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Matthew Moschner

Thank you, Rob. I'm excited for the opportunity to lead Cognex as we embark on our next phase of growth. I extend my gratitude to Rob for his mentorship over the past eight years and for entrusting me with the responsibility to preserve and enhance this exceptional company.
At Investor Day, I will introduce new strategic objectives which are outlined on page 4. Over the next five years, we will concentrate on three key goals that will generate long-term shareholder value. These include The first being the number one provider of AI technology for industrial machine vision applications.
The second, providing the best customer experience in the industry, and the third, substantially expanding our served customer base. Taken together, we expect this strategic focus to yield significant results, including Cognex achieving a number one or number two position in all major markets that we serve. We will discuss these strategic objectives in more detail at our 2025 Investor Day in June, and we hope to see many of you in person at our NAIC headquarters for this event.
On page 5, you can see the high-level agenda for Investor Day. Starting on the evening of Monday, June 9, we will host a welcome reception, which will feature an engaging customer panel discussion and ample time to interact with members of the Cognex management team. On June 10, you will hear presentations from Cognex leaders emphasizing our path to achieving our strategic objectives, as well as our updated financial framework and capital allocation strategy.
We also have some cutting edge product demos planned, which you will be able to see firsthand if you attend in person.
We look forward to discussing these objectives in more detail at our Investor Day. We have allotted ample time for Q&A on June 10th, and I look forward to addressing your questions at that time. Rob and Dennis will be taking the questions on today's call. I'll turn the call back to Rob to highlight the first quarter performance.

Robert Willett

Thank you, Matt. Turning now to first quarter results on page 6. We remain focused on our two strategic initiatives. First, we continue to drive innovation. We launched the Insight 8,900 in Q1, bringing the power of embedded AI to our OEM customers. Second, we continue to support our salesforce transformation and expansion, enabling our sales team to reach a broader customer base and acquire new accounts. We will provide a more detailed update on this initiative at Investor Day.
Looking at Q1 performance, revenue grew 5% year-on-year on a constant currency basis, representing a third consecutive quarter of organic growth. Higher revenue from the logistics and semiconductor industries was partially offset by weakness in the automotive industry, while broader factory automation revenue remained stable.
Operating expense discipline contributed to a year-on-year expansion of an adjusted IBEA margin of nearly 500 basis points ahead of our guidance. This strong increase demonstrates the leverage our business delivers on incremental revenue and our continued focus on cost management. While there have been modest improvements in global PMIs, overall, the macroeconomic environment remains mixed with increasing uncertainty driven by geopolitical and tariff-related risks.
As always, we work closely with our customers and suppliers to assess any changes to their business plan, and even more so in an environment that is changing quickly. At this time we have not seen material changes in purchasing activity or order cancellations. However, this is a fluid situation.
We also expect to substantially mitigate any direct cost impact from tariffs, in effect, as of the time we publish this earnings release. Dennis will provide more details later in the call.
Longer term, manufacturing and logistics will increasingly rely on automation, demanding greater throughput, capacity, traceability, and quality, all at lower costs and with less labor. As the global supply chain shifts to a more regional structure, Cognex stands to benefit from these trends. I now want to provide you with an update on our product innovation.
We're excited about the launch of the Insight 8,900 smart camera. As you can see on slide 7, this is a compact, fully embedded vision system powered by AI engineered to tackle some of the most complex manufacturing challenges with ease. The Insight 8,900 brings the impressive functionality of AI to the OEM, combining AI power to rules-based tools in a single powerful vision system.
Whether the task is simple or complex, the Insight 8,900 enables our customers to optimize automation with a compact design that integrates effectively into the large-scale equipment, such as that widely used in electronics component manufacturing and food and beverage packaging machinery.
As we continue to execute our AI-driven product strategy, we will incorporate AI into more products, making them easier to use and able to solve applications in a more intuitive and human-like way.
Turning now to what we have seen across our end markets, which you will find on page 8 of the earnings presentation. o increase transparency, we are adding two additional and markets to our quarterly disclosure. The first is semiconductor, and the second is packaging, which includes fast moving consumer goods and healthcare.
A discussion of 2025 trends is based on current observations, while acknowledging the heightened macroeconomic uncertainty. First quarter growth in logistics and semi-markets was somewhat offset by order timing, consumer electronics, and ongoing weakness in the automotive sector.
Starting with logistics, revenue continued to grow double digits year-on-year. This is the fifth consecutive quarter of growth and marks the highest level of revenue since Q1 of 2022. As of today, for the full year, we continue to expect strong growth in logistics. Our outlook reflects positive momentum driven by ongoing investments by large e-commerce players and the further penetration of the broader logistics market.
Moving on to automotive, as expected, revenue in automotive was down year-on-year with weakness across all geographies. This reflects continued declines in EV battery investment and tentativeness in large capital projects across the broader industry.
Looking to the full year, we remain cautious about the outlook for auto, as we have previously discussed. However, we anticipate a more modest decline in 2025 versus last year, which declined 14%.
Turning our attention to packaging, our business remained relatively stable in Q1, and we're beginning to see a modest recovery in healthcare following the post-pandemic slowdown.
Packaging is now our third largest market and is poised to become a more significant part of our business over time. This market is particularly promising for us with our new product offerings that are easy to use for our customers.
We have been proactively pursuing the packaging market through our salesforce transformation and expansion investments targeted at reaching a broader cross section of customers. For the full year, we expect our packaging business to remain stable, with increased penetration opportunities enabled by our salesforce transformation efforts.
Turning to consumer electronics, Q1 revenue was down year-on-year, primarily due to project timing. As promised last quarter, we are providing an update on our full year outlook, which currently assumes modest growth. This expectation does not include any potential geographic shifts in production due to tariffs.
Regarding this year's seasonality, we expect electronics revenue to be relatively similar in Q2 and Q3, unlike 2024, when Q2 was more pronounced. We believe consumer electronics has positive long-term trends, and we are well positioned in the market. Move to (inaudible) remains a robust market for us with widespread growth driven by increased investment from major machine builders.
We continue to see demand driven by high bandwidth memory chip investments. However, we have a more cautious outlook for the full year due to increased uncertainty from trade policy and tariffs and the secondary impact on demand for chips.
Let me now hand it over to Dennis to walk you through financial results and the outlook for the second quarter.

