Greetings. Welcome to Cognex second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Susan Conway, Senior Director of Investor Relations. Thank you. You may begin.
Good evening, everyone. Thank you for joining us today. With us are Cognex's Chairman, Dr. Bob Shillman, President and CEO, Rob Willett, and Chief Financial Officer, Paul Podgurski. 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. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release. Any forward-looking statements we made in the earnings release, or any that we may make during this call, are based upon information that we believe to be true as of today. Things often change, however, and actual results may differ materially from those projected or anticipated.
For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Now, I'd like to turn the call over to Dr. Bob.
Thanks, Sue, hello everyone, and welcome to our second quarter of 2020 earnings call. It has been a very busy three months since I talked to you on our last earnings call. As you know, since, and most others, have to do with the worldwide government-ordered shutdowns attributed to COVID-19. Because of that, we had to make difficult measures to align our company to the slowdown, and that resulted in large write-downs in Q2, which severely affected our reported financial results. The details on those results and on what Cognex has been doing this past quarter, I'll turn the call over to my partner, Cognex's CEO, Rob Willett. Rob, the microphone is yours.
Thank you, Dr. Bob, and good evening, everyone. Tonight, Cognex announced financial results for Q2 of 2020 that reflect the difficult business environment we expected when we talked with you in April. Good news to report is that revenue increased by 1% over the prior quarter. This was better than we anticipated due to our faster than expected delivery on a substantial backlog of orders from the logistics market. Cognoids worked hard to manage our supply chain and deliver Cognex products to customers despite significant components shortages. However, revenue declined by 15% year-over-year due to lower spending by customers in Europe and the Americas. It was most noticeable in the automotive market, which resulted in 2019. Growth in logistics, semi, and life sciences helped offset that decline.
Business activity is improving. Demand in many of our markets is weak and is expected to remain so through the end of the year. Despite that, there are two areas of strength in our business that are contributing positively. One is the e-commerce sector of logistics. Even though most retail stores, airport baggage handling customers, and postal accounts are struggling, major online and big box retailers are stepping up their investments in Cognex machine vision to enable higher throughput centers. The other sector that's doing well is consumer electronics. We are now delivering products that we expect will be recognized as revenue in Q3. In addition, our team has been during these times of limited customer access. Salesnoids and application engineers have been successful at demonstrations via video conferencing and winning a lot of business in this manner, even with new customers.
Let's talk about the plan we announced during Q2 to lower Cognoid headcount by 8%. The decision was a difficult one, given our company culture and the value we place on perseverance, but it was something we had to do given the circumstances. We entered 2020 staffed to achieve significant new revenue levels, perhaps exceeding $1 billion in a year or two. Unfortunately, that is unlikely to occur due to the economic disruption, and therefore, we right-sized the team for more modest near-term growth. As part of the restructuring, we saw an opportunity to reduce duplication and redundancies that had built up in our business from years of global expansion. We reorganized our engineering teams around the world in a way that we believe sharpens our focus on specific growth areas and enables us to leverage Cognex's unique capabilities more efficiently.
After the restructuring, we still have the capacity for significant growth. We've not delayed new product development. We're also moving IT systems upgrades, process improvements, and projects to support future growth. The development in Q2 that I want to address is our write-down of a portion of the deep learning technology that we acquired in October with SUALAB. We're confident in our deep learning strategy and believe SUALAB has an important role to play. SUALAB's technology requires hands-on application engineering and in-person collaboration with customers, and that's difficult to do in the current environment. Our projected revenue for SUALAB has been pushed out, thereby reducing the value of that asset. We continue to be bullish about our overall deep learning business. Deep learning's bookings have increased by more than 50% year-over-year, making it our fastest-growing product category.
A major step was the launch of Cognex's In-Sight D900 smart camera in April. The D900 makes advanced deep learning technology accessible to the tens of thousands of manufacturers who have standardized their factory automation on our industry-leading In-Sight platform. Initial sales are growing nicely as customers discover how effectively the D900 finds defects on complex parts, malformed, skewed, and poorly etched codes. In other product news, we launched the In-Sight 8505P, a smart camera with Cognex HDR+ technology that is ideal for integrating into tight spaces on production lines. It's important for our Asia region, where electronics manufacturers and OEMs value its combination of precision, speed, and small form factor for demanding applications, such as inspecting assembled devices for manufacturing defects. We're proud of these new In-Sight products and doubly proud to have launched them in the current environment.
