Cognex Corporation (CGNX) Earnings Call Transcript & Summary

Hi, everybody. Thanks for joining us. Just in case you're wondering if we're in the right room here. We're hosting a fireside chat with 1 of the largest players in machine vision and 1 of the earliest innovators in industrial AI, which of course, is Cognex -- joining us from the company is the company's Chief Financial Officer, Dennis Fehr. Dennis, thanks for being with us today.

Okay. And thanks for having me.

Yes, of course. So maybe just to start for anybody who might be a little unfamiliar with Cognex, could you just give us a real quick brief overview of what the company does, where it sits in the industrial supply chain and kind of what you're seeing in the market today?

Great. So maybe first, quick intro from myself, Dennis here, Chief Financial Officer about 2.5 years with the company. So Cognex, as already said, we're about 45 years into machine vision, probably the category creator. And we see ourselves as the tech leader, especially also leading with the latest AI machine vision tools. We use machine version in factories and in warehouses to inspect like think about like defect inspection. We do identification like Barcode reading and what we call optical character recognition. We do also robotic arm guidance and measurements. And we do that in about $7 billion market, which is growing about a 10% to 11% CAGR as somebody like Interact analysis would say, we are serving that market largely through a direct sales force, serving some of the most iconic names in manufacturing and in warehouse and logistics. But we have recently also started to revitalize our channel program to serve system integrators and machine builders better. And then we are a high-margin business. So our long-term average is about 28% adjusted EBITDA margin. And for this year, we are guiding to 29% to 31%. So we're also in a nice period of margin expansion.

Great. That's a really great intro and a great overview. Maybe just to start off on my end, you reported earnings last week. You put up a really strong beat and raise you introduced a new full year 2026 guide range. The stock did sell off on the day. And I think part of the comments I had gotten back was nominally, it does look like the fourth quarter guide implies or they implies the fourth quarter earnings kind of steps down from a 3Q level. So curious if you could just talk through that a little bit. What are the kind of puts and takes and how you think about the visibility into the end of the year relative to the strength that you've been seeing in the end markets?

Great. So maybe I'll start with a bit of a macro picture and then maybe go from there some of the quarterly sequential view there. So big picture macro, right? So we upgraded 4 of our 5 end market in terms of our growth outlook, and we see really a strong demand environment. If we look at PMIs, we're now about 6 months into PMI being in an expansion territory. And they are around 55. So that means like if you think 6 months just in -- if you look at past cycles, you would have seen PMIs peaking somewhere in the low 60s, maybe in the mid-60s. So in that regard, we feel like, in general, on the cycle, there are still quite some way to go, right? We still feel like we are in the early stages of the up cycles. And in general, we feel quite robust about the macro environment. And we think that we see some of that reflected in the numbers which we put out there. So we reported a second quarter with record quarterly revenues -- so for the first time in this $290 million range. And then we put out a third quarter guide with a midpoint of $310 million. That means another quarterly record if we make that number. So in that regard, we see 2 strong quarters. And these are 2 quarters. However, we need to point out our quarters, which are driven by electronics seasonality. So typically, Electronics is showing up with strong numbers in the second and the third quarter, and Electronics does not have a meaningful impact in Q1 and Q4. And electronics is the largest growing end market if we take absolute dollars. So in that regard, clearly, it's a growth driver in second and third quarter, but it's not reflective of driving growth in the fourth quarter just by seasonality -- so if you look at the fourth quarter, it is also a number we put out there, which was slightly ahead of consensus before we went into the earnings season. And certainly, now it doesn't have the electronics contribution from growth, but it's still a growing quarter. So in that regard, we would say like we wouldn't take this as an indication that the growth rate year-over-year and there is a sequential step down from Q3 into Q4 as any signs of a weaker demand environment. We think it's more a seasonality effect.

Understood. That's really helpful. Dennis, you and the CEO, Matt Moschner, I think, has made a really impressive impact on streamlining the cost structure over the last, call it, 2-plus years. First, you're expecting to realize about $35 million of cost saves annualized by the end of this year. You've also are exiting around $22 million of low growth, low margin business over the next year as well. You raised the long-term EBITDA margin target by about 300 basis points through the cycle. So obviously, there's still a lot of work to be done on what's been announced, but I'm curious -- how do you think about the further opportunities to optimize the cost structure from here as we execute against the current initiatives?

