Q2 2024 Cognex Corp Earnings Call

income conferencing: © BF-WATCH TV 2021 © BF-WATCH TV 2021

Speaker Change: Greetings. Welcome to the Cognex Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Operator: A question in an answer session will follow the formal presentation. If anyone should require operators since this during the conference, please press star zero on your telephone keypad.

Nathan McCurren: Please press star zero on your telephone. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Thanks, Nathan.

Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Nathan McCurren: I will now turn a conference over to you, host Nathan McCurren, head of interest relations.

Speaker Change: I will now turn the conference over to your host, Nathan McCurren, head of investor relations. You may begin.

Nathan McCurren: You may begin. Thank you, operator.

Nathan McCurren: Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market closed, and our quarterly report on Form 10-Q for Q2 2024 was filed this morning. The press release, earnings presentation, and 10-Q are available on the investor relations section of our website. Both our published materials and the call today will reference non-GAB measures. You can find a reconciliation of certain items from GAB to non-GAB in our press release and earnings presentation. 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 would lead to be true as of today.

Nathan McCurren: Thank you, Operator. Good morning, everyone, and thank you for joining us.

Speaker Change: Our press release was published yesterday after market closed, and our quarterly report on Farm 10-Q for Q2 2024 was filed this morning.

Speaker Change: The press release, earnings presentation, and Tim Q are available on the Investor Relations section of our website.

Speaker Change: Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation.

Speaker Change: 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 McCurren: Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Farm 10-Q and Farm 10-Q.

Speaker Change: Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and Form 10-Q .

Nathan McCurren: On today's call, Rob Willett, the Tognex's president and CEO, will discuss in-market trends and provide an update on our strategic initiatives.

Speaker Change: On today's call, Rob Willett, Cognex's President and CEO, will discuss in-market trends and provide an update on our strategic initiatives. Dennis Fair, Cognex's CFO, will discuss our second quarter financial results and will conclude with our outlook.

Nathan McCurren: Dennis Faire, Tognex's CSO, will discuss our second quarter financial results and will conclude with our outlook. With that, I'll turn the call over to Rob.

Rob Willett: Thanks, Nathan.

Joseph Giordano: Hello, everyone, and thank you for joining us. Sequentially, adjusted cross-margin increased given the 1.6 percentage points of unfavorable one-time events in the first quarter from the Strategic Logistics Project's long-term higher-margin recurring revenue. Offset by additional investment in the Emerging Customer Initiative and Incentive Calm Patent. I've combined this feedback with Rob's strategic direction for the company, and three main priorities have emerged. The first is driving profitability and guiding and adjusting operating margins back towards our long-term target of over 30%.

Speaker Change: With that, I'll turn the call over to Rob.

Rob Willett: Hello everyone, and thank you for joining us. In the second quarter, we delivered revenue and gross margin in line with our guidance. Revenue increased sequentially, driven by a typical consumer electronics seasonality. Excluding Maritex, revenue was down year on year in total and across most of our factory automation and markets. This reflects a business environment that remains challenging but stable. Operating expenses were favorable to expectations and contributed to a sequential adjusted EBITDA margin increase of eight percentage points. This increase demonstrates the leverage our business delivers on incremental revenue and our continued focus on cost management.

Rob Willett: Thanks Nathan. Hello everyone and thank you for joining us.

Dennis Fair: In the second quarter, we delivered revenue and gross margin in line with our guidance.

Speaker Change: Revenue increased sequentially, driven by typical consumer electronics seasonality. Excluding Moritex, revenue was down year-on-year in total and across most of our factory automation end markets.

Speaker Change: This reflects a business environment that remains challenging, but stable.

Speaker Change: Operating expenses were favorable to expectations and contributed to a sequential adjusted EBITDA margin increase of 8 percentage points.

Speaker Change: This increase demonstrates the leverage our business delivers on incremental revenue and our continued focus on cost management.

Rob Willett: Earlier in the year, we were encouraged by positive signals in macro leading indicators, notably favorable PMI readings in March, while we also noted that EV demand remained uncertain.

Speaker Change: Earlier in the year, we were encouraged by positive signals in macro leading indicators, notably favorable PMI readings in March, while we also noted that EV demand remained uncertain.

Rob Willett: Dean. However, macro sentiment has now declined again, and we have seen additional delays and reductions in EV projects. While most of our manufacturing customers remain cautious with their CAPEX investment, positive momentum continues to build in logistics and semi. In Q2, we continue to execute against our strategic initiatives. We've rove innovation by incorporating AI into more of our products, and we continue to grow our emerging customer initiative.

Speaker Change: However, macro sentiment has now declined again and we have seen additional delays and reductions in EV projects.

Speaker Change: While most of our manufacturing customers remain cautious with their CapEx investment, positive momentum continues to build in logistics and SEMI.

Rob Willett: I now want to provide you with an update on our product innovation. We are focused on infusing new AI into all our product launches to drive adoption by more customers. Early in the second quarter, we expanded the application of our edge learning technology by launching the Inside L38, the world's first AI-enabled 3D industrial vision system. This product, which we introduced to you on our last call, has been very well received by customers, with a wind rate over two times higher than our previous 3D offering. We also launched on you modular vision tunnel, which introduces AI into logistics tunnel reading.

Speaker Change: I now want to provide you with an update on our product innovation.

Speaker Change: We're focused on infusing new AI into all our product launches to drive adoption by more customers.

Speaker Change: We also launched our new Modular Vision Tunnel, which introduces AI into logistics tunnel reading.

Rob Willett: The speed, power, and AI-assisted decoding of this new tunnel contributes significantly to its industry's leading performance. Within our ID products, we have enhanced the setup and tuning process for our data man barcode readers by using AI and ensuring great results. Our added tuning functionality selects the best parameters to optimize read rates. We're customers by auto-tuning the best settings for light, exposure filters, and dynamic range, which come together in combination to read barcodes more effectively. We've also launched new apps that bring additional capabilities to our Insight SNAP sensor. We recently introduced a new counting app, which counts objects using AI even in highly chaotic scenes.

Speaker Change: The speed, power, and AI-assisted decoding of this new tunnel contributes significantly to its industry-leading performance.

Speaker Change: Within our ID products, we've enhanced the setup and tuning process for our Dataman barcode readers by using AI, and it's showing great results.

Rob Willett: For example, the tool can count how many screws are in a pile of screws, nuts, and other objects. This task previously required linking many tools together using complex programming, which limited its use to sophisticated engineers. As we continue to execute our AI-driven product strategy, we will incorporate AI into more products, making them easier to use and able to solve applications in a more intuitive and human-like way.

Speaker Change: This task previously required linking many tools together using complex programming which limited its use to sophisticated engineers.

Rob Willett: To reach a broader customer base with our latest technology, we continue to invest in our emerging customer initiative. A 2023 cohort of emerging customer sales noise has driven strong customer activity in the first half of the year and is on target to meet or exceed 80,000 customer visits in 2024. This activity has resulted in steadily increasing monthly bookings through the first half of the year. We're pleased to see them getting traction as they're calling on and winning large numbers of new customers. In addition to selling our easier-to-use products, our emerging customer sales know a generating strong referrals for our more sophisticated vision products, leading to new opportunities for our account sales engineers.

Speaker Change: To reach a broader customer base with our latest technology, we continue to invest in our emerging customer initiative.

Rob Willett: While we are pleased with the activity and the funnel creation we're seeing from our emerging customer team, this initiative is focused on factory automation customers who are in end markets where we are seeing prolonged macro softness. This market softness is impacting sales more than we have anticipated, so we now expect it will take longer for the first cohort of emerging customer sales noise to deliver incremental revenue of $50 million. While the revenue ramp on this initiative is taking longer, our emerging customer team continues to steadily increase monthly bookings, and we remain confident that the high level of activity we're seeing will deliver increasing levels of success.

Speaker Change: While we are pleased with the activity and the funnel creation we're seeing from our emerging customer team, this initiative is focused on factory automation customers who are in end markets where we're seeing prolonged macro softness.

Speaker Change: This market softness is impacting sales more than we had anticipated, so we now expect it will take longer for the first cohort of emerging customer sales nodes to deliver incremental revenue of $50 million.

Rob Willett: The orders we are seeing reinforce our confidence in this initiative being gross margin accrued to our mid-70s target. We are continuing to execute on our emerging customer initiative.

Rob Willett: Our 2024 cohort of trainees is now in training and will answer the field at the start of 2025.

Rob Willett: Turning now to what we're seeing across our end markets, which you will find on slide six of the earnings presentation, I will discuss the end market results, excluding the contribution of March X. End markets have been mixed as we have seen both continued weakness as well as pockets of accelerating growth. Starting with automotive, revenue was down both year-on-year and sequentially. We continue to see delays and scaling back at EV battery projects, which led to a revenue decline year-on-year in the second quarter. Additionally, we store a further step down in our broader automotive business, particularly in Europe.

