Cognex Corporation Price & Performance (CGNX)

Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market close, and our annual report on Form 10 ks for 2024 was filed this morning. The press release, earnings presentation, and 10 ks are available on the Investor Relations section of our website. Our published materials and the call today will reference non GAAP measures, You can find a reconciliation of certain items from GAAP to non GAAP in our press release and earnings presentation. Any forward looking statements we made in the press release, the accompanying presentation posted [indiscernible] any that we may make during this call, are based upon information that we believe to be true as of today. Our actual results may differ from our projections due to the risks and uncertainties that are described our SEC filings, including our most recent Form 10 ks. On today's call, Rob Willett, Agnix's President and CEO discuss end market trends and provide an update on our strategic initiatives. Dennis Fair, Cognex's CFO discuss our financial results and we'll conclude with our outlook. With that, I'll turn the call over to Rob. Thanks, Nathan. Hello, everyone, and thank you for joining us.

We began 2024 with the strategic priorities of infusing AI into more of our products and tools. Transforming and expanding our sales force and integrating Moridex, our largest acquisition in company history.

I am pleased with the progress we made against these strategic priorities in 2024. We expanded our portfolio of machine vision products powered by world class AI. A couple of highlights include the industry's first AI enabled 3 d smart camera, the Insight L38, and the addition of the modular vision tunnel portfolio featuring the powerful Dataman three eighty barcode reader that uses improved decoding optimized for logistics applications to minimize footprint, maximize depth of field and read the smallest codes. We successfully executed our sales transformation deploying a new type of sales NOID to broaden our sales reach to customers we have not traditionally served. And we successfully integrated our largest ever acquisition, Maritex, which gives us a more complete machine vision solution and contributes positively to our bottom line. This transaction was accretive to adjusted EPS in 2024. Which led to a slight increase in adjusted EPS for the year. In an otherwise soft market. In 2024, our logistics and semiconductor businesses gained momentum. But conditions across our broader fact Most of these markets stabilized throughout the year. Despite a slight improvement in relevant macro leading indicators, such as PMI, we still characterize our core factory automation markets as soft but stable for an hour.

The exception continues to be automotive. Where we saw a pronounced step down in 2024. Coming into the year, we expected automotive to grow helped by significant EV battery spending. But this investment dropped off throughout the year leading automotive to be our weakest end market in 2024. We continue to see uncertainty in auto as we begin 2025. These mixed market dynamics led to overall revenue growth of 9%, or 1% excluding Moritex for the full year. Throughout 2024, while we continue to invest in long term growth initiatives, we stayed disciplined in our approach to discretionary spending and thoughtful about hiring. I now want to provide you with a more detailed update on our strategic initiatives. We are seeing rapid changes in technology with powerful chips accelerating AI innovation. For industrial machine vision, this means moving beyond the world of rules based algorithms towards a more sophisticated suite of powerful artificial intelligence tools. Transformer models are overtaking convolutional neural networks as the foundation of deep learning. As this shift accelerates, customers will need significantly less data to train and configure our products and we'll be able to ramp up and scale production faster. This will allow Machine Vision to address more applications and reach more customers.

Codnex is defining the leading edge of this shift in industrial machine vision technology by launching industry leading products that leverage AI to solve customers' problems. Our new products address the full spectrum of machine vision applications. At 1 end of the spectrum, new AI allows us to excel at the most complex and difficult inspection tasks while at the other, it allows us to develop products that are easy to deploy and easy to use. In Dec. 0, we launched 4, illustrated on Page 4 of our presentation.

This powerful software designed to tackle the most difficult problems in machine vision is Cognex's first ever product to utilize transformer models. Transformer technology, which forms the core of sophisticated large language models such as CHAC GPT can help to vastly reduce the number of images required to train and implement a machine vision model 4 Signature [indiscernible] few sample mode achieves high levels of accuracy on some of the most sophisticated inspections after training on as few as 10 images. Previous versions would have required hundreds of images to train a vision model with such capability. [indiscernible] [indiscernible] is very valuable for customers who require high accuracy but do not have large training datasets. Which is often the case as they scale up their production. It is also important for customers whose production cycle It is also important for customers whose production cycles are only a few months long and therefore require effective models to be ready in weeks. Few sample mode saves customers time collecting, labeling and managing image data, which has historically been a cost process. We have also expanded our Dataman series to address more applications for customers looking for easy to use products. As illustrated on Page 5, our new Dataman series makes identifying and tracking parts and packages across a facility easier than ever.

Regardless of industry, code quality, or application complexity, embedded AI in these next generation readers helps deliver exceptional read rates for reliable performance at every stage of production. Our latest data man product are examples of the products that allow us to get a highly advanced powerful technology into the hands of customers with less machine vision experience. We continue to tap into this broader customer base by investing to transform and expand sales coverage, Moving to Page 6 of the earnings presentation, we are enthusiastic about the progress of our sales transformation in 2024. Our first class of new sales noides continued to ramp with representing their highest quarter of bookings to date. Leading to over 3000 new customers acquired by this group in 2024.

