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Cognex Corporation (CGNX) Q4 2022 Earnings Call Transcript

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Cognex Corporation (NASDAQ:CGNX) Q4 2022 Earnings Conference Call February 16, 2023 5:00 PM ET

Company Participants

Nathan McCurren - Head of Investor Relations

Robert Willett - President & Chief Executive Officer

Paul Todgham - Chief Financial Officer

Conference Call Participants

Josh Pokrzwinski - Morgan Stanley

Joe Ritchie - Goldman Sachs

Joe Giordano - Cowen

Guy Hardwick - Credit Suisse

Jacob Levinson - Melius Research

Jim Ricchiuti - Needham & Company

Rob Mason - Baird

Paul Chung - JPMorgan

Matt Summerville - D.A. Davidson

Jairam Nathan - Daiwa Capital Markets

Operator

Greetings, and invited to nan Cognex Fourth Quarter 2022 Earnings Conference Call. At this time, each participants are successful a listen-only mode. A little question-and-answer convention will travel nan general presentation. [Operator Instructions] As a reminder, this convention is being recorded.

It is now my pleasance to present your host, Nathan McCurren, Head of Investor Relations. Thank you. Please spell ahead.

Nathan McCurren

Thank you, Dona. Good evening, everyone, and acknowledgment for joining us. With maine connected today's telephone are Rob Willett, Cognex's President and CEO; and Paul Todgham, our CFO.

Our results were released earlier today. The property merchandise and yearly study connected Form 10-K are disposable connected nan Investor Relations conception of our website. Both nan property merchandise and our telephone coming will reference non-GAAP measures. You tin spot a reconciliation of definite items from GAAP to non-GAAP successful Exhibit 2 of nan property release. Any forward-looking statements we made successful nan net merchandise aliases immoderate that we whitethorn make during this telephone are based upon accusation that we judge to beryllium existent arsenic of today. Our existent results whitethorn disagree materially from our projections owed to risks and uncertainties that are described successful our SEC filings, including our astir caller Form 10-K revenge coming for 2022.

With that, I'll move nan telephone complete to Rob.

Robert Willett

Thanks, Nathan. Hello, everyone, and convey you for joining us. We proceed to navigate a challenging environment. Our 4th fourth results were mostly successful statement pinch our guidance, but are not typical of our semipermanent maturation expectations.

The attraction of my remarks coming will beryllium connected nan near-term challenges we're facing, and past connected nan reasons why we stay excited and assured successful our semipermanent maturation opportunities. Our largest situation wrong our logistics business, we proceed to spot a post-pandemic slowdown pinch a fewer of our largest e-commerce customers who person temporarily reduced their investments to sorb excess capacity. Looking beyond this impermanent pause, we proceed to expect logistics to beryllium our highest maturation extremity marketplace complete nan mid to agelong term.

We besides saw little caller business activity successful nan quarter. Bookings were beneath our expectations and generated little gross successful 4th than is typical. Despite these challenges, gross accrued connected a changeless rate ground by 1% for nan afloat twelvemonth compared to 2021, a twelvemonth wherever we reported beardown maturation of 28%. Outside of logistics, gross from nan remainder of our extremity markets grew successful 2022 astir successful statement connected a changeless rate ground pinch what we would expect complete nan agelong term.

As our history demonstrates, we tin acquisition periods of softness successful betwixt periods of robust growth. Our gross maturation target of 15% is simply a multi-year yearly target, pinch that lens gross of complete $1 cardinal successful 2022 represented double digit yearly maturation compared to 2020 and 2019.

Gross separator is 71% successful Q4 and 72% for nan afloat twelvemonth was successful statement pinch our latest expectations. Margins successful some periods were beneath our agelong word target mid 70% level owed to nan elevated acquisition of scarce components done brokers.

Before I spell into item connected our extremity markets and an outlook for Q1, I'd for illustration to move it complete to Paul to locomotion you done much of nan results.

Paul Todgham

Thank you, Rob, and hello, everyone. Revenue was $239 cardinal successful Q4, a 2% diminution year-on-year aliases an summation of 4% connected a changeless rate basis. This includes nan astir $20 cardinal catch-up from deliveries that were delayed successful Q3 pursuing nan fire. In summation to nan slowness pinch a fewer ample e-commerce customers passim nan 4th and slower business activity much broadly astatine nan extremity of nan year, overseas rate translator lowered gross by $45 cardinal aliases 4% successful 2022 and by 6% successful nan 4th quarter.

Looking astatine nan alteration successful gross for Q4 from a geographic perspective, each superior region grew year-on twelvemonth connected a constant-currency basis. Asia accrued by 9%, excluding an 11 percent constituent simplification from rate speech rates. Revenue maturation from semi and automotive much than offset softness from nan challenging situation successful China. Revenue from Europe accrued by 4% excluding an 11 percent constituent simplification from rate speech rates. Growth was led by gross from automotive and user electronics that offset a diminution successful logistics. In nan Americas, gross grew by 1% year-on-year. Lower investments by a fewer ample customers and logistics were offset by maturation successful automotive, user electronics, nutrient and beverage and aesculapian related industries among others.

Gross separator was 71% successful Q4 compared to 72% successful Q4 of 2021 and 73% successful Q3. The diminution from Q3 is owed to nan important premiums we've been paying to replenish constituent inventory destroyed successful nan fire. These purchases negatively impacted gross separator by astir 500 ground points successful nan 4th and astir 400 ground points for nan year.

We are pleased our agent bargain activity is winding down, now that we've replenished post-fire and nan proviso situation has improved. We expect it will return a mates of quarters for nan higher-priced components to activity their measurement done nan P&L, resulting successful a minimal effect by nan 2nd half of 2023.

Moving connected to operating expenses. Our reported operating expenses included a occurrence nonaccomplishment successful some Q3 and Q4 of 2022 and a humble restructuring complaint successful Q4. Excluding these charges, Q4 operating expenses accrued by 3% from Q3. Comparing year-on-year, operating expenses decreased by mid-single digits, chiefly owed to nan favorable effect of rate speech rates and little inducement compensation. These benefits were partially offset by nan incremental investments we've been making successful income and engineering headcount.

