by Chad Meyers & Richa Gupta | 8/7/2023

Earnings season is in full flow and the VDC team has been tracking results from several leading market players across AIDC, enterprise mobility, and machine vision. Q2 2023 was a rough quarter all around, with market leaders expecting continued weakness through the end of the year. As a whole, large projects have temporarily dried up and the run rate business has taken a hit for vendors and distribution partners alike. Customers want to do more with what they have, so what does that mean for future investment indicators? When can the technology investment community expect to see market recovery? What are some of the bright spots in this otherwise bleak environment? Read on for our key takeaways from market leaders’ Q2 earnings calls.

Zebra Technologies
Global AIDC and enterprise mobility market leader, Zebra Technologies (ZBRA), announced its 2023 Q2 earnings on August 1st. EPS was at $3.29, down 29% compared to Q2 2022. Sales declined more than 17% YoY; Asset Intelligence & Tracking segment (AIT) comprising of barcode label printing, RFID/RTLS products, and supplies dropped 2% YoY, and Enterprise Visibility & Mobility (EVM) comprising of data capture, fixed industrial scanning, machine vision, mobile computing, and workflow optimization solutions decreased 32% from Q2 2022. All regions underperformed, mainly due to a decline in mobile computing sales. EMEA and APAC led the regional decline, revenues decreasing 24% and 17% respectively. The Americas experienced significant drops as well – with an 11% decline in North America and a 6% decrease in Latin American sales.

Weakening demand and cautious end user spending contributed to Zebra’s sales drop. Enterprises made significant investments in data capture and labeling devices over the past few quarters, a trend which has prompted them to leverage what they already have instead of purchasing new devices. Verticals most impacted by the lower demand trajectory are retail, e-commerce, transportation, and logistics – growth in these has reset to pre-pandemic levels. However, RFID, data capture, supplies, services, and software shined as the bright spots in Q2.

Key Highlights:

1. Channels are pushing back orders as they attempt to reduce inventory levels from pandemic stock up. Zebra expects to continue to see a sales decline through the rest of 2023 due to inventory reductions from distribution partners but see various potential channels for growth in the long term across many verticals.
2. Adjusted gross margin improved due to lower premium supply chain costs, minorly offset by currency depreciation and volume deleveraging. The company also experienced lower operating costs, higher interest expenses, and a lower share count, which helped contribute to the EBITDA margin and EPS decrease.
3. Zebra sees significantly lower pipeline conversion rates than it has historically for the 2 remaining quarters with projects continuing to get pushed out. This will lead to distributor destocking as a result of softening demand squeezing sales opportunity. The vendor doesn’t expect large deployments/projects through the end of the year, with the continued reduction in velocity of run-rate business also negatively impacting channel growth.
4. Zebra indicated that long term growth will come from several trends existing across its diverse customer base. Automation, mobility, cloud computing, RFID deployments, and artificial intelligence are key areas of focus for its customers. The company has seen double digit growth in recent years in advanced RFID solutions as real-time inventory accuracy becomes more important for end users.
5. Machine vision investments position Zebra for long term growth, as indicated by its strategic acquisitions, revenue increases, and EBITDA margins for this category. The company continues to diversify into EV and pharmaceuticals manufacturing, and warehouse distribution, which are helping offset cyclical declines in the semiconductor industry.
6. Zebra’s management indicated that government/public sector is a key growth vertical, particularly in North America. While historically, deals have been primarily for outfitting the police force with rugged tablets, and parking enforcement officials with mobile computers and mobile printers, investments are now shifting. Large contracts for federal and state governments, including projects for defense logistics operations, are currently underway.

Cognex
Global machine vision market leader, Cognex (CGNX), announced its Q2 2023 results on August 3rd, posting revenues of 245 million and beating EPS expectations by $0.06. Revenues were down 12% from Q2 2022, which includes the reduction caused by global currency fluctuations. Revenues declined across all major regional markets – Americas by 10%, Europe by 8%, China by 8%, and Rest of Asia-Pacific by 27% YoY. Operating expenses declined 13% YoY, which included $20 million in expenses for the factory fire in June 2022. Excluding these expenses, operating costs increased 3% YoY as Cognex invests in its Emerging Customer initiative – with this, the company aims to expand its salesforce to capture greenfield opportunities in the machine vision market. While Cognex checked most of its boxes for the quarter, the company expects weak performance for at least the rest of 2023 due to global market softening (in the industrial supply chain).

