Q4 2023 Cognex Corporation Earnings Call

Operator: Greetings and welcome to the Cognex 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Greetings and welcome to the Cognex fourth quarter 2023 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.

Operator: 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. Thank you, Donna. Good morning, everyone.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Speaker Change: As a reminder, this conference is being recorded it is now my pleasure to introduce your host based on the current head of Investor Relations. Thank you. Please go ahead.

Speaker Change: Thank you Donna and good morning, everyone. Thank you for joining US with me on today's call are Rob Willett, Cognex, as president and CEO and Paul <unk> our CFO.

Nathan McKern: Thank you for joining us. With me on today's call are Rob Willett, Cognex's President and CEO, and Paul Tajem, our CFO. Our results were released earlier today. The press release, annual report on Form 10-K, and a newly introduced quarterly earnings presentation are available in the investor relations section of our website.

Speaker Change: Our results were released earlier today the press release annual report on Form 10-K, and our newly introduced quarterly earnings presentation are available on the Investor Relations section of our website.

Nathan McKern: Today's earnings materials and statements we will make during this call contain forward-looking statements and are based upon information we believe to be true as of today. However, all forward-looking statements are subject to risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K filed this morning for 2023. Before I hand it over to Rob and Paul to discuss the results and outlook, I want to spend a minute explaining changes to our reporting metrics that you will notice. As we previewed with you last quarter, after the acquisition of Moritex in the fourth quarter, we now have a more material level of acquisition costs and amortization of intangible assets. As our financial results have begun to be more impacted by these non-recurring and purchase accounting charges, we've made changes to our non-GAAP measures to exclude those charges from the reporting of our adjusted earnings figures. This change in methodology applies to our calculation of non-GAAP operating expense, operating income, and net income per share.

Robert J. Willett: Today's earnings materials and statements we will make during this call contain forward looking statements and are based upon information, we believe to be true as of today.

Rob Willett: All forward looking statements are subject to risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K filed this morning for 2023.

Rob Willett: Before I hand, it over to Robyn Paul to discuss the results and outlook I want to spend a minute explaining changes to our reporting metrics that you will notice.

Paul J. Chung: As we previewed with you on last quarter. After the acquisition of more tests in the fourth quarter. We now have a more material level of acquisition costs and amortization of intangible assets.

Paul J. Chung: As our financial results have begun to be more impacted by these nonrecurring and purchase accounting charges. We've made changes to our non-GAAP measures to exclude those charges from the reporting of our adjusted earnings figures.

Paul J. Chung: This change in methodology applies to our calculation of non-GAAP operating expense operating income and net income per share.

Nathan McKern: We have also introduced, and we expect to be reporting on and speaking to more frequently, adjusted gross margin, adjusted EBITDA, and free cash flow. These changes and the new non-GAAP measures referenced on our call today are clearly defined with a historical look back to prior period impacts in the earnings presentation posted to our website this morning. You can also see a reconciliation of certain items from GAAP to non-GAAP in our earnings press release.

Paul J. Chung: We have also introduced and.

Paul J. Chung: And we expect to be reporting on and speaking to more frequently adjusted gross margin adjusted EBITDA and free cash flow.

Paul J. Chung: These changes and the new non-GAAP measures referenced on our call today are clearly defined with a historical look back to prior period impacts and the earnings presentation posted to our website. This morning. You can also see a reconciliation of certain items from GAAP to non-GAAP in our earnings press release.

Nathan McKern: We want to emphasize that our previously communicated long-term financial targets of 15% revenue growth, mid-70% gross margin, and over 30% operating margin are unchanged and should be evaluated on an adjusted basis excluding these non-recurring and purchase accounting charges. Next, Rob will discuss our fourth quarter and 2023 results. Paul will then provide additional detail on the financials, and Rob will conclude with our outlook and a discussion on how our execution of strategic initiatives in 2023 sets us up for future growth. With that, I'll turn the call over to Rob.

Paul J. Chung: We want to emphasize that our previously communicated long term financial targets of 15% revenue growth mid 70% gross margin and over 30% operating margin are unchanged and should be evaluated on an adjusted basis, excluding these nonrecurring and purchase accounting charges.

Paul J. Chung: Next Rob will discuss our fourth quarter and 2023 results. Paul will then provide additional detail on the financials and Rob will conclude with our outlook and a discussion on how our execution of strategic initiatives in 2023 sets us up for the future growth with that I'll turn the call over to Rob.

Robert J. Willett: Thanks, Nathan. Hello, everyone, and thank you for joining us. 2023 was a year of perseverance at Cognex. We advanced many high-potential strategic initiatives while navigating a global manufacturing recession. We continue to take important steps towards achieving our strategic priorities and long-term goals. However, after growing almost 30% in 2021 fueled by a pandemic-related acceleration in logistics and electronics investments, revenue was slightly down in 2022 and declined 17% in 2023. Customers have remained cautious with investments as we observed lower confidence in near-term end demand, leading to increased CAPEX scrutiny and delayed orders. PMI readings have now reached 15 consecutive months in contraction territory, which is the longest such stretch since the tech bubble and the 9-11 period over 20 years ago. Investment in China remains especially muted.

Robert J. Willett: Thanks, Nathan Hello, everyone and thank you for joining us.

Robert J. Willett: 2023 was a year of perseverance at Cognex, we advanced many high potential strategic initiatives, while navigating eight global manufacturing recession.

Robert J. Willett: We continued to take important steps towards achieving our strategic priorities and long term goals.

Robert J. Willett: After growing almost 30% in 2021 fueled by pandemic related acceleration in logistics and electronics investments revenue was slightly down in 2022 and declined 17% in 2023.

Robert J. Willett: Customers have remained cautious with investments because we observed lower confidence in near term and demand leading to increased capex scrutiny and delayed orders.

Robert J. Willett: PMI readings have now reached 15 consecutive months in contraction territory, which is the longest such stretch since the tech bubble in 911 period over 20 years ago.

Robert J. Willett: Investment in China remains especially needs it.

Robert J. Willett: In addition to these macro challenges faced by both Cognex and its peers, a high exposure to the leaders in the industries we serve was a headwind for us in 2023. For example, about half of our 2023 revenue decline was driven by two large, longstanding customers who reduced their spending after heavy investment in prior years. However, we are confident that we still maintained or gained share with each of these customers.

Robert J. Willett: In addition to these macro challenges faced by both Cognex and its peers are high exposure to the leaders in the industries. We serve was a headwind for us in 2023.

Robert J. Willett: About half about 'twenty two 'twenty three revenue decline was driven by two large longstanding customers who reduced their spending after heavy investment in prior years.

Robert J. Willett: However, we are confident that we still maintained or gained share with each of these customers.

Robert J. Willett: In some of our end markets, notably EV battery and semiconductor manufacturing, large investment plans are underway. Many of these projects have not reached the stage where significant volumes of our products are ordered, but we anticipate our customers' manufacturing projects that broke ground in 2022 and 2023 will represent future revenue opportunities for Cognex. Throughout 2023, we stayed disciplined in our approach to discretionary spending and thoughtful about hiring.

Robert J. Willett: In some of our end markets, notably EV battery and semiconductor manufacturing large investment plans are underway. Many of these projects have not reached the stage where significant volume of our products is ordered but we anticipate our customers' manufacturing projects that broke ground in <unk>.

Robert J. Willett: 'twenty, two and 2023 will represent future revenue opportunity for cognex.

Robert J. Willett: [laughter] throughout 2023 we stay disciplined in our approach to distinguish discretionary spending and thoughtful about hiring.

Robert J. Willett: We have faced challenging periods before in our 43-year history, and we have shown the ability to evolve. For example, in the year 2000, semi-customers accounted for over half of our revenue, and we saw a significant downturn in that business. To adjust, we moved fast to diversify our business towards factory automation and penetrate the Chinese market.

Robert J. Willett: We faced challenging periods before and a 43 year history, and we have shown the ability to evolve.

Robert J. Willett: For example in the year 2000 semi customers accounted for over half of our revenue and we saw a significant downturn in that business to adjust we moved fast to diversify our business towards factory automation and penetrate the Chinese market.

Robert J. Willett: While different today, we see disruptive trends playing out in our markets, such as the shift away from internal combustion engines towards EVs and deep learning machine vision technology becoming accessible to an increasing number of customers and applications. We are mobilizing to capitalize on these trends and remain focused on the long term and on continuing to evolve to deliver future growth. Before I go into more detail on this evolution and our outlook, let me turn it over to Paul for the financial results for the quarter. Thank you, Rob. And hello everyone. Turning to the results for the fourth quarter. Revenue declined 18% on a reported basis.

Robert J. Willett: While different today, we see disruptive trends playing out in our markets such as the shift away from internal combustion engines towards Evs and deep learning machine vision technology, becoming accessible to an increasing number of customers and applications.

Robert J. Willett: We are mobilizing to capitalize on these trends and remain focused on the long term and on continuing to evolve to deliver future growth.

Robert J. Willett: Before I go into more detail on this evolution and our outlook, let me turn it over to Paul for the financial results for the quarter.

Paul: Thank you, Rob and Hello, everyone.

Paul: Turning to results for the fourth quarter.

Paul: Revenue declined 18% on a reported basis.

Paul J. Chung: This includes $7 million of revenue, or a 3 percentage point contribution from Morris. I'll also remind you that we're comparing against a fourth quarter in 2022 that included $20 million of revenue that shifted from the third quarter due to the fire at our primary contract manufacturer. From an end market standpoint, our biggest year-on-year declines remained in consumer electronics and STEMI. However, broader softness continued across our other factory automation businesses, such as automotive, medical, consumer products, and food and beverage. The underlying business conditions we are seeing in each of these end markets remain consistent with what we reported the past two quarters. These end markets were roughly flat sequentially but declined year on year, mostly driven by the timing of 2022 revenue due to the fire.

Paul: This includes $7 million of revenue or a three percentage point contribution from more attacks.

Paul: Also remind you that we're comparing against the fourth quarter and 2022 that included $20 million of revenue that shifted from the third quarter due to the fire at our primary contract manufacturer.

Paul: From an end market standpoint, our biggest year on year declines remained in consumer electronics and semi.

Paul: Broader softness continued across our other factory automation businesses, such as automotive medical related consumer products and food and beverage.

Paul: The underlying business conditions, we are seeing in each of these end markets remained consistent with what we reported the past two quarters.

Paul: These end markets were roughly flat sequentially, but declined year on year, mostly driven by the timing of 2022 revenue due to the fire.

Paul J. Chung: Within automotive, we continue to see softness across the internal combustion business and increasing demand from EV battery manufacturers. Logistics remains stable, contributing growth sequentially and roughly flat year-on-year, on a geographic basis. Revenue in the Americas increased sequentially, driven by growth in logistics. However, revenue in China stepped down further in the quarter as we continued to see a challenging economic environment. Year on year, revenue declined across all regions, with the steepest decline in China.

Paul: Within automotive, we continue to see softness across the internal combustion business and increasing demand from EV battery manufacturers.

Paul: Logistics remains stable contributing growth sequentially and roughly flat year on year.

