Greetings, welcome to the Cognex second quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. An interactive question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Cognex CFO, John Curran. Thank you. You may begin.
Thank you, good evening, everyone. I'm John Curran, Cognex's CFO, and I'd like to welcome you to our second 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. I'd like to point out that our earnings release and quarterly report on Form 10-Q are available on the Cognex 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, and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings, including our most recent Form 10-K, for a detailed list of these risk factors. Now, I'd like to turn the call over to Dr. Bob.
Thanks, John, hello, everyone. Thank you for joining us today. As shown in today's news release, we reported terrific results for Q2 of 2017. We set new records for quarterly revenue, net income, and earnings per share, and we were highly profitable, reporting an operating margin of 34%. Right now, I'm in San Diego, and everyone else on the call is at our Natick headquarters. For further details, I'm going to hand the microphone over to my partner, Rob Willett, and I'll be available at the end of the call to answer any questions that you may have for me. Rob, take it away.
Thank you, Dr. Bob. Good evening, everyone. I'm pleased with our second quarter results, which set new records for our company. Revenue was also above the top end of the range we gave to investors in May. Sales were better than expected across several industries, including logistics. Cognex is moving faster than ever before. The use of our products is growing worldwide as manufacturers implement vision and ID to improve their throughput and the quality of their products. Our past investments in new product development and in sales are delivering significant returns in the form of high-margin revenue growth. Importantly, we are making strong progress in several areas to ensure our success in the years ahead.
In particular, we continue to build upon the substantial momentum we have in logistics, integrate our recent acquisitions, including the deep learning tools of ViDi Systems and their team of artificial intelligence experts, expand our position in the high-potential market for 3D vision, accelerated by our acquisitions of EnShape, Chiaro, and AQSense, and add and develop Salesnoids, increase sales force productivity through process improvements and training, and provide the growing team with the equipment and technology they need to succeed. With that as a backdrop, let's turn now to John for details of the second quarter.
Thank you, Rob. Cognex continues to make it easy for a new CFO by delivering great results. Here are the highlights from the second quarter, all from continuing operations. Revenue was $173 million, which represents a 17% increase over a strong quarter a year ago and a new all-time revenue record. Growth year-over-year was led by strong performance in logistics. We also saw growth in the broad factory automation market outside of consumer electronics. Gross margin was strong at 78%, representing an increase over last year's Q2 due to manufacturing efficiencies from higher volume. Total operating expenses for Q2 were $76 million, a 22% increase year-over-year, resulting from continued investment for our future. These investments included new engineering and sales resources, costs from the six acquisitions we closed in September, and higher commissions recorded because of our revenue growth. Operating margin was strong at 34%.
The substantial leverage that we have in our business model enabled us to improve our operating margin while investing for the future. Net income includes a $6 million discrete tax benefit from the exercise of stock options during the quarter. Excluding all discrete tax items, earnings were $0.56 per share, which is $0.03 higher than the Thomson Reuters First Call consensus estimate. In factory automation, which is our largest market, revenue grew by 17% year-over-year. From an end market perspective, growth was led by logistics and automotive. Higher sales across several industries were partially offset by lower revenue from consumer electronics, as we discussed on last quarter's call. Looking at factory automation year-over-year from a geographic perspective, Asia was our fastest growing region, with factory automation revenue growing well over 50% year-over-year.
Our business in Greater China and the rest of Asia continues to demonstrate strong performance, particularly in consumer electronics, automotive, and consumer products. The Americas set a new quarterly revenue record in Q2. Factory automation revenue from the Americas grew in excess of 30% from higher sales to customers in the logistics industry and in the broader factory automation market. As expected, our European factory automation revenue declined year-on-year due to lower revenue from consumer electronics. Excluding the impact of consumer electronics, our European region increased more than 20% year-on-year, even with the negative impact of currency exchange rates. Now, I'll hand the microphone back to Rob.
In summary, Cognex reported a record quarter in Q2. If you like those results, just wait until you see Q3. Revenue in Q3 is expected to be between $250 million and $260 million, making it a record revenue quarter and the first to exceed $200 million in our company's history. This range reflects substantial growth, both year-on-year and sequentially, due in large part to higher revenue from the consumer electronics industry. We do not expect anywhere near such high levels of revenue in the near future. Gross margin is expected to be in the mid to high 70% range, lower than reported tonight for the second quarter. Operating expenses are expected to increase by approximately 10% from Q2 as we continue to invest in areas where we see opportunities for long-term growth. The effective tax rate is expected to be 18%, excluding discrete tax items.
