Cognex Corporation (CGNX) Earnings Call Transcript & Summary

Hey, good afternoon, everybody. I'm Brian Gesuale, senior analyst covering the industrial tech space for Raymond James. Delighted to have Cognex here to join us, a leader in the machine vision market with a lot of AI and deep learning IP. They're going to give us an update on their story. Paul Todgham is going to do that, the company's Chief Financial Officer. So we're really excited to hear the update there. We're going to do a brief presentation, so you'll have some slides up there, so you can start to put those up, please. And then we'll be taking some Q&A. I have some questions preloaded. But if anyone in the audience has any questions, please feel free to send them to me via e-mail, and I will try to get to them throughout the course of the program. So Paul, I'll turn it over to you.

Great. Thanks, Brian, and thanks to the Raymond James team for hosting us. And thank you all for joining. I'm are calling in -- or zooming in here from Natick, Massachusetts, where I think Tampa and Orlando have a speed by about 55 degrees today. So I'm sorry, we're not -- particularly, sorry, we're not face-to-face, but hopefully, this is the only virtual conference for Raymond James and next year, we'll all be down in Orlando. I joined Cognex almost exactly a year ago. I came from Levi Strauss & Company. And I previously spent time at Ross Stores and the Boston Consulting Group. It's a pretty crazy time to change jobs and move cross country. And I've still not met several of my colleagues face-to-face or visited any customer sites given the pandemic. But it's also a great time to be at Cognex as we've emerged from the trough of Q2 last year a much stronger company with great growth prospects supported by industry-leading technology and a truly excellent culture. So next slide, please. Just keep in mind that any forward-looking statements I may make today are based upon information that we believe to be true as of today. There's a lot of uncertainty, even more than normal, of course, in these times. And you should refer to our SEC filings for risk factors around these statements. So what is machine vision? Cognex is the leader in the field of industrial machine vision, which is an exciting technology that gives equipment the ability to see. Machine vision operates very much like human vision, your eye like a camera captures data and your brain like vision software makes sense of what it's seeing. Now this all happens easily, seamlessly in humans, but it can be very challenging in manufacturing, getting the answer you need to process or to give with high accuracy, speed, repeatability and reliability in a real environment requires a lot of technology, optics knowledge and application experience. We've been at it for 40 years at Cognex, and we've learned a lot in that time. But we still believe we're in the early innings of this industry and our own growth story. Next slide. Cognex applies its technology to difficult applications performed on high-speed production lines and manufacturing and in logistics. It's something we do better than anyone else. Our products perform critical applications that can be summarized into 4 broad categories that we use the acronym GIGI to remember. So the first, Guide. Machine vision will find objects in a field of view and use that information to guide a robot or an assembly machine. Identify. This is identifying parts and packages by reading unique barcodes or optical character recognition, alphanumeric characters, to ensure that the appropriate process is performed on the correct item in the right sequence. Gauge. Vision can perform in line, highly precise noncontact measurement of critical features of a part accurate to a microscopic level. And lastly, Inspect. Vision will visually inspect an item for surface defects and irregularities before it leaves the factory or the logistics center. Next slide. Machine vision is a great market. It's growing quickly. It's difficult to do, and there's a lot of advancement going on in it. There are about 360 million humans working in manufacturing around the world. And about 35 million of them are inspecting with their eyes to perform basic tasks that often can be done better and more cost effectively by machines. There are several factors that are driving the adoption of machine vision linked to robotics and advanced automation. These include the expense to manage people, particularly in COVID and the impurities they bring into the production process, the need for quality and productivity improvements, a desire for faster throughput and products that are becoming too small to make by human hand or to view by human eye. We view that most broadly as our available market. Turning to our served market. Next slide, please. We estimate our served market at about $4.2 billion, and this is a narrow conservative view of the applications that can be addressed today by Cognex products. It excludes potential opportunities that may develop over time and those segments we choose not to target. We calculated our own market estimate in 2019 because there's really no reliable third-party data available in the way that we look at it. And based on 2020 revenue, we had about a 20% share in those markets, varying by product. We then can segment the market in several ways, by product, by application, by industry or end customer. Next slide, please. So Cognex is a technology company with a high-margin, high-growth operating model. We were founded 40 years ago by 3 MIT grads, and all we do is machine vision. We report software-like gross margins, around 75%, because the capabilities of our products are in the software algorithms that we develop. We do the brain part of machine vision very well. In 2020, our revenue grew by 12% to $811 million, and we maintained those strong gross margins because we have great, highly differentiated software-based products. We solved more systems and have a more recognized brand than any other company in our specific industry. Next slide, please. Turning to our 10-year history. Cognex is a growth company. We invest a lot in technology for a stretched goal of 20% revenue over the long term. Now as our history demonstrates, revenue growth isn't linear. It's hard to predict. I know we give analysts a bit of a tough time with that. There are distortions over time, and that can result in breakout years with huge growth like we experienced in 2017, 2014; and in other years, where growth is much lower. Quarter-to-quarter, the difference in our revenue