Q4 2022 Cognex Corp Earnings Call
Greetings and welcome to the Cognex fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If 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 Nathan Mckern head of Investor Relations. Thank you. Please go ahead.
Thank you Donna and good evening, everyone and thank you for joining US with me on today's call are Rob Willett, Cognex, as president and CEO and Paul <unk> our CFO .
Results were released earlier today, the press release and annual report on Form 10-K are available on the Investor Relations section of our website.
Both the press release and our call today will reference non-GAAP measures you can see a reconciliation of certain items from GAAP to non-GAAP in exhibit two of the press release.
Any forward looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Our actual results may differ materially from our projections due to risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K filed Tonight for 2022.
With that I'll turn the call over to Rob.
Thanks, Nathan Hello, everyone and thank you for joining us.
We continue to navigate a challenging environment, our fourth quarter results were largely in line with our guidance, but are not representative of our long term growth expectations.
The focus of my remarks today will be on the near term challenges, we're facing and then on the reasons why we remain excited and confident in our long term growth opportunities.
Our largest challenge within our logistics business, we continued to see a post pandemic slowdown with a few of our largest e-commerce customers, who have temporarily reduced their investments to absorb excess capacity.
Looking beyond this temporary pause we continue to expect logistics to be our highest growth end market over the mid to long term.
We also saw lower new business activity in the quarter bookings were below our expectations and generated less revenue in quarter than is typical.
Despite these challenges revenue increased on a constant currency basis by 1% for the full year compared to $20 21, a year, where we reported strong growth of 28%.
Outside of logistics revenue from the remainder of our end markets grew in 2022 roughly in line on a constant currency basis with what we would expect over the long term.
As our history demonstrates we can experience periods of softness in between periods of robust growth.
Our revenue growth target of 15% is a multi year annual target with that lens revenue of over $1 billion in 2022 represented double digit annual growth compared to 'twenty 'twenty and 2019.
Gross margin of 71% in Q4 and 72% for the full year was in line with our latest expectations margins in both periods were below our long term target to mid 70% level due to the elevated purchase of gas components through broke.
Because.
Before I go into detail on our end markets and then the outlook for Q1 I'd like to turn it over to Paul to walk you through more but the results.
Thank you Robin Hello, everyone.
Revenue was $239 million in Q4 of 2% decline year on year or an increase of 4% on a constant currency basis.
This includes the approximately $20 million catch up from deliveries that were delayed in Q3 following the fire.
In addition to the slowness with a few large e-commerce customers throughout the quarter and slower business activity more broadly at the end of the year.
Foreign currency translation lowered revenue by $45 million or 4% in 2022 and by 6% in the fourth quarter.
Looking at the change in revenue for Q4 from a geographic perspective, each primary region grew year on year on a constant currency basis.
Asia increased by 9%, excluding an 11 percentage point reduction from currency exchange rates.
Revenue growth from semi and automotive more than offset softness from the challenging environment in China.
Revenue from Europe increased by 4%, excluding an 11 percentage point reduction from currency exchange rates.
Growth was led by revenue from automotive and consumer electronics that offset a decline in logistics.
In the Americas revenue grew grew by 1% year on year.
Lower investments by a few large customers and logistics were offset by growth in automotive consumer electronics, food and beverage and medical related industries among others.
Gross margin was 71% in Q4 compared to 72% in Q4 of 2021 and 73% in Q3.
The decline from Q3 is due to the significant premiums we've been paying to replenish component inventory destroyed in the fire.
These purchases negatively impacted gross margin by approximately 500 basis points in the quarter and approximately 400 basis points for the year.
We are pleased our broker by activity is winding down now that we've replenished post fire and the supply environment is improved.
We expect it will take a couple of quarters for the higher priced components to work their way through the P&L, resulting in a minimal impact by the second half of 2023.
Okay.
Moving on to operating expenses.
Our reported operating expenses included a fire loss in both Q3, and Q4 of 2022 and a modest restructuring charge in Q4.
Excluding these charges Q4 operating expenses increased by 3% from Q3.
Comparing year on year operating expenses decreased by mid single digits, primarily due to the favorable impact of currency exchange rates and lower incentive compensation.
These benefits were partially offset by the incremental investments, we've been making in sales and engineering head count.
Operating margin on a GAAP basis was 23% in Q4.
non-GAAP operating margin was 24% in Q4, an improvement from 23% in Q4 of 2021 and 20% from Q3.
This level of profitability is below our 30% long term target due to lower gross margin and operating deleverage from revenue softness.
The effective tax rate, excluding discrete tax items was 22% in Q4 and 16% for the full year.
Reported earnings were <unk> 32 per share in Q4.
non-GAAP earnings per share 27 cents in Q4, compared with 30 in Q4 of 2021 and 21 cents in Q3, excluding the one time charges mentioned earlier and tax adjustments.
Turning to the balance sheet Cognex continues to have a strong cash position with $854 million in cash and investments and no debt.
The strength of our balance sheet enabled us to aggressively replenish components lost in the June fire.
As a result, we caught up on customer deliveries quickly during the second half of the year and ended 2022 and a healthy inventory position.
