Cognex's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Cognex Corporation (CGNX)

Cognex Corporation (NASDAQ:CGNX)

Q4 2013 Earnings Conference Call

February 13, 2014, 05:00 PM ET

Executives

Richard Morin - Executive Vice President, Finance and Administration and Chief Financial Officer

Robert Shillman - Chairman

Robert Willett - President and Chief Executive Officer

Analysts

Jim Ricchiuti - Needham & Company

Ben Rose - Battle Road Research

Richard Eastman - Robert W. Baird

Shawn Lockman - Piper Jaffray

Holden Lewis - BB&T

Grace Lee - CLSA

Operator

Good day, ladies and gentlemen, and welcome to the Cognex fourth quarter 2013 earnings call. (Operator Instructions) And now, I would like to turn it over to your host, CFO, Dick Morin. Please go ahead, sir.

Richard Morin

Thank you, and good evening, everyone. Earlier tonight, we issued a news release announcing Cognex's earnings for the fourth quarter of 2013, and we also filed our Annual Report on Form 10-K. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results.

During tonight's 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. For your reference, you can see the company's income statement as reported under GAAP in Exhibit 1 of the earnings release and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit 2.

I'd like to emphasize that 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 often change 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.

Now, I'll turn the call over to Cognex's Chairman, Dr. Bob Shillman.

Robert Shillman

Thanks, Dick, and hello, everyone. I'd like to welcome each of you to our yearend conference call for 2013. As you can see in the news release issued earlier, we reported outstanding financial results for the fourth quarter and for the year.

Right now, I am in San Diego, everyone else is suffering the weather in our Natick headquarters, but even with that distance, through the miracle of modern science, I can still hand the microphone over to my partner, Cognex's CEO, Rob Willett. But before I do that, I want to spend some time telling you about a recent decision that we made, about what we'll be talking about or more accurately, what we won't be talking about in this call and in future conference calls and investor presentations.

Those of you who have followed us for many years, know that Cognex has always prided itself on being a very open company. We have always provided our investors and analysts and shareholders, a great amount of detail about our business.

We openly discussed our plans for new products and for the expansion of our sales teams around the world. We told you our plans to increase headcount in engineering and in sales, and we described the new markets that we plan to enter. And I know that many of you found that detailed information to be helpful.

However, unfortunately, our competitors also found it helpful. In the past, Cognex focused on relatively small market niches and had very few competitors in them. And all of those competitors were small and thinly financed. So disclosing details of our business to you didn't have any risk, even if they were listening.

But now, we are addressing very large markets with breakthrough technology, where we have significant entrenched international competitors, who are defending their turf with older products. The business plans that we've been providing to you are battle plans for them. We will continue to hold conference calls and attend investor presentations to talk about our successes and the challenges that we face, but we won't go into nearly as much detail, as we have in the past.

Following our prepared remarks today, I am sure that you'll still ask those detailed questions, but I hope that you'll now understand why we won't be giving detailed answers.

With that, I'll now hand the microphone over to my partner Rob Willett. Rob, the microphone is yours.

Robert Willett

Thank you, Dr. Bob. Good evening, everyone. Earlier tonight, Cognex reported its fourth consecutive year of record revenue. Revenue for 2013 was $354 million, which represented an increase of 9% over 2012. This growth came from the factory automation market where revenue increased 16% year-on-year to set a new annual record in absolute dollars.

We did invest in new product developments and sales initiatives to drive growth in this market, and we were pleased to see those efforts deliver for us as the year progressed. In the second half, factory automation revenue growth picked up, growing 23% year-on-year.

From a product standpoint, our leading performer was ID products, with growth in excess of 30% for the year. From an industry perspective, consumer electronics and automotive, both early adopters of vision on the factory floor were important contributors to growth in 2013.

We also saw good momentum in verticals that are newer uses of machine vision, such as logistics, consumer products and medical devices. Every geographic region contributed to the record annual revenue that we've reported tonight, with the exception of Japan, where we saw a moderate growth, but it was obscured by currency exchange rates.

Gross margin was strong at 76% for the year, a 100 basis point increase over 2012. This came from a number of factors, including a higher percentage of revenue from factory automation, the most profitable part of our business, higher unit volume and cost reduction through purchasing improvements.

