Q1 2024 Cognex Corporation Earnings Call
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Operator: Greetings. Welcome to the Cognex First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference over to your host, Nathan McCurren, President and Head of Investigative Relations.
Speaker Change: Greetings and welcome to the Cognex first quarter 2020 for earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: I will now turn the conference over to your host Nathan <unk> head of Investor Relations you may begin.
Nathan: Thank you Mollie.
Nathan McCurren: Good morning, everyone. Thank you for joining us.
Nathan: Everyone. Thank you for joining us our results were released earlier today. The press release earnings presentation and quarterly report on Form 10-Q are available on the Investor Relations section of our website.
Nathan McCurren: Our results were released earlier today. The press release, earnings presentation, and quarterly report on Form 10-Q are available in the investor relations section of our website. Both the press release and our call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release. Any forward-looking statements we make in the press release, the accompanying presentation posted on our website, or any that we may make during this call are based on information that we believe to be true as of today.
Nathan: Both the press release and our call today will reference non-GAAP measures you can find a reconciliation of certain items from GAAP to non-GAAP in our press release.
Nathan: Any forward looking statements we made in the press release, the accompanying presentation posted to our website or any that we may make during this call are based upon information that we believe to be true as of today.
Nathan: Our actual results may differ materially from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K, and our Form 10-Q filed this morning for Q1 2024.
Nathan McCurren: Our actual results may differ materially from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and our Form 10-Q filed this morning for Q1 2024. On today's call, Rob Willett, Cognex's President and CEO, will discuss our first quarter results. I will then provide additional detail on the financials, and Rob will conclude with an update on our strategic initiatives and our outlook. Laura McDonald, our Corporate Controller and Interim Principal Financial Officer, has also joined us in the room for the Q&A portion of the call. With that, I'll turn the call over to Rob. Thank you.
Nathan: On todays call, Rob will at Cognex, as President and CEO, who will discuss our first quarter results. I will then provide additional detail on the financials and Rob will conclude with an update on our strategic initiatives and our outlook.
Nathan: Laura Macdonald, our corporate controller and interim principal financial Officer has also joined US in the room for the Q&A portion of the call with that I'll turn the call over to Rob.
Robert J. Willett: Thanks, Nathan. Hello, everyone, and thank you for joining us. Our first quarter results reflect a challenging but stable business environment. Revenue was above the high end of our guidance range, as we saw order volumes slightly higher than we had expected. Revenue, excluding the contribution of Martex, increased sequentially from the fourth quarter but remained down year-on-year across most of our factory automation end markets. While customers remain cautious with their CapEx investments, I'm encouraged by the early indications of recovery we have started to see in certain end markets.
Rob: Thanks, Nathan Hello, everyone and thank you for joining us.
Rob: Our first quarter results reflect a challenging but stable business environment.
Rob: Revenue was above the high end of our guidance range as we saw order volumes slightly higher than we had expected.
Rob: Revenue, excluding the contribution of <unk> increased.
Rob: Sequentially from the fourth quarter, but remains down year on year across most of our factory automation end markets.
Rob: Well customers remained cautious with that Capex investments I'm encouraged by the early indications of recovery, we had started to see in certain end market.
Robert J. Willett: We also expect the slight improvement of macro leading indicators such as the PMI in many of our most important geographies to be a tailwind for our business. This year, we have taken important steps in executing against our strategic initiatives. We expanded the application of our edge learning technology by launching the Insight L38, the world's first AI-enabled 3D industrial vision system.
Rob: We also expect the slight improvement.
Rob: Macro leading indicators such as the PMI and many of our most important geographies to be a tailwind for our business.
Rob: This year, we have taken important steps in executing against our strategic initiatives.
Rob: We expanded the application of our edge learning technology by launching the insight L 38, the world's first AI enabled three D industrial vision system.
Robert J. Willett: Our 2023 cohort of emerging customer sales noids entered the field and began actively calling on customers, and we operated the Maritex business for a full quarter and advanced its integration. We remain on track for this acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024. I would like to take a moment to welcome Dennis Fair, who we announced this morning will become our new Chief Financial Officer, effective tomorrow, May 3.
Rob: 2023 cohort of emerging customer sales noise, and citrus fields and began actively calling on customers.
Rob: And we operated the Martech business for a full quarter and advanced its integration.
Rob: We remain on track for this acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024.
Robert J. Willett: Dennis will lead the company's global finance and information technology organization. Dennis brings over 20 years of experience, spending the last 6 years as a CFO, most recently as the CFO of 6K Inc. Dennis joined 6K after spending five years as the CFO of Fluence Energy, which he led through an IPO in 2021. Prior to Affluence Energy, Dennis was vice president of finance at Siemens, where he spent the first 15 years of his career. He brings broad international experience to Cognex. This includes time living and working in China, Mexico, Germany, and Indonesia.
Rob: I would like to take a moment to welcome Dennis <unk>, who we announced this morning will become our new Chief Financial Officer effective Tomorrow may 3rd.
Rob: Dennis will lead the company's global finance and information technology organizations.
Rob: Dan It's brings over 20 years of experience spending the last six years as the CFO. Most recently as the CFO of 6K, Inc. Denny.
Rob: Dennis joined 6K after spending five years as the CFO of Fluence energy, which he led through an IPO in 2021.
Rob: Prior to Fluence energy Dennis was vice President of Finance at Siemens, where he spent the first 15 years of his career.
Rob: Dennis brings broad international experience to Cognex. This includes time living and working in China, Mexico, Germany and Indonesia.
Rob: This knowledge will be of great value to cognex as we continue to execute on our global growth strategy.
Nathan McCurren: This knowledge will be of great value to Cognex as we continue to execute on our global growth strategy. You will hear from Dennis on our Q2 earnings call. Before I go into further commentary on the business and outlook for Q2, I'd like to turn the call back over to Nathan to walk you through more of the results.
Rob: We'll hear from Dennis on our Q2 earnings call.
Rob: Before I go into further commentary on the business and outlook for Q2, I'd like to turn the call back over to Nathan to walk you through more of the results.
Nathan: Thank you Robyn.
Nathan McCurren: I will walk through our financial highlights, which you can see on page four of our earnings presentation posted to the website this morning. First quarter revenue of $211 million increased by 5% year on year with a contribution from Moratex of just under 8% of total revenue. Excluding Moratex and foreign exchange effects, revenue declined 3%. Turning to margins, the Adjusted Gross Margin was 68.8% in Q1, in line with guidance, and down from 71.8% a year ago.
Nathan: I'll walk through our financial highlights, which you can see on page four of our earnings presentation posted to the website. This morning.
Nathan: First quarter revenue of $211 million increased by 5% year on year with a contribution from <unk> of just under 8% of total revenue, excluding <unk> and foreign exchange effects revenue declined 3%.
Nathan: Turning to margins adjusted gross margin was 68, 8% in Q1 in line with guidance and down from 71, 8% a year ago.
Nathan McCurren: Gross margin included a two percentage point dilution effect from a full quarter of Moritz. There was also 1.6 percentage points of unfavorable one-time events in the quarter, primarily the strategic logistics project with future recurring revenue that we mentioned on our last call. Sequentially, adjusted gross margin stepped down due to more attacks and one-time effects. Adjusted operating expenses increased 3% year-on-year, as expected, driven by a full quarter of more attacks and increased investment in our emerging customer initiatives. Excluding these strategic investments, adjusted OPEX declined 6% year-on-year.
Nathan: Gross margin included a two percentage point dilution effect from a full quarter of more attacks.
Nathan: There was also one six percentage points of unfavorable one time events in the quarter, primarily the strategics logistics project with future recurring revenue that we mentioned on our last call.
Nathan: Sequentially adjusted gross margin step down due to more attacks and onetime effects.
Nathan: Adjusted and adjusted operating expenses increased 3% year on year as expected driven by a full quarter of <unk> and increased investment in our emerging customer initiatives.
Nathan: Excluding these strategic investments adjusted Opex declined 6% year on year.
Nathan McCurren: sequentially, adjusted operating expenses increased 5%, as expected. In addition to higher costs for the Emerging Customer Initiative and a full quarter of Moratex, there was a reset in incentive compensation at the beginning of the year, as we mentioned last quarter. Adjusted EBITDA margin was 11.9% in Q1, down from 13.5% a year ago. This was driven by a lower gross margin and higher operating expenses related to emerging customers, partially offset by the positive contribution of the Moratex acquisition, which was accretive to adjusted EBITDA margins.
Nathan: Sequentially adjusted operating expenses increased 5% as expected in.
Nathan: In addition to higher costs for the emerging customer initiative and a full quarter of more attacks there was a reset and incentive compensation at the beginning of the year as we mentioned last quarter.
Nathan: Adjusted adjusted EBITA margin was 11, 9% in Q1 down from 13, 5% a year ago.
Nathan: This was driven by a lower gross margin and higher operating expenses related to emerging customers, partially offset by the positive contribution of the <unk> acquisition, which was accretive to adjusted EBITDA margin.
Nathan McCurren: Diluted earnings per share on a gap basis were 7 cents down year-on-year due to lower operating margins, acquisition and amortization costs, and unfavorable discrete tax hikes. However, sequentially, GAP-diluted EPS increased 7%. Adjusted Diluted EPS was 11, down two cents year on year and flat sequentially. The adjusted effective tax rate was 16% in both Q1 of 2024 and Q1 of 2023.
Nathan: Diluted earnings per share on a GAAP basis was seven.
Nathan: Down year on year due to lower operating margins acquisition and amortization costs and unfavorable discrete tax items sequentially GAAP diluted EPS increased 7%.
Nathan: Adjusted diluted EPS was <unk> 11.
Nathan: Down two cents a year on year and flat sequentially.
Nathan: The adjusted effective tax rate was 16% in both Q1 of 'twenty 'twenty, four and Q1 of 2023.
Nathan McCurren: I will now go through our end market results, which you can find on slide 5 of the earnings presentation. I'll discuss the end market and geographic results, excluding the contribution of more. Markets have been mixed to begin 2024, as we have seen both continued weakness as well as pockets of positive signals. Starting with automotive, revenue was down year on year but flat sequentially. EB battery revenue continues to be lumpy, and in the first quarter, we saw customers delay some project spending as they face uncertain near-term demand.
Speaker Change: I will now go through our end market results, which you can find on slide five of the earnings presentation I'll discuss the end market and geographic results, excluding the contribution of <unk>.
Speaker Change: Markets have been mixed to begin 2024, as we have seen both continued weakness as well as pockets of positive signals.
Speaker Change: Starting with automotive revenue was down year on year, but flat sequentially.
Speaker Change: EV battery revenue continues to be lumpy and in the first quarter, we saw customers delay some project spending as they faced uncertain near term demand.
Nathan McCurren: Moving on to logistics, revenue grew year on year but was flat sequentially. Much of the business remained stable, and we executed a sizable strategic project in the quarter, driving year-on-year growth. Consumer Electronics revenue was down year on year, although the rate of decline slowed compared to the back half of 2023. Rob will go into more detail regarding what we expect from Consumer Electronics for the full year.
