Cognex Corporation (CGNX) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cognex Fourth Quarter 2014 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to turn the program over to your CFO, Dick Morin.

Thank you, and good evening, everyone. Earlier today, we issued a news release announcing Cognex's earnings for the fourth quarter 2014, and we've also filed our annual report on Form 10-K. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results. During tonight's call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. For your reference, you can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release and in the Form 10-K. I'd like to emphasize that any forward-looking statements we made in the earnings release or any of that we've 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 hello, everyone. I'd like to welcome each of you to our year-end conference call for 2014. As you've seen in the news release that we issues earlier today, we had an outstanding year in 2014 in which we set new records for revenue, net income and earnings per share, and we achieved a remarkable after-tax margin of 25% for the year. Right now, I'm at our R&D office in San Diego, everyone else on the call is at our Natick headquarters. Now for further details, I'm going to hand the microphone in a moment over my partner, Rob Willett, our President and CEO. I will be available at the end of the call to answer any questions that you might have for me. But before I hand the microphone over, I want to point out that as required by the SEC, we disclosed the name of our largest customer in 2014 in our Form 10-K. However, the strict nondisclosure agreement with that customer remains in place. And because of that we will not and we don't intend to provide any details about their specific projects or how our products are used in their manufacturing process. Having said that now, the microphone is yours, Rob.

Thank you, Dr. Bob. Good evening, everyone. I'll begin my remarks with an overview of the last year. I'm pleased to Cognex's outstanding performance in 2014. Our team's ongoing efforts in new product development and sales force expansion delivered great revenue growth and higher levels of profitability. Growth in 2014 came from the factory automation market, where new annual revenue records were set in Europe, the Americas and Asia, excluding Japan. Revenue from surface inspection also set a new record. ID products continued to grow well above our 30% long-term target. In addition, we saw very strong performance from our Vision products, which also grew in access of 30%. From an industry perspective, consumer electronics, automotive and logistics were important contributors to growth in 2014. Gross margin remained strong at 75%, despite volume pricing and higher support costs for our largest customer. Operating margin expanded to 30% and net margin to 25%. Both represent significant increases over 2013, reflecting the substantial leverage that incremental revenue has on our business model. We delivered earnings of $1.36 per share, setting a new annual record that is 65% higher than the prior record of $0.83 per share set in 2013. Now, for details of the fourth quarter. We ended 2014 on a strong note. Revenue for Q4 was $117 million, which exceeded the high end of our guidance. This was the result of better-than-expected demand from the factory automation market. Revenue from factory automation in Q4 was $93 million, representing our second highest factory automation revenue quarter of all time. Growth for factory automation, as reported, was 16% year-on-year and 20% in constant currency. Looking at factory automation from a geographic perspective, we were pleased to see double-digit revenue growth over Q4 2013 in 3 of our 4 geographic regions. Asia, excluding Japan, was our best performing region in terms of percentage growth, increasing more than 30% year-on-year. An important contributor was Greater China, where we continue to expand and diversify our business into many industries, different applications and new customers. In Europe, factory automation revenue grew in excess of 20% over Q4 2013, even though it was negatively impacted by a weaker euro. Strong performance across several industries, including automotive, consumer electronics, medical devices and food, drove factory automation growth in this region. Factory automation revenue in the Americas set a new quarterly record in Q4. Revenue grew in the low teens over Q4 2013, which had been particularly strong because of the substantial revenue from our package delivery company. In Japan, the factory automation market continued to struggle and unfavorable currency exchange rate further hurts results. Our revenue from this region, as reported, declined to 27% year-on-year or 17% in constant currency. Moving on. Revenue from the surface inspection market was also above our expectation. Surface inspection revenue was a record $18.7 million in the fourth quarter, which is a substantial increase both year-on-year and sequentially. We continue to perform well in surface inspection, and demand remains at a high level. In the semiconductor and electronics capital equipment market, revenue was $5 million in Q4. Semi revenue softened considerably at the end of 2014 following several quarters of growth. That fact, combined with news from the field, leads us to believe that we passed the high point in semi sales to this cycle. Turning next to operating activities. Based upon the confidence we have in our strategies and the opportunities we see, we continued to make significant investments in our business during 2014 to drive growth in the years to come. We invested heavily in engineering, spending $60 million on RD&E in 2014, an increase of $12 million or 25% over 2013. That investment helped launch more new products in 2014 than in any year in our company's history and we have additional major products slated for introduction in 2015. We expanded our sales channel and significantly broadened our market reach. Activities included adding a significant number of people to our sales and marketing organization, increasing sales force productivity through systems upgrades and process improvements, and investing in our surface infrastructure to support large customers and logistics and other high-growth markets. We added new offices and expanded facilities around the world, including our operations facility in Cork, Ireland to ensure adequate capacity for higher levels of the business. We feel good about our ongoing investments and we believe that they are important to address the growth potential we see for our company. In summary, we reported outstanding financial results to 2014. The result of the team's strong execution on our long-term strategies. With the excellent progress we made during 2014, we believe that 2015 will be another record year for Cognex on both the top and bottom lines. Here is the specific guidance for Q1 of 2015. We expect revenue of between $108 million and $111 million. This range represents growth of 19% to 22% year-on-year, even with an expected unfavorable impact from a stronger U.S. dollar. Gross margin is expected to be in the mid-70% range. Operating expenses are expected to increase by up to 6% from Q4. We're gearing the organization for a higher level of revenue expected in subsequent quarters. In addition, we see an increase in stock option expense and incremental fees related to our patent lawsuits against Microscan. The effective tax rate is expected to be 19%, excluding discrete tax items. Now let's open the call up for your questions. Operator, we are ready to take questions.

