Q3 2020 Cognex Corp Earnings Call
Greetings and welcome to the Cognex third quarter 2020 earnings Conference call.
All participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn this conference over to your host Susan Conway.
Director of Investor Relations. Thank you you may begin.
Good evening, everyone. Thank you for joining us today with.
With US are Cognex is chairman Dr., Bob Chairman, President and CEO, Rob Willett.
Chief Financial Officer, Paul Todd.
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 Dot com forward Slash investor.
Both contain highly detailed information about our financial results.
During the call we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends.
You can see a reconciliation of certain items from GAAP to non-GAAP in 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 based upon information that we believe to be true as of today [noise].
Things often change however, and actual results may differ materially from those projected or anticipated.
For a detailed list of risk factors, you should refer to our FCC filings, 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 Thanks.
Thanks, Sue and Hello, everyone.
Hi, I'm actually physically here with the team at this time and I'm happy to be here.
Joining the beautiful fall colors, not so happy to to experience the grey rainy weather, but it does remind me why I left many years ago for southern California.
Well, it's shown on the news release earlier today, we reported terrific results Q3 was the second highest quarterly revenue went up 39 year history, along with terrific profitability.
In addition at Cognex is board of directors increased the quarterly cash dividend to six cents a share and the dividend increase demonstrates our confidence in cognex is financial strength.
And long term growth prospects, despite the current difficult business environment.
No you're not here just to hear that those platitudes here to hear more details and for those I'm going to turn it over to my partner Cognex as CEO, Rob Willett and Rob the microphone is now yours.
Thank you Dr., Bob and good evening everyone.
Called mix reported strong results for the third quarter revenue was $251 million, which represents 37% growth year on year.
We were highly profitable reporting an operating margin of 38%.
The 14 point increase over Q3 of 2019 demonstrates the substantial operating leverage we have in our business model.
Earnings for the quarter more than doubled year on year to 49 cents per share.
We expect its Q3 to be our best quarter of the year and it even exceeded our expectations that we gave as guidance last quarter.
This high level of achievement was made possible by the efforts of Cognoids around the world. They worked hard to meet the increased demands of some of our existing customers to win new customers and to successfully manage our own supply change or any is difficult times.
Because of their efforts, we want more orders than we expected during Q3, particularly in the Americas also we met accelerated delivery requirements from existing customers concerned about potential disruption in Q4.
[noise] consumer electronics delivered impressive growth in the quarter revenue from this market has an annual cycle with lodge revenue generating quarter is typically in Q2, while Q3. This.
This year that happened in Q3.
Much of our revenue in consumer electronics relates to the assembly of smartphones and the manufacturing of related components. However, this year online learning and the work from home dynamic I'm, making a notable contribution piece.
People need tablets laptops, and wearable devices for a world where connecting virtually has become even more important.
Cognex machine vision is enabling the precise and rapid manufacturing of those products.
[noise] in logistics, we reported another record revenue quarter due to continued strong demand in the E commerce sector.
We delivered on both recent orders as well as on a backlog of orders.
Major E Commerce, and big box retailers are investing in automation for higher throughput in that distribution centers to meet higher online demand and to prepare for the upcoming holiday season.
Other bright spots in Q3 included both medical related industries and semi although they were a much smaller contributor to overall growth then consumer electronics and logistics.
Regarding medical related orders were pleased to report growth from manufacturers to produce kobin related products.
Next machine vision is currently being applied in a variety of coated related applications, including the automated manufacturing of mosques inspection of vials of vaccines and the assembly of cobot testing kits.
We are proud to have been chosen by industry leaders to help them bring these important products to the worlds.
[noise] in automotive and a broader factory automation market revenue continues to improve on a sequential basis. However, it sink unclear whether this is the start of a recovery or a catch up from depressed levels in Q2 and from customers, placing orders in advance of a potentially difficult.
Winter season.
[noise] business was good in Q3, but we have a saying at cognex. Good is not good enough excellence is expected.
