Earnings Call Transcript - CGNX Q1 2022

Operator, Operator

Greetings, and welcome to Cognex First Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Susan Conway, Senior Director of Investor Relations. Thank you, ma'am. You may begin.

Susan Conway, Senior Director of Investor Relations

Thank you. Good evening, everyone. Welcome to our first quarter earnings call for 2022. With us are Rob Willett, Cognex's President and CEO; and Paul Todgham, our Chief Financial Officer. I'd like to remind you that our earnings release and quarterly report on Form 10-Q are available on the Investor Relations section of our website at www.cognex.com/investor. Both contain detailed information about our financial results. During the call, we may use a non-GAAP financial measure if we believe it is useful to investors; we think it will help them better understand our results or business trends. You can see a reconciliation of certain items for GAAP to non-GAAP in Exhibit 2 of the earnings release. Any forward-looking statements made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. However, things can change, and actual results may differ materially from those projected or anticipated. For a detailed list of risk factors, you should refer to our SEC filings, including our most recent Form 10-K and our Form 10-Q filed tonight for Q1. Now I'll turn the call over to Rob.

Rob Willett, President and CEO

Thanks, Sue. Hello, everyone. Thank you for joining us. We are pleased with our results for the first quarter of 2022. Cognex reported record first quarter revenue following a milestone year in 2021. It was also the second highest quarterly revenue in our 41-year history, and we reported an operating margin greater than 30% and an after-tax margin of 24%. Revenue for Q1 grew by 18% year-on-year to $282 million, near the top of our expected range. Companies invested in automation and Cognex's industry-leading machine vision products to support the growth of e-commerce, address widespread labor shortages, and meet increasing requirements for product traceability. Importantly, our product delivery times were mostly back to normal by the end of Q1, thanks to the perseverance of Cognoids, our close relationships with suppliers, and our aggressive buying actions to secure supply. Though costly, the premium prices we are paying to secure scarce components through brokers is the right thing to do. We are prioritizing the needs of our customers and winning market share ahead of shorter-term margin and cash flow considerations. While Cognex's supply chain situation has improved, it is becoming more challenging for many of our customers and partners to source basic parts since we last spoke with you in February. As you know, Cognex products are often part of a broader automation deployment. It's taking customers longer to implement projects, and some projects are getting delayed due to longer lead times from suppliers of other equipment they need like conveyors. That's backing up opportunities for Cognex and delaying revenue. While this dynamic did not have a material impact on our Q1 results, it is causing us to become more cautious about our outlook. From an end market standpoint, the biggest contributor to year-on-year revenue growth in Q1 was logistics. E-commerce, omnichannel, and brick-and-mortar retailers continued to invest in Cognex's machine vision products to enable higher throughput and cost reductions. In the broader factory automation market, revenue from automotive increased year-on-year and set a quarterly record in Q1. Customers in Asia continued to invest in Cognex products for production capacity to bring new batteries for electric vehicles to market. Spending by customers in Europe and the Americas on traditional vehicles was more muted as they held back orders due to a lack of business confidence and supply and labor shortages. Consumer electronics revenue grew well in Q1 year-on-year. We expect this year's spending cycle for consumer electronics will be moderately higher than in 2021, and that played out in Q1 as well. I'll say more about this year's outlook for Consumer Electronics in the guidance section of today's call. In other markets, semiconductors continued to perform above overall growth rates. Turning now to other news. It's been great to engage closely with Cognoids and customers again as the world opens up and becomes more accessible. In recent weeks, I joined Cognoids in Karlsruhe, Akin, and Cork offices to celebrate product launches and innovations. We also recognized Cognoids reaching career milestones as we do at Cognex with perseverance awards. In this difficult labor environment, I'm pleased to report that Cognex's work hard, play hard, move fast culture continues to flourish. Regarding our China team, many Cognoids are working online and making virtual sales calls. The circumstances in China are difficult now, and we're doing all we can to support them. In the realm of new product development, there's tremendous excitement within Cognex about our new product lineup for 2022 and beyond. Our excitement was shared by customers last month at MODEX, a major supply chain trade show held in Atlanta. The Cognex booth was busy and well attended. Customers at MODEX saw a breakthrough In-Sight 2800 Series vision system that we launched in April. The In-Sight 2800 integrates Cognex's new edge learning technology, making powerful deep learning vision tools much simpler to use and train. Manufacturers can quickly automate inspection tasks of varying complexity with as few as 5 images. A few years ago, this work would have required a PhD, a very large image library, and a massive fan called GPU to perform. Bringing our deep learning technology into an easy-to-use, small, smart camera where training and processing takes place directly on the device was not an easy feat. It's representative of an overall dynamic in a high-tech business like Cognex. Our products continually get smarter, smaller, faster, less expensive, and easier to use. This has led to increased demand over time and has allowed us to introduce new customers to the potential of machine vision, and the products we launch are almost always gross margin accretive to those they replace. Customer feedback on the In-Sight 2800 is very good. Experienced automation engineers are enthused about how quickly they can solve existing and new applications that would have previously required hours or weeks. New users of machine vision find the In-Sight 2800 extremely simple to use and deploy without needing to have any machine vision experience. In other product news, we recently introduced the DataMan 280 series of fixed-mount barcode readers. The DataMan 280 features a high-resolution sensor, which when combined with our latest decode algorithms and dynamic image formation system, dramatically improves code-reading performance and line coverage. This technology, along with the latest connectivity options for today's Industry 4.0 manufacturing needs, allows users to read complex barcodes across the broadest set of applications. It performs exceptionally well on high-speed production lines throughout factory automation and logistics supply chains, from reading 1D and 2D label-based codes on boxes to small direct part mark codes etched on critical medical devices. And now I'll turn it over to Paul. Paul?