Operating separator connected a GAAP ground was 23% successful Q4. Non-GAAP operating separator was 24% successful Q4, an betterment from 23% successful Q4 of 2021 and 20% successful Q3. This level of profitability is beneath our 30% semipermanent target owed to little gross separator and operating deleverage from gross softness. The effective taxation complaint excluding discrete taxation items was 22% successful Q4 and 16% for nan afloat year. Reported net were $0.32 per stock successful Q4. Non-GAAP net per stock were $0.27 successful Q4 compared pinch $0.30 successful Q4 of 2021 and $0.21 successful Q3, excluding nan one-time charges mentioned earlier successful taxation adjustments.

Turning to nan equilibrium sheet. Cognex continues to person a beardown rate position pinch $854 cardinal successful rate and investments and nary debt. The spot of our equilibrium expanse enabled america to aggressively replenish components mislaid successful nan June fire. As a result, we caught up connected customer deliveries quickly during nan 2nd half of nan twelvemonth and ended 2022 successful a patient inventory position. During nan year, we besides had a important return of superior to shareholders pinch complete $200 cardinal of stock repurchase activity and much than $45 cardinal of dividends paid.

Now, I'll move it backmost complete to Rob for colour connected our extremity markets and connected our outlook.

Robert Willett

Thanks, Paul. I would for illustration to now springiness a small humanities context. You whitethorn remember, we went done a restructuring successful 2020. As portion of that action, we reorganized our R&D and engineering teams. These teams is focused connected groundbreaking separator learning exertion and modular merchandise architectures that tin deploy connected innovations much efficiently and astatine a faster rate. As a consequence of these improvements, we now person galore caller products coming to marketplace successful 2023.

Recent merchandise launches see our caller DataMan 580. This fixed-mount barcode scholar is designed for 5 and six cited Cognex modular imagination tunnels for usage successful nan astir demanding logistics applications. Pairing this merchandise pinch Cognex 3D imagination systems helps logistics customers to use a explanation connected a package successful a spot that does not screen different accusation connected that package, a amazingly difficult task to automate. This results successful optimizing processes by expanding statement speeds and traceability without lowering publication rates.

In different merchandise launch, we expanded nan capabilities of our Insight 2800 imagination strategy to see heavy learning enabled optical characteristic recognition. This allows customers to deploy powerful AI-based OCR Technology sloppy of their accomplishment level. Prior manufacture solutions required hours of programming by highly trained engineers preventing galore companies from automating this type of inspection. Now, models tin beryllium group up and deployed straight connected nan instrumentality successful minutes, pinch this position arsenic 10 sample images.

Food and beverage manufacturers will beryllium capable to easy publication expiration dates, moreover connected curved metallic surfaces. Electric conveyance manufacturers tin quickly find and publication nan alphanumeric matter edged connected nan bottommost broadside of EV batteries for traceability. And logistics businesses tin decipher codes and matter connected a assortment of package types to guarantee due routing and forestall rework. We judge these products and galore of that is planned for 2023 motorboat position america to broaden nan marketplace we serve, and seizure much share.

With that, let's jump into much item astir what we're seeing successful each of our extremity markets. Our largest extremity marketplace successful 2022 was automotive, which represented astir 25% of our revenue. We reported grounds gross from automotive and double digit maturation year-on-year successful changeless currency. This is chiefly driven by nan summation successful physics components successful vehicles and nan ongoing modulation to electrical vehicles. The modulation to electrical vehicles is generated an summation successful caller exemplary introductions and request for EV batteries. We person beardown relationships pinch nan awesome EV artillery manufacturers who are projected -- who projected continued maturation wrong Asia and caller maturation successful nan Americas and Europe.

In nan 4th quarter, we acquired Sirius Advanced Cybernetics GmbH aliases SAC, a German computational lighting company. Combining SAC's capabilities pinch Cognex's imagination and AI tools, equips america pinch an manufacture starring offering for artillery inspection. The SAC acquisition will support our strategy to seizure a larger stock of nan high-growth artillery inspection market.

Moving connected to logistics. Logistics represented astir 20% of our full gross successful 2022. After complete 60% maturation successful logistics successful 2021, yearly gross from logistics contracted by 25% successful 2022. Aside from nan fewer ample e-commerce customers who reduced investment, gross from nan remainder of our logistics business grew some successful nan 4th and year. We judge logistics will proceed to beryllium an important maturation driver for america complete nan agelong term. The marketplace is still successful nan early stages of adopting instrumentality vision, astir companies are still highly reliant connected labour and very fewer warehouses globally are realizing nan afloat imaginable of automation. An illustration of nan type of opportunities that beryllium successful logistics is simply a caller triumph pinch a Fortune 50 retailer that was antecedently a comparatively mini customer of us.

In 2022, we deepened our narration pinch this company, who had antecedently announced a multi-billion dollar finance to heighten its shopping experience. They are establishing location sortation centers and converting in-store stockrooms into sortation centers to battalion and vessel orders nonstop to consumers. Cognex was chosen to supply instrumentality imagination because of our best-in-class algorithms that tin reliably publication barcodes of angles. Our passageway solution enabled our customers to summation nan number of products connected a high-speed conveyor by reducing nan gaps betwixt them, while still reference barcodes astatine adjacent cleanable publication rates.

After first wins and fantabulous execution support, nan customers asked Cognex to adhd worth successful further areas, specified arsenic converting manual operations to automated tunnels, to offset labour shortages and costs successful existing location distribution centers.

Shifting to user electronics. Our 3rd largest extremity marketplace successful 2022 representing astir 20% of revenue. Consumer electronics grew successful nan mid-teens year-on-year connected a changeless rate basis. Growth was chiefly driven by nan premium extremity of nan smartphone marketplace pinch an further publication from different user electronics products specified arsenic tablets and accessories. We had peculiarly beardown request for our heavy learning and 3D solutions successful this market.

Turning now to our outlook. We expect gross successful nan first 4th will beryllium betwixt $180 cardinal and $200 million, which represents a meaningful measurement down year-on-year. You whitethorn callback that nan first 4th of 2022 was an exceptionally beardown 1 for america arsenic we reported an different sequential summation successful revenue, led by our 2nd highest 4th ever for logistics. We had beardown request broadly crossed our business moreover from user electronics, which is typically quiet successful Q1. We besides caught up connected $20 cardinal of orders successful backlog caused by proviso concatenation delays successful nan 4th fourth of 2021.

