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Cognex Corp (NASDAQ:CGNX)
Q2 2020 Earnings Call
Jul 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Cognex Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

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.

Susan Conway -- Senior Director of Investor Relations

Good evening, everyone. Thank you for joining us today. With us are Cognex' Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham. I'd like to point out that our earnings release and quarterly report on Form 10-Q are available on our Investor Relations website at www.cognex.com/investor. Both contain highly detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors are we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit two 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 report on Form 10-Q.

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

Dr. Robert J. Shillman -- Chairman and Founder

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. And as you know, since that time in our business and most others have deteriorated substantially due to 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 writedowns 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' CEO, Rob Willett. Rob, the microphone is yours.

Robert Willett -- President and Chief Executive Officer

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 component shortages. However, revenue declined by 15% year-on-year due to lower spending by customers in Europe and the Americas. The downturn was most noticeable in the automotive market, which was our largest end market in 2019. Growth in logistics, semi and life sciences helped offset that decline. Business activity is improving, but 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 and productivity in their distribution centers. The other sector that's doing well is consumer electronics. We are now delivering large deployments of Cognex products that we expect will be recognized as revenue in Q3. In addition, we are pleased with how productive our sales team has been during these times of limited customer access. Salesnoids and application engineers have been successful holding technical discussions and product demonstrations via video conferencing, and winning a lot of business in this manner, even with new customers. Next, 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 placed 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 one year or two. But unfortunately, that is unlikely to occur due to the economic disruption, and therefore, we rightsized the team for more modest near-term growth. As part of the restructuring, we saw an opportunity to reduce duplication and redundancies that have built up in our business from years of global expansion and acquisitions. 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' unique capabilities more efficiently. After the restructuring, we still have the capacity for significant growth. We've not changed our product road map, nor have we delayed new product development. We are also moving forward with other initiatives such as IT systems upgrades, process improvements and projects to support future growth. Another development in Q2 that I want to address is our writedown of a portion of the deep learning technology that we acquired in October with Sualab. We are confident in our deep learning strategy and believe Sualab has an important role to play. However, Sualab's technology requires hands on application engineering and in person collaboration with customers, and that's difficult to do in the current environment. As a result, 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-on-year, making it our fastest-growing product category. A major step was the launch of Cognex' In-Sight D 900 smart camera in April. The D 900 makes advanced deep long technology accessible at 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 D 900 finds defects on complex parts and accurately reads badly deformed, skewed and poorly etched codes. In other product news, we launched the In-Sight 8505 P, a high-performance five megapixel smart camera with Cognex HDR plus 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 insight 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, we saw some vendors struggle to supply parts. We also continue to see freight deliveries taking longer and costing significantly more. Our close relationship with suppliers and our practice of holding substantial component inventory have 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.

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

Thank you, Rob, and 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 to 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 noncash 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 completed by the end of the quarter. We expect a residual charge of between $1 million to $2 million in the second half, primarily in Q3. We also recorded a noncash charge of $19.6 million in Q2 and primarily to writedown a portion of the intangible assets from our acquisition of Sualab. Excluding these onetime 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 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 writedown. 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 $0.11 in Q1 of 2020, excluding discrete tax items and the three charges just mentioned. Looking at the change in revenue for Q2 year-on-year from a geographic perspective, our best-performing region was Asia, which increased by 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 related products. The most challenging region in Q2 was Europe, where revenue declined by 40% year-on-year. Business shutdowns further worsened already weak 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 our Asia region. Turning to our balance sheet. We ended the quarter with approximately $900 million in cash and investments and no debt. Our approach to capital allocation remains unchanged despite the difficult business conditions. We continue to manage Cognex for the long-term while also sharing our many years of success with shareholders. We paid approximately $10 million in dividends to shareholders during Q2. And tonight, we announced a similar payment to be made in Q3. We did not buy back any stock in the quarter. Our inventory balance decreased by approximately $7 million or 12% from the end of 2019. However, excluding the substantial 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.

Robert Willett -- President and Chief Executive Officer

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.

Operator

[Operator Instructions] Our first question is from Karen Lau with Gordon Haskett. Please proceed

Ka Wing Lau -- Analyst

Rob, you sound pretty downbeat on markets, excluding e-commerce and CE. Are you I was wondering, are you guys not seeing any meaningful sequential improvement in markets outside of those two? And can you maybe comment on kind of the rate of decline you saw in April versus the exit rate you saw in June or maybe July even?

Robert Willett -- President and Chief Executive Officer

Yes, Karen, I think the story really is the automotive market, which was our largest market last year, and it 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 of the other markets, actually, which are performing reasonably well and showing some growth. So I don't wish to sound overly negative, but certainly, automotive is the market that is giving us substantial headwind.

Ka Wing Lau -- Analyst

And so to that point, can you comment on kind of the exit rates that you're seeing in auto in June and July? How much you And I hope is down revenue down year-over-year?

Robert Willett -- President and Chief Executive Officer

Yes. Yes, I mean, I'll give you some color on that. I mean, so I think automotive was our largest market in 2019, and it was soft coming into this year. But 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 situation. Demand from automotive deteriorated sharply around the COVID outbreak. And revenue from automotive declined by 40% year-on-year in Q2. 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 signs that it's improving from its lows. I would certainly say, I think we've hit bottom there. But in terms of getting to the level that we had hoped coming into the year or the return to the kind of solid 10% growth that we've become used to over the past few years, we don't expect that to happen probably until the middle of next year.

Ka Wing Lau -- Analyst

Got it. Understood. Thanks for the color. And then on QE, so with the delivery expected in the third quarter, can you comment on how much the overall is going to be up this year? And then 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?

Robert Willett -- President and Chief Executive Officer

So generally, Karen, we don't give kind of full year projections, as you know, forecasting for Cognex nor would we gives specific guidance like that. What I would say, I think you're right is that 2017 was our best year in electronics, and I wouldn't expect us to outperform that this year. But we do we're putting up some good growth in that 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 growth but it may not be quite at the level that we would like. So I think what there's a bunch of things going on. One is outside of phones outside of smartphones, the accelerated online learning and working from home and is certainly driving growth, and we're seeing a lot of growth in that area. And then we certainly are seeing some nice growth related to 5G and OLED screens. But I'd say some of that growth that we had hoped would come this year. It looks like it may be getting pushed out a little. But despite that, I think it will be a good year for us. In consumer electronics. So we expect consumer electronics will be our largest market this year, but logistics may just give it a run for its money. And automotive is not in the running to be our largest market this year, I would say.

Operator

Our next question is from Andrew Buscaglia with Berenberg Capital Markets. Please proceed

Andrew Edouard Buscaglia -- Analyst

And can you how those consumer electronics trends, is there a reason to believe, just given the 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?

Robert Willett -- President and Chief Executive Officer

Well, I think we certainly think that most of this year's revenue will be recognized in Q3. Last year, it was Q2. In Q3, pretty much if you look back through the last five years or so, which have been really big electronics use for us. It's always been Q2 and Q3. And this year, as we've sort of discussed in previous calls, it's got pushed into Q3. I don't I wouldn't expect large amounts of it to flow into Q4, but there's no reason why we couldn't see some growth or still some strength in electronics in Q4. But it's really a Q3 play from where it looks from here.

Andrew Edouard Buscaglia -- Analyst

Okay. And you took some substantial restructuring that you haven't taken out in a long time, which would indicate you wouldn't expect really a pickup in demand anytime soon. But 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?

Robert Willett -- President and Chief Executive Officer

Yes. I wouldn't read it in such a short-term way. I think we've been we've grown our head count, and we've made a lot of acquisitions, seven acquisitions in the last four years. We I think we were staffed. I know we were staffed entering 2020 like we expected to return to some pretty strong growth after having the first down year in nine years in 2019. So 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. And then after COVID, we recognized that we needed just to take action and we viewed the current environment 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. So I think we really aligned our capabilities better following many years of growth. So I we're really long-term thinkers at Cognex. And this is something that probably needed to happen. We needed to align ourselves better. And the downturn in demand really was very clear to us that this is the time to get on with that. But we as I said in my prepared remarks, I think we have plenty of capacity for growth, right? We really are, I think, well-structured for growth. So 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.

Andrew Edouard Buscaglia -- Analyst

All right, that's helpful. Thank you.

Operator

Our next question is from Joe Giordano with Cowen & Company. Please proceed

Joseph Craig Giordano -- Analyst

Wondering, can you kind of, like, scale the content that you're getting on some of these CE and logistics kind of orders? Like if you were to think about it in a given production line, for CE, you're in a given amount of square footage like a logistics facility, how does your content look now versus a few years ago? I am not looking for specific dollar amounts, obviously, but how has that like-for-like content expanded over time?

Robert Willett -- President and Chief Executive Officer

Well, it's 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 a facility, and we think that 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 alliances is similar, probably than it's been over previous years in facilities, but it's changing. I think it's more vision related, higher value. So 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 just learning, higher value type applications.

Joseph Craig Giordano -- Analyst

That's fair. And then on auto, third-party estimates right now, and obviously, those can change widely over time. But right now, we're talking about pretty substantial year-on-year production growth next year. I mean, how would you think about Cognex' business in that kind of environment? Now obviously, that's mostly just filling up existing capacity to some extent. But how would you think if those numbers are right, that your business could fare in that environment?

Robert Willett -- President and Chief Executive Officer

Yes. I want to make sure I understand your question. You're saying in automotive, you think if your expectation...

Joseph Craig Giordano -- Analyst

Yes, in auto, they're expecting production ramps next year, pretty substantial on a year-on-year, obviously, off a low base, but I'm just curious, you're more on the investment side of things. So how do you think your business would operate in that sort of production site see?

Robert Willett -- President and Chief Executive Officer

So you're talking more about unit volumes of production?

Joseph Craig Giordano -- Analyst

Yes. 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?

Robert Willett -- President and Chief Executive Officer

Yes. Yes. I think for us, it's going to be more about new lines of retrofitting existing lines. So 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 drive would be real growth drivers for us. So 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. But of course, when big automotive or Tier one automotive, who are our customers in that space, if they're struggling, and if they can serve in cash, then they're likely to do less retrofits or upgrades in general. So it does have an impact on us, but more of the kind of metric to gauge future growth for us would likely be around introduction of new models and new technologies into automotive.

Joseph Craig Giordano -- Analyst

And 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 chain is adjusted to the current reality, does this year strike you for your business as like well above trend, something that can't be repeated? Or is this just the normal like this is the way we were going, it just accelerated a little bit, but we don't see why this can't continue?

Robert Willett -- President and Chief Executive Officer

Well, I think so I think we see logistics as a great growth market for us. And 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 developed supply chains. And as those supply chains move to more online and more e-commerce type models, we just have it's a great market, and we have a great technical advantage in it to play. I think so what we're seeing at the moment is we're seeing that growth is being very skewed toward winners in that marketplace, particularly those who already have pretty sophisticated e-commerce models or well under development.

What's been disappointing to us more in the logistics area is those customers in broad retail, like formerly, bricks-and-mortar retailers that we wouldn't have expected to see growing strongly at the moment. But of course, they're really struggling. Right? And I think they're struggling with liquidity and their own future. So we're not saying the same level we're not seeing the same level of investment there we would like to have. Also, airport baggage handling is not the biggest part of our logistics type business, but that's a market that has really gone very cold this year. So I think those 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.

And then 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. So I think we have big and exciting growth plans in logistics. Some of them have gone really well, some of them in the current environment but a little tepid. And I think that demand will come back once we're through this current situation.

Joseph Craig Giordano -- Analyst

Thank you.

Operator

Our next question is from Joe Ritchie with Goldman Sachs. Please proceed

Joseph Alfred Ritchie -- Analyst

So 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 2Q? Or is that predominantly still on track to kind of ship for 3Q?

Robert Willett -- President and Chief Executive Officer

Yes, Jeff, I'm not sure we gave a specific number, but I think directionally, you're correct that we did. We saw a big backlog of logistics business building and deliveries getting delayed. And we're really we're seeing a lot of that business come through Qs 2, three and four is kind of how it looks. And we're also seeing a pretty big backlog build in addition to that. So broadly speaking, that's kind of what is happening, I think, as we expected there.

Joseph Alfred Ritchie -- Analyst

Got it. Okay. That's helpful. And look, some of the some of the integrators like a Honeywell, for example, their intelligrated business. They just reported their orders were up something like 300% this quarter, and Kion's orders were also doubled this quarter. I guess how should we think about 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 time frame? Is there any kind of bubble that's forming that could potentially constrain your ability to get your products installed and delivered on time?

Robert Willett -- President and Chief Executive Officer

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 of them. There are many others, Damatic, Randol, Andy, Bastian, or 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. And in some ways, the dynamic is a little bit like what a line builder does in automotive. So they're getting contracts for new car models that are a couple of years out. And then as the product becomes closer, nearer to implementation, we work with them on putting the vision system in, but we're specified normally by the end user. So 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. So I view it as leading indicators and in line with what I would expect.

Joseph Alfred Ritchie -- Analyst

Got it. That's great to hear. And I guess just lastly, maybe just following up on some of on the consumer electronics question. You did reference like online learning, 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 like iPads or what specifically this is going into?

Robert Willett -- President and Chief Executive Officer

Yes. So Cognex, we sell we really sell to all the major players in consumer electronics. And so they most of them really have a broad portfolio of products. Our business has been very much in smartphones this year, still very solid in smartphones, for sure, it's how it looks. But it's perhaps growing better. It's stronger than we would have expected more in tablets and laptops and other electronics and devices, wearable devices, headphones, etc, that we've seen, I think everyone has seen an uptick in that business, which is a result of everybody equipping themselves to work at home. That's how it looks. Then in terms of OLED screens, that's a market we've been working on heavily for 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, etc, where we're working with some of the major players there. But I think in terms of our expectations, maybe OLED isn't it's this is not a blow-the-doors-off year for OLED. It's sort of growth, and we're working there. And by the way, those companies really value our deep learning technology for inspection because there's some the value of yield in that market is massive. But in terms of perhaps what were 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.

Joseph Alfred Ritchie -- Analyst

That's super helpful. Thank you, guys.

Robert Willett -- President and Chief Executive Officer

Thanks.

Operator

Our next question is from Paul Coster with JPMorgan. Please proceed

Paul Coster -- Analyst

So you mentioned that the gross margins might be a little light because of the logistics mix. I'm just wondering, did I hear that right? And if I did hear it right, what is it in the product mix that leads to slightly lower gross margins for that end market?

Robert Willett -- President and Chief Executive Officer

Yes, so Paul So yes. Yes. And I'll invite I'll talk on a product level, and I think Paul will talk a little bit more about that, too. So when we 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. So we were doing more application engineering, right? So that was certainly a part of that. Part of that issue. And we still do some of that, which can be dilutive to our margins. So it has some more service-related pieces, and it also has more integration, which may be, in some case, 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, but we're developing products that are more modular, and we're developing relationships with systems integrators. So we're 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 say?

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

And yeah, have some. I think you landed it, but logistics is still slightly dilutive to our overall gross margin, but it is improving versus a year ago or certainly versus three years ago. So it's similar to the strategy we use for developing the factory automation market, solve people's problems, a little more service and then figure out how to effectively productize it. And we're in the middle of that migration with logistics, and it's going well. But overall, 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 margins and is a growth

Paul Coster -- Analyst

Got you. So 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 what does this chill your interest in further acquisitions in that area, knowing that there's a sort of integration work involved? Or is it just an anomalous situation?

Robert Willett -- President and Chief Executive Officer

Well, let me kind of back up for a minute. So 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. And 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 D 900 that we just launched. And it fits very well within our existing kind of model of selling smart cameras with a lot of performance, right?

Now then we've acquired Sualab. Sualab has very, 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. So 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, but some of the nearer-term applications for it did require on-site work with very sophisticated engineering teams in Asia. And that's the thing we really haven't been able to do at the moment. So 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. And then Sualab brings great engineers and great technology, which will help us with all the other things we want to do in deep learning.

Paul Coster -- Analyst

So M&A will remain the sort of a key area of focus?

Robert Willett -- President and Chief Executive Officer

Yes. Maybe we're I think sorry, yes, thanks. Sorry, Paul, that was the second part of your question. So I think we've got a lot of horsepower now in deep learning, but we're always out there looking for interesting assets to acquire in deep learning or in other growth areas of the business. And generally, we're always on the lookout for great engineers who bring a lot of capability to our organization. So that's an ongoing kind of cadence at Cognex.

Paul Coster -- Analyst

Got you. Thank you very much.

Operator

Our next question is from Richard Eastman with Robert W. Baird. Please proceed

Richard Charles Eastman -- Analyst

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 pulled some of the logistics business that you shipped came out of backlog? Are those the two primary factors for the upside?

Robert Willett -- President and Chief Executive Officer

Yes. I'll let Paul comment. I mean, certainly, we were able to win and ship more logistics business than we'd expected in the quarter was a big driver. And then yes, and certainly, the recovery in our China business was probably stronger than we had anticipated. Paul, any other color you'd like to give?

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

Yes. I mean, the commentary on China was more about kind of Q1 revenue levels to Q2 revenue levels, not so much our expectations for Q2. I think for why we beat our Q2 forecast or we didn't give guidance, except 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 is and meet customer demand is pretty good.

Paul Coster -- Analyst

So you put a Rick Greg

Robert Willett -- President and Chief Executive Officer

Yes, Rick. Sorry, it's Rob again. I think but just to make sure we understand the standing finding order activity during the quarter was quite a lot stronger than we anticipated, right? So we did we certainly exited the quarter with a very large backlog. So I wouldn't want you to think that we made Q2's beat off backlog necessarily, we didn't. We had good strong orders as well.

Paul Coster -- Analyst

Yes. I understand. And was China again, China year-over-year was down 11%, but that other Asia number, other Asia was plus 23%. Is that massive dollars? But what was that kind of $6 million increase that amounts to other Asia in APAC? What end market was that particularly driven by CE?

Robert Willett -- President and Chief Executive Officer

It's semi and CE from I may booked OK. Yeah. And obviously, there is some element of inorganic from Sualab in there too, but very modest.

Paul Coster -- Analyst

I see. And was so if we 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? I mean, is that kind of timing on backlog? Is that a doable expectation?

Robert Willett -- President and Chief Executive Officer

So yes. So we've got some good momentum in logistics business. We had a record quarter for revenue in Q2, and we expect Q3 to be higher. So yes, and we expect Q4 to be good also. So yes, we definitely have good momentum, and it's not getting concentrated in particular quarters at this point.

Paul Coster -- Analyst

Understood. And just I'm sorry, my last question here, just promise. The 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. But just curious, would you expect to see a 10% customer in CE this year?

Robert Willett -- President and Chief Executive Officer

Well, yes, that's not really a question I feel like I'm ready to answer at this point. So I'm going to pass on that one just given sensitivities in that market.

Paul Coster -- Analyst

Okay, understood. Thank you.

Operator

Our next question is from Markus Mittermaier with UBS. Please proceed

Markus M. H. Mittermaier -- Analyst

Two questions from my side, please. One more long-term and one on the second half. Maybe I start with the longer-term question. Given the sort of 8% head count 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 vision that you have throughout the cycle, right? I mean, some of your competitors, particularly on the sales force side, have probably significantly larger sales forces. So I'm just trying to think about strategically how you think about that through the cycle. That's long term. And then on the second half, I don't want to belabor all the seasonality issues around consumer electronics, etc. 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 get understand the puts and takes here from into Q3, Q4.

Robert Willett -- President and Chief Executive Officer

Great. Yes. To your first question about the 8% headcount reduction. I mean, I think if you go back and you kind of look at our productivity as a company, it's even with the headcount reduction, it's well below what it was in 2016. So we see as having plenty of capacity for growth, right? And 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. But we really I don't really feel constrained on that. You kind of talked about sales productivity. And we do you're right, we do compete with customers that have bigger sales forces. But we come back that in two ways. One is we're pure-play machine vision. So Cognex salesnoid is not selling at PLCs or robots. They're focused very much on their experts in machine vision. And then we do have a good network of systems integrators and distributor partners who cover those areas that we don't reach. So I'm not at all concerned about lack of coverage or 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. And 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. So we've seen certainly, medical, pharmaceutical applications are others that are we've seen some interesting demand for our products in that area. And 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, it's an area that I think we see good upside potential for us as we move through this year and into next. So those would be some of the areas that come to mind.

Markus M. H. Mittermaier -- Analyst

Great. And 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, etc, but then as you 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?

Robert Willett -- President and Chief Executive Officer

Yes. I think material in it's true definition, probably the answer to that question is no. And I don't think we're going to see something really massively material from some of these other conversations in Q4. But 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 we see more and stronger demand the back end of the year, which can happen in our business. So but generally, I don't want to give you an overly optimistic picture of Q4, as 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.

Markus M. H. Mittermaier -- Analyst

Thanks so much. I'll pass it on.

Operator

Our next question is from Jairam Nathan with Daiwa Capital Markets. Please proceed

Jairam Nathan -- Analyst

Just on the 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?

Robert Willett -- President and Chief Executive Officer

Yes. So we've worked certainly had over the last two years to try to take our technology and apply it more broadly, whether that's more into component type areas, such as like 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. And then, obviously, more in accessories, as we discussed, certainly, we see and in portable type products, the less laptops and others. So you should see our businesses being much more diversified in terms of its applications in that market, although, as we know, the end users I'm sorry, the brand owners are pretty concentrated still.

Jairam Nathan -- Analyst

Okay. And with regard to logistics, you still largely U.S. build based business? Or and what's the scope for expanding into Europe and Asia?

Robert Willett -- President and Chief Executive Officer

Yes. So the majority of our revenue today is still in the U.S. But we've been investing and we're seeing good percentage, very good percentage growth rates in European market and in parts of Asia, certainly. So and we expect probably the majority of growth to come from those areas as we go over the long term. But right now, we're definitely still highly concentrated in the United States.

Jairam Nathan -- Analyst

Okay. And I know there is 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, like is it a multiple of that, you think, based on what's happened?

Robert Willett -- President and Chief Executive Officer

Yes. I don't really feel ready to answer that. We said it was a $1 billion served market. And I would have thought that might actually be quite similar now. I mean, 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. So those businesses, they're only growing slightly for us. And we're probably gaining share, the market may be shrinking currently. So I still 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, and I view it very similar now just with a different complexion.

Jairam Nathan -- Analyst

Okay. And 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 on going bankrupt or exiting the business?

Robert Willett -- President and Chief Executive Officer

Yes. I'm sorry, I didn't quite understand your question. Have we seen it getting more difficult with who?

Jairam Nathan -- Analyst

No, any of your competitors have exited the business or given the tough conditions.

Robert Willett -- President and Chief Executive Officer

I see, competitors. No, I wouldn't say we've seen a major change in the competitive environment overall. No, I wouldn't say so.

Operator

Our next question is from Karen Lau with Gordon Asset. Please proceed

Ka Wing Lau -- Analyst

So 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. So you would kind of imply that the savings is coming starting in the third quarter. But sequentially, opex is flat. So is the idea that some of the temporary cost that to put temporary cost savings that took place in the second quarter is coming back, but this structural savings kicking in, so they kind of offset? Or is there some temporary costs associated with the higher delivery in the third quarter that is like kind of masking that sequential savings structural savings uptick?

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

Sure. Yes, Karen. It's mostly puts and takes. I mean, 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, and then we've now committed to a $25 million annualized cost reduction, of which we did realize a portion of it in Q2. But certainly Q3, we'll be realizing more. So yes, so I'd say the payroll savings and some of the savings and depreciation and amortization and 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 salesnoids are going and paying visits. We did get some onetime benefits associated with the restructuring in Q2 in our incentive compensation that won't repeat in Q3. So that's also one of the takes to offset the payroll savings.

Ka Wing Lau -- Analyst

Understood. And 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 like semiconductor customers, they buy mostly software. So the ASP is smaller for customers in that market. But I guess in the context of maybe people learning new applications. And then we have the backdrop of these arms race going on in building chips everywhere. Is 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?

Robert Willett -- President and Chief Executive Officer

Yes. We're having a good year in semi. It's true, and I think the industry is having a good year. But just generally, that has been around 5% of our business. We view it as kind of a cyclical probably cyclical declining market overall. Why? 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.

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

Okay. And Karen, just back to your original question too, one piece, obviously, just with a higher revenue mix or higher revenue level in Q3 versus Q2, that will also bring some opex, right? Think about commissions and so on. So there's an element of that as well in the quarter-to-quarter.

Ka Wing Lau -- Analyst

Yeah, makes sense. Thank you.

Operator

We have reached the end of our call. I will now turn the call back over to Dr. Shillman for closing remarks.

Dr. Robert J. Shillman -- Chairman and Founder

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.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 61 minutes

Call participants:

Susan Conway -- Senior Director of Investor Relations

Dr. Robert J. Shillman -- Chairman and Founder

Robert Willett -- President and Chief Executive Officer

Paul Todgham -- Senior Vice President of Finance and Chief Financial Officer

Jairam Nathan -- Analyst

Ka Wing Lau -- Gordon Haskett Research Advisors -- Analyst

Andrew Edouard Buscaglia -- Joh. Berenberg, Gossler -- Analyst

Joseph Craig Giordano -- Cowen and Company -- Analyst

Joseph Alfred Ritchie -- Goldman Sachs Group -- Analyst

Paul Coster -- JPMorgan Chase & -- Analyst

Richard Charles Eastman -- Robert W. Baird & Co -- Analyst

Markus M. H. Mittermaier -- UBS Investment Bank -- Analyst

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