Q2 2020 Cognex Corp Earnings Call

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Good evening, everyone. They keep is joining us today.

With us for Cognex is chairman Dr., Bob Sheldon, President and CEO, Rob Willett, <unk>, Chief Financial Officer Paul.

I'd like to point out originally quarterly reports on form 10-Q.

Well on our Investor Relations Web site.

Do you W. W Dot.

[music].

Okay.

Information about our financial results.

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

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Any forward looking statements we need to be originally.

Any that we may make during this call based upon information that we believed to be true today.

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Where do you feel blessed with south it should refer to walk you keep filing.

Including our most recent form 10-K, and subsequent quarterly reports on form 10-Q.

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

Strikes true Hello, everyone and welcome to our second quarter of 2020 earnings.

It has been very busy three months since I talk to you.

<unk> as you know since that time can then our business and most others haven't deteriorated substantially during the world wide government ordered shutdowns attributed to cope with Nike.

Because of that we'd have to make it difficult measures to align our company to the slow down.

Not resulted in large write downs in your Q2, which severely affected our reported send out your oh.

The details on those results.

Our next has been doing this past quarter I'll turn the call over to my partner Cognex CEO, Rob Willett.

Rob the microphone what's yours.

Thank you Dr., Bob and good evening everyone.

And I called announced financial results for Q2 of Twentytwenty reflect the difficult business environment, We expect it when we talked with you in April.

Good news to report is the revenue increased by 1% over the prior quarter.

This was better than we anticipated due to off Austin unexpected liberate honest substantial backlog of orders from the logistics market.

Called can always worked hard to manage our supply chain and deliberate called next products to customers despite significant component shortages.

However, revenue declined by 15% year on year due to lower spending by customers in Europe and be American.

The downturn was most noticeable in the automotive market, which we thought lucky and market in 2019.

Gross in logistics.

<unk> and life Sciences helped offset that decline.

Business activity is improving but demand in many of 'em pockets is weak and is expected to remain so trendy ended the year.

Despite that there were two areas of strength in our business that are contributing positively.

One is the E commerce sector of logistics.

Even though most we tell stores airport baggage handling customers and Postsurgical accounts, a struggling major online big box retailers stepping up their investments in cosmetics machine vision to enable high at Freeport and productivity and that distribution centers.

The other sector, that's doing well is consumer electronics.

We are now delivering it locks deployments at cognex products that we expect will be recognized as revenue in Q3.

In addition, we're pleased with how productive Pos sales team as danger in these times of limited customer access.

Sales noise, an application engineers have been successful holding technical discussions on product demonstrations Bard video conferencing and winning a lot of business in this matter, even with new customers.

Next let's talk about the plan, we announced during Q2, so lower Cognoids head count by 8%.

The decision was a difficult one given our company culture in the valley, we placed on perseverance, but it was something we have to do given the circumstances.

We entered twentytwenty stops to achieve significant new revenue levels, perhaps exceeding a billion dollars engineer or too.

But unfortunately that is unlikely to work yet occur due to the economic disruption and therefore, we right size the team for more modest near term growth.

As part of the restructuring we saw an opportunity to reduce duplications redundancies that had built up in our business from years of global expansion at acquisition.

We reorganized our engineering teams around the world in a way that we believe sharpens our focus on specific growth areas and enables us to leverage cognex is unique capabilities more efficiently.

After the restructuring we still have the capacity for significant growth.

We've not changed ballpark roadmap, nor have we delayed new product development.

We're also moving forward with other initiatives such as I T systems upgrades process improvements and projects to support future growth.

Another development in Q2 that I want to addresses our write down up a portion of the deep learning technology that we acquired in October with Sewell out.

We're confident in our deep planning strategy and believes to a lot has an important role to play a web. So a lot of technology required hands on application engineering and in person collaboration with customers and that's difficult to do in the current environment.

As a result, our projected revenue for us to lap has been pushed out, thereby reducing the valley with that asset.

We continue to be bullish about our overall deep learning business deep learning bookings have increased by more than 50% year on year, making it off Boston is growing product category.

A major step with the launch Cognex is insight de 900 smart camera in April.

Do you 900 makes a ton steep learning technology accessible to the tens of thousands of manufacturers, who a standardized that factory automation on our industry leading insights platform.

Initial sales are growing nicely as customers discover how effectively the de 900 finds defects on complex pots and accurately beats badly deformed skewed and coeliac codes.

In other product news, we launched the insight 85, low fives, Pete a high performance might make a pixel smart camera with Cognex HDR plus technology is ideal for integrating into tight spaces on production lines.

It's important for Asia region, where electronics manufacturers and Oems value its combination of precision speed and small form factor, but demanding applications such as inspecting assembled devices the manufacturing defects.

We are proud at these new insight products and doubling proud to have launched them in the current environment. They demonstrate the advantage that our culture brings us we effectively what to get that your whitney's challenging times.

Well many cognoids is still working from home, we're maintaining our product development plan and remaining on schedule with our operations I'm process improvement plans.

