Cognex Corp. (CGNX) Q3 2020 Earnings Call Transcript

Cognex Corp. (NASDAQ: CGNX) Q3 2020 earnings call dated Oct. 28, 2020

Corporate Participants:

Susan Conway — Senior Director, Investor Relations

Robert J. Shillman — Chairman and Founder

Robert Willett — President and Chief Executive Officer

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Analysts:

Josh Pokrzywinski — Morgan Stanley — Analyst

Joseph Giordano — Cowen — Analyst

Richard Eastman — Robert W. Baird — Analyst

Karen Lau — Gordon Haskett — Analyst

Andrew Buscaglia — Berenberg Capital Markets — Analyst

Blake Gendron — Wolfe Research — Analyst

Presentation:

Operator

Greetings and welcome to the Cognex Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Susan Conway, Senior Director of Investor Relations. Thank you. You may begin.

Susan Conway — Senior Director, Investor Relations

Good evening, everyone. Thank you for joining us today. With us are Cognex’s Chairman, Dr. Bob Shillman; President and CEO, Rob Willett; and Chief Financial Officer, Paul Todgham.

I’d like to point out that our earnings release and quarterly report on Form 10-Q are available on our Investor Relations website at www.cognex.com/investor. Both contain highly detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or 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 and actual results may differ materially from those projected or anticipated. For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and subsequent quarterly reports on Form 10-Q.

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

Robert J. Shillman — Chairman and Founder

Thanks, Sue, and hello everyone. I am actually physically here with the team at this time. And I’m happy to be here enjoying the beautiful fall colors. Not so happy to experience the gray rainy weather, but it does remind me why I left many years ago for Southern California.

Well, as shown in the news release earlier today, we reported terrific results. Q3 was the second highest quarterly revenue in our 39-year history, along with terrific profitability. In addition, Cognex’s Board of Directors increased the quarterly cash dividend to $0.06 a share. And the dividend increase demonstrates our confidence in Cognex’s financial strength and long-term growth prospects despite the current difficult business environment.

Now, you’re not here just to hear that — those platitudes, you’re here to hear more details. And for those, I’m going to turn it over to my partner Cognex’s CEO, Rob Willett. And Rob, the microphone is now yours.

Robert Willett — President and Chief Executive Officer

Thank you, Dr. Bob, and good evening, everyone. Cognex reported strong results for the third quarter. Revenue was $251 million, which represents 37% growth year-on-year. We were highly profitable reporting an operating margin of 38%. The 14-point increase over Q3 of 2019 demonstrates the substantial operating leverage we have in our business model.

Earnings for the quarter more than doubled year-on-year to $0.49 per share. We expected Q3 to be our best quarter of the year. And it even exceeded our expectations that we gave the guidance last quarter. This high level of achievement was made possible by the efforts of Cognoids around the world. They worked hard to meet the increased demands of some of our existing customers to win new customers and to successfully manage our own supply chain during these difficult times. Because of their efforts, we won more orders than we expected during Q3, particularly in the Americas. Also, we met accelerated delivery requirements from existing customers concerned about potential disruption in Q4.

Consumer electronics delivered impressive growth in the quarter. Revenue from this market has an annual cycle with large revenue generating quarters typically in Q2 or Q3. This year, that happened in Q3. Much of our revenue in consumer electronics relates to the assembly of smartphones and the manufacturing of related components.

However, this year, online learning and the work-from-home dynamic are making a notable contribution. People need tablets, laptops and wearable devices for a world where connecting virtually has become even more important. Cognex machine vision is enabling the precise and rapid manufacturing of those products. In logistics, we reported another record revenue quarter due to continued strong demand in the e-commerce sector. We delivered on both recent orders as well as on a backlog of orders. Major e-commerce and big-box retailers are investing in automation for higher throughput in their distribution centers to meet higher online demand and to prepare for the upcoming holiday season.

Other bright spots in Q3 included both medical-related industries and semi, although they were a much smaller contributor to overall growth than consumer electronics and logistics. Regarding medical-related orders, we’re pleased to report growth from manufacturers that produce COVID-related products. Cognex machine vision is currently being applied in a variety of COVID-related applications, including the automated manufacturing of masks, inspection of vials, vaccines and the assembly of COVID testing kits. We’re proud to have been chosen by industry leaders to help them bring these important products to the world.

In automotive and the broader factory automation market, revenue continues to improve on a sequential basis. However, it’s unclear whether this is the start of a recovery or a catch-up from depressed levels in Q2 and from customers placing orders in advance of a potentially difficult winter season. Business was good in Q3, but we have a saying at Cognex, good is not good enough, excellence is expected. In our quest for excellence, we have launched some very innovative products in recent months that we believe will strengthen our leadership position.

Our most important product launch this year is the In-Sight D900 smart camera, which we introduced in April. It is among our most successful new product launches ever. Designed to run Cognex deep learning tools on our industry-leading In-Sight platform. This easy-to-use vision system addresses inspection applications that were previously too difficult to serve with traditional rule-based vision tools.

Customers of the D900 include existing Cognex customers as well as many first-time users of machine vision, all of whom need to inspect items for surface defects such as scratches, chips or other blemishes that human inspectors often miss and which rule-based machine vision can’t reliably detect. New color and optical character recognition models broaden the applications addressable by the D900 and perform exceptionally well on difficult task such as decoding tiny and deformed alphanumeric text on a wide variety of materials.

The merging of our SUALAB and ViDi deep learning technologies is progressing well. In fact, SUALAB vision tools are now available together with ViDi video tools on the Cognex deep — Cognex Vision Pro deep learning platform. This product is targeted at sophisticated customers who have very complex problems to solve.

Now, let’s turn to details from our third quarter. Paul, over to you.

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Thanks, Rob, and hello, everyone. Obviously this was a busy quarter both professionally and personally. My wife and kids and I packed up our home in the San Francisco Bay Area and moved to a new home near Cognex’s headquarters. We are excited to see the house when we arrived because we literally had never physically seen it. I generally wouldn’t recommend buying a home based on photos, floor plan and a FaceTime call with a realtor, but it went well. I think we’re all doing things during COVID that we never expected we do.

Turning now to our results. Revenue for the third quarter was $251 million, which represents substantial growth both year-on-year and sequentially and was significantly higher than the guidance we gave you last quarter. Growth came from consumer electronics and e-commerce sector of logistics, where revenue from a few large customers were even stronger than we expected. In the broader factory automation market, we successfully fulfilled a stronger than anticipated pick-up in demand and accelerated customer delivery requests that were previously scheduled for Q4. And new COVID-related business that Rob just spoke about contributed nicely.

Automotive remained a drag for considerably less so than in Q2. Gross margin was 76%, which was higher than we expected and an increase over both Q3 of 2019 and the prior quarter. And that is even after excluding an $8 million excess inventory charge we took in Q2. The stronger performance was due to a favorable product mix and leverage on higher volume. Gross margin and logistics, while still dilutive to the company overall, continues to improve. As we discussed three months ago, we recorded one-time charges in Q2 for a restructuring and a write-down of intangible assets that totaled approximately $35 million. Restructuring charges in Q3 were very modest at $250,000 and we expect to complete the charges in Q4.

Excluding those charges, the combined total of RD&E and SG&A increased by 4% sequentially and 2% year-on-year. This is consistent with our expectations. Within operating expenses, incentive compensation was higher due to strong revenue. And we continue to realize savings in travel and entertainment and from the restructuring actions taken in Q2. Operating margin expanded to 38% in Q3 ’20, which, as Rob noted, is 14 points higher than in Q3 ’19, demonstrating the operating leverage we have from incremental revenue.

The effective tax rate was 18%, excluding discrete tax items. This is a slight decrease compared to Q2, given higher profit, reducing the impact of non-deductible expenses. I’d like to make you aware of a discrete tax benefit we expect in Q4 related to our 2019 federal tax return, which we filed this month. Under new IRS regulations, we were able to reduce our US tax liability by more than $12 million for foreign taxes we paid when we moved acquired Sualab technology from Korea. We will recognize tax savings for accounting purposes this year in the fourth quarter.

