Cognex Corporation (CGNX) Earnings Call Transcript & Summary

All right. Good afternoon. Thank you for joining us for Cognex's presentation. I'm Quinn Fredrickson senior research analyst at Baird covering advanced industrial technology Cognex, as many of you are aware, is a leading provider of machine vision and barcode ID reading. And so with us today to discuss the company is Matt Moschner, the President and CEO. So Matt is going to open up with a few introductory remarks and some slides, and then we'll come back for Q&A.

Yes. Great. Thanks, Quinn. Hi, everybody. Thanks for your interest in Cognex. My name is Matt Moschner. CEO of Cognex actually Chicago native. So always nice to be back in town, or up just north in Lake Forest. But I thought I'd start -- we can skip those. At a very high level, who is Cognex. We are the world leader in industrial machine vision -- we make these embedded smart vision systems. And machine vision, maybe not a technology area that everyone knows about. The easiest way to think about it is we give machines, the machines that make the products we all use and consume every day. We give those machines the ability to see and see what they're doing at line speed in tens of thousands of manufacturing facilities around the world with billions of inspections per day. The way to think about this is very much like your human eye sight, right? We have a set of image capturing technologies, lights, lenses, sensors. We then have embedded processors, and we have vision algorithms and software that dissect those images to make sense of them and drive insights from them. What does that look like practically, right? Here's a fun example, very relevant today with data centers in our electronics business, where as chips are being soldered to PCBA boards, a very common application would be before that soldering or even after that Saturn, how well was that done? Was it done correctly? Was it done to that inspection. And so Cognex would engage with a customer, in this case, Molex who was consulted with Cognex and what would we bring to the table? We would bring imaging, lighting lenses and sensors. We would bring an embedded in stem that comes preloaded with our market-leading vision inspection tools. And we bring everything else you would need to design and deploy that vision inspection at scale. And so what you can see here on the are really our vision algorithms and our software at work, where very detailed inspection of these soldering pads and pins in this case and doing things like checking the integrity, checking the surface area, checking the distance between them. And the way to think about this is doing this all on device in doing it very, very quickly, very, very accurately and repeatedly on in this case, many, many different stations, right? So just start to bring this to life. If you look at 2025, these are the numbers last year, $994 million this year, if you look at our midpoint of full year '26 revenue, $1.15 billion. So we're really facing a very good growth year in 10-year historical adjusted EBITDA of 28%. It's a very profitable business. This year, we're forecasting 31.5% adjusted EBITDA for the full year, so above our historical range. As a business, we view ourselves as the technology leader and a great proof point for that is how prolific we are in setting new standards and patenting those things. So a global patent portfolio that's peer leading. As a high-tech company, we're 45 years in business, which is quite a feed on to itself. And so over the years, we reinvented the company. We've reinvented the technology stack. We are leading in AI in its application -- and in many ways, drawing from the legacy of the company, but also viewing it very much as sort of day 1. And we are a team of 500 today, Cognoids that operate around the world. Our revenues and our employee base is roughly 1/3 in Asia, 1/3 in the Americas and 1/3 in Europe. And so a truly global diversified player in industrial machine vision. And what is our value proposition to investors and to many of you. Well, on 1 hand, it is that technology leadership, right? You don't get to the levels of profitability that we have if you don't deliver tremendous value and deliver it in a very differentiated durable way. And we invest quite a bit over $100 million in some years, sort of mid-teens percent of revenue in R&D to make sure that we maintain our technology leadership and hardware and software. We're in a large growing market, $7 billion estimated served market growing at 10% to 11% through the cycle. A key to our differentiation is going to market through a direct end user-oriented sales force. So roughly 1 in 4 Cognoids is a quota-carrying salesperson very important to drive -- to be a consultant, frankly, to our customers and drive differentiation in the market and growth. We work with all of the major manufacturers in the world. Many of the brands that you're aware of across automotive, semiconductor, packaging, logistics and semi. We're a high-margin business. A lot of that has to do with our differentiation in software, but frankly, the fact that we design our technologies as full stack, both imaging, embedded processing, software applications and software tools. And it's really that combination I would say that sets us apart. And then in general, highly cash generative. We're very capital light. We operate a fabless manufacturing where we have a network of CMs around the world that manufacture on our behalf. And so that keeps -- our CapEx extremely low on our cash generation, very strong. And then generally spoken, for those that know, Cognex really have come to appreciate what is a very unique corporate culture, one that favors entrepreneurship, taking risk, moving fast, -- and that, frankly, is very, very focused on growth, as you would find at any early-stage start-up but within the 4 walls of a 45-year-old well-established company. So hopefully, that's a helpful overview. Quinn, take me where you want to go.