These entry level sales NOIIDS are also continuing to gain strong traction in referrals of more complex vision systems to our more technical and advanced sales noise. The second cohort of new sales noise entered the field recently and we expect this to further grow our customer base. In 2025. We remain confident in the long term We're excited to continue this strategy and introduce a new cohort of sales noise each year. As we plan for future years, we will be flexible about cohort sizes and be responsive to market conditions. Turning now to what we are seeing across our end markets, which you will find on Page 7 of the earnings presentation. I will discuss the end market results for the year excluding the contribution of Moritex. End markets have been mixed. As we have seen both continued softness as well as pockets of growth. Starting with logistics, revenue grew 20% in 2024. We continue to see broad momentum in logistics from global e commerce leaders as well as regional e commerce retail and parcel and post providers. Market growth has improved as large e commerce players return to capacity expansion and broader logistics remains an under penetrated market.

We believe we also gained share with recent product innovation including the success of the modular vision tunnel and Dataman three eighty launched last year. Moving on to automotive. Revenue in Automotive was down 14% year on year. We continue to see declines in EV battery investment and tentativeness in large capital projects across the broader automotive business. Coming into the year, we expect to strong growth in EV battery investment and for it to be 1 of our largest growth engines. But as the year progressed, we saw delays, reductions and cancellations of EV battery projects We still expect EV battery to be a long term growth driver but likely not in 2025. Consumer electronics revenue was down 5% year on year as smartphone design changes remained limited and we saw conservative CapEx spending across the market. Consumer electronics has positive long term trends Currently, our expectations for near term have a better line of sight to this by each year. So we will give you another update on our next earnings call. Lastly, semi is continuing to build. With significant year on year growth albeit off a low 2023 base. Growth is widespread across semi with investment increases from major machine builders, but we have seen strong demand driven by high bandwidth memory chip investments.

As we kick off 2025, we expect momentum to continue in logistics and semi. Automotive to remain weak, and other factory automation growth to be relatively in line with macro indicators such as PMI We continue to see disruptive trends playing out in our market to an increasing number of customers and applications. We lead the industry in making machine vision technology usable by industrial customers at scale. With this, can automate more inspection tasks and grow the machine vision mark both by solving more of our sophisticated customers' most challenging problems but also by making our powerful technology accessible for those less experienced in automation. Let me now hand it over to Dennis to walk you through the financial results and the outlook for the Thank you, Rob. Our quarterly financial highlights can be found on Page 8 of our earnings presentation post to our investor website yesterday. Revenue of $2.30,000,000 dollars finished at high end of our guidance range and increased 17% year on year. Excluding MoraTax, revenue grew by 12%. As we have now passed the one year anniversary of the close of our Moritex acquisition, I will note this will be the last quarter we speak to revenue trends excluding this part of our business.

From a geographic viewpoint, excluding MoraTax, year on year revenue grew double digits in both The Americas led by continued logistic strength and compounded by accelerated demand in the [indiscernible] and in other Asia. Led by semiconductor. Europe declined slightly due to weaker automotive spending. Year on year revenue growth in the quarter was strongest in greater driven by project timing in consumer electronics as well as an easy year ago comparison. While China revenue has grown year on year in the past two quarters, we remain cautious about the overall overall outlook for this market. Which continues to see both significant uncertainty and heightened competitive pressure. Turning to margin. Adjusted gross margin was 69.4% in down 130 basis points from 70 driven by Moritex negative mix from higher logistics revenue and to a lesser extent pricing headwinds. Most pronounced in China. Adjusted operating expense increased 3% year on year in the quarter. The increase was driven by more attacks, as well as investment in our sales force transformation and expansion. As a result of reallocation and adjustment to our employee base, incurred $3,000,000 of reorganization costs in the quarter that are excluded from our non GAAP metrics. Even with our investment in sales force expansion, ending headcount for this year was 3% below year ago levels and we continue to focus on tight cost management.

Adjusted EBITDA margin was 18.5% in above the high end of our guidance and up nearly 6 percentage points from 12.6% a year ago. Revenue growth and tight cost management drove high incremental EBITDA margin despite gross margin pressure. Diluted earnings per share on a GAAP basis was $0,.16 up from $0,.07 in Adjusted diluted EPS was $0.2 up from $0,.11 year on year. Both increases were due to higher revenue and higher margins. Driven by working capital optimization we delivered strong free cash flow for the in a row in totaling $49,000,000 compared to $7,000,000 in Cognex returned $57,000,000 to shareholders in the quarter. Dollars 43,000,000 of share repurchase was our highest quarterly total since and we intend to continue to be opportunistic with our stock buyback. I will also briefly cover our full year 2024 results which can be found on Page 9 of our presentation. 2024 revenue of $9.50 $15,000,000 grew 9% year on year or 1%, excluding MoraTax.