Speaker Change: End markets have been mixed as we have seen both continued weakness as well as pockets of accelerating growth.

Speaker Change: Starting with automotive, revenue was down both year-on-year and sequentially. We continued to see delays and scaling back of EV battery projects, which led to a revenue decline year-on-year in the second quarter.

Rob Willett: We are seeing more tentative myths from auto-customers driven by concern around near-term and user demand and political uncertainty. While we've seen a slowdown in Greenfield and discretionary productivity projects, we still see a baseline of maintenance and product upgrades on existing lines. We also continue to expect our EV battery business to be a growth driver over the long term.

Speaker Change: We are seeing more tentativeness from auto customers driven by concern around near-term end-user demand and political uncertainty. While we have seen a slowdown in greenfield and discretionary productivity projects, we still see a baseline of maintenance and product upgrades on existing lines.

Speaker Change: We also continue to expect our EV battery business to be a growth driver over the long term.

Rob Willett: Moving on to logistics. In the first half of the year, logistics achieved strong double-digit revenue growth year-on-year, and we expect growth to continue in the back-off of the year. We saw growth across this business, including large e-commerce customers, fossil and post-customers, and across our based logistics business globally. We believe logistics is well positioned to grow as automation penetration increases and e-commerce investment returns. Consumer electronics revenue was down year-on-year. Q2 of 2023 included $15 million of revenue that shifted forward from Q3. This year, we again expect consumer electronics revenue to be more heavily weighted to Q2, but to a lesser extent than in 2023.

Speaker Change: Moving on to Logistics. In the first half of the year, Logistics achieved strong double-digit revenue growth year-on-year, and we expect growth to continue in the back half of the year.

Speaker Change: Consumer Electronics revenue was down year on year. Q2 of 2023 included $15 million of revenue that shifted forward from Q3.

Rob Willett: Consumer electronics has positive long-term trends, but we continue to have temperate expectation for investment in 2024.

Rob Willett: Semi had strong momentum in the quarter, with significant year-on-year growth. Coming off a down year in 2023, we're now seeing strong growth. Customers are making significant investments in high bandwidth memory to support growth in AI. We're optimistic over the long term that we can see a strong return to growth in Semi as projects to localize chip production and to further support big AI investments, which the automation phase.

Speaker Change: SEMI had strong momentum in the quarter, with significant year-on-year growth.

Speaker Change: Coming off a down year in 2023, we're now seeing strong growth.

Speaker Change: We're optimistic over the long term that we can see a strong return to growth in SEMI as projects to localize chip production and to further support big AI investments reach the automation phase.

Dennis Faire: Let me now hand it over to Dennis to walk you through more of the financial results and the outlook for the third quarter. Thank you, Rob. I will walk through our financial highlights, which you can see on page seven of our earnings presentation posted to the website. Second quarter revenue of $239 million declined in line with guidance by 1% year-on-year, including a contribution from more index of 7% of total revenue. Excluding more attacks and the 1% foreign exchange, had revenue declined 7%. From a geographic viewpoint, excluding more attacks, year-on-year revenue growth was mostly stable across all regions except China, which declined for the seventh consecutive quarter.

Dennis Fair: Let me now hand it over to Dennis to walk you through more of the financial results and the outlook for the third quarter.

Dennis Fair: From a geographic viewpoint, excluding moral tax, year-on-year revenue growth was mostly stable across all regions except China, which declined for the seventh consecutive quarter.

Dennis Faire: America was slightly in the quarter, driven by strong performance in logistics. Outside of logistics, the broader factory automation business experience continued softness, needing to slide declines in Europe and other Asia excluding China. Turning to margin, adjusted cross margin was 70.3% in Q2, in line with guidance and downed from 74.3% a year ago. Growth margin included a 2% point dilution effect from more attacks. There was also a negative mixed impact due to the strengths of logistics and lower consumer electronics revenue. Sequentially, adjusted cross margin increased given the 1.6% points of unfavorable one-time events in the first quarter on the strategic logistics project as long term higher margin recurring revenue.

Dennis Fair: Outside of logistics, the broader factory automation business experience continued softness, leading to slight declines in Europe and other Asia, excluding China.

Speaker Change: Turning to margins. Adjusted gross margin was 70.3% in Q2, in line with guidance, and down from 74.3% a year ago. Gross margin included a 2% point dilution effect from Oritex.

Dennis Fair: There was also a negative mixed impact due to the strength in logistics and lower consumer electronics revenue.

Dennis Fair: Sequentially, adjusted gross margin increased given the 1.6 percentage points of unfavorable one-time events in the first quarter from the strategic logistics project with long-term higher margin recurring revenue.

Dennis Faire: Adjusted operating expenses increased 8% year-on-year and were flat sequentially, which was favorable to our guidance. The year-on-year increase was driven by more attacks, increased investment in our emerging customer initiative, and the headwind in the incentive compensation from a lower bonus achieved in the fall in 2023. We remain very disciplined on cost management and the current business environment. Excluding more attacks on the emerging customer initiative, this cost optimization resulted in a 1% year-on-year reduction in adjusted OPEX, despite incentive compensation headwinds. Adjusted every day, our margin was 19.9% in Q2, downed from 28.1% a year ago. This was driven by a lower gross margin and the high investment in emerging customers, partially offset by the positive contribution of the more attacks acquisition, which remained accretive to adjusted every day our margin.

Dennis Fair: Adjusted operating expenses increased 8% year-on-year and were flat sequentially, which was favorable to our guidance.

Dennis Fair: Adjusted EBITDA margin was 19.9% in Q2, down from 28.1% a year ago.

Dennis Fair: This was driven by a lower gross margin and the higher investment in emerging customers, partially offset by the positive contribution of the Moritex acquisition, which remained accretive to adjusted EBITDA margin.

Dennis Faire: Adjusted over the R margin increased by over 8% to 0.6%, driven by the seasonal 14% increase in revenue and flat OPEX. This over 60% in current mental over the R margin demonstrates how quickly our margins can ramp with revenue growth by actively managing costs. The eluded earnings per share on the get basis was 21 cents, down year and year due to lower operating margins and higher acquisition and armortization costs. Sequentially, get diluted EPS increased 200%; adjusted diluted EPS was 23 cents, down 10 cents year and up 11 cents sequentially. He adjusted effective tax rate of 15% in both Q2, 2024 and Q2 of 23.

Dennis Fair: Adjusted EBITDA margin increased by over 8 percentage points sequentially, driven by the seasonal 14% increase in revenue and flat OPEX.

Dennis Fair: This over 60% incremental average ARR margin demonstrates how quickly our margins can ramp this revenue growth by actively managing costs.

Dennis Fair: Sequentially, gap diluted EPS increased 200%. Adjusted diluted EPS was 23 cents, down 10 cents year-on-year, and up 11 cents sequentially.

Dennis Fair: The adjusted effective tax rate was 15% in both Q2 2024 and Q2 2023.

Dennis Faire: Turning to the balance sheet, Karas continues to have a strong cash position with $555 million in cash and investment and no debt. Free cash low in Q2 was $23 million compared to $24 million a year ago, reflecting lower gap net income, partially offset by lower working capital investment. He returned $23 million to shareholders in the form of stock buybacks and dividends.

Dennis Fair: Turning to the balance sheet.

Dennis Fair: Cognex continues to have a strong cash position with $555 million in cash and investments and no debt.

Dennis Faire: I will now turn to our outlook for the third quarter. In the third quarter, we expect revenue between $225 and $240 million. This range reflects a soft but stable market backdrop with trends in select and markets but continues to meet in our broader factory automation business. It also includes a slight step down sequentially driven by seasonal consumer electronics revenue more heavily weighted to Q2 this year. I will remind you that last year 50 million dollars of consumer electronics revenue that you originally expected in the third quarter of 2023 shifted into Q2. We expect the Moritex business to contribute 10 to 12% of revenue in Q3.

Dennis Fair: I will now turn to our outlook for the third quarter.

Dennis Fair: It also includes a slight step down sequentially driven by seasonal consumer electronics revenue more heavily weighted to Q2 this year.

Dennis Fair: I will remind you that last year $15 million of consumer electronics revenue that we originally expected in the third quarter of 2023 shifted into Q2.

