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Cognex (NASDAQ: CGNX)
Q3 2024 Earnings Call
Oct 31, 2024, 8:30 a.m. ET

Cognex Reports Strong Q3 2024 Performance Amid Automation Challenges

Overview of Earnings Call

Operator

Welcome to the Cognex third quarter 2024 earnings conference call. All participants are in listen-only mode, and a question-and-answer session will follow the presentation. Now, I introduce your host, Nathan McCurren.

Nathan McCurren — Head of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us. Our press release detailing our earnings was published yesterday, and our Form 10-Q report for Q3 2024 was filed this morning. Both documents are accessible on our Investor Relations website.

This call will reference non-GAAP measures. Reconciliations of these to GAAP are available in our press release and earnings presentation. Forward-looking statements made today are based on information we believe to be accurate. Actual results may differ due to risks outlined in our SEC filings, including our most recent Form 10-K and Form 10-Q.

Positive Trends Amid Challenges

Rob Willett, Cognex’s President and CEO, will discuss market trends and our strategic initiatives, while CFO Dennis Fehr will cover the third-quarter financial results. We’ll conclude with an outlook on future performance. Rob, over to you.

Robert J. Willett — President, Chief Executive Officer, and Director

Thanks, Nathan. Happy Halloween, everyone! This quarter, we achieved revenue and adjusted EBITDA margins as expected. Revenue grew 19% year-over-year, or 7% when excluding our Moritex acquisition, led largely by advances in the Logistics and Semiconductor markets.

Our factory automation business still faces challenges, particularly in Automotive, even as other areas stabilize. Despite these hurdles, we kept a tight grip on costs, reducing operating expenses even with growing costs from new customer initiatives.

Innovations in AI and Machine Vision

We continue to innovate, integrating advanced AI into our machine vision products. A notable launch this quarter was our AI-assisted labeling tool, which dramatically decreases the time needed to train deep-learning models. One model is now able to cut out objects in images with a single click, reducing labeling time by 90%.

Our AI-driven Optical Character Recognition tool also debuted this quarter. This new tool requires nearly no setup, making it accessible to a wider range of customers and delivering top-tier performance immediately.

Expanding Our Customer Base

We believe that as AI enhances machine vision capabilities, small- and medium-sized businesses will increasingly drive market growth. Historically, Cognex has focused on advanced manufacturers, but we see potential in less complex applications.

New technologies developed over the past five years are tailored for these smaller businesses. With this strategy, we aim to tap into a market of hundreds of thousands of potential customers through simplified products.

To broaden our reach, we’ve added a new group of inexperienced but ambitious recent college graduates, whom we call “Salesnoids.” They allow us to expand our sales coverage and focus on shorter calls to connect with more customers.

The first group of Salesnoids began in early 2024, and we’ve seen positive results in a challenging economy. In Q3 2024, we reached our highest ever bookings for emerging customers, including sectors where we previously had little presence, such as aerospace and agriculture.

Key Metrics and End-of-Quarter Update

In Q3, our new Salesnoids recorded nearly $1 million in sales weekly and referred millions in vision business closed by other teams.

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Cognex Reports Third Quarter Financial Results Amidst Mixed Market Conditions

The experienced sales teams at Cognex have been actively engaging both new and existing customers, though some of these bookings may not represent entirely new revenue streams. Currently, a new group of sales representatives is undergoing training and will start their fieldwork in the upcoming four months. The company’s emerging customer initiative is a long-term effort, still in its nascent stages, and focuses on continuous improvement.

Cognex is learning which products resonate best with its target customers. In response, the company has refined its product offerings and equipped sales staff to promote additional vision products. Not only do new customers show interest, but existing accounts also recognize the value of easy-to-use technology, benefitting from increased engagement and wider sales coverage. Emerging Salesnoids, or sales representatives, are even able to identify more potential applications for advanced vision products and refer these leads to their more experienced colleagues.

To optimize sales coverage and better serve clients, Cognex is consolidating its sales forces under a single management structure for each geographic area. While the focus is on long-term growth, the company acknowledges the current challenging market climate but sees this initiative generating greater customer interaction, expanding its customer base, and driving profitable business. Emerging Salesnoids are expected to conduct over 80,000 additional in-person customer visits and to add about 3,000 new accounts within this year.

