Robert Willett: Yes, and to your question about [indiscernible], obviously too soon to make a call on that, but we would see Emerging Customers as a long-term initiative with a lot of long-term potential to, as I say, take our customers from 30,000 to, with luck, hundreds of thousands. This is a multi-year initiative. Overall, I would see it as that. But in terms of 2025, we start to really think about–get concrete on our plans probably in the fall for that, as we start to get into recruiting for next year, next season, and plan our budget for that period.
Tommy Moll: Thanks for the insight. I’ll turn it back.
Operator: Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas Asset Management. Please proceed with your question.
Andrew Buscaglia: Hey, good morning guys.
Robert Willett: Good morning Andrew.
Andrew Buscaglia: You made the comment that you think gross margin marks the low point in Q1 and guided, obviously, a step up into Q2. A couple questions on that. I guess, what gives you that confidence that that is the low point? Presumably you have logistics improving and you’ve got a large order that was somewhat dilutive to that gross margin, so I guess you’re not assuming any larger orders the rest of the year. If you could just comment on some of the things that you see in the back half that would give some confidence in that comment.
Robert Willett: Yes, well first of all, Q1 gross margin was dragged down by that larger order we described, right, and a low revenue quarter, so those are kind of factors that impacted us. But overall through the year, Moritex is about a 2% headwind, so with that as sort of context, but then what should lift gross margin for Cognex going forward is obviously revenue – you know, revenue particularly in markets like electronics, but particularly factory automation. Factory automation for us is a high margin business in a broad-based way, right, so as we begin to see that market recover, that has strong gross margins overall and, as we’ve discussed, has been under pressure for quite a few quarters now, our industry has. As that returns, it would lift gross margin.
Then our Emerging Customer initiative is selling high gross margin, very, very competitive products, so that’s going to be gross margin accretive for us also, we expect, generally selling to smaller customers who perhaps don’t get the same kind of discounts that larger customers do. There are many reasons to feel positive about gross margin and our return back in the long run to that 75% target that we have, but in the near term, which I sense is where you’re more interested, those one-time factors being behind us in Q1, the build of business, particularly consumer electronics which tends to be a high gross margin business, and semi also, and then–and scale growing back and return of factory automation business.
Andrew Buscaglia: Yes, okay. Then my next question, I wanted to go back to consumer electronics – you know, flattish this year. You commented on uncertainty around project size and timing. I’m wondering, you know, there’s not much innovation in phones and handsets these days, but the latest is implementation of AI features. I’m wondering, that’s not a physical form factor change, but I’m wondering what you’re referencing there in terms of these projects, whether–you know, I know the timing’s tough, but does AI have an influence on machine vision as it relates to consumer electronics?
Robert Willett: Well, if we talk more about kind of the market, our customers and why we are excited about the long term potential there, this is a market that has waves of innovation that come through it, right? I think we’re living through a couple of years where that innovation hasn’t come through in products, but I’m very confident it will. I think if we think of all the AI technology in chips that we’re starting to see broadly released in the world, that’s going to drive a whole generation of new products. It may be smartphones, it may be augmented reality, virtual reality also, and I think some of the spending and investment we’re seeing in semi, that we all understand, will drive growth in that area. The second reason that I think I expect Cognex’s business to grow is in just–in the replacement of humans in the manufacturing of electronics, particularly smartphones.
I think the potential of that technology is so big, and perhaps I’ve mentioned on occasion just one of our customers spends over a billion dollars a year on human visual inspectors, so it gives you an idea the potential that exists to replace some of that with machine vision. Machine vision, when you look at our newest launches, is becoming more human-like in what it can do, so in the long run, the potential for those in that industry and that kind of technology in that industry is very significant. I don’t see that popping this year, right, but I’m aware of road maps from many companies in that industry and the exciting plans that they have, and we might get lucky and see some of it in the products that are launched ahead of the holidays this year, but I think at this point, we’re assuming that may be out in–further years out for us.
Andrew Buscaglia: Okay, thanks Rob.
Operator: Thank you. Our next question comes from the line of Piyush Avasthy with Citi Research. Please proceed with your question.
Piyush Avasthy: Good morning guys. Thanks for taking my questions.
Robert Willett: Good morning.
