Richard A. Morin - Executive Vice President of Finance & Administration and Chief Financial Officer Robert J. Shillman - Chairman Robert J. Willett - President, Chief Executive Officer & Director.

Jim Ricchiuti - Needham & Co. LLC Ben Z. Rose - Battle Road Research Ltd. Robert Burleson - Canaccord Genuity, Inc. Richard Eastman - Robert W. Baird & Co., Inc. (Broker) Joseph Giordano - Cowen & Co. LLC Jeremie Capron - CLSA Americas LLC Robert Wilkinson Eubank - Chevy Chase Trust Co..

Good day, ladies and gentlemen, and welcome to the Cognex First Quarter 2016 Earnings Conference Call. Currently at this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. Also, as a reminder, this conference call is being recorded.

I would now like to turn the call over to your host to Richard Morin. Sir, you may begin..

Thank you, and good evening, everyone. Earlier today, we issued a news release announcing Cognex's earnings for the first quarter of 2016, 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 a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release. 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 hello, everyone. I'd like to welcome each of you to our first quarter conference call for 2016. And as you've probably seen in the news release issued earlier today, we reported better than expected results for the first quarter of 2016 despite challenging market conditions. Right now, I'm at our R&D office in San Diego.

Everyone else on the call was at our Natick headquarters. For details of the quarter and outlook, I'm going to hand the microphone over to my partner, Rob Willett, our President and CEO, and I'll be available at the end of the call to answer any questions that you may have for me. So Rob, the microphone is yours..

Thank you, Dr. Bob. Good evening, everyone. I'm pleased that the year started off slightly ahead of our expectations. First quarter revenue was $96 million, which was $2 million higher than the top end of the range we gave to investors in February. Notably, demand was higher than expected from logistics customers where we saw more activity than in 2015.

Gross margin was also stronger than expected at 78%, helped by higher than expected product revenue. These positive items combined to deliver earnings for the quarter of $0.17 per share exceeding the Thomson Reuters' first core consensus estimate of $0.11 per share. Let's now turn to the details of the first quarter.

Factory automation revenue for Q1 was $90.4 million. We typically experienced a revenue decline from Q4 to Q1, and that seasonal trend held through again this year. However, revenue was also lower than a year ago, which is not typical. Notably, we saw lower revenue from large consumer electronics orders than in Q1 of 2015.

Revenue outside of that industry did grow year-on-year although the rate of increase was small. Looking at factory automation from a geographic prospective, we now find it is more meaningful to separately report to Greater China, which we define as Mainland China, Taiwan and Hong Kong.

We are also combining smaller countries in Asia including Japan and Korea into a category titled other Asia. Looking at the trends year-on-year in our three largest geographic areas, Greater China was our fastest growing region in terms of percentages growth even though the rate of increase has slowed.

A large contribution to growth in absolute dollars came from the Americas, where factory automation revenue grew faster than in recent quarters. And in Europe, factory automation revenue declined significantly year-on-year due to lower revenue from the consumer electronics industry.

Outside of electronics, revenue showed modest growth even with the negative impact of currency exchange rates. In the semiconductor and electronics capital equipment market, revenue was $5.8 million in the first quarter, down 10% year-on-year. Demand from semi follows the market cyclical trends.

Our expectations for growth in this small piece of our business continue to be low. Next, let's turn to exciting news. We have entered two new markets this year that increased our total addressable market by more than 25%.

Consistent with our long-term strategy, we are deploying Cognex Vision into adjacent markets that are poorly served by outdated technology. First and most important is our entry into a $500 million segment of the ruggedized mobile terminal market.

Our new MX-1000 series combines Cognex's powerful barcode reading capabilities with user friendly smartphones for performing tasks such as inventory management and field service. This innovate approach will replace less capable and more difficult-to-use products that rely on laser-based technology and Windows operating systems.

We've already seen initial sales to several Fortune 500 companies and are currently undergoing trials with a wide range of prospective users. We also entered the $50 million market for reading barcodes on airport baggage.

The market is served almost exclusively by laser-based barcode reading products and we will benefit from the higher read rates and better reliability offered by Cognex's vision technology.