Speaker Change: Moving on to logistics revenue grew year on year, but was flat sequentially.
Speaker Change: Much of the business remains stable and we executed a sizable strategic project in the quarter driving year on year growth.
Speaker Change: Consumer electronics revenue was down year on year, although the rate of decline slowed compared to the back half of 2023.
Speaker Change: Rob will go into more detail regarding what we expect from consumer electronics for the full year.
Nathan McCurren: SEMI had strong momentum in the quarter, with year-on-year growth turning positive after four quarters of significant decline. From a geographic viewpoint, revenue growth was strongest in Asia outside of China, led by strength in SME and logistics. America's also grew in the quarter, driven by its higher logistics mix. However, outside of logistics, America has experienced continued softness across our factory automation business, as was also the case for Europe. China remained challenging as revenue in the region declined year-on-year for the sixth consecutive quarter.
Speaker Change: Send me it had strong momentum in the quarter with year on year growth turning positive after four quarters of significant declines.
Speaker Change: From a geographic viewpoint revenue growth was strongest in Asia outside of China led by strength in semi and logistics.
Speaker Change: Americas also grew in the quarter driven by its higher logistics mix.
Speaker Change: Outside of logistics America's experienced continued softness across our factory automation business as was also the case for Europe.
Speaker Change: China remained challenging as revenue in the region declined year on year for the sixth consecutive quarter.
Robert J. Willett: Turning to the balance sheet, Cognex continues to have a strong cash position with $557 million in cash and investments and no debt. Free cash flow in Q1 was $10 million compared to $22 million a year ago, reflecting lower gap net income and increased working capital investment as we continue to scale new supply chain initiatives. We return $22 million to shareholders in the form of stock buybacks and dividends. Now, I'll turn it back over to Rob. Thank you.
Speaker Change: Turning to the balance sheet Cognex continues to have a strong cash position with $557 million in cash and investments and no debt.
Speaker Change: Free cash flow in Q1 was $10 million compared to $22 million a year ago, reflecting lower GAAP net income and increased working capital investment as we continue to scale and new supply chain initiatives, we've returned $22 million to shareholders in the form of stock buybacks and dividends.
Speaker Change: Now I'll turn it back over to Rob.
Rob: Thanks Nathan.
Robert J. Willett: Let me spend some time discussing the progress we're making on our strategic priorities. We are making strong progress introducing world-class AI to the field of industrial machine vision. Our latest example of this is our Insight L38 3D Vision System, which combines AI, 2D, and 3D vision technologies to solve a range of inspection and measurement applications. The Insight L38 greatly simplifies the process of configuring 3D systems thanks to embedded AI technology that uses pre-trained models with domain-specific data.
Rob: Let me spend some time discussing the progress we're making on our strategic priorities.
Rob: We are making strong progress introducing world class AI to the field of industrial machine vision.
Rob: Legacy examples of this is our insight L 38, three D vision system, which combines AI two D and three D vision technologies to solve a range of inspection and measurement applications.
Rob: Insight L 38 greatly simplifies the process of configuring <unk> systems. Thanks to embedded AI technology that uses pre trained models with domain specific data.
Robert J. Willett: Cognex has captured these data through our long history of serving customers. The Insight L38's example-based training replaces complex programming steps previously required in vision application development and enables our technology to address a broad array of applications. The Insight L38's unique AI-powered 3D tools can be set up in minutes, requiring as few as 5 to 10 labeled images to automate a task. With a few simple point-and-click training examples, customers can guide robotic arms to locate items on a conveyor, measure glue to ensure its consistent application, or read tire identification numbers on low-contrast black rubber material. Example-based learning solves 3D applications in a more intuitive and human-like way, enabling Cognex to expand its applications where human inspectors or offline measurements have previously been the only viable option.
Rob: Cognex is captured these data through a long history of serving customers.
Rob: The insight L. 30, Eights example, based screening replaces complex programming steps previously required envision application development and enables our technology to address a broader array of applications.
Rob: The insight L 30, eights unique AI powered <unk> tools can be set up in minutes, requiring as few as five to 10 labeled images to automated task.
Rob: With a few simple point and click training examples customers can guide robotic arms to locate items on a conveyor measure glue to ensure its consistent application will lead tier identification numbers on low contrast, black rubber material.
Rob: Example, based learning so three D applications in a more intuitive and human like way, enabling cognex to expand its application where human inspectors or offline measurement have previously been the only viable option.
Robert J. Willett: I'll shift now to give you an update on our emerging customer initiative. Our excitement continues to build for this initiative as it broadens our customer base and deepens our penetration into end markets such as parcels. Our initial emerging customer sales cohort fully entered the field and began to sell at the beginning of this year. These sales reps have been demoing and selling to customers we have not previously called on. We've seen a lot of new applications with these customers. Some examples of emerging customer applications include inspecting the quality of food items like bread, pizzas, and biscuits. Detecting the presence or absence of ceiling caps on air fresheners.
Speaker Change: I'll shift now to give you an update on our emerging customer initiatives.
Rob: Our excitement continues to build for this initiative as it broadens our customer base and deepens, our penetration into end markets such as packaging.
Rob: Our initial emerging customer sales cohorts fully entered the field and began to sell at the beginning of this year.
Rob: These sales noise, that's been demo ing and selling to customers. We have not previously called on we've seen a lot of new applications with these customers.
Rob: Some examples of emerging customer applications include inspecting the quality of food items like bread pizzas and biscuits.
Rob: <unk> presence absence of ceiling caps on air Fresheners verifying bottle caps are properly sealed confirming the correct insertion of connectors for an electronics customer and optical character recognition and the classification of parts for the automotive parts manufacturer.
Robert J. Willett: Verifying bottle caps are properly sealed, confirming the correct insertion of connectors for an electronics customer, and Obstacle Character Recognition and the Classification of Parts for an Automotive Parts Manufacturer. We are building a funnel of opportunities with this initiative and are encouraged by what we have seen. We expect our emerging customer sales team to make over 80,000 customer visits this year. We've had early success across geographies and end markets, and we continue to build this team towards delivering at least $50 million of incremental revenue in 2024.
Rob: We are building a funnel of opportunities with this initiative and are encouraged by what we've seen.
Rob: We expect our emerging customer sales noise to make over 80000 customer visits this year.
Rob: We've had early success across geographies and end markets and we continue to build this team towards delivering at least $50 million of incremental revenue in 2024.
Robert J. Willett: Early orders continue to reinforce our belief that this initiative will be gross margin accretive. We're excited to grow this initiative by welcoming our second cohort of emerging customer sales nodes in 2024. Let me now give you an update on our integration in March. We made good progress on the integration in Q1. Our engineering teams are already collaborating on optics innovation, and our sales teams are driving successful customer engagement. The experienced leaders who joined us from MARTEX are now leading Cognex Japan.
Rob: Early orders continue to reinforce our belief that this initiative will be gross margin accretive.
Rob: We're excited to grow this initiative by welcoming our second cohort of emerging customer sales noise in 2024.
Rob: Let me now give you an update on our integration of Mar Tech.
Rob: We made good progress on the integration in Q1, our engineering teams are already collaborating on optics innovation and our sales teams are driving successful customer engagements.
Rob: The experienced leaders who joined US from <unk> are now leading cognex Japan.
Robert J. Willett: While we expect Morotex products to be slightly dilutive to total company gross margin, in the medium term, we continue to expect the acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024 and beyond. I'll turn now to our outlook for the second quarter. For the second quarter, we expect revenue between $230 and $245 million.
Rob: While we expect <unk> products to be slightly dilutive to total company gross margin in the medium term. We we continue to expect the acquisition to be accretive to adjusted operating margin and adjusted EPS in 2024 and beyond.
Rob: I'll turn now to our outlook for the second quarter.
Rob: In the second quarter, we expect revenue between 230 and $245 million.
Robert J. Willett: This step-up from the first quarter is in line with our typical Q1 to Q2 consumer electronics seasonality. I will remind you that Q2 of last year included $15 million of consumer electronics revenue that we originally expected in the third quarter of 2023. Adjusting for that baseline effect and excluding MARTEX, this range implies revenue to be slightly down year on year. We expect the Martex business to contribute 6 to 8% of revenue in Q2. Gross margin continues to be below our long-term targets given volume de-leverage and an approximately 2% dilution effect for Marta. We expect the first quarter to be the low point for the year in adjusted gross margin.
Rob: This step up from the first quarter is in line with our typical Q1 to Q2 consumer electronics seasonality.
Rob: I will remind you that Q2 of last year included $15 million of consumer electronics revenue that we originally expected in the third quarter of 2023.
Rob: Adjusting for that baseline effect and excluding Maher Tex.
Rob: Range implies revenue to be slightly down year on year.
Rob: We expect the martech business to contribute 6% to 8% of revenue in Q2.
Rob: Gross margin continues to be below our long term targets given volume deleverage and an approximately two percentage point dilution effect from Martech.
Rob: We expect the first quarter to be the low point for the year in adjusted gross margin for the second quarter. We expect adjusted gross margin slightly above 70% a sequential step up as we move past the gross margin dilutive one time events in Q1 and expect stronger revenues as just mentioned.
Robert J. Willett: For the second quarter, we expect adjusted gross margins slightly above 70%, a sequential step up as we move past the gross margin dilutive one-time events in Q1, and expect stronger revenues as just above. We expect adjusted operating expenses to increase low to mid-single digits on a sequential basis due to additional investment in the emerging customer initiative and higher incentive compensation. As we disclosed last quarter, we expect an incremental $25 million of emerging customer OPEX for the full year, the timing of which should ramp throughout 2024, similar to the investment made in 2023. We also expect incentive compensation to be a $15 to $20 million year-on-year headwind, materializing mostly in the second through fourth quarters.
Rob: We expect adjusted operating expenses to increase low to mid single digits on a sequential basis due to additional investments in the emerging customer initiatives and higher incentive compensation.
Rob: As we disclosed last quarter, we expect an incremental $25 million of emerging customer opex for the full year, the timing of which should ramp throughout 2024 similar to the investment made in 2023.
Rob: We also expect incentive compensation to be a $15 million to $20 million a year on year headwind materializing, mostly in the second through fourth quarters.
Robert J. Willett: Logistics has continued to be stable, and we believe it is well positioned to grow as automation penetration increases and e-commerce investment returns. For the full year, we expect logistics to grow as we start to see infrastructure investment plans materialize. So logistics growth this year will likely still be below the 30% growth we target long-term in this market. Consumer electronics has positive long-term trends, but the timing and revenue contribution can be lumpy. We do not expect 2024 to be a significant growth year for consumer electronics.
Rob: Logistics has continued to be stable and we believe is well positioned to grow as automation penetration increases in E Commerce investment returns.
Rob: For the full year, we expect logistics to grow as we start to see infrastructure investment plans materializing.
Rob: Logistics growth this year will likely still be below the 30% growth we target long term in this market.
Rob: Yeah.
