Cognex Corp Morgan Stanley's 14th Annual Laguna Conference

Hey, guys, we ready to start? Great. Fantastic. All right. Good morning, everyone. I'm Sean Kerasi. I'm a managing director on our investment banking side. I'm joined today by Dennis Fehr, Chief Financial Officer of Cognex. On behalf of the Morgan Stanley folks, welcome to our 14th annual Laguna Conference. Cognex is one of the leading industrial companies in machine vision, an early innovator in AI, and a key element of the factory floor. You're coming off Q2, which was a record for you guys.

Thank you. You upgraded, what was it?

Four of the five key end markets for yourself, which is great to hear. Again, thanks for joining us. Maybe just to kick us off, give us a little about what Cognex does and where you guys are adding the industrial supply chain.

Sure, absolutely. First of all, thanks a lot for having me. Good morning, everyone. Thanks for being here early morning. Yes, as already introduced by Sean, my name is Dennis Fehr, Chief Financial Officer at Cognex. At Cognex, we solve some of the most challenging machine vision tasks in the industry. That means we are helping our customers across different verticals, we'll probably talk a little more about these, to inspect their either finished products or some of their components they use to identify, think about parts in the production or also in the logistics, warehouse automation, e-commerce type of space. We also help to gauge and to measure. Think about, and guide, think about robotic arm guidance, for example.

In that regard, we're playing really in a diverse set of end markets from semi, packaging, electronics, and of course, logistics, our largest end market.

That's great. Thanks for that. As you talk to customers now, you've had a few new product launches. What are the kind of problems that they're trying to solve, and what is Cognex enabling them to unlock in sort of those problem sets?

Yeah, no. Let me talk through maybe a few examples, on an industry-wide basis, but to some extent, many of them, you could also apply it to some of the other verticals. Perhaps starting on the packaging side. First, what do we say with packaging? That means fast-moving consumer goods and kind of pharmaceuticals. It's called packaging because very often you kind of inspect not the product itself, but basically where the product is packaged. Here, a lot is about resolving for throughput. That means the speed the line can run on, and then for quality, right? I think one of the biggest issues, think about a shampoo manufacturer and so on.

One of the biggest issue for them is if they deliver a product, and it sits on the shelf, and it just doesn't look like there's scratches, there are wrong labels or only partially labeled, things are opening, just a bad quality experience. In that regard, we are helping them, especially with speed and quality. Then, in logistics, in warehouse automation, we're really helping to resolve topics like labor shortages and then especially cost also. That means optimizing how much does it cost to ship a single parcel and to run that through an e-commerce distribution network. Then maybe lastly, on the semiconductor side, here, we're really helping our customers to expand capacity. So right now, that's very much a capacity build-out type of play.

I think the exciting thing on top of all of these underlying customer needs, we are layering in new AI-based vision tools, which really drive additional penetration. That means we are able to unlock applications for our customers, which in the past they could not solve with machine vision, and they needed either human beings for it, or they couldn't solve it at all. In that regard, definitely, a lot of kind of secular growth drivers here.

Okay, on the secular growth drivers, when we think about the semiconductor and electronics end market, what is kind of the mix that you are seeing? In particular, is that broader capacity additions? Are we doing supply chain relocation, new devices, form factors? What's the mix that's driving your business?

Right. On semi, I would really point towards the build-out of the AI infrastructure, right? I mean, semi is the one market where we point towards much less of a penetration play, but it's a capacity expansion play. Here, obviously, you see the news, you see all the investment going into that space, and then you read also about memory cost increases and so on, and we are basically helping our customers to ramp up their capacity. On the electronic side, it's a very different story. It's a much more broader-based kind of growth driver. I think a lot of investors ask, especially those who maybe know us for many years, maybe they think and ask us about, like, "Hey, is your electronics this year driven mainly by new form factors like foldable phones?" My answer continuously is, it's a factor, but it's not the factor, right?

In that regard, the electronics growth which we are seeing this year is very broad-based, first by customers. So it's not tied to one single customer, and it's not driven by one single kind of item, like a foldable phone, but really from, in general, kind of ramping up device quantities. It's about more devices. Outside of phones, so think about AI gadgets, wearables, glasses, for example. Then also here in electronics, we have a portion, still small today, but growing at interesting growth rates, is helping the data center supply chain. Before I talked about the chips itself and semi, but here it's about a full server rack assembly verification. In that regard, electronics is a very broad-based play at the moment.

Maybe this is a good spot to talk about some of the applications you're seeing in the data center. Could you give everyone a preview or an overview of what you're seeing there?

Right. I think what we really saw over the last, I would almost say 6 months or so, since we launched a new product called the In-Sight 3900 together with OneVision, which is our cloud-based AI training tool, that we are now able to solve tasks for these, let's call it contract manufacturers. At the end, these are the contract manufacturers for the hyperscalers who build the server racks for them. If you build a server rack, while it's itself, I would say it's not a very complicated production process. Obviously, there are a lot of things which need to be at the right places, a lot of connections at the right places, and certainly you do not want to find them when you start shipping these or have shipped these server racks into the data centers. You want to find that at the factory.