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Presentation

Cognex Corporation beats earnings expectations. Reported EPS is $0.32, expectations were $0.25.

Operator: Greetings. Welcome to the Cognex Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Nathan McCurren, Head of Investor Relations for Cognex. You may begin.

Nathan McCurren: Thank you, Shamali. Good morning, everyone, and thank you for joining us. With me on today’s call are Rob Willett, Cognex’ 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: Thanks, Nathan. Hello, everyone, and 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, and 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, and 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: Thank you, Rob, and 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 remain muted in Q3 – 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 source 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 manufacturers facility. It would be helpful for me to explain two items related to the fire. First, was a noncash 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: 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’ industry-leading technology across our product lines. In 2022, we launched a new product platform, which includes our Insight 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 Insight 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, but 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 Insight 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 weeding 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 needs [ph] 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. Now we will open the call for questions. Operator, please go ahead.

Operator: Thank you. [Operator Instructions] Now our first question comes from Josh Pokrzywinski from Morgan Stanley. Please proceed with your question.

Josh Pokrzywinski: Hi, good morning all.

Rob Willett: Good morning, Josh.

Josh Pokrzywinski: While I was hoping to dig in a little bit on what you’re seeing in logistics market. I think some of your peers out there, maybe some with perhaps some more inventory destock risk have seeing the market get a little choppier, but you guys have started to see this for a few quarters now. I’m just wondering if you feel like we’re more bouncing along the bottom? Or if 2Q represented sort of another step-down in activity.

Rob Willett: Yes. 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? And we’ve sort of unwound any backlog a long time ago related to that. And what we really see now is, we’re kind of we think we’re kind of bumping along the bottom of where we were. Our logistics bookings 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. Then we also have, as you well know, a kind of base logistics business, which are other customers, right? That’s a business where we expect growth this year still, but we’re still also seeing some caution that we’re seeing elsewhere across all of our markets, where I think sort of macroeconomic concerns and other concerns perhaps hitting that market, too.

So I think we feel we’re kind of 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.

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

Rob Willett: Yes, thanks. I think it is a lot about the cycle. We tend to see bigger years very frequently followed by lower years. We sort of saw that when we last spoke to you, but I think that the level of softness is greater than we anticipated. So certainly, that’s a factor going on. I think some of the things that we expect to drive investment in electronics haven’t been materializing as quickly as we might have thought overall and 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 might have expected. But Josh, you also really ask about kind of new technology and new waves that are coming.

And I think we see a number of things that we’re very optimistic about in terms of long-term growth for Cognex and 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. So those are things that, I think, offer us a lot of confidence about longer-term growth. You’re also asking about kind of – you asked about OLED, for us, really kind of peak OLED was probably 2017, right? So that’s quite a long time ago, at this point, but where we see kind of newer technologies, we saw 5G, of course, giving us a lift also in the business. What’s coming next? Clearly, we all see virtual reality products kind of being wheeled up from a number of companies in the industry.

So products like that or other things that we see in our customers’ product lines do offer us optimism about growth in future years. And some of those devices, 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 the strength that we would like to see in electronics this year and less strong than when we last spoke with you, but plenty to feel optimistic about as we look forward.

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

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

Tommy Moll: Good morning and thanks for taking my questions.

Rob Willett: Hi, Tommy.

Tommy Moll: Rob, I wanted to circle back to the comment you made about logistics. I think you said you’re optimistic about next year. And so 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 was built out recently? We’ve noticed you’ve got some content on some symbiotic systems that are being deployed to some of the key players in omnichannel. I wonder if that might be something that we should pay attention to. Anything you can give us on those points would be helpful.

Rob Willett: Yes, Tommy. I mean we work closely with the engineering teams that – major e-commerce players. We see that they overbuilt capacity around the pandemic and that they’ve kind of turned the tap off on that about a year ago, right? And they have plans that go out multi-year to address growth in their markets, whether it’s here in the United States or overseas, and those investment plans are moving along. They take longer to get approved. We’d say that there’s a lot more scrutiny going on now. But we do see plans, which may get delayed, but we see plans for further investment coming. And I think to think that we would see that start to flow into our business next year is realistic and we would expect to sort of inflect back to growth on some of that bigger logistics business. But far from certain at this point, but certainly some reasons for optimism at Cognex.