Rob: Consumer electronics has positive long term trends, but the timing and revenue contribution can be lumpy. We do not expect 2024 to be a significant growth year for consumer electronics for the full year. We expect revenue in 2024 to be approximately in line with 2023 with <unk>.
Robert J. Willett: For the full year, we expect revenue in 2024 to be approximately in line with 2023, with continued uncertainty of project size and timing. We are seeing more tentativeness from EV battery customers, driven by concern around near-term end-user demand and political uncertainty. We've started to see delayed projects result in a reduction in the pace of greenfield investments from our EV customers.
Rob: <unk> uncertainty of project size and timing.
Rob: We are seeing more tentativeness from EV battery customers driven by concern around near term end user demand and political uncertainty.
Rob: We started to see delayed projects result in a reduction in the pace of Greenfield investments from our customers.
Rob: We are still seeing customers invest in productivity improvements and product upgrades on existing lines and we still expect our EV battery business to be a robust growth driver over the long term.
Rob: The semi landscape is improving as leading equipment manufacturers have communicated more uptick optimistic 2024 outlooks.
Rob: We're excited that Martech gives us additional opportunities in this market, which looks well positioned for strong growth.
Rob: We are encouraged by the positive macro signals, we have started to see and we believe the progress we are making on our strategic initiatives keeps us well positioned to capitalize on exciting industry trends as the operating environment begins to improve.
Operator: We are still seeing customers invest in productivity improvements and product upgrades on existing lines, and we still expect our EV battery business to be a robust growth driver over the long term. The SEMI landscape is improving as leading equipment manufacturers have communicated a more optimistic 2024 outlook. We're excited that Martex gives us additional opportunities in this market, which looks well positioned for strong growth. We are encouraged by the positive macro signals we have started to see, and we believe the progress we are making on our strategic initiatives keeps us well positioned to capitalise on exciting industry trends as the operating environment begins to improve. Now, we will open the call to questions. Operator, please go ahead. Thanks. At this time, we will be conducting a question and answer session if you would like to ask a question.
Speaker Change: Now we will open the call for questions. Operator. Please go ahead.
Speaker Change: Thank you.
Operator: At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing restart. One moment, please, while we poll for questions. Our first question comes from the line of... Damon Karras with UBS Securities. Please proceed with your question.
Speaker Change: At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: Our first question.
Speaker Change: Our first question.
Speaker Change: Comes from the line of.
Damian Karas: Damian Karas.
Damian Karas: <unk> Securities. Please proceed with your question.
Damon Karras: Hi, good morning, everyone. Can you hear me? Yeah, good morning. We can hear you.
Damian Karas: Hi, Good morning, everyone can you hear me.
Damian Karas: Yeah. Good morning, we can hear you go ahead and then.
Damon Karras: Terrific. Hey, congratulations on completing that CFO certificate. Thank you.
Damian Karas: Terrific congratulations on completing that CFO search.
Damian Karas: Thank you started off by it.
Speaker Change: Yeah, No I know you put a lot of effort into that.
Robert J. Willett: We're going to start off by... Yeah, no, I know we put a lot of effort into that. Maybe we could begin by... Getting your perspective a bit more on the logistics market. You kind of characterize it as stable, but you're expecting to get some more modest growth as the year progresses. Can you just talk about, you know, what you're seeing across the logistics market? You know, are there some more strategic projects in the pipeline that you've got some good visibility on that are likely to hit later this year? And I was just curious what indications you might have from your largest customer in this space.
Speaker Change: Than it did a.
Speaker Change: Again by <unk>.
Speaker Change: Getting your perspective, a bit more on the logistics market.
Speaker Change: You kind of characterize it as stable, but you're expecting to get some more modest growth.
Speaker Change: As the year progresses can you just talk about what youre seeing across.
Speaker Change: The logistics market are there some more strategic projects in the funnel that you have got some good visibility are that are likely to hit later this year and just curious what indications you might have from your largest customer in this space.
Robert J. Willett: Thanks. So let's start with a bit of context. So our logistics business grew 65% in 2021 and was around $300 million, fueled by a lot of investment in e-commerce, particularly. And then, as that kind of investment really slowed down and stopped, it contracted by 25% in 2022 and by 21% in 2023. So I think we've seen a big downturn in that industry, but we're now feeling much more positive that it's starting to really come back.
Speaker Change: Thanks, So let's start with a bit of context, so our logistics business grew 65% in 2021 was around $300 million.
Speaker Change: Pat fueled by a lot of investment in E Commerce, particularly and then as that kind of that.
Speaker Change: Our investment really slowed down and stopped it contracted by 25% and in 2022 and by 21% in 2023 so.
Speaker Change: I think we've seen a big downturn in that have that industry. We're now feeling much more positive that it's starting.
Robert J. Willett: So logistics revenue grew 24% year-on-year in the first quarter of this year, although it was flat if we exclude the very large project that we talked to you about on the last call. But we're having positive conversations and starting to see early indications of recovery.
Speaker Change: Starting to come to really come back.
Speaker Change: Logistics revenue grew 24% year on year in the first quarter of this year, although it was flat if we exclude the very large project that we talked to you about on the last call.
Speaker Change:
Speaker Change: But we're having positive conversations and starting to see early indications of recovery.
Robert J. Willett: We expect a return to growth in logistics this year, although still below the target of 30% growth that we're expecting from that industry over the long term. And over the long term, we're expecting to see large e-commerce customers and broader warehouse automation going on. We're starting to penetrate more into parcel and post, where we see our technology is really starting to be very, very competitive, and we're seeing some really good trials with some of the major names in that industry.
Speaker Change: We expect a return to growth of logistics for this year.
Speaker Change: That is still below the target of 30% growth that we're expecting from that industry over the long term and.
Speaker Change: Over the long term, we're expecting to see.
Speaker Change: Large e-commerce customers brought a warehouse.
Speaker Change: Automation going on we're starting to penetrate more in parcel and post where we see a.
Speaker Change: Technology is really starting to be very very competitive and we're seeing some really good trials with some of the major names in that industry.
Speaker Change: We're also seeing at smaller customers.
Robert J. Willett: We're also seeing smaller customers grow nicely with Cosmex and the opportunities we see growing there. We're seeing more adoption of other technologies beyond barcode reading that we're marketing, such as edge intelligence, which is the technology I referred to in the last call that brings us recurring revenue from customers. And we're bringing more vision to allow us to inspect packages for damage, due dimensioning, etc., with products like the Insight 2800 detector that we referred to.
Speaker Change: Grow nicely with cognex and the opportunities we see growing there.
Speaker Change: We're seeing more adoption of other technologies beyond barcode reading that we're marketing such as edge intelligence, which at which is the technology I referred to in the last call that brings us recurring revenue from customers and we're bringing more vision.
Speaker Change: To allow us to inspect packages for for damage do dimension, Ingo et cetera products like the insight 2800 detector that we referred to.
Robert J. Willett: In reference to larger customers and investments, we're starting to see more positive signs that those kinds of investments will be returning to what I would consider more normal levels. Although some of those opportunities may result in bookings this year from us, but revenue next year, because there's a fairly long lead time on that. It would also just be worth saying that our logistics business is relatively concentrated in the United States and nicely penetrated and growing in Europe over the long term, but we see a lot of growth potential in Asia, particularly India and emerging markets. So that's kind of an overall view.
Speaker Change: In reference to sort of large logic customers and investments yeah, we're starting to see more positive signs that there is kind of investments will be returning back to what I would consider more normal levels.
Speaker Change: Although some of those opportunities May result in bookings this year from us, but revenue next year, because there's a fairly long lead time on that it would also just be worth saying that.
Speaker Change: Our logistics businesses relatively concentrated in the United States.
Speaker Change: Nicely penetrated and growing in Europe over the long term, but but we see a lot of growth potential in Asia, particularly India and emerging markets. So that's kind of an overall view.
Robert J. Willett: Very helpful caller, thank you. And then I wanted to ask you about semis. It sounds like the business is improving more than you had expected. Could you just maybe give us a sense for, you know, how much of a recovery, how much of a snapback you think you could see in semis this year? And you know, your initial guide for more attacks was up six to eight percent. Was that factoring in already a better semi-annual outlook for this year? Or, just based on what you're seeing, could that possibly be tracking better?
Speaker Change: Very helpful color. Thank you.
Speaker Change: And then I wanted to ask you about semi that sounds like.
Speaker Change: The business is improving more than you had expected.
Speaker Change: Could you just maybe give us a sense for how much of a recovery how much of a snapback.
Speaker Change: Do you think you could see in spending this year and your initial type of more attacks was up 6% to 8%.
Speaker Change: Does that factor in all already a better outlook for this year or just based on what you're seeing could that possibly be tracking better.
Robert J. Willett: So we're seeing our semi-business after a couple of more difficult years in 2023. It's starting to return back to some pretty nice potential growth. Revenue year-on-year in Q1 was up 6%, excluding Maritex.
Speaker Change: So were so were seeing our SME business.
Speaker Change: After after a couple of smaller more difficult years in our in <unk>.
Speaker Change: Well in 2023.
Speaker Change: <unk> is starting to return.
Speaker Change: Back to.
Speaker Change: Some pretty nice.
Speaker Change: <unk> growth in revenue year on year in Q1 was up 6% excluding <unk>.
Robert J. Willett: So still, I think, pretty early on in seeing that start to ramp. But this is the market where we have some longer-term exposure and long-term relationships with OEMs. Um, some characteristics, certainly like investments in high bandwidth memory, which is really being driven by growth in AI investments, that are starting to look very positive for us. And then Martex is a very, very highly regarded brand with a lot of great relationships with machine builders. I had the pleasure of visiting a bunch of them in Japan a couple of weeks ago.
Speaker Change: So you know still I think pretty early on and seeing that start to ramp but this is a market where we have some longer term.
Speaker Change: Exposure and long term relationships with Oems.
Speaker Change: Some some characteristics certainly like them investments in high bandwidth memory.
Speaker Change: Which is really being driven by growth in AI investments and are starting to look very positive for us and then <unk>.
Speaker Change: Very very highly.
Speaker Change: Regarded brand with a lot of great relationships with machine builders.
Speaker Change: Pleasure and visiting a bunch of them in Japan, a couple of weeks ago.
Speaker Change: And that's.
Robert J. Willett: That's a business that, as those companies start to see their business grow, should be very beneficial for us in the longer term. So, I think we've probably been going through a period where there's been some recalibration around changes that are going on in the market, particularly related to China and perhaps the scaling up of big AI investments and investments such as around the CHIPS Act. So, we're optimistic over the long term as those work their way through and those investments become finalized, and automation is expecting that we'll really see a nice return to strong growth in that market. And then, if we sort of size semi-auto for you, it's around, when we include Martex, around 10% of our business overall with a lot of strong growth potential in the next few years.
Speaker Change: That's a business that.
Speaker Change: As those companies start to see that business grow it should be.
Speaker Change: It should be very beneficial for us in the longer term.