Dennis Faire: This is higher than the typical 6 to 8% of revenue, as Q3 will include an extra month of Moritex financial. This is a catch up as we have reported Moritex on a one month flag as we integrate the business. Our Q4 2023 financials included only 6 weeks of Moritex results, despite contracts owning the business for about 10 weeks. After Q3 2024, Moritex will be on the same close schedule as the rest of the contracts. Adjusting for the timing of consumer electronics revenue in 2023 and excluding Moritex revenues expected to be flat to slightly down year on year.

Dennis Fair: This is higher than the typical 6-8% of revenue, as Q3 will include an extra month of more tax financial.

Speaker Change: This is a catch-up as we have reported more attacks on a one-month lag as we integrate the business.

Dennis Fair: Our Q4 2023 financials included only 6 weeks of more tax results, despite Cognex owning the business for about 10 weeks.

Dennis Fair: Adjusting for the timing of consumer electronics revenue in 2023 and excluding more attacks, revenues expected to be flat to slightly down year on year.

Dennis Faire: For the third quarter, we expect adjusted gross margin of slightly below 70%. The gross margin impact of Moritex was expected to be approximately 3 percentage points in the quarter due to the additional month of financials. Excluding this one-time catcher, adjusted gross margin would be down slightly sequentially, driven by the seasonal step down in consumer electronics revenue. As we discussed previously, we expect an incremental 25 million dollars of emerging customer apex for the full year, which is ramping through our 2024, similar to the investment made in 2023. Historically, we have provided guidance on our operating expense in the upcoming quarter.

Dennis Fair: For the third quarter, we expect adjusted gross margin of slightly below 70 percent.

Dennis Fair: The gross margin impact of more tax is expected to be approximately 3 percentage points in the quarter due to the additional month of financials.

Dennis Fair: As we discussed previously, we expect an incremental $25 million of emerging customer OPEX for the full year, which is ramping through 2024, similar to the investment made in 2023.

Dennis Fair: Historically, we have provided guidance on our operating expense in the upcoming quarter.

Dennis Faire: To increase clarity and to better reflect our focus on the bottom line, we instead will begin guiding to adjusted everyday our margin. We expect adjusted everyday our margin between 16 and 19 percent. The midpoint of this range is the line with the prior year, which reflects positive operating leverage on fire revenue and strict cost management, offset by additional investment in the emerging customer initiative and incentive compartments.

Dennis Fair: To increase clarity and to better reflect our focus on the bottom line, we instead will begin guiding to adjust it at the DR margin.

Dennis Fair: The midpoint of this range is in line with the prior year, which reflects positive operating leverage on higher revenue and strict cost management.

Dennis Fair: Offset by additional investment in the Emerging Customer Initiative and Incentive Calm Patents.

Dennis Faire: I would now like to take some time to touch on a few key areas I've identified and will be focusing on to drive long-term value creation at Cognex. To add my first 90 days of CFO, I've completed a 336-degree view of the company, gathering a large amount of feedback from customers, employees, and shareholders. I've combined this feedback with Rob's strategic direction for the company, and three main priorities have emerged. The first is driving profitability and guiding adjusting operating margins back towards a long-term target of over 30 percent. As CFO, I will be focused on supporting long-term revenue growth by championing initiatives to rationalize cost.

Speaker Change: I would now like to take some time to touch on a few key areas I've identified and will be focusing on to drive long-term value creation at Cognix.

Speaker Change: I've combined this feedback with Rob's strategic direction for the company, and three main priorities have emerged.

Speaker Change: As CFO , I will be focused on supporting long-term revenue growth by championing initiatives to rationalize cost.

Dennis Faire: Second, there's an opportunity to increase our capital efficiency through optimizing the work and capital needs of the business and to refine our capital allocation strategy. Lastly, I will continue to prioritize enhancing our investor communication. We will be planning an investor day in the first half of 2025 with a primary objective of purely messaging or task to achieve our long-term financial framework. I am excited about the point-in-time at which I'm joining Cognex. One of the operating and challenging but stable business environments, we encourage by the positive momentum and logistics, and we believe the progress we are making on our strategic initiatives keeps us well positioned to capitalize on exciting industry trends and the operating environment improves more broadly.

Speaker Change: Second, there's an opportunity to increase our capital efficiency through optimizing the working capital needs of the business and to refine our capital allocation strategy.

Speaker Change: We will be planning an Investor Day in the first half of 2025 with the primary objective of clearly messaging our path to achieve our long-term financial framework.

Nathan McCurren: Now, we will open the call for questions. Operator, please go ahead. Thank you.

Speaker Change: Now, we will open the call for questions.

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 phone will indicate your line as in the question queue. You may press star 2 if you would like to remove your question from the queue, but participants using speaker equipment may be necessary to pick up your handset before pressing the start key.

Speaker Change: Thank you. At this time, we will be conducting a question and answer session.

Speaker Change: 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 the star keys.

Operator: One more, please, while we pull for questions.

Speaker Change: One moment, please, while we poll for questions.

Andrew Vestalia: Our first question comes from the line of Andrew Vestalia with B&D Paraba. Please proceed with your question.

Speaker Change: Our first question comes from the line of Andrew Buscaglia with BNP Paribas.

Nathan McCurren: Hi, good morning, guys. Good morning, Andrew. Good morning.

Speaker Change: Please proceed with your question.

Andrew Buscaglia: Hi, good morning, guys.

Andrew Vestalia: Yeah, so I just wanted to first ask on the emerging customer initiative. You know, some of the conversations with customers, with customers you're having that, you know, informs you guys pushing out that excitation for revenue this year.

Andrew Buscaglia: Yeah, so I just wanted to first ask on with the emerging customer initiative You know some of the conversations with customers

Andrew Buscaglia: The customers you're having, that informs you guys pushing out that expectation for revenue this year. And again, just to reiterate, you're expecting $25 million now in 2025, and can you maybe talk about how that splits between Q3 and Q4?

Andrew Vestalia: And again, just to reiterate, you're expecting 25 million now in 2025, and can you maybe talk about how that splits between Q3, Q4.

Rob Willett: Okay, so just the levels that I think your second point relates to cost, right? I'll let Dennis speak to that.

Speaker Change: Okay, so, just to level set, I think...

Speaker Change: Your second point relates to cost, right? I'll let Dennis speak to that. I think the first part of your question really relates to demand.

Rob Willett: I think your first body of question really relates to kind of demand. And, you know, we're seeing really nice traction in terms of getting the team out into the field and the activity that they're seeing. But we are seeing a softness in some of the end markets that they're serving.

Speaker Change: Softness in some of the end markets that they're serving.

Rob Willett: So, you know, this is kind of a period of prolonged macro softness that we've seen in factory automation in general.

Dennis Fair: This is kind of a period of prolonged macro softness that we've seen in factory automation in general.

Rob Willett: So we now expect it will take longer for the first cohort of emerging customer sales in order to deliver the incremental revenue of 50 million that we spoke about. Specifically, automotive and packaging end markets, such as consumer products, food and beverage. It tends to be pretty highly correlated with the macro leading indicators like the PMI.

Dennis Fair: We now expect it will take longer for the first cohort of emerging customer sales nodes to deliver the incremental revenue of $50 million that we spoke about.

Andrew Buscaglia: Specifically, automotive and packaging end markets, such as consumer products, food and beverage.

Andrew Buscaglia: It tends to be pretty highly correlated with the macro leading indicators, like the PMI, and those have kind of remained persistently low. They're stable, but they're softer.

Rob Willett: And those that kind of remain persistently low, they're stable, but they're softer than we expected. So, as our team is going out there, you know, really pleased with the activity that we're seeing.

Rob Willett: We're just seeing a slowness in spend among those customers that is slower than we had anticipated.

Rob Willett: On the old peg side, we continue to see a 25 million increase year over year that have unchanged to what we have said previously. A 25 million is ramping throughout the year, right? So, as we're bringing on the next cohort, the ramp up of the old pegs was weighted towards the second half of the year. And so, in that regard, you can model that some increase throughout the quarters. Okay.

Andrew Buscaglia: The 25 million is ramping throughout the year, right, so as we're bringing on the next cohort, the ramp-up of the OPEX was weighted towards the second half of the year, and so in that regard you can model that as an increase throughout the quarters.

Andrew Vestalia: Okay, then maybe just turning to some of the end markets. You know, it sounds like maybe consumer electronics a little bit weaker than you thought versus three months ago. Can you talk about what changed there? And then any expectations in 2025 around device grades, maybe helping influence some volumes there? Yes. So I think the overall sense would be this more uncertainty in consumer electronics, which is our observation. Some context, you know, following what was that 31% decline in 2023, consumer electronics remains soft with slow and user demand and particular weakness in China. We've temperate expectations for consumer electronics in 2024.

Andrew Buscaglia: Okay.

Speaker Change: Okay, and then maybe just turning to some of the end markets.

