CGNX - NASDAQ

Greetings. And welcome to the Cognex Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Nathan McCurren, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market close and our annual report on Form 10-K for 2024 was filed this morning. The press release, earnings presentation and 10-K are available on the Investor Relations section of our website. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Any forward-looking statements we made in the press release, the accompanying presentation posted to our website or any that we may make during this call are based upon information that we believe to be true as of today. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K. On today's call, Rob Willett, Cognex's President and CEO, will discuss end market trends and provide an update on our strategic initiatives. Dennis Fehr, Cognex's CFO, will discuss our fourth quarter financial results, and we'll conclude with our outlook. With that, I'll turn the call over to Rob.

Thanks, Nathan. Hello, everyone, and thank you for joining us. We began 2024 with the strategic priorities of infusing AI into more of our products and tools, transforming and expanding our sales force and integrating Moritex, our largest acquisition in company history. I am pleased with the progress we made against these strategic priorities in 2024. We expanded our portfolio of machine vision products powered by world-class AI. A couple of highlights include the industry's first AI-enabled 3D smart camera, the In-Sight L38 and the addition of the modular vision tunnel portfolio, featuring the powerful DataMan 380 barcode reader that uses improved decoding, optimized for logistics applications to minimize footprint, maximize depth of field and read the smallest codes. We successfully executed our sales transformation, deploying a new type of sales noid to broaden our sales reach to customers we have not traditionally served. And we successfully integrated our largest ever acquisition, Moritex, which gives us a more complete machine vision solution and contributes positively to our bottom line. This transaction was accretive to adjusted EPS in 2024, which led to a slight increase in adjusted EPS for the year in an otherwise soft market. In 2024, our logistics and semiconductor businesses gained momentum, but conditions across our broader factory automation business remained challenging. Most of these markets stabilized throughout the year. Despite a slight improvement in relevant macro leading indicators such as PMI, we still characterize our core factory automation markets as soft, but stable for now. The exception continues to be automotive, where we saw a pronounced step down in 2024. Coming into the year, we expected automotive to grow, helped by significant EV battery spending, but this investment dropped off throughout the year, leading automotive to be our weakest end market in 2024. We continue to see uncertainty in auto as we begin 2025. These mixed market dynamics led to overall revenue growth of 9% or 1% excluding Moritex for the full year. Throughout 2024, while we continue to invest in long-term growth initiatives, we stay disciplined in our approach to discretionary spending and thoughtful about hiring. I now want to provide you with a more detailed update on our strategic initiatives. We are seeing rapid changes in technology with powerful chips accelerating AI innovation. For industrial machine vision, this means moving beyond the world of rules-based algorithms towards a more sophisticated suite of powerful artificial intelligence tools. Transformer models are overtaking convolutional neural networks as the foundation of deep learning. As this shift accelerates, customers will need significantly less data to train and configure our products, and we'll be able to ramp up and scale production faster. This will allow machine vision to address more applications and reach more customers. Cognex is defining the leading edge of this shift in industrial machine vision technology by launching industry-leading products that leverage AI to solve customers' problems. Our new products address the full spectrum of machine vision applications. At one end of the spectrum, new AI allows us to excel at the most complex and difficult inspection tasks, while at the other, it allows us to develop products that are easy to deploy and easy to use. In December, we launched VisionPro Deep Learning 4.0, illustrated on Page 4 of our presentation. This powerful software designed to tackle the most difficult problems in machine vision is Cognex's first-ever product to utilize transformer models. Transformer technology, which forms the core of sophisticated large language models such as ChatGPT can help to vastly reduce the number of images required to train and implement a machine vision model. VisionPro Deep Learning 4.0 signature few sample mode achieves high levels of accuracy on some of the most sophisticated inspections after training on as few as 10 images. Previous versions would have required hundreds of images to train a vision model with such capability. This is very valuable for customers who require high accuracy but do not have large training data sets, which is often the case as they scale up their production. It is also important for customers whose production cycles are only a few months long and therefore, require effective models to be ready in weeks. Few sample mode saves customers' time collecting, labeling and managing image data, which has historically been a costly process. We have also expanded our DataMan series to address more applications for customers looking for easy-to-use products. As illustrated on Page 5, our new DataMan series makes identifying and tracking parts and packages across the facility easier than ever. Regardless of industry, code quality or application complexity, embedded AI in these next-generation readers helps deliver exceptional read rates for reliable performance at every stage of production. Our latest DataMan products are examples of the products that allow us to get our highly advanced powerful technology into the hands of customers with less machine vision experience. We continue to tap into this broader customer base by investing to transform and expand sales coverage. Moving to page 6 of the earnings presentation. We are enthusiastic about the progress of our sales transformation in 2024. Our first class of new sales noise continued to ramp with Q4 representing their highest quarter of bookings to date, leading to over 3,000 new customers acquired by this group in 2024. These entry-level sales noise are also continuing to gain strong traction in referrals of more complex vision systems to our more technical and advanced sales noise. The second cohort of new sales noise entered the field recently, and we expect this to further grow our customer base in 2025. We remain confident in the long-term value of our sales transformation strategy, allowing us to serve more customers with easy-to-use products. We're excited to continue this strategy and introduce a new cohort of sales noise each year. As we plan for future years, we will be flexible about cohort sizes and be responsive to market conditions. Turning now to what we are seeing across our end markets, which you will find on page 7 of the earnings presentation. I will discuss the end market results for the year, excluding the contribution of Moritex. End markets have been mixed as we have seen both continued softness as well as pockets of growth. Starting with logistics, revenue grew 20% in 2024. We continue to see broad momentum in logistics from global e-commerce leaders as well as regional e-commerce, retail and parcel and post providers. Market growth has improved as large e-commerce players return to capacity expansion and broader logistics remains an under penetrated market. We believe we also gained share with recent product innovations, including the success of the modular vision tunnel and DataMan 380 launched last year. Moving on to automotive. Revenue in automotive was down 14% year-on-year. We continue to see declines in EV battery investment and tentativeness in large capital projects across the broader automotive business. Coming into the year, we expected strong growth in EV battery investment and for it to be one of our largest growth engines. But as the year progressed, we saw delays, reductions and cancellations of EV battery projects. We still expect EV battery to be a long-term growth driver, but likely not in 2025. Consumer electronics revenue was down 5% year-on-year as smartphone design changes remained limited, and we saw conservative CapEx spending across the market. Consumer electronics has positive long-term trends. Currently, our expectations for near-term investment in consumer electronics are tempered, but we tend to have a better line of sight to this by early Q2 each year. So we will give you another update on our next earnings call. Lastly, Semi is continuing to build with significant year-on-year growth, albeit off a low 2023 base. Growth is widespread across semi with investment increases from major machine builders, but we have seen strong demand driven by high bandwidth memory chip investments. As we kick off 2025, we expect momentum to continue in Logistics and Semi, Automotive to remain weak, and other factory automation growth to be relatively in line with macro indicators such as PMI. We continue to see disruptive trends playing out in our markets. AI technology is making our products more accessible, to an increasing number of customers and applications. We lead the industry in making, Machine Vision Technology usable by industrial customers at scale. With this, we can automate more inspection tasks and grow the Machine Vision market, both by solving more of our sophisticated customers' most challenging problems, but also by making our powerful technology accessible, for those less experienced in automation. Let me now hand it over to Dennis, to walk you through the financial results and the outlook for the first quarter.

