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Edited Transcript of CGNX.OQ earnings conference call or presentation 28-Oct-20 9:00pm GMT

·38 min read

Q3 2020 Cognex Corp Earnings Call NATICK Oct 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Cognex Corp earnings conference call or presentation Wednesday, October 28, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Paul Todgham Cognex Corporation - Senior VP of Finance & CFO * Robert J. Shillman Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer * Robert J. Willett Cognex Corporation - CEO, President & Executive Director * Susan Conway Cognex Corporation - Senior Director of IR ================================================================================ Conference Call Participants ================================================================================ * Andrew Edouard Buscaglia Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Blake Geelhoed Gendron Wolfe Research, LLC - SVP of Equity Research * Joseph Craig Giordano Cowen and Company, LLC, Research Division - MD * Joshua Charles Pokrzywinski Morgan Stanley, Research Division - Equity Analyst * Ka Wing Lau Gordon Haskett Research Advisors - Research Associate of Industrials * Richard Charles Eastman Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Cognex Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Susan Conway, Senior Director of Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Susan Conway, Cognex Corporation - Senior Director of IR [2] -------------------------------------------------------------------------------- Good evening, everyone. Thank you for joining us today. With us are Cognex' 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. 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 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 reports on Form 10-Q. Now I'd like to turn the call over to Dr. Bob. -------------------------------------------------------------------------------- Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [3] -------------------------------------------------------------------------------- Thanks, Sue, and hello, everyone. I am actually physically here with the team at this time, and I'm happy to be here, enjoying the beautiful fall colors, not so happy to experience the gray, rainy weather, but it does remind me why I left many years ago for Southern California. Well, as shown in the news release earlier today, we reported terrific results. Q3 was the second-highest quarterly revenue in our 39-year history, along with terrific profitability. In addition, Cognex' Board of Directors increased the quarterly cash dividend to $0.06 a share. And the dividend increase demonstrates our confidence in Cognex' financial strengths and long-term growth prospects despite the current difficult business environment. Now you're not here just to hear that -- those platitudes. You're here to hear more details. And for those, I'm going to turn it over to my partner, Cognex' CEO, Rob Willett. And Rob, the microphone is now yours. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [4] -------------------------------------------------------------------------------- Thank you, Dr. Bob, and good evening, everyone. Cognex reported strong results for the third quarter. Revenue was $251 million, which represents 37% growth year-on-year. We were highly profitable, reporting an operating margin of 38%. The 14-point increase over Q3 of 2019 demonstrates the substantial operating leverage we have in our business model. Earnings for the quarter more than doubled year-on-year to $0.49 per share. We expected Q3 to be our best quarter of the year, and it even exceeded our expectations that we gave as guidance last quarter. This high level of achievement was made possible by the efforts of Cognoids around the world. They worked hard to meet the increased demands of some of our existing customers to win new customers and to successfully manage our own supply chain during these difficult times. Because of their efforts, we won more orders than we expected during Q3, particularly in the Americas. Also, we met accelerated delivery requirements from existing customers concerned about potential disruption in Q4. Consumer electronics delivered impressive growth in the quarter. Revenue from this market has an annual cycle with large revenue-generating quarters typically in Q2 or Q3. This year, that happened in Q3. Much of our revenue in consumer electronics relates to the assembly of smartphones and the manufacturing of related components. However, this year, online learning and the work from home dynamic are making a notable contribution. People need tablets, laptops and wearable devices for a world where connecting virtually has become even more important. Cognex machine vision is enabling the precise and rapid manufacturing of those products. In logistics, we reported another record revenue quarter due to continued strong demand in the e-commerce sector. We delivered on both recent orders as well as on our backlog of orders. Major e-commerce and big-box retailers are investing in automation for higher throughput in their distribution centers to meet higher online demand and to prepare for the upcoming holiday season. Other bright spots in Q3 included both medical-related industries and SEMI, although they were a much smaller contributor to overall growth than consumer electronics and logistics. Regarding medical-related orders, we're pleased to report growth from manufacturers that produce COVID-related products, Cognex machine vision is currently being applied in a variety of COVID-related applications, including the automated manufacturing of masks, inspection of vials for vaccines and the assembly of COVID testing kits. We're proud to have been chosen by industry leaders to help them bring these important products to the world. In