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Cognex Corp
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Greetings. Welcome to the Cognex Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to Susan Conway, Senior Director of Investor Relations. Thank you. You may begin.
Good evening and thank you for joining us today. With us are Cognex’s Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham.
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.cognex.com/investor. Both contain highly detailed information about our financial results. We 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 2 of the earnings release.
Any forward-looking statements we made in 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. 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 SEC filings, including our most recent Form 10-K and subsequent quarterly report on Form 10-Q.
Now, I’d like to turn the call over to Dr. Bob.
Thanks, Sue, hello everyone, and welcome to our second quarter of 2020 earnings call. It has been a very busy three months since I talked to you last earnings call [Technical Difficulty] in our business and most others have deteriorated substantially due to the worldwide government ordered shut downs attributed to COVID-19. Because of that, we had to make difficult measures to align our company to the slow down and that resulted in large write-downs in Q2, severely affected our reported our financial results.
The details on those results and what Cognex has been doing this past quarter, I'll turn the call over to my partner, Cognex CEO, Rob Willet. Rob the microphone is yours.
Thank you, Dr Bob and good evening everyone. Tonight Cognex announced financial results for Q2 of 2020 that reflects the difficult business environment we expected when we spoke with you in April. Good news to report is that revenue increased by 1% over the prior quarter. This was better than we anticipated due to our faster than expected delivery on a substantial backlog of orders from the logistics market.
Cognex worked hard to manage our supply chain and deliver Cognex products to customers despite significant components shortages. However, revenue declined by 15% year-on-year due to lower spending by customers in Europe and the Americas. The downturn was most noticeable in the automotive market, which was our largest end market in 2019.
Growth in logistics semi and life sciences helps offset that decline. Business activity is improving, but demand in many of our markets is weak and is expected to remain so through the end of the year. Despite that, there are two areas of strength in our business that are contributing positively.
One is e-commerce sector of logistics, even though most retail stores, airport baggage, handling customers and postal accounts as struggling, major online and big box retails are stepping up their investments in Cognex machine vision to enable highest throughput and productivity in their distribution centers.
The other sector that's doing well is consumer electronics. We are now delivering large deployments of Cognex products that we expect will be recognized revenue in Q3. In addition we’re pleased with how productive our sales team has been during these times of limited customer access. Salesnoids and application engineers have been successful holding technical discussions and product demonstrations by our video conferencing and winning a lot of business in this manner even with new customers,
Next, let's talk about the plan we announced here in Q2 to lower Cognoid headcount by 8%. The decision was a difficult one given our company culture and the value we placed on perseverance, but it was something we had to do given the circumstances. We entered 2020 stuffs to achieve significant new revenue levels, perhaps exceeding a billion dollars in a year or two, but unfortunately that is unlikely to occur due to the economic disruption and therefore we right-sized the team for more modest near term growth.
As part of the restructuring, we saw an opportunity to reduce duplication and redundancies that is built up in our business from years of global expansion and acquisitions. We reorganized our engineering teams around the world in a way that we believe shoppings are focused on specific growth areas and enabled us to leverage Cognex's unique capabilities more efficiently.
After the restructuring, we still have the capacity for significant growth. We've not changed our product roadmap nor have we delayed new product development. We are also moving forward with other initiatives such as IT systems upgrades, process improvements and projects to support future growth.
Another development in Q2 that I want to address is our write-down of a portion of the deep learning technology that we acquired in October with Sualab. We’re confident in our deep learning strategy and believe Sualab has an important role to play. However, Sualab's technology required hands-on application engineering and in-person collaboration with customers and that's difficult to do in the current environment. As a result, our projected revenue for Sualab has been pushed out thereby reducing the value of that asset.
We continue to be bullish about our overall deep learning business. Deep learnings bookings have increased by more than 50% year-on-year, making it our fastest-growing product category. A major step with the launch of Cognex's In-Sight D900 smart camera in April, the D900 makes advance deep learning technology accessible to the tens of thousands of manufacturers who have standardized their factory automation on our industry leading In-Sight platform.
Initial sales are growing nicely as customers discover how effectively the D900 finds defects on complex parts and accurately leads badly deformed, skewed, and poorly etched codes. In other product news, we launched the In-Sight 8505P, a high performance 5 megapixel smart camera with Cognex HDL plus technology. This is ideal for integrating into tight spaces on production lines.