Speaker Change: You know, it sounds like maybe consumer electronics a little bit.

Speaker Change: Meeker, then you thought, versus three months ago, can you talk about what changed there and then any expectations in 2025 around device upgrades maybe helping influence some volumes there?

Speaker Change: Yes.

Meeker: So, I think the overall sense would be there's more uncertainty in consumer electronics, which is our observation.

Speaker Change: Some context, you know, following what was a 31% decline in 2023, consumer electronics remains soft with slow end-user demand and particular weakness in China.

Rob Willett: And we still have certain uncertainty around project size and timing. Our customers remain cautious with investment in productivity initiatives to automate manual inspection like at tasks. And we expect limited investment in 2024 from customers planning to invest capital to diversify their supply chains.

Rob Willett: So all of those factors, I would say, kind of are probably underlying what seems like, you know, kind of continued softness in that market that hasn't returned to the strong growth we expect to see at some point going forward. On that note, you know, analysts or forecasts, we can't expect forecast this year for the important players who are our large customers. And they're more optimistic about 2025, I would point that out.

Speaker Change: On that note, analysts forecast week CAPEX forecast this year for...

Rob Willett: I think one dynamic of note is that among the large share smartphone players, one that is gaining share is one that we are not allowed to sell to for regulatory reasons. and I also just point out that, you know, the weakness that we see in our electronics businesses broad-based is not focused on one customer or region.

Speaker Change: and I'd also just point out that you know the weakness that we see in our electronics businesses broad base is not focused on one customer or region.

Nathan McCurren: All right, thanks, Rob. Thanks. Thank you.

Speaker Change: Thanks.

Tom Wall: Our next question comes from the line of Tom Wall with Stephen Z. Please proceed with your question.

Nathan McCurren: Good morning, and thank you for taking my questions. Good morning, Tommy. Good morning.

Speaker Change: Good morning and thank you for taking my questions.

Rob Willett: Rob, I wanted to start on logistics. It sounds like the positive trends are fairly broad-based. I was particularly interested in the e-commerce cycle where it seems like maybe we've turned the corner, but to the extent you can get more insight, that would be helpful, particularly just any momentum that may be gathering there as the year has progressed. Thanks. Yeah, thanks. Certainly, logistics is a bright spot for us. I think we've seen all this on the last conference call, and that has continued to strengthen now as we look out. And the positive signs we're seeing are pretty broad-based, not just in e-commerce and not necessarily specific to big customers or the base.

Speaker Change: Good morning, Tommy. Good morning.

Speaker Change: and the

Speaker Change: The positive signs we're seeing are pretty broad-based, not just in e-commerce, and not necessarily specific to big customers or the base. We're just seeing all of it is up materially now, was in the second quarter.

Rob Willett: We're just seeing all of it is up materially now; it was in the second quarter. And you know, logistics includes strong double digits in the first half of 2024, and we expect the business to continue to grow in the second half. New customer activity is with many of these customers having the potential to become large contributors over time. And our customers are beginning to embrace vision technology and agent intelligence, the technology that allows them to manage the data coming out of our vision systems to provide them with much more knowledge about the operating environment. And we're doing a nice job further penetrating the parcel and post sector.

Speaker Change: Logistics grew strong double digits in the first half of 2024, and we expect the business to continue to grow in the second half. New customer activity is strong.

Speaker Change: with many of these customers having the potential to become large contributors over time.

Speaker Change: And we're doing a nice job further penetrating the parcel and post sector. That's a market we're targeting for growth, and it's going to be a long road because those...

Rob Willett: That's a market we're targeting for growth, and it's going to be a long road because those specifications go out and you win them, and sometimes it can be two years later that the revenue starts to come in. But we're pleased with our progress winning the specification, some of the larger players in parcel and post. I also talked in the opening announcement about a module of vision tunnels, which really are allowing that business to deploy for large customers, for customers at larger tunnels more quickly, more scalable, more efficiently, and bring in new technology and features into that part of the market very quickly.

Speaker Change: [inaudible]

Speaker Change: I also talked in the opening announcement about modular vision tunnels.

Rob Willett: So yeah, we're, it's board-based, it's not just e-commerce, it's not just larger small customers, it's pretty global overall and we're making nice progress penetrating parcel and post. So we're feeling good. And we had to that just from a revenue recognition timing. Keep in mind that logistics is a project-based business and much less a book to ship business. So therefore I expect from the P&L perspective to be more lumpy in the P&L and also that there is some time difference between bookings and revenue.

Speaker Change: It's broad-based. It's not just e-commerce. It's not just large or small customers. It's pretty global overall, and we're making nice progress penetrating past on post. So, we're feeling good.

Speaker Change: Revenue recognition timing, keep in mind that logistics is a project-based business and is much less a book-to-ship business.

Speaker Change: I expect from the P&L perspective just to be more lumpy in the P&L and also that there is some time difference between bookings and revenue.

Tom Wall: Thank you for the clarification and the insight.

Tom Wall: As a follow-up, I wanted to circle back on Rob, your commentary regarding the base auto business.

Speaker Change: Thank you for the clarification and the insight. As a follow-up, I wanted to...

Speaker Change: Circle back on, Rob, your commentary regarding the base auto business.

Rob Willett: Sounds like the bulk of the weakness may be in Europe, but if you can just give us any context on the European versus US trends there, and again, what some of the drivers are on the base side. Thank you. Yes. So, you know, auto modif in 2023 was our best performing market. It did decline, but only in its single digits. And it's declined more year and year and year, and the first half of 24 than it did last year. And the weakness is across traditional ICE business and EV battery, with EV battery really being, you know, I would say the most kind of disappointing for us or slowest in terms of the biggest decline.

Speaker Change: Sounds like the bulk of the weakness may be in Europe , but if you can just give us any context on the European versus U.S. trends there, and again, what some of the drivers are on the base side.

Rob Willett: than it did last year. And the weakness is across traditional ICE business and EV battery, with EV battery really being, I'd say, the most kind of disappointing for us or slowest in terms of, you know, biggest decline.

Rob Willett: We still, we add a lot of value to EV battery production, but the end demand from customers is not there; around a lot of uncertainty in the near term.

Speaker Change: We add a lot of value to EV battery production, but the end demand from customers is not there around a lot of uncertainty in the near term.

Rob Willett: You know, auto is a cyclical end market. It grew nicely in 21 and 22 and, you know, an additional sum of the big players can drive some of the plans on investment. And in terms of your question on sort of regional, I would say, you know, we definitely see softness in China; you know, that's certainly one of the bigger areas of softness we see, and we and Europe also is looking weaker on the automotive side. So those are two pockets of weakness. I would certainly point out to in addition to EV battery.

Speaker Change: And, you know, in addition, some of the big players can drive some of the...

Speaker Change: and Europe also is looking weaker on the automotive side. So those are two pockets of weakness I would certainly point out in addition to EV battery.

Nathan McCurren: Thank you, Rob. I'll turn it back. Thank you.

Speaker Change: Thank you, Rob. I'll turn it back.

Joe Gerardo: Our next question comes from the line of Joe Gerardo, Talent and Company. Please receive your question.

Rob Willett: Thank you.

Speaker Change: Our next question comes from the line of Joe Giordano with Cowen & Company. Please proceed with your question.

Michael: Good morning. This is Michael on for Joe. Good morning, Michael. Good morning.

Rob Willett: Good morning, this is Michael on for Joe.

Speaker Change: Good morning, Michael. Good morning.

Michael: Yeah, thanks for providing some color on the end markets.

Speaker Change: So thanks for providing some color on the end markets, but could you just on a fuller basis, particularly on the auto side and consumer electronics, what's baked into guidance for the ER from a growth perspective?

Michael: Could you just on like on a solar basis, particularly on like the auto side and consumer electronics? What's based on baked into, you know, guidance for the art from a group perspective?

Rob Willett: Generally, we don't give, you know, full year guidance, and certainly not by an end market. I think, you know, if I was to sort of point you in trying to understand some of those markets, certainly on automotive, you know, I think we looked at PMI. We looked at CapEx spending kind of reducing in that area. You know, we look to some of the project cancellations that we're seeing, particularly around EV. So I think so, some of those are the leading indicators that we definitely see manifest in our customers and our sales funnel. You know, concerning consumer electronics, I think I spoke a little bit about that in the first answer, but I would, you know, I think if we look at the CapEx plans that larger customers have analysts to forecast week, CapEx forecast this year, but I'm more optimistic about next year.

Speaker Change: cap-ex spending kind of reducing in that area, you know, we looked at some of the project cancellations that we're seeing particularly around EV. So, I think some of those are the leading indicators that we definitely.

