Cognex Corporation

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 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 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.

Thank you. Good evening, everyone. Welcome to our third quarter earnings conference call for 2022. Leading today's call are Rob Willett, Cognix'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 10Q 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 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, in our Form 10-Q file 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 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 that 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 Cogmex 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, Cogmex customers include many e-commerce and omnichannel 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 Postal and Post, where we have a small presence today and superior solutions that position us well to grow. And 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 markets. 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 Cognix 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 and 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, on our edge intelligence data analytics software platform in high-speed, high-throughput operations. Another example is the DataMan 8700LX, 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 milliseconds. The 8700LX 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.