Paul: On a geographic basis revenue in the Americas increased sequentially driven by growth in logistics.

Paul: Revenue in China stepped down further in the quarter as we continued to see a challenging economic environment.

Paul: Year on year revenue declined across all regions with the steepest decline in China.

Paul J. Chung: Adjusted gross margin in Q4 was in line with expectations at 70.7%, or 68.7% on a reported basis, including $4 million of acquisition costs and intangible asset amortization in cost of sale. Compared to last year, favorability from the decline in broker buys was offset by Volume D leverage, more attacks, and unfavorable. On a sequential basis, adjusted growth margin was down slightly due to Morris. Let's turn now to operating expenses. Adjusted operating expenses increased $5 million, or 5% sequentially, and $6 million, or 6% year-on-year.

Paul: Adjusted gross margin in Q4 was inline with expectations at 77% or 68, 7% on a reported basis, including $4 million of acquisition costs and intangible asset amortization and cost of sales.

Paul: Compared to last year favorability from the decline in broker buys was offset by volume deleverage more attacks and unfavorable mix.

Paul: On a sequential basis adjusted gross margin was down slightly due to more attacks.

Speaker Change: Let's turn now to operating expenses.

Paul: Okay.

Paul: Adjusted operating expenses increased $5 million, or 5% sequentially and $6 million or 6% year on year.

Paul J. Chung: The sequential increase is due to the timing of incentive compensation and other employee benefits and the addition of more. The year-on-year increase is driven by the investment in the Emerging Customer Initiative and more ATT&CK, partially offset by continued diligent cost management and lower incentive competition. Excluding the Emerging Customer Initiative and Moratex, Adjusted Offex would have declined by $4 million, or 4% year on year.

Paul: The sequential increase is due to the timing of incentive compensation and other employee benefits and the addition of more attacks.

Paul: The year on year increase is driven by the investment in the emerging customer initiative and more attacks, partially offset by continued diligent cost management and lower incentive compensation.

Paul: Excluding the emerging customer initiative and more attacks adjusted Opex would have declined by $4 million or 4% year on year.

Paul J. Chung: As you'll see in our non-GAAP reconciliation tables, we had $8 million of acquisition costs and $2 million of amortization of acquisition-related intangibles during the course. Adjusted EBITDA was 13% in Q4, below Q4 of 2022, due primarily to operating deleverage and our investment in emerging markets. Adjusted diluted earnings per share was $0.11 in Q4, a year-on-year decline driven by lower revenue Turning to the balance sheet, Cognex reported a strong net cash position at the end of Q4, with $576 million in cash and investments and no debt. The $270 million quarter-on-quarter decline was driven by the closing of the Moratex transaction in the quarter.

Paul: As you'll see in our non-GAAP reconciliation tables, we had $8 million of acquisition costs and $2 million of amortization of acquisition related intangibles in the quarter.

Paul: Adjusted EBITDA was 13% in Q4 below Q4 of 2022, due primarily to operating deleverage and our investment in emerging customers.

Paul: Adjusted diluted earnings per share was <unk> 11 in Q4, a year on year decline driven by lower revenue and margins, partially offset by a lower tax rate and share count.

Paul: Turning to the balance sheet Cognex reported a strong net cash position at the end of Q4 with $576 million in cash and investments and no debt.

Paul: The $270 million quarter on quarter decline was driven by the closing of the more attacks transaction in the quarter.

Robert J. Willett: After acquiring Moratex, we believe we still have sufficient capital to support our growth plans and to continue to return capital to shareholders through stock buybacks and dividends. With that, I'll turn it back over to Rob to discuss the future growth drivers and the outcome. Thanks, Paul. And thank you, Paul, for being a valued member of our executive team over the past four years. As previously announced, Paul will be leaving Cognex on March 15th.

Paul: After acquiring more attacks, we believe we still have sufficient capital to support our growth plans and to continue to return capital to shareholders through stock buybacks and dividends.

Paul: With that I'll turn it back over to Rob to discuss the future growth drivers and the outlook.

Robert J. Willett: Thanks, Paul and thank you Paul for being a valued member of our executive team over the past four years as previously announced pool will be leaving Cognex on March 15th He's made significant contributions to cognex is success, including enhancing cognex is planning and budgeting process and overseeing investments.

Robert J. Willett: He's made significant contributions to Cognex's success, including enhancing Cognex's planning and budgeting process and overseeing investments in Cognex's CRM platform. The external search for our next CFO is progressing well. I am pleased with the quality of candidates we're seeing, and we will update you with developments as they become available. Now, let me spend some time discussing how we continue to invest in the future despite near-term macro challenges. Last year, Cognoids worked hard to release more products than in any previous year in Cognex's history. Our portfolio of new products leverages the best rule-based vision while incorporating more human-like inspection capabilities made possible by advances in deep learning and edge learning artificial intelligence technology.

Robert J. Willett: And Cognex is CRM platform.

Robert J. Willett: The external search for our next CFO is progressing well I am pleased with the quality of candidates, we're seeing and we will update you with developments as they become available.

Robert J. Willett: Now, let me spend some time discussing how we continue to invest in the future despite near term macro challenges.

Robert J. Willett: Last year Cognos <unk> worked hard to release more products than in any previous year in cognex history.

Robert J. Willett: Folio of new products Leverages, the best rule based vision, while incorporating more human like inspection capabilities made possible by advances in deep learning and edge learning artificial intelligence technology.

Robert J. Willett: As with many industries, developments in AI have profound implications for industrial machine vision. We were early to identify major advancements in AI technology, leading to the acquisition of Vidi Systems and Suolab in 2017 and 2019, respectively. These acquisitions jump-started our innovation around the use of convolutional neural networks, the technology now powering our deep learning and edge learning products. AI makes our products easier to use and sell, and makes machine vision more human-like, enabling Cognex to expand its applications where human inspectors have previously been the only viable option. Increases in the cost and scarcity of labor continue to be a problem for our customers. We estimate that 35 million people across the globe are manually completing vision inspection tasks, such as examining products for scratches, dents, and defects.

Robert J. Willett: As with many industries developments in a I have profound implications for industrial machine vision.

Robert J. Willett: We were early to identify a major advancements in AI technology, leading to the acquisition of <unk> systems and sewer lab in 2017 in 2019.

Robert J. Willett: These acquisitions Jumpstarted, our innovation around the use of Convolutional neural networks, the technology now powering our deep learning and edge learning products.

Robert J. Willett: AI it makes our products easier to use and sell and makes machine vision more human like enabling cognex to expand its applications, where human inspectors have previously been the only viable option.

Robert J. Willett: Increases in the cost and scarcity of labor continues to be a problem for our customers.

Robert J. Willett: We estimate that 35 million people across the globe are manually completing vision inspection tasks, such as examining products for scratches dents and defects.

Robert J. Willett: One of our customers estimates that they spend over a billion dollars per year on human visual inspectors. AI-enabled machine vision can complete this work more cost-effectively while helping to improve quality and productivity. Our deep domain knowledge allows us to leverage the best of rule-based, deep learning, and edge learning technologies to address the full spectrum of customer needs. We remain dedicated to helping the world's most sophisticated manufacturers and logistics providers achieve their goals, while also bringing Cognex machine vision technology to more markets and new customers. To reach the broader customer base that can now be served by our new, easier-to-use edge learning technology, we launched our Emerging Customer Initiative, a salesforce expansion that drove $28 million of OPEX in 2023. Our initial emerging customer sales class is now trained and has started to sell.

Robert J. Willett: One of our customers estimates that they spend over $1 billion per year on human visual inspectors.

Robert J. Willett: AI enabled machine vision can complete this work more cost effectively while helping to improve quality and productivity.

Robert J. Willett: Our deep domain knowledge allows us to leverage the best of rule based deep learning and edge learning technologies to address the full spectrum of customer needs.

Robert J. Willett: We remain dedicated to helping the world's most sophisticated manufacturers and logistics providers achieve their goals, while also bringing cognex machine vision technology to more markets and new customers.

Robert J. Willett: To reach the broader customer base that can now be served by a new easier to use edge learning technology, we launched our emerging customer initiatives. Our sales force expansion that drove $28 million of Opex in 2023.

Robert J. Willett: Our initial emerging customer sales class is now trained and has started to sell.

Robert J. Willett: We expect this initial class of emerging customer sales nodes to generate over $50 million of incremental revenue and positively contribute to operating income in 2024. Early orders reinforce our belief that this initiative can be gross margin accretive. Now equipped with the right products and with a defined process for hiring and training, we are well positioned to welcome our second class of emerging customer sales nodes this year. We have budgeted approximately $25 million of additional OPEX for this initiative in 2024.

Robert J. Willett: We expect this initial class at the emerging customer sales nodes to generate over $50 million of incremental revenue and positively contribute to operating income in 2024.

Robert J. Willett: Early orders reinforced our belief that this initiative can be gross margin accretive.

Robert J. Willett: Now equipped with the right products and with a defined process for hiring and training we are well positioned to welcome our second class of emerging customer sales noise. This year.

Robert J. Willett: We have budgeted approximately $25 million of additional Opex for this initiative in 2024.

Robert J. Willett: [laughter].

Robert J. Willett: Yes.

Robert J. Willett: I'll turn now to our outlook for the first quarter, along with a few thoughts on the full year. For the first quarter, we expect the following results: revenue between $190 million and $205 million, which represents flat year-on-year and sequential growth, reflecting another challenging quarter.

Speaker Change: I'll turn now to our outlook for the first quarter, along with a few thoughts on the full year.

Speaker Change: In the first quarter, we expect the following results.

Speaker Change: Revenue between 190 million and $205 million, which.

Speaker Change: Resents flat year on year and sequential growth, reflecting another challenging quarter.

Robert J. Willett: I will note that this is narrower than our normal $20 million range as we continue to see a relatively stable operating environment. Maritex should contribute 6-8% of revenue in Q1 and for the year, adjusted gross margin in the high 60% range. However, gross margin continues to be below our long-term targets given volume, deleverage, and negative mix.

Speaker Change: I will note that this is narrower than our normal $20 million range as we continue to see a relatively stable operating environment.

Speaker Change: Mara Techs should contribute 6% to 8% of revenue in Q1 and for the year.

Speaker Change: Adjusted gross margin in the high 60% range.

Gross margin continues to be below our long term targets, given volume deleverage and negative mix a full quarter of Mar Tech is expected to be an approximately two percentage point drag on gross margin and incremental 100 basis point headwind compared to Q4.

Robert J. Willett: A full quarter of MARTEX is expected to be an approximately 2 percentage point drag on gross margin, an incremental 100 basis point headwind compared to Q4. Our gross margin guidance also includes an approximately two percentage point drag from a strategic logistics project with a large customer. The project has higher upfront costs but includes high-margin recurring revenue enabled by our edge intelligence software. We expect adjusted operating expenses to increase mid-single digits on a sequential basis due to investment in our emerging customer initiative, higher incentive compensation, and the impact of a full quarter of Morotex operations. For the full year, we expect the incremental $25 million of emerging customer OPEX to ramp throughout the year, similar to the investment we made in 2023. We also expect incentive compensation to be a $15 to $20 million year-on-year headwind.

