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Cognex Corp
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Greetings, and welcome to the Cognex First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, John Curran, Senior Vice President and Chief Financial Officer of Cognex. Please proceed.
Thank you, and good evening, everyone. I'm John Curran, Cognex's CFO, and I'd like to welcome you to our first quarter earnings conference call.
With me on today's call are Dr. Bob Shillman, Cognex's Chairman; and Rob Willett, Cognex's President and CEO. Please note that our earnings release and Form 10-Q are available on the Cognex website at www.cognex.com. Both contain detailed information about our financial results.
During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.
Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Things can change, however, and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings including our most-recent Form 10-K for a detailed list of these risk factors.
With that, I will now turn the call over to Dr. Bob.
Yes, thanks John. Hello, everyone and thank you all for joining us today.
As shown in today’s earnings release, we reported solid results for the first quarter of 2018 which are in line with our expectations. Despite a pullback that we've seen with respect to consumer electronics, our overall business remains strong following dramatic growth in 2017.
As those of you who have been on the call in the past know, I’m typically available for questions during the Q&A period after the formal presentation but unfortunately I need to attend a very important meeting and therefore I have to leave the call quite soon.
So I will now turn the call over to my partner Rob Willett, who will provide some key details of this quarter. Rob, take the microphone, it's yours.
Thank you Dr. Bob and good evening everyone.
This year Q1 revenue was $170 million squarely in the middle of our guidance and representing year-on-year growth of 22%. Operating expenses grew faster than revenue in Q1 and that was reflected in our operating margin. We expect that 2018 will follow our typical seasonal trend and that Q1 is our lowest revenue quarter and includes the highest level of expenses as a percentage of revenue.
In Q2, operating margin is expected to expand due to higher anticipated revenue and RD&E and SG&A will come down as a percentage of revenue. Overall, market conditions remain very good across virtually all geographic areas and industry verticals except for consumer electronics, our largest industry vertical.
A handful of large customers in OLED display and smartphone manufacturing appear to be investing less in automation this year after an exceptionally strong 2017. As such, we will face tough comparisons in the second half of this year.
Regarding our two fastest growing areas, revenue from logistics and 3D products continues to grow quickly. Combined they represented roughly 15% of our total business in Q1 up from less than 10% in Q1 of 2017. We expect both to be growth drivers for us over the long-term.
We are pleased to share with you an updated view of our served market. We now estimate the size of our served market to be $3.5 billion, which is 20% higher than our previous estimate first shared with you in September of 2016. Notably, this increase reflects up provisions for both logistics and 3D.
Since our last update 18 months ago, our understanding of these emerging areas has increased. Plus new technology introduced by Cognex enables us to address more applications in most sectors we have chosen to serve.
Overall we believe our served market will grow in the high single-digits in the coming years. We expect to continue to outperform market growth as a result of our superior technology and the strength of our customer relationship.
Together they provide the foundation for our long-term strategy which is to gain share and applications we currently serve and to expand into adjacent markets that we believe offer high growth potential and high margin opportunities for Cognex machine vision. You can see the updated market view on the Investor Relations section of our website at www.cognex.com/investor.
Turning now to new product development, we got a busy shop to the year launching two new products that broaden the applications we serve. Our new DataMan 470 series of high-performance barcode readers expand the opportunity for Cognex vision with customers in general manufacturing industries and logistics. With unmatched performance and a user-friendly interface, DataMan 470 sets a new industry standard for accurate, simultaneous reading of challenging 1D and 2D codes and multiple mixed symbologies even when they're closely spaced on high-speed production lines and conveyor systems.
We also launched the MX-1502 ER, a new extended range addition to our vision enabled mobile terminal product range capable of reading codes in quick succession from as near as 6 inches to as far away as 30 feet. With the MX-1502 ER manufacturing and warehouse applications requiring near far scanning are now also addressable with the MX product family.
I will now turn the call over to John for some financial details from the first quarter.
Thank you, Rob.
Let me start by reviewing the new revenue standard that took effect on January 1. As we mentioned on our Q4 call, the primary impact for Cognex is how we account for sales of certain accessories which we historically reported on a net basis and now report on a gross basis. This change has resulted in our revenue and cost of goods sold increasing by the same amount of. Our gross margin dollars have not changed while our gross margin percentage has decreased from historical rates by 100 to 200 basis points. Our Q1 earnings release and all our discussions today reflect the retroactive adoption of this new standard.