Speaker Change: see manifest in our customers in our sales funnel.

Speaker Change: I think if we look at the CapEx plans that our larger customers have, analysts have forecast weak CapEx forecast this year, but are more optimistic about next year.

Rob Willett: So I would look to that.

Rob Willett: Right. And in general, maybe think really of that automotive as all the social markets, which we own. Viterian, and seeing the most headwinds all there. I think on the consumer electronics want to re-point to the topic at the moment. We see that uncertainty in terms of project size and timing; therefore, we have rather temperate expectation on that side for this year.

Rob Willett: There's a more positive outlook in 2020-25 based on another street points.

Michael: Thanks, that's helpful.

Michael: Just one more if I may. You're guiding, you know, gross margin slightly below 70% or so, you know, for next quarter. How much of that is, you know, attributed to the more tax dilution and just curious, you had mentioned mix and sort of the press release as a headwind. Any color there would be great.

Speaker Change: Thanks, that's helpful. And just one more if I may.

Speaker Change: you know, attributed to the more text dilution. And just curious, you had mentioned mix and sort of the press release as a headwind. Any call out there would be great. Thank you.

Dennis Faire: Thank you.

Dennis Faire: You know, I'm happy to take that. So overall, all right, it's the additional month of more tax included in the Q3 financials. We are seeing a 3% dilution effect from more tax versus our typical 2% dilution impacts in that regard.

Speaker Change: Yeah, happy to take that. So overall, right, with the

Speaker Change: With the additional month of Moritex included in the Q3 financials, we are seeing a 3% dilution effect from Moritex versus our typical 2%.

Dennis Faire: Really, the large share of that step down is driven by more attacks. But certainly also there is also the revenue step down in consumer electronics from the second quarter into the third quarter. And therefore there's also a negative mix effect happening on that side.

Speaker Change: solution impacts. In that regard, a large share of that step down is driven by more attacks.

Eli: Our next question comes from the line of the EU's about EU city. Please proceed with your question.

Eli: Good morning, guys. Thanks for taking my questions. Good morning, morning.

Speaker Change: Good morning, guys. Thanks for taking my questions.

Rob Willett: Rob, I want to go back to the emerging customer initiative. You guys talked about a slower software ramp in booking revenue. Maybe drill down a bit more. I think we understand the end market dynamics, but is it all that, or has it been a challenge to push pricing as well? I'm assuming, as you reduce the complexity of your products, there could be products from less sophisticated competitors at a lower price point. Do you see that as a challenge? Obviously, it's just basically end market dynamics. I don't see that as a challenge at all. No, no.

Speaker Change: Good morning. Good morning.

Speaker Change: Rob, I want to go back to the Emerging Customer Initiative. You guys talked about a slower, softer ramp in bookings revenue. Maybe drill down a bit more. I think we understand the end market dynamics, but is it all that or has it been a challenge to push pricing as well?

Speaker Change: I'm assuming as you reduce the complexity of your products, there could be products from less sophisticated competitors at a lower price point. Do you see that as a challenge or it's just basically a market dynamics?

Rob Willett: I think it's probably a tourism that's smaller customers generally pay higher prices. They have less negotiating ability.

Rob Willett: I don't see that as a challenge at all. No, no. You know, I think it's probably a truism that smaller customers generally pay higher prices, they have less negotiating ability. We talked at this initiative, we expect it to be gross margin accretive.

Rob Willett: We talked about this initiative. We expect it to be gross margin, egregious. So that's not our challenge. The challenge is really just about spending habits at the many, many customers that go into it. I think it might tell us something about spending at smaller customers, which is primarily where these sales noise are calling. Just not seeing the funnel convert as quickly as we would expect. It's a phenomenon we see broadly, not just among our emerging customer players at the smaller accounts or the larger accounts. In general, I think I would be pleased that it's smaller or packs, smaller and Gadget Healthful.

Speaker Change: Sales noise calling and just not seeing the funnel convert as quickly as we would expect and it's a phenomenon we see broadly not just among our emerging customer players of the smaller accounts or the larger accounts.

Rob Willett: And from a geographic perspective, helpful comments on 2Q.

Speaker Change: Got it, helpful. And from a geographic perspective, helpful comments on 2Q. In context of your pre-Q guidance, are you expecting similar trends as 2Q? Like, I think there is some seasonality, but other than that, any region where you are more or less concerned?

Rob Willett: In context of your 3Q guidance, are you expecting similar trends as 2Q? Like, I think there is some seamality, but other than that, any region where you are more or less concerned?

Rob Willett: I mean, in general, we have been talking about that, maybe as a consecutive quarter in China being done. And I think in general, I think it is either trend to be continuing.

Speaker Change: I mean, in general, we have been talking about that, right, we have this consecutive quarter in China being down, and I think, in general, I think we see that trend to be continuing in that regard, in terms of the regional allocation, I would say, China, Europe .

Rob Willett: And that regard, in terms of the regional allocation, I would say China, Europe, Rob pointed to that, especially on the ultimate side, under two areas, which are to the weaker side, but then America's basically on a better path.

Speaker Change: Rob pointed to that, especially on the automotive side, are the two areas which are to the weaker side, but then America's basically on a better path.

Eli: Got it, appreciate all the color guys, thank you.

Speaker Change: Got it. I appreciate all the color, guys.

Jacob Levinson: All right, the next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.

Speaker Change: Thank you. Our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.

Jacob Levinson: All right, good morning, everyone. Welcome, Dennis. Good morning, Jay. Good morning.

Dennis Fair: Good morning everyone. Welcome to Dennis.

Jacob Levinson: I know medical is a market that doesn't get a lot of airtime, usually, but I'm just curious if you can help us understand the drivers there. And I know certain parts of that were all to have had some COVID, post-COVID headwinds, but it's what you're seeing now really more a function of higher rates. And also, if you can just remind us of the size of that business as well, that would be helpful.

Dennis Fair: I know medical is a market that...

Rob Willett: Yeah, I'll start out there. We know what we're seeing in that market. We're seeing slower spending in that market too. And I think what we, and I know other players in that market, are seeing very large inventories that were built up at customers during COVID that are being depleted of COVID over time. So I think that's what's causing that market to be down. We have good positions with some of the larger medical players, and we're happy with our rate win rates in those areas, and then we're having design win still in our life science business.

Speaker Change: I'll start out there. We know what we're seeing in that market. We're seeing slower spending in that market, too, and I think what we, and I note other players in that market,

Speaker Change: All right.

Speaker Change: are seeing is very large inventories that were built up at customers during COVID that are being depleted over time. So I think that's what's causing that market to be down.

Rob Willett: But the underlying rate of demand in that market continues to be low.

Rob Willett: And then maybe in terms of the overall market strength or market ratio, right? So we include that in this one. We call the others as part of that share. And I would say there are several markets included in that others. And the medical pharmaceutical doesn't dig out specific size compared to other markets in this other bucket.

Joseph Giordano: And then maybe in terms of the overall market strength or market ratio, right, so we include that in what we call the others, so it's part of that share, and I would say there are several markets included in that others bucket, and the medical and pharmaceutical industry doesn't stick out in specific size compared to other markets in this other bucket. Okay, that's helpful. And then, just on a different topic and with more attacks.

Jacob Levinson: Okay, that's helpful.

Rob Willett: And then just on a different topic, and with more attacks, and you've had that deal under your belt for a few quarters now, and if I recall correctly, it's partly at least apply on the Japanese market and try to expand your position there, but maybe you can just walk us through the puts and takes of the deal so far.

Speaker Change: If I recall correctly, it's partly at least to play on the Japanese market and try to expand your position there, but maybe you can just walk us through the puts and takes of the deal so far and if it's tracking to your expectation.

Rob Willett: And if it's tracking your expectation. Yeah, we're pleased with how that acquisition is going with the asset that we bought. And the progress we're making, and you know, we generally don't speak to the performance of a business product line, but you know, I can confirm that the investment thesis we had when acquiring the company is well supported. The business has the significant portion of its revenue within semi and consume electronics. So, you know, that certainly the semi side is helping, and it's really building our percentage of our businesses exposed to semi, which we're feeling positive about that market and what we're seeing and it going forward.

Speaker Change: We're pleased with how that acquisition is going with the assets that we bought.

Rob Willett: The integration is going well.

Rob Willett: And to your point, you know, we're excited about the experience management we've acquired, who are now leading the integrated business of March X and Cogniz in Japan. So we have that. We see significant revenue synergy opportunities, and right now we're executing very well on that with the Cogniz sales force selling the March X products and more of them in the pipeline to come. And cost synergies are right where we expect them to be, a little bit better. So overall, we're positive there. I would also add, you know, we're very pleased with the quality of engineering that we've acquired with March X, really, just world-class optics people who are able to accelerate some of our product lines, our product introductions around objects.

