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

New Report: Mobile Barcode Scanners – Shaping the Future of the Data Capture Industry

(VDC recently published a report focused on Mobile Barcode Scanners. The following blog highlights some of our thoughts on this market and its potential.)

The data capture industry is constantly changing. Handheld barcode scanning is no longer restricted to traditional pistol grip form factors or rugged mobile devices as pairing or integrating scanners with consumer devices is increasingly becoming a popular option for organizations’ barcode scanning applications. Capitalizing on growing smartphone adoption in the enterprise space, new and emerging hardware vendors such as Infinite Peripherals & Koamtac and non-traditional ISV participants like Scandit and Manatee Works (now part of Cognex) are challenging AIDC incumbents by bringing data capture technology to a wider audience in new ways.

As retail, logistics, and health care organizations face growing pressures to support vital workforce operations, improve customer experiences and improve productivity, consumer smart device-based solutions such as companion scanners, sleds, and barcode scanning software platforms are being evaluated as viable solutions to replace or be deployed alongside traditional purpose-built devices. The following are short descriptions of mobile scanning form factors that are available in the market.

• Companion scanners: Small form-factor barcode scanners that pair with other devices via Bluetooth/Wi-Fi.
• Sleds: Peripherals that encase and enable consumer-grade smart devices for enterprise- grade scanning.
• Personal Shopping Solutions: Mobile computer solutions that are used by consumers for shopping in store.
• Software platforms: Software development kits that enable consumer-grade smart devices to use their built-in cameras for enterprise-grade barcode scanning

Exhibit: Respondents’ Plans to Replace Purpose-built Scanners with Mobile Scanning Devices

According to results from VDC’s recent survey of mobile scanner end users and evaluators, 63% of organizations are considering replacing their purpose-built scanner investments with mobile scanners for daily operations. Respondents surveyed across retail, logistics, and health care are currently evaluating the option to deploy mobile scanning solutions to support daily operations. Consumer smartphone-based scanning solutions are also gaining consideration in the enterprise space as companies evaluate BYOD policies and alternatives to traditional purpose-built scanners. However, while mobile scanners do make barcode scanning available to a wider audience and broader range of applications, concerns related to initial investments and deployment costs remain.

VDC believes that mobile scanners are just about starting to present growth potential; application development will play a major role in sustaining long-term business development for vendors in the mobile scanning ecosystem, creating apps for enterprise uses cases and extending vendors’ products to wider audiences. Distributors with vertical expertise and a strong application developer network will be key components to success, since vendors must differentiate themselves from competitors and establish strong brand images.

Mobile scanner vendors profiled as part of this report – Amazon.com, Code, Datalogic, Grabba International, Hiku, Honeywell, Infinite Peripherals, Koamtac, Opticon (OptoElectronics Co. Ltd.), Scandit, Socket Mobile, and Zebra Technologies

For more information and insights on this report, please feel free to download the Executive Brief and contact us to learn how to gain access to the full report.

Written by Shahroze Husain and Richa Gupta. For more information, be sure to review our full mobile scanning report- Mobile Barcode Scanners or contact us at [email protected].The author can be contacted directly at [email protected]

Zebra Technologies beats EPS but integration to come at a higher cost

Zebra Technologies reported its Q3 2015 earnings on November 10th beating analysts’ EPS estimates by $0.16 while missing on revenue by $2.22 million. The company’s revenues grew 3% from Q2 2015. Net sales of $916.27 million for the quarter included $605.1 million contributed by the Enterprise business unit acquired from Motorola Solutions, a 5.6% increase from Q3 2014. Zebra’s legacy business (including barcode printers, card printers, consumables, location services) accounted for $314 million, up from $303.3 million in Q3 2014. The company’s gross margin now stands at 45.2% for the first 3 quarters in 2015, down from 50% 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. Although Zebra managed to exceed analyst expectations in EPS estimates, company shares have fallen almost 12% since the Q3 earnings release.

Here are some key insights from the company’s 2015 third quarter performance. 

