Socializing the AIDC World

(VDC breaks down AIDC solution providers’ use of social media and outlines best practices for success)

AIDC solution providers mentioned in this report - Barcoding Inc., Barcodes Inc., Cognex, Datalogic, Honeywell Scanning & Mobility (now part of Honeywell Sensing & Productivity Solutions), Lowry Solutions, SICK AG, System ID, Wasp Barcode, and Zebra Technologies

Social media continues to be a relatively under-explored and under-utilized avenue for digital marketing within the AIDC community. In our bid to transform how AIDC solution providers use social media platforms, VDC just published a report on current usage trends and statistics along with detailed insight into best practices that can help them achieve their objectives for social media engagement. The report focuses on four platforms – Facebook, LinkedIn, Twitter, and YouTube – and 10 AIDC solution providers’ presence, outreach, content generation consistence, and engagement on each. VDC believes each chosen organization is influential in the AIDC space due to their technology and market development and their established presence on one or more social media platforms.

(The chart below highlights Engagement Rate statistics for 10 data capture solution providers, part of VDC's latest social media-focused report.)

Engagement rate aidc social media

Leading vendors are starting to take steps by hiring talent exclusively dedicated to managing content creation for these platforms and having targeted, specific, and measurable goals outlined for social media engagement. While short-term returns associated with social media activities may be limited, consistently posting the right type of content for the target audience (on each individual platform) will help generate an attractive ROI – in terms of (potential) lead generation and higher levels of engagement (with customers, partners, and employees).

We explore these themes in the Social Media report and also talk about the opportunity in front of AIDC solution providers to extend their reach and enhance their levels of engagement on these popular social media platforms. While this report is available to existing clients for free, non-clients can download this Executive Brief and contact us to learn how they can access the full report.


Barcode Scanner Vendors Entering Consumers’ Homes? Looks Like We’re Almost There!

What is the next step in the evolution of the barcode scanner market? Are vendors going to be restricted to B2B transactions or is there a potential consumer device opportunity for them here? In this blog post, VDC will focus its attention on two at-home scanning devices – Hiku Labs’ Hiku and Amazon’s Amazon Dash (both the wand and the button).

Hiku, an in-home barcode scanning solution designed by Silicon Valley startup Hiku Labs, is a 1D barcode scanner with a built-in microphone to help consumers build grocery and shopping lists. The product can be used at home to generate these lists by either scanning barcodes on everyday items or speaking into the device. It was first introduced to the market in October 2013 and is compatible with both Android and iOS.

What VDC finds particularly interesting is that Hiku’s executive team considers this to be a reference design or proof-of-concept while placing more value in the “smarts” built into the device (as opposed to the hardware itself). This start-up is open to having OEMs build devices that leverage its cloud-based platform, which includes barcode lookup, voice transcription, and data synchronization. Its platform enables users to scan and recognize items by retailers that do not make their UPC codes available to the public – by crowd-sourcing barcode label information and uploading it to the cloud.

As it stands today, the company’s decision to launch an in-home scanner with a 1D linear imager is purely based on the fact that most barcodes in circulation today (as part of product identification labels) are 1D. The mic allows users to add items that, for instance, they may not have around to scan. The Hiku hardware also has a magnet by which a consumer can place it on their fridge or any such surface in the kitchen. Forgoing the traditional Bluetooth connection, Hiku supports a wireless b/g/n connection to connect to the internet and user’s phone. Items which are scanned or picked up through the microphone are sent up to the cloud platform, where the item is recognized and then added to the user’s shopping list. Hiku Labs wants the product to be device-agnostic, with the ability to upload across a variety of different types of hardware and OS platforms. Hiku’s creators want OEMs to leverage their APIs and platform for at-home scanners – essentially creating hardware that plugs right in with Hiku’s solution and its capabilities – all while keeping overall costs in mind. The goal is to have consumers always pay a flat price for these products – no recurring fees or subscription-based models.

The device, as it stands today, is being piloted by notable supermarket chains – Waitrose in England and Cole’s Supermarkets in Australia; the company also announced a full rollout by French supermarket chain Chronodrive in March 2015 – marking it the first commercial availability of Hiku in the world. The device and API support multiple languages as Chronodrive customers are mainly French speaking. While Hiku is successfully piloting its products internationally, the company is yet to announce any major tie ups in the US. With the vision of providing what Hiku calls “frictionless shopping,” the company wants to reduce the steps involved in replacing items that consumers run out of. Via its partnership with Chronodrive, Hiku has enabled seamless scanning and listing of items through the device to the retailer’s app, and a mobile/e-payment option, and then having consumers simply picking up the desired items from the store-of-choice.

What VDC views as one of the primary adoption deterrents is the fact that this solution, at least for now, is designed to support only one retailer at a time, making it quite an expensive proposition for consumers looking to ease the shopping list creation process. Hiku has dropped its price per device from $79 to $29 (special promotion), making it slightly more palatable, but costly nevertheless. Most, if not all, shoppers shop at more than one store at a time. Hiku’s “exclusivity” clause with retailers could be detrimental to its future growth, making it something the company needs to work on.

