Cognex Corp

NASDAQ:CGNX

Earnings Call Transcript 2020-Q4

[Operator]

Greetings and welcome to the Cognex Fourth 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] As 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.

[Susan Conway, Senior Director, Investor Relations]

Good evening, everyone. 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 Annual report on Form 10-K are available on our Investor Relations website at www.cognex.com/investor. Both contain highly detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 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. You should refer to our SEC filings, including our most recent Form 10-K for a detailed list of risk factor.

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

[Bob Shillman, Chairman and Founder]

Thanks, Sue, and hello everyone. Welcome to our fourth quarter earnings conference call. As shown in the news release issued earlier today, Cognex reported record fourth quarter revenue for 2020. And we also set a record for annual revenue as well. It was a challenging year, but with a lot of hard work we did quite well and emerged in very good shape for 2021.

This year marks a very important anniversary for Cognex. We've not only been in existence for 40 years, but we continue to be the leader in our field. This is a significant milestone that few technology companies achieve. Machine vision was in its infancy in 1981 but it is now playing a critical role in both industrial, automation and in logistics where it ensures the quality and accurate delivery of virtually everything that you purchase. And by continuing to invest wisely in 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 of 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 Cognoid as an advisor to the company.

Of course, I have mixed emotions about this transition but I'm at that point in my life, to make it and it also happens to be a time of unusual strength at Cognex. I'm very confident in Rob's leadership and in 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 of this very special company in very capable hands.

Now I'll turn the call over to my partner, and Cognex is super capable CEO Rob Willett. Rob, the microphone is yours.

[Rob Willett, President and Chief Executive Officer]

Wow. Thank you, Dr. Bob. Thank you and Good evening, everyone. Before we discuss our financial results, I want to take a minute and thank Dr. Bob for his immense contributions to Cognex, and for instilling the enthusiastic entrepreneurial spirit that is the hallmark of our company. Dr. Bob, and the unique culture he built over the past four decades, will forever be a part of Cognex.

Now for our financial results; 2020 was a roller coaster ride, both for the world and certainly for us at Cognex. We entered 2020 optimistic about growth. 2019 has been a challenging year in which lower spending by customers in our two largest markets, automotive and consumer electronics resulted in our first revenue decline in nine years. However, after the global COVID-19 outbreak in March 2020, and the related supply disruptions, business shutdowns and capital investment pullback, we recognize that the outlook for 2020 had changed. We no longer believed 2020 would bring the broad-based strength we had expected when 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 workforce reduction, which was difficult for us, and an organizational realignment that better 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 Cognoids and customers through our own difficult pandemic related challenges.

From a business perspective, the second half of 2020 was much more positive than initially expected. You can think of it as a tale of two hogs. Revenue in the second half of the year was up a surprising 41% over the first half. As a result, we reported good financial results for 2020, setting a 40-year record for annual revenue.

Revenue grew by 12% year-on-year, thanks largely to highest spending by customers in Consumer Electronics and Logistics, where we benefited from strong partnerships with market and technology leaders that fed well during the pandemic. Spending in 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 in Consumer Electronics relates to the assembly of smartphones and the production of related components. In 2020, there was also 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 2019 due to growth in the e-commerce sector. Now representing approximately 20% of total revenue, Logistics surpassed Automotive to become a second largest market. We benefited from major e-commerce and omnichannel retailers investing in automation to enable higher throughput and cost productions. Other sectors of Logistics such as bricks and mortar retail and airport baggage handling struggled in 2020.

Further bright spots included medical-related industries and semi, both of which grew double-digits year-on-year. We're proud that manufacturers serving the healthcare industry are relying on Cognex to help make COVID vaccines available to the public. More specifically Cognex machine vision and deep learning are an integral component of production machines worldwide to ensure the highest quality standards and full traceability in COVID vaccines. Applications include inspecting vials for defects; ensuring vials of vaccines are filled to the correct level and a free of contaminants and ensuring that 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 worsened already weak fundamentals. As a result, the automotive market which was our largest market in 2019, dropped to third place in 2020. Automotive is improving somewhat from its most depressed levels in Q2, and increased Q4 year-on-year for the first time in several quarters. However, it remains at a significantly lower level than in recent years.

