Cognex Corporation (CGNX) Q2 2018 Earnings Conference Call Transcript

Cognex Corporation (CGNX -0.03%)
Q2 2018 Earnings Conference Call
July 30, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Cognex's second quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Curran, Senior Vice President and Chief Financial Officer. Please go ahead.

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

Thank you, and good evening, everyone. I'm John Curran, Cognex's CFO, and I would 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.

Please note that our earnings release and Form 10-Q are available on the Cognex website at www.cognex.com. Both contain detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.

Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Things can change, however, and actual results may differ materially from those projected or anticipated. You should refer to our SEC filings, including our most recent Form 10-K, for a detailed list of these risk factors. With that, I will now turn the call over to Dr. Bob.

Robert J. Shillman -- Chairman

Thanks, John. Hello, everyone, and thank all of you for joining us today. Cognex reported rather good results in the second quarter of 2018. In fact, our revenue for this Q2 was the second highest of any quarter in our company's 37-year history. Operating margin was 30%, which is in line with our long-term target. The underlying business trends is the broad factory automation market continue to be strong. Excluding consumer electronics, revenue in Q2 grew at a rate that was well above our long-term target of 20%.

I'm now going to turn the call over to my partner, Rob Willett, who will provide more details, and I'll be available at the end of the call for any questions that you may have for me. Rob? The microphone is yours.

Robert Willett -- President and Chief Executive Officer

Thank you, Dr. Bob, and good evening, everyone. Revenue in Q2 was $21 million, representing year-on-year growth of 19%, and landing slightly over the top end of our guidance. We performed well across most end markets, led by logistics and automotive. Our investments in new product development in sales source expansion continue to deliver share gains for Cognex across most of our served market.

Strengths in our broader factory automation market is obscured this year by lower spending on vision by major OLED display and smartphone manufacturers following substantial investments last year. Despite this, our very positive view of Cognex's long-term growth prospects remain unchanged.

Positive drivers, including rising labor costs around the world, the need for increased productivity, and improvements in product quality and, of course, the manufacture of products too small to be assembled by human hand, are all increasing investments in machine vision. We see the fastest growth rates among our smaller, newer markets such as consumer products and food, which are increasingly adding Cognex vision and ID to improve product quality and increase productivity. We are able to satisfy these needs by increasing the ease of use and integration of our products, as well as by adding sales noise to reach an ever broader set of machine vision customers.

Regarding new products, we're pleased to report good progress in integrating technology from our recent acquisition into Cognex's standard products. Deep learning based image analysis software from ViDi Systems is now accessible through our VisionPro platform. This enables sophisticated customers to more easily leverage deep-learning technology, together with our industry-leading vision tools. We are pleased to report that we have just received our first $1 million purchase order for our deep-learning vision software and we are working on its application at many other leading manufacturers.

The barcode code verification capabilities we acquired from Webscan are now available on our DataMan ID platform. We are seeing broad-based demand for code verifiers. Grading and verification is becoming increasingly important as manufacturers seek to implement a consistent quality of ID codes across their widely distributed supply chains.

In other news, we received our first large purchase order for mobile terminals of approximately $1 million from a Fortune 100 company. While we are still at the beginning of our journey into the mobile terminal market, this year's addition of our long-range MX-1502 ER product has noticeably strengthened our position.

I'll now turn the call over to John for some financial details from second quarter.

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

Thank you, Rob. As noted last quarter, our Q2 earnings release and all discussions reflect the retroactive adoption of the revenue standards that took effect on January 1st. As a reminder, the sale of certain accessories that we've historically reported on a net basis are now reported on a gross basis. This does not change our gross margin dollars, but our gross margin percentage is decreased from historical rates by 100 to 200 basis points.

Now, for our Q2 highlights. As mentioned, Q2 revenue was $211 million, an increase of 19% year-on-year. Gross margin was 74%, compared to 76% in the year-ago period. This decrease is primarily due to an increase in revenue related to application-specific customer solutions. These solutions typically have lower gross margins, due to the engineering effort required to develop the solution, as well as services associated with the installation and support.