Regarding supply managing a global supply chain continues to be a challenge currently but we're navigating well under the circumstances in Q2, we saw some vendors struggled to supply pockets. We also continued to see freight deliveries taking longer and costing significantly more.

How close relationship with suppliers and I'll practice of holding substantial component inventory of helped us in the current crisis.

Even so we recognize and continue to plan for the possibility of supplier in customer closures and for the disruption down the road.

Let's now turn to details from us second quarter coal over to you.

Thank you, Rob and Hello, everyone.

As you know cognex is known for being straightforward.

We typically discuss our results almost exclusively on a GAAP basis.

We believe some pro forma disclosure will be helpful. This quarter given the actions we took in Q2.

With that in mind, let's get into the details.

Revenue for the quarter was $169 million, which was better than we expected.

Still weak.

That level represented a substantial decline year on year in the broad factory automation market.

Piccadilly automotive.

Impact with most noticeable in Europe, and the Americas because of widespread business disruptions in both regions.

Partially offsetting the decline with growth in logistics.

Commerce fulfillment customers performed well.

Logistics also increased on a sequential basis.

That growth combined with returning production in China, offset the decline we experienced in other areas where business for Q1 Q2.

Reported gross margin was 70%.

Which included a reserve of $7.7 million for excess inventory, resulting from the business decline.

Gross margin was 75%, excluding non cash charge, which is consistent with Q1.

It was slightly better than we expected due to a favorable product mix and improving gross margins in logistics.

Operating expenses in Q2 included a restructuring charge a $14.8 million.

I never really for the workforce reduction discussed by Rob.

Our restructuring actions were substantially completed by the end of quarter.

We expect a residual charge of between $1 million to $2 million in the second half.

Early in Q3.

We also recorded a non cash charge of $19.6 billion in Q2 I.

I don't really to write down a portion of the intangible assets somewhere acquisition.

Excluding these one time charges combined total of already any that's you know.

Hi, and by 14% on a sequential basis as expected.

The decrease was due to lower stock option expense savings from actions, we implemented early in Q2, including lower travel and entertainment costs.

Prudent management of discretionary spending.

I had a restricted hiring plan.

We recorded an operating loss in Q2 because of the charges for the restructuring actions intangible asset impairment and inventory write down.

Excluding these charges operating margin was 21%.

Which was approximately 800 basis points higher on a sequential basis.

The decline year on year due to lower revenue, that's compared with Q2 29 too.

The effective tax rate in Q2 was 19% excluding discrete tax items.

That was higher than we expected because we now believe more of our profits in 2020, well the earned and tax and higher tax jurisdictions.

On a non-GAAP basis earnings were 18 cents per share in Q2.

Compared with 28 cents in Q2, 2019, and 11 cents in Q1 2020.

Excluding discrete tax items and the free charges just mentioned.

Looking at the change in revenue for Q2 year on year from a geographic perspective.

Our best performing region was Asia.

Which increased by low single digits year on year.

Higher revenue from consumer electronics, and semi offset a decline automotive.

Our customers in Asia are now largely back to work and in that regard ahead of other regions.

In the Americas revenue declined by low double digits year on year.

Growth in logistics, almost offset a substantial decline in revenue from automotive.

Spending by manufacturing customers the gradually improving.

So what either reopening and we're winning business from companies that are scaling up production for cold and related products.

The most challenging region in Q2 was Europe, where revenue declined by 40% year on year.

Business shutdowns further worsened already weak fundamentals in automotive.

The timing of revenue from consumer electronics was also a factor.

In that regard large order revenue from consumer electronics in 2019 was split between Q2 in Q3.

This year, we expect that business will be mostly concentrated in Q3 and with a higher proportion benefiting our Asia region.

Turning to our balance sheet, we ended the quarter with approximately $900 million in cash and investments and no debt.

Our approach to capital allocation remained unchanged despite the difficult business conditions.

We continue to manage cognex, but a long term well also showing our many years of success with shareholders.

We paid approximately $10 million and dividends to shareholders during Q2.

Tonight, we announced a similar pay left to be made in Q3.

We did not buyback any stock in the corner.

Our inventory balance decreased by approximately $7 million or 12% from the end of 29 too.

However, excluding the substantial you know reserve we recorded in Q2 inventory was roughly flat over the six month period [laughter] now I'll turn the call back over to Rob.

Thank you Paul.

Moving next to guidance.

We expect Q3 will be the best quarter at the year I call with revenue between $200 million and $220 million.

That range represents an increase both year on year and sequentially due to higher expected revenue from consumer electronics, which we believe will be mostly concentrated in Q3 this year.

We also expect another strong quarter and E Commerce tripped logistics as we deliver on business that we had been working on for some time.

Despite that's Frank which can be attributable to a few large customers any E commerce semi in electronics overall demand is lackluster and it's unclear when that will change.

Gross margin for Q3 is expected to be in the mid 70% range slightly tempted by the high volume up revenue, we expect from logistics.

