Greetings, and welcome to the Cognex Fourth Quarter 2018 Earnings 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, Chief Financial Officer. Please, go ahead..

Thank you, and good evening, everyone. I'm John Curran, Cognex's CFO, and I'd like to welcome you to our fourth quarter earnings conference call. With me on today's call are Dr. Bob Shillman, Cognex's Chairman and Rob Willett, Cognex's President and CEO.

Please note that our earnings release and Form 10-K are available on the Cognex website at www.cognex.com. Both contain detailed information about our financial results.

During the call, we may use 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 Dr. Bob..

Thanks, John. Hello, everyone. Thank you for joining us. And I hope it's still culturally acceptable to say Happy Valentine's Day. But if that offended anyone, I will immediately take responsibility for that and issue a dramatic apology.

Tonight, we reported record fourth quarter and full-year results from continuing operations for revenue, for net income, and for earnings per share. And as we expected and reported to you on our last call, our growth rate did slow at the end of 2018 because of slower spending by customers, particularly in China.

And you'll hear more about that detail later in the call. I'll now turn the call over to my partner Rob Willett, who will provide a much more detail into our 2018 results. Rob, the microphone is yours..

Thank you, Dr. Bob, and good evening everyone. For 2018, we reported our ninth consecutive year of record revenue. This achievement follows a spectacular 2017 that included substantial investments by our customers in machine vision for OLED display and smartphone manufacturing.

We faced tough comparisons to 2017 when a few large customers scaled back their purchases in 2018. As a result, annual revenue grew by only 5% over 2017. However, if you exclude those customers, the increase was 18%, reflecting substantial contributions from the rest of our business.

Cognex performed well in a number of end markets; notably, logistics and automotive. Our logistics business grew by more than 50% over 2017. With annual revenues surpassing $100 million, it has become a meaningful part of our business. The growth outlook for logistics remains strong.

Cognex is now widely recognized as the technology leader for machine vision in this market, and we are rapidly gaining market share. In automotive, annual revenue grew by high-single digits year on year, just short of our 10% long-term growth expectation for that market.

Following two consecutive years of faster growth, the industry began to slow in the second half of 2018. Despite recent softness in this market, we see the potential for growth in the medium and long term as recent trends in the automotive industry drive significant changes in technology and automation.

In 2018, Cognex invested a record $116 million or 14% of revenue in engineering; marking our ninth consecutive year of RD&E growth. We believe that investing in engineering will keep Cognex on the leading edge of vision technology. In that regard, we launched several high-performing products during 2018.

VisionPro ViDi integrates the power of deep learning technology we acquired in 2017 into the Cognex VisionPro platform. It's now easier for sophisticated customers to use our deep learning techniques with our industry-leading vision tools.

Deep learning is one of the most exciting advances in our market in the past 20 years, as Cognex is viewed as the leader in applying this new technology to industrial machine vision. Our deep learning based image analysis software opens a new range of applications for Cognex, where our traditional rule based vision doesn't apply.

Our DataMan 470 barcode reader was the most successful product launch in Cognex’s history in terms of sales generated within the first six months. This high performance reader has been rapidly adopted in the logistics industry as well as in general manufacturing.

The MX-1502 ER broadens our Vision-enabled mobile terminal family to include extended range reading. The MX-1502 ER can read codes in quick succession from as near as 6 inches to as far as 30 feet, a capability that improves our position in the high potential mobile terminal market.

In Q4, we introduced the 9000 series of our industry-leading In-Sight smart camera enabling ultra-high resolution machine vision in an easy to use product. In 2018, we added more than 350 Cognoids worldwide. Most of these new employees were hired in sales and in engineering.

Also of note, we successfully implemented our new SAP enterprise resource planning system which provides a platform to scale our operations and understand our business with greater clarity as we approach $1 billion in annual revenue. Turning now to key financial metrics. Gross margin was within our expected range for 2018.

But our success in the logistics market has required engineering to support to help customers get up and running. This support has been slightly dilutive to our overall gross margin and it is expected to continue to be in the first half of 2019.

We consider this as a worthwhile near-term cost of winning share and introducing our leading edge products to customers in the large, fast growing logistics market. Our strategy for developing this market is similar to the one we used successfully in the factory automation market nearly 20 years ago.