Speaker Change: So I think we've probably been going through a period, where there's been some recalibration around changes that are going on in the market, particularly related to China, and perhaps the scaling up of our big AI investments and investments such as around the chips Act.
Speaker Change: So we're optimistic over the long term as those work their way through and those investments become finalized and automation inspection that will really see nice.
Speaker Change: Returned to strong growth in that market.
Speaker Change: And then if we sort of sized semi for you.
Speaker Change: It's around when we include <unk> around 10% of our business overall with a lot of strong growth potential in the next few years.
Robert J. Willett: And Damian, I just point out, you mentioned more attacks. There's some puts and takes in terms of end market growth and timing. We originally guided to six to eight percent of our total revenue coming from Ortex for the year. And that's still our guidance for that end market, just given how some of the other pieces of businesses are expected to move throughout the year.
Speaker Change: And Damian I would just point out you know you mentioned more attacks.
Speaker Change: There's some puts and takes in terms of end market growth and timing, we originally guided to 6% to 8% of our total revenue coming from <unk> for the year and that's still our that's still our guidance for the for that end market just given how some of the other piece of the businesses are expected to move throughout the year.
Damon Karras: Okay, I got it. Thank you very much. I'll pass it along. Best of luck.
Speaker Change: Okay got it. Thank you very much I'll pass it along the best of luck.
Speaker Change: Okay.
Robert W. Mason: Thank you. Our next question comes from the line of Rob Mason with Robert W. Baird. Please proceed with your question.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Rob Mason with Robert W. Baird. Please proceed with your question.
Robert W. Mason: Yes, good morning. Thanks for taking the question. So Rob, you said consumer electronics probably tracks flat year-over-year with last year. I'm just curious how the makeup of that business would compare on a flat basis and really maybe the composition coming from your historically larger customers versus other customers. And have there been any efforts to change the customer mix diversification efforts on that front that you would comment on?
Robert W. Mason: Yes. Good morning, Thanks for taking my question.
Robert W. Mason: So Rob you said consumer electronics, probably tracks flat.
Robert W. Mason: Year over year with last year I'm, just curious how the makeup of that business would compare on a flat basis, and and really maybe the composition coming from what you're historically larger customer versus other.
Robert W. Mason: Customers.
Robert W. Mason: Have there been any efforts too.
Robert W. Mason: You change the customer mix diversification efforts on that front that you would comment on.
Speaker Change: Uh huh.
Robert J. Willett: Robert, you know, I think you're right in interpreting what I said is sort of broadly flat. There isn't a broad change in our overall exposure to different customers. We do business with a lot of the major names in that industry, although historically, we've had one very large customer. I would say my outlook for the industry is broad across a range of customers, not being overly swung one way or another by a particular customer overall.
Speaker Change: Rob, but you know I think youre right in interpreting what I said to sort of broadly flat.
Speaker Change: There isn't a broad change in our overall exposure to different customers, we do business with a lot of the major names.
Speaker Change: In that industry. Although you know historically, we've had one very large large customer I would say, Mike Mike sort of outlook for the industry is broad across a range of customers not being overly swung one way or another by a particular customer overall, but as I did mention that that industry can be lumpy when we can see feature.
Robert J. Willett: As I mentioned, that industry can be lumpy. We can see features coming into products that perhaps might have been expected next year coming in or this year moving out. That can move around quite a lot, in our experience.
Speaker Change: Coming into products.
Speaker Change: That perhaps might have been expected next year coming in or this year moving out so that that can move around quite a lot in our experience.
Speaker Change: Sure.
Speaker Change: And just.
Robert J. Willett: Sure. As a follow-up, on your emerging customer initiative, I'm curious if you could just comment, I know it's early with all the forces being in the field to start the year, but early reads on maybe productivity levels and if you've had any feedback from the field just in terms of things that Cognex can do, you know, to help them be more successful and, you know, understanding it is kind of a tougher market you But whether that's lead generation, you know, product tweaks, or product portfolio enhancements, I'm just curious what the early feedback is.
Speaker Change: As a follow up on your emerging customer initiative I'm curious if you could just comment I know it's early.
Speaker Change: With.
Speaker Change: All of the force just being in the field to start the year, but any early reads on maybe productivity levels.
Speaker Change: And if you you know.
Speaker Change: <unk> had any feedback from the field just in terms of.
Speaker Change: Things that cognex can do to help them be more successful than you know understanding it's kind of a tougher market you're selling into as well but.
Speaker Change: Whether thats lead generation product tweaks product portfolio enhancements I'm just curious what the early feedback is.
Robert J. Willett: Yes, I think the central thesis around emerging customers was, you know, traditionally, we've been, you know, very strong at the most sophisticated accounts in the world, where they really like to work engineer on engineer. And, but a couple of years ago, we developed this technology called edge learning, which makes, you know, difficult machine vision applications pretty easy to demo and sell. So the 2800 is the best example of that product in that area.
Speaker Change: Yes, I think.
Speaker Change: Central thesis around emerging customers was traditionally we've been.
Speaker Change: Very strong at the most sophisticated accounts in the world, where they really like to work engineer an engineer.
Speaker Change: But a couple of years ago, we developed this technology called edge learning, which makes difficult machine vision applications pretty easy to demo and sell so the 2800 is the best example of the product in that area and then we also have a nice.
Robert J. Willett: And then we also have a nice ID portfolio, which is, you know, broadly considered the best in the world for reading industrial barcodes, such as, you know, laser printed, 2D matrix barcodes on metal applications, those types of things. So with that, with that kind of strength, we realized we needed to go and get this technology to more customers. And if we serve, you know, 30,000 or so customers today, there are perhaps 200,000 customers or more that we could be reaching with this technology as it becomes easier.
Speaker Change: Portfolio, which as you know broadly considered the best in the world that reading industrial Barcodes and such as that you know laser printed on <unk>.
Speaker Change: <unk> matrix buckets on metal applications those types of things so with that with that kind of strength, we realized we needed to go and get this technology to more customers in if we serve 30000 or so customers today. There is <unk> 200000 customers, though more of that.
Speaker Change: And in that that we could be reaching but this technology as it becomes easier so with that we brought in some very.
Robert J. Willett: So with that, you know, we brought in some very strong, young salespeople, most of them engineers, and we've trained them, and they're going into the field now. At the same time, you know, we've implemented salesforce.com over the last few years, and we have a lot of intelligence now, in terms of what activity goes on, where we're demoing, how to generate leads and get those to those salespeople.
Speaker Change: Strong young salespeople, Mr. Adam Engineers, and train them and they're going into the field now.
Speaker Change: We.
Speaker Change: At the same time you know we.
Speaker Change: We've implemented our Salesforce dot com over the last few years and we have like a lot of intelligence now intense intense.
Speaker Change: Intense.
Speaker Change: Activity goes on Huawei demo Ing has to generate leads and get those to those to those salespeople. So that processes is kind of you know.
Robert J. Willett: So that process is kind of, you know, getting implemented, and I think we're pretty pleased with what we're seeing. I mentioned we expect that team that's gone into the field to make about 80,000 customer visits this year. They're certainly on target to do that.
Speaker Change: Think getting implemented and I think we're pretty pleased with what we're seeing I mentioned, we expect that team that's gone in the field to make about 80000 customer visits this year certainly on target to do that and we're going to be able to help them get in front of more customers over time.
Robert J. Willett: We're going to be able to help them get in front of more customers over time, you know, as our lead generation engine spools up, as they learn about how to be effective in front of customers. So we expect their productivity, and I would say, based on the data that I see, on average, they're selling more and more each month currently. So, and they're getting in front of new customers, and I gave you examples of applications that you probably, well, we certainly, a few years ago, would have probably walked away from because there was just going to be too much engineering to make some of those things work. But now, our emerging customers, salespeople can demo and sell those products in perhaps two visits. Generally, what I would observe.
Speaker Change: As they as our lead generation engine spools up as they learn about how to be effective in front of customers. So we expect their productivity.
Speaker Change: And I would say you know in the data that I see on average they are selling more and more each.
Speaker Change: Each month currently so so and they are getting in front of new customers and as I gave you examples of applications that you're probably well, we certainly a few years ago would have probably walked away from because.
Speaker Change: I was just going to be too much engineering to make some of those things work, but now our imaging customers salespeople can demo and sell those products in.
Speaker Change: In past two visits is generally what I would observe so so we're going to see the metrics keep moving up we're pretty pleased with what we're seeing we will see more products coming to market and more tools, enabling them to address more applications. Then it builds from here so based on that confidence we're bringing in another.
Robert J. Willett: So we're going to see the metrics keep moving up. We're pretty pleased with what we're seeing. We will see more products coming to market and more tools enabling them to address more applications. And it will build from here. So, you know, based on that confidence, we're bringing in another full class, and we're training them up, and we're getting better all the time. It does feel like turning a flywheel. It's getting faster and faster every year.
Robert J. Willett: Total class and we're training them up and with luck, we're getting better all the time and it does feel like turning a flywheel, it's getting faster and faster.
Speaker Change: Yeah.
Robert J. Willett: Very good. That's very helpful. Thanks.
Speaker Change: Very good that's very helpful. Thanks.
Robert J. Willett: Okay.
Speaker Change: Thank you.
Joseph Craig Giordano: Our next question comes from the line of Joe Giordano with Cowen & Company. Please proceed with your question.
Robert J. Willett: Our next question will come from the line of Joe Giordano with Cowen <unk> Company. Please proceed with your question.
Michael: Good morning, this is Michael on behalf of Joe.
Good morning, this is Michael on for Joe.
Michael: Can you go on it.
Michael: Yes, we can. Yeah, please go ahead, Michael. Great. Thank you so much.
Michael: Yes, we can yeah. Please go ahead, Michael great. Thank you so much.
Michael: Great, thank you so much. So on the end market front, I think Mr. Surprised on the semi-strength in the quarter, you know, based on some of the industry commentary there, what was driving that outperformance in the quarter? And I have a follow-up. Thank you.
Michael: On the end market front.
Michael: Mr surprised on like the semi strength in the quarter.
Michael: Based on some of the industry commentary there.
Michael: What was driving that outperformance in the quarter and I have a follow up thank you.
Robert J. Willett: on. Well, we. In SEMI, we're very strong in the wafer process, particularly where we're reading IDs, barcodes, letters, numbers, and reflective surfaces of wafers. That's been a very strong area for Cognex for a very long time. We're spec'd in with most of the leading OEMs in those types of spaces, and the fabs rely on our equipment. That business is strengthening. We have a good team in ASEAN, markets such as Malaysia, certainly where we're seeing strong investments going on in that area, but, as we're also reading, more and more SEMI is coming to other markets like Europe and America. But I would say more of the growth that we're seeing is around some of the areas I described, and also some kind of inspection and alignment in applications such as high bandwidth memory.
Speaker Change: While we are at.
Robert J. Willett: In semi.
Robert J. Willett: We're very strong.
Robert J. Willett: At the at the in the wafer process, particularly where we're reading.
Robert J. Willett: I'd <unk> Barcodes letters numbers reflective surfaces of wafers. So that's been a very strong area for cognex for a very long time and we.