Geographically, for the full year excluding Moritex, Other Asia delivered the highest revenue growth due to semi. In addition, Americas grew moderately. Europe declined slightly and China declined more materially in the year. Adjusted gross margin was 69.3% in 2024, down 3.2 percentage points due to Moritex, unfavorable mix and to a lesser extent [indiscernible] For the full year, adjusted operating expense increased 6% driven primarily by MorayTx, as well as our sales force transformation efforts. Adjusted EBITDA margin declined 140 basis points 17.1%, primarily due to the impact of the COVID-nineteen pandemic. Adjusted EBITDA margin declined 140 basis points to 17.1% in 2024 due to lower gross margins and higher operating expense associated with our sales transformation. GAAP diluted earnings per share of $0,.62 declined 6% year on year partially due to a higher effective tax rate. Adjusted diluted EPS of $0,.74 was up from $0,.73 in 2023 as the accretion from was $134,000,000 representing 105% conversion of adjusted net income. We returned $119,000,000 to our shareholders in the year and ended the year with $5.87,000,000 dollars in cash and investments. And note that I will now turn to our outlook for the on Page 10 of our presentation.

In the we expect revenue between $202.20,000,000 dollars This range continues to be reflective of a mixed and volatile macro backdrop. At the midpoint, this represents revenue line versus reflecting our expectation of continued growth in logistics and semiconductor offset by weaker automotive and an approximately $5,000,000 FX headwind.

The expected sequential step down is driven by the acceleration in demand from customers in and an anticipated $4,000,000 FX headwind in the We also expect adjusted gross margin to remain in the high percent range. Sequentially, mix is expected to be a slight headwind. We expect adjusted EBITDA margin between The midpoint of this range represents 150 basis point increase year on year driven by operating leverage and operating expense discipline.

Lastly, we're excited to hold our Cognex Investor Day this year on June '9 and June '10 at our Boston area headquarters. And we hope to see you there. Now we will open the call for questions. Operator, please go ahead.

Thank you. The floor is now open for questions. Today's first question is coming from Damian Karas of UBS. Please go ahead.

Hey, good morning, everyone.

Good morning, Damian. Good morning.

Thanks for all the color around the end market. Rob, I wanted to ask you about autos. Know you've talked in the past about this being the worst market environment you've ever experienced in your career, I know you expect autos to also continue to be your weakest market this year. But what's your assessment on how much lower that customer spend could possibly go from here. I mean, the business segment was down 14% in 2024, are you kind of thinking like double digit declines again in 2025 or should we'd be thinking much more modest declines from here? What do you mean? I think you paint the picture well is that it was a very, very, very tough year last year for automotive and our business there in automotive. We entered the year very enthusiastic about what we saw going on in EV and EV battery. Manufacturing. And to give you a sense of the magnitude of that, I think coming in, we had we're aggressive at Cognex. We had stretch goals to really drive a lot of business into EV battery where we have just some great technology. And I think where we ended up relative to where we came on was on the order of $50,000,000 delta.

So that was kind of the most difficult thing that we encountered coming into the year. And obviously, that continued as the year went along. Now we think it's going to continue to be a bad year for automotive, but I don't think 1 on the order of decline that we saw in 2024. There is are some reasons to be optimistic about automotive, right? We do great things in automotive when EV battery comes back, when capacity is more utilized and investment returns and what we're able to do in that space is very good. And certainly, Cognex's technology in the area of sensors on the car, electronics, in the car and some of our new technology, what it can do an inspection in the cars. Are exciting growth areas for us. And we have a sense that investment might start to return to that market in 2026, which then might lead to sort of a pickup for business for us later in the year. But it's we don't give full year guidance not optimistic that we're going to see a good year, but I'm hoping that the time of serious decline for us in automotive is over. That's really helpful.

And then I wanted to ask you about consumer electronics, which was down for the second year in a row in 2024. And I know you said you'll have better insights when the earnings comes around. But I wanted to ask you, your slides you mentioned kind of limited change to form factors. What's your sense for that aspect this coming year. Do you think that there should be more consumer electronics product changes, this coming year compared to the past few years?

