Q3 2024 Earnings Summary
- 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.
- 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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.