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Edited Transcript of CGNX earnings conference call or presentation 29-Jul-19 9:00pm GMT

Q2 2019 Cognex Corp Earnings Call

NATICK Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Cognex Corp earnings conference call or presentation Monday, July 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Stagno

Cognex Corporation - Treasurer

* Laura Ann MacDonald

Cognex Corporation - Principal Financial Officer, Principal Accounting Officer, VP & Controller

* Robert J. Shillman

Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer

* Robert J. Willett

Cognex Corporation - CEO, President & Executive Director

* Susan Conway

Cognex Corporation - Senior Director of IR

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Conference Call Participants

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* Andrew Edouard Buscaglia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Ben Zion Rose

Battle Road Research Ltd. - Founder, President & Analyst

* Jairam Nathan

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Jeangul Chung

JP Morgan Chase & Co, Research Division - Analyst

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Joshua Charles Pokrzywinski

Morgan Stanley, Research Division - Equity Analyst

* Ka Wing Lau

Gordon Haskett Research Advisors - Research Associate of Industrials

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Michael Joseph Cikos

Needham & Company, LLC, Research Division - Associate

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to Cognex' Second Quarter 2019 Earnings Conference Call. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Susan Conway, Cognex' Senior Director of Investor Relations. Thank you, Ms. Conway, you may begin.

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Susan Conway, Cognex Corporation - Senior Director of IR [2]

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Thank you, and good evening, everyone. With us today are Cognex' Chairman Dr. Bob Shillman; President and CEO, Rob Willett; Vice President and Corporate Controller, Laura MacDonald; and Cognex' Treasurer, Chris Stagno.

I'd like to point out that our earnings release and quarterly report on Form 10-Q are available on the Investor Information section of our website at www.cognex.com. Both contain highly 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 often change, however, and actual results may differ materially from those projected or anticipated. You should refer to our SEC filings, including our most recent 10-K, for a detailed list of these risk factors.

With that, I'd like to turn the call over to Dr. Bob Shillman.

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Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [3]

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Thanks, Sue, and hi, everybody. Thanks for joining us. Overall, our Q2 results were in line with our expectations, and we were highly profitable. However, it's very frustrating to report a year-over-year decline in both revenue and profits as a result of the current downturn in both consumer electronics and automotive markets.

Even so, we are confident about the future of Cognex and the role of machine vision in automation, and turns out, the distribution remains strong, logistics. Right now, I'm in San Diego, and everyone else is at our Natick headquarters. So for more details, I'll turn the call over to my partner, Rob Willett, and I'll remain on the call for any questions you may have with me. Rob, the microphone is yours.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [4]

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Thank you, Dr. Bob. Good evening, everyone. As Dr. Bob said, our Q2 results were as expected, with revenue at the top of our guidance range. The lower spending by customers in consumer electronics and the automotive sector in the Americas that we discussed last quarter played out as expected. However, the broad factory automation market in Europe was considerably softer than we anticipated in Q2, and the impact of this will be more noticeable in our Q3 results. Demand from many end markets is declining, notably in the automotive, which is one of our largest markets in Europe. Customers, particularly those that are exposed to the slowdown in Greater China, are reducing and deferring large projects.

Asia has also weakened. This is due to a continuation of the challenges that we have been experiencing broadly across China and to softness observed in industrial markets elsewhere in Asia. These dynamics obscure our continued strong performance in logistics. In that market, a growing and broad base of well-known e-retail and traditional retail companies are investing in automation to improve the speed and the efficiency of their fulfillment operations, and they are turning to Cognex' machine vision as a key enabling technology in their distribution centers. We also continue to make strong progress in other industries we serve that are currently relatively small but are growing quickly.

Putting it together, consumer electronics and automotive, our 2 largest markets that, combined, have recently been responsible for more than 50% of our revenue, are both contracting simultaneously for the first time in many years. Broadly speaking, it's due to a widespread lack of business confidence amid falling demand, changes in customer preferences and the timing of transitions to new technologies. Heightened uncertainty and the distractions around trade tensions are also a problem.

However, we are confident in our business strategy and are keeping a long-term perspective. We continue to fund our engineering projects, and the developments in impressive new products continues to plan. We are reallocating resources toward faster-growing areas, such as logistics and deep learning, and markets where the adoption of machine vision is still in its infancy. The skill sets of our engineers and salesnoids are highly transferable and can be applied to a variety of opportunities.

