Cognex Corporation (CGNX) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cognex First Quarter 2013 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to introduce your first host for today, Richard Morin.

Thank you, and good evening, everyone. Earlier tonight, we issued a news release announcing Cognex's earnings for the first quarter of 2013, and we have 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 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.

Thanks, Dick, and good evening, everyone. I'd like to welcome each of you to our first quarter conference call for 2013. And as you can see in the news release that we issued earlier today, we reported very good results for the first quarter. Right now, I'm in our R&D center in San Diego, and the team is at our Natick headquarters for this call. For details of the quarter, therefore, I'm going to hand the microphone over to my partner, Rob Willett, who is our President and Chief Executive Officer. I will be on the call until the end and available to answer any questions that you have for me at that time. So now, I'm just going to pass the microphone over to Rob Willett in our headquarters in Natick, Mass. Go ahead, Rob.

Thank you, Dr. Bob. Good evening, everyone. I'm pleased with the results we reported tonight for the first quarter of 2013. It was a good start to the year. Revenue, net income and earnings per share all set new first quarter records. Revenue grew 4% over the first quarter of 2012, driven by record quarterly revenue for factory automation. Asia, excluding Japan, was our top performer. From a product standpoint, the lion's share of growth came from ID products, which increased 23% year-on-year. Gross margin was strong at 76%, reflecting the substantial percentage of revenue that comes from high-margin factory automation sales. Operating margin was 22%, even with our investments in new product development and sales force expansion. And we reported earnings of $0.35 per share, $0.02 per share higher than the $0.33 reported for the prior quarter's first quarter -- I'm sorry, the prior year's first quarter. Let's turn now to the details of the quarter. Revenue from the factory automation market set a new quarterly record at $63 million and accounted for 78% of total revenue. Factory automation grew 7% year-on-year and 2% on a sequential basis. This is surprisingly good news, given that Cognex typically experiences a revenue decline in factory automation from Q4 to Q1. Looking at factory automation from a geographic perspective, Asia, excluding Japan, continue to be our best performing region in terms of percentage growth. In the first quarter, factory automation revenue from Asia grew 24% year-on-year and 20% over the prior quarter. Growth was led by strong sales to consumer electronics customers in Korea and China. In the Americas, factory automation revenue increased 7% over the first quarter of 2012. On a sequential basis, it decreased 2% from the record revenue reported in Q4. The underlying trend in the Americas is improving. Factory automation revenue from Europe increased 4% year-on-year and decreased 1% sequentially. This was a solid performance in what are proving to be difficult market conditions. Sales to the Japanese factory automation market decreased 13% from the first quarter of 2012 and 5% from the fourth quarter due to currency exchange rate fluctuation. In constant currency, Japanese factory automation was flat year-on-year and grew 7% sequentially. Revenue from the semiconductor and electronics capital equipment market was $7 million in the first quarter. That level represents an increase of 4% year-on-year and 27% over the prior quarter. This is the first quarter in 2 years that SEMI revenue increased both year-on-year and sequentially. It's too soon to say if that signals the beginning of our market recovery, as it was mainly due to higher orders from a limited number of customers. In the surface inspection market, first quarter revenue was $10.5 million. This represents a decrease of 9% year-on-year. It's also a decrease of 27% from Q4, which is the second-highest revenue quarter ever for that segment. Surface inspection revenue can be uneven due to the timing of deliveries and installations and the impact of revenue deferrals. Demand for our service inspection systems in the first quarter was good. Those orders will turn into revenue later in the year. Turning to operating expenses. The combined total of RD&E and SG&A increased in Q1 by 6% year-on-year. This increase is due to our investments in new product developments and in our sales channel that is targeted at longer-term initiatives. We expect that they will provide significant returns in the future. From a technology standpoint, Cognex is now developing and introducing new products at a faster rate than ever before. We believe that the highly advantaged disruptive products that we launched in Q1 will quickly increase our share of the markets we serve. The initial success of the DataMan 503 high-performance ID reader should accelerate our growth in the logistics market. New capabilities of the DataMan 503 include high-speed bar code reading on wide conveyor belts and in situations where there are large variations in package height. The DataMan 50 marks our entrance into the high-volume, lower-priced portion of the ID market. Feedback is excellent, and the initial adoption by machine builders is encouraging. The DataMan 50 has already won major accounts away from the competitors' laser bar code readers. Our new DS1100 Displacment Sensor signals our entry into the highly profitable markets of 3D Vision. Measuring features such as height, volume and tilt, the DS1100 expands our product offering to existing customers in the automotive, consumer electronics and food and beverage industries. Two of our competitors have significant sales and profits in this area, and we've been interested in it for some time. We expect that our advanced vision tool, faster speed and ease of use during setup and calibration will enable us to compete very effectively in this important new market segment. On the sales front, we continue to invest heavily in our sales channel. We are recruiting, hiring and developing sales engineers in areas where we see the highest potential for growth, particularly in ID products in China. Technology and process improvements are being made to increase productivity. There's also the cost of equipping our sales force with our new products. We're making these investments today with an eye towards long-term growth. In summary, Cognex had a good start to 2013. We expect revenue for the second quarter will be between $83 million and $86 million. This range represents an increase of 3% to 6% over the revenue reported tonight for the first quarter. Operating expenses are expected to increase by approximately 3% on a sequential basis. And the effective tax rate, excluding discrete tax items, is expected to be 19%. Looking at Q2, we expect to report very good results, but comparisons to Q2 of 2012 will be difficult for the following reasons: Market conditions were much stronger ago -- stronger a year ago in Europe's automation market and in SEMI; we're making good progress on our strategic initiatives, although again the full benefit of that work is not flowing through yet; and Q2 of 2012 included approximately $1 million of investment gains that are not expected to repeat this year. Now let's open the conference up for your questions. Operator, we're ready to take questions.