So consumer electronics revenue fell 5% for Cognex last year excluding Maritex. That said, it did grow in the back half. Right? So due to project timing and a some strength that we saw coming. It's really difficult and too early to call kind of Cognex's Cognex year in electronics and I will give you more color on that at our next earnings call. There were reasons that we feel confident that in the long run consumer electronics is that will be great growth market for us and will continue to be. The issue is always on when do these things occur. There are a lot of great new features planned, a lot of innovation coming, whether it's in smartphones or in wearable devices or in other LA type technology that I think many of our customers working hard to try to bring to market. And if and when those are successful and need to be manufactured, on a massive scale, I'm very confident that some of these will turn to Cognex to help them do that. There's also a lot of human inspection going on in huge amounts of human inspection going on in consumer electronics manufacturing. And if I refer you to some of the comments I made in my prepared remarks earlier, newer technology, particularly transformer technology allows us to meet the needs of some of those customers very well by allowing them to implement our [indiscernible] And to get great results, which makes payback much, much faster.

To give you a little context of that, if you think of electronics, off often it's a very, very rapid scaling up in a relatively short period of manufacturing at huge scale. So this technology in that market, I think, can be very, very valuable and I think is already being seen to be so by some of our customers in the space. So that's kind of the overview. But to give you a direct to Oncidium question, too soon to say, let's regroup here in about thirteen weeks. Understood. Really appreciate your thoughts. Best of luck out there.

Thank you.

Thank you. Ladies and gentlemen, due to next question is coming from Tommy Moll of Stephens. Please go ahead.

Good morning and thank you for taking my questions. Hey, Tommy. Hey, Tommy. Rob, I want to start on logistics and ask what insight you can provide there on the breadth of the strength, whether that's in terms of the geographies, the subverticals, I'm thinking e commerce versus parcel perhaps, and then the durability of this strength, I mean, there were multiple quarters there where I guess we were in an absorption phase for a lot of the capacity built out during the pandemic. Does it feel like we're solidly back into a a period where we need more capacity or how would you situate us? [indiscernible] think you're right in pointing out that we saw our logistics business peak in 2021 where there was huge, huge investment and then we've been through a period of absorbing that investment and then we're now back to a period of growth. Our logistics business grew 20% year on year last year with strength really across pretty much everywhere, right? U. S, Europe, other Asia. And then as we look in terms of customer tiers, I would say, we made good progress in base logistics, seeing some nice growth in that space. We've made great progress with very large e commerce players.

And then as you might expect, there's sort of a group more large customers some of whom didn't grow with us last year and others have [indiscernible] Specifically in The U. S, a couple of customers who who I think are struggling with their own retail supply chain and execution of various things. So so didn't put up growth. But that's those are really very few exceptions to what is a very broad and underlying return to growth. We're positive, very positive about our logistics business and what we're seeing happening. We do see more capacity being added. We do see a lot of technology being invested in this industry. [indiscernible] barcode reading, which is a very difficult thing. We do very well, but there's much, much more to be done and we're seeing more and more traction with that. New customer activity is is strong. We're bringing more data management with our Intelligence platform to this space. And then as you rightly note, the parcel and post sector is an area we see growth in. I did spend a lot of last week in Europe visiting a lot of Parcel and post businesses in that space. I would say they're not overly enthusiastic about the investment environment in Post, currently.

But I don't think that it's going to be a headwind to our opportunity to grow in that space. These are really newer customers for us, newer technology. So we're coming off a low base and we have a lot to offer. But it's worth keeping in mind some of those possible post companies have five year capital spending plans that we've been starting to muscle in on now for a number of years. And we'll play out, I think, over time. Another thing to point out, of course, is geographic expansion is exciting for us, the highest growth rates we see and would expect to see our markets outside The U. S. Where we have strong penetration it's really more in markets where they're really starting to really drive e commerce fulfillment and spend significantly on a consumer base that's becoming wealthier and spending more money online. And I'm thinking of markets like India and Indonesia where we're making some great progress.

Thank you, Rob. As a follow-up, and perhaps this is for Dennis, I wanted to ask about what you would highlight for us in terms of Cognex discipline, Dennis. So you've sketched the contours previously on the level of investment for the emerging customer initiatives. So I'm thinking elsewhere in the OpEx budget, what can you highlight us whether quantifying or just speaking qualitatively about a philosophy on cost management there. Thank you.

Yes, no, absolutely happy to do that. I think as we said in our prepared remarks, we're very focused on tight cost management and keep on looking for areas where we can drive efficiencies throughout the organization. And I think a positive thing I really would like to highlight is that that we invested successfully into our our emerging customer initiative into the sales transformation. Last year. But at the same time, our OpEx year over year for the full year grew by 6% and revenue grew 9%. So that means OpEx growth was below the the revenue growth in 2024. And maybe to help you think a bit about 2025, what we what we expect is that we will The OpEx growth also below the revenue growth in 2025.

Thank you, Dennis. I'll turn it back.

Thank you. The next question is coming from Andrew Pasquale of BNP Paribas. Please go ahead.

Hey, good morning guys. Good morning, Andrew. Good morning, Andrew.

I just want to get an update into year end on the emerging customer initiative. In terms of your expectations, it seems like it's going well.

