Q1 2020 Earnings Call

Greetings and welcome to the Cognex first quarter 2020 earnings conference call. At this time, all participants are in they listen only mode.

<unk> answer session will follow the formal presentation.

Anyone should require operator systems during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Susan can you may begin.

Good evening and thank you good joining us.

He was in Conway season.

Senior director of Investor Relations I hope, everyone is very well and staying healthy.

Joining us today are cognex is chairman Dr., Bob Sheldon.

<unk> CEO Rob Willett.

And Chief Financial Officer coal car, Jim and his team.

I'd like to point out that our earnings release and quarterly report on form 10-Q are available on our Investor Relations website at Www Dot Cognex dotcom forward Slash investor.

Contain highly detailed information about our financial results.

During the call we may use and non-GAAP financial measure if we believe it is useful to investors are we believe that will help investors better understand our results our business trends.

You can see a reconciliation of certain items from GAAP to non-GAAP inexact exhibit two of the earnings release.

Any forward looking statements we made in the earnings release or any that we may make during this call a based upon information that we believed to be true as of today.

Things all can change however, and actual results may differ materially from those projected or anticipated.

For a detailed list a brisk soccer's you should refer to our FCC filings, including our most recent form 10-K, and our form 10-Q filed Tonight for Q1.

Now I'd like to turn the call over to Dr. Bob.

[noise] like Sue and Hello, everyone welcome to our first quarter of 2020 earnings calls.

Tonight Cognex announced results for Q1 of 2020, which are pretty good.

But one quarter doesn't tell the whole story.

After a challenging gearing 29 team we were looking forward to improved macroeconomic conditions in 2020.

But all of that has changed in recent weeks.

And like many other companies we are now preparing for different cold days.

And perhaps months ahead due to the restrictions that governments around the world.

I placed on travel and on their businesses and on their citizens.

At a time like that's our strong balance sheet with 845 million cash in investments and having no debt.

Provides us with the breathing room and flexibility, but many other companies just do not happen.

Because we'll be able to continue our long term product development efforts, which should enable us to emerge from this crisis.

Even a stronger competitor position.

Hold in the past.

Right now where all participating mostly on this call.

For further details on the first quarter.

For a high level view of our plans in their current challenging environment.

I'll turn the call over to my partner, our CEO Rob.

Rob the microphone is yours.

Thank you Dr., Bob and good evening everyone.

Our results for the first quarter of 2020 were in line with our expectations.

Revenue and gross margin worked to live but at the high end up our expected range. It.

Operating expenses and the tax rate were lower than anticipated.

The team did a good job managing the supply chain. Despite some component shortages from Chinese suppliers [laughter] balloons delivery dates.

We now see many of those manufacturers successfully ramping up production, it's China goes back to work.

We also were able to successfully accommodate an unusually high number of requests to either accelerate or in some cases delay order deliveries in March.

In recent weeks conditions have become more challenging in most regions of the world's most notably in Europe and the Americas.

Many customers the Lux down operating with reduced capacity and that's impacting our ability to engage with them and get new orders.

[noise], particularly hard hit in the automotive industry, which was our largest and market last year.

There's a long term potential for growth that's the market transitions from internal combustion engines to electric vehicles.

The near term outlook has deteriorated significantly.

Many customers have suspended production and not allowing us sales engineers interfacing with these to help with previously planned automation projects that are now on hold.

[noise] in consumer electronics, we just found that it's too early to to predict the timing and magnitude at this years investment cycle, which we typically have insight into by now.

Our largest customers are asking for in fact counting on us to be ready with product shipments and onsite support for their advanced automation initiatives.

However, we recognize that there are risks around both the timing and the size of those automation projects given the current situation.

[laughter] best end market for US right now is clearly logistics, which was off third largest market in 2019.

Online E Commerce sales are accelerating as the result of Combet related restrictions I.

That's a recognized leader in machine vision and barcode reading for E. Commerce, Cognex is well positioned to capitalize on this trend.

Ecommerce companies and retailers with ecommerce presence are continuing to implement cognex vision and I'd products to increase both productivity and capacity.

Our technology has become even more valuable than this crisis as our customers are able to achieve higher throughputs on our better able to maintain social distancing and that distribution centers.

[noise] in the immediate view I'm sorry in the immediate future our priorities are supporting our customers at a time like this and helping cognoids be healthy.

Okay and productive.

Cognex is primarily a software company, we have the processes and systems in place, but cognoids to work quite effectively from that homes.

Most cognoids the now doing that working hard to maintain product development schedule, making video sales calls and product demonstrations and remotely supporting our custom is critical manufacturing and logistics operations.

[noise], we have taken measures to maintain a safe environment. So those employees, who are on site at cognex facilities supporting essential business functions.

We are working with many customers and critical industries, including logistics life Sciences, and medical related businesses that have formally asked us to continue supplying minutes for the current crisis.

Because of a move fast culture, where we're able to quickly come up with changes to our operations that allowed us to meet their needs.

In terms of boss supply chain sourcing component parts and accessories for him up for our products is a challenge, but thankfully, it's not a wide sprayed spread issue for us today.

We're managing well under the circumstances and we continue to work closely with us applies to mitigate risks to I'd delivery schedules.

