Cognex Corporation (CGNX) Q4 2018 Earnings Conference Call Transcript

Cognex Corporation (CGNX -0.59%)
Q18 2018 Earnings Conference Call
Feb. 14, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Greeting and welcome to Cognex's Fourth 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, Chief Financial Officer. Please go ahead.

John Curran -- Senior Vice President 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 Fourth Quarter Earnings Conference Call. With me on today's call are Dr. Bob Shillman, Cognex's Chairman, and Rob Willett, Cognex's President and CEO. Please note that our earnings release and Form 10-K are available on the Cognex website at www.cognex.com. Both contain detailed information about our financial results.

During the call, we may use 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 Shillman -- Chairman

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

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

I'll now turn the call over to my partner, Rob Willett, who will provide much more detail into our 2018 results. Rob, the microphone is yours.

Robert Willett -- President and Chief Executive Officer

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

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

Cognex performed well in a number of end markets, notably logistics and automotive. Our logistics business grew by more than 50% over 2017. With annual revenue surpassing $100 million, it has become a meaningful part of our business. The growth outlook for logistics remains strong. Cognex is now widely recognized as the technology leader for machine vision in this market and we are rapidly gaining market share.

In automotive, annual revenue grew by high single digits year-on-year, just short of our 10% long-term growth expectation for that market. Following two consecutive years of faster growth, the industry began to slow in the second half of 2018. Despite recent softness in this market, we see the potential for growth in the medium and long-term, as recent trends in the automotive industry drive significant changes in technology and automation.

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

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

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

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

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

In Q4, we introduced the 9000 Series of our industry-leading In-Sight smart camera, enabling ultra-high-resolution machine vision in an easy-to-use product.

In 2018, we added more than 350 cognoids worldwide. Most of these new employees were hired in sales and in engineering. Also of note, we successfully implemented our new SAP enterprise resource planning system, which provides a platform to scale our operations and understand our business with greater clarity as we approach $1 billion in annual revenue.

Turning now to key financial metrics, gross margin was within our expected range for 2018 but our success in the logistics market has required engineering to support to help customers get up and running. This support has been slightly dilutive to our overall gross margin and it is expected to continue to be in the first half of 2019. We consider this as a worthwhile near-term cost of winning share and introducing our leading-edge products to customers in the large, fast-growing logistics market. Our strategy for developing this market is similar to the one we used successfully in the factory automation market nearly 20 years ago. The downward pressure on our overall gross margin should ease as we move through the back half of this year.

Moving on to operating margin, our focus on the long-term led to investments during a slower growth year in 2018 that reduced Cognex's overall operating margin below the exceptional levels we saw in 2017. We believe that our long-term growth will be the result of our continued technology leadership and a larger salesforce.

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

John Curran -- Senior Vice President and Chief Financial Officer

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

As Dr. Bob and Rob mentioned, we reported good results for the fourth quarter. Revenue for the quarter was $193 million, which was slightly above the top end of our guidance. As expected, revenue declined from Q3 due to the seasonality associated with consumer electronics. Revenue in Q4 '18 grew by 6% over Q4 of '17. Our results for the quarter reflect an increasing level of customer uncertainty in certain areas of our business.

Looking at revenue by industry, consumer electronics declined, as expected, in Q4, due to lower revenue from large customers in OLED display and smartphone manufacturing. Excluding the impact of those large customers, revenue grew in the mid-teens over Q4 '17, led by strong performance in logistics, which nearly doubled. Automotive revenue in Q4 '18 was roughly flat year-on-year compared to high single-digit growth for all of 2018. The other industries we serve continued to grow but at a combined rate that was slower than earlier in the year.

Turning to gross margin, the three point decline from Q4 '17 was due to a higher percentage of revenue coming from application-specific solutions for logistics customers in Q4 '18.

Operating expenses totaled $95 million in Q4, up 9% year-on-year and flat sequentially. The increase in OpEx was driven mostly by new hires in sales and in key business areas where we see higher growth potential, such as logistics, deep learning, and 3D. While we continue to invest for long-term growth, we are mindful of the market uncertainty we have observed in recent months. We intend to focus on productivity improvements and will remain prudent with regard to discretionary spending in the coming months.