And do you care to provide any context around incremental revenue from the strategy going forward? Maybe in '25? [indiscernible] yes, I think you characterized it well. This has been a major initiative for Cognex. We've onboarded and got to improve the productivity of a large first cohort of emerging customer salespeople. Their performance in I think, was in line or better than what we had done expected and communicated to you at the last call. They've completed over 80000 customer visits in 2024, adding over 3000 customers achieving bookings rate around $1,000,000 a week.

And then referring significant business to the rest of our sales team that's turning into larger and more sophisticated opportunities for customers. So we're really starting to see much better penetration of the market.

But this is just the beginning. Right? And we hired the second cohort as we went through last year and they're now entering the field They're going to really help us expand our sales coverage. So I think we can sort of be cut and pasting the numbers we saw with the first cohort, but hopefully doing better because we're getting better.

We're understanding how to do this more. And then I would say, and I as I communicated, we've adjusted how we're managing them and what we're doing based on what we've learned.

And so they're better integrated with our existing sales force now and so better able to [indiscernible] accounts, some larger accounts where we've been really under penetrated they're making more calls. So different customer profiles within those large accounts. And then, we're also giving them really great new technology. And I think the best example would be the Dataman two ninety and three ninety series that is now in their hands great by AI technology that's easy to sell and easier to use and the sales force was designed with technology like that in mind. So that's our our playbook that we will continue to iterate on with as we go through future cohorts. I think in terms of other things, the the business that we're winning is has over 75% gross margin.

So again, as we expected, in that regard. Then, yes, so you asked about 2025 and I think we're going to see that continue, our progress continue and we've got the metrics and the way to manage it. And we continue to be pleased.

And maybe just to add on that, your specific question on the incremental side, right? We have been talking in the last earnings call and Rob said also just before that we really integrated that that new sales noise, these entry level sales noise into the larger sales organization. And let them go to also to existing customers in that regard. We're not really able to give you like a number, here's what it's [indiscernible] Like Rob said, we're tracking their bookings metrics and other sales efficiency KPIs very closely. But just that 1 particular question, we just can't answer you in that way. So I hope that gives you a bit more color to that Okay.

And what are the you guided to gross margins in the high 60s. And what are the biggest levers there that could provide some tailwind to the margins going above 70% again? Is it really just volume coming back or can this emerging customer initiative have an impact in 2025 on gross margins already? I'll kick off at a high level, but then I'll throw it to Dennis to give you more details. So The wonder of Cognex is implementing great technology to factory automation and and logistics. We've got a lot of great technology coming and the DataMan two ninety is an example of that for sure.

And then all the sales force that we have now in the field making tens of thousands of sales calls to sell. It should be a tailwind for us As we move forward, And then there is certainly a volume story and where we've seen volumes not growing anywhere near our expectations over the last few years. We've built an infrastructure ready to supply a much larger business. And as that business comes, as markets recover, certainly the fall through on incremental revenue should be Hi.

Right. And might be guided for the to the high 60s so pretty much in line to what we have guided previously. Right? So in the near term, there's certainly some effects that we have strong growth in logistics, which typically is slightly dilutive to the gross margin. So there's a bit of a mix headwind on that side. So the growth in Logistics has a fantastic flow through to the bottom line, right? You have seen you look back at coming out at the high end of the revenue range, we had a nice earnings speed from that regard. On the bottom line, but certainly in the near, it's a slight headwind towards gross margin. But then as Rob said, the long term, the sales transformation, sales sales expansion of coverage is a nice measure to bring up gross margin with the incremental or the accretive gross margin we're getting from that initiative. We have strong leverage also in terms of using the infrastructure We have new NPIs, right, we talked in the prepared remarks about like the DM290, for example, that that product family. So there are really areas where we can drive gross margin increases and that's really what we'll what we'll be focused on in the mid and long term.

Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead.

Hi, good morning. I guess 2 questions. 1, Rob, just on the total market served, the $650,000,000,0.0 that you guys have put out there. Just wondering, understanding you probably still feel comfortable with that number, I'm just just wondering if perhaps as you're thinking going forward, do we pivot which end market we want to focus on, perhaps markets that are less cyclical like automotive or consumer electronics maybe focusing more on on medical or other markets so that I just get your sales over time can be less sickle coal versus some of the markets that you focus on. So wondering if there'll be a pivot there over time? And then I guess my second question, obviously, you're still sitting with a very strong balance sheet sitting in net cash. With more techs behind you. I'm just wondering what your appetite is or the environment is for acquisitions in 2025 relative to where we sat in 2024?

Yes. Thank you. Let me talk about our markets. And how we think about that and volatility and opportunity within them. First and then I'll ask Dennis to address the second part of your question about capital.