We were highly profitable in 2013, even with our investments in engineering and sales. We've reported an operating margin of 24% and a net margin to 21%, which excluding stock option expense was 23%.

The year ended on a strong note, with record revenue reported for the fourth quarter and at the high-end of our expected range. In addition, reported earnings were $0.23 per share for Q4, which was $0.01 above the Thomson Reuters first call consensus estimate.

Let's turn now to the details of the quarter. In factory automation, revenue was a record $79.8 million in the fourth quarter and accounted for 83% of total revenue. This level is an increase of 28% year-on-year and 11% higher than the prior records, at just last quarter.

Looking at factory automation from a geographic perspective. Our best performing region was the Americas, where we reported record revenue in Q4. The Americas was our fastest growing region both year-on-year and sequentially and the largest contributor in absolute dollars to factory automation growth. We saw particularly strong performance in consumer products, automotive and ID.

Factory automation revenue from Europe also set a new quarterly record in Q4, helped by the favorable impact of foreign exchange rate. It was second quarter in a row, where factory automation revenue from Europe grew both year-on-year and sequentially. This maybe an indication that our prospects in Europe are improving after a period of slower growth.

In Asia, excluding Japan, fourth quarter revenue increased substantially year-on-year due to our strong execution, particularly in China. As expected, revenue declined from Q3 to Q4, due to what we have found to be the seasonal nature of consumer electronics demand in China. We typically see higher revenue in the second and third quarters, as manufacturers set up production for holiday shopping.

Factory automation revenue from Japan increased on a sequential basis in Q4. While the weaker yen negatively reported revenue from Japan throughout the year, we were pleased to see improvement in the underlying business from that region. Revenue from the semiconductor and electronics capital equipment market, or SEMI as we call it, was $5.2 million in the fourth quarter. That level represents a decrease of 6% year-on-year and 9% from the prior quarter.

In the service inspection market, fourth quarter revenue was $10.7 million. That level was below our expectations, because we deferred revenue related to a new software release. Our surface inspection products are large sophisticated systems, where the final testing of new functionality must be performed at customer sites. That timing issue aside, surface inspection ended 2013 with annual bookings growth and we continue to do well in this market.

Turning next to operating activities. We made significant investments in our business during 2013 to enable growth in the years to come. We invested in our long-term product portfolio, spending more on RD&E than in any year in our history. RD&E was $48 million in 2013, an increase of $6.5 million or 16% over 2012.

This will result in new product launches, which will drive our growth in 2014 and the years to come. In addition, in the sales area, we significantly broadened our market reach during 2013, both in terms of adding resources and partners and in the development of our sales force.

In summary, we had a very successful year in 2013. We reported record financial results. We introduced innovative new products, which we believe further strengthened our leadership position. We expanded the sales force to sell those products and we have an exciting line up of product launches scheduled for 2014 and beyond.

In regard to guidance for Q1, we expect that revenue will be in the range of $88 million to $91 million. This is a decrease from the record revenue reported tonight for Q4, which is typical, given the normal decline that we see from Q4 to Q1. Operating expenses are expected to be relatively flat on a sequential basis. The effective tax rate, excluding discrete tax items, is expected to be 19%.

Now, let's open the call us for your question. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

Can you give us the revenues for the ID products business?

Robert Willett

I think we've decided not to share that data anymore. I think we did tell that our growth for the year was over 30% and the ID products continue to do well. But there are reported as part of FA overall.

Jim Ricchiuti - Needham & Company

Any chance, Rob, of giving us the year-over-year increase in Q4, in that part of the business without giving the dollar amount?

Robert Willett

I think we're just going to say, it was more than 30%.

Jim Ricchiuti - Needham & Company

Can you talk a little bit about of the factory automation business in China. You alluded to the fact that you're seeing seasonality in that business. I think you have more experience in it. In Q4 versus Q3, how is it year-over-year? And what are you seeing thus far in Q1, just given the concerns people have about China?

Robert Willett

I'd say we are very positive about our business in China in factory automation. So we've seen sequential growth regularly in all quarters recently. And I think we're very positive and optimistic about growth in China. Inevitably it's a strange time, Jim, to ask that question, because of Chinese New Year, the timing of Chinese New Year. But I think taking that noise aside, I would say, yes, we are looking forward to I think what will be a very strong growth here for us, in China.

