Greetings, and welcome to the Cognex' Second Quarter 2022 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] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms.

Susan Conway, Senior Director of Investor Relations. Thank you, ma'am. You may begin..

Thank you. Good evening, everyone. Welcome to our second quarter earnings conference call for 2022. With us are Rob Willett, Cognex' President and CEO, and Paul Todgham, our Chief Financial Officer.

I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available in the Investor Relations section of our website at www.cognex.com/investor. Both contain detailed information about our financial results.

During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we think it will help them better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.

Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information we believe to be true as of today. However, things can change, and actual results may differ materially from those projected or anticipated.

For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and our Form 10-Q filed tonight for the second quarter. Now I'll turn the call over to Rob..

Thanks, Sue. Hello, everyone, and thank you for joining us. The three months since our last earnings call have been particularly active. To begin tonight's call, I want to update you on two big challenges going on in our business right now. One concerns a fire at our primary contract manufacturer that occurred in June.

The other relates to overcapacity in our largest end market. First, let's talk about the fire at our primary contract manufacturer. On June 7, there was a fire at the facility in Indonesia, where most Cognex products are manufactured. Thankfully, no one was injured.

Also, our area on the production floor and the Cognex specific manufacturing equipment was largely unaffected. However, a significant portion of our component inventory was destroyed. As you can imagine, this is a serious situation, because these components touch many of our products.

As we've all seen over the past year, in everything from cars to video game consoles, the unavailability of one chip in an otherwise completed assembly can hold up a customer delivery until it's sourced. Our top priorities currently are to support customers and source supply.

Cognex sales noids have been actively communicating with customers and addressing their delivery schedules. We're transitioning customers to next-generation Cognex technology for older products containing chips that are hard to replace. Cognoids around the world are moving fast to source components.

We're also redesigning products with alternative chips that are easier to procure. I'm communicating directly with CEOs at many of our major suppliers, and I'm grateful they are prioritizing our component shipments.

Our strong balance sheet and our reputation as a technology leader and a growing customer that pays on time, is helping us with suppliers at a time like this. Cognex's culture has shined during this difficult time.

The leadership team and I deeply appreciate how Cognoids have stepped up, especially considering all the hard work they had put in before the fire to get us in an excellent supply position. It has required a lot of extra effort, flexibility and taking on new assignments and ingenuity in finding solutions to help us meet our commitments to customers.

We believe the brunt of the business disruption from the fire will be in the third quarter. I will talk more about the implications in the guidance section of tonight's call. Let's move now to our second major challenge.

After two years of heavy spend on automation and Cognex machine vision, our largest customer and other technology leaders in e-commerce logistics are postponing investments in new fulfillment centers now that the surge in online shopping during the pandemic is waning.

We view this as a temporary setback in our growth profile in logistics that could take multiple quarters to play out. Spending on new capacity for e-commerce fulfillment has been a strong growth driver in our logistics business.

We expect that in the near term, more revenue will come from productivity and process improvements at these customers, which is good business for us, but lower volume. The further headwind in logistics is that projects are taking longer to implement and are being delayed, because customers and integrated partners are having difficulty sourcing parts.

The current situation notwithstanding, we are as excited as ever about our growth opportunity in logistics over the medium and long term. It is a large, fast-growing emerging market for machine vision where we expect to gain share.

We continue to see customers implement machine vision beyond barcode reading to perform tasks such as item detection and dimensioning, and believe that we will be a significant growth – that will be a significant growth driver for us. Retailers outside the U.S.

are adopting Cognex products at a rapid rate, and new products we are introducing to implement our technology quickly and easily will open more of the market to Cognex machine vision. A last point on logistics. As many of you are anticipating, and as we indicated in our last call, is that we recently updated our goal for long-term growth in logistics.

We'll share that with you in the guidance section of tonight's call. I'll stop here for now. Paul, the microphone is yours, for details of the quarter..

Thanks, Rob, and hello, everyone. Revenue was $275 million in Q2 and in the middle of our guidance range. That level represents a low single-digit change, plus or minus, compared to Q2 of 2021 and Q1 of 2022. Both prior periods included substantially higher revenue from logistics for the reasons Rob discussed.

Also, revenue in the prior quarter included a catch-up of orders on backlog. Given the timing of the fire, the incident did not have a material impact on revenue in Q2. Thankfully, large deployments in consumer electronics were either already shipped or in Cognex owned distribution centers at the time.

Looking at the year-on-year change in revenue for Q2 from a geographic perspective, our best-performing region was Asia, which increased by 20% from Q2 of 2021.