Paul Todgham, Chief Financial Officer

Thank you, Rob, and hello, everyone. I apologize in advance if we're the only thing standing between you and Margarita on Cinco de Mayo. We were pleased to deliver revenue at the high end of our expected range for Q1 in a difficult supply and macro environment. Revenue was $282 million, which represents an increase of 18% over a strong quarter a year ago and a new first-quarter record. It's worth noting that our 2-year growth rate was 69%. Also, we were pleased to begin catching up on orders in backlog because of our hard work to source supply. Looking at the change in revenue for Q1 from a geographic perspective, revenue from Asia increased by 25% year-on-year. Growth in consumer electronics, EV manufacturing, logistics, semi and the broader market was offset by a 2 percentage point reduction from currency exchange rates. Within Asia, Greater China grew by 27% despite a few million dollars of revenue being delayed to Q2 due to lockdowns at quarter end that impacted our flow of goods and customer delivery acceptance. Revenue from the Americas increased by 17% year-on-year and delivered a substantial contribution in absolute dollars due to growth in logistics, among other industries. In Europe, revenue also increased by 17%, excluding a 7 percentage point reduction from currency exchange rates. Growth came from logistics, automotive, medical related, and other industries in Europe's broad factory automation market. Gross margin in Q1 was 72% as expected. This level is 5 percentage points below the gross margin reported in last year's first quarter, due almost entirely to the significant premiums we are paying to procure electronic components through brokers. I want to remind you that our gross margin target remains in the mid-70% range. We expect to be back at that level once the global supply challenges have passed. It appears that will be in 2023 at this point. Operating expenses were down slightly on a sequential basis and in line with our guidance. Comparing year-on-year, operating expenses in Q1 increased by 10% due to incremental investments we made in sales and engineering headcount during 2021. Operating margin was 31% in Q1 of 2022, compared with 33% in Q1 of 2021 and 23% in the prior quarter. While above our long-term target, the decline year-on-year is due primarily to the supply situation which is driving elevated product costs near term. Regarding the tax provision, the variance in the effective tax rates presented this quarter there are more discussions than is typically warranted. First, discrete tax items combined for a net expense of $6.3 million in Q1 of 2022 compared to a net benefit of $5.2 million in Q1 of 2021 and a net expense of $25,000 in Q4 of 2021. Second, the effective tax rate, excluding discrete tax items, was 16%, 18%, and 8%, respectively. The notable increase on a sequential basis was due to a true-up in Q4 that lowered the 2021 annual tax rate to 16% from a previously estimated 18%. Third, the effective tax rate of 16% in Q1 of 2022, excluding discrete tax items, is below our guidance because we now expect more of our profits this year will be earned and taxed in lower tax jurisdictions. Reported earnings were $0.38 per share in Q1 compared with $0.39 in Q1 of 2021 and $0.30 in Q4 of 2021. Discrete tax items reduced EPS by $0.04 in the quarter while they added $0.03 per share in Q1 of 2021. On a non-GAAP basis, earnings were $0.42 per share in Q1 compared with $0.36 in Q1 of 2021 and $0.30 in Q4 of 2021, excluding discrete tax items. I want to point out that we are no longer excluding excess and obsolete inventory charges from non-GAAP earnings per share. We had adjusted for it starting in Q2 of 2020 because of the unusually large charge we recorded that quarter as part of our restructuring activities. We no longer believe it is necessary now that 2020 is out of our prior year comparison. Turning to the balance sheet, Cognex continues to have a strong cash position with $794 million in cash and investments and no debt. Cash outflows in Q1 included our stock buyback activity. We spent $130 million to repurchase Cognex stock, which is the highest amount we have deployed to buy back stock in a single quarter. Our Board authorized a new $500 million repurchase program in Q1 after we completed our previous $200 million program. Our accounts receivable balance increased by 19% from the end of 2021 and remains very healthy. Large orders shipped late in Q1 contributed to the increase. Regarding our inventory balance, we are continuing to bring in components and other supplies to support customers and a higher level of business. And we are doing so at elevated costs to win market share and underwrite our resilience in a time of global supply chain constraints. Now I'll turn the call back to Rob.