Operating expenses totaled $94 million for the second quarter, an increase of 23% year-on-year. It's worth noting that the rate of expense growth is slowing, but we expect to continue to invest in critical areas to support the long-term growth opportunities we see for our business. Incremental spending in Q2 came from new hires, and increased activity in sales and engineering. In terms of headcount, we now have nearly 2,000 Cognoids worldwide, an increase of 26% over a year ago.

Operating margin in Q2 was 30%, an increase of 10 percentage points compared to Q1 of 2018, but a decrease of 4 percentage points when compared to Q2 of 2017. The year-over-year change is mainly a reflection of our record-breaking performance last year, along with our continued investments in engineering and sales.

Our tax rate excluding discreet items, was 17% for the quarter, compared to 15% in Q1 of 2018 and 18% in Q2 of 2017. We have increased our tax rate for 2018 to 16%, reflecting our expectation that more of the company profits will be earned and taxed in a higher tax jurisdiction than previously expected.

Excluding discreet tax adjustments, we reported earnings of $0.31 per share for Q2 of 2018, compared to $0.28 in Q2 of last year. Looking at revenue year-on-year from a geographic perspective, overall market conditions were strong. Greater China led the way in percentage growth, as revenue grew more than 50% year-on-year. Demand was strong in automotive and in the broad electronics supply chain.

Revenue from the Americas grew by more than 20% over Q2 of '17. Similar to Q1, growth was particularly strong in the logistics market, as well as other industry verticals including automotive, food, and consumer products.

[Inaudible] increased mid-single digits in constant currency. Strength in the broad factory automation market, led by logistics, automotive, and consumer products was partially offset by lower large order revenue from consumer electronics. Revenue from Other Asia region decreased mid-single digits on a percentage basis from Q2 of 2017, reflecting lower spending by customers in OLED display manufacturing.

Our balance sheet remains in great shape, as we exited the quarter with $755 million in cash and investments and no debt. We have sufficient capital to support our organic growth objectives, M&A plan, and for returning capital to our investors through stock buy-backs and dividends. In Q2, we bought back 1.1 million shares. We plan to continue to buy back stock in Q3, subject to market conditions and other factors. As announced tonight, our Board of Directors declared a cash dividend of $0.045 per share, payable on August 31st to all shareholders of record as of August 17th.

With that, I will now turn the call back to Rob.

Robert Willett -- President and Chief Executive Officer

Thanks, John. Turning to guidance for the third quarter, we expect revenue of between $220 million and $230 million, which at the midpoint represents growth at 7% from Q2. However, if we look year-on-year, this range reflects a substantial decline from an exceptional quarter a year ago, when large projects OLED display and smartphone manufacturing drove revenue to a record level.

Gross margin for Q3 is expected to continue to be in the mid-70% range. Quarterly operating expense growth is expected to continue to moderate year-on-year as we move through the second half of 2018. On a sequential basis, operating expenses are expected to be approximately flat with Q2.

The effective tax rate is expected to be 16%, excluding discrete tax items. In summary, Q2 proved to be the quarter we expected, and we remain confident about our longer-term growth opportunities. As such, we will continue to make investments in Cognoids and technology to strengthen our leadership in the global machine vision market.

We'll now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

At this time, we'll be conducting our question-and-answer session. During the question-and-answer session, please limit yourself to one question and one follow-up prior to getting back into the queue. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. One moment please, while we poll for questions.

Our first question comes from the line of Joe Giordano with Cowen. Please proceed with your question.

Joseph Giordano -- Cowen & Company -- Analyst

Hey guys. Good afternoon. I was wondering, is there a way you can frame the OLED impact on your business this year, or somehow frame the base as we go into next year just so we can figure out what our expectations are for the end market, but just how much of that is left in your business this year? So, it seems like that's obviously a different part of your business that's less kind of recurring.

Robert Willett -- President and Chief Executive Officer

Hi, Joe. It's Rob. I'll make a few comments to try to help you with that. While investment in OLED manufacturing capacity has slowed this year, we continue to be positive about the long-term prospects for OLED and the contribution that machine vision and Cognex will play in OLED manufacturing.

