John Curran - Senior Vice President and Chief Financial Officer Robert Willett - President and Chief Executive Officer.

Jim Ricchiuti - Needham & Company Josh Pokrzywinski - Morgan Stanley Richard Eastman - Robert W. Baird Matt Summerville - D.A. Davidson Jairam Nathan - Daiwa Capital Management Paul Coster - J.P. Morgan Joseph Giordano - Cowen and Company Bobby Eubank - Chevy Chase Trust.

Greetings, and welcome to the Cognex Third Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Curran, CFO. Thank you. Please begin..

Thank you, and good evening, everyone. I'm John Curran, Cognex's CFO, and I'd like to welcome you to our third quarter earnings conference call. With me on today's call are Rob Willett, Cognex's President and CEO. Dr. Bob Shillman, Cognex's Chairman won't be joining us this evening.

He sent his regards and he looks forward to talking with you on our next call. Please note that our earnings release and Form 10-Q are available on the Cognex website at www.cognex.com. Both contain detailed information about our financial results.

During the 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. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.

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 can change, however, and actual results may differ materially from those projected or anticipated.

You should refer to our SEC filings, including our most-recent Form 10-K for a detailed list of these risk factors. With that, I will now turn the call over to Rob Willett..

Thanks John, and hello everyone. Thank you for joining us today. I am pleased to report our results for the third quarter of 2018. We have a tough comparison to the exceptional record setting results that we reported in Q3 of 2017. Other than that comparison this year's Q3 results were very good.

We've report keep the second best revenue, net income and EPS from continuing operations in the company's 37 year history. Revenue in Q3 was $232 million, down 13% from last year's record setting performance and up 10% on a sequential basis. It was also slightly above our guidance for the quarter.

Gross margin in Q3 was slightly higher both year-on-year and sequentially, mainly attributable to a favorable mix towards higher margin product. We continued to invest in sales and engineering for our long term growth.

Although our rate of increase has slowed in recent quarters, we're committed to delivering industry leading vision and ID products to our growing customer base. We believe that we invest more in industrial machine vision and barcode reading technology than any company in the world.

And it is that investment that will continue to drive our growth and profitability over the long term. In Q3, operating margin expanded on a sequential basis to 34%, demonstrating that substantial leverage that incremental revenue has on our business model.

During the quarter, Cognex performed well in many end markets, of course one significant exception was consumer electronics, which is our largest market. As we expected, revenue in Q3 from consumer electronics was substantially below the extraordinary level reported a year ago.

Excluding consumer electronics, revenue grew in mid-single-digits year-on-year. Looking at our performance in our second and third largest markets, revenue from automotive was flat year-on-year in Q3 after growing much faster than expected in many quarters.

Demand softened in our major regions during the summer months, since then we've seen a sequential improvement in the Americas and Europe. In logistics, our Q3 comparisons do not reflect the strength we see for Cognex products. Better viewed on an annual basis, revenue from logistics has grown more than 50% in the first nine months of this year.

At this point in the year, I spent a lot of time in the field with our sales force, visiting large customers and prospects to understand their requirements and their plans for automation in 2019 and 2020. This year, I came back more excited than ever about how Cognex machine vision and ID will improve quality and delivery and drive down costs.

Many large retailers are now planning to follow the example of the world's largest e-retailers in automating their distribution centers. They actually a lot more business for Cognex in the years to come. Interest is particularly high for our AI based deep learning vision.

Cognex deep learning vision technology allows manufacturers to perform inspection tasks that were previously very difficult or impossible for rule based machine vision.

Many of our AI customers are now moving from trials where they train our deep learning tools to factory floor deployment in industries such as medical devices, automotive and consumer electronics. The development of our sales force continues to be a critical part of our effort to broaden and grow our business.

In the third quarter, we recruited, trained and equipped many sales noise that will build the capacity we need to drive future growth. We've made good progress in increasing the reach of our sales channels to access new and growing markets for machine vision and develop closer ties with customers.

I will now turn the call over to John for financial details from the third quarter..