Before we move on to details of the quarter, as you may know, we are actively recruiting to fill the CFO role. In the meantime, we're especially fortunate to have Laura MacDonald serving as our principal financial and accounting officer. Laura is a 25-year Cognoid and has led Cognex' finance and accounting and reporting teams as Vice President and Corporate Controller since 2007. Laura, the microphone is yours.

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Laura Ann MacDonald, Cognex Corporation - Principal Financial Officer, Principal Accounting Officer, VP & Controller [5]

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Thank you, Rob, and hello, everyone. Revenue in Q2 was $199 million representing a decline of 6% year-on-year due to a reduction in revenue from the consumer electronics and automotive markets. The decline was 3% in constant currency. Logistics continued to be a strong performer and offset much of the decline in the manufacturing sector. Gross margin of 74% was consistent with Q2 '18 despite the lower revenue and was up 1 percentage point from Q1 '19.

Operating margin in Q2 was 26%, down from 30% in Q2 '18. On a sequential basis, operating margin increased by 9 percentage points due to seasonal growth in revenue and prudent management of the discretionary expenses. The effective tax rate for the first 6 months of the year was 16% before discrete tax items, up from our expected rate of 15% due to a shift of income from lower- to higher-tax jurisdictions. The true-up of the tax rate reduced net income for Q2 by approximately $925,000.

Excluding all discrete tax items, earnings per share were $0.27 in Q2 '19 compared with $0.31 in Q2 '18 and were up from $0.17 in Q1 '19.

Looking at revenue from a geographic perspective, the Americas performed the best of any region, increasing by high single digits year-on-year. Strong growth continued in logistics and was partially offset by lower revenue from the automotive sector where spending continued to be slow. Revenue from Europe declined by midteens year-on-year, and that includes a 6 percentage point negative impact from currency exchange rates.

Consumer electronics declined substantially as expected. We also saw growth soften in the factory automation market.

In Greater China, revenues declined by low teens year-on-year also due to consumer electronics and a negative impact of 6 percentage points from currency exchange rates. Manufacturing across our customer base in China continued to cut back their capital spending plan.

Revenue from the rest of Asia declined by mid-single digits principally due to reduced spending in the electronics and semi market, which are dependent upon demand in China.

Turning to our balance sheet, Cognex continues to have a strong position. We ended the quarter with $862 million in cash and investments and no debt. During the quarter, cash provided by operation was $59 million. We repurchased shares of Cognex' stock totaling $62 million, and we paid $9 million in dividends to shareholders.

Inventory decreased $6 million or 8% from the end of Q1 as expected. As noted last quarter, we prospectively adopted a new lead accounting standard this year, which resulted in a balance sheet gross-up of assets and liabilities of approximately $18 million at the end of Q2.

Now I'll turn the call back to Rob.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [6]

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Thank you, Laura. Moving next to guidance. Revenue for the third quarter is expected to be between $175 million and $185 million. Compared to $232 million reported in Q3 of 2018, the decline is due almost entirely to substantially lower revenue from consumer electronics. As discussed last quarter, this is particularly related to smartphone manufacturing. Otherwise, we believe the continued growth in logistics and a few smaller high-potential markets that are performing well will be offset by decreased revenue from the automotive sector and other industrial markets. We expect gross margin for Q3 will be in the mid-70% range and slightly lower than the 74% gross margin we reported for Q2. Operating expenses are expected to be relatively flat with Q2. The effective tax rate is expected to be 16% excluding discrete tax items.

And with that, we will open the call for questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Karen Lau of Gordon.

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Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [2]

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Rob, you mentioned logistics was still growing at a pretty healthy pace. There were some other companies that called out some push-out in large projects, I guess, over the course of past few months. I guess, can you comment on the growth rate you're seeing in Q2 and what you're expecting in 3Q and if you're not seeing any -- if you are seeing any push-out in projects in your pipeline?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [3]

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Yes. Thank you, Karen. Our logistics business continues to be very healthy. We're growing at a good clip, and we -- and baked into our Q3 guidance is continued growth right around that 50% growth rate that we're targeting. So we haven't -- we've seen a fair bit of seasonality in logistics and as we get into this market more and understand it better, generally, what we tend to see is higher revenue quarters for us in Q2 and Q4 and lower revenue quarters in Q1 and Q3. But the growth rates we're seeing continue to be very strong, and we expect that to continue. There are other factors I can go to in more detail if that's of interest.

