Good day, ladies and gentlemen, and welcome to the Cognex Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Richard Morin, Chief Financial Officer. Sir, please go ahead.

Thank you, and good evening, everyone. Earlier tonight, we issued a press release announcing Cognex's earnings for the second quarter of 2012, and we also filed our quarterly report on Form 10-Q. 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 press 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 press 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.

All right. Thanks, Dick, and hello, everyone. I'd like to welcome each of you to our second quarter conference call for 2012. As you can see from the press release issued earlier today, we reported very good results for the second quarter. And right now, I'm in our R&D Center in San Diego. So for details of the quarter, I'm going to hand the microphone over to my partner, Rob Willett, who is our Chief Executive Officer. I'll be available at the end of the call to answer any questions that you may have of me. Rob, the microphone is yours.

Thank you, Dr. Bob. Good evening, everyone. I'm pleased with the results we reported tonight for the second quarter of 2012, which include the second-highest quarterly revenue and the highest quarterly profit in Cognex's 31-year history. Unfortunately, we don't expect to see records like these in the near term because of slowing manufacturing spending over concerns about Europe's debt crisis and weakening global economies. Getting back to the quarterly results, revenue increased 1% over a very strong second quarter a year ago, and that increase includes a 3% negative currency impact. Growth from the surface inspection market was partially offset by lower revenue from semiconductor, electronics and solar industries due to market downturn that began in mid-2011. From a product standpoint, ID products continue to be our leading performer, increasing 24% year-on-year in constant currency. Gross margin was a strong 76%. Profitability was high, with an operating margin of 28% despite continued investments in new product development and sales force expansion. Reported earnings for the quarter were $0.45 per share, which exceeded expectations, primarily as a result of lower-than-planned operating expenses and gains on investments. Let's now turn to the details of the quarter. Revenue from the factory automation market was $61.7 million and accounted for 73% of our total business. Reported factory automation revenue was flat year-on-year, as growth was offset by a substantial decline in revenue from solar manufacturers and unfavorable currency exchange rates. Backing these 2 items out, factory automation grew 9% over the prior year's second quarter. On a sequential basis, factory automation revenue increased by 4%. A nice increase, the order rate was lower than expected during the quarter, especially in Europe. Looking at factory automation from a geographic perspective, Asia continues to be our best performer in terms of percentage growth. Factory automation revenue…

[Operator Instructions] Our first question comes from the line of Zach Larkin from Stephens.

You mentioned in your remarks some of the changes or softness in order patterns. Can you give a little bit more detail as to where you saw the biggest changes from what you might have been expecting earlier on in the quarter?

Yes. I would say that was really in Europe and the Americas, specifically, and most in terms of kind of where we saw order patterns softening and particularly, around the automotive market. In terms of strengthening, we saw our SEMI strengthen in the quarter in a way we did -- we had not expected.

And kind of telling the non-SEMI, do you expect SEMI to remain strong? Or you think that might have just been a one-quarter kind of pickup in demand that might be soft as we -- given all the macro headlines?

Yes. I think we're not expecting it to get stronger and as we go through the next couple of quarters. But I think on a year-on-year basis, it's going to look pretty favorable for us.

Okay. And then one final question, if I might. As you look at the ID products, which you mentioned did quite well in the quarter, given UPS' kind of broad commentary on being a little more cautious, have you seen any changes in your expectations for that segment and orders for ID products at all?

Well, okay. So ID serves a very broad market, and your factory automation is the main market for our ID products. When you talk about UPS, we would call that a logistics account, and that's a market we're relatively new in. And we see a lot of interest in our products, which are relatively disruptive in that space. That said, it's a longer-term opportunity for us in logistics. So I don't think our near-term trend in spending would affect our expectations for that market.

And our next question comes from the line of Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Just a continuation on the ID products question. I may have missed it. Rob, did you give a percentage of what it represented of your overall revenues?

No, I did not. I said it grew 24% in constant currency year-over-year, but we can give you that data if you give us a moment. James Ricchiuti - Needham & Company, LLC, Research Division: Sure. And just while you're looking for that data, with respect to Japan, it looked like you showed pretty good sequential growth. Was that driven primarily by electronics? Because I thought you called out some weakness in the factory automation part of that business.

