Thank you for standing by, and welcome to the Cognex Third Quarter Conference Call. [Operator Instructions] There will be a presentation, followed by a question and answer session. [Operator Instructions] Please be advised that this conference is being recorded today, November 1, 2012. I would now like to turn the call over to your speaker today, CFO, Richard Morin. Thank you. Please go ahead.

Thank you, and good evening, everyone. On Monday this week, we issued a press release announcing Cognex's earnings for the third quarter of 2012, and we also filed our quarterly report on Form 10-Q on that day. 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 Chief Executive Officer, Rob Willett.

Thanks, Dick, and hello, everyone. Welcome to our third quarter conference call for 2012. Now I know most of you are used to hearing Cognex's Chairman, Dr. Bob Shillman. Welcome participants to our earnings call. Dr. Bob won't be joining the call this evening. He's been stranded in New York City since the weekend due to Hurricane Sandy, and is just now in the process of, as he put it to me, escaping from New York by plane to San Diego. He sends his regards, and he looks forward to talking with you in our next call. As you can see in the press release issued earlier this week, our results for Q3 of 2012 were good. Revenue for the third quarter was $80 million, which was within our expected range in what's typically a seasonally soft quarter for Cognex. Growth year-on-year in factory automation was offset by unfavorable exchange rates and lower revenue from the semiconductor and electronics capital equipment market, or SEMI, as we call it. On a sequential basis, revenue decreased 5%, primarily due to SEMI. ID products, our #1 growth initiative, continued to perform well. Revenue from ID products in the third quarter increased to 21% year-on-year in constant currency, offsetting the decline in SEMI. Another bright spot was Greater China, where the investments we made to build our team continued to show strong results. China factory automation increased 50% year-on-year in the third quarter and 18% on a sequential basis. We were highly profitable in the third quarter, reporting margins that tracked at or above our long-term targets. Gross margin was strong at 76%. Operating income equaled to 27% of revenue and net income, 22%. These percentages are in line with our reported results for last year's third quarter. This is despite more difficult operating…

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

First off, I wondered, you touched upon medical being strong and the factory automation segment. I wonder if you could give a little bit more color on that, the types of applications you're seeing and what your expectations are for that vertical as we move forward.

Yes. So Cognex's long-sold vision into the medical device industry, where there are a lot of demands for kind of the management, pieces in the process using bar codes, but more often than not, precise measurement and alignment as part of the manufacturing process. So many or even most of the major medical device companies in the world use Cognex Vision. I think we reported tonight a particular contract in the medical device industry, and we have a series of those on an ongoing basis with particularly one very large medical device company. And we have an ongoing relationship with them, specifically concerning a product of theirs and a number of products of theirs where we're doing some very sophisticated things with machine vision. You asked about the outlook for the industry, medical devices, I think, is generally a pretty stable part of Cognex business, and we see that continuing. There has been some softness, I guess, in medical devices reported, perhaps, around some tax, tax credits for R&D and other things. But generally, I would say that's not, from our perspective, affecting the rate of investment that we see for machine vision and medical devices, and we expect this further to be a decent grower for us in the long term.

Okay, great. And then just one quick follow-up on Asia. You mentioned the potential for maybe a little bit more caution going forward. Are you seeing any changes in order rates? I know there's some concerns over there with the premier change and other things causing some potential pauses. But I wondered what you guys are seeing with the feet on the ground?

Yes. So we've had a great last couple of quarters in Greater China particularly, and very strong in Korea. But we are noticing some kind of moderation in that growth rate as we come into the fourth quarter, particularly in China. Hard for us to tell at this point whether that's more to do with just various waves of investment, particularly in electronics, which is our biggest market there, or whether it's some more caution related to the things you were talking about, the macroeconomic changes around the leadership change. So I think the point that's really important to bear in mind is we've been investing strongly in China, and we see China as a very good long-term growth area. So shorter term, we might see some bumps in the road on levels of investment. Longer term, we think it's going to be very good for us and continue to be very good. A final point I'll make is we've been very heavily weighted towards electronics in Greater China particularly. But more recently, we're starting to make a lot of ground in the automotive space, and we're very bullish about automotive growth for us in China over the medium to long term, and we're starting to see it already.