Now, let's open the call up for your questions. Operator, we're ready to take questions.
Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Paul Coster from JP Morgan. Please go ahead.
Well, these are great results. The near-term guidance is astonishing indeed. Congratulations. Of course, Rob, you know that we'll want a little bit of color around your comments about not expecting this in the near future. What does that mean? Is this a one-time associated with, say, a new iteration of technology or a new specific customer? Or perhaps you can tell us why it's shaped in the manner that you're indicating here, presumably with 4Q being sequentially down? Question mark.
Yeah. Hi, Paul. Thanks for your question. Traditionally at Cognex, we don't give guidance past the next quarter. Obviously this is quite a monster quarter we're forecasting here in Q3. It's really the result of some very large consumer electronics revenue hitting the P&L in that quarter. We certainly expect Q4 to be a much more normal quarter for Cognex. Probably somewhere between Q1 and Q2 in terms of revenue. Still some nice growth year-on-year. We certainly didn't want to leave anyone with the impression that the new normal for Cognex is the kind of quarter we're going to report or expect to report for Q3.
Well, we appreciate the transparency there. Regarding the CE surge, can you relate it to, for instance, the ramp in OLED production or to a new customer or to a new product cycle?
Well, I think historically, Paul, if you look back, we've seen some pretty large quarters in Q2 or Q3 coming from the consumer electronics industry. We're seeing that again this year. We're seeing it concentrated in Q3. I think we're seeing a lot of activity in that market. Certainly, OLED displays is helping us drive some growth. The rollout of new products also is, I think, pretty substantial in terms of what we see across the industry and in investment. I would imagine that's something that other companies are seeing as well. Of course, Cognex technology is so important in the adoption of sort of new features and new technologies in this market. We're really seeing the market respond very well to what we have to offer and demand really peaking here.
Okay, my last question is that, there's talk of repatriating some consumer electronics manufacturing capabilities to North America. We assume it would be a very automated factory that gets ramped up here in North America in 2018. Can you talk us through the sequencing? At what point in the process does Cognex get pulled into a new factory? What kind of lead time after they've built the facility would you expect to see orders coming in? Just generically.
Yeah. If your question relates to consumer electronics, which I think it does, because I think we're reading the same newspapers or whatever. Generally, in consumer electronics, we tend to get bought into activities about a year to nine months before products go into production where we're working with large customers in that space. It's pretty fast, pretty quick in terms of the industries we serve. In automotive, we tend to have more like a three-year look at what's going on. Electronics moves fast. We're a company that likes to move fast, that certainly helps us meet their needs. I think sort of nine months before any of those plants went into production is when we would see investment and shipments from us.
Great. Thank you very much.
Thank you.
Our next question is from Joe Ritchie from Goldman Sachs. Please go ahead.
Thanks, great quarter, everyone. I guess my first question, you mentioned that logistics and auto really kind of led this quarter. Really kind of thinking about the sustainability of that growth moving forward, how do you think about that from a kind of cyclical perspective versus being product cycle driven? How sustainable do you see that growth moving forward?
Hi, Joe. Your question relates to automotive and logistics. I'll talk about automotive first. Automotive is pretty stable kind of and slower growing business, more mature business in terms of its adoption of vision and automation. Over the long run, we've kind of said, I think it's proving true, that automotive for Cognex will grow sort of high single, low double digits. We've seen some growth recently that's a little faster than that, although it did seem to slow down in most places in Q2, the activity, the outlier being America, where it actually accelerated. We think of automotive as a nice solid market. It's one of our two biggest markets.
We realize it's going to lag, or we expect it's going to lag our overall growth rate in the long run because we just see more adoption of vision technology and investment in markets like consumer electronics and importantly in the second market that you raised, logistics. Let me address that for a moment. Logistics is a very exciting market for Cognex. We sized it as about a $350 million market when we met with analysts last fall. We have about a 15-20 share in that market today. We expect to be able to grow that business at about a 50% annual growth rate for the foreseeable future as we just see vision technology being adopted in all kinds of areas, initially barcode reading, but now more and more vision type of activities in that space as well.
You kind of talked about the consistency of that revenue, I think was what your question got to. That's something we're still trying to understand more clearly ourselves. We expect Q4 to be a slower quarter in logistics based on what we've heard and observed about the industry because big e-commerce and other parcel and postal kind of businesses are slowing down implementation and getting into execution mode in front of Thanksgiving, Christmas, and Chinese New Year. That didn't prove to be the case last year, though. We saw logistics in Q4 last year was very good. We're still figuring that out, but I would expect other quarters, Q1, Q2, Q3, to be pretty consistent and strong. Overall very good prospects in that market, and the only question about seasonality would be Q4.