Operating margin in Q4 was 23%, down from 28% in Q4 of 2017, reflecting both the shift in revenue mix and our OpEx investments to support continued growth.

The effective tax rate was 14% before discrete items, down from our forecasted rate of 16% due to a shift of income from higher to lower tax jurisdictions. This benefited the quarter by approximately $4 million. Excluding all discrete tax adjustments, we reported earnings of $0.26 per share compared to $0.24 for Q4 of 2017.

Looking at revenue year-on-year from a geographic perspective, market conditions were as expected in Q4. The Americas delivered the largest contribution to growth, both in absolute dollars and in percentage terms. That growth was led by substantially higher revenue from logistics customers.

Revenue in Europe was down from Q4 '17 because of the decline in consumer electronics but the modest growth we experienced in other areas was in line with our expectations.

In Greater China, revenue was relatively flat. The softer trends we saw in the third quarter across our end markets in China continued to weigh on growth in Q4. Revenue from Other Asia was also flat year-on-year because of the OLED smartphone headwind. The region performed well otherwise in Q4 but the rate of growth has slowed among our machine-build customers who sell into the Chinese market.

Looking at our balance sheet, we have nearly $800 million in cash and investments with no debt. And, lastly, inventory decreased $11 million from Q3 '18, as we expected.

I will now turn the call back to Rob.

Robert Willett -- President and Chief Executive Officer

Thanks, John. Turning to guidance, revenue for the first quarter is expected to be between $165 million and $175 million, which, at the midpoint, is flat year-on-year. We expect gross margin for Q1 go be in the mid-70% range, similar to the gross margin we reported for Q4. Operating expense is expected to be up slightly on a sequential basis. Also, we expect the effective tax rate to be 15% excluding discrete tax items.

To summarize, Cognex is performing well given current market conditions. The outlook remains uneven across end markets and geographic regions. Logistics, deep learning, and 3D all represent near-term growth drivers for us. We also continue to broaden our reach to new customers and bring new products to market. Demand from China is soft after many quarters of outperformance and that softness is affecting electronics, OEMs, and other Cognex customers who rely on exports to China. In addition, we are seeing delayed spending and project push-outs by our customers in the American automotive market. As for consumer electronics, we should be prepared to discuss the large order potential for 2019 in our Q1 call.

With that, we will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press "*1" on you 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. During the Q&A session, please limit yourself to one question and one follow-up prior to getting back in the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing "*". One moment, please, while we poll for questions.

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

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hey, can you guys hear me?

Robert Willett -- President and Chief Executive Officer

Yes, we can. Hi, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi. Sorry about that. Just, first, I guess on logistics, clearly, you've had some pretty awesome growth there the last several years. And I wanted to get an update on the state of play. Any new things you've seen out of competition -- good, bad, indifferent -- new customer growth versus growth within the existing customer base, and then anything new or different that we should be aware of geographically?

Robert Willett -- President and Chief Executive Officer

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

Our business there has really started out very much in e-commerce, companies that I think are reinventing supply chain and differentiate themselves by quick supply and major investments in automation to do that. And it's grown more broadly and we're seeing, certainly, more regular retail companies, I think, under pressure from what's happening with e-commerce. But, more generally, seeing the benefits of automation, start to adopt more sophisticated automation, and very much adopt Cognex Vision and the technology and advantages we can bring them. So, we're certainly seeing our reputation build.

Our largest market is America but we're seeing rapid growth spread into Europe also and some good business picking up in Asia as well, as that develops. Other things, certainly, we do serve the parcel market. The career parcel and package business and postal, as well, are accounts for us. But those markets sometimes have bigger, more systems-integrated type solutions that we're not really best positioned to serve them yet but we do see some business in that space and we expect more to come in the future.