The downward pressure on our overall gross margin should ease as we move through the back half of this year. Moving on to operating margin. Our focus on the long term lead to investments during a slower growth year in 2018 that reduced Cognex’s overall operating margin below the exceptional levels we saw in 2017.

We believe that our long-term growth will be the result of our continued technology leadership and a larger salesforce. I will now turn the call over to John for financial details from the fourth quarter..

Thanks Rob. At the outset, let me remind everyone that our results reflect the retroactive adoption of the new revenue standard that took effect in 2018. Those changes did not materially impact gross margin dollars but did lower the gross margin percentage from historical rates by one to two percentage points. As Dr.

Bob and Rob mentioned, we reported good results for the fourth quarter. Revenue for the quarter was $193 million, which was slightly above the top end of our guidance. As expected revenue declined from Q3 due to the seasonality associated with consumer electronic. Revenue in Q4 ‘18, grew by 6% over Q4 ‘17.

Our results for the quarter reflect an increasing level of customer uncertainty in certain areas of our business. Looking at revenue by industry, consumer electronics declined as expected in Q4 due to lower revenue from large customers in OLED display and smartphone manufacturing.

Excluding the impact of those large customers, revenue grew in the mid-teens over Q4 ‘17, led by strong performance in logistics, which nearly doubled. Automotive revenue in Q4 ‘18 was roughly flat year on year compared to high-single digit growth for all of 2018.

The other industries we serve continued to grow but at a combined rate that was slower than earlier in the year. Turning to gross margin. The three-point decline from Q4 ‘17 was due to a higher percentage of revenue coming from application specific solutions for logistics customers in Q4 ’18.

Operating expenses total $95 million in Q4, up 9% year on year and flat sequentially. The increase in OpEx was driven mostly by new hires and sales, and in key business areas where we see higher growth potential such as logistics, deep learning and 3D.

While we continue to invest for long-term growth, we are mindful of the market uncertainty we have observed in recent months. We intend to focus on productivity improvements and will remain prudent with regard to discretionary spending in the coming months.

Operating margin in Q4 was 23%, down from 28% in Q4 of 2017, reflecting both the shift in revenue mix and our OpEx investments to support continued growth. The effective tax rate was 14% before discrete items, down from our forecasted rate of 16% due to a shift of income from higher to lower tax jurisdictions.

This benefited the quarter by approximately $4 million. Excluding all discrete tax adjustments, we reported earnings of $0.26 per share compared to $0.24 for Q4 2017. Looking at revenue year on year from a geographic perspective, market conditions were as expected in Q4.

The Americas delivered the largest contribution to growth both on absolute dollars and in percentage terms. That growth was led by substantially higher revenue from logistics customers.

Revenue in Europe was down from Q4 ‘17 because of the decline in consumer electronics, but the modest growth we experienced in other areas was in line with our expectations. In Greater China, revenue was relatively flat. The softer trends we saw in the third quarter across our end markets in China continued to weigh on growth in Q4.

Revenue from other Asia was also flat year on year because of the OLED smartphone headwind. The region performed well otherwise in Q4, but the rate of growth has slowed among our machine builder customers who sell into the Chinese market. Looking at our balance sheet, with nearly $800 million in cash and investment, with no debt.

And lastly, inventory decreased $11 million from Q3 ’18 as we expected. I will now turn the call back to Rob..

Thanks, John. Turning to guidance, revenue for the first quarter is expected to be between $165 million and $175 million, which at the midpoint is flat year on year. We expect gross margin for Q1 to be in the mid 70% range, similar to the gross margin we reported for Q4. Operating expense is expected to be up slightly on a sequential basis.

Also, we expect the effective tax rate to be 15% excluding discrete tax items. To summarize, Cognex is performing well given current market conditions. The outlook remains uneven across end markets and geographic regions. Logistics, deep learning, and 3D all represent near-term growth drivers for us.

We also continue to broaden our reach to new customers and bring new products to market. Demand from China is soft after many quarters of outperformance and that softness is affecting electronics, OEMs, and other Cognex customers who rely on export to China.

In addition, we're seeing delayed spending on project pushouts by our customers in the American automotive market. As for consumer electronics, we should be prepared to discuss the large orders potential for 2019 in our Q1 call. With that, we will now open the call to questions. Operator, please go ahead..