Along similar lines, Amazon introduced the Amazon Dash (wand) in 2014, aimed at Amazon Fresh customers in California and Seattle. Like the Hiku device, this wand scans barcodes and is also capable of transcribing voice commands – connecting to smart devices (smartphones, tablets, laptops) via Wi-Fi, and automatically adding items to the customer’s basket on Amazon Fresh. Customers have access to everything from groceries to electronics, household tools, and games via their Amazon Fresh subscription. From VDC’s perspective, Amazon is likely to be more successful with this product than any of its competitors in the marketplace because Amazon.com is a one-stop shop, capable of fulfilling all of a consumer’s shopping requirements – plus, available for free. For now, however, its limited availability (by invitation only) is potentially holding back consumer use.

Amazon also revealed its Dash button 5 months ago, again as an “invitation only” product, but made it available to all its Prime members on September 2nd. This product is designed to help consumers instantly order more of a single product at the press of a button, pushing a confirmation notification on the phone before it ships. The company now has more than 29 CPG brands (including Bounty, Clorox, Hefty, Tide, and Ziploc) and 500 products that can be ordered with the click of a Dash Button.

The at-home scanning market still has a long ways to go, of course, but it is interesting to talk about and follow all these developments. Leading AIDC market participants are eager to learn more about how they can potentially target the end consumer with their products, and this certainly sounds like the right kind of opportunity. Potentially. While there certainly is an OEM scan engine opportunity here, can traditional barcode scanner vendors do more from a (final) product design, development, marketing, and innovation standpoint? Or is the smartphone going to be the primary at-home scanning device for consumers? Would it be more judicious for retailers to integrate voice recognition and enterprise-grade barcode scanning types of capabilities into their consumer device application itself?

VDC will explore this topic while discussing products like the Amazon Dash and Hiku in its Mobile Scanner report scheduled to publish in Q4 2015.

(With Shahroze Husain, Research Associate)


Can Scandit’s new Proof-of-Delivery (POD) system break through the rugged handheld-dominated logistics and delivery industry?

Zurich based mobile image processing and cloud computing software vendor Scandit recently announced the launch of its new mobile Proof-of-Delivery (POD) System for the logistics and transportation industry such as logistics providers, couriers and postal services. POD apps are designed to track the delivery of products through the delivery chain by scanning barcodes on packages and collecting signatures upon delivery. POD solutions are designed to improve efficiency, reduce paperwork, and eliminate errors.

Designed to enable mobile workers to use consumer grade smartphones and wearables in logistics applications, the POD solution is an all-in-one logistics suite. The system includes Scandit’s proof-of-delivery app, along with its Enterprise Mobility and Data Capture Cloud software. The app which is both Android and iOS compatible, carries features including navigation, geotagging, signature capture, and barcode scanning, supporting both 1D and 2D symbologies.

Scandit is leveraging its barcode scanner SDK and has created an app suite for transportation and logistics (T&L) around it. In addition to its Proof-of-Delivery solution, Scandit also has customizable apps for Shipping & Receiving and Asset Management in its suite of logistics solutions. The customizable apps can be leveraged by the development community to create end-to-end solutions for T&L enterprises that can customize these apps to fit their needs.

  POD system

Image Source: Scandit.com

The image above highlights Scandit’s POD solution architecture. It works through an interconnected system where the customizable POD app, integrated with Scandit’s barcode scanner SDK installed on a smartphone, is connected to Scandit’s Enterprise Mobility and Data Capture Cloud service, which in turn is connected to clients’ current IT infrastructure with existing data sources. Scandit’s POD solution integrates with existing IT infrastructure in place for logistic providers, couriers and postal services and can connect client’s Enterprise Resource Planning, Transportation Management Systems and Warehouse Management Systems to the mobile workforce. It can also be downloaded to corporate devices or by third party contractors, allowing transparency to the full delivery chain to track progress and location in real time. Scandit’s Enterprise Mobility and Data Capture Cloud software offers device management of devices on the field, a built-in analytics dashboard, and additional configuration and management options while deliveries are being made.

Currently, the T&L industry’s primary solution for field operations is rugged devices with major companies such as FedEx, UPS, USPS, and Royal Mail all employing rugged handheld devices for their product tracking and delivery needs. The decision to go with rugged devices such as Zebra’s MC9500 (FedEx) or TC75 (Royal Mail), and the custom Mobile Delivery Device by Honeywell (USPS) is based on these devices’ usage scenarios – for making more than 100 stops per day, and the need to withstand drops, dust, water, and other outdoor conditions. Due to concerns surrounding ruggedness, companies like FedEx have traditionally stayed away from deploying consumer-grade devices for field operations but have considered using consumer grade devices with rugged cases for applications in hubs and stations. Companies in the T&L space carry out refreshes for these solutions every 4-5 years.

