Greetings, and welcome to the Cognex third quarter 2022 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 you would like the opportunity to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Susan Conway, Senior Director of Investor Relations. Thank you. Please go ahead. Hi. Thank you. Good evening, everyone. Welcome to our third quarter earnings conference call for 2022. Leading today's call are Rob Willett, Cognex's President and CEO, and Paul Todgham, our Chief Financial Officer. I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available in the Investor Relations section of our website at www.cognex.com/investor. Both contain detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors or if we think it will help them better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release. Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information we believe to be true as of today. However, things can change and actual results may differ materially from those projected or anticipated. For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and our Form 10-Q filed tonight for Q3. Now, I'll turn the call over to Rob. Thanks, Sue. Hello, everyone. Thank you for joining us. When we spoke with you in August, we were in the middle of managing two challenges in our business. One concerned the June fire at our primary contract manufacturer, and the other related to overcapacity at a few of our large logistics customers. Let me start by giving you an update on how we have been addressing both of those challenges. Turning first to the fire, we believe the business disruption is now behind us. The leadership team and I appreciate the hard work and collaboration of Cognoids and our suppliers in the aftermath of the fire. They demonstrated the best of our culture during a difficult time. Together, they helped replenish the significant component inventory positions that were destroyed in the fire and fulfill customer demand more quickly than we anticipated. These efforts led to strong shipments at quarter end, which allowed us to reduce the negative impact of the fire on Q3 revenue to roughly $40 million, or about half of what we estimated in our original guidance. This also resulted in exceeding the updated guidance we published in September. Moving next to logistics. As we reported in August, our largest customer and other e-commerce technology leaders are taking a post-pandemic timeout to absorb excess capacity. This follows two years of heavy investment through Q3 of 2021, which you may recall was a record-setting quarter for both our logistics revenue and Cognex overall. Despite slower current spending by a few customers, we believe our long-term prospects in logistics are as exciting as they have ever been. There are several reasons for our confidence. First, Cognex customers include many e-commerce and omni-channel retailers that are early in their adoption of machine vision. Second, we believe more growth collectively will come from Europe and Asia than the Americas. Third, there are other market adjacencies in logistics, such as parcel and post, where we have a small presence today and superior solutions that position us well to grow. Lastly, we see many applications beyond barcode reading where our machine vision technology is increasingly being used to solve new problems in logistics fulfillment. We believe that logistics will continue to be an important growth driver for us. It has emerged as the largest, and we expect it will remain the fastest-growing sector in our served market. We estimate the logistics segment to be a $2 billion market growing by 20% long term. Our differentiated technology and the opportunities we see in logistics gives us confidence we can continue to be a share gainer and grow this part of our revenue by 30% over the long term. Next, let me turn to a broader view of our served market and our expectations for longer-term growth. The excitement we have about our future was apparent at our Analyst Day event in September. We see tremendous value in bringing the investment community to our headquarters in Natick. They had an opportunity to meet in person with Cognoids, experience our culture firsthand, and see live demos of our products. We received a lot of great feedback from the event. At Analyst Day, we introduced an updated view of our served market. The new estimate is $6.5 billion, up 55% from our previous estimate of $4.2 billion that we shared with you in 2019. We believe the market will grow by 13% over the medium to long term. As a reminder, we calculate our served market estimate ourselves because there is no reliable third party source. Our served market reflects a relatively narrow definition of how big our business could be if we won every dollar of opportunity in the markets where we are focused today. Also, at Analyst Day, we updated our long-term target for Cognex revenue growth to 15% on a compound annual basis. We expect to continue to outperform market growth thanks to our strong product pipeline, our focus on high growth end markets, and the strength of our reputation with leading manufacturers. At this point in the year, I spend a lot of time with our sales force conducting in-depth reviews of our customers by geographic region. I'm excited about the new products and solutions we are introducing. They will help us scale our business more quickly and will enable a wider and less technical profile of customer to use our sophisticated and powerful technology. Our new Modular Vision Tunnels are an example of this. These pre-configured standard solutions are part of our plan to develop the opportunity for Cognex machine vision and logistics. They make it easier and faster for customers to solve complex vision problems using Cognex technologies, products, and our Edge Intelligence data analytics software platform in high speed, high throughput operations. Another example is the DataMan 8700 LX, the latest addition to our highly successful next generation series of industrial handheld readers. LX stands for Extreme Label Reading, and it's highly accurate in reading the most challenging label-based codes in a fraction of a second, 150 ms. The 8700 LX outperforms other handheld products available today and is being embraced by leaders in cloud computing and high-performance EV battery manufacturing, among other segments. Lastly, we were pleased to publish our first comprehensive sustainability report during the quarter. We have a great story to communicate. Cognex machine vision and deep learning technology plays an important role in making manufacturing