In contrast, caller business activity astatine nan extremity of 2022 was slower than we anticipated, and we had a slow commencement to 2023. Lower activity pinch our largest logistics customers continues, and we're besides seeing a broader slowdown crossed galore of our extremity markets arsenic customers are wary of committing to important investment. We judge gross separator successful Q1 will stay successful nan debased 70% range. The proviso situation has improved and our agent bargain activity has coiled down by nan effect of what we've already purchased will return a mates of quarters to travel done our P&L.

We expect operating expenses successful Q1 will summation by astir 10% connected a sequential basis, excluding nan charges related to restructuring and nan occurrence successful Q4. This summation is driven by investments we're making successful our caller emerging customer income unit on pinch merit increases and a weaker US dollar. Throughout 2023, we expect to spot a ramp-down successful nan effect of agent buys and a ramp-up successful our emerging customer income unit investment.

From an operating separator standpoint for nan year, we expect these 2 drivers to astir offset. We expect nan emerging customer inaugural to broaden our reach, summation penetration and further diversify our customer base, representing perchance hundreds of thousands of businesses. This customer conception is looking for automation solutions that are easy to implement, easy to usage and supply nan highest performance. Our newest separator learning and ID products position america good for this initiative.

To straight scope these customers, we're expanding our income force. We've already hired nan first income sound focused connected this segment. We will onboard and train much successful nan quarters ahead. We expect costs from this inaugural to ramp done nan first 3 quarters of this year.

While our continued investments during a slower maturation play will consequence successful adjacent word operating deleverage, we judge it's an important inaugural for agelong word growth. We stay committed to tightly managing operating costs successful this environment, and we besides judge it's important to proceed to put successful precocious ROI initiatives.

We're excited astir our semipermanent maturation prospects. Though timing is uncertain, we expect ample e-commerce customers to displacement backmost into finance mode, EV artillery maturation to continue, China to much meaningfully reopen and our emerging customer initiatives to commencement to deliver. I'm proud of really Cognoids responded successful a twelvemonth pinch galore challenges. It gives maine moreover much assurance successful having nan correct squad to present beardown maturation and caller customer worth together successful nan years to come.

Now, we will unfastened nan telephone for questions. Operator, please spell ahead.

Question-and-Answer Session

Operator

Thank you. The level is now unfastened for questions. [Operator Instructions] Our first mobility coming is coming from Josh Pokrzywinski of Morgan Stanley. Please spell ahead.

Josh Pokrzywinski

Hi, bully evening, all.

Robert Willett

Hi, Josh.

Josh Pokrzywinski

Just first mobility connected benignant of nan 1Q guide. I cognize that we've gone done a decent magnitude of, telephone it, off-cycle gross volatility pinch nan occurrence and immoderate of nan proviso concatenation worldly and nan catch-up connected nan different side, backlog position successful e-commerce. But should we deliberation of 1Q was benignant of representing normal seasonality without immoderate benignant of different large items arsenic we deliberation astir nan remainder of nan year? I cognize you don't springiness guidance, but conscionable trying to make judge there's nary different benignant of sound successful there?

Robert Willett

All right, yes. So, Q1 is looking slow. We've seen slow periods for illustration this earlier and we've travel retired of them and delivered meaningful growth. I think, you cognize that our business successful flex quickly and it's not benignant of backlog driven arsenic immoderate of our peers. And additionally, we're comparing to what is simply a peculiarly reliable Q1, fixed past year's unusually precocious gross from logistics and different markets.

But I deliberation it's besides adjacent to opportunity that, we spot little PMI information crossed each of nan regions that we service successful our regular business, and that's surely reflected successful nan activity that we're seeing, which is astatine a little complaint than we were expecting a fewer months ago.

And then, of course, arsenic I deliberation I've explained rather a lot, nan logistics business is really astatine a very debased level, really arsenic a consequence of nan ample customers really pulling backmost connected e-commerce spending. So, that's nan benignant of colour that we're looking at. For those of you who person followed Cognex for a long-time, we cognize that historically Q1 was ever our lowest 4th that somewhat sewage changed pinch ample logistics orders coming successful aliases sometimes precocious user electronics business successful Q1, but this looks for illustration a 4th without immoderate of that.

Josh Pokrzywinski

Got it, that's helpful. I admit that color. And past conscionable reasoning astir thing you said successful nan prepared remarks that I want to make judge I’ve understand better. A simplification successful agent buys done nan twelvemonth sounds for illustration a bully guy. And past you mentioned a ramp successful immoderate of these target finance customers for illustration – sorry, I get nan nonstop phrasing wrong, but some of those sound good. Are you saying it's a ramp successful nan disbursal to create that income unit that merchandise capacity like, is it a ramp successful nan disbursal aliases that customer revenue?

Paul Todgham

It's a ramp successful nan expense. Josh, this is Paul. So, nan measurement to deliberation astir this is, we had astir 400 ground points of agent bargain effect to gross separator successful our 2022 results. So, deliberation of it is astir $40 cardinal aliases so, $0.5 cardinal of revenue. We're expecting to spot astir a $25 cardinal to $30 cardinal simplification successful that disbursal this year, ramping up complete time. We still expect successful nan first 4th to person reflected successful our low-70s gross separator astir 300 ground constituent to 400 ground constituent effect of agent buys.

But we should spot a $25 cardinal to $30 cardinal finance -- savings to gross separator from agent buys and that's astir comparable to nan level of investment, we expect to make successful our emerging customer inaugural successful OpEx. So it's an summation complete -- ramping-up complete nan first 3 quarters. So location are immoderate of that reflected successful our Q1 OpEx guidance, which is why we spot nan sequential -- 1 portion of nan sequential OpEx summation from Q4, but we'll expect to spot much of that successful Q2 and Q3.

Josh Pokrzywinski

Crystal clear. Thanks, Paul.

Operator

Thank you. The adjacent mobility is coming from Joe Ritchie of Goldman Sachs. Please spell ahead.

Joe Ritchie

Thanks. Good afternoon, everybody.

Robert Willett

Hi, Joe.

Joe Ritchie

Hey. So, I wanted to touch connected nan logistics commentary a small spot further. So, arsenic you benignant of deliberation astir nan remainder of nan year, clearly, location is volatility passim nan twelvemonth successful 2022. It sounds to maine for illustration things person benignant of worsened and so, while logistics mightiness person been down 25% for nan twelvemonth is astir apt down a batch much possibly successful nan 4th quarter. I'm conscionable trying to understand going forward, wherever would you expect logistics, peculiarly nan bottommost conscionable based connected what you spot successful nan conversations that you're having pinch your customers?

