Greetings, and welcome to the Cognex Second Quarter 2021 Earnings Conference. 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.
Thank you. Good evening, everyone. Welcome to our 2nd quarter earnings conference call. With us are Rob Willett, Cognex's President and CEO and Paul Todjem, our Chief Financial Officer. We'll start with prepared remarks and then open the call for questions.
I'd like to remind you that our earnings release and quarterly report on Form 10 Q are available in the Investor Relations section of our website atwww.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 or if we think it will help them better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non GAAP in Exhibit 2 of the earnings release. Any forward looking statements we 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 ks and Form 10 Q we filed tonight for Q2. Now I'll turn the call over to Rob.
Thanks, Sue. Hello, everyone. Thank you for joining us. As shown in today's news release, Cognex reported the highest Revenue was also at the top of the expected range we gave as guidance last quarter. Revenue grew by 59% from Q2 of 2020, making it the 4th quarter in a row in which we have reported year on year revenue growth comp.
This high level of achievement was made possible by the efforts of Cognoids around the world. They worked hard to support customers and meet increasing order rates in a very difficult supply environment. Logistics was again our largest end market in Q2. We also reported another record revenue quarter for logistics Conference due to continued strong demand from the e commerce sector. Cognex is recognized as the technology leader in logistics Conference.
Plus, sectors that struggled in 2020, such as brick and mortar retail, are restarting their automation plans. Consumer electronics was a large contributor to growth in Q2. Revenue was higher than we expected because some business happened earlier than we anticipated. While the highlights for this quarter, it does not Conference. This is due to lower levels of investment in smartphone manufacturing and Revenue from manufacturing industries increased substantially from depressed levels in Q2 of 2020.
Automotive set a new quarterly revenue record after being hard hit last year. Other highlights included consumer products and Food and Beverage. Sammy also grew well year on year. Medical related industries did too. Moving now to our supply chain.
We're facing the most difficult supply chain environment I've experienced in my 13 years at Cognex. The use of Cognex products is growing worldwide as manufacturers respond to labor shortages and increasing consumer demand. They're implementing machine vision to improve their throughput and the quality of their products. At the same time, Cognex and many other companies are under pressure from comp. Record long component lead times, vendors struggling to supply parts, freight delays and capacity constraints, Even so, the situation intensified as we move through Q2.
We continue to aggressively secure strategic components comp. And our customers appreciate what we're doing to accommodate their requests. Let's talk next about new product development. Conference. The spring and summer are an exciting time at Cognex.
It's when we bring our technical and sales leadership together for strategic planning. These are some of my favorite weeks of the year. There's a tremendous excitement within Cognex about the new technologies and products we expect to introduce over the next few years and the growth opportunities ahead of us. Cognex's industry leading vision tools An example is VisionPro 10, a recent major update to our PC based vision platform. Development environment.
Along with VisionPro 10, we introduced SmartLine, the industry's first hybrid smart tool comp. For PC vision that combines the high accuracy of 2 d vision with the flexibility of deep learning. SmartLine quickly solves Conference. Complex line detection for high precision alignment applications in consumer electronics assembly and semiconductor manufacturing processes Furthermore, our new VisionPro Deep Learning 2 point comp. Blemishes, cracks and other defects.
This is particularly valuable in demanding medical and electronics applications. We're also leveraging our software advantage with new optics technology from investments we've made in image formation. An example is our new high speed steerable mirror, which features next generation liquid lens technology to significantly comp. The steerable mirror is ideal for Conference. Quickly reading a high volume of barcodes at shorter working distances, such as in pharmaceutical packaging aggregation, as well as across large fields of view, such as reading many barcodes on a large pallet in a warehouse.
Conference. In other product news, we continue to make good progress transitioning our logistics business from Conference Call. These standard solutions are easier to deploy and require less hands on engineering support from Cognex. We believe this will enable us to scale more easily and report higher gross margins in logistics Conference. It's gratifying to see the hard work and ingenuity of Cognoids come to market in innovations like Beam's.
They underscore the value of our long term investments in RD and E. The decisions we make on where to invest Conference. Now I will hand the call over to Paul
Thanks, Rob, and hello, everyone. As mentioned, revenues for Q2 was 2 comp. $69,000,000 which represents a 59% increase over a weak quarter a year ago and a new all time revenue record. We were pleased to deliver revenue at the top of our expected range. We believe this demonstrates improved visibility and our success in navigating the difficult supply environment.
