Greetings, and welcome to 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. 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.
Good evening, everyone. Thank you for joining us today. With us are Cognex's Chairman, Doctor. Bob Shillman President and CEO, Rob Willett and Chief Financial Officer, Paul Todger. I'd like to point out that our earnings release and annual report on Form 10 ks are available on our Both contain highly detailed information about our financial results.
During the call, you may use we may use A non GAAP financial measure, as we believe it is useful to investors, 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 ks for a detailed list of risk factors. Now, I'd like to turn the call over to Doctor. Baugh.
Thanks, Sue, and hello, everyone. Welcome to our 4th Quarter Earnings Conference Call. As shown in the news release issued earlier today, Cognex reported record 4th quarter revenue for 2020 and we also set a record for annual revenue as well. It was a challenging year. 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 We intend to continue to be the world's leading provider of machine vision and advanced barcode systems.
Finally, as we also announced earlier today, this will be my last conference call as Chairman of Cognex. After 40 years at the helm, I've decided to retire from Cognex's 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's super capable CEO, Rob Willett. Rob, the microphone is yours.
Well, thank you, Doctor. Bob. Thank you, and Good evening, everyone. Before we discuss our financial results, I want to take a minute and thank Doctor. Bob for his immense contributions to Cognex and for instilling the enthusiastic entrepreneurial spirit that is the hallmark of our company.
Doctor. Bhav and the unique culture he built over the past 4 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 It's been a challenging year in which lower spending by customers in our 2 largest markets, automotive and consumer electronics, resulted in our first revenue decline in 9 years. However, after the global COVID-nineteen 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 twenty twenty was much more positive than initially expected. You can think of it as a tale of 2 halves. 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 higher spending by customers in consumer electronics and logistics, 6, where we benefited from strong partnerships with market and technology leaders that fared 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 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 percent of total revenue logistics surpassed automotive to become our 2nd largest market. We benefited from major e commerce and omnichannel retailers investing in automation to enable higher throughput and cost reductions. 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 to defects, ensuring vials of vaccines are filled to the correct level and are 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 20 19 dropped to 3rd 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 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 to win new customers and to successfully manage our supply chain. Because of their efforts, we launched powerful new products that have made our superior vision tools easier to use and therefore available to a wider audience. The most Important introduction in 2020 and one of our most successful product launches ever was the Insight D900 Leveraging Incyte's widely recognized easy builder interface, the D900 enables both existing Cognex customers and new users Machine vision to apply our Vidi 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 Cognex VisionPro deep learning software platform and are being widely adopted by more sophisticated customers to solve their most complex 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 3 d.
Last month, We launched the Insight 3 d L4000, an exciting new smart camera platform for the fast growing industrial 3 d vision market. The 3 d L4000 leverages our successful insight intuitive spreadsheet interface, making it easy for our broad insight customer base to use powerful new vision tools created for true three d inspection. Under development for some time, the 3 d 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 3 d vision tools available in We believe the 3 d L4000 is a breakthrough product that makes 3 d as easy to use As 2 d vision, it positions us very effectively against competitors who have significant sales and profits in this area. Both Cognizant 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 Q4.
Thank you, Rob, and hello, everyone. I'm pleased to report record 4th quarter revenue, Cognex's 1st Q4 greater than $200,000,000 At $224,000,000 4th 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 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 favorable product mix and higher volume. Gross margin and logistics, while still dilutive to the company overall, continues to improve. The restructuring program we announced last spring has been completed.
Final charges totaling $875,000 were recorded in Q4. Excluding those charges, the combined total of RD and E and SG and 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 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 in Q4 of 2019. Turning now to everybody's favorite subject, taxes. Benefit of $14,000,000 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 SUILAB 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 in the prior periods was because we earned a greater share of profit over Reported earnings were $0.39 per share in Q4 compared with $0.46 in Q4 of $2,019.49 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 1 third due to growth in logistics and incremental revenue from medical related industries, including companies scaling up production for 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 $767,000,000 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 Doctor. 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.