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Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [4]

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Yes, sure. I guess, do you think it's a function of you have been adding so much resources in the market that allows you to outgrow that market? Or are you somehow just more penetrated in like smaller projects these days so any kind of deferral in large -- into larger project areas doesn't affect you as much?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [5]

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Yes. I mean we're new-ish to this market, and we have some very advantaged technology that we're bringing. And certainly, the technology leaders in this market, particularly in the e-commerce space, recognize that. And I would say we're being very much recognized as technology leaders. So I think that's the reason we think we can keep growing -- we have been, and we think we can keep growing this market at 50% growth rate over the long term. So I think I see that continuing.

We're also introducing some exciting new products. We introduced the 3D-A1000 for dimensioning, which will be very advantaged over Time of Flight and laser-based dimensioning systems that are currently in that market. And we're reallocating resources, as you note, to make sure that we have the capacity to go on growing. So if there's a silver lining to this very disappointing market situation we are seeing in automotive and electronics, it's that we're able to reallocate as Cognoids to some very exciting growth opportunities, notably logistics and deep learning.

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Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [6]

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Okay, great. And then just on consumer electronics, can you update us versus the down 1/3 expectation that you had going into the year? What is your expectation now for that market?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [7]

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Well, I would say we don't really want to be giving annual guidance every time we meet. We're not really changing our kind of approach for that. However, I will say things haven't really changed a lot in our outlook in that market since we last spoke. So our guidance in Q3 reflects a $50 million year-on-year decline in revenue from consumer electronics. That's the big change we expected to see and we're going to go on seeing. So as you try to understand our Q3, it's really not so much an electronics story. I think that's what -- it's similar to what we had told you previously. It is much more a story of softening in automotive and -- in Europe and the overall market we see in China.

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Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [8]

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Okay, understood. And then just lastly, I guess more broadly on CE. I realize Huawei is not -- probably not a big customer of yours or you expect that is not that material of an impact. I'm just curious, the whole episode of the ban and the ongoing trade tension, does it impact your confidence or will it impact your ability at all to participate in future smartphone CapEx cycles given that I guess a lot of the infrastructure, whether it's manufacturers, machine OEMs, are -- a lot of them are in China, right? So does it impact -- I guess, does this whole trade tension impact your longer-term outlook in CE at all?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [9]

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Yes. It's a difficult call to make longer term. I mean -- and obviously, as you rightly noted, we don't talk about specific customers. Cognex does supply all of the major manufacturers of smartphones, whether directly or indirectly through contract manufacturers. And the current market and trade conditions make it more difficult to work with particularly some more than others, as you've said. And that some of the ones that's hard for us to work with are perhaps one of the ones that are showing most growth or have been in recent quarters. So that's a challenge for us certainly. But certainly, our guidance contemplates that situation. And I think we all have to see how it's going to play out from a government and trade talk point of view.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Andrew Buscalagi (sic) [Andrew Buscaglia] of Berenberg.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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I'm curious, from a high level, you made some comment that you haven't seen in quite a while consumer electronics and auto detracting simultaneously. You also would have this trade thing going on which could be impacting things further. I just -- given you guys have a long history in the space and experience in here, can you talk about how this compares to other downturns? Is this something you think is going to be prolonged? Or do you -- based on your history and experience, do you see -- do you get a sense that things could turn quickly if we do get some sort of resolution in the trade agreement? Or any other factors, curious on your thoughts on that.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [12]

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Yes, Andrew, it's not easy to kind of prognosticate on these kind of things, but I would say a few things. One is I think the consumer electronics market can turn quite quickly, right, so I think particularly around these issues. So I think that one potentially is one that could come back more strongly. I think the automotive market tends to be more of a kind of that longer-term player and tends to take them longer to decelerate and accelerate around changes that go on. So I think I'd make that point of view.

I also think, I can't quite remember exactly, I want to say 2015, we certainly saw some contraction in consumer electronics, but we did see the same thing going on in automotive at the same time, so that's a little bit different. And I think all of us know that Cognex has grown its top line every year consecutively for the last 9 years, and we're not growing this year, so this is a different situation that we are seeing. And I think it has to do with a number of factors that have -- and some of which we have talked about. The automotive industry itself is oversupplied at the moment, and it's between kind of the fact that -- it's between having combustion engine cars and too many of them manufacture it and perhaps not as competitive for consumers as they need to be but not yet having geared up on electric vehicles that are coming but not yet really in the phase of major investment in automation. So we're in that situation there. And in consumer electronics, I think we have gone through a period where we had massive investments, and it is a matter of when we are going to return to that as well.