In the medium and long term, this sales transformation is anticipated to drive substantial growth and profitability. However, incremental revenue from this group is no longer a measure of success. Instead, the focus shifts to the broader goal of achieving over 30% adjusted operating margins, positioning Cognex for future success. Each year, new cohorts of Salesnoids will be introduced as part of this initiative, although future cohort sizes will adapt based on market conditions.

Now, addressing current market conditions—details can be found on Page 6 of the earnings presentation. The company is seeing a mix of performance across different end markets, excluding contributions from Moritex. The automotive sector, for instance, has faced challenges, with revenue declining both year-on-year and sequentially. There have been ongoing delays, cutbacks, and cancellations in electric vehicle battery projects, leading to the weakest performance in this sector that I have observed during my 16 years with Cognex.

The automotive industry is grappling with overinvestment in electric vehicles, uncertainty in the economy, and heightened competition. Consequently, there has been little capital investment across the value chain, and we expect this trend to persist until clarity is restored among customers. Conversely, the logistics sector has shown resilience, with significant year-to-date revenue growth.

Growth continues in logistics, driven by large e-commerce operations, parcel and post services, and traditional logistics customers globally. This increase is fueled by market demand and innovations like the newly launched DataMan 380 in 2023. For example, Cognex partnered with a leading e-commerce company in South Korea, helping them streamline their warehouse operations for better package tracking and throughput. We achieved this with superior read rates at higher speeds than competing solutions, showcasing the effectiveness of our technology.

We believe that logistics is well-positioned to remain our fastest-growing end market. As automation adoption grows and e-commerce investments become more apparent, we expect to capture more market share in the parcel and post segments, expanding beyond basic barcode reading to a wider array of vision solutions. The consumer electronics sector has shown an uptick year-on-year, although it experienced a sequential decline due to timing issues. The second quarter of 2023 included $15 million in revenue that shifted from the third quarter.

Furthermore, the uptick in consumer electronics revenue in 2023 was less pronounced. Looking ahead, our predictions for consumer electronics investment remain cautious. We will have a clearer view of this market by early Q2 each year.

In regards to the semiconductor market, we are observing significant growth year-on-year from a relatively low base in 2023. Investment from major machine builders across different regions is increasing, and we are optimistic that this trend will endure. Now, I will turn the discussion over to Dennis Fehr, the Chief Financial Officer, who will present the financial results and fourth-quarter outlook.

Dennis Fehr — Chief Financial Officer

Thank you, Rob. Let’s discuss the financial highlights, available on Page 8 of our earnings presentation on our website. The third quarter featured four months of Moritex financials as we synchronized our accounting schedules. Third-quarter revenue reached $235 million, slightly exceeding the midpoint of our guidance and grew 19% year-on-year.

When excluding Moritex, revenue increased by 7%. It’s important to note that the $50 million in Consumer Electronics revenue shifted to Q2 from Q3 in 2023 provides a more favorable comparison. Adjusting for this timing, revenue without Moritex was about flat year-on-year. Geographic performance excluding Moritex showed growth across all major regions for the first time in over two and a half years.

Europe experienced a nearly double-digit growth rate, while the Americas and other Asian markets grew slightly. The strong performance in logistics significantly contributed to growth in these regions. China also saw a notable increase after seven straight quarters of decline, largely due to timing in Consumer Electronics revenue comparisons.

Now, turning to margins, the adjusted gross margin was 68.7% in Q3, down from 72.7% a year prior. The gross margin was negatively impacted by a three-percentage-point dilution effect from Moritex, which exceeded the usual two-percentage-point effect due to an additional month of financials. The margin also faced competitive pricing pressures as many manufacturers have become more cost-conscious amidst a challenging market.

In light of fewer available projects, preserving market share has become our priority, particularly evident in China. Adjusted operating expenses rose by 10% year-on-year, though they dipped slightly sequentially, even with the extra Moritex expense accounted. The year-on-year rise was influenced by Moritex costs, greater investment in our emerging customer initiative, and reduced incentive compensation due to a lower bonus achievement accrual in 2023. We maintain a strong commitment to cost management moving forward.