Thank you, Rob. As we go through the financials, Please note that our results reflect the retroactive adoption of the new revenue standard took effect on January 1 of this year. The sale of certain accessories that we historically reported on a net basis are now reported on a gross basis.

This is not change our gross margin dollars, but our gross margin percentage has decreased from historical rate by 1 to 2 percentage points. Now for our Q3 highlights. As Rob noted, Q3 revenue was $232 million, a decrease of 13% year-on-year.

This decline is primarily attributable to the exceptional growth we achieved in Q3 of last year across our business, led by consumer electronics. Gross margin of 75% was up slightly year-on-year and within our long term target range Operating expenses totaled $95.5 million for the third quarter, an increase of 10% year-on-year.

Our spending was slightly above guidance mainly due to the higher than expected revenue in the quarter. While we continue to be prudent in terms of discretionary spending and best thing for the future remains a key to our success.

This includes maintaining our strong commitment to engineering and the continued expansion and development of our sales team. Turning to our new ERP system, we successfully implemented SAP in Q3 and used it to close the quarter.

There's still more work to be done to fully implement the new system, but we believe it provides an excellent foundation for future growth. Operating margin in Q3 was 34%, an increase 4 percentage points compared with Q2 of 2018 and driven primarily by the higher revenue level.

The eight point decrease in operating margin from a year ago, mainly reflects last year's record breaking revenue in our previously mentioned investments in engineering and sales. Moving next to taxes. If we exclude discrete items, our tax rate was 16% as expected.

Our discrete items in the quarter fell into three categories, with the largest related to the Tax Cuts and Jobs Act of 2017. And finalizing our 2017 4tax returns, we recorded a net benefit of $7.7 million based on new regulatory guidance for the 2017 Tax Act.

We also recorded $2.8 million in benefits associated with the exercise of employee stock options and $1.7 million in benefits primarily related to the release of tax reserves. On a GAAP basis, we reported earnings of $0.45 per share for Q3 of 2018. This compares with $0.57 per share in Q3 of last year.

Looking at revenue year-on-year from a geographic perspective. In the Americas, revenue increased over Q3 of 2017 due to growth in several and markets, including logistics, automotive and life sciences. Internationally, revenue declined because of this quarter's substantially lower contribution from consumer electronics.

Lower spending by large customers in OLED display and smartphone manufacturing was most noticeable in Europe and to a lesser extent in our other agent region. It was partially offset by growth in automotive and other industries. Also impacted by lower OLED, smartphone related revenue was our Greater China region. Moving on from the income statement.

Our balance sheet remains very strong. We exited the quarter with $809 million in cash and investments and no debt. We continue to have sufficient capital to support our organic growth objectives. Our M&A plans and for sharing our ongoing success with our shareholders through stock buybacks and dividends.

In that regard, we repurchased nearly 4,000 shares of Cognex stock in Q3 and we plan to continue to buy back stock in Q4 subject to market conditions and other factors. As announced tonight, the board has authorized a new $200 million stock repurchase program, which will begin once our current $150 million plan is completed.

About $53 million remains available under the existing plan. Also our Board of Directors has increased the quarterly cash dividend to $0.05 per share. This is payable on November 30 to all shareholders of record on November 16. With that I will turn the call back to Rob..

Thank you, John. In terms of guidance, we expect that fourth quarter revenue will be between $180 million and $190 million. At the midpoint that range represents a slight increase year-on-year. We expect a $15 million headwind from last year's high level of investment in OLED display and smartphone manufacturing.

We will be glad to have those tough comparison behind us as we move into next year. Excluding this OLED smartphone reduction, we expect year-on-year growth in Q4 of approximately 10%. That's slower than we'd like, due to softness we're seeing in China where customers are becoming more cautious and slowing their spending plans.

Gross margin for Q4 is expected to continue to be in the mid-70% range and lower than we reported tonight for Q3. Operating expenses are expected to be roughly flat on a sequential basis. Lastly, we expect the effective tax rate will be 16% excluding discrete tax items. We will now open the call to questions. Operator, please go ahead..