Dennis Fehr

Thank you. Our quarterly financial highlights can be found on page 9 of our earnings presentation. At a high level, we are pleased with our Q1 results. Our focus on profitability is yielding strong results with an almost 500 basis point year-on-year increase in our adjusted margins.
And I joined about a year ago. One of my priorities was to enhance capital efficiency. I am pleased to report that results are now visible in our numbers. This trailing 12 months free cash flow conversion of 120% and more than $100 million returned to shareholders in the form of share buybacks in Q1, the largest quarterly buyback since the first quarter of 2022.
Looking more closely at the first quarter results on page 10, revenue of $216 million was above the midpoint of our guidance. This represents 2% year-on-year growth or 5% on a constant currency basis. In Q4, we noted accelerated demand late in the quarter, which pulled revenue forward. If we adjust for this, first quarter revenue growth would be modestly higher.
I will now discuss geographic revenue trends on a constant currency basis. he Americas let our year-on-year growth in the quarter, expanding 20% on the back of continued strength and logistics. Revenue in other Asia was roughly flat. Europe declined 7% due to a weaker automotive market, and Greater China was down 9% due to lower consumer electronics revenue, which is mostly timing related, only for strength and other factory automation.
Turning to margins. Adjust the gross margin was 67.6% in the quarter in line with our guidance. This represents a decline of 120 basis points from 68.8% a year ago, which was mainly driven by unfavorable mix and FX heads. Higher logistics contribution and lower consumer electronics revenue drove the mixed effect. Pricing impacts were offset by productivity measures. Adjusted operating expenses declined 8% year-on-year and the quarter and 6% sequential. The reduction was driven by lower overall head count, discipline, cost management, lower stock expense, and effects.
In recent quarters, we have highlighted our increasing focus on bottom line profitability, which is yielding substantial results.
You can see this in our numbers with a 490 basis points year-on-year improvement in adjusted a margin to the 16.8%, which is well above the high end of our guidance and consensus. He achieved a strong performance through improved cost discipline and operating efficiency.
And our upcoming Investor Day, we will introduce our updated long-term financial framework, which underscores our commitment to profitable growth and outlines the path towards further increasing adjusted at down margins.
Diluted earnings per share on a GAAP basis were $0.14, up from $0.07 a year ago, and adjust the diluted EPS for $0.16, up from $0.11 a year ago. The increases were driven by higher margins resulting from revenue growth and lower operating.
Our focus on profitability and disciplined working capital management drove another strong quarter for free cash flow. The first quarter cash generation of $38 million compared to $10 million in the year ago period. Trading 12 months free cash flow conversion was 120% of it just the net income.
We have also made significant progress in driving improvements to our cash conversion cycle, reducing the number of days by more than 70 days year-on-year. Considering strong cash generation and attractive share prices, we deployed capital opportunistically, returning $116 million to shareholders in the quarter, including $102 million of stock buybacks, our highest quarterly total in three years.
Turning to page 11. I will now address recent developments in tariffs and their impact in conflicts. The terrorist situation remains fluid and highly uncertain. Cognex utilizes multiple third-party contract manufacturers to assemble our products in Southeast Asia.
We've conducted an analysis of tariff impacts based on those in effect as of April 30, including a universal 10% rate on US imports and the elevated tariffs between the US and China.
We believe it can substantially mitigate the direct cost impact of the tariffs, resulting in no material impact to earnings per share or adjusted at a dollar margin. But we do not expect an impact on profitability. We do expect a dilution of approximately 50 basis points and adjusted gross margin.
Should tariff rates on US imports continue to rise, we would evaluate further actions and cost mitigation efforts to help contain any impact. Longer term, we believe the potential recalibration of global supply chains represents a growth opportunity for us. Cognex has built a strong market position globally and a small position to capitalize on any such trends.
Moving on to our second quarter guidance, which can be found on page 12 of our presentation. In the second quarter, we expect revenue between $235 and $255 million. This range is reflective of a mixed micro backdrop. At the midpoint. This represents modest year-on-year growth compared to Q2 of 2024, driven by our expectation for continued growth in logistics partially offset by weaker trends in automotives.
As Rob mentioned, we expect consumer electronics to be more evenly weighted across Q2 and Q3 as compared to last year. It's skewed more strongly to Q2. We also expect adjusted gross margin to remain in the high 60% range, which reflects continued mixed headwinds in the year-on-year comparison.
We expect adjusted EBITDA margin between 18.5% and 21.5%. The midpoint of this range is comparable to last year, driven by operating expense discipline somewhat offset by gross margin mix.
As it relates to cash flow, in April, we made a final tax payment of approximately $16 million related to one-time transition tax on unrepatriated foreign earnings related to the tax cuts and Job Act of 2017. We expect our adjusted effective tax rate to be approximately 16% compared to 15% in Q2 of 2024.
Lastly, as you mentioned earlier, we will be hosting a rest day on June 10 at our native headquarters. Please reach out to the Investors Relations team to RSVP. We look forward to seeing many of you there.
Now, Rob and I are ready for your questions. Operator, please go ahead.

