Greetings, and welcome to the Cognex Fourth Quarter 2021 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] As a reminder, this conference is being recorded I would now like to turn this conference over to your host, Ms. Susan Conway, Senior Director of Investor Relations. Thank you, ma'am. You may begin.

Thank you. Good evening, everyone. Welcome to our year-end earnings conference call. With us are Rob Willett, Cognex's President and CEO; and Paul Todgham, our Chief Financial Officer. We'll start with prepared remarks, and then we'll open the call for questions. I'd like to remind you that our earnings release and annual report on Form 10-K are available on the Investor Relations section of our website at www.cognex.com/investor. Both contain 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, we think it will help them 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. However, things can change, 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 that we filed tonight. Now I'll turn the call over to Rob.

Thanks, Sue. Hello, everyone. And thank you for joining us. I'm proud of the results Cognex reported tonight for 2021. We surpassed a $1 billion of annual revenue for the first time in our history. We also set new annual records for net income and earnings per share from continuing operations. Demand for Cognex products was strong worldwide in 2021. Manufacturers implemented machine vision to ensure the quality and accurate delivery of so many of the products we all purchase. Growth came from all geographic regions, most major product categories and a wide range of industries. Logistics was our largest end market for the first time in 2021. Now representing approximately 30% of total revenue, logistics grew by approximately 65% year on year. E-commerce and omnichannel retailers invested in automation and Cognex's industry leading products to enable higher throughput and cost reductions. Also, after struggling in 2020, traditional brick and mortar retailers increased investments to compete more effectively for online sales. Automotive represented approximately 20% of our company revenue in 2021. After two consecutive years of declining sales, revenue from automotive grew faster than the company average. Our customers increased investment in Cognex products both for long standing applications and for production capacity to bring new electric vehicles and related technologies to market. Automotive grew across all regions with notable strength in Asia, given the concentration of easy battery manufacturing in that region. One large market that did not grow in 2021 was consumer electronics. Revenue decreased modestly year-on-year. It represented roughly 20% of the company total, making it our third largest market after being number one in 2020. Unlike 2020, in 2021 customers focus more on upgrading existing lines, rather than making big incremental investments for new smartphone technologies, or to meet suddenly increasing demand for remote work products.…

Thanks, Rob. And hello everyone. Revenue for Q4 was $244 million, which represents an increase of 9% over a strong quarter a year ago, and a new fourth quarter record. It's worth noting that revenue for Q4 was 44% above the pre COVID period of two years ago, and consistent with growth of 43% for the full year of 2021, when compared to 2019, automotive, logistics, consumer products, semi and food and beverage were growth drivers in Q4. Consumer Electronics was a headwind and declined as expected primarily due to the timing of annual spend. We were pleased to deliver revenue above the top of our expected range in a difficult supply environment. Gross margin for Q4 was 72%. While this is lower than Q4 of 2020, it's an improvement over the prior quarter. The decline in gross margin year-on-year was due to higher supply chain costs. On a sequential basis, a more favorable revenue mix more than offset these higher costs. Operating expenses increased by 6% sequentially, and were in line with our guidance range. Comparing year on year operating expenses increased by 8% over Q4 of 2020. These increases were due to incremental investments we made in sales and engineering headcount, along with higher variable incentive compensation, marketing activities, and travel expenses. Operating margin was 23% in Q4 of 2021, and compares unfavorably with 26% in Q4 of 2020, and 31% in the prior quarter. The decline is due to both the supply situation, which is delaying revenue and adding costs near term and higher operating expenses, we are incurring to drive future growth. Regarding the tax provision, we recorded discrete tax items in all periods that make comparisons difficult. In Q4 of 2021, discrete items combined for a net expense of $25,000, compared to net benefits of…

