Greetings, and welcome to Cognex First Quarter 2022 Earnings Conference Call. [Operator Instructions] 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 first quarter earnings call for 2022. With us are Rob Willett, Cognex' 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 10-Q are available on the Investor Relations section of our website at www.cognex.com/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, we think it will help them better understand our results or business trends. You can see a reconciliation of certain items for GAAP to non-GAAP and Exhibit 2 of the earnings release. Any forward-looking statements 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 in our Form 10-Q filed tonight for Q1. Now I'll turn the call over to Rob.

Thanks, Sue. Hello, everyone. Thank you for joining us. We are pleased with our results for the first quarter of 2022. Cognex reported record first quarter revenue following a milestone year in 2021. It was also the second highest quarterly revenue in our 41-year history, and we reported an operating margin greater than 30% and an after-tax margin of 24%. Revenue for Q1 grew by 18% year-on-year to $282 million, near the top of our expected range. Companies invested in automation and Cognex' industry-leading machine vision products to support the growth of e-commerce, address widespread labor shortages, and meet increasing requirements for product traceability. Importantly, our product delivery times were mostly back to normal by the end of Q1, thanks to the perseverance of Cognoids, our close relationships with suppliers and our aggressive buying actions to secure supply. Though costly, the premium prices we are paying to secure scarce components through brokers is the right thing to do. We are prioritizing the needs of our customers and winning market share ahead of shorter-term margin and cash flow considerations. While Cognex' supply chain situation has improved, it's becoming more challenging for many of our customers and partners to source basic parts since we last spoke with you in February. As you know, Cognex products are often part of a broader automation deployment. It's taking customers longer to implement projects and some projects are getting delayed due to longer lead times from suppliers of other equipment they need like [indiscernible]. That's backing up opportunities for Cognex and delaying revenue. While this dynamic did not have a material impact on our Q1 results, it is causing us to become more cautious about our outlook. From an end market standpoint, the biggest contributor to year-on-year revenue growth in Q1 was logistics. E-commerce, omnichannel and…

Thank you, Rob, and hello, everyone. I apologize in advance if we're the only thing standing between you and Margarita on Cinco de Mayo. We were pleased to deliver revenue at the high end of our expected range for Q1 in a difficult supply and macro environment. Revenue was $282 million, which represents an increase of 18% over a strong quarter a year ago and a new first quarter record. It's worth noting that our 2-year growth rate was 69%. Also, we were pleased to begin catching up on orders in backlog because of our hard work to source supply. Looking at the change in revenue for Q1 from a geographic perspective. Revenue from Asia increased by 25% year-on-year. Growth in consumer electronics, EV manufacturing, logistics, semi and the broader market, was offset by a 2 percentage point reduction from currency exchange rates. Within Asia, Greater China grew by 27% despite a few million dollars of revenue being delayed to Q2 due to lockdowns at quarter end that impacted our flow of goods and customer delivery acceptance. Revenue from the Americas increased by 17% year-on-year and delivered a substantial contribution in absolute dollars due to growth in logistics, among other industries. In Europe, revenue also increased by 17%, excluding a 7 percentage point reduction from currency exchange rates. Growth came from logistics, automotive, medical related and other industries in Europe's broad factory automation market. Gross margin in Q1 was 72% as expected. This level is 5 percentage points below the gross margin reported in last year's first quarter, due almost entirely to the significant premiums we are paying to procure electronic components through brokers. I want to remind you that our gross margin target remains in the mid-70% range. We expect to be back at that level once the global…