Let's talk now about Cognoids, our people. Our achievements in 2020 were the result of the dedication of Cognoids around the world. They exemplified our strong culture by working hard and moving fast in a volatile environment to meet significantly increased demands from a few of our existing customers to win new customers tend to successfully manage our supply chain. Because of our efforts, we launched 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 In-Sight D900 smart camera. Leveraging In-Sight's widely recognized easy builder interface, the D900 enables both existing Cognex customers and new users of machine vision to apply our 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 SUALAB. These techniques are now sold together with our ViDi tools running on the Cognex Vision Pro Deep Learning software platform and are being widely adopted by more sophisticated customers to solve their most complex vision problems.

Revenue from applications utilizing our deep learning technology more than doubled year-on-year in 2020. 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 in the years ahead.

Now let's talk about 3D. Last month, we launched the In-Sight 3D-L4000, an exciting new smart camera platform for the fast growing industrial 3D vision market. The 3D-L4000 leverages our successful In-Sight-intuitive spreadsheet interface, making it easy for our broad insight customer base to use powerful new vision tools created for true 3D inspection.

Under development for some time, the 3D-L4000 packs novel capabilities into a compact form factor without the need for a separate PC. Exciting features include patented optics technology for superior image quality, and the broadest range of 3D vision tools available in a vision system. We believe the 3D-L4000 is a breakthrough product that makes 3D as easy to use as 2D vision. It positions us very effectively against competitors who have significant sales and profits in this area. Both Cognoids and customers are excited about these new products and others we have in our pipeline.

Now I will turn the call over to Paul for details of the fourth quarter.

[Paul Todgham]

Thank you, Rob. And hello everyone. I'm pleased to report record fourth quarter revenue, Cognex's 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. The biggest contributor to growth was the e-commerce sector of Logistics, which was stronger than we expected. In 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%, compared to 74% in Q4 of 2019. The stronger performance was due to a favourable product mix and higher volume. Gross margin in logistics while still dilutive to the company overall, continues to improve. The restructuring program we announced last spring has been completed. Final charges totalling $875,000 were recorded in Q4. Excluding those charges, the combined total of RD&E 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 in 2020.

I'm encouraged that Cognoids earned strong sales commissions and bonuses in 2020. I can tell you, they've earned it. As a result, we fully funded -- sorry, as a reminder, we fully funded our company bonus pool in 2020 after not paying a bonus in 2019. We continue to realize savings in travel and entertainment and from the restructuring actions. Operating margin was 26% in Q4, which was below the exceptional level we reported in the prior quarter, but 1600 basis points higher than Q4 of 2019.

Turning now to everybody's favourite subject, taxes. There was substantial discrete tax items recorded in all periods that made comparisons difficult. In Q4 of 2020, 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 in October related to new IRS regulations on the treatment of foreign taxes paid on acquired SUALAB Technology.

Excluding all discrete tax items, the effective tax rate was 14% in Q4 of 2020, 18% in Q3 of 2020 and 18% in Q4 of 2019. The slight decrease compared to our guidance and the prior periods was because we earned a greater share of profit overseas.

Reported earnings were $0.39 per share in Q4, compared with $0.46 in Q4 of 2019 and $0.49 cents in Q4 of 2020 -- sorry Q3 of 2020. On a non-GAAP basis, earnings were $0.32 per share in Q4, compared with $0.11 in Q4 of 2019 and $0.47 in 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 in logistics and incremental revenue from medical related industries, including companies scaling-up production for COVID related products.

In Europe, revenue also grew by one third over Q4 '19. Logistics, consumer electronics and the broader 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% year-on-year due to growth from consumer electronics, logistics and the broader market.

Turning to the balance sheet, we ended 2020 with $767 million in 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, our board decided it was in the best interest of shareholders to return excess cash ahead of potentially higher tax rates.

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

[Rob Willett, President and Chief Executive Officer]

Thank you, Paul. In summary, Cognex ended 2020 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 in 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, is more than 40% year-on-year at the midpoint. We expect Q1 will be the third quarter in a row in which revenue will grow by more than 30%, as a result of substantial backlog of logistics orders that we intend to convert to revenue in the first half, predominantly in Q1.

Gross margin is expected to be in the mid 70% range, unlikely 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.

[Operator]

[Operator Instructions]

Our first question comes from the line of Jim Ricchiuti with Needham and Company.

