Cognex Corp Q4 FY2021 Earnings Call

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. 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 $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's 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 electric 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's total, making it our third largest market after being number one in 2020. Unlike 2020, in 2021 customers focused 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. Otherwise, growth was strong in almost all the other industries we serve, including semiconductors, medical-related industries, and consumer products. Together these smaller markets represented about 30% of total revenue in 2021 and collectively grew in line with the company average year-on-year. This is encouraging because we've been investing to increase our sales presence as we seek to reach new customers for machine vision and win market share at competitor's accounts. Turning to a key financial metric, gross margin was 73% in 2021, compared to 75% in 2020. There were two primary factors that resulted in downward pressure. One, in keeping with our customer-first company value, we've been prioritizing delivery during this time of global chip shortages, which added incremental costs in 2021 due to significant premiums we've paid to procure components through brokers and for expedited freight. The good news is that our customers appreciate what we're doing for them. After many months of intense engagement through very challenging conditions, I'm pleased to report that delivery times on most major products had improved substantially by year-end. The second factor that impacted gross margin was the greater percentage of revenue from logistics in 2021, along with some comparatively lower margin strategic logistics projects we chose to undertake last year. Cognex has built a remarkable $300 million business in logistics, a market that is still in the early stages of adopting Cognex machine vision technology. We see the engineering support we provide customers to get up and running as a worthwhile cost of winning share, but it is slightly dilutive to our overall gross margin. We're making good progress transitioning our logistics business from customized to standardized solutions that are easier for customers to deploy. We're also developing an experienced group of logistics integrator partners able to deploy these standard solutions quickly and effectively. We believe these developments will enable us to scale more easily and to report higher gross margins in logistics over the long term. Overall, it's a great time to be at Cognex. We believe that macro trends such as widespread labor shortages, the growth of e-commerce, and a focus on supply chain integrity further underscore the value proposition for machine vision in manufacturing and logistics operations. Delivering on our commitment for new product development, we launched a long list of high-performance next-generation products in 2021 that we believe keep us at the forefront of vision technology. The Cognex In-Sight 3D-L4000 makes our industry-leading true 3D vision tools as easy to use as 2D. This product positions us effectively against some of our competitors who have significant sales and profits in 3D. The DataMan 8700 reasserts our technology leadership for handheld barcode reading in automotive, medical devices, electronics, and other industries. Our new patented high-speed steerable mirror significantly expands the field of view of Cognex DataMan 470 barcode readers. This is invaluable for reading a high volume of barcodes at shorter working distances, such as in pharmaceutical packaging aggregation, and across large fields of view, such as reading many barcodes on a large pallet in a warehouse. The Cognex Edge Intelligence software platform helps customers understand the performance of large numbers of devices deployed across facilities, quickly identifying issues and taking corrective actions. VisionPro 10 enables customers to use our rules-based vision software and deep learning technology together more easily in a powerful development environment. We also introduced Cognex Deep Learning Technologies that further enable the automation of time-consuming manual inspections. VisionPro Deep Learning 2.0 software expands Cognex capabilities for high precision measurement of scratches, blemishes, cracks, and other defects. Cognex's Smart Line Smart Tool combines the high accuracy of 2D vision with the flexibility of deep learning to quickly solve complex line detection applications that are challenging for rules-based vision alone. Moving on, our headcount grew by approximately 200 Cognoids company-wide in 2021. Many of these employees are salesnoids, hired to sell Cognex industry-leading products to manufacturers and logistics customers around the world. Finally, we successfully implemented Salesforce to further improve sales productivity and deepen our understanding of customers. We believe our new customer relationship management platform will help us scale and understand our business with greater clarity on our path to the next billion dollars in annual revenue. Now, I'll hand the call over to Paul for details of the quarter.