growth can also be very dramatic as we saw in 2020. So after 9 consecutive years of growth, revenue declined in 2019 due to weak manufacturing confidence and uncertainty and distractions around trade tensions. Expecting a growth year in 2020, we carried investments we've made in headcount in 2017, 2018 and 2019. After the disruption caused by the global COVID outbreak last spring, we no longer believe 2020 would bring the broad-based strength we had expected. So given the circumstances, we quickly took steps to adjust our operating expenses to align with more modest growth, while keeping our product road map and plans for continued innovation intact. From a business perspective, the second half of 2020 was much more positive than we initially expected. Revenue grew 41% from H1 to H2 as the 12% year-on-year growth we drove last year was really a tale of 2 halves. We had a 10% contraction in the first half, followed by 34% growth in the second half. This growth was largely due to higher spending by customers in consumer electronics and logistics. Other bright spots included medical-related industries such as life science, COVID-related business as well as semiconductors. Automotive and the broader factory automation market are also improving, although the level of business remains lower than in recent years. Next slide. Our success is underpinned by a strong corporate culture, as demonstrated by our model, work hard, play hard and move fast. Pretty much everybody at Cognex, you ask them what Cognex stands for, that's the answer they would give. We strive to create an environment where people, particularly engineers, love to come, work hard and do their best work, their career's work in the spirit of supporting machine vision. We also believe it's important to have fun together as a team and not take ourselves too seriously. When Cognoids, as we call ourselves, see our company founder and our CEO dressed up in Halloween costumes, you can see here from fall of 2019. Dr. Bob is our founder, is imitating Mick Jagger in the green jacket. And Rob Willett, our CEO, is behind him, playing guitar as Keith Richards. It's silly, but it promotes informal communication, a lack of hierarchy, a sense of camaraderie and an engaged committed employee population. We believe this is an important competitive differentiator for us. Next slide. Our industry leadership and our ability to deliver 20% top line growth over the long-term really comes from our investment in engineering. We have product road maps that go out 3 to 5 years, and we're working on executing against those. Each year, we spend about 15% of our revenue on RD&E. It was 16% last year or more than $130 million. We believe we invest more in technology than any of our competitors. We're a high intellectual property business with more than 1,000 patents issued or pending. The sophistication of our software and our application experience creates significant barriers to entry. Next slide. I want to speak briefly about 4 important growth areas for Cognex going forward. The first is logistics, which represents roughly $1 billion market opportunity for Cognex. Most of our logistics business today is barcode reading and e-commerce fulfillment, where the need to ship items to individual customers faster than ever before is driving massive changes in technological innovation and automation. Logistics revenue grew by about 40% in 2020 due to growth in the e-commerce sector. Now representing approximately 20% of our total revenue, logistics surpassed automotive to become our second largest market. We're benefiting from major e-commerce and omnichannel retailers investing in automation to enable higher throughput and cost reductions. Other sectors of logistics, such as brick-and-mortar retail and airport baggage handling are also important areas for us, but struggled in 2020. We expect a substantial revenue quarter in Q1 2021 due in large part to a backlog of logistics orders that we intend to convert to revenue. The next area I want to point out is deep learning. We believe deep learning is the most important technological innovation to be introduced into industrial machine vision in the past 20 years. Cognex is the leader in applying this new technology to industrial machine vision. Our techniques are expanding our served market by enabling us to address applications where traditional rule-based vision can't be applied or would require thousands of engineering hours to implement. So this is an area we're investing in heavily. Our most important product introduction in 2020 and one of our most successful product launches ever was the In-Sight D900 smart camera. The D900 leverages our widely recognized In-Sight platform to enable more customers to apply our deep learning tools for the detection of scratches and chipped surfaces that were previously too difficult to solve using traditional rule-based vision. Revenue from applications using our deep learning technology more than doubled year-on-year in 2020. And as we look at the opportunities ahead, we believe we're just scratching the surface, no pun intended, of what we can accomplish. Third, a third fast-growing market for us we've moved into is 3D vision. Earlier this year, we launched a breakthrough smart camera platform that makes 3D as easy to use as 2D vision. This is called the In-Sight 3D-L4000, which positions us very effectively against competitors who have significant sales and profits in this 3D vision area. And lastly, fourth growth area is represented by Industry 4.0, also known as the connected factory. We believe Cognex can make a big contribution to industry 4.0 as companies invest to improve their supply chains in real time. Our products generate more digital data on the factory floor and in logistics than anybody else. Technology is coming to the point where it's possible to get that data off the vision system with speed and analyze it in the cloud or elsewhere. We're currently focused on connecting our systems to collect that data and provide more value to customers with what we do with that data. Next slide. In summary, Cognex is an industry leader in the exciting field of industrial machine vision. We have an experienced management team that understands the industry, a strong brand built from years of technological leadership and close partnership with our customers and a great business model that generates high-quality revenue growth with tremendous fall through to the bottom line. Look forward to answering, Brian, your questions and any questions from the floor. Thank you.

