Rob Willett: Yes. Joe. How are you doing? Well, we don’t give full guidance. So, we don’t give certainly full year guidance, and we don’t give guidance by industry. But I will — I’ll comment a little. I would also say I’ve been running industrial companies, for the best part of 25 years, and this is always a bit of a dark confusing period. As we come into January and has a lot of businesses don’t really, kind of getting gear through January, and then we have Chinese New Year. So it’s too early to call some of these things. But if I talk about our industries overall, I think it’s probably pretty in line with how we think of our long-term growth plans as I look at this year. I think logistics, we expect to see it grow this year and I think we’re confident we’re getting back to strong growth there.
It’s perhaps notable in the logistics to say that can be longer cycle business. So what we might see in bookings may not turn into revenue until possibly 25%, but we’re confident about we’ll be reporting good results in logistics. Consumer electronics has the potential to really come back strongly, but as I said, too early to say. Automotive, we view that as sort of a 10% long-term grower and that industry looks like it’s having some challenges at the moment. EV, I think we’re very confident about that contributing and driving some growth, potentially offsetting declines in internal combustion engine business. But – so probably, I would rank that as the lower of our big industries with expectations. But things can change quickly. So there’s just a few sort of thoughts for you, Joe.
Joe Ritchie: Yes, that’s helpful. And totally appreciate the potential volatility, but it is helpful color. And I guess, maybe two other real quick ones. So just making sure that I have thought through the gross margin progression correctly, from the first quarter through the rest of the year. It sounds like you do expect to get back to 70-plus percent gross margins by 2Q. And then also, I just had a question around free cash flow. Just what are kind of expectations, for free cash flow this year? It seemed a little bit lighter than we anticipated in 4Q. Any comments around that would be great?
Paul Todgham: Sure. So I think, again, without guiding beyond the current quarter, just by virtue of a roughly 200 basis point drag from one strategic logistics project, I think you kind of get back to hopefully what you’re seeing. The Moritex drag versus our long term will certainly persist for a while until we fully integrate and achieve more synergies and then the impact of volume deleverage and mix. That will change a little bit quarter-to-quarter, but obviously growth is the driver there that’s going to help us get back to target margins. Specifically for free cash flow, the biggest driver of free cash flow for us is obviously our profit. And so as we get more leverage on growth, which we expect to do, obviously, that would help.
We did have a little higher investment in working capital in Q4. Some of that is sort of strategic decisions we’re making around inventory. So we may see elements of that going forward. But generally speaking, this is a business that continues to generate cash. We do feel quite good about the inventory we have to deliver on our growth expectations. So hopefully, you shouldn’t be seeing major drags on the capital side.
Joe Ritchie: Okay. Good to hear. Thank you, guys.
Operator: Thank you. The next question is coming from Piyush Avasthy of Citi. Please go ahead.
Piyush Avasthy: Good morning, guys. Thanks for taking my questions. Just quickly on Moritex, I think you said 6% to 8% contribution. Can you elaborate on trends you’re seeing in Japan and particularly the semi and electronics end market there? Are you seeing some stabilization in those markets as well? Like – and I know it’s still early, but have you started to see any synergies as you continue to integrate?
Rob Willett: Yes, thanks for your question. So yes, so plenty of synergies with Moritex and we’re out of the gate fast on that. A lot of the synergies have to do with helping to sell their product more broadly and across Cognex, but we’re also integrating our businesses in Japan and we’re excited about the reputation and leadership that Moritex brings us in Japan. So you asked about semi, our business in semi, and we have – we’re overweight semi in our Japan business now both between Cognex and the Moritex piece that we’ve acquired. It has – it did experience a period of tremendous growth in 2021 and the first half of ’22. And then the trajectory slowed a lot in the second half of 2022. And there are signs that we may see – we have more optimism about semi coming back later in the year. And I think it’s hard to call it beyond that at this point.
Piyush Avasthy: Got it. And just following-up on the margin commentary, it was very helpful. Like I think you’ve talked about some cost management actions. And then you continue to invest across our Emerging Customer initiatives. Maybe elaborate on how you are balancing these two heading into ’24. And for the cost management actions, are these more structural in nature that can provide you a longer-term tailwind or more transitory that when sales improve, these costs might come back?
Rob Willett: Yes. Thanks. So as we look at kind of pieces of Cognex’s cost, we have sales, big sales expense. We’re investing heavily, as you saw in our emerging customers, right? And we see that as the potential to make our sales force more productive, where those sales – those Emerging Customer salespeople will be delivering leads and opportunities to the other – rest of the sales force. So we’re being careful about how we’re building that sales force to balance both the more sophisticated, and the emerging customer sales force, and also balance it in terms of the sophistication, but ease of use of our technology. So that’s – there is some sort of changes going on there, which are allowing us to be careful on the cost side in that area.