So we'll give you an update on our view of our served markets in June 0 at the Analyst Day. I think I look forward to sharing that with you and our view about how we expand them. Obviously, we did expand with the acquisition of Maritex. And adjacencies and other markets we're moving into that where we see opportunities to grow that serves market and we'll give you more color on on that. In terms of kind of where our interest lie and kind of where how to think about volatility within those markets, We see our logistics market is still our largest served market and the 1 we expect to grow faster. And that was true when we last gave you an update and it's still true today very much that those are exciting growth markets for us and will continue to be a great focus of innovation and investment. And so that's exciting. And witness the modular vision tunnel progress we're making with possible and post companies, our great success with the technology leaders in that space. And we think that has a long way to run. In terms of other markets, what I would say is, think we all understand that Cognex is highly indexed on the technology leaders and the big leaders in the the premier customers in our markets where it's automotive or consumer electronics, right?

And those tend to have more they have tend to put more volatility into our business overall. But our emerging customer base going from serving about 30000 going down more into more mid tier and more entry level customers and really broadening that. So we would expect that to take some volatility out of our business in the future. And with volatility, you can see that we can underperform in difficult periods and outperform, because I think we did in the as a result of some very strong relationships we have in some very good markets. But that's not ideal in terms of running a stable business. And I think the emerging customer program allows us to do that. Quite well. You asked about other markets. Medical, which in a big bad medical businesses, including pharmaceutical, life science, medical device, representing about 10% of our business overall.

Those markets haven't been good over the last few years since COVID. I'm confident I think everyone is that they will return to growth And that's the type of market again where we where we will be having much more sales activity as a result of our emerging customer sales force and much more appropriate products for the level of technical expertise that those industries have to adopt them.

So I would expect over time that we would see smaller markets packaging related medical, even ARRIS aerospace markets where we've been very underpenetrated, but we're seeing some nice progress in terms of activity. And as those markets recover, hopefully a broader base of customers with less volatility. Let me take it from here in regards to the M and A question. Maybe I'll start first.

With a quick summary of the overall capital strategy and then talk a bit more about M and A specifically. So on overall capital strategy, we've been always saying like our number 1 area is our organic investments, think about like the sales transformation and sales expansion, which we're investing into. And second comes M and A, third share buybacks and forced dividends. That's kind of your order of priority. It means M and A quite high in that stack. And we have been coming out of the Moritex acquisition, which think we feel extremely positive and successful about. We We talked about how it has helped to be accretive to adjusted EPS and saying actually it up by a penny They also in that regard I think we made very good success story on the Moritec side and that clearly means like we are looking for continued M and A, but it's also clear that we're looking for quality deals and that means we'll be thoughtful when we are making these decisions. And at the same time, I think there's probably a lot further to discuss where probably doesn't have the time right now, but I'm really looking forward to to continue a bit more in this conversation at our Investor Day we can talk to them a bit more about like, hey, what could be potential markets?

How do we think about like the balance sheet in that regard? So a lot of good topics to cover there and I think we'll address these at Investor Day.

Thank you. Very helpful.

Thank you. The next question is coming from Piyush Abasi of Citi. Please go ahead.

Hey, good morning guys. Thanks for taking my questions. So the current U. S. Administration appears to be more pro U. S. Manufacturing. Speaking with your customers across the auto or consumer electronics end markets, have you at least begun to see a step up in conversations with your customers are talking about reshaping their manufacturing footprint and maybe adopting more automation and machine vision? Thanks for the question.

I would say there's certainly an increase of discussion and interest around that topic. No question. And I think every manufacturer in America is thinking very much about the risks and upside associated with tariffs and other actions that are going on. Would put a little in the Cognex, though, that there's just a huge amount of uncertainty and confusion So I think it's not that sort of interest isn't really leading to I think action at the moment. It's leading to confusion and hopefully we'll see more clarity and then more actually action. But maybe to give you a little Cognex, if we think about our performance, and our guidance, I think there was a lot quite a lot of excitement and positivity that we saw in the back end of last year really post election in Nov. 0 and Dec. 0, which did account for some higher spending, 1 in prior years I might have called it budget flush type spending that went on in Nov. 0 and Dec. 0 in Americas really only. I'd say. And I'd I might, size that about $6,000,000 to $7,000,000 of business that I think we received in as a result of that enthusiasm that really came straight out So I think there's that we do have FX is think a worry in general for companies where the strength of the U. S. Dollar is a $5,000,000 or so headwind for us in as well.

So and then there are a lot of policy changes obviously. When we were talking a year ago, there was a lot of enthusiasm about the Isolation Reduction Act and other things. Clearly, a lot of there's a lot more confusion about that. So certainly that's all at play. I do think if we see major investment in manufacturing and major on shoring going on in The United States, Cognex should be a major beneficiary of that given our strength in this market.

Helpful. I was a bit late on the call, so maybe address this. But I think you highlighted pricing challenges in the quarter particularly competing in the China region.