One of the largest international airports in Europe is already deploying Cognex DataMan ID readers and two major airports in North America are in the process of installing our products. My last topic is our outlook.

For Q2 of 2016, we expect that revenue will be in the range of $135 million to $140 million, reflecting a substantial increase over the $96 million reported tonight for Q1. Looking year-on-year, we expect a slight decline in revenue due to large orders from the consumer electronics industry.

Unlike last year, when the majority of orders were recognized in Q2, this year we expect them to be split between Q2 and Q3. Outside of that industry, we expect our business to grow year-on-year. Gross margin for Q2 is expected to be in the mid-to-high 70% range.

Operating expenses are expected to increase by up to 4% from Q1 due to our investments in engineering and sales and to the timing of marketing initiatives. Operating expenses are expected to be essentially flat year-on-year. The effective tax rate is expected to be 18% excluding discrete tax items. Now, let's open up the call for your questions.

Operator, we are ready to take questions..

Thank you, sir. Our first question comes from Jim Ricchiuti of Needham & Co..

Hi, thank you. Good afternoon. The strength that you saw on the logistics market, can you talk about that relative, was it stronger in the U.S.

market, Europe, and to what extend do you see the demand in that area continuing to be strong in Q3, because there is a seasonal aspect to that business as well?.

Yeah, hi Jim. It's Rob. So we've definitely seen a significant improvement in our logistics business in the Americas, or in the United States really. And you rightly point out that that business is a little cyclical, but I think – or seasonal, I would say. And we expect the outlook for the logistics business to be good in Q2 and Q3.

We're less sure about Q4 where seasonality can affect and particularly retailers tend to stop spending and focus on delivering around Thanksgiving, Christmas, and Chinese New Year. But I think we're pretty optimistic about the outlook for our logistics business everywhere.

America is our largest market in logistics at the moment, and we expect that strong condition to continue through Q3 of this year..

That's helpful.

And Rob, when you talk about the consumer electronics business, the split between Q2, Q3, any feel for how that splits? Do you expect a larger contribution in the June quarter versus Q3?.

It's a little difficult to make a call on that at the moment, because sometimes where revenue will land for particular opportunities that we're working on, they can move. I would think we would probably expect Q2 to be a little higher than Q3, although that's not a certain thing..

And if I could, one final question, I'll jump back in the queue. The airport opportunities, is there – could you maybe size that for us? In a normal large-size international airport, what kind of a revenue contribution could that be for you? And is the deployment, I assume, is – you mentioned it's being deployed in two airports in the U.S.

currently?.

Sure. Yeah. So we think it's a $50 million market overall, whether it's one pretty big player today selling most of the laser-based or almost all laser-based opportunity. So we think we have a lot to bring to the party. These are capital projects that occur not on an even regular basis.

As the companies upgrade their lines, I think an average system for one baggage line might be in the range of $60,000, but it's also possible that they'll be outfitting multiple lines at the same time. So certainly, there's accounts we won so far that the opportunity at each airport is in the range of $0.25 million.

And then I think you asked, Jim, something about where. Yeah, two in North America, one in Europe is what we've said..

Okay. Thanks very much..

Sure..

Thank you. Our next question comes from Ben Rose of Battle Road Research..

Good evening, Rob and Dick. Question regarding North America, the pickup that you saw this quarter, I think I surmised from your commentary at the opening that that was mostly in logistics. Could you confirm that that was the case? And regardless, could you talk a little bit about various manufacturing sectors in the U.S.

and what you saw this quarter?.

Sure. Hi, Ben, it's Rob again. Yeah, so I think the Americas market is an interesting topic. Yes, certainly we saw logistics picking up, and that's been a particularly bright spot for our business in the Americas.

We tend to talk about the Americas, so not necessarily the United States, but – and I would say – but North America is really obviously where all the action is. In terms of some specific markets, so yeah, logistics would be our best performing. The automotive market continues to perform pretty well for us in the United States also.

And then other markets where growth seems healthy moving into this year. Particularly consumer products and food and beverage are strong performing markets for us at the moment..

Okay, and just a follow-up with regard to Europe, exclusive of the change in revenue from the large customer in last year's Q1, are the same trends in terms of the end markets similar in Europe as they are in the Americas?.