[Operator Instructions] Our first is coming from Ben Rose.

A couple of questions. The machine builders in Europe have traditionally been a strong customer segment for Cognex, particularly on the machine vision -- in the machine vision business. And can you give us your sense, Rob, of the strength -- current strength in that market?

Yes, well, we see continued strength in adoption in machine vision by machine builders in Europe. In contrast to maybe what you read about the broader market, we certainly see exporting. Machine builders seem to be continuing their strength and growth. Another factor that we see among European machine builders is, vision is becoming less expensive and easier to use and easier to integrate. And that's allowing us to penetrate machine builders in markets that in the past haven't been -- haven't had the sophistication to apply machine vision. I'm thinking particularly food and beverage, pharmaceutical type machine builders. So we see strength -- continuing strength currently and some nice market dynamics playing in our favor among -- in that market.

Okay. And then, just a question on the outlook in the Far East. I know that, in the past, you've noticed -- that you've noted some seasonal weakness in China due to the Chinese New Year. Can you just maybe update us with your thoughts on the outlook there?

Well -- Chinese New Year certainly happens every year in the first quarter. That's -- no new news there. But I would say, kind of if you take that out of both sides of the equation, last year and this year, where -- we think we see continued strength and growth in our business in Asia. And we do -- we saw a strong finish to last year and a strong start to this year in the underlying business.

And our next question comes from Holden Lewis. Holden Lewis - Oppenheimer & Co. Inc., Research Division: You talk about the amount of money that you're going to be spending in the most recent year as well as in the Q1 for these opportunities as you move through the year of 2015. Can you talk about maybe where we are with a couple of these opportunities? I would imagine that you're talking about new product launches, you may be talking about maybe additional large orders coming through kind of like maybe what you had last year and then sort of just run rate growth. I'm just sort of curious about your spending, is it going to all 3 of those things? And kind of what the status of those items might be at this stage?

Sure. Holden, I think if you look at what we said, there are some kind of sort of specific things related to Microscan lawsuits and stock options. But if we peel those away, really, the major areas of increase in spend are around gearing up for business we see coming later in the year and that we expect. And it is in all of the areas really that you talk about. We do have some large customer opportunities that we're looking to execute on and that we think can bring substantial revenues to the business in subsequent quarters. And in addition to that, we are bringing a lot of important new products to market, and obviously, investing in getting those out of the door and the sales force supplied with them as part of what we need to do to sustain significant growth we see in factory automation. And I'll just go back to what I said earlier about large opportunities we see and large customer opportunities, I think we see those coming both in consumer electronics, but also in logistics and gearing up our organization to support those are expenses we're taking now and we expect to see significant revenue come in future quarters. Holden Lewis - Oppenheimer & Co. Inc., Research Division: Okay. And just a follow-up, I mean those large customer opportunities, have you seen -- since sort of doing the first one in Q3 of 2014, has that been a bit of eye-opening event for other customers in as much as having done that, you're seeing your pipeline of maybe not $70 million orders, but your pipeline of $20 million, $30 million types of opportunities, are you seeing that begin to fill up meaningfully or is it still just 1 or 2 customers here and there? How is that evolving?

I think it's a bit early to speculate on that or to talk about that, the largest customer, in terms of how they're going to play out in terms of more business. But I would go back to what I'd say, and I think we do see large opportunities in consumer electronics and logistics. And obviously, there's a lot more of those and a lot more sizable at Cognex today than there was 2 years ago.