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 the 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 $13.8 million in Q4 of 2020, and $6.3 million in Q3 of 2021. Excluding discrete tax items, the effective tax rate was 8% in Q4 of 2021, compared to 14% in Q4 of 2020 and 18% in Q3 of 2021. The decrease was due to a revision we made in the fourth quarter to reflect a full year 2021 tax rate of 16% versus our prior estimate of 18%. Reported earnings were $0.30 per share in Q4 compared with $0.39 in Q4 of 2020 and $0.44 in Q3 of 2021. On a non-GAAP basis, earnings were $0.30 per share again in Q4, compared with $0.32 in Q4 of 2020 and $0.40 in Q3 of 2021. That's excluding discrete tax items and restructuring and other charges that we removed for comparison's sake. Looking at the change in revenue for Q4 from a geographic perspective, revenue from the Americas increased by low double digits year-on-year and delivered the largest contribution to absolute dollars due to growth in logistics among other industries. Revenue from Asia also increased by low double digits year-on-year. Continued growth in automotive, logistics, semi, and the broader market offset lower revenue from consumer electronics. In Europe, revenue increased by mid-single digits, excluding a two percentage point reduction from currency exchange rates. Growth in logistics, automotive, consumer products, and other industries in Europe's broad factory automation market was offset by a decline in revenue from consumer electronics. Turning to the balance sheet, Cognex continues to have a strong cash position with $907 million in cash and investments and no debt. While this balance is higher than the end of 2020, it is below Q3 of 2021 because we were more opportunistic with our stock buyback activity. We spent $113 million in Q4 to repurchase Cognex stock, which is the highest amount we have deployed to buy back stock in a single quarter. That brought the total for 2021 to $162 million. We plan to continue to buy back stock in Q1 at a regular pace while maintaining flexibility to be more opportunistic. Our inventory balance has increased substantially over the past year. We're bringing in components to support customers at a higher level of business. And we're doing so at elevated costs to win market share and underwrite our resilience in a time of global supply chain constraints. Now, I'll turn the call back over to Rob.

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 and 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.

Our first question comes from 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, 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 there's 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 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 integrator. I think some of the implementation that's going on is getting delayed because of chip shortages and supply chain challenges and other issues. So I think that could affect some players' revenue in the marketplace. And it certainly slows 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 logistics to continue being accretive to our overall growth and being an excellent part of our business. I would also say, I think so much as you know, logistics business has been barcode reading, but there are other vectors for growth also, which are more applications of vision technology, and logistics where over the long run, we see strong growth potential. So that's kind of my overall answer to your question, Josh, please feel free 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 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 upswings, and good years, as well as sort of more challenges like we saw in 2021. And we'll let you know how this year is looking when we next talk.

Understood. Really appreciate the color. Thanks.

Our next question comes from the 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 as 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 in 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 a regulated industry. So sometimes one speed of penetration into their market can be slower, but then the revenue is more consistent when it 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 there 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 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, maybe changed to diagnosis. And then we've also moved 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 help out with what lab technicians would usually do. And then we also have very interesting customers more in the area of patient positioning, where there may be things going on with patients in an operating theater 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 currently 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, where customers specified Cognex vision inside their machines, and they may deliver hundreds of thousands 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 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 it's beneficial 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 the 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 the 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 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 several customers really leaning into that investment to be relevant and competitive in the e-commerce world. I think it's a trend we're going to see not only with this customer but with others 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 are 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, 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 insights. Regarding our capital deployment priorities, what areas do you consider most favorable for M&A in the current 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 was a number of years ago now, we had approximately a 20% share in our market. 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. 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 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'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 on how that looks now versus what it looked like versus pre-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 did grow year-on-year from where we ended 2020 to where we ended 2021. In most quarters, our backlog grew. So there's an element of seasonality of the business, but there 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 times 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 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 do you see that crossover 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. 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 is certainly 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. We see it primarily in Asia, where the major EV technology companies are. So certainly, we see that. It becomes a little 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, is 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 at all.

I would like to add that Rob made a good point. Currently, the portion of our business specifically linked to electric vehicles is well under 50%. However, I believe that 2021 marked a pivotal moment for us. In 2019 and 2020, while electric vehicles were a positive aspect, they did not significantly impact the overall decline in industry revenue. In 2021, the automotive sector experienced growth that exceeded our overall revenue growth, surpassing our long-term target of around 10% for automotive growth. Electric vehicles were the main contributor to this, driven by investments in battery manufacturing and other areas, as Rob mentioned. Additionally, the launch of more hybrid and electric vehicle models has triggered substantial changes in the automotive sector, influencing projects related to tires, car seats, and other areas where it’s challenging to directly associate with 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 continue to see that scale and grow. I think where it's a little less clear is on sort of more established automotive businesses in America and Europe, which is a substantial part of our business. 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. Is it really a short-term phenomenon around chip shortages and COVID and a slow start to the year? Or is it something more endemic 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. I have a follow-up question regarding the new deep learning products you mentioned. As I recall, you were expecting significant growth, possibly a doubling from last year, even though it's a small part of your business. Did that meet your expectations? You mentioned the D900 as a strong start for a new product. As we consider this opportunity in 2022, how do you view it, and in which markets are you seeing the most traction?