Now back to Q3. Reported earnings doubled to $0.49 per share in Q3 compared with $0.24 in Q3 of 2019. We reported a loss of $0.01 in Q2 of 2020. On a non-GAAP basis, earnings were $0.47 per share in Q3 compared with $0.24 in Q3 ’19 and $0.18 in Q2 of 2020, excluding discrete tax items and the charges just mentioned.

Looking at the change in revenue for Q3 year-on-year from a geographic perspective, Asia was our best performing region increasing by 82% year-on-year with Greater China growing even faster due to this quarter’s substantial contribution from consumer electronics. Notably, customers in China are largely back to work, while challenges continue elsewhere in Asia, particularly India.

In Europe, revenue was roughly flat year-on-year. Growth in logistics and in the broad factory automation market offset a decline in automotive. You may recall that in past years, Europe was helped by consumer electronics orders for Cognex products used on assembly lines in Asia. Due to a shift in procurement, that revenue is now largely recognized in our Asia region.

In the Americas, revenue increased by more than 30% year-on-year due to growth in logistics. There was also incremental revenue from medical-related industries, including companies scaling up production for COVID-related products.

Turning to the balance sheet. We ended Q3 with $1 billion in cash and investments and no debt. As noted by Dr. Bob, we announced today that our Board of Directors has increased the quarterly cash dividend to $0.06 from $0.055 per share. The dividend is payable on November 27th to all shareholders of record on November 13th.

Now, I’ll turn the call back over to Rob.

Robert Willett — President and Chief Executive Officer

Thank you, Paul. In summary, Cognex had a strong third quarter, but the substantial consumer electronics revenue we expect in Q3 is behind us for this year. It would likely be several quarters until we report revenue as high as we did in Q3. We believe revenue for Q4 will be between $190 million and $210 million, which represents an increase year-on-year due to growth in consumer electronics, logistics, medical-related industries and semi. Automotive is improving but remains at a significantly lower level than in recent years. There also continues to be a high degree of uncertainty in today’s environment and business conditions are difficult overall.

Gross margin is expected to be in the mid-70% range and lower than we reported for Q3, given the expected increase in logistics revenue as a percentage of total revenue. Operating expenses are expected to increase by mid-single digits on a sequential basis and to decline year-on-year due to cost saving measures and lower travel and entertainment costs.

Lastly, the effective tax rate is expected to be 18%. That excludes all discrete tax items such as the expected $12 million benefit described earlier by Paul.

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

Questions and Answers:

Operator

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

Josh Pokrzywinski — Morgan Stanley — Analyst

Hi. Good evening, all.

Robert Willett — President and Chief Executive Officer

Hi, Josh.

Josh Pokrzywinski — Morgan Stanley — Analyst

I guess, first question on the consumer electronics strength, which was pretty notable. I guess, pretty consistent with what we’ve seen and heard out of the supply chain constraints, low inventory lead times extended out to things like PCs and notebooks. I guess, first question, how long do you expect that to continue? And what have your customers told you about kind of future investments there, given that this is not something that they would have anticipated six, nine months ago either?

Robert Willett — President and Chief Executive Officer

So, Josh, I’d say that this is a good year for our consumer electronics, not a great year like 2017. And it’s changing in dynamic kind of as it often does. Obviously there’s new technologies rolling out like 5G and some of the sort of more virtual reality-type technology we’re starting to see adopted. And if you joined us for our Analyst Day about a year ago, I think we were sort of — I think we sort of suggested that these new technologies were coming, and they’re always coming in consumer electronics. There’s always innovation and it’s always challenging to manufacture. And that’s why you need great vision technology in automation to do it.

So, I think this is a fairly regular cadence of that going on. I think what can drive higher or lower revenue years with some of the dynamics we’ve talked about like big model changes and shift to new technologies. And in this case, obviously market dynamics like to work from home high level of orders that we see and then new features like screens. A lot of great new OLED screens from these suppliers hitting the market now currently. But I think really that’s as much as I can tell you. I’m not — I don’t have great insights into next year’s roadmaps or the demand profile unlike the companies that actually make these products.