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Cognex Reports Strong Performance Amid Ongoing Market Challenges

Cognex Corporation reveals a steady decline in operating expenses year-to-date, despite facing hurdles from incentive programs. Excluding Moritex and emerging customer initiatives, adjusted operating expenses decreased by 2%. Remarkably, the company managed to cut operating expenses by $3 million sequentially just in the third quarter.

Key Financial Metrics for Q3

The adjusted EBITDA margin landed at 17.6% during Q3, consistent with guidance and showing a slight increase from 17.4% the previous year. Although a rise in revenue year-on-year contributed positively, this was countered by a dip in adjusted gross margin and investments in emerging customer initiatives. Additionally, the adjusted EBITDA margin saw a sequential decline of 2.3 percentage points, primarily due to lower adjusted gross margins and slight operating leverage challenges. Cognex’s diluted earnings per share (EPS) on a GAAP basis reached $0.17, up from $0.11 a year earlier.

This year-over-year increase was largely influenced by an $8.5 million foreign currency loss reported in Q3 of 2023, which stemmed from a forward contract to hedge against the purchase price of Moritex. Adjusted diluted EPS improved to $0.20, reflecting a 19% increase or $0.03 compared to the previous year, thanks to Moritex’s contribution. The adjusted effective tax rate remained steady at 18% for both Q3 of 2024 and Q3 of 2023. Furthermore, free cash flow reached $52 million in Q3, marking the highest quarterly total since Q4 of 2022.

Last year, free cash flow stood at $35 million. Although still early in the initiative, our strategy to enhance working capital efficiency shows results, evidenced by improvements in the cash conversion cycle. The robust free cash flow bolstered Cognex’s financial position, leaving it with $607 million in cash and no debt. In Q3, the company returned $17 million to shareholders through stock buybacks and dividends.

Looking Ahead: Optimistic Projections for Q4

As we look forward, Cognex anticipates fourth-quarter revenue between $210 million and $230 million. This range accounts for seasonal trends in consumer electronics and one month less of Moritex results. At the midpoint of this guidance, excluding Moritex, the outlook indicates a high single-digit increase year-on-year, driven primarily by growth in logistics and semiconductor markets. It is anticipated that Moritex will revert to its typical revenue contribution of 6% to 8% in Q4, after contributing approximately $7 million in the previous quarter.

Regarding anticipated margins, the adjusted gross margin is expected to fall in the high 60% range. Factors such as product mix and competitive pricing may present mild challenges, though they could be offset by the reduced financial impact from Moritex. The overall gross margin impact from Moritex is estimated at nearly two percentage points for the quarter, translating to about a one-point year-on-year headwind. For adjusted EBITDA margin, projections sit between 14% and 17%, with the midpoint reflecting a three-percentage-point improvement year-on-year, supported by tight expense management and positive operating leverage, albeit slightly tempered by reduced gross margins and investments in new customer initiatives.

Lastly, we are excited to announce that we will host our Investor Day on June 9th and 10th next year. We invite you to join us in person at our Boston area headquarters for this valuable opportunity. Now, let’s open the floor for questions. Operator, please proceed.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer segment. [Operator instructions] One moment while we collect questions. Our first inquiry comes from Jamie Cook with Truist.

Jamie Cook — Analyst

Good morning, and thank you for taking my questions. Firstly, regarding the emerging customer initiative, how does your target of acquiring 3,000 new customers align with earlier revenue projections of an additional $50 million? With the combined sales force, do you see potential cost savings in 2025? My second question concerns gross margins for Q4. Can you provide more details on how mix and pricing might affect margins? I’m curious about the pricing environment moving forward. Thank you.

Robert J. Willett — President, Chief Executive Officer, and Director

Thanks for your questions. To start, Cognex is maintaining a strong presence among leading manufacturers. We are working to extend our innovative technologies to a broader customer base. Our goal is to enroll 3,000 new customers in our current initiative’s first year, which may seem modest compared to our overall customer base of about 30,000, but represents a significant initial step.

The momentum is building, and we anticipate even greater growth from these customers as we proceed. With continual improvements, the second cohort of customers will likely mirror or exceed these results.

