Greetings, and welcome to the Cognex Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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, Cognex'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 10-Q are available in 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 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 and our Form 10-Q filed 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 Cognex overall. Despite slower current spending by a few customers, we believe our long-term prospects and logistics are as exciting as they have ever been. There are several reasons for our confidence. First, Cognex customers include many e-commerce and omni-channel retailers that are early in their adoption of machine vision. Second, we believe more growth collectively will come from…

Great. Thanks, Rob and hello, everyone. Revenue was $210 million in Q3. That level represents a decline of roughly 25% from both last year's record-setting performance and Q2 of 2022. It was better than we expected, when we gave our updated Q3 guidance, but still lower than we would have anticipated earlier in the year. The business disruption from the fire caused revenue from most end markets to decline in Q3 year-on-year, and all to decline on a sequential basis. The quarter was also impacted by lower revenue from large customer projects in logistics. And with approximately two-third of our revenue coming from outside of the United States, currency exchange rates had a negative impact, leading to a five percentage point drag on revenue growth in the quarter. Looking at the change in revenue for Q3, from a geographic perspective. Each primary region was also negatively impacted by business disruption from the fire. Asia decreased mid-single digits, excluding a six percentage point negative impact from currency exchange rates. Large order revenue from consumer electronics, made a positive contribution in the quarter. Revenue from Europe, decreased low teens excluding a 12 percentage point reduction from currency exchange rates. Lower revenue from logistics and declining business confidence impacted revenue across the region. In the Americas, revenue decreased by more than 40% year-on-year due to the slowing of large investments, by a small number of customers in logistics. Gross margin was 73% in Q3, compared to 70% in Q3 of 2021 and 72% in the prior quarter. Gross margin was better than our guidance, due to leverage on our fixed costs given the higher-than-expected revenue level, while partially offset by unfavorable FX. The three percentage point increase year-on-year, is due to a more favorable revenue mix this quarter. The improvement in gross margin…

Thanks, Paul. Let's talk now about our guidance for Q4. We expect revenue for Q4 will be between $235 million and $255 million. That range represents a strong rebound from an artificially low level in Q3 due to a return to more normal production lead times. It also includes a remaining $20 million catch-up on customer deliveries following the fire. At the midpoint, we expect revenue will be roughly flat on a year-on-year basis. We expect to continue to experience lower large project activity in logistics. Reflected in this guidance is a 10 percentage point headwind to year-over-year growth from the strong US dollar. I want to clarify that this is a 10 percentage points, not basis points, as there was a typo in the press release. We believe gross margin in Q4 will be in the low 70% range. The supply environment is improving and that's leading to lower broker buy activity. However, the impact of what we've already purchased and is in inventory will take a few quarters to flow through our income statement. We expect the combined total of RD&E and SG&A will increase by low single-digits on a sequential basis due to the timing of incentive compensation. The effective tax rate in Q4 is expected to be 16% excluding discrete tax items. Now, we'll open the call up for questions. Operator, we're ready to go ahead with questions.

Thank you. [Operator Instructions] The first question today is coming from Joe Giordano – Cowen. Please go ahead. Q – Joe Giordano: Hi, good afternoon.

Hi, Joe. Q – Joe Giordano: I just wanted to get a sense on the fourth quarter like how much of this is underlying demand and how much is kind of backlog delivery? I know you called out $20 million specifically is like a catch-up. But how much is just thought that you've been booked over the year? And how much do you feel like is truly new business and reflective of what conditions on the ground are?