Thank you, Paul. Let's move next to guidance. Cognex reported a solid start to 2022, and we expect to report good results for Q2. We believe revenue for the second quarter will be between $265 million and $285 million. As mentioned earlier, our customers are facing supply chain challenges and labor shortages that are beginning to slow our growth rates. In addition, we expect Q2 will be a quiet quarter for logistics. We believe this is primarily due to the timing of large projects, and then it will be followed by a more active quarter in Q3. For consumer electronics, our visibility into this year's spending cycle is beginning to crystallize. We believe annual revenue for consumer electronics will be accretive to our growth rate in 2022 and that seasonality will be comparable to last year. For Q2, we expect a seasonal increase on a sequential basis as usual and growth over Q2 of 2021. We believe Q3 will be our largest revenue-generating quarter for consumer electronics this year. I want to remind you that Cognex products for consumer electronics are predominantly installed on production lines in Asia, China particularly. I'm sure you will understand how difficult it is to forecast business in China right now. Despite COVID-related lockdowns, our customers are asking for us to be ready for product shipments for a number of large deployments and on-site support in Q2. Our guidance reflects that timing as well as the assumption that the COVID situation in China does not get worse. We expect gross margin in Q2 will be in the low 70% range. We believe the premium prices we are paying to brokers for scarce components will persist for the remainder of this year. We expect operating expenses will be roughly flat on a sequential basis. Lastly, we expect the effective tax rate will be 16%, excluding discrete tax items. Now, we will open the call for questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of Jacob Levinson with Melius Research.

I think there seems to be quite a lot of angst out there for lack of a better word around a potential recession. I guess the question is, how do you think your customers respond in that type of scenario? I mean, do they cancel or delay projects? Or do you think that they're just going to keep spending on automation because of labor challenges or inflation or whatever the case might be.

Yes. It's an interesting question, Jacob. I think we've worked in this industry through a number of recessions. And sometimes shorter cycle spend can take quite a strong downturn initially, and then we've seen it come back pretty strongly. I would say, our major customers, so in areas like logistics, consumer electronics, EV longer-term thinkers, and we believe they would continue executing on plans that transcend short-term changes in the business environment. So it could be a mixed picture in that way. We believe Cognex is well positioned to weather difficult conditions given our strong balance sheet, a large backlog position, willingness by customers to improve productivity through automation and machine vision in environments. But those are sort of traditional things that we've seen in the past that may be more pronounced now than perhaps coming into previous recessions based on our size and the strength of our customer relationships. So those are some of the things I would point out.

Okay. That's helpful. And somewhere related to that as a comment that you folks made in the 10-Q on slowing factory automation investment. I assume that that's related primarily to the product shortages that you mentioned, but just curious if there are particular nuances around certain net markets or if that was more just a general comment.

Well, I'd say there's a lot going on out there, Jacob, I'm reminded of Tom Peters' quotation. If you're not confused, you're not paying attention. It's like there's so many variables, I think, currently for anyone running a business. So certainly, supply chain challenges are notable. And as I said, I think often, what we're seeing now is our deployments and sales are being held up by other suppliers in the automation infrastructure, whether it's integrators or sales of we're seeing from some major suppliers' lead times on PLCs and other motion control equipment going out 6 months at this point. And certainly, that is deploy and that's slowing down some deployments. But what else I think is obviously the China COVID situation we discussed. Also, I think spending by companies and Europe and America becoming more tentative, particularly in automotive and packaging. And I think obviously concerns macroeconomic concerns, the geopolitical situation with the war in Ukraine, et cetera. So -- and I think we've also seen -- we've read this in the press, you have that some new distribution centers and logistics are being delayed. More focus is being placed now on productivity and process improvements to reduce costs and improve worker safety. So these are all factors that are playing into our thinking as we look out about -- into the year. Some are playing very positively, particularly around company's interest to reduce costs and improve worker safety, others delaying greenfield sites would have a longer-term implication. The final thing I would say is I think a lot of what we're seeing more is delaying of projects is giving us some concern rather than we're not seeing -- I can't think of really any cancellation of projects that we're seeing, nor would we expect to in the near term.

Our next question comes from the line of Jim Ricchiuti with Needham & Co.

Question I have is just with respect to some of the projects in the logistics area. Are these -- do these tend to be larger projects? And I guess where I'm going with this is normally, if some of these deployments are not done by Q3, my impression is that customers like to have them in place by the strongest calendar quarter, Q4. Is there a risk that the slip perhaps into 2023?