So our next question comes from Jim Ricchiuti. James Ricchiuti - Needham & Company, LLC, Research Division: Well, just on that last point that you made. If we go back to that -- the order that you received from that large customer last year, I believe you got it in the spring and it shipped in Q3 obviously. But as you look at some of the opportunities that you see out there with other potential large deals, are these -- do we have that kind of a lead time, where we have -- you would have to see these orders earlier in the year to potentially ship them in the back half?

Jim, I would say, it's -- the kind of lead times that you see in different markets are different, right? I mean, automotive tends to be a larger, slower market in terms of 3-year product roadmaps being implemented and you intend to have more visibility about how business will play out more gradually in those markets. But I think in the 2 markets we were discussing, logistics and consumer electronics, there can be very significant deployments and at relatively short notice. Sometimes, things can be in our funnel and close within -- a booking in 1 quarter can close in the next. And so it can move quite quickly, I would say. I think it's too early to speculate about big order volumes, specifically, or the timing of orders in logistics and electronics at the moment. But obviously, when we tell you we expect top line growth and we expect bottom line growth for this year on top of the excellent year we had last year, you can see that we're certainly expecting continued strong growth in factory automation and continued -- excluding those larger opportunities and certainly some larger opportunities to materialize as we move through the year. James Ricchiuti - Needham & Company, LLC, Research Division: Can you comment on the strength of the SISD business that -- can you talk about where that's coming from and just generally what the outlook looks like for that business in 2015?

Sure. Yes. Our surface inspection business had an outstanding quarter in Q4, as you already note, and the team executed very well. There was significant increase both year-on-year and sequentially. We're seeing growth in such areas as specialty metals, like aluminium. I mean, certainly, you've -- you read a lot about the adoption of aluminium in automotive, that's an area that our team excels in and where we're generally recognized as the gold standard for inspecting aluminium going into car bodies. But I don't want to give you the impression that the outstanding growth was purely around that. It was pretty broad-based both in paper and in metals. And broadly speaking, revenue for surface vision was strong in most regions of the world. In addition, I would say, Q4 is traditionally the strongest quarter for surface vision. James Ricchiuti - Needham & Company, LLC, Research Division: So potentially you will see that slip back, and we know it's very uneven business, but it sounds like you feel like there's a decent -- a reasonable pipeline of opportunities for that business as well in 2015?

Yes, sure. I mean demand in surface vision remains at a very high level. And -- but you're right, we don't expect them to be close to that record revenue we saw in Q4 as we move into Q1.

So we'll take our next question from Jeremie Capron.

I wanted to go back to the outlook for this year, and you seem to be very confident in your ability to grow both the top line and the bottom line. I wonder if you could give us some color on margins. Obviously, we've seen a major increase in operating margins this year. Do you expect cost to trend up at a similar pace as revenue this year?

Jeremie, overall, we expect revenue to grow faster than expenses over the year, but not in the first quarter as I told you in the guidance. Clearly -- and as I've also told you, we expect to see revenue grow as we move through the year. Traditionally, the first quarter is the lowest revenue quarter at Cognex and we expect that to be the case this year as well. So I think if we peel it back, revenue growing faster than expenses, gross margins in the mid-70s, I think that can kind of give you a sense of where we expect things to land as the year goes forward. There's going to be headwind from currency obviously and I think it's too early to speculate about the big order volume or timing of big orders in logistics and electronics. And of course, we'll be updating you on all of that as we move through the year.

Okay. And what end markets do you see driving growth for 2015?

Well as we look across our markets, we see growth in almost every market that we serve, with the exception of semi. We do expect every market this year to grow. Traditionally, our large markets, automotive, we see a good steady adoption of vision and factory automation in automotive. And -- but that's probably going to be a smaller growth market on a percentage basis. Consumer electronics has been a great growth market for us in recent quarters and we would expect '15 to continue to show growth in that market this year. And in fact, in 2014, consumer electronics actually was a larger market than automotive for the first time in probably 5 years at Cognex or more. And then, we come to a whole series of other industries, where we're seeing the adoption of machine vision around the dynamics I sort of discussed earlier in the call, where machine vision is becoming less expensive, easier to integrate, higher performance and that's driving its introduction into many verticals that haven't used machine vision extensively in the past. And I'm thinking of markets like food and beverage, consumer products, tobacco for instance, pharmaceuticals, medical devices, and those markets, although they're still relatively small, all of those less than 10% of our overall revenue, we do expect those markets to growth at a high percentage rate. They did last year and we do expect them to do so again next year -- I mean in 2015.

And maybe, lastly, going back to your guidance for gross margin in the mid-70s for this year. I mean I understand in 2014 you had the large volume orders that probably weighed on the gross margin in Q3 in particular. Should we read your guidance as basically not much change in the mix when it comes to large orders versus more the regular, smaller orders that you historically have been booking?