[Operator Instructions] Our first question comes from the line of Josh Pokrzywinski with Morgan Stanley. Please proceed with your question. Josh Pokrzywinski, please proceed with your question..

Hey, can you guys hear me?.

Yes, we can. Hi, Josh..

Hi. Sorry about that. Just first, I guess on logistics, you know, clearly you've had some pretty awesome growth there the last several years and wanted to get an update on the state of play.

Any new things you've seen out of competition, good, bad, indifferent, kind of new customer growth versus growth within the existing customer base and then anything new or different that we should be aware of geographically?.

Okay. So, yeah, your question is sort of about how the logistics market is developing and for Cognex. So, I would say, we've seen a very rapid growth rate in our logistics business in the last few years. And revenue from logistics was more than $100 million, grew more than 50%.

Our business has really started out very much in e-commerce, companies that I think are very -- are reinventing supply chain and differentiate themselves by quick supply and major investments in automation to do that.

And it's grown more broadly and we're seeing certainly more regular retail companies, I think under pressure from what's happening with e-commerce, but more generally seeing the benefits of automation start to adopt -- more sophisticated automation and very much adopt Cognex vision and the technology and advantages we can bring them.

So, we're certainly seeing our reputation build. Our largest market is America, but we're seeing rapid growth spread into Europe also and some good business picking up in Asia as well, as that develops.

Other things, certainly we do serve the parcel market, the courier parcel and package business and postal as well are accounts for us, but those markets sometimes have bigger more systems integrated type solutions, so we're not really best positioned to serve them yet, but we do see some business in that space and we expect more to come in future.

Other things I would say, there are longer term potential to broaden our business which primarily is in barcode reading today but to broaden more into -- more and more Vision applications, where we're doing things with 2D vision, such as looking at things like hazardous labels or damage to boxes, and into 3D vision, where we'll be doing things like dimensioning and providing more information to customers and packages.

And then even broader, I would say a longer term trend that I think has a lot of legs and is beginning and where Cognex I think already has a very good reputation is in more how we connect up and provide information from the readers, an area variously referred to as industrial IoT or industry 4.0..

Got it, that's very helpful color. And then just one and I’ll let some of my other peers on the call go through consumer electronics in more detail, but just one on that from me.

I understand the business is down and it’s kind of a growthier business over time, I wouldn't expect a lot of end markets for you to decline multiple years in a row, but we have seen in that broader industry CapEx budgets come in and oftentimes cited as getting leverage on existing tooling.

I don't think of Cognex as necessarily being the, be all end all of that definition of tooling.

But how do you think about tough versus easy comp still in the consumer electronics space at large?.

Yes. So, Josh, I think, we'll be in a better position to give you a sense of how the year is shaping up in that industry in Q1. I mean, if you look back over the years that we've had major business in that space, there's a lot of things being analyzed and considered for implementation at this time of year.

And, in general, they would have to do with new features or new technologies being adopted within smartphones, of course, OLED was a big one, but we see many different ways. And generally, there's always new technology under consideration for adoption and we get more clarity in the next couple of months on what actually is going to be going.

And so certainly that's the case. And then, of course, there's a need to improve productivity. So, to what degree customers have ambitions to remove what is still huge amounts of labor from that process as they look to automate. So, I think there's a long way for what machine vision and automation can do in that space to run.

I think your question probably gets to something we're not ready to give you a good insight and right now versus how does it look for this year..

Our next question comes from a line of Richard Eastman with Robert W. Baird & Company. Please proceed with your question..

Could you perhaps just kind of walk us through a little bit of the automotive business? Was it -- did it stay soft or soften in all three regions in the quarter? And would it be best to assume with a first half where you really have some big comparisons in auto.

Do you think the auto business can grow for you in ‘19? You should have a little bit better visibility there I would think..

I’d say a word that would describe what we're seeing at the moment is uncertainty, right. So I think where it's, there's uncertainty around many of our industries, but certainly automotive. I’ll tick through regions. We see broad softness in China. Capital expenditure being delayed across the region.

Europe, in contrast, we see performing relatively well at the moment, if not buoyant but it is growing.

And I think in Europe what we saw is they had some kind of challenges in that market in the middle of the last year and now customers appeared to have worked through issues around diesel engines and emission standards that caused a delay and we are starting to see in a more concerted and more planful investments around the future of automotive particularly around electric vehicles and new technologies that require significant and in cases quite complex automation.