Well, I'd say, Jim, we're still kind of continuing to learn about the seasonality in logistics it appears that Q1 and Q3 will be the stronger revenue generating quarters this year for our logistics and then we would probably expect, as we have in previous years, lower revenue, certainly in Q4 for the reasons you suggested. I don't necessarily see the dynamic we're playing -- you're referring to really having a marked effect on our business this year overall, but those -- the overall quarterly phasing with a stronger Q1 and Q3 is probably what we're expecting at this point. Not so much related to any change in the business environment just more to the timing of deployments.

Yes. Jim, this is Paul. I've shared this before, but the last 3 years have had quite different seasonality in logistics. In 2020, Logistics grew every quarter from Q1 to Q4. So Q4 was actually the highest quarter in logistics in 2020. So kind of bucking that theory of holiday readiness that you said. Last year, it grew from Q1 to Q3 steadily and then Q4 was down. And then as Rob mentioned, this year is a different pattern. So we are trying to give color on the overall flavor of the year, but I don't think we have true insight into a pattern or at least we haven't seen it over the past 3 years.

Understood. And just on -- with respect to the color you gave on appreciate on the consumer electronics and logistics market. What are you thinking in terms of automotive? Do you see the same trends, more investment over the balance of the year in EV, a little bit more uncertainty in the traditional market?

Well, certainly, we're seeing automotive revenues growing faster in Asia, and that's where the global part suppliers and EV battery manufacturers are concentrated. And we see a lot of investment and very strong growth in that part of the business. And then we're seeing slower growth or declining growth rates in Europe and America, but there are more traditionally combustion engine and Tier 2 traditional automotive parts suppliers. So I would expect those dynamics to continue. There are obviously EV battery projects increasingly in Europe and America. But I think those are probably longer-term plays for Cognex' gross plans.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

I just want to ask just kind of a broader question around the longer-term growth framework for for the logistics business. Obviously, it's been an incredibly great story for you guys been talking about a 50% kind of compounded growth rate over time. But there is news out last week that Amazon had built too many warehouses has excess fulfillment capacity. I'm just curious, I mean we don't have to talk about that specific customer, but just more broadly, how you're thinking about the growth rate over the long term and whether there is potential like excess capacity right now and that growth slows for the next, I don't know, 12 to 24 months?

Yes. I think we expect logistics to be accretive to our overall growth this year, but unlikely to grow anywhere close to our 50% stretch goal after a remarkable year last year and a remarkable 3 years, really, I think, that we've seen. So there's a lot of demand for machine vision in logistics. However, I think you correctly referenced plans for new distribution centers are being delayed. More focus is being placed on productivity, process improvement to reduce costs and improve worker safety. So there are a lot of repetitive motion that goes on in in logistics fulfillment. And I think certainly with more concerns about labor and safety and potential unionization in those plants. I think there's more focus going on in pivoting towards those applications, it actually plays very well for Cognex where we sell fixed mount and more sophisticated vision rather than so many handhelds, right, into that marketplace. And so we're -- and as I've mentioned, the deployment is slowing due to supply chain and also labor, meaning engineering and integration shortages. So that's kind of the dynamics for this year. I think we do expect to kind of revisit some of our long-term growth targets around logistics. We're not quite ready to share those with you. But I think you can expect later this year will come with what is a very exciting vision for the future of Cognex Logistics, particularly as it relates to moving beyond barcodes and more into vision, where we see some very exciting growth opportunities. I think you're right to ask for that and give us a little time to come back to you in the community later in the year about how we should think about what's been a 50% stretch goal and what that might look like going forward. Still, I would expect very exciting.

Got it. That's super helpful, and I appreciate that all that color. Maybe my one follow-up question, again, just kind of keeping this a little bit longer term. I'm curious whether there's been like any change to the competitive dynamic yourselves and your competitor in Asia have enjoyed like some pretty good barriers to entry. I thought it was interesting that Zebra bought Matrox Imaging announced this this past month. I'm just curious like whether -- does that -- is the dynamic changing at all competitively -- any comments that you can make around that would be helpful as well.