Well, I would say, gross margin in the mid-70s is kind of where we see the picture shaping up at the moment. And there is some hit to gross margins sometimes on larger orders like the ones, which we discussed in logistics or consumer electronics where they require more in-depth engineering service support from us. So it's possible that will be slightly dilutive to gross margins. But then I think with the overall growth we see in the base factory automation, where margins are higher, should be accretive to gross margins. And then, surface inspection, certainly, is dilutive to that 75% number. So all those factors are kind of at play, but I -- so that's how I would answer the question.

So our next question comes from Richard Eastman. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Can I just ask, Rob, I think at the beginning of your comments, you had talked about the factory automation sales in the quarter exceeding plan, could you just speak to maybe which end markets maybe were measurably above plan in the fourth quarter if possible?

Well, yes. I mean I would say that actually the performance was very broad-based. So it wasn't like this was one end-user market. I'm talking about factory automation here. So we saw a strong end to the year in automotive, in general ID products, we saw a lot of -- strong end to the year. There's a dynamic around logistics basically not -- tending not to purchase in the fourth quarter because they're gearing up to support the year-end Christmas, Chinese New Year-type rush, though. In fact, that market wasn't a contributor particularly to the kind of growth in the fourth quarter. So -- and obviously, some of the large customer revenue, as you'll have observed, really occurred in Q3. So sequentially. That in the consumer electronics space was down sequentially, but still above our expectations. So my answer, really, it's very broad-based in general solid factory automation growth. I think coming into the quarter, Rick, to answer your question in a different way, this time sort of 13 weeks ago, we were a little more concerned about kind of the macro situation, some of what we were reading out of Europe and China. And I think as we went through the quarter, that didn't really materialize and we saw more just general strength. And we saw our sales force executing very well at the back end of the year in a broad-based sense. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I see. Okay. And then towards the front of the K, the backlog at year end is plus 25% year-over-year. And there's just a reference to factory automation and a reference to SISD. But the shippable backlog in the MVSD business as well as the SISD business is significantly different. And I'm just -- I'm curious, does the 25% growth in backlog, would you apply that growth rate year-over-year similarly to the 2 pieces, to MVSD as well as to SISD, or is one of the other stronger?

Yes. I think, Rick, the MVSD backlog at the end of fourth quarter this year is significantly higher than it was last year. And there's been a decrease in the SISD backlog as a result of, as you may recall, we had some deferred revenue at the end of 2013 on SISD. Backlog includes both orders expected to ship plus any deferred revenue. And so SISD was a little bit higher than normal last year. And we're seeing an increase this year in MVSD due to a little bit of deferred revenue and simply because we did have a strong bookings quarter in Q4, some of which shipped and some of which we expect will ship here in the first quarter. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So -- and you would attribute -- could you attribute the MVSD backlog growth more to the transactional business versus any large customer stuff?

I think one of the big increases was we did see -- we have -- at the end of each particular quarter, we have some deferred revenue on -- at both divisions. And I think this particular year, because of some deliverables that weren't done by year end, I think we've seen an increase, if you will, in the deferred revenue at MVSD more so than we had seen in the past. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I see. Okay. This -- and can I ask just, there's just been a reference to larger pieces of business, both consumer electronics and logistics, and we're gearing up on the field service, I think you made that known as well, that we have to have -- there's a tail on the service side. But is that -- is there a service revenue tail to these larger orders? It doesn't matter which customer, but do we sell this with a service contract, these larger pieces of business, how does that work?

I'm sorry, you're going to finish the rest of your question?

No, I'm and just curious how we sell these larger pieces of business if they have a service contract with some -- with a revenue stream for a year or 2.

The answer to that is no, there's no revenue stream going out a year or 2. It might be a quarter or 2 relative to making sure that our vision systems up on the production line are up and working appropriately during not only the start up of the cycle but for some number of months afterwards. But clearly, not more than like a 6-month period. So there's not 1- or 2-year tail. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I see. So the utilization of your field service just comes with overlapping contracts essentially?

Correct.

So we'll go with our next question coming from Ben Rose.

Okay, I get to -- I'll just ask a quick follow-up question. This should be for Rob. It looks like Keyence is at least upping its game a little bit with its CVX line, which includes 3D inspection. Could you give your technical assessment of their market position at this point?

Ben, so your question is around their 3D vision displacement sensing product?

Yes, the CVX line?

Right. So the displacement sensing area of vision is a market that Keyence has been in for some time and that Cognex has entered over the last 18 months. And it's a market we see as a high potential for Cognex but still early in terms of our penetration. But we have launched -- we have developed and launched some pretty significant products into that space over the last year and go on doing so. And our proprietary technology, particularly around software -- software algorithms allows us to be very competitive in that market. The Keyence -- I would say that their advantages tend to be around the hardware and their experience of implementing in this market. We've been talking to you about the 3D displacement sensor market for some time, and I think previously you've heard me size the market at around a $100 million and the addressable part of it being relatively small for Cognex. But now that we're out in that market and where our salespeople are selling the products, we're now getting more visibility about the opportunities. And we recently revised or put our estimate for displacement sensors at a market to $200 million. So twice our original estimate. So we're still selling only a few million dollars in that last year into that market, but we do think it's one that offers a lot of potential growth. And Keyence is the leader in that market, and -- but we'll certainly be going head-to-head with them for share in that market.

Okay. Sorry, just what caused your -- what caused you to increase the size market? What type of new, I guess, information was brought to your attention?

I think a lot more activity at customer facing, from sales interacting with customers, from seeing applications and seeing current deployment of competitive products, we realized that the adoption of that technology is broader than we thought.

Okay. And sorry, just a quick question for Dick. Just in reviewing the balance sheet before the call, it looks like there was a pretty decent sized uptick in property, plant and equipment during the quarter, could you just maybe give a little bit of color on that?

Yes, the most significant thing that we did is we spent of EUR 4.5 million to buy the facility in Cork, Ireland that we use as a distribution center. We had rented roughly half the space there and -- we had rented a lot less than half, but over the last couple of years, we've had to increase the amount that we leased because of the business growth. We spoke with the landlord, there was only one other tenant, that tenant moved, and we decided to essentially double our capacity, and so we purchased that building in December.

So our next question comes from Holden Lewis. Holden Lewis - Oppenheimer & Co. Inc., Research Division: I just wanted to get a sense about the gross margin guidance, where you talked about sort of the mid-70s. That's fairly boilerplate language for you guys. And I know that before you got into this larger order, you were sort of running in the 76.5%, 77% type level. And I guess my question is, now that, that large order is out, is that the kind of level that we should kind of build in to our models or is there something taking place within mix or what have you that would suggest that in fact the 75.5 -- or the 76.5%, 77% level in fact should come down towards that mid-70s range?

Well, I think the factors at play here are going to be how much service support we're delivering to our customers and particularly, that's in large deployments in logistics or in consumer electronics. And then the mix of the business, factory automation is going to have higher gross margins, semi traditionally has high gross margins and surface vision lower gross margins. So these are some of the factors that are playing out. When you see a quarter that has a business from large, large customers like we saw in the third quarter of last year and with a lot of service behind it and you see quarters with high surface vision revenue, you're going to see lower gross margins. I think when we say mid-70s, we're thinking 74% to 76% is where we expect the kind of gross margins to land going forward, pivoting around those factors that I just discussed. Holden Lewis - Oppenheimer & Co. Inc., Research Division: Okay. But in Q1, which is where you give your guidance, there obviously is none of that large order in there. You haven't built any in the revenue, you're presumably not building any gross margin, so that drag wouldn't been there. So for Q1, if we assume that there's no large business -- what is the factor that gets you to 75% from the prior non-large business level of 76.5% to 77%, do you see the mix between SISD and that MVSD shifting that much?

There's a little bit of that, less semi, more surface vision, generally factory automation will be, we think, strong in the first quarter, certainly relative to a year ago. And then there will still be some service costs related to support of larger customers, right? And also service costs that relate to gearing up for larger orders coming later in the year. So some of those can be -- will be -- may be dilutive in Q1, holding it back more to that 75% level. Holden Lewis - Oppenheimer & Co. Inc., Research Division: Got it. Okay. And then you mentioned on the balance sheet, or I guess with respect to the buyback, historically you've always bought back stock to offset sort of your share creep and you didn't specifically cite share creep when you talked about buyback and being in the market this time, are you still thinking that it's all about share creep or might you get more aggressive with share buyback in light of the continued expansion of the balance sheet at this stage?

No, I think pretty much, we have indicated that most of our intent or what we have done in the past has been to offset the share creep. Clearly, we would take a look at any opportunistic event or whatever in order to buy back some additional shares should that occur at any point in time during the year. Holden Lewis - Oppenheimer & Co. Inc., Research Division: Okay. But the sentiment towards buyback beyond share creep is no different from what it's been in the past?

At this time, that is correct.

And our next question comes from Bobby Burleson.

So I think a lot of questions have been asked, but I just want to touch on the 3Cs logistics one more time. We look at kind of the consumer electronics, et cetera, business that's materializing in China, do you expect the customer base there to diversify in the back half of this year? And then if you look just at large order potential generally is -- what's the kind of waiting between the likelihood of more of this consumer-type business -- consumer electronics production-type business versus logistics in the back half?

Bobby, I think, we're obviously pretty limited as to what we can say about the large -- the largest customer, but we're obviously under contractual obligations about what we can say with them, but we do expect to do more business with them in the future. I think consumer electronics, in general, though, is a great market for machine vision playing out over the next quarters and years. And I think there are some really great fundamental things that are driving it, some of which include product roadmaps in that industry, where products are getting smaller and more difficult to assemble by human hand and costs are increasing at the point of manufacture in China, where wages are rising quickly. And so a lot of factors there. And also robotics is coming more and more into play in terms of the process of assembly of those products. So I think there's a pretty good rising tide for the adoption of the machine vision into the manufacture of consumer electronics that we discussed, right? So I think that's going on. So I think you have to bear in mind, Cognex is the world's leading machine vision company. So you can pretty much count on the world's leading consumer electronics brand adopting our technology to greater or lesser degree. So -- it's not like -- it's not like we're really at 1 or 2 customers, we're really being adopted broadly at many customers and manufacturers in that market. And I think as they accelerate their adoption of machine vision, we would expect to see more opportunities appearing and growth in that market. You asked about logistics as well and there, we're seeing very strong growth in the logistics business. We have seen for a while. It's part of our ID business that has been growing at 30% regularly for many years now and continues to do so and growing faster than that even last year. Logistics is a great market for us traditionally. While we've been in that market a few years, we've seen a lot of strength in the Americas or in America. But last year, we saw that strength spread to Europe. And then we would -- we do see lots of opportunities for Cognex in machine vision in China as logistics market becomes more automated from what is a pretty inefficient structure today. So we do see lots of opportunities there. I think it's difficult to speculate though without the rates, the amounts and the timing of larger orders that we see in those areas.

Okay, great. And then, you did, at one point I believe in the Q&A session, say, that strong demand would continue in 2015 potentially, even without large orders, did I catch that correctly?

So we see in -- if we strip out the effect of large order that we've seen and you look at our base factory automation business, we saw that grow in around 20% last year. We saw it grow, at constant currency, 20% in the fourth quarter. And we've said for a long time now that we expect factory automation to grow over the long term at a -- we think we can grow that at the rate of 20%. And I don't see any difference to that now. It's difficult to speculate though the effects of things like currency and the effects of customers who may be mid-sized customers today turning into large customers in the future. But, yes, overall, we continue to be very positive about our factory automation business, the underlying many thousands of customers that we serve in that market.

Great. And then just in a couple of key instances, I think you have some competition that's maybe more vertically integrated, maybe making some of its own cameras for more of the solutions. Have you found your focus on the sensor to be an advantage in terms of maybe competitors needing to adjust maybe not build their own cameras in the future, is that then a source of differentiation or an advantage in any way for you technologically?

Well, I think we see customers who want very flexible, highly deployable, modular vision systems. They -- that's what they want from us and that they get with products like In-Sight, our biggest selling product, which allows them to do a whole range of vision activities like guidance and inspection and engaging and identification, all within a tiny and very powerful vision system. So there are companies that sell only vision software, and those are then more difficult to deploy. We sell it in some cases, vision software, but in general, almost always, with it deployed it inside a piece of hardware that makes it easier for use by the customer. So we have some smaller companies who want to sell vision software only, and then they rely on systems integrators often to implement it. And then we have many companies also that are supplying vision systems, in almost all cases, less capable than ours. So I don't know if that answers your question.

I was just wondering, in the cases where customers are actually manufacturing their own cameras as well as sensors rather than buying them from a third party, do you think that, that's led to maybe some -- maybe less innovation in terms of that actual sensor and software technology at they're selling?

In our market, there are many, many companies that supply cameras, right? So they supply cameras and then they integrate with -- in machine vision, they integrate with software, which is where Cognex's core technology is. In most cases, we go-to-marketing it together, with software inside our own proprietary camera, right? In other cases, we integrate other people's cameras. There's lots of change going on in this sensory, camera market. If we move from CCD to CMOS-based sensors is something certainly going on. The better optics that's going -- that's being integrated also. These are things that we leave every day, and we're often leading in terms of lenses and optics and sensors to go into our products. So we don't really see companies going into cameras being -- that's not a concern of ours per se.

So we'll take our next question coming from Jim Ricchiuti. James Ricchiuti - Needham & Company, LLC, Research Division: Rob, you mentioned that this is going to be a year for significant new products. Can -- how would you characterize the new product rollout versus prior years? And when you say significant, do you mean significant in the sense that these will be meaningful contributors to revenues? Or just significant in the sense that this will expand your market presence 1 year or 2 years out?