Robert Willett

So yes, truthful logistics correspond astir 20% of gross successful 2022 astir $225 million, and it was our 2nd largest market, right? And it contracted. And we saw that contraction benignant of increases we gain done nan twelvemonth was comparatively beardown successful nan first half and past I deliberation it's really a communicative of 2 different customer types. We've sewage regular logistics customers who are increasing nicely, and we expect those to proceed to grow. Little little than half of that wide logistics business roughly. And past we've sewage ample customers, very fewer of them, immoderate of them beautiful celebrated businesses, and they've each really overinvested for a play done COVID and past now person really reined successful investments.

Some of them are going done restructuring. And that's going connected correct now and we expect they'll look from that. And past arsenic we get done nan year, they'll commencement to put again. That whitethorn not hap until precocious successful nan twelvemonth aliases moreover adjacent year, right? But we do expect to spot much finance going on. But moreover astatine those customers, there's still important activity that goes connected pinch benignant of productivity improvements, regular business, regular automation projects. So that's not for illustration that business has gone distant completely. But certainly, a batch of nan greenfields, really each of nan greenfields for immoderate of these bigger customers person been stopped aliases importantly delayed. So that's really nan authorities of play.

Paul Todgham

And Joe, to your mobility astir quarterly versus yearly maturation rates and truthful on, again, we don't consistently supply information connected each extremity marketplace by quarter. But I deliberation we did telephone retired successful nan Q3 net that was a -- Q3 2022 was a peculiarly unfavorable comparison. It was very debased for logistics successful 2022, and that was I deliberation our highest ever logistics 4th successful Q1 of 2023. So certainly, that 4th was difficult. In Q4, our maturation complaint aliases contraction successful logistics was beautiful comparable to nan year-on-year and past I would opportunity we're up against different reliable comparison successful Q1. Q1 was nan biggest logistics 4th of 2022 and then, obviously, location were immoderate announcements astir pauses successful caller capacity description and truthful connected that muted our logistics gross from Q2 to Q4 past year.

Joe Ritchie

Got it. That's ace helpful. If I could inquire conscionable 1 much it is interesting. It was very adjuvant to get nan colour connected nan 2022 baseline, right, for nan 3 biggest extremity markets. I consciousness bad asking for for illustration nan 4th but I'm curious, arsenic for illustration 1 of nan extremity markets possibly conscionable emerged and now is for illustration a sizable percent of your business arsenic well? And if you possibly want to supply I don't cognize if it's successful for illustration nutrient and beverage aliases user products aliases semis, but conscionable supply immoderate colour astir that extremity marketplace and what your anticipation is for 2023?

Robert Willett

Well, yes, Joe, I deliberation we talked astir our large extremity markets, right, user electronics, automotive being largest user electronics and logistics. And past different markets for Cognex are beautiful broad, and they see aesculapian related industries, user products, nutrient and beverage, merchandise security, truthful I deliberation if I'm knowing your mobility correctly, you're really asking astir those benignant of markets successful general. And location -- they supply bully coagulated maturation for america successful statement pinch our wide maturation expectations. And they've been -- there's variety among those markets. But generally, they proceed to turn overmuch successful nan measurement nan remainder of nan business does. But fto maine inquire for clarification. Were you asking astir a circumstantial marketplace aliases something?

Joe Ritchie

Yes. I was conscionable wondering whether 1 of nan extremity markets has grown to beryllium much important than nan others. And what's really been driving that? [Multiple Speakers]

Robert Willett

Yes. Yes. I mean we've sewage immoderate bully maturation drivers I could talk astatine magnitude astir life sciences and immoderate of what we're seeing successful those spaces and nutrient and beverage. And -- but I don't deliberation that's really going to -- moving nan needle successful position of our results successful a important measurement currently.

Paul Todgham

And I deliberation we've spoken to this before, but obviously, complete nan past mates of years, semiconductor has -- which is mostly mini for us, benignant of mightiness person been 5% of our business 2 aliases 3 years agone and still beneath 10%, but it surely has knowledgeable rather robust growth. So obviously, we're seeing immoderate cyclicality there.

We are starting to turn medical-related wide is astir 10% of our business, which we discussed astatine Analyst Day. But mostly speaking, yes, nan trends crossed that divers scope of our business pinch nan removal of benignant of semi, which is much volatile, I would say, person been reasonably consistent.

Robert Willett

And building connected that, I deliberation nan aesculapian business is increasing nicely and steadily. And nan semi business has had a awesome run. And I deliberation we're into a slower play arsenic galore semiconductor companies are reporting arsenic we look.

Joe Ritchie

Okay. Thank you for nan color.

Operator

Thank you. The adjacent mobility is coming from Joe Giordano of Cowen. Please spell ahead.

Joe Giordano

Hey, guys.

Robert Willett

Hey, Joe.

Joe Giordano

I wanted to conscionable travel up connected logistics a small bit. Obviously, it's not astonishing to perceive nan commentary astir nan ample players. And I deliberation astir group admit that nan extracurricular of those mega players benignant of for illustration crushed level logistics is overmuch stronger. But Rob, you talked astir nan declining globally. When does that commencement to effect that group of customers? Is it apt that PMI is trending little beneath 50, that logistics aliases moreover for those group who are behind, but are they still going to bespeak nan economical rhythm and apt diminution successful that benignant of environment?

Robert Willett

Right. So Joe, I deliberation your mobility is really is benignant of little PMI affecting our guidelines logistics business is that that's what you're getting at?

Joe Giordano

Yes.

Robert Willett

Yes. Yes. We person really beardown underlying exertion and maturation trends successful our guidelines is business, and we still person a comparatively debased stock and a batch of awesome maturation drivers. So I would opportunity that arsenic we're looking astatine that business, we're expecting bully beardown maturation from it arsenic we look forward. But it's not immune either to PMI activities. So we do spot customers much tentative astir placing orders longer cycles to adjacent business, et cetera, successful that space, too. But nan underlying maturation prospects are very good, I think, really sloppy of benignant of nan benignant of PMI information we're seeing now, though it will slow it down a small bit.