Other things, I would say there is longer term potential to broaden our business, which primarily is in barcode reading today, but to broaden more into more and more vision applications, where we're doing things with 2D vision, such as looking at things like hazardous labels or damage to boxes, and into 3D vision, where we'll be doing things like dimensioning and providing more information to customers and packages. And then even broader, I would say a longer term trend that I think has a lot of legs and is beginning and where Cognex, I think, already has a very good reputation is in more how we connect up and provide information from the readers, an area variously referred to as Industrial IoT or Industry 4.0.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's very helpful color. And then just one and I'll let some of my other peers on the call go through consumer electronics in more detail. But just one on that from me. I understand the business is down and it's kind of a growth-year business over time. I wouldn't expect a lot of end markets for you to decline multiple years in a row. But we have seen, in that broader industry, CapEx budgets come in and oftentimes cited as getting leverage on existing tooling. I don't think of Cognex as necessarily being the be all, end all of that definition of tooling but how do you think about tough versus easy comps still in the consumer electronics space at large?

Robert Willett -- President and Chief Executive Officer

Yes. So, Josh, I think we'll be in a better position to give you a sense of how the year is shaping up in that industry in Q1. I mean, if you look back over the years that we've had major business in that space, there's a lot of things being analyzed and considered for implementation at this time of year. And, in general, they would have to do with new features or new technologies being adopted within smartphones. Of course, OLED was a big one but we see many different ways. And, generally, there's always new technology under consideration for adoption and we get more clarity in the next couple of months on what actually is going to be going. And so, certainly, that's the case. And then, of course, there's a need to improve productivity. So, to what degree customers have ambitions to remove what is still huge amounts of labor from that process as they look to automate? So, I think there's a long way for what machine vision and automation can do in that space to run. I think your question probably gets at something we're not ready to give you a good insight in right now, which is how does it look for this year.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Understood. Thanks, Rob. I'll leave it there.

Operator

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

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Yes. Thank you. Good afternoon. Could you perhaps just kind of walk us through a little bit of the automotive business? Did it stay soft or soften in all three regions in the quarter? And would it be best to assume, with a first half where you really have some big comparisons in auto, do you think the auto business can grow for you in '19? You should have a little bit better visibility there, I would think.

Robert Willett -- President and Chief Executive Officer

Yeah, thanks, Rick. Well, I'd say if there's a word that would describe what we're seeing at the moment, it's uncertainty. Right? So, I think there's uncertainty around many of our industries but certainly automotive. So, I'll tick through regions. We see broad softness in China, capital expenditure being delayed across the region.

Europe, in contract, we see performing relatively well at the moment. It's not buoyant but it's growing. And I think in Europe, what we saw is they had some kind of challenges in that market in the middle of last year and now customers appear to have worked through those issues around diesel engines and emission standards that caused a delay and we're starting to see more concerted and more planned investments around the future of automotive, particularly around electric vehicles and new technologies that require significant and, in some cases, quite complex automation.

What we're seeing in the Americas is that the market seems to be scaling back and delaying large automation projects at the moment. And that's something we saw more recently, in December and January and the first part of February. So, it seems to be, I guess, uncertainty, again, in that space. And particularly among larger capital projects. That's where we're seeing it. We would expect to have seen in a normal year many more of those breaking loose at the moment. So, there seems to be tentativeness about that.

So, I think we have positive views about the long-term plans for our automotive customers and good visibility into those longer term plans but we're certainly seeing some shorter term anxiety, mostly in China and America. And then it's hard to give you a view on that, given it's not clear how long that uncertainty, particularly, I would say, in the Chinese market, is going to continue and how much it's related to trade talks and other things that are going on. So, it's hard to give you a better sense of 2019 but we can certainly discuss it more as we move through the year.

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Okay. And then I noticed in the K, your largest customer was about 15% of your revenue in '18, which works to a bigger number than we might have thought. Did you suggest that in the fourth quarter, year-over-year, was that one -- your largest customer, was revenue up or was it down for that particular customer in the fourth quarter?

Robert Willett -- President and Chief Executive Officer

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

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Okay. And just one last question --

Robert Willett -- President and Chief Executive Officer

And maybe I wonder if we can help you by talking more broadly about consumer electronics. And I think we mentioned a few, a very few, large customers in smartphone and OLED. So, perhaps we can help frame your question in that context. John?