I think as I think about this longer term, which is how we like to think about things at Cognex, I think the story of the last many decades really has been increased spending and innovation in automation and electronics in automotive, right? As I look at consumer electronics, I think I would certainly expect there will be future waves of innovation and investments that are coming. And you can see that in many areas, 5G being one example in consumer electronics or autonomous, semi-autonomous vehicles and electric vehicles in automotive. So I think it's a matter of when those come and how they play out and how much of a lift they bring to automation. But when I think of the millions, literally millions, of people involved in manufacturing consumer electronics and the major investments and challenges and margin pressure on automotive to automate, I'm very optimistic about long term but much less optimistic about this year.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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Okay. That's helpful. Maybe just turning to your balance sheet, that's -- something I asked last quarter, you guys have this pile of cash. Do you think -- did your appetite change in the last 3 months given some of your peers, your machine vision peers, are a little bit weaker now? Also just curious, maybe a second part of that question, would you ever consider vertical integration with any specific pieces of your business?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [14]

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So I would say we have a long-term strategy and some very strict and thoughtful criteria around acquisition, if you're getting at that, so that doesn't really change based on short-term considerations. We obviously have a lot of firepower in our balance sheet to make acquisitions as and when they become actionable. So that will continue.

I didn't really understand your vertical integration question. Perhaps you can explain that to me.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Just some of your suppliers that you use, does it ever make sense -- or does it ever, thinking longer term, on the camera side make sense to bring those in-house?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [16]

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Right, right. So we -- I now understand your question. So I think there are various technologies that we at Cognex work with. An example might be in the area of high-performance liquid lenses. So what -- technology partner we have in that space where we've used the -- our ability to invest to get some exclusivity around that technology without having to acquire the company. But it shows you what we're willing to do when we find advantaged technology that we want to secure. And whether it's through exclusivity or acquisition, we would do that. But I don't think you're going to see us acquiring what I would consider more commoditized businesses like cameras, right, as an example.

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Operator [17]

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Our next question comes from the line of Joe Ritchie of Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [18]

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So Rob, just your comments on the auto market and electronics market notwithstanding, you did also say that like you experienced the broad factory automation market, particularly in Europe, slowing down. And so I was just wondering like if you can provide a little bit more color on what really factored into that comment and what you guys are seeing specifically in Europe.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [19]

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Sure, Joe. I think it's pretty a well-known fact that the Purchasing Managers' Index, or PMI, for manufacturing in Europe was -- recently fell to a number of 46.4, which is a 79-month low. And I think generally, we're seeing a pretty underconfident manufacturing environment broadly in Europe right now.

We saw that emerge really kind of right after our European organization came back from sort of the Easter vacation time frame, right, so right after the call we had last with you. And I would say -- and we really noticed a lot of pulling back, I would say, on investment. I think another thing that perhaps might have clouded the view to that was I think in automotive, we sort of saw Q4 of last year from memory or certainly the second half which didn't look very good. It wasn't good last year in Europe, and there was a bunch that has to do with regulation, right, around emissions, the factors that they were dealing with, which kind of held up demand in the end of last year.

And then we saw that kind of break free, and I think it made Q1 in Europe look better than probably it was on an underlying basis. So then we had to really try to really calibrate on really where are we as we came through into Q2, and we realized it was weaker than we were expecting. And as I look around at other companies, I see similar things, particularly in automotive. I would point to the very large Tier 1 automotive supplier Continental, recently said they have revised their view about the automotive industry this year from being flat -- not their business but the industry in total on a global basis, not flat but down 5%, and they've revised that down in a similar time period. So I would say we see that.

The other thing, I think it's probably -- I know you -- many of you on the call cover many companies, but the difference between Cognex and some of those companies is our distributors don't really carry almost any inventory, and that's kind of part of our supply chain model. We really like to work in a situation where we tell our distributors we'll supply you quickly and we don't want you tying up your cash holding Cognex inventory. So as a result, we have a pretty clear line of sight with what's going on in the marketplace. So I think while other companies might be later to see that where the kind of sell-through of inventory may cloud that in some way.

