Cognex - Q2 2023

Transcript

Operator (participant)

Greetings! Welcome to the Cognex second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to your host, Nathan McCurren, Head of Investor Relations for Cognex. You may begin.

Nathan McCurren (Head of Investor Relations)

Thank you, Shamali. Good morning, everyone, thank you for joining us. With me on today's call are Rob Willett, Cognex's President and CEO, and Paul Todgham, our CFO. Our results were released earlier today. The press release and quarterly report on Form 10-Q are available on the Investor Relations section of our website. Both the press release and our call today will reference non-GAAP measures. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the press release. Any forward-looking statements we made in the press release or any that we may make during this call, are based upon information that we believe to be true as of today.

Our actual results may differ materially from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and our Form 10-Q filed this morning for Q2. With that, I'll turn the call over to Rob.

Rob Willett (President and CEO)

Thanks, Nathan. Hello, everyone, thank you for joining us. We delivered second quarter revenue at the top end of our expected range, gross margin in line with our guidance and operating expenses favorable to expectations. We had a strong sequential step up in operating margin as gross margin returned to our mid 70% long-term target, we carefully managed costs in the quarter. While these results were in line or better than our outlook, conditions weakened as the quarter progressed. You can see this in the latest PMI data, which has trended downward over the past three months. China has not gained the momentum we expected at the time of our last call, there is slower manufacturing activity in important factory automation markets, including Germany and the United States.

Our customers remain cautious with their capital investments, particularly in Consumer Electronics and Semi, where we have seen the steepest decline in demand. As a reminder, we tend to see the impact of these dynamics more rapidly than many of our industrial peers, given the short cycle nature of our business. These challenges are not as apparent in our second quarter results, since we recognized approximately $15 million of revenue from Consumer Electronics that we had previously expected in Q3. Before I go into further commentary on the business and outlook for Q3, I'd like to turn the call over to Paul to walk you through more of the results.

Paul Todgham (CFO)

Thank you, Rob. Good morning, everyone. Second quarter revenue was $243 million, a 12% year-on-year decline. Foreign currency translation remained a headwind, reducing revenue by $5 million, or 2% year-on-year. From an end market standpoint, Consumer Electronics and Semi have had the most significant slowdown in demand. Revenue from our largest e-commerce customers remained muted in Q2, yet has been roughly flat for each of the past four quarters. The rate of year-on-year decline is improving as we anniversary the slowdown in large investments from these few customers. The remainder of our Logistics business has continued to outpace our largest e-commerce customers. Shifting to Automotive, EV battery growth continues to materialize, yet the growth we are seeing there did not outweigh the decline in traditional automotive.

Revenue in other end markets was mostly lower year-on-year, with the exception of consumer products and food and beverage. Looking now at the change in revenue on a geographic basis. Revenue in the Americas declined 10% and in Europe declined 8% year-on-year. Excluding the impact of approximately $15 million of Consumer Electronics revenue we had expected in Q3, revenue in China and Other Asia each declined by close to 30% year-on-year, driven by the softness in Consumer Electronics and Semi. Gross margin in Q2 was 74%, which is in line with both our guidance and mid 70% long-term target now that the higher priced inventory we sourced through brokers has worked its way through the P&L. Slightly offsetting the improvement in gross margins was deleverage on lower revenue and foreign exchange headwinds. Let's turn now to operating expenses.

OpEx declined by 13% year-on-year on a GAAP basis, which included $20 million of items related to the June 2022 fire at our primary contract manufacturer's facility. It would be helpful for me to explain two items related to the fire. First, was a non-cash net charge of $17.4 million in Q2 of 2022, primarily for the estimated value of inventory on our books that was destroyed or abandoned, net of estimated insurance proceeds. The other was a gain of $2.5 million in Q2 of this year for proceeds from business interruption insurance. Excluding fire-related items, operating expenses increased by 3% year-on-year due to investment in our emerging customer initiative. Beyond the investment in emerging customers, non-GAAP OpEx declined year-on-year as we have been closely managing costs given the challenging outlook.

On a sequential basis, OpEx in Q2 declined by 4%, excluding the insurance proceeds. This was better than our guidance due to headcount management, lower incentive compensation, and tighter management of discretionary spending. Operating margin, excluding fire-related items, was 26% in Q2, which was a significant step up sequentially, but below Q2 of 2022, due primarily to operating deleverage and our investment in emerging customers. The non-GAAP effective tax rate, excluding discrete tax items and fire-related items, was 15% in Q2 of 2023 and 13% in Q2 of 2022. Reported earnings were $0.33 per share in Q2. Non-GAAP earnings per share were $0.32. Turning to the balance sheet, Cognex continues to have a strong cash position, with $832 million in cash and investments and no debt.

