Q4 2024 Cognex Corp Earnings Call
Speaker Change: Greetings and welcome to Cognex fourth quarter and full year 2024 earnings conference call.
Speaker Change: At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker Change: If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nathan McCurren, Head of Investor Relations. Thank you.
Speaker Change: Thank you, Operator. Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market close, and our annual report on Form 10-K for 2024 was filed this morning.
Speaker Change: The press release, earnings presentation, and 10-K are available on the Investor Relations section of our website. 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.
For more information visit www.FEMA.gov
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.
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.
Speaker Change: On today's call, Rob Willett, Cognex's President and CEO, will discuss end market trends and provide an update on our strategic initiatives. Dennis Fehr, Cognex's CFO, will discuss our fourth quarter financial results and will conclude with our outlook. With that, I'll turn the call over to Rob.
Thanks Nathan. Hello everyone and thank you for joining us.
Speaker Change: We began 2024 with the strategic priorities of infusing AI into more of our products and tools, transforming and expanding our sales force, and integrating Moritex, our largest acquisition in company history.
Speaker Change: I am pleased with the progress we made against these strategic priorities in 2024.
Speaker Change: We expanded our portfolio of machine vision products powered by world-class AI.
Speaker Change: A couple of highlights include the industry's first AI-enabled 3D smart camera, the InSight L38.
Speaker Change: and the addition of the Modular Vision Tunnel Portfolio, featuring the powerful Dataman 380 barcode reader that uses improved decoding.
Speaker Change: optimized for logistics applications to minimize footprint, maximize depth of field, and read the smallest codes.
Speaker Change: We successfully executed our sales transformation, deploying a new type of Salesnoid to broaden our sales reach to customers we have not traditionally served.
Speaker Change: And, we successfully integrated our largest ever acquisition, Moritex, which gives us a more complete machine vision solution and contributes positively to our bottom line.
Speaker Change: This transaction was accretive to adjusted EPS in 2024, which led to a slight increase in adjusted EPS for the year in an otherwise soft market.
In 2024, our logistics and semiconductor businesses gained momentum.
But conditions across our broader factory automation business remained challenging.
Speaker Change: Most of these markets stabilize throughout the year. Despite a slight improvement in relevant macro leading indicators, such as PMI, we still characterize our core factory automation markets as soft, but stable for now.
Speaker Change: The exception continues to be automotive, where we saw a pronounced step down in 2024.
Speaker Change: Coming into the year, we expected Automotive to grow, helped by significant EV battery spending.
Speaker Change: But this investment dropped off throughout the year, leading automotive to be our weakest end market in 2024. We continue to see uncertainty in auto as we begin 2025.
Speaker Change: These mixed market dynamics led to overall revenue growth of 9%, or 1% excluding Moratex for the full year.
Speaker Change: Throughout 2024, while we continue to invest in long-term growth initiatives, we stay disciplined in our approach to discretionary spending and thoughtful about hiring.
Speaker Change: I now want to provide you with a more detailed update on our strategic initiatives.
Speaker Change: We are seeing rapid changes in technology with powerful chips accelerating AI innovation.
Speaker Change: For industrial machine vision, this means moving beyond the world of rules-based algorithms towards a more sophisticated suite of powerful artificial intelligence tools.
Speaker Change: Transformer models are overtaking convolutional neural networks as the foundation of deep learning.
Speaker Change: As this shift accelerates, customers will need significantly less data to train and configure our products, and we'll be able to ramp up and scale production faster.
Speaker Change: This will allow Machine Vision to address more applications and reach more customers.
Speaker Change: Cognex is defining the leading edge of this shift in industrial machine vision technology by launching industry-leading products that leverage AI to solve customers problems.
Speaker Change: Our new products address the full spectrum of machine vision applications. At one end of the spectrum, new AI allows us to excel at the most complex and difficult inspection tasks, while at the other, it allows us to develop products that are easy to deploy and easy to use.
Speaker Change: In December, we launched Vision Pro Deep Learning 4.0, illustrated on page 4 of our presentation.
Speaker Change: This powerful software, designed to tackle the most difficult problems in machine vision, is Cognex's first ever product to utilize transformer models.
Speaker Change: Transformer technology, which forms the core of sophisticated large-language models such as CHAT-GPT, can help to vastly reduce the number of images required to train and implement a machine vision model.
Speaker Change: Vision Pro Deep Learning 4.0's signature few sample mode achieves high levels of accuracy on some of the most sophisticated inspections after training on as few as 10 images.
Speaker Change: Previous versions would have required hundreds of images to train a vision model with such capability.
This is very valuable for customers who require high accuracy.
Speaker Change: but do not have large training data sets, which is often the case as they scale up their production.
Speaker Change: It is also important for customers whose production cycles are only a few months long and therefore require effective models to be ready in weeks.
Speaker Change: Few sample mode saves customers time collecting, labeling, and managing image data, which has historically been a costly process.
Speaker Change: We have also expanded our Data Man series to address more applications for customers looking for easy-to-use products.
Speaker Change: As illustrated on page 5, our new Data Man series makes identifying and tracking parts and packages across a facility easier than ever.
Speaker Change: Regardless of industry, code quality, or application complexity, embedded AI in these next generation readers helps deliver exceptional read rates for reliable performance at every stage of production.