Turning now to Q1, here are the highlights; as mentioned Q1 revenue was on target at $170 million. Gross margin was 76% in line with our expectations and down one percentage point year-on-year. This decrease was mainly a result of a slightly higher proportion of service revenue related to large orders from logistics.
Operating expenses for Q1 were $95 million representing a 37% increase from Q1 of last year. Consistent with our strategy over the past year we added to our industry-leading team of engineers and made important progress with respect to product development. In fact, Cognex
continue to invest more in industrial machine vision than any competitor. We believe this will help us to sustain a technology leadership position in our served market for years to come.
Also we invested in sales resources to support and grow our business worldwide. We now have more than 1800 employees across the globe. While the rate of increase has slowed, we have added more than 100 new Cognoids since the start of the year.
Operating margin in Q1 was 20% down from 27% in Q1 of 2017. This decrease reflects the strong Q1 we reported a year ago and our continued investments in engineering and sales. Excluding discrete tax items, we reported earnings of $0.18 per share for both Q1 of 2018 and Q1 of 2017.
Looking at revenue year-on-year from a geographic perspective, overall market conditions were good globally apart from the consumer electronics industry. The Americas delivered the largest contribution to growth both in absolute dollars and in percentage terms and grew by nearly 40%. Growth was led by substantially higher revenue in the logistics market, as well as higher sales to customers in several other vertical industries.
Europe continued to perform well increasing by 30% over Q1 of 2017 with logistics, automotive and consumer products leading the way both within the high teens and constant currency. In Greater China, revenue grew by 20% year-on-year over a very strong quarter a year ago that included significant revenue from consumer electronics.
And finally, revenue from our other Asia region declined in the low teens from Q1 of 2017 which also featured strong revenue from the consumer electronics market in Korea.
Moving on to our stock buyback program, we repurchased 1.3 million shares in Q1. We plan to continue to buy back stock in Q2 subject to market conditions and other factors. In addition, tonight we announced a cash dividend of $0.045 payable this quarter.
Our balance sheet continues to be in great shape. We have sufficient capital to support our organic growth plans, M&A and for returning value to our investors through stock buybacks and dividends.
With that, I will now turn the call back to Rob.
Thank you, John.
Looking ahead we expect Q2 revenue to be between $200 million and $210 million which at the midpoint represents growth of 15% year-on-year. Regarding consumer electronics, slower trends compared to the unusual growth we experienced last year lead us to believe that revenue from that market segment will decline in 2018. As a result, Cognex's revenue for the next three quarters in total will be relatively flat with revenue over the same period in 2017.
Gross margin is expected to be in the mid-70% range. We expect operating expenses to be essentially flat on a sequential basis. Lastly, the effective tax rate is expected to be 15% excluding discrete tax items. In summary, despite softness in consumer electronics we had a good start to the year. Our overall business is solid and we are positioned well for both the near-term and the long-term.
We will now open the call to questions. Operator, please go ahead.
[Operator Instructions] Our first question is with Richard Eastman with Robert W. Baird. Please proceed with your question.
A couple of things, can I just ask about the automotive business in particular maybe what - how that looked year-over-year from a growth perspective. And then also is that - is the gain on the automotive side of the growth in the automotive side, is it coming out of the EV category or is it more traditional automotive?
As you know automotive is an important part of Cognex and we were pleased to see automotive deliver another strong quarter in Q1. We outperformed our expectation readily in all regions and we had a growth rate significantly above our expected 10% or so long-term growth rate.
So, automotive continues to look very strong. If you look by region, the Americas increased at the fastest rate of our major geographic regions. In China, automotive grew quicker than we would expect for the industry over the long-term and Europe provided the largest contribution in absolute dollars.
Moving to the other part of your question, I stated a number of things driving growth. Model changes towards SUVs and different form factors. The one you asked about electric and hybrid engines, and increasing electronic components and systems, you know are all driving growth for our industry.
And then just a follow up question would be around CE side of the business. Again trying to do the math on the second to the third and fourth quarters being flat revenue wise. Maybe would be suggestive that consumer electronics might be down something like 20%ish for the full year and I'm a little bit curious as to what your visibility might be on that.
Do you have kind of any backlog that maybe you know backstops that down 20% or just maybe what the visibility on the consumer electronics order magnitude decline would be.