Speaker Change: The integration is going well, and to your point, we're excited about the experienced management we've acquired who are now leading the integrated business of Maritex and Cognex in Japan, so we have that.

Speaker Change: Cost synergies are right where we expected them to be or a little bit better.

Speaker Change: Overall, we're positive there. I would also add that we're very pleased with the quality of engineering that we've acquired with MARTEX. Really, just world-class optics.

Speaker Change: and other people who are able to accelerate some of our product lines, our product introductions around optics. So overall, yeah, we're very positive. Same here. Reconfirmed from my side, stepping into the role.

Dennis Faire: So overall, yeah, we're very positive.

Dennis Faire: Same here; we've confirmed from my side, stepping into the role and taking a fresh look at the deal. I think very positive deal economics are very positive in terms of performance against the original metrics and deal assumptions, which we have good progress on the integration side. So overall, it's really a nice success story.

Jacob Levinson: Thank you. That's great. Thank you.

Nathan McCurren: I'll pass it on.

Speaker Change: That's great. Thank you. I'll pass it on.

Nathan McCurren: Thank you.

James Ricchiuti: Our next question comes from the line of James Ricchiuti with Need in the company.

Speaker Change: Thank you.

Nathan McCurren: Please proceed with your question. Thanks.

Brian Gesuale: Thanks. Good morning. Does the relative contribution of the MoraTex business increase through the year, just as it relates to the overall weakness you're seeing and the broader factory automation business? Earlier in the year, you gave some sense as to what it could represent in terms of revenues. It sounds like it potentially could be a little higher than that.

Rob Willett: Good morning. Does the relative contribution of the Moritex business increase for the year, just as it relates to the, you know, the old world weakness you're seeing and the broader factor automation business? You've given it earlier in the year. You gave some sense as to what it could represent of revenues. It sounds like it potentially could be a little higher than that.

Speaker Change: Thanks, good morning, good to see you.

Speaker Change: for the year, just as it relates to the overall weakness you're seeing in the broader factory automation business. You've given, earlier in the year, you gave some sense as to what it could represent of revenues. It sounds like it potentially could be a little higher than that.

Rob Willett: Maybe in general, I think what we see right is particularly for few three years due to this integration reason that the catch up on the close schedules that the Moritex revenue is higher than what we would typically expect. Overall, the, as we just mentioned, the Moritex performance is really in times of what we expected, and we feel very positive about that. I wouldn't say it's the one that in general, I think it's kind of increasing the overall perspective on the revenue contribution or the share of the overall business.

Robert Willett: I mean, in general, I think what we see, particularly in Q3, due to this integration reason, the catch-up on the closed schedule is that Moritex revenue is higher than what we would typically expect. Overall, as we just mentioned, the Moritex performance is really on top of what we expected, and we feel very positive about that. I wouldn't say that, in general, I get... And then just from the revenue ramp... Originally, we definitely thought that, right, it's... Is this effort mainly in the Americas, or how does it compare to the rest of the business geographically? Or is it not as broad an effort?

Speaker Change: I wouldn't say so that in general I guess it's kind of increasing the overall perspective on the revenue contribution or the share of the overall business.

Rob Willett: And just pivoting to the emerging customer initiative. So originally, you had thought, Rob, I guess that it could add as much as 50 million of incremental revenue. When you were thinking about that kind of target, how, how that half weighted was that?

Speaker Change: the Emerging Customer Initiative.

Speaker Change: So, originally, you had thought, Rob, I guess, that it could add as much as $50 million of incremental revenue. When you were thinking about that kind of target, how...

Rob Willett: And are you making any changes in the way you're thinking about this initiative? As well as the timing of when the next group of salespeople comes online? Well, we're, you know, it was still in the early stages of this program, right? This is a, this is a multi-year initiative to really take our edge learning technology, particularly, which is kind of well-class to customers who can benefit from it. So I think it's a start with that context. You know, we said we serve about 30,000 customers. And there are, you know, there are more than 200,000 customers who are now addressable with the edge learning technology products like our Insight 2800 series.

Rob Willett: that half-weighted was that? And are you making any changes in the way you're thinking about this initiative as well as the timing of when the next group of salespeople come online?

Speaker Change: Edged learning technology particularly which is kind of world-class to customers who can benefit from it So I think it's let's start with that context, you know, we've said we serve about 30,000

Speaker Change: customers.

Speaker Change: And there are, you know, there are more than 200,000 customers who are now addressable with the edge learning technology, products like our Insight 2800 series. And so this team is coming in to sell those products and, you know, we're pretty excited about the pipeline we have and the more products we can have them sell over time.

Rob Willett: And so this team is coming in to sell those products, and you know, we're pretty excited about the pipeline we have, and then more products we can have them sell over time. Now, they, they joined us about a year ago, and they trained, and then they entered the field at the start of last year into one, and they are ramping nicely, you know, every month they're selling more, and they're achieving what we expect in terms of customer visits. So, you know, we've said to meet or exceed 80,000 customer visits this year. So all that is looking good.

Speaker Change: and they're achieving what we expect in terms of customer visits.

Rob Willett: And, you know, we expect them to ramp a quarter on quarter, you know, as we keep going here. And that's certainly borne out with what we see now.

Rob Willett: The, you know, the challenge we're seeing is that the end markets are a little less responsive to them than we expected. But I, we're not dissuaded by that at all. We're very, very positive, you know, about when, when those accounts spend, we're going to see the benefit from it. And we have recruited the second cost, right? And they're pretty much all here, you know, and I think maybe a few have yet to stop, but, but so it's basically at the second, you know, large cohort is in training. We're excited about the products and getting trained on.

Speaker Change: The challenge we're seeing is that the end markets are a little less responsive to them than we expected, but we're not dissuaded by that at all. We're very positive about when those accounts spend, we're going to see the benefit from it.

Rob Willett: And, you know, we're learning; we're learning through this process. We're learning about how to manage them, how to deploy them, how to train them. And so, you know, we expect learning code effects from that, as we, as we keep going. And that's, that's really everything. You know, everything going to plan.

Rob Willett: I would say, in that regard, it really is just a matter of the end user demand. We're seeing at some of these customers. I would also say, you know, they are signing up lots of new customers every month, which is, you know, a great. That's a great metric. That's where we headed out to start for us. So happy to see that kind of level of penetration going on, and it's increasing every month.

Rob Willett: and then just from the revenue ramp, originally we saw it definitely that it's the initiative full ramp for the year, that's what we are still seeing in terms of the bookings. Basically, month over month, we're seeing an increase in the bookings, but as kind of the macro softness is out there, there's certainly kind of shifting that ramp rate more to the right, and that will basically impact how we think about the second half of the year in terms of booking and revenue generated from this initiative. Maybe one other area we look at closely is this team obviously is calling on new customers and they're finding opportunities for our more sophisticated products, so certainly part of the benefit that they bring to Cognex is only extra opportunities they bring to our account sales engineers, and that's also going well in terms of what we're seeing as sort of an additional marketing arm for us in many respects.

Speaker Change: Originally, we thought definitely that, right, it's, um...

Speaker Change: But as kind of the macro softness is out there, it's certainly kind of shifting that ramp rate more to the right. And that will basically impact how we think about the second half of the year in terms of booking and revenue generated from this initiative.

Rob Willett: Is this effort mainly in the Americas, or how would those compare to the rest of the business geographically, or is it as broad an effort? Well, it's a global initiative, right? So we have our emerging customer sales noise in all of our major regions: Asia, Europe, and America. And yes, so I think broadly in line with that is how to think about it. We don't want to disclose specific markets just for competitive reasons.

Paul Todgham: Well, it's a global initiative, right? So, you know, we have emerging customer sales nodes in all of our major regions, Asia, Europe, and America. And yes, so I think broadly in line with that is how to think about it. Thank you. Hi, good morning. Good morning. Is there any kind of change that, you know, isn't quarter specific, but I think it's kind of a long-term trend? I think we're seeing stronger competition from machine vision players in China and weaker competition from European competitors overall. That's a trend that I think we watched very closely and are pretty aware of.

Rob Willett: Understood. Thank you.

Speaker Change: Understood. Thank you.

Guy Hardwick: Our next question comes from the line of Guy Hardwick with Reading Capital Market.

Nathan McCurren: Please proceed with your question. Hi, good morning.

Damian Karas: Great, thank you. Thank you. Our next question comes from the line of Damian. Thank you. Yes, we normally have a... Got it. That's very helpful. Well, I want to thank you for joining us this morning on the call, and we look forward to speaking with you next quarter.