• Zebra experienced a strong quarter for its data capture business unit driven by the increasing migration from 1D to 2D imagers and it plans to build on this momentum by actively engaging its installed client base. In addition, Zebra’s printing business experienced continued growth which was driven by the increased sales of table top and desktop printers.
• OS migration continues to play a major role in driving sales growth this year as Android-based mobile computer sales have increased by 170% through September this year in comparison to the same time period last year.
• North American sales were flat quarter on quarter with 3% growth. The company accomplished a number of new wins for mobile computers in retail and manufacturing engaging the Tier 2 & 3 markets. Growth for data capture came from Zebra’s scan engine business as more organizations transition and upgrade their scanning solutions to 2D imagers and the printing business continues to generate growth with the increased sales of tabletop and desktop printers. Zebra’s Latin America business was the only region to experience a decline this quarter with a 16% decline as a result of difficult currency and microeconomics challenges. The company plans to reengage the market once the regional economy improves. 
• EMEA sales were stable at 3% this quarter as anticipated with typical European slowdown during summers, in contrast to the unusually strong Q3 in 2014. Zebra’s price increase back in April 2015 appears to have had limited impact on European demand as the company achieved new wins across retail, manufacturing and government sectors.  Sales remained strong for mobile computers in Europe with Germany and UK leading the way while the company saw a slowdown (even decline) in parts of the Middle East and Eastern Europe due to geopolitical reasons.
• Asia Pacific led the way for most year-over-year growth with 23% in the quarter. In Asia, Zebra’s Enterprise division experienced strong sales in China, India, and Southeast Asia. The company saw success in the retail space for its mobile computing and data capture solutions driven by e-commerce adoption and upgrades. Increased sales of desktop printers to the healthcare and T&L verticals contributed to the positive growth for the printer business in Asia.
• The company continues to gain traction with e-commerce, mobility and OS transition leading the way for growth. Hardware upgrades and e-commerce have driven retail sales growth for both mobile computers and scanners. Printer sales were also strong as desktop printers saw increased deployment across health care and T&L verticals. Ongoing printer hardware refresh at some of Zebra’s largest clients is also a key growth driver.
• Zebra will continue to spend a substantial amount on integration and synergy operations. The company has expects synergy related expenses to increase to $180 million - $200 million which would see the company through to 2017 in its efforts to reduce costs and perform as one complete unit. Acquisition and integration related costs were $42.7 million this quarter, an increase from $35.2 million in 2014. As a part of its ongoing integration efforts, Zebra has carried out the removal of hundreds of Enterprise IT applications and Motorola service agreement items and is now focusing on the implementation of a companywide IT infrastructure and transitioning the Enterprise business onto Zebra Systems.  

With additional cost savings and cost controls being implemented, Zebra expects its positive growth to continue and plan to end on a high note in the fourth quarter. The company expects total revenues in the range of $945 million to $975 million. Zebra Technologies’ executive leadership is confident in its market standing and optimistic about market opportunities for the remainder of 2015.

Like we’ve mentioned in our previous posts, Zebra has its work cut out for it from a distribution and execution standpoint and needs to manage expectations via well-crafted messaging to both partners and customers. We will continue to follow the company’s progress and keep our readers updated.

(with Richa Gupta, Senior Analyst)

AutoID Market Shakeup: TSC Acquires Printronix’s Thermal Printer Business

Leading barcode printer vendor TSC AutoID Technology (TSC) announced on November 9 that it has signed a definitive agreement to acquire the thermal printing business of Printronix, a company focused on serving the industrial supply chain with its rugged, high-performance thermal label printer product line. This acquisition is expected to close in January 2016. I find this development equal parts interesting and refreshing. It has been a while since the market saw an acquisition by a vendor other than one of the AIDC conglomerates (Datalogic, Honeywell, Zebra Technologies, and the former Motorola Solutions).

TSC had a strong 2014, as indicated in VDC’s recently published 2015 Stationary Thermal Barcode Printers report, and has grown at consistently high rates in recent years while also outperforming overall market growth. The company is an especially strong competitor to Honeywell, SATO, Toshiba TEC, and Zebra Technologies in the Asian market. While TSC has made some headway into EMEA in recent months, its performance in the Americas left much to be desired. This will change with its Printronix acquisition as this vendor earns 90% of its revenues from the Americas and Europe. Printronix exclusively targets application environments in the industrial supply chain with its line of thermal label printers. The company had a lackluster 2014 in terms of sales growth, but saw a leadership change early in 2015 and started laying the groundwork for a new approach to building channel relationships. It is making its way into the low-end industrial market with its entry-level T2N series, priced aggressively at less than $1,000 for the 203dpi model. The company also recently released its second portable printer, M4L2, which is designed for use in industrial and warehousing environments. All of its recent investments prove its commitment to differentiating its product line from both Honeywell and Zebra. Printronix is also the only vendor that offers industrial label printers with in-line verification capability, giving the vendor a distinct advantage over its peers in industries like retail with strict labeling compliance requirements.