Speaker Change: Our latest Data Man products are examples of the products that allow us to get our highly advanced, powerful technology into the hands of customers with less machine vision experience.
Speaker Change: We continue to tap into this broader customer base by investing to transform and expand sales coverage.
Speaker Change: Moving to page six of the earnings presentation, we are enthusiastic about the progress of our sales transformation in 2024.
Speaker Change: Our first class of new salesnoids continued to ramp, with Q4 representing their highest quarter of bookings to date, leading to over 3,000 new customers acquired by this group in 2024.
Speaker Change: These entry-level salesnoids are also continuing to gain strong traction in referrals of more complex vision systems to our more technical and advanced salesnoids.
Speaker Change: The second cohort of new sales nodes entered the field recently and we expect this to further grow our customer base in 2025.
Speaker Change: We remain confident in the long-term value of our sales transformation strategy, allowing us to serve more customers with easy-to-use products.
Speaker Change: We're excited to continue this strategy and introduce a new cohort of salesnoids each year. As we plan for future years, we will be flexible about cohort sizes and be responsive to market conditions.
Speaker Change: Turning now to what we are seeing across our end markets, which you will find on page seven of the earnings presentation. I will discuss the end market results for the year, excluding the contribution of Moritex.
Speaker Change: End markets have been mixed as we have seen both continued softness as well as pockets of growth.
Speaker Change: Starting with logistics, revenue grew 20% in 2024. We continue to see broad momentum in logistics from global e-commerce leaders, as well as regional e-commerce, retail and parcel, and post providers.
Speaker Change: Market growth has improved as large e-commerce players return to capacity expansion and broader logistics remains an under-penetrated market.
Speaker Change: We believe we also gained share with recent product innovations, including the success of the Modular Vision Tunnel and Data Man 3AD launch last year.
Moving on to automotive.
Speaker Change: Revenue in automotive was down 14% year on year. We continue to see declines in EV battery investment and tentativeness in large capital projects across the broader automotive business.
Speaker Change: Coming into the year, we expected strong growth in EV battery investment and for it to be one of our largest growth engines. But as the year progressed, we saw delays, reductions and cancellations of EV battery projects.
Speaker Change: We still expect EV battery to be a long-term growth driver, but likely not in 2025.
Speaker Change: Consumer electronics revenue was down 5% year-on-year as smartphone design changes remained limited and we saw conservative capex spending across the market.
Consumer Electronics has positive long-term trends.
Speaker Change: Currently, our expectations for near-term investment in consumer electronics are tempered, but we tend to have a better line of sight to this by early Q2 each year, so we will give you another update on our next earnings call.
Speaker Change: Lastly, SEMI is continuing to build, with significant year-on-year growth, albeit off a low 2023 base.
Speaker Change: Growth is widespread across SEMI with investment increases from major machine builders, but we have seen strong demand driven by high bandwidth memory chip investments.
Speaker Change: As we kick off 2025, we expect momentum to continue in logistics and SEMI, automotive to remain weak, and other factory automation growth to be relatively in line with macro indicators such as PMI.
Thank you.
Speaker Change: We continue to see disruptive trends playing out in our markets.
Speaker Change: AI technology is making our products more accessible to an increasing number of customers and applications.
Speaker Change: We lead the industry in making machine vision technology usable by industrial customers at scale.
Speaker Change: With this, we can automate more inspection tasks and grow the machine vision market both by solving more of our sophisticated customers' most challenging problems, but also by making our powerful technology accessible for those less experienced in automation.
Speaker Change: Let me now hand it over to Dennis to walk you through the financial results and the outlook for the first quarter.
Dennis Fehr: Thank you, Rob. Our quarterly financial highlights can be found on page 8 of our earnings presentation posted to our investor website yesterday.
Dennis Fehr: Fourth quarter revenue of $230 million finished at the high end of our guidance range and increased 17% year-on-year. Excluding more attacks, revenue grew by 12%.
Dennis Fehr: As we have now passed the one-year anniversary of the close of our Moritax acquisition, I will note that this will be the last quarter we speak to revenue trends excluding this part of our business.
Dennis Fehr: From a geographic viewpoint, excluding more attacks, year-on-year revenue grew double digits in both the Americas, led by continued logistic strength and compounded by accelerated demand in the quarter, and in other Asia, led by semiconductor.
Europe declined slightly due to weaker automotive spending.
Dennis Fehr: Year-on-year revenue growth in the quarter was strongest in Greater China, driven by project timing and consumer electronics as well as an easy year-ago comparison.
Dennis Fehr: While China revenue has grown year on year the past two quarters, we remain cautious about the overall outlook for this market, which continues to see both significant uncertainty and heightened competitive pressure.
Turning to March.
Dennis Fehr: Adjusted gross margin was 69.4% in Q4, down 130 basis points from 70.7% a year ago, driven by more attacks, negative mix from higher logistics revenue, and to a lesser extent, pricing headwinds, most pronounced in China.
Adjusted operating expenses increased 3% year-on-year in the quarter.
Dennis Fehr: The increase was driven by more attacks, as well as investment in our sales force transformation and expansion.
Dennis Fehr: As a result of reallocation and adjustment to our employee base, we incurred $3 million of reorganization costs in the quarter that are excluded from our non-GAAP metrics.
Dennis Fehr: Even with our investment in Salesforce expansion, ending headcount for this year was 3% below year-ago levels and we continue to focus on tight cost management.