Jim Ricchiuti - Needham & Company

I have one more question, and I'll jump back in the queue. The SISD business declined in 2013, I mean that's a first decline in recent memory. And some of it you alluded to in Q4, what some of the issues were. But how should we think about that business in 2014?

Robert Willett

So we're feeling good about the surface inspection business. You're right, it did decline last year and revenue for the year was $46 million. And it really comes down to the fourth quarter, where we didn't see the kind of growth we were expecting purely as a result of this software release, working on it with customers. So that was what drove it. And the underlying booking situation is good. We're seeing growth and we do expect the business to grow in 2014.

Operator

And our next question is from Ben Rose from Battle Road Research.

Ben Rose - Battle Road Research

Just a few questions. Regarding China, which I know you say, fell sequentially somewhat due to seasonal reasons. Can you just walk us through a little bit, how seasonality plays into things? And I guess sort of an add on to that is to what extent is the business driven by the product cycles of your customers there, particularly in consumer electronics?

Robert Willett

I think as I said to Jim previously, we see strong underlying growth in our business in China and year-on-year quarterly growth is pretty regular and strong in the Cognex business in China. What I referred to in my prepared remark was that, we do see some seasonality in our business in China, and generally what we see are very strong quarter in Q2 and Q3, and then slower quarter relatively in Q4 and Q1.

And that really has to do with the design cycle of our customers, particularly in electronics in that market, where generally they're testifying their new products now and testing products, then they are placing large orders on us in Q2 and Q3. So that's a ramp up production for the holiday season, which is for the world is December, outside of China, and for China is right now around Chinese New Year. So that's the kind of cycle that we see.

An added color I might put on that is we're going to see similar cycles related to logistics, which is becoming a more important market for us again, where our customers invest in capacity in Q1, Q2 and Q3, and generally they are not investing in Q4, because they are trying to get as much product out of the door on time as possible.

Ben Rose - Battle Road Research

And on the ID products relating to the retail and logistics market, are you seeing increased interest on the part of, let's say, multiple e-commerce vendors and logistics vendors. I didn't see any press releases I guess from the last few months, but maybe if you could just give some update there?

Robert Willett

We're on a journey into the logistics market. It's going very well. We have real advantage technology in that space in terms of its performance. And we really saw our business pickup substantially in the second quarter of last year and we did report two very major customer wins.

And we're seeing substantial follow-on orders from both and many new customers, big names in the industry, placing initial orders. And we expect them to grow too substantially. So we're very positive and optimistic about what we're doing in logistics. And we're reporting it as part of our overall ID business, which is growing in excess of 30% and we expect to go and doing so.

Operator

And our next question from Richard Eastman from Robert W. Baird.

Richard Eastman - Robert W. Baird

Can I just maybe double-back for a minute, the factory automation year-over-year growth rate, the 28% that it works out too. Can I just dig into that a little bit, without any added color on product ID. I'm curious as to how the underlying base factory automation business did? And could you at least maybe suggest, total revenue of $80 million was more in the quarter than we had anticipated, and it's maybe more than seasonally one would expect. And I'm just curious if the upside came in the product ID side of the business or if you saw some good traction on the non-ID factory automation or the inside products.

Robert Willett

Sure, Rick. So we saw significant traction in both sides of the business. ID was very good as was the big vision part of our business in factory automation. And I think that was very encouraging to us and we've seen, I would say, sequential strengthening, as we're going through the last year in the vision part of our business.

And particularly in the Americas where a lot of business we've been looking on for a long time, some of it years, really customers started to place substantial orders, and they wanted those orders before the end of the year. So we were very encouraged by that. And it wasn't just ID, it was certainly vision systems, vision software and the whole part of our factory automation business.

Richard Eastman - Robert W. Baird

And is there one or two industries that you could single out. I think you had mentioned some earlier, but I'm not sure if you were suggesting logistics, consumer products, med devices. Was that for the year or was that kind of a fourth quarter uptake?

Robert Willett

It's really both. Both performed well, logistics, consumer products.