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

Tommy Moll: 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 and as you look to next year, what’s a reasonable time frame 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: Sure, I’ll start with this year question, Tommy. I think yes, we should hit the ramp rate in Q3. Effectively, we’re hiring largely college grads, which meant sort of hiring began in Q2 and through early mid-Q3 or really early Q3. So we really should be at ramp rate with this – with the Q3, which was reflected in our guide. And it is – we’ve discussed previously about a $25 million to $30 million investment this year in our operating expenses and roughly $10 million quarter-to-quarter. Now that we’re at run rate in Q3, Q4. In terms of next year, lots of excitement and more to come, but I think it’s premature to sort of speculate when we’re going to have ROI or other insights. And I think we would expect to be hiring for a class next year as well.

Tommy Moll: Thank you. I’ll turn it back.

Operator: Our next question comes from the line of Joe Giordano with Cowen. Please proceed with you question.

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

Paul Todgham: Yes, Joe, I’ll take it. I mean, obviously, our hope and expectation once the broker buys would be behind us that we’d be in the mid-70% range pretty consistently and that is still our expectation. I think right now the biggest challenge we’re faced is deleverage on lower revenue levels. So, we have certain fixed costs associated with our COGS and if we’re guiding to revenue below – even in Q2 versus a year ago, deleverage was a partial offset to the broker buy phenomenon being significantly reduced. That will increase at the guide we gave, $180 million to $200 million. So I’d say deleverage is a big phenomenon. And then yes, revenue mix. I see revenue mix is really varying quarter to quarter. It can be product related, it can be industry or it can be geography related.

In Q3 if I think about sort of versus a year ago, we are expecting significantly less consumer electronics revenue in Q3 versus a year ago. 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. But because of this $15 million that we’d expected to recognize very early in Q3 that recognized late in Q2, it’s going to be a significant step-down this year from Q2 to Q3 in our consumer electronics revenue and the year-on-year comparison is also very steep. Consumer electronics is a very high software component to the business. So the gross margins are high associated with that. So that’s the biggest factor in Q3, but there could be other factors to going forward.

We do have growth levers for gross margin beyond just the broker buys going away. Emerging customers, for instance, we’re seeing 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. So we do expect to be at that mid-70s level, but that’s going to be very challenging at lower revenue levels because of the deleverage.

Joe Giordano: Right. And now that we’re through August – well, beginning August here, do you have more of a full year update on growth for CE auto logistics?

Rob Willett: So, I’ll start and then I’ll invite Paul to comment. Generally, we don’t give guidance for full year, but I think some of the factors we are seeing, we’ve spoken about consumer electronics and 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 automotive, what we see going on there is, we see nice strength building in EV, right? We’re seeing – we had – in the last quarter, we had good growth, more than 30% year-on-year growth in our EV business, but it’s still representing less than a quarter of our automotive business overall. And we’re seeing 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.

So that’s sort of the take in automotive. So and you also asked about logistics, 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: Yes. So I mean that will give a – full year info. Go ahead, Joe.

Joe Giordano: No, no, sorry, go ahead.

Paul Todgham: Yes. No. I mean without giving full year guidance, which we don’t do, of those three sectors, we would say automotive is probably the healthiest right now. We’ve talked about logistics where we were up against on a year-on-year basis, right? We were up against a very tough compare in Q1 of this year in logistics because Q1 2022 was really our last big quarter of logistics and then Q2 we work through some backlog. And then as Rob mentioned, it’s been sort of fairly steady since then Q3 2022 to this most recent quarter and we’re sort of expecting steadiness reflected in our guide for Q3. And as Rob said, I don’t necessarily see a big pickup in Q4. So I think that the tough compares are largely behind us in logistics, but a fairly steep [ph] hill versus what we’ve already seen in the first half of this year.

And then consumer electronics, we’re expecting to be down meaningfully we expect it to it down modestly and now we’re saying down meaningfully. So both of those are end markets having a tougher year, automotive relatively better, and then kind of all other industries relatively better as well as we called out consumer products and food and beverages, relative points of strength within that other packaging group.

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

Rob Willett: 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 pretty strong kind of funding environments that no longer exist. So yes, we see – we definitely see it as a pretty rich environment for M&A activity, and we have lots of activity going on.

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

Joe Giordano: Yeah. And that was a cool product. So thanks guys.

Operator: And our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Unidentified Analyst: 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. And 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 in effort to take share or just lodge an existing solution?