Thank you, Rob. Our quarterly financial highlights can be found on Page 8 of our earnings presentation posted to our investor website yesterday. Fourth quarter revenue of $230 million finished at the high end of our guidance range and increased 17% year-on-year, excluding Moritex, revenue grew by 12%. As we have now passed the one-year anniversary of the close of our Moritex acquisition, I will note, that this will be the last quarter we speak to revenue trends, excluding this part of our business. From a geographic viewpoint, excluding Moritex, year-on-year revenue grew double digits in both the Americas, led by continued logistics strength and compounded by accelerated demand in the quarter and in other Asia, led by semiconductor. Europe, declined slightly, due to weaker automotive spending. Year-on-year revenue growth in the quarter was strongest in Greater China, driven by project timing in consumer electronics as well as an easy year ago comparison. While China revenue has grown year-on-year in the past two quarters, we remain cautious about the overall outlook for this market, which continues to see both significant uncertainty and heightened competitive pressure. Turning to margins, adjusted gross margin was 69.4% in Q4, down 130 basis points from 70.7% a year ago, driven by Moritex, negative mix from higher logistics revenue and to a lesser extent, pricing headwinds, most pronounced in China. Adjusted operating expenses increased 3% year-on-year in the quarter. The increase was driven by Moritex as well as investment in our sales force transformation and expansion. As a result of reallocation and adjustment to our employee base, we incurred $3 million of reorganization costs in the quarter that are excluded from our non-GAAP metrics. Even with our investment in sales force expansion, ending headcount for the year was 3% below year ago levels, and we continue to focus on tight cost management. Adjusted EBITDA margin was 18.5% in Q4, above the high-end of our guidance and up nearly six percentage points from 12.6% a year ago. Revenue growth and tight cost management drove high incremental EBITDA margin, despite gross margin pressure. Diluted earnings per share on a GAAP basis was $0.16, up $0.07 in Q4 of 2023. Adjusted diluted EPS was $0.20, up from $0.11 year-on-year. Both increases were due to higher revenue and higher margins. Driven by working capital optimization, we delivered strong free cash flow for the second quarter in a row in Q4, totaling $49 million compared to $7 million in Q4 of 2023. Cognex returned $57 million to shareholders in the quarter. $43 million of share repurchase was our highest quarterly total since Q1 2022, and we intend to continue to be opportunistic with our stock buyback. I will also briefly cover our full year 2024 results, which can be found on page 9 of our presentation. 2024 revenue of $915 million grew 9% year-on-year or 1% excluding Moritex. Geographically, for the full year, excluding Moritex, other Asia delivered the highest revenue growth due to semi. In addition, the Americas grew moderately. Europe declined slightly, and China declined more materially in the year. Adjusted gross margin was 69.3% in 2024, down 3.2 percentage points due to Moritex, unfavorable mix and, to a lesser extent, pricing. For the full year, adjusted operating expense increased 6%, driven primarily by Moritex, as well as our sales force transformation efforts. Adjusted EBITDA margin declined 140 basis points to 17.1% in 2024 due to lower gross margins and higher operating expense associated with our sales transformation. GAAP diluted earnings per share of $0.62 declined 6% year-on-year, partially due to a higher effective tax rate. Adjusted diluted EPS of $0.74 was up from $0.73 in 2023 as the accretion from Moritex offset softness in factory automation for the full year. Total free cash flow in 2024 was $134 million, representing 105% conversion of adjusted net income. We returned $119 million to our shareholders in the year and ended the year with $587 million in cash and investments and no debt. I will now turn to our outlook for the first quarter on page 10 of our presentation. In the first quarter, we expect revenue between $200 million and $220 million. This range continues to be reflective of a mixed and volatile macro backdrop. At the midpoint, this represents revenue in line with Q1 2024, reflecting our expectation of continued growth in logistics and semiconductor, offset by weaker automotive and an approximately $5 million FX headwind. The expected sequential step down is driven by the acceleration in demand from customers in Q4 and an anticipated $4 million FX headwind in the first quarter. We also expect adjusted gross margin to remain in the high 60% range. Sequentially, mix is expected to be a slight headwind. We expect adjusted EBITDA margin between 12% and 15%. The midpoint of this range represents a 150 basis point increase year-on-year, driven by operating leverage and operating expense discipline. Lastly, we're excited to hold our Cognex Investor Day this year on June 9th and June 10th at our Boston area headquarters, and we hope to see you there. Now, we will open the call for questions. Operator, please go ahead.

