Good day, ladies and gentlemen, and welcome to the Cognex First Quarter 2015 Earnings Call. At this time, all participants will be in a listen-only mode, but later, there will be a chance to ask questions and instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to turn the call over to your host, Chief Financial Officer, Dick Morin.

Thank you, and good evening, everyone. Earlier today, we issued a news release announcing Cognex's earnings for the first quarter of 2015, and we've 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 of 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 thanks to all of you on the call this evening to discuss Cognex's first quarter results. There are two topics that I'd like to cover with you before Rob and the team at Natick dive in to the details of the quarter. First, as you can see from the press release issued earlier today, one of the two, the Board reinstated our quarterly cash dividend. Some of you will recall that two years ago we prepaid dividends for all of 2013 and 2014 so that shareholders could benefit from the lower federal tax rate that existed at that time. Now that the prepayment period has passed, the Board reinstated this quarterly dividend at $0.07 per share payable in Q2 as more details are supplied in that press release. By the way that $0.07 compares to a split-adjusted dividend of $0.055 per share that was last paid in Q4 of 2012. My second comment is regarding our financial results. As you can see in the earnings release the year started off on a very strong note. Our business has substantial momentum, which is only partially driven by a handful of large orders, some from manufacturers of consumer electronics, some from large retailers and some in the logistics space. Larger orders always generate a lot of questions from the Street, some of which we cannot answer because of the confidentiality issues with those customers and some of which we may choose not to answer because we want to keep our competitors in the dark. Bottom line is that going forward we may not tell you about large orders at all and if we do, we will only speak about them in very general terms. Now I'd like to hand the microphone over to my partner, Rob Willett, our President and Chief Executive Officer, who will give you details on this record first quarter. I'll be available at the end of the call to answer any questions that you may have for me. Rob, the microphone is yours.

Thank you, Dr. Bob. Good evening, everyone. I am pleased with the results we reported tonight for the first quarter of 2015. Revenue, net income and earnings per share all set new first quarter records as a result of our ongoing investments in new product development and sales. Revenue was also higher than the guidance we gave to investors in February. Revenue increased 25% year-on-year to $113 million and that's despite a negative impact of nearly $7 million from currency exchange rate fluctuations. Growth came primarily from factory automation, where revenue increased 26% year-on-year. We also saw higher revenue from surface inspection and semi. Gross margin was 75%. Cost reductions, volume purchasing and manufacturing efficiencies were offset by pricing discounts on some large orders and higher new product introduction costs. Operating expenses increased by 9% from Q4. Our confidence in Cognex's growth prospects led us to make substantial investments during what is typically our lowest revenue quarter of the year. We feel good about our ongoing investments in engineering and sales and we believe that they will be important to delivering top and bottom line growth over the long-term. Operating margin was 21%. While most companies would be pleased with such a high level of profitability, it is below the 25% operating margin we've reported a year ago. We expect operating margin to improve as we move through the year. Reported earnings were $0.23 per share that is $0.02 higher than the first quarter of 2014 and $0.01 above Thomson Reuters' First Call consensus estimate. Let's now turn to the details of the quarter. Factory automation revenue was $95 million in Q1 and accounted for 84% of total revenue. As I said a moment ago, factory automation revenue increased 26% year-on-year. The growth rate in constant currency was an even…

[Operator Instructions] Okay, we’ll take our first question from Ben Rose from Battle Road. Please go ahead sir.

Good afternoon, gentlemen. With regard to the guidance for the first quarter, is the large consumer electronics order that you’re expecting, is that – can we take that to be a valid reference to the large customer in 2014?

Hi, Ben, Rob here.

Hi.

So you said guidance for the first quarter.

No, I’m sorry. I meant to say guidance for the second quarter.

Right. So we have given guidance and obviously that includes all of our business and we are not obviously giving specific guidance on any particular large customer.

Okay. And can we infer that part of the increase with regard to second quarter guidance would be traceable to business in North America?

I mean, I think we have reported pretty strong growth in Asia and Europe, and some growth also in the Americas and what we reported for Q1, I think we expect sequential growth in all of those regions in the second quarter. But I wouldn’t infer from my remarks that we are going to get large growth, particularly in the Americas.

Okay. Is there any – just, sorry, one final question. Is there any commentary that you can make with regard to some of the softness year-over-year in North America beyond just kind of general reluctance on the part of some customers?

Well, I spent a lot of time with customers in the first quarter, both partners and with end-user customers. We saw some softening in the Americas as the quarter progressed, and there are lot of factors sort of being cited in the market, none of them particularly clear as a major root cause, but I would say we did hear reports of some orders being delayed. That said, we do expect growth to continue in the Americas and our business in the Americas remains at a high level and revenue comes from a broad range of industries, including automotives, logistics, consumer products, medical devices and food. So I wouldn’t want you think that our business in Americas is struggling more than the market, I don’t think it is. I just think we are seeing some tentativeness there that I think you’re seeing a lot – across the lot of industrial companies right now in the Americas.

Okay. Thanks very much for the additional color.

Okay, thank you. So we will take our next question coming from Jim Ricchiuti from Needham & Company.

Thanks, good afternoon. Rob, just want to make sure I understood you correctly, you’re saying that operating margins should improve sequentially as you go through the year?

Well, we don’t give operating margin guidance for the year, Jim, but I think you can certainly infer from our Q2 guidance where we see very significant revenue growth and relatively a lot less expense growth that we can expect some better operating margins in Q2. And then I also said that I expect revenue to grow faster than expenses for the full year, so which would also infer some improvement in operating margins as we move through the year. Certainly, what we told you tonight was we see a lot of momentum in our business on the topline and we invested quite heavily behind that in the first quarter, which is normally and this year was probably again our lowest revenue quarter for the year. So as a result we reported some lower operating margins in the first quarter. But we continue to expect to see those operating margins improve through the year. And I think if you look at our results last year, you saw some very significant [follow] [ph] through on the incremental revenue that we had and you get a sense of how much our margins can improve when the topline grows at the rate it has been.

So just looking for instance at the R&D line, it sounds like there were some heavy investments, continue to probably be some heavy investments again this quarter, would you assume that that sequentially in the second half slows down a bit?

Well, I think we’ve told you that relative to the topline certainly and quarter-on-quarter in Q2, we will see a slowing of the rate of increase. And I think in general we can’t say yes, but the R&D growth rate year-on-year and sequentially isn’t likely to grow at the rate it has been as we move through the year. We've been making some major investments around some large opportunities and new products that we’re bringing to market. We expect RD&E to be within our normal range for the year, which is 10% to 15% of revenue.

Don't know if you could answer this but can you say if there were any 10% customers in the March quarter and do you anticipate one or more 10% customers in the second quarter.

Yeah, we can't say more based on the confidentiality we have with our large customers.

Okay, I'll jump back in the queue, thank you.

Thanks Jim.

Thank you. And we'll take our next question coming from Bobby Burleson from Canaccord.

Hi, congratulations on the strong results and strong guidance.

Thank you Bobby.

I just have -- it's a couple of quick ones. Are you expecting nice seasonal growth second half over the first half or given the magnitude of the revenue you're seeing in Q2, does that kind of mitigate the potential for seasonal uptick starting in Q3?

I would say, we're not giving guidance for the second half of the year, but we do see strong momentum in our business with -- in the base factory automation business that you saw in what we reported tonight, and also in large orders and large opportunities we see in consumer electronics and logistics that we see coming. So it's too early to give guidance on the second half of the year and of course, we do face a pretty tough comparison with Q3 of last year, where we reported huge revenue from one customer flowing through the P&L. Other color I'd give you is I think we do expect Q2 and Q3 to be the largest revenue quarters for Cognex, that's from what we can see today, where we think those are sort of the seasonal aspect of consumer electronics, logistics and some of the other markets that we're serving more at this point may mean that those two quarters are the high quarters for us. But I can't really answer specifically second half on first half and what we expect in that regard at this early stage in the year.

Great, thanks. And then, you're using plural - large customers or customers with large orders this year, so it sounds like more than one. So I'm wondering, looking at consumer electronics, is that an area where you could have couple or several meaningful customers this year or does one have to look across consumer electronics and logistics, when we start talking about more than one customer driving large orders?

Well, I think what we've seen over the last year and as we look forward is some strong interest from customers in consumer electronics and logistics, where large customers are putting our technology to work and where we’re supporting those customers with quite a lot of technical help in implementing our technology and that; we do expect to result in large customers in those two vertical markets. Beyond that I wouldn't say whether there will be as large as what we did last year with one customer or how that spread will take place but we're optimistic about our technology being applied more broadly and at large accounts in those vertical markets of consumer electronics and logistics.

Okay, great and just one last one before I jump back into the queue. Just wondering in terms of the new products that you're talking about, are those revenue opportunities for this year or looking out to 2016 or beyond when those forthcoming announcements become meaningful revenue opportunities? Thanks.

Well, you're going to see some new product introductions coming from us in the next weeks and months and these are products, many of them are products that will make us even more competitive in our core markets. And then potentially, there will be some announcements later also about new markets we may enter but it's too soon to give you any specifics on those but we've been investing a lot in R&D and we're very excited about the new products that we have coming and I think they will be the source of discussion for us very soon here.

Okay. Thank you and congratulations.

Thank you.

Okay. We’ll take our next question from Jeremie Capron from CLSA.

Hi. Good afternoon, everyone.

Hello, Jeremie.

Hi, Jeremie.

Congratulations. Great quarter. And when I first looked at your second quarter guidance, I wondered for a second if I was looking at please delivered on that in reference to your annual report, which I very much enjoyed. And anyways, we've seen quite a few companies over in Japan and Europe, factory automation companies that have also reported very strong orders from consumer electronics companies, particularly related to smartphone manufacturing and metal casing in particular and some of these companies have expressed concerns around lack of visibility beyond September, October. So I wander if you could help us understand what your visibility is beyond what looks like a massive second quarter and the second part of my question is about the use of Cognex products, consumer electronics companies, are you very concentrated on that metal casing opportunity, are we looking at a much broader opportunity for the use of Cognex machine vision?

Right. Yes. So, obviously, we don't really give guidance for the second half and we don’t talk specifically about customers. That said, we see lots of applications for Cognex vision in consumer electronics and many potential large accounts that we can help and work with in that market and we have a pretty major asset underway to address that potential. In terms of what that is, the applications are very broad, so it's not limited to the metal casing, the PC size, the peripherals, it's a lot of potential application for replacing humans in the supply chain where automation and particularly vision is allowing companies in that market to, in some cases, make their product which is becoming too small for human hand, but also to make it more cost effectively and reliably and to higher quality. So this is a pretty broad market and I wouldn’t want you to think it’s limited to any one specific application like metal casing or others or to one particular account, obviously there are many large players in that market and many more, kind of, product roadmaps that are underway from companies for mobile and wearable electronic devices. So we believe this is a strong potential market for Cognex, it is today, you're seeing some of that coming through, but I think we have high hopes for it for many quarters to come. That said, some of the revenue may be bumpy and it’s very hard to predict for us and certainly not able to share with you what we think the kind of flow of revenue per quarter would be out to the second half or into next year for any of these customers specifically or as the industry in general.

Great. Thanks for that Rob. And I'm assuming I was a little bit surprised by the strength in Europe and Asia, we feel that coming and you had flagged this rank there and opportunities in Asia. Now, Europe was up more than 40% if I remember correctly, is that a true reflection of your European customer base or is there any proof from Asia that’s included in these numbers?

Yes. So growth in Europe factory automation came from a broad base of industries, including consumer electronics, automotive, product security, pharmaceuticals and medical devices, right. So it’s pretty broad. What I would say is what we see is OEMs and machine builders in factory automation in Europe I think are becoming increasingly competitive, partly because they just make great products, but also because of the weakness of the euro is making them more competitive and more confident about investing and I think making customers more interested in placing orders into that market now. And I think we are the beneficiary of that. I also think there is a trend underway where vision is becoming easier to use, less expensive, smaller, more powerful, easier to integrate and that's causing it to proliferate in markets that are strong on machine builders and certainly Europe that applies too. So I think we are seeing a broad-base uptick in demand for our products, much of it for export in Europe.

Thanks. And then maybe quickly just one more for Dick. I understand the compensation systems, it's an important element of your strategy, but I couldn't help but notice the very large increase in the stock option expense year-over-year, you talked about a higher share price and more employees, but, Dick, how should we expect the stock option expense to grow in the remainder of the year and further than that if you can give us any color?

Sure. Typically we see our stock option expense overall is highest in the first quarter. That is when we typically give out our annual grants. Part of the reason for the increase year-on-year is our options vest over four years, so the options that dropped off out of expense have been granted out of price of $15 a year, $15 an option rather whereas the options that we've granted in the past two years were about $40 and $41 apiece. So you can see the big difference there that created it, but we expect to see a decrease in option expense beginning right away in the second quarter and holding for the rest of the year at a lower level.