Paul Todgham

Yes. I mean a bully number of those customers delayed immoderate investments early successful COVID and are conscionable now I tin speak to my erstwhile employer for conscionable getting backmost to those plans backmost successful place. And perchance again depending connected nan user vulnerability they have. In galore cases, nan user information is simply a small much robust than nan manufacturing accumulation information we've seen.

So I deliberation successful a debased PMI environment, we mightiness spot a higher percent of projects delayed, but generally, nan finance cycles of building a caller distribution halfway and truthful connected thin to transcend a shorter-term economical cycle.

Robert Willett

And past I would say, arsenic we look astatine that business, too, we really person truthful overmuch opportunity to turn our business successful Europe and Asia wherever we're still -- we person still debased stock and a batch of competitory advantage. So certainly, we're expecting outsized and seeing outsized maturation successful those areas of our business.

Joe Giordano

Okay. So conscionable is it adjacent to opportunity that, that guidelines business and logistics successful nan situation that we're successful correct now, you'd still expect it to grow? I mean things tin evidently alteration betwixt now and nan extremity of nan year. But fixed wherever things are, that would beryllium a adjacent connection to make.

Robert Willett

Yes.

Joe Giordano

And past my follow-up would beryllium connected nan emerging customer worldly that you're doing. Where are you connected nan existent products? Like I cognize you're talking astir processing for illustration smart sensors and things that are easier to usage and benignant of for illustration a different type of merchandise than you've done historically. So I cognize you're ramping up this nan Cognoids and getting nan income statement fresh to support this, but wherever are you connected nan products themselves?

Robert Willett

Yes. Right now, we person a bully range, very, very competitory products for emerging customer income sound to sell, right? So nan -- and location are much coming. But we're retired successful nan field, and they are very good equipped to adjacent a batch of business that they spot astatine these mini customers.

Joe Giordano

I'll walk it on. Thanks, guys.

Operator

Thank you. The adjacent mobility is coming from Guy Hardwick of Credit Suisse. Please spell ahead.

Guy Hardwick

Hi, bully afternoon.

Robert Willett

Hello.

Guy Hardwick

Just -- I cognize you gave a -- successful your preamble, you referred to a slow commencement to nan year. Obviously, logistics arsenic good known, and you besides referenced nan semiconductor extremity market. Are location immoderate different markets which are showing weakness. Could you grow a small spot connected that?

Robert Willett

Yes. I deliberation broadness is -- I deliberation weakness is beautiful wide successful wide arsenic you described and arsenic witnessed successful PMI information overall. I deliberation if there's thing other that I would -- well, if location are immoderate different things wide themes I'd draw. One is, obviously, astatine nan commencement of nan year, we're still seeing complete related disruption successful China, right? And past -- and I think, obviously, rising liking rates creating challenges successful improving capital. And really, a batch of our business is driven by superior spend, right?

And past I deliberation there's a mates of regulatory things I would telephone out. So nan ostentation Reduction Act it's going to thrust a batch of EV artillery finance successful nan United States. And it's going to tie immoderate of that finance distant from Asia and Europe. So we're seeing projects that we were expecting to beryllium winning and installing successful Europe aliases successful Asia person been delayed because they're moving into America. So that's going connected and a somewhat akin move pinch nan CHIPS Act restricting exports to China is causing immoderate changes among those customers where, I think, adjacent term, they will beryllium spending little agelong term, I expect them to beryllium equipping much accommodation extracurricular of China. And truthful that's causing immoderate delays also.

Guy Hardwick

So conscionable arsenic a follow-up, if Tier 1 logistics CapEx comes backmost successful 2024, I mean, what are your logistics partner integrators telling you do discussions connected projects person to commencement really by nan mediate of this twelvemonth person immoderate effect successful 2024, fixed typically 18-month lead times?

Robert Willett

Yes, you're right. Was location a mobility there? [Multiple Speakers]

Guy Hardwick

General what are your partner integrator is telling you successful position of imaginable outlook longer term. If you want to return backmost to nan logistics maturation that you referenced astatine nan Investor Day, you've sewage to person benignant of betterment successful 2024.

Robert Willett

Yes. So I deliberation possibly 1 point to understand is for those large customers, we do straight pinch nan institution itself, right? -- and we're moving often pinch their engineers connected implementing their exertion plans and their rollout. So -- and past we deliberation of integrators really has much capacity to thief execute their plans. Right? So we spot we're successful a barren period. It's not clear to america precisely erstwhile it comes back, surely not successful this first half.

And I deliberation beyond that, we'll stock much accusation erstwhile we person thing much coagulated and meaningful this year. We deliberation it will travel back. We deliberation we're optimistic astir that. But nan timing of it is it 2nd half? Is it 2024 we're not clear ourselves connected that. And I don't deliberation our customer customers needfully are clear connected that either.

Guy Hardwick

Okay. Thank you.

Operator

Thank you. The adjacent mobility is coming from Jacob Levinson of Melius Research. Please spell ahead.

Jacob Levinson

Hi. Good evening, everyone.

Robert Willett

Good evening.

Jacob Levinson

Just connected this acquisition, SAC that you did successful nan 4th sounds beautiful interesting. But tin you thief america understand a small spot astir really that what nan differentiation is, what nan exertion that they're really doing and why -- I guess, why is that truthful important successful artillery inspection process successful particular?

Robert Willett

Yes. Yes. Thank you. I admit nan question. Yes. So -- truthful thing that goes connected successful instrumentality imagination is you get an image right? And past you usage imagination devices to decode and make consciousness of that image, right? And Cognex, I think, is undisputed successful our expertise to make consciousness of and to construe images, and peculiarly pinch our heavy learning technology, we really person phenomenal capabilities successful that area. But image acquisition is thing wherever we felt we really wanted to do amended comparative to our competitors.

And we saw a large request successful this marketplace to do that. The company, SAC that we've acquired is really a leader successful this area of computational lighting aliases computational optics. And what that exertion does is it it's deliberation of it for illustration a dome of ray that sits connected apical of an image that's being analyzed. And location are LEDs that are lit up successful a very controlled and circumstantial measurement utilizing very blase package to create almost for illustration a 3D image of what's underneath them. And successful this case, it very often is illuminating dense and scratches connected nan aboveground that's being analyzed. They tin do it very quickly and almost pinch 3D type capability.