That's helpful color, Rob. Maybe as my follow-up there, you guys mentioned just increased sales investments this quarter. I know that this is something that has been ongoing. How do you think about the variable nature of the increased investments moving forward if in fact growth were to slow down for you guys?
Yep. We're adding a lot of Salesnoids, as we call them, to our team. They're helping us reach customers and markets as the adoption of vision kind of is more broad. We're in a market where, like any really great technology, our products are getting less expensive and easier to use. As a result, it's being adopted more and more broadly in a whole bunch of markets like food and pharmaceuticals and medical devices and other markets. We're getting out and reaching those customers by adding salespeople. Your question kind of came to, I think, the issue of what happens if bookings slow down and how do we think about cost? Overall, we would think about 50% of the Salesnoids costs being fixed and 50% variable in general. We give them pretty substantial quotas as well.
Certainly there's plenty of skin in the game for Salesnoids as we grow. In years like this, where we're seeing substantial growth in our market, obviously their compensation hits higher levels of accelerators, et cetera. I don't know if that really gets to what you're asking. Please come back with more detail if you're after that.
Yeah. That hits it great. Thank you.
Our next question is from Richard Eastman from Robert W. Baird. Please go ahead.
Hi. Yes, and good afternoon. I would second fantastic quarter, but astounding guidance for the third quarter, so good for you guys. Hey, just a couple questions, Rob. On the second quarter here, you pegged FA growth was 17%, and automotive was your second largest or fastest-growing market. Did automotive grow double digits in the quarter? I am just trying to gauge. Logistics obviously was much greater than the 17% number, but how did automotive grow in total?
Yeah.
Just roughly.
Yeah.
Rough order of magnitude be in the high single digits.
Yeah. High single digits.
I see.
Rick, is where it came in.
Okay. Just in Europe, obviously Europe declined because of consumer electronics, but pulling that out, you had suggested growth was greater than 20%. Is there an end market or two in Europe that you could flag that drove the growth excluding CE?
It's really a broad base of industries, including automotive, consumer products, and pharmaceuticals. Demand from the broad European factory automation market, I would say, is good. There's always this moment during the summer where you're kind of wondering, is it slowing down because they're going on vacation, or is it something more? It's a little early to say in that. Other color, I would say logistics continues to do very well for us in Europe.
Okay.
Spending in tier 1 automotive grew at a rate that we'd expect for the industry.
I got you. Okay. Can I just ask one last question here? Around the consumer electronics business is really the outsized driver here now for the third quarter. Can I just ask, when you look at your large customer revenue for the third quarter and also, because the visibility must be in backlog here, but does the large customer really grow or drive growth in the third quarter, or is that coming from other consumer electronics?
Well, Rick, we're pretty guided about what we say about any customers in particular, but I think you can certainly, when you look at consumer electronics being up so much and concentrated in the third quarter, you can figure pretty much everything is driving it up.
Yeah. That's probably a fair comment. I guess, the point being that obviously there is outsized growth outside of that large customer, so much broader base of consumer electronics growth than what we had last year. Consumer electronics revenue. Is that fair?
Yeah, I think it's a fair description, and certainly, it points to the kind of growth that you're seeing in other Asia in our business.
Yes.
The comments we've made about OLED manufacturing.
Sure.
That technology, we think is very exciting, has multiple years to run, and we're going to see it adopted, I think, broadly.
Does Cognex pay the commission when I look at the operating expense number, and you talk about it being up sequentially another 10%, potentially. Is the commission on the consumer electronics side, irrespective of the customer, is that paid in the quarter that you get paid?
It will follow revenue.
The rev rec, it would be third quarter is going to be that large, and then the commission is paid out there, correct?
Yes.
Yes, I understand. Okay, great. Thank you, and congrats.
Our next question is from Joe Giordano from Cowen and Company. Please go ahead.
Hi, guys. Thanks for taking my questions. You've been nudging your consumer electronic growth outlook for the full year up progressively as we've gone here. Now that you have the line of sight into 3Q guide, where do you see consumer electronics as an end market shaking out on a growth rate for the full year?
Generally, we don't give kind of full year guidance, but we're obviously seeing very strong growth in that market. We would see it being above our overall performance for the business for the year.
Okay. Fair enough. You mentioned the logistics you've been consistently with the 50% growth estimate for foreseeable future. How fast do you think the TAM is expanding relative to that growth rate?