They demonstrate the advantage that our culture brings as we effectively work together during these challenging times. While many Cognoids are still working from home, we're maintaining our product development plans and remaining on schedule with our operations and process improvement plans. Regarding supply, managing our global supply chain continues to be a challenge currently, but we're navigating well under the circumstances. In Q2 supply parts, we also continue to see freight deliveries taking longer and costing significantly more. Relationship with suppliers and our practice of holding substantial component inventory helped us in the current crisis. Even so, we recognize and continue to plan for the possibility of supplier and customer closures and further disruption down the road. Let's now turn to details from our second quarter. Paul, over to you.
Thank you, Rob. Hello, everyone. As you know, Cognex is known for being straightforward. We typically discuss our results almost exclusively on a GAAP basis, but we believe some pro forma disclosures will be helpful this quarter given the actions we took in Q2. With that in mind, let's get into the details. Revenue for the quarter was $169 million, which was better than we expected, but still weak. That level represented a substantial decline year-on-year in the broad factory automation market, particularly automotive. The impact was most noticeable in Europe and the Americas because of widespread business disruptions in both regions. Partially offsetting the decline was growth in logistics, where e-commerce fulfillment customers performed well. Logistics also increased on a sequential basis. That growth, combined with returning production in China, offset the decline we experienced in other areas of our business from Q1- Q2.
Reported gross margin was 70%, which included a reserve of $7.7 million for excess inventory resulting from the business decline. Gross margin was 75%, excluding that non-cash charge, which is consistent with Q1. It was slightly better than we expected due to a favorable product mix and improving gross margins in logistics. Operating expenses in Q2 included a restructuring charge of $14.8 million, primarily for the workforce reduction discussed by Rob. Our restructuring actions were substantially complete. We expect a residual charge of between $1 million-$2 million in the second half, primarily in Q3. We also recorded a non-cash charge of $19, primarily to write down a portion of the intangible assets from our acquisition of SUALAB. Excluding these one-time charges, the combined total of RD&E and SG&A declined by 14% on a sequential basis, as expected.
The decrease was due to lower stock option expense and savings from actions we implemented early in Q2, including lower travel and entertainment costs, prudent management of discretionary spending, and a restricted hiring plan. We reported an operating loss in Q2 because of the charges for the restructuring actions, intangible asset impairment, and inventory write-down. Excluding these charges, operating margin was 21%, which was approximately 800 basis points higher on a sequential basis. The decline year-on-year was due to the lower revenue as compared with Q2 of 2019. The effective tax rate in Q2 was 19%, excluding discrete tax items. That was higher than we expected because we now believe more of our profits in 2020 will be earned and taxed in higher tax jurisdictions.
On a non-GAAP basis, earnings were $0.18 per share in Q2, compared with $0.28 in Q2 of 2019, and excluding discrete tax items. Looking at the change in revenue for Q2 year-on-year from a geographic perspective. Our best performing region, low single digits year-on-year. Higher revenue from consumer electronics and semi offset a decline in automotive. Our customers in Asia are now largely back to work, and in that regard, ahead of other regions. In the Americas, revenue declined by low double digits year-on-year. Growth in logistics almost offset a substantial decline in revenue from automotive. Spending by manufacturing customers is gradually improving. Facilities are reopening, and we are winning business from companies that are scaling up production for COVID-19 related products. The most challenging region where revenue declined by 40% year-on-year. Business fundamentals in automotive.
The timing of revenue from consumer electronics was also a factor. In that regard, large order revenue from consumer electronics in 2019 was split between Q2 and Q3. This year, we expect that business will be mostly concentrated in Q3 and with a higher proportion benefiting. Turning to our balance sheet, we ended the quarter with approximately investments and no debt. Our approach to capital allocation business conditions. We continue to manage Cognex for the long term with shareholders. To shareholders during Q2, and tonight we announced a similar payment. We did not buy back any stock in the quarter. Our inventory balance decreased by approximately 70% the end of 2019. Potential E&O reserve we recorded in Q2. Inventory was roughly flat over the six-month period. Now I'll turn the call back over to Rob.
Thank you, Paul. Moving next to guidance. We expect Q3 will be the best quarter of the year by far, with revenue between $200 million and $220 million. That range represents an increase both year-on-year and sequentially due to higher expected revenue from consumer electronics, which we believe will be mostly concentrated in Q3 this year. We also expect another strong quarter in the e-commerce sector of logistics as we deliver on business that we have been working on for some time. Despite that strength, which can be attributable to a few large customers in e-commerce, semi, and electronics, overall demand is lackluster, and it's unclear when that will change. Gross margin for Q3 is expected to be in the mid-70% range, slightly tempered by the high volume of revenue we expect from logistics.