Yes. Let me kind of speak to that more generally for everyone on the call. So our revenue guidance in Q4 is roughly flat year-on-year. Our expectation for the quarter it's driven primarily by four things, right? There are two headwinds and two tailwinds. And Joe I think you're talking about one of the tailwinds that we have. So first of all headwinds a few large customers and logistics are currently spending less on new fulfilment centres than a year ago. And we also expect a roughly 10 percentage point negative impact from currency rates in the quarter. The tailwinds things that are helping us expected growth from the broader factory automation market and then there's about $20 million of revenue shifted from Q3 resulting from a catch-up on customer deliveries following the fire. So I think that $20 million gets a little to your question Joe. Business activity in the broader factory automation market is holding up although it's less robust than it was a year ago particularly in Asia and we're not expecting a big budget flush this year overall. So it's generally kind of how I would think about the fourth quarter. Q – Joe Giordano: Just given where we are in the year in November, I'm guessing you have a pretty good idea of where your big markets your critical markets are going to come in. So maybe if you can take us through logistics consumer electronics where there's been a lot of negative headlines in automotive maybe as to what growth looks like for 2022 full year for those markets?

Yes. I mean I'll start out and encourage Paul to say a little more. Generally, we don't give sort of that full year position until after the year is over. I think what we've already said is that we're expecting a growth in our electronics market. I think we've said around in double digits low double digits. Obviously, we're expecting significant contraction in our logistics business right? Automotive overall I think probably moderate performance in that market and similar in other markets overall. So that's kind of and then obviously we've got headwind from currency which is pretty significant at this point. Paul would you like to give any more color? A – Paul Todgham: No I mean I think that's right. After Q3 we're now down on logistics year-on-year. So we know we said we'd be down for the year. We're now there. And with Q3 going to be the most down as we've sort of communicated last quarter. Consumer electronics is playing out really as we expected and communicated in our last earnings call. And again automotive gets a little bit clouded by the fire impact and currency and so on. But we're generally pleased by what we're seeing in EV and there's tentativeness elsewhere, the broader market in Europe for instance, there a some tentativeness in automotive.

And just last for me. Is there any way to kind of like -- I know you talked about the gross margin in the quarter. How much benefit in the quarter are you getting from less like large customer deliveries of mixed negative logistics stuff versus like the benefit that you got from less broker, but I'm trying to just understand like what that looks like? How much up versus how much down and then where net out you know me.

Sure. Yes. So as you'll recall, a year ago was our low point for gross margin. We reported a 69.9% gross margin. And at the time we were calling out three factors. One was broker buys. One was a strategic project in the logistics space that was particularly low margin, it was sort of a co-investment in something that would lead to productized solutions like the machine vision tunnels that we -- the modular vision tunnels that Rob spoke to today. And the third was some supply chain issues that were particularly impacting some of our highest margin Vision products. So, those are the three factors that kind of jointly brought us from our typical mid-70s to the 69.9% or 70% we did. This quarter, the broker buy impact was pretty comparable year-on-year I would say. And again that's a little bit artificially low just by virtue of what we sold in this quarter and it's going to be a little higher next quarter, which is why we brought our guidance down slightly versus what we've communicated. So that's the impact. FX was about a 120 basis point negative impact to gross margin for the quarter. And then our pricing actions are offsetting our component cost inflation which really is our strategy. So those are the real drivers. Revenue mix was favorable this quarter versus a year ago. It's favorable within the quarter -- within the year in Q3, just by virtue of a little lower logistics mix this quarter and we'll have a little more of that next quarter.

Thanks, guys.

Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

All right. Thanks. Good afternoon guys.

Hi Joe.

So I know that you guys you don't give guidance for a full year. But I'm hoping that you maybe can kind of contextualize like how to think about logistics in 2023? I know that your long-term growth rate is you expect to grow 30%. But I'm trying to just get an understanding of your views on the market versus your ability to potentially outgrow the market with as you mentioned earlier new use cases and applications for your technology?