Thank you, Paul. Let's move next to guidance. Cognex reported a record year in 2021. And we're excited about the opportunities that we see for our company in 2022. We believe revenue for the first quarter will be between $265 million and $285 million, which represents low double digit growth on a sequential basis. We expect higher revenue particularly from the logistics market. Also, thanks to the perseverance of Cognoids in our excellent relationships with suppliers, we're seeing improvement in our delivery times. That is helping us somewhat reduce our substantial backlog. We expect gross margin in Q1 will be in the low 70% range, which is in line with the gross margin we reported for Q4. However, that range is below the gross margin we reported in last year's first quarter due to higher supply chain costs and revenue mix. I want to remind you that our gross margin target remains in the mid 70% range. We expect operating expenses will be approximately flat on a sequential basis. We believe the incremental investments we made in sales and engineering headcount during 2021 will be roughly offset by a reset of our incentive compensation plans with relevant performance goals for 2022. Lastly, we expect the effective tax rate will be 17% excluding discrete tax items. Now, we will open the call for questions. Operator, please go ahead.

[Operator Instructions] Our first question comes to line of Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.

Good evening, folks.

Hi, Josh.

For me the question on the logistic side. So you grew 65% last year, I think a large integrator and probably a partner results well grew about 50%. So clearly a good penetration story, I know that there were sort of ebbs and flows in terms of ability to deliver. But that same integration partner is talking about flat in '22 given bottlenecks and things like labor, since it's kind of an intensive job to do some of the integration. Understand that you guys can outgrow the market? Is that sort of what you would agree with as an assessment of the market and anyway, that's sort of handicap one way or the other how you guys are thinking about, that outgrowth gap that you had last year as being kind of a reliable number going forward?

Right, so I think our logistics market is broadening, right. So we have a large customer that has represented, as you'll see from reading our disclosures, so about half our logistics business overall, but the rest of our business is growing more quickly outpacing the growth of that customer. And we're broadening our business to reach a lot of different end user customers and applications and a lot of new geographies as well. In fact, our growth in America and Asia outpaced, the growth we saw in the Americas market. So, we feel still a very strong undercurrent of growth potential in this marketplace. However, I don't think we're likely to achieve the kind of growth that we saw last year, we do expect our growth to moderate and I think it would be a stretch even for us to achieve our 50% stretch goal in logistics. I don't think we perhaps see that on the cards, although as we don't give guidance for the full year. I think there's something going on in the marketplace, which is probably referenced by your question where you're referencing a large integrate areas, I think some of the implementation that's going on is getting delayed because of chip shortages and supply chain challenges and other things. So I think that kind of affect some players revenue in the marketplace. And it certainly slowing down all of our growth rates as we seek to implement whether there's a lack of labor or parts going on. But overall, we continue to be optimistic, we expect to know logistics to go on being accretive to our overall growth and being excellent part of our business. I would also say, I think so much as you know about logistics business has been barcode reading, but there are other vectors for growth also, which are more and more applications of vision technology, and logistics were over the long run, we see strong growth potential. So that's kind of my overall answer to your question, Josh, please feel to follow-up.

I appreciate it. That's helpful. And then I guess, maybe on the consumer electronics side, sort of an unusual down year. I mean, I think we can all appreciate the circumstances. So on one hand, there's a content story here. This is a growth model for sure. On the other hand, inventories I think in the consumer electronics sector as a whole, are maybe looking a little high. So I don't know how that flows into your customers’ bias for investment? Can we start to swing the pendulum back to growth this year? Or are those folks still cautious given maybe sort of an inventory overhang kind of weighing on their memory?

I think those, like you who've studied Cognex electronics business over many years know that it can swing and that there can be a tick-tock of investment around new models and new lines and new technologies coming to market. Generally speaking, it's a little too early in the year for us to really give a good indication of kind of how we see the year shaping up, right. And we would expect in our next earnings call, to give you a better view of that. We continue to see strong growth drivers over the long term. And I sort of feel very confident there'll be up swings, and good years, as well as sort of more challenges like we saw in 2021. And we'll let you know, kind of how next -- how this year is looking when we next talk,

Understood. Really appreciate the color. Thanks.

Our next question comes from line of Jacob Levinson with Melius Research, you may proceed with your question.

Good evening, everyone.

Good evening.