It's important for our Asia region where electronics manufacturers and OEMs value its combination of precision speed and small form factor for demanding applications, such as inspecting assembled devices, the manufacturing defects. We're proud of these new In-Sight products and doubly proud to have launched them in the current environment. They demonstrate the advantage that our culture brings as we effectively work together during these challenging times.
While many Cognex is still working from home, we're maintaining our product development plans and remaining on schedule with our operations and process improvement plans. Regarding the supply, managing our global supply chain continues to be a challenge currently, but we're navigating well under the circumstances.
In Q2, we saw some vendors struggle to supply parts. We also continue to see freight deliveries taking longer and costing significantly more. Our close relationship with suppliers and our practice of holding substantial component inventory have helped us in the current crisis. Even so we recognize and continue to plan for the possibility of supplier and customer closures and further disruption down the road.
Let's now turn to details from a second quarter. Paul, over to you.
Thank you, Rob, and hello everyone. As you know, Cognex is known for being straightforward. We typically discuss our results almost exclusively on a GAAP basis, but we believe some pro forma disclosures will be helpful this quarter, given the actions we took in Q2. With that in mind, let's get into the details.
Revenue for the quarter was $169 million, which was better than we expected, but still weak. That level represented a substantial decline year-on-year in the broad factory automation market, particularly automotive. The impact was most noticeable in Europe and the Americas because of widespread business disruptions in both regions, partially offsetting the decline with growth in logistics where e-commerce fulfillment customers performed well.
Logistics also increased on a sequential basis that growth combined with returning production in China offset the decline we experienced in other areas of our business from Q1 to Q2. Reported gross margin was 70%, which included a reserve of $7.7 million to excess inventory resulting from the business decline. Gross margin was 75% excluding that non-cash charge, which is consistent with Q1. It was slightly better than we expected due to a favorable product mix and improving gross margins in logistics.
Operating expenses in Q2 included a restructuring charge of $14.8 million, primarily for the workforce reduction discussed by Rob. Our restructuring actions were substantially completed by the end of the quarter. We expect a residual charge of between $1 million to $2 million in the second half, primarily in Q3.
We also recorded a non-cash charge of $19.6 million in Q2 primarily, the write-down a portion of the intangible assets from our acquisition of Sualab. Excluding these onetime charges, the combined total of RD&E and SG&A declined by 14% on a sequential basis as expected. The decrease was due to lower stock option expense and saving some actions we implemented early in Q2, including lower travel entertainment cost, prudent management of discretionary spending and the restricted hiring plan.
We reported an operating loss in Q2 because of the charges for the restructuring actions in tangible asset impairment and inventory write-down. Excluding these charges, operating margin was 21%, which was approximately 800 basis points higher on a sequential basis. The decline year-on-year was due to lower revenue as compared to Q2 in 2019. The effective tax rate in Q2 was 19% excluding discrete tax items that were higher than we expected because we now believe more of our profits in 2020 will be earned from tax and higher tax jurisdictions.
On a non-GAAP basis, earnings were $0.18 per share in Q2 compared with $0.28 in Q2 of 2019 and $0.11 in Q1 2020, excluding discrete tax items and the free charges just mentioned. Looking at the change in revenue for Q2, year-on-year from a geographic perspective, our best performing region was Asia, which increased by low single digits year-on-year, higher revenue from consumer electronics offset a decline in automotive. Our customers in Asia are now largely back to work and in that regard ahead of other regions.
In the Americas, revenue declined by low double digits year-on-year. Growth in logistics almost offset a substantial decline in revenue from automotive. Spending by manufacturing customers is gradually improving. Facilities are reopening and we're winning business from companies that are scalping up production for COVID-related products.
The most challenging region in Q2 was Europe where revenue declined by 40% year on year. Business shutdowns further worsened already weak fundamentals in automotive. The timing of revenue from consumer electronics was also a factor. In that regard, large order revenue from consumer electronics in 2019 was split between Q2 and Q3. This year, we expect that business will be mostly concentrated in Q3 and with a higher proportion benefiting our Asia region.
Turning to our balance sheet, we ended the quarter with approximately $900 million in cash and investments and no debt. Our approach to capital allocation remained unchanged despite the difficult business conditions. We continue to manage Cognex for the long term while also sharing our many years of success with shareholders.
We paid approximately $10 million in dividends to shareholders in Q2 and tonight we announced a similar payment to be made in Q3. We do not buyback any stock in the quarter. Our inventory balance decreased by approximately $7 million or 12% from the end of 2019; however, excluding the substantial E&O reserve we recorded in Q2, inventory was roughly flat over the six month period.