Dennis Fehr: Revenue growth and tight cost management drove high incremental EBITDA margin despite cross-margin pressure.
Dennis Fehr: Diluted earnings per share on a gap basis was $0.16, up from $0.07 in Q4 of 2023.
Dennis Fehr: Adjusted diluted EPS was $0.20, up from $0.11 year-on-year. Both increases were due to higher revenue and higher margins.
Dennis Fehr: Driven by working capital optimization, we delivered strong free cash flow for the second quarter in a row in Q4.
Dennis Fehr: totaling $49 million compared to $7 million in Q4 of 2023.
Cognex returned $57 million to shareholders in the quarter.
Dennis Fehr: $43 million of share repurchase was our highest quarterly total since Q1 2022, and we intend to continue to be opportunistic with our stock buyback.
Dennis Fehr: I will also briefly cover our full year 2024 results, which can be found on page nine of our presentation.
Dennis Fehr: 2024 revenue of $915 million grew 9% year-on-year, or 1% excluding mortgage tax.
Dennis Fehr: Geographically, for the full year excluding moray tax, other Asia delivered the highest revenue growth due to SEMI.
In addition, the Americas grew moderately.
Dennis Fehr: Europe declined slightly and China declined more materially in the year.
Dennis Fehr: Adjusted gross margin was 69.3% in 2024, down 3.2 percentage points due to more attacks, unfavorable mix, and to a lesser extent, pricing.
Dennis Fehr: For the full year, Adjusted Operating Expense increased 6%, driven primarily by more attacks, as well as our Salesforce transformation efforts.
Dennis Fehr: Adjusted EBITDA margin declined 140 basis points to 17.1% in 2024 due to lower gross margins and higher operating expense associated with our sales transformation.
Dennis Fehr: Gap-diluted earnings per share of 62 cents declined 6% year-on-year, partially due to a higher effective tax rate.
Dennis Fehr: Adjusted diluted EPS of $0.74 was up from $0.73 in 2023 as the accretion from Moritax offset softness and factory automation for the full year.
Dennis Fehr: Total free cash flow in 2024 was $134 million, representing 105% conversion of adjusted net income.
Dennis Fehr: We returned $119 million to our shareholders in the year and ended the year with $587 million in cash and investments and no debt.
Dennis Fehr: I will now turn to our outlook for the first quarter on page 10 of our presentation.
Dennis Fehr: In the first quarter, we expect revenue between $200 and $220 million.
Dennis Fehr: This range continues to be reflective of a mixed and volatile macro backdrop.
Dennis Fehr: At the midpoint, this represents revenue aligned with Q1 2024, reflecting our expectation of continued growth in logistics and semiconductor, offset by weaker automotive, and an approximately $5 million FX headwind.
Dennis Fehr: The expected sequential stepdown is driven by the acceleration in demand from customers in Q4 and an anticipated $4 million FX headwind in the first quarter.
Dennis Fehr: You also expect adjusted cross-margin to remain in the high 60% range.
Sequentially, mix is expected to be a slight headwind.
Expect adjusted EBITDA margin between 12% and 15%.
Dennis Fehr: The midpoint of this range represents a 150 basis point increase year on year driven by operating leverage and operating expense discipline.
Dennis Fehr: Lastly, we're excited to hold our Cognex Investor Day this year on June 9th and June 10th at our Boston-area headquarters, and we hope to see you there.
Now, we will open the call for questions.
Operator, please go ahead.
Thank you. The floor is now open for questions.
Dennis Fehr: If you would like to ask a question, please press star 1 on your telephone keypad at this time.
Dennis Fehr: A confirmation tone will indicate your line is in the question queue.
Dennis Fehr: 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 the handset before pressing the star keys.
Speaker Change: We do ask that you please limit yourself to one question and one follow up. Again, that's star one to register a question at this time. Today's first question is coming from Damian Karras of UBS. Please go ahead.
Hey, good morning, everyone.
Good morning, Damian. Good morning.
Speaker Change: Yeah, thanks for all the color around the end markets. Rob, I wanted to ask you about autos. I know you've talked...
Speaker Change: in the past about this being the worst market environment you've ever experienced in your career. And I know you expect autos to also continue to be your weakest market this year.
Speaker Change: But what's your assessment on, you know, how much lower that customer spend could possibly go from here? I mean, the business segment was down, you know, 14% in 2024. Are you kind of thinking, like,
Speaker Change: Double-digit declines again in 2025 or should you know, we'd be thinking much more modest declines from here
Speaker Change: Well Damien, I think you paint the picture well is that it was a very, very, very tough year last year for automotive and our business there in automotive.
Speaker Change: You know, we entered the year very enthusiastic about what we saw going on in EV and EV battery.
Speaker Change: manufacturing and to give you a sense of the magnitude of that I think coming in we had you know we're aggressive at Cognex we had stretch goals
Speaker Change: to really drive a lot of business into EV battery where we have some great technology. And I think where we ended up relative to where we came on was on the order of
Speaker Change: $50 million Delta. So that was, you know, kind of the the most difficult thing that we encountered coming in coming into the year, you know, and and You know that the obviously, you know that that continued as the year went along You know now we we think it's going to continue to be a bad year for automotive But I don't think one on the order of decline that we saw in 2024
Speaker Change: There are some reasons to be optimistic about automotive, right? We do great things in automotive when EV battery comes back, when capacity is...