Yes, sure. I'll make a few general comments. So I can, our main competitor in this marketplace and we, I think, have gained quite a lot of share over the last few years. I think our technology, our balance sheet, our investments, our R&D spend, our sales improvements have paid dividends through this period. So I would say those dynamics, I think, are borne out, if you look over the last, say, 18-month period of results, -- in terms of new competitors, we're always very focused on what's going on in terms of new entrants and new competitors. Certainly, Zebra is a company we see investing a lot in this space. And of course, we did been very interested and not surprised by Zebra's acquisition of Matrox. I wouldn't say it changes our overall strategy or thoughts but some thoughts I have about certainly that would be both companies sell primarily through partners, not direct sales as we and cans would the majority -- half of the majority of our business. And Matrox is a very strong technical company. They've been in the industry a little bit longer than we have. They're very strong in rules-based vision and have strong semiconductor relationships with large OEMs. So those are all interesting things for us to observe, as we think about that transaction. We're also, there is more activity, I would say, is in local Chinese competitors, and we certainly watch those very carefully. There have been some IPOs locally by some Chinese machine vision companies and there's also obviously a large state-owned enterprise in hike robot that also is growing in China. So quite dynamic. I would say probably the companies I've mentioned, are gaining share and growing, and they're probably doing so at the expense of many of the other players in the industry who have been there for a long time and perhaps haven't kept up with R&D and innovation and investment in sales channels. So those are some of the broad dynamics I would see, Joe.

Our next question comes from the line of Andrew Buscaglia with Berenberg.

My comment on consumer electronics growing. I was not expecting to hear that, especially this early in the year. But what exactly is driving that? What's giving you the visibility to make that comment?

Well, it's -- we have very close working relationships with a number of very large consumer electronics providers but also their supply chains and their customers. So we do have pretty good insights by this time of the year. about their plans to roll out new technology and new models and invest in new lines. And that's been the case for us for many years now. So it's really -- that's kind of our read, and that's really what we're sharing. I would say there's certainly there are always dynamics of new features and new technology coming into the electronics space. And there are years where that really pops for us, and you've seen that in years like 2017 and then there are years that are more muted or have declined. And I think we're calling this year as 1 of moderate growth.

Okay. And the comment on automotive you're talking about faster growth in Asia, but maybe some declining growth rates in North America from traditional OEs. Do you guys do work or intend to do work with some of the newer nontraditional EV makers that are based out of the U.S.

Well, as we often say, we're the leading provider of advanced machine vision technology for industrial automation in the world and we work with the most sophisticated customers in general. And those in general are very sophisticated users, and they have excellent engineering teams. So they're exactly the kind of companies that we work with.

Okay. Well, actually, maybe a question, if those guys are still investing, how come you wouldn't see that automotive growth this year. So kind of like newer EV makers are still moving forward with their plans.

I think we have seen good automotive growth in the first quarter, and we're -- so I don't think we've given more guidance for the year overall. So -- but I think the comment I would make is we see strong growth in EV and EV battery and much more muted growth in traditional automotive. So that's additionally been a large market for us. So it's more of a mixed thing, and you can count on the innovators, particularly the EV battery and the the electric vehicle companies, certainly who are experiencing great growth, providing us with strong growth also.

Yes. And the scale of EV in Asia remains -- is the highest concentration of our -- of the mix. So it could be growing -- EV is growing everywhere but different levels -- different base levels and different timing durations of rollouts of CapEx in the different geographies.

And it might help to understand, too, that EB it's a supply chain ecosystem that includes a lot of OEMs and and subcontractors and machine builders and battery manufacturers, right? So much more than it is selling directly to end user brands that you might recognize even though those brands are often contracting with the machine builders.

Yes, it's terrible, Rob. So what we recognize the revenue where we execute the project, not necessarily where the OEM might be located for headquarters.

Yes. And certainly, the large EV battery manufacturing companies are almost all Asian.

Our next question comes from the line of Rob Mason with Baird.

Just to follow up on that last question around automotive and EV. Rob, could you frame the growth rate range that we're falling into right now? I mean is it triple digits, you said strong. But just perhaps a reference point for the rate of growth that you're seeing?

Rob, is your question about EV or automotive in general?