During the year, we also had a substantial return of capital to shareholders with over $200 million of share repurchase activity and more than $45 million of dividends paid.
Now I'll turn it back over to Rob for color on our end markets and on our outlook.
Thanks, Paul.
I would like to now give a little historical context you.
You May remember, we went through a restructuring in 'twenty 'twenty as part of that action, we reorganized our R&D and engineering teams. These teams just focused on groundbreaking edge learning technology and standard product architectures that can deploy on innovations more efficiently and at a faster rate.
As a result of these improvements we now have many new products coming to market in 'twenty two 'twenty three.
Recent product launches include our new day demand five eight T. This fixed Mount barcode reader is designed for five and six cited Cognex Montreal Division tunnels for use in the most demanding logistics applications.
This product with Cognex three D vision systems helps logistics customers to apply a label on a package in a spot that does not cover other information on that package is surprisingly difficult task to automate this results in optimizing processes by increasing line speeds and traceability without lowering read rates.
In another part of that launch we expanded the capabilities of our insight 2800 vision system to include deep learning enabled optical character recognition.
This allows customers to deploy powerful AI based OCR technology, regardless of their skill level pre.
Prior industry solutions required hours of programming by highly trained engineers, preventing many companies from automating this type of inspection.
Now models can be set up and deployed directly on the device in minutes with as few as 10 sample images.
Food and beverage manufacturers will be able to easily REIT exploration dates even on curbed metal surfaces electric vehicle manufacturers can quickly locate and read the alphanumeric text ex hedged on the bottom sides of EV batteries for traceability.
And logistics businesses can decipher codes and text on a variety of package types to ensure proper routing and prevent rework.
We believe these products and many others planned for 2023 launch position is to broaden the market, we serve and capture more share.
With that let's jump into more detail about what we're seeing in each of our end markets.
Our largest end market in 2022 was automotive, which represented approximately 25% of our revenue we reported record revenue from automotive and double digit growth year on year in constant currency.
This is primarily driven by the increase in electronic components in vehicles and the ongoing transition to electric vehicles.
The transition to electric vehicles has generated an increase in new model introductions and demand for EV batteries, we have strong relationships with the major EV battery manufacturers, who are projected to projected continued growth within Asia and new growth in the Americas and Europe .
In the fourth quarter, we acquired serious advanced Cybernetics G. M. P. H R. S. A C a German computational lighting company <unk>.
Combining S Acs capabilities with Cognex vision and AI tools.
Obsessed with an industry, leading offering for battery inspection.
S. A C acquisition will support our strategy to capture a larger share of the high growth battery inspection market.
Moving on to logistics.
Logistics represented approximately 20% about total revenue in 'twenty to 'twenty two.
After over 60% growth in logistics in 2021 annual revenue from logistics contracted by 25% in 2022.
Aside from the few large e-commerce customers, who reduced investment revenue for the remainder of our logistics business grew both in the quarter and year.
We believe logistics will continue to be an important growth driver for us over the long term the market is still in the early stages of adopting machine vision. Most companies are still highly reliant on labor and very few warehouses globally are realizing the full potential of automation.
An example of the type of opportunities that exist in logistics is a recent win with a fortune 50 retailer that was previously a relatively small customer of ours.
In 2022, we deepened our relationship with this company, who had previously announced a multibillion dollar investment to enhance the shopping experience.
They're establishing regional sortation centers and converting in store stock rooms into sortation centers to pack and ship orders direct to consumers.
[noise] Cognex was chosen to provide machine vision because of a best in class algorithms that can reliably read barcodes that angles.
Our tunnel solution enabled our customer to increase the number of products on a high speed conveyor by reducing the gaps between them, while still reading barcodes at near perfect read rates.
After initial wins and excellent execution support the customers asked cognex to add value in additional areas such as converting manual operations to automated tunnels to offset labor shortages and costs in existing regional distribution centers.
Shifting to consumer electronics.
Our third largest end market in 2022, representing approximately 20% of revenue consumer electronics grew in the mid teens year on year on a constant currency basis.
Growth was primarily driven by the premium end of the smartphone market with an additional contribution from other consumer electronics products, such as tablets and accessories.
We had particularly strong demand for our deep learning and <unk> solutions in this market.
Turning now to our outlook.
We expect revenue in the first quarter will be between 180 million and $200 million, which represents a meaningful step down year on year.
You may recall that the first quarter of 'twenty two was an exceptionally strong one for us as we reported an unusual sequential increase in revenue led by our second highest quarter ever for logistics.
We had strong demand broadly across our business even from consumer electronics, which is typically quiet in Q1, we also caught up on $20 million of orders in backlog caused by supply chain delays in the fourth quarter of 2021.
In contrast, new business activity at the end of 2022 was slower than we anticipated and we've had a slow start to 'twenty to 'twenty three.
Our activity with our largest largest logistics customers continues and we're also seeing a broader slowdown across many of our end markets as customers are wary of committing to significant investment.
We believe gross margin in Q1 will remain in the low 70% range.
The supply environment has improved and our broker by activity has wound down but the impact to what we've already purchased will take a couple of quarters to flow through our P&L.