Thank you. The floor is now open for question. [Operator Instructions] Today's first question is coming from Damian Karas with UBS. Please go ahead.

Hey good morning everyone. Thanks for all the color around the end markets. Rob, I wanted to ask you about autos. I know you've talked in the past about this being the worst market environment you've ever experienced in your career. And I know you expect autos to also continue to be your weakest market this year. But what's your assessment on how much lower that customer spend could possibly go from here? I mean the business segment was down 14% in 2024. Are you kind of thinking like double-digit declines again in 2025? Or should we be thinking much more modest declines from here?

Well, Damian, I think you paint the picture well is that, it was a very, very, very tough year last year for automotive and our business there in automotive. We entered the year very enthusiastic about what we saw going on in EV and EV battery manufacturing. And to give you a sense of the magnitude of that, I think coming in, we had -- we're aggressive at Cognex. We had stretch goals to really drive a lot of business into EV battery where we have just some great technology. And I think where we ended up relative to where we came on was on the order of $50 million delta. So, that was kind of the most difficult thing that we encountered coming into the year. And the -- obviously, that continued as the year went along. Now, we think it's going to continue to be a bad year for automotive, but I don't think one on the order of decline that we saw in 2024. There are some reasons to be optimistic about automotive, right? We do great things in automotive when EV battery comes back, when capacity is more utilized and investment returns and what we're able to do in that space is very good. And certainly, Cognex' technology in the area of sensors on the car, electronics in the car and some of our new technology, what it can do in inspection in the cars are exciting growth areas for us. And we have a sense that investment might start to return to that market in 2026, which then might lead to sort of a pickup for business for us later in the year. But it's -- we don't give full year guidance. We're not optimistic that we're going to see a good year, but I'm hoping that the time of serious decline for us in automotive is over.

That's really helpful. And then I wanted to ask you about consumer electronics, which was down for the second year in a row in 2024. And I know you said you'll have better insight when the second quarter earnings comes around. But I wanted to ask you, your slides, you mentioned kind of limited change to form factors. What's your sense for that aspect this coming year? Do you think that there should be more consumer electronic product changes this coming year compared to the past few years?