Cash flows in Q2 reflected a return of $37 million to shareholders in the form of stock buybacks and dividends. Now, I'll turn the call back over to Rob.

Rob Willett (President and CEO)

Thanks, Paul. We remain focused on long-term growth, yet disciplined in the near term as we manage through this softer demand environment. We had a strong quarter of product launches. Our investment in emerging customers is on track, and momentum is building in EV battery. Our products and platforms innovation strategy is resulting in more rapid new product introductions and the proliferation of Cognex's industry-leading technology across our product lines. In 2022, we launched a new product platform, which includes our In-Sight 2800 vision system and our DataMan 280 fixed mount barcode reader. In the past, our next product would have been built on a new architecture. Today, we're leveraging common architectures, which eliminates the need to replicate prior work, allowing us to move faster to market.

The latest example of this is the DataMan 80, which we launched in July and leverages the same platform as the In-Sight 2800 and DataMan 280. We trialed this product over the past year with a select number of customers, including a global e-commerce leader. After a very positive reception, we're excited to fully launch this product globally. The DataMan 80 delivers the superior barcode reading performance Cognex is famous for. It's easier to sell and easier to use. We continue to roll out products that offer our industry-leading edge learning technology, which began with the In-Sight 2800. Our latest launch with edge learning was the Advantage 182 Series, our next generation image engine for life science OEMs.

The 182 leverages Cognex's edge learning tools for automating diagnostic tasks by reading letters, numbers, and vials, and codes on vials, running inspections, and detecting substances in blood samples, among other applications. We launched 13 new products in the first half of 2023, a record number of new Cognex product introductions in a six-month period. We're excited about bringing these products to a broader audience through our emerging customer sales force. We have now completed the bulk of hiring of these new sales nodes for this year, and training is progressing well. We're learning from this initial stage and remain excited about the growth potential and strong returns of this investment to broaden our customer base. We also have strong momentum with EV battery manufacturing customers.

We see this as a long-term growth driver, as the activity we are now engaged in fuels growth in future years for us. Some of these projects have faced delays or are ramping up more slowly than our customers anticipated, and we expect EV battery revenue to be lumpy as our customers roll out large projects. Turning now to our outlook. We expect revenue in the third quarter to be between $180 million and $200 million. This represents a sequential decline of approximately $25 million at the midpoint, adjusting for the approximately $15 million of Consumer Electronics revenue that shifted from Q3 to Q2. The decline is primarily driven by further softening of manufacturing investment, resulting in a step down in demand in our factory automation business.

We expect gross margin in Q3 to be in the low 70% range, due primarily to further operating deleverage and the negative mix impact of a more significant decline in Consumer Electronics revenue. Considering these near-term pressures, we will remain diligent about cost management. Despite a further ramp in emerging customer investment, we expect OpEx to decline by low single digits sequentially in the third quarter. We remain confident in our strategy and our ability to manage through a challenging operating environment and return to our long-term growth model. We will open the call for questions. Operator, please go ahead.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. To participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Josh Pokrzywinski with Morgan Stanley. Please proceed with your question.

Joshua Pokrzywinski (Equity Analyst)

Hi, good morning, all.

Nathan McCurren (Head of Investor Relations)

Good morning, Josh.

Joshua Pokrzywinski (Equity Analyst)

Well, I was hoping to dig in a little bit on what you're seeing in logistics markets. I think some of your peers out there, maybe some with perhaps some more inventory, destock risk, have seen the market get a little choppier, but you guys have started to see this for a few quarters now. Just wondering if you feel like we're, we're more bouncing along the bottom or if, if Q2 represented sort of another step-down in activity?

Rob Willett (President and CEO)

Yeah. Thanks, Josh. I think if we turn our minds to a year ago, that was when we really saw some of our big customers in e-commerce really return off their investment in kind of new infrastructure, right? We'd sort of unwound any backlog a long time ago related to that. What we really see now is we think we're kind of bumping along the bottom of where we were, and our logistics bookings, you know, are very consistent over the last few quarters as we're waiting really for spending to come back on. That's a phenomenon with large customers. We also have, as you well know, a kind of base logistics business, which are Other customers, right?