[JamesRicchiuti]

Hi, thank you. Good afternoon. And Dr. Bob, I wish you the best.

[BobShillman]

Thank you, Jim.

[JamesRicchiuti]

So on to the outlook. It sounds like the mix of business that you're suggesting in Q1. Fair to say, Rob, is that skewed a little bit more toward the logistics than you would normally see because of the order activity in which have been backlog going into the quarter?

[RobWillett]

Yes. Hi, Jim. Yes, it is. I think we're seeing growth across most of the industries we serve in the first quarter, but the majority of the growth we're going to see in Q1 is going to be a result of logistics and orders that we already have in the backlog.

[JamesRicchiuti]

And just with respect to logistics, it appears you now have another large customer officially that you're disclosing in your K, although you're not identifying that customer, but 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 in '21, and perhaps with this customer, your visibility, your line of sight into that business?

[RobWillett]

Yes. So you correctly point out that we do have another large over 10% customer now, Cognex for the first time having a second one. And it is a customer in logistics. And you asked about visibility on the logistics business. We're seeing a lot of strong growth in that market. You can see we reported about 40% growth in revenue last year and very substantial growth on deck here in the first quarter. I think -- we think the first quarter will probably be our highest logistics revenue quarter in a while. It is obviously larger than we think we will be reporting in the subsequent quarters.

But we see broad base strength across that whole area and a number of other good customers coming online that will be reporting revenue on and a lot of growth as we move through the year. In terms of visibility, there's some short cycle business in logistics that turns more 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 then turning into revenue, sometimes two, three quarters after it books and shows up in our backlog. That's the kind of dynamics that we're looking at.

[Operator]

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

[JoshPokrzywinski]

Hi, good evening, folks. And Bob, congrats again on a successful and solid career.

[RobWillett]

Thank you, Josh.

[JoshPokrzywinski]

So as we look 10-K dive in here. I guess my first question, I noticed I think for the first time I haven't scanned every single line. But Rob, you mentioned China competition kind of up front, as a new risk in the business description, I didn't see that last year. Anything that we should be aware of? I mean, China 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 it's new language all the same.

[RobWillett]

Yes, hi, Josh. I don't think there's anything too dramatic or radical going on there. I think over a number of years we've seen our competitors in China switched from being a sort of global competitors and seeing more and more aggressive local competitors going on coming into the market. So I think we're seeing that, and I think we're keenly aware of that. And we monitor the situation very carefully. And, some of them 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, we take them more and more seriously and we watch them closely. And I would consider them a risk to the future of the business.

[JoshPokrzywinski]

Got it, it's helpful. And then, I know there’s lot of the 1Q commentary focusing on logistics. I guess rightfully so, it's consistent with what we hear from some of the other peers in that space. But, the other two big markets that weren't really touched on electronics and auto. Electronics, we know that inventories are still low, lean times are still long. Auto, I think some of the broader automation cohort has seen a lot of strength in China in particular. How are those factoring into the 1Q guide or how is your visibility for those markets just given you haven't really touched on as much?

[RobWillett]

So I think we expect to see most or all of our markets grow Q1 year-on-year. But the big growth we see coming from logistics. And I think, consumer electronics, we saw a big year last year and we still would expect to see some growth in Q1 in that market. But generally, Q1 is a low quarter for consumer electronics. It's not a big tends to be more Q2 and Q3 tend to be a big consumer electronics quarters. I often get asked this time of year, like, how is the year looking for consumer electronics? And I give it the same answer really that I give 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 at consumer electronics last year, we saw it near the back end of the year. We didn't see much revenue from consumer electronics in Q2 than we saw most of it in Q3 and still some healthy revenue in Q4. And I think that was due to the difficulty in standing up lines and getting component inventory coming out of the most serious COVID conditions in China and elsewhere in the spring. So that was the kind of the dynamic there. I think we're going to see in a more aggressive and faster deployment schedule probably as we come into this year, but that's still relatively unknown.

Anyway, and then I think, we were expecting a lot of 5G and a lot of other technology coming into phones last year. I would think that's fair to say, some of which we didn't see happen and we hope and expect will now come into this year builds and it should help the electronics market.

But also electronics can be a bit of an up and a down market up one year, up next year, down the next one up. And certainly last year was more of an up market. So, we have moderate expectations.