[Operator Instructions] Okay. So we'll take our first question from Tom Hayes.

I guess, 2 questions. One, you called out some of the increased R&D spending tied to accelerating the product development. I was just wondering if you could talk about -- or provide some color on how quickly that can accelerate the product development cycle for you guys.

Sure, Tom, yes. So we're a technology company. We're developing products all the time. We've been investing particularly in process improvements to get products out of engineering and into production more smoothly and consistently. So obviously, by putting in better processes, a more rigorous phase gate process around products introduction, investing on -- in manufacturing and engineering to get product scale then into our contract manufacturers can bring forward our time to market by a number of months, we believe, some of the processes we're doing. And when we're spending obviously this significant amount, $42 million a year -- or last year on R&D, and some of these new products deliver substantial growth for us, that's very real in terms of the benefits it brings.

Okay. I guess staying on that theme a little bit. You mentioned obviously the China and the ID market as a beneficiary of some of the extra spending. Can you just maybe provide a little bit more color on some of the specific market segments you're targeting in China?

In China, sure. Yes, so our business in China today is largely concentrated on electronics, and -- where we do a substantial amount of business in that consumer electronics, which is the industry that's typically adopted our technology first. And we see a lot of good traction in that market, and we continue to see it. But we're really looking to China to diversify the base of business over the longer term. Specific end user markets we're interested in and we see a lot of growth potential in is automotive. And automotive is our largest vertical market globally, but not in China. And we see a lot of growth occurring in the Chinese automotive market. And in the first quarter of this year, it accounted for 20% of our China factory automation business. So we're certainly starting to see some traction there in investment. But other markets, particularly consumer products, food and beverage, we see a lot of growth opportunity, and specifically also ID, where we're seeing very high rates of growth in that market going forward in China. Some of the drivers there are -- increase well amongst the Chinese population, where there's greater concerns about safety and product quality, and ID is of great means for tracking products from manufacturer out to consumer. So we see a lot of traction in that area, and we have a lot of growth plans around delivering. That's China specific, but, of course, our ID products themselves are great growth drivers on a global basis and that plays through in a multiplied effect in China.

Great, I appreciate the color. And one more if I may, obviously, you provided the indication that we should expect OpEx up about 3% sequentially. Should we kind of think about not the 3% growth but kind of the -- where were the rates we saw in Q1 is kind of proxies for the balance of the year considering your increased spending?