Yes. So I would say, I guess -- well, I think -- obviously, we saw our improvements in the SEMI market and kind of flowed through in the quarter. So that was kind of -- we got help in that area. In terms of factory automation, I think what we're seeing year-on-year is continued softness. And I think what we're also seeing is some of our customers moving production or they have moved production offshore after the tsunami. So instead of reinvesting in lines in Japan, we're seeing them investing in lines in Taiwan, Korea or in China. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. And how is the relationship going, Rob, with Mitsubishi? Is that still somewhat slower to get the traction you had anticipated?

Well, no. I would say our relationship with Mitsubishi is very strong, and I think we would all agree on that. And we're now really about 3, 3.5 years into the relationship. And we've seen some very strong growth over those 3 years. So -- but I would say our relationship with Mitsubishi is primarily to address the factory automation business in Japan, that market. I would say that market to us looks relatively soft at the moment. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. So with respect -- when you see some of the customers possibly shift -- shifting offshore, that really doesn't have any effect on the Mitsubishi portion of the business.

No. I would say it possibly does because the business that was once is going to be in Japan is now in other markets, so that may not necessarily be through the Mitsubishi channel. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. And one final question. On the SISD business, it's somewhat surprising that it doesn't appear that you're seeing the effects of the global slowing in that part of the business. What's driving that -- the strength -- continued strength in that business?

Well, I would say that it is a pretty long order to sales cycle in surface inspection. So we saw very strong orders through the back end of last year and into this year, and we're seeing that flow-through in revenue now. So -- and I think it's more immune to short-term impact. But I would say also, even in that market too, we're seeing some customers hesitate to write POs in the current environment.

Jim, just to -- as you were asking further questions, ID business year-on-year, on a constant currency basis, essentially grew 24%. James Ricchiuti - Needham & Company, LLC, Research Division: 24%. And Dick, what was it as a percent of revenues?

As a percentage of revenues in the current quarter, it's about 20% -- a little over 20%.

And our next question comes from the line of Jagadish Iyer from Piper Jaffray.

So 2 questions. So first, if you look at your historical trend, you see that Q4 usually kind of picks up. So what needs to happen for the Q4 to really kind of move up compared to Q3?

Right. So you're right, Q4 and Q2 traditionally are our best order quarters. And what tends to happen is our bookings in factory automation market, particularly in Europe, slowed down through Q3 in the summer, and then they come back in Q4. If I'm interpreting your question correctly, what has to happen for us to see sales come back strongly or business come back strongly in Q4, I think it really is the funnel of business we have and the opportunities we see in front of us have to turn into business, which is a matter of whether customers cut loose the projects of per-capital spend that we expect them to. And it depends how hesitant they are about doing that, given the current economic environment.

Just a quick follow-up on your commentary on China. I just was wondering, how sustainable is China in the second half vis-à-vis the first half?

Yes. So we -- China is definitely a bright spot for Cognex in our recent performance in Q2, and I think it was interesting. I think we've seen a lot of companies saying they expected the China business to start coming back now, and I think they haven't so much. But we really have. We really saw a lot of the business come through in Q2, and we expect that to continue at a high level through the back end of the year, where we're going to have some pretty favorable comparisons year-on-year as we look back. And what's driving that particularly is the consumer electronics business in that market, particularly demand around smartphones and tablets, I think, as those customers gear up for the end-of-the-year holiday season push.

Okay. Did you call out the sales from China, please?

Yes. We can do that. We don't have the detail by just China right here. I have total Asia but not...

Okay, yes, yes. But is it fair to assume that the bulk of the Asia comes from China? At least 75%, is that a fair approximation?

No, I don't think it would be because Asia also -- 75%. I...

We have to get back to you on that.

Less than 75%, yes. And I think our quarterly business in China would be approaching $7.5 million in the quarter.

And our next question comes from the line of Ben Rose from Battle Road Research.

Question, Rob, regarding the DataMan product. Now that the DataMan 300 has the liquid lens technology. How are you differentiating the 500 versus the 300 in terms of customer engagements and selling situations?

So yes, DataMan 500 is still the highest read rate performance of any barcode reader that we have or any vision barcode-reading products on the market today, super fast, very high performance for 1D barcode reading. The DataMan 300 is also very powerful and incorporates quite a lot of technology. But it's more general purpose, and it's at a lower price point, serving a broader market in general. So it gives you a bit of a sense of where they're positioned.

Okay. And would you say the same is true for this new In-Sight 7010 model in terms of its price point relative to the rest of the In-Sight product line?

Yes. So the new set of 7000-series In-Sight that we've launched is at a -- it's a very high-performance but easy-to-use vision system, and we're targeting a lower price point in the vision systems market. And yes, so it's very capable, easy to use, more at the entry-level price point, where typically we haven't played in the past and where we see a lot of growing demand in emerging markets.