Speaker Change: Our gross margin guidance also includes an approximately two percentage point drag from a strategic logistics project with a large customer.

Speaker Change: The project has higher upfront cost, but includes high margin recurring revenue enabled by our edge intelligence software.

Speaker Change: We expect adjusted operating expenses to increase mid single digits on a sequential basis due to investment in our emerging customer initiatives higher incentive compensation and the impact of a full quarter of Mar Tech operations.

Speaker Change: For the full year, we expect the incremental $25 million of emerging customer opex to ramp throughout the year similar to the investment we made in 2023.

Speaker Change: We also expect incentive compensation to be a $15 million to $20 million a year on year headwind.

Robert J. Willett: While we continue to see a challenging operating environment in the first quarter, we are more optimistic about the back half of the year. We have started to see signs in longer cycle businesses that momentum could be building. For the full year, we expect logistics to grow as we start to see infrastructure investment plans materialize, though logistics growth this year will likely still be below the long-term market growth we expect. We expect our EV battery business to be a strong growth driver long-term, but we are seeing more tentativeness from these customers driven by uncertainty around end-user demand and the political environment. The semi landscape is improving, as you have heard from the leading semi equipment manufacturers with a more optimistic 2024 outlook.

Speaker Change: While we continue to see a challenging operating environment in the first quarter. We are more optimistic about the back half of the year, we have started to see signs and longer cycle businesses the momentum could be building.

Speaker Change: For the full year, we expect logistics to grow as we start to see infrastructure investment plans materializing. The logistics growth. This year will likely still be below the long term market growth we expect.

Speaker Change: We expect our EV battery business to be a strong a strong growth driver long term, but we are seeing more tentativeness from these customers driven by uncertainty around end user demand and the political environment.

Speaker Change: The semi landscape is improving as you've heard from the leading semi equipment manufacturers with more optimistic 'twenty 'twenty four outlooks.

Operator: Consumer Electronics has positive long-term trends, but the timing and in-year contribution remain uncertain. As usual, we expect to have more visibility by next quarter and to give you more clarity for the year on our next earnings call. While we expect to deliver below-target growth in the first half, we remain confident in our 15% annual revenue growth target over the medium to long term. Based on double-digit market growth, expansion of our served markets, our pipeline of new products, and our reputation with leading manufacturers, we believe the progress Cognoids made last year on several promising initiatives positions us well for the future. Now, we will open the call for questions. Operator, please go ahead. Thank you.

Speaker Change: Consumer electronics has positive long term trends, but the timing and any contribution remains uncertain as usual, we expect to have more visibility by next quarter and to give you more clarity for the year on our next earnings call.

Speaker Change: While we expect to deliver a low target growth in the first half we remain confident in our 15% annual revenue growth target over the medium to long term.

Speaker Change: Based on double digit market growth expansion of our served markets.

Speaker Change: Our pipeline of new products and our reputation with leading manufacturers. We believe the progress Cognize have made last year on several promising initiatives positions us well for the future.

Speaker Change: Now we will open the call for questions. Operator. Please go ahead.

Operator: The floor is now open to questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker Change: 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.

Speaker Change: You May press star two if he 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 the star keys.

Operator: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. We do ask that you please limit yourself to one question and one follow-up, and then get back in queue for any additional questions. Again, that's Star 1 to register a question at this time. Our first question is coming from Andrew Buscaglia of BNP Paribas. Please go ahead. Hey, good morning. Hey, good morning, guys. Good morning.

Speaker Change: We do ask that you. Please limit yourself to one question and one follow up and then get back in queue for any additional questions.

Speaker Change: And Thats Star one to register a question at this time.

Speaker Change: Our first question is coming from Andrew <unk> of BNP Paribas. Please go ahead.

Andrew: Hey, good morning, Hey, good morning, guys.

Andrew: Good morning.

Andrew: So in your commentary.

Robert J. Willett: So, in your commentary for your Q1 guidance, you talk about some signs of stabilization or stabilization, and the guidance implies just a modest sequential decline. Where are you seeing that stabilization? It sounds like logistics is a little bit better than you would have expected. And then can you just comment on some of the other end markets? I know visibility is limited, but where do you see that momentum building? Yes, thanks, Andrew.

Andrew: For your Q1 guidance you talk about.

Andrew: Some signs of stabilization or stabilization in the guidance implied.

Andrew: Just a modest sequential decline.

Andrew: Where where are you seeing that stabilization it sounds like logistics is a little bit better than you would've expected and then.

Andrew: Can you just comment around some of the other end market.

Andrew: I know visibility is limited, but where you see that momentum building.

Speaker Change: Yes, thanks, Andrew So so you know we have a sales funnel, we see order patents that are that exist across our business. So we have some pretty good you know kind of visibility about how how the business is looking in this sort of volatility that we see in that so the overall picture seems to be stabilizing overall.

Robert J. Willett: So, you know, we have a sales funnel. We know we see order patents that exist across our business. So we have some pretty good, you know, kind of visibility about how the business is looking and the sort of volatility that we see in that. So the overall picture seems to be stabilizing overall. As you say, I think we're seeing more sort of positive momentum.

Andrew: As you say I think we're seeing more sort of positive momentum, yes, and logistics, we see that building.

Robert J. Willett: Yes, in logistics, we see that building, you know, across a number of other markets, of our larger markets also. And we see the EV battery, you know, continues to have a nice, you know, growth momentum behind it. You know, generally, our European business also seems to be, you know, pretty stable and growing, you know, in a way in terms of its momentum overall. So those would be positive areas, I think. More uncertainty would be around China, right? As we mentioned, we'll give you a better readout on consumer electronics, whether we know kind of how that's looking for the year, but there's nothing particularly to report at this point on that. So I think that's the overall picture.

Andrew: A number of other markets.

Andrew: Of our larger markets also and we see EV battery and it continues to have a nice.

Andrew: <unk>.

Andrew: Momentum behind it.

Andrew: <unk>.

Andrew: Generally our European business also seems to be pretty.

Andrew: Pretty stable and growing.

Andrew: In a way in terms of its momentum overall, so those would be positive areas I think.

More uncertainty than it would be around China, right and as we mentioned we will give you a better readout on consumer electronics, whether we know kind of how that's looking for the year, but it's not.

Andrew: There's nothing particularly to report at this point about that so I think that's the overall color, it's not strong, but it's not the sort of.

Robert J. Willett: It's not strong, but it's not the sort of whipsaw and decline that we saw. You know, if you go back sort of into last year, back a few quarters that we were seeing, we see more relative stability. Yeah. Okay. Okay.

Andrew: Whipsaw in decline that we saw you know if you go back at Siderca loss until last year back a few quarters that we were seeing we see more relative stability.

Andrew: Yes.

Speaker Change: Okay, and then just some clarification on the Q1 guide for margin.

Paul J. Chung: And then, um, just some clarification on the Q1 guide for margins, you know, um, is it fair to say, you know, excluding, It sounds like a two point dilution from Mortax, two points from this logistics project, you're closer to 70%. And then following up on that, how do you figure this initiative is gross margin accretive? Can you talk about some of the pilots?

Speaker Change: Is it fair to say you're excluding.

Speaker Change: It sounds like a two point dilution from more tax two points from this logistics project you are closer to 70% and then following up on that how do you figure.

Speaker Change: <unk> is gross margin accretive or can you talk about some of the pilots.

Paul J. Chung: you've done or something to give us confidence that, yeah, that will lead to positive contributions to margin. Yeah, Andrew, this is Paul.

Speaker Change: You've done or something to give us confidence that.

Speaker Change: That will lead to a positive contribution.

Speaker Change: Contributions to margin.

Speaker Change: Yeah. Andrew This is Paul why don't I start with your specific kind of gross margin question and then Rob can chime in on.

Paul J. Chung: Why don't I start with your specific gross margin questions, and then Rob can chime in on emerging customers and any additional color. So, you know, we are expecting adjusted gross margin in the high 60% range in Q1. The sequential step down, which is, you know, about 200 to 300 basis points, that really is driven by a full quarter of more attacks and then the strategic logistics projects that we called out in Q1, which bring with them, you know, additional high-margin recurring revenue. So, those are really drivers from Q4 to Q1.

Paul: Emerging customer than any any additional color. So we are expecting adjusted gross margin in the high 60% range in Q1.

Paul: The sequential step down which is about 200 to 300 basis points. That's direct really is driven by a full quarter of of more attacks and then the strategic logistics projects that we called out in Q1, which brings with it additional.

Paul: High margin recurring revenue.

So.

Paul: The doesn't really drivers from yeah from Q4 to Q1, if we think kind of relative to our full target our target of seven mid 70% I think there's really three drivers there and two of which are the same one as we expect deleverage from muted volume and negative mix to continue to be.

Paul J. Chung: If we think kind of relative to our full target, our target of mid-70%, I think there are really three drivers there, and two of which are the same. One is we expect de-leverage from muted volume and negative mix to continue to be a 200 to 300 basis point headwind in the first quarter. And again, that's driven by a few factors, just lower revenue levels overall, as well as product mix. Q1 is typically a lower quarter for consumer electronics, for instance, which is primarily software and comes with it very high, higher gross margins. And then Moratex, a full quarter of Moratex is overall at a 200 basis point rough headwind, and that's an incremental 100 basis point contoured to Q4. And then the strategic project we referenced is also about a two percentage point or 200 basis point drag. This is something we don't tend to report very often.

Paul: 200 to 300 basis point headwind in the first quarter.

Paul: And again, that's driven by a few factors just lower revenue levels overall as well as product mix. You know Q1 is typically a lower quarter for consumer electronics for instance, which is primarily software and it comes with it with very high you'll hire higher gross margins.

Paul: And then more attacks a full quarter of more than Texas overall at a 200 basis point headwind, that's an incremental 100 basis points towards the Q4 and then the strategic project. We referenced is also about a two percentage point or 200 basis point drag.

Paul: This is something we don't tend to report very often actually I was looking through my notes and in Q3 2021 was the last time, we called out any one project, having a strategic impact. So it's not something that we would generally expect to be reporting and I don't have visibility to more of those this year, but it is very opportunistic and when we see a great opportunity to build a long term revenue even if it comes with some upfront costs.

Paul J. Chung: Actually, I was looking through my notes. I think Q3 2021 was the last time we called out, you know, any one project having a strategic impact. So it's not something that we would generally expect to be reporting on, and I don't have visibility to more of those this year.

Paul J. Chung: But it is very opportunistic. And when we see a great opportunity to, you know, build a long-term revenue, even if it comes with some upfront costs, we'll, of course, make that investment. Yeah, thanks, Paul.

Paul: Of course make that investment.

Paul: Yeah, Thanks, Paul anything to give us maybe some longer.