You asked about automotive as well. And 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 in automotive. And we're certainly seeing that pretty broadly across all markets, including China.

[Operator]

Our next question comes from the line of Richard Eastman with Robert W. Baird & Co.

[RichardEastman]

Yes. Good afternoon, Dr. Bob, best of luck. While we won't be the same, you left.

[BobShillman]

Thank you, Richard.

[RichardEastman]

You'll have to stay visible. I've just been so impressed with just what you've done with Cognex and it's just been a fabulous public company story. So best of luck.

[BobShillman]

Thank you. And much of that gain is due to the tremendous strategic and operational capabilities of my partner, Rob and the team that he's built that I'll take part credit at any rate, so thank you.

[RichardEastman]

You're very welcome. Rob, just -- could you just speak to, there's so much press here lately. And the challenges seem to be increasing, not decreasing around just semi chip shortages both from -- I'm curious the impact that you might see from that, 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 around that for '21?

[RobWillett]

Yes, hi, Rick. Well, first of all, Cognex, we're pretty capable in terms of having plenty of component inventories at Cognex. We're not afraid of having very significant inventory, and of key components and chips, really a part of that. So we're feeling comfortable at the moment about our ability to go on supplying on time for the foreseeable future. So, we're filling in good shape in that respect. Later in the year, if we found that was massive de-commitment on already ordered and accepted orders from our own suppliers that might lead to trouble, but 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 an area of confusion. At the moment, we're seeing stronger demand in automotive, and perhaps we'd expected and so part of the team wonders to what degree that that's out of panic buying or forward buying from customers who really don't need to be doing that from Cognex, or to what degree it's really an uptick in the market overall. But certainly, you can read about it in the press that automotive particularly around there are plants from very large OEMs that are closed, because they can't get components to go and in America, too.

So, we're certainly seeing that as well in terms of basic interaction with automotive. Automotive is where we're seeing it mostly, I'm not seeing much of that affecting our electronics business. And then our semi business itself is putting up good numbers right now. We've seen good growth in semi last year, and that appears to be continuing, currently.

[RichardEastman]

Okay. And just to dovetail on to the automotive question. Just numerous and really aggressive schedules to bring EVs to market, somewhere in the '23 to '25 maybe timeframe. And again, we're seeing a little bit of uptick here, it's probably 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? That's really focused on the EV market including kind of battery capacity. Is that kind of push to '22, '23 for you? Or, how do you think about the timing there?

[RobWillett]

Yes. Well, Rick, first of all, I think about battery manufacturer, that's a business that we see a lot of demand for vision now. And we're very well positioned with 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 in that space, and we definitely see a very strong and improving demand in that market. I wouldn't say it's material yet to our business, but I think it can be in a relative -- in the medium term, in a relatively short period of time.

So we see that. Then we see like you both probably not like you. We see visibility with our major customers on their plans to bring to market electric vehicles. And certainly there, generally if a major brand owner, OEM is planning to launch major electric vehicle, that really bringing in vision in about 18 months in advance. And they're introducing us to the line builder and they're specking the vision to scale that up. And certainly, we're seeing some of the signs of that beginning, we of course, have seen it over the last couple of years as well, but in a relatively small way and we're starting to see that in a larger way.

So that's kind of the positive side of it. And interestingly enough, electric vehicles they have a lot of different things going on. Obviously, the powertrain and what we used to see with the internal combustion engine cars. But certainly, there's a lot more sensors and there's a lot of changes to the product, just whether it's even things like wheels and tires and other things that we're seeing opportunities around as a result of that switch.

And then on the other side, I think investment in internal combustion engine vehicles obviously is being minimized, which is a headwind in that market too.

[RichardEastman]

Understood. And just to sneak in, one last question. The 3D vision, as you define it consistently, has it grown to more than 5% of sales with all the puts and takes in the other markets? Is it 10% of sales yet there?

[RobWillett]

It's less than 10% and it did grow pretty healthily last year. I think we have much higher expectations of it in the next few years, given the product launches we've announced recently.

[Operator]

Our next question comes from the line of Joe Giordano with Cowen and Company.

[JoeGiordano]

Hey, guys. Dr. Bob, I was born in the same year you founded Cognex, and sadly for me, I've accomplished a lot less in the last year than you guys have. So congratulations and you'll be missed.

