Keith Housum

Keith Housen asked about the confidence in the Europe and Australia segment achieving low single-digit growth by year-end, given the slight decline in Q1 and ongoing macro challenges. He also inquired about the BradyScan app's availability, target audience, and product integration, as well as revenue synergies and progress from the Gravitech and MECCO acquisitions. Finally, he sought further insights into the trajectory of gross margins, considering the solid Q1 performance despite tariff headwinds and the increasing contribution from engineered products.

Answer

President and CEO Russell Shaller expressed confidence in the Europe and Australia segment's potential turnaround based on economists' predictions for a better calendar year 2026 compared to 2025. He noted that while core manufacturing in key European countries hasn't improved, it hasn't worsened, suggesting a turnaround might be one to two quarters away. Regarding the BradyScan app, Mr. Shaller confirmed its release on Apple and Android, highlighting a free consumer version and an industrial version designed to integrate seamlessly with Brady's printers and readers, with future plans for lasers and other marking technologies. For the Gravitech and MECCO acquisitions, he acknowledged they operate in a challenging heavy industrial manufacturing environment, including the automotive supply chain, but are performing adequately. He reiterated Brady's long-term strategic thesis that all products will eventually be marked in production, focusing on mid-size manufacturers. On gross margins, Mr. Shaller explained that the increasing mix of engineered products, which have higher gross margins (around 60%) compared to commodity products (around 40%), naturally expands the overall gross margin. He emphasized that while tariffs are an offsetting factor, the primary focus remains on driving growth and increasing market penetration rather than solely pursuing margin expansion, as strong cash flow is generated even at current margins.

Keith Housum, a Managing Director and Senior Equity Analyst at Northcoast Research, questioned Brady Corporation's confidence in achieving low single-digit growth in the Europe and Australia segment by year-end, given the current quarter's decline and challenging macro conditions. He also inquired about the new BradyScan app's availability, target audience, and product integration. Furthermore, Housum sought insights into potential revenue synergies and progress from the Gravitech and MECCO acquisitions, and asked for management's perspective on the future trajectory of gross margins, particularly with the increasing contribution from engineered products.

Answer

President and CEO Russell Shaller expressed confidence in the Europe and Australia segment's turnaround based on economic forecasts for 2026, though he noted that tangible improvements in core manufacturing are still 1-2 quarters away. Regarding BradyScan, Shaller confirmed its launch with both consumer and industrial versions, highlighting its current seamless integration with printers and readers, with future plans for lasers and other marking technologies. He acknowledged that recent acquisitions like Gravitech and MECCO are operating in a challenging heavy industrial environment but expressed long-term confidence in their strategic fit and potential for growth, especially in mid-size manufacturing. Shaller reiterated that while engineered products naturally lead to higher gross margins, Brady's primary focus remains on driving overall sales growth and cash flow rather than solely targeting margin expansion, despite tariff headwinds.

Keith Housum of Northcoast Research inquired about the top-line impact from tariffs, the sustainability of recent SG&A reductions, and the strategic opportunity presented by the Funai microfluidics acquisition.

Answer

President and CEO Russell Shaller responded that no tariff-related demand destruction has occurred yet, but price increases are expected. He affirmed the long-term goal is to continuously lower SG&A, despite potential quarterly fluctuations. Shaller also detailed that the Funai acquisition provides industrial inkjet technology for direct part marking, filling a strategic gap in Brady's product portfolio.

Keith Housum from Northcoast Research questioned the financial impact of the recently announced facility closures and headcount reductions, asking about the expected savings, timeline, and if they were contemplated in guidance. He also asked about the new I-7500 printer, its potential for cannibalization, and its expected revenue contribution.

Answer

President and CEO Russell Shaller responded that the restructuring actions are expected to be completed within the current fiscal year and will create a better run rate for the future. He noted the changes will be beneficial to growth and gross margins, though not 'hugely' so. Regarding the I-7500 printer, Shaller described it as a unique product for high-mix labeling applications with a strong ROI for customers. He expressed hope for it to become a product generating over $10 million in revenue but stated it's too early to know for sure.

Keith Housum of Northcoast Research asked about the potential impact of the Gravotech acquisition on Brady's business seasonality, the sales cadence during the quarter given October's strength, the company's long-term gross margin target post-Gravotech, and the breakdown of organic growth between volume and price.