Rob Willett, President and CEO

Thank you, Paul. Let's move next to guidance. Cognex reported a solid start to 2022, and we expect to report good results for Q2. We believe revenue for the second quarter will be between $265 million and $285 million. As mentioned earlier, our customers are facing supply chain challenges and labor shortages that are beginning to slow our growth rates. In addition, we expect Q2 will be a quiet quarter for logistics. We believe this is primarily due to the timing of large projects, and then it will be followed by a more active quarter in Q3. For consumer electronics, our visibility into this year's spending cycle is beginning to crystallize. We believe annual revenue for consumer electronics will be accretive to our growth rate in 2022 and that seasonality will be comparable to last year. For Q2, we expect a seasonal increase on a sequential basis as usual and growth over Q2 of 2021. We believe Q3 will be our largest revenue-generating quarter for consumer electronics this year. I want to remind you that Cognex products for consumer electronics are predominantly installed on production lines in Asia, particularly China. I'm sure you will understand how difficult it is to forecast business in China right now. Despite COVID-related lockdowns, our customers are asking for us to be ready for product shipments for a number of large deployments and on-site support in Q2. Our guidance reflects that timing as well as the assumption that the COVID situation in China does not get worse. We expect gross margin in Q2 will be in the low 70% range. We believe the premium prices we are paying to brokers for scarce components will persist for the remainder of this year. We expect operating expenses will be roughly flat on a sequential basis. Lastly, we expect the effective tax rate will be 16%, excluding discrete tax items. Now, we will open the call for questions. Operator, please go ahead.

Operator, Operator

Our first question comes from Jacob Levinson with Melius Research.

Jacob Levinson, Analyst

I think there seems to be quite a lot of angst out there, for lack of a better word, around a potential recession. I guess the question is, how do you think your customers respond in that type of scenario? I mean, do they cancel or delay projects? Or do you think that they're just going to keep spending on automation because of labor challenges or inflation or whatever the case might be?

Rob Willett, President and CEO

Yes. It's an interesting question, Jacob. I think we've worked in this industry through a number of recessions. And sometimes shorter cycle spend can take quite a strong downturn initially, and then we've seen it come back pretty strongly. I would say our major customers, so in areas like logistics, consumer electronics, and EV longer-term thinkers, we believe they would continue executing on plans that transcend short-term changes in the business environment. So it could be a mixed picture in that way. We believe Cognex is well-positioned to weather difficult conditions given our strong balance sheet, a large backlog position, and the willingness by customers to improve productivity through automation and machine vision in their environments. But those are sort of traditional things that we've seen in the past that may be more pronounced now than perhaps coming into previous recessions based on our size and the strength of our customer relationships. So those are some of the things I would point out.

Jacob Levinson, Analyst

Okay. That's helpful. And somewhat related to that is a comment that you folks made in the 10-Q on slowing factory automation investment. I assume that that's related primarily to the product shortages that you mentioned, but just curious if there are particular nuances around certain net markets or if that was more just a general comment.

