Q3 2022 Cognex Corp Earnings Call
[music].
Greetings and welcome to the Cognex third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like the opportunity to ask a question. Please press star one on your telephone keypad.
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 it is now my pleasure to introduce your host Ms. Susan Conway Senior director of Investor Relations. Thank you. Please go ahead.
Hi, Thank you good evening, everyone welcome to our third quarter earnings conference call for 2022.
Leading today's call are Rob Willett, Cognex, as president and CEO and Paul Todd, Jim Our Chief Financial Officer.
Like to remind you that our earnings release and quarterly report on Form 10-Q are available in the Investor 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 we believe it is useful to investors or if we think it will help them better understand our results or business trends.
You can see a reconciliation of certain items from GAAP to non-GAAP in exhibit two of the earnings release.
Any forward looking statements we made in the earnings release or any that we may make during this call are based upon information, 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 Q right now.
Now I will turn the call over to Rob.
Thanks, Sue and Hello, everyone. Thank you for joining us.
When we spoke with you in August we were in the middle of managing to challenges in our business. One concerned June fire at our primary contract manufacturer and the other related to overcapacity head a few about large logistics customers.
Let me start by giving you an update on how we have been addressing both of those challenges.
Turning first to the fire.
We believe the business disruption is now behind us.
The leadership team and I appreciate the hard work and collaboration of Cognos and our suppliers in the aftermath of the fire. They demonstrated the best of our culture during a difficult time.
Together, they helped to replenish the significant component inventory positions that were destroyed in the fire and fulfill customer demand more quickly than we anticipated.
These efforts led to strong shipments at quarter end, which allowed us to reduce the negative impact of the fire on Q3 revenue, so roughly $40 million or about half of what we estimated in our original guidance.
This also resulted in exceeding the updated guidance we published in September .
Moving next to logistics as we reported in August our largest customer and other E. Commerce technology leaders are taking a post pandemic time out to absorb excess capacity there.
This follows two years of heavy investment through Q3 of 2021, which you may recall was a record setting quarter for both our logistics revenue and cognex overall.
Despite slower current spending by a few customers. We believe our long term prospects and logistics are as exciting as they have ever been.
There are several reasons for our confidence.
First cognex customers include many e-commerce omnichannel retailers that are early in their adoption of machine vision.
Second we believe more growth collectively will come from Europe , and Asia than the Americas.
Third there are other market adjacencies and logistics, such as parcel and post.
While we have a small presence today and superior solutions that position us well to grow.
And lastly, we see many applications beyond barcode reading, where our machine vision technology is increasingly being used to solve new problems and logistics fulfillment.
We believe that logistics, we will continue to be an important growth driver for us.
It has emerged as the largest and we expect it will remain the fastest growing sector in our served market.
We estimate the logistics segment to be a $2 billion market growing by 20% long term.
Differentiated technology and the opportunities we see in logistics gives us confidence we can continue to be a share gainer and grow this part of our revenue by 30% over the long term.
Next let me turn to a broader view of our served market and our expectations for longer term growth.
The excitement we have about our future was apparent at our analyst day event in September .
We see tremendous value in bringing the investment community to our headquarters at Natick.
Had an opportunity to meet in person with Cognize experience, our culture firsthand and see live demos of our products. We received a lot of great feedback from the event.
At Analyst day, we introduced an updated view of our served markets. The new estimate is $6 5 billion.
Up 55% from our previous estimate of $4 $2 billion that we shared with you in 2019.
We believe the market will grow by 13% over the medium to long term.
As a reminder, we calculate our served market estimate ourselves because there is no reliable third party source are served market reflects a relatively narrow definition of how big our business could be if we won every dollar of opportunity in the markets, where we are focused today.
Also at Analyst day, we updated our long term target for cognex revenue growth to 15% on a compound annual basis.
We expect to continue to outperform market growth. Thanks to our strong product pipeline, our focus on high growth end markets and the strength of our reputation with leading manufacturers.
At this point in the year I spend a lot of time with our sales force conducting in depth reviews of our customers by geographic region.
Excited about the new products and solutions, we are introducing they will help us scale, our business more quickly and will enable a wider and less technical profile of customer to use a sophisticated and powerful technology.
Our new modular vision tunnels are an example of this these pre configured standard solutions are part of our plan to develop the opportunity for Cognex machine vision and logistics, they make it easier and faster for customers to solve complex vision problems using cognex technology.
<unk> products are.
<unk> intelligence data analytics software platform and high speed high throughput operations.
Another example is the data men 8700 L X. The latest addition to our highly successful next generation series of industrial handheld readers.
Ex stance for extreme label reading and it's highly accurate and reading the most challenging label based codes in a fraction of a second 150 milliseconds.
The 880, 700, Lx outperforms other handheld products available today, and it's being embraced by leaders in cloud computing and high performance EV battery manufacturing among other segments.
Lastly, we were pleased to publish our first comprehensive sustainability report during the quarter.