And this exertion is amended astatine doing that than immoderate different that we've seen successful nan marketplace truthful far. And what is that going to let america to do, it's going to thief america service immoderate really important needs successful artillery production, successful EV artillery production. And looking astatine worldly for illustration moreover conscionable return nan extracurricular of a cylindrical artillery that is beautiful wide utilized and wide retired location successful nan world of EV. Dense and scratches tin origin occurrence and different problems and person done, right? So it's a very basking taxable for sure. As companies are rolling retired caller EV artillery exertion and they're building billions of dollars of manufacturing capability. This is simply a exertion we deliberation will beryllium highly prized and will thief america thrust maturation successful years to travel successful that space. So that's a small spot of an overview.

Jacob Levinson

Super interesting. And conscionable 1 for Paul quickly. I cognize you guys anterior to nan occurrence successful Indonesia that we're embarking connected a proviso concatenation diversification scheme for deficiency of a amended description, but possibly you tin conscionable update america connected what you've been capable to suffice immoderate different statement suppliers aliases manufacturers rather?

Paul Todgham

Yes, sure. Thanks, Jacob. I deliberation we've reflected successful our erstwhile Qs and successful this K. Really, since 2021, we've been bringing online a 2nd statement shaper arsenic good arsenic a mates of sites for our superior statement manufacturer. And we're making bully advancement there. The 2nd shaper is producing astatine this constituent successful Q1. So we're happy pinch that and has nan capacity to do rather a spot more, and we'll proceed to ramp that up complete this year.

So we're -- this will beryllium a journey. It is simply a progress, but I deliberation we are headed successful nan correct guidance arsenic good arsenic location are broader efforts to diversify immoderate of our proviso concatenation risk, including distribution centers, we move to a overmuch larger distribution halfway successful nan Americas, for instance, earlier successful 2022 and looking astatine imaginable opportunities globally for distribution and warehousing.

Jacob Levinson

Perfect. Still invited 2023 guys. Thank you.

Operator

Thank you. The adjacent mobility is coming from Jim Ricchiuti of Needham. Please spell ahead.

Jim Ricchiuti

All right. Thank you. You've fixed immoderate commentary, immoderate colour astir galore of nan extremity markets. And Rob, I'm wondering if you would possibly talk a small spot much astir your expectations for automotive. You've sewage immoderate puts and takes. Obviously, nan EV marketplace still seems for illustration it's reasonably healthy. What's your consciousness arsenic you look astatine nan automotive portion of your business this year?

Robert Willett

Yes. I deliberation we're beautiful optimistic astir nan automotive marketplace overall. I mean, gross from automotive 2022 grew 13% successful changeless currency, which is supra what we expect for that marketplace complete nan agelong term. And we do spot a batch of multiyear finance successful caller capacity peculiarly EV artillery manufacturing capacity getting teed up, right? And we besides spot much of that finance going into nan United States.

I mean we're a very, very beardown stock and a very, very beardown squad capable to execute connected nan needs of those companies. And past we person nan SEC acquisition that I mentioned, which brings a really powerful instrumentality to carnivore into what is simply a very difficult manufacturing problem. So and our heavy learning capabilities successful wide and our separator learning devices really, I think, are going to beryllium very valuable successful those applications. So -- it's -- yes, I deliberation we stay beautiful optimistic astir nan outlook for automotive complete nan coming quarters and years.

Jim Ricchiuti

And I cognize that you don't usually person a batch of colour connected nan user electronics market. The mobility I had much successful that area is astir nan reports that we've each been seeing astir much production, user electronics shifting to places for illustration India including for applications astir smartphones. First of all, are you seeing immoderate signs of that? And really soon -- really acold retired if that were really occurring and is it going, would you spot orders arsenic that capacity gets built retired successful places for illustration that?

Robert Willett

I deliberation immoderate awesome smartphone manufacturers are connected a multiyear travel to diversify their manufacturing footprint. And I deliberation various caller -- various things that person been going connected successful nan world are surely continuing to thrust that benignant of sentiment for sure, accumulation is being moved to different markets specified arsenic India and Vietnam, and we've been seeing that complete a number of years, and it's decidedly continuing and gathering pace.

And yes, we are surely receiving orders and doing business for a business that historically mightiness person been done successful China and is now being done successful India.

Jim Ricchiuti

Okay. Thank you.

Operator

Thank you. The adjacent mobility is coming from Rob Mason of Baird. Please spell ahead.

Rob Mason

Yes, bully evening. I person a mobility astir --

Robert Willett

Hi, Rob.

Rob Mason

Good evening. I had a mobility astir nan build-out of nan emerging customer income force. What -- if you deliberation astir astatine nan extremity of this twelvemonth aliases possibly moreover complete nan people of nan adjacent 2 years, what percent of your income caput count would you expect that income unit to comprise?

Robert Willett

Yes, I do deliberation we're going to get that accusation conscionable for competitory reasons. We person competitors successful this abstraction that are very tight lipped astir their ain investments, et cetera. But certainly, if you do nan mathematics connected benignant of what Paul told america astir investment, it's going to beryllium a important number of heads we would expect to adhd this twelvemonth and train and put into nan field. And past I could spot this arsenic being an inaugural that's going to build, really present for america complete many, galore years arsenic our products get amended for that marketplace and our income unit becomes much established.

Maybe there's different benignant of inclination aliases information constituent I'd constituent to is for illustration surely positive years agone erstwhile we were talking, and astir 50% of our business was going done distribution, right? But arsenic our products person sewage much powerful and easier to instrumentality and our business has sewage bigger, it's really 70% of our business now is nonstop and only 30% done distribution. So certainly, we admit that continued maturation is going to mean continued end-user nonstop income caput count. And that's a way we're connected and we'll proceed to beryllium on.

Rob Mason

I see. Okay. And past conscionable arsenic a follow-up, possibly going a small spot nan past questioner, but conscionable astir user electronics. And again, I cognize you don't person awesome visibility astatine this constituent successful nan year. But conscionable sizing up nan twelvemonth that you conscionable had, which I deliberation played retired amended wide than possibly you were reasoning astatine nan outset of nan year. Is nan -- are you seeing anything, immoderate indications that would support, I guess, maturation this year, conscionable fixed nan emblematic cadence that, that business often is on? Or is location -- is location thing that you would telephone retired that we should deliberation astir arsenic we effort to exemplary retired 2023?