The largest manufacturers with whom we work in our Other Asia region have paused their investment in machine vision with respect to OLED displays for smartphones after record levels in 2017. You can really see that if you look at the regional breakdown in the 10-Q, where what has been our fastest growing region actually shrank in the second quarter. So, you can see a pretty substantial impact there localized to that region.

I think we all know that investments in new technologies like OLED displays tend to come in phases. It appears that investments in capacity, obviously additions are lower this year, and we think they'll be up over three years. It's very hard to make a call though about next year at this point, and obviously, we don't give guidance out beyond the quarter. So, your question about what would be next year is difficult.

We think we have clear technical advantages in OLED manufacturing. We're very well positioned to see pick-up in the business when capital investments returns into that sector. I would say this. I think OLED drove more than $20 million of growth for Cognex in 2017. And if you include its influence over other areas of electronics, obviously it was multiples of that. But if you really talk about OLED material, that would be the case. The negative impact to this year was mostly on our Other Asia region and in the first half.

Joseph Giordano -- Cowen & Company -- Analyst

That's very helpful. Then when I look at -- I'm not asking, again, for guidance into next year, but when I think about the spending patterns you've had, if we just assume that 2019 is like a normalized growth year for Cognex according to your longer-term growth rate that you expect, do you feel that you've spent ahead of that or would we require another move higher in opex to kind of support that level of growth?

Robert Willett -- President and Chief Executive Officer

I think we're managing the company for the long-term, right? So, I say we were kind of behind in investments we needed for the long-term growth of the business. So, we found ourselves spending to catch up with that. I think in the long-term though, we expect expenses to grow at a lower rate than revenue. Then we'll kind of adjust expense growth based on how much growth or lack of growth we see in certain areas in the shorter term.

Joseph Giordano -- Cowen & Company -- Analyst

Okay. I'll leave it there and I'll jump back in queue.

Robert Willett -- President and Chief Executive Officer

Thank you, Joe.

Operator

Our next question comes from Joe Ritchie with Goldman Sachs. Please proceed with your question.

Joseph Ritchie -- Goldman Sachs -- Analyst

Thank you. Good afternoon, everyone. Rob, maybe you can touch on this whole concept of application-specific customers solutions, the impact that's having to your gross margin. If you could provide any color, maybe some examples of specific end markets where this is occurring, that would be helpful.

Robert Willett -- President and Chief Executive Officer

Yes, I think I can help with that. At Cognex, we provide a higher level of support to those companies that offer large potential and require extra help deploying machine vision as part of their current automation plan.

We have an advanced engineering team, or we have many advanced engineers who work closely with influential customers, helping them install and apply our capabilities to improve the performance of their processes. This is not something we do for most customers. This is something we do for a select growth of very sophisticated, high-potential major industries and they tend to be in our major industries. We do it significantly in consumer electronics, we do it in automotive, and increasingly in logistics as that business grows and these capabilities help us unlock the potential that we see.

Now, our high level of support can influence gross margin in the near term, and we see it as an investment in the future. We don't think in the long term it's a factor that affects the overall gross margin profile of the company.

Joseph Ritchie -- Goldman Sachs -- Analyst

That's helpful, Rob. Maybe as my follow-on question, obviously China is growing a lot this quarter. I think I heard earlier up to 65%. How are you guys thinking about all of what's happening in the background from the trade war perspective and how that potentially impacts your business?

Robert Willett -- President and Chief Executive Officer

Right. So, I mean, you're right that Greater China continues to be the region where revenue for us is growing fastest. Our business in China is really quite diverse in terms of end user markets. Of course, consumer electronics is large, but automotive is substantial and consumer products are also substantial.

Just in the last quarter, automotive in Greater China increased at the fastest rate of our major geographic regions. So, I think we remain very positive about the long-term growth prospects for machine vision in the China market, based on all that kind of [inaudible] issues that are going on there in terms of labor, costs rising fast, productivity not keeping pace with cost, population being squeezed in terms of people are going into the workforce versus those leaving. So, I think in the long-term we remain positive.

Now, you asked about the noise that we hear from governments and trade wars. We're watching that situation very carefully, but currently we don't see much or any impact on our business in what we currently see. Certainly, our product we sell in China is manufactured outside of the U.S., so it's not as if that's necessarily on the first line of fire for any trade stuff that would be going on.