Rob Willett: Yes. Thanks, Chris. So to paint the kind of picture in context here. So Cognex, our business has succeeded over the years as our name implies the cognition expert. 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’re the most sophisticated automation companies in their industries very often. And that’s been great for us, and it’s allowed us to serve what is a customer base of about 30,000 customers worldwide, very successfully. But 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.

And that’s allowing us to have a different approach to the market where as witnessed say, with the 2,800 that we launched with our Edge learning technology is, 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 provide it very quickly and easily to customers who don’t have heavy engineering teams on board. So 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 and going forward over the years. And we need a sales force to go out and meet and call on those customers regularly. And 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 who have great sales personalities and reasonable technical skills. So that’s kind of the backdrop, right? So 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. So we’re learning. To your question about are they new division 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. So a little less than half really don’t have much experience with vision products or vision technology.

And others of them have less sophisticated vision technology and less capable products from other companies. And we’re seeing a pretty broad range of those. So it’s kind of what we’re seeing overall. We’re in the process now of training up a large group of emerging customer sales noises, and they’ll be entering the field around the end of the year and we’ll be – 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.

Unidentified Analyst: Great. Appreciate the color. Thank you very much.

Operator: And our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question.

Jacob Levinson: Thank you. Good morning, everyone.

Rob Willett: Good morning.

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

Rob Willett: Yes, Jake. It’s Rob. Let me start off here. I think we – the markets that we have seen some better traction in this down market based logistics. We’ve spoken about consumer products, which you mentioned and EV. So in terms of consumer products, we sell to companies making often regulated goods or difficult to manufacture goods, and they might include pharmaceuticals. They might include razor blades, diapers, products like that. And often, these companies have longer programs that they’re rolling out. Some of them can be quite regulated in terms of tax and other things that are going on. And they can be more sizable products opportunities too. Food and beverage also kind of fits in with that kind of profile.

So 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. We have great technology for them, which can really read barcodes and capture data very reliably through the supply chain. And sometimes those companies 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. So they look to us. And yes, we – so that’s the kind of business that we’ve seen pretty healthy over the last few years and still looks. I think, quite good for us.

Paul Todgham: Yes. And 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: Okay, that’s helpful. I’ll leave it at that. Best of luck.

Operator: [Operator Instructions] Our next question comes from the line of Jairam Nathan with Daiwa Capital Markets. Please proceed with your question.

Jairam Nathan: Hi, thanks for taking my question. I just had a kind of follow-up on the emerging customer initiatives, so have you – how you thought about the payback period? How should we think of the payback period for that investment to $25 million to $30 million. And internally, what metrics are you using – is it kind of a sales per employee kind of metric or – and would appreciate if you could give some more details on that?

Rob Willett: Yes. I think for competitive reasons, we want to be a little bit careful what we say about that. But we’re running pilots. Of course, sales per salesperson is pretty important. We implemented salesforce.com 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 going to 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. So we have a lot of KPIs around this that we’re tracking very carefully. I think of this as a long-term initiative for Cognex. So I think if this goes very well, we’ll put salespeople in the field.

We will see them ramp to our expectations. They’ll be contributing hopefully accretive to gross margin. And over time, the people we hire now will be operating margin accretive. But I think if this goes well, we’re going to keep adding them because I think we, like – some other companies see a lot of potential for a larger end user sales presence where we’re calling on customers that are underserved today.

Jairam Nathan: And thanks for that. Sorry, go ahead.

Paul Todgham: My boss did a great job, nothing to add from the finance side.

Jairam Nathan: Thanks. On the EV battery side, we are seeing – we are hearing of some push-outs in China and even in the U.S., forward, I think a couple of weeks back talked about kind of pushing out their ramp on the EV given the higher losses. Are you seeing any impact from lower-than-expected pricing for EVs and things like that impacting your EV business here?

Rob Willett: That’s not apparent to me, no. I – to manufacture batteries, and there aren’t a ton of them. I’m thinking really of 10 or so. They have plans to execute on scaling up manufacture, right. So China might be a little different. I can see perhaps there’s more capacity in China in EV battery, but I think outside of China – And that’s slowed things down in terms of time to execution. And then it’s not an example of EV, but I think we’ve all read about semiconductor, I think, who faces some sort of similar challenges and 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. So I see that sort of phenomenon being driven by the investment, the IRA and I think it’s a phenomenon that’s just causing some delays.

Jairam Nathan: Okay. Thanks. And final question is on 4Q, and I know you don’t – you guys only do one quarter ahead, but it’s a seasonally 4Q is it’s typically been down about let’s say 10% or so sequentially. Would you expect any change in that seasonality this year?

