Q4 2020 Cognex Corp Earnings Call
Greetings and welcome to Cognex first quarter, 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad other.
A reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Susan Conway Senior director of Investor Relations. Please go ahead.
Good evening, everyone. Thank you for joining us today with us are cognex as chairman and Dr. Bob Sheldon President and CEO, Rob Willett, and Chief Financial Officer, Paul Gotcha.
And I did point out that our earnings release and annual report on form 10-K are they on.
On our Investor Relations website and other.
Ww dock Cognex, dotcom, well with flash investor.
It will contain highly detailed information about our financial results.
During the call, we may use and non-GAAP financial measure.
Well, it's going faster.
We believe it will help investors better understand our results or business trends.
You can see a reconciliation of certain items from GAAP and non-GAAP and exhibit two of the earnings release.
Any forward looking statements made on the earnings release or any that we may make during this call are based upon information that we believe to be true as of today.
And often change however, and actual results may differ materially from those projected or anticipated.
And you should refer to our SEC filings, including our most recent form 10-K for a detailed list of risk factors now I'd like to turn the call over to talk about.
Thanks, Sue and.
Hello, everyone welcome to our fourth quarter earnings Conference call.
As shown on the news release issued earlier today Cognex reported record fourth quarter revenue for 'twenty and 'twenty and we also set a record for annual revenue was well.
It was a challenging year, but with a lot of hard work, we did quite well and emerged and very good shape for 'twenty and 'twenty one.
This year marks a very important anniversary for cognex.
Not only been in existence for 40 years, but we continue to be the leader and our field.
This is a significant milestone a few technology companies achieve.
And on machine vision was in its infancy and 1981, but it does now playing a critical role and both industrial automation and and logistics, where it ensures the quality and accurate delivery of virtually everything that you purchase.
And by continuing to invest wisely and technology, we intend to continue to be the world's leading provider of machine vision and advanced barcode systems.
Finally, as we also announced earlier today this will be my last conference call as chairman of Cognex.
After 40 years at the helm I've decided to retire from Cognex as board of directors and also as an executive officer of the company.
I will continue to be a cognovit as an adviser to the company.
Of course, I have mixed emotions about this transition.
But I'm at that point and my life to make it and it also happens to be a time of unusual strength that cognex on.
I'm, very confident and Rob's leadership, and and the team's understanding of our business.
Our customers and our culture and it gives me great comfort knowing that I'm, leaving the helm.
This very special company and very capable hands.
Now I'll turn the call over to my partner.
And cognex, it's super capable C E O.
Rob Willett.
Rob and Mike.
The phone is yours.
Thank you Dr. Bob Thank you and and good evening everyone.
Before we discuss our financial results I want to take a minute and thank doctor Bob for his immense contributions to cognex and for instilling the enthusiastic entrepreneurial spirit that is the hallmark of our company.
Doctor, Bob and the unique culture. He built over the past four decades will forever be a part of cognex.
Now for our financial results.
'twenty and 'twenty was a roller coaster ride both for the world and certainly for us at Cognex.
We entered 'twenty and 'twenty optimistic about growth.
1919 had been a challenging year, and which lower spending by customers and our two largest markets automotive and consumer electronics resulted on a first revenue decline and nine years.
However, after the global COVID-19 outbreak and March 'twenty, and 'twenty and the related supply disruptions business shutdowns and capital investment pullback, we recognize that the outlook for 'twenty and 'twenty had changed we no longer believe to 'twenty and 'twenty would bring the broad based strength, we had expected weighted.
We started the year.
Given the circumstances, we quickly took steps to adjust our operating expenses to align with more modest growth.
These steps included a work force reduction, which was difficult for us and and organizational realignment that better for cat food focused our internal investments on high growth opportunities and important operational priorities.
As a result of these changes we've been better able to support called noise and customers through our own difficult pandemic related challenges.
From a business perspective, the second half of 'twenty and 'twenty with much more positive than initially expected.
And think of it as a tale of two halves revenue and the second half of the year was up a surprising 41% over the first half.
As a result, we reported good financial results for 'twenty and 'twenty setting a 40 a record for annual revenue.
Revenue grew by 12% year on year, thanks, largely to highest spending by customers and you can see.
And electronics and logistics, while we benefited from strong partnerships with market and technology leaders that fed well during the pandemic.
Spending and the broader factory automation market has also improved from depressed levels in Q2.
In consumer electronics revenue increased by approximately 30% year on year. It also represented roughly 30% of total revenue and became our largest market.
Much of our revenue and consumer electronics relates to the assembly of smartphones and the production of related components.
In 2020 that was on.
So a larger relative contribution from other electronic devices necessary for online learning and the work from home dynamic.
Logistics revenue grew by approximately 40% over 'twenty and 19, Judah growth and the E commerce sector.
Now representing approximately 20% of total revenue logistics surpassed automotive to become our second largest market.
We benefited from major E commerce, and omni channel retailers investing and automation to enable higher throughput and cost reductions.
Other sectors of logistics, such as bricks and mortar retail and airport baggage handling struggled in 'twenty and 'twenty.
Further bright spots included medical related industries, and semi both of which grew double digits year on year.
And we're proud that manufacturers, serving the health care industry are relying on cognex to help make COVID-19 vaccines available to the public.
More specifically cognex machine vision and deep learning are an integral components of production machines worldwide to ensure the highest quality standards and full traceability and COVID-19 vaccines and.