But, of course, I think a second order affects as it relates to customers and changes in markets are things that we're watching carefully. But in some cases, in terms of automotive production, it may mean fewer cars coming into the country, which may benefit the investments in our technology inside the country.

All that to say we're positive about China. We're very positive about the long-term effects. Our business is doing well there. We don't see any short-term impacts based on what we're reading in the news. We're watching very carefully.

Joseph Ritchie -- Goldman Sachs -- Analyst

Helpful. Thank you.

Operator

Our next question comes from the line of Jairam Nathan with Daiwa Securities. Please proceed with your question.

Jairam Nathan -- Daiwa Capital Markets -- Analyst

Hi, thanks for taking my question. Just with regard to the mobile terminal order, can you give us an idea of what end market did you get the order from?

Robert Willett -- President and Chief Executive Officer

So, our progress in mobile terminal markets is kind of similar to other markets like logistics, 3D, life sciences. So, we're still very early on. We have what we think, and what our customers seem to think, is a highly technically advantaged product. We continue to be enthusiastic. Most of our business today is small orders with customers starting to explore our technology. We're encouraged by that activity.

Your question was specifically about the large order we received from a Fortune 100 company. It's going to use our mobile terminals to track its products through the production process, the supply chain, and ultimately its delivery to retail locations. Now, that's about as much as I can say and I don't want to say more, mostly for competitive reasons, but also we don't talk specifically about customers. But I would say we're encouraged, but it's still early stages in that market.

Jairam Nathan -- Daiwa Capital Markets -- Analyst

Again, just as a follow-up, with regard to R&D, we did see an increase in the first quarter and then a decline of, you talked about some large projects. Should we think of the revenue base to be at these levels on the RD&E side?

Robert Willett -- President and Chief Executive Officer

I think R&D expense can be a little bit lumpy. Sometimes the focus can depend on some of the application-specific work we're doing in support of growth. I think we saw probably more of that hitting the expense line in Q1, and more of it hitting the gross margin line in Q2.

I think I would say that our R&D plans are long-term in nature and we're targeting between 10% and 15%. Last year roughly 13% or $100 million. We're confident about where we're going and we continue to spend on R&D and our technology. I think beyond that, I wouldn't say there's a change in our overall spending, a little bit of a pattern between Q1, where more is going in expenses and Q2, where more was going against gross margin. I would imagine in Q3, we'll probably see more going against gross margin.

Jairam Nathan -- Daiwa Capital Markets -- Analyst

Okay. And just quickly on R&D, do you get reimbursed from customers sometimes? Like in the autos? Some of the auto companies reimburse R&D.

Robert Willett -- President and Chief Executive Officer

As a rule, no. It has happened on occasion with Cognex, but we prefer not to do that.

Jairam Nathan -- Daiwa Capital Markets -- Analyst

Okay, thank you. Thanks, Rob.

Operator

Again, if you would like to ask a question, press *1 on your telephone keypad. Our next question comes from Rob Mason with Robert W. Baird. Please proceed with your question.

Robert Mason -- Robert W. Baird & Company -- Analyst

Good afternoon. Rob, could you just address the product ID business? I know we've had a long-stated kind of 30% growth target on that business over and above your 20% larger target. It sounds from the commentary that it's reasonable to assume logistics continues to grow at its 50% clip. So, maybe that's question 1.

And then just for the balance of that ID business, could you speak to the growth rate there with respect to the 30% target and perhaps what is driving it beyond logistics?

Robert Willett -- President and Chief Executive Officer

Right, yes, hi, Rob. You're right. We're seeing very strong growth in the logistics business and that continues. We've said and I would reiterate that we think logistics continues to be a great market for Cognex and it's a business that is growing and we expect to continue to grow at 50% over the long term.

In terms of the ID business overall, it's been a major contributor to Cognex's growth for many, many years now and it continues to be. In terms of recent growth rates, I think if we strip out consumer electronics, because, again, that can be a bit of a confusing factor, we continue to see growth rate in ID, which is in excess of the company's overall growth rate. So, certainly in the 20%+ range. We add logistics on top of that, we get north of the 30% target that we have long talked about.