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 $225,000,000 $245,000,000 which represents growth of more than 40% year on year at the midpoint.
We expect Q1 will be the 3rd quarter in a row in which And likely lower than the gross margin we reported in Q4, given the expected higher mix of revenue from logistics. Operating expenses are expected to be flat to slightly down year on year. We expect 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
queue. Please limit yourself to one question and one Our first question comes from the line of Jim Ricchiuti with Needham and Company, you may proceed with your question.
Hi. Thank you. Good afternoon. And Doctor. Bob, I wish you the best.
Thank you, Jim.
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 you
have in backlog going into the quarter? Yes. Hi, Jim. Yes, it is. Yes, I think we're seeing growth across most of the industries we serve in the Q1, 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.
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 'twenty one and perhaps with this customer, Your visibility, your line of sight into that business?
Yes. Well, 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 kind of 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 Q1. I think we think the Q1 will probably be our highest logistics revenue quarter in a while, right? It is obviously Larger than we think we will be reporting in the subsequent quarters. But We see broad based strength across that whole area and a number of other good customers coming Online that we'll 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 Half of it is that. And then there are some larger deployments that we do, which tend to be on our books, Booked and then turning into revenue, sometimes 2, 3 quarters after it books
Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.
Hi, good evening folks. And Doctor. Bob, congrats again on a successful Instorted career.
Thank you, Josh.
So as long as we're kind of 10 ks diving here, I guess maybe 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 Upfront is 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?
Certainly, last year wouldn't indicate it, but it's new language all the same.
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 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 in 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 The future of the business.
Got it. That's helpful. And then, yes, I know it's a lot of the 1Q commentary focusing on logistics. And I guess rightfully so, What
we hear from some of your the other peers
in that space. But the other 2 big markets that weren't really touched on, electronics and auto, Electronics, we know that inventories are still low, lead times are still long. Auto, I think some of the broader automation cohort is seeing a lot of in China in particular. How are those factoring into the 1Q guide or how is your visibility for those markets, Just given that you haven't really touched on this much.
I think we expect to see all 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. We still would expect to see some growth In Q1, in that market, but generally Q1 is a low quarter for logistics I'm sorry, for consumer electronics. It's not A big tends to be more Q2 and Q3 tend to be our big consumer electronics quarters. I often get asked this time of year, like how is the year looking for consumer electronics?
And I give you 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 So 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 2, and 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 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 5 gs and a lot of other technology coming into phones last year.
I would think it's Fair to say some of which we didn't see happen and we hope and expect will now come into this year's builds and should help The electronics market, but also electronics can be a bit of an up and a down market, up 1 year up, the Next year down, the next one up, and certainly last year was more of an upmarket. So we have moderate expectations. You asked about automotive as well. And I did say that the Q4 that we just reported was the first in a number of quarters that we saw year on year Thank
you.
Our next question comes from the line of Richard Eastman with Robert W. Baird and Co. You may proceed with your question.
Yes. Yes, good afternoon. Doctor. Bob, best of luck. Wow, it won't be the same.
We'll have to stay visible. I've just been so impressed with just what you've done with Cognex, and it's It's been a fabulous public company story. So best of luck.
Thank you. And much of that gain is due to the tremendous strategic and operational capabilities of my partner, Rob, and And the team that he's dealt, but I'll take credit at any rate. So thank you.
You are very welcome. Hey, 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 2021?
Yes. Hi, Rick. Well, first of all, for Cognex, we're pretty capable in terms of having Plenty of component inventory at Cognex. We're not afraid of having very significant inventory 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 feeling in good shape in that respect. Later in the year, if we found there was Massive de commitment on already ordered and accepted orders from our own suppliers that might lead Trouble, but I'm not we're not concerned at the moment. But then obviously, the other impact is more on our customers Specifically, automotive. And I'd say that's a bit of a area of confusion at the moment. We're seeing a stronger demand in automotive than perhaps we'd expected.