Implications include inspecting vials for defects, ensuring vials of vaccines or fill to the correct level and are free of contaminants and ensuring the vaccine kits are packaged correctly.
That's most of the good news on the negative side automotive revenue declined by approximately 20% year on year as business shutdowns further west and already weak fundamentals.
As a result, the automotive market, which was our largest market and 2019 dropped to third place in 'twenty and 'twenty.
Automotive is improving somewhat from its most depressed levels in Q2 and increased Q4 year on year for the first time and several quarters how.
However, it remains at a significantly lower level than in recent years.
Let's talk now about cognos or people.
Our achievements in 'twenty and 'twenty with were the result of the dedication of cognos needs around the world.
And they exemplified our strong culture by working hard and moving fast and a volatile environment to meet significantly increased demands from a few of our existing customers to win new customers and to successfully manage our supply chain.
Because of their efforts, we launched a powerful new products that have made us superior vision tools easier to use and therefore available to a wider audience.
The most important introduction in 2020 on one of our most successful product launches ever was the insight D 900, smart camera levered.
Leveraging insights widely recognized easy build their interface. The D 900 enables both existing and cognex customers and new uses of machine vision to apply our very deep learning tools to inspect surfaces for defects.
Popular applications include the detection of scratches and chip surfaces that were previously too difficult to solve using traditional rule based vision.
We also integrated deep learning technology that we acquired with Sue lab.
These techniques and now sold together with a B D tools running on the Cognex vision and pro deep learning software platform and are being widely adopted by more sophisticated customs to solve their most complex vision problems.
Revenue from applications utilizing our deep learning technology more than doubled year on year in 'twenty and 'twenty.
As we look at the opportunities ahead. We believe we are just scratching the surface no pun intended of what we can accomplish.
We believe deep learning and logistics will be major contributors to growth and the years ahead.
Now, let's talk about three D last month, we launched the insight three D. L 4000, and exciting new smart camera platform for the fast scrubbing industrial three D vision market.
The three D. L 4000, leverages, our successful insight intuitive spreadsheet interface, making it easy for a broad insight customer base to use powerful new vision tools created for true three D inspections.
On the development for some time, the three D O 4000, and Pacs novel capabilities into a compact form factor without the need for a separate P. C.
Exciting features include patented optics technology for superior image quality and the broadest range of three D vision tools available innovation system.
We believe the three D. L 4000, and does it breakthrough product that makes three D as easy to use as two deviation.
And it positions us very effectively against competitors, who have six significant sales and profits and this area.
Both called noise and customers are excited about these new products and others, we have and our pipeline.
Now I will turn the call over to Paul for details of the fourth quarter.
Thank you, Rob and Hello, everyone.
I'm pleased to report record fourth quarter revenue Cognex is first Q4 greater than $200 million.
At $224 million fourth quarter revenue grew 32% year on year.
It was also above the guidance, we gave you last quarter.
Yeah.
The biggest contributor to growth was the E commerce sector of logistics, which was stronger than we expected and.
And the broader factory automation market the positive momentum we experienced in Q3 held up better than anticipated and was the biggest driver of our beat to guidance.
Consumer electronics grew nicely year on year and was down on a sequential basis as we expected.
Gross margin was 75 per cent compared to 74 per cent and Q4 of 2019.
The stronger performance was due to a favorable product mix and higher volume.
Gross margin and logistics while.
They'll dilutive to the company overall.
Continues to improve.
The restructuring program, we announced last spring has been completed.
Final charges totaling $875000 were recorded in Q4.
Excluding those charges the combined total of Ardine and SG&A costs increased by 15% sequentially and was roughly flat year on year.
The increase sequentially was more than we expected due to higher incentive compensation related to our performance and 2020.
I'm encouraged that Cognize earned strong sales commissions and bonuses and 2020.
I can tell you they've earned it.
As a result, we fully funded our sorry as a reminder, we fully funded our company bonus pool and 2020 after not paying a bonus and 2019.
We continue to realize savings and travel and entertainment.
And from the restructuring actions.
Operating margin was 26% and Q4, which was below the exceptional level, we reported and the prior quarter, but 600 basis points higher than Q4 of 2019.
Turning now to everybody's favorite subject.
Texas.
There were substantial discrete tax items recorded in all periods that made comparisons difficult.
And Q4 of 'twenty and 'twenty discrete items combined for a net benefit of $14 million.
The largest was savings we realized on our U S tax liability when we filed our federal tax return and October related to new IRS regulations on the treatment of foreign taxes paid on acquired through a lab technology.
Excluding all discrete tax items, the effective tax rate was 14% and Q4 of 2000 2018 per cent and Q3 of 2020, and 18% and Q4 of 2019.
The slight decrease compared to our guidance and the prior periods was because we earn a greater share of profit overseas.
Reported earnings were 39 cents per share and Q4, compared with 46 cents and Q4 of 2019, and 49 cents and Q4 of 2020.
I'm, sorry, Q3 of 2020.
On a non-GAAP basis.
Earnings were <unk> 32 cents per share and Q4, compared with 11 cents and Q4 of 2019, and 47 cents and Q3 of 2020, excluding discrete tax items and restructuring and other charges.
Looking at the change in revenue for Q4 from a geographic perspective, we saw broad based growth across all regions year on year.
The Americas reported strong growth increasing by about one third due to growth and logistics and incremental revenue from medical related industries, including companies scaling up production for Covid related products.