[BobShillman]

Thank you, Joe. Thank you very much. And I hope your next 40 is more productive than your first 40 than.

[JoeGiordano]

Me too. Rob, you've always categorized logistics potential, as on average, 50% a year. Now that you have a big customer there. That's very material; it's a much larger business. You grew 40% this year. Is that still your normalized expectation and within that context, is that doable unless that -- is it doable with or without the large customer growing it, at least at that pace?

[RobWillett]

Well, first of all, Joe, Cognex, we're very ambitious and we have stretch goals. So I've described the 50% as a stretch goal number, but when we've been able to achieve or come close to for a number of years here with logistics. We grew about 40% last year, and I think we would have hit that or exceeded that 50% number, have some of the other logistics markets, but we expected 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 diversification of our customers in general. We have many more omnichannel retailers who are investing in a big way to have an e-commerce platform that complements their stores. So, we expect to see other large -- obviously maybe not 10% customers, but large customers as we move through the years ahead. And then our big customer there obviously, is a major investor in automation and one I think that still has a very small share of the overall market that it can address and global aspirations that I think we're hoping to and expect it to keep up with.

So it's certainly -- the potential is clearly there and the technology and the infrastructure we put in place to serve it are there. Yes. But there may be volatility along the way, particularly within quarters in that business.

[JoeGiordano]

Understood. Paul, when you think about this year and what you were able to accomplish in a world where people aren't traveling in. Is the way of doing business for you guys, like fundamentally different in some respects? Should we think of SG&A a percentage of sales structurally lower even as we start to come back going forward?

[PaulTodgham]

I mean, yes and no. I think, I've been in finance for a while, and every year we would try to squeeze T&E to drive some profitability. And it turns out a global pandemic is actually a more effective technique and reducing travel entertainment and finance people braiding people come forecast or budget time. So we've been fairly conservative about our planning for T&E for this year. Although, to be clear, we would like to be travelling more we would like to be visiting, customers more, we've pivoted nicely to online sales activities. But we really do value that face-to-face relationship with our customers and, and clearly with other Cognoids, too.

So, it's a part of the, I expect that will ramp up fairly slowly. We're going to get some savings on that in Q1, because we're anniversary, largely a pre-COVID world in Q1. But I would hope that in the back half of the year, we'll 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 will maybe be different than we've done before.

One example of that being sales launches, sales product launches. We launched our largest product, the D900 entirely virtually this year. And actually, there were some real benefits to doing that. And that you don't have a whole bunch of people with non-refundable tickets from around the world, depending on certain product launch timing. And if we decide actually, we want to hold that product for one more month; we're not left kind of holding the bag or making kind of difficult decisions.

And then, 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 our engineers, our solution providers. But on the margin, we did close 11 offices to the course of our restructuring or downsize and obviously, look at our real estate portfolio as well.

[Operator]

Our next question comes from the line of Matt Summerville with D.A. Davidson.

[MattSummerville]

Congrats to Dr. Bob as well. Just 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 a front end, maybe loaded logistics year versus kind of easy 1Q comes from China, and easy second quarter comes in other parts of the world due to lockdown. And then you have kind of the moving pieces with CG. And I know it's hard to sort of guide out beyond one quarter, but maybe Rob, if you're able to give us some sense for how we should be thinking about that sequential cadence that might be helpful?

[RobWillett]

Yes, hi, Matt. In general, Cognex, we don't give annual guidance. But I think here's what we have said or can say is that we're expecting a large, unusually large first quarter as a result of logistics backlog turning into revenue. And we have a very healthy logistics business that, is putting up great, great growth numbers. And I do expect good growth continuing through the year, but not to the degree that we've seen this, what will be an unusual Q1 for Cognex.

And then, consumer electronics, it's been a pretty reliable, large contributor to growth in Q2, or Q3 or both. That's gone on for many years now. And I would expect to see similar things. We'll have more of a sense of the timing of that when we talk to you at the next conference call in early May.

And then Q4 is always a strong quarter for our factory automation business. It tends to be a lot of year-end purchasing from markets like automotive, and other general markets, food, beverage, pharmaceuticals, medical. So as often, particularly in the U.S., where there's kind of a budget flush phenomenon that goes on.

And so I'm not able to give you, specific but I think that's the kind of cadence 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.