I believe our In-Sight D900 deep learning-enabled smart camera was definitely a highlight for us. This is impressive technology that saw strong adoption, particularly in our European and American markets. We launched an updated version featuring edge learning tools, which are much easier to use and train, and we're very excited about this business as our customers are enthusiastic about the product. The other aspect of our business involves more complex deep learning software that demands a high level of programming skill and functions more in a vision software PC environment. This segment tends to be more prominent in Asia and among large, sophisticated manufacturers of electronics and other products, where we are making steady progress. However, I would note that the implementation has been somewhat slower than we would prefer, partly due to travel restrictions and challenges in providing hands-on support. The pace of adoption for this advanced technology has also been a factor. We see numerous opportunities in both areas—the smart camera and the vision software—offering long-term growth potential. Ultimately, we need to observe how these developments unfold over time, but I am confident it will be very positive. The key question is the pace of growth and its impact 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, we don't provide specific guidance. However, what's interesting is that these deep learning tools are becoming increasingly powerful and widespread. I mentioned some new technologies we've launched earlier. We have rules-based vision technology that you're familiar with, alongside new deep learning, trainable, self-programming technologies that are now operating simultaneously. I believe we'll continue to see this trend grow. We're very excited about our deep learning technology and its growth potential, but I don't think it will be distinctly separable from our overall activities as we progress.

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 discuss consumer electronics once more. I know you've mentioned in the past that areas like augmented reality, virtual reality, and wearables could experience growth. Can you share whether the volumes in these areas are sufficient to drive that segment? Additionally, how reliant are you on significant changes in handset designs to achieve substantial growth in consumer electronics?

Thank you, Andrew. The market dynamics we've discussed previously continue to evolve. We consistently observe numerous technologies and shifts in the roadmaps of our major customers with whom we maintain close collaboration. As we progress through the season of introducing new models, typically later in the year, some technologies may be integrated while others might be postponed. This can affect outcomes. Additionally, we have been focusing on form factors since around 2014. We've noticed that variations in materials used, such as metal or glass, can significantly influence the market, along with elements like screens that can drive growth. So, it's not just about handset form factors; there are multiple factors to consider. Regarding augmented reality and other emerging technologies, if we reflect on the market entry of smartwatches, tablets, and new screens, we generally see them beginning to be adopted, leading to considerable growth a few years later. Therefore, I don't anticipate these innovations to drastically impact our results if they haven't already made a significant mark in the market over the past few years.

Yes. Individually, they are relatively small, but collectively, they can be significant for the smartphone market and can contribute meaningfully to growth. Additionally, I have mentioned in certain discussions, although not in an earnings call, the potential of applying deep learning technology to consumer electronics, especially in visual inspection. There is a substantial opportunity where much of the work currently done by humans is difficult to staff and often not performed exceptionally well, and we believe our technology can address this issue more effectively. We are still in the development stages, but we see this as an important growth driver that would enable us to expand faster than the market without needing major technological changes or new product introductions. It is unlikely that this will have a significant impact in 2022, but I believe it will serve as a solid growth driver in the coming years.

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 someone like that who's already pretty established? Yes, just wondering how you intend to make headway in that market if you've got such a dominant player there.

Yes, that's a great question. We have made significant progress in three different product areas in 3D. The first is the 3D-L4000 product that we launched last year. It is a true smart camera version of 3D that is very user-friendly and equipped with outstanding optics. In comparison to existing 3D technologies in the line displacement area, particularly from the market leader you're referring to, our new product line requires less programming and doesn't need a separate controller and head. Ease of use is crucial in this market. Our product is programmed similarly to how one would program an In-Sight, which is the best-selling smart camera made by Cognex. If you can use an In-Sight, then you can easily manage the In-Sight 3D-L4000. We believe our combination of power and usability will greatly benefit this sector. In general, there's an ongoing trend in vision technology: it is challenging to use sophisticated technology, but it is becoming easier, cheaper, smaller, and more integrated. These trends should influence all markets we are involved in over time, including 3D. The second product gaining traction is our scan product, the 3D-A5000. It projects a pattern of light and shifts it, allowing for imaging over a large stationary area instead of moving the product. It's very fast and accurate, and customers recognize it as the best image acquisition tool for applications like structured robot bin picking. We typically know what we're looking for, which is not random samples, and we're seeing growth in that area. The third product is our 3D-A1000 platform, designed for high-speed moving objects. Similar to technology used in video games that track your movements at home, we project a pattern and observe products in motion. We are particularly gaining traction in logistics, where customers want to determine the size and position of moving products efficiently and cost-effectively. We outperform all other products currently available in that market. We are making significant strides in 3D vision. While there is a dominant share leader, we are gradually encroaching on their position and see other, faster-growing market opportunities beyond theirs. Ultimately, Cognex's advantage lies in offering the best vision tools available. There is no doubt in the marketplace that we provide superior vision tools, especially in the 3D category, enabling customers to achieve tasks that our competitors cannot.