And Europe revenue also grew by one third over Q4 and 19.
Logistics and consumer electronics, and the broader Fox factory automation market increased despite many businesses operating under significant restrictions.
Foreign exchange contributed about 600 basis points to that growth.
Revenue from Asia increased by more than 25 per cent year on year due to growth from consumer electronics logistics and the broader market.
Turning to the balance sheet, we ended 2020.
$767 million and cash and investments.
And no debt.
This balance is below both the end of 2019 and the end of Q3 due to a $2 per share special dividend paid in Q4 or as Dr. Bob likes to say a very special dividend.
Our approach to capital allocation remains unchanged.
We continue to manage cognex for the long term, while sharing success with shareholders.
Given how well we are weathering the current serious economic conditions and the fact that we have no debt and our board decided it was and the best interest of shareholders to return excess cash ahead of potentially higher tax rates.
Now I'll turn the call back over to Robert.
Thank you Paul.
In summary, Cognex ended 'twenty and 'twenty on a strong note and our guidance for Q1 is also very positive.
Even so the business environment continues to be difficult and volatile. In addition, the strength, we experienced and the second half was less broad based than we'd like.
We believe revenue for Q1 will be between 225 million and $245 million, which represents growth of more than 40% year on year at the midpoint we.
We expect Q1 will be the third quarter in a row in which revenue will grow by more than 30 per cent as a result of substantial backlog of logistics orders that we intend to convert to revenue and the first half predominantly in Q1.
Gross margin is expected to be in the mid 70% range and likely lower than the gross margin we reported in Q4.
Given the expected higher mix of revenue from logistics.
Operating expenses are expected to be flat to slightly down year on year, we expect savings due to our restructuring actions and lower travel and entertainment costs offset by higher commissions from the strong revenue growth we are projecting for the quarter.
Lastly, the effective tax rate is expected to be 18%, excluding discrete tax items.
Now we will open the call for questions. Operator. Please go ahead.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and you come from.
Come on indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the queue and participants using speaker equipment and may be necessary to pick up your handset before pressing the star key please limit yourself to one question and one follow up prior to getting back in the queue one moment.
Fair question.
Our first question comes on the line of Jim Ricchiuti with Needham and company. You May proceed with your question.
Hi, Thank you good afternoon and Dr. Bob I wish you the best.
Thank you Jim.
And <unk>.
So on to.
The outlook it sounds like the mix of business that you're suggesting and Q1.
Fair to say Robert is that skewed a little bit more toward the logistics than you would normally see because of the order activity and would you have and backlog going into the quarter.
Yes, Hi, Hi, Jim Yes. It is yeah, I think I think we're you know we're seeing growth across most of the industries, we serve and the first quarter, but the majority of the growth we're going to see and Q1 is going to be a result of logistics and orders that we already have and the backlog.
And just with respect to logistics and it appears you now have another large customer officially that youre disclosing and your K, although you're not identifying that customer, but and <unk>.
And I believe it's 14% of revenues can you give us a sense just as you think about the outlook for the logistics business broadly speaking and 21 and perhaps with this customer you're your visibility your line of sight into that that business.
Yes, well you know you correctly point out that we do have another la drove a 10% customer now cognex for the for the first time, having a second one and and it is a customer and logistics.
And you.
You asked about you know kind of visibility on the logistics business you know, we're seeing and a lot of strong growth and that market. You can see we reported about 40% growth and revenue last year and a very substantial growth on deck here and the first quarter I think we we think the first quarter will probably be our highest.
Logistics revenue quarter, and a while right. It is obviously larger than then we think we will be reporting and the subsequent quarters and.
But we we see we see broad based strength across that whole area and a number of other you know good good customers coming on line that will be on reporting revenue on and a lot of growth as we move through the year and in.
In terms of visibility.
There's some short cycle business and logistics and you know the 10 small quickly from bookings into revenue and then so probably less than half of it is that and then there are some larger deployments that we do which tend to be on our books and booked and then turning into revenue sometime.
And sometimes two three quarters after it books and and shows up and all backlog. So that's the kind of dynamics that we're looking at.
Thank you I'll jump back in the queue.
Our next question comes on the line of Josh Vogel and SKU with Morgan Stanley You May proceed with your question.
Hi, good evening folks and Dr. Bob Congrats again on a successful and storied career.
Thank you Josh.
So as long as we're kind of 10-K diving here I guess, maybe first question you know I noticed.
I think for the first time I I haven't scanned every single line, but Rob you mentioned, China competition kind of upfront as you know and new a new risk and and the business subscription I didn't see that last year.
Anything that we should be aware of I mean, China is still seems like it's growing pretty well, but is there a market shift going on there that kind of bears pointing out because certainly last year wouldn't indicate it but its new language all the same.
Yeah, Hi, Josh.
Yeah, I don't think there's anything too dramatic or radical going on there you know I think I think over a number of years, we've seen our competitors and in China and switch from being on sort of global competitors and seeing more more and more aggressive local competitors are going on are coming into the market. So.
And I think we're seeing that you know and I think I'm you know where are we keenly aware of that and we monitor the situation very carefully and you know some of them and try to compete on price, which can be difficult and machine vision, where there's a lot of technical expertise required, but certainly they're getting better. So yes, you know, we we take them more and more seriously and we watched them.
Closely and I would consider them you know a risk to the future, but the future of the business.