Yes. I think to kind of contextualize that, we have significant and growing base of regular logistics customers, right? And they're growing and they're growing very strongly outside the US. And that -- and we expect that to continue, right? And we're expecting continued strength in that to be one of the fastest-growing parts of our business. It's less than half of our logistics business, but it's -- I mean last year it was. And -- but the growth dynamic and the broadening of those customers and the geographic broadening is really a great thing for us. Then, we have this other dynamic that we're speaking to a lot, which are large technology e-commerce players and there are a few of those, right? And one I think we focus on a lot of your questions often do, but there are a few of those customers and they really are going through a similar phenomenon where they're taking this kind of time out from investing having really overbuilt capacity and seeing some more challenging environments post pandemic right? So I think the big challenge and one that's hard to call is when will that investment cycle turn and those companies start investing more heavily again. I don't think, it's in the first half of next year. I feel confident in saying that. But at some point we're very confident it will return. And we just have so much value to add and we all see that. And we have so much new technology to bear beyond barcode reading that we're very confident about that coming back. But I certainly am not expecting it in the first half of next year.

And Joe, I'd maybe add –

Okay.

So the full year view on logistics is tough to call, because of kind of the timing of when that might come back. But we are up against tough compares in the first half. We -- Q1 this year 2022 was our highest quarterly revenue level and also our highest quarterly growth rate and we did have a strong quarter in logistics in Q1 this year kind of broad-based across all of our logistics customers, including large customer activity. So we're up against a tough compare. And then the question really is, when does the large customer business come back in the – is it back half of 2023? Is it 2024?

Yeah, Paul, that's helpful. And maybe sticking with you for a second and talking about the gross margins a little bit more. So, can you maybe just help me understand again why the gross margin step down in the fourth quarter? What is it specifically about what you sold through in Q3 that maybe helped gross margins? And then as you start to think about the first half of next year, if logistics doesn't come back as you have that tough comp, I mean, you should get a pretty decent benefit at least on the gross margin side from mix, if there's any way to quantify that that would be helpful.

Yeah. Yeah. So first maybe just the biggest phenomenon for our gross margins over the last five quarters has been our broker buys. So – and it helps to understand there's really sort of two factors with broker buys. There's the volume of the buys we're making and then the timing of when that flows to the P&L. So there is a lag effect. We commit to the value, we receive it in inventory before it becomes a finished good that's then sold through. So what we're seeing right now Joe is the volume of the buys it spiked a bit right after the fire as we quickly replenish inventory, and it's come down very significantly through the rest of Q3. So we're optimistic that we are headed in the right direction with regard to a return to our normal levels. And now we're dealing more with the lag effect of – it will take a few quarters for that to flow through our P&L. So part of why Q4 is a little worse than Q3 in our guidance is that factor. We're going to take a little more broker buys to the P&L. We have a little more FX expected. We quoted a 10 percentage point impact on Q4 versus the five percentage points we had in Q3 as a revenue impact and that there's a corresponding impact to gross margin. And then overall revenue mix, which in Q3 we benefited from quite high electronics business, which is generally gross margin accretive to us. It's high software content, and a lower logistics mix. So that lower logistics mix may benefit us to some extent next year. But I think, it's smaller than the broker buy factor that's really been driving our gross margin over the last five quarters.

Okay. That's helpful. Thank you both.

Thank you. The next question is coming from Josh Pokrzwinski of Morgan Stanley. Please go ahead with your question.

Hi. Good evening, Rob, Paul, and Sue.

Hi, Josh.

Hi, there. So first question on the fourth quarter guide and this $20 million catch-up. If you could just remind us how much is left if any? And if there's any change to the part of the business that you thought was lost as a function of out-loaded product there was some way to backfill that with newer stuff or some other work around you on?

Yeah. So strictly the financials. Back in August, we said we had an $80 million impact of the fire in Q3, $20 million of that business we thought would be lost, and $60 million of it we thought would shift from Q3 to subsequent quarters. And then in a follow-up there was how long might that take? And we said two quarters. So we thought there might be some impact in Q4 and some in Q1. The $20 million fire loss impact we estimated really was dead on. In some cases it was a product that was being sunset and maybe a couple of last buys of that product that once the components were lost we weren't going to get back into the product or unable to get back into it. And some of it is maybe just quick cycle readers or vision systems, for which if a customer couldn't get it in time they would either not do the project or get it from a competitor. So that's pretty much played out as we've expected. We're still in the process of migrating customers to newer products and so on, but that wasn't really a major factor in the product loss I would say. And then of the $20 million shifted, we really think we're going to realize all of that in Q4 rather than have any overhang going into next year. Again, the replenishment has been quicker than we expected. And so we thought a couple of months ago or three months ago, we might be holding some product back to deliver to customers. But because of how quickly we've gotten back into supply, we're not needing to do that at all and business is good. Supply chain businesses are good.