Your next question comes from the line of Tom Hayes from Thompson Research.

Tom Hayes here. Just A quick question. You had mentioned some project delays in the American market. I was just wondering maybe you -- if that's in a currency you had not seen before or just some new larger project delays you saw this quarter?

No. We've been noticing kind of project delays over the last number of quarters. And I think since -- perhaps, we all started to see some slowdown in the economy. We're seeing the same thing now, perhaps a little more than we were in previous quarters. But it's not a step change in what we're observing.

Great. And then this is a follow-up. You had mentioned in the last call, you were starting to see some nice wins in the logistics market. I was just wondering maybe you could give us an update on what you're seeing in that market?

Yes. So logistics, we think, is a great long-term market for Cognex. And logistics companies are starting to recognize the value of ID products, and they're in the early stages of adopting our technology. We've been launching products into the logistics space now for about the last 1.5 years, and they're starting to get some real traction. We have seen, and I mentioned it in the last call, a very nice win in the postal market, which is part of that market. And that will play out in revenue over the next 5 quarters or so. But we're also in line to get -- expecting into some other, I think, pretty major projects over the next 6 months with some very major names in logistics and retail. And where we're starting to see smaller orders now, we're expecting to see bigger orders next year and to be part of that CapEx plan for next year. So I think as I've mentioned over a number of recent quarters in discussions with you that kind of the move into that industry has been a little slower than we expected. It's sort of more conservative an industry, I think, than we thought going into it. Our products are clearly advantaged in this space, and we have some even better ones in the pipeline coming along here. So we're very positive and we're starting to be really recognized by the big players in that market. So I think it will be a major growth driver for Cognex over the next few years.

Your next question comes from Ben Rose from Battle Road Research.

Just quickly on China, can you refresh our memory as to what percentage China is of total Asia?

Yes, we can. Yes, so we talk about Greater China, and revenue for Greater China factory automation in Q3 was a little more than $8 million in the quarter, right? So it's on track to be a little more than $30 million this year. And I think that's in a region that's doing -- we'll do around $50 million this year, right? And I'm talking really about the MVSD business. So on top of that, is the SISD business, which would be on the order of $10 million to $12 million.

Okay. And on the ID products, can you talk a little bit about the performance of the DataMan 500 versus 300 in the quarter? I would gather that 300 was a stronger contributor to growth.

Yes. So we're very pleased with the performance of the DataMan 300. When we launched that product at the start of the year, we had a stretch goal for ourselves to sell about $6 million into the industry, and we now look like we're in a position to well exceed that. So that's performing very well, and it's really a very versatile, general-purpose product, right? And it leverages a lot of the Vision System on a Chip technology that we saw 1.5 years ago coming in the DataMan 500. The DataMan 500, in contrast, is a very, very high-performance kind of single-functional product for reading 1D bar code. So what looks like picket fences as opposed to, say, crossword puzzles, which might be 2D bar codes, right? So it's more of a specific product. DataMan 500 is a great kind of door opener for us and a great performer. It's pulling through a lot of business. But definitely the DataMan 300 and other products will be launching into those cases are going to be bigger in the long run.

Okay. And then finally, on Europe, which I know is weak this quarter, and you certainly warned of that last quarter on the conference call. Given your experience, Robert, at Cognex, what do you think is similar and what's different vis-à-vis the downturn in 2009? Do you have any sense of what the duration of the weakness might be in that particular geography?