In our quest for excellence, we have launched some very innovative products in recent months that we believe will strengthen our leadership position.
Our most important product launch this year is the insight D 900, smart camera, which we introduced in April.
It is among our most successful new product launches ever.
Designed to run Cognex deep learning tools on our industry, leading insight platform. This easy to use vision system addresses inspection applications that were previously too difficult to serve with traditional rule placed vision tools.
[noise] custom is it the D 900 include existing costs cognex customers as well as many first time users of machine vision, all of whom need to inspect items for surface defects, such as scratches chips or other blemishes human inspectors, often miss and wish rule based machine vision can reliably.
Detect.
[noise], new color and optical character recognition models broaden the applications addressable by the D 900, and perform exceptionally well on difficult tasks, such as decoding tiny and deformed alphanumeric text on a wide variety of materials.
[noise], the merging of us doing lab and deep and video deep learning technologies is progressing well.
In fact Sewell ABS vision tools are now available together with our video tools on the Cognex deep Cognex vision pro deep learning platform.
This product is targeted at sophisticated customers, who have very complex problems to solve.
Now, let's turn to details from us third quarter pull or what do you.
Thanks, Rob and Hello, everyone.
Obviously this was a busy quarter, both professionally and personally.
My wife, and kids and I packed up our home in the San Francisco Bay area and moved to a new home Cognex is headquarters.
We're excited to see the house when we arrived because we literally had never physically seen it.
I generally wouldn't recommend buying a home based on photos for plan based on call with a realtor.
Well.
I think we're all doing things during cold that we never expected we do.
Turning now to our results.
Revenue for the third quarter with $251 million, which represents substantial growth both year on year and sequentially and was significantly higher than the guidance. We gave you last quarter.
Growth came from consumer electronics, and the E commerce sector of logistics, where revenue from a few large customers with even stronger than we expected.
In the broader factory automation market, we successfully fulfilled a stronger than anticipated pickup in demand and accelerated customer delivery requests that were previously scheduled for Q4.
A new Cobra related business that Rob just spoke about contributed nicely.
Automotive remained a drag but considerably less so than in Q2.
Gross margin was 76%, which was higher than we expected and an increase over both Q3 of 2019 and the prior [laughter].
And that is even after excluding an $8 million excess inventory charge, we took in Q2.
The stronger performance was due to a favorable product mix and leverage on higher volume.
Gross margin in logistics, while still dilutive to the company overall continues to improve.
As we discussed three months ago, we recorded one time charges in Q2 for our restructuring and a write down of intangible assets they totaled approximately $35 million.
Restructuring charges in Q3 were very modest at $250000 and we expect to complete the charges in Q4.
Excluding those charges the combined total ardian. He then asked DNA increased by 4% sequentially and 2% year on year.
This is consistent with our expectations.
Within operating expenses.
No compensation was higher due to strong revenue and we continue to realize savings and travel and entertainment and from the restructuring actions taken in Q2.
Operating margin expanded to 38% in Q3, 20, which as Rob noted its 14 points higher than in Q3 19.
Constraining the operating leverage we have from incremental revenue.
The effective tax rate was 18% excluding discrete tax items.
This is a slight decrease compared to Q2, given higher profit, reducing the impact of non deductible expenses.
I'd like to make you aware of a discrete tax benefit we expect in Q4 related to our 2019 federal tax return, which we filed this month.
Under new IRS regulations, we were able to reduce our U.S. tax liability by more than $12 million for foreign taxes, we paid when we moved acquired to allow technology from Korea.
Well recognize that savings for accounting purposes. This year in the fourth quarter.
Now back to Q3 reported earnings doubled to 49 cents per share in Q3, compared with 24 cents in Q3 2019.
We reported a loss of one cents in Q2 2020.
On a non-GAAP basis earnings were 47 cents per share in Q3, compared with 24 cents in Q3 19, an 18 cents in Q2 2020, excluding discrete tax items and the charges just mentioned.
