I'm Brian Gesuale, Senior Analyst covering the industrial technology space for Raymond James. Welcome this morning. Delighted to have Cognex here to present their story. Obviously, a leader in automation. Lots of big themes playing here, from China reopening to reshoring, to just general automation trends. We have the company's Chief Financial Officer, Paul Todgham, here to take us through the story. What we're gonna do is a brief presentation from Paul, and then we're gonna open it up to Q&A. I'll lead some of those, but if you have some questions, raise your hand, and I'll try to get to them. Paul? Excellent. Thanks, Brian. You guys hear me okay? Good. Cool. It's a pleasure to be here today and, yeah, I'll talk for maybe six or seven minutes and then turn it over to Q&A. Just provide an overview before diving into your questions. Please keep in mind that any forward-looking statements I may make are based upon information that we believe to be true as of today. You should refer to our SEC filings for our risk factors around these statements. I'll start things off with just a high level overview of Cognex. We are a high intellectual property growth technology company and the technology leader in industrial machine vision, which gives equipment the ability to see. We've been around for more than 40 years, and in 2022, we generated over $1 billion of revenue, reported a 72% gross margin, nearly 25% GAAP operating margin, and about 27% non-GAAP operating margin. What do we mean by machine vision for folks who are newer to the story? It's a technology that operates much like human vision. Your eye, like a camera, captures data, and your brain, like vision software algorithms, makes sense of what is seen. While this happens easily in humans, it can be very challenging in manufacturing. Replicating vision with the 99.99% accuracy required in manufacturing takes a lot of technology and know-how, which Cognex has spent over 40 years developing. We focus on machine vision for difficult applications performed on high speed production lines in manufacturing and logistics. It's something we do better than anyone else. For example, Cognex machine vision might guide robots for tasks such as placing a computer chip on a circuit board. We identify unique barcodes and alphanumeric characters to ensure traceability. We precisely measure or gauge critical features and inspect for cosmetic defects on parts such as smartphones or automotive brake pads. Machine vision is a great market. It's growing quickly, it's difficult to do. There's a lot of technological advancement going on in it. Labor shortages and the rising cost of labor are driving companies to invest in automation. Machine vision is one of the most important and difficult technologies required to make that happen. Machine vision also helps manufacturers produce higher quality products and with significantly less waste or scrap of metals, plastics, and other scarce materials. At our Analyst Day last September, we introduced an updated view of our served market. This estimate is $6.5 billion, growing at about 13% annually. We expect to outperform market growth due to the strength of our technology and customer relationships and our market focus. Our served market is a narrow, relatively conservative view of the applications that can be addressed today by Cognex products rather than a comprehensive TAM. It excludes potential opportunities that may develop over time and those segments we choose not to target. I'll talk briefly about the largest three sectors in our served market from left to right. First is automotive, where machine vision is used in almost every step of vehicle manufacturing. Historically, our automotive revenue has grown by about 10% compounded annually over the long term. We're optimistic that the multi-year investment in EV battery manufacturing equipment that's currently underway will increase that rate in the medium term. Next is electronics. Electronic companies have big plans for technologies and new uses for smartphones that will be difficult to manufacture on a massive scale. We expect to be the partner of choice as companies bring their devices to market. Third is logistics, which we believe will continue to be an important growth driver for us. It's emerged as the largest, and we expect it will remain the fastest growing sector in our served market. After growing our logistics business at about 50% compounded annually over the past five years ending in 2021, we shrank 25% in 2022 because leading e-commerce players have taken a post-pandemic timeout to absorb excess capacity. However, our differentiated technology and opportunities we see in logistics give us confidence we can continue to be a share gainer and grow that part of our revenue by up to 30% over the long term. Now, Cognex is a growth company. As our history demonstrates, revenue growth isn't linear. There are distortions over time, and this can result in breakout years with huge growth and other years where growth is much lower or negative. Following a substantial growth year in 2021, led by logistics, our revenue declined slightly in 2022, due primarily to slower spending by a few large customers in logistics and a headwind from FX. We mentioned recently on our fourth quarter earnings call that we also started to see broader softness towards the end of 2022 and beginning of this year. While many of our customers are being cautious with their capital spend in this uncertain environment, we remain just as confident and optimistic in our long-term growth drivers. Over the long term, our target is to achieve revenue growth of 15% compounded annually, a gross margin in the mid-70% range, and an operating margin of 30% or greater. Oops, sorry. All right. I just want to wrap by giving you a glimpse into Cognex's unique culture. It's something we probably talk about more than many companies you might meet with. The success of Cognex is underpinned by a strong corporate culture, as is demonstrated by our motto: Work hard, play hard, and move fast. We strive to create an environment where people, particularly engineers, love to come and do their best work. We think our two strongest competitive advantages are our technology leadership and our culture, the two reinforce each other. When Cognoids, as we call ourselves, see the CEO or CFO or other leaders poking fun at ourselves, it promotes informal communication, lack of hierarchy, a sense of camaraderie, and an engaged, committed employee population. That's us in the middle, top middle, dressed up at last year's Halloween party as the Willy Wonka cast. Most importantly, we persevere to deliver excellence in a demanding technical field and move fast, whether in responding to a crisis or aggressively going after a new growth opportunity. It's an exciting place to work, we hope for those with a long-term growth mindset, an exciting investment opportunity. Thank you. Thanks, Paul. I'm gonna stand, so if anyone has some questions, just raise your hand, and I'll try to get to you throughout the program. Paul, maybe we just start with your biggest end market. This is the singular, most received question I get, logistics. Can you talk about what's happened there? I think you went into it a little bit. Maybe talk about the importance of kind of new builds or incremental square footage versus technology insertion into existing facilities and what you're looking for to get signals that that business is beginning to recover. Sure. Yeah. We were here a year ago, we'd just come in off 65% growth for logistics, 28% growth for the whole company, you know, this year, coming off of 2022, where we shrank 3%, you know, up 1% in constant currency with logistics down 25%. It is certainly a different story. You know, what's happened, you know, is essentially there's been a pause in, you know, new capacity expansion for, you know, generally large e-commerce providers. You know, we have one that's listed in our 10-K, you know, went from 17% of revenue in 2021 to 11% in 2022. That's a pretty significant decline, obviously driving the majority of that 25% decline we saw in logistics last year. That really reflects a, yeah, a pause on new capacity expansion for that customer and then others who've done the same. You know, our logistics business is primarily made up of three different types of revenue. There's, you know, new capacity expansion, productivity improvement projects. We develop technology that, you know, improves one part of the process in a fulfillment center or distribution center, might get piloted in one place and then rolled out across the entire network. Kind of a replacement cycle and just, you know, replacement of spares and so on. Really, that first piece has been the biggest for our largest customers, followed by that productivity improvement. We haven't had a meaningful replacement cycle yet because our technology is still fairly new and holding up pretty well. Yeah, we're seeing that pause right now. For many other customers who didn't kind of take off immediately during the pandemic, many of them put their investments actually on hold in 2020 and 2021, and we're seeing those kind of come back to life. We think that piece is holding up pretty well. Again, excluding just a small handful of customers in e-commerce, the rest of the business did grow last year. Maybe not as fast as we'd like, but still growing. Can you maybe talk about some of those, the big customers, it sounds like they've been on pause because they were early to invest. Some of the other late investors into e-commerce activities are really building out that capability. How long is that tail of those customers kind of spending? I mean, we serve about 30,000 customers overall in our business, and logistics is about, you know, about 20% of our business last year. I don't think we've enumerated our logistics customers, but you can make a fair sort of extrapolation from there. You know, we do have some very large businesses in what we would call kind of our base business. They may not be as big for us as, you know, as an 11% customer, but, you know, very large. You know, we described one of them in our last earnings call, which is a Fortune 50 retailer that's again, more of an omni-channel retailer, you know, big physical presence growing their, you know, growing their online business, you know, investing aggressively in automation. It's a pretty broad portfolio. I mean, I think the big macro trend in logistics is, yes, more and more stuff being sold online to consumers directly. That has significant implications for the machine vision content you require. It just takes a lot more barcode reading, a lot more cameras to ship, you know, millions of packages every day to people in stores than tens of thousands of boxes to people at their homes than, you know, tens of thousands going to stores. That's a general trend. That trend spiked obviously during the pandemic and is now, you know, still upward, but basically absorbing. Beyond that, other levers of growth, you know, U.S. e-commerce is probably the most automated of all parts of logistics, so the most use of our technology and other technologies. You still see a lot of people moving stuff on conveyors with handheld scanners or whatnot, you know, other parts of the U.S., you know, brick-and-mortar retail and then more broadly in Europe and Asia. As labor, you know, continues to be scarce and, you know, wage rates continue to grow, particularly in Asia, we're seeing more appetite for automation there. Most of our business today is still barcode reading and logistics, but we have some great vision applications, which is, you know, really what we do across our broader portfolio in more equal measure. Doing things like, helping you figure out on a, you know, as a box is going down, where to find that clear spot to put a label that doesn't cover up a hazmat symbol or some other symbol that you can't cover or previously, you know, put down barcode, helping dimension, helping spot defects or damage on boxes, things like that, helping do preventative maintenance in fact, in a distribution center. We see levers of growth along that dimension as well. Terrific. Maybe we pivot over to the auto vertical. One of your biggest markets, 20% of sales roughly. Can you talk about the dynamics between increasing auto production this year, how that impacts your business? Then think about the two vectors of kind of your traditional auto business and then this EV business, which has started to rapidly grow over the last couple of years. Sure. Yeah. We, we spent a bunch of time internally trying to figure out the best way to characterize, you know, the EV investment we're seeing and how to talk about it. I think our thinking and our description have sort of evolved over time. But, you know, initially, we were sort of saying, just let's just flag anything that is tied to EV as, as an EV, you know, business. It ends up being pretty tricky for our sales force, 'cause a lot of our businesses with tier one suppliers across sort of a wide range of areas like, you know, cars, car seats, obviously the traditional ICE powertrain, EV battery, you know, also with the brand owners as well. These days, we're now saying we're focusing a little more exclusively on EV battery as sort of a market that's really easy to define, really well understood, quite concentrated. You know, 90%+ of the production is in Asia, sort of six major players and whatnot. That's about 10%-20% of our business today, Brian, we've sort of quantified, but growing, you know, growing very, very fast. What we're seeing there is still a lot of investment in Asia, but increasingly more, you know, JVs and plants, you know, broken ground and so on in the Americas and in Europe. We're not really seeing a meaningful revenue from that yet. I think we're still sort of in the let's win, let's win the spec, let's get specced into the new factories as they're being built. It's been a little bit slower than we might have expected. Just some of that's been based on government regulations and so on. That's sort of probably the fastest-growing, most exciting part of the business. We recently acquired a small German company that has some computational lighting that helps us, you know, better do inspection on battery cells for that industry in particular. You know, beyond that, we've got exposure to the powertrain, again, the wheels, all parts of an automotive. We do believe that that pace of investment in EV is gonna far outstrip the decline in kind of traditional ICE powertrain in the near term to medium term. Just the amount of new capacity that's being brought online is more than offsetting the fact that it's, you know, you're having a tough go of it if you're making traditional ICE powertrain parts. We've obviously been serving those people for a while, but we expect we'll pick up more than we lose. Fantastic. Go ahead. I'm wondering if you can talk a little bit about the technology development trends in machine vision. What would be required to unlock new applications, you know, by way of, you know, perhaps feature size resolution or the speed of, you know, things moving through past the cameras, you know, 2D going to 3D, AI, ML, other technology trends that, you know, might help you unlock new markets, applications? Yeah. Yeah. I'll do my best. I'm not, I'm an economist, so I might, I might blunder this a little bit, but thankfully, I don't have any of our engineers here to correct me. You know, first of all, there's a lot of innovation across all the different things you mentioned. I mean, I think at the core of our market, there still is just kind of continuous improvement of, you know, faster, smaller, you know, with a, with a wider, you know, read rate. Like, what was new to me coming to this business three years ago that I hadn't expected is just how much people are still making those trade-offs today. Like, you would think, you know, if my smartphone has a 20-megapixel camera, why isn't everything 20 megapixels and color? Yet, you know, we do the vast majority of our business, if we can, at the sort of two megapixel, five megapixel, black and white, cause why You know, any introduction of incremental variables just requires more technology or more expense or slows you down, and we wanna be doing stuff, you know, as fast as possible. There still is, I would say, just a lot of innovation just in kind of what I would have considered sorta core stuff, right? Like that, you know, you think kind of from a consumer point of view, no one worries about how many megapixels your camera is anymore or whatnot. We still worry about, you know, how small a device with what chip count and we can, you know, power and so on that we can do to unlock opportunities. Beyond that, I think the biggest and most exciting growth opportunity over the last five years has been with deep learning and innovation there. You know, prior to, say, 8 years ago or so, all of our technology was rule-based vision, which is, you know, algorithms that, you know, if that and various statements that, you know, based on what inputs it's receiving, telling the algorithm to, you know, spit out a certain outcome. Whereas deep learning, you know, conceptually is just trying to get computers to think more like humans do via neural network and pre-trained models and so on, where based on training by example rather than training by rules, they can do things that otherwise machine vision couldn't do very well. The example I like to give is, like, spotting something weird going on with the wall. If I'm looking at that wall over there, I can see a few, like, things, like, there's some discoloration over there. The humans pick that up super easily. To train a machine to say, "Hey, that panel of that wall needs inspection. The other, you know, 12 panels look fine," is actually really difficult, especially if I don't know what we're trying to spot. Is it a discoloration? Is it a scratch? Is it a squash bug or something like that? By showing a company, you know, a model, enough images, you can train it well and spot defects that way. First it was just the ability to do that, and that required really high computational processing, GPUs, and generally hundreds or thousands of images. More recently, in the last two or three years, we've launched this edge learning. You know, our first product came to market last year, the In-Sight 2800, where you can do sort of simpler inspections on about five-10 or 15 images or classifications. It's basically not all of the power of the most sophisticated deep learning, but most of that power with dramatically lower ease, you know, barriers to entry, ease of use, improved deployment. That's been driving a lot of innovation for us, a lot of new applications. You can give it to an engineer at a plant who doesn't have a ton of vision experience, and they can tinker and be like, "Oh, great, I can solve this problem I never could have solved," or whatnot. you know, we're still the technology leader embedding at sort of the forefront of bigger, faster, smarter, you know, less, lower cost while also innovating significantly on ease of use. It's those two vectors, I would say. Great. Thank you. We'll take one back here. Hey there. I was wondering, in your logistics business, with as many customers, you mentioned that there are 30,000 customers or 30,000 potential customers? Are you typically selling directly to the e-commerce provider, or do you sell oftentimes to a vendor that implements your solutions for the e-commerce provider? It just sounds like with 30,000, it's a lot of folks to sell to. How do you get to a smaller number of people effectively? Sure. First, to clarify, Cognex's total customer base is about 30,000 across all of our markets. And if, you know, I don't have our logistics customer mark, but logistics was about 20% of our business last year with, you know, with meaningful customer concentration. You know, it's I would guess that it's, you know, kind of less than 20% of that, of that 30,000, but still a large universe. And you know, the answer to your question is really we do both. We have, you know, direct relationships with end customers, and that's usually our strongest relationships. We also sell significantly through machine builders or integrators who are doing that. In many cases, even when the sale is with an integrator, the partnership is actually with both because in some cases, the integrator has full flexibility to figure out which machine vision solution they want. In other cases, the end customer is saying, "No, we standardize on Cognex technology. Our engineers, you know, who run maintenance in the plants are all trained on their systems, and we have a, you know, a support contract with them or whatnot, so you're gonna use Cognex for this." I would say our business mix is both, and our relationships are also both, but even when it's going through a machine builder, the end customer relationship is critical. When a client moves his capacity, manufacturing capacity from one country to another, say, a consumer electronics company moving from China to India, does he typically take his capacity, your products with him, or does he buy anew in his new location? Maybe just a word on, typical product life cycles. Thank you. Yeah. Yeah. No, they're related. I mean, our products, you know, tend to last for five years, let's say, or more. You know, it's sort of, you know, very rare that they don't last at least three years, but usually more like five to seven years. Our own life cycle of introducing new products for a given, you know, product family, let's say, you know, a low-range barcode reader or a mid-range 2D vision system also tend to be around that time, sort of a five to seven year replacement cycle. Or sorry, new, you know, before we're launched to the next version of, you know, better or faster or cheaper. Because of those factors, generally, when someone's moving their plant, they're buying new. It just makes sense to do so. The scope of the investment they're making to build a new facility just says, "Well, let's just get the newest stuff and reset that clock of, you know, 5+ years." I do think that's a benefit to us as there's more sort of, you know, diversification away from China, you know, broadening kind of the, you know, supply chain diversification. That should lead to a little more new builds. In consumer electronics, it's a bit more of a modest impact than you would think just 'cause most of our business in consumer electronics is pretty tied to software. There is a hardware component to it, but in Asia in particular, and in consumer electronics in particular, we have a higher% of our kind of pure software business. It's maybe a little bit less of a benefit there than in other businesses, but it certainly is still a benefit. Maybe let's just pull on the thread of that last question a little bit here with kinda two follow-ups. Would you talk maybe broadly about what you're seeing in consumer electronics? What are things that are gonna help create opportunities for Cognex to re-accelerate that vertical market? Also I get a lot of questions on what China reopening could mean for Cognex. Maybe just kind of weave those two things together. You say sort of re-accelerate that market. Consumer electronics had a pretty good year last year. You know, if we, you know, take a step back, logistics was down 25%. Most of our other end markets we target for sort of 10%-15% growth and, you know, automotive grew, I think, 13% last year. Consumer electronics in the mid-teens or mid-double digits in constant currency. Currency was, you know, a few point headwind to us. The other businesses, you know, did reasonably well. I'd say overall, we're starting at a reasonably healthy point. The year-to-year dynamics are very hard to call early in the year. You know us really well, Brian, you've heard me or Rob say this 20 times. you know, a lot of the business still is tied to smartphone deployment cycle. you know, over half of our business is still tied to kind of annual smartphone deployment cycles. The revenue for us tends to be in Q2 and Q3 from that. The bookings in kind of late Q1 and Q2. We have a sense by our Q1 earnings call, which is the beginning of May, kind of what that year looks like. Is it a lot of innovation, a little innovation, a lot of capacity expansion? I would say the things that are positive is, yeah, certainly broadening geographies is generally a positive for us. Just, you know, diversifying away from China. China's a tough market to compete in, lots of local competition, lots of state preferences for, you know, using certain suppliers and so on. I think that's one positive for us. You know, last year we grew pretty well, but it wasn't really grown based on technological innovation. When there's big technology, that's a good thing for us. Too soon to say whether this year will be a good year for that or will next year be a really big year for that. You had a second point to your question, Brian, that I didn't. Well maybe I'll just add a third while we're at it since your answer took me this way. Should we think about augmented reality, virtual reality as opportunities for Cognex? Yes. Medium range opportunities for Cognex, I would say. I think, again, this could be one of these industries that has many false dawns, right? Like video conferencing, I felt like, you know, I was using Skype back in, you know, 2002, and, you know, technology was pretty clunky. Then all of a sudden, you know, for many years I was skeptical about these video conferencing technology, and for the last five years it's been amazing, right? Like it's, you know, worked really, really well. VR, AR could be the same thing, right? It could take a while, but it does lend itself really well to automation 'cause, again, it's tends to be a very small parts with quite a lot of technical sophistication in it. You need, you know, powerful machine vision to do that. Then to produce anything at scale, you know, you need to do it in an automated way with machine vision. I don't think that's gonna be a growth driver for us this year. I think we're well positioned with what we're, you know, the relationships we have, sort of the engineering investment we make. It's still, you know, in the kind of early stages I would say. Can that be a medium-term growth driver for us? You know, absolutely. Yeah. Great. Maybe just move on a little bit to a major kind of strategic initiative that you've talked about over the last several months, and that's really addressing, smaller sized purchasing customers. You're investing in a sales force, you've got a strategy. It seems to be gross margin neutral or accretive. Maybe just take us through the rationale behind that, the opportunity set and the investments you're making. No, sure. you know, we got our start, you know, 40-plus years ago as the vision scientists, right? The sort of, you know, pride ourselves on great engineers solving the most complicated problems. If you look at kind of a pyramid, sort of solving that top of the pyramid with, you know, the fewest customers with the most sophisticated problems in machine vision. When you solve those, you know, you're getting massive revenue, massive business with those customers. That's been sort of our heritage. Then we've, you know, we've moved down, you know, down the stack to, you know, from solving, you know, customer problems at a few hundred thousand dollars or $1 million or whatnot, then, you know, tens of millions and whatnot. We've innovated a lot in ease of use over the last five years, I would say. You know, Cognex, I think for all the years we've been around, people would say, surveys would say and so on, that we have the best technology. They would not have said we are the easiest to use and to deploy. Again, with large customers, we can solve that via engineering resources and customization and application knowledge and so on, and a really highly trained sales force. That model doesn't work as you go further down. With the innovations we've had in edge learning, which is that sort of simpler version of deep learning, train it on five, 10 images, you know, really easy to get up and running, along with just the tremendous growth we've had in our ID business. Our barcode reading business, you know, has become about half of our business, you know, over the last few years, whereas it was maybe 10% 10 or 15 years ago. That gives us a much bigger portfolio of products to sell to smaller customers. The kind of why we're going after it, I'd say, is primarily because we feel like we have the products to be able to do that efficiently now that we maybe didn't before. You know, like Cognex, we're pretty aggressive. We're going after it pretty hard. We're gonna make about a $25 million-$30 million investment this year, primarily in kind of sales force investment. We're gonna get leverage on the R&D spend we're already making, so it's not really a new R&D investment. You know, basically feet on the street calling on customers that historically we haven't called on or our channel partners haven't really focused on, you know, selling this sort of simpler portfolio of goods to them. Very early days, we're sort of in pilot programs now while we're out aggressively recruiting for folks who are gonna graduate from college, you know, in early this year or mid this year. You know, we'll see how it goes. Overall, we're very optimistic. There's proof of concept of this in the market, but I also don't think it's overly competitive, too, 'cause, frequently, when we're calling on customers, they may or may not have been called on by our largest competitor. Even if they were and we're coming a month later, the month later may have been the right time to get the sale than it was previously. Great. Maybe let's just move a little bit into gross margins. You've always been a high gross margin business. Price has never been kind of the gating factor for deployments from your customers. The margins have been under a little bit of duress, supply chain, currency, perhaps. Can you just maybe talk about some of the headwinds you face this year and how you unwind some of those as we move forward? Sure, yeah. You know, you all are looking at a whole lot of different companies with. My bet is 75% of the companies you've looked at have had gross margin challenges over the last, you know, two years. I think for Cognex, what's. It's often many different factors. For us, it's one massive factor and then a bunch of puts and takes. You know, the one massive factor for us has been broker buys. It's basically, you know, it might take 50 parts to make one of our embedded camera, you know, smart cameras. One or two of those parts, for maybe half the products or 25%, you know, we just couldn't buy at the volume we needed from the direct market. We're buying them basically from kind of a third party, you know, distributors who eat up a bunch of the supply, and then, you know, in down times, they don't do so well, or they make a tiny profit. In, you know, supply constrained times, they make out gangbusters. You know, literally like a $4 part or a $6 part, we might have been paying $200 or $400 for. Thankfully, with our gross margin profile, we can afford to do that. For us, disappointing our customer and not meeting their near-term needs is worse than paying that premium, even though it sucks to be the guy signing the check to pay that much money. That's been about a 400 basis point impact for us over the last six quarters, last two quarters of 2021 and all four quarters of 2022. And it's reflected in our Q1 guidance of a similar impact, you know, in the low 70s. When that goes away, and we believe it will go away, I believe it will go away by the end of this year, and I believe it will be under a 100 basis point impact by the 3rd quarter this year, our gross margin all of a sudden gets way better. You know, there are other puts and takes too. We've had core component cost inflation, meaning, you know, buying your semi-chips directly from the supplier, that's maybe costing 10% or 15% or 20% more than before. We're more than offsetting that by our own pricing initiatives. I'm not worried about. We have a put and take on component cost inflation and our own pricing. You know, business mix can also shift things. Logistics is a little bit lower margin than the rest of our business. When logistics is down, that's kind of a benefit to gross margin. When it's up, it's a headwind. We also get scale in our fixed costs in our gross margin. When our revenue overall is at higher levels, we get more leverage on our fixed costs. The other things basically all work themselves out. Great. We're gonna end it there. Paul, you've been great with the Q&A. Audience, appreciate the questions. We will be adjourning to the breakout room to continue the discussion. Thanks so much, Paul.