The EV portion of your automotive business?

Right. So I'm not sure we would necessarily give you specifics, but it's certainly growing a lot faster than our overall growth rate. And maybe I'll leave it at that.

Okay. Okay. And also, clearly, you're seemingly a little more comfortable around your supply position relative to how the ecosystem that you're selling into is faring. But I'm just curious how that -- how you're handicapping that and how it's played out for you if you saw any increase in the comments that you were able to just manage around? Or how that -- I guess, how you're accounting for that risk in your outlook as we go forward here still because it is still challenging for many.

Yes. I think we've been about a year really into this kind of problem. And for us, it's tended to be suppliers of chips who have decommitted where we have a buy schedule agreed with them that goes out years in some cases. And in a period of extreme growth that we saw going back a year, where we were reporting type growth rates. Obviously, we were consuming large amounts of chips and burning through our strategic reserves of chips. So we have that dynamic. And then we had some suppliers specialty custom chips for really decommitting and they were decommitting out 6 months. So I think we -- when we last spoke to you, we sort of thought I think that we were kind of making really great headway, and we expect to get -- see that kind of broke by headwind really diminished by the end of the year. right? But more recently, we've seen some decommits continue, and that's problematic for us. One of our suppliers, particularly is came with a schedule that they've pushed back a good 6 months, and I'm hearing a lot in the industry about the pain that that's core. So certainly, those are challenges. We're then working very hard to design out those chips or replace them with other opportunities. And then we have to go out into the broker market sometimes. And and source chips from brokers, and that can be in the current environment, very expensive. We're saying that we think that kind of process of going out and sourcing in the broker market is going to continue for us. Obviously, goes into inventory and then it comes into revenue. So there's a bit of delayed timing where we can see what's sitting more costly inventory will go into products in subsequent quarters. So kind of we have a view of that. I'll turn it over to Paul to sort of to size that for you.

Yes. Rob, for the last 3 quarters, we've given some sizing of -- I'll start with the revenue side and then will go to the gross margin. We've done some sizing of how much revenue might have been shifted or pushed out a quarter because that would be recognized in a normal supply environment and was delayed. So that -- those were positive number. We pushed some revenue and it kind of grew through the back half of last year. Because of our -- the investment we've made to secure supply and positioning, and as Rob mentioned in the prepared remarks, we're basically back to normal delivery times for the vast majority of our products. And we delivered about $20 million of orders in the quarter that had been in the backlog for some period of time, which primarily benefited Europe and the Americas. And this was partially offset by a few million dollars of orders that we otherwise we would have recognized in China were it not for COVID-related delays in transit and customer acceptance at quarter end. And then on the gross margin side, yes. I think what's maybe a little more unique for Cognex relative to others who are citing several different factors, core component cost inflation, freight and broker buys is really the broker buys are the vast majority of the delta between last year's gross margin of 77% and certainly us versus 72% now versus the 75% or mid-70s target. It was about 400 -- a little over 400 basis points of margin headwind driven by the broker buys, which is very comparable to what we saw in Q4 and comfortable to what we expect to see in Q2. I have some hope, it might get better in the back half, but we're not counting on it at this point.

[Operator Instructions] Our next question comes from the line of Joe Giordano with Cowen.

I just wanted to confirm 1 thing I think you said, but are both consumer electronics and logistics expected to be accretive for the full year to total company growth.

Yes, they are.

Okay. I thought that's what you said. And you kind of I think indirectly answered this, too. But based on 3Q logistics expected to be like a more active quarter, and I think you mentioned 3Q is expected to be your highest revenue quarter for CE. Is it fair like based on everything we know right now that 3Q is likely sequentially a higher revenue quarter for the full company than 2Q?

Yes. Joe, again, we just guide for the current quarter, of course. But putting those trends together and thinking about the seasonality of consumer electronics, which does tend to be a seasonal build. And this year, we are expecting Q1 and Q3 to be our largest quarters for logistics. I think that's a safe bet.

