Cognex Corporation

Greetings and welcome to the Cognix fourth 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 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.

Thank you. Good evening, everyone. Welcome to our year-end earnings conference call. With us are Rob Willett, Cognex's president and CEO, and Paul Tajam, 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 annual report on Form 10-K 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's useful to investors or if we think it'll help them 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 that we filed tonight. Now, I'll turn the call over to Rob.

Thanks, Sue. Hello everyone, and thank you for joining us. I'm proud of the results Cognex reported tonight for 2021. We surpassed a billion dollars of annual revenue for the first time in our history. We also set new annual records for net income and earnings per share from continuing operations. Demand for Cognex products was strong worldwide in 2021, Manufacturers implemented machine vision to ensure the quality and accurate delivery of so many of the products we all purchase. Growth came from all geographic regions, most major product categories, and a wide range of industries. Logistics was our largest end market for the first time in 2021, now representing approximately 30% of total revenue Logistics grew by approximately 65% year-on-year. E-commerce and omni-channel retailers invested in automation and Cognix's industry-leading products to enable higher throughput and cost reductions. Also, after struggling in 2020, traditional brick-and-mortar retailers increased investments to compete more effectively for online sales. Automotive represented approximately 20% of our company revenue in 2021. After two consecutive years of declining sales, revenue from automotive grew faster than the company average. Our customers increased investment in Cogmex products both for longstanding applications and for production capacity to bring new electric vehicles and related technologies to market. Automotive grew across all regions with notable strength in Asia, given the concentration of EV battery manufacturing in that region. One large market that did not grow in 2021 was consumer electronics. Revenue decreased modestly year on year. It represented roughly 20% of the company total, making it our third largest market after being number one in 2020. Unlike 2020, in 2021, customers focused more on upgrading existing lines rather than making big incremental investments for new smartphone technologies or to meet suddenly increasing demand for remote work products. Otherwise, growth was strong in almost all the other industries we serve, including semi, medical-related industries, and consumer products. Together, these smaller markets represented about 30% of total revenue in 2021 and collectively grew in line with the company average year-on-year. This is encouraging because we've been investing to increase our sales presence as we seek to reach new customers for machine vision and win share at competitors' accounts. Turning to a key financial metric, Gross margin was 73% in 2021 compared to 75% in 2020. There were two primary factors that resulted in downward pressure. One, in keeping with our customer-first company value, we've been prioritizing delivery during this time of global chip shortages. That added incremental costs in 2021 due to the significant premiums we've paid to procure components through brokers, and for expedited freight. The good news is that our customers appreciate what we're doing for them. After many months of intense engagement through very challenging conditions, I'm pleased to report that delivery times on most major products had improved substantially by year end. The second factor that impacted gross margin was the greater percentage of revenue from logistics in 2021. and some comparatively lower margin strategic logistics projects we chose to undertake last year. Cognoids have built a remarkable $300 million business in logistics, a market that is still in the early stages of adopting Cognex machine vision technology. We see the engineering support we provide customers to get up and running as a worthwhile cost of winning share, but it is slightly dilutive to our overall gross margins. We're making good progress transitioning our logistics business from customized to standardized solutions that are easier for customers to deploy. We're also developing an experienced group of logistics integrator partners able to deploy these standard solutions quickly and effectively. We believe these developments will enable us to scale more easily and to report higher gross margins in logistics over the long term. Overall, it's a great time to be at Cognex. We believe that macro trends such as widespread labor shortages, the growth of e-commerce, and a focus on supply chain integrity further underscore the value proposition for machine vision in manufacturing and logistics operations. Delivering on our commitment for new product development, we launched a long list of high performance next generation products in 2021 that we believe keep us at the forefront of vision technology. The Cognex Insight 3D L4000 makes our industry-leading true 3D vision tools as easy to use as 2D. This product positions us effectively against some of our competitors who have significant sales and profits in 3D. The Dataman 8700 reasserts our technology leadership for handheld barcode reading in automotive, medical devices, electronics, and other industries. Our new patented high-speed steerable mirror significantly expands the field of view of Cognex DataMan 470 barcode readers. This is invaluable for reading a high volume of barcodes at shorter working distances, such in pharmaceutical packaging aggregation, and across large fields of view, such as reading many barcodes on a large pallet in a warehouse. The Cognex Edge Intelligence software platform helps our customers understand the performance have large numbers of devices deployed across facilities, quickly identifying issues and taking corrective actions. Vision Pro X enables customers to use our rules-based vision software and deep learning technology together more easily in a powerful development environment. We also introduced Cognex deep learning technologies that further enable the automation of time-consuming manual inspections. VisionPro Deep Learning 2.0 software expands Cognex capabilities for high precision measurement of scratches, blemishes, cracks, and other defects. Cognex's SmartLine smart tool combines the high accuracy of 2D vision with the flexibility of deep learning to quickly solve complex line detection applications too challenging for rules-based vision alone. Moving on. Our headcount grew by approximately 200 Cognoids company-wide in 2021. Many of these employees are Salesnoids hired to sell Cognex industry-leading products to manufacturers and logistics customers around the world. Finally, we successfully implemented Salesforce.com to further improve sales productivity and deepen our understanding of customers. We believe our new customer relationship management platform will help us scale and understand our business with greater clarity on our path to the next billion dollars in annual revenue. Now, I'll hand the call over to Paul for details of the quarter.