Speaker Change: Sensors on the car, electronics in the car, and some of our new technology, what it can do in inspection in the cars.
are exciting growth areas for us.
Speaker Change: and we have a sense that investment might start to return to that market in 2026.
Speaker Change: You know, which then might lead to sort of a pick-up for business for us later in the year But it's we don't give full year guidance We're not optimistic that we're going to see a good year But I'm I'm hoping that that the time of serious decline for us in automotive is over
That's really helpful.
Speaker Change: that aspect, you know, this coming year. You know, do you think that there should be more consumer electronic product changes this coming year compared to the past few years?
Speaker Change: So consumer electronics revenue fell 5% for Cognex last year, excluding Maritex. That said, it did grow in the back half, due to project timing and some strength that we saw coming. It's really...
Speaker Change: Difficult and too early to call kind of Cosmex's year in electronics, and I will give you more color on that at our next...
Speaker Change: running school. You know there were reasons that we feel confident that in the long run consumer electronics is a you know will be a great growth market for us and will continue to be. The issue is always on you know when do these things occur.
Speaker Change: There are a lot of great new features planned, a lot of innovation coming, whether it's in smartphones or in wearable devices or in other electronics, such as...
Speaker Change: Augmented Reality, Virtual Reality type technology that I think many of our customers are working hard to try to bring to market.
Speaker Change: and if and when those are successful and need to be manufactured.
Speaker Change: On a massive scale, I'm very confident that companies will turn to Cognix to help them do that.
You know, there's also...
Speaker Change: A lot of human inspection going on, in huge amounts of human inspection going on in consumer electronics manufacturing and if I refer you to some of the comments I made in my prepared remarks earlier, you know, newer technology, particularly transformer technology, allows us to meet the needs of some of those customers very well by allowing them to implement our technology quickly.
Speaker Change: and to get great results, which makes payback much, much faster.
Speaker Change: To give you a little context of that, if you think of electronics, often it's a very, very rapid scaling up and a relatively short period of manufacturing at huge scales. So this technology in that market, I think, can be very, very valuable and I think is already being seen to be so by some of our customers in the space.
Speaker Change: That's kind of the overview, but to give you a direct on-studio question, too soon to say, let's regroup here in about 13 weeks.
Understood. Really appreciate your thoughts. Best of luck out there.
Thank you.
Speaker Change: Ladies and gentlemen, due to the number of callers for today, we are asking you to please limit yourself to one question and one related follow-up if needed. The next question is coming from Tommy Moll of Stevens. Please go ahead.
Good morning and thank you for taking my questions.
Hey Tommy. Hey Tommy.
Speaker Change: Rob, I want to start on logistics and ask what insight you can provide there on the breadth of the strengths, whether that's in terms of the geographies, the sub-verticals, I'm thinking e-commerce versus parcel perhaps.
Speaker Change: and then the durability of this strength. I mean, there were multiple quarters there where...
Speaker Change: I guess we were in an absorption phase for a lot of the capacity built out during the pandemic. Does it feel like we're solidly back into a period where we need more capacity, or how would you situate us?
Speaker Change: Yeah, Tommy, I think you're right in pointing out that, you know, we saw our logistics business peak in 2021 where, you know, there was huge, huge investment and then we've been through a period of absorbing that investment and then we're now back to a period of growth. You know, logistics business grew 20% year on year last year with strength really, you know, across.
Pretty much everywhere, right?
Speaker Change: US, Europe, other Asia And then as we as we look in terms of customer tiers, I would say you know, where we made You know good progress in base logistics seeing some nice growth in that space. We've made
Great progress with very large e-commerce players.
Speaker Change: And then, you know, as you might expect, there's sort of a group of more large customers, you know, some of whom didn't grow with us last year, and others of them did.
Speaker Change: You know, specifically, you know, in the U.S., a couple of customers who, who I think, you know, are struggling with their own retail supply chain and execution of various things, you know, so, so didn't, didn't put up growth. But that's, those are really very few exceptions to what is a very broad and underlying return to growth.
Speaker Change: We're, we're positive, very positive about our logistics business and what we're seeing happening. We do see
Speaker Change: More capacity being added. We do see a lot of technology being invested in this industry, whether it is vision technology, you know, and certainly beyond barcode reading, which is a very difficult thing. We do very well, but there's much, much more to be done. And we're seeing more and more traction with that.
Speaker Change: And then, as you rightly note, the Postal and Post sector is an area we see growth in. I did spend a lot of last week in Europe visiting a lot of Postal and Post businesses in that space. I would say, you know, they're not overly enthusiastic about the investment environment in Postal and Post.
Speaker Change: currently, but I don't think that is going to be a headwind to our opportunity to grow in that space. These are really newer customers for us, newer technology, so we're coming off a low base and we have a lot to offer, but it's worth keeping in mind some of those possible and post companies have.
Speaker Change: You know, five year capital spending plans. That, you know, we've been starting to muscle in on now for a number of years. And, you know, it will play out, I think, over time. Another thing to point out, of course, is geographic expansion.
Exciting for us, the highest.
Speaker Change: It's really more in markets where they're really starting to really drive e-commerce fulfillment and spend significantly on a consumer base that's becoming wealthier and spending more money online. And I'm thinking of markets like India and Indonesia where we're making some great progress.