Stronger than expected growth in consumer electronics and higher revenue from semi, automotive, logistics and the broader market was offset by a 5 percentage-point reduction from currency exchange rates. Within Asia, Greater China grew by more than 30% due to our delivery of large electronics orders despite rolling lockdowns in the country.

In Europe, revenue increased by 13%, excluding a 10 percentage point reduction from currency exchange rates. Despite tentative market conditions and supply chain challenges, our growth came from a broad range of end markets including consumer electronics, automotive, logistics and consumer products.

Revenue from the Americas decreased by 16% year-on-year due to lower revenue from logistics. As Rob discussed, we are experiencing fewer Greenfield investments and activity is lower overall as integrators and customers struggle with supply shortages. Gross margin in Q2 was 72%, as expected.

This level is 3 percentage points below the gross margin reported in last year's second quarter, due almost entirely to the significant premiums we are paying to procure electronic components through brokers.

Regarding the fire, operating expenses in Q2 included a net non-cash charge of $17.4 million, primarily for the value of the lost inventory on our books that we don't believe will be covered by our insurance. I want to point out that insurance claims are being processed for both Cognex and our contract manufacturer.

And as such, we may see future adjustments to this charge in Q3 and possibly Q4. Excluding that charge, the combined total of RD&E and SG&A declined by low single digits on a sequential basis and was slightly favorable to our guidance.

Comparing year-on-year, operating expenses in Q2 increased by 5% due to the incremental investments we've been making in sales and engineering headcount. Operating margin was 24% in Q2 of 2022, including the fire loss.

Excluding that charge, operating margin was 30% and in line with our long-term target compared with 34% in Q2 of 2021 and 31% in the prior quarter. The decline year-on-year was due to the elevated supply costs near term and the headcount additions we made over the past year to drive future growth.

The effective tax rate in Q2 was 16%, excluding discrete tax items as expected. Reported earnings were $0.34 per share in Q2 compared with $0.43 in Q2 of 2021 and $0.38 in Q1 of 2022.

On a non-GAAP basis, earnings were $0.41 per share, $0.43 and $0.42 per share, respectively, for prior period and prior quarter, excluding discrete tax items and the fire loss just mentioned. Turning to the balance sheet. We ended the quarter with $788 million in cash and investments, and no debt.

Having a strong cash position continues to be an advantage for us. Following the fire, we were able to quickly begin securing components without having cash flow concerns. Accounts receivable increased by 32% from the end of 2021 and remains very healthy. Large orders shipped late in Q2 represent most of the increase.

Regarding our inventory balance, we wrote off approximately $36 million of mostly component inventory lost in the fire net of reserves. We also wrote off about $8 million of primarily prepaid assets, representing payments we made to our contract manufacturer for component inventories they bought and held for us that were lost in the fire.

Now I'll turn the call back to Rob..

First, the fire reduced our expectations for Q3 by about $80 million. Of that, we believe $20 million is lost revenue from discontinued products and delivery requirements we are not able to meet. The remaining $60 million, we expect to realize in later quarters.

Second, the recent slowdown in logistics and project deferrals reduced our expectations for Q3 by about $50 million. We believe Q3 will be the low point for logistics revenue this year. Separately, we expect revenue from consumer electronics will be strong in Q3 and grow year-on-year.

We also believe that annual revenue from consumer electronics will grow by double digits year-on-year, up from our prior estimate of moderately higher. We believe gross margin in Q3 will be about 70% due to pressure from the lower expected revenue and broker premiums.

We believe we'll be paying premium prices to brokers for scarce components into next year. We expect the combined total of RD&E and SG&A will decline by low single digits on a sequential basis due to lower variable incentive compensation. The effective tax rate in Q3 is expected to be 16% excluding discrete tax items.

Lastly, our new goal for logistics is to grow revenue by 30%, compounded annually over the long-term. This is an internal goal we are sharing with you to help you understand how we think about logistics. We are not providing guidance.

We believe logistics will continue to be a growth driver for many years to come after we get through the near-term situation. I'd like to remind you that revenue from logistics grew by approximately 65% year-on-year in 2021 and the five-year compounded annual growth rate was approximately 50% and in line with our previous target.

We believe it's prudent to adjust our target rate given the dramatic growth we experienced in recent years and our sizable $300 million annual revenue base. Now we will open the call for questions. Operator, please go ahead..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joshua Pokrzywinski with Morgan Stanley. You may proceed with your question..

Hi. Good evening all..

Hi, Josh..