Piyush Avasthy: Following up on your auto commentary, Rob, you have been very constructive on the EV battery space. Can you help us better understand what surprised you? I understand some bigger projects being pushed out, but for EV battery investments in China, is that softening for you guys as well?
Robert Willett: Yes, I think for maybe on the order of six months now, we’ve started to see concern around EV battery investment, that it may be getting out a little ahead of demand in general in the world. We’re working closely with really all the large EV battery manufacturers. I think 10 of them, I think really constitute most of the investment going on, and its huge investment that’s going on with the idea that this is a multi-year phenomenon. There are two ways in which Cognex really benefits, can really help those customers, and where we do very well. One is just helping them build out their capacity, and we’ve been working with customers in that area. I would say–you know, I can think of quite a few instances where those plans have been slowed down over the last six months and pushed out – partly, that’s just to do with demand, customers are not buying as many EVs as perhaps the industry had expected; and secondly, just uncertainty about the political environment and whether the subsidies that are being discussed for consumers who buy cars and for companies that invest in building out battery plants and EV plants, whether those are still going to be there, so I think there’s that kind of concern.
Over the long term, EVs no doubt will have a larger and larger market share of automotive overall. There will be waves of technology coming, whether that’s the current cylindrical prismatic pouch technologies that we see, moving more perhaps to solid state, so there are going to be waves of investment. Those are challenging technical problems to deal with, and we’re certainly working closely with customers, and I think they recognize the value of our technology, but there’s building of greenfields, which is a challenge. The second area is just increasing the productivity of manufacturing batteries, and this is an area where Cognex excels, and particularly applying our computational optics technology partly that we acquired with SAC, that we have more strength with Moritex, to create fantastic, almost 3D images of battery surfaces and to inspect them, and then applying our deep learning and edge learning tools to those applications.
What that really allows–if I can sort of make it real [indiscernible], what that allows a customer to do is take–inspect a circuit and tell whether dents or scratches or the position of a defect on the battery is a problem and should lead it to be rejected, or whether it’s not a problem and the battery can pass through. There’s a very high scrap rate going on today, and there’s a very high rate of human inspection going on of those surfaces, and one customer I visited over the last six months told me that they scrap $200,000 to $300,000 of good batteries per day – good batteries, they’re thrown away because they’re concerned about quality. Our technology can help reduce that significantly, so that’s one example of where Cognex technology can help that industry and one of the reasons, based on all the investment plans and all the challenges that we see, we’re expecting long term growth in that industry.
Piyush Avasthy: Got it, helpful. Next for my follow-up, a two-part question. One, we have been hearing a lot about India and the growth potential there, and you have kind of mentioned India and Vietnam a couple of times, so maybe size the opportunity for us; and then on Japan, the yen has been under pressure, but you reiterated your 6% to 8% revenue contribution from Moritex, maybe a little color there, how the trends that you are seeing in the end market, any concerns related to FX, that would be helpful.
Robert Willett: Yes, thanks. I’m mindful of the time, so I’m going to answer your question quickly – please excuse me. India, huge opportunity, I visit it regularly, I was there in the first quarter, and just a huge potential we see. We’re building our business there, it’s still a relatively small part of Cognex overall, but the growth dynamic is probably one of our, if not our fastest growing market. The yen, yes, the weak yen creates some interesting dynamics. It certainly is helping the cost of goods for some of our competitors and helping their gross margins and making–the strong dollar, anyway, making the business environment more challenging for us. But we have great technology and a great team in Japan, so we’re able to be competitive.
Piyush Avasthy: Appreciate all the color, guys. Thank you.
Robert Willett: Okay, I think we have time for one more question.
Operator: Our last question comes from the line of Jairam Nathan with Daiwa Capital Markets. Please proceed with your question.
Jairam Nathan: Hi, thanks for taking my question. Just two of them. I wanted clarification first on the recurring revenue and the large project that you had in logistics. Are those the same things, and has the recurring revenue started flowing in, or is that a future business?
Robert Willett: Yes, that large project comes with a nice piece of regular recurring revenue, which is to do with our edge intelligence, allowing to extract huge value of out of vision data and manage our vision systems more effectively and build on kind of a regular basis tied to that large installation, where we took a lower price to get this technology embedded, and we’re excited about that.