Looking at the change in revenue for Q3 year on year from a geographic perspective.
Asia was our best performing region, increasing by 82% year on year with greater China growing even faster due to this quarter's substantial contribution from consumer electronics.
Notably customers in China are largely back to work well challenges continue elsewhere in Asia, particularly in the us.
[noise] in Europe revenue was roughly flat year on year.
Growth in logistics and in the broad factory automation market offset a decline in automotive.
You may recall that in past years, Europe was helped by consumer electronics orders for Cognex products use on assembly lines in Asia.
Due to a shift in procurement that revenue is now largely recognized in our Asia region.
In the Americas revenue increased by more than 30% year on year due to growth in logistics.
There was also incremental revenue from medical related industries, including companies scaling up production for Cobra related products.
Turning to the balance sheet, we ended Q3 with $1 billion in cash and investments and no debt.
As noted by Dr., Bob we announced today that our board of directors has increased the quarterly cash dividend to six cents from five cents per share it.
Dividend is payable on November 27th to all shareholders of record on November 13th.
Now I will turn the call back over to Rob.
Thank you Paul.
In summary, Cognex had a strong third quarter, but the substantial consumer electronics revenue. We experienced in Q3 is behind us for this year it will likely be several quarters until we report revenue as high as we did in Q3.
We believe revenue for Q4 will be between 190 million and $210 million, which represents an increase year on year due to growth in consumer electronics logistics medical related industries and semi.
[noise] automotive is improving but remains at a significantly lower level than in recent years.
There were also continues to be a high degree of uncertainty in today's environment and business conditions are difficult overall.
Gross margin is expected to be in the mid 70% range and lower than we reported for Q3, given the expected increase in logistics revenue as a percentage of total revenue.
Operating expenses are expected to increase by mid single digits on a sequential basis and to end to decline year on year due to cost saving measures and lower travel and entertainment costs.
Lastly, the effective tax rate is expected to be 18%.
It excludes all discrete tax items, such as the expected 12 million dollar benefit described earlier by pole.
Now we will open the call up for questions. Operator. Please go ahead.
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Limit yourself to one question and one.
[laughter].
One moment, while we.
No question.
Our first question comes from the line of Josh Pokrzywinski with Morgan Stanley You May proceed with your question.
Hi, good evening all.
Hi, Josh.
I guess first question on the consumer electronics strength, which was pretty notable I guess.
Pretty consistent with what we've seen heard out of the supply chain constraints low inventories lead times extended out so things like PC notebooks.
Yeah, I guess first question how long do you expect that to continue and what have your customers told you about your.
Kind of future investments there given that this is not something that they would have anticipated you know six.
Six nine months ago either.
Well I guess I'd say that you know this this is a good year for a consumer electronics not not a great year like 2017, and it's it's it's changing and dynamic kind of as as it often does obviously you know, there's new technologies I'm rolling out like Fiveg and.
Some of this sort of more virtual reality type technology, we're starting to see adopted and if he joined us for our analyst day about a year ago. I think you know we were sort of I think we sort of.
Suggested that these new technologies for coming and there are always coming in consumer electronics is always innovation and it's always challenging to manufacture and that's why we need a great vision technology and automation to do it. So I think that's a fairly regular cadence in fact going on I think what can drive you know higher or lower revenue.
Two years with some of the different dynamics, we've talked about like big model changes and and shifts to new technologies and and in this case, obviously market dynamics like the work from home high level of quarters that we see and then new features like screens you know a lot a lot of great new overly overly de screens for.
New suppliers.
Hitting the market now currently.
But you know that I think really that's as much as I can tell you I'm not you know I don't have great insights into next year's Roadmaps or the demand profile. Unlike the companies that actually make these products.
Understood I appreciate that color and then I guess I'm just to follow up on the cost side for for whoever wants to take it if I think about operating expenses clearly some some some good work done on the cost containment side in the second quarter are getting good leverage off that.
Here in the in the medium term.
