VDC Research: RFID, Barcode, Retail Automation & Self-Service Market Blog

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)

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