Yeah, I would put it in the teens currently. That maybe is more aggressive than you're going to see in other studies you might read. I think the adoption of automation, robotics, and particularly vision in that market is exceptional. We are certainly gaining share and credibility in the space. I would say we're probably 3x the TAM expansion.
Is there a margin profile difference between what you're selling into that market and the rest of your business?
Generally not. There is some business that we're doing there in that space which requires more application engineering. Sometimes when we get into a new market, we're helping customers adopt our technology. That may be a drag to gross margin, a few points as we get into some of the larger deployments and some of the newer applications. Overall, we would expect logistics margins to be pretty similar to our business overall.
Maybe I just want to touch on the balance sheet here. Good problem to have, $700-plus million in cash, no debt. You've done M&A, I think if there was a huge deal to be done, you probably would have been there already. Should we start thinking about the possibility for more outsized shareholder return, whether it be a special or something like that? Or are you happy to keep it on the balance sheet for now?
I'll kick off, I'll hand it over to John. This is Rob. Consistently, we've always said, the first use of cash is acquisitions. You can see in the quarter we've put some cash to work, particularly through the acquisition of ViDi. We won't hesitate to do that, significantly larger acquisitions as and when they become available. Second use of cash is stock buybacks, third is dividends. I think we consumed cash in the quarter, eroded our cash balance a little bit. John?
Yeah, Rob, that's true. In this quarter, we basically consumed our domestic cash generation. We're kind of holding at par from a cash perspective. If we have a large transaction in the works or in the quarter, that would likely dip into our cash balance from a domestic cash perspective.
Maybe if I could sneak one more. If you normalize 2Q and 3Q to take out the timing difference year-over-year for consumer electronics orders, I guess the big question is how much of this is just the market using this technology more? How do you frame out how much is that just the market consuming more of this product versus some large, high-profile scaled launches that are not one time in nature, but you can kind of point to very specific things? How much of this is just market growth versus those more idiosyncratic drivers?
I think it's difficult to parse that out with any real precision. What I would say is, I think it's a great market currently for industrial businesses, and I think particularly in consumer electronics. I think we've certainly seen pretty strong conditions. I think every year we kind of have been being asked that question about consumer electronics. I think every year we seem to see solid growth and more and more vision being used in that market. Obviously we have some growth initiatives that I certainly have been commenting on, whether it's logistics, whether it's 3D vision, whether mobile terminals, where we're expanding our serve market and we see opportunities for exceptional growth. The other kind of color I'd put on it is, we've been saying pretty consistently our growth target is 20% in factory automation over the long run.
I think as you look back over various periods, that's kind of what we're doing or better. We've always said it won't necessarily be consistent, but that's kind of what we're shooting for. I would encourage everyone to take a longer-term view on what we're doing and seeing that this is really the consequence of many of the things we've been working on for a long time.
Thank you.
My next question is from Jim Ricchiuti from Needham & Company. Please go ahead.
Hi, good afternoon. Rob, I'm wondering if we could talk a little bit more about the OLED opportunity in terms of how meaningful has it been up until now. As we look out over the next couple of years, I think we're all aware of the capacity that's going to be coming on, I'm just wondering, are you designed in? Can you talk a little bit about your line of sight into some of these factories?
Yeah, sure, Jim. The opportunity for Cognex is with machine builders who build the OLED display modules because of the volume of equipment and high-precision alignment that's needed to produce them. We're seeing manufacturers of the material itself using a lot of vision because OLED displays are harder to make and certainly more expensive than LCD displays before them because of the fragile layers in the display module. Cognex has a clear technical advantage in OLED manufacturing from our experience in consumer electronics manufacturing with very precise alignment. Vision is important in every step of the OLED display manufacturing and in the final assembly of the modules. I think this adoption of this technology will come in phases.
It's difficult to see beyond the next couple of years, we believe the final assembly and testing of electronic devices has the potential for more substantial business over a longer period. We really like what we're seeing and what we're able to do to help this market with machine builders, but also then as it's going to flow into end user consumer products. I know everyone's thinking about smartphones for OLED, I think there are other markets also, particularly I think in the longer run in automotive You're going to see a lot of OLED inside cars. That material is difficult, requires precise alignment, it's easily damaged, it's difficult to move, and that's where automation is really coming into play, and Cognex has a lot to offer.
Got it. That's helpful. Just on the logistics side, two quick questions. You're showing very strong growth, I'm wondering is, can you give us a sense, is the average deal size increasing, Rob? Are you just securing business with more customers in this market, or both?