So, consumer electronics revenue fell 5% for Cognex last year, excluding Moritex. That said, it did grow in the back half, right? So, due to project timing and some strength that we saw coming. It's really difficult and too early to call kind of Cognex's year in electronics, and I will give you more color on that at our next earnings call. There are reasons that we feel confident that in the long run, consumer electronics will be a great growth market for us and will continue to be. The issue is always on when do these things occur. There are a lot of great new features planned, a lot of innovation coming, whether it's in smartphones or in wearable devices or in other electronics such as augmented reality, virtual reality type technology that I think many of our customers are working hard to try to bring to market. And if and when those are successful and need to be manufactured on a massive scale, I'm very confident that companies will turn to Cognex to help them do that. There's also a lot of human inspection going on and huge amounts of human inspection going on in consumer electronics manufacturing. And if I refer you to some of the comments I made in my prepared remarks earlier, our newer technology, particularly transformer technology, allows us to meet the needs of some of those customers very well by allowing them to implement our technology quickly and to get great results, which make the payback much, much faster. And to give you a little context of that, if you think of electronics, often, it's a very, very rapid scaling up and a relatively short period of manufacturing at huge scale. So, this technology in that market, I think, can be very, very valuable and I think is already being seen to be so by some of our customers in the space. So, that's kind of the overview. But to give you a direct answer to your question, too soon to say, let's regroup here in about 13 weeks.

Understood. Really appreciate your thoughts. Best of luck out there.

Thank you.

Thank you. [Operator Instructions] The next question is coming from Tommy Moll of Stephens. Please go ahead.

Good morning and thank you for taking my questions.

Hey Tommy.

Hey Tommy.

Rob, I want to start on logistics and ask what insight you can provide there on the breadth of the strength, whether that's in terms of the geographies, the sub-verticals, I'm thinking e-commerce versus parcel perhaps and then the durability of this strength? I mean there were multiple quarters there where, I guess, we were in an absorption phase for a lot of the capacity built out during the pandemic. Does it feel like we're solidly back into a period where we need more capacity? Or how would you situate it?

Yes, Tommy, I think you're right in pointing out that we saw our logistics business peak in 2021, where there was huge, huge investment, and then we've been through a period of absorbing that investment. And then we're now back to a period of growth. Our logistics business grew 20% year-on-year last year with strength really across pretty much everywhere, right? US, Europe, other Asia. And then as we look in terms of customer tiers, I would say we made good progress in base logistics, seeing some nice growth in that space. We've made great progress with very large e-commerce players. And then as you might expect, there's sort of a group more large customers, some of whom didn't grow with us last year and others of them did, specifically in the US, a couple of customers who I think are struggling with their own retail supply chain and execution of various things, so didn't put up growth. But that's -- those are really very few exceptions to what is a very broad and underlying return to growth. We're positive, very positive about our logistics business and what we're seeing happening. We do see more capacity being added. We do see a lot of technology being invested in this industry, whether it is vision technology and certainly beyond barcode reading, which is a very difficult thing. We do very well, but there's much, much more to be done, and we're seeing more and more traction with that. New customer activity is strong. We're bringing more data management with our edge intelligence platform to this space. And then as you rightly note, the parcel and post sector is an area we see growth in. I did spend a lot of -- last week in Europe visiting a lot of parcel and post businesses in that space. I would say they're not overly enthusiastic about the investment environment in parcel and post currently. But I don't think that is going to be a headwind to our opportunity to grow in that space. These are really newer customers for us, us newer technologies. So we're coming off a low base, and we have a lot to offer. But it's worth keeping in mind some of those parcel and post companies have five-year capital spending plans that we've been starting to muscle in on now for a number of years. and will play out, I think, over time. Another thing to point out, of course, is geographic expansion is exciting for us. The highest growth rates we see and would expect to see our markets outside the US where we have strong penetration is really more in markets where they're really starting to really drive e-commerce fulfillment and spend significantly on a consumer base that's becoming wealthier and spending more money online. And I'm thinking of markets like India and Indonesia where we're making some great progress.

Thank you, Rob. As a follow-up, and perhaps this is for Dennis, I wanted to ask about what you would highlight for us in terms of OpEx discipline, Dennis. So you've sketched the contours previously on the level of investment for the emerging customer initiatives. So I'm thinking elsewhere in the OpEx budget what can you highlight us whether quantifying or just speaking qualitatively about a philosophy on cost management there? Thank you.

Yeah. No, absolutely, happy to do that. I think as we said in our prepared remarks, we're very focused on tight cost management and keep on looking for areas where we can drive efficiency throughout the organization. And I think a positive thing I really would like to highlight is that we invested successfully into our emerging customer initiative into the sales transformation last year. But at the same time, our OpEx year-over-year for the full year grew by 6% and revenue grew 9%. So that means our OpEx growth was below the revenue growth in 2024. And maybe to help you think a bit about 2025, what we expect is that we will see the OpEx growth also below the revenue growth in 2025.

Thank you, Dennis. I’ll turn it back.

Thank you. The next question is coming from Andrew Buscaglia of BNP Paribas. Please go ahead.

Hey, good morning, guys.

Good morning, Andrew.

Good morning, Andrew.

I just want to get an update into year-end on the emerging customer initiative in terms of your expectations, it seems like it's going well. And do you care to provide any context around incremental revenue from the strategy going forward, maybe in 2025?