Thank you. [Operator Instructions] And thank you. Our first question comes from line of Jim Ricchiuti from Needham & Company. Please proceed..

Hi. Good afternoon. I wonder if you could talk a little bit Rob, about the business ex consumer electronics which is clearly going to be more volatile.

But just I wonder if you could talk about what you're seeing in the market just in light of some of the concerns that concerns being some slowing in the automotive market and it looks like that cuts across geographic regions as well as you know potential implications from the trade care of issues in China as it may relate to demand in some of your other regions?.

Yeah, Hi Jim. You're asking a pretty broad question there. But I'll start answering and perhaps in your follow-up, you can go to specific areas. Okay, so I say you know it Q3, we perform well in most end markets against some tough comparison.

We had some good growth in America from logistics, automotive grew but not as quickly as it has been, from life sciences. And in Europe, I think we saw some slowing down in automotive. Greater China we saw broad slowing down. But I think really Europe, China and Asia in Q3 were down year-on-year a lot due to the decline in consumer electronics.

So I think when strips that out, we saw general growth across all of our major region with the exception of China. So that's kind of a bit about the industry's overall. You asked a little bit about automotive, so let me kind of speak a little to automotive. So automotive was slower than normal in the Americas and Europe.

And it's always slower in summer in Europe, but it was slower this year. But what we've seen in both Americas and Europe is has improved in recent weeks.

I think Europe may have been slower in automotive through the summer, partly to do with some of the new emissions regulations that I think was causing a bit of a bottleneck in automotive production and probably spending in working automation. So we saw that happening.

We've seen a lot of growth in automotive over the years, over the last few quarters I should say. In the long run, we expect it to grow at 10% and it's been growing faster than that but in the last quarter it grew more slowly than that.

So I would say in the long run though you know automotive business showing any signs of saturation, I think it's just more attentiveness among customers. So then Jim, if I turn to sort of Q4 outlook and we think about markets.

We still have obviously as I talked about lingering headwind since some OLED smartphone and you were asking specifically not about that. I think other than China, we expect you know decent but not exceptional growth among many of our end markets.

And I think as we said excluding that smartphone OLED business, we would expect about 10% growth for the rest of the business and I think we're going to see slowing in China. So you can think better than that across the other regions in general. So I don't know if that answers your question..

No, that's helpful, Rob. I had one follow-up because you suggested I think logistics portion of the business. You might have experienced somewhat slower growth than normal in Q3 and yet, if I heard you correctly, you're expecting that to pick up again.

And I'm just wondering what occurred in Q3 that was somewhat unusual relative to recent quarters?.

Yes, I want to be cleared, our logistics business is growing really quickly and we just happen to have a lower revenue quarter in Q3, really more - it was a matter of timing, it's not to do with the overall growth. The business in the logistics is growing very, very quickly.

It has grown more than 50% in the first three quarters of this year and we expect to go on growing very rapidly..

Okay. Thank you..

Thank you. Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Please proceed..

Hi, good evening, guys. Justly a follow-up on that question.

I think probably you lower visibility in auto and consumer electronics more broad way than when we entered the quarter, you mentioned some tough comps in auto, but I think the industry dynamics there are maybe changed a little bit more recently in terms of willingness to spend some production misses.

Maybe same thing on the consumer electronics side, we've seen a bit more weakness there than just the tough comps.

When you guys look out into I guess beyond 4Q and kind of the next year at large, would you say your visibility is at a normal place or maybe a little tighter than usual because I'm just trying to understand how much of the blip we're seeing here is tough comps versus a bit more of a macro deceleration?.

Sure, Josh.

And you'd like me to talk about both auto and consumer electronics in that regard?.

I think that's probably where we've seen the most demand interruption so and are clearly important markets for you guys, so those would be helpful, Rob..

Yeah, so I think our automotive market, we have a long - we have lots of tight customer relationships with major brand owners and Tier 1 automotive parts suppliers in automotive.

