Cognex Corp Q2 FY2020 Earnings Call

Greetings. Welcome to the Cognex Second 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. Please note this conference is being recorded. I will now turn the conference over to Susan Conway, Senior Director of Investor Relations. Thank you. You may begin.

Good evening and thank you for joining us today. With us are Cognex’s Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham. I’d like to point out that our earnings release and quarterly report on Form 10-Q are available on our Investor Relations website. Both contain highly detailed information about our financial results. We 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 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, actual results may differ materially from those projected or anticipated. For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and subsequent quarterly report on Form 10-Q. Now, I’d like to turn the call over to Dr. Bob.

Thanks, Sue, hello everyone, and welcome to our second quarter of 2020 earnings call. It has been a very busy three months since I talked to you last. In our business and most others have deteriorated substantially due to the worldwide government-ordered shutdowns attributed to COVID-19. Because of that, we had to make difficult measures to align our company to the slowdown and that resulted in large write-downs in Q2, severely affecting our reported financial results. The details on those results and what Cognex has been doing this past quarter, I'll turn the call over to my partner, Cognex CEO, Rob Willett. Rob, the microphone is yours.

Thank you, Dr. Bob, and good evening everyone. Tonight, Cognex announced financial results for Q2 of 2020 that reflect the difficult business environment we expected when we spoke with you in April. The good news to report is that revenue increased by 1% over the prior quarter. This was better than we anticipated due to our faster than expected delivery on a substantial backlog of orders from the logistics market. Cognex worked hard to manage our supply chain and deliver Cognex products to customers despite significant component shortages. However, revenue declined by 15% year-on-year due to lower spending by customers in Europe and the Americas. The downturn was most noticeable in the automotive market, which was our largest end market in 2019. Growth in logistics, semiconductors, and life sciences helped offset that decline. Business activity is improving, but demand in many of our markets is weak and is expected to remain so through the end of the year. Despite that, there are two areas of strength in our business that are contributing positively. One is the e-commerce sector of logistics. Even though most retail stores, airport baggage handling customers, and postal accounts are struggling, major online and big box retailers are stepping up their investments in Cognex machine vision to enable the highest throughput and productivity in their distribution centers. The other sector that's doing well is consumer electronics. We are now delivering large deployments of Cognex products that we expect will be recognized revenue in Q3. In addition, we’re pleased with how productive our sales team has been during these times of limited customer access. Sales and application engineers have been successful in holding technical discussions and product demonstrations via video conferencing and winning a lot of business in this manner, even with new customers. Next, let's talk about the plan we announced in Q2 to lower Cognex headcount by 8%. The decision was a difficult one given our company culture and the value we place on perseverance, but it was something we had to do given the circumstances. We entered 2020 expecting to achieve significant new revenue levels, perhaps exceeding a billion dollars in a year or two, but unfortunately, that is unlikely to occur due to the economic disruption and therefore we right-sized the team for more modest near-term growth. As part of the restructuring, we saw an opportunity to reduce duplication and redundancies that built up in our business from years of global expansion and acquisitions. We reorganized our engineering teams around the world in a way that we believe focuses on specific growth areas and enables us to leverage Cognex's unique capabilities more efficiently. After the restructuring, we still have the capacity for significant growth. We've not changed our product roadmap nor have we delayed new product development. We are also moving forward with other initiatives such as IT systems upgrades, process improvements, and projects to support future growth. Another development in Q2 that I want to address is our write-down of a portion of the deep learning technology that we acquired in October with Sualab. We’re confident in our deep learning strategy and believe Sualab has an important role to play. However, Sualab's technology required hands-on application engineering and in-person collaboration with customers, and that's difficult to do in the current environment. As a result, our projected revenue for Sualab has been pushed out, thereby reducing the value of that asset. We continue to be bullish about our overall deep learning business. Deep learning bookings have increased by more than 50% year-on-year, making it our fastest-growing product category. A major step was with the launch of Cognex's In-Sight D900 smart camera in April. The D900 makes advanced deep learning technology accessible to the tens of thousands of manufacturers who have standardized their factory automation on our industry-leading In-Sight platform. Initial sales are growing nicely as customers discover how effectively the D900 finds defects on complex parts and accurately reads badly deformed, skewed, and poorly etched codes. In other product news, we launched the In-Sight 8505P, a high-performance 5-megapixel smart camera with Cognex HDL plus technology. This is ideal for integrating into tight spaces on production lines. It's important for our Asia region, where electronics manufacturers and OEMs value its combination of precision, speed, and small form factor for demanding applications, such as inspecting assembled devices for manufacturing defects. We're proud of these new In-Sight products and doubly proud to have launched them in the current environment. They demonstrate the advantage that our culture brings as we effectively work together during these challenging times. While many Cognex employees are still working from home, we're maintaining our product development plans and remaining on schedule with our operations and process improvement plans. Regarding supply, managing our global supply chain continues to be a challenge currently, but we're navigating well under the circumstances. In Q2, we saw some vendors struggle to supply parts. We also continue to see freight deliveries taking longer and costing significantly more. Our close relationship with suppliers and our practice of holding substantial component inventory have helped us in the current crisis. Even so, we recognize and continue to plan for the possibility of supplier and customer closures and further disruption down the road. Let's now turn to details from the second quarter. Paul, over to you.