So, Rob, a question on the logistics commentary you gave as it pertains to how much of the 3Q revenue buildup or lower than expected revenues kind of built out there. That seems to suggest your run rate here in logistics is pretty small, call it, well under $50 million a quarter.

Is that sort of the run rate that we're going to be at for a while? Or is there something that's more acute happening next quarter that we should maybe keep in mind as a bit more of an artificial low?.

I think we are looking at next quarter, Q3, the 1 we're currently in, as artificially low. To give you some context on that, our logistics business, in the first half, was slightly up to flat on the prior year.

We're expecting a very difficult quarter in Q3 for the reasons I explained, both deferred orders and supply chain challenges, both ours and other companies implementing systems in which we go into. And then we would expect a much stronger quarter in Q4 sequentially, but there's still a lot of things we don't know.

So I think we're expecting certainly our logistics business to be down year-on-year, but certainly not down to the rate going forward that we're going to see in this quarter that we're in now..

Got it. That's helpful. And then in terms of maybe your just early thoughts or conversations with customers about the time over which that $60 million gets caught up on the deferred side, if I'm remembering the number right. Is that something that's two quarters, eight quarters? Like how long do you anticipate the deferrals to take? Thanks..

That's a difficult question to answer. We have deliveries where we are rescheduling now. I would expect a significant portion of it would happen in Q4 or Q1. I mean that's the normal kind of order time line for us. I wouldn't expect it to extend much beyond those two quarters..

Got it. Exactly what I was hoping for. Thanks for the color. Good luck..

Thank you..

Our next question comes from the line of Joe Ritchie with Goldman Sachs. You may proceed with your question..

Yes, thank you. Good afternoon everybody. Look, obviously, clearly dealing with a lot externally right now.

I'm just curious in thinking about the fire, what portion – like the portion that's discontinued versus the deferrals, like how did you kind of – like how did you arrive at the $20 million versus $60 million? And maybe talk to us a little bit about some of the decisions you made on some of the products that you decided not to try to pursue going forward?.

Sure. Joe, I'll start. This is Paul and Rob can chime in. We're using the best information we have at this time. It's obviously a dynamic situation and we're getting new information from customers and from our sales teams regularly. But broadly speaking, while we would say the two factors are both important in that $20 million.

And on the products discontinued, for instance, we can point to one large project. For instance, it was the last project we were going to do with a particular product line and given the fire damage, we're no longer able to fulfill it. So that's sort of one project for a logistics customer that is completely off.

And then there's a series of much smaller pieces, where it really is projects that were – products that were near the end of their life cycle or we maybe had last time buys for a period of time that it doesn't make sense to go back into the market to go do that.

And then with regard to the sort of short lead time items, that's really what the other lost businesses, there's some short cycle where a product that customer needs something very quickly and we can't fulfill that. That's included in our $20 million estimate.

But, overall again, that's a relatively small percentage of our business and we're thankful that with the strength of our customer relationships, we tend to have pretty good visibility and also have built trust over time that allows us to figure out when do they really need the product and how can we meet those needs..

Got it. That's helpful. I guess maybe just following up on that, on the deferrals that you expect to deliver in future quarters, there must be relatively tough conversations with your customers, like why, and maybe you can give us a little bit color on what their response has been.

Why can't they just go potentially to market from one of your competitors? And maybe tell us a little bit about like, why they are willing to wait in your confidence in actually booking that $60 million in future quarters..

Yes, I think there is a number of factors here, Joe. One is a lot of our customers are OEMs and they spend a lot of time qualifying our technology and it really does outperform our competitors, right. So certainly there switching is not an easy thing to do. We're being very thoughtful in how we're prioritizing supply.

So we're keeping our customers supplied. And in some cases they are agreeing to take less of our product in near quarters and more further out. I think it's also if happening against a backdrop where projects are getting delayed, which has nothing to do with Cognex, right.

So they are more able to even though they might like to receive our product earlier, we are not the customer that's holding up the delay in the projects that they have. And then also we are also moving customers from one product we have to another product, often a newer technology that we may have more readily available.

And they are therefore seeing that as an opportunity to upgrade and improve their technology. They might not have wanted to do it so soon, but they are starting to do that with us now. So those are kind of the factors that we're seeing..

Got it. That's helpful. If I could maybe flip in one more on logistics, similar line of questioning, just the project deferrals versus the actual weakness that you're seeing in the market today. How much of it is just demand weakness that we don't get back of the $50 million.