So we have a pretty good view out three years, what we can do not to be able to call so well shorter term interruptions whether it's around regulatory things or some of the dislocation we've seen around emission standards, diesel problems, even supply chain parts, shortages and interruptions that have been going on in that market.

So that's why I think our business can perform more or less well in a given quarter. I think in the long run, assuming kind of a reasonably stable trading environment, we expect that business to grow 10%. And I think your question was more about next year and beyond, I mean that's how we overall think about market in general, right.

I think if we then turn more to consumer electronics, it's almost like everything I said but kind of more extreme and more volatile right there.

There we tend to see companies implementing and executing railroad maps on a much shorter term basis, more in a 6 to 9 months kind of window, they may be planning a rollout of new products now that we'll be seeing in the market next spring and summer or fall.

And we expect their investment in automation and in machine vision to be growing much more quickly than automotive. There we think 20% long term growth or above is what we expect in that industry. But the volatility in those markets can come from the readiness and the adoption of new technologies.

So obviously, we all spoke in a great deal over the last few quarters about OLED technology, there was massive investment in that, in capacity in 2017 really for vision anyway and we're seeing a much slower year this year. It's a difficult call to say when the next round of capacity expansion and major investment would go on.

But there's still a great deal of investment going on in yield to improve the yield of screen production where there are still many people involved visually inspecting. So there's ongoing business in that area but in terms of the volatility and the timing of investment that's what can drive some of spend.

Then obviously in the smartphone market where we really all the major players then of course the big ones, a lot can do have to do with the timing and the number of new products introduced in that space and a number of features, new technologically complex and difficult to manufacture features that go into those products.

So again that can drive, what's going on in that space. And obviously we don't comment on specific customers and their plans, but more features, more models, more changes to form factors or technology will drive higher growth for us and we remain pretty confident about our growth potential in that market over the next few years..

Got it. And then just as my follow-up, Rob, you've added a lot of new sales come in in the last year, call it four quarters.

How do you view kind of the ramp time on those folks getting out there in the field and are you starting to go a lot more direct maybe to me or your big competitor a bit more in terms of the pack to market?.

We have been adding a lot of sales noise as we call them over the last few years and they allow us to reach more customers and particularly service larger more sophisticated customers, they don't understand their needs. We see about 60% of our business going direct, although may vary quarter-by-quarter and about 40% through partners.

Partners are very important to cause a go-to-market strategy. They allow us to - some of them a systems integrators who have very sophisticated, technology and applications goes for our vision and they do business that we as a company don't wish to undertake directly ourselves particularly for small and medium sized customers.

And in other cases they serve regions or industries that they can serve better than we can. And thirdly, I would say we are a vision specific company but we sell products into a broader factory automation ecosystem. So very often our products are sold with motion control, robots PLCs and we have no intention of selling those products.

So we may be selling only one vision system or sensor with a number of those other products and those partners have the economies of scale and they have the customer relationships to sell those into smaller accounts. So that works well.

But our market is growing quickly and we continue to invest in Cognex sales people as we harvest all the great R&D product development that we're bringing to market and they're allowing us to do that better and faster than we were able to before..

Got it. That's helpful and because I know it's a big deal around there, happy Halloween..

Thank you..

Thank you. Our next question comes from line of Richard Eastman with Robert W. Baird. Please proceed..

Yes. Good afternoon. Rob, you had mentioned earlier when you're kind of speaking in the fourth quarter revenue guide and kind of suggesting at the midpoint of the guide column $185 million, without the smartphone and OLED, the business would be up maybe 10% at the midpoint.

And I'm curious so again we tend to target 20% and we talk a little bit about automotive, but it just so the general slowdown, if we're talking about 10% without the troublesome areas of smartphone OLED, is a thought is that automotive is still against tough comps or they're still tough comps in the underlying revenue number or are we just expecting somewhat of a drag on the macro industrial spend into Q4?.

Hi, Rick. The slowdown as we kind of size it out, there is a $15 million headwind around OLED and smartphone right. And then we're going to get to at the midpoint as you say about we would see about a 10% growth rate, a net of that slowdown. Why is that now 20%? The biggest single reason would be China.