Now I'll turn the call back over to Rob.
Thank you, Paul. Moving next to guidance, we expect Q3 will be the best quarter of the year by far with revenue between $200 million and $220 million. That range represents an increase both year-over-year and sequentially due to higher expected revenue from consumer electronics, which we believe will be mostly concentrated in Q3 of this year. We also expect to see another strong quarter in the e-commerce sector of logistics as we deliver on business that we have been working on for some time
Despite that strength which can be attributable to a few large customers in e-commerce, semi and electronics, overall demand is lackluster and it's unclear when that will change. Gross margin for Q3 is expected to be in the mid 70% range, slightly tempted by the high volume of revenue we expect from logistics. The combined total of RD&E and SG&A which excludes the charges that we discussed tonight is expected to be relatively flat year-on-year and sequentially. Lastly, the effective tax rate is expected to be 19% excluding disagreed tax items.
Now, we will open the call to questions. Operator, please go ahead.
Thank you. [Operator Instructions] Our first question is from Karen Lau with Gordon Haskett. Please proceed.
Rob, you sound pretty downbeat on markets excluding e-commerce and CE, I was wondering, are you guys not seeing any meaningful sequential improvements in markets outside of those two? And can you maybe comment on kind of the rate of decline you saw in April versus the exit rates you saw in June or maybe July even?
Hi Karen, yes, I think the story really is that the automotive market, which was our largest market last year. I mean, it looks so sweet and I think that's the main source of it. There are other markets that we serve, medical-related industries, including life sciences, medical devices, pharmaceuticals, product security, a broad range of our markets, more than other markets, actually what you're performing reasonably well and showing some growth. So, I don't wish to sound overly negative, but certainly automotive is the market that is giving us substantial headwinds.
To that point, can you comment on kind of the exit rates that you're seeing in auto in June and July? How much is down year-over-year?
Yes. I'll give you some color on that. I mean, so, I think automotive was our largest market in 2019 and it was stopped coming into this year. But we were optimistic at the start of the year that, we thought things might pick up in the second half and obviously we no longer expect that to happen, given the COVID situation. Demand from automotive deteriorated sharply around the COVID outright and revenue from automotive declined by 40% year-on-year in Q2. So it's roughly $25 million of headwind for us in the quarter.
It continues to look weak worldwide, including spending even on electric vehicles, not really showing this right as we might've expected. In terms of exit rate, I mean, there's some signs that it's improving from its low as I would certainly say, I think we've hit bottom there. But in terms of getting to the level up that we had hoped, coming into the year or the return to the kind of solid 10% growth that we we've come used to over the past few years. We don't expect that to happen probably until the middle of next year.
Got it. Understood. Thanks for color. And then on CE, so with a delivery expected in the third quarter, can you comment on how much the overall to be up this year? And then maybe put it into context for us, I believe your CE business peaked in 2017. If you account for the increase this year, how much would you still down versus that peak level?
So, generally, Karen, can't give kind of full year projections as you know focusing for Cognex nor would we give this specific guidance like that. What I would say, I think you're right is that, 2017 was our best year ever and electronics, and I wouldn't expect us to outperform that this year. But we're putting up some good growth in that market.
I would say coming into the year, we told them with the very good shots, we would see very strong growth in consumer electronics and we're seeing growth, but it may not be quite at the level that we would like. So, I think, there's a bunch of things going on. One is outside of phones, outside of smart phones, the accelerated online learning and working from home it's certainly driving growth, that we're seeing a lot of growth in that area.
And then we certainly are seeing some nice growth related to 5G and OLED screens, but I'd say some of that growth that we hoped would come this year, looks like it may be getting pushed out a little. But despite that, it will be a good than in consumer electronics. So, we expect consumer electronics will be our largest market this year, but logistics may just give it a run first month and automotive is not in the running to be our largest market this year, I would say.
Our next question is from Andrew Buscaglia with Berenberg Capital Markets. Please proceed.
Hey, guys. Can you -- on those consumer electronics trend, is there a reason to believe that's given the -- given how unprecedented times in Q1 and Q2. We could see some a typical seasonality in consumer electronics in Q4. Is there any indication that is likely this year?
I think we certainly think that most of this year's revenue will be recognized in Q3. Last year, it was and Q3. Pretty much if you look back through the last five years or so, which have been really big electronics use for us. It's always in Q2 and Q3. This year as we discussed in previous calls, it's got pushed into Q3. I wouldn't expect large amounts of it to flow into Q4, but there is no reason why we couldn't see some growth or still some strength in electronics in Q4, but it's really a Q3 play from where it looks from here.
