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    Cognex Corp (CGNX)

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    Business Description

    Cognex Corporation is a leading global provider of machine vision products and solutions that enhance efficiency and quality across various industries. The company specializes in technologies that automate the manufacturing, distribution, and tracking of discrete items by locating, identifying, inspecting, and measuring them. Cognex sells machine vision systems, sensors, software, and industrial image-based barcode readers, which are utilized in applications where human vision is inadequate due to requirements for size, accuracy, or speed, or where significant cost savings and quality improvements can be achieved.

    1. Machine Vision Systems and Sensors - Includes deep learning solutions for complex applications and lower-cost vision sensors for simpler tasks like presence/absence inspections.
    2. Vision Software - Allows customers to use Cognex's software with their own hardware or purchase standalone units that integrate cameras, processors, and software.
    3. Industrial Image-Based Barcode Readers - Designed for tracking and identification purposes.

    Q3 2024 Summary

    Initial Price$47.00July 1, 2024
    Final Price$39.69October 1, 2024
    Price Change$-7.31
    % Change-15.55%

    What went well

    • Strong growth in the Logistics sector: Logistics revenue grew materially year-over-year for the third straight quarter, with strong double-digit growth expected for the full year. Recovery from overcapacity built during the pandemic has led to a renewed growth path, with big e-commerce players investing in new automation and strong new customer activity, including in emerging markets like India.
    • Expansion of customer base through the Emerging Customer Initiative: Cognex is targeting to sign up 3,000 new customers in the first year, broadening beyond the existing 30,000 customers. The first cohort of sales staff has reached an almost $1 million per week run rate in bookings, with expectations for the initiative to be accretive next year.
    • Technological leadership with innovative products: Cognex launched the first AI-powered industrial 3D vision system in April, which has significant growth potential. The company is seeing strong investment in the semiconductor sector due to their quality technology for precise alignment and inspection, leveraging the Moritex acquisition for additional market exposure. Their edge learning and deep learning tools are resonating with customers, especially in medical-related industries which grew nicely in Q3.

    What went wrong

    • Declining Gross Margins due to Competitive Pricing Pressure, especially in China. Cognex reported that adjusted gross margin in Q3 declined by 1.6 percentage points sequentially, driven mostly by mix effect and competitive pricing pressure. They noted that manufacturers, particularly in China, are being more discerning on cost, and Cognex has prioritized maintaining share, which has impacted margins.
    • Weakness in Automotive Market with No Near-Term Recovery Expected. The company highlighted that the automotive market is very weak, with sentiment being "very weak". They are not expecting a recovery in the automotive market anytime soon. Automotive customers in the U.S. and Europe have been burned by investments in EVs that haven't come through, leading to reduced investment.
    • Challenges in China Market with Increased Competition and Excess Capacity. Cognex mentioned that the market in China is "very weak compared to where it was," with excess manufacturing capacity leading to decreased desire to invest in new automation. Additionally, local Chinese competitors are gaining share, particularly against European and Japanese players. To maintain share, Cognex is pricing more aggressively in China, which is dilutive to gross margin.

    Q&A Summary

    1. Gross Margin Outlook
      Q: What impacts gross margins in Q4?
      A: Gross margins will have both positive and negative factors in Q4. We will benefit from having one month less of Moritex, adding approximately one percentage point to margins. However, we face headwinds from mix, as growth is coming from Logistics and Q4 is typically the weakest quarter for Consumer Electronics. Additionally, we are experiencing pricing headwinds, particularly in China.

    2. Emerging Customer Initiative Progress
      Q: How is the Emerging Customer Initiative performing?
      A: The first cohort of our Emerging Customer Initiative nearly reached $1 million per week in sales during the third quarter. They are also referring significant business to our account sales engineers. While it will take some quarters before they break even and reach our targeted 30% operating margin, the initiative is gross margin accretive. We expect the program to be accretive to our numbers next year.

    3. Logistics Growth and Outlook
      Q: Are there signs of inflection in Logistics growth?
      A: We are very positive about Logistics, with revenue growing materially year-over-year for the third straight quarter. We expect to finish the year in strong double-digit growth. Overcapacity built during the pandemic has been worked through, and we are returning to our envisioned growth path. We have good visibility due to longer lead times and bigger projects. New customer activity is strong, and the industry is embracing our edge intelligence platform.

    4. Cost Savings and Productivity
      Q: Does the combined sales force offer cost savings?
      A: By bringing in a different profile of salespeople who sell easier-to-sell products and are less expensive to employ, we see potential for higher productivity per salesperson both from a sales amount and a cost point of view. We track this with many metrics and are optimistic about broadening our customer base over time.

    5. Pricing Environment in China
      Q: How is pricing affecting margins, especially in China?
      A: We are facing headwinds on pricing, particularly in China. This affects our gross margins as we adjust to maintain market share. The remainder of our sequential gross margin step-down is driven by mix and pricing, including less Consumer Electronics and more Logistics.

    6. 2025 Guidance Visibility
      Q: Can you provide guidance for 2025?
      A: It's too early to talk about 2025. We can discuss broader market trends, but in general, it's a bit early to call '25 at this moment.

    7. Impact of Moritex Acquisition
      Q: How does Moritex affect gross margins?
      A: The addition of an extra month of Moritex financials diluted gross margin by 3 percentage points instead of the normal 2 points in the quarter. In Q4, we will have one less month of Moritex, which adds approximately one percentage point to margins.

    8. Emerging Customer Initiative Revenue Contribution
      Q: Is the Emerging Customer Initiative contributing in Q4?
      A: Yes, there is a contribution baked into our Q4 guidance from increased bookings coming out of the Emerging Customer Initiative. We have been seeing continuous increase in bookings.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Robert J. WillettPresident and Chief Executive Officer2011Joined Cognex in 2008 as President of the Modular Vision Systems Division, promoted to COO in 2010, and became CEO in 2011. Previously held leadership roles at Danaher Corporation and Willett International Ltd..
    Paul D. TodghamSenior Vice President and Chief Financial Officer (resigning 2024)March 2020Joined Cognex in March 2020. Previously held senior finance roles at Levi Strauss & Company and Ross Stores, Inc. Resignation effective March 15, 2024.
    Carl W. Gerst IIIExecutive Vice President, Vision and ID ProductsOctober 2020Joined Cognex in 1999. Promoted to Senior Vice President of ID Products in 2014 and later expanded leadership to Vision Products and Marketing. Became EVP in October 2020.
    Sheila M. DiPalmaChief Culture Officer and Executive Vice President, Employee ServicesOctober 2020Joined Cognex in 1992 as a Senior Reporting Accountant. Held various finance roles, including Treasurer, before transitioning to Employee Services in 2016. Promoted to EVP in 2020 and Chief Culture Officer in 2021.
    Joerg KuechenChief Technology OfficerJune 2022Joined Cognex in 2003 through the acquisition of Gavitec AG, a company he founded. Led acquisitions and Cognex's Advanced Vision Technology team. Appointed CTO in June 2022.
    Dennis FehrSenior Vice President of Finance and Chief Financial Officer (incoming)May 3, 2024 (future)Appointed CFO effective May 3, 2024. Previously CFO at 6K Inc. and Fluence Energy, Inc., where he helped take the company public. Held various finance roles at Siemens across Germany, Indonesia, and China.
    Laura A. MacDonaldVice President of Finance and Corporate Controller; Principal Accounting OfficerDecember 2007Joined Cognex in 1994. Promoted to VP of Finance in 2007 and Principal Accounting Officer in 2019. Will serve as interim Principal Financial Officer from March 15, 2024, to May 3, 2024.

    Questions to Ask Management

    1. With the ongoing competitive pricing pressures impacting gross margins, particularly in China, how do you plan to balance maintaining market share with protecting profitability, and what strategies are in place to mitigate these margin headwinds?

    2. Given that the emerging customer initiative will take several quarters before breakeven and reaching a 30% operating margin, what risks might delay or prevent achieving these targets, and how confident are you in the projected timeline?

    3. In light of uncertainties in the semiconductor capital expenditure trajectory for 2025, how is Cognex preparing to mitigate potential headwinds in the SEMI market, and what is your outlook for growth in this segment?

    4. Considering tempered expectations for near-term investment in Consumer Electronics and seasonal weakness expected in Q4, how do you anticipate this will affect overall company growth, and what steps are you taking to offset any potential slowdown in this segment?

    5. With the addition of less experienced sales staff in the emerging customer initiative, how sustainable is this strategy in effectively selling your complex products, and what measures are you implementing to ensure these new salesnoids achieve the desired productivity and sales effectiveness?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateMarch 3, 2022
    End Date/DurationNot specified
    Total Additional Amount$500,000,000
    Remaining Amount$309,051,000 as of 2024-09-29
    DetailsRepurchases depend on factors like dilution impact, stock price, share availability, and cash requirements. Methods include open market purchases, Rule 10b5-1 plans, or privately negotiated transactions.

    Past Guidance

    Cognex (CGNX) Guidance from the Last Four Earnings Calls

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      1. Revenue: Expected to be between $210 million and $230 million, representing a high single-digit increase year-on-year, excluding Moritex.
      2. Moritex Contribution: Expected to return to its typical range of 6% to 8% of revenue.
      3. Adjusted Gross Margin: Expected to be in the high 60% range, with a 2 percentage point impact from Moritex.
      4. Adjusted EBITDA Margin: Expected to be between 14% and 17%, with a 3 percentage point increase year-on-year.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024
    • Guidance:
      1. Revenue: Expected to be between $225 million and $240 million, reflecting a soft but stable market backdrop.
      2. Adjusted Gross Margin: Expected to be slightly below 70%, with a 3% dilution effect from Moritex and a negative mix effect.
      3. Adjusted EBITDA Margin: Expected to be between 16% and 19%, with the midpoint in line with the prior year.
      4. Emerging Customer Initiative (ECI): Incremental revenue of $50 million expected to take longer to materialize, but the initiative remains gross margin accretive.
      5. Consumer Electronics Revenue: Expected to be more heavily weighted to Q2 in 2024.
      6. Moritex Contribution: Expected to contribute 10% to 12% of revenue, higher than the typical range due to a one-time catch-up.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Q2 2024:
        1. Revenue: Expected to be between $230 million and $245 million, reflecting typical consumer electronics seasonality.
        2. Gross Margin: Expected to be slightly above 70%, improving sequentially.
        3. Adjusted Operating Expenses: Expected to increase by low to mid-single digits sequentially.
      • FY 2024:
        4. Emerging Customer Initiative OpEx: Incremental $25 million expected, ramping throughout the year.
        5. Incentive Compensation: Expected to be a $15 million to $20 million year-on-year headwind.
        6. Logistics Market Growth: Expected to grow but below the 30% long-term target.
        7. Consumer Electronics Market: Not expected to be a significant growth year.
        8. Total Revenue: Expected to be approximately in line with 2023.
        9. Moritex Contribution: Expected to contribute 6% to 8% of total revenue.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024
    • Guidance:
      1. Revenue: Expected to be between $190 million and $205 million, representing flat year-on-year and sequential growth.
      2. Gross Margin: Expected to return to 70-plus percent by Q2 2024.
      3. Moritex Contribution: Expected to contribute 6% to 8% of revenue.