In addition, our strong balance sheet together with our conservative manufacturing philosophy have enabled us to build a buffer critical component inventory for times like these.

Even so we recognize the possibility of further closures and disruption down the road.

Adding more uncertainty is the governments have implemented and continue to implement restrictions on the movement of people and goods.

These are indeed, very challenging times for our business that has suppliers and customers around the world.

[noise] regarding on new products early this month, we held a number of large scale live virtual meetings for our sales engineers and distributor partners.

They received an in depth look at on new products, including our groundbreaking insight de 900, smart camera, featuring featuring cosmetics industry, leading video deep learning software.

[laughter] leveraging insights widely recognized easy builder user interface. This product launch brings deep learning technology to a wider audience and allows customers to solve complex visual inspection tasks with relative ease.

[noise] also presented was the Cognex data man for 75 me the V is for verify.

They demand for 75 be isn't inline system that measures the accuracy and quality of a barcode based on globally recognized standards. Importantly, this is performed in line on high speed production lines as Dibacco did they imprinted on used in industries, including automotive life Sciences consumer.

Products and logistics.

[laughter], let's talk about Cognoids all people.

At a time like that I feel very grateful to be leading such a committed talented and creative group of people.

Throughout this crisis, they have exemplified all strong culture, working hard and moving fast in this volatile environment.

Oh work Cod play Hochmuth bus culture is a significant advantage on full display to all our stakeholders.

Customers our employees, our vendors the local communities and last but not least our shareholders.

That advantage, it's particularly affected because we strategized spread the year ahead and think about how we can work together to meet the needs of our customers and we allocate our efforts to promising growth areas.

Before we move onto the details from off first quarter I'd like to extend a warm welcome to our new CFO, Paul Thompson, who joined Cognex in early March.

To say that cosmetics joined at an interesting time would be something of an understatement.

Paul brings extensive experience leading financial teams and in strategic and operational planning after working at large scale businesses over the past 20 years with very pleased to have them with a.

Oh, Oh, but do you.

Thank you, Rob and Hello, everyone.

My first few months on the job has indeed been a unique adventure.

But I'm very excited to be part of cognex and to help drive our future.

I'm, particularly impressed with the people I've met.

Strong work ethic, and Cognex is moved fast culture.

I look forward to meeting many of you and the investment community in the coming months.

And I hope all of you on this call and your loved ones are safe and healthy.

Let's turn now to our financial results for Q1 of 2020.

Revenue was 167 million.

Dollars, which is at the top end of our February guidance I.

As expected revenue declined year on year and sequentially due to continued softness in automotive and the broad factory automation market.

Compared to guidance.

Decline in the manufacturing sector was partially offset by customers accelerating orders in March the buffer possible supply risks that they feared.

Despite the lower revenue gross margin of 75% represents an increase over both Q1 of 2019 and Q4 lighting as a result of a shift in revenue mix to higher margin products.

Operating expenses increased by 8% year on year and were down slightly on a sequential basis.

Over the past year, we added employees and other recurring costs related to the Sulabh acquisition, and we made investments to support our strategic priorities.

These expenses were partially offset by lower travel and other discretionary expenses in the quarter.

Operating margin was 13%.

Down from 17% in Q1 2019.

On a sequential basis operating margin increased by three percentage points as a result at the higher gross margin and lower operating expenses compared with Q4.

The effective tax rate in Q1 was 17% before discrete tax items, which is lower than our expected rate of 19%.

It was shifted income to lower tax jurisdictions.

Excluding discrete tax items earnings per share were 11 cents in Q1, compared with 17 cents in Q1 at 29 team an 11 cents in Q4.

Looking at the change in revenue for Q1 year on year from a geographic perspective.

Asia performed the best of any region as a result of higher revenue from consumer electronics.

China increased in the mid teens over a relatively weak quarter, a year ago, Despite business shutdowns and the rest of Asia grew by approximately 20% in Q1 year on year.

Revenue from the Americas declined by high single digits year on year.

This was primarily a result, and the timing of revenue from logistics.

The logistics sector as Rob noted continues to perform well for us.

We're building a substantial order backlog to be delivered in the coming months when access to distribution centers is less restricted.

In Europe revenue declined in the high teens year on year, due primarily to softness in automotive.

Unfortunately, we don't see many bright spots in Europe at the moment.

Turning to our balance sheet as noted by Dr., Bob we ended the quarter with $845 million in cash and investments and no debt.

Cognex has a history of consistent cash generation as well as a financially disciplined board of directors and management team.

Uses of cash are primarily to support our long term growth objectives.

We also share on many years of success with shareholders stock buybacks and dividends.

In that regard, we repurchased 1.2 million shares at cognex stock totaling $51 million in Q1.

How did the new 200 million dollar authorization to our repurchase program.

We are fortunate to have the ability to continue the buyback program and still have cash for acquisitions if opportunities arise.

We also paid nearly $10 million dividends to shareholders.

Now I'll turn the call back over to Rob.

Thank you pull.

Those of you follow Cognex note that we typically provide guidance one quarter out.

However, given the current business shutdowns widespread travel restrictions and potential disruptions, we may face in our supply chain, there's too much uncertainty today for us to be overly specific.