That's a business where we, we expect growth, you know, this year still, but we're still also seeing some caution that we're seeing elsewhere across, you know, all of our markets, where I think sort of macroeconomic concerns and other concerns are perhaps hitting that market, too. I think we feel we're kind of, you know, in, at the bottom of the trough. When will things pick up, I guess, is the big question? We don't think this year, but we're optimistic about next year.

Joshua Pokrzywinski (Equity Analyst)

Understood. That's helpful. Then just shifting over to Consumer Electronics. You know, if I, if I try to take a wider view, maybe going back to the OLED cycle, several years ago, I think Cognex's outgrowth is sort of, you know, happened inside of some of those industry cycles. Obviously, we can see some of that spending coming in, and I, I think, you know, multiple companies would say that China, you know, reopening was a little disappointing. What can you tell us about either content growth or anything on, you know, kind of the, the new product introduction side, where there's a chance, you know, like OLED did in the past, for contents go up, or are you guys really just seeing sort of the cycle at this point, you know, govern, govern the activity?

Rob Willett (President and CEO)

Yeah, thanks. I, I think, I think it is a, a lot about the cycle. You know, we tend to see bigger years very frequently followed by lower years. We, we sort of saw that when we last spoke to you, but I think the, the level of softness is, is greater than we anticipated. Certainly that's a, a factor going on. You know, I think some of the things that we expect to drive, you know, investment in electronics haven't been materializing as quickly as we, as we might have thought, overall, and that those include, obviously, the introduction of new products and features and some of the change in location away from China towards Vietnam and India. I think those things are going a little more slowly than we, we might have expected.

Josh, you also really ask about, you know, kind of new technology and new waves that are coming. I think we see a number of things that we're very optimistic about in terms of long-term growth for Cognex in electronics. One is just the number of people still involved in manufacturing of electronics and the challenges of inspection and quality that exists and the power of our technology to really assist with customers. Those are things that I think offer us, you know, a lot of confidence about longer term growth. You know, you're also asking about kind of, you asked about OLED. You know, for us, really kind of peak OLED was probably 2017, right? That's quite a long time ago at this point.

Where we see kind of newer technologies, we saw 5G, of course, giving us a lift also in, in the business. You know, what, what, what's coming next? You know, clearly we all see, virtual reality products, you know, kind of being wheeled up, from, from, a, a number of companies in the industry. So, you know, products like that or other things that we see in our customers', product lines do offer us, you know, optimism about growth in, in future years. Some of those devices, you know, they are costly, complex, and very, very difficult to manufacture, which is really where, industry leaders rely on Cognex and the power of our engineering and technology to help them.

So, challenging year, not not the strength that we, we, you know, we would like to see in electronics this year and less strong than when we last spoke with you, plenty to feel optimistic about as we look forward.

Joshua Pokrzywinski (Equity Analyst)

Understood. Thanks for the comprehensive answer. Best of luck, second half.

Operator (participant)

Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your question.

Tommy Moll (Equity Research Analyst)

Good morning. Thanks for taking my questions.

Rob Willett (President and CEO)

Hi, Tommy.

Tommy Moll (Equity Research Analyst)

Rob, I wanted to circle back to the comment you made about Logistics. I think you said you're optimistic about next year. I just wanted to unpack that a little bit. Is it based on conversations that you've had with end users, or a view on when some of the larger players there will have fully absorbed a lot of the capacity that, that was built out recently? We've noticed you've got some content on some Symbotic systems that are being deployed to some of the key players in omni-channel. I wonder if that might be something we should pay attention to. Anything you can give us on those points would be helpful.

Rob Willett (President and CEO)

Yeah, Tommy, I mean, you know, we, we work closely with, the engineering teams that, you know, major e-commerce players. You know, we, we see that they overbuilt capacity, you know, around the pandemic, and that they kind of turned the tap off on that about a year ago, right? You know, they have plans that go out multi-years to address growth in their markets, whether it's here in the United States or overseas. You know, those, those investment plans are moving along. They, they take longer to get approved. You know, I would say that's, there's a lot more scrutiny going on now. You know, we do see plans, which may get delayed, but we see plans for, for further investment coming.

I, I think to, to think that we would see that start to flow into our business next year is realistic, you know, and we would expect to sort of inflect, inflect back to growth on some of that bigger logistics business. But, you know, far from certain at this point, but certainly, some reasons for, for optimism at Cognex.