Robert J. Willett: As expected with many.
Robert J. Willett: Most of the leading Oems and those types of spaces in the fabs when they rely on our equipment so that.
Robert J. Willett: That businesses strength strengthening nicely.
Robert J. Willett: We have good good team and in in at the end markets, such as Malaysia, certainly, where we're seeing you know strong investments going on in that area, but as we also reading.
Robert J. Willett: More more and more semi is is is coming to us.
Robert J. Willett: Other markets like Europe, and America, but I would say more of the growth that we're seeing is around some of the areas that I described reading wafers.
Robert J. Willett: Also kind of inspection and alignment and applications such as high bandwidth memory.
Robert J. Willett: And Michael, one thing I'd add is just a reminder that our business has a much shorter cycle than a number of our peers who are supplying to this industry. So, as you look at the type of customers who we serve here, they've given very positive outlets for 2024. You would expect Cognex to react to that a bit faster than some of the other suppliers to the industry, given the short cycle nature of our business. On the geography front, a lot of business here in Asia is beyond China, so our other Asian business is where we saw a lot of that activity.
Robert J. Willett: Michael One thing I'd add is just just a reminder, that our business is much shorter cycle than a number of our peers, who are supplying to this industry. So as you look at the type of customers, who we serve here, they're they've given very positive outlook for 'twenty 'twenty. Four you would expect cognex to react to that a bit faster than some of the other suppliers into the industry given the short cycle nature of our business.
Robert J. Willett: And we.
Robert J. Willett: On the geography front, you know a lot of a lot of the business here in Asia beyond beyond China. So our other Asia businesses, where we saw a lot of that activity.
Robert J. Willett: Great, that's super helpful. And just one more, if I may. You had mentioned that you thought, you know, logistics was up for the year, you know, CE likely flat, but can you discuss the puts and takes on the auto side, growth expectations there, maybe cadence throughout the year as well? Thank you. Yeah, sure. I am. You asked about the auto side.
Speaker Change: Great. That's super helpful and just one more if I may you had mentioned that.
Speaker Change: Logistics was.
Speaker Change: It could be up for the year.
Speaker Change: <unk> likely flat, but can you discuss the puts and takes on the auto side I mean.
Speaker Change: The growth expectations, there maybe cadence throughout the year.
Speaker Change: As well thank you.
Speaker Change: Yeah sure I am.
Speaker Change: So that automotive I think.
Robert J. Willett: Context, you know, automotive was our largest and best-performing market last year, representing 25% of our revenue. It looks to be entering a more difficult period at the moment, you know, I think we see that, particularly around some of the EV battery investments, which, you know, over the long term look very good, have really been scaled back, pushed out, right? So that can give our revenue some big bumps. And we saw, you know, a pretty big EV battery order in the first quarter of last year in China. And, you know, that did not happen this year.
Speaker Change: Context, automotive was our largest and best performing market last year, representing 25% of our revenue and it looks to be entering a more difficult period at the moment.
Robert J. Willett: I think I think we see that and particularly around some of EV battery investments, which are over the long term look very good over the short term have really been scaled back pushed out right. So that can that can give our revenues.
Robert J. Willett: <unk> bumps and we saw pretty nice EV battery order in the first quarter of last year in China.
Robert J. Willett: And that that did not repeat this year. So certainly there's some tentativeness there much as youre reading.
Robert J. Willett: So certainly, there's some tentativeness there. You know, much of your reading, probably about cars, we are seeing customers, some of them move more quickly into hybrid, back into hybrid, if you like, and we've seen some success with customers there. But the broad view is that the car industry, you know, is slowing down, looks challenging for this year, and EV investments are being pushed out.
Robert J. Willett: Really about automotive we are seeing customers some of them move more quickly into hybrid back into hybrid and feel like and we've seen some success with customers there, but the broad view is that that.
Robert J. Willett: The automotives.
Robert J. Willett: Is slowing down looks challenging for this year and in EV investments are being pushed out.
Speaker Change: Thank you.
Robert J. Willett: Okay.
Robert J. Willett: Yeah.
Speaker Change: Thank you.
Jacob Frederick Levinson: Our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.
Robert J. Willett: Our next question comes from the line of Jacob <unk> with Melius.
Jacob Frederick Levinson: Please proceed with your question.
Jacob Frederick Levinson: Hi, good morning, everyone. Good morning. I know, uh... AI and deep learning in a certain way, is something you folks have been doing for quite a while now, but can you help us understand Howdy, Proliferation of high-density compute, if you want to call it that, really changes, or doesn't change for that matter, the capabilities, and I would imagine it would be pretty expensive to put GPUs in the computer next to a lot of your cameras, but I guess how does this computing power that hasn't been.., available before Willett changed the product roadmap for E5.
Jacob Frederick Levinson: Alright, good morning, everyone.
Jacob Frederick Levinson: Good morning, Jack.
Speaker Change: I know.
Jacob Frederick Levinson: Hey.
Jacob Frederick Levinson: Deep learning in a certain way.
Jacob Frederick Levinson: Something that FERC can bearing for for quite a while now but can you help us understand.
Jacob Frederick Levinson: Sure.
Jacob Frederick Levinson: Proliferation of high density compute I want to.
Speaker Change: Caught that.
Jacob Frederick Levinson: Sandoz or doesn't change for that matter.
Jacob Frederick Levinson: <unk> I would imagine it for expenses to support Gpus and the computer next year a lot of their cameras, but I guess, how does how does the computing power of it hasnt been.
Jacob Frederick Levinson: Available before we would change the product roadmap for folks.
Jacob Frederick Levinson: Okay.
Robert J. Willett: Yeah, thanks, Jake, for the question. So, if we start with a longer-term view, you know, deep learning technology has kind of been around for a long time, but I think we really began to see in 2013-14, the work of Geoffrey Hinton, you know, started to make that really workable. So, your question is kind of how chips change that. Well, one thing is that one works with AI and applies it.
Speaker Change: Yes, Thanks, Jay for the question so.
Robert J. Willett: If we start with a longer term view.
Robert J. Willett: Deep learning technology has kind of been something that's been around for a long time.
Robert J. Willett: But.
Speaker Change: I think.
Robert J. Willett: We really began to see in 2013 14.
Robert J. Willett: Geoffrey Hinton.
Robert J. Willett: Got it to make that really workable and we saw then it started to be usable in machine vision and factory automation.
Robert J. Willett: Later in the decade, and we acquired <unk> in 2017 and sewer lab in 2019. So you know I do credit Cognex, we're seeing this trend early and leading the application of deep learning technology and.
Robert J. Willett: And then.
Robert J. Willett: As we move now into generative AI to be a leader in that space as it applies to factory automation and you can really see that and I really encourage you to come to our website and look at our insight L. 38, three D vision system, which is taking that powerful technology, making it really easy to use and putting it in.
Robert J. Willett: Into appoint cloud environment to do three D vision. So historically vision is really being two D. But three D adds an extra dimension. So that's really an exponential amount of data one has to manage so it's quite computer intensive. So your question is kind of have chips change that well one thing is as one.
Robert J. Willett: These models used to be very, very difficult, computer-intensive, slow to manage, but now, with cloud capability and GPUs, we're able to, you know, use and train and manage huge data sets very quickly and effectively. But then, the reality of factory automation is that it's really happening at the edge, right? So, we have to take all that powerful technology, put it into a pretty small form factor, and apply it right at the point of manufacture, right on the line, right?
Robert J. Willett: With AI and applies it these models used to be very very difficult computer intensive slow to manage but now with cloud capability and Gpus.
Robert J. Willett: Where we're able to use and train and manage huge datasets very quickly and effectively.
Robert J. Willett: But then the reality of factory automation is that it's really happening at the edge right. So so we have to take all that powerful technology put it into a pretty small form factor and apply it right at the point of manufacturer right on the line right and something Cognex has been extremely good at is is making processors run.
Robert J. Willett: And something Cognex has been extremely good at is making processors run efficiently. And in this case, we've taken deep learning technology and developed something called edge learning, which pre-trains models and applies them to edge-based devices in a very efficient way. So, as chips get faster, you know, we're able to bring that technology right to the edge and make it work very, very, very effectively. So, that's kind of the process we've been going through, and it really is making our products much easier to use, easier to sell, and broaden into applications that used to be really only really managed effectively through humans. And you can bet we'll expect to be right at the leading edge of that.
Robert J. Willett: Efficiently.
Robert J. Willett: And in this case, we've taken deep learning technology and developed something called edge learning, which pre trained models and applies them to edge based devices in a in a very efficient way. So as chips get foster you know, we're able to bring that technology rights to the edge and make it work very very very effective.
Robert J. Willett: So that's kind of the process, we've been going through and it really is making our products much easier to use easier to sell and broaden into applications that used to be really only only really managed effectively through humans. So those are some of the changes going on.
Robert J. Willett: They're really really powerful chips that I think you're perhaps referring to that's still going on in the cloud not coming to the edge you know in the next few years I wouldn't say, but as we all know with Moore's law and everything those chips become more powerful smaller and I think create a lot of opportunity to see some very powerful.
Robert J. Willett: Our machine vision.
Robert J. Willett: Our performance in the years to come and you can bet, we'll be expect to be right at the leading edge of that.
Robert J. Willett: Yeah.
Jacob Frederick Levinson: That's super interesting, Rob. Just switching gears on China, a market that I think is often hard to know what's going on if you're not actually there. And I know that obviously wraps into some of your commentary on the other end markets, but just trying to get a sense of what you're hearing from your folks on the ground in terms of your customers' investment plans for this year.
Robert J. Willett: It's a super interesting Rob.
Jacob Frederick Levinson: Just switching gears on China.
Jacob Frederick Levinson: Our market.
Jacob Frederick Levinson: But it's often hard to know what's going on I'm sure a fernand extra there.
Jacob Frederick Levinson:
Jacob Frederick Levinson: But our progress at Rhapsody with some of your comments around the other end markets, but just trying to get a sense of.
Jacob Frederick Levinson: What are you hearing from your folks on the ground in terms of your customers' investment plans for this year.
Robert J. Willett: The Chinese market is certainly the most difficult geographically for us at the moment. We've seen revenue decline year-on-year for six straight quarters. In China, it was down 17% year-on-year in Q1, excluding Martex.
Jacob Frederick Levinson: Yet the China market is certainly the most difficult market.
Robert J. Willett: Geographically for us at the moment.
Robert J. Willett: We've seen revenue decline at year on year for six straight quarters in China. It was down 17% year on year in Q1, excluding <unk>.
Robert J. Willett: We have a pretty large team in China, and we're very successful with larger customers, particularly in that space. So I think we see this as a broad-based phenomenon. I can't think of a company in the automation space that's putting up good results in China at the moment. So I think this is pretty typical of what we're seeing.
Speaker Change: We have a pretty large team in China.
Robert J. Willett: We're very successful with larger customers, particularly in that space.
Robert J. Willett: So.
Robert J. Willett: I think we see this as a broad based phenomenon.