John Curran -- Senior Vice President and Chief Financial Officer

Yeah. I think we did kind of discuss across a number of large customers a roughly $15 million headwind in the quarter. Is that what you were referring to, Rick?

Richard Eastman -- Robert W. Baird & Co. -- Analyst

So, well, there's a $15 million headwind, you're suggesting, in the fourth quarter of '17?

John Curran -- Senior Vice President and Chief Financial Officer

Yeah, compared fourth quarter '17 to fourth quarter '18.

Richard Eastman -- Robert W. Baird & Co. -- Analyst

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

Robert Willett -- President and Chief Executive Officer

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

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Okay. Okay. Just one last question about the VisionPro ViDi that you've spoken to. I think that is in market and was there -- this is kind of the first deep learning tool that you have. And I'm curious, were there some pre-orders for that or any early adopters? What market is that targeted at? That product?

Robert Willett -- President and Chief Executive Officer

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

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Okay. Okay. All right. Thank you very much.

Robert Willett -- President and Chief Executive Officer

Thank you.

Operator

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

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good afternoon, everyone, and happy Valentine's Day, Dr. Bob. So, maybe just starting on auto for a second. Rob, can you just remind us, in North America, what percentage of your business is North America auto?

Robert Willett -- President and Chief Executive Officer

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

Joe Ritchie -- Goldman Sachs -- Analyst

Yeah. Okay. That makes sense. And then maybe just kind of following on that last line of questioning around -- you guys called out that $15 million headwind in 4Q. When you did your revenue forecast for the first quarter, are there any specific headwinds either related to OLED or anything else that you'd like to call out?

John Curran -- Senior Vice President and Chief Financial Officer

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

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. All right. Fair enough. And then, I guess, as we progress through the year, you talked a little bit about the gross profit rate improving as the year progressed, partly due to some investments that are occurring in the first half. Can you maybe just talk a little bit more about those investments? And then the follow-on to that is, given logistics is growing at such a fast pace, is it fair to assume that, from a mix perspective, you're probably going to have these headwinds for some time, just given how quickly that market is growing?

Robert Willett -- President and Chief Executive Officer

Joe, there are a number of factors at play here. One is, as we would move through the year, we normally would expect a different mix in revenue with much more consumer electronics and other business kind of flowing through the P&L. So, that's, I think, one thing to keep in mind. But to address this issue of what's going on in logistics, we have new customers, some of them significant in size, beginning to adopt Cognex machine vision. And they're not necessarily the most sophisticated or experienced users of machine vision so we're doing more work for them in applications engineering to help them adopt and use the technology. It's something we only do for large and important customers, in general.

Another factor is the logistics market, it's been around a long time and there's been a lot of laser-based systems sold into that market. Very hard to configure, long setup, laser-based barcode readers. And so the industry has become used to suppliers and companies coming in and actually doing that installation themselves. As our technology is much easier to configure -- often, we think it takes less than 25% of the time to set up a Cognex barcode reading tunnel in a logistics distribution center as it would to set up a line scan vision system or a laser-based system that the share leader in this market sells. Right? But in order to kind of make sure we get that business and get customers going, we're doing a little more applications engineering.

Now, we expect to introduce products to help customers and to lessen the percentage of that type of business that we see in our logistics P&L. And we expect to see some benefits of that or some improvements start to come in later in the year. That's kind of our overall view on that.

Joe Ritchie -- Goldman Sachs -- Analyst

That's helpful, Rob. If I could just sneak in one more. You mentioned giving us an update on electronics and the outlook for the year in the first quarter. Are you guys planning to give a full-year guidance like you did last year or how are you thinking about the guidance for the year?

Robert Willett -- President and Chief Executive Officer

In general, it's not our practice to give full-year guidance at all, for anything. But in that case, it was obviously so material and we understood the headwind that we were facing and so we were able to share it with you. We're not willing to commit, at this point, on whether we'll give you a longer term view of consumer electronics for the year. But we'll be better positioned to sort of address that in 13 weeks from now.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from the line of Joe Ricchiuti with Needham and Company. Please proceed with your question.

Jim Ricchiuti -- Needham & Company -- Analyst

I think it's Jim.