Yes, absolutely. And just for the audience, the Session 4 is where you can send any questions. But just to start us off, Matt, I think it'd be helpful to kind of set the stage on what you're seeing this year. We can dive into some of the specific verticals later. But first, just at an overall level, mid-teens kind of organic growth this year, maybe even a little bit better than that. What are you seeing customers do with their purchasing budgets, what value are they looking to drive and problems they're keen to solve? And why are they turning to Cognex and not someone else?

Yes. No, great question. Yes. So by the numbers, I think, sort of high teens potentially, growth for the full year based on where we guided Q4, well above our through-cycle range of 10% to 11%. And I would say, most importantly, we're seeing growth very broad-based -- what does that mean really across geographies, across customer segments, across end markets, which, in a way, we frankly haven't seen since I've been with Cognex, which is roughly 10 years. I'd say there's a few kind of secular demand drivers that are worth noting. One, why do our customers adopt machine vision? Why do they invest in automation? Well, in many cases, it's rising labor costs, rising input costs, both of which I think we're seeing quite clearly scarcity of labor. For sure, we're seeing that. We're you're replacing human eyes with machine vision inspection. I think we're also seeing kind of a diversification of our customer supply chains. From what historically has been very concentrated in Asia and specifically China to other parts of the world, producing within the geographies that you're selling more and more. And so we're benefiting from that because as you suspect, as our customers are diversifying their supply chains and setting up new plants, they're doing it with an eye towards automation and vision inspection. Yes. And then we've done a lot of work internally to the business to improve the growth engine. Obviously, as a technology-driven organization -- our product innovation is very important. I think we're very much on the front foot in terms of how we're launching market-leading products, increasingly adopting AI in the product. We've put a lot of work into our commercial organization where we are, I would say, our sales motion is very effective in how we target the right customers, target the right opportunities and kind of flow that through to growth. And so I'd say it's really a mixture of things. I think broadly speaking, a very strong demand environment, while at the same time, executing quite well as a business.

Touching on some of your verticals. Maybe we can start in logistics since that is your largest vertical, -- you've added 11 consecutive quarters now of double-digit growth there. Could you frame up where that growth is coming from, whether it's mainly the larger customers or if you've seen any signs of broadening out.

Yes. So absolutely right, 11 quarters of double-digit growth in logistics. It's our largest end market and where we see just tremendous penetration, right? So penetration potential provision. So we work with 1 large customer that you all know. I won't name them, but for sure, the growth is more broadly based than that. So today, what we mostly sell into the logistics warehouse automation market is barcode reading -- we are the leader in high-speed, high-accuracy industrial barcode reading using machine vision technology, and we see good growth activity there. But increasingly, we're seeing our customers and logistics adopt vision, vision it for defect inspection, damage, hazardous labels, other intelligence on their process. And really, a lot of these things weren't possible before AI, right? If you think of a logistics warehouse, just a lot of complexity, right? One of several millions of SKUs that could be passing underneath across the conveyor underneath our camera and the ability to tolerate that level of variation in our detection algorithms, very challenging using traditional tools with the advent of AI that's let us kind of bring vision to this market. And so we're seeing growth, I would say, more broadly based, certainly with our 1 large customer, but other customers, good growth in sort of traditional applications of vision to sparked rating, but increasingly driving vision penetration as well.

And you discussed the potential for growth to moderate given those 11 consecutive quarters of double-digit growth. What informs that view? And if upside materializes to that outlook, what do you think would have to drive that? .

Yes. I mean, so a year ago, we called potential moderation in logistics, and we were wrong. Hard to call. But yes, I mean, any time you're on a 3-year growth run, the comps start getting a little more challenging and our customers often digest a lot of the automation that we've delivered to them over the years. So that's really what's behind the comment, right, is potentially just kind of a digestion of what has been a very strong multiyear growth -- but there's reason for optimism, right? So a lot of what we're doing is process improvement within existing facilities, right? So so much of our growth next year is not necessarily based on new CapEx and new greenfield build-outs. A lot of the work we're doing is within existing facilities and driving process improvement increasingly with vision. So I think of all of our end markets, logistics is probably the 1 as we look to next year that has the highest potential variability and where we have the most uncertainity.

Where does that mix of barcode scanning versus machine vision stand today? And any thoughts on where that could migrate overtime?