Got it it's helpful. And then you know and there's a lot of the other one of your commentary focusing on logistics and I I guess rightfully. So it's consistent with what we hear from somebody or the other peers in that space, but you know the.
The other two big markets that Werent really touched on electronics and auto and.
Electronics, you know, we know that inventories are still low lead times are still long on.
I think some of the broader automation you know cohort has seen a lot of strength and China in particular.
How are those factoring into the <unk> guide or how is your visibility for for those markets I'm, just giving you you haven't really touched on this much.
And I think we we expect to see Oh, Oh, you know most all of our markets grow Q1 year on year, but the big growth, we see coming from logistics and.
And.
Think you know consumer electronics, we saw a big year last year, and we still would expect to see some growth and in Q1 and in that market, but generally Q1 is a low quarter for logistic and I'm, sorry, if a consumer electronics, it's not a big tends to be more on Q2, and Q3 tend to be a big consumer electronics.
Quarters.
I often get asked this time of year, you're like How's the year and looking for consumer electronics and I gave you. The same answer really Ah that I gave every year, which is we really don't have visibility. We can share with you until sort of the May conference call. So I think we'll get a better sense of that overall I think if we look back of consumer electronics last year.
We saw it near the back end of the year, we didn't see much revenue from consumer electronics, and Q2, and we saw on most of it and in Q3 and still some healthy revenue and Q4 and and I think that was due to the difficulty and standing up lines and.
Getting a component inventory coming out of the most serious COVID-19 conditions, and China and elsewhere and in the spring. So that was the kind of the dynamic there and you know I think we're gonna see and a more more aggressive and and a faster deployment schedule, probably as we come into this year, but that's still a.
Relatively on.
On unknown and.
And anyway, and then I think you know we were expecting a lot of you know five G.
And a lot of other technology coming into phones last year I would think said, it's fair to say some of which you know we didn't see happen and we hope and expect will now come into this year's build them and you know it should help the electronics market, but also you know the electronics can be a bit of a up and a down market up one year up and next year down and.
Ex one up and certainly last year was more of an up market. So you know we have a moderate expectations.
You asked about and automotive.
Well and you know I did say that you know the fourth quarter that we just reported was the first in a number of quarters that we saw year on year growth and in automotive and we're certainly seeing that I'm pretty broadly.
Across all markets and including China.
Got it and it's very helpful. Thanks, Rob I'll get back in queue and and congrats team. Thank you.
Our next question comes from the line of Richard Eastman with Robert W. Baird <unk> co. You May proceed with your question.
Yes.
Good afternoon.
Well best of luck, well and won't be the same day.
And Richard Thank you, we'll have to see visible on just the.
But and so impressed with the just what you've done with Cognex and.
There's been a fabulous public company story, so best of luck.
Thank you and much of that gain is due to the tremendous.
On strategic and operational capabilities of our of my partner Rob and.
And the team that he's built but I'll take part credits and the right. So thank you.
Very welcome.
Hey, Rob just could.
Could you just speak to that.
And so much pressure lately and the you.
You know the challenges seem to be increasing not decreasing and Ron just semi chip shortages.
Both from I'm curious the impact that you might see from that.
And both on your own business and your own supply chain, but also just on how the customers are going to approach.
This increasing shortage scenario that we're seeing kind of globally.
Just your thoughts are on that for 'twenty one.
Yeah, Hi, Rick well first of all for Cognex and yeah, we we we're pretty capable and in terms of having plenty of component inventory at Cognex, we and the way we're not we're not afraid of having a very significant inventory and and.
And a key components and chips really.
On a part of that so we you know we're feeling comfortable at the moment about our ability to go on supplying on time for you know for the foreseeable future you know, so, but so and so where we're feeling and.
And in good shape in that respect I'm you know later in the year. If we found there was massive decommitment on already ordered and accepted orders for them from a from a around.
Liars that might lead to trouble, but I'm not we're not concerned at the moment, but then obviously the other impact is more on our customers and specifically automotive and I'd say, that's a bit of a.
A bit of a L.
Area of confusion at the moment, we're seeing and a stronger demand in automotive and perhaps we'd expected and so part of me wonders are part of the team wonder to what degree that that's on a panic buying of forward buying from customers, who really don't need to be doing that from cognex or to what degree it's really and Ah.
And uptake in the market overall, but certainly and you know you can read about it and the press that automotive, particularly our and there are plants from very large.
Oems that are closed because they cant get components you have to go in and and America too. So we're certainly seeing that as well in terms of other sort of basic interaction with where the automotive automotive is where we're seeing it mostly.
And I'm not seeing much of that and I'm affecting our electronics business and then our semi business itself is putting up good numbers right now we've seen good good growth and semi last year and that appears to be continuing them currently.
Okay and just.
Just to dovetail onto the automotive question, just just numerous and really aggressive schedules to Britney vs to market you know somewhere in the 'twenty three to 'twenty.
23 to 25, maybe a timeframe.
And again, we're seeing a little bit of uptick here, it's probably you know off of a pretty trough kind of bounce around probably more around ice vehicles, but.
My question really is when do you expect to maybe see some line of sight.
And start to get some traction.
And that's really focused on you know the EV market is too you know and including kind of battery capacity.
Hum.
Is that kind of pushed.
Pushed to 'twenty two 'twenty three.
And for you or how do you think about the timing there.
Yeah, well, Rick I first of all I think about you know battery manufacturer and that that's a business that we see a lot of demand for vision now and we're very well positioned with them you know, particularly with deep learning, but really the whole range of our products and it's a market. We've worked on for a while and that we see and we do business really with.
All of the major players and that space, and we're definitely seeing and a very strong and and improving demand and that and that market and I wouldn't say, it's it's a material yet to our business, but I think it can be.
And on a relative and the mint and the medium term and a relatively a short period of time.
So we see that then we see like you are probably not likely we see we see on visibility with our with our major customers on their plans to bring to market and electric vehicles, and <unk> and <unk> and suddenly they're you know generally if if.
If if a major brand owner you know Oems has is planning to launch a major electric vehicle, they're really bringing and vision in about 18 months and advance right. So you know that and they are introducing us to the line builder and that's backing the vision and to scale that up right now and certainly was saying and if some of.
Some of the signs of that beginning with beef costs have seen it over the last couple of years as well, but and a relatively small way and we're starting to see that and a larger way. So that's kind of the positive side of it and interestingly enough. You know electric vehicles, you know they have a lot of different things going on.
They don't have the on the powertrain and and.
And what we used to see with the internal combustion engine cars, but certainly there's a lot more sensors right and as you know a lot of changes changes to the product you know just whether it's even things like wheels and.
And tires and and and other things that are that we're seeing opportunities around us are up as a result of that switch and then on you know on the other side I think you know investment and internal combustion engine vehicles, obviously is being minimized, which is headwind and that market too.
Understood Yep Yep.
And just to sneak in one last question did the three D vision as you define it.
Consistently is has it grown too you know.
More than five per cent of sales with all the puts and takes and and the other.
Other markets is it is it 10% of sales yet there.
So it's less than 10 per cent and it did grow it did grow pretty healthily last year I think we have much higher expectations of it and the next few years given the product launches we've announced recently got.
Got you.
Okay very good thank you.
Kim.
Our next question comes from the line of Joe Giordano with Cowen and company. You May proceed with your question.
Hey, guys.
Dr. Dr. Bob and I was born the same year, you founded Cognex and Sadly for me I have accomplished in the Midwest and the west.
And then you guys have so congratulations on.
And you'll be missed.
Thank you Joe and thank you very much and I Hope your next 40 years more productive and your first 40 events.
Me too.
Rob.
You've always categorized logistics potential is.
And on average 50 per cent a year now that you and you have a big customer there and that's been very material.
It's a much larger business grew 40%. This year is that still your normalized expectation and within that context is that doable.
Unless that is it doable without the large customer growing and at least that day.
Well first of all Joe.
Cognex, we're very ambitious and we have stretch goals and swipe describe the 50% is a stretch goal number but one we've been able to achieve or come close to you know for for a number of years here with logistics and we grew about 40% last year and I think we would have hit that or exceeded that 50% number I have some of the other logistics market.
We expect a very strong growth from coming into the year, notably more bricks and mortar retailers and airport baggage handling to put up the numbers we were hoping to so certainly that's the case and then we do see a lot of you know a diversification of our customers in general we have many more on.
And the channel retailers, who are investing you know and in a big way I'm too to have on an E. Commerce platform that complements that stores. So you know, we we expect to see other large obviously, maybe not 10% customers, but large customers as we move through the years ahead, and then you know.
Or a big customer there you know obviously as you know a major investor and automation and one I think that still has a very small share of the overall market that it can address so and and global aspirations that I think we're hoping to and expect it to keep up with so it is certainly the potential is clearly there and the technology and.
The infrastructure, we put in place to serve it is there, yes, and but you know there may be there may be volatility along the way, particularly within quarters and that business.
Understood.
And then Paul when you think about this year and when you were able to accomplish and a world where people aren't traveling and.
And as a way of.
Doing business for you guys like fundamentally different and in some respects.
Should we think of SG&A per.
Turning to sales and a truly low or even as things start to come back going forward.
I mean, yes, and no I think you know I've been and finance for Awhile and every year, we would try to you know.
Squeeze T and need to drive some some profitability and it turns out a global pandemic is actually more effective technique and reducing travel and entertainment and finance people, writing people come and forecast or budget time, but you know so we've been fairly conservative about our planning for for tea and <unk> for this year, although to be clear, we would like to be traveling more we would like to be visiting customers.
More.
We've pivoted nicely to online sales activities, but you know, we really do value of that and face to face relationship with our customers and and and clearly with other cognizance too. So you know.
And it's a part of that I expect that will ramp up fairly slowly we were going to get some savings on that and Q1, because we're anniversarying largely a pre COVID-19 world and Q1, but I would hope it and the back half of the year, we will see a little more I think the nature of our activities. We do will be different I think kind of when we choose to meet well may be different than we've done before.
And.
One example of that being sales launches sales product launches, we launched our largest product. The day 900 entirely virtually this year and and actually there was some real benefits to doing that.
And that you don't have a whole bunch of people with nonrefundable tickets from around the world depending on a certain product launch timing and if we decided actually we want to hold that product for one more month. You know we're not you know, we're not left holding the bag or making kind of a difficult decision. So yeah.
Yeah, and and then you know to some extent, we obviously would look at real estate going forward. Although again, I think cognex will be a place where we always value the face to face collaboration, particularly for engineers our solution providers, but you know on the margin. We did close 11 offices through the course of our restructuring or downsize and.
Obviously look on our real estate portfolio as well.
Okay.
Our next question comes from the line of Matt Summerville with D. A Davidson you May proceed with your question.
Thanks, and congrats Dr Bob as well.
A.
One question here when you think about kind of the sequential revenue cadence as we move throughout the year should we be thinking about seasonality differently. This year, you have upfront and maybe loaded logistics year versus kind of an easy <unk> comps and China easy second quarter Cups, and other parts of the world due to walk down.
And then you have kind of the moving pieces with CE and I know, it's hard to sort of guide out beyond one quarter, but maybe Robert you're able to give us some sense for how we should be thinking about that sequential cadence that might be helpful.
Yeah, Hi, Hi, Matt in.
In general at Cognex, We don't give you know annual annual guidance, but but I think here's what we have said or you know can say is that we're expecting a large unusually large first quarter as a result of logistics backlog turning into revenue.
And are you know we have a very healthy logistics business that you know is putting up great great growth numbers, though and I do expect good growth continuing through the year, but not to the degree that we've seen this what will be and unusual Q1 for cognex.
And then you know consumer electronics.
It's it's been on.
A pretty reliable large contributor to growth in Q2, or three that's and well both REIT. That's gone on for many years now and I would expect to see similar things and we'll have.
Have more of a sense of the timing of that when we talk to you and at the next conference call and in early May and then Q4 is always a strong quarter for our broad factory automation business you know it tends to be a lot of the year and purchasing from markets like automotive and and other and other general.
Market food and beverage pharmaceuticals, medical so often particularly and in the U S, where there's kind of a budget flush phenomenon and that goes on and so I'm not able to give you.
Specific but I think that's the kind of cadence I I would expect and I think Q1, obviously is going to be unusually large due to this very large logistics revenue that's going to hit us.
Thank you and then maybe as a follow up can you maybe comment as to the action ability of what you may have and the M&A pipeline and how we should be thinking about share repurchases. You guys were pretty active and Q1, and then kind of table things for the balance of 'twenty and 'twenty. Thank you al.
And I'll talk about M&A type stuff and then I'll have Paul and took about Pep stuff you know the other balance sheet issues. So yeah.
Next we're always looking at and acquisition opportunities you know and you.
And we really like to purchase and technology companies with a great engineers and technology, who can bring it to cognex and you've seen us do that with through a lab and VT and and shape and chiaro and other businesses that we've acquired over the last five years or so and.
So we're always working on that and you know those deals happen when they happen and when they're actionable. So there's nothing specifically I can point to them and so that's that's and that's kind of how the outlook is there and but Paul can speak to other aspects of the balance sheet, yes, no. Thanks.
And Matt I think that as we've said before the the purpose of our stock buyback program is primarily to offset the dilution from stock based compensation. So we repurchase as you noted $1 2 million shares and in Q1 of 'twenty and 'twenty.
<unk> spent $51 million doing so on an average price of $42, which looks really good right now from a repurchase point of view and that but that actually did cover the dilution from our 'twenty and 'twenty annual grant during that first quarter.
We don't we don't take the the the buyback.
So time constraint or is it maybe looked last year, we do tend to issue on the majority of our equity and in the first quarter as we do through annual grant programs, but are kind of mandate from the board to buyback that dilution is really quite broad.
We we would aspire to do it.
And year broadly, but tightening within year or if it happened to carryover.
On extend and where we happen to be opportunistic and buy a little more you know I would view all of that is sort of consistent with our with our philosophy. So you know, we we do have $280 million roughly remaining and our repurchase program.
So I feel like we've got you know, we've got cash and dry powder.
We will be issuing equity you know quite shortly and.
And Oh, well, we'll make those decisions and partnership with the board kind of quarter to quarter about when to be more aggressive and and and when to get ahead of dilution and use it can be five one trading plans as appropriate as well.
Great. Thank you guys.
Our next question comes from the line of.
Low with Gordon Haskett, you May proceed with your question.
Hi, good afternoon, everyone and and my congrats to you Bob on his retirement as well.
So Rob I think two quarters ago, you initiated a cost reduction action I guess, what's the problem is that the 1 billion dollar sales.
Milestone has been pushed out because of the pandemic right.
Keep growing at that rate and you wouldn't have to wait very long to reach that milestone and so I guess the question is at what point do you think.
And you have to add back kind of people costs and obviously, we saw very strong incremental margins on fourth quarter and <unk>.
Guy So I'm just curious you know at one point as costs have to come back and is there something about perhaps the new way of selling on new ways of operating that and might lend itself or sales people to be much more productive than previous cycles, and so you may not have to add back so quickly.
Yeah, Hi, Karen.
So I think.
I think if you go back and you look at you know Cognex is head count increases and our investments over the last three years, what perhaps you know since 2017, you can if you can see that our level of investment and our head count additions that exceeded our revenue growth significantly and I think coming into this day.
Into 'twenty and 'twenty, and we're expecting strong growth and and then when Covid hit we realized that that was going to be pushed out. So it became obvious that we needed to kind of adjust our our head count and but we also saw opportunities to shift head count and into areas, where we saw stronger growth going forward. So low.
Sticks and deep learning being obvious example, and Ah Yeah and then.
I think it's been just a very volatile situation. So I think we know we.
And restructured the company and AR and AR and a very healthy.
Healthy way for its future growth and.
And I think we still have good capacity in the business to absorb more growth without adding a lot of significant head count and.
But we'll have to see kind of how things develop going forward and where what rates of growth and what need for head count we have and future I would point to on our engineering spend which as a percentage of revenue was certainly relatively high and healthy we spent more last year on a on R&D, then we spent and any year in the company's history.
And so certainly you know we're not we certainly havent curtailed our R&D and engineering on our product launch plans and any way. So in terms of where we may need capacity. It may be more and the sales force and but if you listen on numbers overall it doesn't imply that we're you know we're were understaffed or capacity constraints.
And in most areas of the business at least and the short term.
Okay.
And so the incremental margin right now and should be pretty sustainable and then.
And then you know you kind of revamped and have to reevaluate and and towards the end of the year and see how that becomes a great trajectory is going in and we have to eat at nee.
And digital sales people.
Part of that.
Oh, that's right yeah, Yeah, I mean, yeah, I think we're watching the situation very carefully you said margin I mean, the only and and I think as that relates to expense. That's probably correct. I think you know we did point out that we expect our gross margins to be a little lower in Q1 as a result of more logistics business, which generally is if margins are improving.
Nicely over time, but it still is dilutive to our gross margin so that would be the only qualification and I'd put on what you said, yeah and on and Rob I can add on the operating expense point of view you know a year ago, we were calling out.
Roughly $25 million of kind of incremental opex going into our cost base in 'twenty and 'twenty associated with a reset of our annual compensation plans, having not paid a bonus in 2019, and then a full year of sewer lab expenses, a portion of which is deep learning engineers on the team and the salespeople, there as well and a portion of which.
And just the structure of the acquisition, which had a deferred compensation component that hits your opex over a over a four year period, we don't see sort of any major disk.
Ads like that and in the current year I think there are some puts and takes right. This quarter will be a little low on T and E. I hope and the back half will be a little higher for the year, we expect our team to be up slightly you know from.
From a head count where were making and a major investment, which we cited in our 10-K around a new CRM and see PQ configure price quote and customer relationship management system. I think we've we've referenced up to about $10 million and spend much of that capex this year, but some of that opex.
And that we're that we're bringing so we have some puts and takes but by and large I don't think there's any sort of major resets and let's say like there was from 2019 going into 'twenty and 'twenty.
And then of course, we have two more quarters of Q1, and Q2, where we should be seeing seeing healthy benefit from the restructuring actions, we took last day.
Got it got it and that that's very helpful. Color. Thank you and then I wanted to follow up on on the auto discussion. So Rob you talked about like the differences.
And definitely the closure on EV different components trusses that yeah Oh.
Sure historically, you have and very strong relationship with the tier one suppliers.
Suppliers and the other supply chain and how is your competitive.
And positioning on the EV component side and I think.
But you know, if Ryan and competitive dynamics coming across different competitors and things like that you can give us some color on like how you're positioning and needs are.
But you're on.
Historical.
Exposure.
Yeah, Kevin I think I think on one thing I'd point to is I think a lot of the tier one and.
Suppliers that Cognex has had very strong and has been the majority of our automotive business. You know obviously, we continue to work very closely with them and.
But I think some of the.
You know the kind of powertrain internal combustion type of parts of that business, obviously is declining and being replaced with EV battery business and a lot of the technology that goes into making you know EV batteries as being really developed and is being scaled up.
By Asian companies right. So so that's been kind of a shift and where and the problems, they're working on and some ways up and some in some way, it's very different but fortunately there are areas that cognex technology, and a very capable and and and substantial sales force in Asia is very well equipped to deal with.
So this is an area, where we've been able to pivot our business and in some ways and it's more like electronics and we've been working with those very sophisticated EV battery manufacturers and notably in Korea and in China and.
To to meet their needs using some technology and capability that we perhaps had originally thought we would use and electronics. So so overall I think we're pretty well positioned and you see some of those those names that are big EV suppliers.
And also EV car manufacturers themselves, who are making plays and batteries are starting to be much more substantial customers of cognex and probably at the expenses some of the tier one suppliers and notably and in Europe, who maybe over the long run are losing share on to that shift that's going on and business.
Okay. That's helpful. Thank you.
Our next question comes from the line of Andrew Buscaglia.
Thank God you May proceed with your question.
Congrats on Dr. Bob and good luck.
Andrew actually I had a really important question for you, though before he got surprised on that day, yet, but what is your departure I mean force. So it was really entertaining any other reports that you guys put out.
Well I think as you go into like the one for 'twenty and 'twenty and I was certainly involved and that one and and.
And as an advisor and I'm going to continue to be a cognos and I don't know if the press release made that clear and adviser to the board and the company and I expect that and they will still call on me for for my input and my creative input into future annual reports on blood.
I hope that there's no change on our philosophy of taking.
Picking a work seriously, but not taking ourselves seriously.
That's great to hear.
So now for a couple of other questions I had.
You know Robert you cited.
And some interesting commentary on it.
AI and deep learning.
And the quarter you know it started it's starting to perk up and yourselves can you give us some sort of context around how you think about that in 2020 and why is it still is this gonna be growing fast. So I was just going to be.
Hum popping up as meaningful.
Through our revenue or margins or both.
You know and then what end markets should we expect to see some debt.
And on movement from AI deep learning.
Yeah. Thanks, Thanks, Andrew and I I've, just got to add that you know there's no no one more creative to tap and Doctor Bob So the annual reports and I think Keith and with it.
And one of his key advising Ralph good there.
With that but.
But yeah, so so about deep learning and I'll make some commentary on that you know, it's we you know we see it as a technology that's kind of.