Question and Answer Session

Operator

(Operator instructions) Joe Giordano, TD Cowen.

Joe Giordano

Hey guys, good morning. Good morning, Joe. Good morning, John.
Maybe I'll start on the OpEx. Like, I don't want to overreact to any one quarter, but like that was nice to see like on higher revenues in an OpEx decline.
How much of that was there anything kind of like more onetime-ish in nature in nature there like how should we think about the ability to leverage the remainder of the year and like structurally from here.

Dennis Fehr

Hey Joe, yeah, we've been talking in the prior quarters about our focus on profitability and cash and cost management, and we're really pleased to see the results, both on the OEC side but especially the flow through to the bottom line. Certainly we'll talk a little bit further on on Investor Day on our path to profitable growth and how we will. Manage and also leverage our expense space, and that will play an important role when we think about achieving our profitable goal goal targets. Now, to your question in regards to one-time effects in there, but certainly FX played a role, right?
So if you think about a strong dollar in the first quarter overall that's a headwind on top line and bottom line, but it's a It's a tailwind for for OPEC itself, in that regard that brought the absolute numbers down and as the as the dollar has weakened now in the second quarter, so you will see some some effect of that in the second quarter numbers. But again, softer dollar would be actually better for us both for top line and bottom line. So in that regard, we'll, see that as a positive, but we also expect that FXs will remain volatile throughout the year, so we'll watch that closely.

Joe Giordano

There, and then while I have both Robin and Matt on here, like I have more of a philosophical question about embedded versus kind of computer vision.
Like I know that, I mean, clearly you guys lead in what you do and how you do it. I think there's just been a push from the market to at least make a claim that you can do more things than the, than you could in the past without having to have embedded, right? That the, that there's been technology changes that have allowed. That other technology to compete more directly like.
How do you respond to that and how do you think Cognex in the next decade plays in like the combination of those two types of technologies?