Richard Eastman - Robert W. Baird

Robert, it's one thing not to answer the questions, but when you do answer them, I got to ask something here. How about the R&D, maybe I'll throw this one at Dick, and see if he'll slip off?

Robert Willett

Before you do, do you want to talk about backlog?

Richard Eastman - Robert W. Baird

No. Well, I can ask.

Robert Willett

No, it's in the 10-K. I mean it's something that that is disclosed at yearend.

Richard Eastman - Robert W. Baird

Well, I'll read that. I'll find that. But in the R&D investment, should we expect in '14 that that tracks up a similar percentage year-over-year, say 15%, or do we start to get some leverage out of that and maybe the growth rate in R&D declines a bit?

Robert Willett

I don't think at this time that we're expecting the R&D to grow at that higher level. We're going to continue to invest in new product development, but we're expecting that our R&D growth in expenses as well as in sales expense will be quite a bit less than what we expect at the topline growth.

Richard Eastman - Robert W. Baird

And just one more question on the factory automation side of the business. A chunk of that non-product ID stuff goes into distribution, and did you get any sense in the fourth quarter that, was distribution stronger, the sell into distribution stronger than you might have expected?

Robert Willett

Well, when you say sell-in, Rick, I think its important to know that generally our distributors don't hold any product. They don't hold inventory. And we saw equivalent strength in both sides of the business in factory automation. And factory automation is it's two-thirds distribution, one-third direct, and we saw strength with some large strategic customers, but also broadly through distribution. And that demand was clear and there is no kind of sell-through issue in our business. It all moves in. Our distributors don't hold inventory.

Richard Eastman - Robert W. Baird

And just the last question then on the SISD business. Can you just give us a sense from a percentage standpoint of how much of the surface inspection business ends up in Asia, particularly China. I mean is it third, is it?

Robert Willett

It's roughly, give me a couple of seconds here.

Richard Eastman - Robert W. Baird

The follow-on question of this be that obviously we've heard much and seen much in a way of build a lot of infrastructure, especially in steel, I presume in paper as well. Are you seeing any of that, any sluggishness or downturn in demand, just specifically out of China, given where their spending priorities have shifted?

Richard Morin

Well, if you take a look our total SISD sales into Asia, which is Asia plus Japan, that is roughly 40% of the total SISD business during the year with another 40% being in the Americas and roughly 20% coming out of Europe. There is a lot of business in metals, in China these days for surface inspection, both steel and aluminum as we're seeing that because of the automotive market is growing over in China and that there is a greater demand for quality, not only for some of the international manufacturers that have established facilities over there. But even from the local Chinese automobile manufacturers. They're now requiring better quality of the steel and aluminum that's going into their production. So we're seeing opportunities in the various suppliers there.

Robert Willett

And I'll fill that, it's important to understand that we're serving kind of the higher specification part of the metals market, as Dick, said like aluminum et cetera. I think among broader steel companies, Rick, probably what you're seeing is there is overcapacity and there is other challenges in that part of the market. But in our part of the market, which is more stainless, aluminum for automotive, et cetera, we still think there is pretty -- we're seeing pretty healthy demand.

Richard Eastman - Robert W. Baird

Does there tend to be a retrofit market there, on that capacity in particular?

Robert Willett

Yes, absolutely, and fitting surface vision systems to existing lines that didn't have surface inspection systems before.

Operator

And we'll take our next question coming from Shawn Lockman from Piper Jaffray.

Shawn Lockman - Piper Jaffray

As we look at your revenue by geography in the fourth quarter, little over 40% in the Americas. So it seems sort of shift, and I assume that the Asia numbers are down just because of China, as you spoke about, but is the shift to Americas is something that we should continue to kind of see the greater mix of your revenue. So is it something that you expect to kind of adjust back to kind of more traditional levels and if you could talk about factors there that could impact that kind of revenue mix by geography?

Robert Willett

Sure. So I think we've seen some very strong demand and major success in the Americas market more recently as we've ran through 2013. I think that has to do with the number of factors. One is the execution of our sales force, like we've invested a lot and done very well in that market as the year's gone on.