It's worth noting that Q2 of 2020 was an unusual quarter due to COVID and our own restructuring actions. Comp. Q2 of 2019 provides another potential helpful comparison. Revenue in this year's Q2 was 35% above that pre COVID period of 2 years ago. Our 3 largest end markets, logistics, automotive and consumer electronics, all made strong contributions to year on year growth.
We were particularly pleased that automotive exceeded our highest pre COVID level to set a new quarterly record. Broadly speaking, growth in many sectors comp. Gross margin was 75% and within our target range. Our gross margin increased substantially year on year because of an $8,000,000 excess inventory charge in Q2 of 2020 resulting from last year's economic disruption. On a sequential basis, gross margin declined as we expected due to revenue mix.
We are beginning to experience cost increases associated with the current supply environment. Given our software like gross margin and our customer first philosophy, we are prioritizing customer demand even if it means a modest short term hit to the P and L. I want to remind you that in Q2 of 2020, operating expenses included a restructuring charge of $15,000,000 comp from a program undertaken to right size the team and a non cash impairment charge of $20,000,000 primarily to write down a portion of acquired intangible assets. Excluding these charges, the combined total of RD and E and SG and A increased by 19% year on year and was in line with our expectations. One driver of that increase was incentive compensation, which consists primarily of sales commissions and company bonus related to the higher revenue.
Travel and other sales and marketing activities are also higher this year and we have higher expenses from incremental growth investments, stock based compensation expense and the translation impact of a weaker dollar. Savings primarily from last year's restructuring activities have partially offset these increases. Operating margin in Q2 of 2021 was 34%, reflecting excellent leverage on the revenue growth. That compares very favorably to the operating loss we reported in last year's Q2, resulting from the charges for the restructuring actions, intangible asset impairment and Inventory Write Down. Below operating income, investment income decreased by approximately $1,500,000 year on year, primarily because of lower yields on our portfolio in the current environment.
The effective tax rate excluding discrete tax items was 18% in both Q1 and Q2 of 2021 compared to a benefit of 1% in Q2 of 2020. On a non GAAP basis, earnings were $0.43 per share in Q2 compared with $0.18 in Q2 of 2020 and $0.36 in Q1 of 2021, excluding discrete tax items and the three charges just mentioned. Looking at the change in revenue for Q2 from a geographic perspective, growth broadened year on year in all regions. Comp. Europe was our fastest growing region, helped by currency exchange rates.
Revenue grew by more than 60 comp over a particularly challenging quarter a year ago. 10 percentage points of the increase was due to the weaker U. S. Dollar. Conference.
Growth drivers included automotive, logistics, consumer products and other industries in Europe's broad factory automation market. The Americas increased by more than 50% year on year and delivered the largest contribution in absolute dollars. Substantially higher revenue from logistics led the increase. Automotive and medical related industries also contributed nicely. Revenue from Asia also increased by more than 50% year on year.
Consumer Electronics increased substantially due to the timing of this year's spending cycle. Automotive, semi and the broader market continued to grow well, Particularly in Asia outside of Japan. Currency exchange rate fluctuations contributed about 4 percentage points to Asia's growth. Turning to the balance sheet. Cognex continues to have a strong cash position with $952,000,000 in cash and investments and no debt.
We spent $14,000,000 to repurchase Cognex stock in Q2 and a total of $21,000,000 year to We plan to continue to buy back stock in Q3 at a regular pace, while maintaining flexibility to be more opportunistic. As we announced tonight, our Board of Directors declared a quarterly cash dividend of $0.06 per share payable on September 3rd to all shareholders of record as of August 20. Now, I'll turn the call back over to Rob.
Thank you, Paul. In summary, Cognex had a very strong second quarter in which we reported record revenue. It was also our 4th quarter in a row of revenue growth comp. We believe that growth is unsustainably high and expect comparisons will moderate in the back half. For Q3, we expect revenue will be between $275,000,000 $295,000,000 At the midpoint, this expected range represents growth of about 14% year on year.
Breaking it down in more detail, We believe logistics will be a growth driver in Q3, both year on year and sequentially. Automotive And the broader factory automation market should continue to contribute nicely. We do expect some seasonal softness during the summer months as usual. We expect consumer electronics will be a headwind in Q3. You may recall that last year's Q3 included a heavy concentration of Conference.