I'm going to say, no, I don't. I mean, I think these are the questions that relate a lot to European macroeconomic policy and the world economy overall. What I would say is factory automation revenue in Europe exceeded our expectations in Q3. And it's really currency exchange rates that hurt us. We are outperforming the underlying market in Europe in factory automation because of our continued strong execution by a European sales organization, really one of the best teams at Cognex. And our channel into factory automation includes OEMs. They give us a lot of stability. And then ID products is gaining traction. And automotive is performing relatively well, especially in Eastern Europe, where we're seeing growth. So I think here what I would say is the kind of pressure -- downward pressure we see this time around in Europe is a lot less. I think it's going to have a lot less impact on our business than what we saw in 2009.

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

Two questions, please. First, if you look at your factory automation market and you set out a goal of double-digit growth for next year -- I mean, for this year. I was just wondering, you're not probably going to grow on a year-over-year basis for this year. Where do you think this segment really fell short? And where was it up to your expectation? And how should we be thinking about 2013?

Yes, great. Okay. So factory automation is a great growth driver for Cognex in the long term. I mean, in the quarter, it represented 77% of our total business, and it grew 9% year-on-year in constant currency. In the long run, we expect it to grow 20% year-on-year in constant currency. And I think the reason it's not -- there are few reasons it's not doing that right now. I think reason #1 is macroeconomic environment. And I'd say, you might figure it like this, there's about 10 points downward pressure at the moment on our growth rates in factory automation and in ID. If you like ID, grew 20, we expect it to grow 30. Factory automation grew 10 in constant currency, and we expected it to grow -- we expect it to grow 20 in the long run. And I don't think much have changed about that. We think it's a great market where Vision has a lot to play. We spoke and I kind of don't really enjoy going on speaking about the solar market, but that's certainly being kind of a major headwind to us on the order of $10 million this year of downward pressure as well. I think what I would encourage you to do is take a longer-term view of factory automation, see that it's delivering some okay growth rates right now. It will -- it has delivered great growth rates. We expect it to go on. If I look at some data, I looked at recently, said over the last 3 years for the first 9 months of the year, we've reported compound annual growth rate in factory automation of 26%, right, including the first 9 months of this year, right? If you look back over 5 years, that's closer to 13%.…

Yes, that's very helpful. And just as a quick follow-up, I wanted to understand, can you give us some kind of a color in terms of what is your overall exposure in the automotive segment? And can you break it down by geography between U.S. autos, European autos, Asian autos? That will be helpful.

Yes. On kind of a high level, our automotive business globally is between about $80 million and $100 million. And it's our largest vertical market and it has been delivering great growth. This year, year-to-date revenue in that market is up around 4%. You kind of asked about where is it? It's really in Europe and America, okay? So Europe, we're very well penetrated. That represents a large part of the revenue. And the other large part is the Americas. We're relatively -- or very unpenetrated in Japanese automotive. And still the spend that's going on in Chinese automotive is a very small part of our business also. But that is growing and naturally about Vision getting adopted in-country in China, and we're seeing a lot more of that starting to happen.

[Operator Instructions] And your next question comes from the line of Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Robert, I wondered if you could comment a little bit more about the softness in the Japanese market. Is it more toward consumer electronics? Is it more broadly based?

Jim, so I've been to Japan twice in the last 13 weeks. I've been spending a lot of time there and spend a lot of time with customers. So I feel I can probably answer your question. I feel the overall -- what I heard was the overall factory automation market is very weak in Japan right now. A lot of -- particularly end-user electronics is leaving Japan and going to markets like Korea, Thailand, even I started to hear about Indonesia as markets where it's moving. And then I would say that the markets that are perhaps a little stronger are automotive, where we're very underpenetrated, I would say, and then electronic components. So actually, the sort of finished pieces of electronics that go into things like smart phones, those businesses are holding up better, but still not good. So overall, it's a relatively bleak picture in that market. Part of our strategy is our relationship with Mitsubishi and the distributor channels that we have there. While our overall business is shrinking relatively significantly in Japan, that part of our business is pretty flat. So I'd say that part is probably outperforming the rest of the business and the market. But overall, Japan doesn't look good. James Ricchiuti - Needham & Company, LLC, Research Division: And Mitsubishi, overall, though, if you look back versus where you thought it might be a year ago, is it safe to say that, that's coming a little under your expectations because of the macro environment?