As we get a kind of back into a normalized growth environment.
At the corporate level, how should we think about either growth in operating expenses relative to revenue growth.
Or just as a percentage of sales that theres a target in mind, because I think if you look over the past few years since it's been all over the map depending on investment mode or cost containment.
[noise], Yeah, well, Josh I'll start and then I'll invite Paul to give some color I mean, I think you know we we at Cognex have long term plans to grow the company substantially at high gross margins and where we are investing in R&D to support that growth and sales force where necessarily to grow that to the to to grow the company over.
The long term and as you can see Tonight and as you know you see many quarters that cognex the substantial revenue central substantial fall through on revenue growth to the bottom line. So that's kind of our model now we believe at the moment, we have capacity to grow revenue substantially without significant head count additions and I, we think were pretty well site.
Yes, and you know we're still not as big as we were in 2018 and I am in terms of yes, you know.
The size of the business if you take our guidance for Q4. So so I think we have plenty of room to grow and without adding a lot of cost but of course, you know there are it does more detail his salary increases and other things that inevitably got businesses absorb and you know and other factors as well, but generally I think we're pretty well.
All sides to expense wise to grow without adding a lot of expense pool.
Yeah, I mean, I think I think that's that's right Robin we're in the middle of our budget cycle and we'll have more to share with you in February you know related to expectations for <unk> for Q1, and so on but I think it is that balance of being very disciplined in the short term, we are being disciplined around head count growth being disciplined around you know all of our operating expenses.
While ensuring that were continued to be positioned well for longer term longer term growth.
Of course, there'll be some puts and takes right we save money on travel and entertainment. This year I assume that will be fairly conservative next year, but we hope to be able to travel more and see customers more often.
By the end of this quarter will have annualized RC will have cost so that won't be a variance will be talking about you know in the new year, which will be which will be great too. So.
Okay. Appreciate the color Robin Paul Thank you very much.
Our next question comes from the line of Joseph Giordano with Cowen You May proceed with your question.
Hey, guys.
Hey, Jeff almost along those same lines are are you kind of rethinking.
This the salesforce kind of organization a little bit at this point, because you're obviously being successful with people not traveling I know that's a huge part of your you know historically huge part of that sale and being patient visit customers, but now with the ability to kind of do things remote or are you organizing it internally different or people covering it didnt.
Regional anymore or how do you how do you think about this and about the new world.
Connectivity.
Uh-huh well around the restructuring we did earlier in the year. We did do some work on the sales force, what just to align them with their capabilities in areas, where we needed them. You know we saw strong growth potential over the coming years. So so there was some realignment on your point about changing the way we.
Work I mean, I I think we were pretty successful at changing to online sales and marketing and we kind of pivoted into that pretty well in the spring you know we've been seeing as much as 50% of our sales activity really being online and then what.
Very well [laughter].
Okay.
Noise there.
It works it works that was not a sales call going on in the background and fresh I don't think so anyway.
With that it works pretty well at selling online online for us customers are engineers and often sometimes they don't even want to meet with people in person there introverts and they enjoy kind of getting into the technology and we found that to be very receptive to kind of an online selling model, but where it can be more challenging or areas.
Where we have very sophisticated technology that requires hands on work on a customer site right and you know we would've expected to see some more sales, particularly from deep learning technology, and replacing human inspectors in Asia, we kind of talked about that I think a little bit in the last conference call, where you know it does run.
Acquire more onsite work. Unfortunately, now you know things in Asia are opening up much more and to and we're able to do much more of that so so it's a long way of saying I think that we've adapted pretty well we've reorganized our sales force to kind of address what we see in front of us.
I also wanted to ask on logistics I mean, I know you have some some core customers that are large retailers and that makes sense. So curious as to the momentum you're seeing on new customer front and whether it's.
Threepl type companies or like a Fedex GPS type companies or just smaller smaller retailers looking to move more omni channel I guess.
What's the pacing on new customer acquisition into that space.
