Cognex Corporation (NASDAQ:CGNX) Q3 2019 Earnings Conference Call - Final Transcript

Oct 28, 2019 • 05:00 pm ET

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Cognex Corporation (NASDAQ:CGNX) Q3 2019 Earnings Conference Call - Final Transcript

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Executive
Robert Willett

words about our recent acquisition of Sualab, an outstanding technology company specializing in deep learning software to automate inspection tasks that are currently done by human visual inspectors. Sualab is the type of acquisition that we like to do. It has an excellent engineering team, I'll expand on this in a few moments, and also is a great cultural fit. We believe that deep learning technology will be a major growth driver for Cognex in the years ahead. For the first time, machine vision is reaching a level of performance that allows it to replace tens of thousands of humans globally, whose work it is to perform highly repetitive, visual inspection tasks, to identify cosmetic flaws and defects on products during their manufacture.

The market we serve today for machine vision using deep learning and factory automation is estimated at $100 million of annual revenue and is growing rapidly, we believe, by 75% per year. The largest and fastest growing segment of that market is the replacement of human inspectors in Asia, particularly for electronic components and finished products where Sualab is well positioned. The acquisition of Sualab not only extends our deep learning capabilities for inspection application, it more than triples the size of the Cognex team dedicated to developing and applying deep learning technology to industrial inspection tasks.

Upon closing, we welcome the approximately 100 smart, ambitious and energetic new employees who share our passion for machine vision, the majority of whom are in engineering departments and are highly skilled in both contemporary programming techniques and applying deep learning to inspection tasks in the manufacturing process. Led by co-founder Song Kiyoung, the Sualab engineering team will continue to operate from its headquarters in downtown Seoul. They will work closely with our team based in Cambridge, Massachusetts, which is led by Reto Wyss, a co-founder of ViDi systems, which we acquired in 2017. The ViDi acquisition established our deep planning development efforts and is the reason for our success in this area to-date.

Here are a few more details on the acquisition that I'd like to share with you. The purchase price was $195 million. We paid $171 million in cash at closing. Payment of the remaining $24 million is deferred until a later date. Although Sualab's revenue is modest, the price is justified by the high value of the company's substantial engineering team, its core technology developed over the last six years, and its experience applying that technology at very large companies in Asia. We expect technology acquisitions to be accretive within two years, and it looks like Sualab will fit within that model.

Moving on to the next topic. We have published an updated view of our served market. You can find it on our Investor Relations website at investor.cognex.com. Our new estimate of Cognex's total served market for machine vision is $4.2 billion. This is a narrow definition of what we can serve with our current product offering. This estimate is 20% higher than our previous