Our customers and vendors type shed some of that plant with us, but they're also facing on certain things.

I can't say, however that we believe both revenue and earnings per share excluding discrete tax items will decline in Q2 on both a year on year and sequential basis.

Although we have performed reasonably well overall in April demand in the overall factory automation market is deteriorating, particularly in Europe and the Americas.

Gross margin for Q2 is expected to remain in the mid 70% range, although lower than the gross margin reported for Q1.

As for expenses, our leadership team has experience with severe economic downturns and we are working together to aggressively manage costs.

We expect to reduce operating expenses in Q2 by greater than 10% on a sequential basis.

Savings include lower travel and discretionary expenses and a more restricted hiring plan.

Lastly, the effective tax rate is expected to be 17%, excluding discrete tax items.

Now we will open the call for questions. Operator. Please go ahead.

Thank you I.

At this time, we will be conducting a question and answer session.

If he would like to ask your question. Please press star one on your telephone keypad. It confirmation tone indicate your line is in the question to you.

You may probably starting to if you like to remove your question from the Q.

All participants using speaker equipment and baby necessary to pick up your hands it before person to Starkey.

Please limit yourself to one question and one follow up prior to getting back into Q.

One moment, please while we pull for questions.

Our first question.

It is from Jim Ricchiuti from Needham <unk> company.

Please go see what's your question.

Hi, Thank you good afternoon I wanted to just.

If I could go back to the comment you made about.

Rob that I think you made that usually high number requests to growth accelerate or delay was the net effect of that more on the positive side. It was that tied more to the comment you made about consumer electronics in Asia.

Yeah, Hi, Jim Yeah. Thanks to your question, so I'm not what really what I was referring to was right around the ended the quarter, we store quite a few customers, saying asking how bad delivery dates moved and earlier and we saw others say you know they wanted them pushed out I would say net.

Was caused us probably an increase perhaps with a few million dollars, but it was both ways and it wasn't really industry specific I would say.

Got it that's helpful and it sounds like you're still.

Moving pretty or at least a the activity level on the logistic side is still encouraging and I'm wondering if I look at your traditional brick and mortar retailers, which I guess has been a a fast growing part of the business How's this business holding up I mean, how would you care.

Dr rises is holding up because you're aligned with some of the key players who seem to be doing better in this market presumably.

Yeah, Jim I would say you know I've been segment. It like this that customers who are have become proficient in E commerce, whether they started their or their you know moving.

Coherently and aggressively into into E commerce.

You know I'd say, they're doing well you know there that they see a lot of business and they moved their systems. You know online right. Those do happen you know I think I think we're seeing their businesses deteriorates. So I think ecommerce players I think you know very well positioned to succeed as a result.

It's going on at Cognex, I think will succeed with them and I would say that's the part of logistics, obviously, where were strongest or have larger share. But then there are certainly those customers more traditional E commerce bricks and mortar players who have an automated their interactions with customers and taken them online and then other companies you know we considered.

Possible logistics business, maybe global post offices airport baggage type businesses that I think a you know looking at very very weak at this time. So we would expect to see up business with them drop off.

But the summer ramped from one customer is that still on track and I'll stop there, let somebody else Basque Yeah, Yes, Jim you know certainly I think I think the timing of it you know what's the timing of some of the bigger logistics orders. We have you know will depend on their ability to implement you know a lot of these.

Companies are operating at higher rates than they've ever operated out at their highest peak moments in previous years. So the idea that we couldn't go in stop the line and do automation implementation. At this time is is is obviously not happening although orders are coming in I think a good clip in that market so our ability to.

Caught that as revenue I think you know certainly as the second half phenomenon for us at this point and the timing will depend on a number of factors, one, which certainly is our ability to get access to that facilities and their engineers to implement these improvements.

Got it thank you.

Our next question is from Joe Ritchie from Goldman Sachs. Please proceed with your question.

Hi, Thank you good afternoon, everybody hope you're all well.

Hi, John.

Just just maybe just touching on the on the China comments I saw I thought in the Q.

It was up 16% this quarter I'm just curious like you guys hit the high end of your revenue range for the quarter. It seems like it was fairly orderly at least a in Asia Pac as we're coming out of you know in and things are starting to normalize in China, you, maybe talk a little bit of.

About like what the order patterns look like as the quarter progress and if you can provide some more commentary around you know what really drove the strength in China. This this past quarter that would be helpful.

Sure Joe you could just some color on that so yeah, I mean, I think entering thing about running a global business is you've sort of seen this kind of a challenge kind of they've all around the world and we started we started in January in Asia I was in Asia in January and you saw the challenge that it was putting on Sept.

Like agents and then China got into Chinese new year, which is always slow and then wasn't able to come back you know for a number of weeks after that.

But you know there they're ahead and what we now see is that a production you know from both the companies we source hot from but much more importantly, really I guess in this case our customers. You know is starting to come back and I would say came back in much quicker than we expected mostly due to higher.

<unk> is really in the electronics ecosystem.

And April continued to improve as the result of China production coming back and we're seeing a manufacturer to be pulling forward orders in some cases to reduce the risk of shortages in their supply chain and so we've been I think very effectively managing this shifting demand at that time.