Robert Willett -- President and Chief Executive Officer

Your brother. Your brother, maybe.

Jim Ricchiuti -- Needham & Company -- Analyst

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

Robert Willett -- President and Chief Executive Officer

Yeah, we're sort of thinking. I would probably say it was similar but John's looking at some data here. I think our largest takeaway is that we have a few customers, a select few, in that OLED smartphone space and we saw more than one have a material impact, in terms of decline. And your question is, is that similar to what we saw in the overall consumer electronics industry.

John Curran -- Senior Vice President and Chief Financial Officer

So, if we break it down, Jim, what we saw, we had declines from a few large customers, while the remainder of the business actually grew during the year. So, net-net, we saw an overall decline in our consumer electronics, the overall business, but that mix was quite different when you look at a couple of large customers versus the remainder of that industry group.

Jim Ricchiuti -- Needham & Company -- Analyst

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

Robert Willett -- President and Chief Executive Officer

Yes. It is. You know us very well, Jim, and you know that we're about great technology that's easy to adopt and high gross margin. So, we don't really look to be doing a lot of applications engineering unless it's for a very good reason and we see it, in the short-term, as being a very good thing to do in the logistics market. But that's not where we intend to end up in terms of gross margin.

Jim Ricchiuti -- Needham & Company -- Analyst

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

Robert Willett -- President and Chief Executive Officer

Yeah, what we've said is we see that business growing at 50% annually for the foreseeable future.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay. Thank you.

Operator

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

Paul Coster -- J.P. Morgan -- Analyst

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

John Curran -- Senior Vice President and Chief Financial Officer

Yeah, so we usually don't get into the details of backlog. But in terms of our forward visibility, it's consistent with our forward visibility in other periods. It's really 3-6 months out. Things obviously get more clear the closer we get.

Paul Coster -- J.P. Morgan -- Analyst

And so the mix is similar to the mix that we've seen in the business previously, we should just assume then, unless otherwise advised?

John Curran -- Senior Vice President and Chief Financial Officer

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

Paul Coster -- J.P. Morgan -- Analyst

Okay. Maybe I could just go back to comments that Rob made about the application-specific work that's being done in the logistics space that's weighing temporarily on margins. It sounds like it goes by the second half of the year. Why is that? Will you actually productize the developments that you've made and then just sort of make it cookie-cutter, easy to use? Or is there some other reason why it starts to get easier in the second half?

Robert Willett -- President and Chief Executive Officer

I think there's a number of reasons, not all of which I want to talk about for competitive reasons. But, certainly, one is we're teaching customers to apply our technology and then we're letting them get on with it. Right? So, that's certainly one reason that we don't need to do so much application engineering. But other things have to do with our technology roadmap.

Paul Coster -- J.P. Morgan -- Analyst

Okay. All right. And my last question is have you seen any difference in the behavior between large customers across any vertical and the smaller customers in those same verticals? In other words, is this hesitancy we're seeing -- and we heard this on a call last night -- is the hesitancy sort of specific to the large customers or is it broad-based?

Robert Willett -- President and Chief Executive Officer

I'll discuss your question in two geographic areas. So, in China, it doesn't seem specific to large versus small customers. The area where is it notable is more in America, where we're seeing notably fewer large projects breaking loose. More projects over $100,000.00 in scope, which might be large capital projects when you consider all the automation that's getting matched up. We're seeing those being deferred at a much larger rate than they were in any recent period.

Paul Coster -- J.P. Morgan -- Analyst

Okay. Good. Thank you very much.

Operator

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

Joseph Giordano -- Cowen and Company -- Analyst

Hey, guys. How are you doing?

Robert Willett -- President and Chief Executive Officer

Hey, Joe.

Joseph Giordano -- Cowen and Company -- Analyst

I just want to clarify something. We talked about the margin dilution from logistics a bit here. Is there anything on the products specifically being sold into that vertical that's lower margin or is this solely the impact of you guys spending that item to install?