Yeah, so I think the answer to that is, broadly, yes. Automotive continues to contribute for us. Logistics looks strengthening off a smaller base in Europe, and then, yes, consumer markets looking pretty good..

Okay. I'm sorry, and just one final question for me. In the press release, you specifically cite the expectation for consumer electronics customers' orders in the second quarter. And I'm wondering if exclusive of the large customer that's called out in the 10-K, are there any specific manufacturers that you can mention at this point..

Ben, I think it's fair to assume Cognex is the world's leading supplier of machine vision and we're working with, really, all the major brands in consumer electronics and automotive. So yes, certainly we're working with all of those and we do see some very good growth opportunities with a number of consumer electronics manufacturers.

So, that's certainly the case. I think with our largest vertical in 2015, so aside from the one large customer that we report in our 10-K, we do have a number of other significant customers in that space..

Okay. Thanks so much..

Thank you. Our next question comes from Bobby Burleson of Canaccord Genuity..

Yeah. Good afternoon. Thanks for taking my questions..

Hi, Bobby..

Hi.

So I think just the first one on the mobile terminals, the MX-1000 business, is that appreciably different in terms of gross margins once it ramps to kind of scale versus the corporate average?.

No, we expect Cognex-like gross margins in that business..

Okay, great. It sounds like that's gotten off to a nice start here. Are you going to break it out over time as a separate or at least kind of call out how the revenue's doing in that business? And curious when you think it becomes meaningful..

Yeah, we have no plans currently to call that out. It's going to be part of our ID business and it's going to help us achieve that 30% growth rate for ID.

As this business gets bigger, new markets like the two we've reported tonight, both ID markets, are going to help us continue to grow that pretty substantial business, now more than a third of our total revenue, at the kind of growth rates that we expect. I would say in terms of expectations this is a new market we're entering.

We have a very innovative approach, but it's a market that I think, like other markets we've entered, will probably grow in sort of an S-curve, where right now we have a lot of units out with a lot of customers and they're interested in it, but I don't think we're going to see very large revenue this year.

I think probably relatively small revenue this year, and I expect to see a meaningful contribution next year, and then perhaps we'll revisit the topic of how to report that as we move along that S-curve..

Okay, great. And then just a last quick one, you mentioned that you've got a pretty broad offering into consumer electronics, besides the large customer in the 10-K.

And I'm wondering in terms of large orders kind of broadening out by OEM, do you expect that to start happening next year in terms of a broader base of customers driving the larger consumer electronics orders? Thanks..

Yup. So we – as I say, I think we sell into really pretty much all of the major players in consumer electronics. They all have kind of different supply chain models and different projects that we work with them on, so it can be a little difficult to nail when larger chunks of business will come from companies in that industry.

We certainly do have some pretty exciting and large potential projects we continue to work with on them, but in terms of kind of trying to tell you when those chunks of revenue will arrive or with whom or in which region, we really can't give you any more color than that..

Thank you. Our next question comes from Rick Eastman of Robert Baird.

Question, sir?.

Yes, thank you. Good afternoon. Robert, can I ask you, the Europe number that you disclosed was down 19%.

Is that constant currency or is that a reported number?.

It's recorded number..

That's reported? Can we get a constant currency number?.

Let's see, constant currency – hang on one second, Rick. Constant currency year on year in Europe was probably – we lost about $1 million due to currency, compared to last year..

Okay, so the revenue – okay, the revenue impact of currency in Europe was $1 million. And then, I guess, maybe if I look at your factory automation business and I take out currency and I make an assumption on the large customer, it looks like perhaps that you are – in constant currency that factory automation maybe was up low single-digits.

And I guess what I'm getting at is, is there any discernible improvement around the factory automation business without currency, without the customer noise? Do you view that business as having kind of stabilized or – how do you look at it?.

Yes, so, Rick I think your assumptions about up a small amount is correct. I think – I would say it's kind of operating in a relatively weak set of market conditions currently.

I am – I've spent quite a lot of time in the last few weeks with our sales channel in Europe and in America, actually, and I would say, yeah, the European business is probably as you described it, sort of stable at a low-ish level. Automotive continues to look relatively healthy, but obviously, there's still a lot of uncertainty.

