Cognex Corp (CGNX) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Cognex Corp (CGNX 0.94%)
Q4 2020 Earnings Call
Feb 11, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Cognex Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn this conference over to your host, Ms. Susan Conway, Senior Director of Investor Relations. Please go ahead.

Susan Conway -- Senior Director, Investor Relations

Good evening, everyone. Thank you for joining us today. With us are Cognex's Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham. I'd like to point out that our earnings release and 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 call, we may use a non-GAAP financial measure if we believe it is useful to investors or 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. You should refer to our SEC filings, including our most recent Form 10-K for a detailed list of risk factors.

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

Dr. Robert J. Shillman -- Chairman And Founder

Thanks, Sue, and hello, everyone. Welcome to our fourth quarter earnings conference call. As shown in the news release issued earlier today, Cognex reported record fourth quarter revenue for 2020, and we also set a record for annual revenue as well. It was a challenging year. But with a lot of hard work, we did quite well and emerged in very good shape for 2021. This year marks a very important anniversary for Cognex. We've not only been in existence for 40 years, but we continue to be the leader in our field. This is a significant milestone a few technology companies achieved. Machine vision was in its infancy in 1981, but it is now playing a critical role in both industrial automation and in logistics where it ensures the quality and accurate delivery of virtually everything that you purchase. And by continuing to invest wisely in technology, we intend to continue to be the world's leading provider of machine vision and advanced bar code systems.

Finally, as we also announced earlier today, this will be my last conference call as Chairman of Cognex. After 40 years at the helm, I've decided to retire from Cognex's Board of Directors and also as an Executive officer of the company. I will continue to be a Cognoid as an advisor to the company. Of course, I have mixed emotions about this transition, but I'm at that point in my life to make it, and it also happens to be a time of unusual strength at Cognex. I'm very confident in Rob's leadership and in the team's understanding of our business, our customers and our culture. And it gives me great comfort knowing that I'm leading the helm of this very special company in very capable hands.

Now I'll turn the call over to my partner and Cognex's super capable CEO, Rob Willett. Rob, the microphone is yours.

Robert Willett -- President And Chief Executive Officer

WOW! Thank you, Dr. Bob. Thank you, and good evening, everyone. Before we discuss our financial results, I want to take a minute and thank Dr. Bob for his immense contributions to Cognex and for instilling the enthusiastic entrepreneurial spirit that is the hallmark of our company. Dr. Bob and the unique culture he built over the past four decades will forever be a part of Cognex. Now for our financial results. 2020 was a roller coaster ride, both for the world and certainly for us at Cognex. We entered 2020 optimistic about growth. 2019 had been a challenging year in which lower spending by customers in our two largest markets, automotive and consumer electronics resulted in our first revenue decline in nine years. However, after the global COVID-19 outbreak in March 2020 and the related supply disruptions, business shutdowns and capital investment pullback, we recognized that the outlook for 2020 had changed. We no longer believed 2020 would bring a broad-based strength we had expected when we started the year. Given the circumstances, we quickly took steps to adjust our operating expenses to align with more modest growth. These steps included a workforce reduction, which was difficult for us. And an organizational realignment that better focused our internal investments on high-growth opportunities and important operational priorities.

As a result of these changes, we've been better able to support Cognoids and customers through our own difficult pandemic-related challenges. From a business perspective, the second half of 2020 was much more positive than initially expected. You can think of it as a tale of two halves. Revenue in the second half of the year was up a surprising 41% over the first half. As a result, we reported good financial results for 2020, setting a 40-year record for annual revenue. Revenue grew by 12% year-on-year, thanks largely to higher spending by customers in consumer electronics and logistics, where we benefited from strong partnerships with market and technology leaders that fared well during the pandemic. Spending in the broader factory automation market has also improved from depressed levels in Q2. In consumer electronics, revenue increased by approximately 30% year-on-year. It also represented roughly 30% of total revenue and became our largest market. Much of our revenue in consumer electronics relates to the assembly of smartphones and the production of related components. In 2020, there was also a larger relative contribution from other electronic devices necessary for online learning and the work from home dynamic. Logistics revenue grew by approximately 40% over 2019 due to growth in the e-commerce sector. Now representing approximately 20% of total revenue, logistics surpassed automotive to become our second largest market.

We benefited from major e-commerce and omnichannel retailers investing in automation to enable higher throughput and cost reductions. Other sectors of logistics such as bricks-and-mortar retail and airport baggage handling struggled in 2020. Further, bright spots included medical related industries and SEMI, both of which grew double digits year-on-year. We're proud that manufacturers serving the healthcare industry are relying on Cognex to help make COVID vaccines available to the public. More specifically, Cognex machine vision and deep learning are an integral components of production machines worldwide to ensure the highest quality standards and full traceability in COVID vaccines. Applications include inspecting vials for defects, ensuring vials of vaccines are filled to the correct level and a free of contaminants and ensuring that vaccine kits are packaged correctly. That's most of the good news. On the negative side, automotive revenue declined by approximately 20% year-on-year as business shutdowns further worsened already weak fundamentals. As a result, the automotive market, which was our largest market in 2019 dropped to third place in 2020. Automotive is improving somewhat from its most depressed levels in Q2 and increased Q4 year-on-year for the first time in several quarters.

However, it remains at a significantly lower level than in recent years. Let's talk now about Cognoids, our people. Our achievements in 2020 were the result of the dedication of Cognoids around the world. They exemplified our strong culture by working hard and moving fast in a volatile environment to meet significantly increased demands from a few of our existing customers to win new customers and to successfully manage our supply chain. Because of their efforts, we launched powerful new products that have made our superior vision tools easier to use and, therefore, available to a wider audience. The most important introduction in 2020 and one of our most successful product launches ever was the In-Sight D900 smart camera. Leveraging In-Sights widely recognized EasyBuilder interface, the D900 enables both existing Cognex customers and new users of machine vision to apply our ViDi deep learning tools to inspect surfaces for defects. Popular applications include the detection of scratches and chip surfaces that were previously too difficult to solve using traditional rule-based vision. We also integrated deep learning technology that we acquired with Sualab. These techniques are now sold together with our ViDi tools running on the Cognex VisionPro deep learning software platform and are being widely adopted by more sophisticated customs to solve their most complex vision problems. Revenue from applications utilizing our deep learning technology more than doubled year-on-year in 2020.

As we look at the opportunities ahead, we believe we are just scratching the surface no pun intended of what we can accomplish. We believe deep learning and logistics will be major contributors to growth in the years ahead. Now let's talk about 3D. Last month, we launched the In-Sight 3D-L4000, an exciting new smart camera platform for the fast-growing industrial 3D vision market. The 3D-L4000 leverages our successful In-Sight intuitive spreadsheet interface, making it easy for our broad In-Sight customer base to use powerful new vision tools created for true 3D inspections. Under development for some time, the 3D-L4000 packs novel capabilities into a compact form factor without the need for a separate PC. Exciting features include patented optics technology for superior image quality and the broadest range of 3D vision tools available in a vision system. We believe the 3D-L4000 is a breakthrough product that makes 3D as easy to use as 2D vision. It positions us very effectively against competitors who have significant sales and profits in this area. Both Cognoids and customers are excited about these new products and others we have in our pipeline.

Now I will turn the call over to Paul for details of the fourth quarter.

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

Thank you, Rob, and hello, everyone. I'm pleased to report record fourth quarter revenue, Cognex' first Q4, greater than $200 million. At $224 million, fourth quarter revenue grew 32% year-on-year. It was also above the guidance we gave you last quarter. The biggest contributor to growth was the e-commerce sector of logistics, which was stronger than we expected. In the broader factory automation market, the positive momentum we experienced in Q3 held up better-than-anticipated and was the biggest driver of our beat to guidance. Consumer electronics grew nicely year-on-year and was down on a sequential basis as we expected. Gross margin was 75% compared to 74% in Q4 of 2019. The stronger performance was due to a favorable product mix and higher volume. Gross margin and logistics, while still dilutive to the company overall, continues to improve. The restructuring program we announced last spring has been completed. Final charges totaling $875,000 were recorded in Q4. Excluding those charges, the combined total of RD&E and SG&A costs increased by 15% sequentially and was roughly flat year-on-year. The increase sequentially was more than we expected due to higher incentive compensation related to our performance in 2020. I'm encouraged that Cognoids earned strong sales commissions and bonuses in 2020. I can tell you, they've earned it.

As a result, we fully funded -- or sorry, as a reminder, we fully funded our company bonus pool in 2020 after not paying a bonus in 2019. We continue to realize savings in travel and entertainment, and from the restructuring actions. Operating margin was 26% in Q4, which was below the exceptional level we reported in the prior quarter, but 1,600 basis points higher than Q4 of 2019. Turning now to everybody's favorite subject, taxes. There were substantial discrete tax items recorded in all periods that make comparisons difficult. In Q4 of 2020, discrete items combined for a net benefit of $14 million. The largest was savings we realized on our U.S. tax liability when we filed our federal tax return in October related to new IRS regulations on the treatment of foreign taxes paid on acquired Sualab technology. Excluding all discrete tax items, the effective tax rate was 14% in Q4 of 2020, 18% in Q3 of 2020 and 18% in Q4 of 2019. The slight decrease compared to our guidance in the prior periods was because we earned a greater share of profit overseas. Reported earnings were $0.39 per share in Q4 compared with $0.46 in Q4 of 2019 and $0.49 in Q4 of 2020 -- sorry, Q3 of 2020.

On a non-GAAP basis, earnings were $0.32 per share in Q4 compared with $0.11 in Q4 of 2019 and $0.47 in Q3 of 2020, excluding discrete tax items and restructuring and other charges. Looking at the change in revenue for Q4 from a geographic perspective, we saw broad-based growth across all regions year-on-year. The Americas reported strong growth, increasing by about 1/3 due to growth in logistics and incremental revenue from medical related industries, including companies scaling up production for COVID related products. In Europe, revenue also grew by 1/3 over Q4 '19. Logistics, consumer electronics and the broader factory automation market increased despite many businesses operating under significant restrictions. Foreign exchange contributed about 600 basis points to that growth. Revenue from Asia increased by more than 25% year-on-year due to growth from consumer electronics, logistics and the broader market.

Turning to the balance sheet. We ended 2020 with $767 million in cash and investments and no debt. This balance is below both the end of 2019 and the end of Q3 due to a $2 per share special dividend paid in Q4 or, as Dr. Bob likes to say, a very special dividend. Our approach to capital allocation remains unchanged. We continue to manage Cognex for the long-term while sharing success with shareholders. Given how well we are weathering the current serious economic conditions and the fact that we have no debt, our Board decided it was in the best interest of shareholders to return excess cash ahead of potentially higher tax rates.

Now I'll turn the call back over to Rob.

Robert Willett -- President And Chief Executive Officer

Thank you, Paul. In summary, Cognex ended 2020 on a strong note, and our guidance for Q1 is also very positive. Even so, the business environment continues to be difficult and volatile. In addition, the strength we experienced in the second half was less broad-based than we'd like. We believe revenue for Q1 will be between $225 million and $245 million, which represents growth of more than 40% year-on-year at the midpoint. We expect Q1 will be the third quarter in a row in which revenue will grow by more than 30% as a result of substantial backlog of logistics orders that we intend to convert to revenue in the first half, predominantly in Q1. Gross margin is expected to be in the mid-70% range and likely lower than the gross margin we reported in Q4, given the expected higher mix of revenue from logistics. Operating expenses are expected to be flat to slightly down year-on-year. We expect savings due to our restructuring actions and lower travel and entertainment costs, offset by higher commissions from the strong revenue growth we are projecting for the quarter. Lastly, the effective tax rate is expected to be 18%, excluding discrete tax items.

Now we will open the call for questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti joined Needham & Company. You may proceed with your question.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Thank you. Good afternoon. Dr. Bob, I wish you the best.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you, Jim.

Jim Ricchiuti -- Needham & Company -- Analyst

So on to the outlook, it sounds like the mix of business that you're suggesting in Q1 fair to say, Rob, is that skewed a little bit more toward the logistics than you would normally see because of the order activity and what you have in backlog going into the quarter?

Dr. Robert J. Shillman -- Chairman And Founder

Yes. Hi, Jim. Yes, it is. Yes, I think we're seeing growth across most of the industries we serve in the first quarter, but the majority of the growth we're going to see in Q1 is going to be a result of logistics and orders that we already have in the backlog.

Jim Ricchiuti -- Needham & Company -- Analyst

And just with respect to logistics, it appears you now have another large customer officially that you're disclosing in your K, although you're not identifying that customer, but I believe it was 14% of revenues. Can you give us a sense just as you think about the outlook for the logistics business, broadly speaking, in '21 and perhaps with this customer, your visibility, your line of sight into that business?

Robert Willett -- President And Chief Executive Officer

Yes. Well, you correctly point out that we do have another large over 10% customer now at Cognex for the first time, having a second one. And it is a customer in logistics. And you asked about kind of visibility on the logistics business. We're seeing a lot of strong growth in that market. You can see we reported about 40% growth in revenue last year and a very substantial growth on deck here in the first quarter. I think we think the first quarter will probably be our highest logistics revenue quarter in a while, right? It is obviously larger than we think we will be reporting in the subsequent quarters. But we see broad-based strength across that whole area and a number of other good customers coming online that we'll be reporting revenue on and a lot of growth as we move through the year. In terms of visibility, there's some short-cycle business in logistics that turns more quickly from bookings into revenue. And then -- so probably less than half of it is that. And then there are some larger deployments that we do, which tend to be on our books, booked and then turning into revenue, sometimes 2, three quarters after it books and shows up in our backlog. So that's the kind of dynamics that we're looking at.

Jim Ricchiuti -- Needham & Company -- Analyst

Thank you. I'll jump back in the queue.

Operator

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good evening folks and Dr. Bob, congrats again on a successful and solid career.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

So as long as we're kind of 10-K diving here. I guess maybe first question, I noticed, I think for the first time, I haven't scanned every single line, but Rob, you mentioned China competition kind of upfront as a new risk in the business subscription. I didn't see that last year. Anything that we should be aware of? I mean, China still seems like it's growing pretty well, but is there a market shift going on there that kind of bears pointing out? Because certainly, last year wouldn't indicate it, but it's new language all the same.

Dr. Robert J. Shillman -- Chairman And Founder

Josh, I don't think there's anything too dramatic or radical going on there. I think over a number of years, we've seen our competitors in China switch from being sort of global competitors and seeing more and more aggressive local competitors going on coming into the market. So I think we're seeing that. And I think we're keenly aware of that, and we monitor the situation very carefully. And some of them try to compete on price, which can be difficult in machine vision, where there's a lot of technical expertise required, but certainly, they're getting better. So yes, we take them more and more seriously, and we watch them closely. And I would consider them a risk to the future of the business.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. And then I note a lot of the 1Q commentary focusing on logistics, I guess, rightfully so, it's consistent with what we hear from some of the other peers in that space. But the other two big markets that weren't really touched on, electronics and auto. Electronics, we know that inventories are still low, lead times are still long. Auto, I think some of the broader automation cohort has seen a lot of strength in China, in particular, how are those factoring into the 1Q guide? Or how is your visibility for those markets, just given that you haven't really touched on it as much.

Dr. Robert J. Shillman -- Chairman And Founder

I think we expect to see all -- most or all of our markets grow Q1 year-on-year, but the big growth we see coming from logistics. And I think consumer electronics, we saw a big year last year, and we still would expect to see some growth in Q1 in that market. But generally, Q1 is a low quarter for logistics -- I'm sorry, for consumer electronics. It's not a big -- it tends to be more -- Q2 and Q3 tend to be our big consumer electronics quarters. I often get asked this time of year, like how is the year looking for consumer electronics? And I give you the same answer really that I give every year, which is we really don't have visibility. We can share with you until sort of the May conference call. So I think we'll get a better sense of that overall. I think if we look back at consumer electronics last year, we saw it near the back end of the year. We didn't see much revenue from consumer electronics in Q3 and we saw most of it in Q3 and still some healthy revenue in Q4. And I think that was due to the difficulty in standing up lines and getting component inventory coming out of the most serious COVID conditions in China and elsewhere in the spring.

So that was the kind of the dynamic there. I think we're going to see more aggressive and faster deployment schedule, probably as we come into this year, but that's still relatively unknown. Anyway, and then I think we were expecting a lot of 5G and a lot of other technology coming into phones last year. I think fair to say some of which we didn't see happen, and we hope and expect will now come into this year's builds, and it should help the electronics market. But also electronics can be a bit of an up and a down market. Up, one year up, next year down, the next one up. And certainly, last year was more of an upmarket, so we have moderate expectations. You asked about automotive, as well. And I did say that the fourth quarter that we just reported was the first in a number of quarters that we saw year-on-year growth in automotive. And we're certainly seeing that pretty broadly across all markets, including China.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's very helpful. Thanks, Rob. I'll get back in queue and congrats to the team.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you.

Operator

Our next question comes from the line of Richard Eastman with Robert W. Baird & Co. Your may proceed with your question.

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

Yes, good afternoon. Dr. Bob, best of luck. It won't be the same.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you, Richard. Thanks.

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

I've just been so impressed with just what you've done with Cognex, and it's just been a fabulous public company story. So best of luck.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you. And much of that gain is due to the tremendous strategic and operational capabilities of my partner, Rob and the team that he's built, but I'll take part-credit, anyway. So thank you.

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

Rob, just -- could you just speak to -- there's so much press here lately and the challenges seem to be increasing, [not decreasing] around just SEMI chip shortages, both from -- I'm curious the impact that you might see from that both on your own business and your own supply chain, but also just on how the customers are going to approach this increasing shortage scenario that we're seeing kind of globally? Just your thoughts around that for '21?

Dr. Robert J. Shillman -- Chairman And Founder

Rick, well, first of all, for Cognex, we're pretty capable like in terms of having plenty of component inventory at Cognex. We're not afraid of having very significant inventory and of key components and chips really a part of that. So we're feeling comfortable at the moment about our ability to go on supplying on time for the foreseeable future. So we're feeling in good shape in that respect. Later in the year, if we found there was massive [decommitment] on already ordered and accepted orders from our own suppliers. That might lead to trouble, but I'm not -- we're not concerned, at the moment. But then obviously, the other impact is more on our customers and specifically automotive. And I'd say that's a bit of a area of confusion at the moment, we're seeing stronger demand in automotive than perhaps we'd expected.

And so part of me wonders or part of the team wonders to what degree that that's in a panic buying or forward buying from customers who really don't need to be doing that from Cognex. Or to what degree it's really an uptick in the market overall. But certainly, you can read about it in the press that automotive, particularly, are -- there are plants from very large OEMs that are closed because they can't get components to go and in America, too. So we're certainly seeing that as well in terms of our sort of basic interaction with automotive. Automotive is where we're seeing it mostly. I'm not seeing much of that affecting our electronics business. And then our SEMI business itself is putting up good numbers right now. We've seen good good growth in SEMI last year, and that appears to be continuing currently.

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

Okay. And just to dovetail onto the automotive question, just numerous and really aggressive schedules to bring EVs to market somewhere in the '23 to '20 -- '23 to '25 maybe time frame. And again, we're seeing a little bit of uptick here. It's probably off of a pretty trough kind of bounce around probably more around ice vehicles. But my question really is, when do you expect to maybe see some line of sight and start to get some traction that's really focused on the EV market, including kind of battery capacity. Is that kind of push to '22, '23 for you? Or how do you think about the timing there?

Dr. Robert J. Shillman -- Chairman And Founder

Yes. Well, Rick, first of all, I think about battery manufacturing, and that's a business that we see a lot of demand provision now, and we are very well positioned with -- particularly with deep learning, but really the whole range of our products. And it's a market we've worked on for a while and that we see -- and we do business really with all of the major players in that space, and we're definitely seeing very strong and improving demand in that market. I wouldn't say it's material yet to our business, but I think it can be in a relative -- in the medium-term in a relatively short period of time. So we see that. Then we see, like you -- well, it's probably not like you. We see visibility with our major customers on their plans to bring to market electric vehicles. And certainly there -- generally, if a major brand owner, OEM has -- is planning to launch a major electric vehicle, they're really bringing in vision in about 18 months in advance, right? So that's -- and they're introducing us to the line builder and they're specking the vision to scale that up, right?

And certainly, we're seeing some of the signs of that beginning. We, of course, have seen it over the last couple of years as well, but in a relatively small way, and we're starting to see that in a larger way. So that's kind of the positive side of it. And interestingly enough, electric vehicles, they have a lot of different things going on. Obviously, they don't have the powertrain in what we used to see with the internal combustion engine costs. But certainly, there's a lot more sensors, right? And there's a lot of changes to the product, just whether it's even things like wheels and tires and other things that we're seeing opportunities around as a result of that switch. And then on the other side, I think investment in internal combustion engine vehicles, obviously, is being minimized, which is headwind in that market, too.

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

Understood. Yes. Yes. And just to sneak in one last question. Did 3D vision, as you define it consistently is -- has it grown to more than 5% of sales with all the puts and takes in the other markets? Is it 10% of sales yet? Or

Robert Willett -- President And Chief Executive Officer

It's less than 10%, and it did grow pretty healthily last year. I think we have much higher expectations of it in the next few years given the product launches we've announced recently.

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

Got you. Okay. Very good. Thank you.

Robert Willett -- President And Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Joe Giordano with Cowen & Company. You may proceed with you question.

Joe Giordano -- Cowen & Company -- Analyst

Hey, guys. Dr. Bob, I was born the same year you founded Cognex, and sadly for me, I've accomplished a lot less in the last [Indecipherable] years than you guys have. So congratulations and you'll be missed.

Dr. Robert J. Shillman -- Chairman And Founder

Thank you, Joe. Thank you very much. And I hope your next 40 is more productive than your first 40 then.

Joe Giordano -- Cowen & Company -- Analyst

Me too. Rob, you've always categorized logistics potential as, on average, 50% a year. Now that you've have a big customer there that's very material. It's a much larger business. It grew 40% this year. Is that still your normalized expectation? And within that context, is that doable? Unless that -- is it doable without the large customer growing at at least that pace?

Dr. Robert J. Shillman -- Chairman And Founder

Well, first of all, Joe, at Cognex, we're very ambitious and we have stretch goals. So I've described the 50% as a stretch [whole] number, but one we've been able to achieve or come close to for a number of years here with logistics. We grew about 40% last year. And I think we would have hit that or exceeded that 50% number, have some of the other logistics markets, but we expected very strong growth from coming into the year, notably, more bricks-and-mortar retailers and airport baggage handling to have put up the numbers we were hoping to. So certainly, that's the case. And then we do see a lot of diversification of our customers in general.

We have many more omnichannel retailers who are investing in a big way to have an e-commerce platform that complements their stores. So we expect to see other large obviously, maybe not 10% customers, but large customers as we move through the years ahead. And then our big customer there, obviously, is a major investor in automation and one, I think that still has a very small share of the overall market that it can address, so -- and global aspirations that I think we're hoping to and expected to keep up with. So it's certainly -- the potential is clearly there and the technology and the infrastructure we put in place to serve it is there. Yes. And -- but there may be volatility along the way, particularly within quarters in that business.

Joe Giordano -- Cowen & Company -- Analyst

Understood. Paul, when you think about this year and what you're able to accomplish in a world where people aren't traveling and is the way of doing business for you guys like fundamentally different in some respects? Like should we think of SG&A percentage of sales structurally lower even as things start to come back going forward?

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

I mean, yes and no, I think. I've been in finance for a while and every year, we would try to squeeze T&E to drive some profitability. And it turns out a global pandemic is actually more effective technique in reducing travel and entertainment than finance people, berating people, come forecast or budget time. But so we've been fairly conservative about our planning for T&E for this year, although, to be clear, we would like to be traveling more. We would like to be visiting customers more. We've pivoted nicely to online sales activities. But we really do value that face-to-face relationship with our customers and clearly with other Cognoids, too. So it's a part of the -- I expect that will ramp up fairly slowly. We're going to get some savings on that in Q1 because we're anniversarying largely a pre-COVID world in Q1. But I would hope that in the back half of the year, we'll see a little more. I think the nature of our activities, we do will be different. I think kind of when we choose to meet will maybe be different than we've done before.

One example of that being sales launches -- sales product launches. We launched our largest product, the D900 entirely virtually this year. And actually, there was some real benefits to doing that and that you don't have a whole bunch of people with nonrefundable tickets from around the world depending on a certain product launch timing. And if we decide actually, we want to hold that product for one more month. We're not left kind of holding the bag or making kind of difficult decisions. So -- and then to some extent, we obviously would look at real estate going forward. Although, again, I think Cognex will be a place where we always value the face-to-face collaboration, particularly for engineers, our solution providers. But on the margin, we did close 11 offices through the course of our restructuring or downsize and obviously, look at our real estate portfolio as well.

Joe Giordano -- Cowen & Company -- Analyst

Thank you.

Operator

Our next question comes from the line of Matt Summerville of D.A. Davidson. You may proceed with your question.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks and congrats to Dr. Bob as well. Just one question here. When you think about kind of the sequential revenue cadence as we move throughout the year, should we be thinking about seasonality differently this year? You have a front end, maybe loaded logistics year versus kind of easy 1Q comps in China, easy second quarter comps from some other parts of the world due to the lockdown and then you have kind of the moving pieces with CE. And I know it's hard to sort of guide out beyond one quarter. But maybe, Rob, if you're able to give us some sense for how we should be thinking about that sequential cadence, that might be helpful.

Dr. Robert J. Shillman -- Chairman And Founder

Matt, in general, at Cognex, we don't give annual guidance, but I think here's what we have said or can say is that we're expecting a large, unusually large first quarter as a result of logistics backlog turning into revenue. And we have a very healthy logistics business that is putting up great growth numbers. So I do expect good growth continuing through the year, but not to the degree that we've seen this what will be an unusual Q1 for Cognex. And then consumer electronics, it's been a pretty reliable, large contributor to growth in Q2 or Q3. That's -- or both, right? That's gone on for many years now, and I would expect to see similar things, and we'll have more of a sense of the timing of that when we talk to you at the next conference call in early May. And then Q4 is always a strong quarter for our broad factory automation business. It tends to be a lot of year-end purchasing from markets like automotive and other general market, food, beverage, pharmaceuticals, medical. So as often, particularly in the U.S., where there's kind of a budget flush phenomenon that goes on. So I'm not able to give you specific, but I think that's the kind of cadence I would expect and I think Q1, obviously, is going to be unusually large due to this very large logistics revenue that's going to hit us.

Matt Summerville -- D.A. Davidson -- Analyst

And then maybe as a follow-up, can you maybe comment as to the actionability of what you may have in the M&A pipeline? And how we should be thinking about share repurchases? You guys were pretty active in Q1 and then kind of tabled things for the balance of 2020.

Dr. Robert J. Shillman -- Chairman And Founder

I'll talk about M&A type stuff, and then I'll have Paul talk about perhaps the other balance sheet issues. So at Cognex, we're always looking at acquisition opportunities. And we really like to purchase technology companies with great engineers and technology who can bring it to Cognex. And you've seen us do that with Sualab and ViDi and EnShape and Chiaro and other businesses that we've acquired over the last five years or so. So we're always working on that. And those deals happen when they happen and when they're actionable. So there's nothing specifically I can point to. And so that's kind of how the outlook is there. And -- but Paul can speak to other aspects of the balance sheet.

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

Yes. And Matt, I think as we've said before, the purpose of our stock buyback program is primarily to offset the dilution from stock-based compensation. So we repurchased, as you noted, 1.2 million shares in Q1 of 2020, spent $51 million doing so at an average price of $42, which looks really good right now from a repurchase point of view. And that -- but that actually did cover the dilution from our 2020 annual grant during that first quarter. We don't take the buyback so time constrained that maybe looked last year. We do tend to issue the majority of our equity in the first quarter as we do through annual grant programs. But our kind of mandate from the Board to buy back that dilution is really quite broad.

We would aspire to do it in year broadly, but timing within year or if it happened to carry over to some extent where we happen to be opportunistic and buy a little more, I would view all of that as sort of consistent with our philosophy. So we do have $280 million roughly remaining in our repurchase program. So I feel like we've got cash and dry powder. We will be issuing equity quite shortly. And we'll make those decisions in partnership with the Board kind of quarter-to-quarter about when to be more aggressive and when to get ahead of dilution and use 10b5-1 trading plans as appropriate as well.

Matt Summerville -- D.A. Davidson -- Analyst

Great. Thank you guys.

Operator

Our next question comes from the line of Karen Lau with Gordon Haskett. You may proceed with your question.

Karen Lau -- Gordon Haskett -- Analyst

Hi good afternoon everyone and my congrats to Dr. Bob on his retirement as well. So Rob, I think two quarters ago, you initiated the cost reduction action I guess, with the promise that your $1 billion sales milestone has been pushed out because of the pandemic, right? If you keep growing at that range, you wouldn't have to wait very long to reach that milestone. So I guess the question is, at what point do you think you have to add back kind of people cost? And obviously, we saw very strong incremental margins for fourth quarter and in the 1Q guide. So I was just curious, at what point, those costs have to come back? And is there something about perhaps the new way of selling or new ways of operating that might lend itself for salespeople to be much more productive than previous cycles so you may not have to add that so quickly.

Robert Willett -- President And Chief Executive Officer

Karen, so I think if you go back and you look at Cognex's headcount increases and our investments over the last three years, well, perhaps since 2017, you can see that our level of investment in our headcount additions have exceeded our revenue growth significantly. And I think coming into this -- into 2020 we're expecting strong growth. And then when COVID hit, we realized that, that was going to be pushed out. So it became obvious that we needed to kind of adjust our headcount. But we also saw opportunities to shift headcount into areas where we saw stronger growth going forward, so logistics and deep learning being obvious examples. And yes, and then, I think it's been just a very volatile situation. So I think we restructured the company in a very healthy way for its future growth.

And I think we still have good capacity in the business to absorb more growth without adding a lot of significant headcount, but we'll have to see kind of how things develop going forward and where -- what rates of growth and what need for headcount we have in future. I would point to our engineering spend, which is a percentage of revenue was certainly relatively high and healthy. We spent more last year on R&D than we spent in any year in the company's history. So certainly, we're not -- we certainly haven't curtailed our R&D and engineering our product launch plans in any way. So in terms of where we may need capacity, it may be more in the sales force. But if you look at our numbers overall, it doesn't imply that we're understaffed or capacity constrained in most areas of the business, at least in the short term.

Karen Lau -- Gordon Haskett -- Analyst

Okay. So the incremental margins for now should be pretty sustainable and then you kind of have to reevaluate toward the middle of the year and see how the recovery trajectory is going, and we have to meet -- add additional salespeople as part of the process, right?

Robert Willett -- President And Chief Executive Officer

Yes. Yes. I mean, yes, I think we're watching the situation very carefully. You said margin, I mean, the only -- and I think as that relates to expense, that's probably correct. I think we did point out that we expect our gross margins to be a little lower in Q1 as a result of more logistics business, which generally is -- its margins are improving nicely over time, but it still is dilutive to our gross margin. So that would be the only qualification I'd put on what you said.

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

Yes. And Rob, I could add, on the operating expense point of view, a year ago, we were calling out roughly $25 million of kind of incremental Opex going into our cost base in 2020 associated with a reset of our annual compensation plans, having not paid a bonus in 2019. And then a full year of Sualab expenses, a portion of which is deep learning engineers and the team and the salespeople there as well and a portion of which is just the structure of the acquisition, which had a deferred compensation component that hits your Opex over a 4-year period. We don't see sort of any major adds like that in the current year. I think there are some puts and takes, right? This quarter will be a little low on T&E. I hope in the back half will be a little higher.

For the year, we expect our T&E to be up slightly from a headcount. We're making a major investment, which we cited in our 10-K around a new CRM and CPQ, Configure Price Quote and Customer Relationship Management system. I think we've referenced that to about $10 million in spend, much of that capex this year, but some of that Opex that we're bringing. So we have some puts and takes. But by and large, I don't think there's any sort of major resets, let's say, like there was from 2019 going into 2020. And then, of course, we have two more quarters of Q1 and Q2, where we should be seeing a healthy benefit from the restructuring actions we took last May.

Karen Lau -- Gordon Haskett -- Analyst

Got it. Got it. That's very helpful color. And then I want to follow-up on the auto discussion. So Rob, you talked about like the differences, the different disposure in EV, different components versus the ICE exposure. Historically, you have a very strong relationship with the Tier one suppliers in all the supply chain. How is your competitive positioning on the EV component side? And are you seeing sort of a different competitive dynamics coming across different competitors, things like that. If you can give us a little bit of color on like how you're positioning EV versus your historical exposures?

Robert Willett -- President And Chief Executive Officer

Yes, Karen, I think one thing I'd point to is I think a lot of those Tier 1, the suppliers, the Cognex has had very strong and has been the majority of our automotive business. Obviously, we continue to work very closely with them. But I think some of the kind of powertrain internal combustion type of, parts of their business, obviously, is declining and being replaced with EV battery business. And a lot of the technology that goes into making EV batteries has been really developed and is being scaled up by Asian companies, right? So that's been kind of a shift where -- and the problems they're working on in some ways is very different. But fortunately, there are areas that Cognex technology and very capable and substantial sales force in Asia is very well equipped to deal with. So this is an area where we've been able to pivot our business in some ways, and it's more like electronics.

We've been working with those very sophisticated EV battery manufacturers, notably in Korea and in China to meet their needs using some technology and capability that we perhaps had originally thought we would use in electronics. So overall, I think we're pretty well positioned. You see some of those names that are big EV suppliers. And also EV car manufacturers themselves who are making place in batteries are starting to be much more substantial customers of Cognex. And probably at the expense of some of the Tier one suppliers, notably in Europe, who maybe over the long run are losing share to that shift that's going on in business.

Karen Lau -- Gordon Haskett -- Analyst

Okay. Thanks helpful. Thank you.

Operator

Our next question comes from the line of Andrew Buscaglia with Berenberg. You may proceed with your question.

Andrew Buscaglia -- Berenberg -- Analyst

Congrats, Dr. Bob, and good luck.

Dr. Robert J. Shillman -- Chairman And Founder

Thanks, Andrew.

Andrew Buscaglia -- Berenberg -- Analyst

Actually, I had a really important question for you, though, before you go. I'm surprised no one asked it yet, but what does your departure mean for those really entertaining annual reports that you guys put out?

Dr. Robert J. Shillman -- Chairman And Founder

Well, I think you're going to like the one for 2020, and I was certainly involved in that one. And as an advisor, I'm going to continue to be a Cognoid, I don't know if the press release made that clear, and an advisor to the Board and the company. And I expect that they will still call on me for my input, my creative input into future annual reports. But I hope that there's no change in our philosophy of taking our work seriously but not taking ourselves seriously.

Andrew Buscaglia -- Berenberg -- Analyst

That's great to hear. So now for a couple of other questions I have. Robert, you cited some interesting commentary on AI and deep learning in the quarter. It's starting to perk up in your sales. Can you give us some sort of context around how you think about that in 2021. Is this still -- is this going to be growing fast? So is this going to be popping up as meaningful to our revenue or margins or both? And then what end markets should we expect to see some additional movement from AI deep learning?

Robert Willett -- President And Chief Executive Officer

Yes. Thanks, Andrew. And I've just got to add that there's no one more creative to tap than Dr. Bob for the annual report. So I think he just kind of want to keep his key advising role is help us with that. But yes. So about deep learning, I'll make some commentary on that. It's -- we see it as a technology that's kind of changing the vision space, and it's an area we're investing in and leading in a lot. It's primarily software driven. The gross margins are very good and highly accretive to our business. We said it more than doubled last year. It's still less than 10% of our business overall, but it is a big growth driver. It's happening really on two fronts. One is we're taking that technology and putting it into the smart camera In-Sight platform that we have. And the D900 that we launched, one of our most successful product launches, perhaps if not the most successful product launch we've ever had, is using that technology and making it easily available. And so you can expect more of that to go on and I think, change the modular vision system, a smart camera type space that we serve.

And then also, it's really providing a lot to the very high-performance, high-processor requirement business that is our vision software business. And that's bringing a lot of technology, particularly into the electronics space now. And it's adding a lot of value, particularly around the inspection area. Some of the technology we acquired from Sualab is highly relevant in this space and is beginning to get traction with customers. Some of its introduction was held back a little bit by not being able to get engineers on-site to customers during the COVID situation, but we're seeing, I think, hopefully an end to that. And the real opportunity there is to replace human inspectors. And there are tens if not hundreds, many hundreds of thousands who are working on visually inspecting products that we think our technology in that space using vision software. And some of the large customers who are very technically sophisticated, see this potential and are working on it with us. So I think there are two avenues that we see deep learning changing, and we're expecting to continue to see really solid growth as the great engineering capability we have in that space bleeds more and more into our product line over the years.

Andrew Buscaglia -- Berenberg -- Analyst

Interesting. Okay. And everything's pretty fixed over, but are you able to give us a sense of the percentage of sales from each end market? Because I did hear you say automotive is 1/3, I believe? Or are you guys willing to break that out in the first two?

Robert Willett -- President And Chief Executive Officer

I think what we've said, and Paul can come in here too, I think we said electronics was approximately 30% of our business overall. I think we said automotive -- did we mention that, Paul?

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

Yes. Yes. So logistics was second for 2020 at about 20%. Automotive was also about 20%, but lower than -- slightly lower than logistics. And then kind of the remainder of our portfolio, which would include consumer products, food and beverage, medical, semiconductors would comprise the remaining 30%.

Robert Willett -- President And Chief Executive Officer

Okay. Not that you need a reason to read our very exciting annual report, which is coming up, but I think there's a little -- there are a few pie charts in there that break it down as well. I think you will enjoy it.

Andrew Buscaglia -- Berenberg -- Analyst

Thank you.

Operator

Our next question comes from the line of Blake Gendron with Wolfe Research. You may proceed with your question.

Blake Gendron -- Wolfe Research -- Analyst

Yes, thanks. Good evening. Thanks for taking me on here. And Dr. Bob, probably a short list of company founders that retire at least to a degree with company strength at an all-time high, so congrats.

Dr. Robert J. Shillman -- Chairman And Founder

Thanks, Blake.

Blake Gendron -- Wolfe Research -- Analyst

You talked about consumer tech. You've talked about the qualitative outlook there and maybe the puts and takes and on the periphery of this question. But I'm just wondering in terms of SEMI shortages and what we're seeing in terms of bottlenecks in the supply chain, how that impacts either the throughput and more the demand side on consumer tech or if it impacts your input costs, any meaningful degree?

Robert Willett -- President And Chief Executive Officer

Yes. Well, I think we spoke a little bit to that question earlier. Is it related? We don't see shortages in our own supply chain. We're seeing our automotive customers struggle with it, but it doesn't -- we're unclear whether that means they're pulling forward. In consumer electronics, it's not clear to me at the moment that, that's having any impact. But as we know, that business scales later in the year. So we're really going to have a better answer to that question, I think, when we report next time.

Blake Gendron -- Wolfe Research -- Analyst

Okay. That makes sense. And then just to dig into 3D here a little bit. It sounds like it's an exciting growth avenue for yourselves in the broader market here in machine vision. I'm just wondering, specifically in manufacturing, as 3D applications grow, is there any cross-talk or cross communication with 2D vision? Is there any cannibalization, I guess, of one versus the other as 3D gets a bit more popular here? How should we think about the interplay between 3D and maybe other major buckets of machine vision?

Robert Willett -- President And Chief Executive Officer

Yes. I would say you probably wouldn't do things in 3D that you could do in 2D because it's easier and less expensive, less processor required, less optics required, right? So 3D, I think, is additive. And we're going to see lots of 3D and 2D together, right, in applications, and we certainly have those capabilities and more and more of our customers, they're using them. So perhaps the way to think about it is it's going to grow the market and it's going to lead to higher spend per customer to do more and more sophisticated things with their application. And I think we're near the top of the hour. So I think we'll -- Dr. Bob, I think we'll turn it over to you.

Dr. Robert J. Shillman -- Chairman And Founder

Okay. Thank you. And I want to thank all of Cognex's stakeholders, our customers, our employees, our vendors, our neighbors and our shareholders for helping us to grow and succeed over the past 40 years. I want to thank our customers for partnering with us through tough times. I want to thank our Cognoids around the world both past and present, for their dedication to our mission. I want to thank our vendors for delivering high-quality components to us at fair prices and on-time even during part shortages. And I want to thank our neighbors where Cognex has offices for providing us with safe and attractive neighborhoods in which we can work and play. And last but not least, I want to thank our shareholders who took the time to understand our company and its unique work hard, play hard, move fast culture, and who have maintained their trust in us through these years.

Thank you again for joining us tonight. And here's to another 40 fantastic years during which Cognex will continue to preserve and enhance vision. Good night.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Susan Conway -- Senior Director, 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

Jim Ricchiuti -- Needham & Company -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

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

Joe Giordano -- Cowen & Company -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

Karen Lau -- Gordon Haskett -- Analyst

Andrew Buscaglia -- Berenberg -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

More CGNX analysis

All earnings call transcripts