In terms of service costs, we aim to assimilate a sales team that is more productive and less costly. By offering easier-to-sell products, we expect to boost productivity while also seeing a cost-efficiency trend in our sales operations.

Dennis Fehr — Chief Financial Officer

Now addressing your second question regarding gross margins. In Q3, we experienced a sequential decline of about 160 basis points in gross margin. The addition of Moritex this quarter influenced one full percentage point, increasing the dilutive impact to three points instead of the typical two. The remainder of the decline relates to product mix alongside pricing considerations, particularly concerning our operations in China.

Jamie Cook — Analyst

Thank you.

Operator

Thank you. Our next question comes from…

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Logistics Growth and Emerging Customers: Insights from the Latest Earnings Call

Tommy Moll — Analyst

Good morning, and thank you for taking my questions. Rob, I wanted to start with Logistics and the noticeable improvements we’ve seen in the third quarter, which we expect to carry into the fourth. Observations in the market indicate a positive tone, particularly regarding warehouse leasing activity. It seems that many end users have successfully absorbed much of the overcapacity created during previous years.

Could you share whether you foresee any potential for significant growth in this sector in the coming quarters, especially given the long lead times associated with these large projects? How early do discussions regarding orders typically begin?

Robert J. Willett — President, Chief Executive Officer, and Director

We are indeed optimistic about the current trends in Logistics. Revenue has seen substantial year-on-year growth for the third consecutive quarter, and we anticipate a robust double-digit increase for the year. This growth is evident across various end markets and geographic regions.

It’s important to note that we’ve come from a period of lower investments. The excess capacity built during the pandemic has been cleared, and we are now on a promising growth path that aligns with our earlier expectations.

In terms of visibility, we see good potential for larger projects, along with a solid pipeline. The timing of these projects can vary, but generally, we have confidence in the market dynamics we’ve observed. Moreover, we’re witnessing strong interest from new customers, especially as they adopt our edge intelligence platform. This technology enhances their ability to monitor numerous data points in their warehouses, creating a more data-driven environment.

We also see growing interest in our vision products beyond our traditional identification offerings, which is encouraging. While investment in the parcel and post market isn’t exceedingly high, we are starting to make significant inroads there as well. Additionally, emerging markets like India present exciting opportunities for our overall growth.

Tommy Moll — Analyst

Thank you. For my follow-up, I want to discuss the emerging customer initiative. I believe you mentioned that the first cohort reached nearly a $1 million-a-week run rate in the last quarter. What is the target number for this initiative to achieve the anticipated 30% operating margin?

Robert J. Willett — President, Chief Executive Officer, and Director

Correct, they approached almost $1 million per week, and they are also directing significant business to our account sales engineers who are effectively closing vision sales. Achieving a breakeven point will take several quarters, but we anticipate reaching that target margin eventually. While we expect initial attrition, the gross margin from this initiative should improve our overall figures.

Dennis Fehr — Chief Financial Officer

To clarify, while we’re not providing regular updates on specific numbers, understanding the broader context is important. We view the first year as the investment period—focused on hiring and training staff. We expect this year to be when we reach breakeven, and next year should show significant contributions to our overall numbers.

Tommy Moll — Analyst

Thank you both. I’ll turn it back to the operator.

Operator

Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question.

Andrew Buscaglia — Analyst

Good morning, everyone. For your Q4 gross margin guidance, could you clarify if you expect it to be similar to Q3, with more tech remaining above 70%? Any additional insights would be appreciated.

Robert J. Willett — President, Chief Executive Officer, and Director

While I can’t provide a specific figure excluding Moritex, I can discuss the overall factors at play. Starting with Q3, we benefit from having one month less of Moritex in Q4, which impacts our percentage positively. However, since growth is primarily coming from Logistics, we anticipate the typical seasonal decline in the Consumer Electronics segment, leading to a headwind. Furthermore, we face pricing pressures, especially in China, which will also influence our Q4 results.

Andrew Buscaglia — Analyst

With that in mind, regarding the emerging customer initiative, can we expect a contribution in Q4? Also, do you foresee an updated target for 2025, considering the $1 million a week suggests substantial growth?

