of China.
And you mentioned into yourself, and we've been kind of paying attention to that.
In a scenario like that have you seen your customers literally relying on capacity.
Subcontract capacity, that's already in place or why is is there not any demand.
Coming from that incremental capacity, that's being built.
Outside of China to accommodate movement I mean have you seen any indication of demand on your business I mean, it doesn't appear that way but.
Why why should we not or why would we not expect to see that.
I think.
Here's what I do see for a number of a number of companies we work with in the consumer electronics space.
Focusing on the India market, which is generally relying on that machine builders.
That they work within the existing capacity and in in China or in Asia to fulfill that demand tries to then scaling up and machine builders in India for instance that more.
Shipping product over and then also that in some cases moving lines.
And im commissioning and bringing them up on older models.
There so I think I think thats the overall strategy that the following.
And I think it's pretty small scale at the moment and I think it could it could be much bigger in future.
Okay, and then just somewhat related there is a lot of.
Puts and takes right now going on in the small display OLED display market.
There is.
Ironically, some tariff issues between Japan, and Korea, and some of the specific materials that go into small displays or even large.
But.
The Chinese are building out their capacity around.
OLED displays both small and large.
And Weve talked maybe for the last 18 months about cognex broadening its its exposure to in the CE Mark and I think one of those was all that.
But is he has continued to experience any of that demand I mean, just the shift in share.
And we count all of the OLED display manufacturers.
In Asia.
As as customers.
Right so and.
We we are seeing growth among.
Business that we're doing with Chinese OLED customers right, certainly I think you're right in thinking that those manufacturers are seeing.
Growth and investment.
And in many cases, we're supplying those companies through our machine builders in in countries, such as Korea, or Japan right. So that's that's why we're generally seeing that that business increase but to me it looks like at that as being incremental and there's still a lot of capacity.
That was built out in 17.
Among the big players and that still isn't being utilized.
I think I think we were expecting some major increased investments.
As soon as next year right and I think maybe that's a little optimistic now depending on what happens, but I do think at some point it is going to come.
Okay and a related question then im done. This this may be conscious three but although I think a two and a half but was was the reference you made earlier.
The automotive industry. I think you had explained are thought maybe coming out of the first quarter would be flattish for the full year.
And now with the incremental weakness that we've seen.
Are we thinking down mid single digits or down double digits now for auto for the year.
I think we're now thinking down around 10%.
Got you Okay very good. Thank you thanks for the extra question.
Yes, thanks, I am going to us the audience.
Participants to try to keep their on conversations I'm sorry, the question to one or two and I wasn't trying to win my question is were getting well into the hour and there's a lot of you want to ask questions.
Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley . Please proceed with your question.
Hi, Good evening, guys I'll try to keep it to seven questions or fewer.
Okay.
So I guess, just just first one more of a clarification than anything else Rob the.
It looks like a lot of the consumer electronics declined shows up in the third quarter, which is just more seasonality than anything else I think going back prior third quarters had the same phenomenon.
Any other big end markets that show up third or fourth quarter that we should be aware of that are kind of seasonally larger you mentioned logistics.
A little bigger in Twoq and Fourq, you is auto weighted to some.
Quarter in particular that we should keep in mind, we Don the decline or when that comp gets easier.
Yes so.
I think Q4.
Can benefit from larger logistics.
Seasonally lighter logistics, so I would anticipate that again this year and then Q4 can benefit from automotive and general kind of budget flush in the past that goes on but I'm really not anticipating that in the current environment Morris.
So I think and then sequentially from Q3, obviously Europe tends to be very slow in Q3, and then get back up to speed as they come back from vacations and make more investments in Q4. So there is a normal phenomenon that we see in our markets.
Got it Thats helpful. And then just kind of thinking back to the secular growth model here I know cycles get in the way and those are.
Shorter maybe medium term phenomenon, but when you talk about penetrating customers facility and having the kind of more content. There if they're not spending money. There is no ability to gain content, but when that turns on do you kind of catch up from where you were so maybe rephrase differently. You will have a couple of years of easy comps in consumer electronics and auto heading into.
Next year.
D. can you kind of.
Catch what you didn't get during that time period, because customers wanted to spend they just want.
Or is it just a question of the cycle comes back and we start from kind of a reset base that question makes sense.
Yes. It does I would say you know in the in my 11 years with the company I've seen.
Difficult market conditions turn around and and in times that can be very strong growth not predicting that here. Please I got to be wrong, but in 2009, we grew and going into 2010 by 65%.
We had other we had obviously 2017, where we so after some years of fluid.
I think 15 and 16, we grew 44% so does the kind of market, where you can see those kind of turns around.
And im not I'll, just say again I'm not predicting anything there im just saying that we see those kind of.