Scandit’s new solution may break this traditional mold as its platform uses a device’s built–in camera to capture barcode information from any angle, with high read rates and offering the same level of scanning efficiency as dedicated barcode scanners (or mobile computers with integrated scan engines) while decreasing the overall TCO as compared to dedicated solutions. Adoption rates will depend on acceptance of and investments by major logistic providers and courier services as they evaluate ROI implications.

Innovations in smartphone design and improved ruggedized casing for protecting consumer grade devices in harsh environments will play a role in the adoption of Scandit’s POD solution in the market. Scandit will likely have to wait but the company has already taken a step towards maybe bringing a big change to the T&L industry. As a result, we may soon see such solutions leveraging consumer grade devices being used beyond the hubs and stations of delivery companies in this vertical.

VDC will explore this and other mobile scanning solutions further in an upcoming VDC Report on Mobile Scanning Solutions. Stay tuned!


Zebra Technologies – Is the “Better Together” campaign really working?

Zebra Technologies reported its Q2 2015 earnings on August 11th missing analysts’ EPS estimates by $0.13 while beating on revenue. Net sales of $889.8 million for the quarter included $573 million contributed by the Enterprise business unit acquired from Motorola Solutions, a 2% increase from Q2 2014. Zebra’s legacy business (including barcode printers, card printers, consumables, location services) accounted for $320.8 million, down 3.2% from Q1 2015 but up from $288.4 million (11.2%) in Q2 2014. The company’s gross margin now stands at 44.2%, down from 49.3% for 2014; this is reflective of rebranding of legacy Motorola product, the change in product mix and the contribution of Enterprise solutions to the overall revenues, which tend to have a lower margin than legacy Zebra products.

All in all, the investor community is not pleased with the results, sending the stock down almost 24% in a day. From VDC’s perspective, this reflects the market’s reaction to the significantly lower gross margins, lower-than-expected Q3 guidance, and the $3 billion debt that Zebra Technologies has on its hands. Investors are still getting used to the new normal at the company especially given how robust its legacy business performance has been in the past few quarters, especially for what is generally viewed as a stable and relatively saturated market.

The VDC team was invited by Zebra Technologies for a day-long analyst event a few weeks ago to take a sneak peek at some (relatively) new and emerging solution offerings from the company since its acquisition of Motorola Solutions’ Enterprise business unit. VDC was privy to innovative proof-of-concepts and solution capabilities that we are not at liberty to discuss, but there certainly are products and services that we can share here on this blog.

  1. MPact Marketing Platform – This is Zebra’s customer engagement offering that leverages the company’s locationing technology to generate highly personalized and (potentially) customer-specific marketing analytics and insight. This platform is designed to enable decision makers in customer-facing application environments to enhance engagement levels using information available on the MPact dashboard, giving them high levels of visibility into customer movement and providing actionable (and customizable) insights. From VDC’s perspective, the biggest potential drawback to this solution is that all of this information is only available IF customers opt-in to receive in-store or indoor notifications AND also turn on Bluetooth on their mobile devices. While this is an effort to close the gap between online and brick-and-mortar retail in terms of promotions and product recommendations, VDC does not see any material enhancements to the platform since its launch more than a year ago.
  2. SimulScan Document Capture – This was, perhaps, one of the most interesting product demonstrations at the event. The API is designed to extract critical data from documents, automating data entry even with character recognition, helping organizations make the switch from paper-based tracking to one that is fully available electronically. With the ability to also capture information from multiple barcodes at the same time, VDC believes SimulScan has the potential to significantly enhance productivity, providing chain of custody of all material to improve supply chain efficiencies. Zebra now has SimulScan as part of its Mobility DNA suite which also includes Workforce Connect Push-to-Talk, RhoMobile, and Swipe Assist among others. VDC believes extending this SimulScan capability to purpose-built handheld barcode imagers will give the company a big leg-up over its competition in the highly fragmented scanning market.
  3. Zebra One Care and Operational Visibility Service (OVS) – Zebra also officially released a new integrated service portfolio, Zebra OneCare – primarily offering break-fix, repair, and maintenance services for Zebra- and Symbol-branded devices. The portfolio is a combination of Zebra’s previous Zebracare and Motorola Solutions’ Service from the Start. OVS is designed to provide insight into device health, location, and utilization, and to deliver the data and analytics required to optimize device efficiency and is included for no additional charge in the Premier package of Zebra Onecare. This is a big step in Zebra’s efforts to integrate the new acquired division with its legacy business. The company is making a concerted effort to communicate the value proposition and benefits afforded by these new service portfolio extensions and enhancements enabling partners to resell and rebrand the OVS for deeper customer relationships. From VDC’s viewpoint, it will be interesting to see how the company differentiates this offering from Honeywell’s device management software for scanning and mobile devices, Remote MasterMind®.