Yeah, Tommy, you know, we, we spoke about this at our Analyst Day, you know, 11 months ago, you know, different levers of growth in Logistics, but one that where we made some recent progress is the parcel and post sector. you know, some technology we introduced there late last year, early this year, you know, we really are starting to see sort of early signs of, of, of traction there, despite, again, a challenging macro environment, so.

Tommy Moll (Equity Research Analyst)

Thank you. That's helpful. I also wanted to follow up on the emerging customer initiative investment. Should we think about the third quarter as the full run rate level of investment there through your operating expense line, or does it step up again as you exit the year in fourth quarter? As you look to next year, what's a reasonable timeframe you envision where we'll be able to look back and have some observations on the performance there versus your expectations for the investment? Thank you.

Paul Todgham (CFO)

Sure. I'll start with the this year question, Tommy. I think, yes, we'll, we should hit the ramp rate in Q3. You know, effectively, we're hiring largely college grads, which meant sort of hiring began in, you know, Q2 and through early to mid Q3, or really early Q3. We really should be at ramp rate with the Q3, which was reflected in our guide. It is, you know, we've discussed previously about a $25 million-$30 million investment this year in our operating expenses, and roughly $10 million, you know, quarter-to-quarter now that we're at run rate in Q3, Q4.

You know, in terms of next year, you know, lots of excitement and, and, and more to come, but I think it's premature to sort of speculate, you know, when, when we're gonna have, you know, ROI or other, other insights. I think we would expect to be hiring for a class next year as well.

Tommy Moll (Equity Research Analyst)

Thank you. I'll turn it back.

Operator (participant)

Our next question comes from the line of Joe Giordano with Cowen. Please proceed with your question.

Joseph Giordano (Managing Director)

Hey, guys. Thank you. Can you give a little color on the, the margin guide for next quarter, with the mix issues that you called out in the, in the press release? Like, which markets are driving that? Is it, is this kind of like a, in your view, kind of a one quarter blip downwards?

Paul Todgham (CFO)

Yeah, Joe, I'll, I'll take it. I mean, obviously, you know, our, our, our hope and expectation once the broker buys would be behind us, that, you know, we'd be in the mid 70% range, you know, pretty consistently. That is still our expectation. I think right now, the biggest challenge we're faced is, you know, deleverage on lower revenue levels. You know, are we have certain fixed costs associated with our COGS, and if, you know, we're, we're guiding to revenue below even, even, you know, in Q2 versus a year ago, deleverage was, you know, a partial offset to the, the broker buy, you know, phenomenon being significantly reduced. That'll increase at, you know, the guide we gave, $180 million-$200 million. I'd say deleverage is, you know, a big phenomenon.

Yes, revenue mix. I see revenue mix as really varying quarter-to-quarter. You know, it can be product related, it can be industry, or it can be geography related. You know, in Q3, if I think about sort of versus a year ago, you know, we are expecting significantly less Consumer Electronics revenue in Q3 versus a year ago. You know, when we mapped out the view for the year for Consumer Electronics in our last call, we expected Q2 and Q3 to be roughly equal this year in Consumer Electronics revenue.

Because of, you know, this $15 million that we'd expected to recognize very early in Q3, that recognized late in Q2, you know, it's gonna be a significant step down this year from Q2 to Q3 in our Consumer Electronics revenue, and the year-on-year comparison is, is also very steep. Consumer Electronics is a very high-software component to the business, so the gross margins are high associated with that. That's the biggest factor in Q3, but, you know, there could be other, other, other factors too, going forward. We do have growth levers for gross margin beyond just the broker buys going away. Emerging customers, for instance, we're seeing, you know, good gross margin profile of the business we're doing there. We have specific initiatives in logistics to improve our gross margins over time as well.

We do expect to be at that mid-70s level, but that's gonna be very challenging at, at lower revenue levels because of the deleverage.

Joseph Giordano (Managing Director)

Right. Now, you know, that we're through August, well, sort of beginning August here, do you have more of a full year update on growth for CE, Auto, Logistics?

Rob Willett (President and CEO)

I'll start, and then I'll invite Paul to comment. You know, generally, we don't give guidance, you know, for, for full year. I think, you know, some of the factors we are seeing, we've, we've spoken about Consumer Electronics and, you know, the level of revenue we're expecting much lower in the second half, partly as a result of that earlier revenue recognition of the $15 million at the end of Q2. In terms of, you know, Automotive, what, what we see going on there is we see, you know, nice strength building in EV, right?