Robert Willett

Yeah, thanks Joe. Well, first of all, I think that's a great question to bring with you when you come to Investor Day. I think you're going to hear a lot more about how, we and Matt certainly have a vision around that. A quick answer would be, most customers really want embedded vision. They want the high performance that that provides, it's easier to implement, fewer concerns around security. I could list a long list of reasons, and, that's why, we have the best smart camera in the world in terms of sales, globally.
But the cloud and, more processing power, creates real opportunities, and we've certainly invested in those, and the connectivity between embedded systems and the cloud, provide a lot of op opportunity to really supercharge, a lot of the capabilities you find at the embedded. Level, so that's kind of an exciting future for us, we're, we have very strong vision software capabilities that our most sophisticated customers utilize, and I think our combination of strengths in terms of cloud-based AI and embedded systems is really a very powerful thing we expect to do a lot of great things for us in the future.

Operator

Damian Karas, UBS.

Damian Karas

Rob, congratulations on all you've been able to accomplish over the years, and I know you're not vanishing from Cognex, but, wish you the best in your retirement.
And that obviously congratulations on your new role.
So maybe just, starting with consumer electronics, I would like to hear a little bit more on your thoughts there. I know you mentioned it was down in the first quarter, but you're expecting modest growth this year. Could you just talk a little bit about what you're hearing from customers, what trends you've been seeing and just thinking about.
Like a large smartphone maker looking to move production to India from China, like, what are the potential implications for Cognex around that?

Robert Willett

Yes, thanks, yes, just to reiterate, consumer electronics was down in Q1, but, we obviously expect normal strong sequential growth into Q2, and then modest growth for the year is what we're currently expecting, and then more similar, more balanced revenue between Q2 and Q3 than we saw. Last year, which was more skewed to Q3, so obviously that wants to keep that in mind as we I'm sorry, more skewed equally balanced between Q and Q2 and Q3. Last year was more skewed to Q2.
Right, okay, I hope I can confuse you that. I think what that might be useful as you think about Q2 revenue year-on-year, obviously, we had much will have had more, revenue in it in Q for consumer electronics. Okay, so to your question about longer term.
Activity going on, certainly there's a lot going on in this industry that there always is and always new features and, new, form factors that certainly are exciting for for cogics as we think about growth in that industry over multiple years, there there are also, I would say a key factor that we see and we've talked about a lot, that we continue to see a lot of opportunity. And is the replacement of human visual inspectors, this this is an industry where we have a great many human visual inspectors and our technology and the AI we're developing, it's very important for that, and then certainly cosmetic appearance as well as something that's critical in in that market and will continue to be. You you asked about geographic shifts. This is not a new phenomena, right?
Certainly, we've been working over multiple years as supply chains have shifted away from China and into markets, including India, as you've said, but also Vietnam and other markets. I was in India, last quarter, definitely, we see a lot of activity, well planned and rolling out, and, new lines. Being built by various suppliers in in that market, and I think, a lot of ambitions to take no not exactly cut and paste, but to take a new generation of manufacturing as they move into other geographies. And India particularly, and that's a comment I think I might, apply to the world, it's manufacturing ships, I don't think it's necessarily going to be the same manufacturing that shows up on other shores as it leads certain markets. I think it's going to be one much richer in automation, and I do think that's one, that really plays very well into Cognex's hands.

Damian Karas

Well, I'm sure we can talk more about that at the Investor Day but that's really helpful.
And then Dennis, I was hoping you could maybe just unpack a little bit more of the tariff details, like how much are you importing from China into the US? Like what are we talking about? What kind of components, what kind of products, and could you just maybe give us a sense like how is your footprint in machine vision market compared to your competitors?

Dennis Fehr

Yeah, no, happy to do that. So, in general our exposure in terms of the supply chain to China is really very minimal, right? So I think we're mostly working with contract manufacturers across Southeast Asia. So certainly there are some components think about it like accessories and then also some optical equipment. With the Morita acquisition, we got, a factory in China, but we also have another factory in Vietnam and also contract manufacturers for the Mittech business. So in that regard, we are pretty flexible in terms of managing our supply chain and that's certainly part of kind of the mitigation actions which I've been talking about. Which enables us to keep basically or substantially keepthe impact of the terrorists kind of a net neutral, to earnings per share, and that we will drive that flexibility and make use of the supply chains in that regard we feel like you're in a pretty good position and we'll manage that going forward.

Damian Karas

Terrific. Best of luck. I'll pass it along.

Dennis Fehr

Thank you.

Operator

Tommy Moll, Stephens Inc.