It was interesting to see all these solutions and innovative product ideas coming from the erstwhile Motorola Solutions Enterprise unit. However, despite the branding efforts and the combined partner program launched at the Global Partner Summit in May, VDC finds the messaging to be a little disjointed. Product innovation and development continue to be largely restricted to the way things were conducted prior to the acquisition. That said, it has been less than a year since the two businesses came together. While Zebra executives may certainly be professing the “better together” mantra, we believe the market will only be convinced once it sees integrated product development and marketing initiatives from the company.

There is, obviously, a lot more to come from Zebra Technologies. The company’s messaging to its partners and customers needs to match up to expectations from a distribution and execution standpoint – a tough ask, especially given the sizable acquisition (and debt) that it has undertaken. Zebra’s (re)branding efforts in the past few months have certainly been very commendable; it is now up to the company’s leadership to take it to the next level with extensive collaboration across its two “divisions” so they really are viewed as better together by key stakeholders.


Cognex Stock Plunges 20% Day After Q2 Earnings Call; Weak Q3 2015 Outlook to Blame for Sharp Decline

On August 3rd, Cognex (CGNX) published its second quarter results ending July 5, 2015 and recorded a historic winning second quarter for the corporation, ranking the second highest for any quarter in its history. The revenue from continued operations amounted to $143.8 million in the past three months, a 56% growth from the year ago quarter and a 42% sequential increase from Q1 2015. Income from continuing operations from last year and the previous quarter rose 92% and 123% respectively. This quarter’s revenue and income calculations excluded sales from the discontinued Surface Inspection System Division (SISD) operations, which generated $11.2 million in revenue in Q2 of 2015. With the strategic sale of its surface inspection business in early July, Cognex plans to sharpen its focus on automating discrete manufacturing applications with the high-margin yielding machine vision and ID product lines. You can read more about our thoughts on the acquisition here. RD&E and SG&A expenses grew 8% from the previous quarter due to new product development costs and legal fees related to Cognex’s recently-resolved patent dispute with Microscan.

Despite global currency exchange rate fluctuations, Cognex’s operational margins rose to 36%, a 14% increase from the prior quarter. Factory automation revenue contributed $137 million or 95% of total quarter two revenue; majority was accounted by the large volume orders from the consumer electronics industry. Cognex has experienced much success in the European market in the past few quarters; this continued in Q2 with Europe’s consumer electronics sector making significant investments in the company’s factory automation solutions (both machine vision as well as ID products). Asia, excluding Japan, witnessed another solid quarter. The company continues to see success in China, despite the economic woes that the country is presently facing. Cognex is doing particularly well in consumer electronics and electronic components manufacturing industries and is fully committed to generating growth in the long-term. However, from VDC’s perspective, it is the company’s performance in and outlook for the Americas that is most disturbing for the broader investor community. The company is now seeing much lower-than-expected growth from the region with customers pulling back on their factory automation-related investments. Reasons for this “stagnation” as outlined by the company include a strong US dollar, macroeconomic uncertainty, and company-specific considerations especially with “large postal and parcel providers getting pushed out for financially-driven reasons”.

In other not-so-good news, contrary to the company’s growth trajectory in the past few quarters, Cognex has set conservative guidance below market expectations for Q3 2015. Revenues are estimated to be between $106 million and $109 million, a range notably trailing both Q3 2014 (and Q2 2015) figures as well as Wall Street analyst expectations for $144 million. The company also expects a slight decline in gross margin percentage to the mid-70s due to a higher percentage of services-related revenues, consistent with its guidance for Q2 2015 as compared to Q1. Operating expenses will decrease 5% sequentially, helped by the Microscan resolution and lower internal employee-related overheads.

Unimpressive revenue growth in the Americas, timing fluctuations of large projects, and the related uncertainty has some investors questioning the long-term growth potential of the company, leading to a sharp decline in its stock price on August 4th, the day after its earnings call. Cognex’s growth in the logistics vertical in Europe, a relatively undeveloped market territory, has also been deferred to 2016 due to timing and financial drivers. Demands for factory automation in non-automotive industries are forecasted to decline in the Americas.

While factory automation investments are typically soft in Q3, it is important for Cognex to not be overly reliant on a few large customers to meet its growth and profitability targets. From VDC’s perspective, it is important for this leading machine vision solutions vendor to diversify its offerings and further expand its presence in non-electronics markets that have a lower tendency to exhibit massive cyclical fluctuations. What Cognex certainly has going for it is its strong competitive positioning and its market leadership in this space from a product development innovation standpoint. The company is actively looking to acquire – with a focus on enhancing its technology expertise and product feature set, which help keep its gross margins high in an industry that is inundated with vision-based options for automation. Interesting times up ahead for Cognex as it grapples with a certain loss in investor confidence but seeks to build it back with its innovation, new market focus (including life sciences), and potential acquisition(s).