automotive and the broader factory automation market, revenue continues to improve on a sequential basis. However, it's unclear whether this is the start of a recovery or a catch-up from depressed levels in Q2 and from customers placing orders in advance of a potentially difficult winter season. Business was good in Q3, but we have a saying at Cognex: Good is not good enough. Excellence is expected. In our quest for excellence, we have launched some very innovative products in recent months that we believe will strengthen our leadership position. Our most important product launch this year is the In-Sight D900 smart camera, which we introduced in April. It is among our most successful new product launches ever. Designed to run Cognex deep learning tools on our industry-leading In-Sight platform, this easy-to-use vision system addresses inspection applications that were previously too difficult to serve with traditional rule-based vision tools. Customers of the D900 include existing Cognex customers as well as many first-time users of machine vision, all of whom need to inspect items for surface defects, such as scratches, chips or other blemishes that human inspectors often miss and which rule-based machine vision can't reliably detect. New color and optical character recognition models broaden the applications addressable by the D900 and perform exceptionally well on difficult tasks such as decoding tiny and deformed alphanumeric text on a wide variety of materials. The merging of our Sualab and deep -- and ViDi deep learning technologies is progressing well. In fact, Sualab's vision tools are now available together with ViDi -- our ViDi tools on the Cognex deep -- Cognex VisionPro deep learning platform. This product is targeted at sophisticated customers who have very complex problems to solve. Now let's turn to details from our third quarter. Paul, over to you. -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [5] -------------------------------------------------------------------------------- Thanks, Rob, and hello, everyone. Obviously, this was a busy quarter, both professionally and personally. My wife and kids and I have packed up our home in the San Francisco Bay Area and moved to a new home near Cognex' headquarters. We were excited to see the house when we arrived because we literally had never physically seen it. I generally wouldn't recommend buying a home based on photos, a floor plan and a facetime call with a realtor, but it went well. I think we're all doing things during COVID that we never expected we'd do. Turning now to our results. Revenue for the third quarter was $251 million, which represents substantial growth both year-on-year and sequentially and was significantly higher than the guidance we gave you last quarter. Growth came from consumer electronics and the e-commerce sector of logistics, where revenue from a few large customers was even stronger than we expected. In the broader factory automation market, we successfully fulfilled a stronger-than-anticipated pickup in demand and accelerated customer delivery requests that were previously scheduled for Q4, and new COVID-related business that Rob just spoke about contributed nicely. Automotive remained a drag but considerably less so than in Q2. Gross margin was 76%, which was higher than we expected and an increase over both Q3 of 2019 and the prior quarter. And that is even after excluding an $8 million excess inventory charge we took in Q2. The stronger performance was due to a favorable product mix and leverage on higher volume. Gross margin in logistics, while still dilutive to the company overall, continues to improve. As we discussed 3 months ago, we recorded onetime charges in Q2 for a restructuring and a write-down of intangible assets that totaled approximately $35 million. Restructuring charges in Q3 were very modest at $250,000, and we expect to complete the charges in Q4. Excluding those charges, the combined total of RD&E and SG&A increased by 4% sequentially and 2% year-on-year. This is consistent with our expectations. Within operating expenses, incentive compensation was higher due to strong revenue, and we continue to realize savings in travel and entertainment and from the restructuring actions taken in Q2. Operating margin expanded to 38% in Q3 '20, which, as Rob noted, is 14 points higher than in Q3 '19, demonstrating the operating leverage we have from incremental revenue. The effective tax rate was 18%, excluding discrete tax items. This is a slight decrease compared to Q2 given higher profit reducing the impact of nondeductible expenses. I'd like to make you aware of a discrete tax benefit we expect in Q4 related to our 2019 federal tax return, which we filed this month. Under new IRS regulations, we were able to reduce our U.S. tax liability by more than $12 million for foreign taxes we paid when we moved -- acquired Sualab technology from Korea. We'll recognize that savings for accounting purposes this year in the fourth quarter. Now back to Q3, reported earnings doubled to $0.49 per share in Q3 compared with $0.24 in Q3 of 2019. We reported a loss of $0.01 in Q2 of 2020. On a non-GAAP basis, earnings were $0.47 per share in Q3 compared with $0.24 in Q3 '19 and $0.18 in Q2 of 2020, excluding discrete tax items and the charges just mentioned. Looking at the change in revenue for Q3 year-on-year from a geographic perspective, Asia was our best performing region, increasing by 82% year-on-year, with Greater China growing even faster due to this quarter's substantial contribution from consumer electronics. Notably, customers in China are largely back to work while challenges continue elsewhere in Asia, particularly India. In Europe, revenue was roughly flat year-on-year. Growth in logistics and in the broad factory automation market offset a decline in automotive. You may recall that in past years, Europe was helped by consumer electronics orders for Cognex products used on assembly lines in Asia. Due to a shift in procurement, that revenue is now largely recognized in our Asia region. In the Americas, revenue increased by more than 30% year-on-year due to growth in logistics. There was also incremental revenue from medical-related industries, including companies scaling up production for COVID-related products. Turning to the balance sheet. We ended Q3 with $1 billion in cash and investments and no debt. As noted by Dr. Bob, we announced today that our Board of Directors has increased the quarterly cash dividend to $0.06 from $0.055 per share. The dividend is payable on November 27 to all shareholders of record on November 13. Now I'll turn the call back over to Rob. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [6] -------------------------------------------------------------------------------- Thank you, Paul. In summary, Cognex had a strong third quarter, but the substantial consumer electronics revenue we experienced in Q3 is behind us for this year. It will likely be several quarters until we report revenue as high as we did in Q3. We believe revenue for Q4 will be between $190 million and $210 million, which represents an increase year-on-year due to growth in consumer electronics, logistics, medical-related industries and SEMI. Automotive is improving but remains at a significantly lower level than in recent years. There also continues to be a high degree of uncertainty in today's environment, and business conditions are difficult overall. Gross margin is expected to be in the mid-70% range and lower than we reported for Q3 given the expected increase in logistics revenue as a percentage of total revenue. Operating expenses are expected to increase by mid-single digits on a sequential basis and to decline year-on-year due to cost-saving measures and lower travel and entertainment costs. Lastly, the effective tax rate is expected to be 18%. That excludes all discrete tax items, such as the expected $12 million benefit described earlier by Paul. Now we will open the call up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Josh Pokrzywinski with Morgan Stanley. -------------------------------------------------------------------------------- Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- I guess first question on the consumer electronics strength, which was pretty notable. I guess pretty consistent with what we've seen and heard out of the supply chain constraints, low inventories, lead times extended out for things like PCs and notebooks. I guess, first question, how long do you expect that to continue? And what have your customers told you about kind of future investments there given that this is not something that they would have anticipated 6, 9 months ago either? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [3] -------------------------------------------------------------------------------- Well, Josh, I'd say that this is a good year for consumer electronics, not a great year like 2017. And it's changing in dynamic kind of as it often does. Obviously, there's new technologies rolling out like 5G and some of the sort of more virtual reality type technology we're starting to see adopted. And if you joined us for our Analyst Day about a year ago, I think we were sort of -- I think we sort of suggested that these new technologies were coming, and they're always coming in consumer electronics. There's always innovation, and it's always challenging to manufacture. And that's why we need great vision technology and automation to do it. So I think there's a fairly regular cadence of that going on. I think what can drive higher or lower revenue years are some of the dynamics we've talked about, like big model changes and shifts to new technologies and, in this case, obviously, market dynamics like the work-from-home high level of orders that we see and then new features like screens, a lot of great new OLED screens from new suppliers hitting the market now, currently. But I think really, that's as much as I can tell you. I'm not a -- I don't have great insights into next year's road maps or the demand profile unlike the companies that actually make these products. -------------------------------------------------------------------------------- Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Understood. I appreciate that color, Rob. And then I guess just a follow-up on the cost side for whoever wants to take it. If I think about operating expenses, clearly, some good work done on the cost containment side in the second quarter, getting good leverage off that here in the medium term. As we get kind of back into a normalized growth environment, at the corporate level, how should we think about either growth in operating expenses relative to revenue growth or just as a percentage of sales that there's a target in mind? Because I think if you look over the past few years, it's been all over the map depending on investment mode or cost containment mode. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [5] -------------------------------------------------------------------------------- Yes. Well, Josh, I'll start, and then I'll invite Paul to give some color. I mean, I think we at Cognex have long-term plans to grow the company substantially at high gross margins. And we are investing in R&D to support that growth and sales force where necessary to grow that -- to grow the company over the long term. And as you can see tonight and as you see many quarters at Cognex, the substantial fall-through on revenue growth to the bottom line. So that's kind of our model. Now we believe at the moment, we have capacity to grow revenue substantially without significant head count additions. We think we're pretty well sized, and we're still not as big as we were in 2018 in terms of the size of the business if you take our guidance for Q4. So I think we have plenty of room to grow and without adding a lot of cost. But of course, there's more detail, salary increases and other things, that inevitably businesses absorb and other factors as well. But generally, I think we're pretty well sized expense-wise to grow without adding a lot of expense. Paul? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [6] -------------------------------------------------------------------------------- Yes. I mean, I think that's right, Rob. And we're in the middle of our budget cycle, and we'll have more to share with you in February related to expectations for Q1 and so on. But I think it is that balance of being very disciplined in the short term. We are being disciplined around head count growth, being disciplined around all of our operating expenses while ensuring that we're continuing to be positioned well for longer-term growth. Of course, there'll be some puts and takes, right? We've saved money on travel and entertainment this year. I assume that will be fairly conservative next year, but we hope to be able to travel more and see customers more often. By the end of this quarter, we'll have annualized our Sualab costs, so that won't be a variance we'll be talking about in the new year, which will be great, too. So... -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from the line of Joseph Giordano with Cowen. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [8] -------------------------------------------------------------------------------- Along those same lines, are you kind of rethinking the sales force kind of organization a little bit at this point? Because you're obviously being successful with people not traveling. I know that's a huge part of your -- historically, a huge part of that sale is being face-to-face with customers. But now with the ability to kind of do things remote, are you organizing it internally different? Are people covering -- is it not regional anymore? Like, how do you think about this in kind of like the new world of connectivity? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [9] -------------------------------------------------------------------------------- Well, around the restructuring we did earlier in the year, we did do some work on the sales force, more just to align them with their capabilities in areas where we needed. We saw strong growth potential over the coming years. So there's some realignment. On your point about changing the way we work, I mean, I think we were pretty successful at changing to online sales and marketing. And we've kind of pivoted into that pretty well in the spring. We've been seeing as much as 50% of our sales activity really being online, and it works very well. There's some background noise there. And it works -- that was not a sales call going on in a background, unfortunately. So anyway, it works pretty well, selling online, online for us. Our customers are engineers. And often -- sometimes, they don't even want to meet with people in person. They're introverts, and they enjoy kind of getting into the technology. And we found them to be very receptive to kind of an online selling model. But where it can be more challenging are areas where we have very sophisticated technology that requires hands-on work on a customer site, right? And we would have expected to see some more sales particularly from our deep learning technology and replacing human inspectors in Asia. We kind of talked about that, I think, a little bit in the last conference call, where it does require more on-site work. Fortunately, now, things in Asia are opening up much more, and we're able to do much more of that. So it's a long way of saying I think that we've adapted pretty well. We've reorganized our sales force to kind of address what we see in front of us. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [10] -------------------------------------------------------------------------------- I also wanted to ask on logistics. I mean, I know you have some core customers that are large retailers, and that makes sense. Curious as to the momentum you're seeing on new customer front, whether it's like 3PL-type companies or like FedEx-, UPS-type companies or just smaller retailers looking to move more omnichannel? Like, just what's the pacing on new customer acquisition into that space? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [11] -------------------------------------------------------------------------------- So we've been in this market about 5 years. And so certainly, in the Americas market, where we have the majority of our logistics revenue, we're well known, I think, to sort of the big technically sophisticated players in this market, and they certainly respect and know our technology. But we're also expanding to a lot of new companies that are coming up, particularly in the e-commerce space. We had one very nice customer in this quarter who sold pet-related products online, for instance, one that was a new customer for us. And sort of innovative start-up companies, I think, like Cognex technology and like the way we work. So we're seeing some kind of growth in that area. I think customers we would really like to be doing more business and feel are not in a great place at the moment are bricks-and-mortar retailers, customers that really haven't developed an e-commerce model and are now struggling, whether financially or logistically, to do it, right? We also have had a good business in airport baggage handling, but as you can imagine, that isn't going anywhere right now. So there are definitely some parts of the logistics market that are that are down and not really signing up new customers for us. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from the line of Richard Eastman with Robert W. Baird. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- Yes. And congrats on a fantastic quarter. Just a quick question on the logistics business and the e-commerce business that you referenced. When we think about consumer electronics, there is this seasonal demand to get in front of the holiday season. So it's logical that, that falls off seasonally. But the logistics business, there were some big orders booked by some of the upstream players in the second quarter, lots of commentary on how that would -- those bookings would ship well into '21. How does the backlog look for you in logistics or e-commerce? And is there the same seasonal pattern there? Or is there enough panic by the e-commerce players to get square footage in place that, that business can be consistent from Q3 to Q4 and run well into '21? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [14] -------------------------------------------------------------------------------- Yes. Rick, generally, backlog is not something we comment on, except just at the end of the year. And obviously -- but we did give some color maybe a year ago on some larger orders that were going out for longer periods. I would say this: I would say we're still getting to know the logistics market. I think it's a market where we can see pretty consistent revenue and -- over quarters. However, it can be lumpy when larger orders hit. So it's not obvious to me now being in this market that it's a great market in a particular quarter or a poor market in a particular quarter. There's not a sort of cyclicality or seasonality that I observe, and there is some lumpiness. But I draw your attention that I think we've seen a very good sequential quarter growth in logistics. And I think we're well set in general, if we take out lumpy stuff, to see that going forward. -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [15] -------------------------------------------------------------------------------- Yes. And I might just add. Part of what's contributing to our expanded guidance range that we've had in the last couple of quarters beyond just sort of COVID-related uncertainty is how we balance meeting customers' demands, trying to pull orders in, for instance, in anticipation of a challenging supply environment or not being able to get in to deliver certain orders and so on. So as logistics has grown, it has added a bit of uncertainty to kind of that revenue timing for us. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16] -------------------------------------------------------------------------------- Okay. And did you have a or more than 1 -- 10% customers in the quarter? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [17] -------------------------------------------------------------------------------- Well, again, Rick, that's not something we disclose. You can read our 10-K at the end of the year where we'll tell you. -------------------------------------------------------------------------------- Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18] -------------------------------------------------------------------------------- Yes. Okay. Okay. Okay. Fair enough. And Rob, I just -- could I just ask? The D900 that you introduced back in the spring, my recollection is that the first target market or a significant kind of first adopter and vertical was around consumer electronics for some of those tough-to-inspect applications. Can I just ask? Did the D900 have a measurable impact in Q3 growth? I mean, did it have that success? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [19] -------------------------------------------------------------------------------- Well, Rick, first thing I'd say is that, no, you misunderstood if you thought it was a consumer electronics product, specifically. I think our expectation for it was it was going to be very large in automotive. So the success we're having isn't driven by the buoyancy of that market. I'll say that. But it's very widely used. Some of the COVID-related applications I talked about have deployed the D900 to do inspection of things like vials and masks. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from the line of Karen Lau with Gordon Haskett. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [21] -------------------------------------------------------------------------------- Karen, we're not hearing you. -------------------------------------------------------------------------------- Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [22] -------------------------------------------------------------------------------- Sorry, I was on mute. Sorry about that. Rob, I was wondering if you guys are to -- still, to an extent, restricted by access to customer site during this period, which I guess would lead to still plenty of catch-up, pent-up demand from projects that were -- orders that were placed before? Or has that largely been caught up already? If you can just comment a little bit on that. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [23] -------------------------------------------------------------------------------- Well, as I kind of mentioned in my opening remarks, it's a difficult call to know. Kind of we have, I'd say, quite a lot of sort of volatility going on where, customers, some of them are really pulling in demand because they're worried about supply chain and a second wave of COVID shutting factories or causing disruption, right? And then you have other ones who are -- like you suggest, haven't really had the resources in time or given us the access to drive the products and the projects. So it's not something I can really quantify for you. Something I would say is kind of in-person sales activity kind of varies around the world. Like in China, it's 100% what it was before. It's going great guns in other markets. Japan, parts of Europe, it's much less good, less than 50% of