more efficient and reducing its environmental impact. This report was developed by a cross-functional team of Cognoids. It demonstrates the strong progress we're making on our ESG journey. I'll stop here for now. Paul, the microphone is yours for details of the quarter. Great. Thanks, Rob, and hello, everyone. Revenue was $210 million in Q3. That level represents a decline of roughly 25% from both last year's record-setting performance and Q2 of 2022. It was better than we expected when we gave our updated Q3 guidance, but still lower than we would have anticipated earlier in the year. The business disruption from the fire caused revenue from most end markets to decline in Q3 year-on-year, and all to decline on a sequential basis. The quarter was also impacted by lower revenue from large customer projects in logistics. With approximately 2/3 of our revenue coming from outside the United States, currency exchange rates had a negative impact, leading to a 5 percentage point drag on revenue growth in the quarter. Looking at the change in revenue for Q3 from a geographic perspective, each primary region was also negatively impacted by business disruption from the fire. Asia decreased mid-single digits, excluding a 6 percentage point negative impact from currency exchange rates. Large order revenue from consumer electronics made a positive contribution in the quarter. Revenue from Europe decreased low teens, excluding a 12 percentage point reduction from currency exchange rates. Lower revenue from logistics and declining business confidence impacted revenue across the region. In the Americas, revenue decreased by more than 40% year-on-year due to the slowing of large investments by a small number of customers in logistics. Gross margin was 73% in Q3, compared to 70% in Q3 of 2021 and 72% in the prior quarter. Gross margin was better than our guidance due to leverage on our fixed costs given the higher than expected revenue level, while partially offset by unfavorable FX. The 3 percentage point increase year-on-year is due to a more favorable revenue mix this quarter. The improvement in gross margin on a sequential basis is due to lower broker premiums for scarce components. In regards to broker buys, the premiums we've been paying are trending down. However, we expect the negative impact on gross margin will pick up again in Q4. While the supply environment is improving, it will take a few quarters for the higher priced components that are in inventory to work their way through our P&L. Operating expenses in Q3 included a non-cash charge of $3 million related to the fire, primarily for idle production capacity, given temporarily lower business levels. Excluding that charge, the combined total of RD&E and SG&A declined by 2% year-on-year and 4% on a sequential basis, which was slightly favorable to our guidance. Lower incentive compensation and the favorable impact of currency exchange rates more than offset the incremental investments we've been making in sales and engineering head count and other related costs. Operating margin was 19% in Q3 of 2022, compared with 31% in Q3 of 2021, and 24% in the prior quarter on a GAAP basis. Excluding the fire loss, operating margin was 20%, 31%, and 30% respectively. The leverage we have in our income statement worked against us in Q3, despite the benefit provided by a better gross margin and lower operating costs. The effective tax rate in Q3 was 16%, excluding discrete tax items as expected. Reported earnings were $0.19 per share in Q3, compared with $0.44 in Q3 of 2021, and $0.34 in Q2 of 2022. On a non-GAAP basis, earnings were $0.21, $0.40 and $0.41 per share, respectively, excluding discrete tax items and the fire loss. Turning to the balance sheet, Cognex continues to have a strong cash position with $818 million in cash and investments and no debt. Proceeds of $27.6 million from insurance claims related to the fire were received in October and after the balance sheet date. As we announced tonight, our board of directors has increased the quarterly cash dividend by 8% to $0.07 per share. We believe this demonstrates their continued confidence in Cognex's financial strength and long-term growth prospects. Before I turn the call back to Rob, I'd like to welcome Nathan McCurren as Cognex's new Head of Investor Relations. Nathan joined us last week from Lime, where he served as Head of Investor Relations and Treasury, and brings to Cognex prior experience across IR and other finance functions at Iron Mountain, Goldman Sachs, and General Mills. He joins Sue Conway, who many of you know. Susan Conway established our IR program and developed it over the past 26 years. We're excited for Nathan to now lead the Investor Relations team and enhance our engagement with the investment community. Now I'll hand the microphone back to Rob. Thanks, Paul. Let's talk now about our guidance for Q4. We expect revenue for Q4 will be between $235 million and $255 million. That range represents a strong rebound from an artificially low level in Q3 due to a return to more normal production lead times. It also includes a remaining $20 million catch up on customer deliveries following the fire. At the midpoint, we expect revenue will be roughly flat on a year-on-year basis. We expect to continue to experience lower large project activity in logistics. Reflected in this guidance is a 10 percentage point headwind to year-over-year growth from the strong US dollar. I want to clarify that this is 10 percentage points, not basis points, as there was a typo in the press release. We believe gross margin in Q4 will be in the low 70% range. The supply environment is improving, and that's leading to lower broker buy activity. However, the impact of what we've already purchased and is in inventory will take a few quarters to flow through our income statement. We expect the combined total of RD&E and SG&A will increase by low single digits% on a sequential basis due to the timing of incentive compensation. The effective tax rate in Q4 is expected to be 16% excluding discrete tax items. Now we'll open the call up for questions. Operator, we're ready to go ahead with questions. Thank you. The floor is now open for questions. If you would like to ask a question, you may press star one on your telephone keypad at this time. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register a question at this time. The first question today is coming from Joe Giordano of TD Cowen. Please go ahead. Hey, guys. Good afternoon. Hi, Joe. Hey, I just wanted to get a sense on the fourth quarter, like how much of this is underlying demand and how much is kind of backlog delivery? I know you called out $20 million specifically as like a catch up, but how much is just stuff that you've been booked over, you know, over the year, and how much do you feel like is truly new business and reflective of what conditions on the ground are? Yeah, let me kind of speak to that more generally for everyone on the call. You know, our revenue guidance in Q4 is roughly flat year-on-year. Our expectation for the quarter, it's driven primarily by four things, right? There are two headwinds and two tailwinds, and Joe, I think you're talking about one of the tailwinds that we have. First of all, the headwinds. You know, a few large customers in logistics are currently spending less on new fulfillment centers than a year ago. We also expect a roughly 10 percentage point negative impact from currency rates in the quarter. The tailwinds, you know, how things are helping us are, you know, expected growth from the broader factory automation market. Then there's about $20 million of revenue shifted from Q3 resulting from a catch up on customer deliveries following the fire. I think that $20 million gets a little to your question, Joe. You know, business activity in the broader factory automation market is holding up, although it's less robust than it was a year ago, particularly in Asia, and we're not expecting a big budget flush this year overall. It's generally kind of how I would think about the fourth quarter. Just given where we are in the year in November, I'm guessing you have a pretty good idea of where your big markets, your critical markets are gonna come in. Maybe if you can take us through, you know, logistics, consumer electronics, where there's been a lot of, you know, negative headlines in automotive maybe as to what growth looks like for 2022 full year for those markets? Well, I mean, I'll start out and, you know, encourage Paul to say a little more. You know, generally we don't, you know, give sort of that full year position until, you know, after the year is over. I think what we've already said is that, you know, we're expecting a growth in our electronics market. I think we've said around, you know, in double digits, low double digits. Obviously we're expecting, you know, significant contraction in our logistics business, right? Automotive overall, I think probably, you know, moderate performance in that market and, you know, similar in other markets overall. So that's kinda— Obviously we've got, you know, headwind from currency, which is, you know, pretty significant at this point. Paul, would you like to give any more? No, I mean, I think that's right. You know, after Q3, we're now down on logistics year-on-year. We know. You know, we said we'd be down for the year. We're now there and with Q3 gonna be the most down as we sort of communicated, you know, last quarter. Consumer electronics is playing out really as we expected and communicated in our last earnings call. Again, automotive gets a little bit clouded by the fire impact and currency and so on. You know, we're generally pleased by what we're seeing in EV. You know, there's tentativeness elsewhere. You know, the broader market in Europe, for instance, is an area of some tentativeness in automotive. Just last for me, is there any way to kind of like you've talked about the gross margin in the quarter. How much benefit in the quarter are you getting from less like large customer deliveries of of mixed negative logistics stuff versus like the benefit that you got from less broker buys? I'm trying to just understand like what that looks like, how much up versus how much down, and then where it nets out. You know what I mean? Sure. Yeah. As you'll recall, you know, a year ago was our low point for gross margin. We reported a 69.9% gross margin, and at the time, we were calling out three factors. You know, one was broker buys, one was, you know, a strategic project in the logistics space that was particularly low margin. It was sort of a co-investment in, you know, something that would lead to productized solutions like the Modular Vision Tunnels that, you know, that Rob spoke to today. And the third was some supply chain issues that were particularly impacting some of our highest margin [2D] vision products. You know, those were the three factors that kind of jointly brought us from our typical mid-70s to, you know, the 69.9% or 70% we did. You know, this quarter, the broker buy impact was pretty comparable year-on-year, I would say. And again, that's a little bit artificially low just by virtue of what we sold in this quarter, and it's gonna be a little higher next quarter, which is why we brought our guidance, you know, down slightly versus what we've communicated. That's the impact. You know, FX was about a 120 basis points negative impact to gross margin for the quarter. And then our pricing actions are offsetting our component cost inflation, which really is our strategy. Those are the real drivers. You know, revenue mix was favorable this quarter versus a year ago. It's favorable within the quarter, within the year in Q3, just by virtue of, you know, a little lower logistics mix this quarter, and we'll have a little more of that next quarter. Thanks, guys. Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead. Thanks. Good afternoon, guys. Hi, Joe. I know that you guys don't give guidance, you know, for a full year. I'm hoping that you maybe can kind of contextualize like how to think about logistics in 2023. I know that your long-term growth rate is you expect to grow 30%. I'm trying to just get an understanding of, you know, your views on the market versus your ability to potentially outgrow the market, with, as you mentioned earlier, you know, new use cases and applications for your technology. Yeah. I think to kind of contextualize that, we have, you know, a significant and growing base of regular logistics customers, right? They're growing very strongly outside the U.S. That you know we expect that to continue, right? We you know we're expecting you know continued strength and that to be one of the fastest growing parts of our business. You know it's less than half of our logistics business. But it's you know I mean last year it was. But the growth dynamic and the broadening of those customers and the geographic broadening is really a great thing for us. Then we have this other dynamic that we're speaking to a lot, which are you know large technology e-commerce players, and there are a few of those, right? You know, one I think we