That drove substantial year on year growth for the company overall. This year, we expect revenue will be more evenly split between Q2 and Q3 and that consumer electronics will show a modest decline in total for the year. We believe gross margin in Q3 will be in the low to mid-seventy percent range. As we discussed in our Q1 call. We're making a strategic investment in a high potential customer in logistics that is in the early phase of adopting Cognex products.
We're working on a major deployment with them that we will substantially complete by the end of the third quarter. We also expect to go on expediting customer orders and paying higher component costs. We expect operating expenses will increase by mid single digits on a sequential basis. We're adding resources in both engineering and Sales. We're supporting large deployments of Cognex products.
We're preparing for upcoming product launches and We're seeing the resumption of some expenses, such as domestic travel in certain geographies. Lastly, we expect the effective tax rate will be 18%, excluding discrete tax items. Now we will open the call for your questions. Operator, please go ahead.
At this time, we will be conducting a question and answer Conference.
Our first question comes from
the line of Joe Giordano with Cowen. You may proceed with your question.
Hey, guys. Good evening. Hello, Joe.
Can you talk like Given the supply chain, are there sales that you're just not able to get out the door because of that? Or I know you're paying extra on comp and expediting and things like that. But with sales I mean, sales are great, but would they have been higher if not for these issues?
So we're like all companies, we're struggling with longer lead times and the issues we discussed Conference. But we don't think we're losing any business, any material business that we can point to. But certainly, we're seeing a Large increase in backlog and delays in getting some orders out of the door. And we would size that as we would have been probably 5% Plan. Larger.
We would have grown 5% faster in the quarter if we'd been in a normal supply chain environment.
That's very helpful on sizing that. In terms of the margin, If you were to normalize for supply chain and this large customer, are we back to like mid to high 70s? Is it like very Isolated things that you can point to that are keeping it in the low to mid right now?
Yes. Joe, this is Paul. That's right. Yes. We broadened our range given some of the uncertainty in the supply market for next quarter, but there really are 2 major factors.
The first being, I think really concentrated in Q3 the deployment of the strategic investment with a high potential logistics customer. And again, we started to recognize that in Q2, but really the bulk of that is in Q3 and we don't expect much of that beyond that quarter. And then secondly would be the supply chain cost increases we're seeing freight component costs comp predicated on some commodity pricing and so on and that may last a little longer than that. But overall, we get to our common operating model. We do think kind of 75% operating margins on average is still a good benchmark for us.
Perfect.
And then just lastly,
we had some conversations with people in the pharma distribution market And their sense is that it's like extremely early in terms of like vision deployment and real like automation in that market. And it just seems like That could be a gigantic market that's kind of untapped. Just curious as to how you think about that and where you play there and like how you think that market It is relative to some of the others that you play like in terms of maturity.
Yes, it's an interesting question. Let me clarify. Medical or Pharmaceuticals specifically? So in
this one we're talking about like distribution of pills and medicines and things
Yes. I mean, that's a fast growing market for us, but it has similar dynamics that I see in many, many markets that we serve. Obviously, these are high value items that needed to be tracked on an item level. So a
lot of regulation coming.
So our technology where, So our technology where we can help customers track and trace specific products, Even specific pills all the way through the supply chain. Those have been things that have been valuable for some time and have been rolled out Globally, and I'd say increasing momentum. That's for sure. And in some ways, this links to common trends that we see everywhere, right, item level barcode reading, Almost like license plates on cars with unique identifiers where our vision is well positioned to do that better than anybody else's. Call.
So we see that. And then I think another trend that you might be observing in that industry that certainly plays a lot more broadly is Just what one might call Industry 4.0, it's the capturing of images, the housing of them in the cloud, the using of data to improve and update Supply Chains in Real Time. These are things I think we've been seeing for a while and they're certainly gaining momentum and the potential is very large. But Well, I almost might take that same statement I just made and apply it to consumer electronic components, I'm sorry, in electronic components, comp. High value items subject to counterfeit moving through the supply chain.
Wow, you particularly see that today, right? A lot of that stuff going on. So, and again, the similar dynamics and the value of Cognex vision to print to read printed barcodes that may be tiny comp. Reliably through the supply chain and help customers manage it more effectively, that applies. And I could kind of go on to other industries too Conference.
With the same kind of overview. So yes, but it's not just pharma.
Thanks, Ed.
Our next question comes from the line of Jacob Levenson with Melius Research. You may proceed with your question.
Good evening, everyone. Good evening.