We expect operating expenses in Q1 will increase by approximately 10% on a sequential basis, excluding the charges related to restructuring in the fire. In Q4. This increase is driven by investments, we're making in our new emerging customer sales force, along with merit increases and a weaker U S dollar.
<unk>.
Throughout 2023, we expect to see a ramp down and the impact of broker buys and a ramp up in our emerging customer sales force investment.
From an operating margin standpoint for the year, we expect these to drive us to roughly offset.
We expect the emerging customer initiative to broaden our reach and increased penetration and further diversify our customer base representing.
Denting potentially hundreds of thousands of businesses. This customer segment is looking for automate mission solutions that are easy to implement easy to use and provide the highest performance.
Our newest edge learning and I'd products position us well for this initiative.
To directly reach these customers, we're expanding our sales force we've already hired the initial sales noise focused on this segment, we will onboard and train more in the quarters ahead, we expect costs from this initiative to ramp through the first three quarters of this year.
Well our continued investments youre in a slower growth period will result in near term operating deleverage. We believe it's an important initiative for long term growth.
We remain committed to tightly managing operating costs in this environment and we also believe it's important to continue to invest in high and high ROI initiatives.
We're excited about our long term growth prospects, though timing is uncertain, we expect large e-commerce customers to shift back into investment mode. EV battery growth to continue China to more meaningfully we reopen and our emerging customer initiatives to start to deliver.
I'm proud of how cognates responded in a year with many challenges. It gives me even more confidence in having the right team to deliver strong growth and new customer value together in the years to come.
Now we will open the call for questions. Operator. Please go ahead.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing to starkey.
We do ask that you. Please limit yourself to one question and one follow up but you may rejoin the queue for any additional questions that you have.
Our first question today is coming from Josh Polka Winski of Morgan Stanley . Please go ahead.
Hi, good evening all.
Hi, Josh.
Just first question on sort of the <unk> guide I know that we've gone through a decent amount of color off cycle revenue volatility with the fire in some of the supply chain stuff and you know the catch up on the other side our backlog position in e-commerce, but should we think of one Q was kind of representing normal seasonality.
What are you without any kind of unusual big items as we think about the rest of the year I know you don't give guidance, but I'm just trying to make sure. There's no other kind of noise in there.
Right yes.
So you know Q1 is looking slow you know we've seen slow periods like this before and you know we've come out of them and delivered meaningful growth.
I think you know I think you know that our business in flex and flex quickly and it's not kind of backlog driven as some of our peers are.
And Additionally, we're comparing to what is a particularly tough Q1.
Given last years unusually high revenue from logistics and another market, but I think it's also fair to say that you know, we see a low lowing lower PMI data across all of the regions that we that we serve and in our regular business and that certainly are in are reflected in the activity that we're seeing.
Which is at a lower rate than we were expecting a few months ago.
And then of course as I think I've explained quite a lot. The the logistics business is really at a very low level.
Really as a result of the large large customers really pulling back on E. Commerce spending so that's the kind of color that we're looking at.
For those of you who have followed cognex for a long time, we know that you know historically Q1 was always our lowest quarter that somewhat got changed with flash logistics orders coming in or sometimes high consumer electronics business in Q1, but this looks like.
Order went out any of that.
Got it that's helpful. I appreciate that color and then just thinking about somebody who suddenly in the prepared remarks that I wanted to make sure I'm understanding better a reduction in broker buys through the year, what sounds like a good Guy and then you mentioned a ramp in some of these target investment customers I am sorry, I got it exactly.
Raising rock, but both of those sound good or are you, saying, it's a ramp in the expense to develop that salesforce that product capability is it a ramp in the expense or that customer revenue.
It's a it's a ramp in the expense Josh This is Paul so yeah.
The the way to think about this is we had about 400 basis points of broker by impact to gross margin in our 2022 results.
You are at around $40 million or sell off $1 billion of revenue.
We're expecting to see.
Roughly a $25 million to $30 million reduction in that expense this year ramping.
Ramping up overtime, we still we still expect in the first quarter to have now reflected in our low seventy's gross margin about 300 to 400 basis point impact of broker buys.
But we should see a 25 to 30 million dollar investment.
Savings to gross margin from broker buys and that's roughly comparable to the level of investment we expect to make in our emerging customer initiative in Opex. So it's an increase.
Over you know ramping up over the first three quarters. So theres some of that reflected in our Q1 Opex guidance, which is why we see the sequential one part one part of the sequential Opex increase from Q4, but we'll expect to see more of that in Q2 and Q3.
Crystal clear thanks, Paul.
Oh excuse me. So thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks, Good afternoon everybody.
Hi, Joe.
Hey, So I wanted to I wanted to touch on the logistics commentary a little bit further.
As you kind of think about the rest of the year. You know clearly there was there was volatility throughout the year in 2022. It sounds to me like things have kind of worse end and so while logistics might've been down 25% per year is probably down a lot more maybe in the fourth quarter I'm, just trying to understand going forward.
Where would you expect logistics, particularly to bottom just based on what you see in the conversations that youre, having with your customers.
Yeah.
So yeah, so logistics represent about 20% of revenue.
In 2022, approximately $225 million and it was our second largest market right and is it contracted and we saw that contraction kind of increases we went through the year. It was relatively strong in the first half and then.