So anyway, those are my own views about what's going on in European manufacturer and automotive.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP & Lead Multi-Industry Analyst [20]

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That's really helpful commentary. And if I just could ask follow-on there. I guess, as you think about the CapEx cycles that you guys are tied to and how decisions are made, you referenced project deferrals earlier. I guess, how do we think about the timing on when we could see an improvement in CapEx? We're halfway through the year this year. Will budgeting decisions continue to be made this year? Or is this kind of more like we'll get further insight on an improving business condition as we had, really, kind of towards the end of the year.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [21]

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Which is very good question, not one I'm sure I can answer all that well. I'll give you my views which are I think I don't think we're going to see an improvement in the situation this year, right? Although it's possible, right, if they start to budget next year, there are going to be some factors that are going to change things. I think one factor is there's just very significant momentum in investment around electric vehicles and hybrid electric vehicles and autonomous features with very many new models planned to come to market in the next 3, 5 years. And at some point, I think there's going to be a race to get those products to market and to gear up in automation. When does that begin, I think is a critical question. Of course, we are seeing investment in lithium-ion batteries and capacity in that space, and that is a good market. It's growing well for us at the moment. But I think we have to see more of those products, those new cars come into production, and I think we'll have a better view of that probably as we exit the year.

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Operator [22]

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

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [23]

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Rob, you mentioned something. I think you said in CE and auto something about changes in customer preferences. And I just wanted you to clarify exactly what you meant there. And related to that, are you seeing any sort of noticeable shifts in market share for what you guys do in markets that are impacted this much, whether it be just market dynamics or trade? Or is that having any impact on who's supplying in now?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [24]

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Well, yes, I was alluding to I think factors that we probably mentioned, but I think let me try to sort of wrap them up for the group. So I think in automotive, where we have this factor where we -- globally companies have produced a lot of combustion engine cars, and consumers really are less interested in buying those. And we see that particularly in markets like China, right, where capacity, particularly for foreign automotive companies, is a fraction of utilization. So you see those kind of trends going on, which means they're really, no pun intended, slamming on the brakes.

But then you have -- and yet, as I was saying just previously, the electric vehicle investments aren't really flowing through in automotive yet. So I think those changes, we see coming. And some of the government incentives and some of the trade conflicts that's going on isn't helping that situation. Okay. So those are those factors there.

I think in consumer electronics, what we see is we're seeing waves of investments, and we saw a major wave, obviously, in 2017 around OLED technology and new sensors and many new products, right? And now we're seeing overall sales of units slow down. But there will be more features and technology coming. And the most obvious example there I think is 5G, right? I think there is a lot of virtual reality and other sensor technology that we can expect to see coming in future, right? And I think inevitably, there will also be new form factors, new case technology, new products targeting new geographies and markets that have the potential to grow, as an example, markets like India and Indonesia and markets and such as that.

So I think all of those give us confidence that we will see a return to investment and growth again, but none of that appears to be coming in the short term.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [25]

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Are you seeing any evidence -- material evidence of your customers looking to retool outside of China given what's happening there and starting to build up production bases in other parts of the world?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [26]

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Well, I would say that's been something that I think many companies we work with, particularly in consumer electronics, have had under consideration or have been activating on for quite a long time now. Certainly, some of the larger Korean manufacturers in the smartphone space and others have -- certainly have scaled up manufacturing and are producing lower price point models in India as an example. So that's not new. I'm certainly hearing rhetoric around the ability to accelerate that, and contract manufacturers say that they're able to pivot into that space. But I don't have anything specific to tell you.

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Operator [27]

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Our next question comes from the line of Richard Eastman of Robert W. Baird and Company.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Robert, can I just follow up on the last kind of comments that you made there? One of the things that we have been seeing is just, again, in the smartphone market, this movement of production outside of China, and you mentioned India yourself. And we've been kind of paying attention to that. In a scenario like that, have you seen your customers literally relying on capacity -- subcontract capacity that's already in place? Or why is there not any demand coming from that incremental capacity that's being built outside of China to accommodate that movement. I mean, have you seen any indication of demand on your business? I mean it doesn't appear that way. But why should we not -- or why would we not expect to see that?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [29]

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I think -- here's what I do see for a number of companies we work with in the consumer electronics space, focusing on the India market, which is they're generally relying on their machine builders that they work with in an existing capacity in China or in Asia to fulfill that demand, right? So they're not scaling up machine builders in India, for instance. They are more shipping product over and then also there in some cases moving lines and commissioning and bringing them up on older models there. So I think that's the overall strategy that they're following, and I think it's pretty small scale at the moment. And I think it couldn't -- or it could be much bigger in future.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Okay. And somewhat related, there's a lot of puts and takes right now going on in the small display, OLED display market. There's ironically some tariff issues between Japan and Korea in some of the specific materials that go into small displays or even large. But the Chinese are building out their capacity around OLED displays, both small and large. And we've talked maybe for the last 18 months about Cognex broadening its exposure to -- in the CE market, and I think one of those was OLED. But is -- have you -- has Cognex experienced any of that demand? I mean just a shift in share. And do we count all of the OLED display manufacturers in Asia as customers?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [31]

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Right. So we are seeing growth among -- with businesses that we're doing with Chinese OLED customers, right? So certainly, I think you're right in thinking that those manufacturers are seeing growth in investment. And in many cases, we're supplying those companies through machine builders in countries such as Korea or Japan, right? So that's where we're generally seeing that business increase. But to me, it looks like it's sort of incremental, and there's still a lot of capacity that was built out in '17 among the big players that still isn't being utilized. So I don't -- I think we were expecting some major increased investments as soon as next year, right? And I think maybe that's a little optimistic now depending on what happens, but I do think at some point, it is going to come.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [32]

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Okay. And a related question and then I'm done. It's -- this maybe counts as 3, but I'll think it 2.5. But was the reference you made earlier that the automotive industry I think you had explained or thought maybe coming out of the first quarter would be flattish for the full year? And now with the incremental weakness that we've seen, are we thinking down mid-single digits? Or down double digits now for auto for the year?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [33]

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I think we're now thinking down around 10%. (Operator Instructions)

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Operator [34]

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Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [35]

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So I guess just, first, on more of a clarification than anything else. Rob, the -- it looks like a lot of the consumer electronics decline shows up in the third quarter, which is just more seasonality than anything else I think going back prior third quarters have the same phenomenon. Any other big end markets that show up third or fourth quarter that we should be aware of that are kind of seasonally larger? You mentioned logistics a little bigger in 2Q and 4Q. Is auto weighted to some quarter in particular that we should keep in mind with -- on the decline or when that comp gets easy?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [36]

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Yes. So I think Q4 can benefit from larger logistics, seasonally larger logistics, so I would anticipate that again this year. And then Q4 can benefit from automotive in general kind of budget flush in the past that goes on, but I'm really not anticipating that in the current environment we're in. So I think -- and then sequentially from Q3, obviously, Europe tends to be very slow in Q3 and then gets back up to speed as they come back from vacations and make more investments in Q4. So those are normal phenomenon that we see at -- in our markets.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [37]

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Got it, that's helpful. And then just kind of thinking back to the secular growth model here. I know that cycles get in the way, and those are shorter- or maybe medium-term phenomenon. But when you talk about penetrating a customer's facility and having kind of more content there, if they're not spending money, there is no ability to gain content. But when that turns on, do you kind of catch up from where you were? So maybe rephrased differently, you'll have a couple years of easy comps in consumer electronics and auto heading into next year. Do you -- can you kind of catch what you didn't get during that time period because customers wanted to spend, they just weren't? Or is it just a question of the cycle comes back and we start from kind of a reset base? That question make sense?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [38]

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Yes, it does, it does. I would say in my 11 years with the company, I've seen difficult market conditions turn around, and in times, there can be very strong growth. I'm not predicting that here. Please don't get me wrong. But in 2009, we grew going into 2010 by 65%. We had other -- we had obviously 2017 where we saw we're -- some years of slower -- I think '15 and '16, we grew 44%. So ours is a kind of market where you can see those kind of turns around. And I'm not -- I'll just say again that I'm not predicting anything there. I'm just saying that we see those kind of things can change quite quickly in our markets, and we want to be sure when those things happen that we have the capacity and the products to keep our momentum going.

The slow situation we have now is unusual. As you said, we've grown for the 9 -- last 9 consecutive years so we're in a bit of a new space here, and it's hard to know when that will turn around and when we'll return to growth and, when we do, how quickly it will come.

