Cognex Corporation (CGNX) Q1 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to the Cognex First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Susan Conway. You may begin.

Good evening and thank you for joining us. I’m Susan Conway, Senior Director of Investor Relations. I hope everyone is faring well and staying healthy. Joining us today are Cognex’s Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham and his team. 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 results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our business results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release. Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change however and actual results may differ materially from those projected or anticipated. For a detailed list of risk factors you should refer to our SEC filings, including our most recent Form 10-K and our Form 10-Q filed tonight for Q1. Now, I’d like to turn the call over to Dr. Bob.

Thanks, Sue, and hello, everyone. Welcome to our first quarter of 2020 earnings conference call. Tonight, Cognex’s announced results for Q1 of 2020, which are pretty good, but one quarter doesn’t tell the whole story. After a challenging year in 2019, we were looking forward to improved macroeconomic conditions in 2020, but all of that has changed in recent weeks. And like many other companies, we are now preparing for difficult days and perhaps months ahead, due to the restrictions that governments around the world have placed on travel, and on their businesses and on their citizens. At a time like this, our stronger balance sheet we have $845 million in cash and investments, and having no debt, provides us with a breathing room and flexibility that many other companies just do not have. And because of that, we will be able to continue our long-term product development efforts, which should enable us to emerge from this crisis in even a stronger competitive position than we held in the past. Right now, we’re all participating remotely on this call prefer the details on the first quarter and for a high level view of our plans in the current challenging environment. I’ll turn the call over to my partner, our CEO, Rob Willett. Rob, the microphone is yours.

Thank you, Dr. Bob. And good evening, everyone. Our results for the first quarter of 2020 were in line with our expectations. Revenue and gross margin were delivered at the high end of our expected ranges. Operating expenses and the tax rate were lower than anticipated. The team did a good job managing the supply chain, despite some component shortages from Chinese suppliers that had postponed delivery dates. We now see many of those manufacturers successfully ramping up production as China goes back to work. We also were able to successfully accommodate an unusually high number of requests to either accelerate or in some cases delay order deliveries in March. In recent weeks, conditions have become more challenging in most regions of the world, most notably in Europe and the Americas. Many customers are locked down or operating with reduced capacity, and that’s impacting our ability to engage with them and get new orders. Particularly hard hit is the automotive industry, which was our largest end market last year. There’s a long-term potential for growth as the market transitions from internal combustion engines to electric vehicles, but the near-term outlook has deteriorated significantly. Many customers have suspended production and are not allowing our sales engineers into facilities to help with previously planned automation projects that are now on hold. In consumer electronics, we have found that it’s too early to predict the timing and magnitude of this year’s investment cycle, which we typically have insight into by now. Our largest customers are asking for, in fact counting on us to be ready with product shipments and on-site support for their advanced automation initiatives. However, we recognize that there are risks around both, the timing and the size of those automation projects, given the current situation. The best end-market for us right now is clearly logistics, which was our third largest market in 2019. Online e-commerce sales are accelerating as a result of COVID-related restrictions. As the recognized leader in machine vision and barcode reading for e-commerce, Cognex is well-positioned to capitalize on this trend. E-commerce companies and retailers with e-commerce presence are continuing to implement Cognex vision and ID products to increase both, productivity and capacity. Our technology has become even more valuable in this crisis as our customers are able to achieve higher throughput and are better able to maintain social distancing in their distribution centers. In the immediate future, our priority is us supporting our customers at a time like this, and helping Cognoids to be healthy, safe and productive. Cognex is primarily a software company. We have the processes and systems in place for Cognoids to work quite effectively from their homes. Most Cognoids are now doing that, working hard to maintain product development schedules, making video sales calls and product demonstrations and remotely supporting our customers’ critical manufacturing and logistics operations. We have taken measures to maintain a safe environment for those employees who are on site at Cognex facilities, supporting essential business functions. We are working with many customers in critical industries including logistics, life sciences and medical-related businesses that have formally asked us to continue supplying them through the current crisis. Because of our move-fast culture, we’re able to quickly come up with changes to our operations that allowed us to meet their needs. In terms of our supply chain, sourcing component parts and accessories for our products is a challenge. But thankfully, it’s not a widespread issue for us today. We’re managing well under the circumstances and we continue to work closely with our suppliers to mitigate risks to our delivery schedules. In addition, our strong balance sheet together with our conservative manufacturing philosophy, have enabled us to build a buffer of critical component inventory for times like these. Even so, we recognize the possibility of further closures and disruption down the road. Adding more uncertainty is the governments have implemented and continue to implement restrictions on the movement of people and goods. These are indeed very challenging times for our business that has suppliers and customers around the world. Regarding our new products, early this month, we held a number of large-scale live virtual meetings for our sales engineers and distributor partners. They received an in-depth look at our new products, including our groundbreaking In-Sight D900 smart camera, featuring Cognex industry leading ViDi deep learning software. Leveraging In-Sight’s widely recognized EasyBuilder user interface, this product launch brings deep learning technology to a wider audience and allows customers to solve complex visual inspection tasks with relative ease. Also presented was the Cognex DataMan 475V, the V is for verifier. DataMan 475V is an inline system that measures the accuracy and quality of a barcode based on globally recognized standards. Importantly, this is performed in line on high-speed production lines, as the barcodes are being printed and used in industries including automotive, life sciences, consumer products and logistics. Let’s talk about Cognoids, our people. At a time like this, I feel very grateful to be leading such a committed, talented and creative group of people. Throughout this crisis, they have exemplified our strong culture, working hard and moving fast in this volatile environment. Our work hard, play hard, move fast culture is a significant advantage on full display to all our stakeholders. Our customers, our employees, our vendors, our local communities and last but not least, our shareholders. That advantage is particularly effective as we strategize for the year ahead and think about how we can work together to meet the needs of our customers and reallocate our efforts to promising growth areas. Before we move on to the details from our first quarter, I’d like to extend a warm welcome to our new CFO, Paul Todgham, who joined Cognex in early March. To say that Cognex joined at an interesting time would be something of an understatement. Paul brings extensive experience leading financial teams and in strategic and operational planning, after working at large scale businesses over the past 20 years. We’re very pleased to have him with us. Paul, over to you.

Thank you, Rob, and hello, everyone. My first two months on the job have indeed been a unique adventure. But, I’m very excited to be part of Cognex and to help drive our future. I’m particularly impressed with the people I’ve met, strong work ethics, and Cognex’s move fast culture. I look forward to meeting many of you in the investment community in the coming months. And I hope all of you on this call and your loved ones a safe and healthy. Let’s turn now to our financial results for Q1 of 2020. Revenue was $167 million, which is at the top end of our February guidance. As expected, revenue declined year-on-year and sequentially, due to continued softness in automotive and the broad factory automation market. Compared to guidance, the decline in the manufacturing sector was partially offset by customers accelerating orders in March, the buffer possible supply risks that they feared. Despite the lower revenue, gross margin of 75% represents an increase over both, Q1 of 2019 and Q4 2019, as a result of the shift in revenue mix to higher margin products. Operating expenses increased by 8% year-on-year and were down slightly on a sequential basis. Over the past year, we added employees and other recurring costs related to the Sualab acquisition, and we made investments to support our strategic priorities. These expenses were partially offset by lower travel and other discretionary expenses in the quarter. Operating margin was 13%, down from 17% in Q1 of 2019. On a sequential basis, operating margin increased by 3 percentage points as a result of the higher gross margin and lower operating expenses compared with Q4. The effective tax rate in Q1 was 17% before discrete tax items, which is lower than our expected rate of 19% due to a shift in income to lower tax jurisdictions. Excluding discrete tax items, earnings per share were $0.11 in Q1, compared with $0.17 in Q1 of 2019 and $0.11 in Q4. Looking at the change in revenue for Q1 year-on-year from a geographic perspective. Asia performed the best of any regions, as a result of higher revenue from consumer electronics. China increased in the mid-teens over a relatively weak quarter a year ago, despite business shutdowns and the rest of Asia grew by approximately 20% in Q1 year-on-year. Revenue from the Americas declined by high-single-digits year-on-year. This was primarily a result of the timing of revenue from logistics. The logistics sector, as Rob noted, continues to perform well for us. We’re building a substantial order backlog to be delivered in the coming months when access to distribution centers is less restricted. In Europe, revenue declined in the high-teens year-on-year, due primarily to softness in automotive. Unfortunately, we don’t see many bright spots in Europe at the moment. Turning to our balance sheet. As noted by Dr. Bob, we ended the quarter with $845 million in cash and investments, and no debt. Cognex has a history of consistent cash generation, as well as a financially disciplined Board of Directors and management team. Uses of cash are primarily to support our long-term growth objectives. We also share our many years of success with shareholders through stock buybacks and dividends. In that regard, we repurchased 1.2 million shares of Cognex stock totaling $51 million in Q1 and added a new $200 million authorization to our repurchase program. We are fortunate to have the ability to continue the buyback program and still have cash for acquisitions if opportunities arise. We also paid nearly $10 million in dividends to shareholders. Now, I’ll turn the call back over to Rob.

Thank you, Paul. Those of you who follow Cognex know that we typically provide guidance one quarter out. However, given the current business shutdowns, widespread travel restrictions and potential disruptions we may face in our supply chain, there’s too much uncertainty today for us to be overly specific. Our customers and vendors have shared some of their plans with us, but they’re also facing uncertainty. I can say, however, that we believe both revenue and earnings per share excluding discrete tax items will decline in Q2 on both a year-on-year and sequential basis. Although we have performed reasonably well overall in April, demand in the overall factory automation market is deteriorating, particularly in Europe and the Americas. Gross margin for Q2 is expected to remain in the mid-70% range, although lower than the gross margin reported for Q1. As for expenses, our leadership team has experience with severe economic downturns and we are working together to aggressively manage costs. We expect to reduce operating expenses in Q2 by greater than 10% on a sequential basis. Savings include lower travel and discretionary expenses and a more restricted hiring plan. Lastly, the effective tax rate is expected to be 17% excluding discrete tax items. Now, we will open the call for questions. Operator, please go ahead.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jim Ricchiuti from Needham & Company. Please proceed with your question.

Hi. Thank you. Good afternoon. I wanted to just, if I could, go back to the comment you made about, Rob, that I think you made about usually high number of requests to both accelerate or delay. Was the net effect of that more on the positive side? And was that tied more to the comment you made about consumer electronics in Asia?

Yes. Hi, Jim. Thanks for your question. So, really, what I was referring to was right around the end of the quarter, we saw quite a few customers saying, asking to have their delivery dates moved in earlier. And we saw others say, they wanted them pushed out. I would say, net, it was probably an increase, perhaps of a few million dollars. But it was both ways and it wasn’t really industry-specific, I would say.

Got it. That’s helpful. And it sounds like you’re still doing pretty or at least the activity level on the logistic side is still encouraging. And I’m wondering, I look at your traditional brick and mortar retailers, which I guess has been a fast-growing part of the business. How is this business holding up? I mean, how would you characterize this? Is it holding up because you’re aligned with some of the key players who seem to be doing better in this market, presumably?

Yes. Jim, I would say -- I would segment it like this. The customers who have become proficient in e-commerce, whether they started there or they’re moving coherently and aggressively into e-commerce, I’d say, they’re doing well. They’re -- they see a lot of business and they move their systems online, right? Those who haven’t, I think we’re seeing their businesses deteriorate. So, I think e-commerce players I think are very well positioned to succeed as a result of what’s going on, and the Cognex I think will succeed with them. And I would say that’s the part of logistics, obviously, where we’re strongest and have largest share. But, then there are certainly those customers, more traditional e-commerce bricks and mortar players who haven’t automated their interactions with customers and take them online. And then other companies, we consider positive, our logistics business, maybe global post offices, airport baggage type businesses that I think are looking very, very weak at this time. So, we would expect to see our business with them drop off.

The summer ramp from one customer, is that still on track? And I’ll stop there, let somebody else ask.

Yes, Jim, Certainly. I think, the timing of it, the timing of some of the bigger logistics orders we have will depend on their ability to implement. A lot of these companies are operating at higher rate than they’ve ever operated out of their highest peak moments in previous years. So, the idea that we can go in stop the line and do automation implementation at this time is obviously not happening, although orders are coming in I think at a good clip in that market. So, our ability to report that as revenue, I think, certainly is a second half phenomenon for us at this point. The timing will depend on a number of factors, one, which certainly is our ability to get access to their facilities and their engineers to implement these improvements.

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

Thank you. Good afternoon, everybody. Hope you’re all well. Maybe just touching on the China comments. Saw in the Q, China was up 15% this quarter. I’m just curious, like you guys hit the high end of your revenue range for the quarter, seems like it was fairly orderly, at least in Asia Pac. As we’re coming out of -- and things are starting to normalize in China. Maybe talk a little bit about like what the order patterns look like as the quarter progress? And if you could provide some more commentary around what really drove the strength in China this past quarter that would be helpful.

Sure. Joe, give you some color on that. So, yes, I mean, I think the interesting thing about running a global business is sort of seeing this kind of a challenge kind of evolve around the world. And we saw it -- and we saw it in January in Asia, and I was in Asia in January. And you saw the challenge that it was putting on supply chains and then China got into Chinese New Year, which is always slow and then wasn’t able to come back for a number of weeks after that. But, they’re ahead. And what we now see is that -- production from both the companies, we saw source parts from, but much more importantly really I guess -- in this case our customers is starting to come back. And I would say, came back in much quicker than we expected, mostly due to higher demand from customers really in the electronics ecosystem. And April continued to improve as a result of China production coming back. And we’re seeing manufacturers have been pulling forward orders in some cases to reduce the risk of shortages in their supply chain. And so, we’ve been, I think very effectively managing the shifting demand at that time. But, then there’s -- as we can all read, there’s still shifting schedules on actually when production in certain large electronics businesses will ramp up. So, certainly that’s someone in doubt, as we look forward to timing of some of these things. But what we did see was a faster pickup in March than expected, continued ramping and then a pretty aggressive action to make sure that the companies were supplied coming out of this challenge.

Got it. That’s helpful, Rob. And I guess, maybe just following up on that comment and some of your prepared comments on consumer electronics. You said that your customers were -- wanted to make sure that you guys were ready when they were ready to kind of maybe turn the spigot back on from a CapEx standpoint. I guess, at what point do you guys think you’ll have visibility and what are maybe kind of -- what are some of the indicators you’re looking for just from a timing perspective on when you think they’ll be ready to make those types of decisions to really accelerate investment again?

Yes. It’s a difficult question, because normally at this time of the year, we have that visibility, and we don’t have that at the moment. I think, really the primary issue here is the ability to scale up manufacturing. And I think, some -- and obviously, it’s going on in multiple countries. So, that’s part of the challenge. But China, followed by probably Vietnam and Korea are the key markets. And it’s the ability for those markets to be ready to really scale up. And I do think, it’s not just a matter of getting people on site and processes on site, it’s also a matter of their suppliers, sometimes who are our OEM customers, to be able to supply products to start up, particularly what it would be large new products, which can be a big part of our business in this market. So, I think, it’s going to happen, I’m confident of that. The timing of it and the magnitude of it, I think are more in question. I sort of talked slightly about this at our last call, when I said, an issue can become as a window in which to implement certain new features. And if that window is shorter, it likely means fewer new features get included and new products for the launch. So, any extension of that window can be helpful for Cognex. We can provide more engineering support and more technology and production. But, obviously, it will mean, the revenue that we’re used to seeing in Q2 or Q3 is certainly going to be a second half phenomenon for us this year.

Our next question comes from Karen Lau from Gordon Haskett.

I want to ask on -- about project inquiry. I realize, in terms of sales, a lot of your -- it is impacted by your ability to deliver on site. I’m curious, when you look at your project inquiries from customers, are they still pretty robust across geography and end markets? It sounds like from a logistics standpoint, that’s still pretty robust, but you can provide some comments and in terms of what you’re seeing in terms of project inquiry. I’m just trying to gauge when things start to improve and these restrictions get lifted, how quickly can sales kind of bounce back?

Sure. It’s not really one answer sort of almost go around the world and give you a range of answers here, Karen. I think, certainly in China, I think we’ve seen a very, as I hinted, or talked about, we’ve seen a good ramping up of business activity in the last few weeks. And then, in America, we actually saw a decent activity until through March and even into the start of April, but then we’ve seen that fall off quite significantly. And then Europe, a similar case to America, but more so, I would say we saw early activity really fall off. So, if one is to draw an analogy that Europe and America are like -- going to come back like Asia, we would see it start to come back, as the market starts to open up. But of course our businesses in these markets are very different. Asia is much more of an electronics business. So, a lot of the demand there can be driven by ramping up those major electronics products that are slated for introduction around the holidays, while in Europe and America, it’s much more of an automotive phenomenon. And certainly, the automotive industry, I would say, as I hinted out in my -- or as I mentioned in my prepared remarks, looks like it’s much more seriously impacted at the moment than those others. So, it’s difficult to give you one answer. I would say, we were perhaps a little surprised with how well demand in Europe and America held up through the end of -- in terms of activity, through the end of March and even into April, but then we’ve really started to see a decline and then the opposite picture in China coming out, we were quite I think surprised that well, activities seem to be picking up there post kind of loosening of restrictions.

Okay, great. I appreciate the color. I guess -- and then on the project side, I was curious, are you seeing much push out and cancellation in projects across every sector? So, in other words, maybe -- and as things start to improve, we start to see some pent up demand come back. But a lot of these projects that were in the planning phase, they got halted, and so restarting them would sort of take time and that in turn creates some sort of air pocket, whether it’s an auto or logistics. Do you see -- are you seeing any kind of that like pause or cancellation right now that would give you maybe a bit of a risk of an air pocket down the road?

Well, again, it’s a complex picture. I’ll kind of go through the industries and kind -- to come up. You said I think correctly with logistics, I think we’re seeing a lot of potential growth getting deferred later in the year and more intense -- interest. So, we feel that’s the best industry for us. In electronics, it’s a difficult call, I think. I mean, I -- kind of how that’s going to play out, certainly second half phenomenon for us. I think in automotive, another way to sort of look at the automotive industry for us, which is a big part of our Americas and European businesses, MRO type business, more maintenance is really just very weak at the moment as plants are shut down and budgets are put on ice. I would think that has to come back at some point as business starts to pick up. But then, on the CapEx side, the existing plants, also that to me looks pretty weak, relatively on hold, awaiting plans to start off, while strategic investments, things like new vehicles or electric vehicles looks stronger. So I think, that’s probably the part of the business in automotive that is likely to be prioritized, much as we prioritize most -- the most important long-term technology for us, I think we’re going to see that in industries like auto as well. And then, yes, I think other industries, some of whom we deal with, we have a wide range of other industries like, what we sort of might refer to them as packaging type businesses in food and beverage, pharmaceuticals, medical devices. I think, we might -- probably a phenomenon we see there is a slowing down of demand basically for the same issues that companies are operating under very restrictive situations where their workforce is very limited as well they can do. I think, there, those industries I would expect to be relatively strong whenever they start to come out of this situation, because I think demand for them in some areas of their business is quite strong. We read about that consumer packaged goods strength, for instance. And I think, therefore, we might see in that industry some pent up demand where companies want to implement improved automation projects but just don’t have the capacity to open their plants and bring us in and have us work with engineers when they are our operating under social distancing.

Our next question is from Joe Giordano from Cowen.

So, I just wanted to make sure if I could square some of the commentary on consumer electronics. So, you mentioned that China came back strong, electronics leading that but also at the same time, like not having much visibility at all in terms of like the big builds from the major customer. So, like what’s driving that now? Is this kind of like ramp-up of suppliers to those large players, like you getting them kind of ready for them to manufacture their parts?

Yes. Hi, Joe. I think, we are all expecting 2020 to be a pretty strong year for electronics, particularly around 5G and other -- some of the other technologies that plan for rollout. So, I would say probably some of what we’re seeing, the suppliers of those technology is gearing up production.

And then, I just wanted to make sure I understood the comments on auto. So, obviously, when these markets open up, there will be -- car sales will go up and obviously that’s not where you guys are. So, like you mentioned the R&D type projects, you expect that to come back, but not the traditional CapEx -- and maybe I misheard that. I was writing something down. So, can you kind of go through that again?

Yes. I mean, I would say, if we segment it, there is MRO kind of maintenance business. If plans to shut down that business, it’s not really happening. Plants will open, that’ll probably come back. And I think I would segment CapEx into two pieces. There’s like existing plants. Right? I think, probably with the automotive industry and quite a lot of financial distress or challenge at the moment, CapEx in existing plants, I wouldn’t expect that to come back very quickly. I think, it will be challenged. Then the other CapEx, which is really CapEx on strategic projects, new vehicles and new technology is being implemented, electric vehicles, of course is one example of that. That business, I expect them -- I see that remaining strong through this period. I think, it’s the future of the industry. And I don’t think -- I think it’s the things that companies will at least want to compromise on.

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

Yes. Thanks for the question. Welcome, Paul. Very just quickly circle around the consumer electronics for a minute or two. Rob, the business in the first quarter again strong in China and the rest of Asia stronger, is your business there with some of the component vendors and assembly and some of the component vendors that were going to the final devices, given that applications that Cognex is involved in? And I’m thinking perhaps displays or some of those components that are going to end up in a logical place come fall. Is that where the strength is in particular outside of China?

Broadly speaking, Rick, yes. That’s correct. Key components and technologies, particularly coming out of Korea and Vietnam, I’d say, we’ve seen some strengthening of that. And we saw that coming and it’s continued.

And just -- and related, the scale-up there, does it provide you with any sense of demand as you look forward towards the end of the year, given product strategies, product portfolios from your bigger customers?

Well, yes. A difficult call to make really I would say. Because, while one might say, yes, it seems like people have scaling up experience, working in this industry tells me that that’s not necessarily the case like some suppliers may be building capacity that won’t be fully utilized. Others may see demand come on much stronger, and then we’ll be hustling in the middle of the year to support increased throughput there. So, I wouldn’t necessarily draw a linear relationship between what we’ve seen at the beginning of the year and what we’re going to see now at the back end of the year. But it has to be a positive sign.

And just with the same kind of line of reasoning, does your COGS slow down, given some time Cognoids maybe moving from -- traditionally from COGS over to your R&D? Is R&D up and COGS down, because of your mix in the quarter?

No, really, I mean, the margin was mostly a product mix phenomenon. So, we have a wide range of margins, all much healthier than my former employer and that makes up our gross margin -- really was just a higher share of software revenue, as well as revenue in consumer electronics, which comes in at higher revenue -- higher margin generally. And then, the revenue was also -- the share -- the margin was also improved in the quarter. That was really the big driver. I don’t think there was a big difference in RD&E that hit OpEx versus hit COGS for the quarter.