Okay. And you took some substantial restructuring that you haven't taken out in a long time, which would indicate you wouldn't expect really a pickup in demand anytime soon. But it seems like Q3 is picking up a bit. And can you comment on like -- am I reading into that wrongly that you don't expect much of a lift beyond Q3 or Q4?
Yes, I wouldn't read it in such a short term way. I think, we've grown our headcount and we've made a lot of acquisitions, seven acquisitions in the last four years. And we were stopped, I know we were stopped entering 2020 like we expect it to return to some pretty strong growth up to having to first down here in nine years in 2019. So, we were kind of ready to go, expecting the kind of growth we're seeing in logistics, expecting the strong year in electronics, expecting a better year in automotive.
And then after COVID, we recognized that we needed just to take action, and we viewed the current environment as an opportune time to sharpen our focus on growth areas, leverage talent more effectively, reduce some of the redundancies we saw in the business. So I think we really aligned on capabilities better following on many years of growth. So, we're really long-term thinkers at Cognex and this is something that probably needed to happen. We needed to align ourselves better.
And the downturn in demand really was very clear to us that this is the time to get home with that. But as I said, in my prepared remarks, I think we have plenty of capacity for growth. We really are, I think, well structured, so we could expect to grow our business substantially without adding the much cost other than variable costs. Not much head count, not much investment, I think we’re well set for that.
Our next question is from Joe Giordano with Cowen and Company. Please proceed.
Wondering, can you kind of like scale the content that you're getting on some of these CE and logistics and orders and if you would think about it like, in a given production line for CE or given square footage like a logistics facility, like, how does your content look versus a few years ago, I mean not looking for specific dollar amounts obviously, but like how has that like-for-like content?
Well, Joe, it's an interesting question. We don't generally think of it that way. I think we tend to think of numbers of lines and logistics numbers the facility, and then we think what we do in terms of features those specific tasks that are being added there. I would say overall, at the level of content and capability, we're adding to lines similar probably that it's been over previous year, still in facilities. But it's changing I think it's more vision related, higher values. So, I would think probably kind of similar, but evolving in what it is more to higher value applications we used to possibly doing more basic boxes reading and things like that and now we would be doing more vision, more learning of higher value applications.
And then on auto, third party estimates right now and I obviously don’t think change wildly overtime, but right now we're talking about pretty substantial year-on-year production growth next year. I mean, how would you think about Cognex's business in that kind of environment? Obviously, there's mostly just filling up existing capacity to some extent, but how would you think if those numbers are right that your business could fare in that environment?
Yes. I want to make sure I understand your question. You're saying in automotive, you think right now...
Yes. In auto, auto you're expecting production ramps next year is pretty substantial on a year-on-year, obviously up a little base, but I'm just curious, you're more on the investment side of things sort of how do you think your business would operate in that sort of area?
See, you're speaking more about unit volume of production.
Yes. Unit volume is going to go up, I'm must curious as to how you think about what that means for your business next year.
Yes. I think for us, it's going to be more about new lines of retrofitting existing lines. So, I think I don't necessarily see unit volume driving a lot of incremental invest in automation. What I would see is the introduction of new models and new technologies would be real growth drivers for us. So, that's more of a lever. There are speculation that there are past 16 new electric vehicle models coming to market over the next few years. Those kinds of things can really drive a lot of growth for Cognex. But of course, when big automotive or Tier 1 automotive who are accustomed in that space, if they're struggling and conserving cash, then they're likely to do less retrofit for upgrades in general. So, it does have an impact on us. But more to gauge feature growth for us would likely be around introduction of new models and new technologies into automotives.
If I could just sneak one last one. In e-commerce, you're doing quite well there. You mentioned a few big customers driving some of that business now and given what's going on and everyone kind of scrambling to get supply teams adjusted to the current reality. Does this year strike you for your business as like well above trend something that can't be repeated? Or is this just the normal, like this is the way we were going, it's just accelerated a little bit, but we don't see why this can't continue?
So, I think we see logistics as a great growth market for us and we said in the past, we have ambitious plans to grow that business at 50% a year and we've been able to do that pretty well in most of the last few years. I think because we just see so much demand for machine vision and helping productivity, develop supply chains. And as those supply chains move to more online and more e-commerce site model, we just have, it's a great market and we have a great technical advantage and it to play.