Josh Pokrzywinski — Morgan Stanley — Analyst

Understood. I appreciate that color. And then, I guess, just a follow-up on the cost side for whoever wants to take it. I think, about operating expenses, clearly some good work done on the cost-containment side in the second quarter, getting good leverage off that here in the medium-term. As we get kind of back into a normalized growth environment at the corporate level, how should we think about either growth in operating expenses relative to revenue growth or just as a percentage of sales that there is a target in mind? Because I think if you look over the past few years, it’s been all over the map depending on investment mode or cost containment mode.

Robert Willett — President and Chief Executive Officer

Yeah. Well, Josh, I’ll start and then I’ll invite Paul to give some color. I mean, I think, we at Cognex have long-term plans to grow the company substantially at high gross margins. And we are investing in R&D to support that growth and sales force where necessarily to grow the company over the long-term. And as you can see tonight and as you’ve seen many quarters at Cognex, there’s substantial fall through on revenue growth to the bottom line. So that’s kind of our model.

Now, we believe, at the moment, we have capacity to grow revenue substantially without significant head count additions. We think we’re pretty well-sized and we’re still not as big as we were in 2018 in terms of the size of the business if you take our guidance for Q4. So, I think we have plenty of room to grow and without adding a lot of cost. But of course, there’s more detail as salary increases and other things that inevitably got businesses absorb and other factors as well. But generally, I think we’re pretty well-sized expense wise to grow without adding a lot of expense. Paul?

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Yeah. I mean, I think that’s right, Rob. And we are in the middle of our budget cycle and we’ll have more to share with you in February related to expectations for Q1 and so on. But I think it is that balance of being very disciplined in the short term, we are being disciplined around headcount growth being disciplined around all of our operating expenses while ensuring that we continue to be positioned well for longer-term growth. Of course there’ll be some puts and takes. Right, we save money on travel and entertainment this year.

I assume that will be fairly conservative next year, but we hope to be able to travel more and see customers more often. By the end of this quarter, we’ll have annualized our Sualab costs, so that won’t be a variance will be talking about in the New Year, which will be great too.

Josh Pokrzywinski — Morgan Stanley — Analyst

I appreciate the color, Rob and Paul. Thank you very much.

Operator

Our next question comes from the line of Joseph Giordano with Cowen. You may proceed with your question.

Joseph Giordano — Cowen — Analyst

Hey, guys.

Robert Willett — President and Chief Executive Officer

Hey, Joe.

Joseph Giordano — Cowen — Analyst

Along those same lines are you kind of rethinking the sales force kind of organization, a little bit at this point because here obviously being successful with people not traveling, I know that’s a huge part of your — historically huge part of that sale and being face to face of customers. But now with the ability to kind of do things remote or are you organizing it internally different or people covering is it not regional anymore, how do you think about this in kind of the new world of connectivity?

Robert Willett — President and Chief Executive Officer

Well, around the restructuring we did earlier in the year, we did do some work on the sales force, more just to align them with their capabilities in areas where we needed. We saw strong growth potential over the coming years. So there was some realignment. On your point about changing the way we work, I mean I think we were pretty successful at changing to online sales and marketing. And we’ve kind of pivoted into that pretty well in the spring. We’ve been seeing as much as 50% of our sales activity really being online and then looks very well [Technical Issues] background noise — it works, that was not a sales call going on in the background [Indecipherable]. So anyway, it works pretty well selling online — online for us. Our customers are engineers and often sometimes they really want to meet with people in person. They’re introverts and they enjoy kind of getting into the technology and we found them to be very receptive to kind of an online selling model.

But where it can be more challenging or areas where we have very sophisticated technology that requires hands-on work on a customer site, right? And we would have expected to see some more sales, particularly from our deep learning technology and replacing human inspectors in Asia. We kind of talked about that I think a little bit in the last conference call where it does require more on-site work. Fortunately now things in Asia are opening up much more and we’re able to do much more of that. So, it’s a long way of saying, I think that we’ve adapted pretty well. We’ve reorganized our sales force to kind of address what we see in front of us.

Joseph Giordano — Cowen — Analyst

I also wanted to ask on logistics. I mean I know you had some core customers that are large retailers and that makes sense. Curious as to the momentum you’re seeing on new customer front, whether it’s pretty old tech companies or like a FedEx UPS-type companies or just smaller retailers looking to move more omni-channel. What’s the pacing on new customer acquisition into that space?