We think slowdown in business in China, really across all industries in that space, it's not like - it's not we can point to electronics or automotive as the main part, it's a board slowing down in that market.

And I would point out as you as you look at Cognex and you look at other companies that we really sell and have close relationships on a direct basis with our end users, even if we sell through partners. So generally, we know where well north of 90% of all that the business we sell goes and so we have a pretty good sense of the funnel playing out.

And I think other companies that may be reporting a more inflated from that end user position as a factor of distributors buying and holding inventory. So slightly my take on it there is we may have a better view about what's going on in China than some of the other automation players reporting who rely on partners and don't see end user business.

So I think going back to your question that is the $50 million OLED headwind and then there's the China situation driving a lot of our slowdown..

And do you think that the China situation, was there any pull forward business relative to any concerns over tariffs kicking in kind of in the fall, speaking to China in particular because we had second quarter 55% growth in auto in China.

And so is it your sense, I mean we all saw the PMI slowdown in September in China I mean it's been slowing but it hit the 50 mark.

But I'm curious if you have - is there any way to teased out is that tariff benefit and did you benefit from any kind of pull forward in sales relative to care of concerns in China?.

I think as I said, we don't have a situation where customers in particular partners pull forward - pull forward and then hold inventory that we don't - so they don't sort of stock up and destock. It would be hard though however to know whether our customers were buying ahead of tariff issues, it's possible that they may have been.

I was with the China sales force, we did kind of drill into and discuss those types of issues. So I am - I think the answer is possibly, but not something I can say definitively to you..

I Understand. And just lastly just to finish off the China thought.

But if some of these concerns whether they're auto, whether they're CE, whether they're OLED, if trends continue through the fourth quarter and you're looking at 2019 were perhaps maybe we get off to mid to high single-digit type of revenue growth rate, are you prepared at this point to just slow investment in the business just to accommodate if that pauses short term, mid-term or longer-term?.

Your question Rick relates to 2019 outlook and I think it's a little early to kind of call that one.

But we're going to meet as a leadership team, it's for a bottoms up detailed review of product line and geographic plans for next year and there's opportunity for us to prioritize investments into faster growing areas certainly and to taper investments into a slower - from slower growing areas.

At the moment that kind of how it looks to me is sort of a steady state but we'll be watching very closely to see how the outlook is and what goes on in the meantime. So we've successfully managed through turbulent times in the past and I've had a lot of experience of that both Cognex before.

But our revenue at Cognex has grown organically in nine of the last ten years, so you know we're certainly not heading for the bunkers at this point. But you can see as you look at our sequential spending pattern over the last few quarters that we have been slowing down and matching more closely expense rate growth to revenue growth.

That said Cognex is a technology and growth company. We're bringing a lot of really exciting technologies and products to market over the next year, year and a half, so we don't want to inhibit the growth and adoption of those technologies based on hitting some sort of shorter term expense growth constraint.

So we are bearing all that in mind, I guess if I do what I would and you can bet that we're going to think very carefully and act on it..

Okay. Great. Thank you for answering the questions..

Thank you. Our next question comes from line of Matt Summerville with D.A. Davidson. Please proceed..

Thanks. Couple of questions, first can you comment on your inventory levels coming out in Q3, you mentioned that some of that was the result of perhaps some safety stock in advance of this standing up of the SAP, ERP system and talk about what you think about potential timing of drawdown? And then I have a follow-up as well..

Sure. Thanks, Matt. So our inventory balance at the end Q3 included some strategic purchases we made for our ERP implementation that we're really not needed in the end because it went smoother I think and we're expecting in that regard.

And then we also have a fair amount of inventory related to new product introductions that we will be seeing at this quarter and next quarter, so where we're building up product in-house rather than through a subcontract manufacturer, so we were building that.

That's really, that's why it went up and we do expect to see inventory balance come down in the fourth quarter. So we do expect to report lower inventory balance at year end than you saw at the end of Q3..