I think our ID business and our logistics businesses had a particularly strong and successful in the Americas. It's sort of a newer market for us I think because our home market we've been successful there. So I think that's great, but I think to answer the second part of your question, longer term we think the overall growth rate of machine vision in Asia is going to outstrip other regions. That's where we've been growing more on a percentage basis, that's where we see more and more adoption and investment.

I think it's similar to trends that you see in automation, particularly in China around China's increasing sophistication, its population change, where there are fewer people entering the workforce. And the increase that you see in labor costs, they are all driving a what are wonderful conditions for factory automation and specifically for vision. So I think we're investing there and we're opportunistic, and that's where we probably expect to see a largest percentage growth over the long run.

Europe is a great market for machine builders. There are some of the greatest machine builders in the world, are in markets like Germany, in Italy, and they're great consumers of vision. And the German automotive industry is also a great market. But I don't think we're going to see probably growth rates that will be approaching Asia and may in the long run be a little behind America.

And then Japan, I think that's a more challenging market for us. We are executing there much better than we have probably at any time in the last few years. But I think there is strong competition for us there and the growth rates and the relative size of our business there is smaller.

Shawn Lockman - Piper Jaffray

And you had a lots of questions asked on Japan, obviously you're kind of dealing with some currency effects there, but it sounds like that your executions been relatively pretty solid there. Is that a good way to see it or are those factors there that as you mentioned Japan will become less and lesser mix of the business, and it will shift more towards the markets in Asia in longer term.

Robert Willett

That's how I look it from here. Yes. I mean our Japan business has been executing much better in recent quarters than it has for a while, so yes.

Shawn Lockman - Piper Jaffray

And I noticed, you don't want to give us the specific guidance for 2014, but just kind of want to get a sense of what you do see ahead, maybe in a qualitative sense and between sort of the opportunities, these longer term opportunities that you talk about, and maybe what we're seeing in logistics. Is it fair to assume that growth rates for the company could exceed what we've seen over the last year or two or is it something that you would expect to be kind of consistent and in-line in and sort of steady base growth? I guess, we focus here on revenue?

Robert Willett

We think 2014 will be a growth for Cognex, as at 2012 we've reported minimum growth, 2013 increasing growth, and as we move through 2013, we saw increasing levels of year-on-year growth as we move through the quarter. So we think we have some good momentum moving into this business.

We've been investing a lot in new product development and in sales force expansion. We think that puts us in a very good position. I think if you kind of ticked through the businesses, SEMI, I think we're not that optimistic about that business.

Robert Shillman

It's declined year-on-year and probably won't declining any further.

Robert Willett

I think as we said, the surface inspection, we do expect to grow this year. And then factory automation, we'll target a 20% growth rate in that business. that is ambitious. And I know, I think a lot of people will question whether that's achievable, but certainly in the last two quarters, and the second of the year, we've been exceeding that growth rate. And based on investment and what we see, we're optimistic about the factory automation business, which is very large part of what we do.

Robert Shillman

And the other thing I would comment in the factory automation business with Japan, I think in Japan we saw we actually a your-over-year and our factory automation business in constant currency or if you will what we sold in yen. But the Japanese yen declined some 20%, vis-à-vis the dollar and I don't think any of us are expecting a further 20% decline in the yen over the current year, so that should help the reported topline results as well.

Operator

And we'll take our next question coming from Holden Lewis from BB&T.

Holden Lewis - BB&T

A couple of things, first as it relates to the running guidance, you sort of have put out a range that I think is consistent with the historical seasonality, but when I think about some of the changes you've kind talked about in terms of ID products. I assumed that it grew sequentially, I assume you expected to grow sequentially, again, based on contracts.

Its sounds like in the SISD business that you had some deferrals, but I assume it pushes into the beginning of 2014. It sounds like, meaning there is just sort of general momentum, its just sounds like perhaps we shouldn't been expecting, not quite the typical seasonality out of the revenue guidance, that's kind of what we've got. Am I missing something from a standpoint of timing or anything to that sort?

Richard Morin

I think if you go back and look at Cognex's business, pretty much, almost always you see a decline from Q4 to Q1 and that has to do with -- it really does has to do with the seasonal nature of our market. It's to do with slower kind of pickup in business at the start of the year with holidays and everything and Chinese New Year and other aspects to tend to hold back growth.