Rob Willett: So Q4, it’s difficult to make calls and we don’t forecast for Q4. Some of the phenomenon that – the phenomena that go on in Q4, it tends to be a lower consumer electronics quarter for us, and there’s no reason to think different from this year and there can be end of the year spend that goes on kind of budget flush spend. In this case, we’re not expecting that given the environment that we see.

Paul Todgham: I would just caution, Jairam, that we’ve had a lot of variation of our seasonality with the impact of logistics. I know I think 2022, 2021, 2020; there was quite different seasonality of logistics from Q3 to Q4. Consumer electronics is more predictable as Rob noted. And then, excluding those two industries, I think the, the presence or absence of a budget flush. It’s probably the biggest driver of how well revenue holds up in Q4 versus potentially declines a bit. So 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, 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.

Rob Willett: So 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 of EV. So I’ll just try to reprise that a little for anybody who missed it. Basically, yes, we’re seeing slower ramp on some projects in EV nothing to do really with Cognex, I think, to do with the market overall. And that has to do with company is 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 supply and more capacity in China currently. So 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 important growth industry.

Jairam Nathan: Thanks guys. Thank you.

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

Rob Mason: 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 try to penetrate that further. I’m just curious, is that mainly going to be through the penetration of some greenfield opportunities. I would think that’s more of a brownfield opportunity, but just where you’re seeing those early signs. And then just around the – maybe the installed base, 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: Hi Rob. Thanks for the question. Yes, I think we were really focusing quite a lot on big e-commerce in those answers. But I’m glad you bought our parcel and post because those are important markets that we’re making a lot of progress then. We launched the Modular Vision Tunnel earlier this year, which is – and the DataMan 580, which is very capable for parcel and packaging companies. And those companies we’re in trials with them on this product and that technology. And I think it’s going very well. Their applications very often are about getting more capacity out of existing facilities that they have. There’s no – there’s almost no Cognex product in those facilities. So it’s replacing older, often line scan technologies that that is hard to maintain and somewhat out of date that they’re replacing with our technologies.

And then, you know, 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. So that is another area where we may see inflection in our business.

Rob Mason: I see. And then just a quick question. Paul, the third quarter operations, OpEx guidance calls for expenses to be down even though the emerging customer investment would be going up. And I may have missed this, I joined late. But did you quantify what that investment will be sequentially in that emerging customer level? And then, I’m just curious how the fourth quarter OpEx would look if that becomes more visible in the fourth quarter that increased emerging customer investment?

Paul Todgham: Sure, yes. I mean the emerging customers is a few million dollar increase. I’d say again it’s about a $30 million – $25 million to $30 million annual investment and about a $10 million run rate in Q3 and Q4. So not necessarily a step up, a meaningful step up in Q4, Rob. There’s a – there’s always a little bit of one offs in any given period. We might expect incentive compensation to be down a little more in Q3 versus Q4. So that could be some driver between the two. But overall, we’re managing discretionary expenses quite tightly. I think our emerging customers investment is sort of at run rate reflected in our guidance. And there’s always a little bit of movement in things like incentive compensation and stock expense and so on that can lead to some one-offs, but we get more guide on that in November.

Rob Mason: Understood. Very good. Thank you.

Operator: And our next question comes from the line of Keith Housum with Northcoast Research. Proceed with your question.

Keith Housum: Good morning, guys. I just want to unpack your commentary regarding new products over the past six months. Is there an opportunity with the new products that are opening guys up to new use cases and new end markets that perhaps we haven’t seen in historical results?

Rob Willett: Hi, Keith. I think a big play there, which I tried to try to cover in my prepared remarks is really that’s a lot of the products we’re launching are easier to use and easier to sell. And 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. So 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. So that’s certainly a big player in that regard. I would also point, 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.

So 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. So 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: Great. That’s helpful. I appreciate it. And then just as a follow up, there’s been a lot of communication over the past year or two regarding near shoring 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 a commentary on that.

Rob Willett: We certainly do see lots of activity in that area. We see some of our large customers diversifying their supply chains away from China, particularly in consumer electronics and – but also in automotives. And 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 shortages, getting the quality of engineering and just quality of production in some of these markets. So that may be causing some of the progress to be a little slower than we would have expected and as – than they would have expected, I think.

Keith Housum: Great. Thank you.

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

Operator: And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.