Robert Mason -- Robert W. Baird & Company -- Analyst

Could you just assess perhaps the seasonality, the seasonal impact of how logistics business may flow this year? I know in the past, the fourth quarter can sometimes be stronger than others for logistics, but maybe how that is shaping up this year?

Robert Willett -- President and Chief Executive Officer

Right. It's still a relatively new market for us and it's a market that is changing. So, it's a little difficult to do. I would expect our Q1 revenue rate to be the lowest overall and then Q4 can be a little bit difficult to call because it depends on how much automation is deployed earlier before ramp up around Thanksgiving and Christmas and all of that, or how much of that gets recorded in Q3 versus Q4.

But I would say Q1 the lowest, and Q2, 3, and 4 potentially all strong quarters for logistics.

Robert Mason -- Robert W. Baird & Company -- Analyst

Okay. Maybe just an update then as well. You commented last quarter that you expected 2Q through 4Q to be flattish versus 2017. Any update on that pattern?

Robert Willett -- President and Chief Executive Officer

Well, I would say those remarks were particularly targeted to the impact of the OLED and smartphone business. But I think I'd add to that we took the kind of unusual step of when we released Q1 earnings of talking about the year overall. We're not going to be giving guidance to Q4 now, right?

That said, I think our underlying business performance seems to be performing quite strongly and our view of the smartphone OLED challenge that we face really hasn't changed since the last quarter. We believe that revenue will increase year-on-year in Q4, but that growth will be muted by the large orders a year ago from smartphone manufacturing. We're not going to be too specific about the decline in revenue from large customers, but I will say that roughly 15% of their business with us in 2017 was reported in Q4 -- 15% of the overall OLED smartphone large customer business.

So, you can see in Q4, we're expecting growth, but we're still facing a bit of headwind from those very large customers we had last year. And we still think from what we can see at the moment, although we don't give guidance and it's hard to call the overall trading environment in Q4, we do expect growth and continued good performance from our base business.

Robert Mason -- Robert W. Baird & Company -- Analyst

Okay, very good. That's very helpful. I'll hop back in queue. Thank you.

Operator

Our next question comes from the line of Joe Giordano with Cowen. Please proceed with your question.

Joseph Giordano -- Cowen & Company -- Analyst

So, without getting into any specific customers, one of the large players on the logistics side talked about slowing its investment in square footage growth based on spending patterns over the last couple years. When you think about your business and how broad it is, can you frame sensitivity to large big players in that logistics market versus the conglomeration of a lot of smaller players and what the relative impacts could be to your business from certain kind of specific companies?

Robert Willett -- President and Chief Executive Officer

Yes, so, your question relates to our overall exposure to logistics and any speeding up or slowing down of spend in that market. I would say what we hear from our customers tends to be very positive. Particularly in the U.S. and in Europe, we see them increasing their spending plans.

Our business is more focused in that market on e-commerce fulfillment. That's the bit of the market that's growing fastest. It's the market where we think there's the most innovation. We have a whole range of customers from very big companies to much smaller companies in that market. So, I think we see initial orders from large, very famous retailing names who are really working hard to catch up with some of the big e-commerce players. And they have deep pockets and money to spend. Then we also have significant business with some very large e-commerce players, both in market leaders in Europe and America who are investing heavily also to maintain their level.

Other things we have going on in that space is the majority of our business is in ID, so really reading barcodes. But increasingly, we're seeing interest in other technologies from Cognex in that space to do more things for them. So, we remain very positive. We don't see anything in the end user market or end user customer profile which gives us cause to think anything else is going to happen in the near term.

Joseph Giordano -- Cowen & Company -- Analyst

Okay. Then last one. When I look at your inventory and receivable levels, how would you categorize them relative to the pacing of business right now? I mean, just versus the last couple years seems high, but maybe it was too lean and inventory in the past couple years. So, how do you think about that? Do you expect that to run down or is this a level that you're comfortable with?