Robert J. Willett: Can't think of a company in the automation space Thats, putting up good results in China at the moment. So I think this is pretty typical of what we're seeing.
Jacob Frederick Levinson: There is certainly intense competition, as one would expect in that market. We've seen quite a lot of PE and VC-funded companies in that market recently, and I think some of them are obviously struggling with the market conditions that we're seeing there. The decline in automobile sales in the quarter was most pronounced in China also, so that's certainly a tough situation. We do see the phenomenon of customers moving production or diversifying production away from China.
Robert J. Willett: It does.
Jacob Frederick Levinson: Certainly intense competition as one would expect in that market, we've seen quite a lot of PE and VC funded companies kind of.
Jacob Frederick Levinson: In that market over recently and I think there are some of them are obviously struggling with the with the market conditions that we're seeing there.
Jacob Frederick Levinson: <unk>.
Jacob Frederick Levinson: Decline in automotive in the quarter was most pronounced in China also so that's certainly a tough situation, we do see the phenomenon of customers moving production.
Jacob Frederick Levinson: Diversifying production away from China.
Jacob Frederick Levinson: I think we're all familiar with that phenomenon, so into the markets, particularly India and Vietnam. So that's another dynamic that's going on there. In terms of Cognoids and the team, I think we're enthusiastic about adding Martex to our business. Martex has a good business in China and is able to be very competitive now, selling more alongside Cognoids, so that's a positive development. And the kind of technology that we talked about, the 3D AI technology, certainly is something that our Cognoids are very enthusiastic about demoing and selling, and I'm very pleased with the progress that I see them starting to make with our edge learning technology in that market. So, plenty to work on, but difficult conditions. Great, thank you.
Jacob Frederick Levinson: Familiar with that phenomenon, so that they enter into markets, particularly India and Vietnam. So thats. Another dynamic that said thats going on there in terms of called noise in the team.
Jacob Frederick Levinson: I think we're enthusiastic about adding <unk> to our business and Martech says, it's a good business in China and is able to be very competitive now selling more alongside a cognos. So that's a positive a positive development and the kind of technology that we talked about the.
Jacob Frederick Levinson: <unk> AI technology, you know it certainly is something that are causing them. It's very very enthusiastic about them demo ing and selling and I'm very pleased with the progress that I see them starting to make with our edge learning technology broadly in that market, so plenty to work on but difficult conditions.
Robert J. Willett: Great. Thank you, Rob. Pass it on.
Speaker Change: Great. Thank you Rob pass along.
Robert J. Willett: Yeah.
Speaker Change: Thank you.
Thomas Allen Moll: Our next question comes from the line of Tommy Moll with Stevens Inc.
Robert J. Willett: Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your question.
Thomas Allen Moll: Good morning, and thank you for taking my question. Good morning, Thomas.
Thomas Allen Moll: Good morning, and thank you for taking my questions.
Thomas Allen Moll: Yeah, Good morning Tommy.
Thomas Allen Moll: I wanted to start on logistics, where in the quarter, revenue looks like it was flat year-over-year, excluding the large project that you've referenced a number of times. You've given us some reason to be optimistic about the recovery in that end market. And so my follow-up question is, are you seeing those positive signs? fairly concentrated among a smaller list of customers, and the reason I ask that is just because it looks like the base business there was still flat year over year, maybe
Thomas Allen Moll: I wanted to start on logistics, where in the quarter. It looks like revenue was flat year over year, excluding the large project that you've referenced a number of times.
Thomas Allen Moll: You've given us some some reason to be optimistic about the recovery in that end market and so my follow up question is are you seeing those positive signs fair.
Thomas Allen Moll: Fairly concentrated among a smaller among a smaller list of customers.
Thomas Allen Moll: And the reason I asked that is just because it looks like the base business. There was still flat year over year, but maybe I'm missing something though.
Thomas Allen Moll: Yeah.
Robert J. Willett: Yes, so thanks for your question. So, you know, my optimism about logistics really comes from our funnel. So, you know, we certainly see a nice build in our, of our, of our business overall. You know, the logistics when we had it were with, with a, with a big customer, but, you know, not necessarily our biggest customer in that space. And, you know, and we do see some nice progress in penetrating parcel and post where we've seen, obviously, that's an industry dominated by some very large names that we're all aware of, and we're making a lot of progress with our new modular vision tunnel that we launched this year, which brings a lot of functionality, and demoing really well with those customers. Now, in terms of smaller customers, we do see that as a growth part of our business, and it continues to feel that way.
Speaker Change: Yes, so thanks for your questions.
Thomas Allen Moll: My optimism about logistics really comes from a funnel.
Robert J. Willett: So we certainly see a nice build of our of.
Robert J. Willett: Of our business overall.
Robert J. Willett: The logistics when we had was with a with a big customer, but not necessarily our biggest customer in that space.
Robert J. Willett: And we do see some nice.
Robert J. Willett: Yeah.
Robert J. Willett: Progress in penetrating parcel and post where we've seen we're seeing obviously, that's a industry dominated by some very large names that were all aware of and we're making now a lot of progress with our new modular vision tunnel that we've launched this year, which brings a lot of functionality is demo in really well with those customers now in terms of <unk>.
Robert J. Willett: Smaller customers.
Robert J. Willett: We see we do see that as a as a growth part of our business and it continues to feel that way I don't remember Nathan you can give us any color on Q1, and basically just six I'm. Yeah. I mean, I think you're probably referencing we said stable year over year and I think the thing to point out is we are seeing kind of broader based.
Robert J. Willett: Yeah, I mean, you know, you're probably referencing, we said stable year over year. And I think that the thing to point out is we are seeing kind of broader-based funnel optimism. And so, you know, typically, this business has higher penetration in America; we saw some strength in other parts of Asia in the quarter, and we expect to see growth going forward from both the large e-commerce customers that we've referenced, as well as our base logistics.
Robert J. Willett: Funnel ought to optimism and so we saw US typically this business has been a higher penetration in Americas, we saw some strength in other parts of Asia in the quarter and expect to see going forward growth from both the large e-commerce customers that we've referenced as well as our base logistics together I think you should probably expect them or.
Robert J. Willett: You know, I think you should probably expect a little bit less of a bifurcation there than we've talked about over the past 18 months or so, just given the hyper growth that happened with the large e-commerce customers, followed by a really pause in their greenfield investment. We would expect those to converge a little bit more going forward and see more similar trends across the full spectrum.
Robert J. Willett: Little bit less of a of a bifurcation there than what we've talked over the past 18 months or so just given really the hyper growth that happened then.
Robert J. Willett: With the large e-commerce customers, followed by a really a pause in their greenfield investment we would expect those to converge a little bit more going forward in seed see more similar trends across across the full spectrum.
Thomas Allen Moll: And then, following up on the Emerging Customer Initiative, which quarter this year did you hit the full run rate for the expense investment there? Is it Q4 or is it really the first quarter of next year before we'll see that full run rate? And a related question, Rob, is there any chance that you roll out a third cohort here as well? It sounds like things have gone well with the first, and you're ramping up for the second. I just wonder what else might be on the marker board. Thanks.
Speaker Change: Thank you both and then following up on emerging customer initiative.
Thomas Allen Moll: Which quarter. This year do you hit the full run rate for the for the expense investment. There is it Q4 or is it really first quarter of next year before we will see that full run rate.
Thomas Allen Moll: A related question.
Thomas Allen Moll: Rob is there any chance that you rollout a third cohort here as well it sounds like things are going well with the first you're ramping a second I'm just wondering what else might be on the marker board. Thanks.
Robert J. Willett: Yeah, I'll take the cost side first. I mean, as we talked last year, the initiative grew throughout the year. And there's kind of two components to it in 2024. First is the run rate of the investment that we made in 2023, which you should expect to be pretty, pretty stable throughout the year. And then the second piece, which Rob will speak to more in a second, is the class that we're bringing in in 2024.
Rob: Yeah, why don't I I'll take the cost side first I mean, as we talked last year the initiatives ramped throughout the year and there is theres kind of two components to it in 2024 first is the is really the run rate of the investment that we made in 2023, which you should expect that to be pretty pretty stable throughout the year.
Robert J. Willett: <unk>.
Robert J. Willett: And then the second piece is what Rob will speak to more in a second is the class that we're bringing in in 2024 and that part of the costs you should expect to ramp throughout the year with them last year.
Robert J. Willett: And that part of the cost you should expect to ramp up throughout the year. And last year, I mean, just keep in mind what the investment is here. A lot of this is hiring college graduates, so a lot of summer start dates. And so that really ramps linearly up through Q3, with Q3 and Q4 looking fairly similar. So really, kind of, Q3 being the peak and Q4 looking similar to Q3 is the expectation on the OPEC side.
Robert J. Willett: In mind, what what the what the investment is here a lot of this is is hiring of of college graduates. So a lot of summer start dates and so that really ramps linearly up through Q3 with Q3 and Q4 looking fairly similar.
Robert J. Willett: So really kind of cute Q3 being the being the peak in Q4 looking similar to Q3 is the expectation on the Opex side.
Robert J. Willett: Yeah, and your question about the year 2025, like, obviously, too soon to make a call on that, but we would see emerging customers as, you know, a long-term initiative with a lot of long-term potential to, as I say, take our customers from 30,000 to, you know, hundreds of thousands. So, you know, this is a multi-year initiative overall; I would see it as that. But in terms of 2025, you know, we start to really think about, get concrete on our plans probably in the fall for that as we start to get into recruiting for next year and next season and plan, you know, plan our budget for, you know, for that period.
Speaker Change: Yes, and your question about your 2025, obviously too soon to make a call on that but we would see emerging customers as a long term initiative with a lot of long term potential to as I say take our customers from 32.
Robert J. Willett: With luck hundreds of thousands.
Robert J. Willett: So this is.
Robert J. Willett: This is a multiyear initiative overall I would see it is that but in terms of 2025, we start to really think about get concrete on our plan. It's probably in the fall for that as we start to get into recruiting for next year and next season and plan plan on budget.
Robert J. Willett: For.
Robert J. Willett: For that period.
Thomas Allen Moll: Thank you for the insight. I'll turn it back.
Speaker Change: Thank you for the insight I'll turn it back.
Thomas Allen Moll:
Andrew Edouard Buscaglia: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas Asset Management. Please proceed with your question.
Thomas Allen Moll: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas asset management. Please proceed with your question.
Andrew Edouard Buscaglia: Yeah.
Andrew Edouard Buscaglia: Hey, good morning, guys.
Andrew Edouard Buscaglia: Good morning, Andrew.
Andrew Edouard Buscaglia: So, you know, you made the comment that gross margin marks the low point in Q1 and got it, obviously, a step up into Q2. A couple of questions on that. I guess what gives you the confidence that, you know, that is the low point? Presumably, you know, you have logistics improving, and you got a larger order that was somewhat diluted to that gross margin, so I guess you're not assuming any larger orders the rest of the year. And can you just comment on some other things that you see in the back half that would, you know, give some confidence in that comment?
Andrew Edouard Buscaglia: So.
Andrew Edouard Buscaglia: You made the comment that you think gross margin marks the low point in Q1.
Andrew Edouard Buscaglia: Got it obviously a step up into Q2.
Andrew Edouard Buscaglia: Couple of questions on that I guess, what gives you that confidence that you know that is the low point.
Andrew Edouard Buscaglia: Presumably you have logistics improving.
Andrew Edouard Buscaglia: Got it and a large order that was somewhat dilutive to that gross margin. So I guess youre not assuming any larger order the rest of the year and can you just comment on whether it's some other things.
Andrew Edouard Buscaglia: That you see in the back half that would give them confidence in that comment.
Robert J. Willett: Yeah. Well, first of all, Q1 gross margin was dragged down by that larger order we described, right, and a low revenue quarter. You know, so those are kind of factors that impacted us. Overall, through the year, Martex is about a 2% headwind, so that is sort of context.
Andrew Edouard Buscaglia: Yes, well first of all Q1 gross margin was was dragged down by that larger order, we described right and a low revenue quarter and it was so so those are kind of factors that.
Robert J. Willett: That impacted us.
Robert J. Willett: Overall through the through the year, you know Mark, Texas about a 2% headwind so with that as sort of context, but then what should lift gross margin for cognex going forward is obviously revenue revenue, particularly in markets like electronics, but but particularly factory automation and factory automation for us is.
Robert J. Willett: But then, you know, what should lift gross margin for Cognex going forward is obviously revenue, particularly revenue in markets like electronics, but particularly factory automation. You know, factory automation for us is a high-margin business in a broad way, right, and so as we begin to see that market recover, that is, you know, has strong gross margins overall. And as we've discussed, it's been under pressure for quite a few quarters now, our industry has, and if that returns, it would lift gross margin.
Robert J. Willett: It's a high margin business.
Robert J. Willett: Based way right and so as we as we begin to see that market recover that as you know has strong gross margins overall and as we've discussed has been under pressure for quite a few quarters now our industry has in Texas because that returns it would lift gross margin and then.
Robert J. Willett: Our emerging customer initiatives selling high gross margin very very competitive products. So that's going to be gross margin accretive for US also we expected generally selling to smaller customers, who perhaps don't get the same kind of discounts that logic customers do so there are many reasons to feel positive about growth.
Robert J. Willett: Margin and our return back in the long run to that 75% target that we have but in the near term, which is a census, why youre more interested.
Robert J. Willett: Those onetime factors being behind us in Q1.
Robert J. Willett: And then, our emerging customer initiative is, you know, selling, you know, high gross margin, very, very competitive products, so that's going to be gross margin accretive for us also, we expect, and generally selling to smaller customers, you know, who perhaps don't get the same kind of discounts that larger customers do. So, there are many reasons to feel positive about gross margin and our return back in the long run to that 75% target that we have, but in the near term, which is a sense as well, you're more interested, those one-time factors being behind us in Q1, build this business, particularly consumer electronics, which tends to be high gross margin business, and semi also, and, and then, and then, you know, and scale going back and return, return a factory automation business.
Robert J. Willett: Bill this business, particularly consumer electronics, which tends to be high gross margin business.
Robert J. Willett: And semi also and.
Robert J. Willett: And then.
Robert J. Willett: And scale growing back and return return of factory automation business.
Speaker Change: Yes, okay.
Andrew Edouard Buscaglia: Okay, and then my next question, I wanted to go back to consumer electronics, you know, let's flattish, you know, flattish this year. You commented on uncertainty around project size and timing. I'm wondering, you know, there's not much innovation in phones and handsets these days, but the latest is the implementation of AI features. And I'm wondering, you know, that's not a physical form factor change, but I'm wondering what, you know, you're referencing there in terms of these projects, whether, you know, the timing's tough, but does AI have an influence on machine vision as it relates to consumer electronics? Well, if we talk more about the market.
Speaker Change: Okay then.
Robert J. Willett: The next question I wanted to go back to consumer electronics.
Andrew Edouard Buscaglia: Flattish flattish.
Andrew Edouard Buscaglia: Flattish this year and he commented on uncertainty around project size and timing I'm wondering.
Andrew Edouard Buscaglia: There is not much innovation in.
Andrew Edouard Buscaglia: Bones in handsets these days, but the latest the implementation of AI features that I'm wondering.
Andrew Edouard Buscaglia: Physical form factor change, but I'm wondering what.
Andrew Edouard Buscaglia: Are you referencing there in terms of these projects.
Andrew Edouard Buscaglia: Yeah, the timing is tough.
Andrew Edouard Buscaglia: Does that have an influence on.
Andrew Edouard Buscaglia: Machine vision as it relates to consumer electronics.
Robert J. Willett: Well, if we talk more about the market, our customers, and why we are excited about the long-term potential there, you know, this is a market that has waves of innovation that come through it, right? And I think, you know, we're living through a couple of years where that innovation, you know, hasn't come through in products, but I'm very confident it will, right? And I think if we think of all the AI technology and chips that we're starting to see broadly released in the world, that, you know, that's going to drive a whole generation of new products. It may be smartphones, it may be augmented reality, and virtual reality also.
Andrew Edouard Buscaglia: Well, if it was more about kind of the market.
Robert J. Willett: Customers and why why we.
Robert J. Willett: We are excited about the long term potential there.
Robert J. Willett: This is a this is a market that has waves of innovation that comes through it right I think.
Robert J. Willett: We're living through a couple of years, where that innovation hasnt come through in products, but but I'm very confident it will try it and I think if we think of all the AI technology and chips that we're starting to see broadly and are released in the world.
Robert J. Willett: That's going to drive a whole generation of new products. It may be smartphones it may be.
Robert J. Willett: Augmented reality virtual reality.
Robert J. Willett: Wholesale and I think some of the spending and investment we are seeing in semi.
Robert J. Willett: And I think some of the spending and investment we're seeing in SEMI, you know, that we all understand, will drive growth in that area. The second reason why I think, you know, I expect Cognex's business to grow is just the replacement of humans in the manufacturing of electronics, particularly smartphones. And I think that the potential of that technology is so big, and, you know, as perhaps I've mentioned on occasion, just, you know, one of our customers spends over a billion dollars a year on human visual inspectors, right?
Robert J. Willett: Understand.
Robert J. Willett: We will drive growth in that area.
Robert J. Willett: The second reason that I think I expect cognex is business to grow.
Robert J. Willett: And just in the replacement of.
Robert J. Willett: Humans, and the manufacturing of electronics, particularly smartphones.
Robert J. Willett: And I think that the potential of that technology is so big.
Robert J. Willett: And.
Robert J. Willett: Perhaps I've mentioned on occasion, just some one of our customers spend some over $1 billion a year on human visual inspectors right. So it gives you an idea you know the potential that exists to.
Robert J. Willett: So it gives you an idea of the potential that exists to replace some of that with machine vision. And machine vision, when you look at our newest launches, is becoming more human-like in what it can do. So in the long run, the potential for those in that industry and that kind of technology in that industry is very significant. I don't see that happening this year, right, you know, but I'm aware of the kind of roadmaps from many companies in that industry and the exciting plans that they have.
Robert J. Willett: To replace some of that with that with machine vision and machine vision when you look at our.
Robert J. Willett: <unk> newest launches is becoming more human like and what it can do so in the long run the potential for those.
Robert J. Willett: And in that industry and that kind of technology in that industry as is.
Robert J. Willett: Is very significant.
Robert J. Willett: I don't see that pumping this year, right, but but I am but I am aware of kind of roadmap for many companies in that industry and the exciting plans that they have and we might get lucky and see some of it and the products that are launched them ahead of the holidays this year, but but I think at this point, we're assuming that maybe it's out further.
Robert J. Willett: And, you know, we might get lucky and see some of it in the products that are launched ahead of the holidays this year. But I think at this point, we're assuming that may be further years out.
Robert J. Willett: Years out for us.
Speaker Change: Okay. Thanks.
Speaker Change: Thanks, Rob.
Robert J. Willett: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question.
Piyush Avasthy: This question comes from the line of Piyush Avasthy with CDG Research. Please proceed with your question.
Robert J. Willett: From the line of.
Piyush Avasthy: Pete do you show that you can see D. Research. Please proceed with your question.
Piyush Avasthy: Good morning guys, thanks for taking my questions. Good morning. Following up on your auto-commentary, Rob, you have been very constructive in the EV battery space. Can you help us better understand what surprised you? I understand some bigger projects being pushed out, but for EV battery investments in China, is that something for you guys as well?
Piyush Avasthy: Good morning, guys. Thanks for taking my questions.
Speaker Change: Good morning.
Piyush Avasthy: Following up on your auto commentary, Rob you have been very constructive on the E battery space can you help us better understand on what surprised you I understand some bigger projects being pushed out but for EV battery investments in China, We've got something for you guys as well.
Robert J. Willett: So yeah, I think for maybe on the order of six months now, we've started to see sort of a concern around EV battery investment, that it may be getting out a little ahead of demand in general in the world. And we've been working, we're working closely with really all the large EV battery manufacturers. I think, you know, 10 of them, I think, overly constitute most of the investment going on. And it's a huge investment that's going on with the idea that this is a multi-year phenomenon, right?
Piyush Avasthy: So yeah, I I am I think for maybe on the order of six months now we've started to see sort of a concern around the EV battery investment that it may be getting out a little ahead of demand.
Robert J. Willett: In general in the World and.
Robert J. Willett: And we've been working we are working closely with really all the large EV battery manufacturers I think tenants and I think corporately constitute most of the investment going on and its huge investment that's going on with the idea that this is a multiyear phenomenon right and there are two ways in which cognex really benefit.
Robert J. Willett: And there are two ways in which Cognex really benefits or can really help those customers and where we do very well. You know, one is just helping them build out their capacity. And, you know, we've been working with customers in that area. And I would say, you know, I can think of quite a few instances where those plans have been slowed down, you know, over the last six months and pushed out.
Robert J. Willett: Really help those customers and where we do very well.
Robert J. Willett: One is just helping them build out their capacity.
Robert J. Willett: And.
Robert J. Willett: In working with customers in that area and I would say I can think of quite a few instances where those plans are being slowed down over the last six months and pushed out partly that's just to do with demand customers are not buying as many evs as perhaps the industry had expected and then secondly, just uncertainty about the political environment.
Robert J. Willett: Partly that's just to do with demand. Customers are not buying as many EVs as perhaps the industry had expected. And secondly, just uncertainty about the political environment and whether the subsidies that are being discussed for consumers who buy cars and for companies that invest in building out battery plants and EV plants are still going to be there. So, I think there's that kind of concern.
Robert J. Willett: <unk> and whether the subsidies that are being discussed for <unk>.
Robert J. Willett: Consumers, who buy cars and for companies that invest in building out battery plants in E. D plants, whether those are still going to be that so and so I think that that kind of.
Robert J. Willett: I think, you know, over the long term, EVs will no doubt have a larger and larger market share of cars overall. There'll be waves of technology coming, whether that's the current, you know, cylindrical prismatic pouch technologies that we see moving more perhaps to solid state. So, there are going to be waves of investment. But those are challenging technical problems to deal with. And, you know, we're certainly working closely with customers, and I think they recognize the value of our technology.
Robert J. Willett: Concern.
Robert J. Willett: I think.
Robert J. Willett: Over the long term.
Robert J. Willett: <unk> no doubt, we'll have a larger and larger market share of automotive overall.
Robert J. Willett: There'll be waves of technology coming whether that's the current current cylindrical prismatic pouch technologies that we see moving more paths to solid state.
Robert J. Willett: So there are going to be waves of investment those are challenging technical problems to deal with and and you know, we're certainly working closely with customers and I think they recognize the value of our technology, but if this is building out a greenfields you know which is the challenge. The second area is just increasing the productivity.
Robert J. Willett: But if building out of greenfields, you know, which is a challenge, the second area is just increasing the productivity of manufacturing batteries. And this is an area where Pugnex excels, and particularly applying our computational optics technology, partly that we acquired with SAC, that we have more strength with Martex to create. Fantastic, almost 3D images of battery surfaces and to inspect them, and then apply our deep learning and edge learning tools to those applications, and what that really allows, if I could sort of make it real for a moment, what that allows a customer to do is take an inspection of the surface and tell whether they're throwing away because they're concerned about quality, and our technology can help reduce that significantly.
Robert J. Willett: Of manufacturing batteries and this is an area where cognex excels.
Robert J. Willett: And particularly applying our computational optics technology.
Robert J. Willett: Partly that we acquired with SCC that we have more strength with martech too great to create fantastic.
Robert J. Willett: Fantastic almost three D images.
Robert J. Willett: Hattery surfaces.
Robert J. Willett: To inspect them and then applying deep learning and entry learning tools for those applications and what that really allows us if I could.
Robert J. Willett: So to make it real for them and what that allows a customer to do is take taken inspect to surface until weather.
Robert J. Willett: <unk> or scratches or the position of a defect on a battery is a problem and should lead it to be rejected or whether it's not a problem in the battery can pass through and there's a very high scrap rate going on today and it's a very high rate of human inspection going on of those surfaces and one customer I visited over.
Robert J. Willett: The last six months told me that they they scrap two to $300000 of good batteries per day, good batteries, they're throwing away because they're concerned about quality and our technology can help reduce that significantly. So that's one example of where cognex technology can help that industry.
Robert J. Willett: So that's one example of where Cognex technology can help that industry and one of the reasons, based on all the investment plans and all the challenges that we see, we're expecting long-term growth in that industry.
Robert J. Willett: And.
Robert J. Willett: One of the reasons based on fully investment plans and all the challenges that we see we're expecting our long term growth in that industry.
Piyush Avasthy: Got it. It's helpful. Next, for my follow-up, a two-part question. One, we have been hearing a lot about India and the growth potential there. And you have kind of mentioned India and Vietnam a couple of times, so maybe size the opportunity for us. And then on Japan, the yen has been under pressure, but you reiterated your 6% to 8% revenue contribution. From my text, maybe a little color there, like the trends you are seeing in the end market, or any concerns related to effects. That would be helpful.
Speaker Change: Got it helpful.
Speaker Change: For my follow up like a two part question one like we have been hearing a lot about India and the growth potential there maybe issue and you have kind of mentioned.
Piyush Avasthy: A couple of times, so maybe size the opportunity for us and then on Japan. The yen has been under pressure, but you Riyadh correct videos.
Piyush Avasthy: Revenue contribution from <unk>, maybe maybe a little color there like it.
Piyush Avasthy: So you are seeing in the end market any concerns related to FX.
Piyush Avasthy: That would be helpful.
Speaker Change: Yeah, yeah. Thanks.
Speaker Change: I'm mindful at the time, so I'm going to answer your question correctly. Please please excuse me, but yeah, India huge opportunity.
Robert J. Willett: Excuse me. But yeah, India, huge opportunity. I visit it regularly. I was there early in the first quarter, and just the huge potential we see.
Robert J. Willett: I visited regularly I was there early in the first quarter and.
Robert J. Willett: Just a huge potential we see.
Robert J. Willett: Building our business there, it's still relatively small part of cognex overall, but the growth dynamics, it's probably and it's.
Robert J. Willett: We're building our business there. It's still a relatively small part of Cognex overall, but the growth dynamics are probably one of our fastest-growing markets, if not our fastest-growing business. The yen, yeah, the weak yen creates some interesting dynamics. It certainly is helping the cost of goods for some of our competitors and helping their gross margins and making the strong dollar, in a way, make the business environment more challenging for us. But we have great technology, and we're on a great team in Japan, so we're able to be competitive.
Robert J. Willett: One of our if not our fastest growing market.
Robert J. Willett: Yes.
Robert J. Willett: He can create some interesting dynamics.
Robert J. Willett: It certainly is helping.
Robert J. Willett: The cost of goods for some of our competitors.
Robert J. Willett: And helping that gross margins and making the strong dollar in the way of making business environment more challenging for us, but we have great technology and we're on a great team in Japan, So we're able to be competitive.
Piyush Avasthy: I appreciate all the color guys. Thank you.
Speaker Change: I appreciate all the color guys. Thank you.
Operator: Okay, I think we have time for one more question.
Speaker Change: Okay. I think we have time for one more question.
Jairam Nathan: Yes, our last question comes from the line of... Jairam Nathan with Diary Capital Markets. Please proceed with your question.
Operator: Yeah.
Speaker Change: And last question come from the line.
Jairam Nathan: Jairam Nathan with Dialer capital markets. Please proceed with your question.
Jairam Nathan: Hi. Thanks for taking my question. There are just two of them.
Jairam Nathan: Hi, Thanks for taking my question just two of them just wanted to.
Jairam Nathan: Clarification first on the recurring revenue in the large project that you had on logistics are those the same things and.
Jairam Nathan: Just I wanted to, clarification first on the recurring revenue and the large project that you had on logistics. Are those the same things, and has the recurring revenue started flowing in, or is that a feature? business. Yeah.
Jairam Nathan: So they're cutting revenue started flowing in or is that the future.
Jairam Nathan: Mrs.
Robert J. Willett: Yes, so that large project comes with a nice piece of regular recurring revenue, which is to do with our edge intelligence, allowing us to extract huge value out of our vision data and manage our vision systems more effectively and build on a kind of a regular basis, and tied to that large installation, where we took a lower price to get this technology embedded, and we're excited about that.
Jairam Nathan: Yes.
Jairam Nathan: Yes.
Robert J. Willett: Project became with kind of comes with a nice.
Robert J. Willett: Thesis regular recurring revenue, which.
Robert J. Willett: It's to do with our edge intelligence, allowing to extract huge value out of our vision data and manage their systems more effectively and build on a kind of a regular basis and so and tied to that large installation, where we took a lower price to get this technology embedded in where we're excited about that.
Robert J. Willett: <unk>.
Jairam Nathan: Okay, great. And then finally, you know, if you look at your biggest competitor, they kind of equate revenue growth to employee headcount increases. And I just wanted to kind of, I understand if I look at sales per employee or marketing employee for you guys, for the emerging market, the emerging customer, it would not be as high as it is currently just because of the nature of large customers in your current mix. But when you look at, and I understand it's early days, but how is the sales per employee on the emerging customer tracking? How do you expect it to track compared to the current average? Is that one way you get to 50 million? I'm just trying to understand what the potential here is.
Speaker Change: Okay, Great and then finally, you know what.
Jairam Nathan: Preliminary biggest competitor.
Jairam Nathan: The kind of equate revenue growth to employee.
Jairam Nathan: Employee count rig count increases and just wanted to kind of I understand if I look at sales per employee or marketing employee for you guys.
Jairam Nathan: For the emerging market emerging customer will not be as high as high as it is currently just because of the nature of large customers.
Jairam Nathan: Mix, but.
Jairam Nathan: But when you look at some.
Jairam Nathan: And I understand it's early days, but if I if.
Jairam Nathan: How is the sales per employee on damaging customer tracking how are how do you expect it to track compared to.
Jairam Nathan: The current average.
Jairam Nathan: Oh.
Jairam Nathan: Is that one way to get to the 50 million in I'm, just trying to understand whats the potential here.
Jairam Nathan: Yes.
Robert J. Willett: Yeah, that, you know, for competitive reasons, there's unnecessary data that we share at this point, but certainly, yes, emerging customers. We have much more modest expectations for them out of the gate; we expect to see, you know, good improvement. And, obviously, our emerging customer initiative will create salespeople who will go on and manage larger accounts in the future. So a nice feeding ground for that. But certainly, it's going to dilute sales per salesperson in the initial years.
Jairam Nathan: Yeah.
Jairam Nathan: For competitive reasons, but its not necessary data that we share.
Robert J. Willett: At this point, but certainly yes emerging customers, we have much more modest expectations for them out of the gate, we expect to see.
Robert J. Willett: Good improvement and you know obviously, our emerging customer initiative, we hope will will create salespeople, which will go on and manage larger accounts to future. So a nice feeding ground for that but certainly it's going to dilute sales per sales person.
Robert J. Willett: In the initial years.
Jairam Nathan: Okay. Do you think they could do a, like, if I kind of look at your best emerging customer, employee, or salesperson, can you give us an idea of how they are tracking versus the average?
Speaker Change: Okay. Okay.
Robert J. Willett: Like do you think it will be high it could they could do it like if I kind of look at your best emerging customer.
Jairam Nathan: Employee satisfaction.
Jairam Nathan: Can you give us an idea of how they are tracking with the average euro rate.
Robert J. Willett: Yeah, Jairam, this initiative will naturally ramp up over time, and so we'll expect to see more revenue go on, but I think we're not going to give an actual number on what we expect for each of those heads versus a more tenured sales employee.
Speaker Change: Yes jairam.
Jairam Nathan: I mean at one point this.
Robert J. Willett: This initiative will naturally ramp over time, and so we'll expect to see more revenue as they go on but I think we're not going to give an actual number on what we expect for each of those heads versus Ah Ah.
Robert J. Willett: Our more tenured sales employee.
Jairam Nathan: Okay, you are looking great. Thank you.
Speaker Change: Okay, great. Thank you.
Robert J. Willett: Thank you, and we have reached the end of the question and answer session. I'll now turn the call back over to Rob Willett for closing comments.
Jairam Nathan: Thank you and we have reached the end of the question and answer session. I will now turn the call back over to Rob Willett for closing comments.
Robert J. Willett: Well, thank you for joining us this morning. Thank you for your interesting questions. We've enjoyed talking with you, and we look forward to speaking with you again on next quarter's call.
Robert J. Willett: Well. Thank you for joining us this morning, and thank you for your interesting questions. We've enjoyed talking with you and we look forward to speaking with you again on next quarter's call.
Operator: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Speaker Change: This concludes today's conference and you may disconnect your lines at this time.
Operator: Thank you for your participation.
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