So I don't think you should expect sequential growth in FA in general or in ID from Q4 to Q1. SEMI was -- again we don't expect to see much growth in that market in Q4. And then surface vision we expect that to be probably around flat year-on-year in Q1. So that's kind of how its looking for us, but I think it's important to understand that sequential nature of the business from Q4 to Q1, perhaps go back and look at some of those trends and see that, we're pretty much in line with that even with the kind of record revenue that we reported here in Q4.

Holden Lewis - BB&T

I guess, I'm just saying it seems like there is some things like the deferral of some revenue on the surface inspection, sort of, the what I would assume is sort of the sequential growth, that was the logistics business, that had good rate, but I just want to ask that whether it had the potential in that normal seasonality?

Robert Willett

I think we expect the surface vision revenue deferral to unwind we go through the year and not necessarily feel a lot of it come in, in Q1. And also I think one has to bear in mind that we might see orders strongly coming in Q1, but often at the actual revenue and shipments may occur in Q2. So we're feeling strong about where we are, but we don't think we're going to somehow buck the trends over Q4 to Q1, that we've pretty much always seen.

Holden Lewis - BB&T

And then I guess the similar question about gross margin, only in sense that talking about mid-70s is kind of the broader play language. As your volumes has gone up over the last couple of quarters, you kind of moved into 36.5 in Q3, 36.8 in Q4, I mean you lock it on 77. It gets to a point where 75 to 77 is kind of a big difference from a guidance standpoint. And that's why I'm wondering is, is there something about mix or something else that makes the 75 sort of tactile middle sort of in the picture here or as the volumes keep going up, we would expect that the 76, 77 level is at least sustainable?

Richard Morin

To the extent that the revenue level stay up or whatever, most of the growth coming from the MBST side, yes, you can expect that the gross margins will stay at a higher level. However, here we are expecting that the revenue level will in fact decrease in Q1 from Q4. And as we had said that essentially our surface inspection was going to stay relatively flat. A lot of that decrease is going to come out of factory automation, which has the higher gross revenue. So we don't quite expect to be as high in our gross margin in Q1 as we were in Q4.

Operator

And we'll take our next question, a follow-up question from Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

Looking at the headcount from last year, it looks like it was up around 9% in low-double digits in sales and marketing and R&D and engineering. How should we think about headcount? How should we think about the investments you're making in sales and marketing and R&D, just from a headcount perspective? Should we see there similar kinds of increases in 2014?

Robert Willett

Well, I mean how you should think about headcount at Cognex is, Cognoids are outstanding performers. And we're very able to attract very high performing people from universities, from competitors, et cetera. We've been adding quite a lot of headcount recently in two areas, one is really sales force, particularly in high gross market and the other is in engineering for new product development. I would expect our rate of headcount, probably not to keep growing at those kind of rates, as we go through the year, but it does depend on specific opportunities we see.

So we're always going to go on investing where we see opportunity, and we're thinking about the longer-term rather than the short-term. But we've certainly gone through a period of pretty major investment, and I think it's resulted in the kind of growth that we are seeing. And that growth whether it's to do with expenses or it's to do with headcount, we probably expect to grow at a lower rate than revenue in 2014.

Jim Ricchiuti - Needham & Company

Rob, I think you've talked about the opportunity within the logistics market, you've sized it. From where you sit today, do you see that opportunity expanding, the time that you have addressed in the past?

Robert Willett

I think when you were here for the Investor Day, we sized the logistics market around $250 million that we serve. And I think obviously we're selling into less than 10% of that today, that's our share, where we think we're going to grow substantially, as we go forward. Now, there are adjacencies within logistics that we certainly may find ourselves expanding into in the years to come, but there is certainly a lot of headroom right now. And our product range I think is broad enough right now, where we are becoming recognized as able to serve that market, not just being a niche player, but a full provider of ID products.

Jim Ricchiuti - Needham & Company

In along those lines, I am wondering you're clearly on a radar screen of the other industry participants. Can you talk a little bit about the competitive environment? How some of the competitors maybe responding to your inroads in the market and generally how you see that over the next year or so? You can't predict what the competitors are going to do, but just in general how you view the environment?

Robert Willett

Two major competitors in that space, the German company, SICK, and the Italian company, Datalogic. And Datalogic's gone through an acquisition with an American company called Accu-Sort that it bought from Danaher a little over a year ago. And I think it's kind of trying to integrate that business. And SICK has a strong market share. So we're targeting those companies. And I think one of the reasons we've seen such success in the U.S., obviously it is our home market and those are European companies who may struggle more here.

So I think we see that. I think the real issue is that our technology is superior, significantly superior and in terms of its read rate, in terms of giving customers some of the attributes that they want in a barcode reader. And those companies use lasers, which are less reliable, have lower read rates, don't allow the customer to see what the reader sees, and take a lot longer to install.

But they sell line scan vision, which is a bit like the technology we're selling the surface vision side of the business, which is more expensive and takes longer to set out in these types of applications than our technology does. So I think we're certainly in that market with disruptive technology. We see them trying to improve what they're doing, but we certainly think we're years ahead in terms of our capability, and we're working hard to capitalize on that.

Jim Ricchiuti - Needham & Company

And one final question, just on some of the new areas that you've talked about, you alluded to the Investor Day. I wonder if you can give us an update on how you see the opportunities in 2014 in two divisions, and also with the advantage engine that you talked about.

Robert Willett

So, yes, we began the journey in 3D displacement sensing, launching our products in the spring of last year, we've been encouraged. That was just the first product and we've been encouraged by the performance of that product. We've had a few major customer wins and I think we outperformed our own expectations in that market in the first three quarters with life, and we're building on that, when we do have ambitious product development plan in that area too. It's a big market. We're serving just a little piece of it today. And we're looking forward to serving more of it in future. And I'd say our plans are contract.

In the life science and image engine industry, I think as we explained that's a very long sales cycle, where customers' specking machines in many cases require regulatory approval, and that can be a three-year process between starting to design a machine to actually getting regulatory approval and launching it. We are seeing success in that market, definitely getting specified into a number of major life science new products that are on deck for launch.

Again, we don't think we'll see large revenue contribution from that business in 2014. But we do think it's going to be a nice contributor to Cognex in a couple of years from now. And we also think it's going to be nice and stable, it's going to be less cyclical and volatile than other industries we served just because of the nature of that OEM life science regulated business.

Jim Ricchiuti - Needham & Company

And you alluded to some major wins with 3D displacements. I was just curious can you say what verticals that those are coming in or came?

Robert Willett

I mean major wins, a couple of really good orders. Certainly, electronics, automotive, that that product served a very broad range of market, but the two markets where we're seeing some notable wins were electronics and automotive.

Jim Ricchiuti - Needham & Company

Did I leave any other questions that you all can answer?

Robert Shillman

You did a great job. And I want to thank everyone for not probing as deeply as I thought, that we were ready to be really tested on this. And I want to thank you for your understanding. But we'd love to tell you everything, and we just can't anymore. We just can't, you'll just have to see the results.

Operator

And we have another question from Holden Lewis from BB&T.

Holden Lewis - BB&T

So we may not done be done yet with the probing. I guess, you just sort of talked about factory automation continuing to grow at 20%. It sounds like, you think that that number is a good one for this year. Here in the past without talking about specific numbers or quarters, I think you talked about 30%-plus growth out of the logistics or the ID products. You've already done that in the last couple of quarters, as the year goes and comps get harder, but much really factory automation at 20%-plus, do you think that '14 is a year where you can still put up 30%-plus in the ID products, even if the comps get a little bit harder?

Robert Willett

Well, I think those are goals for us. So factory automation, our target is to grow the business with greater than 20%. It's not going to happen every quarter, but it has happening in recent quarters. And the same would apply for ID. Our goal is to grow greater than 30%. And that has been happening.

I think we are very optimistic about the potential to grow on growing ID very quickly and the real reason for that is we're still very little penetrated into what is the pretty large market. We signed the ID products market that we serve at around $900 million. And our share of that is not much more than 10%, right. And we have highly advantage technology.

So I think there's plenty of room for us to go on growing that over the long run. And the movement into adjacencies like logistics, which is part of the $900 million, but other adjacencies that we have on our radar screen gives us confidence that we're going to see some great growth there.