Rob Willett, President and CEO

There is a lot happening right now. I'm reminded of a quote by Tom Peters: If you're not confused, you're not paying attention. There are numerous variables for anyone operating a business today. Supply chain challenges are certainly significant, and I believe our deployments and sales are being impacted by other suppliers in the automation infrastructure, such as integrators or sales from major suppliers facing lead times of up to six months for PLCs and other motion control equipment. This is causing delays in some deployments. Additionally, we have the ongoing COVID situation in China, and we are seeing more cautious spending by companies in Europe and the U.S., particularly in the automotive and packaging sectors. Macroeconomic concerns and the geopolitical situation, including the war in Ukraine, also contribute to the uncertainty. We've noticed delays in the establishment of new distribution centers and logistics as well. There is now greater emphasis on productivity and process improvements to cut costs and enhance worker safety. All these factors are influencing our outlook for the year. Some trends are encouraging, especially companies' interest in reducing costs and improving safety, while delays in new projects could have longer-term implications. Overall, what we are observing is more about project delays causing concern, rather than cancellations, which we have not encountered and do not anticipate in the near future.

Operator, Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Co.

Jim Ricchiuti, Analyst

My question is regarding some of the logistics projects. Are these typically larger projects? Also, I wonder if these deployments that are not completed by Q3 are at risk of being pushed into 2023, especially since customers usually prefer to have them ready by the strongest quarter, Q4.

Rob Willett, President and CEO

We are still learning about seasonality in logistics, and it appears that the first and third quarters will generate the strongest revenue for us this year. We expect lower revenue in the fourth quarter for the reasons you've mentioned, similar to previous years. I don't see the dynamics you're referring to having a significant impact on our business this year overall, but we do anticipate stronger performance in the first and third quarters due to the timing of deployments rather than any change in the business environment.

Paul Todgham, Chief Financial Officer

Yes. Jim, this is Paul. I've shared this before, but the last 3 years have had quite different seasonality in logistics. In 2020, logistics grew every quarter from Q1 to Q4, so Q4 was actually the highest quarter in logistics in 2020. So kind of bucking that theory of holiday readiness that you said. Last year, it grew from Q1 to Q3 steadily, and then Q4 was down. This year is a different pattern. So we are trying to give color on the overall flavor of the year, but I don't think we have true insight into a pattern, or at least we haven't seen it over the past 3 years.

Jim Ricchiuti, Analyst

Understood. Regarding your comments on the consumer electronics and logistics market, what is your outlook for the automotive sector? Are you observing similar trends, with increased investment in electric vehicles for the remainder of the year, or is there more uncertainty in the traditional market?

Rob Willett, President and CEO

Well, certainly, we're seeing automotive revenues growing faster in Asia, and that's where the global part suppliers and EV battery manufacturers are concentrated. We see a lot of investment and very strong growth in that part of the business. Then we're seeing slower growth or declining growth rates in Europe and America, particularly with traditional combustion engine and Tier 2 traditional automotive parts suppliers. So I would expect those dynamics to continue. There are obviously EV battery projects increasingly in Europe and America, but I think those are probably longer-term plays for Cognex's growth plans.

Operator, Operator

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

Joe Ritchie, Analyst

I just want to ask just kind of a broader question around the longer-term growth framework for the logistics business. Obviously, it's been an incredibly great story for you guys talking about a 50% kind of compounded growth rate over time. But there is news out last week that Amazon had built too many warehouses and has excess fulfillment capacity. I'm just curious, I mean we don't have to talk about that specific customer, but just more broadly, how you're thinking about the growth rate over the long term and whether there is potential excess capacity right now and that growth slows for the next, I don't know, 12 to 24 months?

Rob Willett, President and CEO

Yes. We expect logistics to contribute positively to our overall growth this year, but it is unlikely to reach our 50% stretch goal following an impressive year last year and a strong overall three-year period. There is significant demand for machine vision in logistics; however, as you correctly pointed out, plans for new distribution centers have been delayed. There is now a greater emphasis on productivity and process improvements to cut costs and enhance worker safety. Many repetitive tasks occur in logistics fulfillment, and with rising concerns about labor, safety, and potential unionization in these facilities, there is an increased focus on applications that align with these challenges. This situation favors Cognex, as we specialize in fixed mount and advanced vision systems rather than primarily handheld devices for this market. As I've noted, deployment is slowing due to supply chain and labor issues, particularly in engineering and integration. These are the dynamics we are facing this year. We anticipate revisiting some of our long-term growth targets for logistics. While we are not ready to disclose specifics just yet, you can expect to see an exciting vision for the future of Cognex Logistics later this year, especially as we transition from barcodes to more advanced vision solutions, which present promising growth opportunities. We appreciate your inquiry and ask for a bit of time to update you and the community later in the year regarding how we will approach what has been a 50% stretch goal and how it may evolve in the future. Nevertheless, I foresee very exciting developments ahead.