Yes. I would say the vast majority, let's say, greater than 80% of our business in logistics would be marked reading 20% or less would be vision. Where could that grow? I think our vision business is growing 50% plus, right? And so a lot of it is technology driven, right? As we invent new detection algorithms as we release more powerful systems to run them on, we're unlocking novel applications. And I expect that continue for many, many years.

Moving to consumer electronics. There seems to be a number of growth drivers in the market this year, including new form factors, supply chain relocation and more normalized smartphone refresh cycle? As we look forward, do you see any of those factors starting to moderate? Or is there a good remaining growth runway across?

I think there's good remaining growth. Yes, we're quite optimistic about our electronics business. And we say electronics, consumer electronics, frankly, because it's broadening. So for sure, underneath our electronics umbrella is one large customer in consumer electronics has been a good account for us, and we expect that to continue to be strong. We're broadening our customer base into other maybe even new entrants to the consumer electronics world, but also underneath that end market umbrella is also work we're doing as part of the data center build-out, right? So today, a lot of that is visual inspection for the electronic and other mechanical components as they're manufactured, but also the box films that are happening at the EMS providers, that has been a good source of growth for us. So as I think about electronics for next year, obviously, you got to think about that one account. I think we're relatively optimistic in terms of what that could look like, but then also we're making good progress to broaden that customer base, and we're seeing great activity there along with data centers.

And are there steps that you can take or are taking to scale that application more rapidly beyond just the smartphone area?

Yes, absolutely. So a lot of it has to do again with technology. So the holy grail of vision problems to solve in consumer electronics is a cosmetic defect inspection. It's really kind of surface defects where you see a lot of people looking with eyes to detect those things. Very, very difficult. But with some of the advances in AI tools, we're having good success. And so I think, again, it's another example of how technology innovation is driving penetration and growth for Cognex. And I would expect that, particularly in consumer electronics.

Yes. In packaging, I don't typically tend to think of this as 1 of your fastest-growing end markets, but it is seeing really nice growth this year. Could you just help unpack a little bit what's driving the success there, whether it's a result of some of the new AI-infused products or working closer with machine builders. Just any color there?

Yes, absolutely. I think it's both technology and sales force transformation, I would say. So for those that don't know packaging, it includes consumer products, fast-moving consumer goods as well as health care med devices, lab automation, pharmaceutical production. These tend to be smaller, more regional producers. So on one hand, our penetration of that market was relatively low several years ago. And so we placed a really big emphasis on finding and winning new accounts in packaging, and that's been a good source of growth. If you look at our new customer adds that disproportionately in the packaging market, -- and then equally with technology. So a lot of the problems we solve in the packaging market, these are very high-speed lines, right? The best example is diaper production. I don't know if anyone's seen the diaper production line. It's incredible, piece of science, but very, very fast. And what we are typically doing is inspecting the labeling and the assembly. And you have to do that very accurately and very, very quickly. And so with the advent of more powerful embedded systems and more powerful AI tools, that's really been an unlock for us to penetrate packaging with vision. And so those 2 things put together a focus on on our end to acquire new customers in that area with improved technology is really -- you're absolutely right, lead package could be 1 of our strongest growers.

In the semiconductor market to HBM advanced nodes, increasing semiconductor complexity, -- did those translate into increased machine vision content?

Yes. all the above? Yes. So semiconductor is actually Harkins to the early days of Cognex, right? It was really where we had our first big wins in Japan semi in the 80s -- and so it's a market that we've always had a strong position in. Over time, it has become a smaller and smaller share of the business. So last year, semiconductor was about 10% of revenue on a 2025 basis, but for sure, our strongest grow on a percentage basis this year. This year, I would kind of place it more mid-teens as a percent of revenue. So still relatively small, but a good grower. But if you think about the underpinnings of that market, extremely high cost of poor quality, very difficult things to see with the human eyes -- and a very demanding kind of automation spec more generally. That plays very much to our advantages. And so yes, we've been working on strengthening our position in the semi market. We acquired a business -- 2 years ago, a Japan optics and lighting company called MoReTec gave us a great position with leading Japanese semi machine builders. We've had our own investments. We just launched a new product for this market. last week. And so yes, quite optimistic about the growth potential we have there heading into next year, albeit being our smallest end market today.

Great. And then last one, we haven't touched on is automotive. Just any commentary on what you're seeing in that vertical? It seems like North America and China has shown some recovery. But just yes, if you could frame up where we are in that market and as well as any of the longer-term secular drivers to be aware of there.