Speaker Change: Thank you, Rob. As a follow-up, and perhaps this is for Dennis, I wanted to ask about
what you would highlight for us in terms of...
Speaker Change: So, you've sketched the contours previously on the level of investment for the Emerging Customer Initiative. So, I'm thinking elsewhere in the OPEX budget, what can you highlight us whether quantifying or just speaking qualitatively about?
Speaker Change: A positive thing I really would like to highlight is that we invested successfully into our emerging customer initiative into the sales transformation last year, but at the same time
Speaker Change: Our OPEX year-over-year for the full year grew by 6% and revenue grew 9%, so that means OPEX growth was below the revenue growth in 2024, and maybe to help you think a bit about 2025, what we expect is that we will see.
The OPEX growth also below the revenue growth in 2025.
Thank you, Dennis. I'll turn it back.
Speaker Change: Thank you. The next question is coming from Andrew Baskalia of BNP Paribas. Please go ahead.
Good morning, Andrew.
Andrew Baskalia: I just want to get an update into your end on the emerging customer initiative. In terms of your expectations, it seems like it's going well. And do you care to provide any context around
incremental revenue from from the strategy going forward.
Maybe in 25.
Andrew Baskalia: Yeah, thanks. So, yeah, I think you characterized it well. You know, this has been a major initiative for Cognance. We've, you know, onboarded and got up to, you know, improve the productivity of a large first cohort of emerging customer salespeople. Their performance in Q4, I think, was in line or better than what we had, you know, expected and communicated to you at the last call. They've completed over 80,000 customer visits in 2024, adding over 3,000 customers.
Thank you for joining us.
Andrew Baskalia: a million dollars a week, and then referring significant business to the rest of our sales team that's turning into larger, more sophisticated opportunities for customers. So we're really starting to see much better penetration of the market.
Andrew Baskalia: But this is just the beginning, right? And we hired the second cohort, as we went through last year, and they're now entering the field.
Andrew Baskalia: They're going to really help us expand our sales coverage, so I think we can sort of be cut and pasting the numbers we saw with the first cohort, but hopefully doing better.
Andrew Baskalia: because we're getting better and we're understanding how to do this more.
different customer profiles within those large accounts.
Andrew Baskalia: And then we're also giving them really great new technology and I think the best example would be the Dataman 290 and 390 series that is now in their hands.
Andrew Baskalia: great AI technology that's easy to sell and easy to use and this sales force was designed with technology like that in mind, you know So that's our playbook that we will continue to iterate on with as we go through future cohorts
Andrew Baskalia: You know, I think in terms of other things, the business that we're winning has over 75% gross margin. So, you know, it's again as we expected in that regard.
Andrew Baskalia: You ask about 2025 and I think we're going to see that continue, our progress continue and we've got the metrics and the way to manage it and we continue to be pleased.
Andrew Baskalia: Just before that, we really integrated that sales noise, this entry-level sales noise into the larger sales organization.
Andrew Baskalia: Let them go to also to existing customers in that regard. We're not really able to give you like a number Here's what is incremental we have like like Rob said we're tracking They are their bookings metrics and other sales efficiency KPIs very closely, but just that one particular question
Andrew Baskalia: We just can't answer you in that way, so I hope it gives you a bit more color to that as well.
Andrew Baskalia: Okay, and what are the, you're guided to growth margins in the high 60s, and what are the biggest levers there that
Andrew Baskalia: could provide some tailwind to the margins going above 70% again. Is it really just volume coming back or can this emerging customer initiative have an impact in 25 on gross margins already?
Andrew Baskalia: I'll kick off, you know, at a high level but then I'll throw it to Dennis to give you more details. So, you know, the wonder of Cognex is, you know, implementing great technology to, you know, factory automation and logistics. You know, we've got a lot of great technology coming and the Dataman 290 is an example of that for sure. And then all the sales reports that we have now in the field making.
Andrew Baskalia: you know tens of thousands of sales calls to sell it should should be you know a tailwind for us.
Andrew Baskalia: You know, we've built an infrastructure ready to supply a much larger business and, you know, as that business comes, you know, and as markets recover, certainly the fall-through on incremental revenue should be high.
Right and
Andrew Baskalia: We guided for the first quarter to the high 60s, so pretty much in line to what we have guided previously. In the near term, there are certainly some effects that we have strong growth in logistics,
time for QEngineer.
Andrew Baskalia: The sales transformation, sales expansion of coverage is a nice measure to bring up cross-margin with.
Andrew Baskalia: the incremental or the accretive cross-margin we are getting from that initiative. We have strong leverage also in terms of using the infrastructure. We have new NPIs, right, we talked in the prepared remarks about like the DM290, for example, that
Andrew Baskalia: that product family. So they're really areas where we can drive cross-margin increases and that's really what we'll be focused on in the mid- to long-term.
Thank you.
Thank you.
Speaker Change: Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead. Hi, good morning. I guess two questions. One, Rob, just on the, you know, total market serve, the $6.5 billion that you guys have put out there, just wondering, understanding you probably still feel comfortable with that number, I'm just wondering if
Speaker Change: Perhaps as you're thinking going forward, do we pivot which end markets we want to focus on, perhaps markets that are less cyclical like
Speaker Change: automotive or consumer electronics may be focusing more on, you know, medical or other markets so that I just guess your sales over time can be less cyclical versus some of the markets that you focus on. So wondering if it'll be a pivot there over time. And then I guess my second question, obviously you're still sitting with a very strong balance.