Joe Ritchie, Analyst

That's very helpful, and I appreciate the insights. I have one follow-up question, considering the longer-term perspective. I'm interested in whether there have been any changes in the competitive landscape. Your competitor in Asia has had some strong barriers to entry. I found it noteworthy that Zebra acquired Matrox Imaging this past month. I'm curious if the competitive dynamics are shifting at all, and any comments you can provide on that would be appreciated.

Rob Willett, President and CEO

Yes, sure. I'll make a few general comments. So I can, our main competitor in this marketplace and we — I think we have gained quite a lot of share over the last few years. I think our technology, our balance sheet, our investments, R&D spend, and our sales improvements have paid dividends through this period. So I would say those dynamics are borne out if you look over the last, say, 18-month period of results. In terms of new competitors, we're always very focused on what's going on in terms of new entrants and new competitors. Certainly, Zebra is a company we see investing a lot in this space. And of course, we have been very interested and not surprised by Zebra's acquisition of Matrox. I wouldn't say it changes our overall strategy or thoughts, but some thoughts I have about certainly that would be both companies sell primarily through partners, not direct sales, as we and cans would the majority — half of the majority of our business. Matrox is a very strong technical company. They've been in the industry a little longer than we have. They are very strong in rules-based vision and have strong semiconductor relationships with large OEMs. So those are all interesting things for us to observe, as we think about that transaction. We're also, there is more activity, I would say, in local Chinese competitors, and we certainly watch those very carefully. There have been some IPOs locally by some Chinese machine vision companies, and there's also obviously a large state-owned enterprise in hype robot that also is growing in China. So quite dynamic. I would say probably the companies I've mentioned are gaining share and growing, and they're probably doing so at the expense of many of the other players in the industry who have been there for a long time and perhaps haven't kept up with R&D and innovation and investment in sales channels. So those are some of the broad dynamics I would see, Joe.

Operator, Operator

Our next question comes from the line of Andrew Buscaglia with Berenberg.

Andrew Buscaglia, Analyst

My comment on consumer electronics growing. I was not expecting to hear that, especially this early in the year. But what exactly is driving that? What's giving you the visibility to make that comment?

Rob Willett, President and CEO

Well, we have very close working relationships with a number of very large consumer electronics providers but also their supply chains and their customers. So we do have pretty good insights by this time of the year about their plans to roll out new technology and new models and invest in new lines. That's been the case for us for many years now. So that's really our read, and that's really what we're sharing. I would say there are certainly dynamics of new features and new technology coming into the electronics space. There are years where that really pops for us, and you've seen that in years like 2017. Then there are years that are more muted or have declined. I think we're calling this year as one of moderate growth.

Andrew Buscaglia, Analyst

Okay. And the comment on automotive you're talking about faster growth in Asia, but maybe some declining growth rates in North America from traditional OEs. Do you guys do work or intend to do work with some of the newer nontraditional EV makers that are based out of the U.S.?

Rob Willett, President and CEO

Well, as we often say, we're the leading provider of advanced machine vision technology for industrial automation in the world, and we work with the most sophisticated customers in general. Those are exactly the kind of companies that we work with.

Andrew Buscaglia, Analyst

Okay. Well, actually, maybe a question, if those guys are still investing, how come you wouldn't see that automotive growth this year? So kind of like newer EV makers are still moving forward with their plans.

Rob Willett, President and CEO

I believe we have observed solid growth in the automotive sector during the first quarter, and while we haven't provided additional guidance for the year as a whole, I would like to point out that we are witnessing significant growth in electric vehicles and EV batteries, while traditional automotive growth has been more subdued. This presents a mixed picture, but you can rely on the innovators, especially in the EV battery and electric vehicle markets, who are seeing substantial growth, which in turn supports our growth as well.

Paul Todgham, Chief Financial Officer

Yes. The scale of electric vehicles in Asia remains the highest concentration in our mix. While electric vehicles are growing everywhere, the growth rates vary due to different base levels and varying timelines for capital expenditures across different regions.