The combined total live R&D, any and SGN eight which excludes the charges that we discussed Tonight is expected to be relatively flat both year on year and sequentially.

Lastly, the effective tax rate is expected to be 19%, excluding discrete tax items.

Now we will open the call for questions.

Great. Please go ahead.

Thank you.

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Our first question is from Karen Lau with Gordon Haskett. Please proceed.

Good afternoon, everyone.

[noise], Bob you sound pretty downbeat on markets, excluding E Commerce and see each are you I was wondering are you guys not seeing any meaningful sequential improvement in markets outside of those two and can you maybe comment on.

Kind of the rate of decline you saw in April 1st this the exit rate you saw in June or maybe July even.

Yeah, Hi, Karen Yeah, I think the story really is the automotive market, which we thought largest market last year I mean, it looks looks weak I think that that's the main sources that are there are other markets that we said medical related industries, including life Sciences medical devices Thomas.

Calls Park security, a broad range of our markets more the other buckets actually what's your performing reasonably well and then showing some growth.

I wish to sound I'm overly negative, but certainly automotive is is the market is giving us substantial headwinds.

But due to that point I can't comment on kind of be exit rates that you're seeing and.

In auto in June and July.

[laughter] down revenue.

Yeah, Yeah, I mean, I'll give you.

Some some color on that I mean, so so I think automotive was our largest market in 2019 and it was stopped coming into this year, but we were optimistic at the start of the or that we thought things might pick up in the second half and obviously, we no longer expect that to happen given you know that because.

Situation, you know demand from automotive deteriorated sharply around the cobot outbreak and revenue from automotive declined by 40% year on year in Q2, since roughly $25 million a headwind for us in the quarter. It continue.

He used to look weak worldwide, including spending even on electric vehicles, not really showing the strength we might have expected in terms the exit rate I mean that some sign the you know it's it's improving from its slow start with at least I think we've hit bottom there, but but in terms of getting to the level that we.

I'd hoped coming into the year on the return to kind of solid 10% growth that we become used to over the past few years, we don't expect that to happen probably until the middle of next year.

Understood. Thanks for the color and then on E., so with delivery expect getting a third quarter can you comment on how much. The overall I try to be up this year and then maybe put it into context right I believe your Si business peaked in 2017.

If you account for the increase this year, how much would you still be down first is that peak level.

Well generally count we don't give kind of full year projections as you know forecasting for cognex Nora.

We <unk>.

Specific guidance like that what you know what I would say I think you're right is that 2017 was our best year ever and electronics and I wouldn't expect us to outperform that this year, but we do you know we're putting up some some good growth in that market I would say coming into the year weight you know we thought.

Very good shots, we would see very strong growth in consumer electronics, and we're seeing growth, but it may not be quite at the level that we would like <unk>. So I think what there's a bunch things going on.

One is.

Outside of focus outside of smartphones 80, or they are accelerating online learning on working from home and you know is certainly driving growth. We're seeing a lot of a lot of growth in that area and then we certainly are seeing them. Some nice credits related to fight G.N. Wally DC.

I mean, but I see some of that growth that we hoped would come this year you know it looks like it may be getting pushed out a little but despite that you know I think it'll be a good year for us in a in consumer electronics. So we expect consumer electronics will be our largest market. This year, but you know logistics majors give it a run for its money and.

You know what it mode. If it's not in the running to be our largest market. This year I would say.

Okay understood I'll pass it on thank you.

Thank you.

Our next question is from Andrew baskets, Julio with Aaron Berg capital markets. Please proceed.

Hey, guys.

And can you yeah, I live consumer electronics trend.

There is there a reason to believe just given be.

And how.

Okay.

Unprecedented times, our with Q1 early in Q2, and we could see some atypical seasonality in consumer electronics. In Q4 is there any are there any indication of that.

It's likely that here.

Well I think we certainly yeah I think most of this years revenue will be recognized in Q3 last.

Last year to that was Q2 in Q3 pretty much if you look back through the last five years, though so what you're being you know really they get electronics years for us. It's always been Q2 in Q3. This year you know it's as we as we sit as discussed in previous calls it's good it's got pushed into Q3.

I wouldn't expect large amounts of it took flow into Q4, you know there's no reason why we couldn't see.

So you know some growth also strengthen electronics in Q4, but it's really a Q3 place from where it looks from here.

Okay, and you know you picked some substantial restructuring.

But you haven't taken out any a lot a long time.

Which would indicate you wouldn't expect that really a pickup in demand anytime soon but yeah. It seems like Q3's picking up.

Bed and can you comment on like <unk>.

Reading into that wrongly that.

You don't expect yeah.

Much of a lift pee on Q3 or Q4.

[noise], Yeah, I wouldn't read it in such a short term way I think you know weve weeping, we've grown our headcount and a we've we've made a lot of acquisitions seven acquisitions in the last four years and we were I think we was we were stopped I know we must start entering twentytwenty like we expect to return to some pretty strong.