Dennis Fehr — Chief Financial Officer

Yes, we have factored in a contribution from the emerging customer initiative into our Q4 guidance, reflecting an ongoing increase in bookings. However, it’s premature to discuss targets for 2025 as we are focused on current market trends.

Andrew Buscaglia — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Damian Karas with UBS. Please proceed with your question.

Damian Karas — Analyst

Good morning, everyone. Could you provide insights on the regional trends you are observing? You mentioned that growth appears to be strong across all regions.

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Global Market Insights: A Detailed Examination of Current Trends

Robert J. Willett — President, Chief Executive Officer, and Director

Sure, I’m glad to provide insights. Since our last discussion, I’ve traveled around the globe and gathered some observations. Overall, markets are indeed challenging, as reflected in the weak PMIs globally.

This decline is evident across most markets we serve, with the exceptions lying in growth sectors like logistics and semiconductors. Outside of these areas, the sentiment remains considerably weak. In the Americas, particularly in the automotive sector, perceptions are notably negative. Other markets are stable yet low.

In Europe, we see a similar trend but with heightened concerns, especially in automotive. Despite this, we achieved solid results last quarter—primarily driven by our Logistics business. Factory automation, however, continues to struggle.

Turning to China, we’ve observed a consistent decline over the past seven quarters; however, last quarter marked a reversal with growth mainly in electronics. The automotive industry in China is showing strength and even signs of improvement. Despite facing overcapacity issues, the general sentiment in China’s automotive market appears better than in other regions.

Japan seems to be faring somewhat better, benefiting from semiconductors and a weaker yen, which contributes to increased positive sentiment. The overall landscape of Asia holds promise for growth, yet geopolitical concerns contribute to ongoing hesitations.

Damian Karas — Analyst

Your insights are greatly appreciated, Rob. You mentioned incorporating AI tools into your offerings. Has this impacted your pricing, or is it more about attracting new customers and refreshing existing relationships? Moreover, can you elaborate on how AI is shaping an investment cycle for your clients?

Robert J. Willett — President, Chief Executive Officer, and Director

Thank you for the question. AI is indeed advancing rapidly, unveiling new capabilities that can address previously complex problems. This evolution is poised to enhance our ability to serve more customers efficiently.

We’ve engaged with leading manufacturers across various sectors, and there is palpable excitement regarding the transformative potential of AI. It allows us to broaden our service offerings while reducing the engineering burden on both our teams and our customers.

The technology being developed, especially with NVIDIA chips, presents vast data processing capabilities that we leverage for embedded systems, even within smaller, cost-effective products. This approach can help us attract new customers, aiming to expand our reach from 30,000 to potentially hundreds of thousands.

Damian Karas — Analyst

Thank you, Rob, for that detailed overview.

Robert J. Willett — President, Chief Executive Officer, and Director

Thank you.

Operator

Next, we have a question from Joe Giordano of Cowen and Company. Please go ahead.

Unknown speaker — Cowen and Company — Analyst

Good morning. This is Michael standing in for Joe. You mentioned that your emerging customer initiatives achieved nearly $1 million in weekly sales, even as the factory automation sector struggled. What potential revenue uplift do you foresee in a more stable market?

Robert J. Willett — President, Chief Executive Officer, and Director

Our recent sales cadence is indeed growing—it’s not static at $1 million per week but is on an upward trajectory. We’ve established a dedicated team that’s ramping up sales efforts. As we look to the future, our existing customer base is also providing referrals to boost sales.

While it’s still early to gauge the full impact and where we might stabilize, we’re pleased with the development thus far and will update on our progress in due course.

Dennis Fehr — Chief Financial Officer

Exactly. Additionally, we’ve made some strategic adjustments allowing our emerging customer sales team to engage with our existing clients, which may also influence overall revenue growth.

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Cognex CEO Discusses Revenue Challenges and Market Dynamics in Recent Call

Incremental Revenue Insights

Not all revenue generated is new. It’s important to consider this when analyzing the projected $1 million.

Robert J. Willett — President, Chief Executive Officer, and Director

Indeed, it’s crucial to highlight how we are identifying new opportunities. Recently, I had a meeting with a leading global automotive manufacturer. We spent three hours discussing how advanced machine vision technology can enhance robot guidance. During this meeting, I noticed a competitor showcasing their vision sensors and identification products. Typically, Cognex has not ventured into this market, but we recognize the significant business potential here. Our strategy includes not only attracting new customers but also deepening our relationships with existing clients.