Robert J. Willett: And I think, so I will give maybe some longer-term color. I think it will be difficult to get back to our mid-70% gross margin target this year until we have a recovery in volumes and fully integrate Maritex. But I think how we see, or I know how we see our gross margins kind of improving over time includes three factors I'll point out. One is emerging customers, right? So we're outselling highly profitable embedded systems through that channel, and we're excited about what we see with those products and that Salesforce. New products. So we have a pipeline of new products we introduced last year that are ramping nicely, very nicely, some of our most successful products ever. And they come with a strongly accretive gross margin for Cognex. And a third factor would be the consumer electronics business. You know, it was the worst performing of our large markets last year. It can have, you know, it can have cyclicality and volatility.

Paul: Term color I think it will be difficult to get back to a mid 70% gross margin target. This year until we have a recovery in volumes and fully integrate more attacks.

Speaker Change: But I think how we see or I know, how we see our.

Speaker Change: Our gross margins kind of improving over time.

Speaker Change: Include three factors I'll point out one is emerging customers right. So we're out selling on highly profitable and embedded systems through that channel and we're.

Speaker Change: We're excited about what we see in with those products and that sales force.

Speaker Change: New products. So we have a pipeline of new products. We've introduced last year that are that are ramping nicely very nicely. Some of our most successful products ever and they come with a strongly accretive gross margin for cognex.

Speaker Change: And the third factor would be the consumer electronics business. You know it was the worst performing of our launch market last year. It can have a kind of cyclicality and the volatility and we fully expect it to return and deliver some strong growth at some point, whether that's this year or not.

Robert J. Willett: And we fully expect it to return and deliver some strong growth at some point, whether that's this year or not. And we'll, you know, we'll certainly all help to boost our gross margins right back to where we expect them to be. Other things I think are worth pointing out in the broader margin discussion. You know, one is that Moritex is a drag on our gross margin but comes with very strong operating margins that are accretive to us as a business. And as we continue to integrate it and sell its products more directly attached to Cognex Vision Systems, and we develop the specialty optics business that they bring, they and we bring together and integrate them. You know, we expect this to be a nice tailwind for us on our operating margin.

Speaker Change: Will that will certainly will all help to boost our gross margins right back to where we expect them to be.

Speaker Change: Other things I think are worth pointing out on the broader margin discussion you know one is that.

Speaker Change: Vertex is a drag on our gross margin, but has comes with very strong operating margins that are accretive to us as a business and as we continue to integrate it and sell.

Speaker Change: Sell its products more directly attached to cognex vision systems, and we developed a specialty optics business that they bring there when we bring together and integrate them. We expect this to be a nice.

Speaker Change: A tailwind for us on the on our operating margin so.

Robert J. Willett: So, you know, still challenging in 2024. But what we have shown through our history and many times in my 15 years here is that when we pivot back to growth, there's a very, very strong fall through on incremental revenue that occurs at Cognex, so that also gives us great confidence that we should be able to get back to our overall target. Okay, thanks for the answers. I appreciate it.

Speaker Change: Still challenging in 2024, and but what we have shown through our history and many times in my 15 years here is.

Speaker Change: When we pivot back to growth.

Speaker Change: There's very very strong fall through on incremental revenue that occurs that cognex. So we know that also gives us great confidence that we should be able to get back to our our overall targets.

Speaker Change: Okay. Thanks for the answers I appreciate it.

Operator: Thank you. The next question is coming from Jim Ricchiuti of Needham & Company. Please go ahead.

Speaker Change: Thank you. The next question is coming from Jim Ricchiuti of Needham <unk> Company. Please go ahead.

Jim Ricchiuti: Thank you. Two questions. First, on the EV portion of the business, just in light of the mixed demand trends that we've all been reading about geographically in the EV business. How are you seeing that business? You know, for instance, what's your line of sight?

Jim Ricchiuti: Hi, Thank you two questions first one on the E V. A portion of the business just in light of the.

Jim Ricchiuti: [noise] mixed demand trends there.

Jim Ricchiuti: We've all been reading about geographically on the EP business. How are you seeing that business you know for instance, what what's your line of sight. Because my sense is you may be a little bit removed from what's happening on the EV batteries battery side.

Robert J. Willett: Because my sense is you may be a little bit removed from what's happening on the EV battery side. Yeah, thanks, Jim. I've spent a lot of time in the last two quarters meeting with a lot of EV battery manufacturing companies. So I can tell you that there's a huge, you know, huge investment going on in that industry, particularly in Europe and America. It's, it's, So Cognex has two really kind of vectors, I would say on that growth.

Speaker Change: Yeah. Thanks, Tim.

Speaker Change: So I spent a lot of time in the last two quarters are out meeting with a lot of EV battery manufacturing companies. So.

Speaker Change: I can tell you that there's a huge.

Speaker Change: Huge investment going on in that industry, particularly in Europe and in America.

Speaker Change: It's eight <unk>.

Speaker Change: So cognex has to really kind of vectors I would say on that growth. One is on just building lines.

Robert J. Willett: One is just building lines, you know, these customers are building EV production lines to, you know, coat and cut and align and stack and inspect EV batteries, right? And there, you know, there are, I visited just in Europe last week, two companies that are investing over a billion dollars to do that, right? Not all of it is automation, obviously, but real momentum that is not a short-term thing, right? So, and machine vision is key to them doing that.

Speaker Change: These customers these customers are building.

Speaker Change: EV production lines to coat and cutting the line in stack and inspect.

Speaker Change: E B batteries right in there you know there I visited just in Europe last week, two companies that are investing over $1 billion to do that right and not all of it in automation, obviously, but but some real real momentum that is not a short term thing right. So and machine vision is is key to them doing that so this new lines new build.

Robert J. Willett: So there's new lines, new builds where, as one would expect, Cognex is one of the preferred suppliers for what is quite a challenging machine vision kind of a task that goes on. The second, so I think that's sort of the, if you like, the new build green field type scenario that we might be familiar with from other industries at Cognex. But there's a second thing going on, which is the manufacturing of EV batteries. It's very competitive on the innovation side, but it's also pretty dangerous and legally concerning for these companies, so they're very concerned about inspecting them for quality. And we've been developing technology in that market that is..., you know, very advantaged, both through the computational imaging company we bought last year, SAC, I should say in 2022.

Speaker Change: <unk>, where you know as one would expect you know cognex is one of the preferred suppliers for what is quite a challenging machine vision kind of a task that goes on.

Speaker Change: The second so so I think that's sort of the if you like the new build greenfield type scenario that we might be familiar with from other industries that cognex, but there's a second thing going on which is manufacturing of EV batteries is.

Speaker Change: It's very competitive on the innovation side, but it's also a pretty dangerous and legally concerning thing for these companies. So they're very concerned to inspect in quality and we have been developing technology in that market that is.

Speaker Change: Very advantaged both through the computational imaging company, we bought last.

Last year.

Speaker Change: I'm actually I should say in 2022.

Robert J. Willett: And then our deep learning technology, which those two technologies together allow us to image in, with incredible speed and definition, scratches, dents, problems, and then diagnose them with deep learning technology to see whether that's a problem or not. I visited a number of companies in the last six months who have just said what an extraordinarily challenging, expensive task that is for them, where they're scrapping huge numbers of good batteries that they're just concerned can become problems, cause fires, etc.

Speaker Change: And and then our deep learning technology, which all those two technologies together allow us to to image in with.

Speaker Change: With incredible speed and definition scratches dents problems.

Speaker Change: And then diagnose them with deep learning technology to see whether that's a problem or not I visited a number of companies in the last six months, who have just said what an extraordinarily challenging and expensive task that is for them with as scrap scrapping huge numbers of of good batteries that theyre just <unk>.

Concern can become problems caused fires et cetera for them later so so so there are those two things going on Jim which is really I would say this the sort of sweet spot of what cognex is doing on the downside and I think this is what you are hearing and I think we're hearing it too is there's there's anxiety, there's anxiety about will evs.

Robert J. Willett: for them later. So, there are those two things going on, Jim, which is really, I would say this, the sort of sweet spot of what Cognex is doing. On the downside, and I think this is what you're hearing, and I think we're hearing it too, is that there's anxiety. There's anxiety about whether EVs will be as successful as we think. Are they perhaps a kind of products for wealthy customers, or are they, you know, broadly going to cannibalize a lot of the internal combustion engine business that's out there? And I, you know, I've, I've, so that's kind of one issue.

Speaker Change: Be as successful as we think how they perhaps niche.

Speaker Change: Kind of.

Speaker Change: Products for wealthy customers or are they.

Speaker Change: Broadly kind of cannibalize a lot of the internal combustion engine business that's out there and.

Speaker Change: So that's kind of one issue on the one hand.

Robert J. Willett: On the one hand, you know, we all see the slowing sales of EVs and the relatively poor EV numbers reporting out of some of the big, big companies. So I think there's concern that end user consumers are becoming a little more cautious. And then there's another end-user vector, which is one Chinese company, BYD, is talking about developing and selling a $12,500 EV car and really selling it very broadly in some of the markets that, perhaps, in America, we're less focused on. There's plenty to be interested in and confused about on that vector.

You'll see that slowing sales of evs and the relatively poor EV numbers reporting out of some of the big Big company. So I think there's concern that they are becoming a little more cautious the end user consumers.

Speaker Change: And then there's another end user vector you know, which is one one Chinese company you know BYD is talking about developing and selling of 12500 dollar.

Speaker Change: EV car, so and really selling it very broadly and some of the markets that perhaps in America, we're less focused on so.

Speaker Change: There's plenty to be interested in and confused on that vector and then the final one in terms of long term demand, which we see with our customers too is there is some concern about political changes and support for EV business right. So most.

Robert J. Willett: And then the final one in terms of long-term demand, which we see with our customers too, is that there is some concern about political changes and support for EV business, right? So one specific large EV producer from Asia has certainly communicated that they're putting some of their investments in the U.S. on hold until they see more of a clarity in the political environment and what that means for some of the subsidies that they would be expecting to receive through the Inflation Reduction Act. So Jim, this is a long answer, but I hope it's helpful. No, thank you, Rob, for the...

Speaker Change: One one specific large EV producer from Asia.

Speaker Change: Certainly communicated that they're putting some of their investments in the U S on hold until they see more of a clarity in the political environment and what that means for some of the subsidies that they would be expecting to receive through the DM.

Speaker Change: The inflation reduction act so Jim its a long answer but I hope it's helpful. No. Thank you Rob for the there's there are a lot of puts and takes and I think you've highlighted those in the next question may be a little easier and simpler just five years early customer business you sound encouraged where can you elaborate on where you're getting traction.

Robert J. Willett: There are a lot of put-ins and take-outs, and I think you've highlighted those. And the next question may be a little easier and simpler. Just on the early customer business, you sound encouraged. Can you elaborate on where you're getting traction? Is that 50 million, by the way, essentially from this first class of salespeople, or are you including some from the second class that's underway? And is this spread out over the course of the year, or at the back end? Yes,

Speaker Change: Is that $50 billion by the way essentially from this first class of salespeople are you, including some from the second class that's underway and is this spread out over the course of the year or back end.

Robert J. Willett: So, we did pilots starting about a year and a half ago. So we have a few sales guys who are kind of helping us understand. We did a lot of experiments, as you might imagine. And then we went out and hired a large number of this first class, which came in starting sort of in April. The last of them came in October or so.