What I think we told you Q1 OpEx and we told you we expect Q2 to increase 3% sequentially. We don't really give guidance beyond that.

I thought I'll just try. Sorry.

Yes, sure, sure. I mean we're -- we feel good about our business and where we're taking it, and we feel very good about the initiatives we're investing in, new product developments in engineering and sales force expansion, particularly around ID and around China. So I think you can expect us to go on doing that, providing we see the kind of trends looking positive.

And our next question is from Chris Gandy [ph].

You mentioned that the overall trend in the Americas is improving. Can you talk a little bit about what you're seeing there and what's giving you more confidence in the region?

Sure. So, well, obviously, we look at our funnel of business and what we see in our pipeline. And we see a lot of good things occurring. We're seeing signs of improvement ourselves particularly in automotive and ID products. But I would say that temper that the customers are still cautious given the low-growth economy that we're in. So I think by vertical industry, automotive looks fair in terms of its commitment to investment in automotive and -- in terms of automation, I should say, and ID.

Okay, great. And then thinking about the logistics opportunity, last quarter you mentioned that you have several large end-user customers who are currently using your products on a trial basis. Are you seeing any movement toward full adoption there with any of those customers?

Yes, we are, yes. We're seeing on a lot of -- we're undergoing a lot of very active trials. And the DataMan 503 certainly helps and round out our product range. One large postal supplier has spec-ed us in, and we expect to see orders flowing through for the rest of this year. And another large -- very large e-retailer is in a similar situation. So I'd say we're seeing a lot of positive movement in that market.

Okay, great. That's great color. And then last but not least, just a cleanup item. Can you give us the total for ID products in the quarter for revenue?

Yes, we can. Just make sure we get our data correct here. And I think it was $20.6 million. Dick, can you just confirm that?

Yes, it's about $20.6 million.

It represents 23% growth year-on-year and 3% sequentially.

And our next question comes from Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Was the ID business strong in each geography?

So it was very strong in some geographies and slightly less strong in others. Generally good overall, I'd say, where we saw some lesser growth was in Europe, which I think reflects kind of the low-growth environment that we see there at the moment. But I would say our execution is certainly going very well in the Americas and in China, and that's where you'll see some of the better growth. Japan also, yes. James Ricchiuti - Needham & Company, LLC, Research Division: Rob, was the -- I mean, looking at Europe, the rate of decline seems to be slowing. But what's your sense is that market beginning to stabilize at least or is it -- do you potentially have another lag down?

Well, I'd actually say our results in Europe had been relatively good. When I look at our peers and when I look at the -- our level of our performance in Europe relative to our business overall, so I'd say we've been surprised, if you look back over the last few quarters, how our own results seem to be better than what we were reading in the news. And I think we have a very good team there and a lot of good growth drivers. So, however, I would say there's some increasing softness as we look out at that business and we look out at the sales funnel. So I think it looks likely to be all -- perhaps our lowest growth region overall as we look forward in percentage terms. But we're still feeling that we can grow in Europe this year. And I'm not really seeing necessarily it getting softer or stronger right now, but perhaps a little more difficult to cope. I would also say, the automotive industry there, which is our biggest end-user market, it looks to be holding up relatively well in Germany and in Northern Europe, and obviously, less well in Southern Europe. And that's also a little bit of the leading indicators that we're watching in that market. James Ricchiuti - Needham & Company, LLC, Research Division: And in the Americas, the SISD business, was that the main issue for the slower growth in terms of -- and do you see the SISD business snapping back in the June quarter? It sounds like it will be up sequentially.

Yes. So our surface vision business is doing really well, the SISD business in general, and the order trends there are good. And yes, we -- but it matters. The issue that you're referring to is more of the timing of where -- the timing of revenue and the lumpiness of that. So it was a low-revenue quarter in Q1, but that's not indicative of any underperformance at all from our perspective. It's really a matter of timing. So yes, we will see it come back. We expect to see it come back in the second quarter quite nicely. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And I know you don't give guidance. But if we think about that business, is it -- is that -- do you think SISD has the potential to be up year-over-year in -- for the full year?

Yes, that's -- certainly, that's our expectation. We look at that business being something we expect to grow in the mid single digits over the long term. And we think this will be another growth year for SISD. We're seeing a lot of good things going on.