And I wouldn't say the market conditions for industrial products like ours in Europe are particularly good at the moment. But they're not deteriorating or getting appreciably better, as far as I can see right now..

Okay, and then just one last question. On the large customer side of the business, I mean, the reference here is to a much better Q2 and then Q3.

Is it still a solid guess to assume that the large customer revenue is tracking higher in 2016 that it was in 2015? That's still just a solid guess?.

So, yeah – so I think, Rick, we're under a lot of legal obligation not to discuss that customer specifically, so we can't really – can't give you much more color on that..

Okay, all right. Thank you very much..

Thank you..

Thank you. Our next question comes from Joe Giordano of Cowen..

Hey guys, thanks for taking my questions. First, on auto, I'm curious.

Are you seeing your customers actually spending more money or are you just taking a larger share of the overall CapEx spend?.

Well, I think our automotive business was up in the first quarter sort of a double-digits, just, and I would say we're probably holding share or maybe taking small amounts of share in that market.

There's a lot of investment in automation going on in automotives, and there's also a lot of new stuff in automotive, whether – in growth areas of automotive for Cognex, specifically electric, electric cars, and investment in electric drives.

China, although, we're all reading a lot about the slowdown in China, certainly the automotive market for Cognex and I think in general continues to invest pretty heavily in China. And then we're also – we have products, new products, in the areas of 3D, which is a new area for us.

And that's certainly helping to drive some growth into automotive as well. So I think automotive is never going to be a super fast grower for Cognex, and it's our second largest market currently, but it is contributing nicely to growth at the moment and we expect it to go on doing so..

I think it's funny you say 10% is not a super fast grower, considering what we heard across the Street on most of these end markets so far. I think that's pretty good.

Can you maybe discuss, in terms of your consumer electronics, not relative to any specific customer or anything like that, but I feel like there's a lot of confusion about your customers reported volumes of products and how that relates to Cognex' demand for products.

Can you kind of talk about sales volumes at your customers versus the capacity that you're really selling into and how that kind of interrelates?.

Gosh, I could talk at great length about that. Let me sort of think. I think, Joe, I'd say, in general we sell to consumer electronics customers for a number of reasons.

One is where they are trying to implement new features and technology in their product ranges, and they really need really advanced automation and support from Cognex in order to do that. So, that's kind of one area.

And then another area where we see a lot of demand for vision and automation in electronics manufacture is in terms of productivity and taking costs out of the supply chain because there are literally hundreds of thousands, if not millions, of people deployed to manufacture consumer electronics in China.

As we speak, those labor costs are going up and the products are becoming smaller and more difficult for human hands to assemble, so there's a lot of use for vision and robotics to try to address that issue.

I would say as we read about the consumer electronics market, there is obviously differing emphasis on those two aspects, but I think there's going to be plenty of demand for vision among all the leaders in that industry for some years to come to address those two issues..

Okay. That's very helpful. Thank you. And then maybe last for me, just on costs. Typically, we see a ramp in costs ahead of large orders.

Not to try to pull guidance for 3Q out of you, but how much of that typical incremental cost do you think you'll get through, just based on your guidance of 2Q?.

Okay. Your – Joe, your question is about expenses in Q2, or....

Yeah. You typically have a like a ramp up in expenses to kind of prep for large orders that you're getting.

And now, you've kind of indicated that you're going to have large orders through THIRD QUARTER, and I just wonder how much of that cost associated with that is going to come through, like how much of that kind of prep work have you done already or will you have completed by the end of 2Q?.

Right. I think – so, reiterating a little what I said, so operating expenses are expected to increase by up to 4% from Q1 in Q2. I think it's a little early to talk about specific expenses for the Q3.

However, I would say at the moment we have a pretty strong focus on discretionary cost management and productivity without changing our engineering plans, and as a result, we expect that operating expenses will increase at a slower rate than revenue this year. So I think that's how we're looking at the year overall.

I really can't give you anything specific about Q3..

Fair enough. Thanks a lot..

Thank you. Our next question comes from Jim Ricchiuti of Needham & Co..

Yes.

Rob, is it fair to assume that, broadly speaking, you would expect your consumer electronics business to be up for the year as a whole versus last year?.