Yeah, it's really both. We have a broad range of customers now in this market. We have some large customers in that space, who will do certainly more than $10 million with us this year. We have some much smaller customers who are really just doing presentation, scanning of barcodes, people working in warehouses, particularly in markets like China, where logistics is still pretty manual and not highly automated. It's broad, and we see growth across all those segments.
Last question, just on that logistics. Can you give us an update on how the mobile terminals business is going for you guys? It's early days, I know, but just wondering how it's going.
Yeah. I would say our progress in mobile terminals is similar to our journey in other markets like logistics or 3D. It represents a significant opportunity with our installed base that's kind of under transition from old technology to new technology. We got a very good funnel developing, it's a little early to say when that funnel is going to turn into revenue, although we're confident that it will. We like what we see, it's not moving the needle significantly in terms of revenue just yet.
Got it. Congrats on the quarter.
Thank you.
Our next question is from Josh Pokrzywinski from Wolfe Research. Please go ahead.
Hi, good afternoon, guys.
Hi, Josh.
Just a question on the product ID side, I guess logistics. Can you maybe help us out with the way the customers are purchasing? Is it a new facility opening? Are they retrofitting existing facilities? Is there a density or content per sorting facility that is going up over time? Just can you give us a flavor for how the spending evolves with any given customer?
Yeah. The biggest segment for us inside logistics is e-commerce fulfillment. That's certainly kind of the rapidly adopting vision. There, you read about in the press, a lot of new facilities opening up, smaller facilities in more urban areas closer to customers, the drive to be able to deliver in a matter of hours. Certainly that's kind of new sites from our perspective anyway, and that's driving some growth. The other area, though, is, as in a lot of new markets we enter, we enter with something specific that we can do, which is really barcode scanning, initially just on boxes going by on conveyors. Over time, we've migrated into tunnels, which is scanning six sides of boxes, sometimes moving as fast as 500 and 600 feet a minute.
Now we're seeing broader adoption of Cognex vision around the warehouse with things like mobile terminals and adjacent to trucks being filled and our 3D technology starting to be looked at for dimensioning. This is a market where we're seeing broader and broader applications of Cognex vision over time.
Got you. When we think about a major e-commerce player opening a new facility a week for fulfillment centers, this isn't just each new fulfillment center is content of X, it's also going back and retrofitting what's already in the base, if I'm understanding that right.
Yes. If I understand you correctly, that's right. Lots of opportunity to retrofit and sell more broadly vision to do more and more. If you think in general about Cognex vision, what is it doing? It's replacing eyes and brains on the manufacturing floor or in the distribution system. There are a lot of those and lots of opportunities for Cognex to help with more productivity and more precision as people are trying to get packages to consumers quickly and without error.
Got you. That's helpful. If maybe I help and indulge me on a little bit of a read across from some of the other folks out there in industrial land who have seen good momentum on the semiconductor side, where would you see content in that application or the strength in semicon suggest that one or two quarters down the road, kind of further down in the tech supply chain, for final components that you guys would see strength? I guess where I'm getting at is, the strength in semicon that a lot of industrial companies have seen in the second quarter a precursor to the strength you're seeing in the third quarter, or could that be something that is indicating strength even farther down the road, fourth quarter and beyond?
I'm not sure I can even speculate on that. I don't really know. Semi's a pretty small part of our business these days. It tends to be more driven by new technology coming in that's flowing through the supply chain. I think obviously we're seeing a lot of activity in consumer electronics, I guess, semiconductor materials goes into those. I think that might be a leading indicator in some ways of what you're getting at. I don't think I can really give you an insightful answer.
Got you. I appreciate the color on that. That's helpful. I guess in that regard, though, would it be too soon for a ramp in that supply chain to help the consumer electronic side? It just seems like a one-quarter lag might not be the correlated factor that maybe that ramp in the semiconductor side says something good later down the road. Your customers, I wouldn't imagine, ramp that quickly. You said like a nine-month kind of lead time. Presumably, that's what you'd be talking about in this situation as well.
It's tricky to say. What I would say, we're very small in comparison to other customers, is we source electronic components to go into our own products, the market overall for processors and imagers and other things looks very hot. Fortunately, we're a company that keeps a lot of inventory to make sure we can supply our customers quickly. It's not a significant problem for us. Clearly, there's a huge demand pull on electronic components in the world today. That's an insight I would offer.
Fair enough. Thanks for the color, Rob.
Thank you.
Our next question is from Jeremie Capron from ROBO Global. Please go ahead.