But then you know there as old as we can all read I'm you know, there's still shifting schedules on actually when production in certain lodge electronics businesses will ramp up so certainly that some you know that someone in Dallas, we look for the timing of some of these things, but what we did see was you know.

Foster pick up in March than expected continued ramping and then you're pretty pretty aggressive action to make sure that Ah that companies were supplied you know are coming out of the this challenge.

Got it that's a that's helpful. Rob and I guess, maybe just following up on that on that comment and you're in some of your prepared comments on consumer electronics is it is.

You said that your customers. We're me we're wanting to make sure you guys were ready when they were ready to kind of maybe turned they get back on from a capex standpoint, I guess at what point do you guys think you'll have visibility oh, and what what or maybe kind of what are some of the indicator you're looking for.

I just from a timing perspective on when you think they'll be ready to make those types of decision, yes, it really accelerated investment again.

Yeah, it's a difficult question because normally at this time of year, we have that visibility and and we you know and we don't have that at the moment I think I think really the primary issue here is the ability to scale up manufacturing and I think you know some you and.

Obviously is going on in multiple countries. So that's that's a part of the challenge, but your China, followed by probably Vietnam, and and Korea, you noted that the key markets and it's the ability for 'em those those markets to be to be ready to really scale up and I do think on it's not.

Just a matter of getting people on site and process is on site. It's also a matter their suppliers.

Sometimes who are our OEM customers and to be able to supply products to start up, particularly watered would be lodge news new products, which can be you know I'm, a big part of our business and in this market [noise]. So I think it's going to happen I'm, sorry, I'm confident that the timing of it.

Magnitude of it I think.

More in question I've said it took slightly about this is our law school. When I said, you know and issue can become as a window in which to implement set new features and if that window with shorter it likely means fewer new features get included a new products that have launched so any extension of that window can be helpful. For Cognex you know we can provide more.

Engineering support and more technology and production, but but obviously it will mean the revenue that we used to seeing in Q2, well Q3 is certainly going to be a second half phenomenon for us this year.

Oh, it makes a lot of sense appreciate all the color today.

Thank you.

Our next question comes from common law from Jordan Haskett. Please proceed with your question.

Thanks, Good afternoon, everyone welcome Paul Oh, I asked on on a about project increase I realized in terms of sells a lot of your it's impacted by a ability to deliver onsite when curious when you look at your project inquiry from customer.

Chris I, they still pretty robust across geography, and end market. It sounds like from logistics standpoint, that's still pretty robust, but you can't pro fight some comments and in terms of what you're seeing Transcept project in Korea, I'm, just trying to gauge yeah, when things start to improve Andy.

Restrictions get lift and you know how quickly can I'm kind of bounced back so.

Sure. It's it's not really one I'm sorry considerable must go around the world and give you a range of concerts hair care and I think you know certainly in <unk> in China, I think we've seen a very as I hinted or or talked about we've seen a good ramping up that business activity.

In the last few weeks and Ah and then in in a in America, we actually saw decent activity until you know three much and even enter into the started April but then we've seen that full off quite significantly.

And a you know it and then Europe, a similar case to America, but but more so I would say we saw overly activity where the fall off so it if ones to draw in analogy that you know Europe in America like Gonna come back like Asia, you know well, we would see it starts to come back as the market stocks to open up but of course out.

Businesses in these markets are very different or Asia is much more of an electronics business. You know so a lot of the demand that can be driven by ramping up. That's you know major electronics products that are slated for introduction around the holidays right well in Europe and America, it's much more of an automotive phenomena.

And certainly you know the automotive industry I would say I think into that in my or as I mentioned in my prepared remarks looks like it's much more seriously impacted at the moment than those others.

So it it's difficult to give you want to answer I would say you know we were perhaps a little surprised at how well demand in Europe and America held up through the end of you know in terms of activity through the end of.

Much and even into April, but then we've really started to see a decline and then the opposite picture in China coming out we were quite I think surprised at how well activity seem to be picking up their post you know kind of loosening of restrictions.

Okay. Great appreciate the color I guess and then on the project side. Just curious are you seeing a much push out and cancellation projects across many sectors. So in other words, yeah, maybe and yes as things start to improve you know we start you see some pent up demand come back but.

A lot of these projects that wedding planning phase, thank god halted and sell restocking Bam what sort of take time and that in turn treat something like airport air pockets, whether it's an auto I, let just say do you see how are you seeing any kind of that like you know Hawthorne cancellation right now that would give you maybe as much.

If I may still an air pocket down the road.

Well again, it's a complex pitcher all kind of go through the industries in kind of to come up. He said I think correctly with logistics I think we're seeing a lot of potential you know a growth getting deferred later in the year and more intense interest. So we feel that's the best industry for us.

In electronics it it's a difficult cool I think I mean, I kinda, how that's going to play out certainly second half phenomenon for us I think in automotive a you know I another way to sort of look at the automotive industry for US, which you know is a big part of our Americas and European businesses and MRO tight.

Business more maintenance you know is really just very very weak at the moment as planned the shutdown and budgets are put on ice.