I just wanted to touch on Life Sciences for a second, I feel like it's a market that comes up in your calls on and off and certainly been a lot of capital flowing into that space over time, but doesn't seem like maybe it's reached the same potential for your business, as you see in an automotive or consumer electronics or logistics for that matter. Is that a market that over time you expect to see potentially having the same level of machine vision content of some of these other verticals?

Yes, thanks and thanks for your question. Life Sciences is definitely a market that we've had a strong interest for a number of years, and we see very good potential in the longer term. It's kind of a journey we've been on for some time, it's also kind of a regulated industry. So sometimes one speed of penetration into their market can be slower, but then the revenue is more consistent when it's arrives, and maybe part of a regulatory approved product that has a seven to 11-year life. So those are the kind of dynamics that we see in that marketplace. We started out the journey, they're really in barcode reading of things like test tubes and medical samples. And then over the years, we've migrated more into vision type applications, and where we see a lot of value. And so that can include things like looking at color change, and test tube types and data as they move through a product reagent may be changed to diagnosis. And then we've also moved from more into vision, where we may be looking actually at medical samples and seeing what happens there. And then more recently, we're also seeing a lot of interest in Cognex technology for different applications. One is actually looking at radiology images and we have customers that are using our deep learning technology to do that, to help out with what lab technicians would usually do. And then we also have very interesting customers more in the position in the area of patient positioning, where there may be things going on with patients in an operating theatre or in a diagnostic setting where our 3D vision technology is monitoring them and making sure the equipment around them is moving as they're breathing, and doing other things. So we're correctly seeing what's going on with them. So it's definitely an exciting area for us. It's less than 5% of our revenue still today. But it has really great strong consistent growth dynamics, we really look at design wins at OEMs as kind of a key forward metric for us in that market. And to give you a sense of that we had 30 new design wins last year, but customers specified Cognex vision inside their machines and they may deliver hundreds of 1000s or even millions of dollars per design win once they fully come to market in a few years. So it's a market we really like.

That's very interesting. Just a quick follow-up on the switching gears a little bit on the balance sheet. I know you mentioned that. You've got quite a bit of cash on hand, maybe an unusually large amount relative to even your past history. I guess, how are you thinking about what you're going to do with that cash obviously, spent quite a bit of it on your internal product development. But I suppose as it relates to buybacks, or M&A or anything like that, and then how should we think about that this year?

Yes, sure, Jacob, this is Paul. I would say our philosophy is relatively unchanged on this, we've had this level of cash balance before. And, as we noted, it was down slightly from Q3 given we were more aggressive with the stock buyback in the fourth quarter, given some softness in the market. Certainly our top priority for cash is to support our long-term growth objectives, which would include M&A, obviously, that's after we've funded our own organic opportunities, which we do and still generate significant excess cash. Second from that would be then sharing our many years of success with shareholders through stock buybacks and a relatively modest but consistent dividend that we know some shareholders appreciate. So I think those remain our priorities, being opportunistic for M&A at our size and at valuations today, I think is benefiting to have maybe a little more dry powder than you might otherwise.

Perfect. Thank you guys. I'll pass it on.

Our next question comes from the line of Joe Giordano, with Cowan & Co. you may proceed with your question.

Good evening. This is Michael in for Joe. Just wanted to ask about logistics program. Do you have an update here? And what is the potential for this to turn to something a little more material?

Michael, are you referring to investment we made last year in a high potential customer? Or is there something else you're specifically asking about with logistics?

Yes, that's right. It's the pilot program.

Yes. So we have a roughly $300 million business in logistics now. We have one very large customer, which you've read about. But we have other customers who, I think, are looking very much to adopt advanced automation to create e-commerce fulfillment back end for their businesses. And this is kind of a common trend we see across. And I think we've all seen that in our own lives, where companies that used to be brick-and-mortar retailers, we would go visit to buy off the shelves and now we order online and it's delivered or we pick it up in the store. So there's a major trend towards the automation of that. So we see a number of customers who are really leaning into that investment to be relevant and competitive in the e-commerce world. And we see that in different regions of the world, I should say. One customer last year, who we think is a very substantial potential company customer of Cognex and that already was last year and will be again this year. Really, we're making that transition, one from being really a more of a conveyor company stocking shelves with people to one with a fully automated back end that was best-in-class. And we've been helping them do that, and we've been helping them working closely with their new and very capable engineering team to bring that technology up to scale. And I think it's a trend we're going to see not only with this customer, but with other customers who are really leaning into that kind of investment. So that's kind of, I'd say, the story of what's gone on there. And I think there are many companies around the world who I would expect to follow a similar path to who already on that journey.