(With Jenny Hai, Research Assistant)


Digimarc makes a splash in Retail with Walmart Partnership; Stock UP Nearly 45% in a Month

Big news for Oregon-based inventor of the ‘invisible’ barcode as Digimarc made headlines last week when Walmart’s CEO Doug McMillon posted a photo on Instagram, which shows testing of Digimarc’s invisible barcode on a packet of chips.

Since 2014, Digimarc has made great strides in its bid to make its patented Digimarc Barcode the next big thing in the retail space. Taking the traditional UPC barcode, Digimarc makes it invisible to the naked eye using digital watermarking technology and places the barcode all over the printed packaging of the product. This allows for image-based cameras that are used to scan items to quickly pick up the barcode in record time, removing the need to rotate/move around the packaging. Currently, Digimarc’s partner Datalogic offers the capability to read Digimarc Barcode on every imager across both stationary and handheld form factors, with other partnership announcements expected in coming weeks.

Since its launch, the technology was first adopted by supermarket retail chain Wegmans, which incorporated the Digimarc barcode on its private label products. Digimarc was also on the news in May, 2015 when mobile app Shazam, announced the integration of Digimarc’s patented print and audio identification technology to its app. This was followed by the announcement by SAM Group, a leading POS services provider that works with major POS vendors that it will integrate Digimarc Barcode recognition to its product offerings.

Digimarc has also continued developing its Digimarc Digital software enabling barcode scanning using smartphones and other mobile devices from home and outside the retail store. It is a highly relevant and timely technology introduction in the industry as retailers look to enhance their levels of engagement with customers at home to increase customer loyalty. As these consumers scan products at home, information including their purchase history and items they scan can provide retailers with a wealth of information on customer buying habits and trends.

Currently, the Digimarc barcode is at the proof-of-concept stage with Walmart, unlike Wegmans that has printed it on its private labels offerings. Retailers are fully aware of the ‘mixed basket’ challenge as not all products in the store will bear the Digimarc code (at least not in the near term). Products without the invisible code will have to be scanned using the traditional method, which will result in varying levels of checkout efficiency. Impacted by the declining use of traditional cash currency, expiration of licensing deals and consumers moving to electronic forms of payment, this could potentially open up a much needed revenue generating opportunity for Digimarc.

Since Walmart CEO Doug McMillon’s Instagram post last week, the Digimarc stock has climbed to $44.76 as of June 30, 2015. With one of the world’s largest retailers testing its solution, Digimarc can expect great things. However, adoption rates will depend on acceptance of and investments in new camera-based imagers by major retailers that are particularly wary about ROI implications of their technology investments.

VDC took a deeper dive on this rather interesting topic – Digimarc and its “invisible” barcode – last month. You can download the report here.


NCR puts itself up for acquisition; VDC breaks down the “retail” reasons why

On April 22nd, The Wall Street Journal announced the news that ATM-maker NCR is eyeing strategic alternatives as they face lagging stock prices and shareholder pressure. A potential spinoff, sale of assets, or a full acquisition/buyout - all seem like very viable possibilities. On June 2nd 2015, news broke of NCR asking for first-round bids from prospective buyers and on June 16th, two large private equity firms, Blackstone Group LP and Carlyle Group LP, have paired up in a $10 Billion leveraged buyout (LBO) offer for NCR, including debt.

Started by John H. Patterson in 1884, the National Cash Register Company was the maker of the first mechanical cash registers. Moving forward to 2015, the company is now known simply as NCR, and sells transaction services, automated solutions, software and consulting services to clients across a wide array of industries including financial, retail, hospitality, travel and government. The company facilitates over 550 million transactions a day. NCR divides itself into four major segments: Financial Solutions, Retail Solutions, Hospitality Solutions, and Emerging industries.

  • Financial Services provide ATM and payment systems along with software and services for cash management, digital banking, maintenance, and management.
  • Retail Solutions provide retail-oriented solutions and systems including POS terminals and software, barcode scanners, self-checkout solutions and kiosks, printer media and software – all in support of an omnichannel experience. In addition, this division provides professional services including installation, integration, device management, and maintenance for some of the company’s largest clients.
  • Hospitality provides systems and solutions for restaurant chains and venues including POS hardware and software along with professional services and printer media. 
  • Emerging Industries which is targeted towards newer industry verticals including telecommunications and technology, and travel includes maintenance and professional services for third-party hardware for certain manufacturers. It also provides small business-specific systems and solutions including comprehensive POS terminals, software and professional services.

In order to remain competitive and adapt to changing market conditions and consumer trends moving online, NCR made large acquisitions, buying companies like Retalix and Radiant Systems to strengthen its Retail Solutions division and enter the Hospitality segment respectively. However, since then, NCR has failed to integrate and generate sufficient growth from the acquisitions and now carries debt of $4 billion. In this blog, I will shine the spotlight on NCR’s acquisitions of these companies, thereby highlighting the company’s present (unenviable) position from a Retail and Hospitality standpoint.