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

Of all the new products that have been introduced in the last 3 or 4 months, which would you say have the potential to be the highest revenue contributors in 2013?

Well, I would say the DataMan 50, which is a lower price point bar code reader, we see a lot of potential for that product and we see it ramping pretty fast. And it's replacing a lot of laser bar code readers that are used by machine builders and by small purchasing customers on a broad basis. So certainly, it's -- that looks like a winner for us although still early. And then the DataMan 503 certainly is a very powerful product for the logistics market. And I think it depends on how quickly that's adopted, but it would -- also, we expect it to be a large seller. I think the other product I discussed in the call, the Displacement Sensor, the 3D Vision product, we think that'll be a slower ramp. That's our first entry into what's a very exciting market for us longer term, technically quite complex. And we're probably going to be addressing some of the most rigorous and difficult applications in that market initially, where the served market itself is probably relatively small and we're bringing a pretty powerful advantaged product and learning about that market. But I think longer term, we expect that to be a big revenue generator for Cognex, but not this year.

Okay. And then on the 3D laser profiling system, which I understand is your first kind of full-fledged 3D Vision system, you've cited 3 end-user markets: automotive, electronics and food and beverage in the initial press release. And was just curious where you see the -- at least on the near-term basis, the largest opportunities within those industries.

Well, certainly, automotive we think is an obvious product -- an obvious market for us to target that product. That is one. It's a market we know very well and where we see opportunities in that specifically. So certainly, in that, we have Tier 1 suppliers and end users for precise 3D measurements of parts. It's going to be a good market for us. It's good because it's a channel and it's an industry we understand very well. So that I expect to be the best market over the medium term for this product. Consumer electronics, though, I think can be a very good product -- good market for this product also, specifically where you're looking at a Vision problem where parts maybe seated, perhaps components on a circuit board and you want to see whether they're correctly seated and correctly in position. That's a difficult problem for 2D Vision. It's a great problem for this product, and one that we understand how to sell into very well. So that's automotive, one, consumer electronics, two.

And our next question is coming from Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Rob, could you just talk for a second, and I'm sorry, this may be in the Q. If so, just say so. But the -- geographically, other Asia was plus 27%. Is that -- how much of that is China? How did China actually perform in the quarter?

Yes. So Dick will look for some numbers specifically, but here's what I can tell you. The factory automation in China was over $6 million in the quarter, which was up 23% year-on-year. And any other color you want to add to that?

No. Greater -- the rest of Asia it also includes like Korea and India or whatever, which we don't break out all of those pieces separately.

But I did point out that Korea and China were both very strong performance in that market in the first quarter. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Obviously, over the 27% then? And do you think with Japan, the minus 4% in Japan, is that -- that's not an LC number, is it? Because I would think currency would hurt you there.

Well, I think -- yes, I think what I did say when I was talking about factory automation was, in constant currency, Japanese factory automation was flat year-on-year and grew 7% sequentially. So there's quite a lot of currency effect in that. Is that your question? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes. So just when I'm looking at overall Cognex for the quarter, you commented -- I think you'd given the numbers, Japan was off 4% year-over-year. But was that up in local currency? Was Japan up in LC?

In -- well, you've got to take both -- if you take a look at both SEMI and factory automation together, Japan was up in total over 2012. But the biggest -- if you -- let's see, where was it here? Yes, Japan, if you take a look in grand total because SISD had a strong quarter in Japan. So you have -- operationally, if you exclude FX, factory automation was essentially flat. There was a slight decrease in SEMI, but there was a good pickup in the SISD business. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So that was up, okay. And then just Rob, in the factory automation business, can you just maybe talk to the end markets? I mean, we had sales up 6 and -- 6.7% or 7%. I'm going to -- I guess I'll assume there's not a lot of currency in there but could be. But can you just talk to maybe the end markets that, just in factory automation, that we're comping against real difficult comps? Last year, we were talking about solar being a tough comp year-over-year. But is this a situation where just when you look at your end market exposure that all the end markets are grinding slower? Or is there a tough comp or something -- a couple of comp -- tough comps in there?