Okay. And then finally, if I may, on the automotive -- within the automotive segment, were your comments about some of the weakness you're seeing in automotive, was that only in Europe? Or was that also in the United States and in Asia, for that matter?

I think most of our automotive businesses is in the Americas and in Europe, and the revenue numbers looked pretty good in the quarter. What we're seeing right now is some delays in capital-spending plans with those customers. And we're seeing that, particularly as you would imagine in Southern Europe, in markets like Italy and France but also, to some degree, in America or even in Germany. And yes, it's -- for us, it's interesting. We're trying to understand to what degree these are just a cycle of kind of implementing the current projects, whether those have taken some time to digest or whether this is a slowdown in capital-spending plans as a result of the economic situation. And I think we'll know more about that after Labor Day.

And our next question comes from the line of Richard Eastman from Robert W Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes. Just -- Rob, just a question on the slowdown in the Americas that you stated, I guess that's in orders currently but you did imply that you saw some revenue slowdown in factory automation in the U.S. Did that slowdown come through quickest through distribution? Or was that direct? I mean, were you surprised at all by the distributor sell-in versus sell-through at all?

No. It is not a -- there's not a meaningful difference between the 2 of them in terms of what we saw. I mean, you have -- something you have to understand about Cognex is our distributors really don't carry inventory. So our read-through is very clear. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And that's not a more direct channel to say North American automotive than your direct channel?

No, no. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then if I -- if I'm correct, the solar sales comparison eases significantly in Q3 and is almost gone in Q4. Is that right?

Yes. That's correct, yes. So hopefully, you won't hear us talking about solar anymore after this quarter. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: That would be good.

Only in a good way. Probably not at all. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And then also just a question on that SEMI OEM, just so I'm interpreting your comment -- your trend-line comment there correctly, is the -- the SEMI OEM business then is kind of stable at this $10 million-ish level in the short and intermediate term?

Well, it's difficult to predict. Basically, we saw it come back quite strongly in the second quarter. But like you, we're hearing and we're seeing signs from the market that there's some tentativeness to go on in investing on up to cycle as one normally might expect. So I think at this point, we don't expect Q3 or Q4 revenues in SEMI to be any higher than we saw here in Q2. But it really is difficult to call. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And then just lastly, is -- was the implication that the book-to-bill in SISD was less than 1?

We don't particularly talk about book-to-bill, Rick. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I know, that's why I asked if it was the...

I know, I know. You tried this again. You tried this last quarter, too. I mean... Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Let me put it that way. Then I'll just state it as, my interpretation of your comments was it's less than 1.

You can interpret anything you want. As you know, the SISD business is very lumpy. It's lumpy both in terms of when the booking comes in and when revenue actually gets recorded. But if you take a look over the last 4 to 6 quarters or whatever, they've done pretty well. And this past quarter was -- or the next one quarter from them from the revenue perspective, I think it was their second best ever. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And is there any noticeable contribution there? I know you guys kind of entered the glass market a year ago or -- but is there any incremental revenue there year-over-year that's driving some of the growth?

There's a little bit. But I would say it's more a result of share gain and good execution by the team we have in place there.

And our next question is a follow-up from the line of Jim Ricchiuti of Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Can I have the headcount as of the end of June?

I do, and it was 955 people. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. In terms of what your plans are, you have been investing in sales and marketing. Does that -- have you slowed down any of that in light of what you're seeing in the business?

Yes. I mean, I would say our plans for some time had been that we've added a lot of salespeople over, like the last 2 years, but less this year. And we see upside potential from sales productivity of the people we've added who are now really getting up to full performance. And that particularly applies to China, and it's probably one of the reasons why we're seeing good performance out of our China business. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. How would you characterize the competitive environment? Have you -- are you seeing any changes out there? And follow-up on that is, can you talk a little bit about potential pipeline for acquisitions? How would you characterize that?

Yes, I would not say we've seen a noticeable change in the competitive environment over the last prior quarter or since the start of the year. But there has -- there have been some acquisitions in the ID space. The business, Datalogic, has made a number of acquisitions. But they would not rank among our top competitors. So you asked about acquisitions. We have an active process of reviewing acquisitions, and we have a number of opportunities we're looking at it. But we don't expect to close any acquisitions in the third quarter. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And lastly, can you talk a little bit about new products and to the extent you see them potentially contributing in the second half either from new applications or just what you think might be potential significant introductions? To the extent you -- I don't if you could be specific, probably not.