We have a great story to communicate Cognex machine vision and deep learning technology plays an important role in making manufacturing more efficient and reducing its environmental impact.
This report was developed by a cross functional team of Cognize. It demonstrates the strong progress, we're making on our ESG journey.
I'll stop here for now Paul the microphone is yours for details of the quarter.
Great, Thanks, Rob and Hello, everyone.
Revenue was $210 million in Q3.
At that level represents a decline of roughly 25% from both last year's record setting performance in Q2 of 2022.
It was better than we expected when we gave our updated Q3 guidance, but still lower than we would have anticipated earlier in the year.
The business disruption from the fire caused revenue from most end markets to decline in Q3 year on year and all to decline on a sequential basis.
The quarter was also impacted by lower revenue from large customer projects and logistics.
And with approximately two thirds of our revenue coming from outside the United States currency exchange rates had a negative impact leading to a five percentage point drag on revenue growth in the quarter.
Looking at the change in revenue for Q3 from a geographic perspective. Each primary region was also negatively impacted by business disruption from the fire.
Asia decreased mid single digits, excluding a six percentage point negative impact from currency exchange rates.
Large order revenue from consumer electronics made a positive contribution in the quarter.
Revenue from Europe decreased low teens, excluding a 12 percentage point reduction from currency exchange rates.
Lower revenue from logistics and declining business confidence impacted revenue across the region.
In the Americas revenue decreased by more than 40% year on year due to the slowing of large investments by a small number of customers and logistics.
Gross margin was 73% in Q3 compared to 70% in Q3 of 2021 and 72% in the prior quarter.
Gross margin was better than our guidance due to leverage on our fixed costs, given the higher than expected revenue level, while partially offset by unfavorable FX.
The three percentage point increase year on year is due to a more favorable revenue mix this quarter.
The improvement in gross margin on a sequential basis is due to lower broker premiums for scarce components.
In regards to broker buys the premiums we have been paying are trending down. However, we expect a negative impact on gross margin will pick up again in Q4.
While the supply environment is improving it will take a few quarters for the higher priced components that are in inventory to work their way through our P&L.
Operating expenses in Q3 included a noncash charge of $3 million related to the fire primarily for idle production capacity given temporarily lower business levels.
Excluding that charge the combined total of Rd, any and SG&A declined by 2% year on year and 4% on a sequential basis, which was slightly favorable to our guidance.
Lower incentive compensation and the favorable impact of currency exchange rates more than offset the incremental investments, we've been making in sales and engineering head count and other related costs.
Operating margin was 19% in Q3 of 2022 compared with 31% in Q3 of 2021 and 24% in the prior quarter on a GAAP basis.
Excluding the fire loss operating margin was 20%, 31% and 30% respectively.
The leverage we have in our income statement worked against us in Q3, despite the benefit provided by a better gross margin and lower operating costs.
The effective tax rate in Q3 was 16% excluding discrete tax items as expected.
Reported earnings were <unk> 19 per share in Q3, compared with 44 in Q3 of 2021 and 34 in Q2 of 2022.
On a non-GAAP basis earnings were <unk> 21.
40, <unk> 41 per share respectively, excluding discrete tax items in the fire loss.
Turning to the balance sheet Cognex continues to have a strong cash position with $818 million in cash and investments and no debt.
Proceeds of $27 $6 million from insurance claims related to the fire were received in October and after the balance sheet date.
As we announced Tonight, our board of Directors has increased the quarterly cash dividend by 8% to <unk> <unk> per share we.
We believe this demonstrates our continued confidence in cognex with financial strength and long term growth prospects.
Before I turn the call back to Rob I'd like to welcome Nathan Mckern as Cognex is new head of Investor Relations.
Nathan joined US last week from lime, where he served as head of Investor Relations and Treasury.
And brings to cognex prior experience across IR and other finance functions at Iron Mountain Goldman Sachs and General Mills.
He joined Sue Conway, who many of you know.
<unk>, our IR program and developed it over the past 26 years.
We're excited for Nathan to now lead the Investor relations team and enhance our engagement with the investment community.
Now I'll hand, the microphone back to Rob.
Thanks, Paul.
Let's talk now about our guidance for Q4.
We expect revenue for Q4 will be between $235 million and $255 million.
That range represents a strong rebound from an artificially low level in Q3 due to a return to more normal production lead times. It also includes our remaining $20 million catch up on customer deliveries following the fire.
At the midpoint, we expect revenue will be roughly flat on a year on year basis, we expect to continue to experience lower large project activity in logistics.
Reflected in this guidance is a 10 percentage point headwind to year over year growth from the strong U S. Dollar I want to clarify that this is a 10 percentage points not basis points as there was a typo in the press release.
We believe gross margin in Q4 will be in the low 70% range. The supply environment is improving and that's leading to lower broker by activity. However, the impact of what we've already purchased and is in inventory, we will take a few quarters to flow through our income statement.