Answer

President and CEO Russell Shaller responded that Gravotech's seasonality is similar to Brady's, with a weaker August and stronger fall and spring. He noted that sales momentum built later than usual, culminating in a very strong October. Shaller affirmed that the long-term corporate gross margin target remains around 50%, with a clear path to improve Gravotech's profitability. He stated definitively that the quarter's organic growth was driven entirely by volume, with no contribution from price increases.

Keith Housum inquired about the market adoption of Brady's track and trace initiatives, like the V4500 scanner, and whether new technologies such as LabelSense would accelerate the printer refresh cycle. He also asked about any associated price increases and the sustainability of the low SG&A expenses seen in the fourth quarter.

Answer

President and CEO Russell Shaller described the track and trace strategy as building a complete, seamless portfolio for part identification, enhanced by the Gravotech acquisition. He noted LabelSense technology, which saves customers time and material, is being rolled out without a specific price increase to encourage broader adoption. Executive Ann Thornton addressed SG&A, confirming that Q4's level was not due to one-time items and that the general downward trajectory in SG&A as a percentage of sales is expected to continue over the long term, excluding the impact of acquisitions.

Keith Housum asked for CDW's outlook on the PC and endpoint market for 2026, specifically if funding will continue or shift, and if potential headwinds are anticipated. He also questioned the extent of federal government funding for education and healthcare and its contribution to their spending.

Answer

Chris Leahy, Chair and CEO of CDW, stated that solid demand for PCs is expected to continue for the next few quarters, driven by Windows 10 end-of-life transitions and a pickup in AI PCs. For education, Leahy noted K-12 funding primarily comes from state and local sources, while higher ed focuses on technology for student acquisition. He added that CDW is closely monitoring potential policy changes impacting healthcare funding but remains confident in navigating these shifts.

Keith Housum from Northcoast Research asked about the sustainability of PC and endpoint market funding into 2026, following a strong 2025, and whether it might become a headwind. He also inquired about the extent of federal government funding's contribution to education and healthcare spending.

Answer

Chris Leahy, Chair and CEO of CDW, indicated that the PC market is in the "later stage of the mid-inning," expecting healthy demand for the next few quarters, driven by Windows 10 end-of-life and increasing adoption of AI PCs. On federal funding, Mr. Leahy explained that K-12 education is primarily state and local funded, while higher education investments are driven by competition for students. For healthcare, he mentioned monitoring potential policy changes affecting income streams but highlighted the sector's consistent, long-term investment in technology for clinical continuity, security, and competitive advantage.

Keith Housum of Northcoast Research asked if the trend of large deals outperforming the run-rate and SMB business, as seen in the quarter, is expected to continue for the remainder of the year.

Answer

CFO Al Miralles responded that while large enterprise deals were a significant contributor in Q2, he does not anticipate this being an outsized trend for the rest of the year. He expects a more balanced contribution from different end markets going forward, highlighting the strength of CDW's diverse customer portfolio.

Keith Housum inquired about the current pricing environment, asking if vendors have implemented widespread price increases due to tariffs and whether CDW is raising prices for its own services.

Answer

CFO Albert Miralles noted that hardware price increases varied by OEM but the process was orderly, with CDW working closely with customers. He reminded that over half of gross profit comes from software and services, which are not directly affected. CEO Christine Leahy added that CDW is maintaining market-competitive pricing for its own services.

Keith Housum requested details on the financial impact of the Mission Cloud Services acquisition and asked for clarification on recent gross margin pressure from pricing.

Answer

CEO Christine Leahy and CFO Al Miralles explained that while Mission Cloud is a strategic, profitable acquisition, its contribution to 2025 bottom-line results will not be substantial due to integration costs and foregone interest. Regarding margins, Miralles clarified that minor product margin compression seen in Q4 was not material and is a reflection of a competitive hardware market over the last few years.

Keith Housum asked management to reconcile its value-based, relationship-driven model with losing deals to transactional price competition, and to quantify the business mix. He also asked about the degree to which the as-a-service consumption model is creating a headwind for traditional hardware sales.

Answer

CEO Christine Leahy asserted that over 90% of customer relationships are based on the value CDW delivers, and the deals being lost are typically large, transactional rollouts without a value-add component. CFO Albert Miralles explained that while the shift to recurring, consumption-based cloud revenue is growing, it is not yet a material dollar amount but does contribute to the "air pocket" when upfront hardware spend is down.