Market consolidation and over-distribution has given way to pent-up frustration with what is viewed as weak qualification criteria for premier partnership status especially as channel organizations look to enter/exit deals on a profitable note same as hardware vendors. With Printronix, TSC will now be able to take advantage of the company’s defensible niche position in the industrial label printer market. I expect more systems integrators and solution providers – including Lowry Solutions, Peak-Ryzex, and Supply Chain Services – to now seek out a partnership with TSC with an aim to broaden their solution offerings and include newer brands as part of the portfolio, especially if they can get better price exceptions and deals while also meeting unique customer requirements in the industrial supply chain with all-in-one products.

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.

 

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.

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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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.

More AutoID Industry Consolidation on the Horizon - Who's Next?

How will the final quarter of 2014 shape up for the AutoID and Data Capture industry? Can the market accommodate or even handle one more acquisition? I believe it can. In this blog, I will highlight my top picks for:

• The company most likely to make an acquisition
• The company (or business division) most likely to be acquired

The AIDC market has had a rather interesting 18 to 24 months with some big name acquisitions. First, there was Honeywell’s acquisition of Intermec Technologies. When this deal closed in September of last year, the Federal Trade Commission (FTC) placed conditions on this proposed merger, taking issue with the competitive impact of this merger on the 2D barcode OEM scan engine market. In order to ensure that Motorola Solutions and Honeywell are not, essentially, the only vendors competing in the US market for this product category, the FTC afforded Italy-based Datalogic the choice of licensing Intermec’s 2D scan engine patents for the next 12 years. That aside, Honeywell now became involved in the development, manufacture, sale and integration of all core AIDC technologies (barcode scanners, barcode printers, RFID, rugged mobile computers, etc.), giving enterprises with AIDC solution requirements a “one stop shop” alternative.

And then there was Zebra Technologies’ rather unexpected acquisition of Motorola Solutions’ Enterprise business unit in April, 2014 for $3.45 billion. This deal continues to remain subject to regulatory approval, although VDC does not anticipate any issues here. Zebra has now gained direct entry into the broader AIDC market, making it a one-stop-shop much like Honeywell. In addition to its leadership position in the thermal label printer market, Zebra inherits Motorola’s leadership position in rugged handheld computing and barcode scanning, segmented entirely complementary to Zebra’s existing solutions portfolio. However, the deal does have us wondering. To what extent was its timing influenced by longtime Zebra partner Honeywell’s acquisition of Intermec and the addition of their printers to Honeywell’s solutions portfolio, rendering its partnership with Zebra essentially unnecessary?

No, I do not expect either of these companies to jump in and make another acquisition anytime soon. The industry veteran I am looking at is Datalogic, part of the “big 3” in the AIDC space, together with Honeywell and Motorola Solutions. The company last made an acquisition towards the end of 2011 when it bought Accusort from Danaher Corporation. Along similar lines, I would not be surprised if Datalogic considered acquiring Datamax-O’Neil (D-O), the printer division of Dover Corporation, a highly diversified manufacturing conglomerate. Datalogic was rumored to be very interested in buying Intermec Technologies. However, the purchase price ended up being too rich for them.

D-O is one of the leaders in the thermal printer market, with strong stationary and portable portfolios. Datalogic is now the only one of the big 3 to which the “one throat to choke” market paradigm does not apply. By acquiring D-O, Datalogic will not only own a comprehensive printer portfolio, but will also have a full solution suite to offer to its industrial automation partner and customer base. D-O’s mobile printer suite will also serve Datalogic well as it sells its mobile computers and scanners into retail and professional service environments.

In the past year, Datalogic has frequently emphasized on its focus on the industrial and logistics verticals. With a sharp focus on product innovation and feature support, D-O is boosting its position in manufacturing and transportation, while also, more importantly, extending its reach into non-industrial markets. The company’s performance in its core hardware category has stagnated in the past two years. Could being part of an AIDC industry behemoth help turn its fortunes?

From VDC’s perspective, a one-stop-shop approach does not necessarily give one company an edge over the other anymore. No data capture vendor is immune to growing enterprise investments in consumer devices, which is essentially taking away from their AutoID budgets. However, such an acquisition would, at the very least, help Datalogic get back on par with its two largest competitors in this market in terms of solution offerings. And that should be enough for now.