Okay. I think there was a question earlier talking about the inks that's in the market right now. sometimes inks is good for a company with a lot of cash and no debt to be active and opportunistic. So just curious what you think about the M&A markets? Are there parts of the market that are kind of under pressure where you can kind of step in? Or is there stuff looking more attractive now? Just what's your overall view there?

I think we're always out. We're very selective, and we like companies with great technology for sure. My sense is it's a little early, right? I think maybe the the realization of kind of what we're looking at maybe hasn't filtered into the M&A environment and particularly in terms of valuation. So -- but certainly, that's something that we're thinking a lot about.

And if I could just sneak 1 last one. Just the logistics push out, is there visibility around like is this pushed down to 3Q and you kind of -- you've had that discussion, you have the visibility? Or is this push into 3Q and then maybe it's canceled or maybe it's pushed into next year? Like how solid is that the timing around those pushouts?

Yes. I mean, I think, again, there's a reason we give quarterly guidance and not beyond that. I think as Rob noted, there is tremendous volatility right now. So even thinking it's a good bet. That's a good bet based on the information we have today. Could things delay further and could get worse. Of course, they could. But there are several moving pieces associated with these sort of long-term multiyear plans that the pushes do tend to be kind of historically of this duration, not dramatic changes given all the other parts that are sort of lined up. So I'd say it could get worse, but we think the downside of that is bound to some extent, given the commitments our partners are making.

And I'll also comment that I think Cognex tends to deal with the most sophisticated businesses. I think we certainly saw that initially in the downturn that some of these logistics players who are technically sophisticated really kind of leaned in and invested heavily. So I would -- I think while they're -- what they see going on in their business, in terms of sales to customers might be changing. Their automation plans are pretty well established. And it's more the order and the focus of how they implement them. So we have, I'd say, quite a high degree of confidence that, that business is coming our way and would not be canceled.

Our next question comes from the line of Jairam Nathan with Daiwa.

I just had a pricing -- had pricing questions companies have been raising prices to offset some of these cost headwinds. Can you talk about what Cognex has done? And are these numbers net of these price increases?

Yes, I can take it, Cam. Obviously, the current inflation environment is something we haven't seen in some time. For our philosophy on pricing really is our strategy is focus more on offsetting what we believe is permanent inflation at the gross margin line. So the biggest driver of our lower gross margin right now is broker buys. And although we're getting some offset for some pricing actions we've taken at an operating income level, we're really focused on trying to come through this period of supply chain volatility with the price increases we've taken and realized essentially matching the inflation that we think will be with us for some time. And based on what we saw in Q1, we believe we are keeping pace with that underlying cost increases that are permanent. But of course, we'll continue to monitor and react accordingly. We try not to be more specific than that, knowing our largest partner has very little and for competitive reasons, don't wish to disclose further.

Okay. And then just as a follow-up, I see that logistics has been cited as a growth driver in all of your segments -- all of your regions. And I was just wondering if you could kind of give us some more nuance on how the regional growth has been? Are you seeing more weakness in the U.S. or more pushouts in the U.S. and less so in international?

I'll make a general comment, and then Paul may be more specific. But I would say the majority of our logistics business is still U.S. focused. And -- but we've been investing for a number of years and building up our capabilities in Europe and Asia. And so we're generally seeing much higher growth rates in those markets. And I think that's some of the exciting part of logistics business and why we're confident about continuing to grow very strongly as a business, regardless necessarily of what happens in the U.S.

Yes, that's right. You got the data, and that's been playing out the sort of relatively faster growth for some -- abroad for some time now. And I think we've also been quite happy with just the diversification of our logistics business. We have number of customers and depth of relationships with those customers, which has been expanding nicely too.

We're seeing some really great e-commerce technical leaders in Asian markets particularly adopting Cognex vision in a big and exciting way and similarly in Europe. So we have a lot of enthusiasm about that. And I know in our discussions here with you it tends to be a little U.S. focused. So I would recommend we talk about that more in the future.

[Operator Instructions] We have reached the end of the call. I would now like to turn this call back over to Mr. Rob Willett for closing comments.

Thank you so much, and thank you, everyone, for joining us tonight. We look forward to speaking with you again on next quarter's call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.