I would think that has to come back at some point as you know business starts to pick up but then then on the capex side to the existing plants will say that to me it looks pretty weak relatively on hold awaiting pumps to start up well strategic investments I mean are things like new vehicles or electric electric.

Nicole looks stronger right. So I think you know that's probably the part of the business in automotive said is likely to be prioritized much as we prioritize you know most you know the most important long term technology for US I think we're going to see that in industries like auto as well.

And then yeah I think other industries. Some you know some of whom we deal with you know we have a wide range of other industries like what we sort of might refer to them as packaging type businesses in food and beverage pharmaceuticals medical devices.

I think a we might probably a phenomenon we see there isn't a slowing down at the mine basically for the same issues that companies operating under very restrictive situations, where their workforce is very limited as well they can do.

I think there you know those industries I would expect to be relatively strong whenever they start to come out of the situation because I think demand for them in some areas that that business is quite strong we read about that consumer package goods strength for instance, but and I think back where we might see in that industry. Some pen.

Tough demandware companies want to implement improved automation projects, but just don't have the capacity to open that plans and bring US and then have us work with engineers land or operating under social distance thing.

Okay I appreciate the color. Thank you [noise].

Our next question is from Joe Giordano from Cowen. Please proceed with your question.

Hi, guys good afternoon.

Hi, Joe.

Just wanted to make sure.

Second square or some of their commentary on consumer electronics. So.

You mentioned that China came back strong electronics, leading that but also at the same time like not having much visibility at all in terms of like the big the big builds from the major customer so like what's driving that now is this kind of like ramp up of suppliers to those large players like you're getting them kind of ready for them to manufacture their parts.

[noise], Yeah, Hi, Joe I am.

I think we've we're all expecting that to 2020 to be a pretty strong year for electronics, particularly around fiveg and others. Some of these technologies. That's the plan for rollout. So I would say probably some of what we're seeing a the supplies those technologies gearing up production.

Got it.

And then I just wanted to make sure understood. The comments on on auto. So you know obviously when when when these markets open up there will be no car sales will go up but obviously, that's not where are you guys are so tight like you mentioned the R&D type projects, you expect that to come back, but not the traditional capex.

Maybe I misheard that I was writing something down so can you can I go through that again.

Yeah, Yeah, I mean, I I'd I would say, we segmented the MRO kind of maintenance business right. You know if they want to shut down that business is not really happening.

<unk> Punctual open that'll probably come back right, then I think I would segment capex into two pieces, there's like existing clients right I think I think probably with the automotive industry in quite a lot of financial distress or challenge at the moment Capex then existing plans I wouldn't expect that to come back very quickly.

I think it will be challenged then the other capex, which is really capex at and strategic projects, new new vehicles, and new technology is being implemented.

Patrick vehicles supported as one example of that that business I expect I'm you know, we I see that remaining strong through this period I think it's the future of the industry and I don't think I think it's the things that companies will at least one to compromise on.

That's great. Thank you.

[noise] [noise]. Our next question is from Richard Eastman with Baird. Please proceed with your question.

Oh, yes, thanks essentially question welcome Paul.

So.

Just quickly to struggle alone and stick on New York consumer electronics for a minute to Rob.

The business in the first quarter was again strong in China, and and the rest of Asia stronger.

Is your business there with some of the component vendors and assembly and some of the component vendors that we're going to the final devices, you know that the applications at call. It mixes involved in.

You know and I'm thinking perhaps displays were some of those you know components that are going to end up.

In a logical place come fall is that is that where the strength is in particular.

You know are outside of China.

[noise] a broadly speaking Rick yes that that that's correct that component.

Keep key components and technologies, particularly coming out of Korea in Vietnam, I'd say, we've seen some strengthening of that and no I don't we'd be so that coming and its its continued.

And just and then related.

Does this the scale up there does it provide you with any sense of of demand as you look forward you know towards the end of the year, you know given product strategies product portfolios from your bigger customers.

Well, yeah difficult difficult cold and make really I would say because you know well one might say, yes, you know it seems like people are scaling up experience working in this industry tells me that that's not necessarily the case like some some suppliers maybe building capacity that won't be fully utilized right other.

You know what others May see you know demand come on much stronger and then we'll be hustling in the middle of the year to support increased throughput there. So I I wouldn't necessarily draw a linear relationship between what weve seen at the beginning of the year and while we're gonna see now at the back ended the year, but it has to be a positive sign.

Mm Hmm [noise].

And then just with the with the assume kind of line of reasoning just did your Cogs slowed down given some cognoids maybe moving from a you know traditionally from cars over to you know your R&D.

<unk> is R&D up in Cogs down because of your mix in the quarter.

Paul do you want to all the sponsor though.

Sure.

Yeah, Hi, Richard I'm now really I mean, the margin was was mostly a product mix phenomenon. So you know we have a wide range of margin to all all much healthier than then my my former employer and that makes up our gross margin. There really was just a higher share of some software revenue as well as.

Revenue in consumer electronics, which comes in at higher revenue General higher margin generally and then the the revenue was also the show the margins also improved.

In the quarter that was really the big driver I don't think there was.

Big difference in yeah.

Already or do you any that hit opex versus versus had cogs for the quarter. Okay. So it is not without without reply than the R&D from a dollar perspective does it.