Jim, so Cognex is a technology company, and we've -- as I told you in my prepared remarks, we spent about $60 million last year on R&D, 25% more than the previous year. And so we have a big engine of technology development going on here. Traditionally, a lot of our most powerful and capable technology is in the area of vision tools. Vision tools that are better than anybody else's at reading barcodes, for instance, when we launched the technological power grid, that is a texture-based algorithm to read significantly damaged 2D codes. We launched that at the back end of last year. And I think it will give us the continued significant advantage in the ID in factory automation-type markets. So there, that's an example of the kind of products that we've launched. But then we've also launched 3D displacement sensor. That is a very sophisticated optical device, that's getting us into that 3D market also. So that's another example. And then, we continue to launch products in ID and vision. I'm not going to speculate or tell you about what is proprietary plans to launch new products, but I think you can expect a lot of new products in a broad range of area -- broad range of areas coming to market in 2015. You kind of said, what sort of contribution will they make to revenue? I think as we'll be replacing some of our older products with new products and we'll be launching products into new spaces, generally, when we launch products that replace our older products, in those cases, they can generate significant revenue in early years, but it's often cannibalizing on existing business. And then when we launch new products, they can take time to get adopted into the market. So their first year revenue can be relatively small, but by the second year they can be contributing very significantly.

Okay, that's helpful. And one final question, if I may. Just on the logistics market. Has the number of customers in the logistics market that you're serving increased meaningfully, say, between 2013 and 2014?

Yes. Definitely. We -- some of our initial foray into logistics were where we were adopted by some very large players in the market who really saw the advantage of our technology, and in many cases, drove systems integrators to adopt Cognex Vision in preference to other competitors. But then, subsequently, as word got out into the market about the advantage of our technology and we started to invest more in our sales force, we've seen a significant broadening of the customers we serve. So now, yes, we see many, many more customers in logistics in 2014 than we saw in 2013. And if I -- when I look at the names of those customers, broadly speaking, of course, they are parcel delivery companies, for sure; a lot now of retail company names, the sort of companies that you see at the mall and the high street; e-retailers, we see a lot of those distribution centers being fitted with Cognex Vision; and then also postal services. So in all those areas, we've seen a very significant increase, and the addition of smaller businesses and integrators that we're able now to serve.

So our next question comes from Jeremie Capron.

You mentioned stock compensation as a factor behind the increase in operating expenses in Q1. Does this relate to 2014 performance or -- because your stock comp has been up to a large extent in 2014?

It relates to a combination of factors, one of which is an increase in the number of some of the shares that were granted in 2014 and what we expect in our annual grant process, which will occur here in early 2015. We expect an increase in the number of shares. We've had a significant increase in our total headcount. And -- all of those have contributed in, plus the stock price, we expect the stock price to be a little bit higher than maybe some of our former grants that are dropping off out of expense. And with that higher stock price, it gives you a higher intrinsic value for the initial calculations.

Okay. And stepping back a little bit from results here and looking at the big picture for vision technology, it seems to me that we're seeing some very large investments in vision technology and research being made by the leading U.S. tech companies like Google, and there's a lot of excitement around driverless cars, for example. My question is about Cognex's strategy here and are you exploring business opportunities beyond manufacturing, industrial and logistics markets? And also, I'd like to know what the impact has been in term of your ability to recruit and the availability of engineering talent in machine vision, have you seen any changes as a result of these big companies moving into the space?

Yes, it's an interesting question. So certainly, this is something that we watch very carefully. I would say something that's important to understand is when you look at the work that some of the big technology companies that you described are doing in machine vision, it tends to be different. It tends to be around self-learning artificial intelligence, where they're looking at huge libraries of images that are varied and try to make sense of it, like finding your photograph among 20,000 photographs on the web. And generally, that kind of -- it's self-learning artificial intelligence-driven and it's performance rate today is, say, somewhere around, I'm going to say, like 60% effective. The vision that Cognex does is very precise, algorithms that perform at 99.9% performance. And it's a very different type of technology and approach. And then the market, obviously, that we're applying that to is industrial machine vision manufacturing activities, where they're very precise and difficult tasks that we have -- 30 years of experience working in. At the moment, we don't see any convergence between those 2 areas, right? And we see huge opportunities for growth in the markets that we're in, industrial, but we do see adjacent markets, and you've seen us kind of moving into adjacent markets, markets like logistics, like 3D displacement sensing, like imagine engines for life science OEM equipment and areas like that. So I think, you're going to see us watch those areas, move into those kind of adjacent spaces, that's part of our strategy, and I think you can expect more of those from us in years to come. You're not going to see us kind of diversify into driverless cars or applications on cell phones for consumer-type applications.