And then I guess, Rob, I would love to hear a little bit more about your confidence in that longer term target rate, the 30% growth number and what gives you confidence that you will be able to grow up of a lower base at that rate?.

Sure. So I think the $50 million really relates to a slowdown in the market and deferred business that we're seeing in logistics, it's a phenomenon. I think we've all been reading about it.

In fact, I think, it was sort of just emerging at the last earnings call when we last spoke to you where large players in logistics were really talking about slowing down and even shedding some employees and deferring build out at distribution centers.

And I think we were unclear about the implications of that, but as the quarter has gone on it's been clearer to us that there are fewer Greenfield sites.

So really among the kind of technology leaders in ecommerce, although we have a large customer that one often thinks about, there are other technology leaders in ecommerce fulfillment where we see similar dynamics.

And, I think we can point to quite a lot of news coverage from other companies reporting in this space where they see a similar hiatus or a slowdown in spend related to having over capacity. So I think that's happening. That's really the $50 million phenomenon that we see.

And then we do have substantial backlog in other projects that we expect will kick in as we move into Q4 and we're expecting a much stronger Q4. So then to get to your other question about confidence we have in the 30% growth rate, this is a market we have grown to understand very well over the last five to ten years.

And there are a lot of levers that we expect to drive growth in the next five years or as they have in the last five years. And they include the application of vision to logistics.

As you know, most of our business today is in barcode reading, but there really are many new when we look at our sales funnel with these very high profile customers, but really with many customers, there are a lot of new applications that include vision, where to place a label on a package, or how is the package damaged, or is it the right size, or is it been full of the things that should be full or not, these types of applications we see as really gaining traction for us.

Another dynamic that's driving growth that gives us confidence is our sales outside of the United States, which continue to grow much faster on a percentage basis than our sales do in the U.S. And we expect that to continue. We have some really great customers in those markets that are adopting Cognex machine vision.

We have a lot of new products coming to market that are much easier to deploy and bring a lot of powerful vision to market in that space. And then perhaps I should have started by saying, we think the market itself is going to grow quickly, right.

I think we'll share a number with you later this year about how we think about the markets we're in, how big they are and how quickly we're growing. But there is a lot of white space that we're not addressing today in segments in the market, which we are starting to, or will address. And so making our serve market bigger.

And then the market we're in is also, we expect it to grow very quickly as we see it and as others see the market. So that's why we have a very positive view about the growth we see in logistics, but obviously down from the 50% we've been able to deliver over the last five years. .

Super helpful. Thank you..

Our next question comes from line of Rob Mason with Baird. You may proceed other questions..

Yes, thanks for the taking the question. Rob, I wanted to ask about the slower spending trends, just in broader factory automation that you talked about. The press release referenced, I guess slower year-over-year and quarter-to-quarter. So I, I think that's excludes the logistics framing that you had.

Just what you're seeing there and what you saw as you went through the quarter some color there, and whether the adjustment to your third quarter outlook includes anything along the broader factory automation?.

Yes, hi, Rob. I think what we did see as the quarter progressed was slowing growth rates in America and Europe, factory automation. I think we can point to automotive certainly in those regions, as we've seen some very good growth rates in recent quarters in automotive, but the growth rate were slowing in those two areas.

I think we can point to sort of macroeconomic concerns, particularly in Europe, we can point to supply chain problems particularly in automotive in Europe. Factors I think we're all reading about and aware of, I would say those two markets also are still really the majority of the spend that's going on.

And what's going on is around combustion engine cars and hybrid cars still, and the kind of very exciting dynamic growth we've seen in automotive in Asia hasn't really reached Europe and America yet. Although we see signs of it coming and we do expect it to be a growth driver I'm talking about EV applications there.

So, those are certainly some of the dynamics that we see playing out, particularly in Europe and America.

And then I think there's an another phenomenon which was in the rest of Asia, China, we reported some really great results as you've seen, but in the rest of Asia, we also saw some projects getting deferred, some challenges that some of the players had there with implementation, whether it was around electronics for new smartphone platforms and some of the challenges that they are seeing, or whether it's also in more broadly in automotive in the rest of Asia.

So, I think overall that's the kind of softening or slowing down of momentum that we saw as we moved through the second quarter in factory automation..

Is it fair to say though, that that did not – that doesn't necessarily impact your third quarter revenue outlook, but perhaps I guess the way the order funnel built as a result of that would impact your fourth quarter, I’m or just trying to understand how….

I'll for the first part, Rob. This is Paul. Certainly for Q3 by far the two biggest factors in our guidance are the two that Rob outlined.