Yes. Thanks. So yes, I think you characterized it well. This has been a major initiative for Cognex. We've onboarded and got up to improve the productivity of a large first cohort of emerging customer salespeople. Their performance in Q4, I think, was in line or better than what we had expected and communicated to you at the last call. They've completed over 80,000 customer visits in 2024, adding over 3,000 customers, achieving a bookings rate of around $1 million a week and then referring significant business to the rest of our sales team that's turning into larger, more sophisticated opportunities with customers. So we're really starting to see much better penetration of the market. But this is just the beginning, right? And we hired the second cohort as we went through last year, and they are now entering the field. And they're going to really help us expand our sales coverage. So I think we can sort of be cut and pacing the numbers we saw with the first cohort, but hopefully doing better because we're getting better, and we're understanding how to do this more. And then I would say, and I think as I communicated, we've adjusted how we're managing them and what we're doing based on what we've learned. And so they're better integrated with our existing sales force now and so better able to cover accounts, some larger accounts where we've been really underpenetrated. They're making more calls on different customer profiles within those large accounts. And then we're also giving them really great new technology. And I think the best example would be the DataMan 290 and 390 series that is now in their hands, create by AI technology that's easy to sell and easy to use. And the sales force was designed with technology like that in mind. So that's our playbook that we will continue to iterate on with, as we go through future cohorts. I think in terms of other things, the business that we're winning has over 75% gross margin. So again, as we expected in that regard. Then yes, so you asked about 2025, and I think we're going to see that continue. Our progress continue and we've got the metrics and the way to manage it, and we continue to be pleased.

And maybe just to add on that to your specific question on the incremental side, right? We have been talking in the last earnings call, and Rob said also just before that, we really integrated that the sales noise, the entry-level sales noise into the larger sales organization and let them go to -- also to existing customers in that regard. We're not really able to give you like a number, here's what is incremental. We -- like Rob said, we're tracking their bookings metrics and other sales efficiency KPIs very closely. But just that one particular question, we just can't answer you in that way. So I hope that gives you a bit more color to that as well.

Okay. And what are you guided to gross margin in the high-60s. And what are the biggest levers there that could provide some tailwind to margins going above 70% again? Is it really just volume coming back? Or can this emerging customer initiative have an impact in 2025 on gross margins already?

I'll kick off at a high level, but then I'll throw it to Dennis to give you more details. So, the wonder of Cognex is implementing great technology to factory automation and logistics. And we've got a lot of great technology coming and the DataMan 290 is an example of that for sure. And then all the sales force that we have now in the field, making tens of thousands of sales force to sell. It should be a tailwind for us as we move forward. And then there is certainly a volume story, where we've seen volumes not growing anywhere near our expectations over the last few years, we've built an infrastructure ready to supply a much larger business, and as that business comes and as markets recover, certainly, the fall through on incremental revenue should be high.

Right. And we guided for the first quarter to the high-60s, so pretty much in line to what we have guided previously, right? So in the near term, there's certainly some effects that you have strong growth in logistics, which typically is slightly dilutive to the gross margin. So there is a bit of a mix headwind on that side. Certainly, the growth in logistics has a fantastic fall through to the bottom line, right? You have seen -- if you look back at Q4, just coming out at the high end of the revenue range, we had a nice earnings feed in that regard. If you think about the logistics impact to the total P&L, very positive on the bottom line, but certainly in the near, it's a slight headwind towards gross margin. But then as Rob said, in the long-term, the sales transformation, sales expansion of coverage is a nice measure to bring up gross margin with the incremental or the accretive gross margin we are getting from that initiative. We have strong leverage also in terms of using the infrastructure. We have new NPIs, right? We talked in the prepared remarks about like the DM 290, for example, that product family. So there are really areas where we can drive gross margin increases, and that's really what we'll be focused on in the mid to long-term.

Yes. Thank you.

Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead.

Hi. Good morning. I guess two questions. One, Rob, just on the total market s of the $6.5 billion that you guys have put out there. Just wondering, understanding you probably still feel comfortable with that number. I'm just wondering if perhaps as you're thinking going forward, do we pivot which end markets we want to focus on perhaps markets that are less cyclical like automotive or consumer electronics, maybe focusing more on medical or other markets, so that I just get your sales over time can be less cyclical versus some of the markets that you focus on. So, wondering if there will be a pivot there over time? And then I guess my second question, obviously, you're still sitting with a very strong balance sheet sitting in net cash with more tech behind you. I'm just wondering what your appetite is or the environment is for acquisitions in 2025 relative to where we sat in 2024? Thank you.