[MattSummerville]

Thank you. And then maybe as a follow up. Can you maybe comment as to the actionability of what you may have in the M&A pipeline and how we should be thinking about share repurchases? You guys were pretty active in Q1 and then kind of tabled things for the balance of 2020? Thank you.

[RobWillett]

I'll talk about M&A type stuff. And then I'll have Paul and talk about the balance sheet issues. So, at Cognex, we're always looking at acquisition opportunities, and we really like to purchase technology companies with great engineers and technology that can bring it to Cognex. And we've seen us do that with SUALAB and ViDi, and Enshape and KRO and other businesses that we've acquired over the last five years or so.

So, we're always working on that. And those deals happen, when they happen and when they're actionable. So, there's nothing specifically I can point to. And that's kind of how the outlook is there. But Paul can speak to other aspects of the balance sheet.

[PaulTodgham]

Yes thanks. And Matt, I think that, as we've said before, the purpose of our stock buyback program is primarily to offset the dilution from stock-based compensation. So, we repurchased as you noted 1.2 million shares in Q1 of 2020, spent $51 million doing so an average price of $42, which looks really good right now from a repurchase point of view. And that actually did cover the dilution from our 2020 annual grant during that first quarter. We don't take the buyback so time constraint is that maybe looked last year. We do tend to issue majority of our equity in the first quarter, as we do through annual grant programs. But our kind of mandate from the board to buy back that dilution is really quite broad. We would aspire to do it in year broadly, but timing within year, or if it happened to carry over, to some extent, or we happen to be opportunistic and by a little more. I would view all of that as sort of consistent with our philosophy.

So, we do have $280 million roughly remaining in our repurchase program. So, feel like we've got cash in dry powder. We will be issuing equity quite shortly. And we'll make those decisions in partnership with the board kind of quarter to quarter about, when to be more aggressive and when to get ahead of dilution and use the 10b5-1 trading plans as appropriate as well.

[Operator]

Our next question comes from the line of Karen Lau with Gordon Haskett.

[KarenLau]

Hi, good afternoon, everyone. And my congrats to Dr. Bob on his retirement as well. So, Rob, I think two quarters ago, you initiated the, the cost reduction action I guess, was the promise that your $1 billion sales milestone has been pushed out because of the pandemic. If you keep growing at that rate, you wouldn't have to wait very long to reach that milestone. So, I guess the question is at what point do you think you have to add back people cost?

And obviously, we saw very strong incremental margins or fourth quarter in 1Q guide. So was just curious, at what point does cost have to come back? And is there something about perhaps the new way of selling or new ways of operating that might lend itself for salespeople to be much more productive than previous cycles so, you may not have to add back so quickly?

[RobWillett]

Yes. Hi, Karen. So, I think if you go back and you look at Cognex's headcount increases and our investments over the last three years, well, perhaps since 2017, you can see that our level of investment and our headcount additions have exceeded our revenue growth significantly. And I think, coming into this into 2020, we're expecting strong growth 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 headcount.

But we also saw opportunities to shift headcount into areas where we saw stronger growth going forward. So logistics and deep learning being obvious examples. And then, I think it's been just a very volatile situation. So I think we've restructured the company in a very healthy way for its future growth. And I think we still have good capacity in the business to absorb more growth without adding a lot of significant headcount. But we'll have to see kind of how things develop going forward, and where -- what rates of growth and what need for headcount we have in future.

I would point to our, our engineering spend, which is the percentage of revenue is certainly relatively high and healthy. We spent more last year on R&D than we spent in any year in the company's history. So certainly, we're not -- we certainly haven't curtailed our R&D and engineering our product launch plans in any way.

So, in terms of where we may need capacity, it may be more in the Salesforce. But if you look at our numbers overall, it doesn't imply that we're understaffed or capacity constrained in most areas of the business, at least in the short-term.

[KarenLau]

Okay. So, the incremental margins for now is should be pretty sustainable. And then, you have to re-evaluate towards the middle of the year and see, how the recovery trajectory is going and we have to add additional salespeople as part of the process, right?

[RobWillett]

Yes, I think we're watching the situation very carefully. You said margin, I think as that relates to expense, that's probably correct. I think, 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, its margins are improving nicely over time, but it still is diluted to our gross margin. So that would be the only qualification I'd put on what you said.