Speaker Change: She's sitting in net cash with more techs behind you. I'm just wondering what your appetite is or the environment is for acquisitions in 2025 relative to where we sat in 2024. Thank you.
Speaker Change: Thank you. Let me talk about our markets and how we think about that, and volatility and opportunity within them first, and then I'll ask...
to address the second part of your question about capital.
Speaker Change: So, we'll give you an update on our view of our SERV markets in June at the Analyst Day.
Speaker Change: I look forward to sharing that with you and our view about how we expand them. Obviously, we did expand with the acquisition of Maritex, and there's adjacencies and other markets we're moving into where we see opportunities to grow that served market, and we'll give you more color on that.
Speaker Change: In terms of where our interests lie and how to think about volatility within those markets,
Speaker Change: We see our logistics market is still our largest served market and the one we expect to grow fastest. You know, that was true when we last gave you an update and it's still true today very much that those are exciting growth markets for us and will continue to be a great focus of innovation and investment. And so that's exciting and, you know, witness the modular vision tunnel progress we're making
Speaker Change: great success with the technology leaders in that space and we think that has a long way to run.
Thank you.
Speaker Change: In terms of other markets, what I would say is, you know, I think we all understand that Cognex is highly indexed on the technology leaders and the big leaders, the premier customers in our markets, whether it's automotive or consumer electronics, right? And those tend to have more, they tend to put more volatility.
Speaker Change: into our business overall, but our emerging customer initiative really allows us to broaden our customer base, you know, going from serving about 30,000 customers as we do, to going down more into more mid-tier and more entry-level customers and really broadening that. So we would expect that to take some volatility out of our business in future.
Speaker Change: And with volatility, you can see that we can underperform in difficult periods and outperform. As I think we did in the fourth quarter as a result of some very strong relationships we have in some very good markets. But that's not ideal in terms of running a stable business, and I think the Emerging Customer Program.
Speaker Change: allows us to do that quite well. You asked about other markets, you know, medical.
Speaker Change: in a big bag of medical businesses including pharmaceutical, life science, medical device representing about 10% of our business overall. Those markets haven't been good over the last few years since.
Speaker Change: I'm confident, I think everyone is, that they will return to growth. And that's the type of market, again, where we will be having much more sales activity as a result of our emerging customer sales force.
Speaker Change: much more appropriate products for the level of technical expertise that those industries have to adopt them. So, I would expect over time that we would see smaller markets, packaging-related, medical.
Speaker Change: even aerospace markets where we've been very underpenetrated but we're seeing some nice progress in terms of activity and as those markets recover hopefully a broader base of customers with less volatility.
Speaker Change: Let me take it from here in regards to the M&A question. Maybe I'll start first.
Speaker Change: with a quick summary of the overall capital strategy and then talk a bit more about M&A specifically and so on.
Speaker Change: Overall capital strategy, I've been always saying, like, our number one area is our organic investments. Think about, like, the sales transformation and sales expansion, which we're investing into. And second comes M&A, and third, share buybacks, and fourth, the dividends. So it's kind of the order of priorities. I mean, M&A quite high in that stack, and we have been coming out of the MoriTech acquisition, which I think we feel extremely positive and successful about.
Speaker Change: on how it has helped to be a creative to adjust the DPS and bring actually it up by a penny a day. So in that regard.
Speaker Change: I think we made a very good success story on the Moray Tech side and that clearly means like that we are looking for continued M&A.
Speaker Change: thoughtful when we are making these decisions. And at the same time, I think that's probably a lot further to discuss where probably it doesn't.
Speaker Change: a bit more about like, hey, what could be potential markets? How do we think about like the balance sheet in that regard? So a lot of good topics to cover there, and I think we'll address these at investor day.
Thank you. Very helpful.
Speaker Change: Thank you. The next question is coming from Piyush Abbasi of Citi. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Hey, good morning.
Speaker Change: So, the current U.S. administration appears to be more pro-U.S. manufacturing, speaking with your customers across the auto or consumer electronics and markets. Have you at least begun to see a step up in conversations where your customers are talking about reshaping their manufacturing footprint and maybe adopting more automation and machine vision?
Thank you.
Thank you.
Yeah, thanks. Thanks for the question.
Speaker Change: I would say there's certainly an increase of discussion and interest around that topic, no question, and I think every, you know, every
Speaker Change: Manufacturer in America is thinking very much about the risks and upside associated with tariffs and other actions that are going on. I would put a little in the context, though, that there's just a huge amount of uncertainty and confusion.
Speaker Change: So, you know, I think that sort of interest isn't really leading to, I think, action at the moment. It's leading to confusion, and hopefully we'll see more clarity and then more actually, you know, action. But maybe to give you a little context, you know, if we think about our Q4 performance and our Q1 guidance.
Speaker Change: I think there was a lot, you know, quite a lot of excitement and positivity that we saw in the back end of last year, really post-election in November and December, which, you know, did account for some
Speaker Change: Higher spending, you know when in prior years, I might have called it budget flush
Speaker Change: type spending that went on in November and December in America's, really, only, I'd say. And, you know, I might cite that about $6 to $7 million of business that I think we received in Q4 as a result of that enthusiasm that really came straight out of Q1. So I think there's that.