And then likewise, in factory automation, we have invested and we certainly saw those investments paying-off nicely in the recent quarters. I think there will be quarters, I'm reporting to you less than 20% growth and quarters that we did a more, with that said, we're expecting strong growth.

Holden Lewis - BB&T

And then just lastly, SEMI's, obviously, there's probably nothing in it for anybody to go overboard with enthusiast over that market, but you are seeing book-to-bill, as it's getting better for the capital equipment? We do have some other folks who are in that market that seem to think that it's at least getting better, coming after several years on a down-market. I mean are you just kind of saying that you don't expect much, because it's the easiest thing to say or you're hearing from your customers that the fund is not getting better, [indiscernible] optimistic how should we sort of think about that?

Robert Willett

Well, I think there are couple of things to point out here, Holden. One is that the part of the industry that we serve tends to pick up six months or so after what you maybe seeing in the rest of the industry. I think that's one point. Overall I think we think of SEMI as the cyclical, slightly declining business for vision.

I mean, obviously innovation leads to the need for less capacity in that industry over the long-run. But I think what is on the horizon is cyclicality around new designs and specifically 450 millimeter wafers, which I don't think we're going to see a lot out of that in 2014, but it will come and it will likely be a pick up for Cognex, a cyclical pickup that I will be explaining to you, both as a positive thing and a negative thing afterwards, so buckle yourself in for that.

Operator

And our next question is coming from Jeremie Capron from CLSA.

Grace Lee - CLSA

This is Grace Lee sitting in for Jeremie. I have two questions. First one is, I think you've alluded a little while answering previous questions, but I'm wondering whether you can mention some of the verticals that you're seeing growth in China factory automation.

Robert Willett

Sure. So I think we serve a lot of broad verticals. Our largest vertical in China is electronics. We're seeing strong potential and existing growth in that market. And another market the Cognex's serves is automotive. It's one of our largest markets globally and certainly China is, as you well know, I'm sure the largest market in the world now for new automotive purchases.

And not only that, but there is a lot more in-country investment going on, so certainly we've been experiencing good investment from existing and even new Chinese customers in that market. But like everywhere, our business is broad and we serve a lot of verticals and that would apply to China as well.

Grace Lee - CLSA

We have noted that there might be some significant CapEx expansion in automotive sector in China in year 2014. I'm wondering whether do you see some of these, the stronger growth from automotive verticals, given the CapEx expansion?

Robert Willett

Increasing relatively, I'd say, yes. I think there is a lot of investment going on in automotive, and a lot of investments, particularly by domestic and foreign automotive companies in China. So, yes, I would say, we're seeing improvement in that area. But that might be tracking obviously with the overall gross and investment that we see at machine vision in China. It's not an outstanding growth vertical, it's just part of an overall very good automation growth story for Cognex.

Grace Lee - CLSA

And then the second question is, I guess, I've sensed that ID growth is mostly from North America, at least at this stage. I'm wondering, whether I'm understanding this correctly? And also, by which time frame do you think, you'll going to penetrating ID products into regions outside U.S.?

Robert Willett

Well, I'd say, the ID growth story is global for Cognex, for sure. And I think we see strong growth pretty much in all markets that we serve with ID, and that's true. I think perhaps what you're picking up on is we had very strong logistics success in America with some big customers that we reported, and when we do expect that growth to spread globally over the next few years for sure. But don't think that that Cognex's ID story is an Americas stories, it's a global story.

Operator

And I'm showing no further questions. I'd like to turn it back to Dr. Bob Shillman for any concluding remarks.

Robert Shillman

Thanks. Well, just to wrap up, what a great year we had, a fantastic year, virtually in every one of our businesses, in every one of our product lines. And that success really was the direct result of the perseverance and the hard work and the creative work by the entire Cognex team. Everything from product design, to shipping, to manufacturing, to the sales force, the marketing team, credit and collections, just every department at Cognex did an outstanding job. I want to thank all of them.

And I want to thank you, the analysts and shareholders and fund mangers for joining us tonight. And although, our calls won't be quite as detailed as they have been in the past, we do hope you'll continue to attend those calls and our conferences. And I hope to see you at some of them. Thanks again, and good night.

Operator

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.

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