Cognex Corporation Q1 2023 Earnings Call
Greetings welcome to the Cognex first quarter of 2023 earnings Conference call.
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A question and answer session will follow the formal presentation.
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Well now turn the conference over to your host Nathan Mccarron kind of Investor Relations may be good.
Thank you smell like good morning, everyone. Thank you for joining US with me on today's call a rottweiler cognex as president and C E O and Pol pot to our C. F O.
Ah results were released earlier today, the press release and quarterly report on Form 10-Q are available on the Investor Relations section of our website.
Both the press release and our call today, well referenced non-GAAP measures you can see a reconciliation I'm certain items from gap non-GAAP , an exhibit to the press release.
Any forward looking statements we made in the press release oriented 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 projection due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and on our Form 10-Q filed this morning for Q1.
With that I'll turn the call over in Iraq.
Thanks, Nathan good morning, everyone and thank you for joining us.
It is anticipated we had a challenging first quarter of 2023.
Revenue from our largest e-commerce customers remained low and we can see.
To see cautious investment my customers across many of our market.
More projects in our sales finally being delayed by spending cuts and additional levels of executive approval at our customers amid concerns about near term demand.
You can see this in macro leading indicators that remain muted.
Since our last cool new orders and manufacturing P. M. I have decreased slightly in our largest regions, partially offset by an improvement in China compared to the January lows.
We've seen slow periods like this before and we can come out of them delivering meaningful gross.
Additionally, we are comparing to an exceptionally strong Q1 of 2022 highlighted by lunch logistics projects and backlogs catch up as the supply environment improved.
Gross margin of 71% in Q1 was in line with our expectations, yet still below on a mid 70% longterm target due to the elevated prices, we paid to buy gas components and replenished inventory grew brokers, we believe that pressure is behind us going for.
Good.
Before I go into further commentary on their business and outlook for Q2, I'd like to turn the call over to pull to walk through more of the results.
Thank you Robin good morning, everyone.
First quarter revenue was $201 million, which was slightly above the high end of our guidance range, you had a meaningful step down year on year.
In addition to the drivers that Rob touched on foreign currency translation reduced revenue by $8 million or 3% year on year on a reported basis.
Let's now go into more detail about what we are seeing in our end markets and the first quarter.
Turning first to automotive, our largest and market and 2022.
The ongoing transition to electric vehicles is driving multiyear investments and we continue to develop strong customer relationships worldwide with an industry, leading offering for E D battery inspection.
Even so automotive spending in the first quarter was tepid driven by more cautious investment from our customers as they see demand for their products often.
E V battery revenue can be lumpy and large project hiding can be uncertain.
We had a very strong Q1 of 2022 that resulted in a tough compare this quarter, but we continue to expect R. E V battery revenue to grow substantially in 2023.
Moving next to logistics.
Declines at a few of our largest e-commerce customers accounted for over half of our total company year on year revenue decline.
Outside of these few large customers, we saw growth and the remainder of our logistics business.
Logistics is still in the early innings of adopting machine vision.
Most companies rely heavily on labor and very few warehouses globally are realizing the full potential of automation.
E Commerce and Omnichannel players beyond our largest e-commerce customers are investing as they strive to automate Moore and we continue to make progress and parcel and posts.
These customers are important for us going for it.
While a few of our largest e-commerce customers have accounted for over half of our logistics revenue the past several years.
These customers represent less than 5% of global warehouse space. So the remainder of the logistics market, which is also much less automated remains a significant growth opportunity for us over the long term.
She I think the consumer electronics.
Difficult portion of our consumer electronics business is related to the premium segment of smartphones and other smart devices.
As many of you know smartphones shipments were down in 2022 and expect it to be down again in 2000 twenty-three, albeit less significantly in the premium segment.
This week and demand has led the conservative capital spending.
Rob will go into more detail on what we expect from this end market going forward.
And other smaller end markets that we serve revenue declined year on year, primarily due to the soft or macro conditions compared to the strong business environment. We we're still seeing in the first quarter of 2022.
Looking at the change in revenue for Q1 on a geographic basis Europe with our best performing region with flat revenue growth year on year on a constant currency basis or slightly down on a reported basis.
Declines from our largest e-commerce customers were offset by growth in automotive and the remainder of our logistics customers.
The Americas in Asia, where our weakest performing regions.
Revenue in the Americas was down 36% driven by the concentration of large e-commerce customers.
Revenue in Asia was down, 35% or 28% on a constant currency basis.
This was consistent across both China, and the remainder of Asia with softness across the end markets yet most pronounced in consumer electronics, which was also lapping a strong first quarter of 2022.
In China, we had slowness in the beginning of the first quarter, but momentum began to pick up in March and April .
Turning now to margins.
Gross margin was 71 per cent in Q1.
Broker by activity continued to pressure gross margin below our mid 70% longterm target the.
The flow through of this higher cost inventory was in approximately 300 basis point impact in the first quarter, which was an improvement compared to the approximately 500 basis point impact in Q4.
We have not made significant broker buys since early Q4. So this higher priced inventory has nearly worked its way through the P at al.