Things can change quite quickly and our markets and we want to be sure when those things happen that we have the capacity and the products.
To keep our momentum going this does slow situation. We have now is it's unusual as he said we've grown benign last nine consecutive years. So we're in a bit of a new space here and it's hard to know when that'll turn around and when will return to growth and what we do how quickly it will come.
Understood appreciate the color.
Our next question comes from the line of Jim Ricchiuti of Needham and company. Please proceed with your question.
Hi, Tim This is Mike Cecos on the line for Jim or shooting thanks for taking the questions.
First question was around the gross margins that were looking at for Q3.
I guess, a slight deterioration coming off of Q2 and I just wanted to get a better sense.
He then gross margin compression, we're looking at tied to revenue mix.
Coming from logistics more than the consumer or the auto piece or is it more just to reduce revenue base that you're looking for.
Yeah. So gross margin in Q3 is going to continue to be in our mid 70% target range, a little lower than Weve reported Tonight.
We did have the Q2 cents higher margin.
Revenue in the service area that hit the PML that won't repeat in Q3.
And then some of it can have to do with the mix mix of business right.
As well, which can kind of effect on gross margins, but.
I don't I don't think.
I don't think there is a tremendous amount of noise going on in our gross margin in Q3 relative to Q2 that you need to understand it's not that material.
Understood.
And then can you also help us better understand the reallocation of resources. When we're looking at your Opex is it a function of.
Investing more in some of these smaller businesses that that show potential for growth of the logistics business to help offset some of the larger markets, where you're experiencing weakness.
Or how are we thinking about those expenses.
So we have.
You know very talented engineers and sales noise that we we recruit and develop over time and they they are great assets seven times, when we see the market slowdown.
And rather than prevent them.
Our culture is very important to us and we're taking a long term view. So we're moving them, we tended to move them into areas, where we see longer term growth potential.
In one example would be.
We're relatively underpenetrated in the logistics market in China.
But clearly that say on launch on high potential market for us so well whistling seeing a slowdown in those areas were able to leverage those cognoids. We have moved some over would be one example.
And that also applies to areas like deep learning life science.
We see a lot of long term potential.
And the need for a for talent. So that's really what we're doing and at the same time as were doing that where we're being much more conservative about incremental spend that we're making in discretionary spend that we're making at this time.
Because obviously when the businesses and growing we want to try to keep them expenses relatively flat.
That's helpful. Thank you very much.
Our next question comes from the line of Matt Summerville of D.A. Davidson. Please proceed with your question.
Thanks, So it wasn't me what you talked about factory automation a bit more.
From a regional standpoint with respect to Europe in maybe Asia, but with PMI sort of decelerating industrial production decelerating arguably against pretty tough comparisons have you started to see factory automation in North America will start to rollover and is that an incremental concern for you going forward into 2020.
Right.
Yes, I think I think Kim.
The American the Americas region, and then I'd really in the United States I would say is is soft particularly in automotive.
Where investment plans continue to be delayed and.
Too much capacity in too many cars produced.
Certainly.
I would say, we as a company I think we understood that pretty early and we and we we kind of.
We we rightsize.
Our efforts and I think our guidance or our forecasting around the Americas market quite currently so I would say this is not really surprising us the other factor we have in the Americas as we have you know, it's our largest region for logistics and that's growing very very strongly right. So that certainly.
Helping to honor on a region by region basis makeup for.
The the slow areas in general factory automation that we.
That we see in the Americas.
So.
Overall, I think we would that's well that's what we're seeing.
Thank you.
Our next question comes from the line of Jairam Nathan of the Y asset management. Please proceed with your question.
Hi, Thanks for taking my question stylist Securities. So.
I just wanted to get some more color on operating expenses.
We saw.
Into Q, you had mentioned that some of the declines year on year came from.
From ERP.
A lesser listen expense on the ERP side, and just trying to and with respect to R&D.
At this rate it could be you could imply.
Your R&D expense might be flat to year over year.
So just wanted to try to understand how should we think about those.
For.
Rest of this year and next.
I would say I would say generally you know we don't give guidance around operate operating expense beyond what we've already told you on this I'll make a few general comments I think in operating expenses in Q2 were slightly lower than our expectations.
Given the environment, where as we talked about reallocating resources to higher growth areas.
And we continue to manage to manage expenses without disrupting any major products under development, our long term growth plans remain intact.
So you know.
And in the environment or in its gives us a good opportunity to focus on driving productivity.
We did make a major investment in implementing an ERP system last year and there is plenty of opportunity to improve our processes and we're doing a lot of work in that area, which I think will put us in a in good standing when the market comes back and we were able to grow without necessarily adding much capacity.
Okay, and then just as a follow up.
Just.
We have seen some of the mobile terminal kilometer does starting talking about an over inventory under distribution side.