We expect the combined total of R&D and SG&A will increase by low single digits on a sequential basis due to the timing of incentive compensation.
The effective tax rate in Q4 is expected to be 16%, excluding discrete tax items.
Now we will open the call up for questions. Operator, we're ready to go ahead with questions.
Thank you the floor is now open for questions. If you would like to ask a question you May press star one on your telephone keypad at this time.
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First question today is coming from Joe Giordano of Cowen. Please go ahead.
Hey, guys good afternoon.
Hi, Joe.
Hey, I just wanted to get a sense on the fourth quarter.
How much of this is underlying demand and how much is kind of backlog delivery I know you called out $20 million, specifically is like a catch up but how much is just stuff that you have been booked over over the year and how much do you feel like is truly new business and reflective of what conditions on the on the ground.
Yeah, let me kind of speak to that more generally for everyone on the call. So.
Revenue guidance in Q4 is roughly flat year on year, our expectation for the quarter, It's driven primarily by four things right. There are two headwinds and two tailwind and Joe I think you were talking about one of the tailwind.
That we have so first of all the headwinds and a few large customers and logistics are currently spending less on new fulfillment centers than a year ago and we also expect to roughly 10 percentage point negative impact from currency rates in the quarter.
The tailwind how things that are helping us or expected growth from the broader factory automation market and.
Then there's about $20 million of revenue shifted from Q3, resulting from a catch up on customer deliveries. Following the fire. So I think that $20 million gets a little to your question Joe.
I think thats right.
After Q3, we are now down on logistics year on year. So we know we said we'd be down for the year. We're now we're now there and with.
Q3 is going to be the most down as we've as we sort of communicated.
Last quarter.
Electronics is playing out really as we expected and communicated in our last earnings call and again automotive gets a little bit clouded by the fire impact and currency and so on but.
Generally pleased by what we're seeing in EV.
And Theres Tentativeness elsewhere.
Broader market in Europe for instance is there some tentativeness in automotive.
Okay and just last from me is there any way to kind of like you talked about the gross margin in the quarter how much benefit.
In the quarter or are you getting from less like large customer deliveries of Nick's.
Mixed negative logistics stuff versus like the benefit that you got from less broker I was I'm trying to just understand like what's the what that looks like how much up versus how much down and then where it nets out you know what I mean.
Sure, Yes, so youll recall.
A year ago.
<unk> was our low point for gross margin, we reported a 69, 9% gross margin and at the time, we were calling out three factors one was broker buys.
One was a strategic project in the logistics space that was particularly low margin. It was sort of a co investment in.
That would lead to prototype solutions like the machine vision tunnels that modular it isn't tunnels that Rob spoke to today.
And the third was some supply chain issues that were particularly impacting some of our highest margin acuity vision products. So those are the three factors that kind of jointly brought us from our typical mid 70 to 69, 9% or 70%. We did this quarter the broker by impact was pretty comparable year on year, I would say and again thats.
A little bit artificially low just by virtue of what we sold in this quarter and it's going to be a little higher next next quarter, which is why we brought our guidance down slightly versus versus what we've communicated.
So that's the impact FX was about a 120 basis point negative impact to gross margin for the quarter and then our pricing actions are offsetting our component cost inflation, which really is our strategy. So those are the real the real driver revenue mix was favorable this quarter versus a year ago.
Favorable within the quarter within the year in Q3, just by virtue of lower logistics mix this quarter and we'll have a little more of that next quarter.
Thanks, guys.
Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon guys.
Hi, Joe.
I know that you guys don't give.
Don't give guidance.
For a full year, but I'm, hoping that you maybe can kind of contextualize like how to think about logistics in 2023.
I know that your long term growth rate.
To grow at 30%.
But I'm trying to just get an understanding of.
Your views on the market versus your ability to potentially outgrow the market.
Great.
But as you mentioned earlier.
New use cases and applications for your technology.
Yeah I think.
I think.
To kind of contextualize that we have.
A significant and growing base of <unk>.
Regular logistics customers right.
Growing and they're growing very strongly outside the U S and that and we expect that to continue right.
<unk> continued strength in that to be one of the fastest growing parts of our business.
It's less than half of our logistics business.
But it's I mean last year it was.
But the growth dynamic and the broadening of those customers and the geographic broadening is is really a great thing for us.
Then we have this other dynamic that we're speaking to which are.
Large technology E Commerce players and there are a few of those.
And.
I think we focus on a lot or your questions often do but there are a few of those customers and they really are going through a similar phenomenon, where theyre, taking this kind of time out from investing having really overbuilt capacity.
And seeing some more challenging environments post pandemic, great. So I think the big challenge in.
One that's hard to call is when will that investment cycle turn and those companies start investing more heavily again I don't think its in the first half of next year I feel confident in saying that but at some point, we're very confident it will return and we just have so much value to add and we will see that and we have so much new technology to bear.