Robert Willett -- President and Chief Executive Officer

In general, the products we sell into logistics are very similar or the same as the technology that we sell into factory automation and they have great gross margins. What we do see in logistics is sometimes the use of more optics, mirrors, field of view expanders, which in and of themselves aren't particularly margin-different, but setting them up, applying them, that requires much more service, which hits our P&L in gross margin as a service expense which is at lower gross margin. And as we are learning to deploy these, we're becoming more efficient. Right? So, that's sort of the dynamic that's going on.

Joseph Giordano -- Cowen and Company -- Analyst

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

Robert Willett -- President and Chief Executive Officer

No. I wouldn't. I think there's definitely economies of scale that go with what we do. But in other aspects, there are technologies that are much more complex and newer. I think, particularly, of deep learning and 3D, where we're investing and it's a new frontier for vision. So, overall, I don't see the profile changing. We're benefiting from scale. We're getting very good and we're doing the same things that we've been doing for 36 years but applying that into some of these new areas can have a higher level of spend as we get into them.

Joseph Giordano -- Cowen and Company -- Analyst

If I can just sneak in one more, there's a lot of talk, given just the geopolitical tensions, about perhaps some major companies -- and I'm not trying to talk about anyone specifically -- but potentially moving production spaces back to the U.S. And I'm just curious if that's coming through in any of your discussion or if it's even high-level thoughts on the topic for you guys.

Robert Willett -- President and Chief Executive Officer

Yeah. So, we work with the most sophisticated manufacturers in the world and the most sophisticated contract manufacturers in the world. So, certainly, they are talking to us about their plans and, certainly, I have been in discussions in the last few weeks where major contract manufacturers are talking about more investment in certain markets and moving production from certain markets into others. In some cases, those relate to just the growth opportunities they see -- electronics in India might be an example. And in other cases, I think, due to some of their technology and strategy plans. And I'm seeing some more of that in America. I met with a large contract manufacturer recently who clearly has plans for that. So, there definitely is more discussion of that, I would say, in the last six months than I've seen over my ten years in this industry.

Joseph Giordano -- Cowen and Company -- Analyst

Great color. Thank you.

Operator

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

Matthew Summerville -- D.A. Davidson -- Analyst

Thanks. Just two questions. First, outside of CE, auto, and logistics, the remainder 25% or so of the company, can you talk about whether you're seeing more broad-based slowing in some of those end markets, whether they be general industrial, food/beverage, pharma, semiconductor, etc.? Can you frame up sort of the other piece of Cognex that hasn't been talked about?

Robert Willett -- President and Chief Executive Officer

Yeah. Hi, Matt. Sure. So, it is very broad-based. Sometimes the growth that goes on in those markets can be quite volatile, by which I mean this can be some large projects going on in deployment in certain areas, like product security in tobacco or big deployments in consumer products that go on. So, that can tend to obscure some of what's going on. But what's going on underneath over a longer period is those smaller markets have high growth rates. And the reason they do is our products are getting less expensive, easier to use, and easier to integrate. And so we're now coming within the reach of more regular manufacturers who can apply machine vision and we focused a lot on that. It's the reason that we really need to grow our salesforce and our distribution network so we can reach all those new customers. So, that's going well.

Matthew Summerville -- D.A. Davidson -- Analyst

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

John Curran -- Senior Vice President and Chief Financial Officer

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

Matthew Summerville -- D.A. Davidson -- Analyst

Thank you.

Operator

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

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Hey, guys. Can you talk a little bit about your SG&A spend? I mean, it was up 19% or so in 2018 and that's on the heels of a big year last year too. So, at what point does this kind of top out, where you don't need to be spending as much on that side of your business? And if you could also just go into where you expect more spend is needed if you do continue to spend at this rate?

Robert Willett -- President and Chief Executive Officer

Yes. I think, Andrew, we can see we kind of invested quite a lot last year in building out our sales network and building up the number of sales-noids, as we call them, who are able to reach all those customers we were just describing to Matt's question. And then we invested majorly, obviously, in some infrastructure projects, whether it's facilities -- of course, our new ERP system is an example. So, I think some of those have got behind us, although it's capital that will come into the P&L over a longer period.