Our engineering teams certainly, are benefiting from the new AI tools that are available to engineers and those who write software. So certainly, there’s some things that we’re looking at carefully to make sure that we can increase capacity, and manage cost carefully. And then like every company, we have G&A-type functions, again, that are benefiting from process improvement. And in general, we’re really not adding headcount, or haven’t added headcount outside of the Moritex acquisition in really all of the – if I put aside the Moritex and emerging customer pieces, we’ve been very careful to reduce headcount in the rest of the business.
Paul Todgham: Yes. And I think practically this is true for all companies. The biggest variable costs, if we outperform or if we underperform tend to be our incentive compensation, right? So we’ve called out – that’s a headwind of $15 million to $20 million, just a reset towards our budget targets for 2024, where we are expecting to grow. And outperformance of those internal obviously will drive some incremental commissions, and company bonus and underperformance will drive some leverage. But we’re obviously starting from a very low incentive compensation in 2023. That’s really the biggest driver of the things that are going to change in year depending on our company’s performance.
Piyush Avasthy: Appreciate all the color. Best wishes, Paul, and good luck this year.
Operator: Thank you. The next question is coming from Jairam Nathan of Daiwa. Please go ahead.
Jairam Nathan: Yes. Hi, thanks for taking my question. So just wanted to get some more details on the $50 million in emerging customers. Like if you kind of look at it from a 2023 perspective, it’s almost 6% revenue growth. Just wanted to kind of better understand which end markets are you seeing the first initial success in – and what’s the kind of – are you seeing a different set of customers – of competitors? And the success rate in bids, if you can give some more information around those?
Rob Willett: Yes, thank you. Thanks for the question. Yes. So, we’re really enthusiastic about what’s going on in that market. It is – the many, many emerging customer sales noise we have are calling more broadly on manufacturing industries and finding opportunities that may — are more weighted towards industries like packaging and consumer products and food and beverage, right? Visited – I went on right along with one of these – one of the team members, and we visited a company that made pretzels. Would not have been a Cognex customer before, really, not – certainly not a target for us, so to give you an idea of that. And then, yes, so there was another aspect of your question, I think. Oh, competitors.
Jairam Nathan: Yes, yes.
Rob Willett: Yes, thank you. I think – so the competitors that we’re seeing in that market tend to be more weighted towards optical sensor type companies, right? So of course, we still see our traditional competitors, like some of our Japanese competitors. But it’s a broader market. We’re finding ourselves in newer situations and where we’re seeing more German, American optical sensor suppliers. So traditionally, we haven’t thought about competitors but where we can replace potentially many of their products with one of our Snap, In-Sight Snap vision sensor, for instance. So there are opportunities we’re seeing there that are taking us to new places and through the pilots that we did last year and then what we’re seeing, these are really great opportunities for us now to do further work to help our customers realize more value.
I would say, just finally, to profile those customers, generally they’re going to be much less sophisticated than, the large customers we work with. Probably may not have engineers on staff. So our products now are – the ones, we’re selling through that channel are very easy to demonstrate and very easy, to install even for the person we send out, the salesnoid that we send out. So yes, it’s a new world, and we’re kind of excited about it.
Jairam Nathan: Okay. And just following up on like – if I kind of think of a measure like sales per sales employee, a salesperson, where do you see the potential here, compared to – or the gap between the new cohort, the 2023 cohort versus your regular sales force?
Rob Willett: Well, there – most of these new salesnoids are coming out of college, right? And so they have a new training and background. Most of them do have engineering backgrounds but they’re sort of much, I think, more comfortable with the technology and interfacing with it. And as the world moves, this might sound like isn’t that something that’s already happened, but from analog to digital and less sort of deep specialty programming. It’s a different speed, a different cycle, I would say, in how sales occur. But I think what Cognex offers to some of those — to those new salesnoids is a great career path, right? We’re investing in their training and development. They love our culture. We love what they bring to our culture, the energy that they bring. And we hope to see them develop many of them more into bigger roles more sophisticated sales opportunities, management and all of that. So yes, that’s how we’re thinking about it.
Jairam Nathan: Okay.
Nathan McCurren: I think, we have time for one more question, I think.
Rob Willett: Yes, please go ahead.
Operator: Thank you. Our last question for today is coming from Ken Newman of KeyBanc Capital Markets. Please go ahead.
Katie Fleischer: Yes. Thank you. This is Katie Fleischer on for Ken today. Thanks for squeezing me in. I just had one question. You mentioned in the prepared remarks that you’re starting to see healthy project starts in EV battery and semi end markets, but they haven’t really gotten to the point where Cognex is involved yet. I know visibility into these secular trends is pretty limited. But do you have any sense of when you might start to see those impacts flowing through to your results and maybe like when Cognex will typically get involved in projects like that?