Okay. So I think you're right in saying currency had a limited and might have been 1 percentage point of headwind on the growth overall. In some -- I think we serve a lot of different end user markets, so I think to look at one quarter might -- isn't necessarily that instructive. But what I will say, in Q1 year-over-year, automotive was up a little bit more than factory automation overall. Electronics products -- consumer electronic products were up a lot. We had very strong growth in those markets. And then, kind of it's a mixed picture there. There are markets for us that represent between 2% and 7% of revenue in any given quarter, and they can be up and down. And I'm thinking there at markets like pharmaceuticals in this quarter had -- it had some growth. Medical devices can be up and down. In this quarter, it had some good growth. Other markets, less strong just in this case. Pick out some others for you. Food and beverage, food and beverage did okay. Consumer products, you might think of Procter & Gamble-type products, not so strong in this quarter. But these are just kind of small ,sequential movements, not necessarily indicative of how we see the market overall. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And then just one last question on the operating expense number, just double back to that for a first second. The 3% sequential off of Q1 into Q2 puts OpEx at around, call it $45 million or so. Is that a level, a quarterly level that we flattened out at for the back half of the year then?

Well, I would say in general, we don't give OpEx guidance for the full year. I think we said we see it increasing I think 3% sequentially Q2.

Yes. Part of the increase in Q2, Rick, is the fact that our option expense will be a bit higher quarter-on-quarter because we did our annual grant in -- near the end of February. So we only had really 1 month worth of expense in Q1. We'll have a full 3 months in Q2. That's a part of the reason. And going forward, that will start to even out. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Correct, okay, okay. That would -- then it would be all in, in the second quarter, as well as the third and fourth.

Correct. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And then just one last thought, and I don't want to put you on the spot here but I will, in terms of forecasting. But just the SEMI OEM business, again, surprised again. And, Rob, you pointed out kind of the first time in 2 years where we actually saw growth both sequentially as well as year-over-year. But the -- if you look at the SEMI back end order number, it did perk up a little bit. Is there just anything to the tone that you -- that can suggest, hey, there's more interest, there's more bids, anything that would maybe segment -- separate this from uptick from inventory build, say, or any better tone at all?

Well, okay, I'll make some general comments. I think SEMI performed better than expected, with each geographic region reporting an increase over Q4. That would suggest some broadness. Obviously, we kind of had this situation about a year ago where we had this kind of full stone, I would say, in Q2. And we sold $10 million in Q2 of last year compared to, I think, $7 million in what we just reported. So I don't expect necessarily to see that kind of level so -- in Q2 of this year. So is that -- does that connote a recovery? I don't know. The other color I'll say is that we did see some pretty strong growth out of a number of customers in greater China. And so I think some of the strong performance looks like a little uneven or regional, which also makes us less inclined to say that this is the start of a recovery per se.

And our next question comes from Jeremy Katherines [ph] from CLSA.

Just a question on Japan, where I think we've seen rather weak first quarter orders from the Japanese automation companies. And it looks like you were flat. So I'm wondering, are you seeing any pickup in orders in Japan and maybe any color you could add around that?

Well, I think we -- Jeremy, we don't speak to orders specifically. I think there's some signs of slow improvement in the Japanese market on a local currency basis in the factory automation market, but I think it's a little early to say specifically. And then also difficult to compare us with other companies is that we have some kind of growth drivers. I'm thinking specifically of ID in this case where we're starting to see some better growth out of our Japanese business. So, yes, and then I think if you look at our competitors or other benchmarks, probably what you're doing, you're not seeing -- seems like we're not seeing a lot of growth. We haven't over the past few quarters from Japanese companies in automation reporting, and I haven't seen that changing. So what would I say overall? It's like some signs of perhaps some slower recovery. I think if we do see something more major like, as you might expect from all the economic stimulus that's going on in Japan at the moment, what we're hearing is wouldn't expect to see that until later in the year.

And our next question is coming from Jagadish Iyer from Piper Jaffray.

Two questions. First, Rob, let me start -- if I recall last year you had invested in pretty -- I would say a reasonable amount in China. Were you pleased with the revenue that came from the region? And can you help us understand, you did make a comment in your prepared remarks that you are hiring. So which geographies are you adding headcount? And then I have a follow-up, please.