Yes, I’ll start out then I'll invite John to talk about that percentage that you raised. Maybe as a little bit of context consumer electronics is our largest vertical and last year it represented roughly 40% of our business overall. It appears this year we’ll see lower investments from about half a dozen large customers in the OLED and smartphone manufacturing part of the business and these customers represent a significant portion of our electronics revenue last year.
In terms of your question around visibility, in consumer electronics we typically have nine to 12 months visibility into the projects that large customers would like to implement with us. So this visibility is substantially more limited as to when we’re actually going to receive the orders in which quarter they fall into. But I would say at this point we’re starting to get clarity on the year overall so we have that visibility. Now as to the sort of magnitude of the decline, John you want to comment.
I don’t think we will come back with kind of a hard percentage but I would say directionally that's in the ballpark.
And so what falls out of that a little bit is around automotive. So the other big piece of the total revenue. And so again this automotive track out that is slightly lower growth rate than what we seen here in the first quarter, I don’t know you have the same visibility?
We don't generally give full year guidance at all and certainly not by industry. But I would say Rick I would encourage you to think about high growth verticals that we discussed of course particularly logistics which is seeing very strong growth. So that certainly covering for some of the decline that we’re seeing in consumer electronics.
Our next question is with Joe Giordano with Cowen and Company. Please proceed with your question.
So just starting on consumer electronics, I know a lot of this is just math obviously after an explosive year last year. So are you seeing anything that you consider slight structural changes into that market given if we’re in a slower demand for the devices, like are you seeing changes in investment or more lines being turned over quickly where you can kind of use some of the same equipment, are you seeing any that kind of activity?
I would say overall not, I think the structure of the industry hasn't changed, but what has changed are the number of new products and features planned for introduction. And then certainly among our customers helping and implementing the manufacture of displays particularly our OLED displays there has been a slowdown in terms of capital investment. So the timing that we might have expected to come quickly we now see coming later.
But I don’t think that diminishes our overall optimism about consumer electronics or the business we can do in smartphones and in displays with the major players. And unfortunately just means that this is a slower year after last year being such a phenomenal year.
So you would still categorize that business as being capable on average to be at or above your longer-term 20% topline growth estimate right for the full company?
Yes, I would.
In regards of like OpEx, I know you’re not going to give further than 2Q, but with the spending levels there - are they able to flex down or are you comfortable with them where they are kind of as a run rate broadly speaking like a - or is that something that we should expect kind of move more in line with the directionality of revenue?
Well, I think as I mentioned in my comments we typically see lower revenue and relatively high expenses as a percentage of revenue in Q1. So - and I also said you know I expect expenses to be roughly flat sequentially in Q2.
So that's kind of one thing to keep in mind. I think another thing to keep in mind is that we’re really running the business for the long-term. So we're implementing product roadmaps that are three years in duration regularly and are based on large long-term growth opportunities that we see.
So we wouldn't be - we don't see any reason at the moment to be killing those or changing those substantially and we’re playing a long-term gain in that respect. Now certainly, RD&E is substantial part and we spend between 10% and 15% of annual revenue on that. It was higher in the first quarter really as a function of revenue and in recent years it's been on the high end of that range, last year I think it was around 13% overall.
So you know that's obviously something that over the long run we’re managing to within those ranges, but this is not a company that's going to be addressing - cutting long-term programs just around a quarter's operating margin.
Yes, certainly not. Maybe last from me, you guys came in right at the midpoint of your guidance for the quarter, but was there anything I mean generally that's probably internal conversations you’re probably a little upset like you said in early on. Did anything not come through that you were expecting or is it just consumer electronics deteriorating more than you maybe initially thought, was there anything else you would point to that was a little surprising in the quarter?
No, I wouldn’t say so I mean you’re coming up to the end of the quarter there can be timing of certain pieces of business that can tend to shift out particularly among larger customers of ours which can be in consumer electronics and logistics, but nothing especially notable.
Our next question is with Bobby Burleson with Canaccord. Please proceed with your question.
Just curious for gross margins this year with consumer electronics declining any implications there for how we should think about the product mix and any implications for gross margins this year?
Again we don't give guidance for the full year. So what I would say is that everything does change, our gross margin target is in the mid-70% range. Movement can be the result of a number of factors including the percentage of revenue from products versus services, volume and pricing for high volume customers. So, there is a few kind of moving parts in checks and balances there obviously when customers buy less pay higher prices in general right.