Yes, correct. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. But as you see some of these Japanese companies moving to other parts of Asia, Korea, Thailand and Indonesia, I would assume that those are also opportunities for you, aren't they?

Absolutely. And I think that's -- I can't break it out for you, but I think that's part of the reason we've reported such excellent growth in the rest of Asia and certainly in Korea and of course in China. Yes. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. Dick, I wasn't sure, when you -- did you actually give a percentage for ID, or Rob? I'm not sure -- you said it was up 21%, I think, in constant currency. What percent of your revenues is it now?

Hang on while I flip through a couple of pages here. Okay, so our ID business this past quarter was approximately 44% -- no, wait a minute. No, wrong thing, I'm sorry. ID is about 21%, I think. James Ricchiuti - Needham & Company, LLC, Research Division: 21% of overall revenues.

Total revenues.

Yes. James Ricchiuti - Needham & Company, LLC, Research Division: Okay, got it. Okay. And the strength that you're seeing in the ID market in China, it -- does that -- where is that coming from? Because you don't have a major presence in automotive or it's still relatively small. So where are you seeing it? More in the electronics area?

Well, yes. I mean, electronics is our biggest market and a major user of ID. But also a lot in other good markets for ID in China would be consumer products and food, markets like that, where there's increasing use of bar coding and also track and tracing to have supply-chain security. So yes -- but it's going to be a good long-term market for us there. But to answer your question, #1, electronics still for ID in China. James Ricchiuti - Needham & Company, LLC, Research Division: And within China, Rob, I'm not sure, how well developed and mature is the laser bar code market? Or are they making -- are you seeing more of these verticals just making a leap to Vision base?

Yes. I think it's -- and I'm speaking more from 15 years of experience in the coding and marking product identification market, China is pretty undeveloped in the use of bar codes, and they are definitely adopting Vision rather than starting out with lasers in the industrial space. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. Right, got it. SISD, is there anything further that you could say about that? It would seem like that would be more sensitive to the macro environment, and yet it seems like it's kind of performing relatively well in this environment. But how concerned are you of a slowdown? Is there anything you can say about order activity there?

Yes. So SISD, the surface inspection business, it's a relatively stable part of our business. And in many cases, there's a lot of backlog that works its way through. So it's more immune to kind of short-term changes. As I mentioned in my opening remarks, we still see very good demand in metals, and we're penetrating some new markets now, like glass. It's starting to help raise our revenue, where we've been underpenetrated in the past. And even plastic films around the touch panel displays and markets like the touch panels for cell phones or tablets, these are markets that look good. And as I mentioned, weaker markets for surface inspection, Paper, it's a big part of our SISD business, and it's looking a little less strong. Kind of if I look out to the next quarter, we think we expect SISD to have a very good quarter, not to the level of the record $16 million quarter they had in Q4 of last year, but above what they reported in Q3. So we're feeling good about that business. Your question was kind of why is it doing so well? I mean, we've got an excellent management team in there now. They're executing well, and we're strongly represented in that market and I would guess gaining share. James Ricchiuti - Needham & Company, LLC, Research Division: If you would aggregate the, say, the SISD business in plastic films and in glass, is it -- you did, what, about $12 million of revenues in SISD, what is it represent of that? And is that -- did that -- what did that account for last year? Is that a bigger part of the revenue stream? Or is it still relatively small?

Yes. So I'm not really clear on your question. James Ricchiuti - Needham & Company, LLC, Research Division: Sure. If I look at the SISD business, I think in the past I thought about it as more metals and paper. But some of these newer opportunities, inspection of plastic films, glass, is that now a meaningful part of the business? Is it 10% of the SISD business? 20%?