Speaker Change: We do have FX, you know is I think a worry in general for companies where you know that the strength of the US dollar It was is a five million dollar or so
headwind for us in Q1 as well.
Speaker Change: So, you know, and then there are a lot of policy changes, obviously, when we were talking a year ago, there was, you know, a lot of enthusiasm about the Isolation Reduction Act and other things. Clearly, there's a lot more confusion about that. So certainly, that's all at play.
Speaker Change: I do think if we see major investment in manufacturing and major on-shoring going on in the United States, Cognex should be a major beneficiary of that given our strength in this market.
Speaker Change: helpful I was a bit late on the call so maybe address this but I think you highlighted pricing challenges in the quarter particularly competing in the China region
Speaker Change: Can you update us on that? Like, how would you characterize the pricing environment as it doesn't seem that the demand outlook has changed much? And are competitors in other regions being disciplined from a pricing standpoint? Or are you seeing more incidents of lowering prices to win contracts?
Speaker Change: I would say, you know, we've been talking, you know, for a few quarters now about price, the pricing dynamic in China, and, you know, China certainly is an extremely competitive market for us and our customers, right, so I don't, I don't think there's much change to report from that situation in the last quarter.
Speaker Change: compared to what we're generally seeing, but you know, China is a market where there are strong and emerging competitors in our industry and to us.
Speaker Change: specifically. I think everyone's been seeing this is an extremely difficult market. Some of the larger players...
Speaker Change: And that we see, you know, emerging state-owned enterprises have actually been cost-cutting and reducing some of their spend. So certainly they're feeling the sort of pain that we're seeing in that market. Our strategy...
Speaker Change: you know taking you know a leaf out of the innovators dilemma is we want to maintain share you know and we're we want to maintain customers and share as we go through this in in China you know we have you know very strong technology and good gross margins even even at difficult prices so you know we're willing to take a hit to pricing to maintain share and that that's been you know what that's been the situation it continues to be as we bring you know new technology to market you know we're hopeful that we'll have bigger deltas
that led the discussion. Thanks.
Dennis Fehr: Dennis what would you add? Yeah no absolutely I think if you think about
Speaker Change: We have both 2024 as a full year or Q1, Q4 specifically, I think really the biggest topics we have seen working in the gross margin is really more attacks and then mixed effects like the strong growth of logistics and it's also very clearly that
Speaker Change: like a volume plays a big role as well, right? So that means we have infrastructure and fixed costs are there as a higher volume or lower volume really drives leverage there. And then pricing is really the fourth item there in the stack, which is really to a lesser extent, but it's very clearly that we are seeing this dynamics and therefore wanted to be transparent and clear about it, what we are seeing and that's particularly in China. And I think Rob covered that well.
I appreciate all the color guys. Good luck.
Speaker Change: Thank you. The next question is coming from Jacob Levenson of Melius Research. Please go ahead.
All right, good morning, everyone.
Good morning. Good morning.
Speaker Change: Just to attack the M&A side of things from a different angle, I know you folks have brought some really interesting...
Speaker Change: machine learning assets at Suelab and VITI before AI was cool, so to speak, has the rise of AI and the broader public consciousness, has that increased the competition for those types of deals or are they just too niche for
Speaker Change: most buyers that would be looking at the things that interest you guys.
Speaker Change: So Jake, to be clear on your question, you're asking kind of, are those assets still out there? How are they kind of priced and how are we thinking about them?
Yes, exactly.
Yeah, yeah, so, um, excuse me.
Speaker Change: You know, we at Cognex, we really excel at finding the best technology for our
Speaker Change: kind of in a specific market, industrial machine vision, we're very well known, we have a great reputation and we cultivate the companies, the small companies that we think are doing great work. And you know, Vidi is a great example of that, really an excellent Swiss-based company with some phenomenal engineers doing things that when we really got to understand them, blew us away and we were delighted to acquire them. So I think, you know, that was
Speaker Change: eight years ago, I guess. And I think probably that the general investor community, you know, saw the potential for advanced technology in manufacturing. So there are a lot of companies that kind of were very heavily invested in, you know, in the years following that time that are now, I'd say, kind of for sale.
Speaker Change: And, you know, so there's a lot of them to see.
Speaker Change: But a note of caution is when we really get in and look at those companies, you know, they may have raised $50 million of capital on a business plan.
Speaker Change: to have sales of $30 million now, and their sales are 10% of that amount, and they're really more around consulting or other things. They really haven't achieved the potential that they expected. So I think the valuation of those companies is not what people thought they would be five years ago.
Speaker Change: which is an opportunity for Cognex because some of them have good technology they haven't been able to bring to market, but certainly the kind of
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
Speaker Change: It's not enough to have great technology. You have to understand customers, you have to have
applications engineers who really understand the application.
Speaker Change: You know, and that's where, you know, the 3,000 or so strong Cognoids that we have who are out there every day, the 30,000 customers or so with the...
Speaker Change: who some of them are the most sophisticated appliers of technology. That's great, great opportunities for us to take technology and apply it, which isn't quite as easy as it might appear to someone who eight years ago launched off on a plan.