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

This is John. Our inventory we saw come down certainly off of Q1, which is positive. We would expect it to come down a bit more in the second half. That kind of follows what we call our normal seasonal trend on inventory. That's the story on inventory. Receivables, we're also seeing kind of timing impact of our large customer orders in consumer electronics impact our receivables this quarter. And again, we'd expect it to come down toward the end of the year, but that exact timing is still unclear but by year end it should be down.

Joseph Giordano -- Cowen & Company -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Paul Koster with J.P. Morgan. Please proceed with your question.

Paul Chung -- J.P. Morgan -- Analyst

Hi, this is Paul Chung on for Koster. Thanks for taking my question. Just a follow-up on the free cash flow question. Do you expect the conversion rate to be pretty similar to Fiscal Year '17, '16 averages?

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

The percentage or dollars?

Paul Chung -- J.P. Morgan -- Analyst

Percentage, percentage.

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

Probably slightly less, just given the operating margin impact, but should be somewhat consistent.

Paul Chung -- J.P. Morgan -- Analyst

Okay. Then just a follow-up on the mobile computing fronts. I know you're starting from a small base, but if you could talk more about the $1 million win in the quarter? Did you displace an incumbent and if so, how did you end up winning that business? Thank you.

Robert Willett -- President and Chief Executive Officer

I did mention that Fortune 100 company will deploy approximately $1 million of our mobile terminals to track its product through production process, supply chain, and ultimately delivery to retail location. We can't really say that much more for competitive reasons. This is a large organization that's been using mobile terminals for a very long time. So, certainly they're well aware of the competitive advantage and competitive set of mobile terminals and mobile computing.

They, like most of our customers, really value the vision capability that our mobile terminal has and they also really value the operating system and connectivity and the platform of a smartphone in that environment. So, for those of you who are not familiar with our product, our product uses all the power of Cognex's vision with an engine on the front of any iOS or Android smartphone that can be integrated into the product and this really resonates with customers who are moving away from older IT platforms and older products that really were designed for a different age with a lot of Microsoft-type operating systems.

We are the only product that really has those vision advantages and capabilities together with this smartphone-based technology in a ruggedized platform. Those benefits are resonating and that's why we're winning business and that certainly was true in the case of this customer.

Paul Chung -- J.P. Morgan -- Analyst

Thank you, appreciate it.

Operator

Again, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from the line of Ben Rose with Battle Road Research. Please proceed with your question.

Ben Rose -- Battle Road Research -- Analyst

Yes, Good afternoon. To start off with a question for John, exclusive of electronics, could you maybe speak to any trends that you're seeing in average order size among customers in various segments that you serve?

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

We haven't seen any change in trends outside of the large orders in consumer electronics.

Ben Rose -- Battle Road Research -- Analyst

Okay. And the logistics area, I was intrigued, Rob, by your mention of perhaps some newer customers. I sense in the e-commerce area some perhaps smaller players, but maybe some newer players. Is it fair to assume that the business outside of the e-commerce giants is growing at a healthy clip?

Robert Willett -- President and Chief Executive Officer

Yes, I think that's a fair assumption, Ben. Cognex technology is helping to enable a lot of players, increasingly on a global basis. Yeah, we're definitely seeing that business grow quickly but then among large customers also, we're also very healthy take-up of our technology as it becomes more established. So, the customer base is broadening and the growth is strong across all areas.

Ben Rose -- Battle Road Research -- Analyst

Sorry, a final question. I know that the food vertical has been a long-standing segment that you've served. But I did note that you called it out as having strong performance in the U.S. this past quarter. Is there anything new there to comment on in terms of customer use or was it perhaps just a function of some large orders for the quarter?

Robert Willett -- President and Chief Executive Officer

Hi, Ben. It's Rob again. I think the uptake of machine vision in food has been a strongly growing and relatively consistent trend over the last few years. Why is it happening? Well, one is food is increasingly coming under scrutiny from regulation about safety. There have been some, I can't remember the name of the Act as I'm sitting here, but a food regulation act in the U.S. that really required much more tracking and tracing of food products, more similar to what we saw in pharmaceuticals over the last 10 or 15 years. So, that definitely has been driving the adoption of machine vision. I think it's the North American Food Safety Act, a couple years back, and we're seeing it regularly being adopted now. So, that's driving part of it.