[PaulTodgham]

Yes. And, Rob, I could add. On the operating expense point of view a year ago, we were calling out, roughly $25 million of kind of incremental OpEx going into our cost base in 2020, associated with a reset of our annual compensation plans, having not paid a bonus in 2019 and then a full year of SUALAB expenses a portion of which is deep learning engineers and the team and the sales people there, as well as in a portion of which is just the structure of the acquisition, which has a deferred compensation component that hits our OpEx over a four year period.

We don't see sort of any major adds like that in the current year. I think there are some puts and takes. This quarter will be a little low on T&E; I hope in the back half will be a little higher. For the year we expect our T&E to be up slightly from a headcount. We're making a major investment, which we cited in our 10-K, around a new CRM and CPQ. Configure price quote, and customer relationship management system. I think we've referenced up to about $10 million in spend. Much of that CapEx this year, but some of that OpEx 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, let's say like there was from 2019 going into 2020. And then of course, we have two more quarters of Q1 and Q2 where we should be seeing a healthy benefit from the restructuring actions we took last May.

[KarenLau]

Got it. That's very helpful color. Thank you. And then I want to follow-up on the auto discussion. So Rob, you talked about like the differences -- the different exposure and EV, different components versus ICE exposure. Historically has a very strong relationship with the Tier 1 suppliers in the auto supply chain. How is your competitive positioning on the EV component side? And are you seeing sort of a different competitive dynamics coming across different competitors, things like that? If you can give us a little bit of color on like, how you're positioning EV versus your historical exposures?

[RobWillett]

Yes. Karen, I think one thing I'd point to is, I think a lot of the Tier 1 suppliers that Cognex has had very strong and is has been the majority of our automotive business, obviously, we continue to work very closely with them. But I think some of the kind of power train internal combustion type of parts of their business obviously is declining and being replaced with EV battery business. And a lot of the technology that goes into making EV batteries has been really developed and is being scaled up by Asian companies.

So that's been kind of a shift. And the problems they're working on in some ways very different. But fortunately, there are areas that Cognex Technology and are very capable, 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 in some ways and it's more like electronics. We've been working with those very sophisticated EV battery manufacturers, notably in Korea and in China, to meet their needs using some technology and capability that we perhaps had originally thought we would use in electronics.

So, overall, I think we're pretty well positioned. You see some of those names that are big EV suppliers and also EV car manufacturers themselves who are making plays in batteries, starting to be much more substantial customers of Cognex and probably at the expense of some of the Tier 1 suppliers, notably in Europe who maybe over the long run a losing share to that shift that's going on in business.

[Operator]

Our next question comes from the line of Andrew Buscaglia with Berenberg.

[AndrewBuscaglia]

Congrats, Dr. Bob, and good luck.

[BobShillman]

Thanks, Andrew.

[AndrewBuscaglia]

Actually, I had a really important question for you though, before you go and spread known data yet. But what is your departure mean for those really entertaining annual reports that you guys put out?

[BobShillman]

Well, I think you're going to like the one for 2020 and I was certainly involved in that one. And as an advisor, I'm going to continue to be a Cognoids. I don't know if the press release made that clear and advisor to the board and the company. And I expect that they will still call on me for my input -- my creative input into future annual reports. But I hope that there's no change in our philosophy of taking our work seriously, but not taking ourselves seriously.

[AndrewBuscaglia]

That's great to hear. Now a couple other questions I have. Rob, you cited some interesting commentary on AI and deep learning in the starting to perk up in yourselves. Can you give us some sort of context around how you think about that on 2021? Is this still going to be touring fast or is this going to be popping up as meaningful to our revenue or margins or both? And then what end markets should we expect to see some additional movement from AI, deep learning?

[RobWillett]

Yes, thanks. Thanks, Andrew. And I just got to add that, there's no, no one more creative to tap than Dr. Bob for the annual report. So I think he's done with one of his key advising roles with that.

So about deep learning, I'll make some commentary on that. We see it as technology that's kind of changing the vision space, and it's an area we're investing in and leading in a lot. It's primarily software-driven. 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% 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 In-Sight platform that we have and the D900 that we launched in one of my most successful product launches, if not be most successful product launch, we've ever had is using that technology and making it easily available. And so you can expect more of that to go on and I change the modular vision system, a smart camera type space that we serve.

