Welcome to the Cognex fourth quarter 2023 earnings conference call. 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.

Please proceed.

Nathan McCurren — Senior Director, Investor Relations

Thank you, Donna. Good morning, everyone. Thank you for joining us. With me on today’s call are Rob Willett, Cognex’ president and CEO; and Paul Todgham, our CFO.

Our results were released earlier today. The press release, annual report on Form 10-K and a newly introduced quarterly earnings presentation are available on the investor relations section of our website. Today’s earnings materials and statements we will make during this call contain forward-looking statements and are based upon information we believe to be true as of today.

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As we previewed with you last quarter, after the acquisition of Moritex in the fourth quarter, we now have a more material level of acquisition costs and amortization of intangible assets. As our financial results have begun to be more impacted by these nonrecurring and purchase accounting charges, we’ve made changes to our non-GAAP measures to exclude those charges from the reporting of our adjusted earnings figures.

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

Rob Willett — President and Chief Executive Officer

Thanks, Nathan. Hello, everyone, and thank you for joining us. 2023 was a year of perseverance at Cognex. We advanced many high potential strategic initiatives while navigating a global manufacturing recession. After growing almost 30% in 2021, fueled by pandemic-related acceleration in logistics and electronics investments, revenue was slightly down in 2022 and declined 17% in 2023. Customers have remained cautious with investments as we observed lower confidence in near-term end demand, leading to increased capex scrutiny and delayed orders.

Investment in China remains especially muted. In addition to these macro challenges faced by both Cognex and its peers, a high exposure to the leaders in the industries we serve was a headwind for us in 2023. About half of our 2023 revenue decline was driven by two large long-standing customers who reduced their spending after heavy investment in prior years.

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

For example, in the year 2000, semi customers accounted for over half of our revenue and we saw a significant downturn in that business. To adjust, we moved fast to diversify our business toward factory automation and penetrate the Chinese market. While different today, we see disruptive trends playing out in our markets, such as the shift away from internal combustion engines toward EVs and deep learning machine vision technology becoming accessible to an increasing number of customers and applications. We are mobilizing to capitalize on these trends and remain focused on the long term and on continuing to evolve to deliver future growth. Before I go into more detail on this evolution and our outlook, let me turn it over to Paul for the financial results for the quarter.

Paul Todgham — Chief Financial Officer

Thank you, Rob, and hello, everyone. Turning to results for the fourth quarter. Revenue declined 18% on a reported basis. This includes $7 million of revenue or a three percentage point contribution from Moritex.

I’ll also remind you that we’re comparing against the fourth quarter in 2022 that included $20 million of revenue that shifted from the third quarter due to the fire at our primary contract manufacturer. From an end market standpoint, our biggest year-on-year declines remained in consumer electronics and semi. Broader softness continued across our other factory automation businesses.

Steady Growth and Bold Innovations: A Snapshot of Cognex Corporation’s Earnings Call

Market Performance and End Market Analysis

Cognex Corporation, a leading provider of machine vision technology, announced its earnings for the fourth quarter, revealing resilient business conditions in automotive, medical, consumer products, and food and beverage markets. While end markets remained relatively flat sequentially, they experienced a year-on-year decline due to the timing of 2022 revenue, influenced by an unforeseen hurdle. Automotive sales reflected continued softness in the internal combustion business but showed a silver lining with rising demand from electric vehicle battery manufacturers. Similarly, logistics remained stable, contributing to sequential growth. Revenue in the Americas surged, contrasting the downturn in China, which grappled with a challenging economic landscape.

Financial Highlights and Margin Analysis

Adjusted gross margin stood at 70.7% in Q4, meeting expectations. A reported basis, including $4 million of acquisition costs and intangible asset amortization and cost of sales, registered at 68.7%. Comparatively, adjusted gross margin slightly dipped on a sequential basis due to specific factors like Moritex. Operating expenses increased by $5 million or 5% sequentially and $6 million or 6% year-on-year. The rise in expenses was attributed to incentives, employee benefits, and the integration of Moritex. However, excluding the newly integrated businesses, adjusted operating expenses demonstrated a potential decline. Adjusted EBITDA stood at 13% in Q4, trailing behind the corresponding period in 2022, mainly due to operating deleverage and increased investment in emerging customers.