Key Highlights:

1. Cognex’s numbers were fairly in-line with expectations; revenues landed in the top-end of the company’s expected range, gross margin met overall guidance, and operating expenses for the quarter were favorable to expectations. Gross margin came in at 74%, reaching Cognex’s mid-70% long-term target estimate. This improvement was offset by lower revenues and foreign exchange headwinds.
2. Consumer electronics and semiconductors experienced the most significant demand slowdown globally. These industries have historically led with machine vision investments. EV battery manufacturing continues to drive growth in the automotive sector; however, this increase does not outweigh declines in traditional automotive manufacturing.
3. Cognex sees slower manufacturing activity in automation markets in Germany and the United States. Revenues from customers in the Greater China region declined 4% even excluding the impact of foreign exchange conversions. Large installations/projects from the consumer products industry partially offset investment declines across other industries.
4. Cognex has seen lower revenues from the logistics industry as large e-commerce customers pause investments for the past four quarters. However, the vendor does not expect to experience issues related to channel destocking as it saw some of its largest logistics customers turn off infrastructure investments about a year ago after having overbuilt capacity during the pandemic. The company expects the market to stabilize, and even grow, in 2024.
5. Parcel and post organizations are largely new customers for Cognex, with the company replacing legacy line scan technologies with imagers. The vendor’s DataMan 580 and Modular Vision Tunnel products, introduced in early 2023, target this specific opportunity – for high-speed, high performance, and mass flow applications, requiring lots of image capture and data management.
6. Cognex has significantly expanded its new product development initiatives, launching 13 new products in the first half of 2023 – as it combines innovation strategy with leveraging common architecture and platforms across its solutions. These include Advantage 182 Series image engines for lifesciences OEMs; In-Sight 2800 machine vision system combining AI with rule-based tools designed for factory automation applications; and, DataMan 80 Series to decode DPMs and illegible barcodes, among several others.
7. Cognex has historically relied on its direct salesforce to primarily focus on strategic accounts that generate significant sales volumes, with distribution partners selling primarily to smaller customers that typically require more “handholding”. The company launched its “Emerging Customer” sales initiative towards the end of 2022 to broaden the reach of its direct sales team to customers who are relatively new to factory automation, thereby increasing overall market penetration.
8. Q3 revenue is expected to be between $180 million and $200 million, adjusted for the $15 million that was realized in Q2 but was initially expected in Q3. Slowdown in manufacturing demand, as also evidenced by global PMI indices, will impact factory automation investments in the near future.

VDC’s View & Future Outlook
The global markets for data capture, enterprise mobility, fixed industrial scanning, label printing, and machine vision are impacted by inflationary and macroeconomic pressures, and customers’ reluctance to purchase during (what is largely considered to be) an industry-wide cyclical slowdown. VDC estimates that the cumulative 2023 revenues for these product segments will be nearly $21.8B, with the market expected to grow to just under $23.3B in 2024, a gain of 6.8% YoY, as the downturn ends and organizations ramp up their technology infrastructure investments next year.

Zebra has seen performance weaken across industries and regions due to end users managing their inventory by pushing back orders and repurposing existing devices, causing demand slowdown. VDC sees this as a near-term problem for the global market leader that will diminish as macroeconomic pressures subside, global logistics and manufacturing performance indices improve, and customers are able to set aside bigger budgets for infrastructure-related investments. Backlogged orders are being pushed back and not cancelled, which shows that clients intend to buy in the future especially when inflationary pressures ease. While Zebra does expect conditions to worsen over the next couple of quarters, there are bright spots to look to in the long term from the standpoint of vertical adoption and regional spending. With promising attributes present in pharmaceutical and EV manufacturing as well as government projects across the globe, the decline in end user demand is temporary. VDC believes that through diversification into different markets with its new product lines (particularly fixed industrial scanning and machine vision), coupled with market corrections and stabilizing foreign currency exchange rates, Zebra will return to positive growth.

Cognex performed better than Wall Street’s expectations for the quarter even as negative macroeconomic trends continue in 2023. Sharp declines in consumer electronics and semiconductor industries negatively impacted factory automation spends. EV battery manufacturing is the bright spot currently and also for long-term growth as demand in other sectors weakens across the globe. While key e-commerce players have significantly scaled back on infrastructure investments over the past few quarters, parcel and post organizations can drive growth for Cognex in the future. The company is strategically announcing new products for this market in order to position itself for future growth; VDC finds its concerted efforts around new product development and introduction particularly encouraging. Cognex’s decision to expand its direct salesforce to also target factory automation opportunities within the SMB segment will place it head-to-head against Keyence, its largest competitor in the machine vision market with a formidable direct sales team.