Does it just run out pretty much of the current level I.

Renault quarterly.

Yeah, I'd say broadly speaking I mean that you know we have we have reduced our discretionary expenses as noted in the call 'em. We were down you know from Q4, and we expect could be down in Q2, and we think about across all of our operating expenses, we don't do kind of line item.

Differences in.

<unk> per se for for already any versus SGN, a weak. So we do expect them to be down sequentially, though I would say some of the factors are more likely to sales such as reduced travel for instance in the quarters more likely to hit sales and say, then NRT any but restrictions on hiring or discretionary expenses.

Be would be pretty broad based I'd say.

Okay.

Awesome well. Thank you thanks for the questions.

Our next question comes from Nick.

And we could you from you'd be US. Please proceed with your question.

Hi, guys. Thanks for that for the time and welcome Paul I'm. Just a quick question I just want to try to put a finer point on some of the commentary, but we March a mom can we kind of get a a magnitude or the the decline we saw in the U.S. and Europe.

Jimmy China was little that's all.

Better.

In March.

Sure. So you are quite you you you know I think.

I'm not sure I'd describe as much as weak necessarily I think you know we are on the high end of the guidance, but we did see a lot of both pulling in and pushing I'm going to have orders. So I'd describe it more as noisy you know and I guess it depends if you're measuring against our expectations as well, we thought well or weather.

Whether whether you're referring to kind of year on year.

So, but I think you know in the Americas for instance, we did see customers, placing some investments on hold and canceling projects as a result.

ER fund closure is you know distancing protocols lower consumer demand.

We certainly source that some of that and Ah. We saw you know other industries in America, holding up very well or even you know upping their demand from us, particularly in areas like life Sciences, and medical related businesses, who obviously a thing a lot of demand related to the current met.

Nicole Cobot situation.

So, but I'm not sure I'd necessarily onset Youre your question.

Well, Yeah, I mean, I was just kind of sad when looking at U.S. and Europe right down a double digits a year on year, both geographic areas, but just trying to get a gauge of if that was kind of in the March mom, an order of magnitude how hot.

Now how it kinda was impacted by the shutdown.

Yeah, I think if I'm to.

But the good you know.

Give another explanation and another way of looking at it would be automotive right. I mean, I think we really saw a deterioration in automotive, which we didnt see in other parts about business in Americas and Europe as we came through March into April.

Okay great.

And that's just kind of when thinking about the pushing in pulling acceleration in the acceleration and delaying orders from the delaying side have you guys pursued a full on cancellations of orders or is it just kind of indefinitely delayed.

You know until she kinda give more clarity.

Well certainly we've yet suddenly we're seeing some some cancellation of orders not not a large amount or anything but you know it certainly some customers have cancelled orders.

And then definitely delays than I'd describe the delays as short short term delays what literally I you know in in a number of cases, we've shipped product out product out to plans and or <unk> and they've been and then when they arrive to plots the closed right. So [laughter]. So you know they're coming back in some situations like that.

A in a in you know in and in other cases them as we mentioned, they're getting accelerated really worthing customers are worried about being able to maintain production and and getting out product as soon as possible, perhaps concerned that companies like us wouldn't be able to supply on a regular basis, where it we're not concerned about that but I can see.

Among our customers there isn't sense that perhaps as we do in our own personal lives. There's a hoarding phenomenon kind of going on in thinking but supply chain for electronics maybe.

Elongated and and a they need to make sure they getting bears before I lead times go out.

But actually the time does I'll leave it there.

And once again as a reminder, if anyone has any questions. You May proceed star one on your telephone keypad doing so well placed to something so the question Q.

Our next question is from Andrew Buscaglia from Berenberg. Please proceed with your question.

Hey, guys one of the quick clarification on I'm, just gross margins going forward and that you you know it seems that it seems as though electronics is picking up you're seeing some some better mix. So.

You might have said that I've met I missed it but just why wiser by the sequential decline gross margins and then presumably if you.

If things improve.

Towards the back half of the year for that segment do you think you can grow them this year.

Year over year sure.

Yeah, Yeah, Andrew this is Paul.

Yeah, So our gross margins that 75% in Q1, you know, we're we're obviously and high and driven primarily by that the mix of business they'll hire electronics and then even just particular subject sub segment mix within that the mix of different products and and so on as we have quite a quite a range.

Going forward for Q2, Yeah, we do expect them to be lower and again that is that is largely a mix, but all that on as we talked about some deferrals of of logistics revenue logistics is a strategic priority for us.

It's comes with improved margins over time, but still dilutive.

To our to our to our our base business. So as that continues to grow we will see some margin pressure, but overall, we expect to be roughly in the sort of mid seventys range that but that we've been historically.

Okay got it.

Okay and.

Sort of Oh.

Comedy lot people are making a yeah throughout this whole crisis is you know the new normal once we emerge.

Are you guys hearing anything around you know the trend towards three shoring that seems to come up.

As you know you you'd be a long term beneficiary of that but curious if you had some conversely conversations yet to date on that.

Yeah, Hi, it drop here, yes, I would say there are lot of potentially very positive things for machine vision, you know kind of when we come through this its course, but I, but I wouldn't risk I wouldn't list the re shoring of manufacturing.

