Cognex Corporation (CGNX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome. Thanks so much for joining us. Many of you left the snow. So I appreciate you coming to sunnier pastures here. We're delighted to have Cognex here to present their story. This is a stock that's off to a really good start this year, very encouraging demand signals that they talked about on their last conference call and a guide that was really nicely in line or better than where we were looking for. Company's CEO, Matt Moschner, is here to take us through the story. Matt, I'm going to turn it over to you for a presentation, and then we'll certainly have a breakout afterwards. Matt? Thank you.

Great. Thanks, Brian. Welcome, everybody. It's my pleasure to present Cognex, the world leader in industrial machine vision. As mentioned, my name is Matt Moschner. I'm our CEO, and I'm based in our Boston headquarters. We'll get through the legalese. But what I thought I would do is just start with what is industrial machine vision. And I have one of our flagship devices here. It's our In-Sight 3800. And you can think of machine vision as really the technology that allows machinery and robotics to perceive the world around them and make decisions based on that perception. Cognex, the brand, is based on cognition and us being the cognition experts. And what is cognition. Cognition is the gathering of visual of data, in this case, image data. the storage, the processing and driving insights from those data. And we do that better than anyone else in the world, and we do it in some of the harshest industrial environments that exist. Why invest in Cognex? Well, we think there's at least 7 reasons. For one, we're the technology leader in our industry, and we invest against that promise. Historically, as much as 14% or 15% of revenue. And we invest in world-leading visual analysis software in the ability to host it on market-leading industrial hardware. And that has allowed us to build a brand synonymous with driving forward performance in our industry, but also more recently, being a leader in the application of advanced AI to our market. The next is we operate in a large growing market. By our estimates, we're a $1 billion company in a $7 billion served market. That's really -- if you were to sum up all of the applications and the business value of those applications for the areas our products can solve, we think that is $7 billion. And we think that market is growing at 10% to 11%. It's a very attractive market, but plenty of room for us to grow within it. A key differentiator for us in an area as a company we've invested the last several years is having a direct sales relationship with our customers. Most of our customers don't wake up in the morning, expecting to buy a machine vision system. Often, they have a problem. And that problem is rooted in quality issues, in wanting to increase the throughput of their manufacturing or distribution operation or to somehow drive a higher level of efficiency through automation. And our sales force, we call them salesnoids, our consultants, our consultants on how to apply machine vision to solve those problems. And having that direct relationship with our end users and our systems integrators and OEM partners is key to how we go to market and how we prove and demonstrate the value of our technology. We also, over our 45-year history, have built relationships with the leading manufacturers and brand owners, if you will, of the world. These are firms that create some of the most sophisticated automobiles, consumer electronics that make some of the most sophisticated machinery that goes into advanced semi fabs. And our brand as the technology leader, but also as the technology consultant in machine vision has allowed us to build strong relationships with those leading manufacturers. But at the same time, as we've expanded our channel in recent years, we've seen a great opportunity to expand the number of customers that we serve. And I'll share in a bit our goal of doubling the number of customers that we serve over the next 5 years. We're a high-margin business, and particularly a high gross margin business. And a lot of that has to do with how we pair market-leading visual analysis software with industrial embedded systems. And that, coupled with an inherently capital-light business model allows us to generate profits, but also convert those profits into consistent and healthy cash flows while at the same time, maintaining a very clean balance sheet. Now underpinning all of this, I mentioned we're a 45-year-old high-tech company. How do we -- that's pretty unusual in this day and age. And how do we do that? How do we continue to keep our business fresh and how do we continue to maintain our growth mindset? Well, it's really through a very unique culture that we've fostered over the year. And it's a culture that emphasizes excellence, of course, innovation. We have a motto that we like to move fast and move fast is really maintaining an organization that is lean, has few layers and empowers our employees to do what's right and do what's right for the customer. So I mentioned, I stepped into the role of CEO over the summer in early July of last year. One of the first things I did was assemble a leadership team, largely staffed from our deep bench of internal talent. And really, I'd say, look at this leadership team in a few ways. One, really streamlining each of the key segments of our business so that we could really think about how can we be efficient and effective in the work that each of these areas does. I've elevated engineering. My background is in product development, and I'm an engineer, and I've led engineering at Cognex for many years and keeping engineering close to the office of the CEO to make sure that we're driving our technology agenda forward aggressively, and I have a great leadership team of software, hardware and AI vision engineers. And then elevating the role of customer success, right? So the way I'd encourage you to think about Cognex is really the technology leader but probably one of the strongest channels of automation in the industry. And channel, I mean not just a direct sales relationship I have, but also about 500 service and support personnel around the world. And that's applications engineers, project managers, solutions engineers and elevating the role of customer success is really to showcase the importance that, that pillar is for our future growth profile. So Cognex by the numbers. As Brian mentioned, we just announced our full year 2025 and Q4 results, which were very strong, both on the top and bottom line. So we ended the year just shy of $1 billion at $994 million. If you look over the last 10 years of our history, we've had an average adjusted EBITDA in the high 20s. Last year, we made good progress getting back