Robert Willett

Rob, I deliberation you're correct successful nan characterization of past year. We arsenic normal past year, arsenic I'll show you now, we really don't person a clear image of really it's going to play retired and we'll person a overmuch amended image erstwhile we talk adjacent successful May, and we'll springiness you, I think, a clearer publication astatine that point. And past past year, yes, we bought precocious azygous digits and our maturation complaint was substantially northbound of that, right? So arsenic nan twelvemonth played out. But location are things that thrust our maturation successful electronics. And I deliberation location are factors that are coming together rather nicely arsenic we look retired complete longer periods, right?

Certainly, continued waves of finance successful user electronics. There's a batch of caller invention coming, and we spot it peculiarly successful areas for illustration virtual reality and augmented reality. We spot electronics manufacturers opening to diversify their proviso chains extracurricular of China, particularly. And generally, that's caller instrumentality that we're helping them instal successful those markets. And past I deliberation a really awesome inclination really links to heavy learning and separator learning, which is nan desire to switch location are millions of ocular inspectors that are moving successful these markets coming wherever I deliberation COVID has made customers peculiarly delicate to their vulnerability to ample numbers of quality inspectors.

And arsenic a result, I deliberation we're seeing a batch much liking successful applying our exertion to thief reside that vulnerability that they have. So I don't really cognize really this twelvemonth is going to style up I person a batch of optimism astir our early successful electronics, and we'll person a clearer position connected this year's benignant of CapEx and timing and spending. We surely expect to astatine slightest maintain, if not summation stock pinch immoderate of those ample user electronics customers that we person wherever we've built specified awesome relationships complete time.

And you tin spot 1 of them referenced arsenic 1 of our largest customers past twelvemonth arsenic they person successful a number of years.

Rob Mason

Fair enough. Thank you.

Operator

Thank you. The adjacent mobility is coming from Paul Chung of J.P. Morgan. Please spell ahead.

Paul Chung

Hi, acknowledgment for taking my question. So conscionable connected -- you person a ample benignant of sequential summation present successful nan first quarter. But does that OpEx level benignant of enactment astatine that northbound of $110 cardinal benignant of quarterly tally complaint for nan remainder of nan year? Or I deliberation you mentioned immoderate offsets, but really do we deliberation astir wide OpEx levels arsenic we exit 2023.

Paul Todgham

Yes. Paul, this is Paul. We -- again, we don't person afloat twelvemonth guidance connected that. But I deliberation our summation of astir what we said astir 10% sequentially, that's driven by a fewer factors. It's driven by our finance successful our emerging customer income force. It's driven a small spot by conscionable a weaker dollar, which helps america from a gross perspective, but hurts america a spot from an OpEx perspective, immoderate investments successful merchandise launches and truthful on. I deliberation this is simply a decent starting constituent to benignant of exemplary nan year. I deliberation if I were to comparison versus a twelvemonth ago, pinch this guide, if we're up 10% connected mean benignant of sequentially aliases astir 10%.

We're up a small little versus Q1 2022. But we are expecting to spot immoderate of our emerging customer expenses to ramp up a small spot complete time. So I could spot america being up a small much than for illustration successful nan benignant of 5% to 10% scope wide for nan year. Again, that's a operation of being very, very disciplined astir discretionary expenses and investing successful a mates of really important semipermanent maturation initiatives.

Paul Chung

Great. That's very helpful. And past conscionable a follow-up connected merchandise operation by vertical. So user electronics is -- continues to benignant of shrink comparative to logistics and car fixed nan maturation rates there. But really do we deliberation astir longer-term gross separator impact? I deliberation you mentioned successful nan past that benignant of logistics comes successful astatine somewhat comparatively little gross margin. So really do we deliberation astir those moving pieces arsenic we benignant of exemplary retired gross margins longer term? Thank you.

Paul Todgham

Yes. I mean I deliberation connected a semipermanent basis, our mid-70s gross separator target is really nan correct measurement to deliberation astir that. And I expect and dream that you will beryllium capable to spot that successful nan 2nd half of this year. By far, nan biggest publication to getting backmost to that will beryllium nan upwind down of nan agent buys. And again, from a caller acquisition activity, that upwind down has already occurred, absent immoderate caller situation emerging, and now it's conscionable a usability of really it flows to our P&L successful nan existent 4th we're successful and adjacent 4th and ideally by then, we're mostly done it.

The operation betwixt industries, certainly, arsenic Logistics remains somewhat dilutive to our margins overall. We person immoderate bully initiatives including nan modular imagination passageway and session, immoderate of nan standardized solutions that we've spoken astir before, and Rob said astir successful nan prepared remarks. That I deliberation will thief connected that front. But overall, nan merchandise operation factors and nan manufacture operation factors, I consciousness for illustration we're rather manageable wrong our mid-70s target.

Obviously, arsenic we proceed to grow, we get immoderate leverage connected our fixed costs that whitethorn offset if a disproportionate retired of that mightiness beryllium coming from a somewhat little gross separator area.

Paul Chung

Great, convey you.

Operator

Thank you. The adjacent mobility is coming from Matt Summerville of D.A. Davidson. Please spell ahead.

Matt Summerville

Thanks. So really conscionable person 1 astatine this point, Rob. Just funny astir that emerging customer initiative. I conjecture why now? Why not a twelvemonth ago? Why not a twelvemonth from now what benignant of extremity markets and applications are you targeting? Is this wide from a geographic standpoint? And possibly much importantly, really overmuch does this widen your TAM? Thank you.

Robert Willett

Great. Yes. Thanks for nan question. Well, why now is because we sewage nan products, right? We've been launching. We've been processing this separator learning technology, which is really -- and it's -- you tin spot it successful our Insight 2000, and you tin spot it successful nan OCR type we conscionable launched, which it really takes Cognex has benignant of been celebrated successful our life for serving nan astir challenging applications. The astir blase companies successful nan world want to activity pinch america and their engineers connected nan astir difficult instrumentality imagination problems and we've shined successful that segment.

But now Edge learning exertion takes a batch of nan powerfulness of our exertion and makes it really disposable for group who aren't trained automation engineers aliases imagination experts. So -- and that, together pinch our ID products, which are besides becoming progressively easy to usage and powerful intends we person a vascular products yet that we tin put into nan hands of comparatively inexperienced and income noids that we train and nonstop retired to do that. So that's what this inaugural looks like. That's why we're doing it now.