Yes. No. So first of all, very pleased about the results, right? So we -- if you look back, 2024 was a year where we just were in the high teens of adjusted EBITDA margin, 17% to be precise. And now in this year, we're guiding to the 29% to 31% for this year. So in that regard, over a comparatively short period of time, we achieved quite some margin expansion. And what were the ingredients for that, right? On the 1 side, very clearly returning back to the growth, the top line growth, right? So for this year or for the first half of the year, somewhere in the mid-teens of growth. And then at the same time, the ability to take out OpEx, right? As you mentioned, we have this $35 million OpEx reduction target. And we really see this that 2026 total absolute adjusted OpEx numbers will be below the 2025 absolute numbers. And that means we get very, very strong leverage right? In the second quarter, we had 100% flow-through from revenue to the bottom line. And for the full year, we said that probably in the high 80s, 87% probably flow through of revenue into the bottom line. And now as we start to look forward, right? So where would we go from here? So we mentioned that we're probably good with resetting the cost base. So we are not looking to take out further costs in '27. But at the same time, we also don't see the need that we need to add significantly more cost as the top line further growth. So in that regard, we can further drive automation initiatives. We can drive additional process improvement initiatives. And that basically sets us up that we could keep an OpEx growth somewhere at an inflationary level. And that would mean we would still see a strong margin top line flows through to the bottom line, probably not at an 87% basis. But you would think like in a long-term steady state, maybe 60%, and then 27% could be somewhere between the 60% and this 87%. So in that regard, still strong flow-through. And then certainly depends on what the top line will do in '27. It may be too early to talk about that yet. But in general, are we at the end of our margin expansion story? No, clearly, we are not. I think we clearly have that ambition to go further.

Right. I mean to that point, that long-term target, right, of what is it, I want to say, 25% to 31% you did 32% EBITDA margin this last quarter. the midpoint of the third quarter guide is 33%. So I guess is there where Denmark [indiscernible] margins can go in terms of through-cycle performance, right?

So Basically, when we think about a 25% to 31%, we think about this as an annual number, right? So certainly, quarters like the second and the third quarter where we have strong electronic seasonality, they may be outside of that range. But then for the full year, right, our guide of 29% to 31%, right, the midpoint would be 30%. That's still well within the range. And certainly, we will look then further, right? So in that regard, for us right now, the focus is about, let's achieve in the next 5 months, what we put out there. And then once we once we have the full year behind us, we will reevaluate and we'll basically come out whether we will change that range or not.

Understood. Maybe just switching over real quickly to the end markets. You talked a little bit about consumer electronics. It's about 20% of your total revenue. And despite, I think, historically, a decent amount of that exposure has been in China, but it feels like you've seen more upside from that sector as it's moved out of China and into broader Asia and even Europe on some of the supply chain moves. Even with all the moving pieces and the inflation -- what's been the biggest driver of growth in that vertical? And where do you think that could settle out through a cycle?

Yes. I see that the great thing of consumer electronics in this year is that it's a very broad-based growth, right? So that means -- if you look back at prior cycles that were typically very focused on certain things like a change of technology like display technology, if we go back to 2017, for example, but right now, we see it very broad based. So that means we have factors like reallocation of supply chains. That means things moving out of China. That was probably a bigger theme last year than it's this year, but it's still helping this year. We have new form factors. We have new devices overall, right? So that means you see different completely new form factors. It means like not a different phone form factor, but think about like glasses and other variables, which are in the making and part already launched. And then we see data centers swalbringing a complete new component into the what we so far called consumer electronics end market, right, which per se is not consumer electronics. It's really a complete new set of an end market to some extent, which we haven't served in the past. So in that regard, what we see, it's a very diversified growth. So in that regard, that keeps us actually very positive and very confident that this would not be like just a 1-year growth in consumer electronics or electronics broader and that we could see that extending for a bit longer period, yes. So in that regard, I would say we feel really more positive about this end market than probably we did in prior cycles.

Yes. I guess just to touch on the form factor change, right? You do have a large customer within that sector. There's been a lot more news about them potentially kind of introducing a foldable phone later this year. How do you think about the opportunity from that? Is -- I mean, you've already been -- you've got some experience through other suppliers or manufacturers unfoldable I just curious how you think about how big of a catalyst that could be.

I mean I would say at the moment, I would more point to back to the broad-based growth, right? So that means there are many different factors which drive growth. And form factors of phones may be 1 of them, but it's not -- we're not thinking about it like this is the 1 and the big thing which really drives, right? As mentioned before, we are thinking at the moment really about how strong the growth is from a broad-based perspective. And again, we see this actually quite positive.