And then I think it's really a story of two different customer types. We've got.
Regular logistics customers, who are growing nicely and we expect those to continue to grow a little less than half that you know overall logistics business roughly.
Then we've got large customers.
Very few of them.
You know some of them pretty famous businesses and they've really really.
Over invested for a period through through Covid, and then now I've really reined in investment some of them are going through restructuring them and you know that's going on right now and we expect they'll emerge from that and then as we get through the year they'll start to invest again that may not happen until late in the year or even next year.
Right, but we do expect to see more investment going on.
But even at those customers that still.
Significant work that goes on with kind of productivity improvements regular business regular automation projects. So that's not like that business has gone away completely but certainly a lot of the greenfields really all of the greenfields that some of these bigger customers had been stopped towards significantly delayed so that's really our goal.
It's really the state of play and Joe to your question about quarterly versus annual growth rates and so on again and we don't consistently provide data on each end market by quarter, but I think we did call out in the Q3 earnings that that was a particular you know Q3 2022 was a particularly unfavorable comparison it was very low for logistics in 2022 and that was I think our highest.
Ever logistics quarter in Q1 of 2023, so so certainly that that quarter was was difficult in Q4, you know our growth rate at our contraction logistics was pretty comparable to the year on year, and then I would say we're up against another tough compare in Q1 Q1 was the biggest logistics quarter of 2022, and then obviously.
There were some announcements about pauses in new capacity expansion and so on that you know muted muted our logistics revenue from Q2 to Q4 last year.
Got it that's super helpful. If I could ask just one more it is interesting.
Very helpful to get the color on.
The 2022 baseline right for the three figure three biggest end markets.
I feel bad asking for the fourth.
But I'm curious is like one one of the end markets, maybe just emerged and now is like you know a sizable percentage of your business as well and if you maybe want to provide I don't know if it's in like food and beverage or consumer products or semi.
Some color around that end market and what your expectation is for 'twenty three.
Yeah.
Uh huh.
Well, Joe I think you know I think we've we talked about a big end market consumer electronics automotive been largest consumer electronics and logistics and then other markets for Cognex is a pretty broad and they include medical related industries consumer products food and beverage product security. So.
I think if I'm understanding your question correctly, you're really asking about those kind of markets in general and they're you know they they provide good.
Solid growth for us in line with our overall growth expectations and they'd be you know there's.
Among those markets, but generally they that they continue to grow as much in the way the rest of the business does.
But let me ask for clarification were you asking about a specific market or something yeah. I was just wondering whether one of the end market.
It has grown to be more substantial than the others and and what's really been driving that.
Yeah, It sounds like Youre already abide.
Abide by the Big three yeah, Yeah, Yeah, I mean, we got some nice growth drivers I could I could talk at length about you know like life Sciences, and some of what we're seeing in those spaces, and our food and beverage and but but I don't I don't think that's really going to moving the needle in terms of our results in a in a significant way candidly and I think we've spoken to this before but I'll.
Over the last couple of years semiconductor has which is generally small for US you know kind of might have been 5% of our business two or three years ago and still below 10, but it certainly has experienced you know quite quite robust growth. Obviously, we're seeing some some cyclicality there.
We are starting to group medical related overall is about 10% of our business, which we discussed at analyst day, but generally speaking the trends across that diverse range of our business with the exclusion of kind of semi which is more volatile I would say have been fairly consistent and building on that you know I think the medical business is growing nicely and steadily in the semi business has had a great run and I think we're in.
Two a slower period as many semiconductor companies.
Our a reporting you know as we look at 2023.
Okay. Thank you for the color.
Okay.
Thank you. The next question is coming from Joe Giordano of Cowen. Please go ahead.
Hey, guys.
Hi, Joe.
I wanted to just follow up on logistics a little bit.
Obviously, it's not surprising to hear the commentary about the large players and I think most people appreciate that the outside of those mega players.
Kind of like ground floor of logistics is much stronger, but it Rob you talked about the declining globally.
When does that start to impact the that group.
Customers is it likely that.
My friend lower below 50 that.
Logistics for even for those for those people who are behind but there's still going to reflect the economic cycle and likely to decline and that sort of environment.
Right. So Joe I think your question is yes.
How is sort of a lower.
Lower PMI affecting our base logistics business is that correct thats, what youre getting at yes, yes.
We have really strong underlying technology and growth trends in our base logistics business and we still have a relatively low share in a lot of great growth drivers, so I would say that as well.
We're looking at that business, we're expecting you know good strong growth from it.
As we look forward.
But you know that it's not immune either either to PMI activities. So we do see you know customers more tentative about placing orders delay you know longer cycles to close business et cetera in that space too, but the underlying growth prospects are very good I think really regardless of kind of the kind of PMI.
Data were seeing now although it will slow it down a little bit yes, I mean, a good number of those customers delayed some investments early in Covid.
Now again I can speak to my former employer for just getting back to you now.
Those plans back back in place.
Okay got it.
Pentagon the consumer exposure they have in many cases, the consumer data is as you know a little more robust than the manufacturing.