Then just a follow-up on China.

Can you maybe talk about when during the third quarter you started to see your business there outside of consumer electronics so, when you started to see your business tail-off and do you feel that it's now stabilized at a lower level or is it still in the process of growing over?.

I think we really began to see the slowdown as we came out of August and we moved into September and we saw that continue into October. And the answer is no, we don't know what's going to happen now, we're watching it very closely. And I think we're trying to tailor our internal forecast to what we're seeing in our sales funnel and spending patterns.

But it's not - I wouldn't say that necessarily it settles and I think it could go up or down relatively rapidly from - on a week-to-week or month-to-month basis. I just wanted to revisit a point that - just want to revisit a question that Rick mentioned as well about.

Concerning Q4 demand and our thoughts about Q4 demand, I think it's fair to say at the end of every year in industrial companies there's what's referred to as the budget flush we have particularly in strong years, there's a kind of a move to spend capital at the end of the quarter - at the end of the year.

And I would say in that regard, we're taking a relatively prudent view about what's going to happen at the end of this year and certainly at the end of last year, we saw a pretty significant budget flush and had a lot of our sales noise maxing out that quarter is booking of a lot of business with customers you wanted to spend budget.

So we don't expect that kind of wave of strength at the end of the year at this year based on what we're seeing in the marketplace..

Thank you..

Thank you. Our next question comes from line of Jairam Nathan with Daiwa Asset Management. Please proceed..

Hi. Thanks for taking my question. It's Daiwa Capital Markets actually. So you guys mentioned consumer electronics being - you have a long term view of increasing of if, if it increasing the 20% range.

I just wanted to kind of understand what's is one of the drivers behind that you're seeing smartphone sales kind of not growing too high, too much the features, are there any –feature set is troubling, you not seeing a lot of innovation coming from the smartphone manufacturers in the future set.

So I just wondered try to understand what gives you the confidence? And I had a follow-up?.

Sure. Yeah, thanks for your question. So I think we all see that handset unit production rates and the increases an average sales price at the high end of the market, so we sort of see those dynamics going on. So I think we all have foresight into those.

What really is going to drive Cognex vision sales though in the market, we won in the long term is there's a lot of labor, still in the production of smartphones that the large manufacturers want to take out.

So in many cases the products are becoming too small for human hands to manufacture and the yield and quality that can be achieved with humans versus automation and particularly vision makes vision a long term focus of investment for the engineering teams. So that's certainly part of it.

The other part of it is and what I take issue with what you said is I think there is still many feature, advanced technology features that are being planned for introduction in the smartphone market.

So as we look across some, we really do deal with many of the large players in that market, many of the players are all certainly there are technology features that are in their roadmaps that make the adoption which makes the user vision in implementing them very important and give us the sense that we could see strong future growth from that market.

And then we spoke also about the OLED screen in the investment in screens which very important to long term roadmaps in that industry and very difficult and investment intensive to manufacture. So all of those give us a sense underwrite our sense of why we expect long term investment and growth in machine vision in that market..

Thanks. Just finally with regard to competition.

As the actually seeing the environment kind of getting a little more sensitive here, do you - are you seeing customers you know being a little - asking for room - being lot more price competitive or are you seeing kind of does that open up opportunity for competitors, lower cost competitors?.

The answer to that is no. I mean machine vision is very difficult to do and the competitive advantage of advanced products from us and few of our competitors is very substantial. So in general you know this is not a market driven by price, it's a market still driven by technology.

You know of course we could drop price to try to win share, but that's never been something that you know we've wanted to do. It's not what we're about as a company. No, I believe is it really what about our major competitors are about..

Okay, thank you..

Thank you. Our next question comes from line of Paul Coster with J.P. Morgan. Please proceed..

Yes, thanks for taking my question. So I just want to follow-up from Jim Ricchiuti's question from earlier on regarding logistics. Though I point that yesterday's been very strong, there was something in your prepared remarks Rob that just related to some recent change.

What was the point of interim remark on logistics?.