Tommy Moll

Thank you for taking my questions. Hey, tell me, Rob, I wanted to start on logistics, essentially to ask for whatever additional detail you can provide, whether it's by geography or customer type. You called out e-commerce as one of the drivers for the full year. But any additional detail you could provide on the Outlook would be helpful. Thank you.

Robert Willett

Yeah, thank you, Tommy. So, certainly we're seeing a lot more momentum in our logistics business than than we have. It was one-fifth straight quarter strong double digit growth in that market. We're certainly seeing the large e-commerce players, leaning into. Investment, and, that looks strong and we have good sales and funnel activity both there but also just in the broader market in general, both are large customers are growing and our, smaller customers also are showing growth. The growth we're seeing currently is more skewed towards the big players currently, but the funnel is building nicely in the whole business. So you are sort of about your trends overall. I think the first thing to say is I think we all know there's been quite a period of low spending as we came out of COVID and, the market, is now returning to strong growth and.
Those of you who attended the two largest trade shows in the industry at Leamatt in Stuttgart and ProMat in Chicago would have seen kind of justthe level of activity and the number of visitors and, the cognics, the interest in cognic technology that exists there, so it's a lot of. Underlying strengths, I would say, in terms of maybe some of the trends that we're seeing, I would say, that the trend is towards driving more productivity and throughput through existing distribution centers and then sort of the massive buildout of new distribution centers we would have seen 5 years ago. And there's so much activity that goes on in existing, distribution centers that is ripe for automation and vision, not just barcode reading, but vision in general. Here I'm thinking of about, areas like inbound dock door processing of pallets that are being dealletized and sent out, kind of a difficult, and a bottleneck with a lot of labor and a lot of variation. And where your vision and cognitive technology is really able to make a difference, certainly, we're enjoying, what we see is the beginning of a pickup in our parcel business, we've been in that market for a long time, we're recognized in terms of the best presentation scanners in the market for reading inbound parcels, but here now with our tunnels and new machine vision technology that we're bringing to that market, there's a lot of opportunities you obviously read about what's going on in that market, a lot of change and a lot of drive towards a greater productivity and efficiency, and, we're looking forward to capitalizing on that and we can see the beginning of that, but that's, these are long big capital projects, so I think of them as, long term things that will pay off very well for us rather than something you're going to see necessarily in the near term, particularly in the current environment. So it's a bit of a color for you. I hope that's helpful for me.

Tommy Moll

Indeed, thank you. Dennis, I wanted to take a second bite at the apple here on the OpEx controls.
Noting that FX was a good guy in the first quarter you just reported, but can you give us any insight excluding the FX impact, would you still characterize the OpEx dollars as lower year over year?
And is that repeatable in future quarters where you may show top line growth accompanied by OEs decline.

Dennis Fehr

Yeah, I think, in general we have been starting managing the OEC someone second half of last year, right? So we also talked on the on the fourth quarter earnings call about taking one-time charges, which was, part of that was some reorganization of the ofthe sales team where we integrated the teams into one unified management structure and in that regard, certainly some of these effects are clearly lasting and I think reiterating what I said before, I think part of our profitable growth is very clearly that we can get a lot of leverage to growth and managing our existing cost structure and that's really part of driving driving the bottom line in that regard.
Really consider that it will be also going forward laser focused on the OPEC side and that will be a big part of achieving bottom line numbers.

Tommy Moll

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

Operator

Andrew Buscaglia, BNP Paribas Asset Management.

Andrew Buscaglia

Hey, good morning, everyone. Yeah, I wanted to get your take on your comments that you're not really seeing, much delay decision making or customer hesitancy yet. First off, does that surprise you in the quarter you think a company with a bit more tied to CapEx cycles would see something like that or, see that coming in the future. And then you do talk about a little bit of weakness in auto which seemed to be maybe slightly worse than you expected. So are you seeing it maybe maybe in that segment, and maybe comment on your thoughts on auto for the rest of the year.