Got it. Very comprehensive, super helpful. I appreciate it. And just on logistics, I know that you are reluctant to want to call the full year especially, the first half, second half dynamic. But maybe thinking about outgrowth differently and your customer mix versus how you think the market may be different. I think folks like Honeywell and Qian are teeing up down 30-ish type numbers. You talked about 10 points of outgrowth in your core business. Would you think about if the market were to be down that much your outgrowth formula would hold, or there's some mix or comp issue that you think would be more of a distinguishing factor?

And to clarify that, Josh, are you talking about this year, current year, or next year?

Next year, 2023.

Right. Yeah. I think the first thing I would say is we have some -- you know this about Cognex, we're the technology leader in our industry and we have exposure to some of the most sophisticated companies in the space. And that's a wonderful thing, because they teach us so much and many of the technology leaders then go from them to other places and bring Cognex technology with us. But in this case, it does expose us to a few big players who really are not looking to invest particularly in greenfield sites as we move into next year. And our exposure that was more than 50% of our business last year was related to that. So I would think our exposure to that part is going to be down more than the companies that you quoted to perhaps have a broader exposure to broader conveying and material handling. But on the upside I think, we have exposure to the base -- the rest of our business, the large groups of customers who we're gaining share in we have great technology to offer them. So I would expect there we would be outgrowing the general industry as customers are really looking to add and spend more on technology enhancements than perhaps on basic conveying and material handling. So that's perhaps a little context for you.

That was a great answer. I found that really helpful. Thanks, Rob. And best of luck, guys. A – Rob Willett: Thank you.

Thank you. The next question is coming from Jake Levinson of Melius Research. Please go ahead.

Good evening, everyone.

Hi, Jake.

Just wanted to get a sense of -- or do you have visibility, I guess, I should say into the inventories in the channel? And I'm just thinking you've obviously got some markets like logistics that are not in such great shape. I'm sure there's some fire impact in there potentially to make things even more complicated but any color you could give would be helpful.

Sure. Jake I'd say a wonderful thing about Cognex is that there is really almost no inventory in our channel, right? We have a -- we sell about two-thirds of our business is direct and one-thirds is through partners. And for those partners we very much encourage them not to hold inventory. We think it's a wonderful thing about our model and we deliver product to them very quickly of course. When we had a fire that's a problem. But they're really we actually have found that the rest of the automation universe that we're selling into has much longer lead times than we do right? So PLCs as you're probably aware a lot of them are on 6-month lead times and other automation equipment. So we supply quickly around products and there's very little kind of a dampening in our channel around that. There are just very few examples certainly much less than 10% of people who sell Cognex carry any significant inventory at all.

Okay. Got it. And just switching gears for a second. On the consumer electronics side not looking for a 2023 view here but just trying to get a sense of you've got data points showing that people are buying through smartphones and PCs and whatnot after the last couple of years, but it seems like the capital spending side maybe is holding in better. So just curious what your -- are your customers investing ahead of new product launches or new types of technology within that? I'm just trying to get a sense of the difference between maybe the production rates versus the capital spending side?

Yes. I think Jake there are a few things going on there. One is we kind of asked this question around this time every year. And our answers will have really a good picture of the electronics business next year come April. That's when things sort of really kind of locked in for the year. It's been a good year for us relative to the rest of our business in electronics. And I think may be a phenomenon again where we're really connected to the technology leaders in the industry that's, sort of, more high end and more advanced consumers of manufacturing technology. So they've been investing and that's very promising. So what kind of drives that kind of up or down year generally kind of new technologies coming into the market whether it's in smartphones itself or in other similar type technologies or consumer electronics technologies. And there's always a lot of exciting stuff going on in that industry. It's more a matter of when is it coming to market. And how much the timing plays out next year versus in future years. So that's what we know in April. But there's another phenomenon going on which is of interest here is I think many of the -- the players in electronics are looking to diversify their supply chains. And so, we're seeing investments and incremental investments outside of China, which is a positive thing for Cognex and I would expect that to keep playing out over the coming years. I think, we're well positioned and we've seen this trend coming and we're supporting strongly and being asked to the big players in that space, moving to multiple different markets where we have strong presence and are investing. So I do think that's a net gainer for us. And, obviously, particularly, recently, as we've seen with COVID lockdowns and some challenges going on. I only think the kind of impetus towards that is going to increase as we move through the next few years.

That’s great. Thank you. I’ll pass it on.

Thank you. The next question is coming from Jim Ricchiuti of Needham & Company. Please, go ahead.

Hi. Good afternoon. I'm wondering if you could talk a little bit more about that $20 million catch-up that you're anticipating in Q4. Can you give us a sense as to which markets that might be concentrated in?

Yes, Jim, hi, it's very broad-based. Certainly, automotive would be among it, but electronics and other markets too and we -- it's really a general catch up across our general product range, not specifically logistics, I would say, but more general factory automation.

And not necessarily have a larger project focus associated with it?

No.

Okay. Rob, at Analyst Day you guys talked about opportunities that you see in some of the underserved markets, at least, underserved for Cognex. And I'm wondering how you're going to be going about that in terms of redeploying existing sales resources, or do you anticipate having to step up hiring as you go after some of these other market peers that you talked about?

Yes, Jim, thanks for that question. So we're in the process of Cognex of bringing to market some really exciting technology called edge learning. And what that is, is it's very, very powerful deep learning vision that's kind of pre-trained and deployed to smart cameras or basic vision systems, but then easy to sell, right? And so, that's going to bring us to a lot of customers that we really couldn't serve before, right? Customers who aren't sophisticated aren't programmers of automation or machine vision technology. So as we roll that out, we're going to need more coverage, right? And the sophistication or the technical sophistication of the sales force we're going to need to do that is going to be less, right? So certainly we do expect to be recruiting and training and deploying over quite a long period, as that product range rolls out more sales noise, as we call them, to do that. And we'll expect to see that, I think, we'll be talking about that in quarters to come.

And, I think, Rob, it's fair to say outside of sales, we really are sort of as we are setting plans for next year and so on, we really are deploying -- redeploying existing resources and whether that's on the engineering team or G&A functions. It's really the sales phenomenon.

Yes. It is a sales phenomenon.

Got it. Thanks very much.

Thank you. The next question is coming from Jairam Nathan of Daiwa Capital Markets. Please go ahead.

Hi, thanks for taking my question. So I just wanted to concentrate a bit on the Asia ex China number. It was down about 20% excluding currency. And in the past it has been – I think you guys have talked about autos being strong. And I was just wondering what are some of the puts and takes there on fire impact a bigger, bigger impact in that region?

Yes. I'll come in and I'll invite Paul also to comment. I think sales activity in Asia outside of China, was pretty mixed in the bid. We did observe slowing activity and project delays in Japan and Korea. One phenomenon I would point to is well what customers continue to have aggressive plans for electric vehicle manufacturing. Some of the plans that we're seeing are moving and investment that we were seeing getting lined up for those markets in Asia excluding China. As a result of some of the government regulation that's been going on are now shifting geographies and investments we were expecting to see certainly in Korea and Japan and some other markets are now being deferred and being moved to Europe and America. So that's certainly a phenomenon. In semiconductor, continue to grow but growth rate was slowing. So I think it's a little bit of color. And then I think we continue to see good progress in logistics but we do have some larger e-commerce players in that market that we're speaking about who really also had a similar phenomenon to what we're talking about and one very large and successful player in that market really did slow down their spending very sharply post-pandemic.

Yes. And Jairam I just want to make sure there's no confusion over the data. China was roughly flat versus a year ago with about 5% growth in constant currency offset by 4% in currency. And really it was other Asia, which is Korea, India, ASEAN, Japan and so on that was down about 20% in constant currency for the factors Rob cited. So within China, we had strength in electronics and then we did see some fire impact certainly and other factors to sort of offset and then more broad-based bunches in other Asia as Rob described.

Okay. No, thanks for the detailed answer. Just on logistics like you talked about expanding into beyond barcode reading and expanding into some of the parcel and post customers. So I'm just trying to understand like what kind of timing should we think about like where you are in the process? And when should we start seeing some wins – business wins there?

Well, I think the modular vision tunnel that we just about today is certainly a very strong first step into some of those markets. And we saw already in trials with a number of key companies in those markets. So that's – I think that's the first step and I think you're going to see a lot more technology from us coming that will make us very competitive in those markets over the next number of quarters. So I think it's the beginning and it's starting to feel much more tangible around Cognex.

Okay. And a final question if I may on seasonality in 2023. So should we – without the fire impact next year should we kind of go back to normal seasonality of 1Q being the weakest and improvements in 2Q and 3Q?

I think we've got this phenomenon Q1 of last year -- sorry this year was very strong because of logistics. In fact I think it might have been our strongest quarter and that's really not expected in Q1 of next year. I think if we strip that out, then we're dealing with some of the normal seasonality which Q1 tends to be lower quarter for factory automation. And I've seen no reason it wouldn't be again, given some of the dynamics we see in Europe and elsewhere. So I think we certainly have some of those factors playing. I did just want to go back to something you said earlier. So I made the point that we see growth outside of China for investments. So -- and the reason that may not be apparent when you look at the other Asia numbers and some of those purchases may be being made inside China right for contractors who may be then moving it outside of China or out through our European region, if that's confusing to anybody. I'm really speaking to underlying trends in geographical movement rather than where you may see the bookings, only side of the revenue.

Yeah. No. Understood. Thank you. Thank you for details.

Thank you. The next question is coming from Matt Summerville of D.A. Davidson. Please go ahead.

Hi. This is Will Jellison on for Matt Summerville today. Good evening.

Hi Will.

I wanted to start out by referencing something set at the very beginning of the call and that is with the business impact of the fire largely behind you at this point. Can you speak to any lessons or best practices you feel Cognex might have gained from the experience in terms of supply chain management or how to handle supply risk moving forward?

Yeah. We've done a lot of analysis and sole searching on that question Matt. And we're not quite done. We continue to work on it. One thing to point out is I think we had recognized this as a risk factor in our business for some time. And we're in the process of addressing it and the fire came, when we were not in the final quarter I would say but approaching it. And there's a sports metaphor they're not an annual calendar metaphor, anyway, but we've -- we're in the process of starting up a second contract manufacturer, a very substantial and accomplished business. And I think had we been there we would have been in a much stronger position. We've certainly looked a lot at where we hold our inventory and our strategic component inventory and having that in more diverse location is important. I think like a lot of companies we're thinking about kind of diversifying our regional presence where we source and manage products from. I think like a lot of companies through this kind of period we've been going through with supply chain, just making sure that we have very strong relationships with our component and technology suppliers is important. I think -- that's one where we've come out of this really well. I would say, I think one of the reasons we've outperformed what we had expected to do is, despite some very different component supply environment that we've been in the relationships we have with our component suppliers are very, very good and they came through for us. They moved us to the front of the line in some cases in many cases. Why? Because, we're very sophisticated users of their components processors, imagers they really like working with us and we have very collaborative relationships. But the other thing is, we pay on time. And we're very proud of Cognex of being a company that's good to its word, it treats us supply as well, and pays on time. And I think that came through for us in this relationship where the CEOs of some pretty major component suppliers came through to help us. I think if there's maybe another thing, we did coming out of this not maybe we absolutely did. We did a comprehensive assessment of our insurance programs. And I think we were pleased with how we were insured in many regards, but still are opportunities and tunes up that we've done as we've gone through this difficult lending experience. And then finally, as you would expect we've taken more protective measures around such things as fire protection, et cetera across the business in multiple locations globally. So it's been an important learning experience for us, which thalassemia team will continue to engage and we have a meeting next month where we will be doing a full debrief on that internally.