[noise], we've been in this market about five years and so you know certainly in the Americas market, where we have the majority of our logistics revenue. We're around you know were well known I think to say the big technically sophisticated players in this market and they certainly respect and no our technology, but we're also expanding you know too.
So a lot of new companies that that are coming up particularly in the E. Commerce space. We had one very nice customer and this this quarter, who sold related products online for instance, you know one that was a new customer for us and sort of innovative startup companies I think like Cognex technology. Unlike the way we were.
Work. So so we're seeing some kind of growth in that area I think customers, we would really like to be doing more business and feel are not you know in a great place at the moment, our bricks and mortar retailers come customers that really haven't developed an E. Commerce model and then now struggling whether financially all logistically to do it right.
We also have had a good business in airport baggage handling, but she as you can imagine that isn't going anywhere right. Now. So you know there are definitely some.
There are some parts of the logistics market that that are down and not really in a signing up new customers for us.
Thanks.
Our next question comes from the line of Richard Eastman with Robert W. Baird. You May proceed with your question.
Oh, yes, thank you and congrats on a fantastic.
Fantastic quarter.
Just a question on the on the logistics business and the Commerce business that you referenced.
When we think about consumer electronics, you know there is a seasonal demand to get in front of you know the holiday season.
You. So it's logical that that falls off seasonally but the logistics business. You know there were some big orders booked by some of the upstream players you know in the second quarter lots of commentary on how that would you know that those bookings would ship well into 21.
Does how does the backlog look for you and logistics for E Commerce and <unk>.
It's through the same seasonal pattern there reserve enough up [laughter] panicked by the E commerce players to get square footage in place.
That business can be consistent from Q3 to Q4 and and run well into 21.
[noise], Yeah, Hi, Rick.
Generally backlog is not something we comment on access just at the end of the year and obviously, we but we did give some color maybe a year ago on some larger orders that were going out.
For longer periods.
I would say that I would say we were we're still getting to know the logistics market I think it's a market, where we can see pretty consistent revenue and over quarters. However, it can be lumpy when larger orders hit.
So this is not obvious to me now being in this market that it's a great great market in a particular quarter or poor market in a particular quarter. There is not a sort of cyclicality or seasonality that I observed and there is some lumpiness, but you know I draw your attention that I think we've seen very good sequential quarter again.
Growth in logistics and I think you know well said in general if we take out lumpy stuff to see that going forward and I might just add you know part of part of what's contributing to our expanded guidance range that we had the last couple of quarters beyond just sort of cold.
Kobin related.
Certainty is you know how we balance meeting customers' demands trying to pull orders in for instance, in anticipation of a challenging supply environment or not being able to get into deliver certain orders and so on so you know as logistics has grown it has added a bit of uncertainty to kind of that revenue timing for us.
Okay and did you have.
He or more than one no 10% customers in the quarter.
[noise] again make 'cause that's not something we disclose you know you can read our 10-K at the end of the year well tell yeah. Okay. Okay, Okay fair enough [laughter].
Any.
You could I just ask you you know the D 900 that you introduced back in the spring.
<unk> My my recollection is that you know the first target market or or a significant kind of first adopter in and vertical was around consumer electronics for some of those are tough to inspect applications can I can I just ask did the did the 900, how about you know a measurable.
Impact in Q3 growth I mean did it have that you know success.
Well, Rick first thing I'd say is I know you misunderstood if you thought it was a consumer electronics products, specifically I think our expectation where it was going to be a relaunch in automotive. So had the success. We're having isn't you know driven by them that the buoyancy event market I'll say that but it's it's very widely used.
Some of the coated related applications, I, but I I talked about.
Deployed the D. Nine hundreds you do inspection things like vials and mosques.
I see okay. Okay very good thank you.
Our next question comes from the line of Karen Lau with Gordon You May proceed with your question.
[noise] [noise], Karen we're not we're not hearing you.
Oh, Hi, sorry, I was on mute sorry about that good afternoon, everyone I'm not I was wondering if you guys are too I still do you any extended restricted by access to customers.