Okay. And what about your ability to attract the vision engineering talents?

Yes, no, sorry, that's a very good question. I think for people graduating out of graduate programs with a specialty and machine vision -- Cognex is a company that's very attractive to them. And we see -- we do see a great flow of talent in that area. I think, for younger engineers coming out of programs, we have seen more competition from companies like the ones that you mentioned in Silicon Valley, who have a kind of a universal brand name, that does make it attractive for some young engineers to go to. I think our philosophy though in general is Cognex office is like a great environment to work in machine vision over the longer term and those companies may be better for people to start out their carrier in. So our approach has been thinking that, yes, in many cases, those companies are going to kind of vacuum up the new graduates, and we're seeing more interest to people who want more of a stable long-term career in machine vision and we have a good supply of those people coming to Cognex.

Yes, this is Dr. Bob, I want to jump in and add my point to it. What Rob said is absolutely right. What we look for are engineers and scientists who actually want to see their products in customer doing things. There's a lot of hype about driverless cars and other similar applications for using vision. And ultimately, they will be successful. I mean not in our lifetime, but there will be driverless cars on the road. But for the next 10 or 15 years, those engineers who want to see their algorithms, their hardware and their software, their optics delivered to customers in the next quarter or next year, those are the engineers who come to Cognex. And also, I would say that it's very helpful that those big brand names are doing things in vision. That gets more people, more students involved in vision and majoring in machine vision and it helps increase the pool of available talent. I would say that we are having no problem in attracting and retaining very, very high-quality machine vision experts and we expect to continue to do that.

And our next question comes from Richard Eastman. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Dick, can I ask you quickly, there's a reference in the press release. In the fourth quarter, currency was -- impacted sales by minus 4%, what was the -- what was the EBIT impact? How well hedged are you? Is this -- this Cork facility was a distribution facility or manufacturing or...?

Well, it's a combination, manufacturing and distribution facility. But the amount that we spent in Cork, that goes into capital on the balance sheet, that's not -- Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: No, I understand. But your costs there are impacted by the movement in the dollar well, and I'm just -- I'm trying to get the conversion to the EBIT line?

Now, what happens is you better -- revenues are clearly in excess of expenses. And I would say that, roughly about half of the -- of what we lose on the revenue side would fall to -- between 50% and 60% falls to the operating income line. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Really? Okay.

Yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then if I project out, it looks like it's not linear, but it looks like the impact on '15 at current at least euro rate to the dollar would be kind of a similar 4% for the full year. It's not linear, but does that kind of matchup what you're thinking?

Yes, well the problem you have is that for most of the year, the euro was running in excess of $1.30, it was a close to $1.35, and then all of a sudden in September, it started its crash. And I guess what I'd ask you is what do you expect the euro to continue to do, because I've seen all kinds of different -- from different banks, prognostications as to where we're going to end the year. And I think the worst that I've seen is parity. There's a bank out there that do -- does believe that we're going to be at parity. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: I'm not that far out. I'm not thinking parity by year end, convention is look at the -- at today's exchange rate, if you run that out through the balance of the year, year-over-year, it's -- the dollar is what, 12%, 13%, 14% stronger. I'm just doing that math and it would seem to come out about 4% for the year. Now if the dollar keeps strengthening, then we'll just -- it's going to be a bigger impact.

Yes, that's about right. I mean we're taking a look at it quarter-by-quarter trying to figure out where it's going to go.

So ladies and gentlemen, this does conclude your Q&A session. I'd now like to turn the program back to Dr. Shillman for concluding remarks. Dr. Shillman?

Thank you very much. Well, it was an outstanding year and we're very excited as we look forward to the rest of 2015 and see a significant growth and we're very hopeful that it's going to be yet another record year. This is our 34th year in business and I can tell you that the energy level in the company is the highest that it's ever been. And that's not by accident. We're able to perform this well because of the great leadership of the company, Rob Willet's leadership, and because of the team and the culture that we've built at Cognex. We have a philosophy that when Cognex wins, we all win, and we've been able to achieve that through motivating our employees by giving them a sense of ownership in the company, primarily through employee stock options. We don't pay top dollar to get people, but we give them the best economic package. If they work hard and if the company succeeds, they win along with our shareholders. I would ask you, those of you who have the opportunity to influence the proxy departments in your firms to tell them to support what has been working so well for these 34 years, to treat our employees as owners as if they were shareholders of the company because that's what stock options do, and I ask you to please have your proxy departments vote with management when it comes to issues concerning stock options. Having said that, I look forward to speaking to you again on the Q1 conference call for 2015 and presumably reporting fantastic results again. Thanks for joining us and thanks for your continued interest in Cognex.

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