What we're seeing in the Americans is that the market seems to be scaling back and delaying large automation projects at the moment. And that's something you know, we saw more recently in December and January and the first part of February. So it seems to be, I guess, uncertainty again, in that space, and particularly among larger capital projects.

That's where we're seeing, we would expect to have seen in a normal year, many more of those breaking loose at the moment. So, there seems to be tentativeness about that. So, I think we have positive views about the long-term plans for automotive customers and good visibility into those longer term plans.

But we're certainly seeing some shorter-term anxiety, mostly in China and America. And it's hard to give you a view on that given it's not clear how long that uncertainty particularly I would say in the Chinese market is going to continue and how much it's related to trade talks and other things that are going on.

So, it's hard to give you a better sense of 2019, but we can certainly discuss it more as we move through the year..

And then I noticed in the K, your largest customer was about 15% of your revenue in 2018, which was, you know, works to a bigger number than we might have thought.

Did you suggest that in the fourth quarter year over year, was that one your largest customer was revenue up? Or was it down for that particular customer in the fourth quarter?.

Well, I think unfortunately, we don't talk about specifics related really to any customers’ revenue in the quarter and certainly not that one.

And I think maybe if I just [indiscernible] I wonder if we can help you by talking more broadly about consumer electronics and perhaps our -- I think we mentioned a few, you know, I would say a very few large customers in smartphone and OLED, so perhaps we can help frame your question in that context.

John?.

Yeah, I think we did kind of discuss across a number of large customers roughly a $15 million headwind in the quarter.

Is that what you were referring to Rick?.

Well, there's a $15 million headwind you're suggesting in the fourth quarter of ‘17?.

Yes, compared to fourth quarter ‘17 to fourth quarter ‘18..

Okay. All right. I'm not sure how to interpret that, but I will -- I will do my best..

Well, let's try again. Let's see if we can clarify. I think what we're saying is, we've referred to a few customers in that large -- in that area of OLED and smartphone, and we saw a $15 million headwind in Q4 of ’18 compared to Q4 ‘17..

Just one last question about the VisionPro ViDi that you spoke to, I think that is in market and was there -- this is kind of the first deep learning tool that you have. And I'm curious where there some pre orders for that or any, you know, early adopters.

What market is that targeted at -- that product?.

Yes, ViDi technology addresses broad markets that we address overall, so quite similar to our overall mix. So, certainly, we have significant customers and early adopters in electronics and in automotive, but we see [indiscernible] all kinds of markets actually too..

Our next question comes from the line of Joe Ritchie with Goldman Sachs, please proceed with your question..

Thanks. Good afternoon, everyone. And Happy Valentine's Day Dr. Bob. So, maybe just starting on auto for a second.

Rob, can you just remind us in North America, what percentage of your businesses is North America auto?.

Yeah, I'm not sure that something we disclose. But I would say, a little less than half, roughly half. I think we've said, you know, we've said over the years, we told you that automotive is about a quarter of our business overall on a global basis..

That makes sense. And then maybe just kind of falling on that last line of questioning around, you know, you guys called out that $50 million headwind in 4Q. When you did kind of like your revenue forecast for the first quarter.

Are there any specific headwinds related to OLED or anything else that you'd like to call out?.

No, there's no -- in the first quarter, there's no material effect in the first quarter of consumer electronics..

Fair enough. And then I guess, you know, I guess as we progress through the year, you talked a little bit about the gross profit rate improving as the year progressed, partly due to some investments that are occurring in the first half.

Can you maybe just talk a little bit more about those investments? And then the follow on to that is, given logistics is growing at such a fast pace.

Is it fair to assume that from a mix perspective, you're going to -- you're probably going to have these headwinds for some time just given how quickly that market is growing?.

Joe, there are a number of factors at play here. One is, as we would move through the year, we normally would expect a different mix in revenue with much more consumer electronics and other business kind of flowing through the P&L. So that's I think, one thing to keep in mind.

But to address this issue of what's going on in logistics, we have new customers, some of them, significant in size beginning to adopt Cognex Machine Vision, and they're not necessarily the most sophisticated or experienced uses of machine vision. So we're doing more work for them in applications engineering to help them adopt and use the technology.