sales activity in person. So clearly, I think that, that and along with kind of spending anxiety in those kind of markets are certainly depressing sales. And I would expect that to improve when we kind of get back to normal business in those markets. -------------------------------------------------------------------------------- Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [24] -------------------------------------------------------------------------------- Got it. And then I was wondering, could you comment on kind of the cadence of improvement in -- outside of CE and logistics, which obviously have been very strong, but in auto and the other general industrial markets, food and beverage and whatnot? How much are they still down year-over-year, first of all? And what's the cadence of sequential improvement that you are seeing? Did you see maybe over the summer like sort of a big ramp-up, and then now the sequential improvement is kind of more steady petering out? Or has it just been kind of steady improvement? If you can talk about the cadence of like the activities that you're seeing in those markets. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [25] -------------------------------------------------------------------------------- Yes. So I sort of mentioned, I think, on our last conference call that our automotive business was, I think I said, down around 40% in the second quarter. It was down much less, right, last quarter. We're not going to get into the business of giving quarterly growth rates on industries, but certainly, bad but a lot less bad than it was. And I think we all know that automotive was our biggest market last year. So that's a pretty substantial headwind that we're starting to overcome. But a lot of other industries actually kind of did pretty well, I would say. Obviously, we've talked about electronics, but food and beverage, life science, medical devices, pharmaceuticals were all showing much more improved growth rates as we got into the third quarter. In consumer products, maybe it was not as strong as we would have liked to have seen in terms of overall growth. And again, that may have to do with more access to factories and problems particularly around food processing and things like that. -------------------------------------------------------------------------------- Ka Wing Lau, Gordon Haskett Research Advisors - Research Associate of Industrials [26] -------------------------------------------------------------------------------- Okay. And then the cadence of sequential improvement. Like, are you seeing like a big ramp some time for the summer, and then it's just kind of petering out? Or has the improvement sort of been steady over the course of the quarter? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [27] -------------------------------------------------------------------------------- Just -- I mean it's difficult to say. I think, as I say, a lot of volatility. Paul, do you want to comment? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [28] -------------------------------------------------------------------------------- Yes. I mean we don't spend a lot of time talking about month-to-month color, but we do see obviously that April was kind of a weak [line item] we've improved since then. And again, still a bit soon for us to say whether this is a V-shaped recovery or kind of some of the pulling in of orders or recovering from quite a depressed Q2. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Andrew Buscaglia with Berenberg Capital Markets. -------------------------------------------------------------------------------- Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [30] -------------------------------------------------------------------------------- So you gave a -- last quarter, you gave a pretty strong guide for Q3. And you exceeded it by quite a bit. So I'm wondering, where were you mostly surprised? I mean you called out the e-commerce logistics, consumer electronics. And then you also called out some online learning, working from home, kind of seems like a pickup in that activity. But where -- I guess, where were you guys surprised? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [31] -------------------------------------------------------------------------------- Well, I'll kick off. Paul can give some more color. I mean, certainly, e-commerce fulfillment was very, very strong for us. Consumer electronics also, I think, came in stronger as we moved through the quarter. But -- and then geographically, Americas certainly did better, I think, than we were expecting as we moved through the quarter. -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [32] -------------------------------------------------------------------------------- Yes. I mean, obviously, growth versus prior year, consumer electronics and logistics really were the drivers. Outperformance versus our guidance, we saw kind of steady improvement through the quarter. A lot of that really was driven by the base business as well, just converting orders more quickly than we're used to seeing, just higher average daily sales versus kind of what we had projected at the time, kind of showing, again, a steady recovery. Those are kind of big drivers of which the Americas -- clearly, we saw it there. But we saw it pretty broad-based across our regions. -------------------------------------------------------------------------------- Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33] -------------------------------------------------------------------------------- Okay. Yes, it was quite a -- yes, I haven't seen it quite a beat like that on your own guidance in some time. So it's just interesting that those trends are even stronger than you anticipated. -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [34] -------------------------------------------------------------------------------- Yes. We're proud of the revenue results. We're not as proud about [predicting] the guidance versus that. It's a very difficult business to predict. -------------------------------------------------------------------------------- Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [35] -------------------------------------------------------------------------------- Yes, I imagine. And I wanted to ask you, too, on the AI deep learning. You made a comment that the D900 was your most successful product launch. What -- I guess, what's behind that statement? It doesn't seem like it's too material right now. I know you're tying it to more automotive. So as a follow-up, were -- if we were to try to model in some material impact next year from this, which end markets do we assume that comes in? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [36] -------------------------------------------------------------------------------- Yes. So deep learning is a technology that's changing and expanding the served market of vision, right? And the D900 really brings very powerful kind of techniques for inspection, particularly onto this world best-selling smart camera platform we own called In-Sight. And In-Sight has tens -- hundreds of thousands of users who know how to program in it. And now they have all these extra tools available to them in the D900. So -- and what's wonderful is that's a very widespread product. It serves pretty much all the markets that we serve. And so it's bringing that technology. I think we would expect, yes, automotive. But really, almost all the markets that we serve, we expect the D900 to be a big player. Where it might be less of a kind of a move to growth overall would be in Asia, where there tends to be more interest in using PC-based vision, where software is loaded on to powerful computers and used in the factory, and that's generally not used in other markets in that way. But fortunately, in that market, we now have Sualab and the technology we acquired there, which is very powerful on PC platforms and useful for inspection. So Cognex -- when you launch a new product, you don't see hundreds of millions of dollars in the first year. This is not like a consumer market, right? So normally, it can tend to ramp, and it can approach a peak in the third year. So I would sort of -- I would temper your expectations. But the initial signs we see in the first 6 months in terms of its ramp are as good as any I've seen. And what I really like about it is it's getting us to new customers who couldn't use machine vision because it was either too difficult or it just couldn't do the inspection that they currently use or it's going to existing customers who have applications and tasks that they couldn't do before. And now we can do for them with the D900. So we're excited about expanding our served market. Then to give you kind of another data point, if you joined -- if you were with us at our analysts' meeting last year, we sized the deep learning market globally in machine vision at that point at about $100 million, and we said we thought it was growing at 75%, right? So the ease of use is helping annually. The ease of use certainly is helping to broaden that -- the applications served and the speed of adoption. But that may give you a sense of scale about what the overall opportunity is for technology like that. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Our next question comes from the line of Blake Gendron with Wolfe Research. -------------------------------------------------------------------------------- Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [38] -------------------------------------------------------------------------------- I wanted to circle back on the third leg of the stool, being automotive. Somewhat scary to think if you had all 3 of your major end markets working at the same time. [Your SAAR is surprisingly upside.] I know you're not going to give us exact cadence of recovery in that end market. I guess looking past the pandemic, things like electric vehicles seem to be -- there's some pent-up optimism particularly around the battery technology breakthroughs that we've seen from Tesla and others. So I guess my question is, where does Cognex stand on sort of the ICE-to-EV transition? What sort of uplift could we see from an intensity standpoint here just considering that technological inflections are really what drive your demand? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [39] -------------------------------------------------------------------------------- Yes. Well, first of all, Blake, thanks for the question. If I was -- I wouldn't say the third leg if I was referring to automotive. I'd say the third wheel. But keeping that in mind as we talk about it, yes, automotive is a big market for us where the majority of our business has been and will be for a while in an internal combustion engine type activities. But you're quite right to point to electric vehicles and battery manufacturers being kind of the area where we see very challenging applications, huge capital investment, particularly in Asia around battery manufacture and techniques in that space, where machine vision can really make a difference in terms of yield and performance and scaling up for that work that has to happen. So EV is still a very small -- a small part of our overall automotive revenue. It's growing very quickly. And -- but I think it will be a while before I'd say it's a majority of our business and based on what I see on new product plans from our customers. -------------------------------------------------------------------------------- Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [40] -------------------------------------------------------------------------------- Got you. I wanted to circle back on working capital. Great