I would say, in a big picture, we believe really strongly about the potential of machine vision over the long term and the long-term growth prospects of this market. So, we're very serious about being the market leader and making sure that we're doing everything we can to grow our share and maintain that position. And we see high gross margin, we see lots of growth markets, and we want to make sure we're getting to those. So, when we think about this type of thing, we're not thinking about trimming things to hit a quarter number so much as we're thinking about a long-term plan. So, in the long-term, certainly, there's lots of opportunities we see to go on investing in engineering and in our sales channel to make sure that we're getting great products that are easy to integrate, sold to as many customers as can benefit from them.

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

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

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

Robert Willett -- President and Chief Executive Officer

Well, I mean, certainly logistics is a great market and some of the new technologies we've discussed earlier in the call also really warrant some concerted investment. And in terms of other areas, we're obviously going to manage that according to what we see, where, I would say, in other, more established areas, that's how you would see us operating, perhaps more like a regular company.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Okay. And then just one last one. So, you made some interesting acquisitions in 2017. It's hard to get a sense of where you are in developing new products and seeing them flow through into your business. Can you give us a sense of where you are, in terms of your strategy when you picked up those acquisitions, and when you expect a more robust product cycle, I guess, from those specific deals?

Robert Willett -- President and Chief Executive Officer

Yes. So, we made six acquisitions around about two years ago. And we're already seeing the first benefits of those products coming into the market. A good example would be ViDi. We talked about the ViDi technology being brought up inside VisionPro. And we've also brought a lot more robust and powerful deep learning techniques into the suite itself and tools, which you can certainly read about on our website. So, I'd say that's kind of well down the road from a business that we acquired in April of 2017. But lots of exciting stuff coming.

Then we made three acquisitions in the 3D space. So, AQSense, Chiaro, and EnShape. We did formally launch a product -- I think it was earlier this week -- the 3D A5000, which is the highest performance industrial machine vision sensor on the market in terms of the number of pixels and speed with which we can image technology. So, that was technology that came out of the EnShape acquisitions and we've worked over the last less than two years to improve and make robust and integrate within the Cognex platform. So, that's another example of that.

And then we also acquired a business, I suppose about 20 months ago from memory, called, Webscan, which is the leader in technology for barcode verification. And we launched a product last year called the 8072V, which takes that technology and puts it inside a Cognex handheld reader on that platform and allows us to help customers gather very precise information about the quality of the barcodes that they read. And we're in the market with that and we're pleased with the success we're having and it's certainly resonating with our customers who, I think, as you know, want to put barcodes on more and more and more things. An example would be consumer electronics, but automotive also, and they want to hold their suppliers accountable for the quality of those barcodes. And not only is it great that we can help them do that, but it also means that it can help pull through other sales of Cognex barcode readers, as we're both helping the supplier meet those standards and verify them and we're one point of verification from reading at the supplier to reading at the customer itself. So, that's another thing that's been very successful for us.

I think I'm missing an acquisition. Yes. GBI was an automotive -- a very sophisticated applier of vision software to the automotive industry. That was a relatively mature and well-managed business that already really used a lot of Cognex technology. So, we were able to get out of the blocks very fast on that. And when we look at the overall contribution and how we've done against our expectations for those acquisitions, in aggregate, it's gone very well.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Okay. Thanks very much.

Operator

As a reminder, if you would like to ask a question, please press "*1" on your telephone keypad. As a reminder, if you would like to ask a question, please press "*1" on your telephone keypad. One moment, please, as we poll for more questions.

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, thank you and good afternoon, Dr. Bob and Rob, John, and Susan. And happy Valentine's Day to all of you. At the risk of getting people in trouble by extending this call a little bit more, I'd just ask one kind of follow-up question to Rob. Your comments on the automotive market, if I might drill down just a bit, I think you sounded a little bit more optimistic near-term about the opportunity in Europe as opposed to America. And I'm wondering is there anything structurally in Europe that's going on that would differ from the U.S.? I mean, namely, are there any trends affecting the broad market that would make the U.S. slower growth over the course of this year and next?