Beyond barcode reading that we're very confident about that coming back, but I, certainly I'm not expecting it in the first half of next year.
And Joe I'd, maybe add okay.
Our full year view on logistics is tough to call because of kind of the timing of when that might come back, but we are up against tough compares in the first half.
Q1, this year 2022 was.
Our highest quarterly revenue level and also our highest quarterly growth rate and we did have a strong quarter in logistics in Q1. This year kind of broad based across all of our logistics customers, including large customer activity. So we're up against a tough compare and then the question really is when does when do the large customer business come back in the back half.
2023 is a 2024.
Yes.
Yes, Paul that's that's helpful and maybe sticking with you for a second.
And talking about the gross margins a little bit more.
Can you maybe just help me understand again why did gross margin step down in the fourth quarter. What is it specifically about what you sold through in Q3 that maybe helped gross margins and then.
As you start to think about the first half of next year, if logistics doesn't come back because you have that tough comp and you should get a pretty decent benefit at least on the gross margin side from mix, if there's any way to quantify that that would be helpful.
Yeah, Yeah. So first maybe just.
The biggest phenomenon for our gross margins over the last five quarters has been our broker buys so and it helps to understand Theres really.
Two factors with broker buys the volume of the buys were making and then the timing of when that flows through the P&L. So there is a lag effect, we commit to the bi we receive it in inventory before it becomes a finished good that central through so what we're seeing right now Joe is the volume of the buys it spiked a bit right. After the fire as we quickly replenished.
Inventory and its come down very significantly.
Through the rest of Q3, so we're optimistic that we are headed in the right direction with regard to <unk>.
Turning to our normal levels and now we're dealing more with the lag effect of it.
It will take a few quarters for that to flow through our P&L. So part of why Q3 Q4 is a little worse than Q3, and our guidance is that factor, we're going to take a little more broker buys to.
To the P&L, we have a little more FX expected, we quoted a 10 percentage point impact on Q4 versus the five percentage points. We had in Q3 as a revenue impact and so there is a corresponding.
Impact of gross margin and then overall revenue mix, which in Q3, we benefited from quite high electronics business, which is generally gross margin accretive to us at high software content and at a lower logistics mix so that.
That lower logistics mix may benefit us to some extent next year, but I think it's smaller than the broker by factor Thats really been driving our gross margin over the last five quarters.
Yes.
Okay. That's helpful. Thank you both.
Thank you. The next question is coming from Josh <unk> with Morgan Stanley . Please go ahead with your question.
Hi, Good evening, Rob Paul into.
Hi, John first question on Hi, there.
First question on the fourth quarter guidance $20 million catch up.
Could just remind us how much of how much is left.
If any.
And if there's any change to the part of the business that you thought was sort of lost as a function of outmoded product. There was some way to backfill that with newer staff or some other work around your fab.
Okay.
Yes, so, particularly the financials.
Back in August we had said we had an $80 million impact of the fire in Q3.
$20 million of that business, we thought would be lost and $60 million that we thought would shift from Q3 to subsequent quarters and then a follow up there was sort of how long might that take and we've had kind of two quarters. So we thought there might be some impact in Q4 and some in Q1 the.
The $20 million fire loss impact we estimate it really was about dead on.
In some cases it was.
A product that was.
Sunset and maybe a couple of last buys of that product that once the components were lost we weren't going to get back into that product are unable to get back into it and some of it is maybe just quick cycle.
Readers are vision systems, which if the customer couldnt get it in time, they would either not not do the project or get it from a competitor. So that's pretty much played out as we've expected we're still in the process of migrating customers to newer products and so on but that wasn't really a major factor in the product loss I would say and then of the <unk>.
<unk> million dollars shifted we really think we're going to realize all of that in Q4, rather than have any overhang going into next year and then the replenishment has been quicker than we expected and so.
We thought a couple of months ago, three months ago, we might be holding some product back to deliver to customers, but because of how quickly we've gotten back into supply we're not needing to do that at all.
Businesses.
The supply chain conditions are good.
Got it very comprehensive Super helpful. I appreciate it.
Just on the logistics.
I know you kind of reluctant to want to call the full year, especially.
Our first half second half dynamic.
But maybe thinking about outgrowth differently and kind of your customer mix versus how you think the market may be different yes, I think folks like Honeywell and Qian are are teeing up kind of down 30 ish type numbers.
You talked about 10 points of outgrowth in kind of your core business would you think about if the market were to be down that much youre outgrowth formula would hold or there's some sort of mix or comp issue that you think would be more of a distinguishing factor.
And to clarify that Josh are you talking about this year current year or next year.
Next year.
Right, Yeah, I think the first the first thing I'd say is we.
We have some.
This is about cognex, we're the technology leader in our industry and we have exposure to some of the most sophisticated companies in the space right. So and that's a wonderful thing because they teach us so much in many of the technology leaders and go from them to other places and bring cognex technology with us but in this.
Case, it does expose us to a few big.
Big players.
Who really are not not looking to invest particularly in greenfield sites as we move into next year and our exposure, but that was more than 50% of our business last year was related to that so I would think our exposure to that part is going to be down more than the companies that you quoted who perhaps have a broad.
Order exposure to broader conveying and material handling right, but on the upside I think we have exposure to the base. The rest of our business. The large groups of customers, who where we're gaining share and we have great technology to offer them. So I would expect there we would be outgrowing the general industry as our customers.
Really looking to add and spend more on technology enhancements than perhaps on basic conveying in material handling.
Perhaps a little context for you.
That was a great answer and I find that really helpful. Thanks, Rob and best of luck guys.
Thank you.
Thank you. The next question is coming from Jake Robinson of Melius Research. Please go ahead.
Good evening everyone.
Hi, Jake.
Just wanted to get a sense of.
Do you have visibility I guess I should say.
Through the inventories in the channel and I'm, just thinking you've obviously got some markets.
Logistics center that are not in such great shape.
Im sure Theres, some fire impacts on their potential it makes things even more complicated.
Color you could give would be helpful.
Sure Jake.
I would say wonderful thing about Cognex is there is really almost no inventory.
In our channel right, we have that we sell in about two thirds of our business is direct and a third is through partners and for those partners. We very much encourage them not to hold inventory. We think it's a wonderful thing about our model and we deliver product to them very quickly of course.
When we had a fire that's a problem, but theyre really we actually have found.
The rest of the automation universe that we're selling into is has much longer lead times than we do right. So plc as you're probably aware you know a lot of them around six weeks six months lead times and other automation equipment. So so we supply quickly around products and there's very little kind of a dampening.
And our channel around that they're just very few examples certainly certainly much less than 10% of people who sell cognex carry any significant inventory at all.
Okay got it.
Gears for a second on the consumer electronics side.
Not looking for it's one I just wanted to hear but just trying to get a sense of you.
<unk> got data points on that.
People are buying fewer smartphones and Pcs and whatnot. After the last couple of years, but it seems like the capital spending side, maybe it was holding in better. So just curious what your customers investing ahead of new product launches or new types of technology on that.
Just trying to get a sense of the difference between maybe the production rates versus capital spending.
Yes, I think I think Jake there are few things.
Going on there.
One is.
So we kind of asked this question around this time every year in our own series will have really a good picture of the electronics business next year come April that's when things that are really kind of.
Locked in for the year.
It's been a good year for us relative to the rest of our business in electronics and I think it may be a phenomenon again, where we're really connected to the technology leaders in the industry that sort of more high end and more.
More.
More advanced consumers of manufacturing technology. So.
They've been investing in.
It's very promising.
So.
What kind of drives that kind of up or down year generally a kind of new technologies coming into the market, whether it's in smartphones itself or in other similar type.
Technologies are consumer electronics technologies.
There's always a lot of exciting stuff going on in that industry. It's more a matter of when is it coming to market and how much the timing plays out next year versus in future years. So that's what we know in April but there is another phenomenon going on which is.
Of interest here as I think many of the <unk>.
Layers in electronics or are looking to diversify their supply chains, and so were seeing investments and incremental investments.
Outside of China.
Which is.
A positive thing for Cognex, and I would expect that to keep playing out.
Over.
Coming years, I think we're well positioned and we've seen this trend coming and we're supporting strongly in being asked to the big players in that space.
Moving to multiple different markets, where we have strong presence in our investing so so I do think that.
Net gainer for us and obviously, particularly recently as we've seen with Covid lockdowns in some challenges going on I only think kind of impetus towards that is is going to increase as we move through the next few years.
Okay.
Great. Thank you I'll pass it on.
Thank you. The next question is coming from Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Hi, good.
Good afternoon, I'm wondering if you could talk a little bit more about that $20 million catch up that.
Youre anticipating in Q4.
Can you give us a sense as to which markets.
Might be concentrated in.
Yes, yes, Jim Hi, it's very broad based.
Automotive would be among it, but but electronics and other other markets too and it's really a general ketchup across our general product range.
Not specifically logistics I would say, but more general factory automation.
And not necessarily have a larger project focus associated with it.
No.
Okay.
Rob at Analyst day.
You guys talked about.
Opportunities that you see.
Some of the underserved markets at least underserved.
For Cognex.
And Im wondering how youre going to be going about that in terms of.
Redeploying existing sales resources or do you anticipate having to step up hiring as you go after some of these other market peers that you talked about.
Yes, Jim Thanks for that question.
So.
We're in the process of cognex, and bringing to market, some really exciting technology called edge learning and.
What that is is it's very very powerful deep lending vision, that's kind of pre trained and deployed.
Smart cameras.
Our basic vision systems that then are easy to sell right and.
So thats going to bring us too.
A lot of customers that we really couldn't serve before customers who.
On sophisticated on program or is it automation and machine vision technology. So as we roll that out we're going to need more coverage.
And and the sophistication.
The technical sophistication with the sales force, we're going to need to do that is going to be less.
Right. So certainly we do expect to be recruiting and training and deploying.
Over quite a long period as that product range rolls out.
More sales noise as we call them to.
To do that and will it.
Expect to see that I think we'll be talking about that in the quarters to come.
And I think Rob it's fair to say that outside of sales and we really are sort of as we.
Setting plans for next year and so on we really are deploying redeploying existing resources.
Whether that's on the engineering team or G&A functions, it's really the sales and cell phone, yes. It is a sales phenomenon.
Got it thanks very much.
Thank you. The next question is coming from John Nathan of dialogue capital markets. Please go ahead.
Hi, Thanks.
Alright, Thanks for taking my question.
So I just wanted to concentrate a bit on the Asia ex China number it was down about 20% excluding.
Excluding currency and in the past it has been.
You guys have talked about auto as being strong and I was just wondering what are some of the puts.
Puts and takes there.
The fire impact.
Bigger.
Be good impacting that region.
Yes, I'll come in and those who also to comment on that.
Sales activity in Asia outside of China was pretty mixed in the period, we did observe slowing activity and project delays in the Japan and Korea.
One phenomenon I would point to is.
Well while customers.
<unk> have aggressive plans for electric vehicle manufacturing.
Some of the plans that we're seeing are moving and.
<unk> that we were seeing getting lined up for those markets.
And in Asia excluding.
China.
As a result of some of the government regulation that's been going on.
Now shifting geographies and investments we were expecting to see certainly in Korea, and Japan, and some other markets and now being deferred and being moved to Europe and America.
A phenomenon.
In semiconductor continue to grow but the growth rate is slowing.
So I think that's a little bit a little bit of color and then I think we continue to see good progress in logistics, but we do have some larger e-commerce players in the in that market that we're speaking about who really also had a.
Similar phenomenon to what we're talking about one very large and successful player in that market really did slow down their spending very sharply post pandemic, yes.
Jonathan I, just want I, just want to make sure.
There is no confusion over the data China was roughly flat versus a year ago.
With about five 5% growth in constant currency offset by 4% and currency and really it with other Asia, which.
Korea, India ASEAN, Japan is on that that was that was down about 20% in constant currency for the factors Rob sided so within China, We had strength in electronics and then we did see some some buyer impact certainly in.
Other factors to sort of offset and then more more broad based challenges in other Asia as Rob described.
Okay no. Thanks for the detailed answer just on logistics.
I think you talked about expanding into beyond barcode reading and expanding into.
The parcel and post customers.
So im just trying to understand what kind of timing should we think about like where you are in the process and when should we start seeing some.
Vince business Wednesday.
Well I think the modular vision tunnel that we just spoke about today is certainly a.
A very strong first step into some of those markets and so on.
Already in trials with a number of key companies in those markets.
I think that's the first step and I think youre going to see a lot more technology from us coming that will make us very competitive in those markets over the next number of quarters. So.
So I think it's the beginning and it's starting to feel much more tangible around around cognex.
Okay, Thanks and final one.
Anil question, if I may on seasonality in 2023.
So should we.
Without the fire impact next year should we kind of go back to normal seasonality of <unk> being the weakest.
Improvements until <unk>.
I think we've got this phenomenon, where Q1 of last year sorry. This year was very strong because of logistics and Thats I think it might've been our strongest quarter and that's really not expected.
In Q1 of next year I think if we strip that out then we're dealing with some of the normal seasonality, which Q1 tends to be lower.
<unk> for.
In factory automation and I've seen a reason it wouldn't be again, given some of the dynamics, we see in Europe .
And elsewhere. So I think we certainly have some of those factors.
Is playing.
I just wanted to go back to something you said or I said earlier, so I made the point that we see growth outside of China for investments So and the reason that may not be apparent when you look at the other Asia numbers and some of those purchases maybe being made inside China right for contractors, who maybe then moving it outside of.
China or pour out through our European region. If that's if that's confusing to anybody I'm really speaking to underlying trends in geographical movement, rather than where you may see the bookings let me sorry the revenue.
Yes, no understood. Thank you and thank you for the detail.
Thank you. The next question is coming from Matt Summerville of D. A Davidson. Please go ahead.
Hi, This is will jellison on for Matt Summerville today good evening.
Hi.
Yes.
I wanted to start out by referencing something set at the very beginning of the call and that is with the business impact of the fire largely behind you. At this point can you speak to any lessons or best practices, you feel cognex might have gained from the experience in terms of supply chain management or how.
To handle supply risk moving forward.
Yes, we've done a lot of.
Analysis and soul searching on that on that question, Matt and we're not quite done we continue to work on it.
One thing to point out as I think I think we had recognized this as a as a.
A risk factor in our business for some time and we're in the process of addressing it in the fire came when we were not in the final quarter I would say, but approaching it.
And.
Business sports metaphor.
On an annual calendar anyway.
We've been we.
We're in the process of starting up a second contract manufacturer.
Substantial and accomplish business and I think had we been there we would have been a much stronger position. We've certainly looked a lot at where we hold our inventory in a strategic component inventory and having that in more diverse locations is important I think like a lot of companies we're thinking about.
About kind of diversifying R. R.
<unk> presence and.
We sourced and managed products from I think like a lot of companies.
Through this kind of period, we've been going through the supply chain, just making sure that we have very strong relationships with our component and technology suppliers is important and I think that's the one where we've come out of this really well I would say I think one of the reasons we've outperformed.
What we had expected to do is.
Despite despite some very different component supply.
Environment that we've been in.
The relationships, we have with our component supply is a very very good and they came through for us They moved us to the front of the line in some cases in many cases why because we're very sophisticated users of that components processors imagers, they really like working with us and we have very collaborative relationships, but the other thing is we pay.
On time, and we're very proud of cognex of being a company. That's good to its word treats us supply as well and pays on time and I think that came through for us and this relationship where even the Ceos as some pretty major component suppliers came through to help us I think if there is maybe another thing we did coming out of this not maybe we absolutely.
Did we did a comprehensive assessment of our insurance programs and I think we are.
We were pleased with how we were insured in many regards but still there are opportunities in tunes up that we've we've done as we've gone through this difficult lending experience.
Then finally as you would expect we've taken more.
No.
Protective measures around such things as.
Fire.
Protection et cetera across the business in multiple locations globally. So it's been an important learning experience for us, which the whole senior team will continue to engage in and we have a meeting next month, where we will be doing a full debrief on that internally.
Understood Thats, great. Thank you for that color Paul.
Marcello.
Oh yeah.
Thank you for that.
I wanted to ask a follow up about edge intelligence.
And I'm thinking how interesting it is that it unlocks this opportunity for you to serve those markets that you haven't quite paid as much attention to in the past and what I want to better understand about edge intelligence is if theres any sort of IP protection or high degree of know how that helps that.
<unk> software and your ability to create value with it not be imitated by somebody who might want to serve those same markets in the future.
Yes, yes, yes. Thank you I just I just wanted to.
Just a point of order, which is we have these two terms going on at Cognex, which I know confuses everybody, we have edge learning and edge intelligence to.
The comments I made previously Whereabout edge learning, which is taking and I think that you're asking I think your question is really about that deep learning technology that we're applying to the edge right.
Yes, yeah. Good so so so edge.
Edge learning yes.
So.
We have some fabulous technologists cognex that have come to us largely through two acquisitions that we've made over the last six or so years and the acquisition of VT and if sewer Lam and these are.
Foremost technologies in taking deep learning technique, where you create a very sophisticated model and show examples.
Its example based training.
What's good and what's bad.
And then we can this technique of edge learning takes that very sophisticated pre trained model and deploys it into very simple hardware that then is easily programmed in.
If you have a chance to see demos either way this year on or on our website you can see that we can train.
These products and the insight 2800 is perhaps the best example of it so far.
Just a few examples of good and bad and very simply programmed.
And this technology is.
Is the technology, we've developed in house, it's proprietary to Cognex no one else has it.
Our.
The market today and.
Our ability to apply that in refractory context, rather than in a lab or or a consumer type context is we believe very powerful and.
We continue to develop and think we have a significant lead in.
Great. Thank you Rob.
Thank you. Our next question is coming from Damien <unk> of UBS. Please go ahead.
Hi, good evening everyone.
Good evening.
Covered a lot of ground. Thanks for all the helpful details.
And I'm, sorry, if I missed this but related to your commentary about working down some of the.
Broker premium.
Costs from inventory I'm, just curious what's the spread between.
Spot purchases today, and and those inventory levels, just to kind of give us a sense for the level of the gross margin tailwind that.
You should have a head.
Yeah sure Damian So this is Paul.
It was smaller this quarter, but when it was at its worst which was really.
Q4 last year Q1, Q2. This year there was about a 400 basis point impact on our gross margin give or take 50 basis points or so so very significant and I do think.
As you are covering many companies you hear a lot of talk about trade and component cost inflation and some element of broker buys.
My read from studying our peers is we are sort of unique in this being such a large phenomenon and partly that's because we do airfreight already today. So we haven't been substituting.
Ship for airlines like some customers like some some peers or other than the automation industry have.
And that we've been I think doing quite a good job of offsetting our core component of inflation with the pricing actions, we took since implementing our pricing strategy.
Mid to be around the summer of last year that we've been executing against so so that's what it's been this quarter. It was it was it was lower than that maybe call it half of that or so.
And.
I do expect to see that winding down.
But we're going to be carrying carrying some some amount of that into into the first half of next year.
Okay great.
Could you just remind us.
How much exposure you have in semi and how should we think more broadly about the customer mix within consumer electronics.
Yeah.
Yes, yes, yes broadly semiconductor it's about 5% of Cognex. This business, it's been performing very strongly over the last year. So it's probably a little north of that at.
Yes at the moment like 7% or so.
And I think it's I think.
My take on it is we've seen a lot of strong investment we're going to kind of see that moderate for a while now and then then we're all reading about big investments that are going on in new regions. So I expect.
That will start to come back later, but I'm not expecting that to be a factor next year for us it'll probably be in further years out that's my take on it at the moment.
Damian do you have any additional questions.
So I'll move onto the next question is coming from Rob Mason with Baird. Please go ahead.
Yes.
Thanks for taking my question.
Rob I wanted to see just real quickly if you could maybe wrap up your geographic deep dive.
When you mentioned the geographies in your prepared remarks, you called out some of the swing factors logistics being one.
Obvious but.
When you spoke to Europe , you talked about a lower confidence level, there, but you did not make a similar.
Comment about Americas, and I'm, just trying to understand.
If there is a distinction to be made there and if there is lower confidence in Europe .
How is it manifesting itself right now.
Yes, Hi, Rob I think I think that's a good question Tonight.
I think there is a difference when you when you look at our Americas numbers.
They look bad because of logistics right, but if we peel out of way outside of few large logistics customers, we actually saw emerging strength in our Americas broader market, we actually saw in the quarter business activity tracking ahead of our own forecasts, we saw larger products.
Projects moving forward at a better rate than earlier in the year, we observed investments.
I'd say more around kind of re shoring relocating back to the Americas.
<unk> places, particularly such as Mexico.
So.
We're pretty strong player in the Americas market, and we were pretty pleased to see that and.
Perhaps stronger than we expected and kind of in contrast to what some of the understandable challenges that they're seeing in Europe with with.
Their energy crisis in there.
The heavy reliance I think on an internal.
Internal combustion engine automotive, which is still something that I think is.
Is it a drag in our markets there it will turnaround as EV investment starts to come in but they're not there yet nor are we there yet in America.
Well that's helpful. Within the Americas, you would just put that activity thats stronger activity under the umbrella of broader automation do you wouldn't necessarily call out any particular verticals.
No I mean automotive is a very important vertical for us in the U S. So obviously, that's a part of it but no. We saw general strength, yeah, Yes, we saw them.
Yes definitely.
Okay great.
And just last question.
Currency headwind that you've noticed noted for the fourth quarter I'm not sure I would have modeled that high on my own.
A big step up sequentially is that.
We run that out run currency current spot rates for work.
Would that be the type of currency headwind you would take into the first half or is there something unusual about the fourth quarter and your geographic mix.
I don't know I havent necessarily looked at the first half yet Rob, but obviously will be if I think about next year. We didn't have major currency impact in Q1, and Q2, we had a little bit. So I think it'd be modular moderated a bit by we did year to date, we've had about five.
For the currency year to date four points in Q3. So you can kind of back into Q1 and Q2 from that so I would say that's a compare that we're not we're not up against Q4 to Q4, so it'll it'll moderate a little bit just based on that I would say Rob.
Okay very good thank you.
Thank you. The next question is a follow up coming from Joe Giordano of Cowen. Please go ahead.
I appreciate it let me take a quick follow up here, Rob you mentioned logistics do you think maybe the bigger opportunity for you is in Europe and Asia.
Is that any meaningful percent of your logistics business at this time and whats like a realistic timeframe, if it's not to when it could be.
Yes, we have.
Nice and growing businesses in logistics outside the Americas I'm not sure.
Exactly the size them for you at this point, but theyre starting to be significant and.
Where.
Asia definitely is large and getting larger and as is Europe . So yes.
And then we had.
Success with some large customers here in America, which is kind of skewed our business here, but obviously, we're an American company and we have great resources, we can deploy quickly here. So it's not unusual to see growth start first here and go elsewhere, but now we're building off of.
A nice space business in both those markets and we're starting to see sophistication around e-commerce fulfillment and other logistics markets there. So.
We're feeling positive about those and Joe the only thing I would add is.
Although most of our large customer business is concentrated in Americas. It isn't exclusive of the Americas. So there may be a little bit of noise in the numbers for instance in Q3 logistics was a contributor was the biggest contributor to our revenue decline in Europe .
That was more large customer activity than the broader base of business that we've been growing and continue to grow.
Thanks, guys.
Thank you this brings us to the end of the question and answer session I would now like to turn the floor back over to Mr. Wood for closing comments.
Well, thank you for joining us Tonight and thanks for a very engaged discussion. We appreciate it and we look forward to speaking with you again on next quarter's call Goodnight.
Ladies and gentlemen. This concludes today's event you may disconnect. Your lines at this time I'll talk off the webcast and enjoy the rest of your evening.
Yes.
Sure.
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