to the low 20s, and we have a plan to continue to expand our adjusted EBITDA margins. I mentioned we're the technology leader, and we proved that through protecting our IP and maintain a very healthy portfolio of patents and other trade secrets. And having been in business, this is our 45th year, which we're very excited to celebrate. It's quite a diversified business in the end. This is a geographic distribution. You can see that we have a good balance across regions. And if you look at where we are as a company, roughly 1/3 of our Cognoids are in Asia, roughly 1/3 in Europe and roughly 1/3 in the U.S. And so we truly are a global automation player, and we go to where our customers need us to be across our 2,700 roughly staff, and I mentioned we're based in the -- in New England just outside of Boston. So let's talk a little bit about our market. We estimate our served market to be $7 billion, growing at 10% to 11%, and we have 5 primary verticals that we serve. Automotive, right? So you would find Cognex machine vision, both in the final assembly of today's automobiles, but also within the supply chain as those parts, subassemblies are delivered to the final assembly line, and we've been working with the world's leading auto OEMs across the world, in the U.S. and Europe, Japan, Korea, China and elsewhere. Logistics, our largest market vertical by revenue in 2025 is really how do we help drive efficiency in areas like e-commerce, in retail distribution as retail brands like Target, Walmart, Kohl's like to have a direct relationship with their customers and are building and maintaining their own network of distribution as well as Parcel and Postal. Electronics. So this is as the world's advanced AI and other technologies are brought into consumer devices, we help in the assembly of these devices, which are quite sophisticated in their behavior, how they're made and shipped in millions, tens of millions, if not hundreds of millions of quantities. And you'd find machine vision in the quality assurance in the robotic guidance and other aspects of traceability in electronics. Packaging. So packaging is really consumer products, right? So from shampoo bottles to razor blades to diapers to other food stuffs to healthcare, so medical devices, pharmaceutical production, other life sciences lab automation in our packaging market and has been a good grower for us in recent years and last year included. Semiconductor, of course, given the boom in AI and the demand that has driven for advanced chipsets and memory. I know it's top of mind for many folks in this conference. How do we enable the production of these advanced wafer types and other packaging of both the core processors as well as memory. You'd find Cognex machine vision both in the quality inspection and traceability. And we have a set of other markets like aerospace and defense, data centers and other areas that you'd find Cognex machine vision. So what are my strategic objectives for the business? And we shared these for some of you that might have joined in person or virtually our June Investor Day of last year. Well, first, if you think of what we do, it's really visual inspection. And so it's quite an existential imperative for us to make sure that we're investing to be the leader in AI technology for our market. And there's a number of different ways that we measure this. The best way is the quality of the products that we infuse AI into. And I'm happy to say, last year, we had a number of new product launches that are very AI first in their behavior that have been quite successful. We've made acquisitions in this area, and we continue to invest in people and tools to be the leader in AI for industrial machine vision inspections. The second is it's not good enough to be the technology leader, right? We also have to be the easiest and best company to do business with. And we're calling that our customer experience from the second that a customer has a project or an application to learn about machine vision, whether that's our website or whether that's through an initial consult with one of our sales engineers all the way through the purchasing, deployment and maintenance phase of our systems, we're really taking a holistic view of that end-to-end customer journey and we're investing not just to be the technology leader, but also the leader in how customers -- to be a leader in the customer experience that we deliver in each of our verticals. And as I mentioned, as we've scaled our go-to-market channel, we're also looking to diversify and grow our customer base from today, which is roughly 30,000 to 40,000 customers to 2x that number over the next 5 years. And if we do that, if we can continue to be the leader in AI, improve our end-to-end customer experience and invest to grow our customer base, our goal is really to be the #1 or #2 share leader in all of our major markets. This is a slide we shared for those that joined us for our year-end and Q4 earnings. We're really going to drive visibility and rigor and accountability into how we're tracking to each of these 3 strategic objectives. And I'm happy to say last year, we made very good progress against each of them. On the AI technology front, we launched 4 primary new products, the DataMan 290, bringing AI to our barcode reading and traceability portfolio, really focused on how do we make the easier even -- the easy even easier in deploying barcode reading at scale faster than ever before through AI setup, auto setup and advanced code filtering. The In-Sight 8900 which is our smallest form factor, really best suited for OEMs and allowing our OEM customers to access our latest generation of AI. OneVision, probably the biggest headliner for us last year, launching the first in the industry -- it's all right. I thought that was actually a real drill. A cloud training service for our most advanced AI models. We launched that in June to a limited set of customers, and we're excited to launch that to all of our customers this spring and the SLX, which is bringing AI vision tools to the logistics market. And I mentioned logistics is now our largest end market and has been for the last 2 years, our fastest growing. So bringing AI vision to that market is an exciting growth vector for us to continue that -- those trends. Number 1 in customer experience across our industry, I won't go through these bullets, but think of this as really how do we help our customers learn about machine vision in more of a self-service way. We launched a newly redesigned website in late January of this year with assistance to help specify but also find information. We're standardizing the look and feel of our products, and we're enhancing our 24/7 customer support. And then finally, doubling our customer base. We made a big step forward last year, adding 9,000 new customers. That's