focus on a lot or your questions often do. you know, there are a few of those customers, and they really are going through a similar phenomenon where they're taking this kind of time out from investing, having really overbuilt capacity. Seeing some more challenging environments post-pandemic, right? I think the big challenge and one that's hard to call is when will that investment cycle turn and those companies start investing more heavily again? I don't think it's in the first half of next year. I feel confident in saying that. At some point, you know, we're very confident it will return, and we just have so much value to add, and we all see that, and we have so much new technology to bear beyond barcode reading that we're very confident about that coming back. I certainly am not expecting it in the first half of next year. Joe, I'd maybe add. The full year view on logistics is tough to call because of, you know, kind of the timing of when that might come back, but we are up against tough compares in the first half. You know, Q1 this year, 2022, was, you know, our highest quarterly revenue level and also our highest quarterly growth rate, and we did have a strong quarter in logistics in Q1 this year, you know, kind of broad-based across all of our logistics customers, including large customer activity. We're up against a tough compare, and then the question really is, you know, when does the large customer business come back in the— is it back half of 2023? Is it 2024? Yeah. Paul, that's helpful. Maybe sticking with you for a second, you know, in talking about the gross margins a little bit more. Can you maybe just help me understand again why did gross margins step down in the fourth quarter? You know, what is it specifically about what you sold through in Q3 that maybe helped gross margins? As you start to think about the first half of next year, if logistics doesn't come back because you have that tough comp, I mean, you should get a pretty decent benefit, at least, on the gross margin side from mix. If there's any way to quantify that would be helpful. Yeah. Yeah. First, maybe just, you know, the biggest phenomenon for our gross margins over the last five quarters has been our broker buys. It helps to understand there's really sort of two factors with broker buys. There's the volume of the buys we're making and then the timing of when that flows to the P&L. There is a lag effect. You know, we commit to the buy, we receive it in inventory before it, you know, becomes a finished good that's then sold through. What we're seeing right now, Joe, is the volume of the buys, you know, it spiked a bit right after the fire as we quickly replenished inventory, and it's come down very significantly, you know, through the rest of Q3. We're optimistic that we are headed in the right direction with regard to, you know, a return to our normal levels, and now we're dealing more with the lag effect of, you know, it'll take a few quarters for that to flow through our P&L. Part of why Q4 is a little worse than Q3 in our guidance is that factor. We're gonna take a little more bookings to the P&L. We have a little more FX expected. You know, we quoted a 10 percentage point impact on Q4 versus the 5 percentage points we had in Q3 as a revenue impact, and so there's a corresponding impact to gross margin. Overall revenue mix, which, you know, in Q3, we benefited from quite high electronics business, which is, you know, generally gross margin accretive to us. It's high software content and a lower logistics mix. That, you know, that lower logistics mix may benefit us to some extent next year, but I think it's smaller than the broker buy factor that's really been driving our gross margin over the last five quarters. Okay, that's helpful. Thank you both. Thank you. The next question is coming from Josh Pokrzywinski of Morgan Stanley. Please go ahead with your question. Hi. Good evening, Rob, Paul, and Sue. Hi, Josh. First question. Hi there. First question on the fourth quarter guide and this $20 million catch-up. If you could just remind us how much is left, if any, and if there's any change to the part of the business that you thought was sort of lost as a function of, you know, outloaded product, there was some way to backfill that with newer stuff or some other, you know, workaround you found? Yeah. Strictly the financials, you know, back in August, we said, you know, we had a $80 million impact of the fire in Q3. $20 million of that business we thought would be lost, and $60 million of it we thought would shift from Q3 to subsequent quarters. In a follow-up, there was sort of, you know, how long might that take? We said, you know, kind of two quarters. We thought there might be some impact in Q4 and some in Q1. You know, the $20 million fire loss impact we estimated really was about dead on. You know, in some cases it was a product that was being sunset and maybe a couple last buys of that product that once the components were lost, we weren't gonna get back into that product or were unable to get back into it. Some of it is maybe just quick cycle readers or vision systems for which if a customer couldn't get it in time, they would either not do the project or get it from a competitor. That's pretty much played out as we've expected. We're still in the process of migrating customers to newer products and so on, but that wasn't really a major factor in the product loss, I would say. Of the $20 million shifted, we really think we're gonna realize all of that in Q4 rather than have any overhang going into next year. Again, the replenishment has been quicker than we expected. You know, we thought a couple months ago or three months ago, we might be holding some product back to deliver to customers. Because of how quickly we've gotten back into supply, we're not needing to do that at all. You know, business is good. The supply chain conditions are good. Got it. Very comprehensive. Super helpful. I appreciate it. Just on logistics, I know that it's, you know, you're kind of reluctant to want to call the full year, especially, you know, you know, the first half, second half dynamic. Maybe thinking about outgrowth differently and kind of your customer mix versus how you think the market may be different. You know, I think folks like Honeywell and KION are teeing up, you know, kind of down 30-ish type numbers. You talked about 10 points of outgrowth in kind of your core business. Would you think about, you know, if the market were to be down that much, you know, your outgrowth formula would hold, or there's some sort of mix or comp issue that you think would be more of a distinguishing factor? To clarify that, Josh, are you talking about this year, current year, or next year? Next year, 2023. Right. Yeah. I think, you know, the first thing I would say is, you know, we have. You know this about Cognex. We're the technology leader in our industry, and we have, you know, exposure to some of the, you know, most sophisticated companies in the space, right? That's a wonderful thing 'cause they teach us so much. You know, many of the technology leaders then go from them to other places and bring Cognex technology with us. In this case, it does expose us to a few, you know, big players, who really are not, you know, not looking to invest, particularly in greenfield sites, you know, as we move into next year. You know, our exposure, you know, that was more than 50% of our business, last year was related to that. I would think our exposure to that part is gonna be down, you know, more than the companies that you quoted, who perhaps have a broader exposure to broader conveying and material handling. Right? On the upside, I think we have exposure to the base, the rest of our business, the large groups of customers who, you know, we're gaining share and we have great technology to offer them. I would expect there we would be outgrowing the general industry as customers are really looking to add and spend more on technology enhancements than perhaps on basic conveying and material handling. That's perhaps a little context for you. That is a great answer, and I find that really helpful. Thanks, Rob, and best of luck, guys. Thank you. Thank you. The next question is coming from Jake Levinson of Melius Research. Please go ahead. Good evening, everyone. Hi, Jake. Just wanted to get a sense of— or do you have visibility, I guess I should say, into the inventories in the channel? I'm just thinking, you've obviously got some markets like logistics that are not in such great shape, and I'm sure there's some fire impacts in there potentially to make things even more complicated, but any color you could give would be helpful. Sure. Jake, you know, I'd say a wonderful thing about Cognex is that there is really almost no inventory in our channel, right? We sell, you know, about 2/3 of our business is direct, and 1/3 is through partners. For those partners, we very much encourage them not to hold inventory. We think it's a wonderful thing about our model, and we deliver product to them very quickly, of course. When we've had a fire, that's a problem. You know, we actually have found that the rest of the automation universe that we're selling into has much longer lead times than we do, right? PLCs, you're probably aware, you know, a lot of them are on six-month lead times and other automation equipment. We supply quick turnaround products, and there's very little kind of a dampening in our channel around that. There are just very few examples, certainly, you know, certainly much less than 10% of people who sell Cognex carry any significant inventory at all. Okay. Got it. Just switching gears for a second on the consumer electronic side. Not looking for a 2023 view here, but just trying to get a sense of you've got data points showing that people are buying fewer smartphones and PCs and whatnot after the last couple of years, but it seems like the capital spending side maybe is holding in better. Just curious what are your customers investing ahead of new product launches or new types of technology within that. I'm just trying to get a sense of the difference between maybe the production rates versus the capital spending side? Yeah, I think, Jake, there are a few things going on there. One is, you know, we kind of ask this question around this time every year, and, you know, our answer is we'll have really a good picture of the electronics business next year come April. That's when things sort of really are kind of, you know, locked in for the year. You know, it's been a good year for us and, you know, relative to the rest of our business in electronics. I, you know, I think it may be a phenomenon again where we're really connected to the technology leaders in the industry that sort of more high-end and more advanced consumers of manufacturing technology. You know, they've been investing and that's very promising. What kind of drives that kind of up or down year, generally, a kind of new technologies coming into the market, whether it's in smartphones itself or in other similar type, you know, technologies or consumer electronics technologies. You know, there's always a lot of exciting stuff going on in that industry. It's more a matter of when is it coming to market and how much the timing plays out next year versus in future years. That's what we know in April. There's another phenomenon going on, which is, you know, of interest here is I think many of the players in electronics are looking to diversify their supply chains. We're seeing investments and incremental investments, you know, outside of China, you know, which is, you know, a positive thing for Cognex, and I would expect that to keep playing out over, you know, the coming years. I think we're well-positioned, and we've seen this trend coming, and we're supporting strongly and being asked to the big players in that space. Moving to multiple different markets where we have strong presence and are investing. I do think that's a, you know, a net gainer for us. Obviously, particularly recently as we've seen with COVID lockdowns and some challenges going on, I only think the kind of impetus towards that is going to increase as we move through the next few years. That's great. Thank you. I'll pass it on. Thank you. The next question is coming from Jim Ricchiuti of Needham & Company. Please go ahead. Hi. Good afternoon. I'm wondering if you could talk a little bit more about that $20 million catch-up that you're anticipating in Q4. Can you give us a sense as to which markets that might be concentrated in? Yeah. Yeah, Jim. Hi. It's very broad-based, you know. You know, certainly automotive would be among it, but, you know, but electronics and other markets too. It's really a general catch-up across our general product range. Not specifically logistics, I would say, but more general factory automation. Not necessarily have a larger project focus associated with it? No. Okay. Rob, at Analyst Day, you guys talked about opportunities that you see in some of the underserved markets, at least underserved for Cognex. I'm wondering how you're going to be going about that in terms of redeploying existing sales resources, or do you anticipate having to step up hiring as you go after some of these other market tiers that you talked about? Yeah. Jim, thanks for that question. You know, we're in the process at Cognex of bringing to market some really exciting technology called Edge Learning. What that is it's very, very powerful deep learning vision that's kind of pre-trained and deployed to smart cameras or basic vision systems that then are easy to sell, right? That's gonna bring us to a lot of customers that we really couldn't serve before, right? Customers who, you know, aren't sophisticated, aren't programmers of automation or machine vision technology. As we roll that out, we're going to need more coverage, right? The sophistication or, you know, the technical sophistication of the sales force we're gonna need to do that is going to be less, right? Certainly we do expect to be recruiting and training and deploying, you know, well, over quite a long period as that product range rolls out, you know, more Salesnoids, as we call them, to do that. You know, we'll expect to see that, you know, I think, and we'll be talking about that in quarters to come. I think, Rob, it's fair to say outside of sales, we really are sort of as we, you know, are setting plans for next year and so on, we really are deploying, redeploying existing resources and, whether that's on the engineering team or G&A functions, it's really the sales phenomenon. Yes, it is a sales phenomenon. Got it. Thanks very much. Thank you. The next question is coming from Jairam Nathan of Daiwa Capital Markets. Please go ahead. Hi. Thanks for taking my question. So I just wanted to concentrate a bit on the Asia, ex China number. It was down about 20%, excluding currency. In the past, it has been, I think you guys have talked about autos being strong, and I was just wondering what are some of the puts and takes there? What was the fire impact? A bigger, you know, impact in that region? Yes. I'll come in, and I'll invite Paul also to comment. I think, you know, sales activity in Asia outside of China was, you know, pretty mixed in the period. We did observe slowing activity and project delays in Japan and Korea. One phenomenon I would point to is, you know, while customers continue to have aggressive plans for electric vehicle manufacturing, you know, some of the plans that we're seeing are moving and, you know, investment that we were seeing getting lined up for those markets, in Asia, excluding China, as a result of some of the government regulation that's been going on, you know, are now shifting geographies and investments we were expecting to see certainly in Korea and Japan and some other markets, are now being deferred and being moved to Europe and America. Certainly a phenomenon. In semiconductor, you know, continued to grow, but growth rate was slowing. I think, you know, that's a little bit of color. I think, you know, we continue to see good progress in logistics, but we do have some larger e-commerce players in that market that we're speaking about, who really also had a similar phenomenon to what we're talking about. You know, one very large and successful player in that market really did slow down their spending very sharply post-pandemic. Yeah, Jairam, I just want to make sure, you know, there's no confusion over the data. You know, China was roughly flat versus a year ago. You know, with about 5% growth in constant currency offset by 4% in currency. Really it was other Asia, which, you know, is Korea, India, ASEAN, Japan and so on, that was down about 20% in constant currency for the factors Rob cited. You know, within China, we had strength in electronics, and then, you know, we did see some fire impact certainly and other factors to sort of offset and then, you know, more broad-based challenges in other Asia, as Rob described. Okay. No, thanks for the detailed answer. Just on logistics, you know, like you talked about, expanding beyond barcode reading and expanding into some of the parcel and post customers. I'm trying to understand, like, what kind of timing should we think about, like, where you are in the process, and when should we start seeing some, you know, wins, business wins there? Well, I think the Modular Vision Tunnel that we just spoke about today is certainly a very strong first step into some of those markets. You know, it's already in trials with a number of key companies in those markets. You know, that's I think that's the first step, and I think you're gonna see a lot more technology from us coming that will make us very competitive in those markets over the next number of quarters. I think it's the beginning, and it's starting to feel much more tangible around Cognex. Okay, thanks. Final question, if I may, on seasonality in 2023. Without the fire impact next year, should we kind of go back to normal seasonality of 1 Q being the weakest and improvements in 2 Q and 3 Q? I think we've got this phenomenon where Q1 of this year was very strong because of logistics. In fact, I think it might have been our strongest quarter, and that's really not expected in Q1 of next year. I think if we strip that out, you know, we're dealing with some of the normal seasonality, which Q1 tends to be a lower quarter for factory automation, and I see no reason it wouldn't be again, given some of the dynamics we see in Europe and elsewhere. I think, you know, we certainly have some of those factors playing. I did just want to go back to something you said earlier. I made the point that, you know, we see growth outside of China for investment. The reason that may not be apparent when you look at the other Asia numbers and some of those purchases may be being made inside China, right? For contractors who may be then moving it outside of China or out through our European region, if that's confusing to anybody. I'm really speaking to underlying trends in geographical movement rather than where you may see the bookings— sorry, the revenue. Yeah, no, understood. Thank you. Thank you for the detail. Thank you. The next question is coming from Matt Summerville of D.A. Davidson. Please go ahead. Hi, this is Will Jellison on for Matt Summerville today. Good evening. Hi, Will. I wanted to start out by referencing something said at the very beginning of the call, and that is, with the business impact of the fire largely behind you at this point, can you speak to any lessons or best practices you feel Cognex might have gained from the experience in terms of supply chain management or how to handle supply risk moving forward? Yeah. We've done, you know, a lot of analysis and soul searching on that, on that question, Matt, and we're not quite done. We continue to work on it. One thing to point out is I think we had recognized this as a risk factor in our business for some time, and we were in the process of addressing it, and the fire came, you know, when we were not in the final quarter, I would say, but approaching it. Obviously this is a sports metaphor there, not an annual calendar metaphor. Anyway, you know, we're in the process of starting up a second contract manufacturer, you know, very substantial and accomplished business. I think had we been there, we would have been in a much stronger position. We've certainly looked a lot at where we hold our inventory and our strategic component inventory, and having that in you know more diverse locations is important. I think like a lot of companies, we're thinking about kind of diversifying our you know our regional presence and you know where we source and manage products from. I think like a lot of companies, through this kind of period we've been going through with supply chain, just making sure that we have very strong relationships with our component and technology suppliers is important. I think that's one way we've come out of this really well, I would say. I think one of the reasons we've outperformed, you know, what we had expected to do is, despite some very difficult component supply environment that we've been in, the relationships we have with our component suppliers are very, very good, and they came through for us. They moved us to the front of the line, in some cases, in many cases. Why? Because we're very sophisticated users of their components, processors, imagers. They really like working with us, and we have very collaborative relationships. But the other thing is we pay on time, and we're very proud at Cognex of being a company that's good to its word, treats our suppliers well, and pays on time. I think that came through for us in this relationship where even the CEOs of some pretty major component suppliers came through to help us. I think if there's, you know, maybe another thing, you know, we did coming out of this, not maybe, we absolutely did a comprehensive assessment of our insurance programs. I think, you know, we were pleased with how we were insured in many regards, but still there are opportunities and tune-ups that we've done as we've gone through this difficult learning experience. You know, and then, you know, finally, as you would expect, we've taken more, you know, protective measures around, you know, such things as, you know, fire protection, et cetera, across the business in multiple locations globally. It's been, you know, an important learning experience for us, which the whole senior team will continue to engage. We have a meeting next month where we will be doing a full debrief on that internally. Understood. That's great. Thank you for that color, Paul. [crosstalk] That was Rob, by the way. Oh, forgive me, Rob. Thank you for that. I wanted to ask a follow-up about Edge Intelligence. I'm thinking how interesting it is that it unlocks this opportunity for you to serve those markets that you haven't quite paid as much attention to in the past. What I want to better understand about Edge Intelligence is if there's any sort of IP protection or high degree of know-how that helps that software and your ability to create value with it, not be imitated by somebody who might wanna serve those same markets in the future? Yeah, thank you. I just wanna just a point of order, which is that we have these two terms going on at Cognex, which I know confuses everybody. We have Edge Learning and Edge Intelligence, right? The comments I made previously were about Edge Learning, which is taking. I think your question is really about that deep learning technology that we're applying to the edge, right? That's— Yes. Yes. Edge Learning. We have some fabulous technologists at Cognex that have come to us largely through two acquisitions that we've made over the last six or so years, the acquisition of ViDi and of SUALAB. These are, you know, foremost technologies in taking deep learning, you know, a technique where you create a very sophisticated model and show examples. It's example-based training of what's good and what's bad. This technique of Edge Learning takes that very sophisticated pre-trained model and deploys it into very simple hardware that then is easily programmed. If you have a chance to, you know, see demos, either with us here or on our website, you can see that we can train these products, the In-Sight 2800 is perhaps the best example of it so far, with just a few examples of good and bad, very simply programmed. This technology is, you know, a technology we've developed in-house. It's proprietary to Cognex. No one else has it in our market today. You know, our ability to apply that in a factory context, you know, rather than in a kind of, you know, lab or a consumer-type context is, we believe, very powerful and, you know, something we continue to develop and think we have a significant lead in. Great. Thank you, Rob. Thank you. Our next question is coming from Damian Karas of UBS. Please go ahead. Hi. Good evening, everyone. Good evening. Covered a lot of ground. Thanks for all the helpful details. I'm sorry if I missed this, but related to your commentary about working down some of the, you know, broker premium costs from inventory, I'm just curious, what's the spread between, you know, the spot purchases today and those inventory levels, just to kinda give us a sense for the level of the gross margin tailwind that you should have ahead? Yeah. Sure, Damian. This is Paul. It was smaller this quarter, but, you know, when it was at its worst, which was really, you know, Q4 last year, Q1, Q2 this year, it was about a 400 basis point impact on our gross margin, you know, give or take 50 basis points or so. You know, very significant. I do think, you know, as you're covering many companies, you know, you hear a lot of talk about freight and component cost inflation and some element of broker buys. You know, my read from studying our peers is, you know, we're sort of unique in this being such a large phenomenon. Partly that's 'cause we do air freight already today, so we haven't been substituting, you know, ship for air like some peers or others in the automation industry have. That we've been, I think, doing quite a good job of offsetting our core component inflation with the pricing actions we took since implementing a pricing strategy, you know, sort of mid to around the summer of last year that we've been executing against. That's what it's been. You know, this quarter it was lower than that. Maybe call it half of that or so. You know, I do expect to see that winding down. We're gonna be carrying some amount of that into the first half of next year. Okay. Great. Could you just remind us how much exposure you have in semis and how should we think more broadly about the customer mix within consumer electronics? Thanks. Yeah. Broadly, semiconductor is about 5% of Cognex's business. It's been performing very strongly over the last year, so it's probably a little north of that at the moment, like 7% or so. I think— my take on it is, you know, we've seen a lot of strong investment. We're gonna kinda see that moderate, you know, for a while now. Then, you know, we're all reading about big investments that are going on in new regions. I expect, you know, that'll start to come back later, but I'm not expecting that to be a factor next year for us. It'll probably be in further years out. That's my take on it at the moment. Damian, did you have any additional questions? We'll move on. The next question is coming from Rob Mason of Baird. Please go ahead. Yes. Good evening. Thanks for taking the question. Rob, I wanted to see just real quickly if you could, maybe wrap up your geographic deep dive. When you mentioned the geographies in your prepared remarks, you called out some of the swing factors, logistics being one, obvious. When you spoke to Europe, you talked about a lower confidence level there, but you did not make a similar comment about Americas. I'm just trying to understand if there's a distinction to be made there, and if there's, you know, lower confidence in Europe, how it's manifesting itself right now? Yeah. Hi, Rob. I think that's a good question, and I think there is a difference. When you look at Americas numbers, you know, they look bad because of logistics, right? If we peel that away, I mean, outside a few large logistics customers, we actually saw emerging strength in our Americas broader market. We actually saw in the quarter business activity tracking ahead of our own forecasts. We saw larger products— projects, you know, moving forward at a better rate than earlier in the year. We observed investments, you know. I would say more around kind of reshoring, relocating back to the Americas in places particularly such as Mexico. You know, we're a pretty strong player in the Americas market, and we were pretty pleased to see that. It was perhaps stronger than we expected. Kind of in contrast to what, you know, some of the understandable challenges that they're seeing in Europe with, you know, their energy crisis and their, you know, heavy reliance, I think, on internal combustion engine automotive, which is still something that, you know, I think is a drag in our markets there. It will turn around as EV investment starts to come in, but they're not there yet, nor are we there yet in America. Well, that's helpful. Within the Americas, you would just put that activity, that stronger activity under the umbrella of broader automation. You wouldn't necessarily call out any particular verticals. No. I mean, you know, automotive is a very important vertical for us in the U.S., so obviously that's a part of it. But no, we saw general strengths. Yeah. Yeah, we saw. Yeah. Yeah, definitely. Okay, very good. Just last question. The currency headwind that you noted for the fourth quarter, I'm not sure I would have modeled that high on my own, and it's a big step up sequentially. Is that? You know, if we run that out, current spot rates forward, you know, would that be the type of currency headwind you would take into the first half, or is there something unusual about the fourth quarter in your geographic mix? Yeah, I don't know. I haven't necessarily looked at the first half yet, Rob. If I think about next year, we didn't have major currency impact in Q1 and Q2. We had a little bit. So I think it'll be moderated a bit by, you know. You know, year- to- date, we've had about 4 points of currency year- to- date, 4 points in Q3. So you can kind of back into Q1 and Q2 from that. So I would say that that's a compare that we're not up against Q4- to- Q4. So it'll moderate a little bit just based on that, I would say, Rob. Okay. Very good. Thank you. Thank you. The next question is a follow-up coming from Joe Giordano of Cowen. Please go ahead. Hey, guys. Appreciate you letting me take the quick follow-up here. Rob, you mentioned logistics. You think maybe the bigger opportunity for you is in Europe and Asia. Is that any meaningful percent of your logistics business at this time? What's like a realistic timeframe, if it's not, to when it could be? Yeah, you know, I mean, we have, you know, nice and growing businesses in logistics outside the Americas. I'm not sure I'm ready exactly to size them for you at this point. You know, they're starting to be significant and, you know, we're, you know, Asia definitely is large and, you know, getting large and as is Europe. Yeah, that's. We, you know, we've had, you know, success with some large customers here in America, which has kind of skewed our business here. Obviously we're an American company, and we have, you know, great resources we can deploy quickly here. It's not unusual to see growth start for us here and go elsewhere. No, we're building off a nice base of business in both those markets, and we're starting to see sophistication around e-commerce fulfillment and other logistics markets there. We're feeling positive about those. Yeah. Joe, the only thing I would add is, you know, although most of our large customer business is concentrated in the Americas, it isn't exclusive with the Americas. So there may be a little bit of, you know, noise in the numbers as, you know. For instance, in Q3, you know, logistics was a contributor, the biggest contributor to our revenue decline in Europe. That was, you know, more large customer activity than, you know, the broader base of business that we've been growing and continue to grow. Thanks, guys. Thank you. This brings us to the end of the question- and- answer session. I would now like to turn the floor back over to Mr. Willett for closing comments. Well, thank you for joining us tonight, and thanks for a very engaged discussion. We appreciate it, and we look forward to speaking with you again on next quarter's call. Good night. Ladies and gentlemen, this concludes today's event. 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