Speaker Change: Yes.

Speaker Change: So.

Speaker Change: So we did pilots about starting about a year and a half ago. So we have it.

Speaker Change: A few sales noise to a kind of helping us understand we did a lot of experiments as you might imagine and then we went out and hired pretty large a large number of of this first class which came in studying sort of in April the last lots of them came in in October or so and we've trained them and almost all of.

Robert J. Willett: And we've trained them, and almost all of them are now in the field. And that's the whole ballgame, really, this year regarding our growth expectations. And then we're going to be hiring the second class at different points throughout the year based on kind of when they become available and the locations we're hiring in. And so I wouldn't expect them to contribute meaningfully to any kind of revenue growth in 2024, the second class. And then this is a group of sales nods that we've trained and given them a great, really very advantaged edge learning and ID products. And they're out in the field.

Speaker Change: Of them are now in the field and Thats the whole ballgame really this year.

Speaker Change: Regarding our growth.

Speaker Change: Growth expectations right and then we're gonna be hiring the second class you know as we move through the year with different points based on you know kind of when they become available and the locations. We're hiring and so we wouldn't I wouldn't expect them to contribute meaningfully to any kind of revenue growth in 2020 for the second class.

Speaker Change: And then but this is a this is a group of sales noise that we've trained and given them a great really very advantaged edge learning and I'd products and they're out in the field and we're driving them towards metrics about which include activity kind of number of sales calls and other other good sales metrics.

Robert J. Willett: And we're driving them towards metrics that include activity, kind of numbers, sales calls, and other good sales metrics. And we're measuring that performance. And we do expect there to be learning curve effects as they become better and better trained and better able to execute. And we sort of factored that into our numbers. They'll contribute in the first quarter nicely.

Speaker Change: And.

Speaker Change: That performance and we do expect there to be learning curve effects, right as they become better and and and better trained and better able to execute and we sort of factored that into our numbers and they'll contribute in the first quarter nicely, but we expect them to contribute more sequentially each quarter as we move through the year.

Robert J. Willett: But we expect them to contribute more sequentially each quarter as we move through the year. And I would just add, you know, this is, we believe, gross margin accretive based on all the tests and pilots we've run so far. And the drivers of that really are, you know, twofold.

Speaker Change: And I would just add this is we believe gross margin accretive based on all the tests and pilots we've run so far and the drivers of that really are twofold. One is many of these customers not all but many of them are lower volume customers. So expectations around volume discounts and so on are clearly lower than where our list price.

Robert J. Willett: One is that many of these customers, not all, but many of them are lower volume customers. So expectations around volume discounts and so on are clearly lower, and we're, you know, our list price realization is higher. And secondly, you know, we're selling our easiest to use products, which have less service associated with them. You know, great technology, again, the power in the software that's allowing us to command quite high margins when we sell. Thank you. Thank you. The next question is coming from Jacob Levenson of Melius Research. Please go ahead. Good morning, everyone.

Speaker Change: <unk> is higher and.

Speaker Change: And secondly, we're selling are easiest to use products, which have less service associated with them.

Speaker Change: Great technology again, the power and the software, that's allowing us to command quite quite high margins when we when we sell.

Speaker Change: Okay. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you. The next question is coming from Jacob Levenson of Melius Research. Please go ahead.

Jacob Levenson: Good morning, everyone.

Operator: Good morning, Paul. I appreciate your help over the years and wish you the best of luck in your next endeavor and hope you get to work hard and play hard and move fast in whatever that next chapter is. Thanks, Jacob. Um, just on, uh, China, I know this was a... It's a market where sometimes it's hard to know what's really happening if you're not there. It's certainly been a challenge for a lot of companies that we cover, and obviously, a big piece of that for you folks is consumer electronics, and maybe we have to wait another quarter to hear how that's shaping up. Rod, maybe you can just give us a sense of what you're hearing broadly from the field in terms of sentiment. We've heard some companies indicate that January was actually off to a pretty good start. So just curious what you're seeing there. Yeah, so I visited China in the fall for the first time since pre- COVID.

Good morning.

Jacob Levenson: Paul I appreciate your help over the years.

Jacob Levenson: The worst are the best of luck in your next endeavor and I Hope you got for work hard play hard and fast in whatever the next chapter of <unk>.

Speaker Change: Thanks Jacob.

Speaker Change: Yes.

Speaker Change: At this time.

Speaker Change: China and elsewhere.

Speaker Change: Mark I think sometimes it's hard to hard to know what's really happening if you're not there.

Speaker Change: It's certainly been a challenge for a lot of companies will recover.

Speaker Change: And obviously, we're a big piece of that for you folks with consumer electronics.

Speaker Change: Remember, we have to wait another quarter or two for sure how that's shaping up right.

Speaker Change: Rob maybe if you can just give us a sense of what Youre hearing Broadway from our field in terms of the Santa Ana and we've heard some companies indicate that January was actually off to a pretty good start.

Robert J. Willett: Just curious what you're seeing there.

Robert J. Willett: Yeah, So I I visited China in.

Robert J. Willett: In the full for the first time in since pre Covid. So you know it is it has changed I'm certainly kind of some of the.

Robert J. Willett: So you know, it has changed, certainly kind of some of the enthusiasm and growth expectations are different very much. Greater China for us experienced the largest year-on-year revenue decline of any of our major regions, so we were down 29% in Q4 year-on-year and 28% for the year. I think it's going to dampen growth expectations for many companies where that market was such a driver of growth over such a long period. The decline we experienced in the automotive market was most pronounced in China, around the world, for Cognex.

Robert J. Willett: Enthusiasm and growth expectations of different very much.

Greater China for us experienced the largest year on year revenue decline of any of our major regions. So we were down.

Robert J. Willett: 29% in Q4 year on year and 28% for the year. So.

Robert J. Willett: I think and I think it's going to dampen growth expectations for many companies.

Robert J. Willett: That market was such a driver of growth over such a long period.

Robert J. Willett: The decline we experienced in automotive was most pronounced in China.

Robert J. Willett: The world.

Robert J. Willett: For for Cognex.

Robert J. Willett: So then, certainly, electronics is a key part of our business in China. And, as I mentioned, certainly, with large customers, we're confident that we're maintaining a share in what we do for large smartphone companies. And also in the EV space, it's highly advantageous, and we think we're very well positioned to grow and help them grow as they need to in China. But also, I think we're all seeing that we're in the early innings of a long-term shift in manufacturing away from China that could benefit us nicely this year and beyond. We're seeing production capacity moving from China, particularly for us, to India and Vietnam. And we're making sure that we have a strong presence and relationships in both places to help with that transition.

Robert J. Willett: So then.

Speaker Change: Yes, certainly electronics is a key part of our business and in China and as I.

Speaker Change: I mentioned, you know certainly with with large customers. We're confident that we're maintaining share in what we do for large smartphone companies and also in the EV space.

Speaker Change: Is highly advantaged and we think we're very well positioned to grow and help them grow as as they need to in China, but also I think we're all seeing.

Speaker Change: We're in the early innings of a long term shift in manufacturing away from China.

Speaker Change: Could benefit us nicely this year and beyond.

Speaker Change: We're seeing production.

Speaker Change: Capacity, moving from China, particularly for us to India and Vietnam.

Speaker Change: And you know, we're making sure that we have strong presence and relationships in both places to help with that transition.

Robert J. Willett: And then, obviously, some of the EV battery opportunities that are sort of where there's overcapacity in China and some stagnation there are resulting in more businesses around the world, particularly in Europe and the US, growing. So that's my overall view, I would say. In our own business, we have a strong group of committed Cognoids in China, seeing very, very low turnover in terms of people leaving the business and a lot of enthusiasm around our new products and new technology. We celebrated with them our 40th anniversary near the end of last year and saw a lot of the Cognix culture playing out strongly. And we have a very seasoned management team.

Speaker Change: And then obviously some of the EV battery opportunities that are sort of.

Speaker Change: Where there's overcapacity in China, and some stagnation there.

Speaker Change: It is resulting in more businesses around the world, particularly in Europe, and the U S growing so.

Speaker Change: It's my my overall view I would say.

Speaker Change: In our own business, we have strong group of committed Cognize in China.

Speaker Change: Seeing very very low turnover in terms of people, leaving the business and you know and a lot of enthusiasm around our new products and new technology, we celebrated with them.

Speaker Change: 40th anniversary at the near the end of last year, and so are a lot of kind of cognex culture, playing out strongly and we have very seasoned management team, but certainly you know I think the business that we can all expect in China in the years to come we will be lower and will result in opportunities elsewhere.

Robert J. Willett: But certainly, I think the business that we can all expect in China in the years to come will be lower and will result in opportunities elsewhere. Yeah, and I'll just add a couple points specific to kind of our financials and maybe your first comment about, you know, I've heard China's off to maybe a little better start in January. So, you know, seasonality in China and Asia, more broadly, is slightly different than other parts of our business. We do typically see, you know, a step up from Q4 to Q1. So your comment may be, you know, very, very true.

Speaker Change: Jacob I'll, just add a couple points specific to kind of our financials and maybe your first comment about I've heard China is off to a maybe a little better start in January so sees.

Seasonality in China, and Asia more broadly, it's slightly different than other parts of our business, we do typically see.

Speaker Change: Step up from Q4 to Q1, so your comment maybe.

Paul J. Chung: And we would see it ourselves from a seasonality perspective. We, you know, are basically flat against a year ago and flat against Q4 in our Q1 guide. But you know, the answer is quite different.

Speaker Change: Very very true and we would see it ourselves from a seasonality perspective.

Speaker Change: We're basically flat against a year ago and flat against Q4, and our Q1 guide, but the answer is quite different if you're looking sequentially, we're seeing a little bit of a step up in Asia, if youre looking year over year, we're expecting China to be weaker than it was a year ago. So again, depending on your lands. That's that's one aspect and the other color I would give on our full year results.

Paul J. Chung: If you're looking sequentially, we're seeing a little bit of a step up in Asia. If you're looking year over year, we're expecting China to be weaker than it was a year ago. So again, depending on your lens, that's one aspect.

Paul J. Chung: And the other color I would give on our full-year results, you know, again, as Rob mentioned, we were down 28% on the year for China. That's 23% in constant currency and a five percentage point drag on FX with a weaker CNY. The biggest piece of that, the biggest contributor to that, was our consumer electronics business, or was our consumer electronics business, in 2023. So, while the overall business was weak, our numbers were worse because of the disproportionate impact that consumer electronics has on that, which generally follows different macroeconomic drivers and factors than the core Chinese business. So I think it's important to sort of separate those two, and certainly as we're going through the year, I know the team will call out those differences where they're meaningful. I appreciate the color.

Speaker Change: Again, as Rob mentioned, we were down 28% on the year for China.

Speaker Change: 3% in constant currency had a five percentage point drag on FX with a with a weaker C N y.

Speaker Change: The biggest piece of that the biggest contributor that is our consumer electronics business or was our consumer electronics business in 2023, so while the overall business was weak our numbers were worse because of the disproportionate impact that consumer electronics plays in that which generally does follow different.