I know you touched earlier in the call on some of the new products that you Just allowing higher throughput in your customer facilities, I mean, how would you characterize that?
Yes, deep learning is a technology that we've invested in a lot and are leading. And its application is The more we develop it, the broader it is. But some of the initial applications where we've seen a lot more value, it's Opening up areas of inspection that we really just couldn't do before cost effectively or reliably, particularly Looking at things like scratches or reading difficult to read numbers and letters in manufacturing that perhaps were In noisy background like scratches on an automotive part, doing things that really Companies had relied on humans to do and not very effectively in the past. So certainly, we've You've seen very, very powerful applications for deep learning starting there. But in the example I We're talking a little bit about today in our sort of smart line new technology.
We're able to differentiate smartphone and you put a cover, a scratch proof cover on it that you kind of have to try to tape down if you press down. I'm trying to align the line of that, the edge of that with the edge of the phone itself is an example of sort of the sort of thing that we are doing in our own lives, right? Lots of that is happening in manufacturing where different substrates are being aligned and there are different lines that have to be brought together. And a problem can be you can misconstrue one piece of material with another and line the wrong pieces up or not find the right lines to align together. So that's an example where deep learning is extremely powerful and rules based vision tools haven't really been able to do that type of application.
I could go on with many different applications like that where sometimes deep learning is just a far superior technology and we're seeing it get But generally, we're selling those tools and those capabilities for a premium in spaces that really haven't been served
Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.
I think, Paul, you might have mentioned the kind of new pilot customer and logistics Has a fairly chunky shipment in 3Q and that sort of dissipates in 4Q. I think that was in the context of gross margins. But Yes. How important is that in terms of the driver? Because you guys are coming off a pretty solid quarter.
You said you even had a little bit of pull forward in electronics, If I heard you right, 3Q is pretty big step up. So just trying to figure out where that incremental bump
comes from. Conference. So even though we recognize more revenue in consumer electronics in the Q2, we still have a step up. Q3 is historically the largest Quarter for consumer electronics. Last year, it was dramatically higher given kind of delays with COVID.
This year looks a little more regular, but that's a nice step up. Logistics is a modest contributor. As again, we're coming off, as you noted, some record quarters in a row, but it is We do expect to do a little more revenue in logistics in Q3. So those are the 2 major factors.
Got it. And then I guess just sticking with logistics, I think some of the big integrators out there are kind of talking about maybe comp. And near term plateau in activity just because the industry is so busy and there's been so much demand over the past 18 months that Really the physical integration is sort of running in the bottlenecks. Is that what you guys would expect where sort of the growth rates here over maybe the next Several quarters are a little bit more modest just as a function of kind of getting the pig through the python on some of these bigger projects.
Well, I
think what you're talking about is real in certain parts of the industry. I think in big e commerce deployments, that's comps. And perhaps in packaging, it's a parcel and package delivery, that's true. So I think We see and I imagine they see a big backlog that they've got to digest the pig, if you like, in the Python, but that still has a long way to run-in terms of comp. Potential revenue coming through into the P and L.
What we also see, I think, starting to accelerate that gives us Conference. A lot of enthusiasm are other smaller customers coming back to the table, particularly in brick and mortar Activities and then also actually airport baggage handling starting to pick up. So I'd say we might see some of those big deployments kind of to take a while to work through, but we're seeing other markets coming in that have the potential to compensate as we go forward in time over the medium term.
Comp. Our next question comes from the line of Rob Mason with Baird, you may proceed with your question.
Yes, good evening. I wanted to ask About the automotive growth that you're seeing right now and maybe just to put it in a little bit better context, certainly it's 12 months ago, you probably would not have expected to be reporting an all time record automotive quarter, but maybe just speak to the mix Of that business today in terms of where it's going around traditional platforms versus EV investment? And then also just maybe speak to the intermediate term along those same lines. I know it's easy enough to suggest that EV investment may be growing faster as we go forward. But just what are the prospects today around some of the traditional platforms, Given that new model changes often drive demand for your products and there will be those.
So if you could just Speak to that again in the context of where we sit today with the kind of this record quarter in automotive.
Sure. So automotive was our fastest growing major end market in the Q2. And you're absolutely right. I think When we came into the year, we didn't really expect to see this kind of recovery in automotive until the second half, but we did expect to see it coming back, perhaps not this strongly and this quickly. We experienced the fastest growth in Asia, particularly in China, where global activity for automotive shifting due to the concentration of EV parts suppliers.