Your question is purely about China, Jagadish?

Yes, yes, yes.

Okay, yes. So yes, we -- in factory automation in China in Q1, we saw 23% growth year-on-year. And we see -- particularly in consumer electronics, we've seen some pretty strong order trends in that area, particularly in markets like for tablets and smartphones. We see a lot of demand for very high-performance vision in those markets, which is driving a lot of growth. But to the second part of your question, and what I referred to a little earlier, is we see a lot of potential for broad-based investment in automation in China. And we've been seeing this for a long time. Markets like automotive, ID and consumer products and food and beverage, we see very good trends in China in those areas. In terms of geography, we haven't quite a large number. I believe it's 7 offices in major Chinese industrial centers like Chengdu, Shenzhen Jin Jiang, obviously Guangzhou, Shenzhen, Beijing, Shanghai. And we continue to open new offices to support the growth that we see in those industrial markets. So I believe last year, we opened 3 offices in cities across China. And I think you can see us continuing to open additional offices this year.

So then you have some positive comments about your logistics business. I just want to dive a little bit more detail into it. I just want to understand, how should we be thinking about the growth in the logistics business for this year? And you did make -- or mentioned that you have a position with a e-tailer there. I was just wondering, what is your position as a chair? Are you being an exclusive or -- exclusive vendor there? Just some talks on the overall growth rates of this business unit. And I just wanted to get some little bit more color on there, whether you have seen the tipping point for adoption here.

Yes. So I think logistics is a large, previously adjacent market for Cognex, but it's really part of our ID business overall. So some of the growth that we're seeing in the logistics is now all ready and will continue feeding through into our ID growth numbers because our business there is reading barcodes. And we -- as we introduced new products, we're serving a larger part to that market. So most recently with the 503, very high-speed applications on wide webs are allowing us to serve greater parts of it. So it's a journey, and the journey is going well, I would say. The timing of revenue, again, is a little bit more difficult to call. We're seeing good signs or good trends. But quite how much that will flow through into revenue this year is something, I think, that we're still getting our arms around. To the question you asked about large e-retailer, this is a very large company that makes very, very substantial investments in logistics. So we're certainly not the only player, although we're being spec-ed into many new applications on their lines. And we're competing really head to head with one other competitor who does a lot of business with them today. And like in many of the areas Cognex works in, almost all of them, our products outperform. So it's a matter of how quickly we get adopted. That's difficult to know how quickly that will occur, but I would say it's going well.

And sorry, I just have a quick follow-up. If this particular e-tailer is starting to ramp more on the adoption side, would you expect other like freight companies and all of them to start even more aggressively adopting?

Sure. Well, yes, I mean we have wins in postal, we have wins in e-retail, we have wins in standard retail and we have wins in Korea-type applications. And we're in trials or discussions with most of the large players in those spaces. So yes, we're going to see wins and we're going to see broader adoption. And I think it's the rate of adoption that perhaps becomes a little more difficult to call, partly because it's a relatively compact sale and there are integrators, as well as end-user customers. And in many cases, we're being preferred by the end user customer, but it takes time for the integrator to catch up.

And our next question is from Chuck Murphy from Liberty Park Capital. Charles Murphy - Sidoti & Company, LLC: Just a couple regarding Japan. Just -- first, just kind of curious, I was noticing how low your Japan sales, was it percentage of the total down to 12%, 13%. It used to be more like 20%. I was wondering why that has been?

Well, I think if you look back over a period of time, the -- there's been a pretty major contraction in the automation market, in the SEMI market and in Japan. And we've referred to it in the number of calls over prior quarters where we've seen a lot of business getting offshored from Japan into the rest of Asia. And in many cases, we've been able to win that business, whether it was ours in Japan or not. So I would say that that's part of an overall trend that I see broadly. And as I visit Japan, as I do fairly frequently, and talk to the factory automation kind of market leaders in that space, that's pretty consistent with what I hear from them. Charles Murphy - Sidoti & Company, LLC: A little bit with Japan now, a relatively small percentage of sales, I mean the decline in the yen from a translation perspective isn't as big a deal as it might have once been. But from a competitive standpoint, I mean, you have the yen down 20%. I realize you don't really sell on price, but I mean 20% is a pretty big number. I mean, could your competitors not tell your customers, hey, just buy 20% more of our stuff and you get the same performance and maybe save a few bucks?

Well, I think your -- one thing you said is definitely right. We sell highly advantaged, highly technology-driven product, so it's not -- they're not particularly price-sensitive in terms of their sales. However, I would say, the competitor we take most seriously in the world is Keyence, and they are obviously a Japanese-based company. And they've not seen a lot of growth in their own domestic market in recent times, and they are investing outside. But I would -- at the moment, we don't see signs of them kind of trying to use this currency advantage to price competitively. But with that -- if that changes, we're certainly in a position to hold our own very well. Charles Murphy - Sidoti & Company, LLC: And into the point about buying 15% or 20% more and getting the same or higher productivity, is that true at all? Like can you just buy more for a lower price to get the same performance or is it a matter of something -- software-related or something?

No, I'm not sure I understand your question. What I was really saying is we're introducing a lot of highly advantaged products. A lot of science that's software-driven is really driving a lot of the value. So we're certainly very well positioned within our product range to make very good margins. So -- but I'm not sure quite I got your question. Charles Murphy - Sidoti & Company, LLC: Okay, let me explain it this way. If the customer was planning on buying 100 Cognex Vision systems -- could Keyence say let's say, if you buy 110 or 115 from us, you'll get the same or better productivity...

Oh, no. Charles Murphy - Sidoti & Company, LLC: With Cognex system you can save some money since the currency has gone down.

No, no, no. It isn't -- our business doesn't really work like that. There is...

This is Bob here. That reflects -- that question reflects a total misunderstanding of our products. If our product gets the answer right every time and a competitor's product gets the answer right only 80% of the time, buying more of the competitor's product won't make up to the fact that it's getting the wrong answer. So that -- people pay more for our product because it delivers more value. We are more -- we read more codes correctly than incorrectly. We measure things more accurately than others. And buying more of something that doesn't quite work well doesn't make up for the fact that it doesn't quite work well. You just get more errors if you bought more of them. And another answer to your question is Keyence is also high-gross-margin company also. So our prices are not significantly different from Keyence product. So when we talk about our price advantage, it's in general overall of our competitors. But Keyence is generally, if you look at their P&L, it's even more profitable than Cognex. Charles Murphy - Sidoti & Company, LLC: Do you guys manufacture anything particularly in the distribution facility there? But do you manufacture anything in Japan?

No, we don't. Charles Murphy - Sidoti & Company, LLC: Okay. And if the currency were to stay down for a long -- extended period of time, would you consider moving some of your production over there to take advantage of it?

I very much doubt it.

And our final question at the moment comes from Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Rob, 2.5 years ago, you sized the TAM in the logistics market I think at around $150 million. Based on where you are today and with the products you have out there now, is it still in that range? Is there any update as to what -- and I know it's folding into the ID business, but I'm just trying to get a sense as to whether it might be expanding.

Yes. We think it is -- yes, we size it today more in the order of $250 million in terms of what we can address, but also we've seen some significant investment in growth back in that market relative to where it was in a couple of years ago, particularly driven by trends in e-retail and some other areas of investment. So our market looks bigger in terms of what we can serve today than it was. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And when you refer to full adoption, it sounds like there's a layer of complexity with the integrators. But can you give us a sense, when you talk about a large retailer or a large postal supplier full adoption, does that mean full adoption by the end of this year? Does it mean a process into next year?

Okay. So in that case, you're looking at specific accounts where we might be -- where we're getting spec-ed in. Is that right? James Ricchiuti - Needham & Company, LLC, Research Division: Yes.

Yes, so normally the way it would work is we're reviewing our technology with those companies. They're proving it and they're saying it's advantaged and they want to spec it in, right? And then they have specific projects that come along. Let's say, in a large courier company, they may have a couple of largest projects of a number of million dollars that they're planning over this year or next year. So we -- our expectation would be to win those projects. In some cases, they may split the business between us and one other competitor or they may give it exclusively to one.