No, I don't think so..

Okay. That's helpful.

And since you're not breaking out Japan, and it is a smaller piece of your business, can you talk about what you are seeing there in that market?.

Yeah. I'd say overall this year our Japanese business has performed a bit like the rest of Cognex. We've seen sort of moderate growth overall and pretty strong performance in ID. And then we have really advantaged products in ID, and I'm glad to report that our Japanese sales organization is starting to sell them more aggressively.

And so we're seeing some nice growth in that area. But low – high single-digit kind of growth in Japan is, I think, what we're currently looking at. And there, I'm talking about factory automation. I'm not talking about semi..

Okay. Thank you..

Thank you. Our next question comes from Rick Eastman of Robert W. Baird..

Sorry to come back to you. Just two things.

For the second quarter, just so I – maybe understanding the pacing here a little bit on the large customer revenue relative to the gross margin guidance, is the mid- to high-70%s range for the gross margin guidance – I presume that captures – maybe mid-70%s captures more service revenue, and would the pacing of the service revenue fall more towards Q3? Is that how we should think of the cadence on the gross margin line?.

Well, I think you're right that we can expect more service revenue in Q2 than in Q1, but I think we're going to see that, as you suggest, also spread across Q2 and Q3.

So without getting too specific, I would say we will see a little bit of gross margin erosion in Q3 as a result of more service revenue, but still mid- to high-70% range is where we peg gross margins coming in in Q2..

Okay. All right. That's reasonable. And then, Dr. Bob, I want to maybe lob a question in your direction here..

Yeah, sure..

Is there anything in this – anything on the autonomous vehicle side, any developments that maybe put that market back on the radar screen or do we kind of stay in automotive on the production side where we've had so much success?.

Yeah, we're very aware, of course, of the application of artificial intelligence not only in the factory, which is where we dominate, but in other applications, such as intelligent transportation and autonomous vehicles.

Though our experience to-date, and as you may know – you have covered us for some time – when we had acquired a company with significant intellectual property that applied directly to autonomous vehicles, that is lane guidance to make sure a car stays in lane, our experience was that although we had had a lot of technology, and a lot more is necessary to guide a car, of course, through cities, that the business model for it was very difficult.

We found that it was fraught with price pressures and protection of property, intellectual property and also the problem of liability.

So, currently, although we are looking at it, and we have products that could apply to those kinds of problems, we prefer to focus our efforts on the industrial applications, which certainly, in our biggest segment, is in automotive and we are involved.

And I think in the production of many of the – well, there aren't that many autonomous vehicles on the market today. But the one that is on the market, we're already involved in the manufacturing end of those cars. But I don't envision us being a supplier for product or technology that will be part of the bill of materials of those cars..

I understand. And is there – when you look at how the industry is expanding just in general, I mean, Cognex is larger.

Are there any inspection or measurement technologies that maybe stray somewhat from vision? I mean, because Cognex, obviously, being a software – there's other very software-intensive measurement technologies out there, and you mentioned earlier artificial intelligence.

But I'm curious if – is there any tendency for Cognex to think of itself as more of a software processing company than vision as you grow larger?.

Well, certainly, if you look at our P&L, it resembles more of a software company than a hardware company, and if you were to categorize our engineers as either software or hardware, I would say that 90% of our engineers or 80% to 90% are software engineers.

So we are truly a software company, but we see a unique advantage and a distinct advantage in not selling software and not licensing software. We embed that software in rather high-performance specialized hardware and more often than not with specialized optics.

So the more value we can provide to our customers, the more money we can make because the money we make is proportional to the value. I'm not sure if that answers your question, but you can follow on if I haven't..

Okay. No, that's fine. I just – there's some things going on the noncontact laser side and, again, very software data intensive, and it seems like Cognex is still set to – carry over..

Well, if you were to categorize Vision perhaps as only optical, the capture of an image that people can see, that's one thing. But our technology does apply beyond that. We could look at thermographic images; we could look at x-ray images. The source of the image doesn't matter to us, actually.

What we specialize in is the analysis of that image irrespective of the physics of how it was achieved. And, matter of fact, in our most recent 3D product, the image is captured using lasers to illuminate it and in some cases, the laser may be visible spectrum or it may be beyond the visible spectrum.