It's something we only do for large and important customers in general. Another factor is, the logistics market, it's been around a long time and there have been a lot of laser based systems sold into that market. Very hard to configure, long setup, laser based barcode readers.

And so the industry has become used to suppliers and companies coming in and actually doing that installation themselves. Our technology is much easier to configure.

Often, we think it takes less than 25% of the time to set up a Cognex barcode, reading tunnel in a logistics distribution center, as it would to set up line scan vision system or laser based system that the share leader in this market sells. Right.

So -- but in order to kind of make sure we get that business and get customers going, we're doing a little more applications engineering.

Now, we expect to introduce products to help customers and to lessen the percentage of that type of business that we see in our logistics P&L and we expect to see some benefits of that or some improvements not to come in later in the year. That's kind of our overall view on that..

That's helpful, Rob. If I could just sneak in one more, you mentioned, given us an update on the electronics and the outlook for the year in the first quarter.

Are you guys planning to give a full year guidance, like you did last year? Or how are you thinking about the guidance for the year?.

In general, it's not our practice to give full year guidance, but a tool for anything, but in that case, it was obviously so material and we’d understood the headwind that we were facing.

And so we were able to share with you and not willing to commit at this point on whether we will give you a longer term view of consumer electronics for the year, but we’ll be better positioned to sort of address that in 13 weeks from now..

Our next question comes from the line of Joe Ricchiuti with Needham & Company..

I think it's Jim.

So the question I have is just with respect to the decline in revenues that you saw last year from your large customer, was that consistent Rob with the decline overall that you saw with other consumer electronics related business, or was that decline worse? Sounds like it was worse more broadly in the consumer electronics market?.

Yeah, we're sort of thinking. I would probably say it was similar. But John's looking at some data here. I think an obvious takeaway is that we have a few customers, a select few in that OLED smartphone space, and we saw more than one have a material impact on -- in terms of decline.

And your question is, is that similar to what we saw in the overall consumer electronics industry. .

So, if we break it down, Jim, what we saw, we had declines from a few large customers while the remainder of the business actually grew during the year.

So net-net, we saw an overall decline in our consumer electronics -- the overall business, but that mix was quite different when you look at a couple of large customers versus the remainder of that industry group..

And with respect to the logistics business, sounds like you're suggesting that some of the headwinds that you've seen on gross margins, resulting from working closely with some customers in logistics that that's going to ease somewhat in the second half of the year, is that a correct way to characterize it?.

Yes, it is, it's very well Jim and that we’re about great technology that's easy to adopt and high gross margin. So, we don't really look to be doing a lot of applications engineering, unless it's for very good reason.

And we see it as, in the short term, as being a very good thing to do in logistics market, but that's not where we intend to end up in terms of gross margin..

Got it.

And then just related to that, Rob, would you anticipate the logistics business, having the same kind of growth profile that that you saw last year in 2018 at 50% type growth?.

Yeah. What we’ve said is we see that business growing at 50% annually for the foreseeable future..

Our next question comes from line of Paul Coster with JP Morgan..

Can you tell us a little bit about the backlog, which looks to be risen year-on-year and what the composition might tell us about the trends that you're seeing? And to the extent you can, how much visibility have you got. I mentioned it's not much more than the quarter, but would love your thoughts there please..

Yeah. So we usually don’t get into the details of backlog, but in terms of our board visibility, it’s consistent with our board visibility in other periods, it's really three to six months out. Things obviously get more clear the closer we get..

So the mix is similar to the mix that we've seen in the business previously, which just assume now that advice?.

Yeah. I mean, the mix would obviously, as logistics grows, the mix of our backlog would, logistics as a percentage of backlog would grow..

Okay. Maybe I’d just go back to comments that Rob made about the application specific work that has been done in the logistics space that's playing temporarily on margins. It sounds like it goes by the second half of the year.

Why is that? Do you actually -- will you actually productize the developments that you've made and then just sort of make a cookie cutter easy to use, or is there some other reason why it starts to get easier in the second half?.

I think there's a number of reasons, not all of which I want to talk about for competitive reasons. But certainly one is, we're teaching customers to apply our technology and then we're letting them get on with it.

Right? So that's certainly one reason that we don't need to do so much application engineering, but other things have to do with technology roadmap..