Rob Willett, President and CEO

And it might help to understand too that EV is a supply chain ecosystem that includes a lot of OEMs, subcontractors, and machine builders, and battery manufacturers, right? So much more than it is selling directly to end-user brands that you might recognize, even though those brands are often contracting with the machine builders.

Paul Todgham, Chief Financial Officer

Yes, that's right, Rob. So what we recognize is revenue where we execute the project, not necessarily where the OEM might be located for headquarters.

Rob Willett, President and CEO

Yes. And certainly, the large EV battery manufacturing companies are almost all based in Asia.

Operator, Operator

Our next question comes from the line of Rob Mason with Baird.

Rob Mason, Analyst

Just to follow up on that last question around automotive and EV. Rob, could you frame the growth rate range that we're falling into right now? I mean, is it triple digits? You said strong. But just perhaps a reference point for the rate of growth that you're seeing?

Rob Willett, President and CEO

Right. So I'm not sure we would necessarily give you specifics, but it's certainly growing a lot faster than our overall growth rate. Maybe I'll leave it at that.

Rob Mason, Analyst

Okay. You seem a bit more at ease with your supply situation in relation to the performance of the ecosystem you're selling into. I'm curious about how you're evaluating that and how it's impacted you. Did you notice an increase in manageable comments? How are you factoring that risk into your outlook moving forward, considering the ongoing challenges many are facing?

Rob Willett, President and CEO

Yes, we've been dealing with this issue for about a year. The problem has primarily been with chip suppliers who have not upheld their commitments, despite having a purchase schedule that spans several years. Last year, during a period of intense growth, we were consuming a significant amount of chips and depleting our strategic reserves. We also faced some suppliers, particularly for custom specialty chips, who pushed back their commitments by about six months. Initially, we thought we were making good progress and expected the challenges to ease by the end of the year. However, we have seen ongoing decommitments, which is concerning. One supplier, in particular, has delayed their schedule by six months, and industry-wide, there are reports of ongoing difficulties. We are working diligently to redesign those chips or find alternatives. At times, we have to purchase chips from brokers, which can be costly in the current market. We anticipate that this strategy of sourcing from brokers will continue. This process affects our inventory and revenue timing; more expensive inventory will translate into products in the following quarters. We'll have a clearer view on that. Now, I'll hand it over to Paul to provide more specifics.

Paul Todgham, Chief Financial Officer

Yes. Rob, over the past three quarters, we've provided some insights on the revenue situation, which I will discuss first, followed by gross margin details. We've estimated how much revenue might have been deferred or postponed by a quarter due to supply chain issues that typically would have been recognized in a normal environment. These figures were encouraging. We did push some revenue, which grew during the latter half of last year, thanks to our investments in securing supply. As Rob mentioned earlier, we have mostly returned to normal delivery times for the majority of our products. During the quarter, we fulfilled about $20 million in orders that had been backlogged for some time, primarily benefiting Europe and the Americas. However, this was partially counterbalanced by several million dollars in orders we would have recognized in China if not for COVID-related delays in transit and customer acceptance at the end of the quarter. As for gross margin, it's important to note that, unlike others who cite various factors like core component cost inflation, our main issue is the cost of broker buys. This accounts for most of the difference between last year's gross margin of 77% and the current margin of 72%, compared to our target of mid-70s. We faced a margin headwind of just over 400 basis points from these broker buys, which is similar to what we experienced in Q4 and what we anticipate for Q2. I remain hopeful for improvement in the second half of the year, but we aren’t relying on that at this stage.

Operator, Operator

Our next question comes from Joe Giordano with Cowen.

Joe Giordano, Analyst

I just wanted to confirm one thing I think you said, but are both consumer electronics and logistics expected to be accretive for the full year to total company growth?

Rob Willett, President and CEO

Yes, they are.

Joe Giordano, Analyst

Okay. I thought that's what you said. And you kind of I think indirectly answered this too. But based on Q3 logistics expected to be like a more active quarter, and I think you mentioned Q3 is expected to be your highest revenue quarter for CE. Is it fair like based on everything we know right now that Q3 is likely sequentially a higher revenue quarter for the full company than Q2?

Paul Todgham, Chief Financial Officer

Yes. Joe, again, we just guide for the current quarter, of course. But putting those trends together and thinking about the seasonality of consumer electronics, which does tend to be a seasonal build. And this year, we are expecting Q1 and Q3 to be our largest quarters for logistics. I think that's a safe bet.

Joe Giordano, Analyst

Okay. I think there was a question earlier talking about the inks that are in the market right now. Sometimes ink is good for a company with a lot of cash and no debt to be active and opportunistic. So just curious what you think about the M&A markets? Are there parts of the market that are kind of under pressure where you can step in? Or is there stuff looking more attractive now? Just what's your overall view there?

Rob Willett, President and CEO

I think we're always out. We're very selective, and we like companies with great technology for sure. My sense is it's a little early, right? I think maybe the realization of kind of what we're looking at maybe hasn't filtered into the M&A environment, particularly in terms of valuation. But certainly, that's something that we're thinking a lot about.

Joe Giordano, Analyst

Is there clarity on the logistics delays? Is this pushed to Q3 after discussions, or could it possibly be pushed to next year or canceled? How reliable is the timing for those delays?

Paul Todgham, Chief Financial Officer

Yes. I mean, I think, again, there's a reason we give quarterly guidance and not beyond that. I think as Rob noted, there is tremendous volatility right now. So even thinking it's a good bet, that's a good bet based on the information we have today. Could things delay further and get worse? Of course, they could. But there are several moving pieces associated with these sort of long-term multiyear plans that the pushes do tend to be kind of historically of this duration, not dramatic changes given all the other parts that are sort of lined up. So I'd say it could get worse, but we think the downside of that is bound to some extent, given the commitments our partners are making.

Rob Willett, President and CEO

I believe Cognex primarily works with highly sophisticated businesses. During the initial downturn, we observed that many technically advanced logistics companies were proactive and made significant investments. While they might be experiencing changes in their sales to customers, their automation strategies are well defined. The emphasis will be on the timing and focus of their implementation. Therefore, I am quite confident that this business is headed our way and is unlikely to be canceled.

Operator, Operator

Our next question comes from Jairam Nathan with Daiwa.

Jairam Nathan, Analyst

I have some questions about pricing. Companies have been increasing prices to manage some of these cost challenges. Can you explain what Cognex has implemented in this regard? Are these figures adjusted for these price increases?

Rob Willett, President and CEO

Yes, I can take it, Cam. Obviously, the current inflation environment is something we haven't seen in some time. For our philosophy on pricing, really our strategy is to focus more on offsetting what we believe is permanent inflation at the gross margin line. So the biggest driver of our lower gross margin right now is broker buys. Although we're getting some offset for some pricing actions we've taken at an operating income level, we're really focused on trying to come through this period of supply chain volatility with the price increases we've taken and realized matching the inflation that we think will be with us for some time. Based on what we saw in Q1, we believe we are keeping pace with those underlying cost increases that are permanent. But of course, we'll continue to monitor and react accordingly. We try not to be more specific than that, knowing our largest partner has very little and for competitive reasons, don't wish to disclose further.

Jairam Nathan, Analyst

Okay. As a follow-up, I've noticed that logistics has been highlighted as a growth driver across all segments and regions. Can you provide more details on the regional growth trends? Are you experiencing more weakness or delays in the U.S. compared to international markets?

Rob Willett, President and CEO

I'll make a general comment, and then Paul may be more specific. But I would say the majority of our logistics business is still U.S. focused, but we've been investing for a number of years and building up our capabilities in Europe and Asia. We're generally seeing much higher growth rates in those markets. I think that's some of the exciting part of the logistics business and why we're confident about continuing to grow very strongly as a business, regardless necessarily of what happens in the U.S.

Paul Todgham, Chief Financial Officer

Yes, that's correct. The data reflects a relatively faster growth abroad that we've been experiencing for a while now. We are also pleased with the diversification of our logistics business. We have a variety of customers and strong relationships with them that have been expanding well.

Rob Willett, President and CEO

We're seeing some really great e-commerce technical leaders in Asian markets particularly adopting Cognex vision in a big and exciting way and similarly in Europe. So we have a lot of enthusiasm about that. I know in our discussions here with you it tends to be a little U.S. focused. So I would recommend we talk about that more in the future.

Operator, Operator

We have reached the end of the call. I would now like to turn this call back over to Mr. Rob Willett for closing comments.

Rob Willett, President and CEO

Thank you so much, and thank you, everyone, for joining us tonight. We look forward to speaking with you again on next quarter's call.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.