Thank you, Rob, and hello everyone. As you know, Cognex is known for being straightforward. We typically discuss our results almost exclusively on a GAAP basis, but we believe some pro forma disclosures will be helpful this quarter, given the actions we took in Q2. With that in mind, let's get into the details. Revenue for the quarter was $169 million, which was better than we expected but still weak. That level represented a substantial decline year-on-year in the broad factory automation market, particularly automotive. The impact was most noticeable in Europe and the Americas because of widespread business disruptions in both regions, partially offsetting the decline with growth in logistics where e-commerce fulfillment customers performed well. Logistics also increased on a sequential basis. That growth, combined with returning production in China, offset the decline we experienced in other areas of our business from Q1 to Q2. Reported gross margin was 70%, which included a reserve of $7.7 million for excess inventory resulting from the business decline. Gross margin was 75% excluding that non-cash charge, which is consistent with Q1. It was slightly better than we expected due to a favorable product mix and improving gross margins in logistics. Operating expenses in Q2 included a restructuring charge of $14.8 million, primarily for the workforce reduction discussed by Rob. Our restructuring actions were substantially completed by the end of the quarter. We expect a residual charge of between $1 million to $2 million in the second half, primarily in Q3. We also recorded a non-cash charge of $19.6 million in Q2 primarily for the write-down of a portion of the intangible assets from our acquisition of Sualab. Excluding these one-time charges, the combined total of RD&E and SG&A declined by 14% on a sequential basis as expected. The decrease was due to lower stock option expense and savings from actions we implemented early in Q2, including lower travel, entertainment costs, prudent management of discretionary spending, and the restricted hiring plan. We reported an operating loss in Q2 because of the charges for the restructuring actions, intangible asset impairment, and inventory write-down. Excluding these charges, operating margin was 21%, which was approximately 800 basis points higher on a sequential basis. The decline year-on-year was due to lower revenue as compared to Q2 in 2019. The effective tax rate in Q2 was 19% excluding discrete tax items that were higher than we expected because we now believe more of our profits in 2020 will be earned from tax and higher tax jurisdictions. On a non-GAAP basis, earnings were $0.18 per share in Q2 compared with $0.28 in Q2 of 2019 and $0.11 in Q1 2020, excluding discrete tax items and the free charges just mentioned. Looking at the change in revenue for Q2, year-on-year from a geographic perspective, our best-performing region was Asia, which increased by low single digits year-on-year. Higher revenue from consumer electronics offset a decline in automotive. Our customers in Asia are now largely back to work and in that regard ahead of other regions. In the Americas, revenue declined by low double digits year-on-year. Growth in logistics almost offset a substantial decline in automotive. Spending by manufacturing customers is gradually improving. Facilities are reopening, and we're winning business from companies that are scaling up production for COVID-related products. The most challenging region in Q2 was Europe, where revenue declined by 40% year on year. Business shutdowns further worsened already weak fundamentals in automotive. The timing of revenue from consumer electronics was also a factor. In that regard, large order revenue from consumer electronics in 2019 was split between Q2 and Q3. This year, we expect that business will be mostly concentrated in Q3 and with a higher proportion benefiting our Asia region. Turning to our balance sheet, we ended the quarter with approximately $900 million in cash and investments and no debt. Our approach to capital allocation remained unchanged despite the difficult business conditions. We continue to manage Cognex for the long term while also sharing our many years of success with shareholders. We paid approximately $10 million in dividends to shareholders in Q2 and tonight we announced a similar payment to be made in Q3. We did not buy back any stock in the quarter. Our inventory balance decreased by approximately $7 million or 12% from the end of 2019; however, excluding the substantial E&O reserve we recorded in Q2, inventory was roughly flat over the six-month period. Now I'll turn the call back over to Rob.