That's very high on the list in terms of Oh, you know, what we're hearing or intensive.

My own <unk> views about it.

Clearly E commerce fulfillment will benefit from this situation right and logistics will become increasingly automated and with more flexible operations and yeah. We even in the short sentiment thing people don't want to be sharing touched items like handheld barcode readers and Cognex has you know the best.

Fixed Mount barcode readers and the wells and a you know I think we're seeing more interested in them.

Placing handheld barcode readers. So you know there was that there was a kind of some things one seized on I think certainly a visual inspections in manufacturing with large groups of people sitting close together as you see in China. You know certainly that's a phenomenon I think which is likely to play too.

Automation, and you know and and operate a free manufacturing. So you know basically where we're placing the eyes and brains in manufacturing with robotics and automation I'd say, obviously medical applications. You know I think a probably will be a beneficiary of what we're seeing as well you know weve been working.

For many years on the life science market and it's been a a long road for us, but wonder why we've developed a lot of really good customer relationships and a lot of important design wins and we think there you know that that will also be a market that will be better and better from machine vision and will benefit from what we can bring.

And were deep learning as the role to play, replacing kind of lab technicians and more quickly automating so and I think I think probably also if there's something we've all observed living through this is that connectivity is really important so whether it's five GE or what kind of electronics things, we're seeing and.

You know the kind of.

Dr., we're seeing in the semiconductor industry right now is going only be I think accelerated as the result of all of that so a lot of very very positive things I don't see you know it could I I global a movement towards re shoring as as a result of this but you know I I wouldn't claim to be an expert on that subject and then you know obviously to temper.

With that I think automotive is likely in for a prolonged slow down. So I think that'll be you know a drag on a lot of the very positive things, we expect to see coming out of that at the situation.

Okay. Thank you.

Our next question is from Paul Coster from Jpmorgan. Please proceed with your question.

Yeah. Thanks last question really kind of got 2.1 thing called the normal so but many of my questions have been <unk>, but I'm just a couple of things what do you seem to believe the auto industry is going to take longer to come by it's just it's not simply a function of just how are you know smoke stress. There is one that balance sheets and the built.

The news constrained in investing for a period or do you have you juice or believe that the ice to eat the transitions can take longer for some reason.

Yeah, I pull as well I would say, what's making me say that conversations we're having with customers certainly you know tier one suppliers and ER and brand you know brand owners, you know, who who were had a difficult year last year and I think we were expecting to see that business sort of turn around.

You know optimistically in the back half of this year and I think we no longer think that's gonna be the case. So so I think that's one factor. Another factor would be you know I have to believe that consumers are gonna have less cash to spend then less ability to take out loans to buy cars. As a result of this so I would imagine.

And my sense is from this conversations I've had in the and the industry that that's got to be weighing on People's minds also if there's a countervailing factor to that though it may be that may be government stimulus you know what I have read certainly as you know I'm I'm not there's no no particular inside of having to this other than the just reading and being in the IND.

History as you know some some major automotive businesses out you know a pressuring governments to try to implement buying back of older cars and investing in stimulus around electric vehicles. So that's a general sense, but I really have no clarity on that subject for you.

Got a if this recession you lost for more than one quarter and is the for more than one quarter over so there could be very last thing.

Consequences, but I mean generally speaking called makes his view of its long term growth opportunities see how much does it change those results of what we're going through at the moment.

It's difficult to answer, but I would say it hasn't it hasn't changed we still very strong believers in a machine vision and a you know the the the importance of automation and the growth of automation and they're all we have to play in it and those kind of those growth drivers that we discussed at analyst day in and since things like.

Deep learning logistics Fredy industry four point, though we think those are all intact and ER and I also think you know the strength of cosmetics and our balance sheet and I'll willingness to invest for the long term autzen mean, where it better positioned than most of the industry as we come out of this.

Got it thanks, so much.

And our next question is from Jairam Nathan from Daiwa Securities. Please proceed with your question Hi, Hi, Thanks for taking my question I, just well, let's see on just going back to this DNA expense a bit here you mentioned in the queue that.

It was somebody a location to regions with higher labor costs and at the same time it looks like.

The U.S. in Europe, I, probably so you see less real push studies will grow there. So can you kind of explain that chrome and EBIT morning than I had a photo.

Yeah, Yeah, I mean, it's your question about our expenses in those markets are how we're investing or I'm not quite sure what you're asking yeah. So in in that Q. You mentioned placed DNA expense you saw an increase in some of that increase was related well. He said it was related to sales based.

Those as being shifted to hire two regions with higher labor costs.

It does and so I know it because I know I, yeah, I don't yeah. Thank you I do I I think probably I'm sorry, if we confuse you said, it's not necessarily sales resources moving geographically, it's moving functionally. So for instance, you know certainly we were fortunate.

At Cognex to have a lot of very talented sales engineers do have deep knowledge of machine vision. So we know we're pretty use to reallocating them dynamically to areas, where we see growth opportunities. So we might for instance, that'd be will be moving them towards logistics and away from automotive.

That's a I think that's probably what we were trying to get at.