And then beyond that, there are sort of smaller secondary factors which might include some modest slowdown of activity in FA in a factory automation, but also slightly better business in consumer electronics as well. So, we think those sort of roughly offset that get us to the two main factors.

And of course the factory automation business is impacted by the supply dynamic and the fire dynamic as we outlined..

Sure.

Just last question real quick, just your third quarter guidance, is that reflective of production that you are getting out of your contract manufacturer currently, or is this more a function of working off preexisting finished goods inventory?.

It's both..

A mixture of both. Okay. Thank you..

Our next question comes to line of Joe Giordano with Cowen. You may proceed with your question..

Hi guys..

Hi, Joe..

So a couple from me. You expect logistics down this year. Your largest customer has been pretty clear about, the cuts that they are doing and they are spending there.

Do you expect that the logistics business ex your largest customer to be down this year as well? And is it a similar magnitude?.

Well, when we exclude largest customer and perhaps one or two other large customers that we have in logistics, that's how we think about logistics, kind of the Tier 1 large type customers, they are going be down. But when we take the rest of the business, many, many, many customers, we expect that part to be up this year.

So the phenomenon that we're seeing is that a few customers who invested very heavily, like the largest one, but also quite a few others who are substantial customers of Cognex, we see, they invested a lot over the last two years.

They are now seeing the online shopping phenomenon kind of take the time out as everybody comes out of COVID, and starts going to the store, and buying less online, and starts spending their money on experiences and less on home improvement. We see it hitting those big customers who invested heavily.

The other customers which we have many hundreds, they were slower to invest in eCommerce. And in many ways, I think they're going to spend the next period catching up and we do see growth from them. And we also see growth good rates of growth outside the United States, more broadly in all types of customers in Europe and Asia..

In rough terms, can you scale how large that non Tier 1 piece of logistics is in like percentage terms of that $300 million?.

Yes. I would certainly say it's less than half..

Sure. Okay. Now when I think about the 30% new growth rate for logistics, so you said that a five-year CAGR previously was 50% in line with your prior target that included like the world's largest eCommerce customer becoming your largest customer at the company.

Now, like when you built this up from the bottom up if that customer is maybe significantly dilutive to growth in the future, like, what does that mean? That seems like a harder bogie that hit than even the 50 in my mind, just because of how significant one customer was to that ramp and how large that customer is..

Well, I think that customer is, I wouldn't count them out in terms of their potential for growth, their international expansion, as we work with them on some of their plans, I think, they have the potential to be a substantial grower for Cognex.

But there are many other e-commerce companies famous names globally that are we also expect to be investing heavily over that time period, who we have good positions and growing positions with. So certainly that dynamic, I think, in eCommerce is still there.

But I also think we have other applications as I've spoken about with Vision [indiscernible] where we don't really play substantially today because we haven't had products, but we do expect to be introducing products and particularly none the parcel and postal segments would be areas where we see large potential for us to grow.

So we think we think it's a large market. We think our share is still relatively small. We think it's going to add huge dollars of growth to the market. And we expect to be getting more than our fair share of them. So it's not hard for us to draw a picture where our bottoms up build has us growing at 30% compound annual..

Sure. Okay I appreciate that color.

And maybe just one more how do you judge the relative maturity of machine vision versus where it was a couple years ago? I mean, simplistically, I could just say, well, back in 2020, you've had the world's largest comp consumer electronics company ramp up very quickly and then kind of peak, and then the world's largest e-commerce company ramp up very quickly.

And at least near term kind of peak easy way to like, simplify what happened.

Is that the right? How is it significantly more penetrated than it was five years ago?.

Well, I think the number of ways to look at it one way is I think, I think the Mach machine vision technology itself is advancing very quickly and some of the new technologies that we are applying to the market, particularly around the areas of deep learning and edge learning really grow the potential served market significantly.

And if you think – if one defines maturity as full maturity, as lights-out manufacturing, where no humans are involved, right.

And then where we still have a long way to go on that and we're making big progress, and I think we'll make big strides over the field of machine vision will make big strides, particularly as a result of deep learning, which really replicates human inspection type capabilities in manufacturing.

So I think maybe that's kind of one way to look at it overall. And then I think you point to, yes, we've had some great success with some amazing, very sophisticated technical customers who have applied machine vision to certain applications, one in electronics and one in eCommerce.

I think we're going to see those customers go through cycles when they are bringing new technology and new capabilities and entering new markets. And we would expect to partner with them. And we'll expect to see years of growth and years of less growth or contraction with them. Right.

I also fully expect we're going to see more large technology leaders emerge and we would expect to be their partner of choice in bringing machine vision, just like we've been the partner of choice for the most sophisticated and entrepreneurial, large manufacturing companies that make discrete products.

So, I think it's quite a big universe out there that has yet to kind of appear on the scene and is going to need excellent machine vision to realize their manufacturing aspirations. And that's kind of what gives us great optimism about the growth potential that we see for machine vision in factory automation and logistics..

Fair answer. Thanks. I'll jump back in queue..

[Operator Instructions] Our next question comes from the line of Jacob Levinson with Melius Research. You may proceed with your questions..

Good evening, everyone..

Good evening. .

Just returning to the unfortunate events in Indonesia. I guess the question is, has what happened there, catalyzed a broader review of your supply chain strategy and just thinking about maybe creating more redundancy around your manufacturing base..

I think you, thank you for the question. This is something we have been working on for some years before this inflection incident happened. And I wish we all wish we had been further down the road of diversifying our manufacturing footprint and our warehousing of component inventory. I think we were on the right track.

We weren't just far enough down the right track when this happened. But we do have alternatives some, that considerably far along in terms of alternatives and ways that we can diversify and manage our risk around this more carefully.

I think we've learned quite a lot from what's happened in terms about how we can make our supply chain more robust with improvements and diversification. So certainly it's something we were on, wish we were further along and something that we're learning from this experience as painful as it is..

Okay. That's helpful.

And just switching gears quickly for a follow-up on currency, obviously been sometimes since we've seen the dollar appreciated this at this speed, but just curious if you – if that puts you at a disadvantage in any way when you're competing against some of your European or Asian peers that that obviously have a bit of a discount, if they're – with their respective currencies?.

Well, we do. We price some local currencies in all the large markets and in most markets we're in. So in terms of like competing for business on the street no, we're very savvy about that.

But of course it does compress margins and reduce revenue and Paul anything you want to say about that?.

Yes. No, I mean, year-to-date it's had about a 4% impact on our revenue growth. I think that is the biggest impact for us. It's had a very modest impact on our gross margin; I think it's between [indiscernible].

And then from a pricing point of view, again as Rob said, we're we both priced in local currency and many geographies, and then we're also quite nimble in working with our customers..

And it's perhaps worth noting here, we have implemented a number of price increases over the last 12 months that I think have been well received by the market. We've been pleased with how the execution of those has gone..

Got it. Thank you. I'll pass it on. Good luck guys..

Our next question comes to the line of Jim Ricchiuti with Needham & Co. You may proceed with your question..

I just wanted to go back to that $60 million of remaining revenue that you think you'll be able to realize over the next couple of quarters. Is there the – is there a way to think about that revenue in terms of the makeup of your market verticals? I mean, you seem to be suggesting that Q3 will be the low point in logistics.

Does some of that flow into from that $60 million go into logistics in Q4? Just trying to get a sense if it's skewed in any one or more vertical more so than the normal makeup of your revenues? Thanks..

Yes. Thanks Jim for the question. It's a dynamic situation, it's changing all the time and a lot has to do with what we're going to be able to supply over those time periods and our customers need for product as we work through that with them.

So I don't want to give you a sense of false precision, but I would say this, I think consumer electronics is going to be less impacted. We've really shipped and will recognize revenue on that and normally Q4 and Q1 are acquirer for them, right.

I think and I think logistics will be significantly impacted based on the timing and what we're able to get out of the door, because I think we have a very big backlog there and there's the market itself before the fire happened was I think confused about the timing of implementation and also the ability of integrators – large integrators to execute on the plans that customers have.

And then automotive I would think probably sort of more in the middle, so that's as much as colors I think I can give with any clarity..

Yes..

I mean, if you take a geographic lens we might see slightly lower impact in Asia, just by virtue of more consumer electronics there. And just more – pure software business in Asia and then by default and slightly higher in the Americas and Europe where we have more of an embedded products which is more impacted by the fire..

Okay..

Our next question comes to the line of Andrew Buscaglia with Berenberg. You may proceed with your question..

Hey guys, just a modeling question looking out, if logistics sales are a little bit subdued here for a period of time. How do you think that on the gross margin side, because that's presumably is a lower mix or less favorable mix.

So would we not see a little bit of a gross margin tailwind in next year helping a little bit offset some of these component increases?.

Yes. Andrew it's possible. I mean, right now by far the biggest factor impacting our gross margin is the broker buy that we have chosen to do to secure supply of scarce components and meet our customer needs.

And we had seen that starting to wind down or decrease, not dramatic but starting to decrease, and unfortunately the fire is going to drag that on for longer. We're now back in the market and making broker purchases to get back and supply more quickly to minimize the lost revenue and fulfill the deferred revenue as we've discussed.

So I really think that's by far the biggest factor. Specifically on logistics, it is still slightly dilutive to our overall margins but if logistics revenue came down, the only caution I would say is we do get leverage on our fixed costs from a higher revenue level overall at Cognex. So that, that would sort of counteract any mix benefit we might get.

But again, both of those factors are secondary to the broker buy factor. Off note, component cost increases overall, inflation is also a negative factor, but we are offsetting that well with our pricing year-to-date.

So those two factors are roughly at – on par and our pricing actions really have been designed around the core component cost inflation, not the broker buy..

Okay. And then just on that long-term growth rate logistics at 30%, you made the comment growth outside the U.S.

is interesting for you? Where exactly that and why do you see more growth there because I would think you run into more competition as you get overseas?.

Yes. Well, our technology is broadly considered the best in terms of its ability to inspect and read packages in production and perform other machine vision tasks. And we've kind of proven that in the United States and we have – this is our home market, and I think we've been very successful at applying it.

And then it's been slower to become adopted in Europe again, where perhaps, where we're sort of generally a roll out of new products in my experience in industrial markets tends to be slower in Europe. We also have two entrenched local players in logistics that are both Europeans.

And I would say that the larger legacy players in this market, and they have a lot of customer relationships that we are displacing as we get into that market further.

So we're relatively under penetrated and one could say less successful thus far, but we're making a lot of progress and we see a lot of good, certainly high percentage growth rates in Europe. And then in Asia I would say the automation of logistics is still less mature.

So if you – if you travel to many parts of Asia, there's still a lot of physical handling of goods, less automation and less willingness to spend on technology and more willingness to put people into the process. But that's, I think starting to change.

COVID perhaps is starting to change that, still the growth of eCommerce in those market is starting to change. And then wage inflation is obviously helping. Sure, wage inflation, but then I also think some of the big eCommerce players that are large here or retail players that are large here are expanding overseas.

And I think you'll see larger incremental growth rates from those types of customers in markets like Asia, as they start to invest and we're riding into those markets with the confidence of what we've been able to do with them in the U.S., and obviously being the company they want to work most with in those markets.

And thanks to our factory automation experience and our 40 successful years in business envision, we have the footprint to support them and leverage in those markets. So, yes, we're very optimistic about the kind of growth rates we would expect to see in the market outside the U.S. for logistics..

Okay. Thank you..

Our next question comes to the line of Matt Summerville with D.A. Davidson. You may proceed with your question..

Thanks. I just want to put a final point on something, Rob, just kind of your read overall on the duration and severity of this sort of a temporary down cycle you're seeing in logistics.

And to that end, have you put any thought into whether or not the business is properly sized or the organization, excuse me, is properly sized for the business levels you may be looking at over the next however many quarters. I guess I'm trying to get a gauge for 30% is great.

Don't get me wrong, 50% is higher than that and if you have an organization size to 50, do you need to resize it to 30?.

Well I think answer your first question. I think it’s unclear when some of the large Greenfield spend comes back. I don't think it's in the next few – it's not in the next few quarters, but we just have to see how that develops and where it develops and in what form, right. So I think that's a point.

I would say – I would say we – when we look at our own sizing of the business we've been pretty careful with headcount over the last three years. As we exited 2019, we had a pretty similar headcount to that that we that we exited 2021, but we had about $300 million more of sales.

So I think I think we've been pretty prudent about how we've managed our headcount through this period. So – and where we tend to run our company for the long-term. So we are thinking about the growth opportunities we see, and they are significant.

However, I think as we now look forward into the second half of this year, and we see some of the dynamics we spoke about earlier with factory automation, growth rates slowing and some of the challenges we see with logistics over the next few quarters, it is an opportunity for us to slow down on hiring.

And we expect to be doing that not stopping it, but slowing it down. We're a company where we do – we pride ourselves in the quality of our employees, Cognex is a pretty exceptional people.

So when we see exceptional talent, we're going to be going out and bringing it on board regardless of the short-term situation and this market, I think as we all know it's been a very difficult market to recruit people into. So we have been running perhaps leaner than we would've expected to.

But so I think going from 50% growth rate to 30% doesn't really give us heartburn in terms of headcount capacity and how right sized we are as we look forward..

Got it.

And then just as a follow up, sticking with logistics, how much of your logistics revenue is that $300 million? Is that I assume that's a 2021 number, but that aside, how much of your logistics revenue today is generated from barcode versus more higher end vision? And what has been maybe the hesitance of logistics customers moving into some of the higher end applications for the products you have? Thank you..

Yes. So the $300 million is the 2021 revenue number that we've reported. And the vast majority of that is barcode reading, and but the – and I think it's market that's been growing very quickly and it's the ability of the companies to absorb technology into their processes as they've been looking to scale up.

And there's been so much value to be driven out of reading a barcode that that's where they've focused primarily. And I think there's still tremendous amount of value to be rung out of that.

And if we think about a large distribution center that might ship a million packages a day, if we can read a barcode, even 1% more reliably as it goes through the process, then our competitors, it's 10,000 packages a day that don't have to be processed or show up late to customers.

So there's still – there's still a lot of value to be run out of barcodes, but I think more sophisticated customers want to do more things with their logistic supply chains.

They want to look at all sorts of things like, how is the right package in the right place are the right things positioned correctly in the right box? Is the package damaged, all kinds of things. We hazardous goods through the supply chain.

There's again, huge value that is causing a lot of challenges for suppliers today and causing a lot of cost to be to be managed around with, with humans or with other less good technology than vision and more expensive. So we just see a lot of potential, and we also see the engineering capabilities that these companies has increased massively.

When we look at the kind of caliber of engineers that we would've worked at five years ago, say it a number of large retailers I'm thinking of, and the caliber of the engineering they have now based on some acquisitions they've done in the eCommerce and logistics and robotics type spaces.

And then also just based on their own internal investment in these areas. So I think we're going to see some of that engineering capability pivot from or beyond barcoding to more vision applications and we're already seeing that..

Thank you, Rob..

Our next question comes to the line of Joe Giordano with Cowen. You may pursue you’re your question..

Hey, thanks for letting me follow up. Just real quick ones here, Rob, do you have an expectation for auto for the year in terms of growth and then just bigger one like on just computer vision in general? Obviously seeing a lot of new applications pop up for where you'd use that type of stock camera and then like a bespoke program.

I'm just curious as to how you think Cognex; today you're in the future can fit into that world and is it something that's interesting to you from like potentially in M&A standpoint to get in more involved? Thanks..

Yes. So we don't really give your long guidance, so our future guidance by specific market, but I would kind of draw you – draw your attention too. In the past we've shown you serve market maps.

And we've said that we expect our market to grow low-double digits-right? So I think it will – and then we expect to grow faster than that we are investing at a higher rate, we have been world's leading vision, machine vision brand, and we're in the right segments of the market. So that would be one way to think about it.

Our automotive is up significantly this year is highly accretive to our growth rate overall, and we'd expect it still to be strong, through the rest of the year. So that's kind of how that looks.

And then in terms of – in terms of acquisition opportunities, I don't have anything specific to point to, of course, but I do think the market for acquisitions is getting more interesting now in light evaluations perhaps becoming a little more realistic. We've seen some of the acquisitions that are going to in our market at very high prices.

And I think we're glad that we didn't participate at those levels, but there are many, many opportunities that we do continue to cultivate in this space. And, you know, I do think acquisitions will be part of our toolkit going forward as they've been in the past and perhaps even more so..

Thank you..

Thank you..

My next question comes to the line of Joshua Pokrzywinski with Morgan Stanley. Your may pursue the bigger question..

Hey, thanks for the follow up. Just one thing to be clear here on this, this new logistics long-term CAGR. Can you tell us what the base is that's off? I know it seems pedantic, but like, would you have these kind of big numbers 50%, 30% down materially next quarter, like I just want to make we'll start between the same point..

Yes. Well, I think we're uncertain where the year will end at this point, but based on what – how strongly Q4 comes in and there's a whole bunch of variables on that, which – what we can share from what customers want to take.

So I don't want to dodge your question, but I think it's a little uncertain, but our 30-year, sorry, our 30% CAGR is really a long-term view, right? So I think we're thinking out at least three years where we would expect to have some great years higher than that, and some other years lower than that.

But I think if for us all to be kind of on the same page here. I think we probably want to start from where we're going to end up this year, and we said that it would be slightly okay..

Yes. Thanks helpful. Thank you..

Okay..

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Rob Willett for closing remarks..

Well, thank you. Thank you for joining us tonight. We look forward to speaking with you again on next quarter's call. Thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participating..