Up to having to first down here in nine years in 2019. So we were kind of ready to go expecting a you know expecting the kind of growth, we're seeing and logistics expecting a stronger in electronics expecting about a year in automotive and then often Kobe, we recognize that we needed just to take action and we viewed the key.

Current environment as an opportune time to shop, and I'll focus on growth areas leverage talent more effectively reduce some of the redundancies. We saw in the business I'm. So I think we've really aligned our capabilities better following not many years of growth. So I I, we're really.

Long term bankers at Cognex and a you know this is something that probably need it's happened only needed to align ourselves better and the downturn and your bonds really was very clear to us that this is the time to get on with that but we as I said in my prepared remarks, I think we have plenty of capacity for growth.

Right, we were really I think well structured.

Right. So we could expect to grow up it's a substantially without adding much cost other than variable costs.

You know not much head count not much investment I think we're still well set for that.

All right that's helpful. Thank you.

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

They are they doing.

Hi, Joe.

I'm wondering can you kind of like.

Scale the content that you're getting on me on some of these a C and logistics kind of words like if you want to think about it like in a given production line for us he already given amount of square footage Seattle like a logistics facility like how does your content look now versus a few years.

Go I mean, not looking for specific dollar amounts, obviously, but like how has that like like for like content extended overtime.

[noise] well, it's Joe it's an interesting question I I, we don't generally think of it that way I think we tend to think up you know numbers the blind and you know over and the kids logistics numbers. The facility that we think that are what we you know what we do intend to the features those.

But.

That are being added there I wouldn't say you know overall at the level of contention and capability, we're adding to lines is it similar probably that it's been over previous years. So in facility.

It's changing it's more vision related higher value.

So a you know I would say, probably probably kind of similar but evolving and what it is more to higher value applications, we surpassed be doing more basic barcode reading and things like that and now we wouldn't be doing more vision more learning high about high value.

[laughter] [laughter].

That's fair.

Then on and also Yeah third party estimates right now and I, obviously those contain wildly overtime, but right now I'm talking about pretty substantial a year on year production growth next year I mean, how would you think about cognex is business in my in in that kind of environment I mean.

Mostly just filling up existing capacity to some extent, but how would you think if those numbers are right that your business could cause there in that environment.

Yeah, I want to make sure I understand your question, you're saying it in automotive you think if you're able to bridge.

Yeah, and auto they're expecting production ramps next year, a pretty substantially on a year on year, obviously off a little base, but I'm. Just curious you know you're more on the investment side of things. So how is how do you think your business for operating and that's where no light production sites to eat.

I see your Eurs, you're talking more about unit volumes of production, yeah, you're going to look like they're gonna go up I'm just curious as to how you think about what that means for your business next year.

Yep Yep, I think I think for us, it's gonna be more about new lines and retrofitting existing lines. So you know so.

Okay, I don't necessarily see unit volume driving a lot of incremental investment or automation, what I wouldn't see is the introduction of new models, you know and a new technologies.

Would be wouldn't be driver would be real growth drivers.

That's more of a lever you know there are you know there speculation that there are perhaps you know 16, you electric vehicle models coming to market over the next few years those kind of things can really drive a lot of growth for cognex, but of course, you know when big automotive for tier one automotive who our customers in that space its.

That's struggling and if that conserving cash and they're likely to do less retrofit. So upgrades in general. So it does have an impact on us, but more more that [laughter] to gauge future growth for us would likely be around them introduction of new models and a new technologies into automotive.

If I could just sneak one last one in you know E commerce you'd go to doing quite well. There you mentioned a few big customer is causing some of that business now given what's going on and everyone kind of scrambling to get supply chains adjusted to the current reality is this your strike you for your businesses as like.

Well, what we're trying something that can't be repeated or is this just you know the normal like this is the way we were going it's just accelerate a little bit, but we don't see why this can continue.

Well I think so I think we see logistic says you know a great growth market for us than we've said in the past you know we yeah. We have ambitious plans to grow that business, a 50% of here and we've been able to do that pretty well and most of the last few years I think you know sick because we just see so much demand.

Or fault for machine vision in helping productivity and develop supply chains and it's their supply chains moved to more online at more E. Commerce type models. You know, we just have it's a great market and we have a great technical advantage and it to play I think on so what we're saying at the moment is we're seeing that.

Growth is being very skewed towards you know winters in that marketplace, particularly those who you know who already have pretty sophisticated E. Commerce models are well under development what what's the.

Turning to weigh more in the logistics area is then it is it's those customers and brought you know we tail like formerly bricks and mortar retailers, who we would have expected to see be growing strongly at the moment, but of course, there really struggling right you know and I think that's struggling with liquidity and they know their own future. So we're not.

During the same level when I've seen the same level investment there we would like to have also you know airport baggage handling a big part about logistics type business, but that's a market that has really.

Gone very cold this year. So I think you know those it's its been a varied story, but they are really good gross we're seeing better than expected and then E. Commerce I think longer term, we would expect some other markets like the ones I discuss more regular retail to come back more strongly for us in future.