Okay.

My last question is, have you seen any difference in the behavior between large customers across any vertical and the smaller customers in those same verticals? In other words, is this hesitancy we're seeing and we've heard this on the call last night, is the hesitancy sort of specific to large customers? Or is it for both?.

I'll discuss your question in two geographic areas. So in China, it doesn't seem specific to large versus small customers.

The area where it is notable is more in America where we’re seeing notably fewer large projects breaking loose, more projects over $100,000 in scope, which might be large capital projects when you consider all the automation that's getting matched up. We’re seeing those being deferred at a much larger rate than they were in any recent period..

Our next question comes from the line of Joe Giordano with Cowen and Company..

I just want to clarify something, you talked about the margin dilution from logistics a bit here.

Is there anything on the product specifically being sold into that vertical that's lower margin or is this solely the impact of you guys spending the time to install?.

In general, the products we sell in to logistics are ID products and very similar or the same as the technology that we sell into factory automation and they have great gross margins.

What we do see in logistics is sometimes the use of more optics, mirrors, field of view expanders, which in themselves on particularly margin different, but the -- setting them up, applying them, that is requires much more service, which it's P&L and gross margin as service expense, which is lower gross margin.

And as we are learning to deploy these, we're becoming more efficient, right. So that's sort of the dynamic that's going on..

When I think about R&D, given the amount of development over the last several years, would you say that incremental innovation from here is structurally more expensive than it used to be?.

No, I wouldn't. I think there's definitely economies of scale that go with what we do. But in other aspects, there are technologies that are much more complex and newer. I think in particularly a deep learning and 3D, where we're investing and it's a new frontier provision. So overall, I don't see the profile changing, we're benefiting from scale.

We're getting very good and we're doing the same things that we've been doing for 36 years. But it's applying that into some of these new areas can be -- it can have a higher level of spend as we get into them..

If I can just sneak in one more. There's a lot of talk, given just geopolitical tensions about perhaps some major companies.

And I'm not trying to talk about anyone specifically, but potentially moving production basis back to the US and just curious if that's coming through in any of your discussions or if it's even high level thoughts on the topic for you guys..

Yeah. So, we work with them, most sophisticated manufacturers in the world and the most sophisticated contract manufacturers in the world. So certainly they're talking to us about their plans.

And certainly, I have heard – I have been in discussions in the last few weeks where major contract manufacturers are talking about more investment in certain markets and moving production from certain markets into others. In some cases, those relate to just the growth opportunities they see, electronics in India might be an example.

And in other cases, I think due to some of the technology and strategy plans, and I'm seeing some more of that in America, I met with a large contract manufacturer recently who clearly has plans for that. So, there definitely is more discussion of that I would say in the last six months than I've seen over my 10 years in this industry..

Our next question comes from the line of Matt Summerville with DA Davidson..

Just two questions. First, outside of CE auto and logistics, the remainder 25% or so or the company, can you talk about whether you're seeing more broad based slowing in some of those end markets, whether they be general industrial, food, beverage, pharma, semiconductor, et cetera.

Can you frame up sort of the other piece of Cognex that hasn't been talked about?.

Yeah. Hi, Matt. Sure.

So, it is very broad based, when we see -- we – sometimes, the growth that goes on in those markets can be quite volatile, by which I mean, this can be some large projects going on in deployment in certain areas like product security in tobacco or big deployments in consumer products that go on to that content to obscure some of what's going on.

But what's going on underneath over a longer period is those smaller markets have high growth rates. And the reason they do is our products are getting less expensive, easier to use and easier to integrate. And so we're now coming within the reach of more regular manufacturers who can apply machine vision and we focused a lot on that.

It's the reason that we really need to grow our salesforce and our distribution network, so we can reach all those new customers. So that's going well..

Lastly, just as a follow-up, a housekeeping item, could you disclose what FX headwind may have been to revenue in the fourth quarter and what you're anticipating potentially in terms of headwinds in Q1 in the guidance you provided?.

In the fourth quarter, it’s about 1%. And we're not anticipating a material impact in the first quarter..

Our next question comes from the line of Andrew Buscaglia with Berenberg Capital Markets..

Can you talk a little bit about your SG&A spend? I mean, it was up 19% or so in 2018 – or 2018 excuse me, and, that's on the heels of a big year last year too.