I think the second thing going on is machine vision is just becoming easier to integrate and less expensive. So, we have now machine vision and ID products that can be relatively easily implemented and demonstrate a quick payback. That's really taking it away or beyond the realm of very sophisticated, high-performance manufacturing companies in consumer electronics, automotive, and other industries, toward less engineering-heavy organizations. But what it is doing is it's really catching on in those markets. That's happening.

The other thing I would point to is we at Cognex have been adding a lot of sales noise, as we call them. These are guys, engineers, mostly, we recruit and train and develop and they're out on the street making many more sales calls today than we've made in the past because our technology is easier. And they're able to reach other industries and that's driving a lot of growth in what have traditionally been small industries that are growing now at a faster than fleet-average rate and that would apply certainly to food, but would also apply to other markets like beverages, medical devices, pharmaceuticals, a lot of other industries.

Ben Rose -- Battle Road Research -- Analyst

Okay. Thank you very much. That's very helpful.

Operator

Our next question comes from the line of Rob Nathan with Robert W. Baird. Please proceed with your question.

Robert Mason -- Robert W. Baird & Company -- Analyst

Yes, thanks for taking the follow-up. Just real quickly, I wanted to circle back to automotive. Rob, I know you came into the year thinking that sector of your business might grow below the long-term average just given the strength that it had last year. It seems to have surprised you positively, at least through the first half and, frankly, some other players had strong years last year in automotive too, and they have seen that business slow against tougher compares, whereas you have not. I'm just curious what you would attribute the strength to? You seemed to call automotive out in almost all of your regional commentary as well. Whether it's the new sales hires or if it's new applications, electric vehicles ramping. Maybe what would be the stronger contributors to that outperformance versus how you came into the year?

Robert Willett -- President and Chief Executive Officer

So, you're right. We, at Cognex, expect automotive, which is our second largest industry and accounts for about a quarter of our business overall, we expect that vertical market to grow more slowly than our overall business. We've kind of said around 10% is what we expect that to do. And you're right, it's been overachieving that by a good amount this year. Why is that happening? I would say it has to be a very broad number of reasons, as you kind of hinted at.

Our products are becoming more powerful and easier to use and more competitive. I think we're being much more recognized by global automotive companies and Tier 1 companies. I think that's helping. We've added a lot of salespeople who are more able to penetrate particularly Tier 1 automotive suppliers overall.

Then, there are ongoing trends which probably have more life in them than we perhaps thought. For example, vehicle model changes. Phasing out of sedans and increasing of SUVs. These options of electric, but I would also say hybrid engines particularly seem like it's got a lot further to run than perhaps we thought. Although we much read so much, all of us, about autonomous vehicles and electric vehicles, certainly the major investments still seem to be more in hybrid engines and more energy-efficient engines at the moment.

Then, another factor is China. China increased at the fastest rate for automotive of our major geographies. It continues to perform very well for us. It really is a broad range of issues, Rob, but the trend continues to be good.

Robert Mason -- Robert W. Baird & Company -- Analyst

Thank you. That was very helpful.

Operator

Again, if you would like to ask a question, press *1 on your telephone keypad. Since there are no further questions, I would like to turn the call back over to Dr. Shillman for closing remarks.

Robert J. Shillman -- Chairman

Thank you very much, Devon. Good job, by the way. I want to thank all of you who have taken your time to call into the call and ask questions. I hope they have been answered appropriately for you. We look forward to speaking with you next quarter and until then, the entire team of Cognoids is going to continue to work hard because we believe in work hard, play hard, and moving fast. Good night.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.

Duration: 46 minutes

Call participants:

Robert J. Shillman -- Chairman

Robert Willett -- President and Chief Executive Officer

John J. Curran -- Executive Vice President of Finance & Administration and Chief Financial Officer

Joseph Giordano -- Cowen & Company -- Analyst

Joseph Ritchie -- Goldman Sachs -- Analyst

Jairam Nathan -- Daiwa Capital Markets -- Analyst

Robert Mason -- Robert W. Baird & Company -- Analyst

Ben Rose -- Battle Road Research -- Analyst

Paul Chung -- J.P. Morgan -- Analyst

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