Customer site you know it during this period.
Which I guess would be to still apply.
Thank you, yes catch up pent up demand.
Projects that were or is there a place up.
Before or has that largely been caught up already if you can just kind of following up on that.
Well is it kind of mentioned in my opening remarks, it's a difficult its difficult to know kind of yeah, I'd say quite a lot of sort of volatility going on where customers. Some of them are really pulling in demand because they're worried about supply chain and a and I know what the second wave of cobot shutting factories will.
Causing disruption right and ER and then you know and then and then you have other ones who around like you suggest our haven't really had the resources and time will given us the access to to drive to the products and the projects. So it's it's it's not something I can really quantify for you on something I would say it's okay.
In person sales activity kind of varies around the world like in China.
100%, what it was before its going great guns in other markets, Japan, you know parts of Europe. It it's much less good less than 50% of sales activity in person. So clearly I think that that's an along with kind of spending anxiety and those kind of markets that [laughter] depressing or a sale.
And I would expect that to improve when we kind of get back to normal business in those markets.
Got it and then I was wondering could you comment on kind of the cadence I think pretty means and outside of C and logistics, which obviously have been very strong, but in auto and the other general industrial markets, but in beverage and whatnot.
How much are they still down year over year first of all and what what's the cadence that sequential improvement that you are seeing did you see you know maybe over the longer like sort of like ramp up and then now is that the sequential improvement is kind of a more steady petering out already has just been kind of steady improvement.
Can't talk about the cadence of like the activities that you are seeing in those markets.
[noise], yeah, so I I sort of mentioned I think on our last conference call that our automotive business was I think I said down around 40% in the second quarter. You know it was it was down much less right last quarter I wouldn't we're not going to get into the business of giving quarterly growth rates on on industries, but certainly you know bad but a lot less bad.
Then it was and I think we all know that automotive was our biggest market last year. So that's a pretty substantial headwinds that were starting to overcome but a lot of other industries actually kind of did did pretty well I would say you know obviously, we've talked about on trucks, but food and beverage life science medical devices pharmaceutical.
Those were all showing you know much more improved growth rates as we got into the got into the third quarter and consumer products, maybe was not as strong as we would have [noise].
I would like to have seen in terms of overall growth and again that may have to do with more access to factories and problems particular amount food processing and things like that.
Okay, and then a cadence that sequentially improved well like are you seeing like I think a ramp sometime over the summer and then it's just kinda petering out or it has to improvements out of that study over the course of the quarter.
Yeah, just just I mean, I've, it's difficult to say I think because as I say a lot of volatility pulls you want to comment Yeah go ahead.
We don't spend a lot of time talking about month to month color, but we do see obviously that you know April.
April was kind of Oh, we quite right and we have improved since then.
And again, it's still a bit too soon for us to say, whether this is you know.
He shape recovery or kind of some of the pulling in of orders are recovering from from a from a quite a depressed Q2.
Okay understood. Thank you for the color.
[noise] Oh, I guess, you would like to ask a question. Please press star one on your telephone keypad, one moment, while we fall.
[music].
Our next question comes from the line of Andrew Buscaglia with Baird.
Mark you May proceed with your question.
Good evening guys.
Hi, Andrew.
So you gave us last quarter, you gave a pretty strong guide for Q3.
And you exceeded it by quite a bit so.
I'm wondering you know, where where where you mostly surprise the minute you called out.
E Commerce logistics.
Consumer electronics is unethical called out you know some online learning working from home kinda it seems like a pickup in that activity, but where I guess.
Where were you guys surprised.
[noise] well kick off pull can give some more color and set certainly you know E. Commerce fulfillment. You know is very very strong for us a consumer electronics also I think came in stronger as we move through the quarter, but and then and then geographically Americas certainly did better I think than we were expecting as we move through.
The quarter.