Good evening. Thanks for taking my question. Certainly, it was interesting to see the ViDi acquisition early in the quarter, and I want to ask you about the deep learning approach to machine vision that seems to be gaining traction, including in a number of the more industrial and logistics type of applications. We're seeing some relatively young companies becoming quite successful in this area. Perhaps could you discuss Cognex's relative position here, and how you view the deep learning approach in general? Do you perceive this trend as a threat or more of an opportunity for Cognex?
Yeah. Hi, Jeremie.
Yeah, this is Dr. Bob here.
Okay.
I know that Rob is going to pass the microphone to me for this. Deep learning offers some growth opportunity for us. AI applies to many different businesses, from stock trading to determining if when somebody makes a charge on their card, it's a legitimate charge. AI is going to play even a more important role in many different industries, and certainly in machine vision, there is a segment that can best be served by this kind of deep learning, and that's why we went out and searched and found a small company with just the technology we wanted. In addition to having the right technology, they had the right focus, and their focus was on industrial uses of deep learning and artificial intelligence.
We've come across many problems in the past that would've taken our own engineers many, many weeks or months to solve for the customers, and it just wasn't cost-effective for us to do that. Whereas today, some of these deep learning methodologies can solve these problems much more quickly in a matter of perhaps hours or even minutes. We are looking at those, and let me just give you examples of where deep learning and learning machines do play a role in our business. We're being asked by a number of different customers, large customers, to look for flaws and defects on discrete items. Now, this is different, of course, than the flaw and defect detection that is done in the paper industry or the steel industry on webs moving at very high speed.
This is looking at flaws and defects in the machining of items ranging from TV screens to cellphone cases and things like that, where everyone is very concerned that the milling machines operated quite correctly. There were no scratches, no bumps, no extra metal. A lot of this can be solved with our 3D initiatives, with our DS products. Other ones, like scratches and surface flaws, cannot be detected by 3D because there is no third dimension of those kinds of flaws, or nothing that can be really measured by anything today. What we've decided to do is look at those opportunities that our customers have already asked us to solve, and we went out, found the technology, and we're incorporating not only the technology, but those technologists into our company so that we can add more tools into our existing, very large tool set.
The large tool set doesn't currently include these kind of learning tools, but they soon will. Does that answer your question, Jeremie?
Yes, it does. Perhaps thinking about the company strategy going forward and the current state of the competitive landscape, are you already seeing some of those younger companies competing for some of the more traditional industrial business that Cognex has been going after for years?
I'll let Rob answer that. My own impression is we have not seen any small entrepreneurial or companies, whether they're using AI or not using AI or deep learning and not using deep learning. I'm not aware of that, but I'll let Rob speak to it.
Yeah, you're right, Dr. Bob. I think there's a lot of noise about the application of deep learning techniques to industrial vision. People have been trying to do this for decades, but no one's been able to do it to the degree required until ViDi. That's what we were very drawn to, because this was a practical solution which really works, rather than a theoretical lab approach. That's similar to how vision has been in a long time through its history, is things can work in the lab under highly defined conditions, but that's not that useful when you get out into manufacturing, where there's so much changing, the light is changing, the speed of the conveyor is changing, all these things.
That's been true for Cognex, and it's particularly true right now at this kind of cutting edge of technology with deep learning, where we see ViDi really leading.
I would agree with everything Rob said. In addition, I'd like to add that this deep learning does not apply to most of the customers and the applications that we now solve with our own artificial intelligence, which is pre-trained artificial intelligence systems. Our current systems, if a customer, let's say the application is to look at medicine bottles moving by to make sure that the label is on straight, it would be foolish to use self-learning to show what good labels and bad labels and have the system figure out what a good label is and a bad label is. The most appropriate AI technology is the one that we use, which is trained by our own customers who tell it what a good label is, explicitly tell it.
A good label is one that is three and a half inches wide by this high, that is this straight and this amount of error. That the self-learning systems, although they may be able to work on this kind of a problem, wouldn't be practical, and our customers wouldn't want to sit there and train it on the good label versus bad label rather than just tell it explicitly what a good label is. I don't think that our business, and I can say this with a lot of confidence, our business is not at risk by deep learning systems. deep learning gives us an opportunity to grow in those markets and in those applications where deep learning is very appropriate, and that specifically is flaws and defects, where you cannot define very easily. You can't define what a scratch is.
You have to show the system examples and let the system determine by itself after training. That's where we are not worried. We're worried about competitive threats, but they aren't in the deep learning space.
Great. Thanks very much, and congratulations on the upcoming monster quarter, and good luck.
Thank you.
Our next question is from Bobby Eubank from Chevy Chase Trust. Please go ahead.