Rob, I think he also was questioning whether full adoption would mean that there would be purchase orders given to us, let's say, and then none would follow because they have adopted it fully. That's not what Rob meant by full adoption. We expect, when these e-tailers or distribution centers or courier companies buy, they will continue to buy from us as their businesses continue to modernize our growth. So full adoption means that we would hope that we would win all the projects that are available that year or for the next 2 years, and then there would be more projects coming. James Ricchiuti - Needham & Company, LLC, Research Division: Thanks, Dr. Bob. I mean that -- it's clear that it appears that you've reached an inflection point with some of the progress you're making with some of these bigger accounts.

It -- I mean the future looks very bright in logistics and in code reading in general. The breakthrough technology that we have now means that machine vision is just down the line better than laser-based bar code readers. And I expect in a small number of years, you won't be even seeing anything except machine vision-based or camera-based readers. And our expectation, even on the low end, is that the majority of them will be Cognex. That's our -- that's what we're working for.

And I'm showing a couple more questions. Our next is coming from Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Could you just -- my line of question was around 3D and where in the life cycle machine vision is for 3D apps, applications versus an established market for the laser technology itself.

Yes. Well, I think we're in the early stages of we call it displacement sensing. You can -- a lot of people don't quite know what 3D means. So what displacement sensing means to us is you're measuring height of things from looking down on it, which in the past, if you wanted to measure height using machine vision, you'd have to have the camera looking at it sideways, for example the way you take a picture of a person, you could measure the height. You wouldn't measure the height of a person looking down on a person typically. But the sensors that we're now coming out with give you both the 2D view of looking down on some things. You could take also to the XY or height and width -- or width and length measurements on things. And also, even though you're looking down, you can measure the height of things. And this is technology that has been available for some time, but it wasn't possible until recently to offer these products at the same kind of accuracy and at the low price and ease of use. So that's what our breakthrough is going to be, very affordable price and ease of use to measure both the height, the width and length of things. This will be totally new incremental revenue for us. We've never been in this segment before. And it's selling to the same markets, as Rob mentioned, that we've been selling to. So it isn't going to incur any substantial additional sales cost to us. And we have the distribution capability, so we're just adding a new product to our portfolio in a market segment that we weren't in that appears to be, and that we know is for 2 of our competitors, very profitable. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Could you just take a shot at the size of the market now at this point in time? Is it $50 million or...

I think that Rob can better answer that question than I.

Yes, so the initial product we're launching as the -- some very specific application to the high end. And we think the served market for that product specifically that we launched is about $10 million. So not a big market. The overall market that we expect to serve in future based on the developments we have underway, we size at a little more than $100 million.

Okay, all right. And, by the way, this does not include coordinate measurement machines, which is a whole different story, which measure things to an ultrahigh accuracy but do so in a laboratory setting or a quality control setting where you're taking one item off the line and measuring it carefully. Our focus has always been on the production line, where we're going to measure every product that goes by. It's a very different market than the coordinate measurement machine companies focus on.

And we have just one final question coming from Jagadish Iyer.

Just a quick follow-up. Dick, I was just wondering whether did you have any buybacks from the quarter? What are your thoughts on the buybacks? And how should we be thinking about in the big picture in terms of overall earnings growth as you make these investments on trying to roll out these new products into the marketplace?

We did not do any buybacks during this past quarter, but we intend to be more active in that regard in the following quarters in 2013. Clearly, the investments that we're making in some of the areas like the R&D and the sales area are designed to drive the top line growth. And with the kind of high margins that we drive, we expect that the pullthrough all the way down to the operating income and bottom line will be significant and will help increase our overall EPS and EPS growth.

That sounds like it's the last question. And I want to thank everyone for taking part in the call. We're excited about the new products and about the other steps that management -- senior management under Rob is now taking to increase the productivity of both the engineering products, getting them into manufacturing quicker and also in the sales force area to raise productivity in the sales force. And we hope -- and we fully expect those efforts are going to yield increases in EPS in the quarters to come. And that's about it for now, and I want to thank you again for taking part in the Cognex Q1 Conference Call. Good evening.

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