And and then I think the other thing we're expecting and we're seeing already is broader I'm used to machine vision beyond just barcode reading more into things like inspection dimensioning more capabilities, where are we using the data from our our vision systems to help companies manage their logistics.

It's more efficiently study, we you know we have big unexciting growth plans and logistics some of them, we've gone really well some of them in the current environment, but little tepid and I think that's amount will come back once we're through this current situation.

Thank you.

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

Hi, good afternoon, everyone.

Hi, Joe.

Hi, This is Rob I think pick our call correctly at the end of last year, you guys talked about something like 40 million or so of logistics revenue that got deferred and I think you expected to ship it.

In the third quarter this year.

Some of that gets shifted into Q or is that predominantly still on track to kinda ship for threeq.

Yeah, I'm not sure we gave a specific number but I think you know directionally, yes, Youre correct and we did we saw.

Hey, backlog with logistics business building and deliveries getting delayed I, you know and where it really we're seeing a lot of that business can you know through Q2, three and four I'm just kind of how it looks some or all stuff. You know we're also seeing a pretty big backlog built in addition to that so.

Speaking, that's kind of what is happening I think as we expected there.

Got it Okay. That's helpful look some of the you know somebody integrators like like a Honeywell for example, there intelligrated business a they just reported you know their orders are up something like 300% this quarter and kian orders were off off a double this quarter.

I guess, how should we think about their businesses as it relates to yours in being able to you know whether there's any type of.

No no capacity constraint and being able to.

Ensure that your products are being a installed.

Within but in a reasonable timeframe like is there any kind of like oh, well that forming that that yeah could potentially a constrain your ability to to get your products installed and delivered on time.

Well I think I think the way the weight works is you know there's a group that we call them you know integrators out there you know intelligrated that division of Honeywell I think you're referring to is one of them. You know there are many others dramatic Randall Andy on Bastianich, Toyota or is it quite a number those businesses over the years Yep generally that getting.

Very very large contracts you know, there's sometimes can be two years out and in some way.

That makes this a little bit like what a line build it doesn't know what am I guess, so you know they're getting contracts for new car models that are a couple of years out and then as a as the product becomes closer you know nearer to implementation, we worked with them on putting them vision system in but what specified normally by the end user. So you know.

Well when you look at some of those kind of reports that we're hearing.

It's indicative of yours, the growth ahead, which will be coming our way probably in a year or so depending on how the <unk> rollout schedule changes between now and then so you know I view it as a leading indicators and inline with what I would expect.

Got it that's a that's great to hear and I guess, just lastly, maybe just following up on some of that.

The consumer electronics question, you did reference like online learning OLED screen, specifically I'm. Just curious you know if you can give maybe just a little bit more color on end market application it doesn't sound like it smartphones.

No, if it's like I pads or or or what specifically this is going into.

Oh, yes. So you know the so called next we felt we really felt all the major players in that consumer electronics and Ah. So so they they you know as most of them really have a portfolio of products. You know I business has been very much in smartphones. This you're still very solid in smart.

Phones for sure is how it looks but but it's perhaps growing better I know, it's stronger than we would've expected more and in a in tablets and laptops.

Laptops and electronics devices, you know a wearable devices headphones et cetera that we've seen I think everyone seen a an uptick in that business, which is the result of everybody equipping themselves to work in home you know not that's how it looks that you know tens of old led screens.

Market, we've been working on you know heavily for best thought was five years than we saw very.

Very big Spike in our business in 2017, we still see you know some good strength and growth in that business than we diversified you know generally the bases that business and want to China et cetera, We'll we're working with some of the major players there, but I think you know tenets of our expectations, maybe I'll, let it but it's not a.

Blow the doors off year for Oh lets you know its gross spend we're watching merit and by the way those companies really value our deep learning technology for inspection because you know there's some that the value of yield in that market is massive but but in terms of perhaps you know what we've got to be big growth drivers Fiveg I know that its.

Similar or or maybe not quite as good as one might have hoped coming into the air and that's being offset some of these other better areas that I spoke about earlier.

That's super helpful. Thank you got.

Thanks.

Our next question is from Paul Coster with JP Morgan. Please proceed.

Yeah. Thanks for taking my question. So you mentioned the gross margins might be a little light.

Because of the just sticks mix I'm just wondering.

Hey that right and if I did hear it right what does it in the product mix that leads to slightly lower gross margins for that and market.

That's helpful.

Yeah, Yeah, I'll invite I'll talk on a product level isn't available, we'll talk little bit more about that too. So so and so when we when they give you. The long you know the long view, let me go into logistics, you know, we websites and very major customers somewhat as we do in a consumer electronics, who.

Required more implementation from us. So we were doing more application engineering right. So that was certainly a part of that part of that issue and we still do some of that which can be dilutive to our margin. So it has some more service related piece isn't it also has more integration, which may mean in some cases with selling.

Lower margin accessories or metal frames or other things that currently you know we need to do in order to fulfill the needs of customers, but were developing products that are more modular and when developing relationships with systems integrators. So we're taking more more of that business away and allowing our gross margins to approach to gross margins we.