Operating expenses increased by approximately $5 million or 4% year on year.
The majority of this was driven by investment in our emerging customer initiative.
The remainder was primarily driven by personnel related costs.
Occluding, a typical annual increase an employee compensation, partially offset by the favorable impact of currency exchange rates.
Operating margin of 11% was below both QR 20, twenty-two and are 30% longterm target due primarily to operating deleverage from softer revenue.
The effective tax rate, excluding discrete tax items was 16% in both Q1 of 2023 and 2022.
Reported earnings were 15 cents per share in Q1 non.
non-GAAP earnings per share were 13 cents, excluding discrete tax adjustments.
Turning to the balance sheet Cognex continues to have a strong cash position with $844 million in cash and investments and no debt.
Cash flows in Q1 reflected lower that income level, and we returned $36 million to shareholders in the form of stock buybacks and dividends.
As a history demonstrates cognex can experienced periods of softness in between periods of robust growth.
We're excited about the growth drive is that we expect to materialize over the next few years driven by both secular and regulatory Tailwinds.
In the U S alone companies have committed more than $200 billion to manufacturing projects since Congress costs. The Chimps Act and the I R. A five times increase over what was announced last year prior to the passage at the subsidies.
Cleantech in semiconductor investments are beginning to ramp up now we expect these will be medium to long term gross drivers for cognex as manufacturers typically implement machine vision in the later stages of these capital projects.
Significant investment is also happening beyond the United States and.
In the first quarter I spent three weeks in Asia, Visiting Korea, Malaysia, Singapore, India and Vietnam.
My time with customers suppliers and Cognos confirm that manufacturing investment is increasing in these countries and there is a significant opportunity for further automation enabled by machine vision across both factory automation and logistics.
In India investments are being made in electronics to support large customers diversifying their manufacturing outside of China.
One manufacturing facility I visited employees 25000 people they expect to double their workforce over the next few quarters <unk>.
Large portion of these people perform manual visual inspection.
This is just one example went cognex products can help automate manual processes and drive improved process efficiency product quality and service levels for our customers.
My time with executives from E V battery manufacturers reinforce this is an important strategic growth priority for us.
The battery manufacturers are responding favorably to our industry, leading technology that combines the computation of lighting products, we acquired with S. A C and a deep learning vision soft flat.
S E B battery investments accelerate that'll be the next several years will well positioned to capture a substantial share the machine vision growth.
I also spend time with cognex his own contract manufacturers.
Both on long term partner in our new supplier are among the 10 largest contract manufacturers in the world.
We are on track at our second contract manufacturer to ramp up production across many of our largest unit volume products by the end of cute too.
[noise] deepening relationships and diversifying our supply is helping us professionalized and scale our operations.
Let's shipped to an update on product innovation.
Ah reorganization in 2020 led to a product development process centered on common products and platforms.
This is T to set for more efficient and rapid product launches with a focus on ease of implementation and ease of use.
The insight 3800 is a great example of this just.
12 months after launching the insight 20, 801st edge learning enabled division system, We launched a second generation offers similar capabilities at more than twice the processing speed.
The insights 3800 is the fastest embedded smart camera in the market today. It can perform tasks such as automated inspection on high speed production lines in as little as 10 milliseconds, which is less than one third the time, if a blink of an eye.
This accommodates the fastest line speeds to maximize throughput while delivering the high accuracy at customers have come to expect from our insight product line.
[noise] Cognex edge learning technology offers ease of use that enables customers to independently and quickly set up the insight 3800 to solve a wide range of manufacturing applications.
After launching this product at the beginning of April we're getting very positive responses from customers and we've already seen meaningful orders.
In addition to new platforms, a new approach to innovation is resulting in the launch of many platform extensions. For example, the data man 282, which launched in March extends the cosmic state of man to a T series, a fixed amount barcode readers to increase throughput and improve.
<unk> safety in manufacturing and logistics.
The day demand 280 to provide accurate hands free reading of complex barcodes, including difficult to read codes on curved shiny metal surfaces, such as E b components consumer electronics and medical devices.
Expanding our product portfolio with easy to use products is positioning us well to broaden our customer base.
With our emerging customer initiative, we're investing to address smaller or less technically sophisticated customers, who are looking for reliable high performance automation solutions that are easy to implement in use.
We've made strong progress on this initiatives in Q1 and are encouraged by the Kpis, we would see for our initial pilots.
Representing up to 10 times as many customers as a current customer base. We're excited about the potential contribution these customers can make towards targets longterm growth.
Turning now to our outlook.
As we look to the remainder of 2000 twenty-three there is considerable uncertainty about the potential operating environment.
As many of you know revenue from consumer electronics has an annual cadence that we typically talk about in our queue Juan Cole.
For 2023, we believe our customers will not make heavy investments and new capabilities.
As a result, we expect annual revenue from consumer electronics will be modestly lower this year after growing in the mid teens on a constant currency basis in 2022.
Overall in the second quarter, we expect revenue of between 225 and $245 million.
This step up from the first call to Israel actively in line with our typical Q1, two Q G seasonality.