To expand its Retail Solutions business, NCR acquired Retalix, an Israeli vendor of retail, marketing, supply chain and logistics software solutions. The company was purchased for $650 million with the aim of cross-selling to a combined, larger client base, improving margins through its software model while also leveraging R&D best practices. However, NCR did not successfully leverage Retalix’s strengths to position itself as a leader in the next-generation retail solutions segment – from a mobility and e-commerce standpoint. The division has faced challenges with slowing demand from retail customers as they increasingly embrace mobile devices to support transaction processes and cloud-based solutions for their e-commerce initiatives. Retail Solutions has seen revenue declining quarter-on-quarter since Q1 2014 with the latest Q1 2015 results showing a 9% decrease in revenues, at $445 million. This, coupled with an operating margin of 7.7% in 2014, which lowered from 10.1% in 2013, continues to negatively impact overall profitability. The company’s inability to move with the times, especially as it relates to fulfilling its retail customers’ growing focus on e-commerce and online order fulfillment, along with its increasing liabilities are significant contributors to its declining revenues and profitability.

Acquired in 2011, Radiant Systems was a specialized provider of hospitality POS software and solutions which allowed NCR to become competitive in the Hospitality segment. NCR’s hospitality segment makes up only 10% of revenues and has seen declining quarter-on-quarter revenue growth since the first-quarter of 2014. During Q1 2014, revenue growth was 14% quarter-on-quarter, which has dropped to a 1% decline in Q1 2015. The division has also seen its operating margin drop from 16% in 2013 to 13.8% today. Like retail, the hospitality segment encountered slower sales with customers moving away from traditional POS terminals to mobile and handheld solutions, highlighting the massive gap in NCR’s core product line(s). This part of the business has also been affected from the move to mobile POS, as restaurant POS vendors such as Vend and Touch Bistro use subscription-based models for restaurant POS systems to lower capital expenditures. Furthermore, the increased availability of mobile devices has led to smaller restaurants using these solutions to offer greater flexibility and varied payment acceptance, especially as restaurants begin to accept electronic wallets like Apple Pay, which is proving to be a big miss for a company like NCR.

In a positive move for the company, NCR updated its NCR Silver platform, a cloud-based POS solution for the iPad and iPhone that is aimed at serving small businesses. To stay current with evolving market trends, NCR integrated payment alternatives including PayPal, Apple Pay, Bitcoin and LevelUp along with providing enhancements to facilitate safer and more secure transactions. The company has also priced the service more competitively with NCR Silver offered at $59/month, aimed at small businesses, and a NCR Silver Pro Restaurant Edition priced at $129/month. NCR’s Emerging Industries division is also looking to introduce chip and PIN capability later in 2015. With these latest updates, VDC believes NCR is embracing change while staying competitive with offerings in the marketplace today.

NCR’s retail and hospitality-focused acquisitions have not performed according to market (or even company) expectations. Ineffective strategy execution has also resulted in little-to-no organic growth while prompting the company to take on a large debt for financing these sizable acquisitions, in both the retail as well as financial services sector. NCR’s less-than-optimal performance in recent quarters has pushed its largest shareholders to look for strategic alternatives. Will it better for investors to buy parts of the company as opposed to the whole? That remains to be seen. But, for the company to re-invent itself and get back to its glory days with its retail and hospitality divisions, NCR will have to make a concerted research and development effort to introduce innovative products and solutions that align themselves well with end users’ evolving profitability goals and customer engagement initiatives. The company has a great foundation to build off of; it’s now time to change up the structure and better position its business for current and emerging growth opportunities.

VDC will explore this topic further in an upcoming VDC View. Stay tuned!

(With Richa Gupta, Senior Analyst)


Cognex sells its Surface Inspection division for $160 Million; VDC Speculates What’s Next for the Company

Cognex Corporation (CGNX), a leading vendor in the machine vision and industrial scanning markets, announced the acquisition of its Surface Inspection Systems Division (SISD) on June 8, 2015, as part of a $160 million, all-cash deal with AMETEK Inc., a multi-billion dollar manufacturer of electronic instruments and electromechanical devices. While the transaction continues to be subject to closing conditions and regulatory approvals, AMETEK expressed its enthusiasm to have the new SISD department as the latest addition to its Electronic Instrument Group (EIG) product portfolio, a leader in the design and manufacturing of advanced instruments for the process, aerospace, power and industrial markets, which amassed a total of $2.4 billion in sales in 2014. With the strategic sale of its surface inspection business, a division that generated $60 million in sales in 2014, Cognex plans to sharpen its focus on automating discrete manufacturing applications via its Modular Vision Systems Division (includes machine vision and ID products), which accounts for 84% of organizational revenues as of Q1 2015.