Robert Willett

Yeah, thanks. This is a very fluid situation and there's a lot of obviously volatility in in the market, so but I'll give you some color, kind of on what we saw. We have not seen material changes in purchasing activity or order cancellations currently.
We're keeping an eye on to what degree customers may be buying forward ahead of tariffs, we don't think that's particularly significant, at the moment in the numbers that we're seeing. If I look around kind of the world and industries, maybe we just start with the US. In the US in logistics, the current sentiment seems to be to maintain investment levels, although, customers are monitoring potential inflationary trends and other impacts of the FATex projects. And we tend to have longer lead times and we tend to have, better visibility, I think about spending plans and there, as we talked about in the previous question, they're quite good paybacks on automation and logistics facilities, so I think that's looks would suggest, good providing this certain level of confidence, I think, a positive view, autoo obviously is a much more difficult industry and we're seeing, a mixed reaction in. Some instances we're seeing international manufacturers increasing or accelerating domestic production capacity build in the US, I'm certainly hearing I've met with some customers, some in Asia in the last quarter, who see the situation and may be looking to lean into that, but others, particularly, domestic American suppliers, I think are perhaps, now much more cautious in light of all the tariff volatility we're hearing, and they are focusing more on cost savings.
Healthcare investments, seem to be increasing, currently, and I think that's probably more of a trend coming out of, post COVID, where there was, a high level of spending, and now it's returning after a very dry period, and, so, yeah, we're that that's a bit of color there, let's maybe move on to China, so, we have.
We have a significant business in China and it's pretty broad across the whole market, large, factory automation and logistics machine builders are taking what I would consider more of a wait and see attitude related to any new products in the United States. So obviously they're, concerned to see how this plays out. They're focusing, I think, more of the growth activities into Europe and at the end at the moment. That would be a trend, so I've described that as sort of uncertainty and caution there, Korea, I'm certainly hearing from our Korean customers, that, they expect to increase investment in the US, but they're thinking, cautiously again about the near term. And then I think our customers in Nan, Southeast Asia, outside of China, view this as an opportunity for sure, and I think they see opportunities, particularly as trade tariff deals come signed that, they see more manufacturing activity moving into that area. So it's a very complicated picture. There's a lot of uncertainty, but that's touched a bit of a color on what we're seeing.

Andrew Buscaglia

Yeah Interesting, yeah, a lot of moving parts, but yeah, that's a good call.
Thank you.
I just want to get your take on gross margins in in that.
Yeah, it's some sort of each quarter I think we think we've seen the bottom here in your margins and they take a little bit lower and now you got this incremental 50 basis point headwind from tariffs and teams. Do you expect margins to improve sequentially from here despite that headwind and what were the biggest hits within grow charging in Q1?

Dennis Fehr

Yeah, happy to take that. So I think that the two topics which we have been really seeing in this quarter are mixed and FX, right? In that regard, FX has been in the quarter based on where the dollar is right now, we would not see that again in the second quarter, but. Again, FXs may remain volatile. And then the second item mix. So I think mix we have been talking about this for a while, and that's really a continuous tre trend as we're seeing logistics to be our strongest growth market and it's clearly that with growing logistics much faster than in other areas, we will also see continued mixed headwinds to the gross margin.
However, I think what we feel like what's really. Important is that we see that this volume growth is flowing through to the bottom line and I think with the let's say a strong adjust the margin which we have been seeing. In this quarter, I think we really, see that the profitability is coming up and we're pretty happy about it. So in that regard, we'll be very focused on bottom line and we'll certainly talk a little bit more about also cost productivity and OPEC's leverage when we get into investor name.

Operator

Jamie Cook, Truist Securities.

Jamie Cook

Hey, this is actually Kevin Wilson on for Jamie. Good morning and thanks for the time.

Robert Willett

Hi Kevin.

Jamie Cook

Good morning. Congrats, Rob and Matt. And I just wanted to ask about you (technical difficulty).

Robert Willett

It's the what would be. But also products like razor blades and diapers, and some of the applications would include packaging and label inspection, OCR optical character recognition, traceability of products, particularly important in markets like tobacco or pharmaceuticals, high speed barcode reading, and then assembly verification, maybe I think of things like the toys that go into concessions, that we see in retail, in an interesting market. There, so it's pretty broad-based, healthcare includes, pharmaceutical, medical devices, life sciences, contact lenses, right, overall. Now, so, just hearing me describe it, it's a very broad market and there's a lot of machine builders that supply into that market and then a lot of consumer packaged goods and users and, many hundreds of manufacturing plants. And, this plays very well. I think it's a cosmic strategy about how we want to develop our technology and our sales channel because our technology is now easier to use, and easier to apply and.
Easy to demonstrate a quicker payback into a lot of those plants, as a result really of our entry learning technology, we look at a new product also like our Dataman 290 barcode reader, very powerful, a lot of AI. Very easy and intuitive to set up and see results on.
Now there are so many of those plants and so many opportunities, it's a major reason we wanted to expand our sales force through our emerging customer program where we have territory sales engineers who can make many sales calls a week and reach and demonstrate our product to those customers more easily.
The other thing, I think we like about the packaging market is that it offers less volatility and cyclicality, it's broad, and there's spending that goes on, broadly through the cycle in those markets.
You asked about other, the other area, certainly, interesting markets there you mentioned aerospace, certainly with increased defense spending, it's an opportunity for us to call more on those customers and again, our territorial sales engineers are helping us to do that. Generally, volume. Tend to be smaller in those kind of markets, right, but it does lend itself very well to some of our products, particularly think of handheld blocker readers reading, turbine blades for engines and other applications like that which can be easily demonstrated and sold, so, that, that's a bit of color on that.