We're seeing, we had, in, in, in the last quarter, we had, you know, good, good growth, more than 30% year-on-year growth in our EV business, but it's still representing less than 25% of our Automotive business overall, and we're seeing, you know, headwinds offsetting that currently in Auto, I think as big car companies and dealers have excess inventory, and there isn't such a desire to produce going on. That's sort of the take in Automotive. You also asked about Logistics. I think, you know, I think that's what we're seeing is kind of bumping along at this level currently, and probably continuing at that level until things start to pick up with new investments.

Paul Todgham (CFO)

Yeah. I mean, again, without giving full year info—oh, go ahead, Joe.

Joseph Giordano (Managing Director)

No, no, sorry. Go ahead.

Paul Todgham (CFO)

Oh, yeah. No, I mean, without, without giving full-year, you know, guidance, which, which we, which we don't do, you know, of those three sectors, we would say Automotive is probably the healthiest right now. You know, we've, we've talked about logistics, where we were up against, it's on a year-on-year basis, right? We were up against a very tough compare in Q1 of this year in, in Logistics, 'cause Q1 2022 was really our last big quarter of Logistics. You know, Q2, we worked through some backlog, and then as, as, as Rob mentioned, it's been sort of fairly steady since then, Q3 2022 to the, you know, to, to this most recent quarter. We're sort of expecting steadiness reflected in our guide for, for, for Q3, and as Rob said, don't necessarily see a big pickup in Q4.

I think that the compare—the tough compares are largely behind us in Logistics, but, you know, a fairly steep hill versus, you know, what we've already seen in the first half of this year. Consumer Electronics, we're expecting to be down, you know, meaningfully. We expected sort of down modestly, and now we're saying down meaningfully. You know, both of those are, are end markets are having a tougher year, Automotive, relatively better, and then kind of all other industries, relatively better as well. As, you know, we call out consumer products and food and beverages, you know, relative points of strength within that, within that other packaging group.

Joseph Giordano (Managing Director)

If I could just sneak in one last one. You know, just given the weakness in the markets, you know, a lot of smaller companies probably can't weather that to the same extent that you can with your balance sheet and your scale. Has, like, the M&A environment changed significantly, where new technologies are kind of in need of, you know, maybe the business is in need of some help and are more willing to be sellers here?

Paul Todgham (CFO)

I think that's definitely the dynamic that we see. It's similar to what I said to you on the last call, which is, I think a lot of companies had very high valuation expectations, and, you know, and, and pretty, you know, strong, strong kind of funding environments that no longer exists. Yes, we definitely see it as a, a, a pretty rich environment for M&A activity, and we have lots of activity going on.

Yeah. I think our acquisition in December last year of SAC was a, a good example of that, you know, relatively small, organization based in Germany with great technology, great engineers, and difficulty in accessing the market they need to access, which was EV. With their technology, they were accessing traditional German automotive primarily, and, you know, we view that as been a, a great acquisition for us, and we would love to put more money to work than we did, just with that one buy.

Joseph Giordano (Managing Director)

Yeah, that was a cool product, so thanks, guys.

Operator (participant)

Our next question comes from the line of Jim Ricchiuti, with Needham & Company. Please proceed with your question.

Speaker 11

Hi, good morning. This is Chris on for Jim. Thank you very much for taking the questions. If you could, could you elaborate on the traction that you're seeing with the emerging customers? Maybe speak to the composition of the funnel and the prospects. Could you, could you frame maybe for the customers that you're targeting, is this for how many of them, is this a first foray into adopting machine vision versus an effort to take share or, or dislodge an existing solution?

Rob Willett (President and CEO)

Yeah, thanks, Chris. To paint the kind of picture in, in context here, Cognex, our business has, you know, succeeded over the years as, as our name implies, the cognition experts. You know, we're, we're the most sophisticated provider of vision technology to automation, and you can see that in terms of the companies that we work with. They, they're the most sophisticated automation companies in their industries, very often. That's been great for us, and it's allowed us to serve what is about a customer base of about 30,000 customers worldwide, very successfully. Over the years, as happens in our industry, technology has changed and our products have changed, and now our products aren't so difficult to use. They're a lot easier to use and a lot more powerful.

That's allowing us to have a different approach to the market where, as, as witnessed, say, with the 2800 that we launched with our edge learning technology, an area where we lead in the market in terms of bringing powerful, deep learning tools to customers easily. We're able to take this technology and, and provide it very quickly and easily to customers who don't have heavy engineering teams on board. We expect that to broaden the number of customers that we can serve profitably from the 30,000 we serve today, to hundreds of thousands, perhaps 200,000, going forward over the years. We need a sales force to go out and, meet, meet and call on those customers regularly. They don't have to be, our sales force don't have to be highly qualified engineers, right?