Robert Willett — President and Chief Executive Officer

We’ve been in this market about five years. And so, certainly in the Americas market, where we have the majority of our logistics revenue. We’re well known, I think, sort of the big technically sophisticated players in this market. And they certainly respect and know our technology, but we’re also expanding to a lot of new companies that are coming up, particularly in the e-commerce space. We had one very nice customer in this quarter who sold pet-related products online. For instance, one that was a new customer for us. And sort of innovative start-up companies, I think, like Cognex technology and like the way we work. So we’re seeing some kind of growth in that area.

I think, custom is we would really like to be doing more business and feel not in a great place at the moment are bricks and mortar retailers, customers that really haven’t developed an e-commerce model and then now struggling whether financially or logistically to do it right. We also have had a good business in airport baggage handling. But as you can imagine, that isn’t going anywhere right now. So, there are definitely some parts of the logistics market that are down and not really signing up new customers for us.

Joseph Giordano — Cowen — Analyst

Thanks.

Operator

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

Richard Eastman — Robert W. Baird — Analyst

Yes. Thank you and congrats on a fantastic quarter. Just a quick question on the logistics business in the e-commerce business that you referenced. When we think about consumer electronics, there is a seasonal demand to get in front of the holiday season. So it’s logical that that falls off seasonally. But the logistics business, there were some big orders booked by some of the upstream players in the second quarter. Lots of commentary on how that would — those bookings would ship well into ’21. How does the backlog look for you in logistics or e-commerce and is there the same seasonal pattern there or is there enough panic by the e-commerce players to get square footage in place that that business can be consistent from Q3 to Q4 and run well into ’21?

Robert Willett — President and Chief Executive Officer

Yeah. Hi, Rick. Generally backlog is not something we comment on except just at the end of the year and obviously, but we did give some color maybe a year ago on some larger orders that we’re going out for longer periods. I would say this; I would say, we’re still getting to know the logistics market. I think it’s a market where we can see pretty consistent revenue over quarters. However, it can be lumpy when larger orders hit. So this is not obvious to me now being in this market that it’s great market in a particular quarter or poor market in a particular quarter. There’s not a sort of cyclicality or seasonality that I observe and there is some lumpiness. But I draw your attention that I think we’ve seen very good sequential quarter of growth in logistics and I think we’re well set, in general, if we take out lumpy stuff to see that going forward.

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Yeah. And I might just add part of what’s contributing to our expanded guidance range that we’ve had the last couple of quarters. Beyond just sort of COVID related uncertainty is how we balance meeting customers’ demands. I’m trying to pull orders influences in anticipation of a challenging supply environment or not being able to get into deliver certain orders and so on. So as logistics has grown. It has added a bit of uncertainty to kind of that revenue timing for us.

Richard Eastman — Robert W. Baird — Analyst

Okay. And did you have a or more than one 10% customers in the quarter?

Robert Willett — President and Chief Executive Officer

Again, that’s not something we disclosed. You can read our 10-K at the end of the year, we will tell you.

Richard Eastman — Robert W. Baird — Analyst

Yeah, okay. Okay, fair enough. And I just — could I just ask the D900 that you introduced back in the spring. My recollection is that the first target market or significant kind of first adopter and vertical was around consumer electronics for some of those tough to inspect applications. Can I just ask that the D900 have a measurable impact in Q3 growth? I mean, did it have that success?

Robert Willett — President and Chief Executive Officer

Well, Rich, first thing I’d say is, no, you misunderstood it. You thought it was a consumer electronics product specifically. I think our expectation was it was going to be very large in automotive. So, the success we’re having isn’t driven by the buoyancy of that market, I’ll say that, but it’s very widely used. Some of the COVID-related applications I talked about. I have deployed the D900 to do inspection of things like vials and masks.

Richard Eastman — Robert W. Baird — Analyst

I see. Okay. Okay, very good. Thank you.

Operator

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

Karen Lau — Gordon Haskett — Analyst

Good afternoon, everyone. Rob, I was wondering if you guys are to still to an extent restricted by excess to customer site during this period. Which I guess would lead to still upon plan to catch up pent up from projects that or is there were placed before. Or has that you know largely been caught up already. If you can just comment a little bit on that?

Robert Willett — President and Chief Executive Officer

Well, as I kind of mentioned in my opening remarks, it’s difficult call to know kind of we have. I’d say quite a lot of sort of some volatility going on where customers, some of them are really pulling in demand, because they’re worried about supply chain and the second wave of COVID shutting factories while causing disruption. And then, you have other ones who are run like you suggest our haven’t really had the resources and time will give us the access to drive the products and the projects. So it’s not something I can’t really quantify for you. Something I would say kind of in-person sales activity kind of varies around the world like in China. It’s a 100% what it was before, it’s going great guns [Phonetic] in other markets. Japan, parts of Europe it’s much less good less than 50% of sales activity in person. So clearly, I think that that’s an along with kind of spending anxiety and those kind of markets that depressing sales and I would expect that to improve when we kind of get back to normal business in those markets.

Karen Lau — Gordon Haskett — Analyst

Got it. And then I was wondering could you comment on kind of the cadence of improvements in outside of [Indecipherable] and logistics, which obviously have been very strong but in auto and the other general industrial markets food the beverage and whatnot. How much are they still down year-over-year first of all, and what’s the cadence of sequential improvement that you were seeing? Did you see maybe over the summer like sort of big ramp up and then now is the sequential improvement, is that kind of more steady petering out or it has just been kind of steady improvement? If you can talk about the cadence of like the activities that you’re seeing in those markets.

Robert Willett — President and Chief Executive Officer

Yeah. So I sort of mentioned I think on our last conference call that are, our automotive business was, I think I sit down around 40% in the second quarter. It was down much less, right, last quarter. We’re not going to get into the business of giving quarterly growth rates on industries. But certainly bad, but a lot less bad than it was. And I think we all know that automotive was our biggest market last year. So that’s a pretty substantial headwind that we’re starting to overcome, but a lot of other industries actually kind of did pretty well, I would say.

Obviously we’ve talked about our transport, food and beverage, life science, medical devices, pharmaceuticals were all showing much more improved growth rates as we got into the third quarter. Consumer products maybe was not as strong as we would have liked to have seen in terms of overall growth. And again, that may have to do with more access to factories and problems, particularly around food processing and things like that.

Karen Lau — Gordon Haskett — Analyst

Okay. And then, the cadence of sequential improvement, like, are you seeing, like a bigger ramp some timing for the summer and then it’s just kind of petering out or it has the improvement sort of been steady over the course of the quarter?

Robert Willett — President and Chief Executive Officer

Just, I mean, it’s difficult to say. I think, as I say, a lot of volatility. Paul, do you want to comment?

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Yeah, I mean that we don’t spend a lot of time talking about month to month color, but we do see obviously that April was kind of a weak point, right? And we’ve improved since then and again still a bit too soon for us to say whether this is a V-shaped recovery or kind of some of the pulling in of orders are recovering from a quite a depressed Q2.

Karen Lau — Gordon Haskett — Analyst

Okay. Understood. Thank you for the color.

Operator

[Operator Instructions] Our next question comes from the line of Andrew Buscaglia with Berenberg Capital Markets. You may proceed with your question.

Andrew Buscaglia — Berenberg Capital Markets — Analyst

Good evening, guys.

Robert Willett — President and Chief Executive Officer

Hi, Andrew.

Andrew Buscaglia — Berenberg Capital Markets — Analyst

So you gave — last quarter you gave a pretty strong guide for Q3 and you exceeded it by quite a bit. So, I’m wondering where were you mostly surprised? I mean, that you called out the e-commerce logistics, consumer electronics, then you have to call it out some online learning working from home, kind of it seems like pickup in that activity. But where, I guess — where were you guys surprised?

Robert Willett — President and Chief Executive Officer

Well, I’ll kick off. Paul can give some more color. I mean, certainly e-commerce fulfillment was very, very strong for us. Consumer electronics or so I think came in stronger as we move through the quarter. But — and then, geographically, Americas certainly did better, I think, than we were expecting as we moved through the quarter.

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Yeah. I mean, obviously growth versus prior year. Consumer electronics and logistics really were the drivers, outperformance versus our guidance. We saw kind of steady improvement through the quarter. A lot of that really was driven by the base business as well. Just converting orders more quickly than we’re used to seeing, just higher average daily sales versus kind of what we had projected at the time kind of showing again a steady recovery. Those are kind of big drivers of which the Americas clearly saw it there. But we saw it pretty broad based across our regions.

Andrew Buscaglia — Berenberg Capital Markets — Analyst

Okay. Yeah, it’s quite — you haven’t seen it quite a bit like that on your own guidance in some time. So it’s just interesting that those trends are even stronger than you anticipated.

Robert Willett — President and Chief Executive Officer

We’re proud of the revenue results. We’re not as proud about the guidance versus that. It’s a very difficult business to predict.

Andrew Buscaglia — Berenberg Capital Markets — Analyst

Yeah, I imagine. And I wanted to ask you too on the AI deep learning. You made a comment that the D900 was year’s most successful product launch. What — I guess what’s behind that statement, it doesn’t seem I get too material right now. And you’re tying it to more automotive. So, as a follow-up, where — if we were to try to model in some material impact next year from this, which end markets that we assume that comes in?

Robert Willett — President and Chief Executive Officer

Yeah. So, deep learning is a technology that’s changing and expanding the served market of vision, right? And the D900 really brings very powerful kind of techniques for inspection, particularly on to this world best-selling smart camera platform we own called Insight. And Insight has tens — hundreds of thousands of users who know how to program. And now they have all these extra tools available to them in the D900. So — and what’s wonderful is, that’s a very wide spread product serves pretty much all the markets that we serve. And so it’s bringing that technology. I think we would expect, yes, automotive but really almost all the markets that we serve we expect the D900 to be a big player. Where it might be less of a kind of a move to growth overall would be in Asia where it tends to be more interesting using PC-based vision software is loaded on two powerful computers and used in the factory. And that’s generally not used in other markets in that way.

But fortunately in that market we now have Sualab and the technology we acquired there, which is very powerful on PC platforms and useful for inspection. So, Cognex, when you launch a new product, you don’t see hundreds of millions of dollars in the first year. This is not like a consumer market, right? So normally it can tend to ramp. And we can — it can approach a peak in the third year. So, I would sort of — I would a temper your expectations. But the initial signs we see in the first six months in terms of its ram power is good as any I’ve seen. And what I really like about it is, it’s getting us to new customers who couldn’t use machine vision because it was either too difficult or it couldn’t do the inspection that they currently use or it’s going to existing customers who have applications and tasks they couldn’t do before. And now we can do for them with the D900.

So, we’re excited about expanding our served market. Then to give you kind of another data point if you joined — if you were with us at our Analyst Meeting last year. We sized the deep learning market globally and machine vision at that pointed about 100 million and we said we thought it was growing at 75%, right? So the ease of use, it’s helping annually — 70% annually. The ease of use certainly is helping to broaden the applications and the speed of adoption. But that may give you a sense of scale about what the overall opportunity is for a technology like that.

Andrew Buscaglia — Berenberg Capital Markets — Analyst

Yeah, okay. Thank you. That’s helpful.

Operator

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

Blake Gendron — Wolfe Research — Analyst

Hey. Thanks, everybody. I wanted to circle back on the third leg of the stool being automotive. Somewhat scary to think if you had all three of your major end markets working at the same time. USR, a surprise on the upside, I know you’re not going to give us an exact cadence of recovery in that end market. I guess, looking past the pandemic, things like electric vehicles, seemed to be, there is some pent up optimism, particularly around the battery technology breakthroughs that we’ve seen from Tesla and others. So, I guess, my question is, where does Cognex stand on sort of the IC to EV transition? What sort of uplift could we see from an intensity standpoint here just considering that technological inflections or really what drive your demand?

Robert Willett — President and Chief Executive Officer

Yes. Well, first of all, thanks for the question. If I wouldn’t say the third leg, if I was referring to automotive, I’d say the third wheel. But keeping that in mind as we talk about it, automotive is a big market for us where the majority of our business has been and will be for a while internal combustion engine tie back activities. But you’re quite right to point to electric vehicles and battery manufacturer as being kind of the area where we see very challenging applications, huge capital investment, particularly in Asia around battery manufacturer and techniques in that space where machine vision can really make a difference in terms of yield and performance and scaling up for that work that has to happen. So EV is still a very small part of our overall automotive revenue. It’s growing very quickly and — but I think it will be a while before it says the majority of our business based on what I see on new product plans from our customers.

Blake Gendron — Wolfe Research — Analyst

Got you. Wanted to circle back on working capital. Great execution in the quarter, particularly on collections. Work and working capital go from here. And what are some of the puts and takes to free cash conversion? Is it a segment mix sort of input? Is it a customer mix input as deep learning and maybe some of the software-centric capabilities get to be a bigger part of the business that going to have a structural impact on working capital moving forward?

Paul Todgham — Senior Vice President of Finance and Chief Financial Officer

Yeah. I don’t see a lot of changes structurally in working capital. So, thank you for the compliment. We’re very happy but also pleasantly surprised by how good collections environment has been. Our team has been working hard, but also just really good partnership with our customers too and so on. So, yeah, I mean, I think in terms of puts and takes, we need each customer kind of where they are and where they need to be. We look for opportunities to partner with them work with them, we obviously do have a tremendous balance sheet, which can be a source of competitive advantage for us in challenging times. But we’ve seen fewer issues with collections from customers than we might have expected, given the pandemic. It helps, that I think we are a priority investment for them and they can get more products, sometimes until they pay us. But generally speaking, we have a great relationship. And I don’t see big changes going forward.

Robert Willett — President and Chief Executive Officer

And I’ll just — it’s Rob here. I’ll just build on something. I mean, if you followed Cognex for a while, we’re not like a normal company. We really believe strongly in paying our suppliers on time and getting the best support and having the best relationship with them. And keeping plenty of inventory to make sure we can supply the technologies that we have that have quite long roadmap. So, we’re not looking to optimize working capital. We’re looking to optimize high margin growth and the quality of our company.

The other thing I would say in dealing with some of these very large customers, some of them are very — who are long-term payers, right? And as a pull into that, our balance sheet really gives us the air cover to do that without any concern.

Blake Gendron — Wolfe Research — Analyst

Understood. Thanks for the time.

Operator

[Operator Instructions] Our next question comes from the line of Joseph Giordano with Cowen. You may proceed with your question.

Joseph Giordano — Cowen — Analyst

Hey, thanks. So let me jump right in. Just — Rob, just wanted to quickly clarify something you said. I think I missed the beginning of it. You said in Asia there are customers there that are more inclined in some cases to use PC vision. Was that for a particular application or I didn’t hear exactly what you were referring to?

Robert Willett — President and Chief Executive Officer

No, it’s the market dynamics in general, right? There is a lot of very high quality capable engineers in China particularly and who are less, less expensive I think and more eager to deploy vision. For those customers, we have the best and most powerful PC vision suite in the world called Vision Pro. So, a lot of them favor using that and a lot of them who are very big manufacturers use it very effectively.

Joseph Giordano — Cowen — Analyst

Got it. Thanks.

Robert Willett — President and Chief Executive Officer

Joe, sorry, to clarify, are you asking about deep learning or were you asking about vision in general?

Joseph Giordano — Cowen — Analyst

I was just curious like, is this something, are you competing against PCBs vision for traditional like consumer electronic inspection like there and I didn’t think that was the case. So just curious is to like where are you competing against that tech more often.

Robert Willett — President and Chief Executive Officer

Yeah. So you see predominantly the largest share of PC-based vision in Asia and electronics is a big, big market there.

Joseph Giordano — Cowen — Analyst

Sure. Okay. Thank you.

Operator

[Operator Instructions] We have reached the end of the call. I would now like to turn it back over to Dr. Bob for closing comments.

Robert J. Shillman — Chairman and Founder

Thank you very much. And I want to thank all of those who’ve called in and asked questions. Machine vision plays an increasingly important role in automating the manufacture of items, the tracking of those items and even today the delivery of those items. In view of that and in view of our leadership position, we remain bullish on the long-term prospects for Cognex despite the current difficult business conditions. And we look forward to talking to you next quarter and reporting, but I hope are going to be very good results. Thank you, again.

Operator

[Operator Closing Remarks]