And then in certain industries where we're getting established or we have very large very technically challenging customers, I know that would apply for consumer electronics, would also apply to logistics we tend to have a higher percentage of service revenue.
So I think we can expect less of that going forward in consumer electronics in light of the decline of the revenue we see that and partly offset by some growth of that in logistics.
But overall I don't see any significant change to what you've seen from us in the past. Obviously bracketed by the caveat of the new revenue recognition roles that John explained, so on a constant basis much the same.
And then in terms of the addressable markets, you’re taking up that total that TAM that you guys addressed, a lot of that it sounds like came from 3D and from logistics just wondering which one of those was the big contributor to you updating that view?
Well if I look back, our logistics market we’ve taken up by $150 million, but I should point out to you that 50 million of that is the moving in of airport baggage handling which we use to report separately and now it's such a similar business to logistics we've decided to put it there. So net really I guess it would be more $100 million up and 3D actually is done up double from 200 to 400.
So the answer to your question is 3D is where we see the biggest expansion of our served market. And that's a function of our understanding the market better, seeing over the size of the opportunities and being a much more of a competitor now in that space we really see and we are very enthusiastic about the opportunities. But also we've acquired businesses and we’ve launched products to take us into segment to the market we weren’t in before notably profiling which is simpler application just admitting a line.
And then snapshot sensing which is really taking a picture rather than of a static object in very high definition and that’s a market that I think is seeing exceptional growth and has exceptional growth outlook. On two acquisitions we made in the last couple years EnShape and Chiaro Technologies really position us very well in that market where we really weren’t a player before.
And just for clarification that market growth or the outlook for your service available market growth in the high single digits if you guys growing faster that includes consumer electronics?
Yes it’s a long-term look so it’s over a three-year period is how we would think about that that's what we think the market will do over the long-term and I think with everything that we serve consumer electronics, logistics et cetera. Thank you.
Our next question is with Karen Lau with Deutsche Bank. Please proceed with your question.
Just want to take a little bit deeper into CE. Rob your confidence or your imply or embedded outlook for CE. Is that lock and loaded according to customers project pipeline or are there still going to be movements can customer still no change their mind in the next few months how I guess firm is that outlook at this point?
Karen I’d say it’s a pretty sensible measured look based on all the data that we have but what we do know about this market is things technologies can come through or not and timing of launches of products you know can happen or not so it's not without variability. But I think we feel pretty solid about the way we sized it now for Cognex for the rest of the year.
And then I just want to take a little bit deeper on your comments of longer-term outlook for CE in the context of the 20% growth. You mentioned you still expect that to be additive to the 20% I'm just curious as where is that growth coming from I'm asking because the smartphone categories obviously the biggest within CE and that category.
I mean like with sales of devices are maturing so if you're going like a 20% plus on average per year where is that growth coming from is that do you see just ongoing need for automation or is it just based on the pipeline of products beyond smartphone that you are seeing that customer will invest over the longer term like can you maybe give us a bit more color to that CE longer-term outlook?
So I think there are many ways in which Cognex can and is expected to grow our business in consumer electronics over the coming three years or so. So certainly the smartphone functionality with the addition of more technology such as we've seen in recent years certainly there are product roadmaps to support that that we talked to a number of our customers about which would suggest to us to develop more they want to do with them in products in terms of technology and features that will be manufacturing intensive.
So if you look back certainly you can see that’s happened and for us that drives a lot of growth potential. Second thing is we have different share with different smartphone manufacturers that's been the case for Cognex since the birth of the mobile phone we had huge share with Nokia. If you go way back and we have large share with another large player that we don’t mention by name. Now and there is plenty of room for other growth with among other players for us in future.
Then the third area I would say that seems I think we think that Cognex has a long way to run still is the big investments that we saw last year beginning in displays around AMOLED and OLED displays which although capacity may have got out ahead of the technology a bit the market's ability to absorb this year we still think that technology is still early in the cycle in terms of what it offers. And even also with what it offers of course outside of smartphones in markets like automotive or even buildings.
So we’re still optimistic about that and then we’re also optimistic about the new technologies that we're bringing to market to address those areas. So whether it's in the area of 3-D, whether it’s in deep learning for instance, whether it's in other developments that we have in terms of our own even performance. We certainly see lots of opportunity for us to be bringing new features and new manufacturing benefits to customers in that space.
So we remain committed and optimistic about the space and undeterred by what we think will be a down cycle among those customers this year offsetting a very high up cycle last year.
And then just one more from me, it looks like you managed to contain your OpEx to be flat sequentially despite slightly higher sales sequentially. If I backed into your full year or rest of the year comment it looks like there could still be a slight ramp in revenues from 2Q to 3Q. I think in the past you tend to have OpEx associated with projects so there will be a sequential increase in OpEx from to 2Q to 3Q. Is that still the kind of right assumption or do you expect to be able to contain OpEx kind of flat sequentially into the second half as well.
We don’t generally think if Cognex is containing OpEx. We think about investing smart for the long-term growth of the business and in general we don't give outlook on OpEx for beyond the current quarter. But I would say general your assumptions are probably pretty good and that we wouldn’t expect to see a significant increase based on history for Cognex between Q2 and Q3 that tends to be the normal pattern and I wouldn’t see that changing this year.
Our next question is with Jairam Nathan with Daiwa Asset Management. Please proceed with your question.
Firstly I just wanted to understand if yeah the competitive structure or competitive dynamics in the market you're seeing quite a few maybe not a vision companies maybe not directly compete with Cognex, but have you seen an increase and given the market size growing have you seen any additional competition and how do you make sure you don't lose share?
I would say we do not see a change in the general industry dynamics in our market and you we’re not I think I hope the impression that I've given you is that we've been gaining share and we expect to continue to gain share based on the quality an investment we make in technology and our leadership position and the customer relationships and reputation that we have.
So, I certainly see ourselves as gaining share. There is one very strong competitor that we compete with the Japanese company KEYENCE and with the competitive dynamic with them. I would say it continues similarly to what we've seen over the past I would say their field is still quite crowded in terms of having other competitors in the space, but those competitors are underperforming the market leaders in that respect and I think I see that continuing.
We keep a very careful eye on new entrants into the market there are couple Chinese players that are getting a lot of press, we watch them very carefully, but we don't see them currently making much impact from our sales or share point of view in the market.
And just finally with regard to logistics it look - it seems like - again there is competition from legacy of companies that are present there like Honeywell. And they seem to be coming out with mobile products and all that so and it seems to have kind of when you look at that addressable market I was thinking logistic will come above much bigger piece. So what's the dynamics there and does the addressable market seems low compared to the to the opportunity?
So I think I’m going to start from fundamentals so when we talk about logistics we’re really talking for Cognex that is the majority of the business today in line reading of barcode. So and then and that can be products moving down a production line or in a warehouse that are moving past fixed amount readers of barcodes. And in that space we don’t really compete at all with the company that you named although there are other more long-term serving player in that space.
And then we also have handheld readers that we thought and we specialize sort of in very high performing barcode reading using vision technology. So that's kind of our play that market is growing quickly for us so we've been growing at a rate of 50% plus annually and we’re seeing very, very strong performance and we’re broadening what we do in that market to include other things still very small in terms of revenue today, but exciting vision.
So applying vision applications to do other things looking at the integrity of packages, the identity of packages, moving down production line and then also even doing other applications such as dimensioning and 3-D type applications and also in future potentially robot been picking. So to replace people working in warehouses with automation and robotics so those are opportunities.
Now I got the sense from your question that possible you're thinking about our mobile terminal business because that’s the company you named is a strong player one or two very strong players in the market. We call mobile terminals and if you take a look at our market map that’s the gray area off to the very far right called mobile terminals which is we size as a $500 million served opportunity for us where our sales today are negligible.
But we expect to see significant growth and are investing in the products I talked about we launched the 1502 ER helps to round out our product range in that space. So we now have a very full product range from all smartphone enabled, basic reading of barcodes on basically a ruggedized and optics improved smartphone to ruggedized terminal, to very high end, high-performance all of which use vision technology to improve the performance of warehouse and logistics operations, but today that's not a big part of our business.
Our next question is with Ethan Potasnick with Needham & Company. Please proceed with your question.
This is Ethan Potasnick filling in Jim Ricchiuti. I was wondering - so it sounds like the company made some significant additions to its sales force this past quarter, as well as in the second half of last year. Can you comment on whether you are seeing reasonable levels of productivity from these new hires or is this something you would anticipate and more of the back half of the year. And then could you remind us which verticals and geographies kind of the bulk of the sales force additions are targeting?
So Cognex has been investing significantly in our sales force over the last year and that investment is gone on into the first quarter. And these are factory automation field based salespeople the majority of them. And they are out calling on factories and to some degree logistics warehouse opportunities right. We’re hiring we’ve been hiring and training large quantities of them and they’re coming up to speed, but in general I think they're doing well in terms of development of their productivity.
And I think that's reflected in the strong growth rate that we’re seeing in the base business when we strip out consumer electronics. So I think the 22% growth we reported in Q1 would be higher if we netted out the impact of consumer electronics.
And certainly we’re able to achieve that base on the increases we've made in our sales force, but I think your question is a good one and I think there's opportunity to increase productivity and we’re doing that with training, with developments and also with better tools, better management and IT tools So we can improve their time and territory management and hit rate when they’re in front of customers.
And then can you share any details or tell us how active your M&A pipeline is currently?
So our M&A pipeline is always active we have as John mentioned significant cash war chest to deploy, when we see acquisition opportunities. And it's not really like we’re putting the foot on the gas or taking it off. We’ve got it on the gas all the time, but we’re very selective.
So when we see opportunities, when we see markets we really like we look at the actionability of targets within those markets. And then we really need to make sure that they are companies that offer great technology, great engineers, strong growth rates, good cultural fit.
So when we find those and we can reach a deal we move on them we have companies we’re working on currently like we always do and it's a question of whether they can come to fruition or not based on what the seller feels and what we discovered through the process with them.
Our next question is with Ben Rose with Battle Road Research. Please proceed with your question.
To start off Rob could you speak to the expected pace of new product introductions throughout the course of 2018. I know you mentioned the DataMan in MX in the first quarter, but are there others that you can discuss or there are areas as we get into the rest of the year?
Well Ben thank you for the question. So generally we don't talk about new products coming to market, but we spent almost $100 million on R&D last year. We got phenomenal engineers, great pipeline and we made some great acquisitions about a little more than a year ago. So I think you can expect you know a very full and pretty exciting sort of pipeline coming to market over the next 12 months or so.
And as a follow up a little different twist on the M&A question over the last year most of the acquisitions and in fact I think all have been with sort of smaller companies, development stage companies and so forth. Is it fair to say that some of the things that are on your list of potential acquisitions might be larger in size in terms of revenue generation and so forth?
So I think you're right that we bought companies that are small have great engineering teams and really fits very well into what we're trying to do at Cognex. And that’s deliberate because we really like the way that they fit into our culture which as you know is phenomenally important to us at Cognex.
And I would say in all the cases those acquisitions we’ve made have gone very well, people are well integrated, they’re real Cognoids at this point and they’re happy and productive. So that works well for us and those are the acquisitions we most like to do.
However, you entered at the shopping list certainly there are companies they were targets on our shopping lists have been for a long time that we would very much like to acquire that would require much larger investment, but are not actionable and not through our lack of asking.
So that certainly the way things are - I've no idea if and when those companies would break loose, but again there are companies who have exceptional quality with great technology. They are not bolt-on revenue for the sake of bolt-on revenue which is something we don't intend to do.
And if I may just one for John quickly could you give us an update on the SAP rollout and whether it's going according to your expectations?
The project is going well we are on track and we expect to light this candle next quarter.
Our next question is with Joe Ritchie with Goldman Sachs. Please proceed with your question.
So maybe thinking about like the cost structure for a second you know I know Rob you said that you wouldn’t stop investing in long-term program and fully understand why. But I guess what is if we were in scenario where growth started to slow it wasn’t just maybe through the bad part of this year but let’s say growth was a little slower next year how should we think about how you guys will flex your cost structure in that t type of environment?
So I think we've demonstrated over the history of Cognex so we’re very capable of managing costs over the long-term certainly if you look at what we did in the downturn in 2008/2009 we were able to take a lot of cost out. We have our own way of doing that which is we feel very strongly we don't want to damage the culture of the business.
Those are the quality of life here and the excitement of what we're working on can we did something we would guard at all costs. But certainly we can limit the number of engineering programs and we can limit the number of sales heads that we choose to add under scenarios like that.
And of course we can grow more slowly those line items which really is a matter of prioritizing certain projects over others and not pursuing them. So I think there is plenty of capability to do that where we to see the longer-term prospects for growth slowing down, but I think when you really think about the technology and the business wherein the application of machine vision to automation and artificial intelligence and some of the things we've been investing in. I don't think that scenario is very likely currently, but as seasoned managers we’re always ready for those event should they happen.
And maybe if I was just talking - if we talk a little bit more just about CE in your prepared comments you talked about both OLED and smartphone demands really being the cause of the back half weighted call it flat revenues for the rest of the year. Maybe can you tell us a little bit about OLED specifically what your customers are saying about inventory levels the extent you have that kind of information. And then could you possibly size what OLED was to your revenue base in 2017?
Let me ask for clarification, Joe when you say inventory levels are you referring to inventory levels of machine vision perhaps or you meaning their inventories of OLED you know material?
Yes, more the latter and whether that influences CapEx decisions for the former?
Yes, so I’m not authority on that subject but what I would observe among those customers is its more I think it’s more driven on future expected demand from their customers than it is on any level of inventory. So I think it’s the how much capacity do they have how utilized is that capacity. What they want to do with it and I think in cycles where there is too much capacity as we may have seen potentially built out among a number of our customers last year and their OEMs who were supplying equipment into that.
What they’re been seeing is a slowdown of new capital and new lines being deployed, but still opportunity for Cognex to improve the functionality of their lines and as I visit those customers as I have in the first quarter sometimes I observed they’re still a lot of manual stuff going on manual inspection, which is when you consider often this is a clean environment, super clean environment is very costly to have a human interaction there.
So certainly there’re still plenty of opportunity for Cognex, but we’re definitely not going to see the new capital line build out for higher volume. I'm going on and I think the other thing we’re probably seeing is the LED market some of the improvements that are going on in that space its making some of that technology perhaps a little more competitive particularly of course on cost basis and a performance basis.
So we’re seeing some business with customers in that space looking a little brighter, but the actual dollars spent for those kind of technologies is much lower and the process is much less sophisticated than with OLED companies.
That makes sense. And then just in terms of quantifying the revenue base last year?
I’m not sure that something we’re going to be doing probably no.
Our next question is with Paul Coster with JPMorgan. Please proceed with your question.
This is Paul Chung on for Coster. Thanks for taking my questions. Just to follow up on your regional breakout of revenues, it seems like you're gaining share in Europe and the Americas with growth rates above your main competitor, though it kind of seems light in Greater China and other Asian segments.
So are you seeing increasing competition in the Asian markets? I know you mentioned some Chinese competitors entering the mix, so anything you can mention there would be helpful. Thank you.
I think we're seeing broad-based growth across our business. And what's really distorting that, as you try to look through the regional growth rate is, is the consumer electronics picture. So one of our region we're seeing very strong growth overall is the other Asia space, which includes Korea, ASEAN, India and Japan. And the base business there is growing very well, but you wouldn't see a significant reported decline, and it's very much driven by this consumer electronics dynamic that we're talking about.
Elsewhere, we saw a very strong growth in America in the first quarter, and that's probably due to the investments we've made there in our sales force over the last few years, the competitive technology as well as pretty good macro effect going on in the market, in general, with the tax cuts and incentives displaying capital and automotive investments going on.
So I'd say that's driving that. Europe, similar but less so, I guess, I would say to those other markets. My own view is we're holding or gaining share in all those markets if you exclude consumer electronics. We've had bigger exposure, really due to the very sophisticated and intimate relationships we've had with five or so, half a dozen or so really sophisticated players that drove a lot of growth last year that we're going to see less of this year.
But I would say on that, I think our listeners will be interested is, I don't see us losing account share at any of those businesses. So I really view this as a market phenomenon. It's not like we're suddenly on the out at any of these places. And I think those companies view our willingness to stay with them to keep investing into their longer-term plans as key and one of the benefits we have to offer where perhaps some of our financially or less well-managed competitors might not be willing to stay the course.
So I'm not deterred by that at all, although obviously the growth in the back three quarters of this year is not what we wish it was as a result.
Our next question is with Joe Giordano with Cowen & Company. Please proceed with your question.
Thanks for the follow-up. When you go to like tradeshows and things on the vision space, did you see a lot of these pop-ups that are entering some big, some larger, some smaller, but generally in the applications that don't have onboard intelligence and need the third-party software to run them. So like what we need to happen for those types of products or applications to like compete in more force versus what Cognex and KEYENCE are able to supply or why won’t that happen long-term like what's the defense mechanism against those kind of competitors?