Cognex first introduced the SmartView® surface inspection platform in 2000 after the acquisition of Isys Controls, Inc in 1996, a small company that had developed high-performance machine vision systems to automatically detect and classify surface flaws and defects on high value-added materials. Under Cognex, this division now diversifies across verticals with image processing technology that detects, classifies, filters, and maps specific defects on area surface of metals, paper, plastics, nonwovens and glass manufacturing. In addition to the advanced line scan cameras that enable immediate defect detection in high-speed applications, the SmartView® platform also supports global customers with superior detection algorithms, a range of classification and data management software, and technical assistance spread throughout countries in the Americas, Europe, and Asia, including Japan and China. Asia-Pacific, including Japan, accounted for 40% of SISD revenues in 2014, Americas for 40%, and Europe for 20%. Cognex has installed over 1,000 of its surface inspection systems globally with its customer portfolio including names like AK Steel, USS, Bao Steel, China Steel, TATA, and ArcelorMittal.

Cognex has chosen to sell its surface inspection business despite the 29% sales growth from 2013 to 2014 and record sales levels that this division experienced in Q4 2014, particularly for applications like specialty metal inspection (for Aluminum going into car bodies). VDC believes this can be attributed to the company choosing to exclusively focus on discrete manufacturing and logistics opportunities, coupled with the surface vision division’s relatively lower contribution to overall profitability. SISD gross margin stood at 55% in 2014, which was significantly lower than that of the factory automation division (MVSD) with a 78% gross margin. The complex nature of inspection technology required Cognex to opt for in-house manufacturing at its Hayward, California facility, whereas a majority of MVSD products are outsourced to Asian OEMs (like in Indonesia). This difference in gross margins can also be explained by the high service to product sales ratio in SISD, and the lower yield in margins for service revenues in contrast to product revenues. In 2014, Cognex reported that 30% of SISD revenue was derived from service sales, which included the sale of maintenance & support, training, consulting, and installation. Only 4% of MVSD revenues were from service sales and the remaining 96% were from the higher margin yielding product sales – which include technology systems, hardware, and software.

From VDC’s vantage point, this is a great move by Cognex, which can now focus its attention on existing and emerging opportunities for its machine vision systems and ID products portfolios. The company has experienced much success in the consumer electronics and logistics industries in the past few quarters, a momentum that it can capitalize on going forward by intensifying its product development and sales efforts in these high-growth markets. In its latest earnings call, Cognex outlined the enormous potential it sees with large accounts in these verticals, which the company is very eager to profit from. At the same time, the company will lose out on business in metals in China, which is a particularly appealing market right now because of growth in the automotive sector. That said, revenues from this division have been characteristically lumpy because of timing of deliveries and the impact of revenue deferrals.

Its sale of the surface inspection division will not only make it a more profitable company (higher overall gross margins), but also significantly boosts its cash reserves. Cognex has no long-term debt and, per its most recent annual report, does not anticipate needing debt financing in the near future. This opens up the very distinct possibility of Cognex potentially acquiring another company to achieve one (or more) of the following objectives – boost its engineering talent, grow its logistics customer base, or even build partnerships with leading global material handling systems integrators and solution providers.

(With Jenny Hai, Research Assistant)


Zebra Technologies’ Stock Pops; Company Soars to New Highs

Zebra Technologies (ZBRA) reported its Q1 2015 earnings on May 13th, beating the market consensus on EPS by 27 cents and that on revenues by $11.37 million. Net sales of $892.3 million for the quarter included the $561 million contributed by the Enterprise business unit acquired from Motorola Solutions, a 6% increase on a constant currency basis. Zebra’s legacy business accounted for $331.6 million, up 15% from Q1 2014, a remarkable increase for what is generally viewed as a stable and relatively saturated market. The company’s gross margin now stands at 45.8%, down from 51.3% for 2014; this is reflective of the change in product mix and the contribution of Enterprise solutions to the overall revenues, which tend to have a lower margin than legacy Zebra products.

Zebra also spent a substantial amount on integration-related activities. The speed with which the company has integrated the two businesses is rather impressive, especially given the size and scale of each of the individual business units. In the past few weeks, Zebra has also launched a new website and hosted its annual partner conference, all with a goal to communicate its new market messaging and value propositions.

