Cognex Corporation

Greetings and welcome to the Cognizant third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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. 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.

Thank you. Good evening, everyone. Welcome to our third quarter earnings conference call. With us are Rob Willett, Cognex's president and CEO, and Paul Todgen, our chief financial officer. We'll start with prepared remarks, and then we'll open the call for questions. I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available on the investor relations section of our website at www.cognix.com forward slash investor. Those contain detailed information about our financial results. During the call, you 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 the Form 10-Q we filed tonight for Q3. Now, I'll turn the call over to Rob.

Thanks, Sue. Hello, everyone. Thank you for joining us. As shown in today's news release, Cosmex reported the highest quarterly revenue in our 40-year history for the third quarter of 2021. Demand for Cogmex products is high worldwide as manufacturers implement machine vision to improve their throughput and the quality of their products. Revenue grew by 13% over a high growth quarter in Q3 of 2020. It was at the midpoints of the range we gave as guidance in August. Logistics was again our largest end market in Q3 and the biggest growth driver. We reported another record revenue quarter in logistics, beating the prior record set last quarter. Demand continues to be strong, particularly in the e-commerce sector, where Cognex is widely recognized as the technology leader for machine vision. E-commerce and omnichannel retailers are investing in automation and Cognex's industry-leading products to help them fulfill orders rapidly, reliably, and cost-effectively. Furthermore, sectors that struggled in 2020, such as traditional brick-and-mortar retail, are investing again in logistics automation to compete more effectively for e-commerce sales. Among other industries we serve, revenue grew well in automotive, semi, and medical-related industries, particularly life sciences. An exception was consumer electronics. which was a substantial headwind in Q3 as expected. You may recall that last year's third quarter included big incremental investments in new smartphone technologies and capacity for online learning and remote work demands that drove substantial growth for Cognex. This year, consumer electronics revenue is expected to be modestly lower overall and is more balanced between Q2 and Q3. Turning next to gross margin, the challenging supply environment intensified in Q3. Like many companies, we're encountering record-long component lead times, vendors struggling to supply parts, freight delays and capacity constraints, labor shortages, and COVID concerns. At Cosnex, customer first is our number one company value. We prioritize quality and delivery ahead of cost, with an eye to delighting customers and maintaining our exceptional reputation. In Q3, we were tenacious in living these values and added significant incremental costs in order to supply customers on time. While most of the supply chain impact related to higher costs for chips, expedited freight, and designing out unavailable components, we also experienced longer delays on some higher margin product sales, that we now expect to recognize as revenue in Q4 and beyond. Furthermore, we provided a higher level of support on a large deployment by a customer in logistics that we discussed on our August call. We view this as a worthwhile cost of winning share with a customer that we believe has high potential for substantial future business with us. These factors reduced our reported gross margin to 70% in Q3. While many companies would applaud a 70% gross margin, we're dissatisfied given the high value software content in Cosmex products. We view the lower margin business associated with the customer in logistics as a one-quarter phenomenon. However, we anticipate the supply situation will continue to be a drag on our gross margin for the next several quarters. We've taken mitigating actions, including new product designs and pricing initiatives to offset incremental costs at the operating income level. Supply challenges notwithstanding, there are macro trends underway that we believe will benefit Cosmex for years to come. These include the rise of e-commerce, the transition to electric vehicles, and the shortening of supply chains. Coupled with today's cost pressure and labor shortages, market conditions are favorable for automation and machine vision. The excitement was apparent last month at the Vision Show, a major machine vision trade show held in Stuttgart, Germany. Cognix's booth was busy and well-attended. The show had a more European-centric attendance this year, reflecting challenges of travel to and from the Americas and Asia. We heard very favorable feedback from many manufacturers and automation leaders about our deep learning products. They're enthusiastic about the power and performance that Cognix's industry-leading technology provides them as they seek to improve their productivity and product quality. We believe this underscores the value of our long-term development and investment in RD&E. Cogmex's industry-leading vision and ID technologies are key differentiators for us in solving our customers' most challenging applications as they implement automation. Now I will hand the call over to Paul for details of the quarter.