Keith Housum inquired about the pricing and margin profile of data center generators and their potential impact on future overall margins.

Answer

President and CEO Aaron Jagdfeld stated that ASPs for 3.25MW+ units range from $1.5 million to $2 million, with larger units coming in 2026. He noted that the domestic margin profile is similar to Generac's existing C&I products, while international margins are slightly lower due to market competitiveness. He concluded that the incremental impact of data center sales on overall C&I product EBITDA margins would be positive.

Keith Housum asked about the pricing and margin profile of data center generators and their potential impact on future margins.

Answer

President and CEO Aaron Jagdfeld stated that the average selling prices (ASPs) for 3.25MW or larger gen sets range from $1.5 million to $2 million, with competitive pricing. Domestically, the margin profile is similar to Generac's existing C&I products, possibly slightly below. Internationally, margins are lower due to more competitive markets. He concluded that the incremental impact of the data center market on overall C&I product EBITDA margins would be positive.

Keith Housum of Northcoast Research asked for help dimensionalizing the data center opportunity, including the total current industry capacity for generators, the scale of the 5,000-unit deficit, and Generac's own current capacity.

Answer

Chairman, President & CEO Aaron Jagdfeld stated that the 5,000-unit deficit for 2026 was based on feedback from data center customers, not the total market size, which is a moving target dictated by how quickly data centers can be brought online. He estimated Generac's own capacity for these products for next year is 'easily north of $500 million,' which represents a significant portion of the entire C&I business today. He reiterated that the company has momentum and is prepared to commit to more capacity as needed.

Keith Housum asked for clarification on which of Generac's product lines are most affected by the recent tariffs and associated cost increases.

Answer

President and CEO Aaron P. Jagdfeld stated that the company would not provide a product-by-product breakdown, as tariff sensitivities exist across all product lines due to complex global supply chains. He reiterated the $125 million unmitigated incremental impact and stressed that reshoring is a long-term process, making it impossible to avoid some level of tariffs.

Keith Housum of Northcoast Research asked if recent power outages also create growth opportunities for the C&I and beyond-standby battery businesses, in addition to the home standby market.

Answer

President and CEO Aaron P. Jagdfeld confirmed that major outage events absolutely drive awareness and demand for C&I products. He explained that the impact on business customers is typically delayed due to longer capital budget and project approval cycles. He expects to see demand from these events pull through on a four-quarter cycle, which could help offset current cyclical weakness in other C&I markets.

Keith Housum sought more detail on the AI opportunity, specifically if it implies an acceleration of the hardware refresh cycle and a need for higher-end devices. He also asked about the sustainability of the strong growth in retail and e-commerce over the past five to six quarters, and if a transition to another vertical for growth is expected based on historical refresh cycles.

Answer

CEO Bill Burns confirmed that AI creates an opportunity for technology-driven refresh, requiring higher-end devices with faster processors and more memory, which could drive higher ASPs. He also highlighted opportunities in wearable technology. Mr. Burns stated that Zebra's solutions are fundamental for AI by digitizing environments and collecting data. Regarding retail and e-commerce, he noted that e-commerce continues to grow, and refresh cycles vary by customer and vertical, so a direct 'switch' from one vertical to another is not necessarily expected. He desires growth across all segments, acknowledging current challenges in manufacturing and tough comparisons in healthcare.

Keith Housum sought further detail on the AI opportunity, specifically from a hardware perspective, asking if it would accelerate refresh cycles and require higher-end devices, including wearables. He also questioned the sustainability of retail and e-commerce growth, and if other verticals are expected to take over as growth drivers.

Answer

CEO Bill Burns confirmed that AI presents an opportunity for higher-end, premium devices with faster processors and more memory, which would drive higher ASPs and accelerate refresh cycles. He also highlighted the role of wearable technology, such as body-cam type devices, in delivering AI to the frontline. He expects first AI revenues in 2026, scaling thereafter. Regarding retail and e-commerce, Bill Burns noted that e-commerce continues to grow, and refresh cycles vary by customer and vertical. He doesn't foresee a direct transition from one vertical to another, but rather aims for growth across all, acknowledging that manufacturing remains challenging.