The combined total of RD&E and SG&A, which excludes the charges that we discussed tonight, is expected to be relatively flat both year-on-year and sequentially. Lastly, the effective tax rate is expected to be 19%, excluding discrete tax items. Now, we will open the call for questions. Operator, please go ahead.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. For a participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Karen Lau with Gordon Haskett. Please proceed.
Rob, you sound pretty downbeat on markets excluding e-commerce and CE. I was wondering, are you guys not seeing any meaningful sequential improvements in markets outside of those two? Can you maybe comment on kind of the rate of decline you saw in April versus the exit rates you saw in June or maybe July even?
Yeah. Hi, Karen. Yeah, I think the story really is that the automotive market, which was our largest market last year, looks weak, and I think that's the main source of it. There are other markets that we serve, medical-related industries, including life sciences, medical devices, pharmaceuticals, product security, a broad range of our markets, more the other growth. Certainly automotive is the market that is giving us.
To that point, can you comment on kind of the exit rates that you're seeing in June and July?
Um-
Kind of how much is it down year-over-year?
Some color on that. I think automotive was our largest market in 2019, and it was soft coming into this year. We were optimistic at the start of the year that we thought things might pick up in the second half, and obviously, we no longer expect that to happen given the COVID-19 situation. From automotive deteriorated break, and revenue from automotive declined by 40% year-over-year in so it's roughly $25 million of headwind for us in the quarter. It continues to look weak worldwide, including spending even on electric vehicles, not really showing the strength we might have expected. In terms of exit rate, there's some sign that it's improving from its lows. I would certainly say I think we've hit bottom there.
In terms of getting to the level that we had hoped coming into the year or the return percent growth that we've come used to over the past few years, we don't expect that to happen probably until the middle.
Got it. Understood. Thanks for the color. With the delivery expected in the third quarter, can you comment on how much the overall is going to be up this year? Maybe put it into context for us. I believe your CE business peaked in 2017. If you account for the increase this year, how much would you still be down versus that peak level?
Generally, Karen, we don't give kind of full year projections, as you know, forecasting for Cognex nor would we give specific guidance like that. What I would say, I think 2018 was our best year ever in electronics, and I wouldn't expect us to outperform that this year. We're putting up market. I would say, coming into the year, we thought there was a very good chance we would see very strong growth in consumer electronics, and we're seeing the level that we would like.
It's a bunch of things going on. One is that outside of phones, outside of smartphones, the accelerated online learning and working from home is certainly driving growth. We're seeing a lot of growth in that area. Then we certainly are seeing some nice growth related to 5G and OLED screens. I'd say some of that growth that we had hoped would come this year looks like it may be getting pushed out a little. Despite that, I think it'll be a good year for us in consumer electronics. We expect consumer electronics will be our largest market this year, but logistics may just give it a run for its money. Automotive is not in the running to be our largest market this year, I would say.
Okay, understood. I'll pass it on. Thank you.
Thank you.
Our next question is from Andrew Buscaglia with Berenberg Capital Markets. Please proceed.
Hey, guys. Yeah. All those consumer electronic trends, is there reason to believe just given how unprecedented these times are with Q1 or in Q2, that we could see some atypical seasonality in consumer electronics in Q4? Is there any indication that that is likely this year?
Well, I think we certainly think that most of this year's revenue will be recognized in Q3. Last year it was Q2 and Q3. Pretty much if you look back through the last five years or so, which have been really big electronics years for us, it's always been Q2 and Q3. This year, as we've sort of discussed in previous calls, it's got pushed into Q3. There's no reason why we couldn't see some growth or still some strength in electronics in Q4. It's really a Q3 play from where it looks from here.
Okay. You took some substantial restructuring that you haven't taken in a long time, which would indicate you wouldn't expect really a pickup in demand anytime soon. It seems like Q3 is picking up a bit, and can you comment on like, am I reading into that wrongly that you don't expect much of a lift beyond Q3 or Q4?
Yeah, I wouldn't read it in such a short-term way. I think we've grown our headcount and our positions in the last four years, and I think we were spring 2020 like we expected to return to some pretty strong growth up in nine years in 2019. We were kind of ready to go, expecting the kind of growth we're seeing in logistics, expecting a strong year in electronics expecting a better year in automotive. After COVID-19, we recognized that we needed just to take action as an opportune time to sharpen our focus on growth areas, leverage talent more effectively, reduce some of the redundancies we saw in the business. I think we've really aligned our capabilities better, following our many years of growth. We're really long-term thinkers at Cognex. Probably needed to happen. We needed to align ourselves better.
