Cognex Corporation

Greetings and welcome to the CHI Next Third Quarter 2024 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 anyone should require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Nathan McCary. Thank you, and you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market closed, and our quarterly report on Form 10-Q for Q3 2024 was filed this morning. The press release, earnings presentation, and 10-Q are available on the investor relations section of our website. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Any forward-looking statements we made in the press release The accompanying presentation posted to our website or any that we may make during this call are based upon information that we believe to be true as of today. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and Form 10-Q. On today's call, Rob Willett, Pogmex's President and CEO, will discuss end market trends and provide an update on our strategic initiatives. Dennis Fair, Cognex's CFO, will discuss our third quarter financial results and will conclude with our outlook. With that, I'll turn the call over to Rob.

Thanks, Nathan. Hello, everyone, and thank you for joining us on Halloween, Cognex's favorite holiday. In the third quarter, we delivered revenue and adjusted EBITDA margin in line with our guidance. Revenue grew 19% year-on-year, or 7% excluding the contribution of our Moritex acquisition, led by continued momentum in logistics and semiconductor, and comparing against a low base in Q3 of 2023. Conditions across our broader factory automation business remain challenging. While most of our factory automation business has been stable for several quarters, we've seen a further step down in automotive. We continue to manage costs tightly in the third quarter and reduced operating expenses sequentially despite increased costs from the emerging customer initiative and an extra month of Marutex financials. I now want to provide you with an update on our strategic initiatives. We continue to make excellent progress in bringing world-class AI to our machine vision products. In the third quarter we launched AI assisted labeling to reduce the time required to train deep learning vision models. We've incorporated a new AI model into our vision pro deep learning products that can cut out any object in any image with a single click. This makes the labeling process much faster. Training AI vision models can sometimes require labeling of over 1,000 images, and this latest model cuts the labeling time by approximately 90%, allowing more customers to adopt our most powerful deep learning products. Another example of how we're making our products more accessible to a broader audience can be seen in our AI-driven optical character recognition tool that we launched in Q3. Our prior OCR offering required significant training, which limited its use to more sophisticated customers. Now, with virtually no setup required, customers can leverage this out-of-the-box technology to obtain industry-leading weed rates and performance. As AI enables machine vision to solve more human-like tasks, We have conviction that a larger portion of future market growth will be driven by a more diversified set of small and medium-sized businesses who need products that are easy to implement and which deliver powerful results. I now want to go a bit deeper into our strategic rationale for the Emerging Customer Initiative and give you more color on how it is going, what we've learned, and what we expect from here. Historically, Cognex has excelled at providing the most powerful vision technology to the world's most advanced manufacturers. There are thousands of such customers, and our share with them is high. But there's also a much larger segment of customers with less complex applications and less automation engineering capacity who are looking for more standardized products that are easy to apply and easy to use. The technology we have developed over the last five years, including our edge learning sensor and newest ID products, are ideal for these customers. And as we launch more of these types of products, we expect to achieve our long-term growth by reaching more of what we estimate to be hundreds of thousands of potential customers. We're doing so by adding a new SalesNoid profile to our team. Ambitious recent college graduates who are less experienced, less expensive to employ, and less technical. They are enabling us to broaden our sales coverage, make many more shorter sales calls, and reach more customers. Our first cohort of these sales noids entered the field at the beginning of 2024 against a challenging macro backdrop, who were happy to see their bookings continue to ramp. Q3 of 2024 was our largest quarter, and September was our largest month of emerging customer bookings. This is helping to offset slow bookings in many of our end markets in 2024, and even resulting in bookings in end markets where we have previously had minimal coverage, such as aerospace and agriculture. While we will not report the following metric on a regular basis, I want to help you understand the scope of what this program is delivering. In the third quarter, the first cohort of emerging customer sales noids sold almost $1 million per week and referred millions of dollars of vision business that was closed by our more experienced sales teams. I will note that this includes bookings by these sales noids to some existing accounts, so it's not necessarily all incremental. Our second cohort is now in training and will enter the field over the next four months. Our emerging customer initiative is a long-term program still in its early stages and driven with a mindset of continuous improvement. We're learning which products are most compelling to these target customers. We've responded by evolving the product portfolio to the sales team and equipping them to sell additional vision products. Just like prospective customers, Our established accounts also have use cases for our entry-level, easy-to-use technology and benefit from more frequent engagement and broader sales coverage from Cogmex. Emerging customer SalesNoids can also identify more applications for our advanced vision products and refer this business to our more experienced SalesNoids. To better serve these accounts and optimize sales coverage, we are combining sales forces under a unified management structure in each geography. While we are long-term focused, we acknowledge that we are investing in a challenging market environment. In the near term, this initiative is generating more customer visits, increasing our customer base, and generating gross margin accretive business. Emerging customer sales noise are on track to make over 80,000 additional in-person customer visits and to add around 3,000 new accounts this year. In the medium and long term, we expect this sales transformation to support strong growth and profitability. As our sales noise are now serving a mix of new and existing accounts, incremental revenue delivered by this group is no longer a measure we are evaluating to determine success. We believe this sales transformation supports our long-term target of over 30% adjusted operating margins and positions Cognex for future success. We are excited to continue this initiative and to introduce a new cohort of sales noise each year. As we plan for future years, we will, however, be flexible about cohort sizes and be responsive to market conditions and resulting growth. Turning now to what we are seeing across our end markets, which you will find on page six of the earnings presentation, I will discuss the end market results excluding the contribution of Maritex. End markets have been mixed as we've seen both continued softness as well as pockets of growth. Starting with automotive, revenue was down both year on year and sequentially We continue to see delays, reductions, and cancellations of EV battery projects, and we saw a further step down in our broader automotive business. I spent time this past quarter with automotive customers in many geographies. This is probably the weakest and most tentative I have seen the automotive market in my 16 years at Cognex. The industry is suffering from an overinvestment in electric vehicles, macro uncertainty, increased competition from new entrants, and unclear future end user demand. This has all led to minimal capital investment across the value chain, which we expect to continue until these customers have more certainty. Moving on to logistics. Revenue in logistics has grown strong double digits year to date. We continue to see growth across this business from large e-commerce to parcel and post to base logistics customers globally. This is fueled by both market growth and recent product innovations, including the success of the Dataman 380 that we launched in 2023. One recent example of logistics success is our partnership with the e-commerce leader in South Korea. We're seeing regional e-commerce leaders like this automate more of their warehouses and adopt more vision solutions. We partnered with this customer to increase its throughput and enable better tracking and tracing of packages by providing a hands-free ID reading solution for its inbound freight processes across its network. We won this business with better read rates at higher speeds than our competition can support. This customer is also investing in robotic automated bagging across their existing facilities. With unmatched read rates and value, our data man code readers were able to unlock this opportunity for us, where we both replaced competitors on existing equipment and won business on investment in new automation. We believe logistics is well positioned to continue to be our fastest growth and market as automation penetration increases e-commerce investment returns, we win share in the parcel and post segment, and more customers move beyond purely reading barcodes and start to implement a broader range of vision tools and technology. Consumer electronics revenue was up year on year and down sequentially, both driven by project timing. Q2 of 2023 included $15 million of revenue that shifted forward from Q3. This year was also more weighted to Q2, but to a lesser extent than in 2023. Consumer electronics has positive long-term trends. Currently, our expectation for near-term investment in consumer electronics are tempered, but we tend to have a better line of sight to this by early Q2 each year. Lastly, Semi is continuing to build with significant year-on-year growth. albeit off a low 2023 base. We're seeing increased investment from major machine builders across geographies and are optimistic that these trends can continue. Let me now hand it over to Dennis to walk you through the financial results and the outlook for the fourth quarter.