Great. Paul, that was terrific. Thanks for taking us through the story. I'm going to kick off with a few questions. Like I said, those in the audience, feel free to e-mail me as well. I really want to talk on -- about one of the big growth areas that you mentioned start there with logistics. We were really pleased to see that you had a logistics customer cross that 10% customer threshold and breach $100 million plus of revenue. This is something I know that's been a long time in the making. Can you take us through -- I think you talked about it being a $1 billion addressable market for you. But can you take us through the kind of the range of products that you serve this market in, what the penetration might look like? And who you compete with really in that segment?

Sure. Yes. Thanks, Brian. So yes, in the fall of 2019, we came out with our most recent served market size. And of that $4.2 billion, about $1 billion of that is logistics. And we believe it's growing at about 15% annually. There's, again, no great market data for this work. So we do it ourselves and tend to publish updates, often coinciding with our Analyst Days. But 18 months in, that still feels about right. Obviously, the composition of that growth has turned out differently with the pandemic than we've expected, certainly with more growth from the winners in the spaces of e-commerce fulfillment and omnichannel retailer, kind of the companies who really were able to invest through the pandemic and still generating revenues and maybe a slowdown recently with brick-and-mortar retail and certainly airport baggage handling is a piece of that, which is very weak right now. How we think about kind of the product portfolio and so on? Today, it's largely ID, right? Barcode reading is kind of the core application. And that seems like something that should have been commoditized a while ago, but vision versus laser does bring with it unique benefits, and there's been a move from 1D barcodes to 2D barcodes and just the sheer number of codes to read at the speed they need to be read in these advanced facilities, really this does allow us to differentiate with reading more barcodes more quickly even in the -- with the presence of blemishes or lighting issues or other things that can kind of get in the way of a factory floor. And again, being 0.2% better, let's say, in a barcode read rate for a facility that's seeing 100,000 items a day, that's a meaningful difference that's worth paying a premium for Cognex products to go do that and roll it out at scale. In terms of kind of how to think about the replacement cycles and pace of deployment, it's pretty complicated. But I would say the bulk of the business we've done so far has been new revenue. We aren't quite at a point where we're replacing old Cognex products. It tends to be new revenue, but that's not all necessarily tied to capacity expansion. Often, it's new applications within a field as different customers are doing different levels of automation at different parts of the supply chain. I'll kind of pause there, but happy to take any follow-ups.

Yes. No, I think that's great. I mean it's one of the markets that we're certainly very excited about. I guess maybe when you're -- is -- there is one follow-up I have. How do you think about the competitive landscape between organically developed systems from some of these larger companies as well as other machine vision peers that might be certainly targeting this fertile area?

Yes. So far, we see very little in the way of organically developed systems from these competitors, even though some of these companies clearly have fantastic engineers, some of whom we're working with, some of whom we're working in corporate and other areas. So it tends to be much more against other machine vision competitors, the largest of which in logistics is a German company named SICK. And they're deeply penetrated in Germany and also penetrated well in the Americas and Europe. They have some good technology, and there are certain applications that they've invested in that we have not yet invested to go solve. But when we come head-to-head, we've generally been winning a lot of business, and we do see that as part of our growth story and continued room to grow. This is where I think our technology investments really are paying off as well as the application experience and know-how from working with the largest customers with the toughest problems to solve and then taking that knowledge and bringing it more broadly to the industry. So that's probably our biggest competitor today. Certainly, in Asia, you do see some very low-cost competitors, particularly in China, around kind of the barcode reading space and so on. And Hikvision would be an example of a company that's trying to get into that market quite aggressively. They are a large security camera and technology company, state sponsored, in China that we find ourselves come up against some time, and they're very, very willing to cut price. We believe our technology is still years ahead of them, but we are students of the innovator's dilemma and are always sensitive to kind of people coming in from beyond and below and creating just good enough. So we have ways to compete where we need to compete and continue to invest in technology to differentiate.

That's great. I'm going to shift gears a little bit, and I want to talk about 2020, particularly the various COVID headwinds and tailwinds. You mentioned it a few times the baggage handling business and some of the brick-and-mortar retail issues that were out there. How would you quantify the various puts and takes that COVID either created from a new opportunity set? Is everything shifted to e-commerce? Or on the converse side, where industries have ceased up like some of those that we mentioned.

Sure. Yes. We -- I think we sized the COVID impact specific to China in Q1 2020. I think we said it was roughly $10 million headwind. And then once this became a global pandemic, we pretty quickly determined that it would be pretty much impossible to quantify comprehensively versus what kind of the year could have been had we not had COVID or whatnot. So let me speak a little more qualitatively about the factors on both sides and maybe have a little bit of quantitative in there. But on the negative, as you referenced, Brian, airport baggage handling, probably kind of the most depressed. And I'm not sure when that will turn around. Obviously, when people start flying again, that's at least the necessary, but not sufficient condition, I would say, for CapEx to begin to turn around in that area. Brick-and-mortar retail and logistics has been hard hit. I'm coming from a largely brick-and-mortar, evolving omnichannel retailer with Levi Strauss & Company. As we were down 15% in Q2 last year, Levi's was down 62% and basically put a hole on every CapEx project, including some logistics investments that I'd previously been working on. The good news is, I think we are starting to see some turnaround in brick-and-mortar retail late last year and going into this year. So we feel more bullish about, hopefully, a turnaround there. And then automotive and the broader factory automation market were clearly hard hit. Now again, how to separate the COVID piece of it from -- they were coming into 2020 pretty weak already. But if we look at our dynamics, we really hit a trough in Q2 of 2020. Automotive was down about 40% when Cognex was down 15% overall in that quarter. It was also down in Q3, but then it was modestly positive in Q4. So we actually grew for the first time in several quarters in automotive in Q4, I think it was about 8 quarters. So while I don't think we're in full-fledged recovery, at least we are seeing some positive signs. On the positive side, so consumer electronics, I would say, has mostly been helped by COVID. The work-from-home dynamic and what that's meant in terms of opportunities around laptops, tablets, headphones, you name it, I think of the devices I have in my home that I didn't have a year ago, I think helped contribute to a pretty strong year overall in consumer electronics. From the smartphone side, we'd expected it would be a strong year given kind of how technology was playing out with 5G and OLED and foldable screens. And I think that played out reasonably as we'd expected. Some technology maybe didn't make it in, but I think that's kind of common. And we hope that 5G will continue to be a driver of growth as you're beyond sort of the first order effect of putting the technology in and now sort of second order effects. And then the other positives, I would say, would be COVID specific. I think we said we did out $10-ish million of business in the back half of the year on kind of COVID-specific applications. That's everything from mask inspection, vial production, at-home test kit are some of the areas where we're seeing growth. And we're seeing that growth continue and grow in 2021. At some point, beyond that, we do hope it tapers off. I'll gladly give up our revenue if it means we're no longer producing as many masks or as many vaccines or what that means for the world. But still TBD on which elements of those will be with us in some form going forward. And then I think the last piece I would say is a lot of our growth last year was driven by large customers. And it's unusual to be kind of more deeply penetrated with large customers later in our growth than maybe we were a year or 2 years ago. But I view that more as a sort of an idiosyncrasy of those were the customers who were investing in 2020 and not necessarily a strategy. I think over time, we hope to continue to grow with those customers. We love the partnerships. We've got -- we see lots of opportunity with them. But just by virtue of a broader economy and a stronger economy, we think that over time they should be a smaller share going forward.

Okay. That segues really well into my next set of questions. I want to talk about some of the vertical markets. I think it was just 2018, where the automotive business was close to 30% of sales and your largest vertical at the time. As you mentioned, it certainly fell with production in -- that we saw in '19 and then in '20 with COVID. How do we think about that business going forward now? And maybe segment out the combustion engine piece and kind of the traditional automotive markets with the EV piece which you guys have had some pretty interesting success on penetrating?

Yes. Yes. I think we get asked about the outlook for automotive quite a bit. And I think it was clearly soft entering 2020, it weakened during COVID. And right now, we're certainly in a better place than we were last spring, but still feeling like the recovery is pretty fragile. How much of our Q4 growth and kind of optimism going into the year is driven by a bit of buying behavior in anticipation of chip shortages later this year? Or will we start to see a recovery? And as the brands are introducing new models, that should be a benefit to us, but one that we haven't necessarily seen yet and aren't sure exactly when we're going to see it. So EV is clearly a bright spot in automotive. We're definitely seeing increased activity. A lot of that is in Asia, where a lot of the large battery manufacturing is taking place. So we're seeing that. We're going after those opportunities. And by all accounts, we're winning more than our fair share of those opportunities. So feel very good about that. Obviously, we have a great business with the powertrain related to internal combustion engine. And we know that's in decline and going away. So our ambition is to replace that with the EV business. I do think new models should be a good growth driver for us. Just if you look at the number of new models being announced, just to come to market in the next 3 to 5 years, that means a whole lot of new lines need to be redone, retooled. And with automation that should create a good opportunity for Cognex. I think the only kind of counter to that is underlying demand for just sheer number of vehicles. And if we had new models and a whole lot more cars that needed to be produced, I'd feel more confident. When it's kind of more models with roughly flat demand, it's a little bit more tentative, which is why we're somewhat cautious.

Is there -- if I can just follow-up on that. Are there any kind of unit economic differences as you think about Cognex content in an electric vehicle supply chain versus a combustion engine supply chain?

I think we're still figuring it out, to be honest, I mean. The -- our hope is that it should be kind of roughly equal. I mean, these -- the good news is these facilities that are building the batteries and so on are huge CapEx products with tons of automation, lots of issues around why you don't want humans anywhere near certain aspects of the production process that lends itself to robots and machine vision. And so it does tend to be kind of fewer, bigger projects as opposed to sort of more smaller aspects of a powertrain and so on. So that's why we haven't quite figured out the different pieces of it. But right now, our ambition will be to replace that. And then just that the EV business should drive volume of activity that should help us across a whole lot of other areas that are not necessarily tied to whether you have an internal combustion engine or you have a battery. I'd say another positive factor of growth is just the sheer number of sensors and such that are going into cars today. I mean, it's part of the -- chip shortage is kind of clearly exposing the vulnerability of that strategy. But the more that you have of that, that generally, again, the more automation you need and the more opportunities there are to deploy Cognex technology.

That makes sense to me. Maybe wanted to move into your largest market, the consumer electronics vertical. How are you guys viewing 5 -- the rollout of 5G, both in '20, which was a little bit obviously an atypical year but as we think about '21 and '22? And maybe how do you get an early read on this? I know your visibility is in 12 or 18 months, and it's not a perfect crystal ball. But does this feel like it's more like 2016, '17, '18? If there were a year that you could kind of characterize this to or draw analogy to, how would you do that? Or how would you just categorize the business, in general?

Yes. No, I mean -- frequently, as CFO, I feel like it's my job to disappoint people. So giving -- I don't have a view to the year that I'm willing to share at this point, and Rob has counseled me not to share any view to the year. We do tend to hold back on this until our Q1 earnings call, which is just under about 2 months from now, which is typically when we have more visibility into the smartphone side of it. But what can I share? What do I see? If you look at our history in consumer electronics, frequently, really good years have been followed by flat or down years. And 2017 was sort of that strongest year in recent memory. 2014 was also very strong. 2020 was not as strong as that, but was kind of up there. It looked more like that than -- looked more like 2017 than it did 2018 or 2019 or whatnot. So I wouldn't go in thinking 2021 is going to look like 2017 only because we haven't had a year beyond 2017 that looked like 2017. So I don't think I would go in with a ton of optimism, which is not to say you should go in with pessimism either. We do think the work-from-home dynamic may be more of a sort of shorter-term dynamic that benefited us in 2020, that doesn't necessarily repeat in 2021. The sample size of the Todgham household is, I have 5 wireless headphones in my -- sets of headphones in my house now and I had maybe 1 last year. And I'm not going to have 10 next year because I don't have enough ears to put them on in my family. So I think there was a clear upgrade, investment in technology this year, that we did benefit from. Now whether that gets replaced by a return to business investment, which may have been short changed on the consumer electronic side this year, I don't know. And that could be a potential offset. So not quite certain. But overall, we think consumer electronics is a meaningful part of the growth story for Cognex. We do target it to be growing at kind of roughly the rate that we see the company growing. So we do have ambitions to grow it at around 20%, but it will continue to be quite volatile, and we're going to have a really hard time getting annual numbers. And so much of it is still tied to smartphones, which we tend to know kind of the Q2, Q3, roughly in the April, May time frame.

That makes a lot of sense. I didn't expect you to give me a full year number, but figured I'd give it a shot. What is it maybe -- you've kind of stressed, and it's something I've always admired about Cognex, is your ability to innovate. Maybe take us through in a little bit greater detail. You touched on them in some of your intro slides, but some of the key products that introduced some of these AI and deep learning technologies that you seem to think are going to really transform the industry, maybe the In-Sight D900 is one. But really any of the ones that you want to talk about and kind of highlight how they're very different than what you've supplied in the past?

Sure. Yes. So I mean I'll start with -- we do -- we are the technology leader. We invest more in R&D than anyone else, and we don't think of ourselves as a one-trick pony. So we had kind of -- we might have 2 to 4, let's say, major product launches a year and then a host of sort of ancillary products and accessories that support that. And so it's a very robust product road map. And I do think we're at a period where we're kind of firing on all cylinders on that front on the basis of acquisitions we made 3 years and a year ago and on the basis of technology investments we've been making for some time. But a few ones. Let's start with deep learning. There's really 2 aspects of deep learning for Cognex as I think about the technology. Traditionally, the deep learning has largely been tied to a PC. So think about, you've got a camera that's then connected to a PC and all of the processor intensive processing is all happening on the PC. So that's what Sualab was doing really well when we acquired them. And also, we had -- our ViDi technology was doing that, too. And we launched last year the VisionPro deep learning, which is the first integration of the Sualab technology and the ViDi technology. And again, depending on the specific application you have, there's a kind of an identifier or a classifier that we have both the Sualab version and a ViDi version that -- both of which are very powerful, but have different capabilities. And the combination of the 2 is greater than the sum of its parts. So really for our most sophisticated customers who have a lot of programmers on-site themselves or kind of can train the machines, can tweak and so on, VisionPro deep learning is a really great offering for them and so on. And then the other product in deep learning, which we've spent a little more time talking about, is the D900, the In-Sight D900. And that's the first time we've had deep learning embedded in a smart camera. So kind of a camera with a form factor of, call it, 8 inches or so, where you've got the lens and then you've got the brains behind it. And that's really ViDi technology that is very good at processing stuff quickly in a low power, low heat chipset. And that's really about making deep learning accessible to a broader range of customers. You might use a PC to train it but once you've done that, the device is on your assembly line, not connected to PC and generating the outputs you need, making readings of, oh, I spot a defect here or I spot scratches here or things like that. And we think that just opens the field with ease of use and ability to deploy it across a really wide range of customers that makes us super excited. And then I think the last one I would say would be the 3D-L4000. So 3D is an area where Keyence are one of our largest competitors who we respect very much, has done really well, has generated a great business in 3D. We've had some product offerings, some of which have been well received, some of which a little bit less so. And we really doubled down to create great product, investing in both the hardware and the software side and leveraging what Cognex does best, which is our 2D tools and our interface, the In-Sight spreadsheet interface, which is really user-friendly, and we've got many of our customer base trained on. So this allows all those customers who have that knowledge to then use their 2D tools while also doing 3D applications and use the In-Sight spreadsheet that basically makes 3D as easy to use as 2D. So we think that's a real differentiator for us, and we'll take that business, which -- 3D grew for us last year, it grew faster than the company. But we feel like we're only just getting started there. And with the launch of the 3D-L4000, we're really going after that market aggressively.

Terrific. Maybe last one for me. I want to talk about capital deployment, right? You have such a strong balance sheet. You're really in a nice cash-generative position. The markets are coming back from a macro perspective. How are you thinking about inorganic growth opportunities? And I would imagine you're looking at some smaller technology tuck-ins like you've done in the past, but also what's the appetite for something of size as you look forward?

Yes. I think -- obviously -- yes, we keep our corporate development priorities pretty close to our vest. But I think if you -- I'll say a couple of things. I mean, one, from a capital deployment point of view, M&A probably is still the top use of our cash that we would anticipate going forward, along with, obviously, share buybacks, we want to make sure at a minimum we're offsetting the dilution of our employee equity programs. And then a modest dividend, which we've consistently grown. We had a special dividend in Q4 last year, which was again, unusual, but reflective of a very high cash balance and some anticipation around higher tax rates going forward, not exactly sure when, but at some point, so wanted to return some of that cash to shareholders. So M&A, I think, is absolutely a priority. It's going to be very spiky. Obviously, we had $0 of M&A in 2020, $195 (sic) [ $195 million ] in 2019. And I think the best way to think about our future is probably just to look at our past and what's worked really well for us. I'm not saying we won't deviate from that. But I think the things we've done in our past, we really do like, which is finding great technology, market-leading technology investments, great engineers, finding a cultural fit where we feel like we can bring people in who are going to embrace the work hard, play hard, move fast culture, be at a place maybe with a little more scale so they can take that technology and drive even greater growth among our customer base and so on. And then any -- and then bring them in and make them great Cognoids. We view almost any opportunity we look at through a lens of both technology here, we're much more excited about buying great technology than buying revenue, and then cultural fit. We are a unique place. We really pride ourselves on being a fantastic place to work and being kind of quirky and not taking ourselves too seriously and all those kind of things. So we wouldn't want to spend a bunch of money on talent that's going to walk out the door when they -- if they aren't a great cultural fit.

Makes a lot of sense to me. Paul, really appreciate you taking the time. I'm not going to have a final question. I'm going to give you the last word here. But really, what 2 to 3 things would you like existing holders or potential new holders to think about when evaluating Cognex as an investment. And the only thing I'll say is, I think the stock has doubled since you've gotten there. So let's keep that up. I'm expecting somewhere around $180 to $200 next year to close it out. But...

Yes, timing is everything, right, Brian? Yes. No, I've known for sure. And obviously, the market's done a lot since the trough of March last year and obviously our own business is part of that, but I recognize a lot of that is what's going on in the market too. And not -- we're quite humble here at Cognex about how much we're specifically driving versus -- I spend a lot less time thinking about our stock than you might think, and it helps us focus on the business. But I would say, as I kind of -- we are a growth technology company. We're a leader in machine vision. We're focused on high-growth, high-margin opportunities with a long track record of success. And maybe just my parting thoughts is, we really do believe we have 2 main competitive differentiators. It's the great technology investment, solving the problems of the leaders in the field and kind of leading from the top and the most challenging problems that our engineers love to work on and love to solve and having great reference customers who then go to other customers or we take that technology and make it a little more accessible to the broader public. And then our culture, and that culture, they really support each other. It keeps our best engineers excited to work at Cognex, to show up every day, to put in the extra hours that it takes to really hold yourself to a standard of excellence you need to deliver what we do. And hopefully, the hours go by, and you're having so much fun, you're grateful for it all. And it's been a great story for the people who have been at Cognex for a long time. For those of us who are newer to it, I think, hopefully, it will be a great story for the years to come. And hopefully, we'll bring several of you shareholders along with it. So thank you very much.

Paul, that's terrific. Everybody in the digital world, thank you for joining us. Paul, thank you for taking us through the story. And I look forward to the update on the quarterly call in a couple of months. Thanks, so much. Everyone, have a great day.

Thanks, Brian.