Congratulations on the strong quarter, guys. Thanks for taking my call. A couple questions here. Following up on the prior question, the Amazon Picking Challenge just wrapped up, that might be an opportunity to use some of the deep learning technologies from ViDi. Is this an area that you could build out, that you see doing a couple more acquisitions, some smart engineers, and trying to build out deep learning for robotic picking?
I'll start off, but then Dr. Bob might like to comment, too. We don't talk about specific customers, but certainly, we've acquired some technology that I think is going to make picking of parts, particularly, large variety of parts, much more possible. It's a 3D technology we've acquired, particularly EnShape, I would point to, which is industry leading in terms of acquiring and acting on information about parts and their position in a bin. Then also potentially, I think further out, deep learning has the potential to look at what'll be a high degree of variety of different products coming through a production line. I think it'd be interesting to hear from Dr. Bob, because this problem of bin picking and robot guidance is certainly not a new one.
Yes. Thank you, Rob. Bobby, thanks for the question. The problem of bin picking has been around since I was a graduate student back at MIT in the mid-'70s, and it is a very, very difficult problem. The technology had not, until recently, been advanced enough to solve the problem. The key element or the key piece of technology that's necessary is 3D. We have made extremely good progress in our 3D product offering, our 3D technology, and in some of the acquisitions, EnShape, in particular, for this. I can say that we are very involved with large customers in certain types of bin picking. Lots of different bin picking applications, gets very complicated. I'm not sure whether learning systems or expert systems are going to be the right solution, but I certainly know that 3D is going to be a major component.
Without 3D, the problem is intractable. Now that you can buy 3D products from us and from maybe one or two competitors, there is a chance of solving these problems to a great degree. I think it's very forward-thinking of Amazon to hold these challenges and inspire people to try to solve these problems, because it's well worth their money to even offer prizes for this. They should be substantial prizes to advance bin picking, because from what I understand, from what I've read, nothing confidential, there's a major labor component still in logistics, and that is in picking the items off a conveyor or picking the items out of a bin or some sort of a holder for shipment. This is a problem that I believe will be solved and can be solved and will be solved within the next few years.
I fully anticipate that Cognex will be the primary beneficiary on the machine vision end. There are other problems with this. There are problems on the effector of the robot, on the gripper of the robot. There are many different kinds of grippers that might be necessary. It's a very difficult problem, but the technology pieces are around to solve it. That's my view, there will be products offered or components that the customers or system integrators will put together to satisfy customer demand in the next couple of years.
Thank you for the color. That's really great and exciting time to be a consumer. Final question. Back in Q1 2015, I guess we were in a little bit similar situation. We were expanding the sales force, business looked good. Then we had a little bit of a slip up that extended beyond just the large customer, but that certainly contribute to it as well. Are there any lessons learned from that period that, looking at the business today, that preparations being made in case a downturn occurs unexpectedly? Thanks. Congratulations on a strong quarter.
I would say really, Cognex, we take a long-term view. I would encourage you to not look at any specific quarters. Obviously, there's going to be market conditions like we're seeing currently, which are excellent. Then market conditions like the ones you referred to that are more difficult. Generally, our view is we're looking to grow this business at 20% compound annual growth rate, the factory automation business, over the long term. That's kind of what we're focused on, we're not overly focused on particular quarters. I think we have to take the rough with the smooth. Certainly Q3, it's looking very smooth, I'm sure there'll be rough quarters in future too.
We have our eye on a bigger prize, which is being the strong leader in what is turning out to be just a fabulous end market with a lot of barriers to entry and a lot of challenges where Cognoids are very enthusiastic about working and bringing great technology to market. We kind of have our eye on that.
Keep up the long-term vision. Thanks.
Our next question is from Jairam Nathan from TIAA. Please go ahead.
Hi. Thanks for taking my questions. I was wondering if you could update us on some of the other growth markets like life sciences and airports. I have just one more follow-up.
Life sciences is a market we've been working at for some time, that has a very, very long sales cycle. The name of the game there is to get Cognex vision specified into new generations of life science OEM equipment that measures human blood and other bodily fluids as they go through analysis in hospitals or medical processing centers. We're making very good progress in that market. We measure success by design wins. Often it's about a three-year cycle to design a product before it comes to market, and we're seeing Cognex winning a lot of design wins. We're getting specified into those products.
That means that it's not a lot of revenue today, but as we get into the next decade, we're going to see, I think, millions and millions of dollars of regular revenue from those markets as our equipment is adopted. To give you a little bit of a sense we've been specified so far this year into nine new models of equipment, some of which we would expect to be delivering $1 million a year or more of revenue starting early next decade and going on for a period of 7 to 11 years. That's a little bit about that market, one for the future and one that we're working at now, kind of slightly back to the previous question about short-term versus long-term and how we think about things. The other market you asked about was airport baggage handling.