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Operator [39]

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Our next question comes from the line of Jim Ricchiuti of Needham and Company.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [40]

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This is Mike Cikos on the line for Jim Ricchiuti. First question was around the gross margins that we're looking at for Q3, I guess the slight deterioration coming off of Q2. And I just wanted to get a better sense, is that gross margin compression we're looking at tied to revenue mix coming from logistics more than the consumer and the auto piece? Or is it more just the reduced revenue base that you're looking for?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [41]

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Yes. So no, gross margin in Q3 is going to continue to be in our mid 70% target range, a little lower than we've reported tonight. We did have, for Q2, some higher-margin revenue in the service area that hit the P&L that won't repeat in Q3. And then some of it kind of have to do with the mix of business, right, as well, which can affect our gross margins. But I don't think there's a tremendous amount of noise going on in our gross margin, Q3 relative to Q2, that you need to understand. It's not that material.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [42]

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Understood. And then can you also help us better understand the reallocation of resources when we're looking at your OpEx? Is it a function of investing more in some of these smaller businesses that show potential for growth and the logistics business to help offset some of the larger markets where you're experiencing weakness? Or how are we thinking about those expenses?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [43]

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So we have very talented engineers and salesnoids that we recruit and develop over time, and they're great assets. So in times when we see the market slow down and rather than remove them -- and our culture is very important to us and we're taking a long-term view, so when moving them, we tend to move them into areas where we see longer-term growth potential. An example would be we're relatively underpenetrated in the logistics market in China. Clearly, that's a large and high-potential market for us. So while we are seeing a slowdown in those areas, we're able to leverage those Cognoids we have and move them over would be one example. That also applies to areas like deep learning, life science, where we see a lot of long-term potential and the need for talent.

So that's really what we're doing. And at the same time as we are doing that, we are being much more conservative about incremental spend that we're making and discretionary spend that we're making at this time because, obviously, when the business isn't growing, we want to try to keep expenses relatively flat.

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Operator [44]

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Our next question comes from the line of Matt Summerville of D. A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [45]

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Within the U.S., you talked about factory automation a bit more from a regional standpoint with respect to Europe and maybe Asia, but with PMI sort of decelerating, industrial production decelerating, arguably it gets pretty tough comparisons. Have you started to see factory automation in North America start to roll over? And is that an incremental concern for you going forward into 2020?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [46]

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Right. I think due to the American -- Americas region, and I'm -- really, in the United States, I would say, it's soft, particularly in automotive, where investment plans continue to be delayed and there's too much capacity and too many cars produced, certainly. I would say we, as a company, I think we understood that pretty early, and we kind of -- we rightsized our efforts and, I think, our guidance or our forecasting around the Americas market's quite early. So I would say this is not really surprising us. The other factor we have in the Americas is we have -- it's our largest region for logistics, and that's growing very, very strongly, right? So that's certainly helping to, on a region-by-region basis, make up for the slower areas in general factory automation that we see in the Americas.

So overall, I think we -- that's what we're seeing.

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Operator [47]

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

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [48]

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It's Daiwa Securities. So I just wanted to get some more color on operating expense, and we saw in the Q you had mentioned that some of the declines year-on-year came from ERP, lesser and lesser expense on the ERP side. And just trying to -- and with respect to R&D, at this rate, it could be -- it could imply your R&D expense might be flat year-over-year. So just wanted to try to understand how should we think about those for rest of this year and next.

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [49]

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I would say, generally, we don't give guidance around operating expense beyond what we've already told you. I'm going to just make a few general comments. I think in operating expenses in Q2, we're slightly lower than our expectation given the environment we're, as we talked about, reallocating resources to higher-growth areas. And we continue to manage expenses without disrupting any major products under development. Our long-term growth plans remain intact.

So with -- and in the environment we're in, this gives us a good opportunity to focus on driving productivity. We did make a major investment in implementing an ERP system last year. And there's plenty of opportunity to improve our processes, and we're doing a lot of work in that area, which I think will put us in good standing when the market comes back and we're able to grow without necessarily adding much capacity.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [50]

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Okay. And then just as a follow-up, which is we are seeing some of the mobile terminal competitors starting -- talking about [handover] inventory in the distribution side. Are you seeing a similar trend? And can you just update us on the progress you have made in that field?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [51]

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Yes. So we have -- our journey into the mobile terminal market. I think of it as similar to other markets that we've entered over the last 15 years or so and where we're leveraging our technology and strengths. And certainly, it continues to be an area for growth for us. The activity that we're seeing is encouraging. And while the business is still small in mobile terminals, we expect the revenue this year to grow substantially, and so I think we're seeing that.