And I think specifically from a margin point of view, we did call out in both Q2 and Q3 that this was a drag on margin, particularly in Q3 as it was a strategic investment with a high service component to do it, which we were learning with the customer and making that investment. We don't anticipate that type of issue this year. So logistics still does remain slightly dilutive to our overall growth. And as logistics rose in revenue, that's obviously a factor for which we have other factors like the growth of deep learning and other areas to partially offset. But we don't anticipate making a large strategic investment on the cost side and logistics in 2022.

Great. Thanks for the color. And in terms of -- we touched on the capital deployment priorities. In terms of M&A, what areas do you see most favorable in this environment?

Yes. So I think we run a kind of an ongoing and well-structured process where we look at companies in our own service market. Last time we reported out to you, which is a number of years ago. Now we had approximately a 20% share in our market. And so we look at the other players in that market as acquisition opportunities. And then we also look at technology and engineering organizations who we really like what they're doing and we think they would make good integration opportunities. They would enjoy Cognex, we would bring their technology to market. And I think you only have to look at our two acquisitions in deep learning, Sualab and ViDi technologies that we bought over the last few years to see kind of our playbook there. And then thirdly, we look at adjacent opportunities, markets that we're not in today where we see companies that we could use to enter markets that we're not in or have a very small share, but I think we have significant capabilities to bring. So we're constantly looking at markets, evaluating their technologies and considering acquisitions. I would say you've seen that can just tend to ebb and flow. I think one-year we did six technology acquisitions of a small size. We acquired Sualab, our biggest acquisition for approximately $200 million a couple of years ago. So we sort of -- we'll see how that progresses. But you can count on our being very active, if also very selective.

Great. Thank you for the color.

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

Thanks. A couple of questions. First, with respect to your unfilled backlog, can you comment how that it's now maybe versus what it looked like versus pre kind of COVID levels? And it sounds like you've been able to chip into that a little bit. And I guess, I'm wondering if that maybe was a contributor to some of the upside we saw in Q4 relative to your guidance?

Sure. Sure, Matt. Yes, this is Paul. The -- part of our beat to the guidance certainly was the supply environment was a little more favorable than we had expected, and we were able to get more orders out later in the quarter than we had conservatively forecast in our guidance knowing that in Q3, we had some unanticipated shortcomings in the supply chain as the quarter progressed. So I do think that's a factor. Overall, our backlog has -- did grow year-on-year from where we ended 2020 to where we ended 2021. And in most quarters, our backlog grew. So there's an element of seasonality of the business, but there is -- has been a sort of growth as we've seen healthy business activity. As logistics grows and share of our business that does tend to come with longer delivery -- longer time for when we fulfill those orders and convert those to revenues. So you would expect a certain element of it, and then I think it's magnified somewhat from the supply dynamics today. But with delivery times being what they are right now, we're able to meet customer expectations pretty well and execute against both new orders and working through our backlog in Q4 and in the first quarter.

Got it. And then maybe if you could just talk about in the automotive side of things. How much of the product going out the door today is being driven by some form, shape or other around EV proliferation, whether it be on the battery side, the auto OEM side itself versus how much product is still going into the traditional sort of business? And when you see that crossover, I guess, maybe happening where EV overtakes IC-driven revenue? Thank you.