Now, here are some key highlights of the company’s first quarter performance:

  • The data capture business unit experienced its second strongest quarter ever (following Q4 2013) – with a healthy run rate business and a number of large deals. Its camera-based bioptic scanner product line is doing particularly well, with the value propositions resonating immensely with large retailers in the US.
  • North America and EMEA continue to be the strongest regions for Zebra. With sales of $443 million and $291 million in the two regions respectively, the company is re-affirming its market leadership position, especially with its legacy printer products.
  • Retail sales were particularly strong in the US as the company saw large deals for printers, mobile computers, and data capture solutions. Healthcare has consistently been a strong performer for Zebra in the past few quarters. The trend continues with growing traction for the company’s solutions to help care providers with medication management, patient identification, and specimen tracking.
  • Perhaps the most noteworthy development in Q1 was the company’s price increase announcement in Europe in late March, effective late April (after four weeks). This is a move to counter the impact of the strengthening dollar and weakening Euro on the company’s profitability and bottom line given that the region represents about 25% of overall revenues. Zebra expects high stickiness for its run rate products like printers and data capture solutions.
  • Enterprise business unit sales in Asia are in the process of getting back on track after having faltered for much of 2013 due to issues with the sales force and other operational challenges. The company’s efforts to reengage with channel partners in the region and rebuild relationships seem to be paying off with sales in China up sharply for Q1. Overall revenues in the region were at $106 million with sales to customers in logistics and healthcare verticals offset weakness in demand in manufacturing.

The company expects the growth trajectory to continue into the second quarter especially with a strong pipeline for large deals. For Q2, Zebra expects total revenues in the range of $865 to $895 million. The price increase on Euro-dominated sales will start to have a positive effect this quarter and is expected to have a more pronounced impact in the second half of the year.

Following its earnings release, ZBRA’s stock went up more than 12%. This speaks of investor confidence in the company and the efficiency with which Zebra seems to be communicating its “One Zebra” message to its customers and partners. Zebra Technologies’ executive leadership is confident in its market standing and optimistic about market opportunities for the remainder of 2015. At VDC, we will continue to follow its progress and keep our readers updated.


Cognex - Consistently Breaking Records, Exceeding Performance Expectations

Cognex announced its Q1 2015 earnings after market close on Monday, May 4th. The company reported quarterly revenues of $113 million, 84% (approximately $95 million) of which was attributed to its factory automation segment. Cognex reported that this year-over-year revenue increase occurred despite the global currency exchange rate fluctuations, which constituted a negative impact of approximately $7 million. RD&E and SG&A expenses reportedly grew faster than revenues this past quarter due primarily to growth investments including new product development and sales initiatives. Legal fees related to Cognex’s recently-resolved patent dispute with Microscan also contributed to this rise in expenses.

Cognex performed well on a year-over-year basis. Revenues increased by 25% since Q1 2014, which was attributed primarily to a 26% year-over-year increase in factory automation sales. This division also saw a 2% increase from Q4 2014. Sequential increases such as these are not typical of Q1, which is usually Cognex’s weakest quarter. Overall revenue and net income decreased sequentially by 3% and 23%, respectively. Operating expenses increased by 9% since Q4 2014 due to growth investments in both engineering and sales.

CEO Rob Willett reported that Cognex well exceeded its long-term target for factory automation revenue growth in Europe, which was 20%. 38% of revenues this quarter came from Europe, more than any other geographic region including the Americas. Asia, excluding Japan, was Cognex’s best-performing region this quarter in terms of percentage growth; factory automation revenue grew more than 50% year-over-year, which came primarily from increased demand for machine vision from factories in Greater China. Severe pricing pressures, escalating labor costs, and slowing economic growth are all prompting Chinese manufacturers to ramp up their investments in automation solutions to enable them to sustain their competitive edge. The struggling factory automation market in Japan is also dwindling due to the weaker yen; revenue in this region declined in the low teens as compared to Q1 2014.

Cognex reported a 75% gross margin and 21% operating margin, down from the 77% and 25% respectively, in Q1 2014. The decline in gross margin was attributed to volume pricing discounts on large orders and a shift in revenue mix to relatively lower margin maintenance and support services. Operating margins are expected to improve as the year progresses.

On Thursday, April 30th, a New York federal jury decided that Cognex owes Microscan $4.4 million for infringing a barcode patent, a year after a different jury awarded Cognex $2.6 million for Microscan’s alleged infringement of another barcode patent (see here). With this latest dispute, Microscan alleged that Cognex’s DataMan imagers (7500, 8500, and other variants) infringed upon one of Microscan’s existing patents, titled, “Optical symbol scanner with low angle illumination.” The jury found that Cognex infringed on all three asserted patent claims despite Cognex’s assertion that these claims were invalid. Microscan collected royalty damages for past infringement. Cognex spent a total of approximately $1 million this quarter in relation to this lawsuit.

Cognex’s outlook for the remainder of 2015 is positive. The business has generated substantial momentum, generating large orders from consumer electronics manufacturers (like Apple), large retailers, and logistics service providers. From where the company stands today with respect to its sales pipeline, Cognex does expect Q2 and Q3 2015 to be the largest revenue quarters. The company expects a 30% sequential revenue increase in Q2 amounting to $152-157 million. Gross margin is expected to stay in the mid-70% range, only slightly lower than Q1. Operating expenses are expected to increase by approximately 5% sequentially to support further investments in growth areas. However, revenues are projected to grow at a much faster rate than expenses for the full year, which could lead to potential improvement in operating margins for 2015.


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