The downturn in demand really was very clear to us that this was the time to get on with that. Mark, I think we have plenty of capacity for growth, right? We really are, I think, well structured for growth. We could expect to grow our business substantially without adding much cost, other than variable costs. Not much headcount, not much investment, I think. We're still well set for that.
All right. That's helpful. Thank you.
Our next question is from Joe Giordano with Cowen and Company. Please proceed.
Hey, guys. How you doing?
Hi, Joe.
I'm wondering, can you kind of like scale the content that you're getting on some of these CE and logistics kind of orders? If you were to think about it, in a given production line for CE, or in a given amount of square footage, you had a logistics facility. How does your content look now versus a few years ago? I'm not looking for specific dollar amounts, obviously, but how has that like for like content expanded over time?
Joe, it's an interesting question. We don't generally think of it that way. I think we tend to think of numbers of lines or in the case of logistics, numbers of facilities. We think of what we do in terms of features or specific tasks that are being added there. I would say, overall, the level of content and capability we're adding to lines is similar probably that it's been over previous years or in facilities. It's changing. I think it's more vision related, higher value. I would say probably kind of similar, but evolving in what it is more to higher value applications. We used to perhaps be doing more basic barcode reading and things like that, and now we would be doing more vision, more deep learning, higher value type applications.
That's fair. Then on auto, third party estimates right now, and obviously those can change wildly over time, but right now talking about pretty substantial year-over-year production growth next year. How would you think about Cognex's business in that kind of environment? Obviously, that's mostly just filling up existing capacities to some extent, but how would you think, if those numbers are right, that your business could fare in that environment?
Yeah, I want to make sure I understand your question. You're saying in automotive, you think if you're expecting?
Yeah. In auto, they're expecting production ramps next year, pretty substantial on a year-on-year, obviously off a low base. I'm just curious, you're more on the investment side of things. How do you think your business would operate in that sort of production?
Oh, I see. You're talking more about unit volumes of production?
Yeah. Unit volumes look like they're going to go up. I'm just curious as to how you think about what that means for your business next year.
Yeah. I think for us, it's going to be more about new lines and retrofitting existing lines. I think I don't necessarily see unit volume driving a lot of incremental investment in automation. What I would see is the introduction of new models, and new technologies would be real growth drivers for us. That's more of a lever. There are speculation that there are perhaps 60 new electric vehicle models coming to market over the next few years. Those kind of things can really drive a lot of growth for Cognex. Of course, when big automotive or tier 1 automotive, who are our customers in that space, if they're struggling, and if they're conserving cash, then they're likely to do less retrofits or upgrades in general.
It does have an impact on us, but more the kind of metric to gauge future growth for us would likely be around introduction of new models and new technologies into automotive.
If I could just sneak one last one in. e-commerce, you're obviously doing quite well there. You mentioned a few big customers driving some of that business now. Given what's going on and everyone kind of scrambling to get supply chains adjusted to the current reality, does this year shape like a well above trend, something that can't be repeated? Is this just the normal, this is the way we were going, it just accelerated a little bit, but we don't see why this can't continue?
I think we see logistics as a great growth market for us. We've said in the past we have ambitious plans to grow that business at 50% a year, and we've been able to do that pretty well in most of the last few years. I think, because we just see so much demand for machine vision in helping productivity develop supply chains. As those supply chains move to more online and more e-commerce type models, it's a great market, and we have a great technical advantage in it to play. What we're seeing at the moment is, we're seeing that growth is being very skewed towards winners in that marketplace, particularly those who already have pretty sophisticated e-commerce models or are well under development.
What's been disappointing to us more in the logistics area is those customers in what are retailers who we would have expected to see growing strongly at the moment, of course, they're really struggling, right? I think they're struggling with liquidity and their own future. We're not seeing the same level of investment there we would like to have. Also, airport baggage handling is not the biggest part, but that's a market that has really gone very cold this year. I think it's a bit of a varied story, but the really good growth we're seeing, better than expected in e-commerce. I think longer term, we would expect some other markets, like the ones I discussed, more regular retail, to come back more strongly for us in future.
I think the other thing we're expecting, and we're seeing already, is broader use of machine vision beyond just barcode reading, more to things like inspection, dimensioning, more capabilities where we're using the data from our vision systems to help companies manage their logistics efforts more efficiently. I think we have big and exciting growth plans in logistics. Some of them are going really well, some of them in the current environment look a little tepid, I think that demand will come back once we're through this current situation.
Thank you.
Our next question is from Joe Ritchie with Goldman Sachs. Please proceed.
Hi. Good afternoon, everyone.
Hi, Joe.
Rob, I think if I recall correctly, at the end of last year, you guys talked about something like $40 million or so of logistics revenue that got deferred, and I think you expected to ship it in the third quarter of this year. Did some of that get shipped in Q2, or is that predominantly still on track to kind of ship for Q3?
Yeah, Joe, I'm not sure we gave a specific number, but I think directionally, you're correct that we saw logistics business building, and deliveries getting delayed. We're seeing a lot of that business come through Q2, Q3, and Q4. Is kind of how it looks. We're also seeing a pretty big backlog build in addition to that. Broadly speaking, that's kind of what is happening, I think, as we expected there.
Got it. Okay. That's helpful. Look, some of the integrators like a Honeywell, for example, their Intelligrated business, they just reported their orders are up something like 300% this quarter. I guess their businesses as it relates to yours in being able to, whether there's any type of, I don't know, capacity constraint in being able to ensure that your products are being installed within a reasonable timeframe. Is there any kind of bubble that's forming that could potentially constrain your ability to get your products installed and delivered on time?
Well, I think the way it works is, there's a group of, we call them, integrators out there. Intelligrated, the division of Honeywell, I think you're referring to, is one. Dematic, Vanderlande , Bastian, Toyota has acquired a number of those businesses over the years. Generally, they're getting very, very large contracts that sometimes can be two years out. In some ways, the dynamic is a little bit like what a line builder does in automotive. They're getting contracts for new car models that are a couple years out, and then as the product becomes closer nearer to implementation, we work with them on putting the vision system in. We're specified normally by the end user.
When you look at some of those kind of reports that we're hearing, it's indicative of years of growth ahead, which will be coming our way probably in a year or so, depending on how the product rollout schedule changes between now and then. I view it as leading indicators and in line with what I would expect.
Got it. That's great to hear. I guess just lastly, maybe just following up on the consumer electronics question. You did reference online learning and OLED screens specifically. I'm just curious if you can give maybe just a little bit more color on end market application. It doesn't sound like it's smartphones. I don't know if it's iPads or what specifically this is going into.
Yeah. Cognex, we really sell to all the major players in consumer electronics. Most of them really have a broad portfolio of products. Smartphones this year, still very solid in smartphones for sure is how it looks. It's perhaps growing better, stronger than we would have expected more in tablets and laptops and other electronics and devices, wearable devices. I think everyone's seen an uptick in that business, which is a result of staying at home. That's how it looks. In terms of OLED screens, that's a market we've been working on heavily for the best part of five years, and we saw a very big spike in our business in 2017. We still see some good strength and growth in that business, and we've diversified generally the base of that business more to China, et cetera, where we're working with some of the major players there.
I think, in terms of our expectations, maybe OLED, this is not a blow the doors off year for OLED. It's a growth, we're working there. By the way, those companies really value our deep learning technology for inspection because the value of yield in that market is massive. In terms of perhaps what was going to be big growth drivers, 5G and OLED, it's similar or maybe not quite as good as one might have hoped coming into the year, and that's being offset with some of these other better areas that I spoke about earlier.
That's super helpful. Thank you, guys.
Thanks.
Our next question is from Paul Coster with JP Morgan. Please proceed.
Yeah, thanks for taking my question. You mentioned that the gross margins might be a little lighter because of the logistics mix. I'm just wondering, did I hear that right? If I did hear it right, what is it in the product mix that leads to slightly lower gross margins for that end market?
Yes, Paul. I'll talk on a product level, and then I think Paul will talk a little bit more about that, too. To give you the long view, when we got into logistics, we worked with some very major customers, somewhat as we do in consumer electronics, who required more implementation from us. We were doing more application engineering, right? That was certainly a part of that issue, and we still do some of that, which can be dilutive to our margins. It has some more service-related pieces, and it also has more integration, which may mean, in some cases, we're selling lower margin accessories or metal frames or other things that currently, we need to do in order to fulfill the needs of customers.
We're developing products that are more modular, and we're developing relationships with systems integrators who are taking more and more of that business away and allowing our gross margins to approach the gross margins we have elsewhere. Paul, would you like to add something to that?
Yeah. Rob, I think you landed it, logistics is still slightly dilutive to our overall gross margin. It is improving versus a year ago or certainly versus three years ago. It's similar to the strategy we use for developing the factory automation market. Solve people's problems, throw a little more service, then figure out how to effectively productize it. We're in the middle of that migration with logistics, and it's going well. Overall, as logistics is a bigger share of our revenue, it is somewhat dilutive. Although that's countered by other aspects of our business that are growing, that are highly accretive to our margins, such as deep learning is a great example of a software-based market that's highly accretive to our gross margin and in a growth industry.
Gotcha. Just a quick question on the deep learning front. Obviously, you've taken action, changed course really quickly, and I think that's awesome that you sort of identify the need to do so and act precipitously. The question I've got, though, is does this chill your interest in further acquisitions in that area, knowing that there's a lot of sort of integration work involved? Is it just an anomalous situation?
Well, let me kind of back up for a minute. I think we see deep learning as kind of a revolution going on in machine vision, and it's allowing us to approach machine vision problems in a new and better way. We made the acquisition of ViDi 3.5 years ago, and that technology is remarkably good at running on low-power chips, and that's demonstrated in the In-Sight D900 that we just launched. It fits very well within our existing kind of model of selling smart cameras with a lot of performance, right? Now, we've acquired SUALAB. SUALAB has very powerful capabilities around the application of convolutional neural networks to industrial machine vision, and they're ideal for doing other things like classifying images with great precision and inspecting complex images.
It's almost like some of the technology they have is sort of further down the road, and we'll be assimilating it over time. Some of the nearer term applications for it did require on-site work with very sophisticated engineering teams in Asia. That's the thing we really haven't been able to do at the moment because just access to site and working closely with operators in those kind of environments. We're still going to do that. It's just delayed. SUALAB brings great engineers and great technology, which will help us with all the other things we want to do in deep learning.
M&A will remain a sort of key area of focus?
Yeah. Sorry, Paul, that was the second part of your question. I think we've got a lot of horsepower- deep learning. We're always out there looking for interesting assets to acquire in deep learning or in other growth areas of the business. Generally, we're always on the lookout for great engineers who bring a lot of capability to our organization. That's an ongoing kind of cadence at Cognex.
Got you. Thank you very much.
Thank you.
Our next question is from Richard Eastman with Robert W. Baird. Please proceed.
Yes. Good afternoon. Thank you for the time. Rob, just to be clear, the upside in revenue in the second quarter to your previous thoughts that the second quarter would look like less than the first, was that upside, did I capture it right? China came back sequentially faster, and then you pull some of the logistics business that you shipped came out of backlog. Are those the two primary factors for the upside?
Yeah. I'll let Paul comment. Certainly, we were able to win and ship more logistics business than we'd expected in the quarter, was a big driver. Yeah, certainly, the recovery in our China business was probably stronger than we had anticipated. Paul, any other color you'd like to give?
Yeah. The commentary on China was more about Q1 revenue levels to Q2 revenue levels, not so much our expectation for Q2. I think, for why we beat our Q2 forecast, or we didn't give guidance except for that we thought we would be down versus Q1, and we were up slightly. That was more driven by strength in logistics and just, I'd say, managing our supply chain and potential component shortages and other sort of risks in our business didn't materialize as negatively as we had feared. We're certainly seeing higher costs and logistical challenges to work through, but our ability to convert it to revenue and meet customer demand is pretty good.
You put a cushion in there of 10%?
Yeah, Rick. Sorry, it's Rob again. I think, just to make sure we understand, deep learning orders, order activity during the quarter was quite a lot stronger than we anticipated, right? We certainly exited the quarter with a very large backlog. I wouldn't want you to think that we made Q2's beat off backlog necessarily. We didn't.
No, I understand.
We had good, strong orders as well.
Yep, I understand. Again, China year-over-year was down 11%, but that other Asia number, other Asia was +23%. It's not massive dollars, what was that kind of $6 million increase that amounts to other Asia, in APAC? What end market was that particularly driven by? CE?
It's semi and CE, from that meeting.
Semi. Okay.
Yeah.
Obviously, there is some element of inorganic from SUALAB in there, too, but very modest.
I see. If we had a nice quarter in the second quarter to be sure, and we built backlog, is the logistics business, would you expect it sequentially to be higher in Q3 than it was in Q2? Is that kind of timing on backlog? Is that a doable expectation?
Yeah. We got some good momentum in the logistics business. We had a record quarter for revenue in Q2, and we expect Q3 to be higher.
Yeah.
Yeah, so we expect Q4 to be good also. Yeah, we definitely have good momentum, and it's not getting concentrated in particular quarters at this point.
Understood. I'm sorry, my last question here, just promise. Would you expect in consumer electronics to have a 10% customer in 2020 given current backlog and trends? Obviously, you have some help. The factory automation business is down. Just curious, would you expect to see a 10% customer in CE this year?
Well, that's not really a question I feel like I'm ready to answer at this point. I'm going to pass on that one there, just given sensitivities in that market.
Okay. Understood. Thank you.
Thank you.
Our next question is from Markus Mittermaier with UBS. Please proceed.
Yeah. Hi, good afternoon, everyone. Two questions from my side, please. One more long-term and one on the second half. Maybe I'll start with the longer-term question. Given the sort of 8% headcount reduction that you did, which isn't easy in any case, but particularly probably in the Cognex culture, how do you think about supporting that long-term growth ambition that you have throughout the cycle? Right? Some of your competitors, particularly on the sales force side, have probably significantly larger sales forces. I'm just trying to think about strategically how you think about that through the cycle. That's long term. On the second half, I don't want to belabor all the seasonality issues around consumer electronics, et cetera, but maybe just some color where you can, and where you might have some visibility in customer conversations, maybe Q3, Q4.
Is there sort of some special effects around COVID? Maybe also to the upside, I'm thinking about e-commerce. Is there access issues maybe in some of the customers given how busy the distribution centers are? Just trying to understand the puts and takes here into Q3, Q4. Thank you.
Great. Yeah. To your first question about the 8% headcount reduction, I think if you go back and you look at our productivity as a company, even with the headcount reduction, it's well below what it was in 2016. We see us as having plenty of capacity for growth, right? I think we came in thinking we were going to grow into that capacity this year. With revenue being lower, we had a lot more capacity than we needed. I don't really feel constrained on that. You kind of talked about sales productivity, and you're right, we do compete with customers that have bigger sales forces, but we combat that in two ways. One is we're pure-play machine vision. A Cognex Salesnoid is not selling PLCs or robots. They're focused very much on their experts in machine vision.
Then we do have a good network of systems integrators and distributor partners who cover those areas that we don't reach. I'm not at all concerned about a lack of coverage, and I do think there's a lot of opportunity for us to grow into our current headcount and deliver leverage to the bottom line. That's where we see opportunities to focus there, in the next couple of years, I would say at this point. Your second question kind of was around opportunities for growth or other areas. I think it's worth saying that we have seen some nice activity and interest in the use of Cognex machine vision for COVID-related applications. We've seen certainly medical, pharmaceutical applications are others that we've seen some interesting demand for our products in that area.
I do think as companies scale up testing and vaccine production, that is certainly a good opportunity for us to work. Life sciences as well, and the application of our deep learning technology more broadly is an area that I think we see good upside potential for us as we move through this year and into next. Those would be some of the areas that come to mind.
Great. Thank you. Maybe a quick follow-up. Do you think that could be material near term, or is that sort of in early stages? I'm just trying to think through. I understand the seasonality around CE and Q3, et cetera, but then as we think into Q4, you mentioned Q3 is probably going to be the best quarter. Anything that you see early in customer conversations that could be a material factor in Q4 that we might not have on the radar at the moment, or is that too early?
Yeah. I think it's true definition, probably the answer to that question, something really massively material from some of these other conversations in Q4. The other answer is really it's too soon to say. I think in that, I think other more things that might move the needle for us later in the year might be more around whether there's earlier investment in electric vehicles or if there's more electronics kind of business coming in earlier, or perhaps more than those in general might be logistics that we see more and stronger demand near the back end of the year, which can happen in our business. Generally, I don't want to give you an overly optimistic picture of Q4.
I think we said in the opening remarks or whatever, that we do expect Q3 to be our best quarter, and certainly, that's how it looks to us right now.
Our next question is from Jairam Nathan with Daiwa Capital Markets. Please proceed.
Hi. Thanks for taking my question. Just to kind of ask it in a different way to the earlier question here on consumer electronics, how should we think about the diversity within consumer electronics in 2020 compared to 2017? Has it gotten a little more diverse?
We've worked certainly hard over the last few years to try to take our technology and apply it more broadly, whether that's more into component type areas such as housing and screens and other things rather than just final assembly and test and packaging, which is where we were highly concentrated a few years ago. Obviously more in accessories as we discussed, and in portable type products like laptops and others. You diversified in terms of its applications in that market. As we know, the end users, I'm sorry, the brand owners are pretty concentrated still.
Okay. With regard to logistics, is it still a largely U.S. or OEM-based business? What's the scope for expanding into Europe and Asia?
Yep. The majority of our revenue today is still in the U.S. We've been investing, and we're seeing very good percentage growth rates in the European market and in parts of Asia, certainly. We expect probably the majority of growth to come from those areas as we go over the long term. Right now, we're definitely still highly concentrated in the United States.
Okay. I know there's an annual exercise that you do on addressable markets, but how should we think about logistics addressable market from, I don't remember the number, but what it was. Is it a multiple of that, you think, based on what's happened?
No. Yeah, I don't really feel ready to answer that. We said it was a billion-dollar served market, and I would have thought that might actually be quite similar now. We're basically seeing a lot of growth with e-commerce, but I think a lot of that market is actually in areas that aren't doing that well right now, things like package delivery, postal, general bricks and mortar retail. Those businesses, they're only growing slightly for us, and we're probably gaining share. The market may be shrinking currently. I think of that being a great market overall in logistics. We sized it at $1 billion when we told you last. We think it can grow, I think we said in the mid-teens. I view it very similar now, just with a different complexion.
Okay. Final question on the competitive environment, given the difficulties, have you seen it getting a little easier in terms of have you seen any competitors going down and going bankrupt or exiting the business?
Yeah. I'm sorry, I didn't quite understand your question. Have we seen it getting more difficult with who?
No, any of your competitors have exited the business or given the tough conditions?
I see. Competitors. I wouldn't say we've seen a major change in the competitive environment overall. I wouldn't say so.
Okay. Thank you. Thanks a lot.
Our next question is from Karen Lau with Gordon Haskett. Please proceed.
Hi. Thank you for taking the follow-up. Just that one OpEx follow-up question for Paul. I think it sounded like in the second quarter, you didn't realize any of the savings from the restructuring. I think the number is expected to be a $25 million savings run rate. You would kind of imply that the savings is coming starting the third quarter, but sequentially, OpEx is flat. Is the idea that some of the temporary cost savings that took place in the second quarter is coming back, but these structural savings kicking in, so they kind of offset? Is there some temporary cost associated with the higher delivery in the third quarter that is kind of masking that sequential structural savings uptick?
Sure. Yeah, Karen, it's mostly puts and takes. If we take a step back to 2020, going into the year, we said we'd be adding about $25 million to our cost structure associated with reset of incentive plans and some hiring and the integration of SUALAB. We've now committed to a $25 million annualized cost reduction, of which we did realize a portion of it in Q2, certainly Q3, we'll be realizing more. Yeah. I would say that the payroll savings and some of the savings and depreciation, amortization, so on in Q3 will be partially offset by a little more travel, just as you've got more sales activities going on. Travel will still be significantly down for the year, but with facilities open, our sales guys are going and paying visits.
That won't repeat in Q3, so that's also one of the takes to offset the payroll savings.
Understood. Thank you. Rob, if I can ask you a quick one on semi. I understand it's a relatively small market for you, and I think it has something to do with semiconductor customers, they buy mostly software, so the ASP is smaller for customers in that market. I guess in the context of maybe people learning new applications, we have the backdrop of this arms race going on in building chips everywhere. Can that piece of the business become much bigger over time, whether it's aside from the market growing, but more in terms of your content to that market?
We're having a good year in semi, it's true, and I think the industry is having a good year. Generally, that has been around 5% of our business. We view it as kind of a cyclical, probably cyclical declining market overall. Why? Well, it's kind of Moore's Law , where you can produce more and more chips on fewer and fewer lines, right? I think that isn't really going to change. Sure, we can see some pops in investment, and there's some areas where we have very strong positions and great technology, but overall, I don't see it as a big lever for us for growth over the long term.
Okay, understood. Thank you.
Karen, just back to your original question, too, the one piece, I believe just with a higher revenue mix or a higher revenue level in Q3 versus Q2, that'll also bring some OpEx, right? Think about commissions and so on. There's an element of that as well in the quarter to quarter.
Yep, makes sense. Thank you.
We have reached the end of our call. I will now turn the call back over to Dr. Shillman for closing remarks.
Thank you. Well, we're all in very challenging times, but our strong balance sheet, our focus on the long term, and our unique culture will enable Cognex to weather the current disruptions better than most other companies. I want to thank you all for joining us tonight, and we look forward to speaking with you on our next quarter's call, which I expect will contain some very positive news. Good evening.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.