Right. I mean, we don't talk about products we have yet to launch. But I would say we've launched some pretty exciting products and technologies this year, which are already helping in terms of growth and we expect to continue helping. We launched new OCR, optical character recognition algorithms, and tools at the start of this year. And that certainly helped drive some growth for us in consumer products and pharmaceuticals, and that's something we expect to go on delivering for us. I talked at the start of the year about Hotbars, which is very innovative, a really, really game-changing technology to 1D barcode reading. And that's really starting to gather momentum, and we expect continued strong performance out of that. The DataMan 300 that we referenced in the call, we're very pleased. That's well exceeded our expectations in the kind of high-performance, mid-priced barcode-reading market. And we've just recently launched a liquid lens and some other accessory to that product, which help expand what it can do. So that's some of what we have. Then we have a very full product -- full pipeline of new product technology, where you can expect to see from us over the next 12 months. And I think the rates of innovation and the rate of productivity out of our engineering team is very high, and we expect to continue, if not improve, over the next 12 months. James Ricchiuti - Needham & Company, LLC, Research Division: And would you say you're satisfied with the progress you're making in the logistics market? I don't know if you want to break that out at all yet. But is -- can you give us some sense as to how you're doing in that market?

Yes. Let me speak to it. I would say the logistics market is a large and relatively entrenched market in terms of how it operates. There's some large integrators who are very busy in the current environment integrating for gross redistribution, for retail distribution, for postal and other markets. And we're making very good progress with them. But they're -- some of them, they were looking at business in their portfolio that is -- has them busy for the next year. So -- and so I think the rate of adoption of our technology is probably slower than we expected, but the amount of business we see out there is very significant. And we do have some very good wins that we're noting. I mean, just in the last few weeks, we've had an important win at a major national postal supplier. This is a project that is expected to generate between $1 million and $2 million of logistics revenue over the next 18 months. And there are many projects of that size currently in our pipeline. So in terms of kind of how the product is being received, how we're executing, I think it's relatively good. In terms of the dynamics of the market, I'd say it's a little more conservative and slow moving than we had expected.

And we also have a follow-up from the line of Ben Rose of Battle Road Research.

Just a quick follow-up. In terms of the acquisitions that you're taking a look at in the pipeline, Rob, would you characterize them as more being in your core market of machine vision or are there other sort of factory automation market adjacencies that you're looking at as well?

No, the -- All the opportunities we look at are vision related. Yes, we're a vision company, and we expect to remain that.

[Operator Instructions] Our next question is a follow-up from the line of Jagadish Iyer from Piper Jaffray.

Two quick questions. First on the buybacks, it looks like you have not purchased any stock back. Can you give us a kind of your take in terms of what are the mechanics in terms of the -- clearly, the stock has kind of a pullback recently, and I was just wondering what are your thoughts on the buybacks. And then I have a follow-up.

Okay. Well, during the early part of the quarter, we were -- the company stock was trading pretty close to the 52-week high. And at that point, we didn't feel it was an appropriate use of funds. The recent pullback occurred mainly when we've been in a blackout period. Clearly, this is something that we've -- we've seen the stock price go down, and it is something that we will be taking a harder look in the next quarter.

Okay. Just a quick follow-up, I wanted to draw about your thoughts on -- in terms of the automotive segment, where do you see that the automotive segment could spring a big surprise going forward, at least, in the latter part of this year and into next year? Any thoughts here, whether it could be Europe or it could be the U.S. or Japan?

Come out in surprise that you were referring to upside or...

Upside.

Upside, okay, okay. Yes. So automotive is in a period of investment in automation, particularly in vision around some of the new technologies such as hybrid technology that they're bringing into market and other pretty major changes. And they're, in some way, into big-capital spend kind of a period and Cognex's largest vertical market. Our business in automotive is growing this year but not as much as we expect it, right? Where it could come good is if we see, in Europe and/or America, some of these large projects that we expect to come through actually hit and happen. So I think that's where we potentially could see some upside.

And this concludes our question-and-answer session. I would like to turn the conference back to Dr. Robert Shillman for any concluding remarks.

Yes, thank you. Well, we had a very good first half of 2012, and our sales team continues to be very positive about the opportunities that they see for our products. But those are sales guys. So management's outlook is cautious, and we're keeping a very watchful eye on spending in light of -- or maybe I should say in dark of that current economic uncertainty. Well, that's it for now. I want to thank you all for joining us tonight. And I hope that we have more good news to report to you next quarter. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.