Robert Willett -- President and Chief Executive Officer

Yeah. Hi, Ben. I think the first thing I alluded to was I think the European automotive industry went through a bit of a challenge last year around diesel, new emission standards, and that led to a lot of dislocation in the supply chain. Right? So, I think, in retrospect, as we look back, we saw that causing a reduction in purchases for Cognex automotive business in Europe and we've seen it bounce back nicely from that to the point where it's now growing again, sequentially and year-on-year. So, that's going on.

But I think, getting to your question, I would say my perspective on this would be that the European automotive industry has been a little slow to grasp some of the electric vehicle investments that have been going on and some of the new technologies that have been going on. I think a very good example would be lithium ion batteries, which are at the heart of electric vehicles, where, to my understanding, there really isn't a major European manufacturer of that technology. Right? Where you see a lot of Korean, Chinese companies, American, of course, and Japanese in that space. And I think now there's a much more concerted effort by European automotive. And it would be both the big brand owners but more of our business and our industry is with Tier 1 suppliers, seeing them investing seriously and working on automation plans that's starting to see light later than we saw happening in other parts of the world. So, that's one observation I would make.

Ben Rose -- Battle Road Research -- Analyst

Okay. Thanks very much.

Operator

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

Jairam Nathan -- Daiwa Securities -- Analyst

Thanks for taking my question. It's Daiwa Securities. So, just going back to the operating expense, I know you had the ERP implementation this year. Do you expect, now that it's done, to see some benefit from that no longer being there as an expense item?

John Curran -- Senior Vice President and Chief Financial Officer

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

Jairam Nathan -- Daiwa Securities -- Analyst

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

Robert Willett -- President and Chief Executive Officer

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

Jairam Nathan -- Daiwa Securities -- Analyst

And, finally, you mentioned winning a large business, more on the terminal side, about a couple of quarters back, with a Fortune 100 company. Is there any update to that? Any additional events? That would be great if we could talk about it.

Robert Willett -- President and Chief Executive Officer

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

Jairam Nathan -- Daiwa Securities -- Analyst

Okay. Thank you.

Operator

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

Bobby Eubank -- Chevy Chase Trust -- Analyst

Good evening, everyone. Happy Valentine's Day. Thanks for taking my question. Just kind of high level, what would you constitute as a success or failure, maybe one or two comments on each of those success or failure, over the next 3-5 years? What kind of keeps you up at night and what are some of the bigger opportunities that you guys are going after? Thanks so much and happy Valentine's Day again.

Robert Willett -- President and Chief Executive Officer

That's an interesting question. I think we have a strategic plan we're executing and, as you would expect, it's about bringing market-leading breakthrough innovation and technology. We're enabling our engineers to do that and getting our salesforce able to do that and driving high gross margin growth, at or above that 20% growth rate, over the long-term. That's what we're all about.

But I would also say we're a company that's very proud of our culture. So, we would also measure our success by the culture in the business, our ability to attract, retain, motivate, get the very best out of cognoids. So, we certainly think about that. And that leads me into what keeps me up at night. It would be more, as we grow, we want to make sure that we're maintaining and developing that wonderful, entrepreneurial, growth-driven, innovative culture that we have. So, that gets harder as you get bigger but we focus on it very seriously and look forward to showing you our annual report, which I think is always a good expression of our culture, and that will be hitting the press in the next few weeks.

Bobby Eubank -- Chevy Chase Trust -- Analyst

I look forward to getting one in the mail. Keep up the great work, guys.

John Curran -- Senior Vice President and Chief Financial Officer

Thanks, Bobby.

Operator

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

Robert Shillman -- Chairman

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

Operator

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

Duration: 61 minutes

Call participants:

John Curran -- Senior Vice President and Chief Financial Officer

Robert Shillman -- Chairman

Robert Willett -- President and Chief Executive Officer

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Richard Eastman -- Robert W. Baird & Co. -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Paul Coster -- J.P. Morgan -- Analyst

Joseph Giordano -- Cowen and Company -- Analyst

Matthew Summerville -- D.A. Davidson -- Analyst

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Ben Rose -- Battle Road Research -- Analyst

Jairam Nathan -- Daiwa Securities -- Analyst

Bobby Eubank -- Chevy Chase Trust -- Analyst

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