That's an interesting market for us, where we deliver substantial benefits to customers seeking innovation in a market that's traditionally been dominated by, to read barcodes. Now as vision comes in, not only can it read barcodes much more effectively, which means luggage is moving more quickly, baggage through airports, it doesn't have to be taken offline and processed. Potentially there are other benefits also that it can bring. Inspecting baggage for other things, such as problems that can get stuck in conveyor, can slow down the conveyors or jam up conveyors and actually even some security aspects we're certainly seeing interest in. We are winning new business in that market where we're really a new entrant and one of our competitors has a very strong market share, but we think outdated technology.
We've had a major win at a recent airport in Europe, and we're bidding on potential multimillion-dollar deals also. Those are things that have quite a long sales cycle. Again, I don't see huge contribution from that market this year, but it's one we're enthusiastic about in the future. Just to give you a little color, I learned of a term recently in the airport baggage handling market, which is bag hygiene, baggage hygiene. I was thinking of dirty laundry, but turns out that that really has to do with problems with a bag that might get stuck in a conveyor. Glad to share that with you.
That's funny. Just as a follow-up on the mobile terminal, how are you seeing the competitor response from the two large existing players in the market? It looks like they might be launching some at least mobile-based solutions as well, smartphone-based solutions. What are you seeing there?
Well, I don't think that they view us as a very significant player in the market, which is fine by us. We're working more with innovators in the space. I think what I would observe is that Android operating systems are really becoming more and more adopted. I think we've seen one of the players in that industry tended to say, well, Android is not really right for this market, and while another one has sort of said, no, Android is more where it's going. We believe that's really true. The Android operating system certainly was designed for use in a mobile environment as opposed to Windows, which is really the vast majority of what the two big players make. Then iOS also obviously is designed for mobile-type applications, seems to resonate with more forward-thinking customers, and that's kind of where we like to play.
Yeah, as I mentioned, it's a journey for us. We're pleased with what we see. We're in this for the long term, I think it'll be a significant business for us in future. Right now, I think the two big players you're talking about are much more focused on each other, that's fine by us.
Thank you. That's all I had.
Our last question comes from Jagadish Iyer from Summit Redstone. Please go ahead.
Yeah. Thanks for taking my question. I'll make it quick. Two questions, Rob. First on, given your strong guide for Q3, particularly with the magnitude of the consumer order, I was wondering whether you can provide insight whether Cognex got qualified for multiple products at this customer, or is it purely a single product where you experience significant surge in units? Then I have a follow-up.
Yeah. Hi, Jagadish. I can keep this very quick in that we're not going to comment at all about any business at any particular customer in that industry. It's much too sensitive.
Okay. Fair enough. Go ahead.
You had a second question?
Yeah. The second question, it's probably for Dr. Bob, also can jump in on this one. If you look on the semi market, there has been an increased spend on capital equipment, which is historically one of the highest for the recent years. If you look at your semi revenues, it has hovered around $5 million-$7 million a quarter. My question is, have you increased your offering there compared to your historical one? Specifically, Dr. Bob, are there any inflections that you might be able to intercept in the semi market, such as packaging or so? Thanks.
Yeah. Thanks for your question. We did extremely well in the semi industry from like 1985 to 1995 for a 10-year period when the customers really needed what we had. It was very unique. To be able to run on a low-cost product, nobody had technology that could do that. Over time, we found that our OEMs, many of the OEMs, the high-volume OEMs, and because technology moved forward, that even with less powerful software, they made up for it just throwing more hardware at it. That's why we made a concerted effort to expand our business into the end user market. Now, we still think OEMs are valuable. We have very good customers there.
At this point in time, we prefer to put most of our engineering resources on the end user market and other technologies like 3D, which probably don't apply to most of the semi OEM applications. Even if they did, probably too expensive for them. You can follow on with another question on Rob or I will try to answer it. That's where we are right now.
That's good. Congrats on a strong guidance.
Thank you.
Thank you. This does conclude the question and answer session. I'd like to turn the floor back over to Dr. Bob Shillman. Please go ahead.
Okay. Well, it's easy to wrap this one up. We've reported just great results for Q2, we expect, as Rob told you, to deliver even better results for Q3, which we expect to be a record not only for revenue but net income and earnings again. We look forward to speaking with you on next quarter's call, I want to thank you for joining us tonight and for your continued interest in Cognex. Good night.
Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.