Speaker Change: Macroeconomic drivers and factors than the core Chinese business I think it's important as to sort of separate those two and certainly as we're going through the year I know the team what we'll call out those differences, where they are where they are meaningful.

Speaker Change: I appreciate the color I'll keep it to one question for you.

Operator: I'll keep it to one question today. Thank you. Thank you. The next question is coming from Joseph Donohue of Baird. Please go ahead. Hey guys, I'm on for Rob today.

Speaker Change: Thank you. The next question is coming from Joseph Donahue of Baird. Please go ahead.

Joseph Ritchie: Hey, guys I'm on for Rob today.

Operator: I wanted to dig into your discussion about the logistics outlook a little bit. Can you talk about where the optimism is coming from? Is it more greenfield or brownfield, larger or smaller customers, and kind of your expectations for the timing of when we might see an uptick? Sure, yeah, yeah. Thanks, Joe.

Joseph Ritchie: I wanted to dig into your.

Joseph Ritchie: A discussion about the logistics outlook, a little bit can you talk about where the optimism is coming from is it more greenfield or brownfield with larger small customers and kind of your expectations for the timing on when we might see an uptick.

Joseph Ritchie: Yes.

Joseph Ritchie: Yes.

Speaker Change: Sure Yeah, yeah. Thanks.

Speaker Change: So.

Robert J. Willett: So, you know, revenue contracted last year, 21% in logistics, and, you know, it was down 25% in 2020, through after growing 65% in logistics for us in 2021. So, you know, certainly we've seen kind of, you know, as we know, pandemic-fueled investment, particularly around e-commerce in the United States in 2021, and then overcapacity that's being kind of worked through. And so that trend is continuing to play out, perhaps as we might have expected. Our, you know, our logistics business among newer, smaller customers continues to grow nicely, not as much as we would like, right, last year, but there is good underlying growth potential there. And, you know, we expect that to see.

Speaker Change: Revenue contracted last year, 21%.

Speaker Change: In logistics and it was down 25% in 2020 true after growing 65% and logistics for us in 2021, So certainly we've seen kind of.

Speaker Change: No.

Speaker Change: Pandemic fueled investment, particularly around e-commerce in the United States in 2021, and then overcapacity, that's being kind of worked through them and so that that that.

Speaker Change: And as is is continuing to play out perhaps as we might have expected our.

Speaker Change: Our logistics business among new newer smaller customers continues to grow nicely not as much as we would like right last year, but good underlying growth.

Speaker Change: Potential playing there.

Speaker Change: And you know that weeks, we expect that to see.

Robert J. Willett: So, we did see nice quarter-on-quarter growth in logistics in Q4. So there's a picture developing that we think is pivoting back to growth quite nicely. It's coming from those smaller customers. It's coming from customers beginning to embrace vision technology and edge intelligence. It's coming from penetrating parcel and postal applications.

Speaker Change: We did see nice quarter on quarter growth in logistics in Q4.

Speaker Change: So you know that there's a picture developing that we think is pivoting back to growth quite nicely is coming from those smaller customers, it's coming from customers beginning to embrace vision technology and edge intelligence is coming from us penetrating parcel and postal applications, we're seeing some nice wins.

Robert J. Willett: We're seeing some nice wins from some big names, which is indicative of bigger business coming further. We see potential in a lot of geographies around the world, notably e-commerce in India. So there are certainly those trends happening nicely. Among our larger customers, we're confident that they will return to being larger customers of Cognex over time, although the timing of that might still be a little tricky to call at this point.

Speaker Change: From some big names, which are indicative of bigger business coming further we see potential in a lot of geographies around the world, notably E Commerce in India. So there were certainly those trends happening nicely among our larger.

Speaker Change: Customers.

Speaker Change: We're confident that they will return to being larger customers of cognex over time, the timing of that might still be a little tricky to call at this point.

Robert J. Willett: But I would say that our business is growing kind of momentum in the business, the reach, our technology, its acceptance in the market is growing nicely. I think as one looks around, what one would read that is relevant perhaps to Cognex, not necessarily customers specifically, although possibly, Walmart is a great example of the potential in logistics. The company has said it plans to automate or partially automate many of its 100 plus U.S. warehouses in the coming years. So we see that as a nice example.

Speaker Change: But you know I would.

Speaker Change: I would say that I'll build a business is growing kind of the momentum in the business. The reached our technology its acceptance in the market is growing nicely.

Speaker Change: Income.

Speaker Change: One it looks around.

Speaker Change: One would read it.

Speaker Change: Relevant perhaps to cognex not necessarily customers, specifically, although possibly you know Walmart is a great example of the potential in logistics. The company has said they plan to automate or partially automate many of its 100 plus U S warehouses in the coming years. So we see that as a nice example.

Robert J. Willett: UPS certainly has been pretty open about their intention to automate and improve the production and throughput in their warehouses. And certainly, we think a very strong potential user of advanced automation and vision technology. So these would be examples of some of the things that we see going on. You will note in our filings that we didn't have a 10% customer last year.

Speaker Change: Suddenly is is has been pretty open about their intention to automate and improve the production and throughput in their warehouses and certainly we think a very very strong potential user of advanced automation and vision technology. So these would be examples of some of the things that we see.

Speaker Change: Going on.

Speaker Change: You will note in our filings that we didn't have a 10% customer last year. So you know that.

Robert J. Willett: So that's obviously notable, but I think there are certainly better days ahead pretty much across the board for our entire logistics business. We do expect it to grow this year. Okay, thank you, and then related to that, the next question would be kind of. We talked about whether this margin headwind from the... Could be kind of expanded in terms of the software you're developing for other customers, or is it more of a unique situation that it's going to be a one-off? So the quick answer is it's one, it's an in-quarter event where we took the decision to help a large, important customer implement some of this technology that we call Edge Intelligence. This is a product we've been developing for quite some time, and what it allows us to do is manage all of our vision systems, very appropriate for large customers with large deployments, manage them through middleware, which allows us to calibrate, support, upgrade, but also provide a lot of key manufacturing data to our customers, OK?

Speaker Change: That's obviously notable but I you know I think other suddenly better days ahead pretty much across the board for our entire logistics business.

Speaker Change: And we do expect it to grow this year.

Speaker Change: Okay. Thank you and then related to that next question would be kind of could you talk about whether we should have this margin headwind from this logistics project run beyond the first quarter.

And then related to that if the recurring revenue that you've described that's associated with this project something that you think could be.

Speaker Change: Kind of expand it in terms of the software youre developing to other customers or is it more of a unique situation.

Speaker Change: It's gonna be a one off.

Speaker Change: So the quick answer is it's a one it's in quarter event, where we took the decision to help a large important customer.

Speaker Change:

Speaker Change: Implement some some some of this technology that we call.

Speaker Change: Edge intelligence. This is a product we've been developing for quite a long time.

Speaker Change: And what it allows us to do is manage all of our vision systems.

Speaker Change: Very very appropriate for large customers with large deployments manage them through middleware, which allows us to calibrate.

Speaker Change: Support upgrade but also provide a lot of key manufacturing data to our customers right and we've taken the view for a long time that customers should pay on a monthly subscription basis for that business and so this is our largest success with that product so far.

Robert J. Willett: And we've taken the view for a long time that customers should pay on a monthly subscription basis for that business, and so this is our largest success with that product so far, and we've signed a contract that will allow us to bill monthly for that and really hopefully add more functionality over time through it, right? Then we have, when we get and install it now in some of our applications, we provide this technology to customers, and we invite them to use it after a free trial period.

Speaker Change: And we will be we've signed a contract that will allow us to bill monthly for that and really hopefully add more functionality over time through it right. Then we have when we got an installed now and in some of our applications. We provide this technology to customers and we invite them.

Speaker Change: To use it.

Speaker Change: After a free trial period. So this is a this is.

Robert J. Willett: So this is one of our main pushes to try to get our business more on a subscription basis, and that business should be highly profitable as it continues to grow. We've been working really hard on this for a long time. It's still early days in terms of its commercial rollout, but this is a really nice first example, and we do expect to see many more as that technology kind of matures and customers become aware of its value. Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Speaker Change: One of our main push is to try to get our business more on a subscription type basis in that business should be highly profitable.

Speaker Change: Is it as it continues to grow.

Speaker Change: We've been working really hard on this for a long time, it's still early days in terms of its commercial rollout. This is a really nice first example, and we do expect to see many more as that technology kind of matures and customers become.

Speaker Change: Aware of its value.

Speaker Change: Thank you.

Speaker Change: Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Operator: Thanks, good morning. Paul, I wish you the best of luck and then I will love the slides. So thank you for the additional detail this morning. My first question, maybe just starting on slide 6, is: I know it's really early in the year, Rob, and kind of hard to have a perfect crystal ball on exact growth rates for 2024. But I'm curious, you already mentioned that logistics is going to grow in 24. If you had to force rank your different end markets or businesses in 24 and where you would expect to see, you know, the most growth versus potentially the least growth, I'd love to hear any color you would have. Yeah. Hi Joe. How are you doing?

Joseph Ritchie: Thanks, Good morning, Paul with you the best of luck and then loved the slides. So thank you for the additional detail this morning.

Joseph Ritchie:

Joseph Ritchie: My first question, maybe just starting on slide slide six.

Joseph Ritchie: I know, it's I know, it's really early in the year, Rob and kind of hard to have a perfect crystal ball on exact growth rate for 2024, but I'm curious as you already mentioned that logistics do you expect to grow in 2004, if you had to force rank your different end markets or businesses in 'twenty four and we.

Joseph Ritchie: Where you would expect to see.

Joseph Ritchie: The most growth versus potentially the lease growth I'd love to hear any color you would have at this point.

Robert J. Willett: Yeah, Hi, Jeremy How're you doing.

Robert J. Willett: Well, we don't give full guidance, and we certainly don't give full-year guidance, and we don't give guidance by industry, but I will. I'll comment a little. I will also say I've been running industrial companies for about 25 years, and this is always a bit of a dark, confusing period as we come into January and as a lot of businesses don't really kind of get in gear through January, and then we have Chinese New Year. So it's too early to call some of these things, but if I talk about our industries overall, I think it's probably pretty in line with how we think of our I think logistics, we expect to see it grow this year, and I think we're confident we're getting back to strong growth there. It's perhaps notable in logistics to say that it can be a longer cycle business. So what we might see in bookings may not turn into revenue until possibly 25, but we're confident that we'll be reporting good results in logistics. Consumer electronics has the potential to really come back strongly, but, as I said, it's too early to say.

Speaker Change: We don't give full guidance and we don't give certainly a full year guidance and we don't give guidance by industry, but I will comment a little I would also say and I've been running industrial companies for 25 years and this is always a bit of a dock confusing period as we come into January and there's a lot of businesses don't really kind of get.

And gear through January and then we have Chinese new year. So.

Speaker Change: It's too early to call some of these things, but but.

Speaker Change: If I talk about our industry's overall you know I think it's probably pretty in line with how we think about long term growth plans as I look at this year I think logistics, we expect to see it.