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 believe we've started to encounter significant supply chain challenges since the summer, and we have been actively working at high levels within the company to manage and improve our supply chain. As we approached the end of the year, we began to see positive results from our intense engagements with suppliers and our investments to secure short-supply chips for our operations. Our inventory levels have increased during this time, which has strengthened our position as we progress through the year. We recognize that the chip supply situation remains very difficult and isn't expected to improve significantly in the near term. However, I believe we have adequately prepared for these challenges, and you can see signs of this in our fourth-quarter performance. Currently, we are experiencing shorter lead times for most of our major products, which has become a competitive advantage allowing us to gain market share, unlike our competitors. This is the trajectory we foresee moving forward.

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. We believe we have direct relationships with nearly all of our logistics customers, which is central to our model. In logistics, we offer advanced technology that needs to be integrated into production lines and requires significant application and start-up engineering. We collaborate with highly skilled integrators who have been our partners for many years and do this exceptionally well. Sometimes we sell directly to end users, who may integrate the product themselves, while in other situations, we engage logistics integrators and installers to set up the lines and perform essential servicing and commissioning. As we transition more of this work to our partners, we anticipate improvements in our margins and increased scalability. Overall, we maintain direct relationships with customers, which we value and prioritize.

Markus, our approach resembles the one we use for consumer electronics; our relationships with end customers remain strong, and we concentrate on our core strengths. We allow partners to manage aspects of the business that could distract us or reduce our margins. We're committed to executing well in logistics while maintaining customer relationships, as Rob mentioned, which we do not see as a risk.

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, thank you for taking my question. I have two questions, one regarding the short term and the other focusing on the long term. Regarding the quarterly cadence, since you are generating revenue from the backlog, should we expect a different pattern in 2022, considering that historically the first quarter has been the weakest, followed by stronger second and third quarters?

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. 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 for what we know so far.

Okay. That's helpful. In terms of logistics, I receive a common question about the automotive and consumer electronics sectors, regarding the upgrade opportunities that arise when your customers refresh their products or introduce new ones. How should we view logistics in that context? I realize that we probably won't experience substantial growth just yet, as we are still in the early stages. However, how should we approach logistics in relation to selling upgrades into a fully stocked software warehouse?

Yes. I think of it as being pretty similar in general, the products and the technology have a life cycle. There are lots of demand for higher throughput and upgrading of automation equipment within the distribution center or 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 players are entering it. Third-party logistics players are starting to become big players as well. And there's sort of, I'd say, an initial wave of investment as they're building out those capabilities. 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. At the same time, we'll be doing more challenging and value-added applications for them as the industry becomes more sophisticated.

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. No surprise that we just told you that Q4 was the largest quarter we've ever had in stock buyback activity. Going into 2021, we expect to be doing a mix of regular ongoing purchases through just a ratable plan as well as being opportunistic when we feel there's opportunity. Yes, I mean, I think we have the potential, and fundamentally, as a growth technology company, we're not trying to change the stock price through the buyback activities. We want to ensure 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.

You have demonstrated a strong ability to identify opportunities in the market. Can I discuss our strategy and competitive positioning, particularly regarding our relationship with a major customer in logistics? How do you view that relationship moving forward, considering their recent comments? Additionally, what other areas are you witnessing growth in? Following COVID, it would be expected that sectors like protein would see a significant increase in automation. Are you observing any increase in funding yet, or is the supply chain still hindering some of the legacy industries that require automation but are struggling to acquire the necessary parts?

I think it’s great about being at Cognex and being the leader in machine vision, as you see new applications all the time. Some of them you've seen for 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 talking about the implementation of some of our CRM systems. 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 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. So often, the technology and the relationships we develop 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.