So, our expertise is truly analysis of images using artificial intelligence methods, which means software, for doing things with those images that humans would do if they could see those images.

And so, we are looking beyond, although our focus is factory automation and industrial uses of artificial intelligence, such as ID, which is not really factory, but it's part of a factory because if you're going to ship it, it has to go through distribution and logistics. But we're not restricted to that; we are looking indeed at other applications.

The application of machine vision to control traffic is an area that we've looked at in the past and we continue to be interested in. And you could say the Internet of Things. There's cameras going to be everywhere, controlling many things or reporting many things.

And some of those things may be profitable, but until – so far, we haven't found many markets that are as appealing to us, that have the growth and profitable characteristics that the industrial applications have..

Sure, I see. Okay, well, great. Thank you. Thanks for the answers..

You're welcome..

Thank you. Our next question comes from Jeremie Capron of CLSA..

Thanks. Good afternoon. I wanted to follow up on the consumer electronics business, clearly a solid outlook for Q2. But Rob, I noticed your comment in the press release around the outlook for the full year being not any more bullish than a few months ago.

So I'm trying to understand whether your outlook for consumer electronics is somewhat softer than when we entered the year and we've seen that kind of development pretty much across the consumer electronics industry so far this year, so trying to reconcile this..

Yeah, hi Jeremie, it's Rob. I think we would say that our outlook for the consumer electronics industry this year is less positive than it was when we came into the year. So I would say that's true. And I think – and that's why in general our outlook for the year in general that we see at Cognex is about the same.

We're seeing better outlook in certain areas than I think we had originally thought, particularly logistics, some of the more consumer-based markets that we serve, but consumer electronics, specifically a little less bullish than we were when we came into the year..

Okay. And MX-1000, interesting development, I think that looks like a nice extension for you into an adjacent market. However, when I look at this industry and its current structure, the margin structure is clearly much different from what we've seen in the industrial vision applications.

And also the growth rate of this mobile terminal market itself also looks significantly lower. So I'm wondering if you could explain your thinking process going into this market with large established players.

How do you see that playing out for Cognex? I know you made this comment around margins probably coming in at a comparable level to what Cognex does today, but how would you achieve that?.

Yeah, I'm glad you asked that, Jeremie.

I think the first thing to understand is we're approaching this market at a completely different way, right? So we're basically providing – we're providing vision technology and a rugged exterior, into which a customer inserts a smartphone of their choice, right? We're expecting most to be Android phones, possibly iOS phones.

And we're competing with customers in an established market that has not provided much innovation or change to customers in a long time, focus much more on consolidation and cost cutting, and they're providing Windows – Microsoft Windows-based operating systems that are expensive and customized and not evolving in the way that customers really want.

So we're providing a lot of technology really on the front end of the device that brings a lot of powerful vision at a low cost to us with a lot of our technology on it to customers, and then customers are leveraging smartphones, their own smartphones that they will buy, in most cases, although we can supply if they wish.

And hence the technology, the innovation, the differentiation is there, and the margins will be there for us, too..

I see.

And what kind of price point are we talking about here? Is this meaningfully different in terms of the solution that you provide? I understand one need to add the cost of the smartphone to be comparable here, but are we looking at a significantly cheaper solution for the end user?.

Yes, the MX-1000 list price is – ranges from $1,500 to $2,500, okay? So – and then customers purchase a phone separately.

So we are addressing the higher-end segment of that market, but if you look at new products being introduced by the two largest players in that market, they're the same or higher than those kind of prices, even when we include the cost of a reasonably priced Android phone.

So we think a lot more functionality and flexibility and kind of the operating system that customers want. I will also just mention, Jeremie, that we've been studying this market for a while, and we've been talking to a lot of customers, and they're pretty close to our handheld barcode reading business that we have today.

And what we're seeing is that Win CE and Windows Mobile, the concerns around that operating system are considerable. Microsoft is planning not to support Win CE and Windows Mobile after 2020, and they've announced that.

So generally, customers are already in a frame of mind where they're planning to move to Android operating systems or, in some cases, iOS operating systems. So, the whole industry is kind of primed for a change.