execution in the quarter, particularly on collections. Where could working capital go from here? And what are some of the puts and takes to free cash conversion? Is it a segment mix sort of input? Is it a customer mix input? As deep learning and maybe some of the software-centric capabilities get to be a bigger part of the business, is that going to have a structural impact on working capital moving forward? -------------------------------------------------------------------------------- Paul Todgham, Cognex Corporation - Senior VP of Finance & CFO [41] -------------------------------------------------------------------------------- Yes. I don't see a lot of changes structurally in working capital. I mean -- so thank you for the comment. We're very happy but also pleasantly surprised by how good the collections environment has been. Our team has been working hard but also just really good partnership with our customers, too and so on. So -- yes. I mean, I think in terms of puts and takes, we meet each customer kind of where they are and where they need to be. We look for opportunities to partner with them, work with them. We obviously do have a tremendous balance sheet which can be a source of competitive advantage for us in challenging times. But we've seen fewer issues with collections from customers than we might have expected given the pandemic. It helps that I think we are a priority investment for them, and they can't get more product sometimes until they pay us. But generally speaking, we have a great relationship. And I don't see big changes going forward. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [42] -------------------------------------------------------------------------------- And I'll just -- it's Rob here. I'll just build on something. I mean, if you followed Cognex for a while, we're not like a normal company. We really believe strongly in paying our suppliers on time and getting the best support and having the best relationship with them and keeping plenty of inventory to make sure we can supply the technologies that we have that have quite long road maps. So we're not looking to optimize working capital. We're looking to optimize high-margin growth and the quality of our company. The other thing I would say in dealing with some of these very large customers, some of them are very poor long-term payers, right? And as I pull into that, our balance sheet really gives us the air cover to do that without any concern. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- (Operator Instructions) Next question comes from the line of Joseph Giordano with Cowen. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [44] -------------------------------------------------------------------------------- Just -- Rob, just wanted to quickly qualify something you said. I think I missed the beginning of it. You said in Asia, there are customers there that are more inclined in some cases to use PC vision. Was that for a particular application? Or I didn't hear exactly what you were referring to. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [45] -------------------------------------------------------------------------------- No. It's the market dynamics in general, right? There's a lot of very high-quality, capable engineers in China, particularly. And -- who are less expensive, I think, and more eager to deploy vision. And for those customers, we have the best and most powerful PC vision suite in the world called VisionPro. So a lot of them favor using that. And a lot of them who are very big manufacturers use it very effectively. -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [46] -------------------------------------------------------------------------------- Got it. -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [47] -------------------------------------------------------------------------------- Joe, sorry. To clarify, were you asking about deep learning? Or were you asking about vision in general? -------------------------------------------------------------------------------- Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD [48] -------------------------------------------------------------------------------- I was just curious. Like, is this something -- are you competing against PC-based vision for traditional, like, consumer electronic inspection, like, there? I didn't think that was the case. So just curious as to -- like, where are you competing against that tech more often? -------------------------------------------------------------------------------- Robert J. Willett, Cognex Corporation - CEO, President & Executive Director [49] -------------------------------------------------------------------------------- Yes. So you see a larger share of PC-based vision in Asia, and electronics is a big, big market there. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- (Operator Instructions) We have reached the end of the call. I would now like to turn it back over to Dr. Bob for closing comments. -------------------------------------------------------------------------------- Robert J. Shillman, Cognex Corporation - Founder, Executive Chairman & Chief Culture Officer [51] -------------------------------------------------------------------------------- Well, thank you very much, and I want to thank all of those who've called in and asked questions. Well, machine vision plays an increasingly important role in automating the manufacture of items, the tracking of those items and, even today, the delivery of those items. In view of that and in view of our leadership position, we remain bullish on the long-term prospects for Cognex despite the current difficult business conditions. And we look forward to talking to you next quarter and reporting what I hope are going to be very good results. Thank you again. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.