Jamie Cook

Thanks, that's very helpful. And then following up on that emerging customer sales force, which you just mentioned there, understanding that the sales transformation efforts, makes sort of quantifying incremental revenue from that cohort more difficult, but just wondering if you could provide, color qualitatively on how bookings and sales for that less sophisticated customer base have gone in the quarter, and then any thoughts on the opp ex spend associated with emerging customer, are you, considering pulling back costs or just anything around OpEx spending given just how that initiative has performed relative to your targets when you started the program. Thanks.

Robert Willett

Yeah, I'll I'll start with sort of the top line and the channel, and I think Dennis may comment a little on expenses, so when you come to Investor Day, you're going to hear about, a long term strategy and a big part of that is substantially expanding our served customer base. So if we go back to what I just mentioned about markets like consumer packaged goods, healthcare, aerospace, getting more into those markets is one of the reasons that we invested in this channel. So.
We're not going to break out quarterly results on that and reallythe team itself is quite now integrated into an overall team that refers business and is selling much more, efficiently and well, whether it's on, more demonstrate and sell business or more technically detailed and and involved business that are long. Serving account sales engineers would handle, so, but to recap some of the things that we've, we, we've talked about in the past, we added 3,000 new customers, through this program last year, and that was through the first cohort of sales, territory sales engineers that went into the field and they also. Generated billions of dollars of referrals for a more experienced sales team and then the second class went in, so our metrics, we would track towards doubling that number of new customers served and the number of activities that they generate overall and then this year, I think you'll hear more about that at. At Investor Day, but there's we're able to kind of manage our level of sales engineers that we have, as we move through now that we have a good base established a strong pattern of referrals so we can am that up or down as we move forward based on the operating operating environment that that that we see.
Dennis?

Dennis Fehr

Yeah, no, just to, I mean, first of all, as Rob already mentioned, I think we're not having this really as a separate organization anymore. It's really merged into the broader sales organization. And then when we think about like investing into health capacity and we'll certainly be thinking about the overall micro environment in in times of heightened uncertainty it will be double mindful here and in general I think it comes back to my more general OECs comments I made earlier on the call that we're laser focused here and that it's not me being part of our profitable growth story to. The efficient on OECs and to leverage existing expense lines in that regard, do not expect us to growthe OPEC side or expected actually to grow it slower than than our revenue line. And then again will be a great discussion on that.

Operator

Piyush Avasthy, Citi.

Piyush Avasthy

Good morning, guys. Thanks for taking my questions.

Robert Willett

Good morning.

Piyush Avasthy

I think you highlighted reshoring and recalibration of global supply chain as an opportunity. I understand it's still early and macro environment remains fluid, but have you seen a step up in conversations with your customers and would be curious to know if it's any particular in market or if you could remind us how long does it generally take for, these conversations to convert to orders for card next.

Robert Willett

Yes, thanks. So this is not a new topic, obviously, we've seen efforts by previous administrations, the, investment Act to build new fabs and other things in the United States, and so, those projects are still some of them moving along and will result in Cognex sales as they. Brought up and start to produce, so that's it, but I think what we're contemplating now is a much larger potential impact on our US business and our US long term growth prospects if the current plan continues to play out and and perhaps settle down in terms of companies' abilities to invest.
The conversations I had, when I was out in Asia, this year so far, are sort of, I would say enthusiasm around that and the opportunities to invest in the US market. I think they're waiting to see kind of exactly how that will play out, but certainly bringing in manufacturing investment to the United States is something I've heard a number of very large customers talk very seriously about, and, I've also heard them talk about the need for increased automation and, fewer humans in that process because obviously.
Wages in the United States are much higher than what they might see in other markets, so they're very serious about wanting to talk about automation as the answer to that, and those are discussions atthe beginning, but the not caution would be these are long-term plans, these new automotive plants or new semiconductor plants, as they, as they're brought in on shore, will take a long time to be.
Commissioned and and bought up and it's normally at the end of that process that cognic vision is solved.