Yeah, Paul, I mean the point was really there was no point, it was just we had - it was just a revenue, it was just a timing of revenue for logistics in Americas in the quarter with slower than we've seen and it really had just to do with the timing in a few customers where bookings turn into revenue.

Simple is that the market is great and they're growing strongly. And you know we have reported growth year-to-date in the first nine months of over 50% and we see no change in that profile going forward..

Okay, got it. Right. And then you also mentioned that there's a new product cycle coming, is it across the entire range of products and is it the new feature set at the same price points, or is it product extension or you reducing prices they. Just give us some sense of what you're doing here and what are you doing to mitigate the risks i.e.

customs whites and sort of new products are available now and/or that you have some execution challenges in bringing a product to market?.

Yes, so we really don't talk about you know specific new product introductions that are coming up.

But in general what I can say is we continue to invest significantly in R&D and we have products being launched pretty regularly in most quarters, so you can expect to see new products from us this quarter, next quarter, second quarter of next year coming to market.

We don't telegraph specifically what those are going to be, but when we do launch them then we end of life other products and you know that can lead to increased pricing and demand opportunities as well..

Great color, thank you..

Thank you. Our next question comes from line of Joseph Giordano with Cowen and Company. Please proceed..

Hey guys..

Hi Joe..

Just quick on our clarification, the 15 million headwind, is that - that's OLED, but is it also like the large customers spillover from 3Q into 4Q last year, are those both of those numbers included in that 15?.

Yeah, so the 15 is smartphone and OLED, so predominately on the smartphone front..

Okay. And then on the fourth quarter guidance, I'm just curious, as you look at what the trends that are happening in particularly in China, how like haircut is that fourth quarter, are you holding conditions as of today flat or you anticipating like a continuation of a downward trend into that guide.

What - you know I just want to understand the baseline in expectation in there?.

Generally we've never forecasted specific regions and specific orders in terms of growth. I think our message to you is we've seen a decline in that market you know we look at our sales funnel and you know we don't expect that kind of growth and that we don't expect growth in that market year-on-year in 4Q four and we take that into our guidance.

But other than second to the smartphone OLED that's the second piece that is giving us headwind to meaning, we won't be reporting 20% growth, we'll be reporting more like 10% growth net of the OLED smartphone piece..

And then I guess kind of gets me into follow-up. On the 20% longer term view, what's like the baseline level of activity that you need to be able to drive that kind of growth.

You know how do we frame your ability to outgrow markets and when you think about your most important regions, like do we need some sort of certain level of GDP or PMI in the region like China like how do you think about?.

Well, we see vision as a technology that is expected to grow at about a 10% ten you know growth to markets, the main vision markets that we expect them to grow at a 10%. And then we are the market leader investing and bringing to market the best technology and we have the best brand.

And then we have some specific market segments that were in logistics being a good example, 3D, life sciences, some of the new markets invented, mobile terminals that can bring our growth rate well above that rate, right.

So you know obviously historically looking back our ID business has put out some awesome growth rates well north of that 20% goal over the most recent years and we would expect it to go on doing so. You know that's kind of one piece.

The other piece is if you look back over a three year period or a five year period, you see you know compound annual growth rates of in excess of 20%. So we've been doing that and we're also investing in our sales force to the point where we can reach more and more customers and grow with the business.

So what we've always said is you know we're not going to do 20% every quarter or every year, right. We're going to in some years if you look back on history, we ascended to have in almost years like we had last year and some year's slower growth although we have grown in nine of the last ten years. So that's how we think of it..

Thanks guys..

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Bobby Eubank with Chevy Chase Trust. Please proceed..

Good evening, guys. Could you update on Vidi, I know you mentioned strength there and customers moving from training their models to deployment.

Are we over the 10 million revenue market or expectations for that in 2019? And then if you could update on your acquisition pipeline, I know you guys haven't done any acquisition this year, but you know is there tunnel out there that you can find more reasonable valuation or think could be complementary to your products? Thanks..