Are you seeing.
A similar trend and actually ask you update us on the progress you have made in that in that field.
Yes, so we have.
Our our journey into the mobile terminal market is I think of it is similar to other markets that weve entered over the last 15 years, or so where we're leveraging our technology and strengths and.
Yes. It certainly it continues to be an area for growth for us the activity that we're seeing is encouraging animal while the business is still small and mobile terminals. We expect the revenue this year to grow substantially.
And.
So I think we're seeing that and.
Yeah, our customers broadening we've got some large well known company that are evaluating our product and particularly in areas of e-commerce and actually in that in airports.
At Airlines. So we're certainly seeing some innovators starting to use our technology and the growth results very strong on a percentage basis, a little off a very small base.
Okay. Thank you.
Okay.
Our next question comes from a lot of been roles of Saddle Road Research. Please proceed with your question.
Hi.
Hi, Christian for type has it gone Rob.
Question, you know just to clarify.
In terms of the European factory automation market.
Understanding your comments that one of the Differentiators with.
North America is in that market logistics is stronger is it fair to say that factory automation in Europe is more heavily tied.
To the automotive market then it is perhaps.
Some of the other verticals in your other geographies.
Well I mean, I think the European market is is that it.
It is.
Has a large automotive piece to it as does America and day.
Asia tends to be more on consumer electronics, right that would be a broad broad brush America is becoming less dependent on automotive as we broaden into logistics more quickly I would say, but overall automotive is is probably the biggest market for us in both America and.
And Europe has done.
Okay, and I'm I'm, just going to exercise a little discussion here on the call. We got about 10 minutes I think to the top of the hour and we have quite a lot of people in line. So Ben Chris would you mind, my being rude and limiting you'd only one question and moving onto the next call that I'm sure you know I only had one short one should go ahead and thanks, Rob. Thank you. Thanks, a lot better appreciate it. Thank you.
Our next question comes from the line of Paul Cox.
Yes. Thank you please get back in the queue, if anyone wants to sorry pull over to you.
Our next question comes on a lot of Paul Coster of JP Morgan. Please proceed with your question.
Thank you Hey, this is Paul Chung on for cost. So thanks for taking my question. So I'll just be.
Clearly breeze, so just on your Opex spend you know your.
Investing less in the business.
So what youre still generating pretty healthy cash flows should we expect.
No some kind of accelerated pace of buybacks or maybe a higher dividend or is that 60 million per quarter or the right kind of pace of buybacks. We should expect thank you.
Right.
So and so.
We announced on saying with the same dividend currently I'm, but I'm going to I'm just pass it over to our treasurer, Chris Stagno after that.
Hi, This is Chris Thanks for the question I think if you take a look at the at the buyback program.
130 million.
Excuse me available under the plan, we did about 104 million.
Repurchase during Q2.
In terms of future purchases I would expenses.
To continue to purchase the timing would be subject to market conditions potential uses of cash going forward.
Our next question comes from the line of Joe Giordano of Cowen and company. Please proceed with your question.
Hey, just one quick follow up for me.
Just the sequential cost guidance on the Opex.
It's basically you know it's kind of in line with last year's three Q., I think which was a huge revenue number. So just curious if you can talk us through how does that spending on like what is actually going towards changed since I mean, not just on a gross gross level of dollar still pretty high relative to the revenue.
Thanks.
Well I think our R&D investment is probably pretty consistent across those that those two periods and then certainly we view.
Added.
Considerably in terms of sales head count.
Particularly in Europe through that period so.
And in logistics, and so I think I think where were seeing that.
Certainly.
I don't know anybody want to add more color Laura no I would say, it's consistent with bridge and our M&A in our heads here what are you seeing the impacts of the personnel additions that we've added both St Engineering home sale, you know over the past year.
Thank you.
At this time, we have reached the end of the call I will now turn it back over to Dr. Shillman for closing remarks.
Yeah. Thanks, Thanks, a lot for.
For passing it back to me.
And how okay. Luckily the outlook is clearly not what we expected.
And despite the fact that we know that.
Automation and machine vision are key for for the future for making everything from chocolate chips to computer chips and those are real examples.
It's a it's a you know unsettling to see the slowdown that we're seeing now we're hoping for better times and not only hoping for it.
Management is working very hard looking at looking at as Rob mentioned reallocating to those growth areas and that's reasonably easy for us to do and also were looking at some very.
Exciting acquisition opportunities in the future.
Hi.
To add to our growth.
That's it from here I wish we had better news to report and I'm sure in the future we will.
Thanks, again for ROE paying attention to cognex and for participating in todays call.
Good night.
This concludes today's conference. Thank you for your participation.
You may disconnect. Your lines at this time have a wonderful rest of your eating.
Correct.