Yeah, I mean, obviously, you know growth versus prior year, you know consumer electronics and logistics really were the drivers outperformance versus our our our guidance we saw kind of steady improvement through the through the quarter. A lot of that really was was driven by the base business as well just.
Converting converting orders more.
More quickly than we're used to seeing.
Just higher average daily sales Oh versus kind of what we had projected at the time kind of showing again a steady recovery those.
Those are kind of big drivers of which you know the Americas clearly, we thought there, but we thought pretty broad based across across our regions.
Okay.
Yeah. It was quite a you have you haven't seen in quite a I'd be like that on your own guidance sometime so that's interesting that those trends are.
Yeah, even stronger than you anticipated.
Yeah. We're proud of the revenue results were were not as proud about the guidance versus versus that's a very difficult business to predict.
[laughter], Yeah, imagine and I you know I wanted to ask you too on the their deep learning you made a comment that the D. 900 was when you're somewhat years, most successful product launch what I guess, what's behind that statement it doesn't seem like it.
Two material right now and you take your tying it to more automotive.
So a as a follow up where if we were to try to model in some material impact next year from this what's which end markets do we assume.
Assume that comes in.
Yes, it's a.
Deep learning is a technology, that's changing and expanding the served market as a vision right and the D. 900, really brings very powerful kind of techniques for inspection, particularly on to this you know well best selling smart camera platform, we own called insight and insights.
Has.
Tens and hundreds of thousands of users who know how to program in it and now they have all these extra tools available to them in the D. 900, So and what's wonderful is that's that's a very wide spread product. It you know says pretty much all the markets that we serve and and so it's bringing that 10.
No actually I think we would expect yes, automotive, but really almost all the markets that we said, we expect that the 900 to be a big player.
Where it might be less of a kind of a move to a gross overall would be in Asia, where it tends to be more interested in using a PC based vision, where software is loaded on two powerful computers and used in the factory and that's generally not used in a in other markets and.
That way, but fortunately in that market, we now have sewer lab and the technology, we acquired that which is very powerful and on PC platforms and useful for inspection so yeah.
Cognex when you launch a new product you know you don't you don't see hundreds of millions of dollars in the first year. This is not like a consumer market right. So normally it can tend to ramp you know and Oh you. We can it can approach a peak in the third year. So you know I would I would sort of I would temper your expectations, but the initial signs we see in the first six months you know.
In terms of its ramp are as good as any I've seen or what I really like about it is it's getting us to new customers, who couldn't use machine vision 'cause it was either too difficult or it didn't couldn't do the inspection that they currently use or its going to existing customers, who have applications and tasks. They couldn't do before and now we can do for them with the D 900.
Right, so well, where we're excited about expanding our our our served market tend to give you know kind of another data point. If you joined it if you will with us at our analyst meeting last year, we we size them, we sized the deep learning market globally in machine vision that that pointed about 100 million and we said we thought it was growing at 75%.
Right. So the ease of use is helping annually 70 plus annually. The ease of use certainly is helping you know to broaden that that the application served and the speed of adoption, but that may give you a sense of scale about what the overall opportunity is for technology like that.
Yeah. Okay. Thank you that's helpful.
Our next question comes from the line of Blake Gendron.
Wolfe Research you May proceed with your question.
Hey, Thanks, everybody I will.
Want to circle back on the third leg of the stool being automotive I'm somewhat scary to think if if you had all three of your your major end markets working at the same time.
You know U.S., our surprise on the upside I know, you're not going to give us a a you know exact cadence of recovery in that end market I guess looking past the pandemic things like electric vehicles seem to be the.
There was some pent up optimism on particular on the battery technology breakthroughs that we've seen from Tesla and others. So I guess my question is where does cognex stand on sort of the ice to easy transition what sort of uplift could we see from a.
Intensity standpoint here, just considering that technological inflections or really what drive your your demand.
Yes, well first of all Blake. Thanks for the question I, If I was I wouldn't say the third leg up as her friend automotive I'd say, the third wheel, but keep in keeping that in mind as we as we talk about it yeah, what a moat if it's a big market for US where you know the majority of our business has been and will be for a while and internal combustion.