Great. Obviously your questions are really about deep learning and acquisitions. So we made a very important acquisition of technology in Vidi in April of last year and we've been introducing that technology to customers and making it easier to deploy by most recently putting it inside of VisionPro system updating software.

But this is very sophisticated technology that we continue to develop and make easier to use. And the reception has been very good for this technology and it's allowing customers to perform machine vision tasks that were either extremely difficult or impossible for them to perform in the past.

And the way I think about it is, these are tasks that are more like human tasks where instead of rule based vision where one may be measuring something precisely is an angle 90 degrees or 90.1 degrees or is a whole the right with apart or distance from another hold.

These are the sort of tasks today that human beings inspect and we are good at seeing like is these glue lines they may not be straight exactly because you know glue tends glob and move around when it's dispensed right, but are they continuous and they in the right kind of areas are in electronics application, are they generally the right size and in the right place even though their makeup and size may look different to machine vision or even chocolate you know which may be being dispensed and don't have a regular form if you think about them always particularly high end but are generally correct or incorrect.

These are just kind of accessible examples of what deep learning technology can do. We've been starting to see a lot of work since we began to introduce the technology, we've seen a lot of customers taking our technology and looking at their problems with it and it's the area that's getting a lot of attention.

And we've seen a lot of purchased training licenses where customers are becoming familiar with the technology. And now we're seeing it being deployed by many of our most sophisticated customers into their production.

I'm not going to give specific growth numbers or dollar numbers out of this time, but it's certainly beating the expectations we have for growth when we acquired the company and it is many millions of dollars. Your second question has to do with acquisition.

We made a significant number of acquisitions in '16 and '17, I think six acquisitions we made and we haven't made acquisitions since then, but we continue to engage with potential targets and look for similar things that we liked in those companies we acquired, great technology, great engineers, great cultural fit, vision related, good growth potential that we can integrate.

So we've certainly engaged with and in the end decided not to proceed with a number of companies this year in that space.

And then you know as you think about cash on our balance sheet, certainly some of that we would like to deploy to acquire some larger companies and we continue to cultivate and engage them, but we haven't in certainly in the last two years been successful at convincing any of those companies to sell themselves to Cognex, but we continue to ask..

Thank you. [Operator Instructions] Thank you. Our next question comes from the light of Joseph Giordano with Cowen and Company. Please proceed..

Hi guys. Thanks for taking the follow-up. Just a quick one on, curious about the integration of Vidi into the insight platform and how much of that can be kind of combined and where were you now and where do you see that ultimately going..

Definitely talk about how we've combined it and where we see it now, but I am not going to comment on where it's going, only in general terms maybe.

Okay, so when we acquired Vidi, they had you know we thought and still think they had the best deep learning technology for industrial applications that we'd ever seen and we were really impressed with what they could do.

They also had a number of rule based vision tools that allow them to do such things as you know find the object that they wanted to work on quickly. And these are things that we do exceptionally well Cognex through technology known as PatMax and PatMax Redline.

So when we bought those two technologies together and brought them up inside VisionPro, some of our vision tools help the Vidi technology operate better, it was complementary. The other thing is called, next we have excellent user environments.

We hear regularly from customers that they standardize and they really like our inside and our VisionPro user interfaces and environment. So bringing Vidi into that environment also makes it more accessible to all the thousands of customers today who have standardized and used those user interfaces. So that's been a quick and easy win for us.

In the longer term you know we think this technology has a long way to run as we make it easier to use and more accessible to more and more of our customers.

And of course the actual technology profile underneath that processor development and programming techniques around deep learning and plus our own experiences seeing more and more examples to train on mean that our technology in that area is developing very, very quickly.

So it's an exciting area perhaps one will be give me more of a preview next year when you come for Analyst Day..

Sounds good, thanks..

Thank you. We have reached the end of the call. I would now turn it back over to Mr. Willett for closing comments..

Okay. Thank you for joining us this evening. We look forward to speaking with you next quarter. Good night from Boston, home of the world champion Red Sox and happy Halloween. Good night..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation..