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Cognex Corp (NASDAQ:CGNX)
Q4 2019 Earnings Call
Feb 13, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the Cognex Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to our host, Susan Conway, Senior Director of Investor Relations. Thank you. You may begin.

Susan Conway -- Senior Director of Investor Relations

Thank you and good evening everyone. I'm Susan Conway, Senior Director of Investor Relations. With us today are Cognex's Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; Vice President and Corporate Controller, Laura MacDonald; and Cognex's Treasurer Chris Stagno. I'd like to point out that our earnings release and our annual report on Form 10-K are available on our Investor Relations website at www.cognex.com/investor. Both contain highly detailed information about our financial results. During the quarter, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our business results. You can see a reconciliation of certain items from GAAP to non-GAAP in exhibit two of the earnings release. Any forward-looking statements that we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change however and actual results may differ materially from those projected or anticipated. You should refer to our SEC filings, including our most recent Form 10-K for a detailed list of these risk factors. With that, now I'd like to turn the call over to Dr. Bob.

Robert J. Shillman -- Chairman and Founder

Thanks Sue and hello everyone, welcome to our fourth quarter of 2019 year-end earnings conference call. Normally, I'd say I was pleased to report record fourth quarter net income and earnings per share, but this time records in net income and EPS were only achieved because of the substantial discrete tax item in Q4 that combined, there are a number of them, to benefit net income by $61 million. Unfortunately, without those discrete items, Q4 revenue, net income, and EPS all decreased both year-on-year and sequentially due to ongoing weaknesses in many of the industrial markets that we serve. I'll now turn the call over to my partner and Cognex's CEO, Rob Willett, who will provide details on our 2019 results. Rob, the microphone is yours.

Robert Willett -- President and Chief Executive Officer

Thank you, Dr. Bob and good evening everyone. Looking back at 2019, annual revenue declined by approximately $80 million or 10% due to a simultaneous reduction in spending by customers in our two largest markets, consumer electronics and automotive, which together represented approximately half of our revenue. As we discussed on previous calls during 2019, customers in consumer electronics reduced and deferred investments on large automation projects that included machine vision primarily related to smartphone manufacturing. In particular, no significant new technology or form factors for smartphones entered the market in any major way in 2019. As a result, revenue from consumer electronics contracted by about 30% year-on-year. In automotive, revenue declined by approximately 10% from 2018. In this market, manufacturers scaled back and delayed capital spending in response to three forces: changes in consumer trends, the cooling off of car sales, and evolving product road maps. Automotive was also impacted by a lack of business confidence related to trade uncertainty, particularly in China.

Despite lower revenue, gross margin remained consistent with 2018 at 74%. We reported growth in newer high potential markets for Cognex products including logistics, which was our third largest market in 2019. We also saw growth in medical related applications and in food and beverage. Revenue from applications that utilize our deep learning technology nearly doubled year-on-year. While deep learning represents a small percentage of revenue today, we believe that it has the potential to be a major contributor to growth in the future. Consumer electronics and automotive are large markets for machine vision that we believe will resume their growth in the future. It's unclear, however, when we will see that increase. These markets are between major technology shifts. Consumer electronics is transitioning from 4G to 5G and automotive from combustion engines to electric vehicles. Manufacturers aren't expected to meaningfully expand their capacity as they wait for these changes. Revenue for Cognex is expected both from the building of new lines and from the upgrading of existing lines in order to increase both productivity and product quality. Of the two markets, consumer electronics is the faster moving market and we believe it will recover more quickly.

Cognex's technology and sales force can be applied across many markets. We are prioritizing new frontiers for machine vision including logistics, which is a market that is undergoing a major transformation due to the rise of online shopping. Traditional brick and mortar retailers are now the fastest growing segment for Cognex in logistics, reducing our concentration of revenue from e-commerce companies that were the early adopters of machine vision. Our customer base is also broadening geographically. We're receiving larger orders from several companies in Asia. And revenue from logistics is beginning to diversify into more applications including package dimensioning and inspection.

Now I want to give you some details about logistics. We have ambitious plans to grow revenue from logistics at a target rate of 50% over the long term and to do so at high gross margins. However, growth can be volatile over shorter periods. For example, our logistics revenue grew by only 15% in 2019. The slower growth rate in logistics was the result of a major customer focusing more on facility upgrades in 2019 than on new build outs where we play a larger role. After building adequate capacity, this customer then delayed the delivery of large orders for new sites at year-end. We have most of those orders in hand and we expect to deliver them this summer. Excluding that major customer, revenue from logistics grew by approximately 50% year-on-year, which is our long term target.

Now let's talk about deep learning. We see strong potential in the application of our deep learning based software to automation. I'm pleased to report that the integration of Sualab, the Korea-based deep learning company that we acquired in October, is going well. While its revenue contribution in 2019 was small, the acquisition tripled the size of the Cognex team dedicated to developing and applying deep learning technology to industrial applications. I joined the combined team in Seoul two weeks ago where we reviewed our progress and formalized our plans for deep learning. The advantaged technology that Sualab brings to classification and the application of convolutional neural networks to industrial machine vision allows us to solve higher precision deep learning applications. This will enable us to accelerate our product road maps and to address new areas of the market. Our work together in the first three months and the Sualab's teams embracing of Cognex culture are validating the assumptions that we made when we acquired the business. Cognex's engineering relationships with customers and the additional tools and technology we acquired with Sualab are expected to be a powerful combination. We're in the process of introducing Cognex customers to Sualab's technology and demonstrating how we can improve their manufacturing process through its implementation. We've already hosted multiple engineering teams from world leading technology companies that are working on plans to evaluate and implement the combined Cognex-Sualab technology.

Moving on to new products, we have significant introductions planned in the coming months and in 2019 among other products, we introduced two high performance snapshot sensing platforms for the 3D vision market, the Cognex 3D-A1000 dimensioner for logistics and the 3D-A5000 for general manufacturing, and PatMax 3D, a breakthrough part locating vision tool for our entire 3D product range. Also new in 2019 was our line of DataMan 370 fixed-mount barcode readers for reading different sized and challenging codes on packages inside high volume logistics scanning tunnels.

Before I pass the microphone to Laura for details from the fourth quarter, I'd like to update you on our new CFO. As announced tonight, I'm pleased to report that Paul Todgham will join Cognex in early March. Paul is joining us from Levi Strauss & Company, where he was the Senior Vice President of Finance. He will be a great partner and will be joining me on future calls. I want to take this opportunity to thank Laura for serving as our Principal Financial and Accounting Officer on an interim basis. Following Paul's onboarding, she'll continue as our Vice President and Corporate Controller. Laura, the microphone is yours.

Laura MacDonald -- Vice President and Corporate Controller

Thank you, Rob and hello everyone. Revenue in Q4 was $170 million which is above the top-end of our October guidance. As expected, revenue declined year-on-year due to the timing of delivery on large [Phonetic] orders and logistics and lower volume from automotive and consumer electronics. The sequential decline is due to the seasonal timing of revenue from customers in the consumer electronics industry. Despite lower revenue, gross margin of 74% increased slightly over Q4 '18 and was consistent with Q3 '19. Operating expenses increased by 13% year-on-year. Over the past year, we have added Cognoids in engineering and sales. They were also incremental employee expenses and other recurring costs related to the Sualab acquisition. Compared to our guidance for Q4, we reported higher than expected expenses related to our incentive compensation plans. That included expenses related to stock options as well as sales commissions resulting from the better Q4 revenue performance. Operating margin in Q4 was 10% representing a decline both year-on-year and sequentially due to the lower revenue level and higher expenses.

Regarding the tax provision, we recorded a net discrete benefit of $61 million or the equivalent of $0.35 per share in the fourth quarter, which consisted of two major elements. The first item involves changes to our corporate tax structure, which came about because of legislation passed by the European Union. For that, we recorded a net benefit of $88 million. The second item relates to our decision to move acquired Sualab technology out of Korea to align with our corporate tax structure. That resulted in $29 million of additional tax expense. Excluding discrete tax items, the tax rate was 18% in Q4 '19 compared to 16% in Q3 '19. The increase was due to non-deductible tax expenses incurred in Q4.

Looking at the change in revenue for Q4 year-on-year from a geographic perspective, China increased by mid-single digits because of revenue from consumer electronics, some of which was previously reported in our Europe region. Revenue from the rest of Asia grew mid-single digits over Q4 '18 also due to consumer electronics. In the Americas, revenue declined by high-single digits primarily due to delayed shipments in logistics that were previously discussed. The impact of this quarter's lower contribution from automotive and consumer electronics was most noticeable in Europe where revenue declined by roughly 30% year-on-year. As mentioned, the decline in Europe would has been less extreme if not for revenue from certain customer purchases that shifted to China from Europe.

Turning to our balance sheet, we ended the quarter with $845 million in cash and investments and no debt. Even with cash payments of approximately a $171 million in Q4 to acquire Sualab, we have enough capital to support our growth objectives and to share our ongoing success with our shareholders through stock buybacks and dividends. Now I'll turn the call back to Rob.

Robert Willett -- President and Chief Executive Officer

Thank you, Laura. Moving next to guidance, we expect revenue for the first quarter will be between $155 million and $170 million. This range represents a decline both year-on-year and sequentially due to continued weakness in the broad factory automation market led by automotive. Outside of logistics, deep learning, and other new markets for our products, our outlook is cautious. We are concerned about what's happening in China around the coronavirus outbreak. Our Q1 revenue guidance includes an estimated $10 million impact. We also widened our range to account for this uncertainty. We'll continue to monitor the situation closely. Gross margin for Q1 is expected to be in the mid-70% range, similar to the gross margin reported for Q4.

Visible in Q1 will be the higher operating expenses we expect for 2020. We believe operating expenses in Q1 '20 will increase by approximately 10% over Q1 '19 and will be approximately flat with Q4 '19. The increase year-on-year is the result of an annual reset of bonus and other incentive compensation plans, the Cognoids we added over the past year in engineering and sales, and the impact of the Sualab acquisition, higher expenses for stock-based compensation will also contribute to the increase. For the year, we estimate that the reset of incentive compensation and incremental expenses related to a full year of owning Sualab will add approximately $25 million of operating costs in 2020 assuming our financial results for the year are as planned.

The effective tax rate is expected to be 19% excluding discrete tax items. The increase from 16% in 2019 is due to changes in our corporate tax structure and the expectation that more of the company's profits will be earned and taxes in higher tax jurisdictions higher tax jurisdictions. With that, we will open the call for questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operation Instructions] Our first question comes from Josh Pokrzywinski with Morgan Stanley, please state your question.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good evening all.

Robert Willett -- President and Chief Executive Officer

Hi, Josh.

Robert J. Shillman -- Chairman and Founder

Hello.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Just the first question on the logistics business, Rob, if you wouldn't mind just kind of level setting us. So 50% growth over the long term, you will have some revenue shifting from '19 into '20, should we expect then that '20 kind of looks like a 50% plus just given that there is some revenue transferred or are you more comfortable with starting at kind of the 50% growth rate and we'll see how the year plays out.

Robert Willett -- President and Chief Executive Officer

I think the first thing to point out is we don't give annual guidance and we don't do guidance by specific segments, but let me kind of add some color on our logistics business to help still think about it. So logistics is in the early stages of adopting machine vision and we've seen great growth in that market and we continue to see great prospects. We have ambitious plans to grow the revenue at 50% over the long term, right. I think as we look at about what's going on in the business -- I discussed some of the changes in my prepared remarks, but a major customer delayed large orders for new sites at the end of 2019 after achieving meaningful improvements from earlier implementations, a large result I think of work we've done with them at Cognex. Most of the delayed orders we have from them are in backlog and we expect to deliver on them this summer and that major customer did place substantial orders for us in 2019, but nevertheless, they represented less than half of our logistics business overall. Excluding that major customer, revenue from logistics grew by about 50% year-on-year. So there's lots of good underlying growth to report, but I think what I would point out is growth in this market can be volatile. There can be large customer deployments and specific customers can deliver between $10 million and $20 million of revenue in a specific quarter. So it is sometimes quite hard as you've seen from us over the last six months to kind of commit to or give you solid guidance on the timing of revenue over longer periods.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful context. And I guess for those of us who have picked through the 10-K a little bit, just as a follow-up, I noticed we no longer have a material customer that needs to be reported. So one kind of dropped off the radar there. I guess anything that you would comment on from a share perspective or anything that you think could be an impediment to getting back to prior peak revenues with some of your larger electronics customers as a function of product cycles or anything else that is changing i.e., you know if we see $100 million of revenue come off from one customer because of what's happened in the cycle or what's happened with product cycles or the economy, is there anything preventing you from getting back to that or exceeding that over time? Thanks.

Robert Willett -- President and Chief Executive Officer

Well, I compliment you on your speed reading of our 10-K. I'm amazed at how you guys seem to be able to dissect a lot of information very quickly, but you're absolutely right, no customer accounted for more than 10% of Cognex's revenue in 2019 and there were candidates I think as we started out the year in both electronics and logistics that might have made that, but I'm reminded of our 2016 Annual Report featuring Sherlock Holmes and I'm reminded of the story the dog that didn't bark and there was no particular customer that made it above that level last year. So you're right, we've had large customer -- particularly one large customer in the past that's had revenue of $150 million in a specific year and things that really drive that I think are big changes and investments in technology and growth plans, right and we see the potential for those really particularly in electronics and logistics going forward and I think the things that would drive those kinds of implementations, so kind of large growth opportunities with individual customers would be big investments in distribution and technology to outperform in the e-commerce market around delivery or plans they may have to compete on things like same-day delivery and in different geographies and different segments of the market and I see tremendous momentum in those areas with a number of customers and I'm not saying how quickly or how big they can grow, but there is certainly potential there for that and I think the other area where we could see large customers in electronics really grow to be very sizable again and possibly more than 10% of our revenue of course is in the area of new technology implementations in electronics and there specifically the coming of 5G, the coming of other augmented reality type technologies, different screen technologies and foldable screens and other things. I think if those things will really come together with a big new kind of technology roll out, that has the potential to do that, but it's very difficult to know and see, guess on when those technology changes are going to come and are going to hit, but certainly 5G would be one I think that has the potential to drive a lot more momentum in growth back into our consumer electronics business.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. Thanks for the color, Rob.

Robert Willett -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Richard Eastman with Robert W. Baird & Company, please state your question. Richard Eastman, your line is open.

Richard Eastman -- Robert W. Baird & Company -- Analyst

Thank you, a quick follow-up on that, Rob, when you look at the potential for 5G to be a driver. Given that Cognex's position would be long production lines themselves and driving throughput. How do you feel about the timing of that business. If I recall in the past in the anniversary year for a big customer, we saw that lead time maybe be in the order of four months. Would that still be the expectation or is there capacity that can be reused for instance in the system itself?

Robert Willett -- President and Chief Executive Officer

Rick, to clarify, is your question about kind of Cognex or is it about how the timeline and the requirements of the market and the customers deployment?

Richard Eastman -- Robert W. Baird & Company -- Analyst

Yeah, it's really just a macro question, but obviously the position you play there is in the production supply chain, if you will for content and components, but what would be the timing of orders relative to shipments there from your vantage point given where you play in that ecosystem or supply chain?

Robert Willett -- President and Chief Executive Officer

Yeah, I think from now five-plus years of experience working with big players in that market, it does come together quite late and we'll be in a better position in our April conference call to really give you a read on how the years consumer electronics market is shaping up for Cognex. And then I think you're right, we can find that maybe -- we get visibility possibly four months or five months before major revenue hits our P&L. I think something probably we're going to end up talking about during the conference call is the coronavirus and the impact of that, but I think that's a challenge where we're -- we may be working with customers in Asia and particularly in China who have plans to deploy, but right now those plans can't move forward as quickly as they need to because we need engineers working on problem solving to implement features or solve problems within a customers ramp up plan. So I think it's not clear to me what the impact of that is going to be, is that going to just push everything to the right, is it going to mean that certain features and plans for deployment don't occur this year and get pushed out to next year. Those are kind of extra wildcards I'm seeing this year in addition to just what the plans are for rolling out different features and new technology that we confront every year as we look at that market.

Richard Eastman -- Robert W. Baird & Company -- Analyst

Okay and then just a quick question on the auto market, lots of activity around EVs. In Europe some mandates going in place. They've kind of adopted the same cafe standards here that we have in the States, but I'm curious with the pause in the market and kind of the shifting of of spending between EVs and traditional hydrocarbon vehicles, is there a dynamic there that can accelerate auto investment in 2020, even if the SAAR count stays fairly weak, just this kind of shift in spend toward EVs and assembly, both on the battery side as well as the vehicles?

Robert Willett -- President and Chief Executive Officer

Well, I think the issue with EV is major investment. I think it's still a little ways off. We've certainly seen really good growth and a nice pickup in our business that relates to battery manufacturer for sure and other features that relate to new models of electric vehicles that are coming, but it's certainly a relatively small part of our business overall. So I think we do expect that to continue and like we definitely are in touch with and working with all that major battery manufacturers and electric vehicle manufacturers on their plans. So I expect that to be kind of a long and good journey for Cognex, now -- but the countervailing kind of wind in that situation is the general kind of legacy automotive market if you like, and what I do see is really big challenges customers of us [Phonetic] in Tier 1 automotive and end users are facing on that. So, kind of, that certainly I think offsets any optimism one might feel in the near-term about spend on electric vehicles and I think added to that, you know, I don't wish to sound overly negative, but I think if we were expecting a rebound in automotive as we entered the year, we thought that might come later in the year and I now think with the coronavirus, I think the challenge that puts on parts manufacturers and I think on the Chinese consumer being able to afford to kind of get back into the market and buy new cars makes any kind of recovery we're going to see in automotive probably a longer term prospects and quite possibly pushing out into next year.

Richard Eastman -- Robert W. Baird & Company -- Analyst

Okay, very good. Thank you. Thanks for the thoughts.

Operator

Our next question comes from Joe Giordano with Cowen, please state your question.

Joe Giordano -- Cowen -- Analyst

Hey guys, good evening.

Robert Willett -- President and Chief Executive Officer

Good evening.

Joe Giordano -- Cowen -- Analyst

Just to start, Rob you scaled logistics for us. You said minus -- grew 15% in the year. Are you willing to give a similar kind of scale for auto and CE?

Robert Willett -- President and Chief Executive Officer

So just to be clear, so you said logistics grew 15% in the year, right? Yes, sorry, I just wasn't sure from your question if you've made sense to me. So I think in general of ballpark, I think we've said that electronic strength 30% and just give me a second here, so consumer electronics really represents about 25% of our total revenue last year and then automotive declined about 10% last year and it accounts for roughly 30% of our total revenue.

Joe Giordano -- Cowen -- Analyst

Perfect. Then on the coronavirus, you called out a $10 million impact to 1Q. Just curious about how you kind of calculated that, is it mostly auto that's being impacted and how do you kind of weigh the chances of that bleeding into later in the year past 1Q and is that already in your thought process?

Robert Willett -- President and Chief Executive Officer

Well, I'd say it's a developing situation, right and I think nobody knows the answer to how long and how severe it is going to become but I'd like to give you a little color on it. So as you correctly pointed out for Q1, our guidance reflects an estimated $10 million reduction in revenue and we've also put a wider range out there due to what we're seeing and I think we have pretty good visibility of things given the large number of Cognoids we have in China, the customers we deal with in that market and the suppliers who supply with product from that market. So let me kind of break it down for you, but the first and very important thing to say is that your China-based Cognoids are currently safe and most of our employees are working from home and we've asked Cognoids outside of China to postpone travel to and from China for now. So that's the first thing to say, I think in terms of how it impacts revenue, I think how quickly production lines in China get back up and running obviously will impact revenue this year. What we're seeing right is most customers will not take sales visits from us at this time, right. So really our Cognoids are working from home. They are making sales calls, they are dealing with things over electronic media etc, but that certainly is -- it's a challenge. Machine vision is a technology that often needs to be sold at an engineering level and needs to be demonstrated and explained and worked from a team of customers. So certainly that's a challenge and then we are also concerned that companies who we serve and consumers in China are going to face liquidity issues right whether they'll be able to afford buying new cars as I talked about with Rick just earlier and then obviously, making sure that they are still solvent to supply us as well in the case of suppliers, it's important, but I think some of those issues are likely to be a challenge for our automotive customers both inside and outside of China. Okay, so I think there I'm talking about revenue and I think we've probably sized that and I said is we kind of move through straight the quarter, we took our guidance down specifically related to revenue by about $10 million.

Let me talk about the supply chain, which I think is the other aspect that kind of does impact also on us. So we have concerned to see our China suppliers pushing out delivery dates. Now we haven't seen much evidence of that, but production delays constrain our supply chain. Cognex products are manufactured by a contract manufacturer based in Indonesia. So it is not affected by this currently, but various custom components and electro-mechanical and electronic components come, of course, from China. Our suppliers are concentrated mostly in the Guangdong Province with some in other other cities and none are located in the Wuhan at the center of Hubei Province at large. So I think we're feeling relative comfort, you know and we're not seeing specific supply challenges currently. And then what we observe and I think we all observed this is we see announcements from both our customers and contract manufacturers and from the companies that supply us saying they're going to open on Monday. A lot of them said they were going to open last Monday too and we just see that shifting out and we're also concerned when they do open, it doesn't necessarily mean they are going to be scaling up, it may be a small crew in there, it maybe people who are going there to go through quarantine so they can start production a week or more later. So we're watching this carefully and we think we've got it scoped correctly and will it bleed into the second quarter, in the third quarter. I think the answer is quite probably.

Operator

Thank you. Our next question comes from Jim Ricchiuti with Needham & Company, please state your question. Jim Ricchiuti, your line is open.

Jim Ricchiuti -- Needham & Company -- Analyst

I'm sorry, can you hear me now. Sorry.

Robert Willett -- President and Chief Executive Officer

Yeah, hi, Jim, we can hear you now.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi, Rob. If we think about the logistics business in 2020, given the fact that some of these larger shipments deployments with your large customer may not take place until this summer and it sounds like the efforts you are making in China maybe get pushed out a little bit just given I assume that some of the logistics applications in China are not going to come to fruition in the near term. Is there enough growth in the brick and mortar area where you are seeing momentum to help that business show reasonable level of growth in the early part of 2020?

Robert Willett -- President and Chief Executive Officer

Yeah, I think so, Jim, I think obviously most of our logistics business is really in the U.S., right. So I don't it's -- it's not obviously impacted in a big way from the issues we just discussed around China. So I think that's very positive. We also see a lot more of our growth I should start by saying our logistics business, the majority of it has been around reading barcodes and that continues to be a great and a strong growing business, right for us, but increasingly we're seeing more and more applications in the vision area and as I mentioned, some of those we're having a lot of success in various markets with those products. So that's certainly helping to drive growth. We certainly -- we do expect our business to grow in logistics in the first quarter and yeah, we're becoming less dependent on large e-commerce players and we're really seeing a lot of investment lot of investment plans from large, very well known brick and mortar retailers particularly in America, but also in Europe and some in Asia who are really starting to invest more heavily. So yeah, we're very confident about the future and we do see some near term drivers helping us and we do see those larger orders teeing up for the summer. So we continue to be very, very positive about what we see although it can be lumpy.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. And a follow-up question for me is just on the deep learning efforts. You're obviously very excited about the opportunities there. How do we from the outside really begin to evaluate the progress you're making in this area. Are there any either applications or types of customer wins that you can maybe highlight for us that maybe help us understand why you are so excited about it.

Robert Willett -- President and Chief Executive Officer

Well, I think the first thing to point out is what the comments I made really which is we've only been in the deep learning market really for less than three years and we're already seeing -- we've seen phenomenal growth already in that market with a small team that we have as we're applying the technology. Those of you who came to our Investor Day I think we certainly showed you some of the technology and applications and certainly gave you a preview of some of the products that we're planning to launch into that market, but we're seeing substantial contribution to the business from deep learning and then what we observed with Sualab and certainly their customers gives us a lot of confidence that it's there. In terms of applications, I mean the applications are pretty broad based and I think if you go to our website certainly, you can see examples where we are applying deep learning to automotive, to life sciences, of course to electronics and if you, there's certainly material about Sualab's technology and how it is applied to replace human inspectors in visual inspection, particularly of electronics. So I think from our point of view, we see very positive things happening in that market which you'll see more of it as we continue to report in future quarters.

Jim Ricchiuti -- Needham & Company -- Analyst

And regardless of some of the issues that you're seeing in other parts of the business. In other words, it sounds like you still expect this business this year to be a pretty good growth opportunity regardless of some of the pressures that you're seeing in some of the markets?

Robert Willett -- President and Chief Executive Officer

Yes, we do.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay, thank you.

Operator

Thank you. Your next question comes from Karen Lau with Gordon Haskett, please state your question.

Karen Lau -- Gordon Haskett -- Analyst

Thank you. Good afternoon everyone. Rob, appreciate your color on the potential impact on the coronavirus, but I want to flip it around a little bit and try to understand. You know hopefully all of this will pass at some point, what do you see as the constraints toward the supply chain in the industry ramping back up to make to hopefully maybe try to make up for lost time, is there a constraint of people or engineering capacity because there are, I mean putting aside the consumer impact on automotive, there is still a lot of hope and talk about like 5G implementation and whatnot and some people still expect projects move forward. So what do you see from your standpoint as to the constraints for the supply chain to ramp back and also along those lines, given what's going on with like labor shortage and uncertainty, do you see automation machine vision actually playing a greater -- bigger role or having additional opportunity because of this situation?

Robert Willett -- President and Chief Executive Officer

[Speech Overlap] So I'm not sure who that was speaking but Karen, it's Rob and let me speak, I think I got your question. So basically, I think a lot of activity is just not occurring right now right at our customers and with our suppliers. So I think the longer that goes on, the more delay there is the plan, the more stress companies come under, the more will suffer from liquidity challenges, labor shortages problems, right. So I think it's as simple as that in many cases and I think particularly when one thinks about the electronics timetable, I mean, the way that this market works is it is extremely intense, it's not like there is a lot of extra kind of slack time built in there. So either products will get delayed or features and other capabilities that the product will not be in this year's release. So I think that's kind of how I dimensionalize that issue. In terms of the supply chain, in Cognex we have a policy of carrying quite a lot of component inventory, strategic inventory, so in a way. I think we feel we're very well prepared to go on supplying customers around the world if we can't in the short term get inventory from our Chinese suppliers, but at some point, that's a challenge too where if certain companies are unable to manufacture components, we have to find other suppliers and get them ramped up to a level to supply us. It's a lot of a challenge to do so, but the longer that goes on and in a sophisticated business like Cognex or I can only imagine with a large Tier 1 automotive supplier that they face similar problems. That's going to be a challenge for them. So I think I would observe that.

And then I think the third part of your question was sort of the long term. So I think if I'm to draw optimism from what is obviously a very bad situation, it's like it does underscore the potential of machine vision really to robotics and machine vision to replace human automation and to make human automation free of geographical constraints. So, certainly vision systems and robots don't get a coronavirus. So I think that's not lost on companies as they think about their supply chain and all the trade and tariff situations we've had where I've always been pretty skeptical about lots of manufacturing coming back onshore necessarily, but these kind of things I think really do raise the potential more for that to happen and for much more automation to happen and I think automation is starting to get better and machine vision to the point where much more of that is possible and economically so. So it makes me long term, even more optimistic about advanced automation and machine vision, but short term, a lot of challenges to overcome.

Karen Lau -- Gordon Haskett -- Analyst

Okay. I appreciate the color and then if I can sneak one in for Laura. I think opex was expected to be up mid-to-high single-digit for the fourth quarter and then it was up 16% sequentially. I realized sales came in better than expected, but is that the primary driver and can you remind us how much of the $25 million of opex increase year-over-year expected for 2020. How much of that is coming from Sualabs versus just the core, like the operations?

Laura MacDonald -- Vice President and Corporate Controller

Sure, let me answer your second question first because I think we said last quarter that our Sualab expenses run us about $4 million a quarter and that includes operating expenses and also amortization of acquisition-related items. So that would be a $12 million delta related to Sualabs and then your first question why was the expenses higher than our guidance. So yes, you hit on the higher than expected incentive compensation and we also accelerated certain product development efforts. The incentive compensation you mentioned related to sales commissions resulting from better Q4 performance and we also had some additional costs related to the exercise of stock options.

Karen Lau -- Gordon Haskett -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Andrew Buscaglia with Berenberg, Please state your question.

Andrew Buscaglia -- Berenberg -- Analyst

Hey guys, just want to be clear on something. You do not anticipate any revenue from that logistics deferred order in Q1 I mean, excuse me.

Robert Willett -- President and Chief Executive Officer

Yeah, Andrew, your question is the fact -- so we've had the fact. So we've had orders from a large customer that we've deferred that we didn't have last year and that we expect to occur mid-year. It's possible that a very small amount like make that in earlier, but nothing really significant in relation to our conversation.

Andrew Buscaglia -- Berenberg -- Analyst

Yeah, OK. I just want to be clear on that. Secondly, so we're seeing, Rick sort of touched on this in his question, but we're seeing positive comments out of a lot of the semiconductor companies, you guys mentioned 5G at some point being a driver and you are seeing other green shoots, you have Samsung coming out with new form factor type of phone and then you're seeing this trend of more auto electronics in vehicles. So it seems like there are a fair amount of things that could sort of swing things one way or the other this year, but you're tone definitely sounds a little bit bearish. So why is that? Why don't you think you could participate in some of these green shoots that we're seeing?

Robert Willett -- President and Chief Executive Officer

Thanks. I guess we have a reputation at Cognex of saying it like it is right and I think we're concerned that currently what we're seeing in that in China is going to slow down two factors that are going on. One is the consumer electronics build that will go on particularly around smartphone technology, which way [Phonetic] it is going to delay and reduce it and also the recovery of the general automotive business, right. So I would say that's probably what you're hearing we're trying to communicate here. Those things that you said and I would say if I pullback, there are a lot of very strong growth drivers at Cognex and they certainly include logistics, they include deep learning and the application of deep learning and there is we are probably like other companies that you and we read about, we do see improvement in consumer electronics spend. We did as we came through the end of last year and into the beginning of this year, but we are now concerned about the impact of that and the timing of that. We do see lots of strong investment and very large percentage growth rates in electric vehicles particularly related to lithium-ion battery manufacturing and that process and the use of machine vision there, but that's really relatively small. I think even if that were to triple or quadruple this year, I think it's still a challenge, it's not going to make up for slowness in the automotive and consumer electronics industry were that to continue.

Andrew Buscaglia -- Berenberg -- Analyst

Would you account for auto electronics under auto or would that be more of a consumer electronics application?

Robert Willett -- President and Chief Executive Officer

When I talk about lithium-ion batteries, I'm referring to -- it's automotive business. It's really -- yeah, that's where the big spend is particularly with Korean, Japanese, and Chinese manufacturers of lithium-ion battery machines.

Andrew Buscaglia -- Berenberg -- Analyst

Okay, thanks.

Operator

Thank you. Our next question comes from Jairam Nathan with Daiwa Asset Management, please state your question.

Jairam Nathan -- Daiwa Asset Management -- Analyst

Hi, thanks. Its Daiwa Securities. Just firstly can you kind of tell us what drove the higher than expected revenue for this quarter -- for 4Q and then I had a follow-up?

Robert Willett -- President and Chief Executive Officer

Yeah, I think as I mentioned we saw some better bookings and business out of electronics. I think pretty much some of the things we were just discussing really, I think we saw some better conditions that you see out of other semi and electronics manufacturers related to potential implementation of new technology in electronics. So we bet that was certainly one contribution. I think our business in America performed relatively well. I don't know, Laura, anything you want to add to that?

Laura MacDonald -- Vice President and Corporate Controller

I think the electronics was the --

Robert Willett -- President and Chief Executive Officer

Yeah, that's the main driver, yeah.

Jairam Nathan -- Daiwa Asset Management -- Analyst

Okay and you mentioned increasing spend on engineering and sales. In the past I think last year, I guess, you guys mentioned you have been kind of shifting resources from slower growing areas to higher growth areas and it doesn't look like that situation has changed significantly at least in 2020. So what was, where are you investing, which areas are you investing in terms of engineering and sales head count increase.

Robert Willett -- President and Chief Executive Officer

Well, certainly, I think when we think about how we run Cognex, we're taking kind of cutting-edge new technology in machine vision and we're applying to new growth areas. So growth areas that we see of course deep learning is a major area where we see huge potential and we are investing strongly to be the leader in that area of the market; 3D, certainly you've heard me talk about the launch of new 3D products certainly in that market, and then generally in logistics, applying our technology to logistics. So those are all areas where we've been increasing spend.

Jairam Nathan -- Daiwa Asset Management -- Analyst

Again, finally, if I could squeeze one more. With the logistics shifting from a large player to brick and mortar, does it change, do you need to spend more on application engineering than with a large player and could that impact gross margins?

Robert Willett -- President and Chief Executive Officer

It doesn't really relate to where the customer is kind of coming from. I would say that the way that they deploy machine vision is similar. So I would say the answer is no. The difference I would point out though is some kind of leading e-commerce companies are very engineering savvy and capable. [Indecipherable] Some companies that are trying to make the transition from being bricks and mortar companies generally don't have that level of engineering expertise. So in that case, we may have to do more application engineering to help them or we're developing over the last few years and we made a lot of progress last year, we're developing a network of systems integrators who can help them implement our technology. That's key to our plans to be able to scale this business over the long term.

Jairam Nathan -- Daiwa Asset Management -- Analyst

Okay, thank you. That's all I had.

Operator

Thank you. Our next question comes from Joe Giordano with Cowen, please state your question.

Joe Giordano -- Cowen -- Analyst

Hey guys, thanks for taking the follow-up real quick. Just curious, Rob if you had an update on the mobile terminal business and is that largely concentrated to your like more brick and mortar focused customers in logistics?

Robert Willett -- President and Chief Executive Officer

So yes, so our Mobile Terminal business, I think we talked about this a little bit and certainly at the Analyst Day, those of you who joined us, is we have focused that business now much more on logistics and e-commerce type companies who I think are much more receptive to our product, which relies on an integrated smartphone and who are much more technically savvy. So that's where we focused and we're starting to see some larger customers adopt that and roll it out, but we think the potential for us in that market is, it's smaller than we originally thought. We think it's a $200 million market for us. We think that market is going to grow at 10%. We're seeing some nice growth, but it's certainly not as material to the business as other areas like logistics or deep learning or 3D.

Joe Giordano -- Cowen -- Analyst

Fair enough, thanks guys.

Operator

Thank you. Our next question comes from Bobby Eubank with Chevy Chase Trust, please state your question.

Bobby Eubank -- Chevy Chase Trust -- Analyst

Hi guys, thanks for the call. Your major competitor is seeing a little bit better order flow than you guys. Can you talk maybe about the consumer electronics business and share trends in that. I think Rich Eastman was asking about that earlier. I just want to kind of clarify how you feel about market share? Thanks so much.

Robert Willett -- President and Chief Executive Officer

So Bobby, when you talk about a major competitor, I think the other two kind of public companies that report that we keep an eye on certainly would be Keyence and OMRON and I think they both, when I look at their results, the first thing I'd point out is that their results are much broader, we're a pure play machine vision company. So they may have more kind of other more resilient businesses such as microscopes or basic optical sensors or PLCs right that are perhaps less volatile, but when I read the results both of them seem to be recording declines in their business on the order of 7% to 10% in recent -- and they reported certainly slower business in Asia electronics as they looked back. So I -- and when one considers backlog and other factors, I don't -- I think it's in the mix as to whether they or we are growing faster or who's gaining market share. That said, we have high expectations of ourselves at Cognex. We invest more in R&D, certainly in the vision area than any other company that we compete with and our expectations are to outgrow all other competitors. So, we're certainly not happy even to be drawing and I would say right now it looks like everyone's suffering in a generally similar amount.

Bobby Eubank -- Chevy Chase Trust -- Analyst

Thanks.

Operator

Thank you. We have reached the end of the call. I will now turn it back over to Dr. Shillman for closing comments.

Robert Willett -- President and Chief Executive Officer

Dr. Bob, are you possibly on mute?

Robert J. Shillman -- Chairman and Founder

Yes, thank you, I'm sorry. While our results were clearly not what we hoped for at the start of 2019, based on the new products that we have rolling out, based on logistics, the potential of that and artificial intelligence deep learning, we still remain very confident in the future role that machine vision will play in manufacturing automation and therefore for the long term prospects for our company. Thank you all for joining us tonight and we look forward to speaking with you on our next quarterly call.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Susan Conway -- Senior Director of Investor Relations

Robert J. Shillman -- Chairman and Founder

Robert Willett -- President and Chief Executive Officer

Laura MacDonald -- Vice President and Corporate Controller

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Richard Eastman -- Robert W. Baird & Company -- Analyst

Joe Giordano -- Cowen -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Karen Lau -- Gordon Haskett -- Analyst

Andrew Buscaglia -- Berenberg -- Analyst

Jairam Nathan -- Daiwa Asset Management -- Analyst

Bobby Eubank -- Chevy Chase Trust -- Analyst

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