One engine type back activities, but you're quite right to point to electric vehicles and battery manufacturer as being kind of the area, where you know we see very.
Very challenging <unk> applications huge capital investment, particularly in Asia around a battery manufacturer and techniques in that space, where machine vision can really make a difference in terms of yield and performance and scaling up would that work that has to happen. So.
He is still a very small you know a small part of our overall automotive revenue, it's growing very quickly and but I think it'll it'll be a while before it say is the majority of our business and based on what I see a new product you know you put up plans from our customers.
Gotcha wanted to circle back on working capital great execution in the quarter particular on collections work.
Work of working capital go from here.
And what are some of the puts and takes to free cash conversion is at a segment mix sort of input is that a customer mix input as deep learning and maybe some of the software centric capabilities get out to be a bigger part of the business is that going to have a structural impact on working capital moving forward.
Yeah, I don't see a lot of changes and structurally in working capital I need. It. So thank you for that comment we're.
We're very happy, but also pleasantly surprised by how good the collections environment has been our team has been working hard but also to really good partnership with you know with our with our customers to and and so on so yeah, I mean, I think in terms of.
Puts and takes we need each customer kind of where the where they are and where they need to be we look for opportunities to you know partner with them work work with them. We obviously do have a tremendous balance sheet, which can be a source of competitive advantage for us in challenging times, but we've seen fewer issues with collections from customers than we might have expected given.
Given the pandemic it.
It helps that I think we are a priority investment for them and they can't get more products, sometimes until they until they pay off but generally speaking we have a great relationship and I don't see big Big changes going forward.
Just its Rob here I'll, just build on something I mean, if if you followed cognex for Awhile you know, we're not like a normal company, we really believe strongly in paying our suppliers on time and getting the best support and having the best relationship with them and keeping plenty of inventory to make sure. We can supply the technologies that we have that have quite long road map. So we're not looking to optimize.
Working capital, we're looking to optimize high margin growth and the quality of our company. The other thing I would say in dealing with some of these very large customers you know some of them you know a very.
Poor poor long long term payers right and as as a pull into that our our balance sheet really gives us the I've covered to do that without without any concern.
Understood. Thanks for the time.
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Our next question comes the line of Joseph Giordano with Cowen You May proceed with your question.
Hey, Thanks, So let me jump I didn't just Rob just wanted to quickly clarify something you said I think I missed the beginning of it you.
You said in Asia there.
There are customers there that are more inclined in some cases these PC vision was.
Was that a particular application or I didn't I didn't hear exactly what you are referring to.
No. It's it's the market dynamics in general right. There's a lot of very high quality capable engineers in a in China, particularly and a you know and that who are less less expense. If I think I'm more eager to deploy vision and for those customers. You know we have you know the the best and most powerful PC vision.
Sweden, the well coopervision pro so a lot of them favor using that and a lot of them who are very big manufacturers use it very effectively.
Got it thanks, Yeah, Joe Joe Sorry, just to clarify and we you asking about deep learning or were you asking about vision in general.
I was just curious like you is this something are you competing against PCB vision for traditional like consumer electronic inspection like there I didn't think that was the case. So just curious as to like where are you where are you competing against that tech more often.
Yeah. So you see it you see a problem you know a larger share of PC based vision in Asia and electronics is you know a big big market there sure. Okay. Thank you.
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[noise] <unk> call I would now like to turn it back over to Dr., Bob for closing comments.
[noise] well, thank you very much and I want to thank all of those who called in and ask questions.
Well machine vision plays an increasingly important role in automating the manufacture of items the tracking of those items and even today the delivery of those items.
And view with that and in view of our leadership position, we remain bullish on the long term prospects for cognex. Despite current difficult business conditions, and we look forward to talking to you next quarter and reporting what I hope are going to be very good results. Thank you again.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great rest of your evening.
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