I'll kick off, and I'll throw it over to Paul to give you more data on this. But generally, we've seen a lot of growth in our automotive business as we referenced in our prepared remarks. And that growth is really primarily being driven by investment in EV and new vehicle development, whether it's hybrid or EV. And then particularly battery manufacturing certainly is a very significant growth driver where there's so much capital investment going on and Cognex machine vision has so much to offer that we've really seen a lot of success in that market. And we see it primarily in Asia where the major EV technology companies are. So certainly, we see that. Then it becomes a little bit difficult to quantify because it's like when people say how big is your EV business is a hybrid business part of our EV business or not and our specially-designed tires for EV cars that are more efficient as that part of our EV business or not, it's becoming a little blurred. But I think certainly, it's becoming more and more significant and a big driver of the growth. While the internal combustion engine type business, the sort of more legacy business that we used to do certainly is growing much more slowly, if even growing at all.

Yes. I just -- I'd add to that. I think Rob got it. But stuff that we can specifically attribute to EV is well under 50% of our business today. But I do think 2021 was a bit of a turning point for us, whereas in 2019 and 2020 EV was sort of a bright spot, but unable to move the needle in a declining industry revenue profile overall. And this year, in 2021, automotive grew faster than our overall revenue growth, far in excess of our kind of 10% long-run target for growth in automotive and EV really was the biggest driver of that, both kind of specific investment in battery manufacturing and other areas, as Rob noted. And then just second order effects of more models coming out, bigger changes to automotive than driving -- which are precipitated by launch of more hybrid and EV vehicles, but then driving automotive projects in areas like tires or car seats or areas where it's harder to specifically attributed to the engine.

Understood. Thank you guys for the color.

Our next question comes from the line of Jim Ricchiuti with Needham & Co.

Hi, thanks. Maybe just a follow-up to the discussion on automotive. You had a good year in '21, clearly. What's your line of sight in terms of the growth for '22? And I know you don't guide by market vertical. But just in general, based on what you're seeing, how do you view the opportunity in automotive for this year?

Yes. I would say we're relatively positive about the outlook for automotive this year. I think we see continued strong investment in EV battery-type manufacturing activities. We could consider to see that scale and grow. I think where it's a little less clear is on sort of a more established automotive businesses in America and Europe, which has a substantial part of our business. And it's difficult as we're just getting off to the start of the year to really call the situation there. But we're seeing less activity, I would say, in that area. And is it really a short-term phenomenon around chip shortages and COVID and slow start to the year? Or is it something more endemic, I guess, for the full year? So again, Jim, you're right. We don't give full outlook. There's plenty of good stuff going on, but there's also kind of what does that legacy tail of business look like going forward?

Got it. And then a follow-up question just as it relates to -- you mentioned a number of new deep learning products. And I think as I recall, you were anticipating very strong growth, maybe a doubling last year, small part of your business, I understand. But just in general, did that meet your expectations? You, I think, talked about the D900 being a strong start for a new product. I'm just wondering, as we think about this opportunity, in 2022, how do you view that? And which markets are you getting the most traction in?

I think our In-Sight D900 deep learning-enabled smart camera was definitely a bright spot for us. This is great powerful technology that we saw very well adopted in particularly our European and American markets. And we launched an updated version of that with what we call edge learning tools, which are much more easily used and trained, and we're very excited about that business as our customers are very excited about that product. The other sort of part of the business is in the much more sophisticated deep learning software that requires a lot of programming skill and capability that runs in -- more in the vision software PC type environment. And that tends to be a business that's more in Asia and in very large sophisticated manufacturers of electronics and other products. And there, we're making good progress. But I would say some of the implementation has been a little slower than we would like, partly because of just travel restrictions and other things where it's been more difficult to provide hands-on support. And maybe just the speed with which this sophisticated technology is getting adopted. So we see a lot of opportunity, and we see both parts of that, both wheels, if you like, the smart camera and the vision software part of it providing growth in the long term, but we'll have to sort of see how those play out over time. And that's -- I have no doubt it will be very positive. The question is at what pace and what the impact is on this year.

Would you say that you talked about logistics being in the past, a 50% growth business and maybe it's not quite that this year, but is the portfolio of products and deep learning. Is that your expectation that, that has the potential to be 50% plus for the next couple of years?

Yes. I don't think we give specific guidance. And I think the other thing that kind of becomes more interesting and it's slightly like the EV discussion is, in the end, I think these deep learning tools are so powerful and so pervasive that they're going to become almost everywhere. I referenced some new technologies that we launched in my prepared remarks. And I said we've got rules-based vision, Jim, technology, you understand very well. And deep learning kind of new trainable, if you like, self-programming technology that are running side by side now. And I think we're going to see that more and more. But we certainly see -- we're really excited about our deep learning technology and the growth potential, but I don't think it's going to be so clearly separable as we move forward from everything we do.

That makes sense. Thank you.

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

I wanted to touch on consumer electronics one more time. Just in the sense that I know you talked in the past about AR, VR and kind of wearables and some things like that being kind of like where areas you'll see some growth. But can you comment on -- are volumes there big enough to really drive that segment? And then secondly, how dependent are you on really changes in form factors for handsets in order to see consumer electronics grow substantially?

Yes. Thanks, Andrew. I think the dynamics in that market are those we've talked about on a number of occasions. And what we see is there are always many technologies and changes in the road maps of our large customers who we work very closely with. And as we move through kind of the season, if you like, of standing up new models and launching them normally later in the year. Some of those technologies come in and some of them kicked out for a later year, right? So that can sometimes change what happens similarly with form factors if we -- we've been at this intensively since about 2014, and we've seen years where form factors and perhaps even more importantly, the material that's used, whether it's metal or glass or other technologies can have impacts and then screens and other things also can drive growth. So I think that's one thing. It's not necessarily handset form factors. It can be a number of aspects. Then you get to -- you talked about perhaps augmented reality and other technologies coming. I mean, I think historically, if we look back at smart watches coming into the market or tablets or other things that we've seen over time, new screens, I think generally, those tend to be things that are -- start to be adopted and then we see substantial growth in a few years, I would say. So I wouldn't expect those things to radically move the needle if we haven't seen them already in the market in the last few years.

Yes. Individually, they're fairly small. Collectively, they can be everything about smartphone can be meaningful and certainly very meaningful to growth. The other thing that I know I've shared in certain conversations is not necessarily at an earnings call is some of -- with the application of deep learning technology to consumer electronics, particularly in the area of visual inspection, there's just such an existing opportunity of a lot of work being done by humans and hard to staff and not being done particularly well where we believe our technology can solve that problem better. And we're still in development phases of that. But we view that as a meaningful growth driver that would allow us to grow in excess of the market without requiring major technology changes or introduction of new products. And again, I don't show whether that -- unlikely to be material in 2022, but I think is a good driver for us for growth in the years ahead.

Yes. Okay. Interesting. Kind of along those lines, how you ended the question. I know 3D vision has come up a bit even on the call is just how you guys are introducing new products. We think it's going really well, but there is a really big market share leader there. And I'm wondering, I guess, what is your strategy to compete with something -- someone like that who's already pretty established? Yes, just wondering how do you intend to make headway in that market if you got such a dominant player there.

Yes. No, it's a great question. And I think we have kind of three different product areas in 3D that where we're making significant headway. The first is the 3D-L4000 product that we launched last year, which is really -- it's a true smart camera version of 3D that's very easy to use with outstanding optics. And it's -- I view the -- all the existing 3D technologies that we see in this kind of line displacement area from the -- particularly from the market leader in the space that you're referring to, tend to have a separate controller and a separate head and require a lot more programming than does our new product range. So ease of use is kind of key in that market. And our product has really -- it's programmed as one would program an In-Sight, which is the world's best-selling smart camera made by Cognex. And if you can use one of those, you can easily use the In-Sight 3D-L4000. So that's kind of, we think, a lot of horsepower and usability will bring into that space. There's a theme, I would say, in general, in vision, which is it's very difficult to sophisticated technology, but it's becoming easier to use, less expensive, smaller, more easily integratable. And those are trends that I think will move at all markets that we're in over time. And certainly, that applies to 3D. The second product that where we're seeing a lot of traction is our area of scan product, the 3D-A5000. So that projects a pattern of light and moves it and creates rather than having to move the product, it can be over a large stationary area. And it's very fast and very precise and it's recognized by customers as really the best image acquisition tool…

Okay, great. Thanks for the answers.

Our next question comes from the line of Markus Mittermaier with UBS. You may proceed with your question.

Hi, good evening everyone. I wanted to come back, if I could, to the outperformance versus the guide. You mentioned that it was primarily better supply chain availability later in the quarter. Is that related to having qualified new suppliers or better broker availability? I'm just wondering how sustainable that is into 2022? And then is there a way to kind of help us quantify where delivery times now stand versus maybe peak band and versus normal delivery times? That would be helpful. Thank you.

I'm sure. Yes. So we I think we've really started seeing a lot of supply chain challenges sort of in the summer as we move through the summer, and we've been working very hard, I would say, in very senior levels in the company to kind of manage our supply chain to improve. And I think as we came through the back end of the year, we really saw traction on that as we got really engaged our suppliers intensely and also really invested to get particularly short supply chips kind of into the business and available. And you can see if you look at our inventory, we certainly built a lot of inventory over that period to make us more robust as we move through the year. I think we're pretty aware that the chip supply situation is very challenging and not getting measurably better, at least not for a little while here. And I think we've positioned ourselves appropriately for that. And I think you can see some of that coming through in the fourth quarter. It's going to help us again, I think, in terms of what we're seeing now is lead times on most of our major products are getting much shorter, and it's becoming a competitive advantage for us, which we can use to win share in the market because that's not the case necessarily broadly across our competitive set. So we -- that's kind of, I think, where we see things playing out.

Great. That's helpful. And then maybe one on logistics. You mentioned in your prepared remarks that you were going from customized to standardized. I wonder what sort of the ultimate goal that you have in mind here between direct and indirect and some of these integrated partners to what extent is that exclusive. And how do you think about that strategy here sort of medium term between direct and indirect?

Yes. I think -- we think of ourselves having direct relationships with our customers in logistics, almost all of them, right? So that's kind of our model. But then in logistics, we're selling great technology that has to be installed on to lines and commissioned and there's a fair amount of kind of application engineering and start-up engineering required in that market. We have some very sophisticated integrators we've worked with for many years who do that extremely well with us. So we may sell to the end user itself and they will come in and perform some of that integration or in some cases, we -- they may take the product directly. But in other cases, what we're doing is we're bringing in logistics integrators and installers who will help stand up the lines and do some of the more regular but important servicing of the customer and commissioning the product. So as we do less of that work ourselves, and we develop as we're doing very well, these partners to do it for us, know we would expect our margins to improve and us to be able to scale more. But generally, we're having relationships directly with the customer invariably, and we understand that relationship and that's important to us.

And Markus, it's similar to the playbook we use for consumer electronics, where our customer relationships with the end customer are as strong as ever, and we focus on what we do best. And allow partners to take parts of the business that would be potentially a bit of a distraction and also a margin dilutive for us. And we focus on what we do best, and that's what we're executing for logistics. But it isn't -- as Rob said, it isn't a risk of losing the customer relationship.

That’s very helpful. Thanks so much, and good luck.

Our next question comes from the line of Jairam Nathan with Daiwa Securities. You may proceed with your question.

Hi, thanks for taking my question. So I had two questions, one short term and one long term. So in terms of the quarterly cadence, given that you are delivering revenue out of the backlog. Should we -- typically, first quarter is -- I'm guessing that people used to be the weakest quarter and then you kind of see a strong 2Q and 3Q. Now given this condition, do you expect a different cadence in 2022?

Yes. I mean, Jairam, we're not obviously not giving full year guidance, but I think we're not expecting to grow as fast as we did in 2021, right? I mean, we would love to do better than expectations. But we are seeing, given the overall environment, certain supply chain challenges and others that we're seeing. And at this point, it's a little bit early to call the quarterly cadence. We'll certainly share more about consumer electronics. But as you're just sort of starting to do your work, I would think that 2021 is as good a guide as any, and for what we know so far.

Okay. That's helpful. And in terms of logistics, I think one other question I always get is, with automotive and consumer electronics, you guys get the opportunity to kind of an upgrade opportunity, right, when the companies -- your customers upgrade their products or come out with new products. I think we haven't how should we think of logistics in that sense? I understand that we don't probably grow to be very strong. We are staying in early stages of that growth. But beyond that, how should we think of logistics as -- how do you sell an upgrade into a loaded software warehouse?

Yes. I think of it as being pretty similar in general, the products and the technology have a life. There are lots of demand for higher throughput and upgrading of automation equipment within the distribution center or in the -- further down the supply chain where we play. So there's certainly that. I think we're also kind of in an interesting world right now, though, where e-commerce is still kind of growing quickly and more and more players are entering it and third-party logistics players are starting to become big players also. And there's sort of, I'd say, an initial wave of investment as they're building out those capabilities. And so it will be interesting to see after that wave, then we get more into a cadence of replacement. But I would expect in a few years, we'll be having a discussion about the cadence of that replacement and how many years it is. And then at the same time, we'll be doing more and more challenging and value-added applications for them as the industry becomes more sophisticated. So -- but I think probably automotive or factory automation is probably a good kind of guide for how that might will play out.

Okay, great. Thank you.

Our next question comes from the line of Bobby Eubank with Chevy Chase Trust. You may proceed with your question.

Congrats on the quarter. Couple of questions here. But Paul, maybe this is for you. If I look at your forward valuation relative to kind of your legacy largest customer, your consumer electronics customer, you're kind of the cheapest you've ever looked relative to. How do you think about the buyback? And if this market continues with some of the growth stocks selling off, at what point would you consider kind of using that balance sheet? That's my first question.

Yes. Sure, Bobby. I mean I think we have and we will continue to do so. I mean, we are conservative and we are happy to have a good amount of cash on our balance sheet. But after our last earnings call, our stock did take a hit and then the market has been relatively soft and no surprise that we just told you that Q4 was the largest quarter we've ever had in stock buyback activity. And going into 2021, we expect to be doing a mix of regular ongoing purchases through just a ratable plan as well as opportunistic when we feel there's opportunity. So yes, I mean I think we have the potential and -- but fundamentally, as a growth technology company, we're not trying to change the stock price through the buyback activities. We want to make sure we are offsetting our dilution from our equity programs and when the opportunity presents itself to do more than that or to get ahead of that dilution, we'll take the opportunity to do so.

And you guys have been -- have a good track record with seeing opportunistic there. So can end on that. Can I just kind of talk about like strategy and competitive positioning, large customer in logistics? How do you feel about that relationship going forward, some of the comments they've made? And then what other areas are you seeing kind of accelerate? You would think on the back of COVID, things like protein would be a rapid accelerate in automation. Are you guys starting to see some of those dollars flow yet? Or is the supply chain still holding back some of the maybe legacy industries that need to automate and they just haven't been able to get the parts they want?

Can I just quickly ask you to clarify? I didn't think I heard, was it protein? Or what was the word you said?

Yes. As an example, some of the protein companies or food and beverage in America and some of the challenges?

Got it. Yes. Well, something just great about being at Cognex and being the leader in machine vision, as you see new applications all the time. And some of them you've seen for many, many years and suddenly they start to get traction as the automation capabilities that companies develop and as our technology becomes easier and better to use. So that's always interesting, and we're always really, we talked about the implementation of some of our CRM systems. And we're getting better at understanding kind of where those opportunities are and spending time with those customers. You asked about our largest customer, generally, we don't talk specifically about customers over the long term. But there's -- we've certainly seen substantial growth with that customer, and we see more opportunities certainly there and perhaps more generally within logistics overall. I think a great thing about Cognex is we do partner with the most sophisticated players in the world in automation and discrete manufacturing. And so often, the technology and the relationships we developed there bleed out into the rest of the industry, and we see the potential for that going on too.

Your comment on protein reminds me and all of us here on the East Coast that it's awfully close to dinner time. So I think we're coming to the end.

We have reached the top of the hour. I would like to turn this call back over to Mr. Rob Willett for closing remarks.

Thank you. Thank you for joining us tonight. We look forward to speaking with you again on next quarter's call. Good night.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.