Certainly, our competitors person immoderate very beardown stock successful those segments of nan market, and we're looking guardant to sharing our products pinch those types of customers. They're going to beryllium very wide ranges of customers. They're going to beryllium customers who activity successful a batch of -- who manufacture successful a batch of different industries who whitethorn not person a batch of automation already, whitethorn not usage instrumentality imagination already and that's -- but are keen to adopt nan exertion and what it tin do for them. So that's benignant of really to deliberation astir it. Geographically, yes, very nan imaginable is to deploy very divers globally astir these types of initiatives.

Matt Summerville

Thanks. And past Rob, if you've mentioned this already, I apologize. But tin you possibly talk astir it sounded for illustration 2022 car had a grounds twelvemonth for you guys, up double-digits changeless currency. What's your benignant of large image anticipation for car and EV artillery this twelvemonth peculiarly pinch nan ongoing cutover to EV. Just possibly your wide thoughts connected really car plays retired this twelvemonth versus 2022.

Robert Willett

Yes. Automotive grew successful 2022, astir 13% successful changeless currency. And we've seen immoderate bully momentum and beardown maturation imaginable there. It is EV and EV batteries and nan usage of much and much electronics successful automotive creation sensors and entertainment, et cetera, which is really, I think, driving nan usage of instrumentality imagination that's somewhat offset, but surely not wholly offset by a simplification successful soul combustion motor type business, powertrain, which is wherever astir instrumentality imagination utilized to beryllium sold successful that segment. We're emotion optimistic astir nan semipermanent maturation drivers for that. There will beryllium immoderate pun intended bumps successful nan roadworthy astir nan timing of deployment of immoderate of nan EV spend, I think, which will lead to immoderate volatility successful that. But I deliberation complete -- I deliberation we deliberation we're successful a beautiful bully 3 twelvemonth play pinch what's going connected successful nan manufacture pinch our capabilities, nan SEC acquisition we discussed a batch of drivers, I think, really, again, nary pun intended, helping america turn that business complete nan years to come.

Paul Todgham

Yes, if you want a small spot of colour benignant of by quarter, Rob gave immoderate feedback astir nan slow commencement to nan twelvemonth much broadly. I will opportunity automotive is simply a portion of that, right? References to immoderate authorities that are perchance on pinch PMI, starring to immoderate delays successful finance and reshuffling nan plans and truthful connected car would beryllium a portion of that. Historically, automotive is 1 of our little volatile industries 4th connected 4th and truthful on. But -- truthful I deliberation we deliberation we're disconnected to a slower commencement this year. And past if we looked against past year, obviously, Q3 was a peculiarly debased 4th for automotive, conscionable fixed nan occurrence and different factors. So those would beryllium nan benignant of applicable telephone it, Q1 being low, Q3 ideally would beryllium up. So a small much backmost half optimism.

Matt Summerville

Thank you, guys.

Operator

Thank you. The adjacent mobility is coming from Jairam Nathan of Daiwa. Please spell ahead.

Jairam Nathan

Hi, acknowledgment for taking my question. I conscionable wanted to benignant of excavation a small deeper connected this car opportunity, particularly connected nan artillery broadside because it's it seems to beryllium benignant of incremental to what you -- what Cognex had before, and particularly pinch IRA and nan displacement to U.S. if you benignant of comparison what you saw successful China complete nan past 2 years successful position batteries. Can you size nan opportunity successful immoderate measurement aliases successful a different way, I deliberation successful past year, you gave america an addressable marketplace of $1.5 cardinal successful automotive, I believe. Is that has -- tin that number turn fixed what we are seeing successful IRA aliases what that included nan artillery opportunity?

Robert Willett

Yes. I deliberation we talked mostly astir nan size of our automotive marketplace and nan semipermanent maturation potential. Yes, we sized it astatine $1.5 billion. And we spot estimated semipermanent marketplace maturation of 10%. I deliberation complete -- that's going to rhythm up and down complete clip periods, but I decidedly deliberation EV artillery finance and nan timing astir erstwhile it comes, is going to and it helped thrust higher maturation rates for america past twelvemonth and could -- and I dream to spot that again successful nan years to come.

We evidently spot awesome request for our exertion successful that space. So I deliberation what immoderate of what we've been doing recently, specified arsenic nan SEC acquisition intends that we would dream to summation much stock successful that abstraction and person amended and much deployable solutions for customers. So we'll spot really that plays out. We'll spot what our competitors travel pinch also. But we're optimistic astir that. And past I deliberation you mentioned, and it's different point that perchance lifts our business present is nan IRA finance plans from nan U.S. authorities will mean overmuch much finance successful nan United States, wherever we conscionable person large stock and a awesome estimation and a batch of acquisition pinch U.S. automotive companies who are evidently putting up nan money to do this. So yes, we're optimistic astir nan space.

Jairam Nathan

And conscionable finally, related to that, I think, historically, you guys person talked astir really you are much focused connected nan car proviso guidelines alternatively than nan OEMs. Is that still nan case? Or do you spot immoderate of that changing, particularly fixed nan move distant from ICE?

Robert Willett

Yes, it's a really absorbing question. So yes, I deliberation historically, we've seen nan mostly of our automotive business being pinch Tier 1 automotive suppliers. And that move whitethorn alteration complete time. You're seeing a batch of benignant of associated ventures and relationships betwixt marque names and past large Asian exertion suppliers.

We spot that playing retired successful partnerships. And past you spot besides pure-play companies that are really going to business to manufacture batteries. So certainly, there's plentifulness of alteration going connected successful that space. But rather wherever that ends up, I wouldn't declare to know. We thin to look astatine applications and needs and often those are driven by nan extremity users themselves and really they're executed tin beryllium done 3rd parties. Like Tier 1s aliases successful business betwixt extremity personification brands and Tier 1s. So yes, it's an evolving space. One, I look guardant to talking pinch you astir successful future.

Jairam Nathan

Okay, convey you. Thanks a lot.

Operator

Thank you. Unfortunately we are retired of clip for questions today. I would for illustration to move nan level backmost complete to Mr. Willett for immoderate further aliases closing comments.

Robert Willett

Yes, well, convey you for joining america tonight. We look-forward to speaking pinch you again connected adjacent quarter's call. Good night.

Operator

Ladies and gentlemen, convey you for your participation. This concludes today's event. You whitethorn disconnect your lines astatine this time.

Editor: Naga



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