Understood. That's great. Thank you for that color, Paul. And my follow-up -- excuse me, Rob, thank you for that.

Okay.

I wanted to ask a follow-up about Edge Intelligence. And I'm thinking how interesting it is that it unlocks this opportunity for you to serve those markets that you haven't quite paid as much attention to in the past? What I want to better understand about Edge Intelligence is if there's any sort of IP protection or high degree of know-how that helps that software and your ability to create value with it not be imitated by somebody who might want to serve those same markets in the future?

Yes. Yes. Thank you. I just want to just a point of order which is we have these two terms going on at Cognex, which I know confuses everybody. We have edge learning and edge intelligence, right? And the comments I made previously were about learning, which is taking -- and I think that you're asking -- I think your question is really about that deep learning technology that we're applying to the edge, right? That's -- yes, yes good. So Edge learning yes, it's -- so we have some fabulous technologists at Cognex that have come to us largely through two acquisitions that we've made over the last six-or-so years and the acquisition of ViDi and Sualab. And these are foremost technologies in taking deep learning a technique where you create a very sophisticated model and show examples. It's example based training of what's good and what's bad. And we and then we can that this technique of edge learning takes that very sophisticated pre-trained model and deploys it into very simple hardware that then is easily programmed. And if you have a chance to see demos either with us here or on our website you can see that we can train these products and the Insight 2800 is perhaps the best example. If it's so far -- we're just a few examples of good and bad very simply programmed. So that's -- and this technology is the technology we've developed in-house. It's proprietary to Cognex. No one else has it in our market today. And our ability to apply that in a factory context rather than in a kind of lab or a consumer-type context is we believe very powerful and something we continue to develop and think we have a significant lead in.

Thank you, Rob.

Thank you. Our next question is coming from Damian Karas of UBS. Please go ahead.

Hi, good evening everyone.

Good evening.

Covered a lot of ground. Thanks for all the helpful details. And I'm sorry if I missed this but related to your commentary about working down some of the broker premium costs from inventory. I'm just curious what's the spread between the spot purchases today and those inventory levels just to kind of give us a sense for the level of the gross margin tailwind that you should have ahead?

Yes. Sure Damian. So, this is Paul. It was smaller this quarter but when it was at its worst which was really Q4 last year Q1, Q2 this year it was about a 400 basis point impact on our gross margin give or take 50 basis points or so. So very significant. And I do think as you're covering many companies you hear a lot of talk about freight and component cost inflation and some element of broker buys. My read from studying our peers is we're sort of unique in this being such a large phenomenon. And partly that's because we do airfreight already today. So we haven't been substituting ship for air like some peers or others in the automation industry have. And that we've been I think doing quite a good job of offset core component inflation with the pricing actions we took since implementing a pricing strategy sort of mid to around the summer of last year that we've been executing against. So, what it's been this quarter it was lower than that maybe call it half of that or so. And I do expect to see that winding down but we're going to be carrying some amount of that into the first half of next year.

Okay, great. And could you just remind us how much exposure you have in semis? And how should we think more broadly about the customer mix within consumer electronics?

Yes, broadly semiconductor is about 5% of Cognex's business. It's been performing very strongly over the last year. So it's probably a little north of that at -- yes at the moment like 7% or so. And yes it's -- my take on it is we've seen a lot of strong investment. We're going to kind of see that moderate for a while now. And then we're all reading about big investments that are going on in new regions. So, I expect that will start to come back later but I'm not expecting that to be a factor next year for us. It will probably be in further years out. That's my take on it at the moment.

Damian do you have any additional questions? We'll move on. The next question is coming from Rob Mason of Baird. Please go ahead.