Customers over the last five years have become really enamored with their smartphones, and those smartphones come with a lot of innovation and technology and power in terms of connectivity and usability that we are leveraging, and we're wrapping our own or attaching our own high-performance vision to the front of that.

So that's the vision of the product. I really encourage everybody to go to our website and learn about the MX-1000. We have some videos on there explaining the functionality.

As we've been out talking to customers, I'd say I would segment the customers we talk to into those who are like really interested and want to do what we're doing, and like, literally, we have comments like, that's what I've been looking for.

And then we have others who are like, oh, no, we're married to the Windows operating system, and we're going to stay there. And so, we have a saying at Cognex, lose fast. We're not going to waste a lot of time with those who want to stay on the Microsoft operating platform.

But for those in the long run, they're going to need to change because any kind of custom software or integration they have based on Windows isn't going to be supported after 2020, and I think the industry is waking up to that fact.

So we're pretty bullish about the innovation we offer, the way we can apply a technology into that field today, but even going forward, there's plenty more, as you well know, we can do with vision other than read barcodes. So we think we can have a pretty exciting product roadmap around the technology we're building here.

So we're very excited about it..

Understood.

And when you compare that to your entry into the logistics segment of the barcode reading and the success that you've had there, are you – what I'm trying to get to is how do you think about the potential market share that Cognex could take in this $0.5 billion opportunity?.

Well, I'd say that our experience tells us that getting into new markets with a really innovative approach takes a little time. So right now, that's been the case of a number of new markets we have entered. So right now, we're really educating customers. We're learning a lot about their needs and they about our product.

So I would reiterate that I don't expect large contributions of revenue this year. However, I would say what we would aspire to and we have plans that we're working on are we should – we would look to take a 10% share of that market, starting next year, over a period of years.

So, obviously, we won't get a 10% share of such a big market next year, but we would hope to ramp towards that. And that's what we've seen in logistics over our time and that we aspire to do also with the 3D market that we're in the process of gaining share and entering now.

So I would say that if it follows the normal patterns, it will take us a few quarters to get going. We should see some significant contributions next year. Over a three-year period, we would ramp. We would expect towards a 10% share, and I think in the long run we would aspire to have a higher share than that, probably approaching 20%.

But I am really – this is conjecture at this point, and we're still learning a lot about the market, and it will be interesting to see what the competitive response is also..

Great. Thanks very much, and good luck..

Thank you..

Thank you. Our last question comes from Bobby Eubank of Chevy Chase Trust..

Thanks, guys, for taking the call. So logistics right now, I guess, would be your third largest market behind consumer electronics and automotive. Do you think that will overtake automotive, given the growth there? And have you called out the TAM specifically in the logistics market? Thanks..

Yeah. Hi, Bobby. It's Rob again. Yeah, so we talked in the past about – so, first of all, yes, I would say logistics is our third largest market at this point. We've talked about logistics being $250 million market. We haven't updated that number in recent quarters. We don't update our market sizes every quarter.

But $250 million was the kind of last size we gave as the addressable market for the logistics business, and then now, of course, we've added on to that $500 million of mobile terminals, which we would classify as logistics also, and airport baggage handling, another $50 million. So, we've grown that segment significantly that we address.

So, was there a second part to your question?.

Do you expect it to overtake automotive, and kind of timeline for that, just given the relative growth differences there?.

It's an interesting question. Our automotive business is pretty significant, approximately 25% of our total revenue or a little more.

But I think if we map forward where the served market, the addressable market in logistics now, which would be approaching -$800 million, and if our expectations would be in the long run to gain 20% share in that and we think the automotive market is going to keep growing at approximately 10% or so over that time period, I guess those lines would have to cross, right? But some way out there..

Thank you..

Thank you. At this time, I would like to turn the call over to Dr. Shillman..

Okay. Thank you very much. To wrap up, business conditions are difficult, and as a result, 2016 is not going to be a great year for Cognex. Nevertheless, we are still very profitable and we remain confident about our future and that we will continue to be the world's leader in Machine Vision.

So I want to thank you all for joining us tonight and we look forward to speaking with you again on our next quarter's call. Bye-bye..

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may now disconnect. Good day..