Production data, we've seen so I think in a low PMI environment, we might see a higher percent of projects delayed but generally the investment cycles of building a new distribution center and so on tender tend to transcend shorter time I can have a economic cycle and then I would say as we look at that business too you know, we really have so much opportunity to grow our business in Europe .
In Asia, we're still we have still low share and you know a lot of competitive advantage. So suddenly we're expecting outsized and seeing outsize growth in those areas of our business.
Okay. So it's fair to say that that pace.
Base business in logistics in the in the environment that we're in right now you'd still expect it to grow I mean things can obviously change between now and the end of the year, but given where things are that that would be a fair statement to make.
Yes.
Okay, and then my follow up would be on the emerging consumer emerging customer.
Stuff that you're doing where where are you on the actual products like I know you were talking about <unk>.
Developing like smart sensors, and things that are easier to use and kind of like a different type of product than you've done historically, so I know you're ramping up the cognos and getting the sales organization ready to support this but where are you on the products themselves.
Yeah right now we have a good range very very competitive products for.
Our emerging customer sales noise to sell price. So they end and there are more coming but.
Where were out in the field and that Theyre very very well equipped to close a lot of business that they see at these small customers.
Yeah.
Yeah.
I'll pass it on thanks, guys.
Thank you. The next question is coming from Guy Hardwick of Credit Suisse. Please go ahead.
Hi, good afternoon.
Hello.
I just I know you you gave a in your preamble your crowd display stocks of year Oxy logistics is well known and you also referenced the semiconductor end market are there any other markets, which are showing weakness.
Could you expand a little bit on that.
Yeah, I think you know I think I think broadness is I think weakness is pretty broad in general is as you described and as witnessed in Europe PMI data overall, I think if there's anything else that I would well if theres. Some other things I broad themes I'd I'd draw. One is that you know obviously at the start of the year with.
Still seeing COVID-19 related disruption in China, right and and then.
Obviously rising interest rates, creating challenges.
In a proving capital.
A lot of our business is driven by capital spend right.
And then I think Theres, a couple of regulatory things I would I would call out. So the inflation reduction Act. You know is it's going to it's going to it's going to drive a lot of EV battery investment and are in the United States.
And and it's going to draw some of that investment away from Asia and Europe . So we're seeing projects that we were expecting to be winning and installing in Europe or in Asia have been delayed because theyre moving them into America. So that's going on and you know somewhat similar dynamic with the chips Act.
Restricting exports to China is causing some changes among those customers, where I think near term there'll be spending less long term I expect them to be equipping more more facilities outside of China and that's so that's causing some delays also.
So just as a follow up if F.
Tier one logistics Capex comes back in.
2024.
What are your logistics partner integrates is telling you don't discussions on projects have to start really by the middle of this year.
Have any impacts in 'twenty four given typically 18 months lead times.
But yes, you're right was there was there a question there.
I mean generally what do you what are your hot integrates is telling you in terms of potential outlook you know longer term. If you want to return back to the logistics growth that you referenced at the Investor day, you've got to have kind of a recovery in 'twenty four.
Yeah. So I think maybe one thing to understand is that those big customers, we do directly with the company itself right.
And we are working all of them with their engineers on implementing them.
That technology plans in their rollout. So so and then we think of integrators really is more capacity to help execute that plans right. So we we.
We see we're in a dry period, it's not clear to us exactly when it comes back certainly not in this first half and I think beyond that we'll we'll we'll share more information when we have something more solid and meaningful to share. We think it will come back we think you know where.
We're optimistic about that but the timing of it is it second half is it 24 will we're not clear ourselves on that and I don't think all customer necessary customers necessarily all clear on that either.
Thank you.
Yeah.
Thank you. The next question is coming from Jacob Levenson of Melius Research. Please go ahead.
Hi, good evening everyone.
Good evening.
Just on the.
With the acquisition of S ICD.
During the quarter, it sounds pretty interesting but.
Can you help us understand a little bit about how.
That or what the differentiation is what the technology that they really bear wired I guess why is that so important in the battery inspection process in particular.
Yeah, Yeah. Thank you.
I appreciate the question yeah. So so so.
Something that goes on in a in machine vision is a U you acquire an image right and then you use vision tools to decode it makes sense of that image right and you know cognex I think is.
Undisputed in our ability to.
<unk>.
Make sense of and to interpret images and particularly with our deep learning technology. You know, we're really we're really have phenomenal capabilities in that area, but image acquisition is something where you know where we felt we really wanted to do better relative to our competitors and we saw a big need in this.
Market to do that the company see that we've acquired is really a leader in this area of computational lighting or computational upticks and what what that technology does is it it's.
Think of it like a dome of light that sits on top of an image that is being analyzed.
And and thereafter, it Leds that are lit up.
In a very controlled and specific way using very sophisticated software to create almost like a three D image of what's underneath them and in this case. It very often is illuminating dents and scratches on the surface that's being analyzed they can do it very quickly and almost with three D type.
Capability and this technology is better at doing that than any other that we've seen in the market. So far right and what is that going to allow us to do it's going to help us serve some really important needs in battery production in EV battery production.
Looking at material like even just take the outside of a cylindrical battery that you know is pretty pretty widely used in pretty widely out there you know in the world of EV.
Dents and scratches can cause you know fire and other problems in and have done right. So it's a very hot topic for sure.