And so part of me wonders or part of the team wonders To what degree that that's at a 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 are there are 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 our sort of basic interaction with 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 It's putting up good numbers right now.
We've seen good growth in semi last year, and that appears to be continuing currently.
Okay. And just to dovetail on to the automotive question, just numerous and really aggressive Schedules to bring EVs to market somewhere in the 'twenty three to 'twenty 'twenty three to 'twenty five maybe timeframe. And again, we're seeing a little bit of uptick here. It's probably off of a pretty trough kind of balance 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 'twenty two, 'twenty three for you or how do you think about the timing there?
Yes. Well, Rick, first of all, I think about battery manufacturing, that's a business that we see a lot of demand provision now, and we are 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're definitely seeing 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, Beau, I'd probably not like you, we see visibility with our major customers on their Plans to bring to market electric vehicles. And certainly, generally, If a major brand owner, OEM is planning to launch a major electric vehicle, they're really bringing in vision in about 18 months in advance, right? So and they're introducing us to the line builder and they're specking the vision to scale that up, right. 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 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, they don't have the powertrain in what we used to see with the General combustion engine cars, but certainly there's a lot more sensors, right? And there's a lot of changes to the product, just whether it's even things like And then on the other side, I think investment in internal combustion engine vehicles obviously is being minimized, which is headwind in that
Understood. Yes, yes. And just to sneak in one last question. Did 3 d vision, as you define it consistently, Has it grown to more than 5% of sales with all the puts and takes And the other Mark, is it 10% of sales yet or?
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
Got you. Okay, very good. Thank you.
Thank you.
Our next question comes from the line of Joe Giordano with Cowen and Company, you may proceed with your question.
Hey, guys. Doctor. Bob, I was born the same year you founded Cognex and sadly for me, I've accomplished both in the last 20 years than you guys have. So congratulations on what you'll be missed.
Thank you, Joe. Thank you very much. And I hope your next forty is more productive than your first forty then.
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. It grew 40% this year.
Is that still your normalized expectation? And within that Context is that doable unless that is it doable without the large customer growing at least that pace?
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 one We've been able to achieve or come close to for a number of years here with logistics. We grew about 40% last year. I think we would have hit that or exceeded that 50% number have some of the other logistics markets, but we expect 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 expected to keep up with.
So it's certainly the potential is clearly there and the technology and the Structure we put in place to serve it is there, yes. And but there may be volatility along the way, particularly within quarters in that business.
Understood. And then, Paul, when you think about this year and what you were able to accomplish in a world where people aren't traveling, Is the way of doing business for you guys like fundamentally different in some respects? Should we think of SG and A Percentage of sales structurally lower even as you start to come back going forward?
I mean, yes and no. I think I've been at finance for a while and every year we would try to squeeze T and E to drive some profitability and out a global pandemic is actually a more effective technique in reducing travel and entertainment than finance people, berating people come forecast for budget time. But So we've been fairly conservative about our planning for T and E for this year. Although, to be clear, we would like to be traveling more. We would like to be visiting customers more.
We've pivoted nicely to online sales activities, but we really do value that face to face relationship with Customers 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 Savings on that in Q1 because we're anniversarying 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 a certain product launch timing and if we decide actually we want to hold that product for 1 more month, we're not left kind of holding or making kind of difficult decisions. So and then to some extent, we obviously would look at real estate going forward.
Although, again, I think Cognex 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 through the course of our restructuring are downsized and obviously look at our real estate portfolio as well.
Thanks guys.
Our next question comes from the line of Matt Summerville with D. A. Davidson. You may proceed with your question.
Thanks and congrats to Doctor. 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 comps in China, easy second quarter comps in other parts of the world due to the lockdown, And then you have kind of the moving pieces with CE.
And I know it's hard to sort of guide out beyond 1 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.
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 Q1 as a result of logistics backlog turning into revenue. And we have a very healthy logistics business that is putting up great growth numbers.
So 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 That's well, both, right? That's gone on for many years now, and I would expect to see similar things. And we'll have more 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 broad factory automation business, it tends to be a lot of year end purchasing from markets like motive and other general market food, beverage, pharmaceuticals, medical.