Speaker Change: Grow this year and I think we're you know we're confident we're getting back to strong growth. There. It's perhaps notable in logistics to say you know there that can be longer cycle business. So what we might see in bookings may not turn into revenue until possibly 25, but were confident about we will be reporting good results in <unk>.

Sticks.

Speaker Change: Consumer electronics has the potential to really come back strongly but as I said too early to say automotive you know, we view that as sort of a 10% long term grow at.

Robert J. Willett: Automotive, we view that as sort of a 10% long-term grower, and that industry looks like it's having some challenges at the moment. EV, I think we're very confident about that, contributing to and driving some growth, potentially offsetting declines in the internal combustion engine business. So probably I would rank that as the lowest of our big industries with expectations, but things can change quickly. So those are just a few thoughts for you, Joe. Yeah, that's helpful, and I totally appreciate the potential volatility, but it is a helpful color. And I guess maybe two other real quick ones.

Speaker Change: <unk>.

Speaker Change: That industry looks like it's having some challenges at the moment EV I think we're very confident about that contributing and driving some growth potentially offsetting declines in internal combustion engine business, but so probably I would rank that as the lower of our big industries with expectations, but things can change quick.

Speaker Change: Please so.

Speaker Change: Just a few sort of thoughts for you Joe.

Joseph Ritchie: Yes, that's helpful and totally appreciate the potential volatility, but it is helpful color and I guess, maybe maybe two other real quick ones, So just making sure that I.

Paul J. Chung: So just making sure that I've thought through the gross margin progression correctly from the first quarter through the rest of the year. It sounds like you do expect to get back to 70 plus percent gross margins by 2Q. And then also just had a question around free cash flow. Just what are your expectations for free cash flow this year? It seemed a little bit lighter than we anticipated in 4Q.

Joseph Ritchie: Thought through the gross margin progression correctly from the first quarter through the rest of the year it sounds like you.

Joseph Ritchie: You do expect to get back to 70 plus percent gross margins by <unk>.

Joseph Ritchie: And then also just had a question around free cash flow.

Joseph Ritchie: What are kind of expectations are for your free cash flow this year it seemed.

Joseph Ritchie: Little bit lighter than we anticipated in <unk> any comments around that would be great.

Paul J. Chung: Any comments around that would be great. Sure. So I think, you know, again, without guiding beyond the current quarter, just by virtue of a roughly 200 basis point drag from one strategic logistics project, I think you kind of get back to, hopefully, what you're seeing. The Moratex drag versus our long-term targets will certainly persist for a while until we, you know, fully integrate and achieve more synergies. And then the impact of volume deleverage and mix, that'll change a little bit quarter to quarter, but obviously, growth is the driver there that's going to help us get back to target margins. Specifically for free cash flow, you know, the biggest driver of free cash flow for us is obviously our profit. And so, you know, as we get more leverage on growth, which we expect to do, obviously, that would help. We did have a little higher investment in working capital in Q4.

Joseph Ritchie: Sure.

Speaker Change: So I think again.

Without without guiding beyond the current quarter.

Speaker Change: By virtue of a roughly 200 basis point drag from one strategic logistics project I think you kind of get back to hopefully what youre what youre seeing.

Speaker Change: The more attacks drag versus our long term, we'll certainly persists for a while until we fully integrate and achieve more synergies and then the impact of volume deleverage and mix that will change a little bit quarter to quarter, but obviously growth is the driver there that's going to help us get to get back to target margins.

Speaker Change: Specifically for free cash flow.

Speaker Change: The biggest driver of free cash flow for us is.

Speaker Change: It is obviously our profit and so as we get more leverage on growth, which we expected to do obviously that would that would help.

Speaker Change: We did have a little higher investment in working capital in Q4.

Paul J. Chung: Some of that is due to the strategic decisions we're making around inventory. So we may see elements of that, you know, going forward. But, generally speaking, this is a business that continues to generate cash. We do feel quite good about the inventory we have to deliver on our growth expectations. So hopefully, we won't be seeing, you know, major drags on the capital side. Okay, good to hear.

Speaker Change: Some of that is sort of strategic decisions, we're making around inventory.

Speaker Change: So we may see elements of that going going forward, but generally speaking. This is a business that continues to generate cash we do feel quite good about the inventory we have to deliver on our growth expectations.

Speaker Change: Hopefully shouldn't be seeing major drags on the capital side.

Operator: Thank you, guys. Thank you. The next question is coming from Piyush Abbasi of Citi. Please go ahead.

Speaker Change: Okay. Good to hear thank you guys.

Speaker Change: Thank you. The next question is coming from Piyush capacity of Citi. Please go ahead.

Operator: Good morning, guys. Thanks for taking my questions. Just quickly on Moritax, I think it's that 6% to 8% contribution. Can you elaborate on the trends you're seeing in Japan and, particularly, the semi-conductor and electronics market there? Are you seeing some stabilization in those markets as well? And I know it's still early, but have you started to see any synergies as you continue to integrate? Thanks for your question. So, yes, plenty of synergies with Morotex, and we're out of the gate fast on that. A lot of the synergies have to do with helping to sell a product more broadly and across Cognex, but we're also integrating our businesses in Japan, and we're excited about the reputation and leadership that Morotex brings us in Japan.

Piyush: Good morning, guys. Thanks, Thanks for taking my questions just quickly on modern attacks.

Piyush: Is that 6% to 8% contribution can you elaborate on trends, you're seeing in Japan, and particularly the semi and electronics end market. There are you seeing some stabilization in those markets. Those are all like and I know, it's still early but have you started to see any synergies as you continue to integrate.

Piyush: Okay.

Speaker Change: Yeah. Thanks, Thanks for your question.

Speaker Change: So yes.

Speaker Change: Plenty of synergies with Martech somewhere out of the gate fast on that.

Speaker Change: A lot of the synergies have to do with helping to sell that product more broadly and across cognex, but we're also.

Speaker Change: Integrating our businesses in Japan, and we are excited about the the the.

Speaker Change: Our reputation and leadership that Martech spring system in Japan.

Operator: So you asked about SEMI, our business in SEMI, and we're overweight SEMI in our Japan business now, both between Cognex and the Morotex piece that we've acquired. It did experience a period of tremendous growth in 2021 and the first half of 2022, but then the trajectory slowed a lot in the second half of 2022. And, you know, there are signs that we may see, we have more optimism about SEMI coming back later in the year. And I think it's hard to call it beyond that at this point. I got it.

Speaker Change: So you asked about semi.

Speaker Change: Our business in semi.

Speaker Change: And we have we're overweight semi in our Japan business now both between Cognex and.

Speaker Change: And the <unk> piece that we've acquired.

Speaker Change: It has it did experienced a period of tremendous growth in 2021 in the first half of 'twenty, two and then their trajectory slowed a lot in the second half of 2022.

Speaker Change: And you know there are signs that.

Speaker Change: We may see.

Speaker Change: More optimism about semi.

Speaker Change: Coming back later in the year.

Speaker Change: It's hard to call it beyond that.

Speaker Change: At this point.

Speaker Change: Got it.

Robert J. Willett: And just following up on the margin commentary, it was very helpful. Like, I think you've talked about some cost management actions. And then you continue to invest across your emerging customer initiatives; maybe elaborate on how you are balancing these two heading into 24. And for the cost management actions, are these more structural in nature that can provide you a longer-term tailwind or more transitory, so that when sales improve, these costs might come back? Yes, thanks.

Speaker Change: And just following up on the margin commentary was very helpful. Like I think you've talked about some cost management actions.

Speaker Change: And then you continue to invest across our emerging customer initiatives, maybe elaborate on how you are balancing these two heading into 'twenty four and for the cost management actions are these more structural in nature that can provide you a longer term tailwind are more transitory that runs sales improved these costs might come back.

Robert J. Willett: So, you know, I think if we look at kind of pieces of Cognex's costs, you know, we have sales, big sales expense; we're investing heavily, as you saw, in our emerging customers, right? And we see that as the potential to make our sales force more productive, where, you know, those salespeople, those emerging customer salespeople, will be delivering leads and opportunities to the rest of the sales force. So, we're, you know, we're being careful about how we're building that sales force to balance both the more sophisticated and the emerging customer sales force and also balance it in terms of the sophistication but ease of use of our technology. So, there are some sort of changes going on there, which are allowing us to be careful on the cost side in that area. And our engineering teams, you know, are certainly benefiting from the new AI tools that are available to engineers and those who write software.

Speaker Change: Yes.

Speaker Change: So I think if we look at kind of pieces of Cognex is cost we have sales.

Speaker Change: <unk> expense were investing heavily as you saw in our emerging customers right.

Speaker Change: We see that has the potential to make our sales force more productive.

Speaker Change: Those sales those emerging customer salespeople will be delivering leads and opportunities to the other rest of the sales force. So so.

We're being careful about how we're building that sales force to balance both the more sophisticated and ER and the emerging customer Salesforce and also balance that in terms of the sophistication, but ease of use of our technology. So that there is some sort of changes going on there, which are allowing us to be careful on the cost side in that era.

Speaker Change: Yes.

Speaker Change: And our engineering teams you know certainly are benefiting from that.

Speaker Change: The new AI tools that are available to engineers and those who write software. So certainly there's.

Robert J. Willett: So, certainly, there are some things that we're looking at carefully to make sure that we can increase capacity and manage costs carefully. And then, like every company, you know, we have G&A-type functions, again, that are benefiting from process improvement. And in general, we're really not adding headcount or haven't added headcount outside of the Maritex acquisition in almost all of them. If I put aside the Maritex and emerging customer pieces, we've been very careful to reduce headcount in the rest of the business.

Speaker Change: Some things that we're looking at carefully to make sure that we can increase capacity and and managed cost carefully and then like every company. We have a G&A type assumptions again that are benefiting from process improvement and in general, we're really not adding head count or haven't added head count up you know outside of the Martech.

Speaker Change: Acquisition in in really all of the or the if I put aside the martech and emerging customer pieces, we've been very careful to reduce head count and the rest of the business. Yeah. I think just practically this is true for all companies. The biggest variable costs, if we outperform or if we underperform tend to be our incentive compensation.

Paul J. Chung: Yeah. And I think, just practically, this is true for all companies. The biggest, you know, variable costs, if we outperform or if we underperform, tend to be our incentive compensation, right? So, we've called out, you know, that's a headwind of $15 to $20 million, just a reset, you know, towards, you know, our budget targets for 2024, where we are expecting to grow. And, you know, outperformance of those internals obviously will drive some incremental commissions and company bonuses, and underperformance will drive some leverage. But we're obviously starting from a very low incentive compensation in 2023. That's really the biggest driver of the things that are going to change in the year, depending on our company's performance. I appreciate all the co-organizers, especially Paul, and good luck this year.

Speaker Change: So we've called out that's.

Speaker Change: That's a headwind of $15 million to $20 million system a reset towards.

Speaker Change: Our budget targets for 2024, where we are expecting to grow.

Speaker Change: <unk> outperformance of those internal obviously will drive some incremental commissions and company bonus in underperformance will drive some leverage but we're obviously starting from a very low incentive compensation in 2023, that's really the biggest driver of the things that are going to kind of change in year.

Speaker Change: Depending on our company's performance.

Speaker Change: I appreciate all the color guys, especially Paul.

Sure.

Operator: Thank you. The next question is coming from Jaram Nathan of Diawa. Please go ahead.

Speaker Change: Yeah.

Speaker Change: Thank you. The next question is coming from Jairam Nathan of dialogue. Please go ahead.

Operator: Yeah, hi, thanks for taking my question. So just wanted to get some more details on the 50 million emerging customers. Like, if you kind of look at it from a 2023 perspective, it's almost 6% revenue growth.

Jairam Nathan: Yeah, Hi, Thanks for taking my question. So just wanted to get some more details on the $15 million and imaging customer. Thank you for your kind of.

Jairam Nathan: Look at it jumped from in 2023 perspective, it's almost fixed.

Jairam Nathan: 6% revenue growth.

Robert J. Willett: Just wanted to kind of better understand which end markets are you seeing the first initial success in? And, you know, what's the kind of, are you seeing a different set of customers, of competitors, and the success rate in bids? If you can give some more information around that, great. Yeah, thank you. Thanks for the question.

Jairam Nathan: Just wanted to.

Jairam Nathan: And kind of better understand which end markets are you seeing the first.

Speaker Change: Nishu for Christian.

Speaker Change: Yeah.

Nishu: What's the kind of.

Nishu: Are you seeing a different set of customers of our competitors.

Nishu: Sure.

Nishu: And in the <unk> affiliate in bids if you can give some more information on those.

Speaker Change: Great Yeah. Thank you. Thanks for the question, yes, So we're really enthusiastic about what's what's going on in that market. It is.

Robert J. Willett: Yeah. So, we're really enthusiastic about what's going on in that market. The many, many emerging customer sales opportunities we have out are calling more broadly on manufacturing industries and finding opportunities that are more weighted towards industries like packaging and consumer products and food and beverage, right? I visited, you know, went on a ride along with one of the team members, and we visited a company that made pretzels, you know, would not have been a Cognex customer before, really, certainly not a target for us.

Speaker Change: It is.

Speaker Change: The many many emerging customers sales noise, we have out.

Speaker Change: Calling more broadly on manufacturing industries, and finding opportunities that may.

Speaker Change: More weighted towards industries like packaging.

Speaker Change: And consumer products and food and beverage right.

Speaker Change: Visited I went on right along with the weather one of these are one of the team members and we visited a company that made pretzels.

Speaker Change: Not as a cognex customer before really not certainly not a target for us to give you an idea of that and then yeah. So so so there was another aspect of your question I think what the competitors, yes, yeah. So yeah. Thank you I think so the competitors that we're seeing in that market.

Robert J. Willett: So, to give you an idea of that. And then, yeah, so there was another aspect of your question, I think. Oh, competitors. Yes.

Robert J. Willett: Yeah, So, yeah, thank you. I think the competitors that we're seeing in that market tend to be more weighted towards optical sensor type companies, right? So, of course, we still see our traditional competitors, like some of our Japanese competitors, but it's a broader market. We're finding ourselves in newer situations and where we're seeing more German and American optical sensor suppliers who, traditionally, we haven't thought of as competitors but where we can replace potentially many of their products with one of our, you know, Snap, Insight Snap vision sensors, for instance. So, there are opportunities we're seeing there that are taking us to new places, and through the pilots that we did last year and then what we're seeing, these are really great opportunities for us now and to do further work to help our customers realize more value.

Speaker Change: And to be more weighted towards optical sensor type companies right. So of course, we still see our traditional competitors like some of our Japanese competitors, but it's a broader market, we're finding ourselves and newest situations and where we're seeing more.

Speaker Change: German American optical sensor suppliers, who traditionally we haven't thought about competitors, but where we can.

Speaker Change: We can replace potentially many of their products with one of our.

Speaker Change: Snap insight snap vision sensor for instance, so that there are opportunities. We're seeing there that are taking us to new places and through the pilots that we did last year and then what we're seeing these are really great opportunities for us now and to do further work to help our customers realize more value I would say just finally to profile those customers.

Robert J. Willett: I would say just finally, to profile those customers, generally, they're going to be much less sophisticated than the large customers we work with and probably may not have engineers on staff. So, our products now, the ones we're selling through that channel are very easy to demonstrate and very easy to install, even for the person we send out, the sales note that we send out.

Speaker Change: Generally they are going to be much less sophisticated than the large customers. We work with probably may not have.

Speaker Change: Engineers on staff. So our products now are the ones, we're selling through that that channel and very easy to demonstrate and very easy to install even for the person we send out.

Speaker Change: The sales that we send out so yes, it's a it's a new world and we're kind of excited about it.

Robert J. Willett: So, yeah, it's a new world, and we're kind of excited about it. Okay, and just following up on like, if I kind of think of a measure like sales for a sales employee or salesperson, where do you see the potential here compared to or the gap between the new cohort, the 2023 cohort versus, you know, your regular sales? Well, most of these new salesnoids are coming out of college, right? And so they have new training and a new background. Most of them do have engineering backgrounds, but they're much more comfortable with technology and interfacing with it.

Speaker Change: Okay, and then just following up on it.

Speaker Change: If I kind of.

Speaker Change: Think of a measure like sales for our sales force.

Speaker Change: Sales employee sales force.

Speaker Change: Ladies.

Speaker Change: Where do you see the potential here compared to all of the gap between the new cohort the 2023 cohort was.

Speaker Change: Your regular regular sales force.

Speaker Change: Mhm.

Speaker Change: Well there most of these.

Speaker Change: New sales noise coming out of college, right and so and they have you know they.

Speaker Change: They have a new.

New training and background most of them do have engineering backgrounds, but there they are sort of much I think more comfortable with with the technology and interfacing with it and as the world moves this might sound like.

Robert J. Willett: And as the world moves, this might sound like, you know, isn't that something that's already happened? But, you know, from analog to digital and less sort of deep specialty programming, it's a different speed, a different cycle, I would say, in how sales occur. But I think what Cognex offers to those new salesnoids is a great career path, right? We're investing in their training and development. They love our culture,

Speaker Change: Isn't that something that's already happened, but you know from analog to digital and less sort of deep specialty programming.

Speaker Change: Two different speed of different cycle, I would say in how sales occur, but I think what cognex offers to some of those to.

Speaker Change: Do those new sales noise is a great career path right, where we are.

Speaker Change: Investing in their training and developing development. They they love our culture, we love what they bring to our culture the energy that they bring and we hope to see them developed.

Robert J. Willett: We love what they bring to our culture, the energy that they bring, and we hope to see many of them develop into bigger roles, more sophisticated sales opportunities, management, and all of that. So yeah, that's how we're thinking about it. I think we have time for one more question. Yes, please, go ahead.

Speaker Change: Many of them more into bigger roles more sophisticated sales opportunities management and and all of that so so yeah. That's how.

Speaker Change: We are thinking about it.

Speaker Change: Okay. I think we have time for one more question I think yes. Please go ahead.

Operator: Thank you. Our last question for today is coming from Ken Newman of KeyBank Capital Markets. Please go ahead. Again, we've got to be a nicer wire. Yeah, thank you. This is Katie Fleischer on for Ken today.

Speaker Change: Thank you our last question for today is coming from Ken Newman of Keybanc capital markets. Please go ahead.

And we've got it in a nicer wire.

Speaker Change: Yeah.

Speaker Change: This is Katy Fleischer I'm, sorry, Ken today, Thanks for squeezing me in.

Operator: Thanks for squeezing me in. I just had one question. So you mentioned in the prepared remarks that you're starting to see, you know, healthy project starts in the EV battery and semi-end markets, but they haven't really gotten to the point where Cognex is involved yet. I know visibility into these secular trends is pretty limited, but do you have any sense of when you might start to see those impacts flowing through to your results and maybe when Cognex will typically get involved in projects like that? Yes, well, I should say that, you know, we have a healthy, you know, a pretty significant EV battery business we've been building over the last two years. We see some nice growth for that.

Katy Fleischer: I just had one question you mentioned in the prepared remarks that you're starting to see a healthy project starts and EV battery and semi end markets, but they haven't really gotten to the point, where cognex is involved yet.

Katy Fleischer: I know visibility into these secular trend is pretty limited, but do you have any sense of when you might start to see those impacts flowing through tier.

Katy Fleischer: In our results and maybe it's like when Cognex will typically get involved in projects like that.

Katy Fleischer: Yes, well I should say that we have a healthy.

Katy Fleischer: A pretty significant EV battery business, we are building over the last two years, we see some nice nice growth for that so my.

Operator: So, my comment was really a lot about the funnel and the opportunities that we've seen, which have grown hugely, I would say, over the last 12 to 18 months, and plants are, you know, breaking ground. And generally, with machine vision, we tend to be something that's pretty late in the cycle, you know, in terms of when it's purchased and installed.

My comment was really a lot about the funnel and the opportunities that you're seeing which have grown hugely I would say over the last 12 to 18 months.

Katy Fleischer: Plants are.

Katy Fleischer: Breaking ground and generally with machine vision, we tend to be something that's pretty late in the cycle.

Katy Fleischer: In terms of when it's.

Katy Fleischer: Purchased and installed so my comment was really around that and so we do expect to.

Robert J. Willett: And so, you know, we do expect to, you know, we've planned for and expect to see very healthy growth in that business this year. And then, what potentially could become a problem is if projects get delayed, they can get delayed in the semi and EV because execution is slow, right? We've seen that, right?

Katy Fleischer: Planned and expect to see very healthy growth in that business. This year, and then what potentially could become a problem is if projects get delayed they can get delayed in semi any nev because execution is slow right. We've seen that right can't get labor cant get the technical expertise that's needed to get these plants.

Robert J. Willett: You know, you can't get labor, can't get the technical expertise that's needed to get these plants launched on time. And then, political issues. I think, you know, I definitely see concern about whether... Changes in Europe and America are going to go on supporting the level of investment that was sort of touted over the last year or two. So those are some of the uncertainties, but the trend and the opportunity and the value of machine vision are clearly there. Okay, helpful. Thank you. Thank you. At this time, I would like to turn the floor back over to Mr. Willett for closing comments. All right, thank you so much. Thank you for joining us this morning, and we look forward to speaking with you again on next quarter's call. Ladies and gentlemen, thank you for your participation and interest in Cognex. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day. www.larryweaver.com

Katy Fleischer: Launched on time, and then political issues I think and I definitely see concern about.

Katy Fleischer: Weather.

Katy Fleischer: Changes in Europe and in America are going to go on supporting the level of investment that that was sort of talented over the last year or two so those are some of the uncertainties, but the the trend and the opportunity and the value of machine vision is is clearly there.

Speaker Change: Okay helpful. Thank you.

Speaker Change: Yeah.

Mr. Willis: Okay. At this time I would like to turn the floor back over to Mr. Willis for closing comments.

Willis: Alright. Thank you so much. Thank you for joining us this morning, and we look forward to speaking with you again on next quarter's call.

Speaker Change: Ladies and gentlemen, thank you for your participation and interest in Cognex. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

Speaker Change: [music].