We expect gross margin in the mid 70% range in line with a longterm margin target as we move beyond the elevated costs from premium broke goodbyes and expect a more favorable revenue mix.
Operating expenses are expected to increase by low single digits on a sequential basis as investments in the companies emerging customer initiatives will be partially offset by lower stock based compensation.
Lastly, I remain confident in our team and their ability to execute cognetics tend to be longterm minded some morale and retention remains strong as we look ahead at Ah Craig's opportunities for.
Voluntary attrition of our employees remains about half that of up here's.
Additionally, with the lay offs and low morale at some about appears in a big Tech companies, we are recruiting some exceptional talent.
While this call it did not represent the performance that we aim for we have the right ingredients in place to get back to our long term growth model.
Now we will open the call up for questions. Operator. Please go ahead.
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Our first question comes from a lot of Joe Giordano with T. D. Cowan. Please proceed with your questions.
Hey, good morning, guys.
Moaning Joe.
You mentioned that the logistics decline is from large customers and that the smaller customers or growth.
<unk> and I know, we've heard commentary from a lot of companies that those small smaller players who are investing on logistics expect to kind of keep spending through a potential recession. I guess my question is do you believe that you know because we're not really feeling that necessarily major effects of recession, yet once we start feeling that these things to discuss.
Commercial.
I'll continue to spend they're saying that now.
I think if we we strip out a very small number of life e-commerce customers. What we're seeing is that the rest of our customers continue to grow. So that's that's the good news, but I also don't think that they are completely immune to the macro conditions that we're all seeing Sally and I always I visited some of those.
Over the first quarter, you know I I'm hearing also pressures on costs generally within those countries too and and more scrutiny of capital spend. So we we see this as a great growth opportunity for us the base logistics business and it's growing and we expect it to go on growing nicely, but it is not immune to pressure would be my.
My take on it.
Yeah that that that's fair when when you look at the sequential uptick in the two Q here would you say that's reflective of and demand or is this kind of a delivery a backlog that maybe I had been maybe pass newer or delay it a little bit.
Yeah, Hey, Joe This is Paul I think the biggest driver is just sort of seasonality at our consumer electronics business.
You know that's the biggest piece we did call out that China is is improving given where China started started the year. So that's another factor otherwise.
Overall demand.
Week is Rob mentioned in is Yep no no real further commentary on that right now I'd say.
And I'm just thinking one one last question Mark high level.
You're hearing a lot of talk about RFID more recently and if there's what does that mean for you if there's a more protracted.
Move from barcode toward RFID or how do you even think about that progression is that an area that you're interested in or think about thanks.
Yes, I've been in this industry for about 25 years, and we certainly seen RFID trials, we see them you know from time to time over a long period, we've seen them at some major customers of ours and generally they haven't got great traction because RFID is an expensive technology and it doesn't work in certain environments.
I think we will probably seen you know some big quite high profile Rfid's trials going on at a large.
Cost of delivery company. So I think that's what's perhaps creating some noise what I would say is that I do.
C R. A I D and machine vision and competing significantly with one another I think they just of a very different attributes and machine vision is very powerful four of over a whole range of applications and R. F. I D. I think is a more specific technology around very high value of smaller slower moving.
So so I observed some of that but I don't see it taking any business from us currently nor have I over a long period, nor do I really expect to in future periods.
Okay.
Our next question comes from the line of Diehard with with Credit Suisse. Do proceed with your question.
Hi, Good morning, Joe <unk> asks my my main question.
So it does seem that that you were trying to kind of normal seasonality would you also say that's gonna be from what you can see from now that second half also reflect normal seasonality.
Last year, and we also had a fire in our main contract manufacturers warehouse, which you know certainly caused some.
Distortion. So we were gonna get much easier compares as we go into the second half of the year in terms of seasonality you know hot hot to cold, but I think we history tells US we can expect Q2 and three to be large consumer electronics quota for us and thank you for it's very hard to call that as we go out for the.
It depends on the overall environment, we can see a lot of year end spending.
In different markets, we may have a better sense of how the logistics is looking as we get into Q for you know whether there is as we can see some law adhere and projects and committed coming through and I'll bookings, but if that's too hard to call at this point.
I think the <unk>, Oh, sorry, Guy I think this outside understands this really well, but for others listening I think our year over year comparisons and.
In 2000 twenty-three are much more of a function of the 2022 base than they are our our business trajectory I didn't kind of the the seasonality is does looks at a relatively normal this year, especially compared to compared to last year.
And so I just pull just one more in terms of the all party expense gardens does seem to benefit from stock option expensing, but a few to exclude stock option expensing.
Yeah, what you're projecting four Q2 of US are cute you lost you at what what would it be in terms of growth.
It's it's it's mostly most growth I'd say, excluding stock option would be driven by the emerging customer initiatives that we've made you know we are we are carrying some additional head count beyond that but but really the bulk of the head count has been investment for that initiative and then you know we do have.
<unk> and and and promotions is actually I was on an annual cop increases that that you laugh in any year over year comparisons. So those are probably the biggest factors.
<unk>.
Thank you.