So at what point is this kind of top out where you don't need to be spending as much on that side of your business and if you could also just go into where you expect more spend is needed if you do continue to spend at this rate?.

Yeah. So I think we can, Andrew, we can see, we kind of invested quite a lot last year in some building out our sales network and in building up the number of sales noids [ph] as we call them, who are able to reach all those customers, we were just describing to the last -- to Matt’s question.

So, and then we invested majorly obviously in some infrastructure projects, whether it's facilities, but of course on ERP system as an example. So, I think some of those have got behind us all those capital that will come into the P&L over a longer period.

I would say in a big picture like we believe really strongly about the potential of machine vision over the long term and the long term growth prospects of this market. So we're very serious about being the market leader and making sure that we're doing everything we can to grow our share and maintain that position.

And we see high gross margin, we see high -- lots of growth markets and we want to make sure we're getting to those. So when we think about this type of thing, we're not thinking about trimming things to hit a quarter number so much as we're thinking about a long term plan.

So in the long term, certainly there's lots of opportunities we see to go on investing in engineering and in our sales channel to make sure that we're getting great products that are easy to integrate, sold to as many customers and as can benefit from them.

That said, as top line growth changes, and the growth outlook changes, we will manage our expenses accordingly. And I think you can see that, if you look at a sequential growth of expenses over say, the last six quarters and you can see that we're sort of tapering to make sure that we're more in line, but that's how we manage it..

And is there a region or a end market mainly that you're focused on with this spend in 2019, if it does continue?.

Well, I mean, certainly logistics is a great market.

So, and some of the new technologies we've discussed earlier in the call also really warrant I think some concerted investment, and then in terms of other areas, we're obviously going to manage that according to what we see, where I would say in other more established areas that you would see us operating perhaps more like a regular company..

Okay. And then just one last one on your -- so you made some interesting acquisitions in 2017, it's hard to get a sense of where you are in developing new products and seeing them flow through into your business.

Can you give us a sense of where you are in terms of your strategy of when you picked up the acquisitions and when do you expect a more robust product cycle I guess from the specific deals?.

Yes. So we made six acquisitions around about two years ago and we're already seeing the first benefits of those products coming into the market. Good example would be ViDi.

We talked about the ViDi technology being bought up inside VisionPro and we've also bought a lot more robust and powerful deep learning techniques into the suite itself and tools, which you can certainly read about on our website.

So I'd say that's kind of well down the road from a business that we acquired in April of 2017, but lots of exciting stuff coming. Then, we made three acquisitions in the 3D space, so AQSense [indiscernible] and EnShape.

We did formally launch a product, I think it was earlier this week, the 3D-A5000, which is a very -- the highest performance industrial machine vision sensor on the market in terms of the number of pixels and speed with which we can image technology, so that was technology that came out of the EnShape acquisition and we've worked over the last less than two years to improve and make robust and integrate within the Cognex platform, so that's another example of that and then we also acquired a business about, I suppose, about 20 months ago from memory, called Webscan, which is the leader in technology for barcode verification and we launched a product last year called the 8072V, which takes that technology and puts it inside a Cognex handheld reader on that platform and allows us to help customers gather very precise information about the quality of the barcodes that they read.

And we’re in the market with that and we're pleased with the success we're having and it's certainly resonating with our customers to, I think, as you know, want to put barcodes on more and more and more things.

An example would be consumer electronics, but automotive also and they want to hold their suppliers accountable for the quality of those barcodes.

And not only is it great that we can help them do that, but it also means that it can help pull through other sales of Cognex barcode readers as we’re both helping the supplier meet those standards and verify them and we're one point of verification from reading at the supplier to reading at the customer itself.

So that's another thing that's been very successful for us. I think I'm missing an acquisition. Yes. The GVI was an automotive, a very sophisticated applier of vision software to the automotive industry.

That was a relatively mature and well managed business that already really used a lot of Cognex technology, so we were able to get out of the blocks very fast on that. And when we look at the overall contribution and how we've done against our expectations for those acquisitions in aggregate, it's gone very well..

[Operator Instructions] Our next question comes from the line of Ben Rose with Battle Road Research..