Thank you, Paul. Moving next to guidance, we expect Q3 will be the best quarter of the year by far with revenue between $200 million and $220 million. That range represents an increase both year-over-year and sequentially due to higher expected revenue from consumer electronics, which we believe will be mostly concentrated in Q3 of this year. We also expect to see another strong quarter in the e-commerce sector of logistics as we deliver on business that we have been working on for some time. Despite that strength, which can be attributable to a few large customers in e-commerce, semiconductors, and electronics, overall demand is lackluster and it’s unclear when that will change. Gross margin for Q3 is expected to be in the mid-70% range, slightly tempered by the high volume of revenue we expect from logistics. The combined total of RD&E and SG&A, which excludes the charges that we discussed tonight, is expected to be relatively flat year-on-year and sequentially. Lastly, the effective tax rate is expected to be 19% excluding discrete tax items. Now, we will open the call to questions. Operator, please go ahead.

Thank you. Our first question is from Karen Lau with Gordon Haskett. Please proceed.

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

Hi Karen, yes, I think the story really is that the automotive market, which was our largest market last year, is certainly the main source of our challenges. There are other markets that we serve, such as medical-related industries, including life sciences, medical devices, pharmaceuticals, and product security, that are performing reasonably well and showing some growth. So, I don't wish to sound overly negative, but certainly automotive is the market that is giving us substantial headwinds.

To that point, can you comment on the exit rates that you're seeing in auto in June and July? How much is down year-over-year?

Yes. I'll give you some color on that. I think automotive was our largest market in 2019 and it was struggling coming into this year. But we were optimistic at the start of the year that we thought things might pick up in the second half, and obviously we no longer expect that to happen, given the COVID situation. Demand from automotive deteriorated sharply around the COVID shutdown, and revenue from automotive declined by 40% year-on-year in Q2. So it's roughly $25 million of headwind for us in the quarter. It continues to look weak worldwide, including spending even on electric vehicles not really showing the strength we might've expected. In terms of exit rate, I mean, there's some signs that it's improving from its low, as I would certainly say we think we've hit bottom there. But in terms of getting to the level we had hoped, coming into the year or the return to the kind of solid 10% growth that we've been accustomed to over the past few years, we don't expect that to happen probably until the middle of next year.

Got it. Understood. Thanks for the color. And then on CE, so with a delivery expected in the third quarter, can you comment on how much the overall CE business is expected to increase this year? And then maybe put it into context for us, I believe your CE business peaked in 2017. If you account for the increase this year, how much would you still be down versus that peak level?

So, generally, Karen, I can't give kind of full-year projections as you know focusing for Cognex, nor would I give specific guidance like that. What I would say is that 2017 was our best year ever in electronics, and I wouldn't expect us to outperform that this year. But we are seeing some good growth. I would say coming into the year, we told investors we would see very strong growth in consumer electronics, and we're seeing growth, but it may not be quite at the level that we would like. There are a bunch of factors going on. One is outside of smartphones, the accelerated online learning and working from home is certainly driving growth that we're seeing, and then we certainly are seeing some nice growth related to 5G and OLED screens. However, some of that growth we hoped would come this year looks like it may be getting pushed out a little. Despite that, it will still be a good year in consumer electronics. So, we expect consumer electronics will be our largest market this year, but logistics may just give it a run for its money, and automotive is not in the running to be our largest market this year, I would say.

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

Hey, guys. Can you comment on those consumer electronics trends? Is there a reason to believe that, due to the unusual circumstances in Q1 and Q2, we might experience some unusual seasonality in consumer electronics in Q4? Is there any indication that this could happen this year?