I think, so what we're seeing at the moment is we're seeing that growth is being very skewed towards winners in that marketplace, particularly those who already have pretty sophisticated e-commerce models in development, what's disappointing in the logistics area, is those customers in broad retail, like formerly bricks-and-mortar retailers that we wouldn't have expected to see me growing strongly at the moment, but of course they're really struggling, right. And I think they're struggling with liquidity and their own future.
So we're not seeing the same level, what I'm seeing the same level investment there. We would like to have also, airport baggage handling some of the biggest part of our logistics type business. But that's a market that has really gotten very cold this year. So I think it's a bit of a varied story, but the really good growth we're seeing better than expected in e-commerce. I think longer term we would expect some other markets like the ones I discussed more regular retail to come back more strongly for us in future.
And, then I think the other thing we're expecting and we're seeing already is broader use of machine vision beyond just thoughtful reading more to things like inspection, dimensioning, more capabilities where we using the data from our vision systems to help companies manage their logistics efforts more efficiently. So I think we have big and exciting growth plans in logistics. Some of them are going really well. Some of them in the current environment, but a little tepid, and I think that's demand will come back once we get through this current situation,
Our next question is from Joe Ritchie with Goldman Sachs, please proceed.
So, Rob, I think in the last year you guys talked about something like 40 million or so of logistic revenue that got deferred, I think you expected to ship it in the third quarter of this year. Is that some of that shipped in 2Q? Or is that predominantly still on track to kind of shift for 3Q?
Yes, Joe, I'm not sure we gave a specific number, but I think directionally you're correct and we did. We saw a big backlog of logistics business building and delivery is getting delay. And we’re seeing a lot of that business come through Q2, Q3 and Q4, and we're also seeing a pretty big backlog of bills in addition to that. So broadly speaking, that's kind of what is happening I think as we expected there.
That's helpful. And some of the integrators like Honeywell, for example, they're Intelligrated business, they just reported their orders are up something like 300% this quarter and Kion's orders were also doubled this quarter. I guess how should we think about their businesses as it relates to yours in being able to whether there's any type of capacity constraint and being able to ensure that your products are being installed within a reasonable timeframe, like is there any kind of like bubble that's forming that could potentially constrain your ability to get your products installed and delivered on time?
I think the way it works is there's a group that we call them integrators out there. It celebrated the division of Honeywell. I think you're referring to is one of them. There are many others [Dematic Rendell, Landy] [indiscernible]. There is quite of those businesses over the years. Generally, that's getting very, very large contracts. Those sometimes can be two years out and in some way the dynamic is a little bit like what a line builder does in automotive, so they're getting contracts for new car models that a couple of years out.
And then as the product becomes closer or near the implementation, we work with them on putting the vision system in, but we're normally by the end user. So, when you look at some of those reports that we're hearing, it's indicative of years of growth ahead which will be coming always probably in a year or so depending on how the product rollout schedule changes between now and then. So I do it as leading indicator and in line with what I would expect.
That's great to hear. And I guess just lastly, maybe just following up on some of on the consumer electronics question. You did reference like online learning in OLED screens specifically. I'm just curious if you can give me just a little bit more color on end market application. It doesn't sound like a smartphone. I don't know if it's like iPads or what specifically this is going into.
Yes. So, as we felt, we really felt all the major players in consumer electronics, and so, most of them really have broad portfolio of product. Our business has been very much in smartphones this year, still very solid in smartphones for sure is how it looks. But it's perhaps growing better. It's stronger than we would have expected more in tablets and laptops and other electronics and devices, phones, et cetera that we've seen. I think everyone's seen an uptick in that business which is a result of everybody equipping themselves to work at home, that's how it looks then.
Then in terms of OLD screens, that's a market we've been working on heavily for best part of five years that we saw a very big spike in our business in 2017. We still see some good strength and growth in that business and we've diversified generally the base of that business more to China, et cetera, where we're working with some of the major players there. But I think, in terms of our expectations, maybe OLED isn't, this is not a blow the doors off year for OLED.
It's the growth we're working there and by the way, those companies really value our deep learning technology for inspection. But there's some the value of yield in that market is massive. But in terms of what was going to be gross drive is 5G and OLED, it's similar or maybe not quite as good as one might have hoped coming into the year and that's being offset with some of these other better areas that I spoke about earlier.
Our next question is from Paul Coster with JP Morgan. Please proceed.
Thanks for taking my questions. So, you mentioned that the gross margin might be a little light because of the logistic mix. I'm just wondering did I hear that right and if I did hear it right, what is that in the product mix that leads the slightly lower gross margins with that end market?