Unknown speaker — Cowen and Company — Analyst

Thank you for that insight.

Operator

Thank you. Our next question comes from Jim Ricchiuti of Needham and Company. Please go ahead.

James Ricchiuti — Analyst

Hi. Thanks for taking my question. I’d like to delve into the “other” category you sometimes reference in your deck, particularly the semiconductor sector. Can you share what you’re seeing in terms of demand, especially considering potential slowdowns in the wafer fabrication equipment market expected in early 2025? Additionally, you mentioned strength in the medical market; can you elaborate on that as well?

Robert J. Willett — President, Chief Executive Officer, and Director

Hi Jim, I appreciate your question. Predicting the long-term direction of semiconductor capital expenditure is challenging, and there are varying opinions on whether we are entering a super cycle or are in a more cyclical phase. Our discussions with machine builders indicate strong investment in high-bandwidth memory and data center chips. Cognex is well-positioned in this area, thanks to our technology’s capability for precise alignment, inspection, and traceability.

Moreover, our partnership with Moritex is enhancing our revenue opportunities in the semiconductor market, allowing us to cross-sell optics and software. We are optimistic about near-term prospects but remain cautious about the next year’s outlook.

Regarding the medical sector, which accounts for about 10% of our revenue, we saw growth in the third quarter. Although there has been a decline year-to-date due to overinvestment by large machine builders during COVID-19 disruptions, we anticipate a return to normal spending trends in the upcoming quarters. Our advanced edge learning and deep learning tools are particularly appealing to clients focused on inspecting medical samples for quality.

James Ricchiuti — Analyst

Thank you for that clarification. On a related note, I understand you have been engaging with customers in China. Are they optimistic about future business, given the government’s initiatives aimed at stimulating growth?

Robert J. Willett — President, Chief Executive Officer, and Director

It’s not clear that the recent stimulus directly benefits the manufacturing sector; it seems focused more on real estate. If it boosts consumer demand, however, that could support domestic manufacturing. Currently, our business in China has seen a decline for seven consecutive quarters, though we did see a small improvement this quarter. It’s premature to declare if this marks a turning point.

The overall market remains weak, with excess manufacturing capacity limiting investments in new automation. Additionally, local Chinese competitors are gaining market share, especially against European and smaller Japanese firms. To maintain our market position, we are adjusting our pricing strategy, particularly for simpler applications like barcode reading. While this approach may lower our gross margins, it is essential for retaining market share as we prepare to launch our higher-margin products.

James Ricchiuti — Analyst

Thank you for the insights.

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Logistics and Automotive Markets: Insights and Recovery Paths

Operator

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

Jake Levinson — Analyst

Hi. Good morning, everyone. Rob, regarding the Logistics business, we’ve been hearing mixed signals from various companies in the sector. It appears the market may have reached a low point after the post-COVID slump.

Considering a few years ago, you had significant concentration with a well-known e-commerce customer, and you’ve indicated that you’re making strides in the post and parcel market, particularly with a Korean e-commerce firm. Can you share how your Logistics business has evolved over the past couple of years and discuss the diversity of your customer base today compared to previously?

Robert J. Willett — President, Chief Executive Officer, and Director

Yes, I agree that we might have bottomed out. I believe we’re now on a positive growth trajectory. We’ve seen this trend for several quarters, and it’s taking place across our Logistics business for various reasons. Major e-commerce players are ramping up spending and implementing new automation technologies, as reflected in their public statements.

Additionally, we’re experiencing growth with our secondary customer group, which includes smaller players we refer to as our base logistics business. We are signing many new customers, especially in niche areas like pet food and food delivery. There’s a notable increase in customer activity and investment, which is encouraging as we continue our recovery.

In the parcel and post segment, although we’ve been underrepresented, we’re experiencing growth there as well. Our low market share has allowed us to capitalize on our advanced technology, even as spending from major parcel players remains subdued.