Financial Strategy and Outlook

Cognex reported a robust net cash position of $576 million at the end of Q4, despite a quarter-on-quarter decline driven by the Moritex acquisition. The company affirmed its ability to finance growth initiatives and continue returning capital to shareholders through buybacks and dividends. Cognex, under the leadership of Rob Willett, emphasized the proactive search for a new CFO following the impending departure of a valued executive. Affirming its commitment to future investments, Cognex highlighted its focus on developing cutting-edge machine vision products tailored to capitalize on the advancements in artificial intelligence technology. The company’s strategic acquisitions in AI technology have enabled it to foster innovative solutions and expand its portfolio of offerings, targeting a diverse range of industries.

Investment in Innovation and Expansion

Cognex deepened its investment in leveraging AI technology to meet market demands. The company highlighted its dedication to developing products that integrate rule-based vision with advanced AI capabilities, making machine vision more human-like. The widespread adoption of AI-enabled machine vision is projected to drive cost efficiencies for customers and enhance quality and productivity. Notably, the Emerging Customer initiative, involving a sales force expansion, aimed at tapping into a broader customer base. Cognex anticipates substantial revenue generation and a positive impact on operating income from this initiative in 2024.

Outlook and Reflections

Looking ahead, Cognex anticipates a challenging operating environment in the first quarter but expressed optimism for the latter part of the year. The company projects a stable operating environment with revenue in the range of $190 million to $205 million for the first quarter, representing a flat year-on-year and sequential growth. The outlook further indicated expectations for a mid-single-digit increase in adjusted operating expenses due to the Emerging Customer initiative, higher incentive compensation, and the impact of Moritex operations. Despite near-term headwinds, Cognex remains resolute in its commitment to sustenance and growth in the ever-evolving machine vision landscape.

Cognex Discusses Revenue Growth and Market Outlook

The Massachusetts-based machine vision technology company, Cognex, has inspired cautious optimism among investors as the company details its performance and addresses concerns over market momentum. Amidst a backdrop of mixed signals in longer cycle businesses, Cognex is projecting growth in its logistics sector, emerging as a ray of hope amid tentative prospects in other markets.

Discussing Market Visibility and Stabilization

During the Q1 earnings call, Cognex’s President and CEO, Rob Willett, acknowledged the signs of stabilization in the business. He highlighted the relative stability observed across several markets, especially in the logistics segment and the growing momentum in the EV battery business, providing a glimmer of positivity for the company’s future prospects.

However, uncertainties loom, particularly in the context of the Chinese market and the consumer electronics sector. Willett acknowledged the challenges of gauging the performance of consumer electronics for the year but remained resolute about the overall stability seen across the business, noting a shift away from the whipsaw declines experienced in the previous quarters.

Insights on Gross Margin Expectations

Addressing questions on gross margins, Cognex’s Chief Financial Officer, Paul Todgham, provided insights into the Q1 guidance, indicating an adjusted gross margin expectation in the high 60% range. He attributed the potential sequential step down to the inclusion of Moritex for a full quarter and strategic logistics projects. Despite the expected impact on margins, Todgham emphasized the future potential of the strategic project, underlining its long-term revenue benefits, albeit with initial costs.

Willett chimed in, providing a long-term perspective on the company’s gross margins, outlining three key factors driving potential improvement. He emphasized the potential of emerging customers, new product pipelines, and the cyclicality of the consumer electronics business as factors influencing future growth and margin improvement.

Outlook on Margin and Future Growth

Willett acknowledged the challenges in reaching the mid-70% gross margin target in the near term, attributing it to the need for volume recovery and the full integration of Moritex. However, he remained optimistic about the company’s long-term growth and margin prospects, citing the potential of emerging customers, new product pipelines, and the evolving integration of Moritex as factors driving future margin improvements.

Despite the challenges ahead, Willett highlighted the company’s history of resilience and its ability to pivot back to growth, offering a glimmer of hope amidst the prevailing uncertainties in the market.

Prospects and Progress: Cognex’s Position in the EV Market

Rob Willett’s Outlook on the EV Business

Rob Willett, President and CEO of Cognex, recently shed light on the company’s venture into the electric vehicle (EV) market. Willett expressed fervent optimism, citing extensive interaction with EV battery manufacturers. According to Willett, the EV industry is undergoing substantial investment, particularly in Europe and America, a trend that has incited a surge in demand for Cognex’s machine vision technology.

Willett emphasized the dual role played by Cognex in this market. Not only does the company facilitate the construction of new production lines for EV batteries, but it also addresses the critical need for quality control and inspection in the production process. By harnessing cutting-edge technology, Cognex has positioned itself as a pivotal player in ensuring the safety and efficacy of EV batteries.