Rob Willett: Good morning. Robert, just wondering, you referenced analyst forecast for electronics company CapEx or explain why consumer electronics was down year on year. But what about semis because analysts forecast still forecast semi CapEx down to say low single digits last year after say double digits down last year.

Speaker Change: Hi, good morning.

Speaker Change: Company CapEx to explain.

Rob Willett: But Cognex seems to be back in our trend, and he said a strong growth in semis, so can you explain which region or any particular type of customers which are growing strongly? Yeah, thanks. So semi business is doing well, grew meaningfully year on year. It's grown over two times over our long term growth target for this business. So we're happy about how that's going.

Speaker Change: and you said there's strong growth in SEMI, so can you explain which region or any particular type of customers which are growing strongly?

Speaker Change: Yeah, thanks. So, our semi-business is...

Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host

Rob Willett: I think I would point to a number of areas to answer your question. One is kind of high bandwidth memory, which is really essential to all of the production plans for these big data standards that are getting built out of large language models and AI. So I think we're certainly benefiting from exposure to those customers. Remember, we're the most sophisticated vision industrial vision company in the world. So the most sophisticated customer is deploying them. We're likely to be more weighted to that type of exposure. And yeah, I think otherwise, you know, it's pretty global in nature.

Speaker Change: [inaudible]

Speaker Change: to that type of exposure.

Speaker Change: And, yeah, I think otherwise, you know, it's pretty global in nature. We're seeing improvement, you know, in all our regions as we look at that. I would also point, though, the second point would be, we've been hearing for a long time, right, that

Rob Willett: We're seeing improvement in all our regions as we look at that.

Rob Willett: I would also point, though, the second point would be we've been hearing for a long time, right? And there are some. in investments to globalize and diversify the semi-supply chain or underway. So you may be hearing that plants are being built in various geographies, and generally vision and automation are part of, anyways, getting respect pretty near the end of that time. So you're likely to see our businesses going to be benefiting as new plants are starting to come online, and the last parts of the capital is being deployed. So that might account for some of the difference in timing and what the CAPEX forecast for the industry might say and what you might see from us.

Speaker Change: Investments to globalize and diversify the semi-supply chain are underway, right? And so, you know, you may be hearing that, you know, plants are being built in various geographies. And generally, you know, vision and automation are part of it anyway. It's getting spec'd pretty near the end of that time, right? So you're likely to see our business is going to be benefiting as new plants are starting to come online and the last parts of the capital is being deployed. So that might account for some of the difference in timing and what the CapEx forecast for the industry might say and what you might see from us.

Rob Willett: Our customers tend to be some of the most famous OEMs and machine builders in that industry. So certainly we tend to benefit as they see their demand grow, and that's kind of how what we tend to look at in terms of what's growing and going on in that market.

Speaker Change: Our customers, you know, tend to be...

Speaker Change: Some of the most famous OEMs and machine builders in that industry, so certainly we tend to benefit as they see their demand grow and that's kind of what we tend to look at in terms of what's going on in that market.

Rob Willett: Okay, if just a quick follow-up, if I may, I'm just wondering how you're feeling about that's greater than 75% growth margin from ECI revenues, and obviously it's a creative, but what is some of the guard rails around that? Why can't it be higher? Why not 80% given it's all direct, and it's largely to small and medium-sized customers? Can you give it kind of sense of, you know, can that change either way going forward? We feel good about it, you know. We said we expected to be accretive to the 75% growth margin. You know, there are certainly products that they sell that are higher growth margin than that.

Robert: And if just a quick follow-up if I may just Robert just wondering how you're feeling about that's greater than 75% gross margin from ECI revenues

Robert: We feel good about it. We said we expect it to be accretive to the 75% gross margin. There are certainly products that they sell that are higher gross margin than that. And then there are some competitive areas, more like simple barcode reading, which can tend to drag gross margins down. But overall, we're very positive about the gross margin impact to the emerging customer initiative on Cognex with those direct sales.

Rob Willett: And you know, and then there are some competitive areas, you know, more like simple bulk of reading which can tend to drag growth margins down. But overall, we're very positive about the growth margin impact to the emerging customer initiative on Cognix with those direct sales of particularly AI products, which are, you know, amazing technology and command high growth margins.

Speaker Change: particularly AI products which are, you know, amazing technology and command high-gross margins.

Keith Haleson: Okay, thank you.

Speaker Change: Okay, thank you.

Dennis Faire: All right, next question comes from the line of Keith Haleson. With what close research, please receive a true question.

Dennis Faire: Good morning, guys. I appreciate it. Dennis, and welcome aboard. In terms of your priorities here going forward, you mentioned returning to the 30% operating margins.

Dennis Fair: Good morning, guys. I appreciate it. Dennis, and welcome aboard. In terms of your priorities here going forward, you mentioned returning to the 30% operating margins.

Dennis Faire: Is there any, you know, if looking fruit that you're seeing on the cost side that could perhaps can, you know, accelerate your move there over the next phase three to six months? Yeah, thanks. In general, I think we started already in this quarter, but also kind of all of what I asked 12 months ago to really put a tight look to all of all packs outside of the emerging customer initiative. And that regard, we will continue down these costs, and maybe to give you a little bit more sense. I mean, we're looking both on the discretionary side, but also kind of looking at areas where we can reduce headcounts, and we'll continue to doing so.

Dennis Fair: Yeah, thanks. In general, I think we started already in this quarter, but also kind of over the last 12 months or so to really put a

Speaker Change: [inaudible]

Dennis Faire: I mean, we reduced all packs year and year 1%, despite incentive compartments. I just want to remind that we have 15 to 20 million of incentive compartments in this year resulting from the lower bonus a call last year. And obviously, it will continue to drive on the, on the all pack side. I would, however, really say like cost management is an important level, but no doubt the strongest level, which we have to return to the greater than 30% of on the volume side. I think it's very clear that business living from, from leverage as we have seen kind of indeed.

Speaker Change: I think it's very clear that we are a business living from leverage as we have seen in the sequential increase from the first quarter into the second quarter and the cost management is really supporting off that.

Dennis Faire: And the financial increase from the first quarter into the second quarter, and the cost management was really supporting off that. And therefore, we look really at profitable growth, and it's not just through cost management, but it's an important thing.

Dennis Faire: Great, I appreciate that.

Dennis Faire: It's a follow-up or second question here. Any change in the competitive environment over the past several months that is contributing to some of the headwinds that we're seeing here over the next year or the year? I was saying generally on such that question is no, but in terms of competition, as you look at our competitors, some of them are very different than us in terms of if we compete with a small part of that business and they would sell other things like microscopes and PLCs.

Dennis Faire: There's any kind of change that isn't quite as specific, but I think it's kind of a long-term trend. I think we're seeing stronger competition for machine vision players in China and weaker competition from European competitors overall. That's a trend that I think is that we watch very closely and that's pretty aware of.

Speaker Change: If there's any kind of change that, you know, isn't quarter specific, but I think is kind of a long-term trend is, I think we're seeing stronger competition for machine vision players in China.

Speaker Change: and weaker competition from European competitors overall. That's a trend that I think we watched very closely and are pretty aware of.

Dennis Faire: Great, thank you. Thank you.

Damian Karas: Our next question comes from the line of Damian Karas with UBS. Please wondering if there's any way you might be able to just give us a little bit better sense for the level of growth you've seen in the first half and logistics and semiconductors. Like as logistics up double digits mean 10%, 100%, anyway you could just hone in on that a little bit.

Speaker Change: I was wondering if there's any way you might be able to just give us a little bit better sense for the level of growth you've seen in the first half in logistics and semiconductors. Like is logistics up double digits, I mean 10 percent, 100 percent, any way you could just hone in on that a little bit?

Rob Willett: What we have been saying is strong double digits, so that means more than 10%. Certainly, would not go into all the specifics, but basically, I think we have been saying in the past that right at the market where we expect to grow a long-term on 30%. I think we're definitely looking and pushing hard to get back to that 30% number, and I think we feel in general optimistic that the growth which we have seen in the first half of the year and in the logistics will continue in the second half of the year on a year-over-year basis.

Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host

Rob Willett: And then, yeah, so, and then you also asked about semi, and I think I added that semi has grown more than two times our long-term growth target for this business. So it's growing a growing nicely. That's helpful.

Speaker Change: are growing nicely.

Dennis Faire: Thank you. And you thinking about some of the cumulative margin impacts you guys have talked previously about more attacks. I was wondering, just thinking about the spread between the higher margin parts of your business and the lower. Is there any way you can give us a sense, kind of for that spread, just trying to think about logistics being stronger right now, consumer electronics being weaker? Appreciate any color you might be able to provide. Thanks.