Jake Levinson — Analyst

Thank you, that’s quite enlightening. Switching gears to the semiconductor industry, this was historically a primary market for you. I’ve noticed that many companies have moved these capabilities in-house over the years. Could you provide some insight into the current state of this market, and have you been able to penetrate any new areas?

Robert J. Willett — President, Chief Executive Officer, and Director

Reflecting on our history at Cognex, about 30 years ago, our business was heavily reliant on Japan and predominantly focused on semiconductors. As you noted, many capabilities transitioned in-house during the late ’90s. Nonetheless, Cognex technology remains paramount for challenging tasks that other companies struggle to perform, allowing us to work closely with major machine builders.

Our partnership with these builders means our success is closely linked to their sales. We anticipate growth driven by demand for advanced technologies, especially in areas leveraging deep learning. While the semiconductor sector is relatively small compared to our overall business, the robust quality of our products is generating positive growth.

Jake Levinson — Analyst

Thank you, that was very informative. I’ll move on to the next question.

Operator

Thank you. Our next question comes from Rob Mason with Baird. Please proceed with your question.

Rob Mason — Analyst

Good morning. I’m switching between calls, so please forgive me if this has been covered. Rob, I appreciated your comments about the Automotive market.

It seems like a rocky phase right now. Where do you believe the market stands in terms of recovery, and what could trigger renewed investment in this area? Do companies need to shift back to traditional models, or can electric vehicles (EVs) still be the driving force?

Robert J. Willett — President, Chief Executive Officer, and Director

I think the Automotive market is currently quite weak, and there’s a general sentiment of caution. We’re not expecting a recovery anytime soon. However, it will certainly recover eventually.

Talking with companies in America and Europe, many feel disappointed by their investments in EV infrastructure, especially given that expectations were not met. A Tier 1 supplier shared their experience of significantly investing in production capacities for a major automotive client, ultimately leading to only a fraction of anticipated demand.

Many firms are reconsidering their pricing strategies for the EV market, driven by the lack of demand and other challenges like insufficient charging infrastructure. While I believe technology will evolve and lead to greater adoption of EVs, this transformation will take time.

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EV Market Trends in China and New Product Launches at Cognex

The Growth of Electric Vehicles in China

As we look to the future, the electric vehicle (EV) landscape in China stands out. Observations indicate that consumers there are quickly adopting EVs, fueled by strong government support. Our company also experienced a growth spike in the EV sector during the last quarter, despite a slowdown in our traditional automotive business.

Chinese Automotive Dynamics and Overcapacity Issues

While growth is evident, an overcapacity problem exists in China’s automotive sector that needs resolution. This situation will likely impact market dynamics moving forward. In addition to China, countries like Japan and Korea are significant players in the automotive industry. They have taken a proactive approach, often leaning towards hybrid models, which has proven effective for them. Japanese manufacturers, in particular, are navigating this transition with caution, optimizing their use of technology, especially in areas like inspection and battery development.

Market Outlook for Automotive Industry

In summary, the overall automotive landscape appears mixed. Our outlook for the next few quarters is not particularly optimistic regarding broader automotive sales.

New 3D Vision Products: An Exciting Development

Switching gears, we introduced innovative 3D vision products earlier this year, which incorporate artificial intelligence for the first time in an industrial setting. Released in April, we are encouraged by its growth potential and believe it opens significant opportunities for our company going forward.

Looking Ahead

We are excited about our new high-margin products and their ability to tap into a larger customer base through an expanded salesforce. However, due to time constraints, we will end our discussion here today. Thank you to everyone for joining us this morning. We appreciate your questions and look forward to our next quarterly call.

Operator

[Operator signoff]

Duration: 0 minutes

Conference Call Participants

Nathan McCurren — Head of Investor Relations

Robert J. Willett — President, Chief Executive Officer, and Director

Dennis Fehr — Chief Financial Officer

Jamie Cook — Analyst

Rob Willett — President, Chief Executive Officer, and Director

Tommy Moll — Analyst

Andrew Buscaglia — Analyst

Damian Karas — Analyst

Unknown Speaker — Cowen and Company — Analyst

James Ricchiuti — Analyst

Jim Ricchiuti — Analyst

Jake Levinson — Analyst

Jacob Levinson — Analyst

Rob Mason — Analyst

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