Okay. So, in that -- with that reply then, the R&D from a dollar perspective, does it just run out pretty much at the current level? I mean, run up quarterly?

Yes, I’d say broadly speaking. I mean -- we have reduced our discretionary expenses, as noted in the call. We were down from Q4 and we expect to be down in Q2. And we think of that across all of our operating expenses. We don’t do kind of line item differences in -- say for RD&E versus SG&A. So, we do expect them to be down sequentially, though I would say some of the factors are more likely to hit sales such as reduced travel, for instance, in the quarter is more likely to hit sales, let’s say than our RD&E, but restrictions on hiring or discretionary expenses would be pretty broad based, I’d say.

Our next question comes from Nick Amicucci [ph] from UBS.

Just a quick question, I’m just trying for the final point on some of the commentary, like weak March month. Can we kind of get a magnitude of kind of the decline we saw in the U.S. and Europe? So, I mean, China was a little bit better in March?

Sure. I think, I’m not sure I described March as weak necessarily. I think we are on the high end of guidance. But we did see a lot of -- both, pulling in and pushing out of orders. So, I might describe it more as noisy. And again, it depends -- if you’re measuring against our expectations as what we thought -- or whether you’re referring to kind of year-on-year. But, I think in the Americas, for instance, we did see customers placing some investments on hold and canceling projects as a result of front closures, distancing protocols, lower consumer demand. We certainly saw some of that. And we saw other industries in America holding up very well or even upping their demand from us, particularly in areas like life sciences and medical-related businesses who obviously are seeing a lot of demand related to the current medical COVID situation. But, I’m not sure I necessarily answered your question.

I mean, I was just kind of looking at the U.S. and Europe, right, down double digits, year-on-year both geographic areas. I was just trying to get a gauge of if that was kind of in the March month, on order of magnitude, how it kind of was impacted by the shutdown?

Yes. If I’m to put up to give another explanation and other way of looking at it would be automotive, right. I mean, I think we really saw a deterioration in automotive, which we didn’t see in other parts of our business, in the Americas and Europe as we came through March and into April.

Okay, great. And then just kind of -- when thinking about the pushing and pulling, acceleration and delaying of orders. From the delaying side, have you guys received a full on cancellations of orders, or is this just kind of indefinitely delayed until you kind of get more clarity on this?

Certainly, we’re seeing some cancellation of orders, not a large amount or anything, but certainly some customers have canceled orders. And then, definitely delays. And I’d describe the delays as short-term delays. But literally in a number of cases, we’ve shipped product out to plants and they’ve been -- and then, when they arrive, the plants are closed. Right? So, they’re coming back in some situations like that. And in other cases, as we mentioned, they’re getting accelerated to really where I think customers are worried about being able to maintain production and getting our products as soon as possible, perhaps concerned that companies like us won’t be able to supply on a regular basis. We’re not concerned about that. But, I can see among our customers, there is a sense that perhaps as we do in our own personal lives, there’s a hoarding phenomenon, kind of going on and thinking that supply chains, electronics maybe elongated and they need to make sure they’re getting theirs before lead times go out.

[Operator Instructions] Our next question is from Andrew Buscaglia from Berenberg.

Hey, guys. I wanted a quick clarification on just gross margins going forward, and that it seems as though electronics is picking up, and you’re seeing some better mix. So, you might have said that; I might have missed it. But, just why the sequential decline in gross margins, and then presumably things improve towards the back half of the year for that segment, do you think you can grow them this year, year-over-year?

Sure. Yes. Yes, Andrew this is Paul. So, our gross margins is 75% in Q1, we’re obviously high and driven primarily by the mix of business, higher electronics and then even just particular sub-segment mix within that, the mix of different products and so on as we have quite a range. Going forward, for Q2, we do expect them to be lower. And again, that is largely a mixed phenomenon. As we talked about some deferrals of logistics revenue, logistics is a strategic priority for us. It comes with improved margins over time, but still dilutive to our base business. So, as that continues to grow, we will see some margin pressure. But overall, we expect to be roughly in the sort of mid-70s range that we’ve been historically.

Okay, got it. Okay. And sort of a comment that a lot of people are making throughout this whole crisis is the new normal once we emerge. Are you guys hearing anything around the trend towards reshoring that seems to come up as you’d be a long term beneficiary of that? Just curious if you had some conversations year-to-date on that?

Yes. Hi. It’s Rob here. I would say, there are a lot of potentially very positive things for machine vision, kind of when we come through this crisis. But I’m wouldn’t list the reshoring or manufacturing as very high on the list. In terms of what we’re hearing, our intent is my own views about it. Clearly, e-commerce fulfillment will benefit from the situation. And logistics will become increasingly automated, and with more flexible operations. And even in the short term, I think, people don’t want to be sharing touch items like handheld barcode readers, and Cognex has the best fixed mountain barcode readers in the world. And, I think we’re seeing more interest in them replacing handheld barcode readers. So, those are kind of some things one sees. I think, certainly visual inspections in manufacturing with large groups of people kind of sitting close together as you see in China. Certainly that’s a phenomenon I think which is likely to play to automation and operator-free manufacturing, so, basically where we’re placing eyes and brains in manufacturing with robots and automation. I’d say, obviously, medical applications I think probably will be a beneficiary of what we’re seeing as well. We’ve been working for many years on the life science market. And it’s been a long road for us but, one where we’ve developed a lot of really good customer relationships and a lot of important design wins. And we think there -- that that will also be a market that will be better and better for machine vision and will benefit from what we can bring and where deep learning has a role to play, replacing kind of lab technicians and more quickly automating. So, -- and I think, probably also it is something we’ve all observed, living through this is that connectivity is really important. So whether it’s 5G or what kind of electronics things we’re seeing and the kind of drive we’re seeing in the semiconductor industry right now is going to be I think accelerated as a result of all of that. So, a lot of very, very positive things. I don’t see it’s a global movement towards reshoring, as a result of this. But, I wouldn’t claim to be an expert on that subject. And then, obviously to tempt all of that I think automotive is likely in for long slowdown. So I think that’ll be a drag on a lot of the very positive things we expect to see coming out of this situation.

Our next question is from Paul Coster from JP Morgan.

Last question really kind of got to the point, I think on the new normal. So, many of my questions have been answered Rob. But, just a couple of things. You seem to believe the auto industry can take longer to come down? Is that simply a function of just how much stress there is on their balance sheets and they’ll be constrained in investing for a period, or do you also believe that the ICE to EV transitions can take longer for some reason?

Well, I would say, what’s making me say that conversations we’re having with customers, certainly, Tier 1 suppliers and brand owners who were -- had a difficult year last year and I think we were all expecting to see that business sort of turn around, optimistically in the back half for this year and I think we no longer think that’s going to be the case. So, I think that’s one factor. Another factor would be, I have to believe that consumers are going to have less cash to spend and less ability to take out loans to buy cars as a result of this. So, I would imagine -- and my sense is from the conversations that I’ve had in the in the industry, but that’s got to be weighing on people’s minds also. If there’s a countervailing factor to that, so it may be -- there maybe government stimulus. And I have read, certainly and there’s no -- no particular insight I have into this other than just leading and being in the industry, as some major automotive businesses are pressuring governments to try to implement buying back of older cars and investing in stimulus around electric vehicles. So, that’s a general sense. But, I really have no clarity on that subject for you.

If this recession lasts for more than one quarter as deep for more than one quarter, obviously there could be very lasting consequences. But, I mean, generally speaking, Cognex’s view of its long term growth, opportunity, how much has it changed as a result of what we’re going through at the moment?

Yes, difficult to answer, but I would say it hasn’t. It hasn’t changed. We’re still very strong believers in machine vision and the importance of automation and the growth of automation and the role we have to play in it, and those growth drivers that we discussed at Analyst Day and since things like deep learning, logistics 3D, Industry 4.0, we think those are all intact. And I also think, the strength of Cognex on our balance sheet and our willingness to invest for the long-term ought to mean, we’re better physician than most of the industry as we come out of this.

And our next question is from Jairam Nathan Daiwa Securities.

Just firstly on -- just going back to the SG&A expense a bit here. You mentioned in the Q that there was some relocation to regions with higher labor costs, and at the same time, it looks like U.S. and Europe are probably -- you see less opportunities for growth there. So, can you kind of explain that comment a bit more? And then, I had a follow-up.

Yes. And is your question about our expenses in those markets or how we’re investing or -- I’m not quite sure what you’re asking?

Yes. So in a Q, you mentioned for SG&A expense, you saw an increase, and some of that increase was related -- either it was related to sales resources being shifted to higher -- to regions with higher labor costs.

I’m sorry if we confused you. So, we -- it’s not necessarily sales resources moving geographically, it’s moving functionally. So, for instance, certainly, we’re fortunate at Cognex to have a lot of very talented sales engineers who have deep knowledge of machine vision. So, we’re pretty used to reallocating them dynamically to areas where we see growth opportunities. So, we might for instance have been -- we’ve been moving them towards logistics and away from automotive. That’s -- I think that’s probably what we were trying to get at.

Okay, got it. And as a follow-up, just wanted to understand, given the situation, are you seeing more favorable or attractive M&A opportunities, which, given your balance sheet, you can take advantage of?

I think it’s probably too early to say that. But, you’re right, we have a very strong balance sheet and we’re not afraid to be opportunistic. And certainly, we spend a lot of time studying and thinking about acquisition opportunities in the market. But, I think anyone who’s covered Cognex for a long time knows that we’re very selective about the companies we acquire. And some of those companies that I think perhaps have weaker balance sheets or might be challenged by the current environment aren’t necessarily companies we would want to acquire there. They wouldn’t fit well within our high gross margin, high performance, move fast kind of culture. So, I wouldn’t expect us to see -- to see us making any kind of large bolt-on acquisitions with many, many hundreds of people that’s -- if you look at the acquisitions we’ve made, it’s more around technology companies with great engineering, great products, et cetera. There are plenty of those, but it’s not clear to me whether they’re becoming more actionable as a result of what they’re seeing. But when, when if and when they do, you can bet we’ll be looking at them.

And our next question is from Josh Pokrzywinski from Morgan Stanley.

I just have a question on electronics. I guess, with some of the -- some customers now you’re telling to be ready, presumably it comes with a little bit of detail on kind of ready for what. Any sense, Rob, on how 5G or some of the other newer technologies add to Cognex’s kind of area of opportunity or your content in a plant? I know the ambition is to get more over time and there’s other stuff, they can do that. But is there anything about this new product generation that’s coming out that is another kind of step function shift for Cognex, kind like we saw with OLED back a few years ago?

Right. Yes, thanks for the question. I don’t think our view about this topic has changed over the last six months in general. I mean, I think we’re very connected to the large players in the industry and we see some of the challenges that exist with 5G, challenges around the power requirements of 5G technology, the danger issues around batteries, et cetera, handling those and inserting them, some of the new sensors and screens and foldable screens and all those things that we’ve been talking about for a while. So, I sort of see those things as kind of making progress and automation kind of gearing up to be able to implement what’s in product roadmaps. I think, more the issue changing coming out of this is the magnitude of that in the second half. That’s maybe a more difficult thing to call. You have to think that -- I have to think consumers would be less ready to spend on high end technology and new technology as a result of this. But, I’m no expert on that. So, I think, we see quite clearly that machine vision has a key role to play in the implementation of 5G technology and new technologies coming into electronics. I think, the question is, the timing and the magnitude of that. The timing clearly for us is second half, the magnitude is still a little unclear. And I wish last year -- last few years, we’ve been able to give you quite a lot of clarity at this stage. And it’s different this year as a result of what we’re seeing on in the global health situation.

Understood. And then, just shifting over to auto. Rob, can you talk a little bit about customer diversity there? And you mentioned kind of a more shallow recovery, maybe some challenges in the industry? I’d imagine some smaller or weaker players might not survive. Clearly, in the last couple of years, there’s been kind of an explosion of newer car companies, particularly in China maybe not as impacted. But, can you talk a bit about how well you feel like you’re diversified and if you do see some players go away, if that ends up being an issue or more of a temporary setback?

Yes. Cognex is very globally diversified in terms of dealing with really all the major Tier 1 suppliers and really all the major end user brands. We’re less well penetrated geographically in Japan, as you might expect. But, we have strong relationships and would be on the preferred supplier list of almost every automotive OEM brand -- OEM and Tier 1 supplier globally. So, I think, we’re in good position there. I think, if weaker companies fail, and I am no expert. But, I would say, they may get acquired by other companies. And I think that that should play out well for us, given what we’ve seen happen in industry over the last few years. And then, I think machine vision is a very important technology for manufacturing lithium-ion batteries. And we all know that that that’s a key enabling technology for electric vehicles. And capacity is growing very quickly and costs are coming down very quickly. And it’s a very intensive process, in some cases 30 different steps, most of which involve machine vision. So, those are markets, I think that should be very strong for us. And I think that’s a long-term phenomenon with at least six global players competing for process capability in technology to win. So, I think that’s a long-term phenomenon that we should be well-positioned and our industry should be well-positioned to go on benefiting from, for some years.

Got it. I appreciate the color All the best.

Thank you.

And we have reached the top of the hour. Therefore, we have reached the end of the question-and-answer session. And I will now turn the call back over to Dr. Shillman for closing remarks.

Thank you. As I’ve mentioned, our strong balance sheet, our culture and our focus on the long term will enable Cognex to weather the current disruptions better than most companies. But, business is not likely to improve until lockdowns end. In that vein, we urge governments to better balance the risks of COVID with the disastrous effects that lockdowns are having on our economies and on our lives. Thank you for joining us tonight. We’ll speak with you again on our next quarter’s call. End of Q&A:

This concludes today’s conference. And you may disconnect your line at this time. Thank you for your participations.