Keith Housum asked about the revenue composition of the Elo acquisition, questioning if it is primarily hardware-based or includes other revenue sources. He also inquired about Elo's specific competitive moat in the marketplace.

Answer

CEO Bill Burns explained that while Elo's revenue is predominantly from hardware, there is significant value in its software, particularly its Android OS implementation for touchscreens and its software for point-of-sale terminals. He identified Elo's competitive moat as the breadth and depth of its portfolio, deep customer relationships, technology leadership in touchscreens backed by significant patents, and its focused commitment to the market.

Keith Housum asked about the ability to realize recent price increases and the potential for a tailwind in 2026. He also questioned the regional performance, particularly the strong 18% growth in EMEA versus 7% in North America.

Answer

CFO Nathan Winters stated they have factored realistic price realization into guidance and that any 2026 impact depends on future tariff policies. CEO William Burns explained that EMEA's outsized growth was largely due to a favorable prior-year comparison, while North America's growth was solid against a more difficult comparison.

Keith Housum of Northcoast Research asked for clarification on why visibility has decreased recently and how it varies by end market. He also inquired about the evolution of average selling prices (ASPs) for Zebra's devices.

Answer

CFO Nathan Winters attributed lower visibility to increased macro uncertainty and FX headwinds, noting it was a broad issue rather than specific to one end market. CEO William Burns explained that ASPs have been protected by tiering the product portfolio, and the strategic focus is on driving volume by putting devices in the hands of more associates.

Keith Housum requested additional color on the company's geographical performance, specifically asking if the standout growth in EMEA and Latin America was primarily due to easier comparisons or other underlying factors.

Answer

CEO William Burns confirmed that while growth was broad-based, EMEA faced particularly easy year-over-year comparisons. He highlighted specific strengths, such as Northern Europe in EMEA and Mexico and Brazil in Latin America. He concluded that performance variations were currently more influenced by vertical market dynamics than by region.

Keith Housum inquired about the sustainability of TD SYNNEX's better-than-expected performance in the quarter and whether any of the strong results were due to demand being pulled forward from the fourth quarter into the third quarter.

Answer

CEO Patrick Zammit affirmed that the drivers of the overperformance in distribution, including PCs, software, cybersecurity, and compute, are expected to continue into Q4. He also noted that HIVE is benefiting from a very favorable environment with hyperscalers confirming or increasing their spending, ensuring healthy demand for their programs.

Keith Housum of Northcoast Research inquired about the sustainability of the better-than-expected quarterly performance and whether any demand was pulled forward from the fourth quarter into the third quarter.

Answer

CEO Patrick Zammit affirmed that the dynamics driving the overperformance in distribution (PCs, software, cybersecurity, compute) and HYVE (favorable hyperscaler environment, healthy program demand) are expected to continue into Q4.

Keith Housum asked about the sustainability of the company's better-than-expected quarterly performance and whether any demand from the fourth quarter had been pulled forward into the third quarter.

Answer

CEO Patrick Zammit affirmed the sustainability of the performance, citing continued strong dynamics in distribution (PCs, software, cybersecurity, compute) and a favorable environment for HIVE due to confirmed or increased hyperscaler spending on healthy demand programs. He indicated that these drivers are expected to persist into Q4.

Keith Housum from Northcoast Research asked about the magnitude of price increases being passed on from vendors and whether these increases are sufficient to offset potential demand challenges later in the year.

Answer

CEO Patrick Zammit responded that vendor price increases are currently limited and not across the board. He explained that while any significant future increases would be passed through, creating a short-term tailwind, the current impact is minimal and has already been factored into the company's guidance.

Keith Housum asked for a breakdown of the quarter's revenue growth, seeking to distinguish between broad end-market improvement and growth from strategic vendor wins or geographic expansions.

Answer

CEO Patrick Zammit explained that the company does not quantify the growth in that specific way, attributing the outperformance to a combination of market dynamics and the company's differentiating value proposition. He noted that recent strategic wins, like those in India, are positioning the company for future growth but have not yet materially impacted results. CFO Marshall Witt added that the end-market mix was stable versus the prior quarter and year.

Keith Housum asked for more details on the Hyve business, including the progress with new large customers and the specific impact of Hyve on gross margins during the quarter.