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

You mentioned that you have undertaken significant restructuring after a long period, suggesting that you do not anticipate a quick increase in demand. However, it appears that Q3 might show some improvement. Can you clarify if my interpretation is correct, and whether you do not foresee much of an increase beyond Q3 or Q4?

Yes, I wouldn't read it in such a short-term way. I think we've grown our headcount and we've made a lot of acquisitions, seven acquisitions in the last four years. We were stopped, I know we were stopped entering 2020 like we had expected it to return to some pretty strong growth up to having our first downturn in nine years in 2019. So, we were ready to go, expecting the kind of growth we're seeing in logistics, expecting a strong year in electronics, expecting a better year in automotive. After COVID, we recognized that we needed just to take action, and we viewed the current environment as an opportune time to sharpen our focus on growth areas, leverage talent more effectively, and reduce some of the redundancies we saw in the business. I think we aligned on capabilities better following many years of growth. So, we're really long-term thinkers at Cognex and this is something that probably needed to happen. The downturn in demand really made it clear to us that this was the time to go forward with that. But as I said in my prepared remarks, I think we have plenty of capacity for growth. We are well-structured, so we could expect to grow our business substantially without adding much cost other than variable costs.

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

Wondering, can you kind of scale the content that you're getting on some of these consumer electronics and logistics segments, and if you would think about it like in a given production line for CE or given square footage like a logistics facility. How does your content look versus a few years ago? I mean not looking for specific dollar amounts obviously, but how has that like-for-like content evolved?

Well, Joe, it's an interesting question. We don't generally think of it that way. I think we tend to think of numbers of lines and logistics facilities, and then we think about features for those specific tasks that are being added there. I would say overall, at the level of content and capability, we're adding to lines similar to what it's been over previous years, still in facilities. But it's changing; I think it's more vision-related, higher value. So, I would think probably kind of similar, but evolving towards higher value applications. We used to possibly be doing more basic box readings, and now we are doing more vision and higher value applications.

And then on auto, third-party estimates right now indicate pretty substantial year-on-year production growth next year. How would you assess Cognex's business in that kind of environment? While it's mostly about filling existing capacity to some extent, how do you think your business could perform if those numbers are accurate?

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

Yes. In auto, you're expecting production ramps next year are pretty substantial year-on-year. I'm just curious from your perspective, what does that mean for your business next year?

Yes. I think for us, it's going to be more about new lines of retrofitting existing lines. So, I don't necessarily see unit volume driving a lot of incremental investment in automation. What I would see is the introduction of new models and new technologies would be real growth drivers for us. So, that's more of a lever. There's speculation that there are past 16 new electric vehicle models coming to market over the next few years, and those kinds of things can really drive a lot of growth for Cognex. But, of course, when automotive or Tier 1 automotive companies are struggling and conserving cash, they are likely to do less retrofitting for upgrades in general. So, it does have an impact on us. But more to gauge future growth for us would likely be around the introduction of new models and new technologies into automotive.

If I could just sneak in one last question. In e-commerce, you're doing quite well there. You mentioned a few big customers driving some of that business now, and given what's going on and everyone scrambling to get supply chains adjusted to the current reality. Does this year strike you for your business as well above trend, something that can't be repeated? Or is this just the normal, like this is the way we were going, and it's just accelerated a little bit, but we don't see why this can't continue?

So, I think we see logistics as a great growth market for us, and we've said in the past, we have ambitious plans to grow that business at 50% a year and we've been able to do that pretty well in most of the last few years. I think we are seeing so much demand for machine vision and helping productivity, developing supply chains. As those supply chains move to more online and more e-commerce model, it's a great market for us. We have a great technical advantage to play there. What we're seeing at the moment is that growth is very skewed towards the winners in that marketplace, particularly those who already have pretty sophisticated e-commerce models in development. What's disappointing in the logistics area is those customers in broad retail, like formerly brick-and-mortar retailers that we wouldn't have expected to see growing strongly at the moment, but of course, they are struggling. I think they are struggling with liquidity and their own future. So, we're not seeing the same level of investment there. We would also like to see airport baggage handling, which is one of the biggest parts of our logistics type business, but that's a market that has really gotten very cold this year. So, I think it's a mixed story. The really good growth we're seeing is better than expected in e-commerce. I think longer-term we would expect some other markets, like ones I discussed more regular retail, to come back more strongly for us in the future. Then, I think the other thing we expect and are already seeing is broader use of machine vision beyond just box reading, more to things like inspection, dimensioning, and more capabilities where we use the data from our vision systems to help companies manage their logistics efforts more efficiently.