While acknowledging the prevailing apprehension surrounding the widespread adoption of EVs, Willett remains confident in Cognex’s ability to navigate the challenges and leverage the opportunities presented by this rapidly evolving market.

Challenges and Contemplations in the EV Landscape

Willett articulated the concerns looming over the EV industry, including consumer skepticism, varied demand projections, and the potential impact of political shifts. Noting the diverse narratives emerging from different corners of the market, he highlighted the need for a balanced perspective on the trajectory of EV development.

The conversation delved into the nuances of EV sales, touching upon uncertainties about mass appeal, competitive pricing, and governmental support. Despite the complexity of these issues, Willett expressed unwavering determination to steer Cognex towards sustained growth and innovation in this dynamic sector.

Cognex’s Traction in Early Customer Business

Shifting focus, Willett delved into the early stages of Cognex’s customer outreach, outlining the company’s strategic approach to penetrating the market. He revealed that Cognex had deployed a dedicated sales force, primed to drive the company’s growth agenda. With a strong emphasis on training and performance metrics, Cognex is poised to leverage its sales team effectively while anticipating a sequential increase in their contributions over the course of the year.

Paul Todgham, Chief Financial Officer of Cognex, added valuable insights, asserting that the company anticipates gross margin accretion based on their meticulous testing and pilot programs. Todgham highlighted the factors contributing to this margin growth, emphasizing the favorable dynamics associated with Cognex’s customer base and product offerings.

Looking to the Future

Willett’s comprehensive exposition, backed by the financial insights provided by Todgham, elucidated the multi-faceted approach Cognex is employing to capitalize on the burgeoning opportunities within the EV market while navigating its intricacies. As Cognex continues to navigate these uncharted waters, the company remains resolute in its commitment to innovation, customer-centric strategies, and sustainable growth.

The clarity and conviction exhibited by Cognex’s leadership instills confidence in the company’s ability to weather the uncertainties and emerge as a formidable force in the realm of EV technology.

Conclusion

The dialogue between Cognex’s leadership and industry analysts exemplifies the company’s proactive stance and strategic acumen as it steers through the dynamic landscape of EV technology. Despite the challenges and ambiguities, Cognex remains undeterred, drawing from its expertise and innovation to carve a path to sustained success in this evolving market.

The New Frontiers for Cognex in the Face of Global Economic Volatility

Shift in Global Markets and Consumer Electronics Research

The recent earnings call for Cognex Corporation revealed a mixed bag of financial results, with notable challenges in the Greater China market impacting the company’s overall performance. President and CEO, Rob Willett, highlighted the significant year-on-year revenue decline of 29% in Q4 and 28% for the year in Greater China, signifying a dampening effect on growth expectations. This decline was particularly pronounced in the automotive segment, raising concerns among investors who closely follow the company’s financial outlook.

Willett’s account alluded to an industry-wide trend, potentially signaling a broader economic reshuffling beyond Cognex’s individual challenges. The narrative extended into the consumer electronics domain, a vital segment for the corporation, with Willett stressing the significance of maintaining market share in China. However, a silver lining emerged as he speculated on the potential for a long-term manufacturing shift away from China, emphasizing the strategic positioning of Cognex in emerging markets like India and Vietnam.

Financial Insights and Macroeconomic Factors

Chief Financial Officer, Paul Todgham, echoed Willett’s sentiments, appending some financial specifics to the discussion. He delved into the nuanced outlook for the company in China, emphasizing the year-over-year contrast in performance and the impact of macroeconomic variables, particularly the fluctuating Chinese Yuan. Todgham emphasized the influence of consumer electronics on the overall business, shedding light on the disproportionate effect it wielded on Cognex’s numbers in China.

This crystallized the stark reality of a subdued market in China, explicating the intricate interplay between macroeconomic drivers and the company’s performance. These insights provided a deeper understanding of the broader economic headwinds impacting Cognex’s operations, prompting a more holistic evaluation of their future trajectory.

Logistics Sector and Technology Integration

As the discussion pivoted to the logistics sector, Rob Willett outlined the contrasting dynamics at play, with revenue contraction in 2021 cushioning the preceding year’s exceptional growth. Willett emphasized the evolving landscape, punctuated with pandemic-induced investments and subsequent adjustments in response to market conditions, particularly in e-commerce. The introduction of vision technology and edge intelligence was celebrated as integral to the company’s strategic positioning to embrace burgeoning opportunities in logistics.

