Piyush Avasthy

Piyush Avasthy asked for a deeper dive into the decline in gross margins attributed to lower service and software margins, specifically inquiring about software margin performance, the impact of investments, and customer receptivity to new software offerings. He also sought clarification on the underlying demand environment and trends in the Americas, and its expected contribution to the 2026 guidance, given its softness in Q4.

Answer

CFO Nathan Winters clarified that the primary driver of the service and software margin impact was higher repair costs in the service portfolio due to the age of the install base, expecting it to level out in 2026. For software, he noted efforts to unify the platform to lower support costs and improve margins in the latter half of 2026 as revenue scales. CEO Bill Burns explained that North America's softness in Q4 was due to cycling larger order activity in TNL and retail from the prior year, not underlying demand issues, with strength in small and mid-sized businesses. He expressed confidence in the healthy pipeline and broad-based growth across all regions for 2026.

Piyush Avasthy of Citi asked for a deeper explanation of the decline in gross margins attributed to lower service and software margins, specifically inquiring about software margin performance, investment pressures, and the receptivity of new software offerings. He also sought details on the underlying demand environment and trends in the Americas region, and its expected contribution to the 2026 guidance.

Answer

Nathan Winters, Chief Financial Officer, clarified that the primary driver of the service and software margin impact was higher repair costs in the service portfolio due to the age of the install base, expecting this to level out in 2026. For software, he noted efforts to unify the platform to lower support costs and improve margins in the latter half of 2026 and beyond, as revenue scales. Bill Burns, Chief Executive Officer, explained that the Americas' softness in Q4 was due to cycling larger order activity in T&L and retail from the prior year, rather than underlying demand issues. He noted relative strength in small and mid-sized businesses and a healthy pipeline, expressing no concerns for North America and anticipating broad-based growth across all regions and product areas in 2026.

Piyush Avasthy asked for insights into the demand outlook across different verticals heading into 2026, and how the year might compare to Zebra's long-term financial targets given macro uncertainty. He also questioned how soon digital AI features could become a growth catalyst and if customers show appetite for software investment alongside hardware upgrades.

Answer

CEO Bill Burns noted continued customer caution and uneven demand in the near term, particularly in EMEA, Canada, and manufacturing. He emphasized that Zebra's solutions remain fundamental for digitizing and automating environments. Regarding AI, Bill Burns identified opportunities in both hardware (next-gen handhelds, wearables, premium devices driving higher ASPs and refresh cycles) and software (AI agents). He anticipates first AI revenues likely in 2026, scaling in 2027 and beyond, following successful pilot programs.

Piyush Avasthy inquired about the potential construct of 2026, how it might differ from long-term financial targets, and the demand outlook across various verticals, acknowledging that formal 2026 guidance is not yet provided. He also asked how soon digital AI features could become a growth catalyst, if there's customer appetite for software investment, and if the next refresh cycle would translate to strong software alongside hardware upgrades.

Answer

CEO Bill Burns noted that customers remain cautious with uneven demand in certain regions (EMEA, Canada) and verticals (manufacturing), but Zebra's solutions are fundamental for digitization. He sees AI as a longer-term opportunity for sustainable profitable growth. For AI, Mr. Burns identified hardware opportunities (next-gen handhelds, wearables for higher ASPs and refresh cycles) and software opportunities (AI agents, AI suite). He expects first AI revenues in 2026, scaling in 2027 and beyond, emphasizing that Zebra's solutions are fundamental for collecting data to drive AI models.

Piyush Avasthy requested more color on the trends driving the raised 5-7% sales growth guidance, specifically asking for a breakout of performance in adjacencies like machine vision, mobile robots, and RFID. He also asked about the hardware replacement cycle, including visibility into 2026 refresh plans.

Answer

CEO Bill Burns highlighted continued strength in retail/e-commerce and a normalized T&L market, with adjacencies like machine vision and RFID playing important roles across verticals. Regarding the refresh cycle, he noted that while it's too early to guide for 2026, they anticipate an accelerated cycle over the next several years as the installed base of devices has grown and customers look to upgrade.

Piyush Avasthy asked for more detail on the manufacturing end market, which has lagged other verticals, and inquired about the timeline and costs associated with shifting production out of China to mitigate tariffs.

Answer

CEO William Burns acknowledged that the manufacturing vertical, while growing at a high single-digit rate, is lagging the double-digit growth seen in other verticals. CFO Nathan Winters added that shifting production can take 12-18 months, with minimal direct CapEx for Zebra as manufacturing partners bear most of the cost. He noted they are awaiting policy certainty before making further long-term moves.

Piyush Avasthy of Citigroup asked for elaboration on regional demand trends in Europe and China and the outlook for those regions in 2025. He also followed up on the lagging manufacturing vertical, asking if there has been a step-up in conversations around automation and supply chain reshaping.

Answer

CEO William Burns noted that EMEA growth was led by Northern Europe, while China saw modest, stabilizing growth but represents only 3% of sales. He confirmed that while manufacturing is currently lagging other verticals, it remains a long-term automation opportunity as companies invest in machine vision and mobile solutions.

Piyush Avasthy of Citi followed up on the potential impact of AI-assisted coding for software development, asking if it could significantly reduce the R&D timeline and lower R&D as a percentage of sales, as previously discussed. He also questioned if the strong Q1 2026 top-line guidance (13% growth) was due to larger projects or one-time factors, and if deceleration was expected later in the year.

Answer

CEO Matt Moschner affirmed Cognex's commitment to market-leading technology and R&D investment, but acknowledged that AI-assisted coding and other tools are already being used to drive efficiency and productivity in technical design (software and hardware), with full potential still in early days. CFO Dennis Fehr explained that Q1 2026 growth is partly due to year-end spending shifting from Q4 2025 and a weak Q1 2025 comparable, not necessarily indicating deceleration, with typical seasonality expected for Q2 and Q3 driven by consumer electronics.

Piyush Avasthy inquired about the potential for AI-assisted coding in software development to reduce R&D timelines and lower R&D as a percentage of sales, referencing previous Investor Day discussions. He also sought clarification on the 13% top-line growth guidance for Q1 2026, asking if it includes one-time projects or if growth is expected to decelerate later in the year, given the broader mid-to-high single-digit outlook for 2026.

Answer

Matt Moschner, CEO, affirmed Cognex's commitment to market-leading technology and engineering investment, while acknowledging AI-assisted coding and other tools for efficiency in technical design, emphasizing quality and security. Dennis Fehr, CFO, explained that Q1's strong growth is due to year-end spending from 2025 and a weak Q1 2025 comparable, not necessarily indicating deceleration, but rather typical seasonality with stronger Q2/Q3.

Piyush Avasthy of Citi asked for an update on the automotive EV end market, including customer CapEx plans beyond 2025. He also questioned why, with margins already at 20% and markets recovering, the company couldn't reach its 25-30% long-term target sooner.

Answer

CEO Matt Moschner described the auto market as having macro uncertainty but strong underlying drivers for vision, such as quality control and labor scarcity. He noted engagement on EV projects continues despite prior overcapacity. CFO Dennis Fehr explained that the first milestone is to sustain over 20% adjusted EBITDA on a trailing-twelve-month basis, after which they will work towards the 25% target, confirming they are driving towards that goal.

Piyush Avasthy of Citi inquired about the tangible progress of the reshoring opportunity, asking about customer conversations and conversion timelines. He also sought color on trends in China, including local sentiment and the pricing environment.

Answer

CEO Robert Willett confirmed increased customer conversations around reshoring to the US, with a heavy emphasis on automation, but noted these are long-term projects with sales occurring late in the cycle. In China, he attributed the Q1 revenue decline to project timing in consumer electronics, with the broader business stable. CFO Dennis Fehr added that while the China market is price-competitive, the company successfully offset these pressures with COGS productivity in Q1 and aims to continue this trend.

Piyush Avasthy asked if Cognex has seen a step-up in customer conversations about reshoring manufacturing to the U.S. and requested an update on the competitive pricing environment, particularly in China.

Answer

CEO Robert Willett noted an increase in discussions about reshoring but characterized the current state as one of 'uncertainty and confusion' rather than immediate action. Regarding China, he reiterated that it is an extremely competitive market where Cognex's strategy is to maintain customer share, even if it requires pricing concessions, as their technology still provides good margins. CFO Dennis Fehr added that pricing is a lesser factor on gross margin compared to the Moritex impact, mix, and volume.

Piyush Avasthi inquired about the timeline for marketing the SymMicro (micro-fulfillment) offering to customers beyond Walmart and sought an update on the $5 billion Walmart opportunity. He also asked for an update on interest trends for GreenBox (now Exol) and the timeline for its site going live.

Answer

CEO Rick Cohen stated that two next-generation SymMicro prototypes, based on learnings from initial Walmart installs, will be installed within the next 12 months, potentially sooner. He emphasized the vast, worldwide market for SymMicro systems, noting strong customer interest. CFO Izzy Martins added that the $5 billion Walmart backlog represents only 400 stores, with further opportunities beyond that once prototypes are complete. For GreenBox, Mr. Cohen indicated that the site is expected to go live in 9-10 months, with contract discussions already underway with potential customers.

Piyush Avasthi inquired about the timeline for marketing the second-generation micro-fulfillment solution (SymMicro) to customers beyond Walmart, and an update on the $5 billion opportunity with Walmart. He also asked for an update on interest trends for GreenBox (now Exol), including the timeline for its site going live and converting potential customers.

Answer

CEO Rick Cohen stated that two next-generation SymMicro prototypes will be installed within the next 12 months, potentially sooner, and sees this as a very large, worldwide market due to smaller, more affordable systems. CFO Izzy Martins added that the $5 billion Walmart backlog, representing 400 stores, would be triggered after these prototypes are completed this calendar year. For GreenBox/Exol, Mr. Cohen indicated the site would be ready in 9-10 months, with contract discussions underway and tours generating significant interest.

Piyush Avasthy from Citi inquired about the demand drivers in North America, given the mid-single-digit revenue decline, and sought details on the stabilization seen in China, asking if it was sustainable or due to easier comparisons.

Answer

President and CEO Tami Newcombe explained that North American performance is mixed, with strength in utilities and defense offsetting some weakness in Test and Measurement, except for areas related to AI data centers. Regarding China, she attributed the stability to growth in the in-region Sensors business, which is counteracting slower Test and Measurement demand partly impacted by export controls.