up from 3,000 in 2024. I think really a credit in a few areas. One, the investments we've made in our sales force. Obviously, the investments we've made in our products and making them easier to use and perform at higher levels, but also in marketing programs that allow us to reach more customers much more efficiently than before. We also -- when I started as CEO of Cognex in the summer of last year, initiated a comprehensive portfolio review as well as a review of our cost structure. That has culminated in really 2 things: one, an optimization of our portfolio, really looking at areas that are low growth, no growth or low margin and exiting a few of those, exiting or divesting and we are sizing that as roughly $22 million of revenue that we will either exit or divest in 2026, but also transforming the operating model and finding ways to be more efficient and effective in our work. And to that end, announcing a $35 million to $40 million annualized OpEx reduction by the end of this year. And really putting those things together, right, taking a holistic review of the business and really being deliberate about where we want to invest and where we want to participate, exiting those areas that are no longer attractive and then rightsizing the cost base of the business is really, really setting us up well for future growth, but also future profitable growth, I would say. And that's really ultimately our top priority as a management team. We also -- one of the other things we've really been working hard on the last 6 or 9 months has been transforming our go-to-market. And we've been at this for at least 5 years. For those that have followed the story in that time period, you would have seen the big investments we made in something we called our emerging customer initiative. And what was that? It was really a recognition that there are many, many more customers, as many as 3 to 5x more customers that we could serve and realizing that our technology and using and deploying machine vision was getting a lot simpler. And we use that as a rallying credit to make pretty significant investments in our sales organization. And we did that by creating a separate sales organization by focusing mostly on hiring programs and really arming that sales channel with some of our easiest-to-use products. And I would say, generally speaking, that thesis was the right thesis. But what I think we saw this year or last year was some of the inefficiencies that it was driving. And so we've really been focused on moving from emerging customer to our sales force transformation, and it's quite a dramatic transformation in that, moving from a separate organization to one global sales force, to focusing on hiring programs and capacity and headcount to productivity and using data to be more efficient in terms of how we sell, try Cognex Vision faster and more completely. And then recognizing that even though we have a very broad direct sales channel, recognizing the value that our partners bring. Our partners bring in terms of value-added engineering, systems integrators, OEMs and other distribution partners and thinking of those as one go-to-market versus separate pieces of our sales channel and really changing what our success criteria are. On one hand, emerging customers was really about acquiring new customers. I would say that's still a priority, but also thinking about how do we grow our customer base, both through new accounts but also retaining existing accounts. That's a big focus for us. And then optimizing our cost per dollar booked, right, really thinking about how can we be more productive and efficient sales organization versus just a broader one. This, I think, was put in place in the spring and over the summer, I think a lot of what we've seen in terms of the acceleration of growth particularly in Q3 and Q4 of last year, I would attribute to this, and we're seeing nice momentum build in how our sales force transformation is making us more efficient, but also drive top line growth as well. At the same time, right, if you think about those 2 things together, we completed our portfolio review and announced the divestiture of exiting of a certain portion of revenue our $35 million to $40 million annualized 2026 OpEx reduction. And our sales force transformation really gave us the confidence to take the financial framework that we announced in June of last year during our Investor Day and upgrade our profitability targets from 20% to 30% adjusted EBITDA to 25% to 31% adjusted EBITDA while keeping our revenue growth as well as our free cash flow conversion the same. And so very excited about that upgrade. I think that's really a reflection in the confidence we have in our business. and the confidence we have in our leadership team to drive not just growth but profitable growth and very confident that we can use that in the next leg of our long-term value creation story. My last slide, and then it looks like we might have a little time for questions is really the outlook for growth this year. And this is a relatively new piece of information that we've shared publicly, which is really our initial view on the next year's growth, in this case, 2026. And I would really caveat this to say, we're a short-cycle business. If you look at our backlog, it really doesn't extend much past 90 days. And so I wouldn't take this as full year revenue guidance for Cognex, but I would take it as an indication of our sentiment for how our end markets could grow this year. It's built on a variety of data. It's built obviously on a number of conversations we have with customers and their growth plans. It's based on macroeconomic factors like the purchasing managers index and other manufacturing activity indices. And it's based on the momentum we see in each of these areas in our business today. And so what is that initial view? You can see our 5 verticals ranked by their relative revenue split based on 2025. And what we've done here is really juxtapose our 2025 full year revenue growth with our 2026 initial view. And what I'm excited about is we're seeing, for the first time in many years, each of our end markets return to growth, albeit at different levels. And you're seeing that if you were to take the approximate midpoint of each of these things, a mid-single to high-single-digit growth rate, which that, coupled with a lot of the efficiency measures and cost reduction work we've done, I think, sets us really well for the future of the company, and it gives us a lot of flexibility in terms of how we think about investing, how we think about expanding our margin profile over the next year to several years. So happy to engage as we've already engaged this morning on our growth outlook by each of these market verticals. And with that, maybe Brian, we'll open it up to a few questions. Thanks very much.