And then also, it's really providing a lot to the very, you know, high performance, high processor requirement business, that is our vision software business. And that's bringing a lot of technology, particularly into the electronics space now. And it's adding a lot of value, particularly around the inspection area. Some of the technology we acquired from SUALAB is highly relevant in this space, and is 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 situation. But we're seeing, I think, hopefully an end to that.

And the real opportunity there is to replace human inspectors. And there are 10s, if not hundreds, many hundreds of 1000s who are working on visually inspecting products that we think are technology in that space using vision software. And some of the large customers who are very technically sophisticated see this potential, and are working on it with us.

So I think there are two avenues that we see deep learning changing. And we're expecting to continue to see really solid growth as the great engineering capability we have in that space, leads more and more into our product line over the years.

[AndrewBuscaglia]

Interesting, okay. And everything's picked over. But are you able to give us a sense of the percentage of sales from each market? Because I did hear you say automotive third, I believe, Or do you -- are guys going to break that out the first two?

[RobWillett]

I think what we said and Paul can come in here, too. I think we said electronics was approximately 30% of our business overall. I think we said automotive, did we mention that Paul?

[PaulTodgham]

Yes.

[RobWillett]

So logistics was second for 2020, at about 20%. Automotive was also about 20% but lower than -- slightly lower than logistics. And then kind of the remainder of our portfolio, which would include consumer products, food and beverage medical semiconductors that would comprise the remaining 30%.

[AndrewBuscaglia]

Okay. Thanks.

[RobWillett]

Nothing, you need a reason to read our very exciting annual report, which is coming up, but I think little there few pie charts and that it breaks down as well.

[Operator]

Our next question comes to the line of Blake Gendron with Wolfe Research.

[BlakeGendron]

Yes, thanks. Good evening. Thanks for sticking around here. And Dr. Bob probably a shortlist of company founders that retire at least to a degree with company strength and an all time high. So congrats.

You talked about consumer tech; you talked about the qualitative outlook there. And, maybe to put some takes. And on the periphery of this question, but I'm just wondering, in terms of semi-shortages and what we're seeing in terms of bottlenecks in the supply chain. How that impacts either the throughput or more the demand side on consumer tech, or if it impacts your input costs any meaningful degree?

[RobWillett]

Yes. Hi. Well, I think we spoke a little bit to that question earlier as it related. We don't see shortages in our own supply chain where, we're seeing our automotive customers struggle with it. But it doesn't we're unclear whether that means that pulling forward.

In consumer electronics, it's not clear to me at the moment that that's having any impact. But 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 time.

[BlakeGendron]

Okay, that makes sense. And then just to dig into 3D here, a little bit of sounds like that. It's an exciting growth avenue for. Your sales in the broader market here machine vision. I'm just wondering specifically manufacturing, as 3D applications grow is there any cross talk or cross communication with 2D vision. Is there any cannibalization, I guess of one versus the other as 3D gets a bit more popular here. How should we think about the interplay between 3D and maybe other major buckets of machine vision?

[RobWillett]

I would say you probably wouldn't do things in 3D that you could do in 2D because it's easier and less expensive, less processor required, less optics required. So 3D I think is additive, and we we're going to see lots of 3D and 2D together right in applications. And we certainly have those capabilities and more and more of our customers are using them.

So perhaps the 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 with our application.

[BlakeGendron]

It makes sense. Thanks for the time.

[RobWillett]

Thanks. And I think we're near the top of the hour. I think will -- Dr. Bob, I think we'll turn it over to you.

[Bob Shillman, Chairman and Founder]

Okay, thank you. And I want to thank all of Cognex's stakeholders, our customers, our employees, our vendors, our neighbors and our shareholders for helping us to grow and succeed over the past 40 years. I want to thank our customers for partnering with us through tough times. I want to thank our Cognoids around the world of past and present, for their dedication to our mission. I want to thank our vendors for delivering high quality components to us at fair prices, and on time, even during park shortages. And I want to thank our neighbors where Cognex has offices for providing us safe and attractive neighborhoods in which 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've maintained that trust in us through these years.

Thank you again for joining us tonight and here is to another 40 fantastic years during which Cognex will continue to preserve and enhance vision. Good night.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And enjoy the rest of your evening.