So, I will invite -- I'll talk on the product level and then Paul will talk a little bit more about that too. Let me to give you the long view of when we go into logistics, we work with a very major customer electronics who required more implementation from us. So we were doing more application engineering, right. So that was definitely a part of that issue. And we still do some of that, which can be diluted to our margin. So it has the more service related thesis and it also has more integration, which may mean in some cases we're selling lower margin accessories or metal frames or other things. But currently, we need to do in order to fulfill the needs of customers, but we're developing products that are more modular and we're developing relationships with systems integrators. So, we're thinking more and more of that business away and allowing our gross margins to approach the gross of margins we have elsewhere. Paul?
Yes, I think you've landed it, but logistics is still slightly dilutive to our overall gross margins, but it is improving versus a year ago or certainly versus three years ago. So, similar to the strategies we use for developing the factory automation market, solve people's problems, a little more service and then figuring out how to effectively productize it. And we're in the middle of that migration and it's going well, but overall logistics is a bigger share of our revenue. It is somewhat diluted, although that's countered by other aspects of our business that are growing, that are highly accreted to our margins, such as deep, learning's a great example of a software based market. That's highly accretive to our gross margins and in the growth.
So just a quick question on the deep learning front, obviously, you've taken action to change cost really quickly and I think that’s ultimately to identify the need to do so and act precipitously. The question of course though is, does still your interest in further acquisitions in that area knowing that sort of integration work in both? Or is it anomalous situation?
Well, let me come back for a minute. So, I think we see deep learning has kind of a revolution going on in machine vision and it's allowing us to approach machine vision problems in a new and better way. And we made the acquisition of ViDi three and a half years ago. And that technology is remarkably good at running on low powered ships. And that's demonstrated in the In-Sight D900 that we just launched and already fits very well within our existing kind of with a lot of performance, right.
Now, then we've acquired Sualab. Sualab has very powerful capabilities around the application of the convolutional neural networks to industrial machine vision and they're ideal for doing other things like classifying images with great precision and inspecting complex images. So, it's almost like some of the technology they have is sort of further down the road and, we'll be assimilating it over time.
And some of the nearer term applications for it did require onsite work with very sophisticated engineering teams in Asia. And that's the thing we really haven't been able to do at the moment. So -- because just access to site and working closely with operators in those kinds of environments, we're still going to do that. It's just a delayed. And then Sualab that brings great engineers and great technology, which will help us with only other things we want to do in deep learning.
So M&A will remain the sort of a key area of focus?
Yes. I think so. Yes. I think that's the second part of your question. So, I think we've got a lot of horsepower now in deep learning, but we're always out there looking for interesting assets to acquire in deep learning or another growth area of the business. And generally, we're always on the lookout for great engineers who bring a lot of capability to our organization. So, that's an ongoing kind of cadence at Cognex.
Our next question is from Richard Eastman with Robert W. Baird. Please proceed.
Thank you. Thank you for the time. Rob, just to be clear, the upside in revenue in the second quarter to your previous thoughts that the second quarter would look less than the first, was that upside -- did I capture it right, China came back sequentially faster, and then you pulled some of the logistics business that you seat came out of backlog. Are those two primary factors?
Yes, I'll let Paul comment. I think certainly we were able to win and shift more logistics business than we'd expected in the quarter was a big driver. And then yes, then suddenly, the recovery in our China business would probably stronger than we had anticipated. Paul any other color you'd like to give?
Yes, the commentary on China was more about kind of Q1 revenue level revenue levels to Q2 revenue levels, not so much, our expectations for Q2. I think why we beat our Q2 forecast we didn't give guidance separately. We thought we would be down versus Q1 and we were up slightly, that was more driven by strength in logistics and just managing our supply chain and potential component shortages and other sort of risks in our business, didn't materialize as negatively as we had fear looking at higher cost and logistical challenges to do and our ability to convert it to revenue is pretty good.
So you put a...
Yes. Rick, so it's Rob again. So, I think just to make sure we had understand the order activity during the quarter was quite a lot stronger than we anticipated, right. So, we did, we certainly exited a quarter with a very large backlog. So, I wouldn't want you to think that, we may Q2 be off backlogs necessarily. We didn't -- we have strong orders as well.
Yes. I understand. And was China, again China year-over-year was down 11%, but that other Asia number? Other Asia was plus 23% massive dollars, but what was that kind of $6 million increase that amounts to other Asia in APAC? What end market was that particularly driven by CE?