As companies are rolling out new EV battery technology in their building.
Billions of dollars of manufacturing capability. This is a technology, we think will be highly prized and will help us drive growth in years to come in that space. So that's a little bit of an overview.
Oh Super interesting Andrew Star one for Paul quickly.
It goes.
Meyer to the fire in Indonesia, we're embarking on a supplier diversification plan for lack of a better description, but maybe you can just update us on.
What are your friendship over to qualify or some other contract suppliers where manufacturers rather.
Yeah sure. Thanks Jacob.
I think we've reflected in our previous Qs and S. K.
You know really since since 2021, we've been.
Online a second contract manufacturer.
As well as a cup.
A couple of sites for our primary contract manufacturer.
We're making good progress there the.
The second manufacturer is producing at this point.
In Q1, so we're happy about that and it has the capacity to do quite a bit more and we'll continue to ramp that up over this year, so where it'll be a journey.
Progress, but I think we are headed in the right direction as well is there a broader efforts to diversify some of our supply chain risk including.
Distribution centers, we moved to a much larger distribution center in the Americas for instance earlier in 2022.
And looking at potential opportunities globally for distribution and warehousing.
Perfect go are compliant for it guys. Thank you.
Thank you. The next question is coming from Jim Ricchiuti of Needham. Please go ahead.
Thank you.
You've given some commentary some color around.
Many of the end markets and Rob I'm wondering if you would maybe talk a little bit more about you.
Your expectations for automotive.
You know you've got some puts and takes obviously the EV market still seems like it's fairly healthy what are you. What's your sense as you look at the auto automotive part of your business this year.
Yeah.
Yeah, I think we're pretty optimistic about the automotive market overall I mean, our revenue from automotive in 2022 grew 13% in constant currency, which is above what we've we expect for that market over the long term and we do see a lot of multi year investment in new capacity.
The city.
Kelly EV battery manufacturing capacity getting getting teed up right and we also see more of that investment going into the United States.
You know where were very very strong share and are in a very very strong team able to to execute on on the needs of those companies and then we have you know the.
The FCC acquisition that I mentioned, which brings you know a really powerful tool to bear and into what is a very difficult manufacturing problems. So.
And you know and and our deep learning capabilities in general in our edge learning tools really I think are going to be very valuable in those applications. So it's yeah. I think we remain pretty optimistic about the outlook for automotive over over the coming quarter.
Quarters and years.
And I know that you don't normally have a lot of.
Color on the <unk>.
Silver electronics market. The question I had more in that area is <unk>.
Around the reports that we've all been seeing are bad.
More production consumer electronics shifting to places like India.
<unk> core applications around smartphones.
First of all are you are you seeing any signs of that and how soon.
Four.
Do you if that were actually are.
Occurring and is it correct would you see orders as that capacity gets built out in places like that.
Well I think some major smartphone manufacturers are on a multi year journey to diversify their manufacturing footprint and I think you know.
Various recent you know various things that have been going on in the world are suddenly.
Continuing to drive that kind of sentiment.
For sure if production is being moved them to two other markets, such as India, and Vietnam, and we've been seeing that over a number of years, and it's definitely continuing and and and gathering pace and yes, we are certainly receiving orders and doing business.
For business that historically might have been done in China and is now being done in India.
Okay. Thank you.
Thank you. The next question is coming from Rob Mason with Baird. Please go ahead.
Hey, guys. Good evening I have a question about <unk>.
Good evening.
Had a question about the build out of the emerging customer sales force what.
You know if you think about at the end of this year or maybe even over the course of the next two years what percent of your sales head count would you expect that salesforce to comprise.
Yeah, I don't think we're going to get that information just for competitive reasons. You know we have competitors in this space that are you know I'm very tightlipped about their own investments et cetera, but.
But certainly if you if you do the math on kind of what Paul told US about investment you know, it's going to be a significant number of our pets. We would expect to add this year and train and put into the field and then and then you know I could see this as being an initiative that's going to build really deliver for us over many many years as our products.
Yet.
Or for that market and our sales force becomes more established.
Maybe if there's another kind of.
No trend or data point I'd I'd point to is like suddenly.
Five plus years ago, when we were talking about 50% of our business was going through distribution.
But you know as our products have got more powerful and easier to implement in our business as Scott bigger you know, it's really 70% of our business now is direct and only 30% through distribution. So certainly we recognize that continued growth is going to.
Gonna mean continued end user direct sales head count and and that's the path, we're on and we'll continue to be on.
I see okay.
And then just as a follow up maybe echoing a little bit the last questioner, but just around consumer electronics and again I know you don't have great visibility at this point in the year, but.
You know just sizing up the year that you just had which I think played out better.
Overall than maybe you were thinking at the outset of the year is the <unk>.
Are you seeing anything any indications that would.
Would support.
I guess growth.
This year, just given the typical cadence that that business often as owners or is there anything that you would call out.
You know that we should think about.
As we try to model out of 'twenty three.
Europe I think you know I think they are right and the characterization of last year.
As normal last year is I'll tell you now we really don't have a clear picture of how it's going to play out.
And we'll have a much better picture when we talk next next you know in May and we'll we'll look we'll give you I think a clearer read at that point.
And then last year, Yeah, we thought high high single digits and our growth rate was substantially north of that right. So as the year played out.
But you know there are there are things that drive our growth in electronics and I think there are factors that are you know coming coming together quite nicely as we look out over longer periods right.
Suddenly you know continued waves of investment in consumer electronics, you know, there's a lot of new innovation coming and we see it particularly in areas like virtual reality and augmented reality.
We see.
Trunks manufacturers', beginning to diversify their supply chains outside of China, particularly and generally that's new equipment.
That where we're where we're helping them install in those markets.
And then I think a really major trend really links to deep learning and edge learning, which is the desire to replace their millions of visual inspectors that are working in these markets today.
Where you know I think COVID-19 has made customers, particularly sensitive to their vulnerability to a large numbers of <unk>.
This human inspectors and as a result, I think we're seeing a lot more interest in applying our technology to.
To help address that vulnerability that they have so so I don't really know how this year is going to shape up.
A lot of optimism about our future in electronics, and we'll have a clearer view on this year's kind of capex and timing and spending.
We certainly expect to at least maintain if not gain share with some of those large consumer.
Consumer electronics customers that we have what we felt such great relationships over time and you can see one of them referenced is one of our largest customers lost last year as they have in a number of years.
Fair enough. Thank you.
Thank you. The next question is coming from Paul Chung of Jpmorgan. Please go ahead.
Hi, Thanks for taking my question so just on Opex.
You have a large kind of sequential increase here and.
In the first quarter, but does that opex level kind of stay at that.
No north of 110.
Quarterly run rate for the rest of the year or I think you mentioned some offsets, but how do we think about.
Overall opex levels as we exit 'twenty three.
Yeah, Hey, Paul This is Paul we again, we don't have full year guidance on that but I think.
Our increase of.
What we said about 10% sequentially driven by a few factors, it's driven by our investment in our emerging customer Salesforce strip.
Stripping the OIBDA by a weaker dollar which.
It helps us from a revenue perspective, it but it hurts us a bit from a and.
And Opex perspective.
Investments in product launches and so on.
I think this is a decent starting point to sort of model year, I think if I were to compare.
<unk>.
A year ago.
With this this guide where yeah.
If we're up 10% on average sort of sequentially or approximately 10%, we're up a little less versus Q1 2022.
But we are expecting to see some of our emerging customer expenses too.
To ramp up a little bit overtime. So so I could see us being up a little more than I like.
In the in the sort of 5% to 10% range overall for the year.
Again, that's a combination of being very very disciplined about discretionary expenses and investing in a couple of really important long term growth initiatives.
Great. That's very helpful. And then just a follow up on.
Product mix by vertical.
Consumer electronics is continues to kind of shrink relative to.
Logistics and auto.
Given the growth rates, there, but how.
How does how do we think about longer term gross margin impacts I think you mentioned in the past that.
What kind of logistics comes in is slightly relatively lower gross margin. So how do we think about those moving pieces as we as we kind of model out gross margins longer term. Thank you.
Yeah, I mean, I think you know on a long term basis, our mid Seventeens gross margin target is really the right way to think about that and I expect and hope that you will.
Be able to see that in the second half of this year, but by far the biggest contribution to getting back to that will be the wind down of the broker buys and again from a.
New purchase activity that wind down has already occurred you know absent some some new crisis emerging and now it's just a function of.
How it flows through our P&L in the current quarter, we're in and next quarter and ideally by then we're mostly through it.
The mix between between industries, certainly, yes logistics this remains slightly dilutive to our margins overall.
Some some good initiatives, including the modulators and tunnel insertion some of the standardized solutions that we've spoken about before and Rob spoke about in the prepared remarks that I think will help on that front.
But overall the product mix.
Factors in the industry mix factors I feel like a quite manageable within our mid seventies.
Obviously as we continue to grow we should get some leverage on our fixed costs that may offset if a disproportionate amount of that might be coming from a slightly lower gross margin area.
Great. Thank you.
Thank you. The next question is coming from Matt Summerville of D. A Davidson. Please go ahead.
So really just have one.
At this point, Rob just curious about that emerging customer initiative I guess why now why not.
A year ago, why not a year from now.
What sort of end markets and applications are you targeting.
This broad from a geographic standpoint, and maybe more importantly, how much does there's widen your tam. Thank you.
Great. Thanks, Yeah. Thanks for the question.
Why now is because we got the products right.
We've been launching we've been developing this edge learning technology, which is really an eye and it's it's you can see it in our insight 2800, if and you can see it in the OCR version, we just launched which it really takes.
Cognex is you know kind of being famous and a life for serving the most challenging applications. The most sophisticated companies in the world want to work with us and their engineers on the most difficult.
Machine vision problems and we've you know we've shined in that segment, but that's now.
Now edge learning technology takes a lot of the power of our technology and it makes it really available for people who aren't trained automation engineers a vision experts so so so and.
That together with our I'd products, which are also becoming increasingly easier to use and powerful means we have a basket of products. Finally that we can put into the hands of relatively inexperienced and you know them.
Sales noise that we train and send out to do that so that that's what this initiative looks like that's why we're doing it now.
Certainly our competitors have some very strong share in those in those segments of the market and you know where we're looking forward to sharing our products with those types of customers theyre going to be very broad ranges of customers, they're gonna be customers, who work in a lot of manufacturer in a lot of different industries, who may not have a lot of automation.
And already May not used machine vision already.
And that's M, but but are keen to adopt the technology and what it can do for them. So that's that's kind of how to think about it geographically, yes, Barry but the potential is to deploy very diverse globally.
Around these types of initiatives.
Thanks, and then Rob if you may.
And that's already I apologize, but can you maybe talk about.
Sounded like 'twenty, two auto had a record year for you guys up double digits constant currency, what's your kind of big picture expectation for auto and EV battery this year.
Particularly with the ongoing cutover to EV cars, maybe your overall thoughts on how auto plays out this year versus 22.
Yes, yes.
<unk> grew in 2020 to about 13% and you know in constant currency and our you know some we've seen some good momentum and strong growth potential. There. It is you know it is EV and EV batteries and.
The.
They use it more and more electronics in.
In automotive design, yes, sensors, and entertainment etcetera, which is really I think driving the use of machine vision, that's somewhat offset but certainly not completely offset by a reduction in internal combustion engine type business powertrain, which is why I'm most machine vision needs to be sold in that segment.
We are feeling optimistic about the long term growth drivers for that there will be some you know no pun intended bumps in the road you know around the timing of deployment of some of the <unk> spend I think which will lead to some volatility in that but I think over.
We think we're in a pretty good three year period weighted what's.
What's going on in the industry our.
Capabilities. The FCC acquisition, we discussed a lot of drivers I think really again, no pun intended helping us grow that grow that business over the years to come.
Do you want a little bit of color kind of by quarter.
You know Rob gave some feedback about the slow start to the year and more broadly I will say automotive is a piece of that references to.
Some some legislation that are potentially.
Along with PMI, leading to some delays in investment and reshuffling of plans and so on auto would be would be a piece of that historically automotive is one of our less volatile industries quarter on quarter and so on but so I think we think we're off to a slower start this year and then if we looked against last year, obviously Q3 was a particularly low quarter for automotive just.
Given the fire and other other factors so.
Those would be the sort of relevant callouts Q1, being low Q3, ideally would be would be would be up to a little more back half optimism.
Yeah.
Thank you guys.
Thank you. The next question is coming from Jairam Nathan of dialogue. Please go ahead hi.
Thanks for taking my question.
I just wanted to kind of dig a little deeper on this auto opportunity, especially on the battery side, because it's it seems to be kind of incremental to what to what cognex had.
Before.
Especially with Iot and shift to U S.
If you kind of compare what do you see what you saw in China over the last two years in terms of batteries.
She can use can you size the opportunity in some way or in a different way I think in last year, you gave us an addressable market of $1 5 billion in automotive I believe.
Is that can that number go given what we're seeing in Iot or work that included included the battery opportunity.
Yes, I think you know I think we talk generally about the size of our of our automotive market in the long term growth potential year, Besides three sides to that $1 billion.
And.
We see estimated long term market growth of 10%.
I think over that's going to cycle up and down over time periods, but I definitely think EV battery investment and the timing of that when it comes to just kind of.
Is going to and helped drive higher growth rates for us last year and could and I hope to see that again in the years to come.
We obviously see great need for our technology in that space. So I think what some of what we've been doing recently such as the FCC acquisition means that we would hope to gain more share in that space and have better and more deployable solutions for customers. So well see how that plays out we'll see what.
You know what our competitors come with also but we're we're optimistic about.
Yeah.
That and then I think.
You mentioned and it's another thing that potentially lifts our business here is the I R. A.
You know investment plans from the U S government will mean much more investment in the United States, where we just have big share and a great reputation and a lot of experience with that with the U S. Automotive companies, who are obviously, putting up the money to do this so so yeah. We are we're optimistic.
About the space.
Okay, and then just finally related to that and I think historically you guys have talked about how you were more focused on the auto supplier supply base.
Other than the Oems.
Is that still the case or the end or do you see some of that changing especially given the move away from ice.
Yeah, It's a really interesting question. So yes, I think historically, we've seen the majority of our automotive business being with tier one automotive suppliers you know in that.
That dynamic may change over time, you're seeing a lot of kind of joint ventures and relationships between them.
Brand names and a and then b.
He's in technology suppliers, if we see that playing out in partnerships and then we'd be then you see.
Well, so pure play companies that it really go into business to manufacture batteries. So suddenly there's plenty of change going on.
In that space, but you know quite where that ends up I you know I wouldn't claim to know we tend to look at applications and needs and are often those are driven by the end users themselves and how they were executed can be through third parties like <unk> like tier ones or in partnership between end user brands in tier one so it's yeah. It's a it's in it.
It's an evolving space when I look forward to talking with you about.
In the future.
Okay. Thank you. Thank you Todd.
Thank you. Unfortunately, we are out of time for questions today, I would like to turn the floor back over to Mr. <unk> for any additional or closing comments.
Yes, well, thank you for joining us Tonight and we.
We look forward to speaking with you again on next quarter's call Goodnight.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and enjoy the rest of your day.
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