I would say in general our industry is in a situation - it's been a dynamic where more technology is driving more growth, you know particularly at the high-end of the market where there is so much that advance manufacturers want to do with machine vision technology, and so much cost that exists whether it's around quality or labor or even the ability to make the things they want to make but that's where we see huge growth.
Inevitably our business is kind of growing in those applications. And then we shared kind of lower value applications as they get less important or less kind of cutting edge over time. And then I would say other customers - other companies at the low end of the market are adding intelligence onto their businesses over time.
So I think that's the dynamic we see. I could speak to something specific if you have that in mind, but I would say overall that’s what we see.
Our next question is with Karen Lau of Deutsche Bank. Please proceed with your question.
Thanks for taking my follow-up. I was just wondering if you can comment on any impact on sanctions and tariffs, I know you don’t supply much to you like telco equipment where some of those guys make smartphone as well. So, I was wondering if you see any impact and also on the tariffs front, I know you have some contract manufacturing from Asia. So do you expect any impact to the extent that maybe you're buying components from China?
We're not expecting any real impact from tariffs on our business. Majority of our activity in Asia is sourced out of our plants in Europe, our plant in Ireland. And our inbound supply chain is not heavily exposed to China.
And then the sanctions piece where some of the telco equipment players that also make smartphones, looks like any impact there?
No, we don’t expect any impact on that front.
Our next question is with Richard Eastman with Robert W. Baird. Please proceed with your question.
I will go really quickly thank you again. Just a quick question John, when you talk about OpEx being flat sequentially is it anticipated in that guide that options expense declines. Does R&D, SG&A we have more headcount, our sales will be up so commissions I presume would be up. And I'm interpreting the sequential to million dollars, so is the offset there that options expense declines from Q1 to Q2?
There is some pickup on option expense from Q1 to Q2, a reduction in expense from Q1 to Q2.
And then very quickly Rob in the OLED markets, as that business unfolded for you last year and was very good. Presumably your traction early in the year was in the Korean market. I'm curious towards the back half of the year, did you have any success penetrating the Chinese market for OLED manufacturing as it was built out through last year, just kind of a share battle between the Koreans and the Chinese on the OLED capacity but I am curious if the exposure - your exposure today Cognex exposure includes the Chinese manufacturers?
Yes, so Rick certainly as you can see I think if you peel that part we did have very significant success with the Korean player in that space. But in addition we had success with Japanese machine builders who are building OEM equipment that are being used and also some penetration of Chinese players as well less significant but we think we’re well positioned with all of those players.
Our next question is with Bobby Eubank with Chevy Chase Trust. Please proceed with your question.
Rob can you talk about healthcare and some of the x logistics in 3D markets, consumer, products and food products. Those markets are little bit smaller for you but can you maybe paint the opportunity in those markets longer-term? Thanks.
And so I think it’s a fair statement to say about Cognex so we talk about big markets. We talk about automotive, consumer electronics, logistics, semiconductor and those are really very sophisticated users of our technology. But what's going on over time also is our technologies becoming less expensive, easier to use, and integrate and program and hence being adopted by a lot more industries.
And that's a nice dynamic that we have going on. It's part of what is driving the kind of growth rates that you see and that we reported today in Q1 despite the downturn in consumer electronics. So, as I look - if I look across our markets in the first quarter and I look year-on-year we’re seeing growth rates in excess - well in excess of 20% in markets including consumer products, including life sciences, medical devices, things like product security.
So these are kind of I would say smaller and newer adopters of machine vision but are really seeing a lot of growth for us. So that’s another reason why we really have needed to have been successful in expanding our sales force so we can cool on those customers.
And John if you could quickly just mention the buyback stepped into it Q1 a little higher than you’ve been running and I just given the share price decline seems like you’re still very optimistic about the long-term opportunity in the market putting some cash to work with the buyback. Thanks and have a great week.
Yes, we were active in the market in Q1, bought back just under 1.3 million shares or about $6 million to $9 million. We still have got $126 million available to us to continue our buyback and we do expect to be in the market in Q2.
We have reached the end of the call. And I would like to turn the call back over to Rob Willett for closing remarks.
Thank you. And thank you for joining us this evening. We look forward to speaking with you next quarter. Good night.
This concludes tonight teleconference. You may disconnect your lines at this time. Thank you for your participation.