The combined glass and plastics for the third quarter was less than 10% of their total business. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And Dick, I mean, a year ago, rough terms, I was just curious, is that a revenue stream that really didn't -- wasn't that -- all that meaningful at all in SISD a year ago? Or has it been in that range?

I think we started in glass last year, and it's probably been in about that same range. Plastics varies a little bit or whatever. But like I said, it's not yet up to 10%.

And Jim, I'm looking more forward in the remarks I'm making, really, about that where I think where we're seeing some of the growth, you'll see, I think, in coming quarters offsetting any softness we're seeing in paper. James Ricchiuti - Needham & Company, LLC, Research Division: Last question for me is, and just going back, I think it was to your Investor Day, you talked about the total available market in logistics. And I think you had sized it at the time at around $150 million. Is there anything you're seeing now that makes you think that, that opportunity is bigger for you?

Well, no. I think that's a good -- that's still a good number and that's still how we size the available market for what we have today. I mean, there are additional pieces in logistics that Vision can address beyond that. But those are not necessarily markets that we're yet in. So generally, I would say, no. I think your $150 million number is still a good number we're holding to.

[Operator Instructions] Your next question comes from Ben Rose from Battle Road Research.

Just a follow-up question with regard specifically to the automotive market in the U.S. Are you seeing any trends regarding more intensified use of machine vision for new production lines versus retrofitting of various different car lines? And then I had a question about competition as well.

So it's an interesting question. I mean, I would say not particularly pronounced in that way. I think the mix is probably similar. I think when we were back in 2009, then we definitely saw a lot of retrofitting of lines going on. And then through the big growth we saw in 2010 into 2011, we saw more new projects. And I'd say we kind of have a balance of both going on right now. Certainly, plenty of new projects and investments going on in automotive, and that applies to both America and Europe. It's the timing of those investments, I think, that's having an effect on growth and our expected growth.

Okay. And then from a competitive standpoint, do you still see Keyence as your kind of strongest across-the-board competitor? And if so, are you seeing any change in their behavior, either by way of increased or decreased investments in the U.S. and in Europe?

Okay. So, yes, Keyence, we still consider it our #1 competitor in the vision space. You sort of said it, across the vision space, to be able to picky about it. Keyence doesn't really play across the vision space. They don't have surface vision business. They don't have PC or software, vision software, so they're really selling a narrower range of products. However, in our biggest market, Vision Systems and in ID, that's certainly our strongest competitor. To your point, what do we see changing? We see them following a consistent strategy through what they've been following. Recent changes would be, though, we see them cutting back their investments in Japan. Actually reducing the feet on the street they have in Japan selling vision, and alongside us continuing to invest pretty strongly in the Greater China market. We also see them, like us on a small level, investing in sales team in other emerging markets, Brazil, India, where they've recently opened subsidiaries, a number of years after we've been present in those markets.

And your next question comes from Jagadish Iyer from Piper Jaffray.

Just a quick follow-up on a housekeeping question. How should we be thinking about the OpEx going forward for next year, please?

Right. So I think it's probably too soon to talk about what level of increase we expect in 2013 in operating expenses. But we don't expect -- we certainly don't expect double digits. We don't expect to see any major increases in headcount on new offices unless there's an improvement in the overall environment. And I think -- and how we're thinking about 2013 is we certainly don't expect to see clarity on the growth picture until some way into the year. We think we're probably going to see continued challenging environment in Q4 or in Q1. But I think given some of these macro issues get behind us, we'll start to get back to the sort of growth rate we expect for automation with luck in the back end of the year. So we're going to manage our operating expenses tightly to be in line with our growth through that -- through those kind of cycles and changes. But it's too soon to give you a specific number.

There are no further questions at this time. Mr. Robert Willett, please continue.

Okay. So to wrap up, we're pleased with our third quarter performance in light of the global economies dampening effect on our growth rate. Machine vision continues to be a promising space, and the Cognex team continues to execute well. We're enthusiastic about the opportunities we see for our products over the medium to long term. Thank you for joining us tonight. Goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.