So as often particularly in the U. S. Where there's And I think Q1 obviously is going to be unusually large due to this very large logistics revenue that's going to hit us.
Thank you. And then maybe as a follow-up, can you maybe comment as to the actionability of what you may have in the M and 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
I'll talk about M and A type stuff, but then I'll have Paul talk about perhaps the other 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 who can bring it to Cognex. I mean, you've seen us do that with SulaLab, Inviti and NShape and Keyaro and other businesses that we've acquired over the last 5 years or so. So we're always working on that. And those deals When they happen and when they're actionable.
So there's nothing specifically I can point to. And so That's kind of how the outlook is there. But Paul can speak to other aspects of the balance sheet.
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 1,200,000 shares in Q1 of 2020, spent $51,000,000 doing so at an average price $42 which looks really good right now from a repurchase point of view. And that but that actually did cover the dilution from our 2020 annual grant during that 1st quarter, we don't take the buyback so time constrained as it maybe looked last We do tend to issue the majority of our equity in the Q1 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 buy a little more, I would view all of that as sort of consistent with with our philosophy. So we do have $280,000,000 roughly remaining in our repurchase program. So I feel like We've got cash and 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 10b5-1 trading plans as appropriate as well.
Great. Thank you, guys.
Our next question comes from the line of Karen Lau with Gordon Haskett. You may proceed with your question.
Hi, good afternoon, everyone. And my congrats So Rob, I think 2 quarters ago, you initiated The cost reduction action, I guess, with the premise that your $1,000,000,000 sales milestone has been pushed out because of The pandemic, right? 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 kind of people costs. And obviously, you saw very strong incremental margins for Q4 and in your 1Q guide.
So I was just curious at what point does costs have to come back? And is there something about perhaps the new way of selling or new ways of operating that might lend it for salespeople to be much more productive than previous cycles, so you may not have to add deck so quickly. Yes.
Hi, Karen. So I think if you go back and you look at Cognex's headcount increases and our investments over the last 3 years, well, Since 2017, you can see that our level of investment and our headcount additions have exceeded our revenue growth And I think coming into 2020, we're expecting strong growth. And then when COVID hit, we realized 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 Obviously examples.
And yes, and then I think it's been just a very volatile situation. So I think we've restructured the 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 I would point to our engineering spend, which is a percentage of Revenue was certainly relatively high and healthy. We spent more last year on R and D than we spent in any year in the company's history. So Certainly, we're not we certainly haven't curtailed our R and D and our engineering, our product launch plans In any way, so in terms of where we may need capacity, it may be more in the sales force.
But if you look at our numbers overall, it doesn't Why that we're understaffed or capacity constrained in most areas of the business, at least in the short term.
Okay. So the incremental margins for now should be pretty sustainable and then you We have to reevaluate towards the middle of the year and see how the recovery trajectory is going and we have to add additional sales
Yes. I mean, I think we're watching the situation very carefully. You said margin. I mean, the only and 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 is a result of more logistics business, which generally is its margins are improving nicely over time, but it still is dilutive to our gross margin.
So that would be the only qualification I'd put on what you said.
Yes. And Rob, I could add, on the operating expense point of view, a year ago, we were calling out $25,000,000 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 SulaLab expenses, a portion of which is deep learning Engineers and the team and the salespeople there as well as and a portion of which is just the structure of the acquisition, which had a deterred compensation component that hits your We don't see sort of any major adds like that in the current year. I think there are some puts and takes, right? This quarter will be a little low on T and E. I hope in the back half will be a little higher.
For the year, we expect our T and E to be up slightly From a headcount, we're making a major investment, which we cited in our 10 ks around a new CRM and CPQ, configured price quote and customer management system. I think we've referenced up to about $10,000,000 in spend. Much of that CapEx is here, 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 20. And then of course, we have 2 more quarters of Q1 and Q2 where we should be seeing healthy benefit from the restructuring actions we took last May.