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

So, Rob, I think in the last year you guys talked about something like $40 million or so of logistics revenue that got deferred. I think you expected to ship it in the third quarter of this year. Is that some of that shipped in 2Q? Or is that predominantly still on track to kind of ship for 3Q?

Yes, Joe. I'm not sure we gave a specific number, but directionally you're correct. We did see a big backlog of logistics business building and delivery getting delayed, and we’re seeing a lot of that business come through Q2, Q3, and Q4, and we're also seeing a pretty big backlog of bills in addition to that. So, broadly speaking, that's roughly what's happening and we think that aligns with our expectations.

That's helpful. And some of the integrators like Honeywell, for example, their Intelligrated business, they just reported their orders are up something like 300% this quarter, and Kion's orders were also doubled this quarter. I guess, how should we think about their businesses as it relates to yours in terms of capacity constraints and your ability to install your products within a reasonable timeframe? Is there any kind of bubble that could potentially constrain your ability to get your products installed and delivered on time?

I think the way it works is there's a group that we call integrators out there. Honeywell, e.g., is one of them. There are many others, such as Dematic. They handle very large contracts. Those sometimes can be two years out, and in some ways, the dynamic is a little bit like what a line builder does in automotive. They're getting contracts for new car models that are a couple of years out. Then as the product becomes closer to implementation, we work with them on putting the vision system in, but we're normally engaged with the end-user. Some of those reports we're hearing are indicative of years of growth ahead, which will be coming, probably in a year or so depending on how the product rollout schedule changes between now and then. So, I do see it as a leading indicator, and it aligns with what I would expect.

That's great to hear. And I guess just lastly, following up on some of the consumer electronics question. You did reference online learning and OLED screens specifically. I'm just curious if you can give me a little bit more color on end market application. It doesn't sound like a smartphone. I don't know if it's like iPads or what specifically this is going into.

Yes. So, we're feeling from all the major players in consumer electronics, and they really have a broad portfolio of products. Our business has been very strong in smartphones this year, still very solid, but perhaps growing better in tablets, laptops, and other electronics and devices for people. I think everyone's seen an uptick in that business, which is a result of everybody wanting to equip themselves to work at home. In terms of OLED screens, that's a market we've been working on heavily for the best part of five years. We saw a very big spike in our business in 2017, and we still see some good strength and growth in that business. We've diversified generally the base of that business more to China, where we're working with some of the major players there. But in terms of our expectations, OLED isn't, this is not a blow-the-doors-off year for OLED. It's growth we're working towards, and those companies really value our deep learning technology for inspection. The value of yield in that market is massive. But in terms of what was going to drive growth, it would be towards 5G and OLED.

Our next question is from Paul Coster with JP Morgan. Please proceed.

Thanks for taking my questions. You mentioned that the gross margin might be a little light because of the logistics mix. I’m just wondering did I hear that right? If I did hear it right, what is it in the product mix that leads to slightly lower gross margins with that end market?

I will discuss the product level, and then Paul will provide additional insights. Looking at the bigger picture, as we engage in logistics, we are collaborating with a significant electronics customer who requires more implementation from us. This has involved increased application engineering, which is certainly part of the challenge we face. We still engage in some of that work, which can negatively impact our margins. Our approach requires more service-related efforts and further integration, which sometimes leads us to sell lower-margin accessories or components. However, our priority is to meet our customers' needs. We are also focusing on developing more modular products and strengthening our partnerships with systems integrators. This shift in our business model is helping to align our gross margins with those we achieve in other areas. Paul?

Yes, I think you've captured it well. Logistics is still slightly dilutive to our overall gross margins, but it is improving versus where it was a year ago or certainly three years ago. So, similar to the strategies we used for developing the factory automation market, we solve customer problems, add more service, and then figure out how to effectively productize it. We're in the middle of that migration, and it's going well. But overall, logistics is a bigger share of our revenue, which is somewhat dilutive, although that's countered by other aspects of our business that are growing and highly accretive to our margins, such as deep learning, which is a great example of a software-based market.