They can be, more people coming out of college, you know, who have great sales personalities and reasonable technical skills. That's kind of the backdrop, right? Now we've been running, pilots and working on that process through this year, and we've been learning a lot about the customers that we can serve with our products, how they respond, what they need, and we've been able to profile them. We're doing that in a number of markets overall. We're learning. To your question about, are they, new to vision or are they experienced users of vision? I think we're finding more of them have vision than we had anticipated, but still a good portion. A little less than half really don't have much experience with vision products or vision technology.

Others of them have less sophisticated vision technology and less capable products from other companies. We're seeing a pretty broad range of those. That's kind of what we're seeing overall. We're, you know, we're in the process now of training up, you know, a large group of, of emerging customer sales noise. They'll be entering the field around the end of the year. We're, you know, we're optimistic about our ability to have them make a lot of sales calls and sell our products very effectively to those target customers that we have in mind.

Speaker 11

Great. Appreciate the call. Thank you very much.

Operator (participant)

Our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.

Jacob Levinson (Director)

Thank you. Good morning, everyone.

Rob Willett (President and CEO)

Good morning.

Jacob Levinson (Director)

Yeah, Paul, I, I think I heard you mention that consumer products and food and beverage were a couple of the only verticals that seem to be in, in decent shape these days. I suppose you might think that they were, they were in that sort of COVID tailwind bucket and might not be holding up so well. Is that, is that just a function of customers having delayed projects that they couldn't get done during COVID, or, or maybe projects to address labor shortages? Really, just any color on what you're seeing there would be helpful.

Rob Willett (President and CEO)

Yeah, Jake, it's Rob. Let me start off here. I think, you know, I think the markets that we have seen some, you know, better traction in, in this down market, based logistics, we've spoken about, consumer products, which you mentioned, and EV. In terms of consumer products, you know, we, we sell to companies making often regulated goods or difficult to manufacture goods, and they might include, you know, pharmaceuticals, they might include razor blades, diapers, products like that. Often these companies have longer programs that they're rolling out. Some of them, you know, can be quite regulated in terms of tax and other things that are going on, and they, you know, they can be more sizable products, opportunities too.

You know, food and beverage also kind of fits in with that kind of profile. You know, we, we have seen more traction on that over the years, and last quarter was no different, where companies are concerned about tracking and tracing their products through the supply chain, some often collecting tax revenue on those types of products. You know, we have great technology for them, which can really read barcodes and capture data very reliably through, through the supply chain. And, you know, sometimes those companies have, are pretty well financed and have very high and demanding standards for how they operate, and they can be fined, right, for lacking tracking and tracing technology. They look to us.

Yeah, so that's the kind of business that we've seen, pretty healthy over the last few years and, and still looks, I think, quite good for us.

Paul Todgham (CFO)

Yeah, some of the COVID headwinds you mentioned, Jake, we would have put those in our medical-related industry, so a little bit of a separate classification than consumer products and food and beverage.

Jacob Levinson (Director)

Okay, that's helpful. I'll, I'll leave it at that. Best of luck.

Operator (participant)

As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the question and answer queue. Our next question comes from the line of Jairam Nathan with Daiwa Capital Markets. Please proceed with your question.

Jairam Nathan (Executive Director)

Hi. Thanks for taking my question. I, I just had a kind of follow-up on the emerging customer initiative. So have you thought about the, like, the payback period? How should we think of the payback period for that investment to $25 million-$30 million? Internally, what metrics are you using? Is it, kind of, a sales per employee, kind of metric or—yeah, and would appreciate if you could give some more details on that.

Rob Willett (President and CEO)

Yeah, I think, you know, for competitive reasons, we want to be a little bit careful what, what we say about that. You know, we, we, we're, we're running pilots. Of course, sales per salesperson is, is pretty important. We implemented Salesforce over the last few years, so we're really able to have a much more professional, I would say, approach to tracking sales activity and call- and what the calls are. We're also, you know, gonna gain a lot of data and value from the market, where we can also sell these customers into more sophisticated technology as they grow and develop with us. We, we have a lot of KPIs around this that we're tracking, tracking very carefully. I think of this as a, you know, a, a long-term initiative for Cognex.

I think if this goes very well, we'll put salespeople in the field. We'll see them ramp to our expectations. They'll be contributing, you know, hopefully, accretive to gross margin, and over time, the people we hire now will be operating margin accretive. I think if this goes well, we're gonna keep adding them, because I think we, like some other companies, see a lot of potential for, you know, a larger end user sales presence, where we're calling on customers that are underserved today.

Jairam Nathan (Executive Director)

Okay, thanks for that.

Paul Todgham (CFO)

No, I was—

Jairam Nathan (Executive Director)

I'm sorry, go ahead.

Paul Todgham (CFO)

Nope, my boss did a great job. Nothing to add from the finance side.

Jairam Nathan (Executive Director)

Thanks. It's on, on the EV battery side, you know, we are seeing, we are hearing of some push outs in China and, and even in the U.S., you know, Ford, I think, two weeks back, talked about kind of pushing out their ramp, on, on the EV, given higher losses. Are you seeing any, any impact from, you know, lower than expected pricing for EVs and things like that, impacting your, EV business here?

Rob Willett (President and CEO)

That, that's not apparent to me, no. I, I, who manufacture EV batteries, and they're, you know, there aren't a ton of them. Let's—I'm, I'm thinking really of 10 or so. They have plans to execute on scaling up manufacture, right? China might be a little different. You know, I, I, I can see perhaps there's more capacity in China, in, in EV battery, but I think outside of China, and that slow things down in terms of time to execution. You know, and then it's not an, it's not an example of EV, but, you know, I think we've, we've all read about Semiconductor, I think, who faces some sort of similar challenges, and where they're looking to, where they're, where they're looking to start up manufacturing in the United States.

It's proving more difficult, finding the qualified labor that they need or getting the resources lined up and executing on that. I see that sort of phenomenon being driven by the investment, the IRA, and, and, and I, and I think it's a phenomenon that's just causing some delays.

Jairam Nathan (Executive Director)

Okay, thanks. The final question is on 4Q, I know you don't guide only to one quarter ahead, but it's seasonally, 4Q has typically been down about, let's say, 10% or so sequentially. Do you.

Rob Willett (President and CEO)

So, so Q4, you know, it's difficult to make calls, and we don't forecast, you know, for, for, for Q4. Some of the phenomenons that, you know, phenomena that go on, and, you know, there's no reason to think different from this year. And, you know, there can be end-of-the-year spend that goes on and kind of budget flush spend. In this case, we're, we're, you know, we're, we're not expecting reality with, you know, the impact of Logistics. I know, I think, you know, some 2022, 2021, 2020, there was quite different seasonality of Logistics from Q3 to Q4. Consumer Electronics is, is more of, you know, how well revenue holds up in Q4 versus potentially declines a bit. You know, there's, there's, there's a reason we're not really giving we're not giving guidance on that.

I think the only one of those that we could probably call out would be, you know, at this point, we're not projecting an increase in logistics in Q4 as kind of per Rob's comments, and we would expect Consumer Electronics to remain muted. Ladies and gentlemen, I got a little note here from our head of IR, saying that the phone line might have cut out during my fascinating discussion on EV. We're seeing slower ramp up, ramp on some projects in EV. Nothing to do really with Cognex, I think to do with the market overall.

That's has to do with companies struggling with execution really, and moving of geography away from certain markets towards the United States because of the Inflation Reduction Act and the incentives to build out here versus in Europe and other parts of Asia. I did mention, too, that I think there may be more, more supply and more capacity in China currently. That may mean that some of the plans there may be cooling a little, but it doesn't change, I think, our long-term view about the huge opportunity we see in helping to automate this, you know, important growth industry.

Jairam Nathan (Executive Director)

Thanks, guys. Thank you.

Operator (participant)

Our next question comes from the line of Rob Mason with Baird. Please proceed with your question.

Robert Mason (Senior Research Analyst)

Yes, good morning. There was questions around the Logistics business. Earlier on, you suggested maybe seeing some green shoots around the parcel post effort to, to try to penetrate that further. I'm just curious, you know, is that mainly going to be through the penetration of some greenfield opportunities? I would, I would think that's more of a brownfield opportunity, but just, you know, where you're seeing those early signs, and then just around the, maybe the installed base, now, how—is there a refresh cycle that needs to happen there? I'm just curious what the state of the current technology is in that installed base.

Rob Willett (President and CEO)

Hi, Rob. Thanks for the, for the question. Yes, I think we were really focusing quite a lot on big e-commerce, in, in those answers, but I'm glad you brought up, parcel and post, 'cause those are important markets that we're making a lot of progress in. We launched the, Modular Vision Tunnel earlier this year, which is, you know, and the DataMan 580, which is very capable for, parcel and, and packaging companies. And, and those companies, you know, we're in trials with them on, on this product and, and that technology, and I think it's going very well. Their, their applications very often are about, you know, getting more capacity out of existing facilities that they have.

There's almost no Cognex product in those facilities, so it's replacing older, often line-scan technologies that is hard to maintain and, you know, somewhat out of date, that they're replacing with our technologies. Then, there are also potential new facilities, also being built for them. We see some of those in Europe currently, where we're working, and I think we're well positioned. That is another area where we may see inflection, you know, in our business.

Robert Mason (Senior Research Analyst)

I see. Then just a quick question, Paul. The, the third quarter OpEx guidance calls for expenses to be down, even though the emerging customer investment would be going up. I may have missed this, I joined late, but did you quantify what that investment will be sequentially in an emerging customer level? Then, you know, I'm just curious how the fourth quarter OpEx would look, you know, if that becomes more visible in the fourth quarter, that increased emerging customer investment.

Paul Todgham (CFO)

Sure. Yeah, I mean, the emerging customers is a, a few million dollar increase, I'd say. Again, it's, it's about a $25 million-$30 million annual investment and about a $10 million run rate in Q3 and Q4. Not necessarily a, a, a step-up, a meaningful step-up in, in Q4, Rob. There's, there's, there's always a little bit of one-offs in any given, you know, period. You know, we might expect incentive compensation to be down a little more in Q3 versus Q4, so that could be some, some driver between, you know, between the two. Overall, we're, we're managing discretionary expenses, you know, quite tightly. I think our emerging customers' investment is, is sort of at, at run rate, reflected in our guidance.

Yeah, there's always a little bit of movement in, you know, things like incentive compensation and, and, you know, stock expense and so on, that, that can lead to some one-offs, but we, we give more guide on that in November.

Robert Mason (Senior Research Analyst)

Understood. Very good. Thank you.

Operator (participant)

Our next question comes from the line of Keith Housum with Northcoast Research. Please proceed with your question.

Keith Housum (Senior Research Analyst)

Good, good morning, guys. Just want to unpack your commentary regarding, you know, new products over the past six months. You know, is there an opportunity with the new products that are opening you guys up to new use cases and new end markets that perhaps we haven't seen in the historical results?

Rob Willett (President and CEO)

Hi, Keith. I think, I think in my prepared remarks, is really that a lot of the products we're launching are easier to use and easier to sell. Our edge learning technology is a great example of that. It's very powerful, can be trained on a very few number of samples, doesn't require much of any programming. The DataMan 80 is another example, very easy to use and integrate. That, that opens up markets. It opens up customers with less engineering capability, and it's very well suited for our emerging customer sales force, who will be selling it going forward. That's certainly a, a big play in that regard.

You know, I would also point to, as Rob Mason was asking about, parcel and post, the products we've launched over the last year, of the last six months, such as the Modular Vision Tunnel, the DataMan 580, are very much targeted at high speed, high performance, mass flow type applications, lots of parcels moving down a line, lots of image capture, lots of management of data that comes off and out of a tunnel, right? Those are markets that we haven't been able to serve with our technology before, but parcel and post and logistics is now an area that we can serve. I would certainly point to those as markets where we have little or no presence today and would expect to have significant presence, thanks to these products going forward.

Keith Housum (Senior Research Analyst)

Great. That's helpful. I appreciate it. Just as a follow-up, you know, there's been a lot of communication, you know, over the past year or two regarding, you know, nearshoring manufacturing facilities, moving plants out of China to Vietnam, to India and whatnot. Are you seeing the growth opportunities from that transition, or are these yet to develop? Maybe comment here around on that.

Rob Willett (President and CEO)

We certainly do see lots of activity in that area. We see some of our large customers, you know, diversifying their supply chains away from China, particularly in Consumer Electronics, and, but also in Automotive. I would say, it's definitely a trend that's continuing and will continue over many years. I think some of the challenges around execution, though, have been difficult for them. Labor, labor shortages, getting the quality of engineering and just quality of production in some of these markets. That may be causing some of the progress to be a little slower than we would have expected, than they would have expected, I think.

Keith Housum (Senior Research Analyst)

Great. Thank you.

Operator (participant)

We have reached the end of our question-and-answer session. I'll now turn the call back over to Rob Willett for closing remarks.

Rob Willett (President and CEO)

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

Operator (participant)

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.