Speaker Change: Is there any way you can give us a sense kind of for that spread, just trying to think about logistics being stronger right now, consumer electronics being weaker? Appreciate any color you might be able to provide. Thanks.

Dennis Faire: Yeah, maybe it in general right, so that means I think important maybe to reflect on the common I did before that as strong as leverage we have to get back to adjusted operating margin of above 30% as on the volume side and the net regard right there certainly a mixed consideration as well on the gross profit where certainly growing and electronics with hope on the mix side. We're also growing in logistics or growing in more attacks with not help us in gross profit mix, but it definitely helps us on driving the bottom line. So, in that regard, I think we're really very positive about what we are seeing on the logistics side. We're very positive about the development we see on the more attacks on the semi.

Speaker Change: would help on the mix side versus growing in logistics or growing in more effects would not help us in gross profit mix but it definitely helps us on driving the bottom line. So in that regard, I think we...

Dennis Faire: So all of that role that's really helping us to drive bottom line, even so it may be more headwind in terms of gross margin mix, but it's absolutely a creative to the bottom line.

Speaker Change: The road is really helping us to drive bottom line even though it may be more headwind in terms of gross margin mix, but it's absolutely accretive to the bottom line.

Rob Willett: And I'm just going to look back to the emerging customer initiative, and we certainly see that as being a gross margin a creative first overall. And I may have confused people early on the coolest; I reflect on my comments. So the market is very receptive to our emerging customer program right where we're getting out there, we're making a lot of sales coolances we talked about, and we're reaching new customers and selling to them at high gross margins. So all of that is positive. The challenge that we're flagging is just broadly across cognates not specific to emerging customers but in general at factory automation. We're just seeing slower spending, and that really applies to a lot of customers, including those that are emerging customers are calling us.

Speaker Change: And I'm just going to link back to, you know, the Emerging Customer Initiative, you know, we certainly see that as being

Speaker Change: The challenge that we're flagging is just broadly across Cognex, not specific to emerging customers, but in general, at factory automation, we're just seeing slower spending, and that really applies to a lot of customers, including those that our emerging customers are calling on.

Rob Willett: Anderson?

Rob Willett: Understood, thank you very much. Thank you.

Ken Newman: Our next question comes from the line of Ken Newman; we keep making capital markets. Please proceed with your question.

Ken Newman: Hey, good morning guys. Thanks for fitting me in. Sorry to be the dead horse, but I do want to circle back to the electronic upgrades for some of your larger customers. It does sound like you expect that to be a 25 impact on just timing. Can you just remind us what are you typically tapped by those customers before production goes live? And I guess this is the following.

Speaker Change: Hey, good morning guys. Thanks for fitting me in.

Rob Willett: Do you have a sense of how much of that production is going to require new hardware versus maybe retrofitting some existing capacity? I'm just trying to get a sense of how large an opportunity a refresh could be for you. Yes, we normally have a clear picture on what kind of year it's going to be. And we share that with you in normally our April or early May conference call when we put out from the first quarter. We work closely with the lead players, and they have plans that they're right now in the stage of kind of experimenting with piloting and considering what that plan is off to the year that we're in that period.

Speaker Change: And I guess as a follow-on, do you have a sense of how much of that production is going to require new hardware versus maybe retrofitting some existing capacity? I'm just trying to get a sense of how large an opportunity a refresh could be for you.

Speaker Change: A clearer picture on what kind of year it's going to be, and we share that with you in normally our April or early May conference call when we report out from the first quarter. We work closely with the lead players, and they have plans.

Speaker Change: Right now in the stage of kind of

Speaker Change: experimenting with piloting and considering what their plans are for the year that we're in that period. And then that normally solidifies into a production plan and a build-out as we enter, and that's when we can give you a good read in the spring.

Rob Willett: And then that normally solidifies into a production plan and a build out as we go into, as we enter, and that's when we can give you a good weed in the spring. And then the other thing, obviously, that can drive that are new devices, right? Obviously, so that's it's both new features that we see and whether the new features make it into the production round for the year and then new products themselves. And those may be in the area of different form factors in the area of such things as virtual reality or augmented reality AI type devices.

Speaker Change: The other thing obviously that can drive that are new devices, right? Obviously, so that's it's both new features that we see and whether the new features make it into the production round for the year and then new products themselves and those may be in the area of different form factors in the area of such things as virtual reality, augmented reality, AI type devices.

Rob Willett: I think another area, obviously, that we do expect to drive machine vision sales going forward in that market is the replacement of human visual inspectors. And there, I would say the technology is going to get there. But just to be uptake, I think it's a little slower than we would have expected in terms of using that technology. But I think we do expect in years to come that will be an area where the payback is very good for these players, and our machine vision will make a big difference.

Speaker Change: I think, you know, another area, obviously, that we do expect to drive machine vision sales going forward in that market is the replacement of human visual inspectors.

Speaker Change: And there I would say the technology is going to get there, but the uptake I think is a little slower than we would have expected in terms of using that technology, but I think we do expect in years to come that will be an area where the payback is very good for these players and our machine vision will make a big difference. So that will be sort of another variable as we look at the spending plans and our opportunity next year.

Rob Willett: So that will be sort of another variable as we look at the spending plans and our opportunity next year. Then just maybe on the timing P is hot and reflect some of the piano rights. So we see definitely a shift in terms of the seasonality rights. In the past, we have seen consumer electronics starting to random the first quarter. And then second and third quarter to be a high quarter, almost on an equal level in fourth quarter. It's been always like the weakest quarter in the consumer electronics seasonality. But we have seen our last year and also this year is that Q3 shifting or volume from Q3 is shifting forwards into Q2.

Speaker Change: And then just maybe on the timing piece, how that reflects in the P&L, right, so we see definitely a shift in terms of the...

Speaker Change: Seasonality, right? In the past we have seen consumer electronics starting to ramp in the first quarter and then

Speaker Change: Q3 is shifting, or volume from Q3 is shifting forwards into Q2. That means like Q2 is not really the strongest.

Dennis Faire: That means like Q2 is not really the strongest quarter, and the part of what we're seeing on the step down from Q2 to Q3 in our revenue numbers. And then there's another step down happening from Q3 into Q4. So that means when you think about general seasonality, you think about the second half of this year and also kind of about timing next year. And then really think about that the seasonality is shifting with and staying, but the staying is that fourth quarter is the weakest, the low quarter in the consumer electronics seasonality. Got it. That's very helpful.

Speaker Change: The strongest quarter and that's part of what we're seeing on the step down from Q2 to Q3 in our revenue numbers And then there's another step down happening from Q3 to Q4 So that means when you think about general seasonality, you think about the second half of this year

Speaker Change: and also kind of about timing next year and really think about that the seasonality is shifting and staying, what is staying is that fourth quarter is the weakest, the low quarter in the consumer electronics seasonality.

Rob Willett: Maybe for just one last one, I know it's a smaller part of your consolidated revenue, but I am curious if you have any comments on what you're seeing through your distribution channel partners. Are they acting for less inventory versus last quarter, or just any color on how they're thinking about the changes and pull three rates going forward? Yes, yes. The partners really we work with are providing, you know, integration services really far. We work for customers. So I think they're certainly seeing trends to witness on committing to new deployments right now, although some they work on for some time.

Speaker Change: Maybe for just one last one, I know it's a smaller part of your consolidated revenue, but I am curious if you have any comments on what you're seeing through your distribution channel partners. Are they asking for less inventories versus last quarter or just any color and how they're thinking about the changes in pull-through rates going forward?

Speaker Change: The partners, really, we work with are providing integration services, really, for customers. So I think they're certainly seeing tentativeness on committing to new deployments right now, although some they work on for some time. It's important to understand at Cognex, we very much don't want our...

Rob Willett: It's important to understand that at Cognex, we very much don't want our distributors to hold inventory. We want to supply them, and we do very quickly so they can fulfill, and they can use their cash to invest on growing the business, not buying inventory. So, compared to most of the other companies you might cover, there really isn't a lot of latency and inventory at our distribution channels. Very helpful.

Nathan McCurren: We have reached the end of the question and after session, I'm trying to call back over to Dr. Willis for close remarks. Well, I want to thank you for joining us this morning on the call, and we look forward to speaking with you on next quarter's call.

Speaker Change: Thank you. We have reached the end of the question-and-answer session. Now I'll turn the call back over to Rob Willett for a closing remark.

Rob Willett: Well, I want to thank you for joining us this morning on the call and we look forward to speaking with you on next quarter's call.

Nathan McCurren: Bye bye.

Operator: This includes today's conference, and you may disconnect your lives at this time. Thank you for your participation.

Speaker Change: Bye-bye.