Furthermore, the CEO’s characterization of Cognex’s momentum and technological acceptance in the market offered a hopeful perspective amidst the prevailing uncertainties. These insights underscored the company’s endeavors to harness emerging trends and capitalize on partnerships with industry giants like Walmart and UPS, signaling optimism for future growth prospects in the logistics domain.

In essence, the earnings call painted a vivid picture of Cognex’s resilience and adaptability in the face of formidable economic headwinds, reflecting a strategic repositioning to navigate the shifting global landscape. The insights gleaned from the call provide investors with a multifaceted understanding of the company’s operational challenges and the strategic initiatives aimed at embracing new frontiers of growth.

Bright Prospects for Cognex’s Logistics Business

Joseph Donahue from Robert W. Baird and Company posed a question pertaining to the longevity of the margin headwind from Cognex’s logistics project, and whether the associated recurring revenue could be extended to other customers. In response, Rob Willett, President and Chief Executive Officer, expounded on the technology behind the edge intelligence product. Willett emphasized the capability of the technology to manage all vision systems through middleware, thus providing valuable manufacturing data to customers. He also highlighted the company’s long-standing view that customers should pay for this product on a monthly subscription basis, and revealed that the company had achieved its largest success for the product thus far. Furthermore, Willett announced the signing of a contract that would enable monthly billing for the technology and expressed hope for additional functionality in the future. He also outlined their strategy of offering the technology to customers after a free trial period as part of their efforts to transition the business to a subscription-type model. Willett concluded by expressing confidence in the technology’s potential and the company’s expectation of more successes as the technology matures.

Optimistic Market Assessment

Conversing with Joe Ritchie from Goldman Sachs, Willett refrained from giving specific industry guidance for the year but acknowledged the challenging period at the beginning of the year as businesses gear up through January and the impact of Chinese New Year. Willett expressed optimism about the growth prospects in the logistics market for the year and emphasized the ongoing efforts to achieve robust growth. He pointed out that while bookings in the logistics industry may not translate into revenue until a later period, the company remained confident in reporting positive results. Willett also discussed the potential revival of the consumer electronics market and identified automotive as a challenging industry with the offsetting potential of electric vehicles for growth. He cautioned that while these were early indicators, the business environment was subject to rapid changes and fluctuations.

Addressing Ritchie’s query about gross margin progression and free cash flow, Chief Financial Officer Paul Todgham touched upon the about 200 basis point drag from one strategic logistics project and the persistence of the Moritex drag in their margin. Todgham remained hopeful for a return to target margins through growth. Additionally, he highlighted their strategic decisions around inventory and the expected generation of cash through the business operations.

Positive Synergy from Moritex Integration

Responding to Piyush Avasthy from Citi, Willett emphasized the promising integration progress with Moritex and the company’s swift pursuit of synergies. He highlighted the synergies that involved facilitating broader product sales and the integration of their businesses in Japan. Willett underlined the excitement surrounding Moritex’s reputation and leadership in Japan, thereby indicating a positive outlook for the company’s integration and collaboration with Moritex.

Moritex’s Impact on Cognex Corporation’s Strategy and Cost Management

Semi Industry Trajectory and Optimism for Cognex Corporation

Cognex Corporation, despite a period of tremendous growth in 2021 and the first half of 2022, experienced a significant slowdown in the second half of 2022. However, there are signs pointing to a potential resurgence in the second half of 2024, evoking a cautious sense of optimism. This upturn in the semi-industry prompts a reevaluation of the balance between the company’s various business segments, particularly the impact of Moritex in Japan.

Cost Management and Investment Strategy Amidst Emerging Customer Initiatives

Cognex Corporation’s approach to cost management and investment amidst emerging customer initiatives involves a careful balance. The company is heavily investing in its emerging customer segment, which is anticipated to enhance the productivity of its sales force. This is achieved by ensuring a delicate equilibrium between a more sophisticated sales force and the emerging customer sales team. Furthermore, strategic changes are being made to manage costs and enhance the ease of use of the company’s technology, allowing for capacity expansion without a significant increase in headcount. These measures, alongside process improvements in G&A functions, are indicative of Cognex’s prudent approach to cost management and investment.