Speaker Change: So, I'd say that's the current state of it. My hope is that some of those really good companies and great engineering teams will join Cognex over time, and there's the potential for that to happen, certainly.
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Speaker Change: Okay. I appreciate it, Rob. I'll keep it to one question today. Good luck.
Thank you.
Speaker Change: Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.
Hey guys, good morning.
Thank you, good morning.
Speaker Change: So, Rob, I thought your comments on infusing AI into your tools and the fact that you now require less images to train a model were really interesting.
Speaker Change: I guess I'm just curious. On one hand, I can think of that as being a competitive advantage if you are, you know, first mover and your technology is advanced relative to others.
Speaker Change: On the other hand, it also kind of seems like it may potentially lower the barriers to entry for additional competitors, startups.
Speaker Change: maybe Chinese competitors. I'm just curious, how do you get comfortable that you can sustain your technology advantage and this isn't just going to increase competition for your end markets?
Speaker Change: to do things for customers very quickly and very well that we and they couldn't do before. And it'll spread the technology more broadly within existing customers, and that's very exciting.
Speaker Change: publicly available models and applying them and really making them work. They don't work well when just applied even with, you know, experienced programmers to our industry without deep domain and technology and customer knowledge that we have.
I think, you know, where this technology is also really...
Speaker Change: engineering, more pure technology that they can implement. I would say I'm pretty optimistic about what that means for Cognex in the next few years. I think this...
Speaker Change: The technology that you're seeing coming out of Silicon Valley is still going to be too hard to apply, really, to our customers, and the people who are going to apply it first are going to be us, and we're going to see it kind of
Speaker Change: driving, and that's, you know, else if you're really good about the emerging customer sales force we're putting in place, you can just get that technology out to...
Speaker Change: so many more users and sell it much more quickly than we have before. So that's the overall picture.
Speaker Change: We're a technology company, right? The business is always, the technology is getting better and faster and easier to use.
Speaker Change: Prices come down, applications expand, new markets appear, it's a wild and woolly and fun business, and we've been doing it for 43 years, and we're going to go on taking those same principles that have made us successful to this new revolution.
Thank you, Rob. I'll keep it there.
Speaker Change: Thank you. Thanks. Thank you. The next question is coming from Ken Newman of KeyBank Capital Markets. Please go ahead.
Speaker Change: Hi, this is Katie Fleischer on for Ken. I'll keep it short here. I just was wondering how you're positioning for tariffs and any potential margin impacts from those of another trade war materializes.
Things are uncertain, right?
Speaker Change: more terrorists may come, but in general, of what is announced so far, no direct impact. Then, of course, there could be a secondary impact from the terrorists, right? So, in the near term, again, there's a bit of uncertainty. We talked about, like, we have seen a lot of positive momentum in the November-December time frame, and that has shifted towards a more near-term uncertainty in some of our customers. So, I think about the automotive supply chain across Mexico, Canada, and the U.S.
Speaker Change: So that's not necessarily helpful, but then if you think about it in the mid and longer term, the reshoring opportunity for Cognex is tremendous, right? So that means if that is really starting to happen, then there's a tremendous additional market upside for us.
Thank you.
Great, thank you. I'll leave it there.
Speaker Change: Thank you. We're showing time for one final question. Our last question today is coming from Jarom Nathan of Daiwa. Please go ahead.
Jarom Nathan: Hi, thanks for squeezing me in here. So I just wanted to go back to your Moritex acquisition. I think when you made the acquisition the objectives were expanding beyond Japan and using more of Moritex.
Jarom Nathan: optics into Cognex equipment. So I just wanted to kind of understand how you guys, how it was done in the year, what's the progress? And I just had one more question, please.
Jarom Nathan: Yeah, great. We're about a year and a quarter into owning Martex and, you know, we're very pleased with how we're taking that technology and selling it to our existing customers, you know, and that's one way in which we can, you know, increase gross margin and grow our business. So that's kind of awesome, you know, we're taking that technology to many customers which, because they were very much primarily a Japanese-focused business, we're globalizing it for them, and then, you know, you're going to see more and more of it
Jarom Nathan: products. So it's a lot of good progress and increasing excitement around that.
Jarom Nathan: It's something we're very used to doing. It's very sophisticated. We've got PhD photonics people and optics people who work on that, but we're very comfortable and we know how to do it.
Speaker Change: Okay, and just finally, you know, some of the logistics companies seem to be, especially on the parcel side, seem to be, they're talking about moving to sensing from scanning. I just wanted to understand how would that impact Cognex, if that trend kind of continues. I just wanted to understand, it could be good for you, I just wanted to understand that.
Good.
Speaker Change: Sure, I'll keep my answer brief, but you know, today kind of the barcode is the, you know, defining way in which packages are identified. I don't expect that to change, but certainly there is the opportunity to have more package recognition using machine vision
Speaker Change: And some packages are complicated. And being able to use vision to inspect them, something we're extremely good, is somewhere that our customers would like to go. And it's certainly a journey we're enjoying exploring with them.
Thank you.
Okay, thank you.
Thank you.
Speaker Change: Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Rob Willett for closing comments.
Rob Willett: Well, thank you so much for joining us this morning. I enjoyed the discussion and we look forward to speaking with you again on next quarter's call.
Rob Willett: Ladies and gentlemen, thank you for your participation and interest in Cognex Corporation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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