You have one in the back? Yes.

So as we think about the medium term, not this year, in the next couple of years, how do we think about the competitive intensity and the entrance of new competitors coming into the market. We know that Hyundai ordered 30,000 of their humanoid robots. And that's -- they signaled it will grow beyond that. As the market leader today, how do we think about your competitive advantage or moat as these new entrants come in? And how are you going to deal with that competition?

Yes. Great question. So the question was really the competitive dynamic? Have we seen any meaningful shifts recently? Or how do I expect that to play out in the future. So I would say the -- I would characterize the competitive dynamic today as stable, right? If I think about the competitive set or the leading competitors we had 10 years ago when I joined Cognex and the leading competitors today, that group is very, very similar. There's really 1 competitor we have out of Japan that has been really the mainstay across that time period. We've seen domestic competitors coming out of China, in particular, that have improved in their technology over the last several years. And then we've seen some new entrants coming with the advent of AI. And really, that was in the late teens that we're using really 2 things. some of the maturation in AI tools for visual analysis but also cloud infrastructure really coming to its own. That has not really materialized in the ways that I think some thought it might. And so our competitive set, again, I would say, is relatively stable between 1 large competitor in Japan, 1 or 2 large competitors in China. And so how do we compete? Well, we compete by investing in our own technology base and capabilities. We compete by investing in our sales channels and making sure that we have excellent direct relationships with our customers and understand their needs extremely well. And I think we compete increasingly what are we hearing from customers through our global services and support network. What does that mean? The world of manufacturing and distribution is going through tremendous change right now, change not only in terms of the technologies being used to produce, but the geographies in which they're being produced. And so as companies are looking for alternate locations to manufacture or distribute, they're looking for a vendor like Cognex of automation, to also have that global presence. And so I'd say that's an area that we're seeing really emerge for our customers is why do they choose Cognex. They choose Cognex because we can -- we are where they want to be, whether that is an Asian manufacturer wanting to move to South America, a U.S. producer wanting to move to Europe or vice versa. We're a partner that's truly global that can facilitate some of those supply chain shifts that they see as necessary for their future. And so you really put those things together, technology leadership, sales channel and global presence on service and support. Thanks for the question.

Yes. Think of the timing for the EBITDA margin goal and [indiscernible] pricing power.

Yes, yes and yes. So think of these as -- what we say, 5-year through-cycle targets. What does that mean? So we are a cyclical business in the sense that we've historically sold into large CapEx projects. And so as those investment cycles happen, so too, our business does. We look at that as typically a 5-year period through cycle. And so a lot of these financial measures are in that period through cycle. Now what is driving the 25% to 31%. Majority of that is leverage on OpEx. So OpEx efficiency is what we would call it. So controlling -- reducing costs, controlling costs as we return to growth. There is a bit of mix in there. Again, as we optimize our portfolio, as we shed low growth, low-margin portions of the business and double down to higher, more attractive pieces of our business. And then I think you mentioned a really important piece, which is pricing. I think that's a big focus for us. as of last year and into this year. And so I think pricing as well as COGS productivity, we size at about 200 to 300 basis points as well. So I would say all of the above. But yes, cost actions, cost efficiency and leverage on growth primarily.

Great, Matt. Thank you very much. We're going to bring it down for future questions in the breakout session downstairs. Thank you.

Thank you.