Yes. Thank you. Let me talk about our markets and how we think about that and volatility and opportunity within them first, and then I'll ask Dennis to address the second part of your question about capital. So we'll give you an update on our view of our served markets in June at the Analyst Day. I think look forward to sharing that with you and our view about how we expand them. Obviously, we did expand with the acquisition of Moritex and there's adjacencies and other markets we're moving into that where we see opportunities to grow that served market, and we'll give you more color on that. In terms of, kind of, where our interests lie and how to think about volatility within those markets, we see our logistics market is still our largest served market and the one we expect to grow fastest. That was true when we last gave you an update, and it's still true today very much that those are exciting growth markets for us and will continue to be a great focus of innovation and investment. And so that's exciting and witnessed the modular vision tunnel progress we're making with parcel and host companies, a great success with the technology leaders in that space. And we think that has a long way to run. In terms of other markets, what I would say is, I think we all understand that Cognex is highly indexed on the technology leaders and the big leaders in the premier customers in our markets, whether it's automotive or consumer electronics, right? And those tend to have more -- they have -- tend to put more volatility into our business overall. But our emerging customer initiative really allows us to broaden our customer base, going from serving about 30,000 customers as we do to going down more into more mid-tier and more entry-level customers and really broadening that. So we would expect that to take some volatility out of our business in the future. And with volatility, you can see that we can underperform in difficult periods and outperform as I think we did in the fourth quarter as a result of some very strong relationships we have in some very good markets. But that's not ideal in terms of running a stable business. And I think the emerging customer program allows us to do that quite well. You asked about other markets, medical, a big bag of medical businesses, including pharmaceutical, life science, medical device representing about 10% of our business overall. Those markets haven't been good over the last few years since COVID. I'm confident, I think everyone is that they will return to growth. And that's the type of market, again, where we will be having much more sales activity as a result of our emerging customer, sales force and much more appropriate products for the level of technical expertise that those industries have to adopt them. So I would expect over time that we would see smaller markets, packaging related medical, even aerospace markets where we've been very under-penetrated, but we're seeing some nice progress in terms of activity and as those markets recover, hopefully, a broader base of customers with less volatility.

Let me take it from here in regards to the M&A question. Maybe I'll start first with a quick summary of the overall capital strategy and then talk a bit more about M&A specifically. So on overall capital strategy, I've been always saying like our number one area is our organic investments. Think about like the sales transformation and sales expansion, which we're investing into. And second comes M&A, third, share buybacks; and fourth, the dividend. So that's kind of the order of priorities. It means M&A quite high in that stack, and we have been coming out of the Moritex acquisition, which I think we feel extremely positive and successful about. We talked about how that has helped to be accretive to adjusted EPS and bring actually it up by $0.01 there. So in that regard, I think we made very good success story on the Moritex side, and that clearly means like that we are looking for continued M&A. But it's also clear that we are looking for quality deals, and that means we'll be thoughtful when we are making these decisions. And at the same time, I think there's probably a lot further to discuss where probably doesn't have the time right now, but I'm really looking forward to continue a bit more in this conversation at our Investor Day, so we can talk then a bit more about like, hey, what could be potential markets? How do we think about like the balance sheet in that regard? So a lot of good topics to cover there, and I think we'll address these at Investor Day.

Thank you very much.

Thank you. The next question is coming from Piyush Avasthy of Citi. Please go ahead.

Hey good morning guys. Thanks for taking my questions. So, the current US administration appears to be more pro-US manufacturing. Speaking with your customers across the auto or consumer electronics end markets, have you at least begun to see a step-up in conversations that your customers are talking about reshaping their manufacturing footprint and maybe adopting more automation and machine vision?

Yes. Thanks for the question. I would say, there's certainly an increase of discussion and interest around that topic. No question. And I think every manufacturer in America is thinking very much about the risks and upside associated with tariffs and other actions that are going on. I would put a little in the context though that there's just a huge amount of uncertainty and confusion. So I think it's not -- that sort of interest isn't really leading to, I think, action at the moment. It's leading to confusion. And hopefully, we'll see more clarity and then more actually action. But maybe to give you a little context, if we think about our Q4 performance and our Q1 guidance, I think there was a lot -- quite a lot of excitement and positivity that we saw in the back end of last year, really post election in November and December, which did account for some higher spending in prior years, I might have called it budget flush type spending that went on in November and December in Americas really only, I'd say. I might size that about $6 million to $7 million of business that I think we received in Q4 as a result of that enthusiasm that really came straight out of Q1. So I think that -- we do have FX is, I think, a worry in general for companies where the strength of the US dollar is a $5 million or so headwind for us in Q1 as well. So -- and then there are a lot of policy changes, obviously, if we -- when we were talking a year ago, there was a lot of enthusiasm about the Inflation Reduction Act and other things. Clearly, a lot of -- there's a lot more confusion about that. So certainly, that's all at play. I do think in -- if we see major investment in manufacturing and major onshoring going on in the United States, Cognex should be a major beneficiary of that given our strength in this market.

Helpful. I was a bit late on the call, so maybe address this, but I think you highlighted pricing challenges in the quarter, particularly competing in the China region. Can you update us on that? Like how would you characterize the pricing environment as it doesn't seem that the demand outlook has changed much? And are competitors in other regions being disciplined from a pricing standpoint? Or are you seeing more incidence of lowering prices to win contracts?

I would say we've been talking for a few quarters now about the pricing dynamic in China. China certainly is an extremely competitive market for us and our customers, right? So I don't think there's much change to report from that situation in the last quarter. compared to what we're generally seeing. But China is a market where there are strong and emerging competitors in our industry and to us specifically. I think everyone has been seeing this is an extremely difficult market. Some of the larger players that we see emerging state-owned enterprises have actually been cost cutting and reducing some of their spend. So certainly, they're feeling the sort of pain that we're seeing in that market. Our strategy, taking a leaf out of the innovators dilemma is we want to maintain share. And we want to maintain customers and share as we go through this in China. We have very strong technology and good gross margins even at difficult prices. So we're willing to take a hit to pricing to maintain share, and that's been the situation. It continues to be. As we bring new technology to market, we're hopeful that we'll have bigger deltas that we can assert the DataMan 290 being an example of something we might see in that space. But I'd say in terms of the pricing discussion, it's a very distant gross margin topic compared to some of the volume things that hit our gross margin or the dilution of Moritex, which we're getting to growth with and should improve also. Dennis, what would you add?

Yes. No, absolutely. I think if you think about be it both 2024 as a full year or Q1 and Q4 specifically, I think really the biggest topics we have seen working in the gross margin is really Moritex and then mix effects like the strong growth of logistics. And it's also very clearly that volume plays a big role as well, right? So that means we have infrastructure and fixed costs are there. So, higher volume or lower volume really drives leverage there. And then pricing is really the fourth item there in the stack, which is really to a lesser extent, but it's very clearly that we are seeing these dynamics and therefore, we wanted to be transparent and clear about it, what we are seeing, and that's particularly in China, and I think Rob covered that well.

Appreciate all the color guys. Good luck.

Thank you. The next question is coming from Jacob Levinson of Melius Research. Please go ahead.

Hi. Good morning.

Good morning.

Good morning.

Just to attack the M&A side of things from a different angle. I know you folks have bought some really interesting machine learning assets at [indiscernible] before AI was cooled, so to speak. As the rise of AI and the broader public consciousness, has that increased the competition for those types of deals? Or are they just too niche for most buyers that would be looking at the things that interest you guys?

To be clear on your question, you're asking kind of are those assets still out there? How are they kind of priced and how are we thinking about them?

Yes, exactly.

Yes, yes. So we – excuse me, we -- at Cognex, we really excel at finding the best technology for our kind of specific market, industrial machine vision. We're very well known. We have a great reputation, and we cultivate the who – the companies that -- small companies that we think are doing great work. ViDi is a great example of that, really an excellent Swiss-based company with some phenomenal engineers doing things that when we really got to understand them, blew us away, and we were delighted to acquire them. So I think that was eight years ago, I guess. And I think probably that the general investor community saw the potential for advanced technology in manufacturing. So there are a lot of companies that kind of were very heavily invested in the years following that time that are now, I'd say, kind of for sale. And so there's a lot of them to see. But a note of caution is when we really get in and look at those companies, they may have raised $50 million of capital on a business plan to have sales of $30 million now and their sales are 10% of that amount, and they're really more around consulting or other things. They really haven't achieved the potential that they expected. So I think the valuation of those companies is not what people thought they would be five years ago, which is an opportunity for Cognex because some of them have good technology, they haven't been able to bring to market. But certainly, the kind of -- the realism of what they actually have and where they are is one, I would say, is a strong theme that I would observe overall. And I think it kind of underscores that to play well in our market, it's not enough to have great technology. You have to understand customers. You have to have applications engineers who really understand the application. And that's where the 3,000 or so strong Cognoids that we have who are out there every day, the 30,000 customers or so with the -- who know some of them are the most sophisticated appliers of technology. That's great opportunities for us to take technology and apply it, which isn't quite as easy as it might appear to someone who eight years ago launched off on a plan. So I'd say that's the current state of it. My hope is that some of those really good companies and great engineering teams will join Cognex over time, and there's the potential for that to happen certainly.

Okay. Appreciate it all. I will keep it to one question today. Good luck.

Thank you.

Thank you.

Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Hi, guys. Good morning.

Hi, Joe.

Good morning.

So Rob, I thought your comments on infusing AI into your tools and the fact that you now require less images to train a model were really interesting. I guess, I'm just curious, on one hand, I can think of that as being a competitive advantage if you are a first mover and your technology is advanced relative to others. On the other hand, it also kind of seems like it may potentially lower the barriers to entry for additional competitors start-ups, maybe Chinese competitors. I'm just curious, like how do you get comfortable that you can sustain your technology advantage, and this isn't just going to increase competition for your end markets?\

Yes. That's a great question, Joe. Thanks so much for it. It is both a great opportunity and a potential threat for Cognex. There's no doubt about that. The technology is allowing us to do things for customers very quickly and very well that we and they couldn't do before, and it will spread the technology more broadly within existing customers, and that's very exciting. And here, it's worth pointing out that there's a lot of kind of great public technology from Silicon Valley kind of coming out of companies. But that technology isn't ready for industrial applications. And there's a lot of expertise we have in taking publicly available models and applying them and really making them work. They don't work well when just applied even with experienced programmers to our industry without deep domain and technology and customer knowledge that we have. I think, where this technology is also really both very exciting for us, but also will change our industry is it's making machine vision much easier to apply and implement, right? And you can really see that we're leading in that space as a result of applying technology and edge learning. Deep learning went to edge learning and transformer models are, in a way, a future that's almost no learning, right? And that is something that we do extremely well and are leading the industry, but it will change the sale, and it will change who we sell to and how we sell and what we provide for them, less application engineering, more pure technology that they can implement. I would say, I'm pretty optimistic about what that means for Cognex in the next few years. I don't -- I think this -- the technology that you're seeing coming out of Silicon Valley is still going to be too hard to apply really to our customers and the people who are going to apply it first are going to be us, and we're going to see it kind of driving. And that's -- I also feel really good about the emerging customer sales force we're putting in place who can just get that technology out to so many more users and sell it much more quickly than we have before. So that's the overall picture. But we're a technology company, right? The business is always -- the technology is getting better and faster and easier to use. Prices come down, applications expand, new markets appear. It's a wild and woolly and fun business, and we've been doing it for 43 years, and we're going to go on taking those same principles that have made us successful to this new revolution.

Thanks, Rob. Keep it there.

Thank you.

Thank you. The next question is coming from Ken Newman of KeyBanc Capital Markets. Please go ahead.

Hi. This is Katie Fleischer on for Ken. I'll keep it short here. I just was wondering how you're positioning for tariffs and any potential margin impacts from those if another trade war materializes?

Great. Thank you. I've leave it there. Thank you. We are showing ffYeah, happy to take that. I would say the headline statement here is that based on the tariffs, which have been announced so far, there is no material impact to Cognex in direct on the COGS side. So certainly, things are uncertain, right? More tariffs may come. But in general, of what is announced so far, no direct impact. Then of course, there could be a secondary impact from the tariffs, right? So in the near-term, again, there's with this uncertainty. We talked about like we have seen a lot of positive momentum in the November, December time frame, and that has shifted towards more near-term uncertainty in some of our customers. So I think about the automotive supply chain across Mexico, Canada and the U.S. So that's not necessarily helpful. But then if you think about it in the mid and longer term, the reshoring opportunity for Cognex is tremendous, right? So it means if that is really starting to happen, then there's a tremendous additional market upside for us.

Thank you. We're showing time for one final question. Our last question today is coming from Jairam Nathan of Daiwa. Please go ahead.

Hi, thanks for squeezing me in here. So I just wanted to go back to your Moritex acquisition. I think when you made the acquisition the objectives were expanding beyond Japan and using more of more of Moritex optics into Cognex equipment. So I just wanted to kind of understand how you guys -- how it was done in the year? What's the progress? And I just had one more question, please.

Yeah. Great. We're about 1.5 years into owning Moritex, and we're very pleased with how we're taking that technology and selling it to our existing customers. That's one way in which we can increase gross margin and grow our business. So that's kind of awesome. We're taking the technology to many customers, which -- because they were very much primarily a Japanese-focused business, we're globalizing it for them. And then yeah, you're going to see more-and-more of it integrated into our core products. So it's a lot of good progress and increasing excitement around that.

Do you need to do any validation? Like would it -- does it take longer to kind of get Moritex components into the products? Is that a bottleneck or something or...

It's something we're very used to doing. It's very sophisticated. We got PhD photonics people and optics people, who work on that, but we're very comfortable. And we know how to do it.

Okay. And just finally, some of the logistics companies seem to be -- especially on the parcel side, seem to be -- like they're talking about moving from -- moving to sensing from scanning. I just wanted to understand how that impact Cognex if that same kind of continues. I just want to understand, it could be good for you. I just want to understand that. Thank you.

Sure. I'll keep my answer brief. But today, kind of the barcode is the defining way in which packages are identified. I don't expect that to change. But certainly, there is the opportunity to have more package recognition using machine vision on it, right? And some packages are complicated and being able to use vision to inspect them, something we're extremely good, is somewhere that our customers would like to go. And it's certainly one a journey we're enjoying exploring with them.

Okay. Thank you.

Thank you.

Thank you. This brings us to the end of the question-and-answer session. I would like to turn the floor back over to Mr. Rob Willett, for closing comments.

Well, thank you so much for joining us this morning. I enjoyed the discussion. And we look forward to speaking with you again, on next quarter's call.