Q2 2022 Cognex Corp Earnings Call
Greetings and welcome to the public second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Austin and answer session will follow the formal presentation that anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. 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.
Hi, Thank you good evening, everyone welcome to our second quarter earnings conference call for 2022.
With us are Rob Willett, Cognex, as president and CEO , and Paul Todd, Jim <unk>, Chief Financial Officer.
I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available in the industrial relations section of our website at Www Dot Cognex dotcom forward Slash 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 or if we think it'll 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, 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, and our Form 10-Q filed Tonight for the second quarter now I'll turn the call over to Rob.
Thanks, Sue Hello, everyone and thank you for joining us.
The three months since our last earnings call have been particularly active to begin tonight's call I want to update you on two big challenges going on in our business right now.
One concerns a fire at our primary contract manufacturer did it cut in June .
The other relates to overcapacity in our largest end market.
First let's talk about the fire at our primary contract manufacturer on June seven.
Fire at the facility in Indonesia, where most cognex products are manufactured.
Thankfully no one was injured.
Also area on their production floor and the Cognex specific manufacturing equipment was largely unaffected.
A significant portion of our component inventory was destroyed.
As you can imagine this is a serious situation because these components touch many of our products.
As we've all seen over the past year and everything from cars to video game consoles. The unavailability of one chip in an otherwise completed assembly can hold up our customer delivery until it sourced.
Our top priorities currently ought to support customers and source supply.
Next sales noise have been actively communicating with customers and addressing their delivery schedules.
We're transitioning customers to next generation Cognex technology for older products containing chips that are hard to replace.
[laughter] called noise around the world are moving fast to source components. We're also redesigning products with alternative chips that are easier to procure.
I'm communicating directly with Ceos that many of our major suppliers and I'm grateful they are prioritizing component shipments.
Our strong balance sheet and our reputation as a technology leader and a growing customer that pays on time is helping us with suppliers at a time like this.
Cognex is culture has shined during this difficult time, the leadership team and I deeply appreciate how called noise that stepped up, especially considering all the hard work they had to put in before the fire to get us in an excellent supply position.
It has required a lot of extra effort flexibility and taking on new assignments and ingenuity in finding solutions to help us meet our commitments to customers.
We believe the brunt of the business disruption from the fire will be in the third quarter I will talk more about the implications in the guidance section of tonight's call.
Let's move now to our second major challenge.
After two years of heavy spend on automation in Cognex machine vision, our largest customer and other technology leaders in E. Commerce logistics are postponing investments in new fulfillment centers now that the surge in online shopping during the pandemic is waning.
We view this as a temporary setback in our growth profile and logistics that could take multiple quarters to play out.
Spending on new capacity for E. Commerce fulfillment has been a strong growth driver in our logistics business we.
We expect that in the near term more revenue will come from productivity and process improvement at these customers, which is good business for us, but lower volume.
The further headwind in logistics is the projects are taking longer to implement and I being delayed because customers and integrator partners are having difficulty sourcing parts.
The current situation notwithstanding we are as excited as ever about our growth opportunity in logistics over the medium and long term. It is a large fast growing and emerging market for machine vision, well, we expect to gain share.
We continue to see customers implement machine vision beyond barcode reading to perform tasks such as heightened detection of dimensioning and believe that we will be a significant growth that will be a significant growth driver for us.
Retailers outside the U S are adopting cognex products at a rapid rate and new products. We are introducing to implement our technology quickly and easily will open more of the market to cognex machine vision.
A last point on logistics as many of you are anticipating and as we enter as we indicated in our last call is that we recently updated our goal for long term growth in logistics.
We'll share that with you in the guidance section of Tonight's call.
I'll stop here for now Paul the microphone is yours with details of the quarter.
Thanks, Rob and Hello, everyone.
Revenue was $275 million in Q2 and in the middle of our guidance range.
That level represents a low single digit change plus or minus compared to Q2 of 2021 in Q1 of 2022.
Both prior periods included substantially higher revenue from logistics for the reasons Rob discussed.
Also revenue in the prior quarter included a catch up of orders on backlog.
Given the timing of the fire. The incident did not have a material impact on revenue in Q2.
Thankfully large deployments in consumer electronics were either already shipped or in cognex own distribution centers at the time.
Looking at the year on year change in revenue for Q2 from a geographic perspective.
Our best performing region was Asia, which increased by 20% from Q2 of 2021.
Stronger than expected growth in consumer electronics, and higher revenue from semi automotive logistics and the broader market was offset by a five percentage point reduction from currency exchange rates.
Within Asia, Greater China grew by more than 30% due to our delivery of large electronics orders despite rolling lockdowns in the country.
In Europe revenue increased by 13%, excluding a 10 percentage point reduction from currency exchange rates.
Despite tentative market conditions and supply chain challenges our growth came from a broad range of end markets, including consumer electronics, automotive logistics and consumer products.
Revenue from the Americas decreased by 16% year on year due to lower revenue from logistics as.
As Rob discussed we are experiencing fewer greenfield investments and activity is lower overall as integrators and customers struggled with supply shortages.
Gross margin in Q2 was 72% as expected.
This level is three percentage points below the gross margin reported in last years second quarter due almost entirely to the significant premiums we are paying to procure electronic components through brokers.
Regarding the fire operating expenses in Q2 included a net noncash charge of $17 $4 million, primarily for the value of the lost inventory on our books that we don't believe will be covered by our insurance.
I want to point out that insurance claims are being processed for both cognex and our contract manufacturer and as such we may see future adjustments to this charge in Q3 and possibly Q4.
Excluding that charge the combined total of already any and SG&A declined by low single digits on a sequential basis and was slightly favorable to our guidance.
Comparing year on year operating expenses in Q2 increased by 5% due to the incremental investments we've been making in sales and engineering head count.
Operating margin was 24% in Q2 of 2022, including the fire loss excluding.
Excluding that charge operating margin was 30% and in line with our long term target compared with 34% in Q2 of 2021 and 31% in the prior quarter.
The decline year on year was due to the elevated supply costs near term and the head count additions, we made over the past year to drive future growth.
The effective tax rate in Q2 was 16% excluding discrete tax items as expected.
Reported earnings were <unk> 34 per share in Q2, compared with 43 in Q2 of 2021 and 38 cents in Q1 2022.
On a non-GAAP basis earnings were <unk> 41 per share 43 cents and 42 cents per share respectively for prior period and prior quarter, excluding discrete tax items in the fire loss just mentioned.
Turning to the balance sheet, we ended the quarter with $788 million in cash and investments and no debt.
Having a strong cash position continues to be an advantage for us following the fire we were able to quickly begin securing components without having cash flow concerns.
Accounts receivable increased by 32% from the end of 2020, one and remains very healthy.
Large orders shipped late in Q2 represent most of the increase.
Regarding our inventory balance we wrote off approximately $36 million, mostly component inventory lost in the fire net of reserves.
We also wrote off about $8 million, primarily prepaid assets representing payments, we made to our contract manufacturer for component inventories they bought and held for US that were lost in the fire.
Now I'll turn the call back to Rob.
Paul in summary, our results for Q2 were good. However, we believe Q3 will be more difficult. We expect revenue for Q3 will be between 160 million and $180 million. This.
This range is about $113 million lower than what we would've expected a few months ago.
The two challenges we have going on in the business have created a revenue gap that we had sized as follows.
First the fire reduced our expectations for Q3 by about $80 million.
Oh that we believe $20 million is lost revenue from discontinued products and delivery requirements, we are not able to meet.
The remaining $60 million, we expect to realize in later quarters.
Second the recent slowdown in logistics and project deferrals reduced our expectations for Q3 by about $50 million. We believe Q3 will be the low point for logistics revenue this year.
Separately, we expect revenue from consumer electronics will be strong in Q3 and grow year on year.
We also believe that annual revenue from consumer electronics will grow by double digits year on year up from our prior estimate of moderately higher.
We believe gross margin in Q3 will be about 70% due to pressure from the lower expected revenue and broker premiums. We believe we will be paying premium prices to brokers.
Scarce components into next year.
We expect the combined total of R&D and SG&A will decline by low single digits on a sequential basis due to lower variable incentive compensation.
The effective tax rate in Q3 is expected to be 16%, excluding discrete tax items.
Lastly on new goals for logistics is to grow revenue by 30% compounded annually over the long term.
This is an internal goal we are sharing with you to help you understand how we think about logistics.
We are not providing guidance.
We believe logistics will continue to be a growth driver for many years to come after we get through the near term situation.
I'd like to remind you that revenue from logistics grew by approximately 65% year on year in 2021, and the five year compounded annual growth rate was approximately 50% and in line with our previous target.
We believe it's prudent to adjust our target rate given the dramatic growth we experienced in recent years and a sizable 300 million dollar annual revenue base.
Now we will open the call for questions. Operator. Please go ahead.
At this time well be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two Charo move your question from the queue for participants using speaker equipment. It.
Be necessary for you to pick up your handset before pressing the star key one moment, while we poll for questions. Our first question comes from the line of Joshua Buchalter Winski with Morgan Stanley You May proceed with your question.
Hi, good evening all.
Hi, Josh.
So Rob question on the logistics commentary you gave as it pertains to how much of the three key revenue buildup or.
Lower than expected revenues kind of built out there and that seems to suggest a run rate here in logistics as you know pretty small call it well under $50 million a quarter.
Is that sort of the you know the run rate that we're gonna be out for a while or is there something that's more acute happening next quarter that we should maybe keep in mind, there's a bit more of an artificial world.
And I think we are looking at next quarter Q3, but one of them are currently and as that as artificially low and to give you. Some context on that logistics business in the first half was slightly up to flat on the prior year, we're expecting you know a very difficult quarter and in in <unk>.
Q3 for the reasons I explained both your deferred orders and supply chain challenges, both ours and other companies implementing systems in which we go into and then we would expect a much stronger quarter in Q4 sequentially, but there's still a lot of things we don't know.
So I think we're expecting certainly logistics business to be down year on year, but but certainly not down to the rate going forward that we're going to see in this quarter that we're in now.
Got it that's helpful. And then in terms of maybe you're just early thoughts or conversations.
<unk> with customers about the time over which yeah that $60 million you know gets caught up on our on the deferred side, if I'm remembering the numbers right.
Is that something its two quarters eight quarters like how long do you anticipate the deferrals to take.
Okay.
But that's you know that's a difficult question to answer you know we have been we have deliveries. We're rescheduling now I would expect a significant portion of it would happen in Q4 or Q1, I mean, that's the normal kind of order timeline for us I wouldn't expect it to extend much beyond those two quarters.
Got it.
I was hoping for thanks for the color good luck.
Thank you.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. You May proceed with your question.
Yeah. Thank you good afternoon everybody.
Look obviously, clearly Ah yeah, clearly a lot of dealing with a lot externally right now I'm, just curious in and thinking about the fire.
What portion is the portion that discontinue versus the deferrals like how did you kind of can't like how did you. How did you arrive at the $20 million versus 60 million.
And maybe talk to us a little bit about some of the decisions you've made on some of the products that you decided.
Not to try to pursue.
Going forward.
Sure Joe I'll start this is Paul and Rob can chime in.
We were using the best information we have at this time, it's obviously a dynamic situation and you know, we're getting new information from customers and from our sales teams regularly but broadly speaking you know well we would say the two factors are both both.
Both important in that in that $20 million.
And on.
On the products discontinued for instance, we can point to one large project for instance, it was the last project, we were going to do with a particular product line and you know given the fire damage, we're no longer able to fulfill it. So that's sort of one project for logistics customer that is completely off you know and then there's a series of much smaller pieces, where it really is projects that.
There are products that were near the end of their lifecycle than we maybe had last time buys for a period of time that it doesn't make sense to go back into the market to go to go do that.
And then with regard to the sort of short short lead time items, that's really what the but the other lost business. It is theres, a some short cycle where.
Our customer need something very quickly and we can't fulfill that.
That's included in our $20 million estimate, but you know.
Overall again, that's that's a.
Given the small percentage of our business and we're thankful that with the strength of our customer relationships. We tend to have pretty good visibility and also have built trust over time that allows us to figure out you know when do they really need the product and how can we meet those needs.
Yeah.
Got it that's helpful, but I guess, maybe just following up on that on the deferrals.
That you expect to deliver in future quarters.
And they must they must be you know relatively tough conversations with your customers like why maybe you can give us a little bit of color on what what their response has been.
Why why why can't they just go potentially the market from one of your competitors and and maybe tell us a little bit about like why they are willing to wait.
And your confidence in actually booking that $60 million in future quarters.
Yeah, I think I think there's a number of factors here Joe one one is you know a lot or type of customers are Oems and they spent a lot of time, you know qualifying all technology and it really does outperform our competitors right. So suddenly there. It's not switching is not an easy thing to do we're being very.
Thoughtful in how we're prioritizing supply. So we keep you know keeping our customers supplied and in some cases, they are agreeing to take less of a product to near our quarters and more further out I think it's also happening against the backdrop, where projects are getting delayed which has nothing to do with.
Cognex right, so they're more able to.
Even though they might like to receive our product.
Earlier, we're not the customer that's holding up the delay in the projects that they have and then also where we are also moving customers from one product we have to another product offer in a newer technology and that we may have more readily available and their desk, therefore seeing them.
That is an opportunity to upgrade and improve that technology. They might not have wanted to do it. So soon but they're starting to do that with US now. So there was a kind of the factors that are there that we're seeing.
Got it that's helpful. If I could maybe slip in one more on logistics similar line of questioning just the the project deferrals versus the actual weakness that you're seeing in the market today how.
How much of it is is just you know demand weakness that we don't get back of the $50 million.
And then I guess, you know, Rob I'd love to hear a little bit more about your confidence in that longer term target rate of 30% growth number.
And what gives you confidence that you'll be able to grow off of.
Lower base at that rate.
Yeah.
Sure. So I think I think that the 50 million really relates to.
Slowdown in the market and deferred business that we're seeing in logistics. It's a phenomenon I think we've all been reading about it in fact I think it was sort of just emerging at the last earnings call. When we last spoke to you at large players and logistics, we're really talking about slowing down and even shedding some employees in and deferring.
The build out of distribution centers.
We were unclear about the implications of that but as the quarter has gone on it's it's been clearer to us that there are fewer greenfield sites are really among the kind of technology leaders in e-commerce and as well, though we have a large customer that one thinks about you know there are other technology.
Leaders in E Commerce fulfillment, where we see similar dynamics and you know I think we can point to quite a lot of news coverage from other companies reporting in this space, where they see a similar play Hs saw a slowdown in spend related to having overcapacity. So I think that's happening that's really the 50 million dollar phenomenon you know.
That we see them you know and then we do have a substantial backlog and other projects that we expect will kick in.
As we move into Q4, and we're expecting a much stronger Q4. So then to get to your other question about you know the confidence we have in in the 30% growth rate.
This is a market we we've grown to understand very well over the last five to 10 years and there were a lot of levers that we expect to drive growth in the next five years are as they have in the last five years and they include the application of vision two.
Logistics as you know most of our business today is in barcode reading, but there really are many new when we look at our sales funnel.
With these very high profile customers, but really with many customers. There are a lot of new applications that include vision, where to place the label on a package or how is that packaged damaged or is it the right size or has it been full of the things that should be full or not these types of applications. We see is really gaining.
Traction for us.
Another dynamic that's driving growth that gives us confidence is.
Our sales outside of the United States, which continue to grow much faster on a percentage basis than a sales do and in the U S and we expect that to continue and we have some really great customers in those markets that are adopting cognex machine vision, we have a lot of new products coming to market that are much easier.
Year to deploy and bring a lot of powerful vision to market in that space and then perhaps I should have started by saying we think the market itself is gonna grow quickly right I think we'll share a number with you.
Later this year about how we think about the markets, we're in and how big they are and how quickly we're growing but there's a lot of white space that we're not addressing today in segments in the market, which we were starting to or or will address and so making our served market bigger and then the market will ran as also we expect.
To grow very quickly as soon as we see it and as others see the market. So that's you know that's why we have a.
A very positive view about the growth we see in logistics, but obviously down from the 50% we've been able to deliver over the last five years.
Super helpful. Thank you.
Okay.
Our next question comes from the line of Rob Mason with Bard will me personally whether Washington.
Yes, thanks for taking the question Rob I wanted to ask about the slower spending trends just in broader factory automation that you talked about the press release referenced I guess.
Slower year over year and quarter to quarter. So I think that's it excludes the logistics framing that you had.
Just what you're seeing there and what you saw as you went through the quarter some color there and whether the.
The adjustment to your third quarter outlook includes anything along the broader factory automation right.
Right.
Yes, Hi, Rob.
I think what we did see as the quarter progressed with slowing growth rates in in America, and Europe factory automation I think it's we can point to to automotive certainly in those regions. As you know we've seen some very good growth rates in recent quarters in automotive, but the growth rate we're slowing.
In those in those two areas I think.
We can point to sort of macroeconomic concerns, particularly in Europe , we can point to supply chain problems, particularly in automotive and in Europe .
Factors I think we're all reading about and aware of I would say those two markets also or are still really the majority of the spend that's going on and and and and what's going on is around combustion engine cars and hybrid cars still and the kind of very exciting dynamic growth we've seen.
And automotive in Asia, Hasnt really reached.
Europe and America, yet, although we we see signs of it coming and we do expect to be.
Our growth drivers I'm talking about EV.
Applications. There. So so those are certainly some some of the some of the dynamics that we see we see playing out, particularly in Europe , and Americas, and then I think there's an another phenomenon.
Whereas in the rest of Asia, China, We reported some really great results as you've seen but in the rest of Asia. We also saw some projects getting deferred some challenges that some of the players had there with implementation whether it was around electronics for new smartphone platforms and some of the challenges are.
That that they're seeing or whether it's also in and more broadly in automotive from the rest of Asia. So so I think overall, that's the kind of softening or slowing down of momentum that we saw as we move through the second quarter and in factory automation.
Is is it fair to say, though that that did not that doesn't necessarily impact your third quarter revenue outlook, but.
Perhaps I guess your orders the way the order funnel built as a result of that wood would impact you.
Fourth quarter.
Alright.
Yeah, I can understand how I'll answer the first part Rob. This is Paul certainly for for Q3 by.
By far the two biggest factors in our guidance. So that are the two that Rob outlined and then beyond that there are sort of small or a secondary factors which might include.
Some modest.
Slowdown of activity in an FAA and the factory automation, but also slight.
Slightly better business and consumer electronics as well. So we think those sort of roughly offset that get us to the two main factors.
And of course, the factory automation business is impacted by by the supply dynamic in the fire to them because we as we outlined.
Sure sure just last question real quick just your third quarter guidance is that reflective of production that you are getting out of your contract manufacturer currently or is this more a function of.
You're working off of pre existing finished goods inventory.
It's both.
To make sure both okay.
<unk>.
Our next question comes from the line of Joe Giordano with Cowen You May proceed with your question.
Hey, guys.
Just a couple for me.
You expect logistics down this year your largest customer has been pretty clear about the costs that they're doing and they're they're spending there or do you expect that the logistics business ex your largest customer to be down this year as well and is it a similar magnitude.
Okay.
Well when we are when we when we exclude all <unk>.
Logic customer and perhaps one or two other large customers, though we haven't logistics, that's how we think about logistics kind of debt.
The tier one larger type customers that theyre going to be down, but the when we take the rest of the business you know many many many customers we expect that part to be up this year.
So the phenomenon that we're seeing and is that a few customers who invested very heavily like like the largest one but also quite quite a few others who are substantial customers at cognex, we see they invested a lot over the last two years. They are now seeing the online shopping.
<unk>.
Kind of.
Take a time out as is everybody comes out of Covid and start to go into the store and buying less online and start spending that money on experiences and less on home improvement.
We see it hitting those big customers, who invested heavily the other customers of which you know we have many hundreds.
You know they were slower to invest in e-commerce and in many ways I think they're going to spend the next period catching up and we do see growth from them and we also see growth you know good rates of growth outside the United States more broadly and all types of customers and in in Europe and Asia.
In rough terms can you scale, how large that non tier one.
Piece of logistics, it isn't like percentage terms of that $300 million.
Yeah Yeah.
I would certainly say its less than half.
Sure.
Okay.
Uh huh.
Now when I think about 30%.
New growth rate for logistics, So you said that a five year CAGR.
Previously it was 50 in line with your prior target.
That included like the world's largest e-commerce customer, becoming your largest customer at the company now like when you built this up from the bottom up.
If that customer is.
It may be significantly dilutive to growth in the future like what does that mean that seems like a harder bogey to hit that even to 50 in my mind, just because of how significant one customer wasn't that ramp and how large that customers.
Well I think you know.
I think I think that customers you know I wouldn't count them out in terms of their potential for growth there international expansion.
As we work with them on some of their plans I think they have the potential to be you know to be.
Substantial grower for for Cognex.
But there are many other e-commerce companies faint famous names globally that are you know we also expect to be investing heavily them over that time period, who are we have good positions in growing positions with so certainly that that dynamic I think in E. Commerce is still lap, but I also think we have.
Other applications as I've spoken about with vision that we see can be a real value adder as particularly.
Many companies some weeks that are referenced in others, we have and are concerned about labor costs within that business and and how they manage that and safety also so there are those type of factors at play and then there are segments of logistics, where we don't really play substantially today, because we haven't had products, but we do.
Do expect to be introducing products and particularly now the parcel in postal segments would be areas, where we see large.
Potential for us to grow so where we think we think it's a large market. We think our share is still relatively small we think it's added kind of add huge dollars of growth to the market and we expect to be getting more than our fair share of them. So it's not hard for us to draw a picture where a bottoms up build has is growing at 30.
3% compound annual.
I appreciate that color and then maybe just one more.
But how do you how do you judge the.
Relative maturity of machine vision versus where it was a couple of years ago, I mean, simplistically I can just say.
Well back in 2000, you know you've had the world's largest compute.
Consumer electronics company ramp up very quickly and then kind of peak and then the world's largest E Commerce company ramp up very quickly and now at least near term kind of peak.
That's an easy way to simplify what happened, but how.
Is that the right.
How appropriate that outlook and how do you think about maturities. It. So is it significantly more penetrated than it was five years ago.
So I think there's a number of ways to look at it one way is I think I think the machine vision technology itself is advancing very quickly and some of the new technologies that we are applying to the market, particularly around the areas of deep learning and edge learning really grow the potential served market.
Significantly and I think if you know if you think if one defines maturity at full maturity is lights out manufacturing, where no humans are involved right and and then.
We still have a long way to go on that and we're making big progress and I think will make big strides on the field that machine vision will make big strides, particularly as a result of deep learning, which really replicates human inspection type capabilities in manufacturing. So I think maybe that's that's kind of one way.
So to look at it overall.
And then I think I think you point to yes, we've had we've had some great success with our with some you know.
Amazing I'm very sophisticated technical customers, who have applied machine vision to certain applications, one one in electronics and and wanting to e-commerce.
I think we're going to see those customers go through cycles, when they're bringing new technology, and new capabilities and entering new markets and we would expect to partner with them and we will expect to see years of growth and years of less growth or contraction with them right. So I think but I also fully expect we're gonna see more.
Sure.
<unk> technology leaders emerge and we would expect to be their partner of choice in bringing machine vision, just like we've been a partner of choice for the most sophisticated.
And entrepreneurial large manufacturing companies that make discrete products. So I think I think it's quite a big universe out there that has has yet to kind of appear on the scene and is going to need excellent machine vision to realize their manufacturing aspirations and that's kind of what gives us.
Optimism about the growth potential that we see for machine vision and in factory automation and logistics.
Fair answer thanks, I'll jump back in queue.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.
Our next question comes from the line of Jacob Robinson with Melius Research you May proceed with your question.
Good evening everyone.
Good evening.
Oh just returning.
Returning to the unfortunate events in Indonesia I guess the question is is this is what happened there catalyzed a broader review of your supply chain strategy and I'm, just thinking about maybe creating more redundancy around here your manufacturing base.
I think you. Thank you for the question. It's this is something we've been working on for some years before this unfortunate incident happened and I wish we all wish we had been further down the road of diversifying our our our manufacturing footprint and warehousing of component inventory.
But so I think I think we were on the right track, we weren't just far enough down the right track when this happened.
But we do have alternatives some considerably far along in terms of alternatives in ways that we can diversify and and manage our risk around this carefully.
We've also.
We've learned quite a lot from what's happened in terms about how we can.
May cost supply chain more robust with.
With improvements.
And diversification. So certainly it is something we were on wish we were further along and something that we're learning from this experience as painful as it is.
Okay. That's helpful and just switching gears quickly for a follow up on on the currency.
Sometimes that's what I'm, saying the dollar appreciate at this at the speed, but just curious if you if that puts you at a disadvantage in any way when they're competing against some of your European or Asian peers, but that's a lot of this will have a bit of a discount that's where.
Yes.
Yeah, what what their respective occurrences.
Well, we do we price in local currencies in large markets and in most markets. We're in so so in terms of competing for business.
On the street.
We were we're very savvy about that but of course, it does compress margins and reduce revenue and Paul anything you want to say about that yeah. No I mean year to date, it's it's had about a 4% impact on our revenue growth I think that has the biggest impact for us.
It's had a very modest impact on our gross margin.
Got it.
It's between 50 baseball right and then.
From a pricing point of view again, as Rob said, where we both price in local currency in many geographies and then we're also quite nimble in working with.
Our customers.
And it's perhaps worth noting here, we know we have implemented a number of price increases over the last 12 12 months that I think are being well well received by the market. We've been pleased with how the execution of those is gone.
Yeah.
Got it thank you I'll pass along to walk us.
Our next question comes from the line of Jim Ricchiuti with Needham <unk> Co. You May proceed with your question.
Hi, I just wanted to go back to that 60 million of remaining revenue that you think you'll be able to to realize over the next couple of quarters is there is there a way to think about the revenue in terms of the makeup of your market verticals I mean, you seem to be suggesting that.
Q3 will be the low point in logistics does some of that flow into from that $60 million go into logistics in Q4, just trying to get a sense. If it's skewed in any one or more vertical more so than the normal makeup of your revenues.
Yeah, Thanks, Jim for the question.
It's a dynamic situation you know, it's changing all the time and a lot has to do with what what.
We're going to be able to supply over those time periods and our customers' need for our product as we work through that with them. So I don't I don't want to give you a sense of a.
False precision, but I would say this I think consumer electronics is going to be less impacted weeks really you know.
Shipped and we will recognize revenue on that and you know normally Q4, and Q1 are quieter for them right. I think I think logistics will be significantly impacted based on the timing and what we're able to get out of the door. Because I think we have a very big backlog there and then as you know the market itself.
Before the fire happened was I think confused about the timing of implementation and also the ability of integrators.
Large integrators to execute on the plans that customers have and then automotive I would think probably sort of more in the middle.
That's as much as colors, I think I can give with any with any clarity.
If you take a geographic lens, we might see slightly lower impact in Asia, just by virtue of more consumer electronics, there and just more soft pure software business in Asia and in <unk>.
By default and slightly higher than in the Americas, and Europe , where we have more of an embedded.
Products, which is more impacted by the fire.
Okay.
Okay.
Our next question comes from the line of Andrew Buscaglia was bearing bug you May proceed with your question.
Yeah.
Hey, guys just a modeling question.
And looking out.
If.
Logistics.
The sales are a little bit subdued here for a period of time.
How do you think that.
On the gross margin side because that presumably.
There is a lower mix or less favorable Mexico would we not see a little bit of a gross margin tailwind into next year, helping a little bit offset some of these component increases.
Yeah, Andrew it's it's it's possible I mean, right now by far the biggest factor impacting our gross margin is the broker buys that we have chosen to do to secure supply of scarce components and meet our customer needs and we had seen that starting to wind down or decrease not dramatic but starting with <unk>.
Kris and unfortunately, the fire is going to drag that on for longer you know, we're now back in the market and making broker purchases to get back and supply more quickly to minimize the lost revenue and fulfill the deferred revenue as.
As we've discussed so I really think that's by far the biggest factor specifically on logistics. It is still slightly dilutive to our overall margins.
But if logistics revenue came down the only caution I would say is that you don't.
We do get leverage on our fixed cost from a higher revenue level overall at cognex. So that was that would sort of counter counter counteract any mix benefit we might get but again both of those factors are secondary to the broker by a factor.
Of note component cost increases overall inflation is also a negative factor, but we are offsetting that well with our pricing year to date. So those two factors are roughly on.
On par and our pricing actions really happened designed around our core component cost inflation not not the broker buys.
Got it.
Okay and then.
Just on that long term growth rate logistic that 30% you made the comment.
Outside the U S is.
Is interesting for you where where exactly.
That in and why.
Why do you see more growth there because I would think you're running into more competition as you get overseas.
Yes, well.
Our technology is broadly considered the best in terms of its ability to.
Inspect and read packages in production and pro forma them machine vision tasks and.
We've kind of proven that in the United States and you know we have this is our home market and I think we've been very successful they're playing it and then.
It's been slower to become adopted in Europe , again, where perhaps you know where our where we're sort of generally a rollout of new products in my experience in industrial market tends to be slower in Europe . We also have two entrenched local players and logistics that are both Europeans and I would say you know that the larger.
Legacy players in this market and they have a lot of customer relationships that we're displacing them as we get into that market. Further. So we are relatively underpenetrated and one could say less successful thus far but we're making a lot of progress and we see a lot of good suddenly high percentage growth rates in <unk>.
Europe and then in Asia.
I would say the automation of logistics is still less mature. So if you you know we traveled to many parts of Asia, There's still a lot of physical handling of goods less automation and less willingness to spend on technology and more willingness to put people into the process, but that's I think starting to change.
Covid, perhaps starting to change that.
Still still the growth of e-commerce and those market is starting to change and then wage inflation, it's probably would be helpful. Sure. It wage inflation, but then I also think.
Some of the Big E Commerce players that are large here or retail players. The large here are expanding overseas and I.
I think you'll see a larger incremental growth rates from those types of customers in markets like Asia as they start to invest in.
We're writing into those markets with the.
The confidence of what we've been able to do with them in the U S and obviously being.
The company they want to work most with in those markets.
Thanks to our factory automation experience in our 40 successful years in business Division, we have the footprint to support them and leverage in those market. So yeah. We were we're very optimistic about the kind of growth rates, we would expect to see in our markets outside the U S for logistics.
Okay. Thank you.
Our next question comes from the line of Matt Summerville with D. A Davidson you May proceed with your question.
Thanks, I just want to put a finer point on something Rob just kind of your read overall on the duration and severity of this sort of a pet.
Temporary down cycle, you're seeing in logistics into that and have you put any thought into whether or not the business is properly sized for the organization excuse me is properly sized for the business levels you may be looking at over the next.
However, many quarters I guess I'm trying to get a gauge for you know 30% is great don't get me wrong, 50% was higher than that and if you have an organization sized 50 do you need to resize it.
Yeah.
Well I think.
Answer your first question I think it's unclear when some of the large greenfield spend comes back I.
I don't think it's in the next few its not in the next few quarters, but we just have to see how that how that develops and where it develops and in what form right. So I think that that's a point I would say I would say.
We.
When we look at our own sizing of the business.
We've been pretty careful with head count over the last three years.
As we exited 2019, we had a pretty similar head count to that that we that we exited 2021, but we had about $300 million more of sales. So I think I think we've been pretty prudent about how we've managed our head count through this period.
So and and and and.
Where we tend to run a company for the long term. So we're thinking about the growth opportunities, we see and they are significant however, I think as we now look forward into the second half of this year and we see some of the dynamics, we spoke about earlier with factory automation growth rate slowing and some of the challenges we see with logistics over the next few quarters. It is in <unk>.
<unk> for us to slow down on hiring and we expect to be doing that.
Stopping it but slowing it down.
We're a company, where we do we pride ourselves in the quality of our employees you know cognos are pretty exceptional people. So we're when we see exceptional talent, we're going to be going out and and bringing it on board.
Regardless of the short term situation and this market I think is as we all know it's been a very difficult market to recruit people into so we.
We have been running perhaps leaner than we would've expected to them, but so so I think going from 50% growth rate to 30 doesn't really give us heartburn in terms of head count on capacity and how right sized we are as we look forward.
Got it and then just as a follow up sticking with logistics, how much of your logistics revenue and it's at $300 million does that I assume that for 2021 number but that aside how much of your logistics revenue today is generated from bar code versus more how you envision in what has been maybe better.
Hesitance of logistics customers moving into some of the higher end applications for the products do that thank you.
Yeah, so that the $300 million is that 2021.
Revenue number that we've reported and the vast majority of that is barcode reading.
And but b and I and I think it's a market that's been growing very quickly and it's the ability of the companies to to absorb technology into their processes as they've been looking to scale up.
And theres been so much value to be driven out of reading a barcode that that's where they focus primarily and I think there's still tremendous amount of value to be wrung out of that and if we think about our lives.
<unk> distribution center that might ship 1 million packages a day you know if we can read a barcode even 1% more reliably.
As it goes through the process than our competitors. It's 10000 packages a day that they would have to be processed or show up late to customers. So there's still there's still a lot of value to be wrung out of buckets, but I think more sophisticated customers.
I want to do more things with their with their logistics supply chains. They wanted to look at all sorts of things like you know how I used the right packaging. The right place. You know is it are the right things positioned correctly in the right box.
Is the packaged damaged all kinds of things, we hazardous goods through the supply chain does again huge value. That's is is causing a lot of challenges for suppliers today, and causing a lot of cost to be to be managed around with with humans or with other less good.
Apologies invasion and more expensive. So so we just see a lot of potential and we also see the engineering capabilities that these companies has increased massively.
When we look at the kind of caliber.
Of engineers that we would've booked at five years ago said, a number of large retailers I'm thinking of and the caliber of the engineering. They have now based on some acquisitions they've done in the E Commerce and logistics and robotics type spaces, and then also just based on their own internal investment in these areas. So I think we're going.
To see some of that engineering capability pivot from or beyond Barcoding to more vision applications and we're already seeing that.
Yeah.
Yeah.
Thank you Rob.
Our next question comes from the line of Joe Giordano with Cowen You May proceed with your question.
Hey, Thanks for letting me follow up just real quick ones here, Rob do you have an expectation for a.
For auto for the year in terms of growth and then just bigger one like on just computer vision in general are obviously seeing a lot of new applications pop up for where you would use that type of.
Stock camera and then like a bespoke program I'm just curious as to how you think cognex today or in the future can fit into that world and it's just something that's interesting to you from potentially an M&A standpoint to get more involved thanks.
Mhm, Yeah. So you know so we don't we don't really give your lung guide.
Guidance or future guidance by specific market, but I would kind of draw draw you.
Draw your attention to our you know in the past we've shown you our served market maps and we've said that we expect market to grow low double digits right. So I think you've won and then we expect to grow faster than that based on the fact that we're investing at a higher rate we have the world's leading vision machine.
Asian brand and and we're in the right segments of the market. So so that would be one way to think about it.
Our automotive is up significantly this year as is is highly accretive to our growth rate overall, and we would expect it still to be strong through through the rest of the year. So that's kind of.
How that looks and then in terms of in terms of acquisition opportunities eating it I don't have anything specific to point to of course, you know, but I do think the market for acquisitions is getting more interesting now and in light of valuations, perhaps becoming a little more realistic you know we've seen some of the acquisitions that have gone on in the market.
Very high prices and I think we're glad that we didn't participate at those levels.
But there are many many opportunities that we do continue to cultivate in this space and I do think acquisitions will be part of our toolkit going forward is as they've been in the past and perhaps even more so.
Thank you.
Thank you.
Our next question comes from the line of Joshua <unk> with Morgan Stanley You May proceed with your Washington.
Hey, Thanks for the follow up just one thing to be clear here on this this new logistics long term CAGR can you tell us what the basis, that's off of I know it seems pedantic, but like.
When you have these kind of big numbers, 50%, 30% down materially next quarter.
Just want to make sure. We're all starting from the same same same point.
Yeah, well I think I think we were we're uncertain where the year will end at this point you know, but based on what how strongly Q4 comes in and there's a whole bunch of variables on that which what we can ship and what customers want to take so I don't want to Dodge Your question, but I think it's a little uncertain, but our 30 year.
I'm, sorry, 30% CAGR is really a long term view right. So I think we're thinking out at least three years.
So we would expect to have some great years at higher than that in some other years lower than that but I think you know.
First of all to be kind of.
On the same page here I think we probably want to start from where we're going to end up this year.
And we said that it would be slightly down alright.
Okay.
Yeah.
Ladies and gentlemen, we have reached the end of today's question answer session I would like to turn this call back over to Mr. Rob Willett for closing remarks.
Well. Thank you. Thank you for joining us Tonight.
We look forward to speaking with you again on next quarter's call. Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation or the rest of your day.
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