Can you update us on on that? Like how would you characterize the pricing environment as it doesn't seem that the demand out has changed much? And are competitors in other regions being disciplined from a pricing standpoint? Or are you seeing more incidents of lowering prices to win contracts? I would say, we've been talking for a few quarters now about price the pricing dynamic in China. China certainly is an [indiscernible] to report from that situation in the last quarter. Compared to what we're generally seeing. But China is a market where there are strong and emerging competitors in our industry and to us specifically. I think everyone has been seeing this is an extremely difficult market Some of the larger players that we see emerging state owned enterprises have actually actually been cost cutting and reducing some of their spend. So certainly, they're feeling the sort of pain we're seeing in that market. Our strategy taking relief out of the innovator's dilemma is we want to maintain share. And we're we want to maintain customers and share as we go through this in China. We have very strong technology and good gross margins even at difficult prices.

So we're willing to take a hit to pricing to maintain share and that that's been the situation that continues to be. As we bring new technology to market, we're hopeful that we'll have bigger deltas that we can assert. The DataMAND two ninety being an example of something we might see in that space. But I'd say in terms of the pricing to discussion, it's a very distant gross margin top compared to some of the volume things that hit our gross margin or the dilution of Maritex, which we're getting scripts moving should improve Dennis, what would you add?

Yes, no, absolutely. I think if you think about both 2024 as a full year or as specifically, I think really the biggest topics we have seen working in the gross margin is really more attacks and then mix effects like the strong growth of logistics and it's also very clearly that like volume plays a big role as well, right? So that means we have infrastructure and fixed costs are there, so higher volume or lower volume really drives leverage there. And then pricing is really the fourth item there in the stack, which is really to a lesser extent, but it's very clearly that we are seeing these dynamics and therefore wanted to be transparent and clear about it, what we are seeing and that's particularly in China and I think Rob covered that well.

Appreciate all the color guys. Good luck.

Thank you. The next question is coming from Jacob Levenson of Melius Research. Please go ahead.

Good morning, everyone.

Just a Just to attack the M and A side of things from a different angle, I know folks have bought some really interesting machine learning assets at SuvaLab and and Vidi before AI was cool, so to speak. Has the the rise of AI and the broader public consciousness of does that increase the competition for those types of deals or [indiscernible] are they just too niche? For most buyers that would be looking with things that they So Jake, to be clear on your question, you're asking kind of are those assets still out there? How are they kind of priced and how are we thinking about them?

Yes, exactly. [indiscernible] [indiscernible] No, we at Cognix, we really excel at finding the best technology for our kind of in a specific market, industrial machine vision We're very well known. We have a great reputation and we cultivate who the companies, the small companies that we think are doing great work. And your Vidi is a great example of that, really an excellent Swiss based company with some phenomenal engineers doing things that when we really got to understand them, blew us away. And we were delighted to acquire them. So I think that was eight years ago, I guess. And I think probably that the general investor community saw the potential [indiscernible] that kind of were very heavily invested in the years following that time, that are now I'd say kind of for sale. And so there's a lot of them to see. But a note of caution is when we really get in and look at those companies, they may have raised $50,000,000 of capital on a business plan to have sales of $30,000,000 now their sales are 10% of that amount and they're really more around consulting or other They really haven't achieved the potential that they expected.

So I think the valuation of those companies is not what people thought they would be five years ago, which is an opportunity for Cognix Cognex some of them have good technology. They haven't been able to bring to market. But certainly the kind of the realism of what they actually have and where they are is 1 I would say is a strong theme. That I would observe overall. And I think it kind of underscores that play well in our market, it's not enough to have great technology. You have to understand customers, you have have to have applications engineers who really understand the application.

And that's where the 3000 or so strong cognoids that we have who are out there every day that 30000 customers or so with the who knows some of them are the most sophisticated suppliers of technology. That's great opportunities for us to take technology and apply it, which isn't quite as easy as it might appear to someone who eight years ago launched off on a plan. So I'd say that's the current state of it. My hope is that some of those really good companies and great engineering teams will join Cognex Cognex. Over time and there's the potential for that to happen Okay.

Appreciate it, Rob.

I'll keep it to 1 question. Good luck.

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

Please go ahead.

Hey, guys. Good morning.

Hi, Jeff. Good morning. So Rob, I thought your comments on infusing AI into your tools and the fact that you now [indiscernible] less images to train a model were really interesting. I guess I'm just curious on 1 hand, I can think of that as being a competitive advantage if you are first mover and your technology is advanced relative to others. On the other hand, it also kind of seems like it may potentially lower the barriers to entry for additional competitors, startups, maybe Chinese competitors. I'm just curious like how do you get comfortable that you can sustain your technology advantage and this isn't just going to increase competition for your your end markets? Yes, thanks. Great question, Joe. Thanks so much for it. It is both a great opportunity and a potential threat for Cognex. There's no doubt about that. The technology is allowing us to do things for customers very quickly and very well that we we and they couldn't do before and it will spread the technology more broadly within existing customers and that's very exciting. And here it's worth pointing out that there's a lot of kind of great public technology from Silicon Valley kind of coming out of companies, but that technology isn't ready for industrial app and there's a lot of expertise we have in taking publicly available models and applying them and really making them work.