Of course, EV battery manufacturing is certainly driving comp. A lot of growth and then the execution of EV projects more generally and all the new kind of comp. Technology that requires, whether it's inside the vehicle or outside, certainly are drivers. Automotive revenue from the Americas and Europe Conference. We're also good growth drivers in the Q2.
And I would say chip shortages and related plant shutdowns The industry is becoming a lot more sophisticated with new players and a lot of new innovation coming into the market. So certainly, we're seeing Customers who haven't been traditional large customers in automotive of Cognex, say 3 or 5 years ago now being much Larger users of our vision and our technology. And then we also think the long term potential for Cognex in automotive includes applying deep learning for inspection and the increasing use of electronics in vehicles. So those are all driving it. I think also what you're getting at, EV certainly is becoming a larger and larger part, Very significant growth.
That's obviously the fastest growing kind of general trend in the industry, but it's still less than 50% of our automotive revenue for sure is EV related.
I see. Okay. Comp. Just one quick question around expenses that your operating expenses that you guided higher. It does sound like there's also Conference.
Between new products and some of the projects that you're working on, that helps elevate it. Call. Would you typically your expenses also go up a little bit in the Q4 from the 3rd. Given those dynamics that you have going on in the 3rd, Would you still expect that to be the case this year?
I would
say not sure yet. We like to stick to kind of 1 quarter ahead with our guidance. A couple of factors. We had a good year Conference. And we're having a great year this year, I would say, against kind of our own metrics.
So and the second half of last year was stronger. So there is an element of comp. More of our incentive compensation was backloaded last year than this year. So I think there'll be some impact of that. But Speculating on kind of sequential growth rates from Q3 to Q4, we're not prepared to do at this time.
Sure. Okay. Thank you.
Questions. Our next question comes from the line of Andrew Buscaglia with Berenberg. You may proceed with your question.
Good evening, guys. Hello. Regarding consumer electronics, You kind of reiterated that will be down this year, the sales. Do you feel better or worse about that market than you did quarter. Is it kind of the same?
No, I think in general the same, right. I think We recognize that this is a market that has cycles and trends and bigger years and small years. And I think It's coming together much as we expected and as we told you last quarter. Okay.
So no real change there. I was just checking on given component shortages and all that. And A question I had around, so quarter of your sales or call it, You got consumer electronics down slightly, automotive is doing well, logistics is probably your best segment right now, but you still got A quarter of your sales that when you kind of do the math on how the year is shaking out, must be doing pretty well, like a bunch of like kind of hodgepodge
Can you talk more about
like kind of like the business that you don't really talk a ton about, but that quarter of Your market seems to be doing really well. What is really driving that or what areas are driving that?
It's really very, Very broad based. I mean, when we look across our end user markets, I mean, so many of them are growing Conference. In excess of 30%. And certainly medical related, I mentioned them early in my opening remarks. It's medical related pharmaceutical, food and beverage, Semiconductor, right?
So really just general broad based investment. And Conference. I think we're certainly seeing a very strong demand for machine vision on a broad basis. And I think I think it has to do with a lot of the trends we've been talking about for a long time. And in some ways, some of them are being accelerated by the big changes we're seeing in The global economy, perhaps challenges customers are seeing about labor, labor shortages and the need to get more productivity comp.
I'm going and just I think a great environment for investment. So I think those mean that we're seeing very broad based Demand. I mean, also we talked about Industry 4.0 and I think the interest that pretty much any serious manufacturer of Comp. These days is they really want to use the digital data in their businesses to manage it more effectively and sit more securely. And I think certainly Vision is playing strongly into that.
Yes, okay. And maybe lastly, the new product you talked about, are we already seeing that impact your revenues? I'm talking about the AI deep learning stuff. Is that already influencing your sales today or is that can you just comment more in 2022?
Comp. It's a very recent launch. It's been a
lot of work, probably
a 3 year journey It's been a pretty major product release. So we're already working with major customers on its deployment. But generally, the users of those Products are going to be OEMs, more sophisticated customers. So I wouldn't expect to see Major revenue contribution from that product probably until some quarters out. But then it is it's a source of Major competitive advantage for us.
The product VisionPRO that we talked about, this is the 10th release. It's a very major release. The product itself is 20 years old. So it's the most established vision software platform in industrial manufacturing. It's so many users that are trained on it and know how to use it and we're giving them a lot of more powerful tools and a lot of Better user capabilities, but generally it's a very sophisticated product and it tends to be deployed over quite some period.