Elsewhere.

Paul would you like that.

Yeah, that's something I think you you landed it but logistic is still slightly dilutive to our overall gross margin, but it is it is improving.

Versus a year ago are certainly versus universe is three years ago. So yeah. It's similar to the strategy we use for developing.

The factory automation markets.

So I'll call people problem.

Pro growth a little more service and then figure out how effectively product and yeah. We're in the middle of of the of that have that migration liquid just to kind of going well, but.

Overall, it would just because a bigger share of our revenue. It is somewhat dilutive. Although that's countered by other aspects of our business that are growing that are highly accretive to our margins such as deep learning a great example of a software based market that's highly accretive to our gross margin and in the growth contract.

Sure. So just a quick personal them a deep learning front. Obviously you took connection a change course really quickly you know you're talking about somebody.

Yeah, so what into Florida.

We need to do so in act precipitously. The Krishna go though is that what does this to your interest in further acquisitions in the area knowing that this all sort of integration work in both tool.

Or is it just you know the normal us situation.

Well, let me kind of back up for a minute I think we see deep learning has kind of a revolution going on in and machine vision and it's it's allowing us to two approach machine vision problems in a new and better way and and we made the acquisition activity.

Three and a half years ago, and a that [laughter] technologies remarkably good are running on low power chips and that's demonstrated any insight de 900, though we just launched it fits very well within.

Our existing kind of model of selling small cameras.

And with a lot of performance right. Now then we've acquired Sewell out.

It will add has very very powerful capabilities around the application of the combinational neural networks to industrial machine vision and their ideal doing other things like classifying images with great precision.

And inspecting complex images. So it's almost like some of the technology. They have they sort of further down the road and we'll we'll be assimilating it overtime, but some of the nearest I'm applications for data did require onsite work with very sophisticated engineering teams in Asia and that's the thing we.

Really haven't been able to do at the moment, so I'm because it just access to site and working closely with operators I mean, there's kind of environment. We're still gonna do that it's just a delayed and then sewell that brings great engineers and great technology, which will help us with only other things we want to do in deep learning.

So M&A will remain so lucky area of focus.

Yeah, I mean, you know, maybe where I think sorry, yes, sorry, well that's the second part of your question. So.

You know I think we've got a lot of horsepower now in deep learning, but we're always out there looking for interesting assets to acquire in deep learning or another growth areas with the business and generally we're always on the lookout for great Engineers, who bring a lot of capability to our organization. So that's.

That's that's that's an ongoing kind of cadence at cognex.

Sure. Thank you very much.

Thank you.

Our next question is from Richard Eastman with Robert W. Baird. Please proceed.

Yes. Good afternoon. Thank you. Thank you for the time.

Rob just to be clear.

Upside in revenue in the second quarter.

To your previous thoughts the second quarter would look like less than the first.

Set up sorry did I captured right China.

Came back sequentially faster and then you pull some some of the logistics business that you should came out of backlog or those are those the two primary.

<unk>.

So you know.

I'll, let Paul comment I mean, certainly we were able to you know.

When and ship more logistics business than we'd expected in the quarter was a big driver and then yeah and suddenly in America, the recovery in our China business, but probably stronger than we had anticipated pull any other color you'd like to get.

Yeah, I mean, the commentary on on China was more about kind of Q1 revenue level Q2 revenue level not so much you know our expectation for Q2, I think you off or why we beat our Q2.

Forecast or we didn't give guidance, except that we thought we'd be down versus the Q1, and we were we were up slightly that was more driven by strength in logistics and just I'd say, managing our our supply chain and potential component shortages. Another set of risks in our business didn't materialize as.

Negatively as we had fear, we're certainly seeing higher costs and difficult colleges to work through but our ability to convert it to revenues.

Meet customer demand pretty good.

So you put a quickie on Rick Rick.

Yes, Rick sorry, it's Rob again, I think you notice, but they're just to make sure we understand the funding orders order at order activity during the quarter was quite a lot stronger than we anticipated right. So we did recently exited a quarter or with a very large backlog. So I wouldn't want you to think that you know we made you know Q twos beat.

Backlogs necessarily we didn't we marci had we had become good strong orders as well.

Yes, I understand and what is trying to again trying to year over year was down 11%, but the other Asia number you know other Asia was plus 23% was not massive dollars <unk>. What was that you know kind of 6 million dollar increase the that amounts to other <unk> other Asia.

In Asia Pac well, what end market was a particularly driven by.

She.

Semi and see <unk>.

I mean book.

Okay, Yeah, and obviously there are some element of inorganic.

She will add in there too but very modest.

I see it was it was so if we had when we got a nice quarter in the second quarter to be sure. We built backlog you still logistics business would you expect it sequentially to be higher in Q3 than it was in Q2, I mean, just kind of timing on backlog is dark but doable.

Expectation.