At the risk of getting people in trouble by extending this call a little bit more, I’d just ask one kind of follow-up question to Rob, your comments on the automotive market. If I might drill down just a bit, I think you sounded a little bit more optimistic near term about the opportunity in Europe as opposed to as opposed to America.

And I'm wondering, is there anything structurally in Europe that's going on that would differ from the US.

I mean, namely, are there any trends affecting the broad market that would make the US slower growth over the course of this year and next?.

Yeah. Hi, Ben. I think the first thing I alluded to was I think the European automotive industry went through a bit of a challenge last year around kind of diesel emissions and some new emission standards and that led to a lot of dislocation in the supply chain. Right.

So I think in retrospect, as we look back, we saw that causing a reduction in purchases for Cognex automotive business in Europe, and we've seen it bounce back nicely from that to the point where it's now growing again sequentially and year-on-year. So that's going on.

But then I think getting to your question, I would say my perspective on this would be that the European automotive industry has been a little slow to grasp some of the electric vehicle investments that have been going on in some of the new technologies that have been going on.

I think a very good example would be lithium ion batteries, which are at the heart of electric vehicles where to my understanding, there really isn't a major European manufacturer of that technology, right? Well, you see a lot of Koreans, Chinese companies, Americans, of course, and Japanese, Chinese is all in that space.

So, and I think now, you're seeing a much more concerted effort by European automotive, it would be both the big brand owners, but more of our business and our industry is with tier one suppliers, seeing them investing seriously and working on automation plans that are starting to see light later than we saw are happening in other parts of the world.

So that's one observation I would make..

Our next question come from the line of Jairam Nathan with Daiwa Asset Management..

Yeah. Thanks for taking my question. It’s Daiwa Securities.

So just going back to the operating expense? You had the ERP implementation this year, do you expect -- now that it's done -- to see some benefit from that no longer being there as an expense item?.

Yeah. There's obviously some benefit from that. I mean, it wasn't a huge part of our spending this year. I mean, it’s about $10 million asset that we created, but we do expect to generate productivity gains from leveraging that asset certainly as we move forward..

And with respect to a kind of long term margins, I think you mentioned about like kind of a 30% kind of long term target, is that still in place and how do you see the progression from the current, I think 2018 was about 27.5%?.

Yeah. Jairam, our operating model has seen 20% revenue growth over the long term and 30% greater operating margin is what we're looking for and that served us well for many years and we managed the company with that in mind over the long term and we think it's achievable over the long term..

And finally, you mentioned winning a large business in the mobile terminal side about a couple of quarters back with a Fortune 100 company, is there any update to that, any recent wins, that would be great, if you could talk about it..

Yeah. Hi, yes, of course. So what we had mentioned that was our first $1 million customer in that space and we continue to launch products and grow our customer base in that space. So our percentage growth numbers look good, very good, but it's on a small base. So that's the update on that market..

Our next question comes from the line of Bobby Eubank with Chevy Chase Trust..

Yeah, it's just kind of high level, what would you constitute as a success or failure? Maybe one or one or two comments on each of those success and failure over the next three to five years.

What kind of keeps you up at night and what are some of the bigger opportunities that you guys are going after?.

It’s an instant question. I mean, I think, we have a strategic plan, we're executing, and as you would expect, it's about bringing market leading breakthrough innovation and technology with our -- enabling our engineers to do that and getting our sales force able to do that.

And, driving high gross margin growth at or above that 20% growth rate over the long term. That's what we're all about. But I would also say, we're a company that's very proud of our culture. So, we would also measure our success by the culture in the business, our ability to attract, retain, motivate, get the very best out of Cognoids.

So we certainly think about that and that kind of leads me into your, what keeps me up at night would be more, as we grow, we want to make sure that we're maintaining and developing that wonderful entrepreneurial growth driven innovative culture that we have. So that gets harder as you get bigger.

But we focus on it very seriously and look forward to showing you our annual report, which I would think is always a good expression of our culture. And that'll be hitting the press in the next few weeks..

Ladies and gentlemen, we have reached the end of the call. I will now turn it back over to Dr. Shillman for closing comments..

Well, a great year and a great fourth quarter. And I want to thank all of you for attending the call and for covering Cognex and hope to report even better news to you on the subsequent calls. And I'm very happy to see that nobody objected to the Happy Valentine's Day greeting. So keep going guys and we'll talk to you down the road. Good night..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..