Structural and Transitory Cost Management Actions

Amidst the ongoing cost management actions, Cognex Corporation is careful about the nature of these cost decisions. While the company is investing heavily in emerging customer initiatives, it is mindful of maintaining a balance in its cost structure, ensuring that the emerging customer sales force and other business segments remain in equilibrium. This approach encompasses various cost management strategies, from investment in new AI tools for engineers to careful headcount adjustments. Moreover, the company is making strategic decisions to address the variable costs, particularly in incentive compensation, ensuring that these measures provide a longer-term tailwind rather than being transitory in nature.

Insights on Emerging Customer Success and Market Position

Cognex Corporation’s pursuit of emerging customer sales opportunities has demonstrated early success. The company is targeting industries such as packaging, consumer products, and food and beverage, expanding its market presence and reaching previously untapped customer segments. This strategic shift has also led to encounters with a different set of competitors, emphasizing the company’s broader market reach. Furthermore, the ease of installation and demonstration of the company’s products to less sophisticated customers has added a new dimension to its sales approach, portraying a dynamic transformation in its market position.

Investment in Sales Force and Career Development

Cognex Corporation’s strategy to groom its new sales personnel involves a keen focus on training and development, particularly for those emerging from college. The company emphasizes its commitment to nurturing talent, offering a great career path, and investing in the professional growth of its sales force. This approach not only reflects Cognex’s dedication to maintaining a competitive sales force but also sets the stage for the potential evolution of these personnel into larger roles with more sophisticated opportunities, ultimately contributing to the company’s long-term success.

The Bright Vision for Cognex’s Expansion in EV Battery and Semi Markets

Nathan McCurren — Senior Director, Investor Relations

Rob Willett — President and Chief Executive Officer

Paul Todgham — Chief Financial Officer

Andrew Buscaglia — Exane BNP Paribas — Analyst

Jim Ricchiuti — Needham and Company — Analyst

Jacob Levinson — Melius Research — Analyst

Joseph Donahue — Robert W. Baird and Company — Analyst

Joe Ritchie — Goldman Sachs — Analyst

Piyush Avasthy — Citi — Analyst

Jairam Nathan — Daiwa Capital Markets — Analyst

Katie Fleischer — KeyBanc Capital Markets — Analyst

More CGNX analysis

All earnings call transcripts

All right, dear investors, fasten your seatbelts and hold on to your hats as we embark on a remarkable road trip. The splendid folks at Cognex, led by the indomitable Rob Willett, have dropped some thrilling hints about their stunning journey into the world of EV batteries and semiconductor end markets. Buckle up as we dissect the roadmap to Cognex’s potential involvement in these burgeoning sectors and navigate through the twists and turns of market dynamics.

Laying the Foundation for Growth

Enter Katie Fleischer from KeyBanc Capital Markets, pausing graciously for her query, delicately placing her finger on the pulse of Cognex’s involvement in EV battery and semiconductor projects. In response, the sagacious Rob Willett, exuding confidence, clasps the reins of the conversation and sheds light on the flourishing EV battery business that Cognex has meticulously nurtured over the past couple of years. Like a skilled gardener, Willett paints a vibrant picture of the sprouting project opportunities and burgeoning prospects, underscoring the tremendous growth in Cognex’s pipeline over the recent 12 to 18 months. The chimes of progress are echoing, with ground-breaking ceremonies becoming the new anthem, setting the stage for Cognex to saunter in as a late-cycle participant, ultimately reaping the rewards of its involvement.

Adapting to the Unpredictable Terrain

But hold on, dear investors! As the sun rises on this promising landscape, Willett casts a discerning eye on the horizon, cautioning us about the potential roadblocks that lay ahead. He speaks of the treacherous terrain of delays that often afflict projects in the semiconductor and EV sectors, where execution crawls at a glacial pace due to labor shortages and dearth of technical expertise. He muses on the political clouds hovering over Europe and America, casting shadows of uncertainty on promised investments. Yet, in the midst of these challenges, Willett’s unwavering belief in the untapped potential of machine vision shines through like a beacon piercing the fog of doubt.

Through this earnings call, Mr. Willett has painted a picture of Cognex’s future that is as promising as it is unpredictable. As investors buckle in for the ride, it’s clear that Cognex is poised to navigate the twists and turns of these nascent markets, equipped with the vision and agility essential for success.

As the curtain falls on the call, we are left eagerly anticipating the next quarter’s show where Cognex will take center stage once again, offering us a front-row seat to witness the unfolding drama of its expansion into the electric vehicle and semiconductor domains.

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The Bumpy Road for Cognex: Q4 2023 Earnings Assessment

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Agenda:

Key Points from Discussion: