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spk09: Greetings and welcome to the Cognix second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Susan Conway, Senior Director of Investor Relations. Thank you, ma'am. You may begin.
spk08: Thank you. Good evening, everyone. Welcome to our second quarter earnings conference call. With us are Rob Willett, Cognix's president and CEO, and Paul Todgham, our chief financial officer. We'll start with prepared remarks and then open the call for questions. 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 forward slash 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 that 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 Form 10-Q we filed tonight for Q2. Now I'll turn the call over to Rob.
spk06: Thanks, Sue. Hello, everyone. Thank you for joining us. As shown in today's news release, Cogmex reported the highest quarterly revenue in our 40-year history, along with terrific profitability for the second quarter of 2021. Revenue was also at the top of the expected range we gave as guidance last quarter. Revenue grew by 59% from Q2 of 2020, making it the fourth quarter in a row in which we have reported year-on-year revenue growth of more than 30%. This high level of achievement was made possible by the efforts of Cosnoids around the world. They worked hard to support customers and meet increasing order rates in a very difficult supply environment. Logistics. was again our largest end market in Q2. We also reported another record revenue quarter for logistics due to continued strong demand from the e-commerce sector. Cosnex is recognized as the technology leader in logistics by companies investing for improved productivity and throughput. That's leading to a broadening customer base for us. Plus, sectors that struggled in 2020, such as brick and mortar retail, are restarting their automation plans. Consumer electronics was a large contributor to growth in Q2. Revenue was higher than we expected because some business happened earlier than we anticipated. While a highlight for this quarter, it does not change our overall view of consumer electronics for the year. We continue to believe revenue from consumer electronics for 2021 will be modestly below the level we reported last year. This is due to lower levels of investment in smartphone manufacturing and in devices needed for online learning and working from home when compared to a year ago. Revenue from manufacturing industries increased substantially from depressed levels in Q2 of 2020. Automotive set a new quarterly revenue record after being hard hit last year. Other highlights included consumer products and food and beverage. Semi also grew well year on year. Medical related industries did too. Moving now to our supply chain. We're facing the most difficult supply chain environment I've experienced in my 13 years at Cogmex. The use of Cogmex products is growing worldwide as manufacturers respond to labor shortages and increasing consumer demand. They're implementing machine vision to improve their throughput and the quality of their products. At the same time, Cogmex and many other companies are under pressure from record-long component lead times, vendors struggling to supply parts, freight delays and capacity constraints, labor shortages, and COVID concerns. At a time like this, we're thankful we never focused on just-in-time inventory or squeezed our suppliers for short-term gains. Our close, long-term relationships with our suppliers have been helping us. Even so, the situation intensified as we moved through Q2. We continued to aggressively secure strategic components and move fast to certify alternative parts where we see shortages. Our suppliers understand that, and our customers appreciate what we're doing to accommodate their requests. Let's talk next about new product development. The spring and summer are an exciting time at Cognex. It's when we bring our technical and sales leadership together for strategic planning. These are some of my favorite weeks of the year. There's a tremendous excitement within Cogmex about the new technologies and products we expect to introduce over the next few years and the growth opportunities ahead of us. Cogmex's industry-leading vision tools are a key differentiator for us in solving our customers' most challenging applications. Our long-term development and investment in RD&E continue to make our vision tools progressively stronger, more accessible, and easier to use. An example is Vision Pro X, a recent major update to our PC-based vision platform. Vision Pro X enables customers to use Cognex rules-based vision software and deep learning technology together more easily in a powerful development environment. Along with Vision Pro X, we introduced SmartLine, the industry's first hybrid smart tool for PC vision that combines the high accuracy of 2D vision with the flexibility of deep learning. SmartLine quickly solves complex line detection for high precision alignment applications in consumer electronics assembly and semiconductor manufacturing processes that are too challenging for traditional vision alone. Furthermore, our new Vision Pro Deep Learning 2.0 software release, which runs with Vision Pro X, adds new deep learning capabilities from Cosmex that enable the high-precision measurement of scratches, blemishes, cracks, and other defects. This is particularly valuable in demanding medical and electronics applications. We're also leveraging a software advantage with new optics technology from investments we've made in image formation. An example is our new high-speed steerable mirror, which features next-generation liquid lens technology to significantly expand the field of view for our powerful Dataman 470 fixed-mount barcode reader. The steerable mirror is ideal for quickly reading a high volume of barcodes at shorter working distances, such as in pharmaceutical packaging aggregation, as well as across large fields of view, such as reading many barcodes on a large pallet in a warehouse. Both applications previously required either the integration of multiple readers or the programming of PC vision and many high resolution cameras. In other product news, we continue to make good progress transitioning our logistics business from customized to standard solutions. These standard solutions are easier to deploy and require less hands-on engineering support from Cosmex. We believe this will enable us to scale more easily and report higher gross margins in logistics over the long term. It's gratifying to see the hard work and ingenuity of Cognoids come to market in innovations like these. They underscore the value of our long-term investments in RD&E. The decisions we make on where to invest and our work hard, play hard, move fast approach to business continue to serve us well. Now, I will hand the call over to Paul, the details of the quarter.
spk07: Thanks, Rob, and hello, everyone. As mentioned, revenue for Q2 was $269 million, which represents a 59% increase over a week quarter a year ago and a new all-time revenue record. We were pleased to deliver revenue at the top of our expected range. We believe this demonstrates improved visibility and our success in navigating the difficult supply environment. It's worth noting that Q2 of 2020 was an unusual quarter due to COVID and our own restructuring actions. Q2 of 2019 provides another potential helpful comparison. Revenue in this year's Q2 was 35% above that pre-COVID period of two years ago. Our three largest end markets, logistics, automotive, and consumer electronics, all made strong contributions to year-on-year growth. We were particularly pleased that automotive exceeded our highest pre-COVID level to set a new quarterly record. Broadly speaking, growth in many sectors is running at a good clip. Gross margin was 75% and within our target range. Our gross margin increased substantially year on year because of an $8 million excess inventory charge in Q2 of 2020, resulting from last year's economic disruption. On a sequential basis, gross margin declined as we expected due to revenue mix. We are beginning to experience cost increases associated with the current supply environment. Given our software-like gross margin and our customer-first philosophy, we are prioritizing customer demand, even if it means a modest short-term hit to the P&L. I want to remind you that in Q2 of 2020, operating expenses included a restructuring charge of $15 million from a program undertaken to right-size the team and a non-cash impairment charge of $20 million, primarily to write down a portion of acquired intangible assets. Excluding these charges, the combined total of RD&E and SG&A increased by 19% year on year and was in line with our expectations. One driver of that increase was incentive compensation, which consists primarily of sales commissions and company bonus related to the higher revenue. Travel and other sales and marketing activities are also higher this year, and we have higher expenses from incremental growth investments, stock-based compensation expense, and the translation impact of a weaker dollar. Savings, primarily from last year's restructuring activities, have partially offset these increases. Operating margin in Q2 of 2021 was 34%, reflecting excellent leverage on the revenue growth. That compares very favorably to the operating loss we reported in last year's Q2, resulting from the charges for the restructuring actions, intangible asset impairment, and inventory write-down. Below operating income, investment income decreased by approximately $1.5 million year on year, primarily because of lower yields on our portfolio in the current environment. The effective tax rate, excluding discrete tax items, was 18% in both Q1 and Q2 of 2021, compared to a benefit of 1% in Q2 of 2020. On a non-GAAP basis, Earnings were $0.43 per share in Q2, compared with $0.18 in Q2 of 2020 and $0.36 in Q1 of 2021, excluding discrete tax items and the three charges just mentioned. Looking at the change in revenue for Q2 from a geographic perspective, growth broadened year on year in all regions. Europe was our fastest growing region, helped by currency exchange rates. Revenue grew by more than 60% over a particularly challenging quarter a year ago. 10 percentage points of the increase was due to the weaker US dollar. Growth drivers included automotive, logistics, consumer products, and other industries in Europe's broad factory automation market. The Americas increased by more than 50% year on year and delivered the largest contribution in absolute dollars. Substantially higher revenue from logistics led the increase. Automotive and medical-related industries also contributed nicely. Revenue from Asia also increased by more than 50% year on year. Consumer electronics increased substantially due to the timing of this year's spending cycle. Automotive, semi, and the broader market continued to grow well, particularly in Asia outside of Japan. Currency exchange rate fluctuations contributed about four percentage points to Asia's growth. Turning to the balance sheet, Cognex continues to have a strong cash position with $952 million in cash and investments and no debt. We spent $14 million to repurchase Cognex stock in Q2 and a total of $21 million year-to-date. We plan to continue to buy back stock in Q3 at a regular pace while maintaining flexibility to be more opportunistic. As we announced tonight, our board of directors declared a quarterly cash dividend of $0.06 per share payable on September 3rd to all shareholders of record as of August 20th. Now, I'll turn the call back over to Rob.
spk06: Thank you, Paul. In summary, Cosmix had a very strong second quarter in which we reported record revenue. It was also our fourth quarter in a row of revenue growth exceeding 30% year-on-year. We believe that growth is is unsustainably high and expect comparisons will moderate in the back half. The Q3, we expect revenue will be between $275 million and $295 million. At the midpoint, this expected range represents growth of about 14% year-on-year. Breaking it down in more detail, we believe logistics will be a growth driver in Q3, both year-on-year and sequentially. automotive and the broader factory automation market should continue to contribute nicely. We do expect some seasonal softness during the summer months as usual. We expect consumer electronics will be a headwind in Q3. You may recall that last year's third quarter included a heavy concentration of electronics revenue that drove substantial year-on-year growth for the company overall. This year, we expect revenue will be more evenly split between Q2 and Q3, and that consumer electronics will show a modest decline in total for the year. We believe gross margin in Q3 will be in the low to mid 70% range. As we discussed in our Q1 call, we're making a strategic investment in a high potential customer in logistics that is in the early phase of adopting Cogmex products. We're working on a major deployment with them that we will substantially complete by the end of the third quarter. We also expect to go on expediting customer orders and paying higher component costs. We expect operating expenses will increase by mid-single digits on a sequential basis. We're adding resources in both engineering and sales. We're supporting large deployments of COSMEX products. We're preparing for upcoming product launches. And we're seeing the resumption of some expenses, such as domestic travel, in certain geographies. Lastly, we expect the effective tax rate will be 18%, excluding discrete tax items. Now we will open the call for your questions. Operator, please go ahead.
spk09: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation symbol will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes to the line of Joe Giordano with Cowan. You may proceed with your question.
spk05: Joe Giordano Hey, guys. Good evening. Hello, Joe. Given the supply chain, are there sales that you're just not able to get out the door because of that? I know you're paying extra on the cost and expediting and things like that, but sales are great, but would they have been higher if not for these issues?
spk06: So we're, like all companies, we're struggling with longer lead times and the issues we discussed in the call. But we don't think we're losing any business, any material business that we can point to. But certainly we're seeing a large increase in backlog and delays in getting some orders out of the door. and we would say that is we would have been probably five percent um larger and we would have grown five percent faster in the quarter if we'd been in a normal supply chain environment that's very helpful uh on sizing that um in in terms of the margin um
spk05: If you were to normalize for supply chain and this large customer, are we back to like mid to high 70s? Is it like very isolated things that you can point to that are keeping it in the low to mid right now?
spk07: Yeah. Yeah, Joe, this is Paul. That's right. yeah that we broadened our range given some of the uncertainty in the supply market for next quarter but there really are you know two major factors the the first being you know i think really uh concentrated in q3 the the you know deployment of the strategic investment with a high potential uh logistics customer um and again we started to recognize that in q2 but really the bulk of that is in q3 and we don't expect much of that beyond beyond that quarter And then secondly would be the supply chain cost increases we're seeing, you know, freight component costs, you know, predicated on some commodity pricing and so on. And that may last a little longer than that. But overall, we stick to our common operating model. We do think kind of 75% operating margins on average is still a good benchmark for us.
spk05: Perfect. And then just last meeting. Okay. You know, we had some conversations with people in the pharma distribution market, and their sense is that it's, like, extremely early in terms of, like, vision deployment and real, like, automation in that market. And it just seems like that could be a gigantic market that's kind of untapped. Just curious how you think about that and where you play there and, like, how you think that market is relative to some of the others that you play, like, in terms of maturity.
spk06: Yeah, it's an interesting question. Let me clarify. You're talking about medical or pharmaceutical specifically? In this one, we're talking about distribution of pills and medicines and things like that. Yeah. I mean, that's a fast-growing market for us, but it has similar dynamics that I see in many, many markets that we serve. Obviously, these are high-value items that need to be tracked on an item level, so a lot of regulation coming. So our technology where we can help customers track and trace specific products, even specific pills, you know, all the way through the supply chain. Those have been things that have been valuable for some time and have been rolled out globally, and I'd say increasing momentum. That's for sure. And in some ways, this links to common trends that we see everywhere, right? Item-level barcode reading, almost like, you know, license plates on cars with unique identifiers where our vision is well-positioned to do that better than anybody else's. So we see that. And then, you know, I think another trend that you might be observing in that industry that certainly plays a lot more broadly is just what one might call industry 4.0. It's the capturing of images, the housing of them in the cloud, the using of data to improve and update supply chain. These are things I think we've been seeing for a while, and they're certainly gaining momentum, and the potential is very large. But one almost might take that same statement I just made and apply it to consumer electronic components. I'm sorry, electronic components, high value items. subject to counterfeit, moving through the supply chain. Wow, you particularly see that today, right? You know, a lot of that stuff going on. So, you know, and again, the similar dynamics and the value of Cogmex Vision to print, to read printed barcodes, maybe tiny, reliably through the supply chain and help customers manage it more effectively, you know, that applies. And I could kind of go on to other industries, too, with the same kind of overview. So, Yes, but it's not just pharma. Thanks, Ed.
spk09: Our next question comes from the line of Jacob Levinson with Mellius Research. You may proceed with your question.
spk01: Good evening, everyone. Good evening. I know you touched earlier in the call on some of the new products that you folks have been working on that are coming out soon. I guess the question is in regards to deep learning, what has been the biggest advantage that's brought to the product portfolio? I mean, is it product cost? Is it opening up new applications or just allowing higher throughput in your customer facilities? I mean, how would you characterize that?
spk06: Yeah, deep learning. Deep learning is a technology that, you know, we've invested in a lot and are leading. And its application is the more we, you know, develop it, the broader it is. But some of the initial applications where we've seen a lot more value is opening up areas of inspection that we really just couldn't do before, cost-effectively or reliably, particularly looking at things like scratches or damage Weeding, difficult to read numbers and letters in manufacturing that perhaps were in noisy background like scratches on an automotive part. Doing things that really companies had relied on humans to do and not very effectively in the past. So certainly we've seen very powerful applications for deep learning starting there. But in the example I was talking a little bit about today in our sort of smart line new technology, we're able to differentiate the lines, different pieces of clear material that are being aligned in the manufacturer of a smartphone, for instance, or a screen. I think we've all gone through this experience where you bought a new smartphone and you put a – You put a cover, a scratch-proof cover on it that you kind of have to try to tape down, you know, press down. Trying to align the line of that, the edge of that with the edge of the phone itself is an example of sort of the sort of thing that we are doing in our own lives, right? Lots of that is happening in manufacturing where different substrates are being aligned and there are different lines that have to be brought together. And a problem can be you can misconstrue one piece of material with another, I'm lying the wrong pieces up or not find the right lines to align together. So that's an example where deep learning is extremely powerful and rules-based vision tools haven't really been able to do that type of application. I could go on with many different applications like that where sometimes deep learning is just a far superior technology, and we're seeing it get adopted more and more. But generally, we're selling those tools and those capabilities for a premium, you know, into spaces that really haven't been served by machine vision or served well in the past.
spk01: That's super interesting. Thank you. I'll pass it on.
spk09: Our next question comes from the line of Josh Pokowinski with Morgan Stanley. You may proceed with your question.
spk03: Hi. Good evening, guys. Hi, Josh. Can we just talk a little bit about the drivers, the sequential increase? I think, Paul, you might have mentioned the kind of new pilot customer and logistics team. has a fairly chunky shipment in 3Q and that sort of dissipates in 4Q. I think that was in the context of gross margins. But how important is that in terms of the driver? Because you guys are coming off a pretty solid quarter. You said you even had a little bit of pull forward in electronics, if I heard you right. 3Q is a pretty big step up. So just trying to figure out where that incremental bump comes from.
spk07: Yeah. So from a Q2 to Q3 sequential drivers, the biggest would be consumer electronics. So even though we recognize more revenue in consumer electronics in the second quarter, we still have a step up. Q3 is historically the largest quarter for consumer electronics. Last year, it was dramatically higher, given kind of delays with COVID. This year looks a little more regular, but that's a nice step up. um logistics is a modest contributor as again we're coming off as you noted you know some record quarters in a row but it is we do expect to do a little more revenue in logistics in in q3 say those are the two major factors got it and then i i guess just sticking with with logistics
spk03: I think some of the big integrators out there are kind of talking about maybe a near-term plateau in activity just because the industry is so busy and there's been so much demand over the past 18 months that really the physical integration is sort of running into bottlenecks. Is that what you guys would expect where sort of the growth rates here over maybe the next several quarters are a little bit more modest just as a function of kind of getting the pig through the python on some of these bigger projects?
spk06: Well, I think what you're talking about is real in certain parts of the industry. I think in big e-commerce deployments, that's, you know, and perhaps in packaging. Is there a parcel and package delivery? That's true. So I think we see, and I imagine they see, you know, a big backlog that they've got to digest the pig, if you like, in the Python. But that, you know, still has a long way to run in terms of potential revenue, you know, coming through into the P&L. What we also see, I think, starting to accelerate that gives us a lot of enthusiasm are other smaller customers coming back to so actually airport baggage handling, you know, starting to pick up. So I'd say we might see some of those big deployments kind of have to take a while to work through, but we're seeing other markets coming in that have the potential to compensate as we go forward in time, you know, over the medium term.
spk04: Got it. Good cover. Thanks, Rob. Thanks, Paul.
spk09: Our next question comes from the line of Rob Mason with Baird. You may proceed with your question, Paul.
spk03: Yes, good evening. I wanted to ask about the automotive growth that you're seeing right now, and maybe just to put it in a little bit better context. Certainly, 12 months ago, you probably would not have expected to be reporting an all-time record automotive quarter, but maybe just speak to the mix of that business today in terms of where it's going around traditional platforms versus EV investment. And then also just maybe speak to the intermediate term along those same lines. I know it's easy enough to suggest that EV investment may be growing faster as we go forward, but just what are the prospects today around some of the traditional platforms, given that new model changes often drive demand for your products, and there will be those. So if you could just speak to that, and again, in the context of where we sit today with the
spk06: kind of this record record quarter in automotive sure so you know automotive was our fastest growing uh major end market in the second quarter and you're absolutely right i think if when we came into the year we didn't really expect to see this kind of recovery in automotive until the second half but you know we did expect to see it coming back perhaps not this strongly and this quickly um We experienced the fastest growth in Asia, particularly in China, where global activity for automotive is shifting due to the concentration of EV parts suppliers. Of course, EV battery manufacturing is certainly driving a lot of growth. And then the execution of EV projects more generally and all the new kind of technology that requires, whether it's inside the vehicle or outside, certainly are drivers. Automotive revenue from the Americas and Europe were also good growth drivers in the second quarter. And I would say chip shortages and related plant shutdowns don't appear to be reducing demand for our business in automotive currently. So, you know, the industry is becoming a lot more sophisticated with new players and a lot of new innovation coming into the market. So certainly, you know, we're seeing customers who haven't been, you know, traditional large customers in automotive of Cognex, you know, say three or five years ago now being much larger users of our vision and our technology. And then, you know, we also think the long-term potential for Cognex Cognix in automotive includes applying deep learning for inspection and, you know, the increasing use of electronics in vehicles. So those are all driving it. I think also what you're getting at, you know, EV certainly is, you know, becoming a larger and larger part, you know, very significant growth. That's obviously the fastest growing kind of general trend in the industry. But it's still, you know, it's still less than 50% of our automotive revenue for sure is EV related.
spk03: I see. Okay. Just one quick question around expenses that you're operating expenses that you guided higher. It does sound like there's also, you know, between new products and some of the projects that you're working on, you know, that helps elevate it. But would you typically you're expenses also go up a little bit in the fourth quarter from the third, you know, given those dynamics that you have going on in the third, would you still expect that to be the case this year?
spk07: I would say not sure yet. You know, we, we, we like to stick to kind of one, one quarter ahead with our guidance. I, a couple of factors, you know, we, we had a good year last year and we're having a great year this year, I would say against kind of our own metrics. So, and, and, the second half of last year was stronger. So there is an element of, you know, more of our incentive compensation was backloaded last year than this year. So I think there'll be some impact of that. But speculating on kind of sequential growth rates from Q3 to Q4, we're not prepared to do it this time. Sure. Okay.
spk04: Thank you.
spk09: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad One moment while we pull for questions. Our next question comes from the line of Andrew Buscaglia with Barenburg. You may proceed with your question.
spk04: Andrew Buscaglia Good evening, guys. Hello. Regarding consumer electronics, you know, you kind of reiterated that'll be down this year, the sales. Do you feel better or worse about that market than you did last quarter? Or is it kind of the same?
spk06: I think in general, the same. Right. I think we recognize that this is a market that has cycles and trends and bigger years and smaller years. And I think it's coming together much as we expected and as we told you last quarter.
spk04: Okay. So no real change there. I was just checking on given component shortages and all that. And a question I had around you know, so, so quarter of your sales or, you know, call it, um, you got consumer electronics down, um, slightly automotive is doing well. Logistics is probably your best segment right now, but you still got a quarter of your sales that when you kind of do the math on how the year shaking out must be doing pretty well, like a bunch of like kind of hodgepodge areas. What, what's, you know, can you talk more about like, kind of like the non, the business that you don't really talk a ton about, but that quarter of your market seems to be doing really well. What is really driving that or what areas are driving that?
spk06: It's really very, very broad-based. I mean, when we look across our end-user markets, I mean, you know, so many of them are growing, you know, in excess of 30%. And, you know, certainly medical-related. I mentioned them really in my opening remarks. You know, it's medical-related, pharmaceutical, you know, food and beverage, you know, medicine. semiconductor, right? So really just general broad-based investment. And I think we're certainly seeing a very strong demand for machine vision on a broad basis. And I think it has to do with a lot of the trends we've been talking about for a long time. And in some ways, some of them are being accelerated by the big changes we're seeing in the global economy, perhaps. challenges customers are seeing about labor, labor shortages, and, you know, the need to get more productivity going, and just, you know, I think a great environment for investment. So, you know, I think those mean that we're seeing very broad-based demand. I mean, also we talked about Industry 4.0, and I think the interest that pretty much any serious manufacturer of discrete products has these days is they really want to, um, use the digital data, um, in their businesses to manage it more effectively and, uh, uh, and more securely. And, uh, and I think certainly vision is playing strongly into that.
spk04: Yeah. Okay. And maybe lastly, the new product you talk about, uh, are we already seeing that impact your revenues or, you know, I'm talking about the AI deep learning stuff, um, Is that already influencing your sales today, or is that going to be more in 2022?
spk06: It's a very recent launch. It's been a lot of work, probably a three-year journey. It's been a pretty major product release. So we're already working with major customers on its deployment. But generally, the users of those products are going to be OEMs, more sophisticated OEMs, customers and so i wouldn't expect to see you know major revenue contribution from that product probably you know until some quarters out uh but then you know it is it's a source of major competitive advantage for us the the the product vision pro that we we talked about this is the 10th It's a very major release. The product itself is 20 years old, so it's the most established vision software platform in industrial manufacturing. It's so many users that are trained on it and know how to use it, and we're giving them a lot of more powerful tools and a lot of better user capabilities. But generally, it's a very sophisticated product, and it tends to be deployed over quite some period.
spk07: Yeah, I think deep learning is accretive to our growth rate both sequentially and on a year-on-year basis. And it's probably more the products we launched last year that are sort of the biggest contribution to that, right, the D900 and Vision Pro Deep Learning 1.0. We're seeing meaningful uptake of those products and now we're excited to launch Vision Pro Deep Learning 2.0. All right. Thank you both.
spk09: Our next question comes from the line of Jaram Nathan with Daiwa Capital Markets. You may proceed with your question.
spk02: Hi, thanks for taking my question. I wanted to kind of dig a little deeper on autos. From what I understood, Covnex has a stronger presence with the suppliers, tier one suppliers. than the OEMs. I'm just wondering with EVs and the OEMs taking a bigger interest in battery manufacturing, are you seeing a change in your exposure within autos? And I just had one more.
spk06: It's a really interesting question. I observe the same things going on that you're describing. I think historically, if we go back over the last few years, certainly about two-thirds of our automotive business was with component suppliers, tier one automotive, and perhaps a third was with what you described as OEMs, the brands, the big brands we all get into and drive around in. And certainly, We're seeing a potential trend where that's going to be shaken up, and you can see some of the big brands are intending to have more of the component part of the business and the technology part inside their four walls and less outsourced to big tier one partners. That trend is going on, but then there's kind of a countervailing thing, which is you have strong technology players, particularly in the battery manufacturing area, who really have outstanding technology that I think it's going to be very difficult for those brands, OEMs, to replicate. So definitely it's kind of shaking up. And then, as I would say, also, there's a lot of electronics. going into cars. So I think we're going to see some really interesting things happen in that space where traditionally companies we thought of as consumer electronics brands, we're probably going to see more and more of their types of technology being a bigger part of the bill of materials So really exciting. The good news is I think Cognex is really well positioned with all of those groups and really well recognized. So I think we'll do pretty well as that industry shakes out. But in the end, more dollars to the brand owners versus the suppliers, a hard call, I would say.
spk02: Okay. And another question was on that. growth outside of Asia. You mentioned semiconductors in there, and I was wondering, are you seeing any, is that driven by some of the semiconductor manufacturing kind of expanding out of China or diversifying out of China?
spk06: Well, to the small part of Cognix is overall businesses now in semi, certainly less than 10%, you know, in recent years, around five or so. And so, you know, I think we have to put it in context, but we are seeing a very strong demand in those markets. And I think, you know, it's really, I consider it pretty tied to what we're reading about, you know, the the shortage of semiconductor capacity and the investment that's going on and the new, as always, the new semiconductor technologies that are moving through and into production. So certainly we are seeing, you know, very strong demand as those companies invest in that area.
spk02: And then for the last one, if I may, you know, we are hearing about COVID restrictions in Malaysia hurting chip supplies. And I just wanted to, I think your subcontractors are based out of Indonesia. But how do you kind of handicap that risk of a more extended lockdown in Indonesia or something?
spk06: So you're right. We have a largest subcontract partner. He does a lot of the manufacturing of our products. He's based on a small island just off Singapore in the country of Indonesia. It's a very well managed free trade zone, which has significant connections to Singapore. We're seeing that situation with COVID being very well managed in that area, both by that free trade zone and by our supplier. Very high rates of vaccination and testing among employees. And we haven't experienced significant supply chain challenges. And we're feeling very confident about the way it's being managed. But of course, it's like any supply chain at the moment. It's at risk from changes that go on. But right now, no good news to report on that.
spk07: Yeah. And in terms of the availability of chips, obviously, that's the situation we're monitoring very closely. We're we're buying aggressively right to secure component parts it's part of what's reflected in our you know ghost margin guidance uh and you know monitoring that situation but overall feel like we're going to continue to manage through this pretty well okay great thank you as a reminder if you would like to ask a question please press star 1 on your telephone keypad one moment while we pull for questions
spk09: Our next question comes from the line of Joe Giordano with Cowan. You may proceed with your question.
spk05: Hey, thanks for letting me have the follow-up here. Just a quick one. If I was to look at your entire PT Vision deep learning portfolio now, like the D900 and the Vision Pro 1.0, how big is that as a percentage of sales roughly on an annual basis? What's an internal target for five years from now as a percentage of sales basis? How big can that be for you guys if things go according to your runway?
spk06: Yeah, it's an interesting question. I don't want to be too specific about that, you know, for competitive reasons. it's still less than 10% of our overall business. And, you know, we aspire to growing it, you know, close to 100% per year. That's a stretch goal. We're aggressive at Cognex, but certainly we really think it has that kind of potential. And we're seeing very strong growth continuing last year, this year, and the demand for it as we look out. That's helpful. Thank you again.
spk09: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Rob Willett for closing remarks.
spk06: Thank you so much. To wrap up, Cognix had an outstanding first half of 2021. We see a lot of opportunities where we can apply our core technology, and we're excited about the long-term potential for our business. Thank you for joining us tonight. We look forward to speaking with you again on next quarter's call.
spk09: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your evening.
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