It's semi and CE from offline really.
Okay.
And obviously, there's some element of inorganic from Syalab in there too, but very modest.
I see. So if we had, we had a nice quarter in the second quarter to be sure and we build backlog. Some logistics business, would you expect it sequentially to be higher in Q2 than that was in Q2? I mean is that timing on backlog? Is that doable expectation?
So, we got some good momentum in logistics business. We had a record quarter for revenue in Q2 we expect Q3 to be higher than we expect Q4. So, we definitely have good moments and then not getting concentrated in particular course at this point.
Understood, my last question here -- just a promise, would you expect in consumer electronics, to have a 10% customer in 2020, given current backlog and trends? Obviously, you have some help the facts, but just curious, what would you expect to see a 10% customers in CE this year?
Well, that's not really a question I feel like I'm ready to answer at this point. So, I'm going to pass on that one just given sensitivities in that market.
Our next question is from Markus Mittermaier with UBS. Please proceed.
Q - Markus Mittermaier
Hi, good afternoon, everyone. Two questions from side please. One more long-term and one on the second half, maybe I'll start with a longer term question. Given the sort of 8% headcount reduction that you did which isn't in any case, but particularly probably in the Cognex culture. How do you think about supporting that long term growth that we have throughout the cycle? I mean, some of your competitors, particularly on the sales force sides have probably significant large sales force. I’m just trying to think about strategically, how you think about through the cycle? That's long-term. And then on the second, half I don't want to be labeled all the seasonality issues around consumer electronics, et cetera, but maybe just some color where you can and where you might have some visibility in customer conversation, maybe Q3, Q4? Is there sort of some specially fixed around COVID, maybe also to the upside and thinking about e-commerce, if the access issues maybe in some of the customers given how busy the distribution centers are? Just trying to understand what's a puts and takes here from into Q3 to Q4? Thank you.
So to your first question about the 8% headcount reduction, I mean, I think if you go back and you kind of look at our productivity as a company, it's even with headcount reduction its well where it was in 2016. So, we see it as having 2020 as capacity for growth. I think we came in thinking we were going to grow into that capacity this year with revenue being lower. We had a lot more capacity than we needed, but we really, I don't really feel constrained on that. You kind of talked about sales, productivity you're right. We do compete with customers that have bigger sales forces, but we combat that in two ways.
One is we're pure-play machine vision. So Cognex salesnoid is not selling at PLCs or robots. They're focus very much on their experts in machine vision. And then I know we do have a good network of systems integrators and distributor partners who cover those areas that we don't reach. So, I'm not at all concerned about a lack of coverage or -- and I do think there's a lot of opportunity for us to grow into our current headcount and deliver leverage to the bottom line. And that's where we choose to focus there in the next couple of years, I would say at this point.
Your second question kind of was around opportunities for growth for other areas. I think it's worth saying that, we have seen some nice activity and interest in the use of Cognex machine vision for COVID-related applications. So, we've seen certainly medical, pharmaceutical applications that are out there that are, we've seen some interesting demand for our products in that area. And I do think as companies scale up, testing and vaccine production, that is definitely a good opportunity for us to work. Life sciences as well and the application of our deep learning technology more broadly is an area that I think we see upside potential for us as we move through this year and into next. So, those would be some of the areas that come to mind.
Great. Thank you. And maybe, could follow-up. Do you think that could be you material in near-term or in early stages? Just trying to think through, I understand the seasonality around CE in Q3 et cetera not seeing into Q4. You mentioned Q3 is probably going to be the best quarter, anything that you see early in customer conversations that could be a materials factor in Q4 that we might not have on the radar at the moment or is that too early?
Yes. I think material in its true definition, probably the answer to that question is no, right. And I don't think we're going to see something really massively material from some of these other compensations in Q4. But the other answer, there is two things to day. I think in that I think more things that might move the needle for us later in the year, might be more around whether there's earlier investment in electric vehicles or if there's more electronics kind of business coming in earlier or that's more than those in general might be logistics. We see more and stronger demand the backend of the year, which can happen in our business. So, but generally I don't want to give you an overly optimistic picture of Q4 as we said in the opening remarks, so whatever that we do expect in Q3 to be our best quarter and certainly that's how it looks to us right now.
Our next question is from Jairam Nathan with Daiwa Capital Markets. Please proceed.
Hi. Thanks for taking my question. Just on the, to kind of ask it in a different way to the earlier question on consumer electronics, how should we think about the diversity within consumer electronics in 2020 compared to 2017? Has it got a little more diverse?