Okay got it and if I look I've a follow up just wanted to understand a in a given the situation are you seeing a more favorable are attractive M&A opportunities, which we've given you about in sheet you can take advantage of.

I think it's a it's probably too early to say that I'm, you know, but you're right. We have a very strong balance sheet and a you know we're not afraid to be opportunistic and certainly we spend a lot of time studying and thinking about acquisition opportunities in the market, but I think anyone who's covered cognex for a long time knows that we're very selective about.

The the companies, we acquire and some of those companies that I think perhaps have weaker balance sheets are might be challenged by the current environment aren't necessarily companies, we would want to acquire there they wouldn't fit well within a high gross margin you know high performance.

A move fast kind of culture, so I wouldn't expect us to see to see us, making any kind of large bolt on acquisitions with you know many many hundreds of people. That's if you look at the acquisition. We've made it's more around technology companies, we have great engineering, great products et cetera, there are plenty of those but it's not clear to me, whether they're becoming more.

Our actionable as a result of what they're seeing but when when if and when they do you can bet, we'll be looking at them.

Okay, great. Thank you.

And our next question is from Josh.

Oh portray winski from Morgan Stanley. Please proceed with your question.

Hi, Good evening all in a welcome Paul.

[laughter] a question on electronics, Yeah, I guess with some of the or some customers now you're telling you that to be ready you, presumably it comes with a little bit of detail on kind of ready for what you know any sense Rob on how.

Oh, yeah, five GE or if some of the other newer technologies.

Add to Cognex is kinda area of opportunity or content in a plant I know the ambition is to get more over time and there's other stuff that can do that but is there anything about this new product generation a that's coming out that is a another kind of step function shift for cognex kinda like we saw with Oh wed.

Back a few years ago.

[noise] right yeah, yeah. Thanks to the question that I didn't think our view about this that this topic has changed over the last six months in general I mean, I think where we're very connected to large players in the industry and we see some of the challenges that you know it exists with Fiveg you know front you know challenges around.

You know that that the power requirements of Fiveg technology that that the date, you know the danger issues around batteries et cetera handling those and into inserting then the some of the new sensors and screens and multiple screens and all those things that we've been talking about for awhile. So I you know I I sort of see those things because as kind of.

Making progress and the automation kind of gearing up to be able to implement what in product Road map I think more the issue changing coming out of this is the magnitude of that in the second how that's maybe a more difficult things. We call you have to think that I have to think consumers would be less ready to spend on high end.

Technology, and new technology as a result, this but I'm I'm not I'm not I'm no expert on on back so, but I I think I think we see quite clearly that machine vision has a key role to play in the implementation of Fiveg technology, and new technologies coming into electronics I think that the question is.

The timing and the magnitude of that the timing clearly prices second half the magnitude is still a little you know a little unclear I you know I wish last year last few years, we've been able to give you quite a lot of clarity at that stage and it's different this year as a result of what we're seeing on that in the in the global health six.

Duration.

Understood and then just shifting into auto Oh, Yeah, Rob can you talk a little bit about customer diversity. There you mentioned kind of us more shallow recovery, maybe some challenges in the industry yeah. The imagine some some smaller or weaker players might not survive yeah clearly in Alaska.

All of years, there's been kind of an explosion of of Ah, yes, newer car companies, particularly in China, and maybe not as impacted but can you talk a bit about how well you feel like your diversified and if you do see some players go away that you know if that into being an issue or you know more temporary setback.

Yeah, I I Cognex is very very globally diversified in terms of dealing with a really all the major tier one suppliers and really all the major and use the brands.

No were less well penetrated yet geographically in Japan as you as you might expect but you know we have strong relationships.

And would be on the preferred supplier list of almost every automotive.

And you know are.

Are we EM and ER and tier one supplier you know globally. So I think we're in good good position. There I think if we could companies fail and you know I'm no expert, but I would say they make a acquired by other companies and I think that that that should play out well for us given what we've seen happen industry over the.

The last few years, you know and then I think a machine vision, it's a very important technology for manufacturing lithium ion batteries right and we all know that that said you know key enabling technology for electric vehicles and capacity is growing very quickly and cost to come.

Being down very quickly and it's a very intensive process I mean I'm in some cases 30 different steps.

Most of which involved machine vision. So there was a markets I think that or should be very strong for us and I think that's a long term phenomenon with at least six global players competing for process you know process capability in technology to win. So you know I think that's a long term phenomenon that we should be well position done our industry should be.

Well positioned to go on benefiting from for some years.

Got I appreciate the color all the best.

Thank you.

And we have reached the top 30 hour. Therefore, we have reached the end of the question answer session and I will now turn the call back over to Dr. Schulman for closing remarks.

Thank you as I've mentioned, our strong balance sheet, our culture and our focus on the long term.

We will enable cognex, whether the current disruptions better than most companies.

But business is not likely to improve until lockdowns end.

In that vein, we urge governments to better balance the risks of called bid with a disastrous affects the lockdowns are having on our economies.

And on our lives.

Thank you for joining US Tonight, I will speak with you again.

The next quarter's call.

This concludes todays conference and you may disconnect. Your lines at this time. Thank you for your participation.

Okay.

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