Changing the vision space and it's an area, we're investing and and leading and a lot and you know goods.
And it's primarily software driven and the gross margins are very good and highly accretive to our business. We said it more than doubled last year, it's still less than 10 per cent of our business overall, but it is a big growth driver. It's happening really on two fronts. One is we're taking that technology and putting it into the smart camera insight platform that we have and the <unk>.
100, and AR that we launched and on one of our most successful product launches.
If not the most successful product launch we've ever had you know is is using that technology and making it easily available and so you can expect more of that to go on and I think change the modular vision system, a smart camera type space that we serve and then also it's really providing a lot too.
The very high performance high processor requirement business that is our vision software business and you know that's bringing a lot of technology, particularly into the electronics space now and it it's adding a lot of value, particularly around the inspection area. Some of the technology, we acquired from Sue a lap is highly.
A relevant and this space and it's beginning to get traction with customers. Some of its introduction was held back a little bit by not being able to get engineers on site to customers. During the COVID-19 situation, but you know, we're seeing I think hopefully and and so that and and and the real opportunity there is to replace human Inspector.
And as you know and there are tens if not hundreds many hundreds of thousands who are working on visually inspecting products that we think our technology and that space using vision software and some of them are large customers, who are very technically sophisticated and see this potential and are working on it with us. So you know and I think there are two avenues that we see.
Deep learning changing and you know we're expecting to continue to see really solid growth as the great engineering capability, we have in that space bleeds more and more into our product line over the years.
Interesting, okay, and yeah, everything's pretty picked over but.
Are you able to give us a sense of the percentage of sales from each end market.
And here, you say automotive and third I believe.
Alright, guys billing to break that out and the first two.
I think I think what we've said and Paul can come in here too I think we said and electronics was approximately 30% of our business. Overall I think we said I think we said the automotive did we mentioned and that Paul Yes, Yeah. So logistics with second for 'twenty and 'twenty at about 20 per cent automd.
Automotive was also about 20 per cent, but lower than slightly lower than logistics and then you know kind of the remainder of our portfolio, which would include consumer products food and beverage medical semi conductors and that would comprise the remaining 30 per cent.
Okay. Okay.
Okay, not great and I think that not that you need a reason to read a very exciting annual report, which is coming up and I think there's a little there are a few pie charts and now to break it down as well.
Okay, Great ROI.
Looking forward to it thank you.
Our next question comes from the line of Blake Gendron with Wolfe Research you May proceed with your question.
Yeah. Thanks, Good evening, Thanks for sneaking me on here and and Dr. Bob probably a shortlist of company founders that retire or at least to a degree with company's strength and an all time high so congrats.
You know I talked about you've talked about consumer tech and you've talked about.
And the qualitative outlook, there and and maybe the puts and takes and and on the periphery of this question, but I'm just wondering in terms of a semi shortages and and what we're seeing in terms of bottlenecks and the supply chain, how that impacts either the throughput and and more the demand side on consumer Tech.
Or it's.
And if it impacts your input costs any meaningful degree.
Yes, hi, well I think we spoke a little bit to that question earlier as it related which we don't see shortages and our own supply chain, where you know we're seeing on automotive customers struggled with it but it doesn't.
And we're unclear whether that means that pulling forward.
And consumer electronics, it's not clear to me at the moment that you know that's having any impact but as we as we know that business scales. Later in the year. So we're really going to have a better answer to that question I think when we report next next time.
Okay that makes sense and then just to dig into three D. Here, a little bit it sounds like it's an exciting growth Avenue for yourselves and the broader market here and machine vision I'm. Just wondering you know specifically and manufacturing as three day applications grow is there any cross talk or cross communication with two D vision and is there any cash.
Cannibalization I guess of one versus the other as to really get a bit more popular here how should we how should we think about the interplay between <unk> and maybe other major buckets and machine vision.
Yeah, I would say you know if you you probably wouldn't do things and three D that you could do and two D. Because it's easier and less expensive less processor required less optics required right. So you know three D. I think is additive.
And you know, we're going to see lots of three D and two D together right and applications and we certainly have those capabilities and more and more of our customers are using them. So perhaps a way to think about it is it's going to grow the market and it's going to lead to higher spend per customer to do more and more sophisticated things.
And with their application.
Makes sense thanks for the time.
And I think we're near the top of the hour.
So I think we'll we'll Dr. Bob I think we will we'll turn it over to you.
Okay. Thank you and.
And I want to thank.
All of Cognex and stakeholders, our customers our employees.
Our vendors on our neighbors and our shareholders for helping us to grow and succeed over the past 40 years.
And wanted to thank our customers for partnering with us through tough times.
And thank our cognos around the world.
Past and present.
And their dedication to our mission.
I want to thank our vendors for delivering high quality components to wassa at fair prices and on time, even during parts shortages.
And I want to thank our neighbors, where cognex is offices for providing us with safe and attractive neighborhoods and.
And when should we can work and play.
And last but not least I want to thank our shareholders, who took the time to understand our company and its unique work hard play hard move fast culture.
And we have maintained their trust in us through.
Through these years.
Thank you again for joining us Tonight and he.
And here's to another 40 fantastic years during which cognex will continue.
To preserve and enhance.
Sure.
Good night.
This concludes today's conference you may disconnect. Your lines at this time, thank you for participation and enjoy the rest of your evening.
Thanks.
[music].
Yeah.