And yes, our customers are broadening. We've got some live well-known company that are evaluating our product and particularly in areas of e-commerce and, actually, in airports and airlines. So we're certainly seeing some innovators starting to use our technology, and the growth results are very strong on a percentage basis although off of a very small base.

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Operator [52]

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Our next question comes from the line of Ben Rose of Saddle Road Research (sic) [Battle Road Research].

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Ben Zion Rose, Battle Road Research Ltd. - Founder, President & Analyst [53]

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Question just to clarify in terms of the European factory automation market, understanding your comments that one of the differentiators with North America is, in that market, logistics is stronger. Is it fair to say that factory automation in Europe is more heavily tied to the automotive market than it is perhaps some of the other verticals in your other geographies?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [54]

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Well, I think the European market is -- has a large automotive piece to it as does America, and Asia tends to be more consumer electronics, right? That would be a broad brush. America is becoming less dependent on automotive as we broaden into logistics more quickly, I would say. But overall, automotive is probably the biggest market for us in both America and Europe or has been.

And then I'm just going to exercise a little discretion here on the call. We've got about 10 minutes, I think, to the top of the hour, and we have quite a lot of people in line. So Ben, could -- would you mind my being rude and limiting you to only one question and moving on to the next caller?

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Ben Zion Rose, Battle Road Research Ltd. - Founder, President & Analyst [55]

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Sure, I only had one. Sure, why don't you go ahead?

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Operator [56]

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Our next question comes from the line of Paul Coster of...

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [57]

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Yes, thank you. Please get back in the queue, if anyone wants to -- sorry, Paul, over to you.

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Operator [58]

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Our next question comes from the line of Paul Coster of JPMorgan.

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Jeangul Chung, JP Morgan Chase & Co, Research Division - Analyst [59]

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This Paul Chung on for Coster. So I'll just be fairly brief, so just on your OpEx spend, you're investing less in the business so -- but you're still generating pretty healthy cash flow. So should we expect some kind of accelerated pace of buybacks or maybe higher dividend? Or is that $60 million per quarter the right kind of pace of buyback we should expect?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [60]

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Right. So we announced we're staying with the same dividend currently, but I'm going to pass it over to our treasurer, Chris Stagno, who can answer that.

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Christopher Stagno, Cognex Corporation - Treasurer [61]

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This is Chris. Thanks for the question. I think if you take a look at the -- at our buyback program, we did have about $130 million available. Under the plan, we did about $104 million repurchased during Q2. In terms of future purchases, I would expect us to continue to purchase, but the timing would be subject to market conditions and potential uses of cash going forward.

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Operator [62]

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

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [63]

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Just one quick follow-up for me. Just the sequential cost guidance on the OpEx, it's basically -- it's kind of in line with last year's 3Q, I think, which is a huge revenue number. So just curious if you can talk us through how does that spending -- or like what is actually going towards change? Does that mean, just on a gross level of dollars, it's still pretty high relative to the revenue?

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Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [64]

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I think our R&D investment is probably pretty consistent across those 2 periods. And then certainly, we've added considerably in terms of sales headcount particularly the Europe through that period so -- and in logistics. So I think we are seeing that, certainly. I don't know. Anybody want to add more color to that? Laura?

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Laura Ann MacDonald, Cognex Corporation - Principal Financial Officer, Principal Accounting Officer, VP & Controller [65]

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No, I would say it's consistent with the bridge in our MD&A and our 10-Q where you're seeing the impact of the personnel additions that we've added both in engineering and sales over the past year.

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Operator [66]

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At this time, we have reached the end of the call. I would now like to turn it back over to Dr. Shillman for closing remarks.

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Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [67]

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Yes. Thanks a lot for passing it back to me. And okay, look, the outlook is clearly not what we expected. And despite the fact that we know that automation and machine vision are key for the future for making everything from chocolate chips to computer chips, and those are real examples, it's unsettling to see the slowdown that we're seeing now.

We're hoping for better times and not only hoping for it. Management is working very hard looking at, as Rob mentioned, reallocating to those growth areas, and that's reasonably easy for us to do, and also, we are looking at some very exciting acquisition opportunities in the future to add to our growth.

That's it from here. I wish we had better news to report, and I'm sure in the future we will. Thanks again for paying attention to Cognex and for participating in today's call. Goodnight.

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Operator [68]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your evening.