That's helpful. Thanks and good luck.

Thank you.

Thank you.

Thank you. And our next question comes from Richard Eastman from Robert W. Baird.

Yes, good afternoon. Hey, Rob, could you just provide a little bit of color within the product ID and logistics piece of factory automation. Did that -- can you just give a quantitative, qualitative comment on growth there?

Yeah. Sure, Rick. So our momentum in ID continues to be strong, particularly in logistics and ID products were growth driver in Q1, outperforming our overall factory automation business year-on-year. So when you look at how well we grew, you can see ID did better than that even, so certainly it's achieving that 30% compound annual growth rate that we've been seeing and continue to expect from that very strong growth initiative of us. Notably, Q1 was strong for our ID products in Asia particularly and then I think as we move through the year, we're confident about logistics where we think quarter two and quarter three tend to be the high quarters for logistics and we see a lot activity in the funnel and what we think is a very, very competitive product range for large players in postal, logistics and retail and Internet. So lot of good momentum continuing in ID and also some pretty interesting product launches on the horizon as well.

And then just I want to double-back for a second. In Europe, what's the visibility in Europe on the 20% plus growth rates as we move into the second and potentially the third quarter?

Well, we have a sales funnel, which we monitor pretty carefully, and that only takes us out so far, but what I would say is, we've seen strong momentum in Europe now consistently as we've moved through the year and I don’t see change in that. I see continued strong sales funnel opportunities and some strong fundamentals. And then I also see some longer term trends like the one I spoke about with larger OEMs supporting industries and business that might before have gone to America or to China or Japanese machine builders. So pretty optimistic as far out as I can see. But that said, I don't think I can see much beyond the end of Q2.

Right. And it’s -- this large customer order in ’14 -- 2014 channeled through Europe, I think that’s where the buying group was or whatever, was there any change in location where that order was -- shipment was recorded, because Asia ex-Japan was plus 50%? I am just trying to get a sense of where that revenue would have been recorded until we know how much it was.

Yeah, we don’t really comment in -- don’t intend to specifically comment on individual customers and where the revenue comes from at this point.

Okay. And then, let me just good question. What -- given where we are with the business, the business mix, the momentum in the business, how is Cognex now defining a large order? I mean, we use to couple together three orders and we’d release a press release that said $4 million and three orders few years ago. And obviously last year, the business inflected on the machine vision side. So, I’m just curious how do you -- what’s a large order for you guys today?

Good question. Clearly in the past, when we hit -- if we had an order for $1 million, that was considered large. Now, we’re getting quite a few that are at that level and getting a number of orders for couple of $3, $4, $5 million, we don’t intend to issue press releases every time we get an order at that level.

Okay, good. Okay, that’s helpful. Thank you so much and congrats on very nice quarter.

Thank you.

Thank you. We’ll take our next question from Tom Hayes from Northcoast. Please go ahead.

Thank you, good morning -- or good afternoon, thanks for taking my question. Rob, I’m just wondering maybe if you can provide some additional color on the growth drivers in China. You’re growth there seem to be going against a lot of the news we’re seeing on slowing factory activity on that market. Just your thoughts on how you continue to grow that business.

Sure, yeah. So, we think very positive about China for many years now and there is some fundamental drivers that make us very optimistic about that market and those are things that we’ve spoken about in the past, but the growth -- the fundamental growth rate of the economy even though it’s slowing, it’s still pretty substantial. The shrinking labor market, a lot of products are going into contract manufacturing or large manufacturing facilities that have tens of thousands of people working in and those -- their wages are rising faster than productivity, which is really creating a sweet spot for automation in that market. And then, actually the tasks that have to be performed are becoming too difficult and tasks that are not well done by humans and the products becoming small, which are too small for human hands to manufacture. So, some of those trends really I think have a long way to run and I think we’re very well positioned and we are seeing a lot of growth around that. So, I think those are kind of the fundamentals and I don’t see those having changed much even though we’re reading pressed about slowing GDP growth rates and PMI data out of China. And then, clearly, in terms of vertical markets, we see a lot of growth in consumer electronics and automotive. We also see very strong growth in ID in China, where some of the specific problems around tracking and tracing components in the supply chain and problems around that, counterfeiting and full quality and supply chain is causing the adoption of a lot of barcode applications to metal parts and other parts. And then finally, I would say, China has really developed a great deal in the last few years in terms of creating a machine builder infrastructure. There are quite a lot of very competent and very fast growing machine builders supplying automotive, supplying consumer electronics, supplying pharmaceuticals and the sort of thing that we’re used to seeing more down in places like Southern Germany, Switzerland and Italy, you're now seeing more and more very competent engineering groups in China and those companies are adopting Cognex's vision and we're working very closely with them. Final thing I would say is, we've invested a great deal in our infrastructure and team in China; we have a very strong management team in place now with people who have joined us, new Cognoids over the last couple of years joining us from companies like Rockwell [indiscernible] and GE to lead our management team there. So the level of professional leadership we have and the kind of aggression and ambition we have in China is very strong and I think is -- I see continuing regardless of whether a few points of GDP falling of the national data.

