Business Breakdowns
· Brett Larson
In Cognex fashion, they're stacking new S curves in logistics, which is really interesting. So they're taking the vision tunnels, which they've really honed with Amazon to new customers and new geographies. And those non-Amazon customers are growing very quickly. And then they're also identifying other applications outside of barcode reading, things like vision inspection to see damaged boxes coming down the line or damaged labels, make sure there are labels, even things like dimensioning to do, estimating of your shipping costs and things like that. So they get their foot in the door and then they find additional applications within the end market. And that's the story of logistics. At the moment, Automotive is the second largest market at 22% of sales. In theory, EV battery should be a good tailwind for them. Cognex has solutions. The transition just frankly necessitates a bunch of CapEx, whether it be new automotive lines, but also battery facilities that otherwise would not have been the case if it was just new models, internal combustion engine models. But frankly the growth just didn't come through last year as people had expected it to. Automotive sales were down mid teens in 2024. It's not expected to be a good year in 2025, but it shouldn't be a deep decline like 2024 at least. And long term, the target for this end market is 10% growth for Cognex, two other quick ones. So semiconductor is probably about 10 or 15% of sales now. They're selling primarily to the semiconductor capital equipment manufacturers. And the growth outlook there is positive at this point in time. And then the other 20 to 25% is general factory automation and keeping an eye on PMI there primarily. It's been historically long down cycle for industrial manufacturing and that's been felt by Cognex in that part of their customer base.
· Matt Reustle, Brett Larson
[00:00:00] S0: Is there a average useful life in terms of the equipment that they're installing? Are there replacement cycles for the equipment as well? [00:00:00] S1: Ideally when a customer puts the camera in the factory, they're hoping it's going to last for 10 to 20 years. So there's not really a regular replacement cadence. It's more about you get the customer in your installed base and then they'll be doing brownfield CapEx on existing lines and that'll create revenue opportunities for Cognex. Every now and then there'll be these greenfield opportunities with those customers or just new end markets and new customers. And that's what drives the growth of the industry over time. [00:00:00] S0: On the software side of the business is that an actual revenue driver for them. When I think about how much they will make from the sale of equipment, is it all recognized in year one or is it spread out with some type of software component? [00:00:00] S1: The joke I say is that Cognex doesn't adjust out their stock based comp which is great for a company that's essentially a software company. But you get stuck with the cyclicality of an industrial company as a trade off. So it's all an upfront sale. The software is tied to the hardware CapEx.
· Brett Larson, Matt Reustle
[00:00:00] S1: The joke I say is that Cognex doesn't adjust out their stock based comp which is great for a company that's essentially a software company. But you get stuck with the cyclicality of an industrial company as a trade off. So it's all an upfront sale. The software is tied to the hardware CapEx. [00:00:00] S0: It sounds like you get the S curves when there is a paradigm shift or a new form factor introduced into an industry that would require new CapEx spent on a factory or a production line where new Cognex equipment would have to come in. But if it's just producing the same phones or the same cars without added features, you're not going to see a big step up in revenue because you don't have to make adjustments to the factory. [00:00:00] S1: I think that's right. You can think of the core business as supporting customers as they're doing their big CapEx spends, they're tied to that. So at the moment in consumer electronics for example, we're keeping an eye out what it could be. But there's not something that's driving a big CapEx spend. At Apple, for example, that end market's kind of at a more steady state maintenance type of level. You characterize it correctly. [00:00:00] S0: Within that context, on semiconductors, it sounds like it's a meaningful chunk of the business, but not something that maybe has captured the same tailwind of the actual market itself with semiconductors. What drives the disconnect there? What would you tie that to where it's not just this massive chunk of the business right now as we're seeing this cycle play out.
· Matt Reustle, Brett Larson
[00:00:00] S0: Within that context, on semiconductors, it sounds like it's a meaningful chunk of the business, but not something that maybe has captured the same tailwind of the actual market itself with semiconductors. What drives the disconnect there? What would you tie that to where it's not just this massive chunk of the business right now as we're seeing this cycle play out. [00:00:00] S1: They actually did a bolt-on acquisition of a company called Moritex in late 2023 and Moritex sells optics and lighting. A lot of that goes into the semiconductors end market. Prior to that, Cognex's semiconductor exposure was quite small, probably sub 5%. And then after that acquisition it's bigger. It grew quite quickly in 2024 for example, the expectation it's going to grow very strongly again in 2025 at this point in time. So I think that kind of explains why it's the size that it is. [00:00:00] S0: Yeah, everything you mentioned, just in terms of the various big customers, the auto market being tepid or modest at best at the moment, all align. One thing we didn't get into when we talked about the History was the culture more so the leadership. What would you point to just in terms of the evolution of the culture and then management team?
· Brett Larson
[00:00:00] S1: I think it's rare that you get to this point in the discussion before you talk about the culture at Cognex. It really is very unique. As I mentioned, their employees are called Cognoids and they've had two CEOs in the past four and a half decades. So the founder, Dr. Robert Shillman, is one of a kind. He goes by Dr. Bob. And I was thinking about how to describe him quickly for a podcast. And I think there's one theory that he says tongue in cheek, that I think captures him quite well. He says it tongue in cheek, but he says that he doesn't believe in exercise because basically your body's a bunch of mechanical joints and anything mechanical has a finite amount of use. And just from that you can see he's clearly an engineer. He's really smart. He's very skeptical individual and a bit rebellious. He's got a really good sense of humor. And he was also very intentional with culture from the very beginning. Cognex's motto is work hard, play hard, move fast. It's very engineering centric. I believe they have the largest collection of PhDs and machine vision in the world, working on just advancing the field. They hire really smart people and give them the room to make autonomous decisions. And they say be right. Most of the time they're willing to fail and try new things, but they also try to have a lot of fun when they're doing it. Some examples of that, on leap years, a few employees are selected to go jump out of a plane with Dr. Bob and I think he dresses up like a frog or something. Ridiculous. One year they rolled in an armored vehicle to deliver the cash bonuses. And Halloween every year is a huge event. They have without question the best annual reports in the business. They're themed, so you should take a look at those. They're really fun. But what's interesting is they've really managed to maintain the culture from what I can tell. And I think there's two reasons they've been able to do this after Dr. Bob. So first, they have what are called ministers of culture in every office around the world who are responsible for maintaining the culture. And it's actually an incremental job in addition to their existing job. And they have meetings and they actually get a separate check in terms of compensation for this job. And it's viewed as very important to the company. So Rob Willett is the current CEO.
· Brett Larson, Matt Reustle
He joined from Danaher in 2008 and became CEO in 2011. Dr. Bob stayed on as Chief Culture Officer until 2021. He really ensured the culture endured through the transition and Rob's really embraced it. That long handoff as well I think is really interesting and unique. The fruits of the culture is obviously things like voluntary attrition is half of their industry peers. But I also think it's just critical in terms of being nimble and adopting new technology to stack all these new S curves. Over time it ultimately comes back to the culture. [00:00:00] S0: There's no culture like a funky or fun engineering group. I think it's one of the more unique things out there in the market when you find one. Quite interesting to hear about. It did bring up one point just given the technical background. Is there a big patent portfolio or IP focus for the business? [00:00:00] S1: You can go on their website and they list hundreds of patents. [00:00:00] S0: I want to get to just some of the numbers on the business as well. I think we've danced around them a bit. But if I'm thinking about what the cost of their equipment is to visualize for a factory purchasing these, is there a general sense of what the average selling price would be?