So yeah. So we got some you know good good momentum in logistics business. We had we had a a record quarter revenue in Q2, we expect Q3 to be higher so Oh, yes, and we expect Q4 to be good also so yeah. We definitely have you know good momentum and it's not getting concentrated in particular quarters at this point.

Understood and then just I'm sort of my last question here just a promise the would you expect student in consumer electronics to have a 10% customer in 2020, given current backlog and trends.

Yes, you have some hope the factory automation business is down, but but just curious what would you expect to see a 10% customers to eat.

This year.

Well, that's yeah, that's not really a question I feel like I I'm ready to answer at this point, so I'm going to thoughts on that one or just just given sensitivities in that market.

Okay understood. Thank you.

Thank you.

Our next question is from Marcus met her mayor.

Yes.

Please proceed.

Yes, hi, good afternoon, everyone. Two question from I said, the it's one more long term in one on the second half, maybe that's subject but longer term question.

Given the sort of 8% head count reduction that you did which you know isn't easy in any case because of the probing into corporate culture. How do you think you know about supporting the long term growth ambitions.

Throughout the cycle right I mean, some of your competitors, particularly on the food cost side have have probably a significantly larger sales force. It I'm just trying to think about strategically how you. How you think about up through the cycle that that's long term and then on the second half at the moment I believe all the seasonality.

Issues around among consumer electronics et cetera, but but maybe just some color where you can and then you might have some easy but they didn't customer conversations maybe Q3 Q4, you said sort of some specialty fix the wrong Qubits, maybe also to the upset I'm thinking about you know ecommerce.

It's the access issues, maybe in some of the customer given how busy the distribution centers are I'm, just trying to get understand that the puts and takes you from <unk> into Q3 Q4. Thank you.

[noise] great Yeah. So so to your first question about the 8% head count reduction I mean, I think if you go back and you kind of look Oh productivity or the company you know it. It is it's even with the head count reduction, it's it's well below what was in 2016, so yeah, we see as having.

20 plenty of capacity for growth right and I think we came in thinking we were going to grow into that capacity this year and with revenue being lower we have we had a lot more capacity than we needed, but we really I don't really feel constrained on that you kind of talked about sales productivity and we do you right.

You compete with customers that bigger sales forces, but we combat that in two ways. One is where pure play machine vision. So you know cognex sales annoyed is not selling a you know when plc robots there at their focus very much on their experts and machine vision and then we can we do have a good.

Network of systems integrators, and distributor partners, who cover those areas that we don't reach so I'm not at all concerned about lack of coverage or you know and I do think there's a lot of up it shouldn't be for us to grow into our current head count and deliberate leveraged to the bottom line, that's where we see opportunities to focus there.

Or in the next couple of years I would say at this point.

Your second question I'm kinda was around opportunities for growth. So other areas that you know and I think it's worth saying that we have seen some nice activity at interest in the use of cosmetics and machine vision for Kogut related applications. So we've seen I'm you know certainly medical pharmaceutical.

So applications are others that are we've seen some interesting <unk> demand for our products in that area and I do think as companies scale up testing and you know vaccine production that that is definitely a good opportunity for us to work life Sciences as well in the application of Buddy.

Moving on technology more broadly you know is a it is an area that I think we see good upside potential for us I must be moves through this year and into next so those would be some of the areas that comes to mind.

Great. Thank you and maybe a quick follow up do you think that could be material near term I suppose but.

At this stage just im just trying to think through I understand the seasonality around see in Q3 et cetera, but they're not they're thinking for Q4. You know you mentioned Q3 is probably going to be the best quarter. You know anything that you see early in customer conversations, but could you materials factor in Q4 that'd be my not.

I have on the rate at the moment, but that's too early.

Yeah, I think I think material you know in its true definition, probably the answer that question no right.

See something you know really massively material from some of these other conversations in Q4, but the other wants is really it's too soon to say.

I think in that I think other more things that might move the needle for US later in the you might be more around whether there's no earlier investment in electric vehicles, or if there's more electronics kind of business coming in earlier or perhaps more than those in general might be logistics, we see more you know.

More in stronger demand yeah, the back end of year, which kind of happened in our business. So, but you know, but generally I don't want to give you an overly optimistic picture of Q4, as we said in the opening remarks or whatever that we do expect Q3 to be our best quarter and certainly that's how it looks to us right now.

Great. Thanks, so much I talked to them.

Our next question is from Jairam, Nathan with <unk> capital markets. Please proceed.

Hi, Thanks for taking my question just on the to kind of odd because in a different way its ability to question here on on consumer electronics, how should we think about the diversity within consumer electronics.

In 2020 compared to 2017.

HM.

I don't have to has it gone gotten a little more diverse.

Yes, so we certainly part over the last few years to try to take our.

You can't apply it more broadly whether that's more into component tight.

Area, which was like housing and I'm screen and other things rather than just final assembly and test packaging, which is where we were highly concentrated a few years ago and then you know obviously more in accessories as we've discussed suddenly see I and didn't portable type products, you know last laptops and others.