I appreciate the color, thank you very much.

Thank you. And I'm showing our final question at the moment from Jim Ricchiuti from Needham & Company, Jim please go ahead.

Rob, given what you're seeing in ID from some of these vertical markets; postal, logistics, retail, Internet, is there a chance that this business, this market is growing faster than 30%?

Well, first of Jim, we think the market itself is growing relatively slowly like --

Well for you, let me --

What we see is, we have released very powerful technology that's replacing lasers and low performing imagers from larger players and our technology is causing us to gain a lot of share. Do we have the potential to grow faster in that market, yes, but we feel good about the 30% growth rate we're investing at the moment. I think there are obviously you know to kind of go back over the numbers, we said it's a $900 million market, overall the market itself maybe growing mid-single digits. We grow by gaining share which obviously we've been doing very significantly but also by expanding the service market. We did that with logistics a few years ago and I think you can expect to see us further expand the market for -- that we serve for ID in the coming years, which will also help our growth rate and we're very enthusiastic about the opportunities we see there and the competitive dynamics where we think we have a lot of advantage.

And one final question from me. With respect to the information you’re providing, I think we all understand the customer sensitivity but it also sounds like there is some issues regarding how much information you want to provide your competition and that's my question. Given the markets, the activity that you're seeing in logistics, in the consumer electronics markets, are you seeing much in the way of a competitive response?

I think as we've got into these markets, we've learned a lot about the competitive dynamics and we've learned a lot from the end user customers in those two markets you named. I think we see some competitive response, in logistics, certainly we've seen some of the competitors in that space launch products that saw lower performance but more similar in approach to the technology solutions that we have, so we've seen some of the response in that space. I would say in consumer electronics, no, I would say we and you know our -- the larger competitors are well focused on that market and so I haven't seen anything that they've done specifically different as a result of our becoming you know are obviously gaining large revenue growth in that market.

Okay thanks, congratulations.

Thank you.

Thank you. And I'm showing a question from Jeremie Capron from CLSA. Jeremie your line is open.

Hi, and thanks for taking the follow-up. I wanted to ask you about your initiatives around life science and medical devices. You talked previously about winning designs in that space, I wonder if you could just give us an update and give us a sense of when we should expect this market to stop moving the needle at the revenue level for the company?

I think it’s sort of a two-part answer. One is, we are making good progress, but we are also making such great progress in other areas. I don’t think you’re going to see life science register as sort of a significant contributor to our revenue over the next couple of years. But here is what I can tell you. We have a number of design wins with manufacturers of OEM equipment and life science, and they are enthusiastic about our technology. And we had one very high volume customer in that market rolled out a product in their machine, and we will certainly be recording more than $1 million of revenue with them alone this year. We think it’s one of the big players in that market and we also have design wins that we are recording with other very large suppliers of life science OEM equipment, which will – may take a year or two to turn into revenue. So it’s certainly building, we’ll register as a significant source of revenue and if things continue as we expect them to, probably not for the next of couple of years.

Thanks very much.

Thanks.

Thank you. And I am showing no further questions in the queue. I would like to turn the program back to Dr. Shillman for any closing remarks.

Dr. Bob, we are not hearing you, so I think I will go ahead and wrap.

Sorry, I had it unmute.

Okay.

Yeah, thank you. Sorry for that interruption. We reported as you saw rather good results, very good results tonight for the first quarter. And now when we are looking at the order book and getting ready to start shipping in Q2, we expect to deliver even better results for Q2 and that will make it as it occurs a record second quarter for revenue, net income and earnings. So we look forward about three months from now to speaking to you again and reporting on our progress at Cognex Corporation. Thank you very much for joining us tonight.