Got it. 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 in EV, different components versus the ICE exposure. Historically, you have 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
Yes. Karen, I think one thing I'd point to is I think a lot of the Tier 1 suppliers at Cognexis have very strong and 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 powertrain internal combustion type of parts of their business Making EV batteries has been really developed and is being scaled up by Asian companies, right? So that's been kind of a shift.
And the problems they're working on in some ways are in some ways very different. But fortunately, there are areas Cognex technology and a 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 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 And also EV car manufacturers themselves who are making plays in batteries are 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 pleasing share to that shift that's going on in business.
Okay. That's helpful. Thank you. Our next question comes from the line of Andrew Buscaglia with Berenberg. You may proceed with your question.
Congrats, Doctor. Bob, and good luck. Thanks, Andrew. Actually, I had a really important question for you though before you go. I'm surprised no one's Yes.
But what does your departure mean for those really entertaining annual reports that you guys put out?
Well, I think you're going to like 1 for 2020, and I was certainly involved in that one. And as an advisor, I'm going to continue to be a cognoid. I don't know if the press At least made that clear and advised it 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
Couple of other questions I have. Robert, you cited some interesting commentary on AI and deep learning In the quarter, it's starting to perk up in your sales. Can you give us some sort of context around how How would you think about that in 2021? Is this going to be it's going fast, so 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?
Yes. Thanks. Thanks, Andrew. And I just got to add that there's no one more creative to tap than Doctor. Bob for the Annual Report.
So I think Keith, it's going to be one of his key advising roles just to help us with that. But Yes. 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 Growth driver, it's happening really on two fronts.
One is we're taking that technology and putting it into the smart camera insight that we have and the D900 that we launched, one of our most successful product launches, if not the most successful product launch we've I've had is using that technology and making it easily available. And so you can expect more of that to go on and I think change the modular Vision system, a smart camera type space that we serve. And then also it's really providing a lot to The very high performance, high processor requirement business that is our vision software business. And that's The technology we acquired from SulaLab is highly relevant in this space and is beginning to get traction with customers. Some of its 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 tens, if not hundreds, many hundreds of thousands who are working on visually inspecting products that we think are our 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 2 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 bleeds more and more into our product line
Interesting. Okay. And everything is pretty it picks over, but are you able to give A sense of the percentage of sales from each end market, because I did hear you say automotive is a third, I believe. Are you guys willing to break that out, the first two?
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?
Yes. 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, Would comprise the remaining 30%.
Not that you need a reason
Looking forward to it. Thank you.
Our next question comes from the line of Blake Gendron With Wolfe Research, you may proceed with your question.
Yes, thanks. Good evening. Thanks for sticking me on here. And Doctor. Bob, probably a short list of Company founders that retire at least to
a degree with company strength at
an all time high, so congrats. Thanks, Mike. You talked about consumer tech, you talked I'll have a qualitative outlook there and maybe the puts and 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 and more the demand side on Consumer Tech or if it impacts your input costs to any meaningful degree.
Yes. Hi. I think we spoke a little bit to that question earlier. Is 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 they're 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
And then just to dig into As 3 d applications grow, is there any crosstalk or cross communication with 2 d Visions? Is there any The cannibalization, I guess, of 1 versus the other as 3 d gets a bit more popular here, how should we think about the
interplay between
3 d and maybe other major
buckets of machine Between 3 d and maybe other major buckets of machine vision?
Yes, I would say, you probably wouldn't do things in 3 d that you Could do in 2 d because it's easier and less expensive, less processor required, less optics required, right? So 3 d, I think, is additive. And we're going to see lots of 3 d and 2 d together, right, in applications. And we certainly have those capabilities and more and more of our customers are using 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 their application. Makes sense.
Thanks for the time. Thanks. And I think we're near the top of the hour. So I think we'll Doctor. Bob, I think we'll turn it over to you.
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, both 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's offices for providing us with 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 who have maintained their trust in us through these years. Thank you again for joining us tonight and here's to another 40 fantastic years during
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.