So just a quick question on the deep learning front. Obviously, you've taken action to change costs really quickly, recognizing the need to do so, and act precipitously. The question of course though is, does your interest in further acquisitions in that area still stand knowing the integration work involved? Or is this an anomalous situation?

Well, let me come back for a minute. So, I think we see deep learning as part of a revolution going on in machine vision and it is allowing us to approach machine vision problems in a new and better way. We made the acquisition of ViDi three and a half years ago, and that technology is remarkably good at running on low-powered chips. That's demonstrated in the In-Sight D900 that we just launched, and it already fits very well within our existing portfolio with a lot of performance. Now then we've acquired Sualab. Sualab has very powerful capabilities around the application of convolutional neural networks to industrial machine vision, ideal for classifying images with great precision and inspecting complex images. Some of the technology they have is further down the road, and we will be assimilating it over time. Some of the near-term applications required onsite work from sophisticated engineering teams in Asia, and that has been difficult to provide at the moment due to access. We’re still going to do it; it's just delayed. Sualab brings great engineers and technology that will help us with further things we want to achieve in deep learning. Yes, I think so. That was the second part of your question. We have a lot of horsepower now in deep learning, but we're always out there looking for interesting assets to acquire in deep learning or another growth area of the business. Generally, we're always on the lookout for great engineers who can bring a lot of capability to our organization. So, that's an ongoing cadence at Cognex.

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

Thank you for your time. Rob, just to clarify, the increase in revenue in the second quarter compared to your earlier expectations that it would be lower than the first quarter, was that increase due to China recovering more quickly and the additional logistics business you identified coming from backlog? Are those the two main reasons?

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

The commentary about China focused on comparing Q1 revenue levels to Q2 revenue levels rather than our expectations for Q2. We exceeded our Q2 forecast, even though we didn’t provide separate guidance. We initially expected Q2 to be down compared to Q1, but instead, we saw a slight increase. This was largely due to strong logistics performance and effective supply chain management, while potential component shortages and other risks didn’t impact us as negatively as we had feared in terms of higher costs and logistical challenges. Our ability to turn this into revenue was quite effective.

So, it was a nice quarter in the second quarter for sure, and we built backlog. Some logistics business, would you expect it to be sequentially higher in Q2 compared to Q2? I mean, is that timing on backlog doable in expectations?

We have good momentum in logistics business. We had a record quarter for revenue in Q2, and we expect Q3 to be higher than we expect Q4. So, we definitely have good momentum going.

Understood. My last question here is whether you expect to achieve a 10% customer growth in consumer electronics this year, considering the current backlog and trends. I'm aware there are various factors at play, but I'm curious about your expectations for a 10% customer growth in CE this year.

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

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

Hi, good afternoon, everyone. Two questions from my side please. One more long-term and one on the second half. Maybe I'll start with the longer-term question. Given the sort of 8% headcount reduction that you made, which isn't in any case, but particularly probably significant in the Cognex culture. How do you think about supporting that long-term growth that we have throughout the cycle? I mean, some of your competitors, particularly on the sales force side, have significantly larger sales forces. I’m just trying to think about strategically, how you see this play throughout the cycle?

So, to your first question about the 8% headcount reduction, I mean, if you go back and look at our productivity as a company, even with headcount reduction, it’s well where it was in 2016. We see it as positive for our capacity for growth. We came in thinking we were going to grow into that capacity this year, with revenue being lower, we had a lot more capacity than we needed, but we feel confident about this move. You talked about sales productivity; you're right that we do compete with some customers that have bigger sales forces, but we combat that in two ways. One, we're a pure-play machine vision company. Our sales team does not sell PLCs or robots. They focus solely on their expertise in machine vision. We do have a good network of systems integrators and distributor partners who cover those areas that we don't reach. So, I'm not concerned about a lack of coverage, and I see plenty of opportunity for us to grow into our current headcount and deliver leverage to the bottom line. That’s how we’re focused for the next couple of years.

Your second question was around opportunities for growth in other areas. I think it's worth mentioning that we've seen some nice activity and interest in using Cognex machine vision for COVID-related applications. We've seen certainly medical and pharmaceutical applications that are interesting and certainly demand for our products in that area. I do think as companies scale up testing and vaccine production, that is definitely a good opportunity for us to work in. Life sciences, as well, and the application of our deep-learning technology more broadly is an area that I think we see upside potential for us as we move through this year and into next. Those are some areas that come to mind.

Regarding your question on the Q3 and Q4 outlook, I think material in its true definition, probably the answer is no, right. I don’t think we’re going to see something massively material from other compensations in Q4. But things that might move the needle for us later in the year might be around whether there’s earlier investment in electric vehicles, or if there’s more electronics business coming in earlier, or there’s stronger demand on the backend of the year in logistics. So, some of those general trends are certainly possible, but I don’t want to give you an overly optimistic picture for Q4 as we expect Q3 to be our best quarter.

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

Hi. Thanks for taking my question. Just to ask it in a different way to the earlier question on consumer electronics, how should we think about the diversity within consumer electronics in 2020 compared to 2017? Has it got a little more diverse?

Yes. We've worked certainly hard over the last few years to apply our technology more broadly in consumer electronics, whether that's more into components, such as housing and screens and other things, rather than just final assembly, testing, and packaging which was highly concentrated a few years ago. We’re seeing more in accessories for sure, and the overall market is less concentrated than it was a few years back. So, you should see our businesses being much more diversified in terms of its applications in that market.

And with regard to logistics, is it still a largely U.S.-based business or what's the scope for expanding into Europe and Asia?

The majority of our revenue today is still in the U.S., but we've been investing and seeing very good percentage growth in the European market and in parts of Asia. We certainly expect a large percentage of growth to come from those areas in the long term, but right now we are still highly concentrated in the United States.

And I know you do this annual exercise on addressable markets, but how should we think about logistics sizes of the market? From I don't remember the number, but is it a multiple of that you think based on what’s happened?

I don’t feel ready to answer that right now. We said it was a billion dollar market, and it may be similar now. I mean, we’re seeing significant growth with e-commerce, but there are lots of areas in that market that aren't doing well right now, such as package delivery, postal, and general brick-and-mortar retail. Some of those businesses are only growing slightly for us right now. But we think logistics market presents a great opportunity for growth, and we’ve sized it as a billion dollars, with potential growth in the mid-teens.

And finally, regarding the competitive environment, given the difficulties, have you seen it getting easier in terms of seeing any competitors go down or exiting the business?

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

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

One OpEx question for Paul, I think it sounded like in the second quarter you didn’t realize savings from the restructuring, I think the number was $25 million of savings run rate. So you would kind of imply starting the third quarter. But sequentially, you mentioned OpEx is flat, so is the idea that some temporary costs from the highest delivery in the third quarter is kind of masking that sequential savings and structural savings?

Yes, it's mostly puts and takes. If we take a step back to 2020 going into the year, we said we'd be adding about $25 million to our cost structure associated with reset of incentive plans and some hiring, plus the integration of Sualab. And then, we've now committed to a $25 million annualized cost reduction, of which we did realize a portion in Q2, but certainly Q3 will be realizing more. So the payroll savings and some savings in depreciation will be realized in Q3 but will be partially offset by a little more travel and increased sales activities. Travel is still down for the year, but with facilities open, our sales teams will be returning to visit clients. We did get some one-time benefits associated with the restructuring in Q2 in our incentive compensation. That will repeat in Q3 and that's also as one of the takes to offset that.

Thank you. Rob, I have a quick question about semiconductors. I realize it's a relatively small market for you, primarily related to software, so it might be smaller. However, considering that chip production is increasing everywhere, could this market contribute more to your content over time?

Yes. We're having a good year. But generally, that has been around 5% of our business. We view it as cyclical. It is probably both. When it was lower we can bring more and more chips on fewer lines. We can see some positive investments in some areas where we have very strong positions and great technology, but overall growth is still expected over the long-term.

Thank you. Well, we're all in very challenging times, but our strong balance sheets, focus on long-term, and unique culture will enable Cognex to weather the current disruptions better than most. Thank you all for joining us tonight, and we look forward to speaking with you on our next quarter's call, which I expect will contain some very positive news. Good evening.

This concludes today's conference. You may disconnect at this time, and thank you for your participation.