You know you should see our businesses being much more diversified intensive applications in that market well, though as we know the end users I'm sorry, the you know the brand owners a pretty concentrated.

Okay, and what you got the logistics you sit still a largely U.S. embedded base business.

Or into how what's the scope for expanding into Europe and Asia.

Yes. So you know the majority of our revenue today, it's still in the U.S., but we've been investing and we're seeing good percentage very good percentage growth rate and European market and in parts of Asia suddenly so, but we expect probably the majority of growth to come from.

Areas as we go over the long term, but right now with that definitely still highly concentrated in the United States.

Okay, and and I know you do you do center and we'll exercise if you do on on how disciplined markets, but how should we think about logistics I just from the market from.

I don't do it with a number but what it was like if it is it a multiple of that you think based on what's happened.

No yeah, I I don't really feel ready to answer that we said it was a billion dollar served market you know what I would've thought I would've thought that might actually be quite similar now I mean, we basically saying a lot of growth with E commerce, but I think a lot of that market is actually in areas that aren't doing that well right now things like package delivery.

<unk> postal you know general bricks and mortar retail so those businesses you know there only growing slightly for us and we're probably in a gaining share market may be shrinking currently so I still think about being a great market overall in logistics, we sized it is a billion dollars. When we told you last we think it can grow.

So I think we said in the mid teens.

And I view it very similar now just with a different complex.

Okay and final question on the competitive environment, given the can given a the the difficulties have you seen a is it getting a little easier than thumbs up.

Have you seen any competition, that's getting a going to hold them going bankrupt exiting the business.

Yeah, I'm, sorry, I didn't quite understand your question have we seen it getting more difficult with with who.

No it did any of your competitors.

I have exited the business or given given the tough conditions.

I see competitors no I wouldn't say we've seen.

It may change in the competitive environment overall, no I wouldn't say so.

Okay. Thank you.

Hello.

Our next question is from Karen Lau with <unk>. Please proceed.

Hi, Thank you for taking that's all upside just that one opex follow up questions for so Paul I think it sounds like in the second quarter. He didn't realize many of the savings I found the restructuring I think the number is you'd expect it to be a 25 million savings I made so need what kinda imply that its name.

I think that's coming you know starting at quarter, but sequentially Opex flat. So is the idea that some of the temporary cost that's a put temporary cost saving that took place in the second quarter its coming back, but you know this trust with savings kicking in so they kind of off that or is there some.

Temporary costs associated with the higher delivery.

Third quarter and that is like kind of masking that sequential or savings structural savings uptick.

Sure Yeah, Karen and it's it's mostly puts and takes I mean, if we take a step back to 2020 going into the year, we said, we'd be adding about 25 million to our cost structure associated with you know.

Reset of incentive plans and some some hiring and the integration of to allow them and then weve now committed to a 25 million dollar annualized cost reduction of which we did realize a portion of it and you know in Q2, but but certainly Q3 will be realizing realizing more so so yeah. So the I'd say that the payroll savings.

Some of the hating than depreciation amortization. So on a in Q3 will be partially offset by a little more travel just you've got more sales activities going on you know travel will still be significantly down for the year, but.

You know with facility to open ourselves going there are going in and paying because that's we did get some some onetime benefits associated with the restructuring in Q2 in our incentive compensation. That's a won't repeat in Q3. So that's also one of the that the takes to offset the that payroll savings.

Understood. Thank you and Rob if I can ask you a quick one on sand mine understands a relatively small market for you and I think he has something to do is like semi conductor customers. They buy mostly software sobieski smaller what customers in that market I guess in the context of maybe people aren't.

Thank you applications and then we have a backdrop on these arms you know arms race going on and you know fielding chips everywhere.

Well it is you know.

Ken that piece of business become much bigger over time, whether it's like you know aside from the market growing but more in terms of your content to add to that market.

Yeah, Hey, we haven't Goodyear and semi it's true and I think the industry is having a good year, but generally that that it's been around 5% about business, we view it and kinda cyclical you know probably cyclical declining market. Overall, you know why well, it's kinda Moore's law or where you know you can produce more and more chips on fewer and fewer.

Lines I think that it really kind of change Im sure. We can see Sem and you know some pop in investment you know and there's some areas where we have very strong positions in great technology, but overall I don't see it as a big lever for us, but gross over the long term.

Okay I understand thank you.

Just back to your your original question to the one piece, obviously, just with a higher revenue mix or higher revenue level in Q3 versus Q2 that'll also bring some opex right think about commissions and and so on so there's an element of that as well in that in the quarter to quarter.

Yeah. It makes sense. Thank you.

We have reached the end of our call ill now turn the call back over she's Dr. Shellman for closing remarks.

Thank you.

Well, we're all very challenging times most of our strong balance sheets are focused on the long term and our unique culture label card mixed whether the current disruptions better than most other companies.

I want to thank you all for joining US Tonight, and we look forward to speaking with you on our next quarter's call, which I expect will contain some very positive news.

Good evening.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Yeah.

Okay.

[noise].