Yes. So we've worked certainly hard over the last few years to try to take our technology and apply it more broadly, whether that's more into component type areas, which is like housing and screenings and other things, rather than just final assembly and test and packaging, which is highly concentrated a few years ago. And then, we're seeing more in accessories as we discussed, certainly we see and in portable type products less laptops and others. So, you should see our businesses being much more diversified in terms of its applications in that market. As we know that the end users, obviously the brand owners are pretty concentrated.
Okay. And with regard to logistics, is it still a largely U.S. based business or any what's the scope for expanding into Europe and Asia?
So, the majority of our revenue today is still in the U.S. but we've been investing and we're seeing good percentage, very good percentage in European market and in parts of Asia and certainly we expect probably the majority of growth to come from those areas is the long term, but right now definitely still highly concentrated in the United States.
And I know you do this annual exercise that you do on addressable markets, but how should we think about logistics sizes of the market from I don't remember the number but what it was like, is it a multiple of that you think based on what's happened?
I don't really feel ready to answer that. We said it was a billion dollar market. And I would have thought that might actually be quite similar now. I mean, we're basically seeing a lot of growth with e-commerce, but I think a lot of that market is actually in areas that aren't doing that well right now, things like package delivery, postal, general bricks and mortar retail.
So those businesses, you know, they're only growing slightly for us and we're probably in a gaining share. The market may be shrinking currently. So I think about being a great market overall in logistics, we sized as a billion dollars when we told you last, we think it can grow. I think we said in the mid teens and I view it very simple analogy just with a different completion.
And finally question on the competitive environment, given the difficulties, have you seen it getting easier in terms of how have you seen any competitions going down and going bankrupt or exiting the business?
Yes, I'm sorry. I didn't quite understand your question. Are we seeing getting it more difficult with who?
No, any of your competitors have exited the business given the tough conditions?
I see competitors. No, I wouldn't say we've seen a major change in the competitive.
Our next question is from Karen Lau with Gordon Haskett. Please proceed.
One OpEx question for Paul, I think it sounded like in the second quarter you didn’t realizing a saving from the restricting, I think the number is million savings run rate. So you would kind of imply starting the third quarter, but sequentially OpEx is flat so is the idea that sends a temporary cost that took temporary cost savings that took place in the second quarter it's coming back, but this truffle savings kicking in, so they kind of offset or is there some temporary costs associated with the highest delivery in the third quarter that is like kind of masking that sequential savings, structural savings up stick?
Yes, it's mostly puts and takes. I mean, if we take a step back to 2020 going into the year, we said, we'd be adding about 25 million to our cost structure associated with reset of incentive plans and some hiring and the integration Sualab. And then, we've now committed to a $25 million annualized cost reduction of which we did realize a portion of it in Q2, but certainly Q3 we'll be realizing more.
So, the payroll savings and some of the savings in depreciation or realization, so on in Q3 will be partially offset by a little more travel and more sales activities going on, travel will still be significantly down for the year. But with facilities open, our sales going and paying visits. We did get some one-time benefits associated with the restructuring in Q2 in our incentive compensation. That will repeat in Q3 so that's also one of the takes to offset that.
Okay. Thank you. And Rob, if I can ask a quick on semi and I understand it's a relatively small market for you, and I think it has something to do with like mostly software so I guess smaller. But I guess in the context of maybe people learning [Technical Difficulty] applications. And then we have, the fact is going on in building chips everywhere. Can that -- overtime whether more in terms of your content to that market.
Yes. We're having a good year. But generally that has been around 5% of our business. We view it as kind of a cyclical. It is probably both. When it was kind of lower where you can bring more and more chips on fewer lines, right? I think that is [Technical Difficulty] to see some positive investments in some areas where we have very strong positions and great technology, but overall growth over the long-term.
Okay. Understood.
Your original question, obviously with the higher revenue mix or higher revenue level in Q3 versus Q2 that will also bring some OpEx, right, think about commissions and so on.
We have reached the end of our call. I will now turn the call back over to Dr. Shillman for closing remarks.
Thank you. Well, we're all in very challenging times, but our strong balance sheets, our focus on long-term and our unique culture will enable Cognex to weather the current disruptions better than most.
Thank you all for joining us tonight and we look forward to speaking with you on our next quarters call, which I expect will contain some very positive news. Good evening.
This concludes today's conference. You may just connect your at this time and thank you for your participation.