They don't work well when just applied even with experienced programmers to our industry without deep domain and technology and customer knowledge that that we have. I think where this technology is also really both very exciting for us, but also will change our industry is it's making machine vision much easier to apply and implement, right? And you can really see that we're leading in that space as a result of applying technology and edge learning. Deep learning went to edge learning and transformer models are in a way a future that's almost no learning. Right? And that is something that we do extremely well and are leading the industry in, but it will change the sale and it will change who we sell to and how we sell and what we provide for them less application engineering, more pure technology that they can implement. I would say I'm pretty optimistic about what that means for Cognex in the next few years. I don't think this the technology that you're seeing coming out of Silicon Valley is still going to be too hard to apply really to our customers. And the people who are going to apply it first are going to be us We're going to see kind of driving and that's also really good about the emerging customer sales force we're putting in place, who can just get that technology out to so many more users and sell it much more quickly than we have before.

So that's the overall picture. But we're a technology company, right? The business is always technology is getting better and faster and easier to use. Prices come down, applications expand, new markets appear, It's a wild and wooly and fun business and we've been doing it for forty three years and we're going to go on taking those same principles that have made us successful to this new revolution.

Thank you, Rob. I'll keep it there. Thank you. Thanks.

Thanks. Thank you. The next question is coming from Ken Newman of KeyBanc Capital Markets. Please go ahead.

Hi. This is Katie Fleisher on for Ken. I'll keep it short here. I just was wondering how you're positioning tariffs and any potential margin impacts from those of another trade war Yes, happy to take that. I would say the headline statement here is that based on the tariffs which have been announced so far, there is no material impact to Cognex. And direct on the COGS side. And certainly, things are uncertain, right? More tariffs may come, but in of what is announced so far, no direct impact. Then of course, there could be a secondary impact from the tariffs, right? So in the near term, again, there's a bit of uncertainty We talked about like we have seen a lot of positive momentum in the Nov. 0, Dec. 0 timeframe and that that has shifted towards more near term uncertainty in some of our size. Think about the automotive supply chain, across Mexico, Canada and The U. S. So that's not necessarily hopeful. Then if you think about it in the mid- and longer term, the reassuring opportunity for Cognix is tremendous, right? So it means if that is really starting to happening, then there's a tremendous additional market upside for us.

Great. Thank you. I'll leave it there.

Thank you. We're showing time for 1 final question. Last question today is coming from Jaram Nathan of Daiwa. Please go ahead.

Hi, thanks for squeezing me in here. So I just wanted to go back to your Moritex acquisition. I think when you made the acquisition, the objectives were expanding beyond Japan and using more of Moritex optics into Cognex equipment.

I just wanted to kind of understand how you guys how it was done in the year, what's the progress And I just had 1 more question, please.

Yes, great. We're about a year and a quarter into owning Martech. And we're very pleased with how we're taking this technology and selling it to our existing customers. That's 1 way in which we can increase gross margin and grow our business. So that's kind of awesome.

We're taking that technology to many customers, which because they were very much primarily a Japanese focused business when we're globalizing it for them. And then you're going to see more and more of it integrated into our core products. So it's a lot of good progress and increasing excitement around that.

Do you need to do any validation like would it does it take longer to kind of get into you indicate to get get Molotex components into the products? Is that Is that a bottleneck or something or It's something we're very used to doing. It's very sophisticated. We got PhD photonic people and optics people who work on that, but we're very comfortable and we know how to do Okay. And just finally, some of the largest they're talking about moving from moving to sensing from scanning. I just wanted to understand how would that impact Covonex, Cognex that trend kind of continues? I'm not just want to understand it could be good for you. I just want to understand that. [indiscernible] Sure. I'll keep my answer brief. But today kind of the barcode is the defining way in which packages are identified. I don't expect that to change. But certainly, there is the opportunity to have more package recognition using machine vision on it, right? And some packages are complicated, and being able to use vision to inspect them, something we're extremely good is somewhere that our customers would like to go. And it's certainly 1 a journey we're enjoying.

Exploring with them.

Okay.

Thank you.

Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Rob Willett for closing comments. Well, thank you so much for joining us this morning. I enjoyed discussion and we look forward to speaking with you again on next quarter's call. Ladies and gentlemen, thank you for your participation and interest in Cognex Corporation.

This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.