Answer

CFO Marshall Witt confirmed that the new Hyve customer from Q2 continued to ramp strongly in Q3 and is expected to grow further. He explained the year-over-year margin decline was primarily due to tough comparisons from the prior year, when Hyve benefited from cost recoveries and markups on aged inventory. CEO Patrick Zammit added that as the higher-margin Hyve business grows, it will be accretive to the company's overall results.

Keith Housum inquired about the sequential revenue decline in the Intelisys business, the timeline for a turnaround, the scale of planned strategic investments, the factors driving the high and low ends of the FY26 adjusted EBITDA guidance, and the mix of M&A versus organic growth needed to reach the 50% recurring revenue goal.

Answer

CEO Mike Bauer stated that the Intelisys strategy involves adding new suppliers via the "channel exchange" model to drive incremental revenue, with a return to significant growth expected by the end of FY26. CFO Steve Jones noted the FY26 EBITDA guidance range accounts for planned investments and potential product mix shifts, with growth weighted toward the second half. Both executives highlighted that the recurring revenue goal will be achieved through a combination of organic growth and impactful acquisitions, similar to those made recently.

Keith Housum sought to reconcile optimistic commentary on technology growth with the year-over-year revenue decline in North America. He also asked about the recent increase in Intelisys suppliers, changes to executive incentives, and the monetization timeline for the new AI Master Class.

Answer

Chair and CEO Mike Baur and CFO Stephen Jones explained that the top-line comparison was negatively impacted by declines in a few legacy technologies and, more significantly, by the accounting effect of an increase in 'netted down revenue'. Baur confirmed that the number of new Intelisys suppliers is 'way up' thanks to the Channel Exchange program and that business presidents are now incentivized on the bottom line and tasked with driving IT and M&A strategy. He added that the AI Master Class is already being monetized, with deals closed with participating new suppliers.

Keith Housum of Northcoast Research asked about the start of the current quarter, whether performance challenges were broad-based, the underlying performance of the Intelisys business, and the company's ongoing acquisition strategy.

Answer

Chair and CEO Mike Baur declined to comment on the current quarter's performance but reaffirmed full-year guidance based on positive channel partner sentiment. He confirmed that challenges were broad-based beyond the well-performing barcode mobility and physical security categories, with CFO Stephen Jones highlighting weakness in large deals. Regarding Intelisys, Mike Baur stated the business was essentially flat year-over-year and detailed new strategies, including the 'Channel Exchange' platform and partner segmentation, to improve competitiveness. He clarified the acquisition strategy is not a simple roll-up but aims to build a 'channel model of the future' with complementary assets.

Keith Housum inquired about the potential impact of the completed elections on future demand, whether competitive pricing at the VAR level is affecting ScanSource, the specifics of recent SG&A adjustments, and the key performance metrics used to evaluate acquisitions.

Answer

CFO Stephen Jones noted that election uncertainty was already factored into guidance, which assumes a stronger second half. Chair and CEO Mike Baur explained that special pricing arrangements on over 50% of projects create a rational margin environment. Stephen Jones detailed that SG&A adjustments involved headcount reductions in North America, expected to yield $10.5 million in annualized savings. For M&A, Jones emphasized a focus on high-margin, recurring revenue businesses evaluated on long-term strategic fit and ROIC.

Keith Housum of Northcoast Research Partners, LLC inquired about the new D-Series base station, asking if its introduction could unlock significant pent-up demand and drive growth. He also asked for clarification on the composition of the backlog and how it compares to the company's reported revenue mix.

Answer

EVP & COO Jack Molloy explained that the new D-Series base station offers better capacity, coverage, and energy efficiency, creating a multi-year hardware refresh opportunity that also drives cybersecurity and software services. EVP & CFO Jason Winkler clarified that the Software and Services backlog is predominantly driven by long-term LMR contracts, which is the company's largest business.

Keith Housum inquired about the federal business, including Q1 bookings and the outlook for the year, and also asked about the sequential decline in backlog, noting it differed from the year-over-year growth seen in prior Q1s.

Answer

EVP and COO Jack Molloy stated that federal demand remains strong and that budget bills indicate potential for increased spending on border and immigration control technology. Regarding the backlog, EVP and CFO Jason Winkler explained that recent years were atypical due to supply chain normalization and that current Q1 seasonality is more normal. Chairman and CEO Gregory Brown added that they still expect product orders to grow for the full year.

Keith Housum requested more details on the Teatro acquisition, including its capabilities and strategic expansion plans. He also asked for context on the potential impact of future tariffs from Canada and Mexico, which are not yet in effect.

Answer

CFO Jason Winkler noted Teatro's revenue would be small but that it is a strategic fit within the Command Center segment. EVP & CTO Mahesh Saptharishi explained that Teatro offers a turnkey, AI-powered voice solution for frontline workers, which Motorola plans to expand beyond its current retail focus. Regarding potential tariffs, Jason Winkler reiterated that the guidance only reflects current rates and the company will leverage its flexible manufacturing footprint to navigate any changes.

Keith Housum from Northcoast Research requested an update on the progress and scale of European operations within the Commercial Services segment, particularly in Italy. He also asked if there were any concerns about tariffs impacting the cost of cameras for the Government Solutions business.

Answer

CEO David Roberts described the progress in Europe as promising, stating, "there's water on the side of the glass," with rollouts underway in Italy and other countries like France, and positive customer feedback. He noted it is not yet material but is becoming exciting. CFO Craig Conti addressed the tariff question, stating he does not see any structural cost issues and that increasing volumes and ongoing platform consolidation should be beneficial.

Keith Housum asked for the basis of management's confidence in turning around the T2 Parking Solutions business. He also questioned if the company would pursue another round of significant share repurchases in 2025 if M&A opportunities remain limited.

Answer

CEO David Roberts cited strong market demand for parking solutions, significant private equity investment in the sector, and an improving sales pipeline under new leadership as reasons for confidence in the T2 turnaround. He affirmed that the capital allocation strategy is unchanged and the company will remain opportunistic with share repurchases based on its M&A pipeline and valuation.

Keith Housum asked for quantification of the Q4 revenue headwind from Florida toll suspensions, the strategic importance of international markets, and clarification on a potential 'Crossing Guard' product pilot in New York City.

Answer

Executive Craig Conti estimated the Florida hurricane impact at $1-2 million in Q4 revenue. Executive David Roberts highlighted Australia and Europe as key international growth markets. Executive Mark Zindler clarified that there is a separate procurement for school bus safety in NYC, but not a pilot, and it is distinct from the larger automated enforcement RFP.

Keith Housum from Northcoast Research inquired about the enterprise addressable market, product traction in that segment, and the primary drivers of the strong Q2 bookings performance.

Answer

President Josh Isner highlighted that the significant bookings beat was driven by superior execution from the product and sales teams, resulting in the largest deal in company history and a record deal in the corrections vertical. He emphasized that bookings growth is accelerating, not slowing down.

Keith Housum asked if customers are expressing concern about Axon becoming too dominant in their technology ecosystem and also sought to confirm that Axon has not lost any major body camera contracts to competitors.

Answer

CEO Patrick Smith responded that he hears this concern less now than in the past, and that customers are increasingly asking Axon to take on more because its integrated solutions 'just work.' He emphasized that a commitment to an open ecosystem and strong partnerships helps alleviate these concerns. President Joshua Isner confirmed that Axon has not lost a significant agency to a competitor for its body camera and digital evidence platform.

Keith Housum inquired about Axon's pricing strategy for the enterprise market compared to its public safety business and asked for the company's perspective on the potential impact of tariffs on costs and demand.

Answer

CFO Brittany Bagley stated that enterprise pricing is in a 'similar vein' to public safety with no material differences. Regarding tariffs, she explained that Axon has built a flexible, diversified supply chain and does not expect currently proposed tariffs to impact guidance, as the knowable risks are already baked in.

Keith Housum asked about Axon's pricing strategy for the enterprise market and how it compares to the public safety sector. He also inquired about the company's perspective on potential tariffs from both a cost and demand standpoint.

Answer

Brittany Bagley, CFO, stated that enterprise pricing is in a 'similar vein' to public safety, with no material differences. Regarding tariffs, she explained that Axon maintains a flexible and diversified supply chain and that the current guidance already incorporates what is knowable about potential tariff impacts.

Keith Housum of Northcoast Research inquired about the Cerus acquisition, asking if any regulatory changes are necessary to distribute its products. He also questioned the process for the mark-to-market valuation of the private farmland assets and whether that process would change under WisdomTree's ownership. Finally, he sought to clarify if Cerus's private equity investments were included in the transaction.

Answer

CEO Jonathan Steinberg confirmed that no regulatory changes are needed for distribution. CFO Bryan Edmiston explained that the valuation process, which involves annual appraisals of all properties on a rolling quarterly basis by rotating third-party firms, will remain unchanged. Edmiston also clarified that while Cerus's PE-related water strategy is included, the economics of its two other private equity funds are not part of the acquisition.

Keith Housum of Northcoast Research asked about the difference between bookings growth and revenue growth, inquiring what types of revenue are not captured in the bookings metric.

Answer

EVP & CFO Brian Miller explained that transaction-based revenues, including payments, are not included in bookings upon signing because the revenue is dependent on future transaction volumes. President & CEO Lynn Moore provided an example of a deal with both SaaS ARR and transaction revenue, where only the predictable SaaS portion is included in bookings. This is why the company has emphasized total ARR as a more holistic metric.

Keith Housum of Northcoast Research asked for more detail on the guidance for a 2-4% decline in sales and marketing expense for the year and its impact on Q1.

Answer

CFO Brian Miller explained that the primary driver for the lower S&M expense is a change in sales compensation structures. This change results in more commission expenses being capitalized and amortized over five years under GAAP, rather than being expensed immediately, leading to a year-over-year decline in the reported expense line.

Keith Housum inquired about the company's current stance on M&A, given its strong cash generation and favorable debt terms, and asked if any specific end markets were being targeted for acquisitions.

Answer

CEO Lynn Moore stated that the near-term capital allocation priority remains debt paydown, as cash balances are approaching the level of their outstanding convertible debt. While they are always evaluating deals, they are being 'a little pickier' at present. She anticipates becoming more active in 2025 and 2026 but will maintain their disciplined valuation approach, and they are internally discussing a more proactive targeting strategy.

Keith Housum of Northcoast Research sought to clarify the nature of the Q3 one-time revenue partnership, asking if the partner would sell Cognex hardware or use its software on their own systems. He also asked about the outlook for inventory as a contributor to free cash flow.

Answer

CEO Matt Moschner clarified the partner will manufacture Cognex-designed systems and purchase Cognex products for a specific market; it is not a software-on-third-party-hardware deal. CFO Dennis Fehr added the annualized revenue impact is not large. On inventory, Fehr expressed satisfaction with working capital improvements, noting the cash conversion cycle has improved significantly and there is still some potential for further optimization.

Keith Housum asked for more specific detail on the book-to-bill ratio, which was described as 'solidly above 1,' and inquired if emerging growth products have longer order cycles. He also sought to reconcile the strong bookings with a relatively flat sequential revenue guide for Q2.

Answer

CEO Mark Gitin provided regional color on bookings strength in Asia and North America. CFO Timothy Mammen explained that while most orders remain short-term, the medical business has a longer backlog, with recent orders covering deliveries through year-end. He clarified that the Q2 revenue guide would have shown sequential growth without the $15 million tariff-related shipment delay, and that bookings were stronger than even that adjusted midpoint, partly due to the longer-term nature of the new medical orders.

Keith Housum from Northcoast Research questioned the implementation timeline for cost-cutting on new high-power lasers, the company's strategy for potential tariffs, and the primary source of market pressure between volume and price.

Answer

CEO Mark Gitin confirmed the new lower-cost lasers are launching in Q1 and Q2 2025. CFO Tim Mammen stated that while tariffs could have a 150-200 basis point impact, the company's manufacturing flexibility in the U.S. and Europe provides significant mitigation capabilities. Mark Gitin reiterated that the main price and volume pressure remains in the cutting market.

Keith Housum from Northcoast Research inquired about the operational importance of the Belarus facility, CEO Mark Gitin's top strategic priorities, and if the Clean Laser acquisition signals a broader shift into systems.

Answer

CEO Mark Gitin confirmed the Belarus supply operation was fully replaced over a year ago, posing no business risk. He outlined his priorities as focusing on high-value R&D in areas like medical and cleaning, and strengthening organizational execution. He clarified the strategy is not just about systems but about driving adoption in non-laser markets by providing complete solutions, including optimized lasers, components, and process knowledge, to capture value effectively.