Yes. Good evening. Thanks for taking the questions. Rob I wanted to see just real quickly if you could maybe wrap up your geographic deep dive. When you mentioned the geographies in your prepared remarks you called out some of the swing factors logistics being one obvious. But when you spoke to Europe you talked about a lower confidence level there but you did not make a similar comment about Americas and I'm just trying to understand if there's a distinction to be made there and if there's lower confidence in Europe how it's manifesting itself right now?

Rob, I think that's a good question. And I think there is a difference. When you look at our Americas numbers they look bad because of logistics, right? But if we peel that away, I mean outside a few large logistics customers, we actually saw emerging strength in our Americas broader market. We actually saw the quarter business activity tracking ahead of our own forecasts. We saw larger products – projects, moving forward at a better rate than earlier in the year. We observed investments, I would say, more around kind of reshoring relocating back to the Americas in places particularly such as Mexico. So we're a pretty strong player in the Americas market. And we were pretty pleased to see that, and it was perhaps stronger than we expected. And kind of in contrast to what some of the understandable challenges that they're seeing in Europe, with their energy crisis and they're heavy reliance, I think on internal combustion engine automotive, which is still something that I think is a drag in our markets there. It will turn around as EV investment starts to come in, but they're not there yet, nor are we there yet in America.

That's helpful. And within the Americas, you would just put that activity that stronger activity under the umbrella, of broader automation you wouldn't necessarily call out any particular verticals.

No. I mean, automotive is a very important vertical for us in the US. So obviously, that's a part of it. But no we saw general strength, Yes. Yes. We saw – yes, yes, definitely.

Okay. Very good. And just last question. The currency headwind that you noted for the fourth quarter, I'm not sure I would have modeled, that high on my own and it's a big step-up sequentially. Is that, if we run that out run currency -- current spot rates forward would that be the type of currency headwind, you would take into the first half, or is there something unusual about the fourth quarter in your geographic mix?

I don't know, I haven't necessarily looked at the first half, yet Rob. But obviously, we'll be -- if I think about next year, we didn't have major currency impact in Q1 and Q2 we had a little bit. So I think it will be moderated a bit by -- we did -- year-to-date we've had about five -- four points of currency year-to-date four points in Q3. So you can kind of back into Q1 and Q2 from that. So I would say, that's a compare that we're not up against Q4 to Q4. So it will moderate a little bit just based on that, I would say Rob.

Okay. Thank you.

Thank you. The next question is a follow-up coming from Joe Giordano of Cowen. Please go ahead.

Hi, guys. Appreciate it. Let me take a quick follow-up here. Rob you mentioned logistics you think maybe the bigger opportunity for you is in Europe and Asia. Is that any meaningful percent of your logistics business at this time? And what's like a realistic time frame, if it's not to when it could be?

Yes. I mean, we have a nice and growing businesses in logistics outside the Americas. I'm not sure I'm ready exactly the size for you at this point. But no, they're starting to be significant and where Asia definitely is large and getting large and as is Europe. So yes, that's -- and then we've had success with some large customers here in America, which has kind of skewed our business here. But obviously, we're an American company and we have great resources, we can deploy quickly here. So it's not unusual to see growth start first here and go elsewhere. But now, we're building off a nice base of business in both those markets and we're starting to see sophistication around e-commerce fulfillment and other logistics markets there. So, we're feeling positive about those.

And Joe, the only thing I would add is, although most of our large customer business is concentrated in the Americas, it isn't exclusive of the Americas. So there may be a little bit of noise in the numbers, for instance in Q3, logistics was a contributor the biggest contributor to our revenue decline in Europe, and that was more large customer activity than the broader base of business that we've been growing and continue to grow.

Thanks, guys.

Thank you. This brings us to the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Willett, for closing comments.

Well thank you for joining us tonight, and thanks for a very engaged discussion. We appreciate it and we look forward to speaking with you again, on next quarter's call. Good night.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time. I'll walk off the webcast and enjoy the rest of your evening.