Piyush Avasthy

And I want to go back to China. It was down in the quarter, but I think you'd expect improvement in consumer electronics in '23, so I think that should help. But can you elaborate on the trends? I think there's a bit of anti-American sentiment that's going on. I don't know if you sense that. And I think you have talked about pricing challenges in the region as well. Do you expect pricing to improve as demand picks up, or do you think pricing could stay challenged in that region.

Robert Willett

Yeah. So overall, our revenue in China was down about 9% on a constant currency basis in the quarter and really that year-on-year, and the whole story there is consumer electronics timing really. So aside from that, I'd say that, our business in China was relatively stable. Yeah, automotive, has been stronger in China than in other markets, and, I think those who study the automotive market can see that the power of, Chinese automotive and how that's performing, and I think we see that reflected in our business, also.
And, I mentioned some trends around, machine builders, which are important customers to ours and some caution that they're seeing currently, in that market. You asked about kind of, anti, anti-American, sentiment, so I'd say most, the majority of our customers are large, sophisticated. Global players, right, so I think they are, they're very, mature and measured how they think about these topics, and they're really interested in performance and value and productivity, but certainly, about a quarter of our greater China revenue is from smaller local manufacturers where, they may, it may be more challenging to have some of those conversations.
I would also say that, conversations that we've seen in the quarter, even from large players tend to be more really understanding our supply chain, and the components that go into our products and where they come from, I think we have a good story to tell that. On that story is, as Dennis outlined that our supply chain is not particularly dependent on the Chinese sourcing, which I think, gives them confidence that we can go on supporting them globally as this current situation plays out.

Dennis Fehr

Maybe taking your question on the on the gross margin side and on the pricing, I think in general, certainly China is a competitive market, and I think our strategy which we put in place there is that we're basically price aggressive in what we call it and one and two products. So that means older generations and kind of that's where we are competing, let's say call it the with the with this with other players in the market.
But I think other than in prior quarters right where we've been really also flagging that as a as a headwind to our gross margins and bottom line, like in this quarter we have been able to offset that these pressures, this cos productivity and that's really also kind of the way forward for us that we think the first step was to start offsetting it, but certainly a part of our focus on improving the bottom line. The focus will be that to more than offset pricing pressures and to get actually a positive effect to the bottom line of of the talks as well. So I think we'll need to manage the entire P&L to drive profitability, and that's what we're doing.

Piyush Avasthy

Appreciate all the color. Good luck, Robin, whatever is next, and congrats, Matt.

Matthew Moschner

Thank you.

Operator

Jacob Levinson, Melius Research.

Jacob Levinson

So, I just wanted to say, welcome Matt and congrats, Rob on the, on the great run and certainly after 17 years, I think you've deserved a vacation at least. So hopefully won't be too on them.
I just said, I know we're coming up on the hour here, so I just had a quick question for Dennis, but, certainly your stock is down quite a bit this year, even after the rebound here. I know you bought back some shares in the quarter, but can you just give us a sense of how you're balancing the maybe the buyback opportunity versus, yeah, keeping some cash on a rainy day fund, given the uncertain outlook out there.

Dennis Fehr

I know it's a great question. I think first of all, I think the basis that's really strong cash generation, and I think over the last, three quarters and if you look at trailing 12 months, cash generation, I think they've been really performing very well. Well, in that regard we're certainly mindful about our capital allocation priorities and the one side right when we think about share buybacks, the long term objective is here to offset dilution and was having purchased.
About $150 million over the last two quarters, certainly not feeling so strongly that we that we have to buy back more now inthe second quarter and therefore we will be probably a little bit more more reduced on that side then but I wouldn't say. Yes, that we feel the need to have a rainy day fund either, right? It's much more and more like also preserving M&A firepower, which is also an important part to our capital allocation strategy.

Jacob Levinson

Yeah, that's everything for me. I appreciate the time, and I'll see you folks in June.

Dennis Fehr

I'm looking forward to it.

Operator

Thank you. And we have reached the end of the question-and-answer session. I would like to turn the floor back to Matt Mochner for closing remarks.

Matthew Moschner

Thank you for joining us this morning. We look forward to seeing you all at Investor Day in June and speaking with you again on next quarter's call.

Operator

Thank you. This concludes today's conference, and you may disconnect your lives at this time. Thank you for your participation.

Dennis Fehr

Okay.