Yes. I think deep learning is accretive to our growth rate, both sequentially and on a year on year basis. And it's probably more of the products we launched last year that are sort of the biggest contribution to that, right? The D900 and VisionPRO Deep Learning 1.0, We're seeing meaningful uptake of those products and now we're excited to watch VisionPro Deep Learning 2.0.
All right. Thank you, both.
Our next question comes from the line of Jairam Nathan with Daiwa Capital Markets. You may proceed with your question.
Hi, Thanks for taking my question. I just wanted to kind of dig a little deeper on autos. From what I understood, Cognex is, I'd say, stronger placements with the suppliers, Tier 1 suppliers than the OEMs. I'm just wondering with EVs and the OEMs Taking a bigger interest in battery manufacturing, are you seeing a change in your exposure within autos? And I just had one Conference.
It's a really interesting question. I observed the same things going on that you're describing. I think historically, If we go back over the last few years, certainly about 2 thirds of our automotive business was with component suppliers, Tier 1 automotive and Perhaps the third was with what you described as OEMs, the brands, the big brands we all get into and drive around in. And certainly, we're seeing a potential trend where That's going to be shaken up and you can see some of the big brands are intending to have more of the component part of the business and the technology part inside their 4 walls unless outsourced to big Tier 1 Partners, right? That trend is going on, but then there's kind of a countervailing thing, which is you have strong technology players, particularly in the Battery manufacturing area who really have outstanding technology that I think it's not it's going to be very difficult for those brands, OEMs To replicate.
So definitely, it's kind of shaking up. And then as I would say also, there's a lot of electronics Conference. Going into cars. So I think we're going to see some really interesting things happen in that space where traditionally companies we thought of as Consumer Electronics Brands, we're probably going to see more and more of their types of technology, it being a bigger part of the bill of materials of Conference. So really exciting.
The good news is I think Cognex is really well positioned with all of those groups Really well recognized. So I think we'll do pretty well as that industry shakes out. But in the end, more dollars to the
Okay. And another question was on Growth outside of Asia, you mentioned semiconductors in there. And I was wondering if are you seeing any Is that driven by some of the semiconductor manufacturing kind of expanding out of China or
Conference. Well, relatively small part of Cognex's overall business is now in semi, certainly Less than 10% in recent years around 5% or so. And so I think we have to put it in context. But we are seeing very strong demand In those markets and I think it's really I consider it pretty tied to what we're reading about the shortage of semiconductor capacity and the investment that's going on and the new as always the new semiconductor technologies that are moving through and into production. So certainly we are seeing Very strong demand as those companies are invest in that area.
And one last one, if I may. We are hearing about Conference. And I just wanted to I think U. S. Subcontractors are based out of Indonesia, but how do you kind of handicap that risk comp.
Of a more extended lockdown in Indonesia or something.
So you're right. We have Our largest subcontract partner who does a lot of the manufacturing of our products It's based on a small island just off Singapore in the country of Indonesia. It's a very well managed free trade zone, which has Significant connections to Singapore. We're seeing that situation with COVID being very well managed in that area, both by And we haven't experienced significant supply chain challenges and we're feeling very confident about the way it's being managed. But of course, It's like any supply chain at the moment.
It's at risk from changes to go on. But right now, no good news to report on that.
Yes. And in terms of the availability of chips, Obviously, that's the situation we're monitoring very closely. We're buying aggressively, right, to secure component parts. Comp. It's part of what's reflected in our gross margin guidance and monitoring that situation, but overall feel like we're going to continue to manage through this pretty well.
Conference. One moment while we poll for questions. Our next question comes from the line of Joe Giordano with Cowen. You may proceed with your question.
Now like the D900 and the VisionPRO 1.0. How big is that as a percentage of sales roughly on an annual basis? And like what would be like a good What's like an internal target for 5 years from now as a percentage of sales basis? Like how big can that be for you guys if things go according to your runway?
Yes. It's an interesting question. I don't want to be too specific about that from for competitive reasons. Quiet or growing it close to 100% per year. That's a stretch goal.
We're aggressive for Cognex, but certainly, we really think it has that kind of potential. And we're seeing very strong growth continuing last year, this year and the demand for it as we look out.
Comp.
Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to I'll turn this call back over to Mr. Rob Willett for closing remarks.
Thank you so much. To wrap up, Cognex had an
Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your evening.