Greetings, and welcome to the Cognex second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market closed, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. We are joined here today by Matt Moschner, our CEO, and Dennis Fair, our CFO. Today, we plan to share several key messages with you, including how we're positioning Cognex for long-term success, an update on our technology leadership and end market trends, our performance in the second quarter, and our expectations for the third quarter. After prepared remarks, we'll open the lines for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will contain forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent form, 10-K. With that, I'll turn the call over to Matt.

Thanks, Greer. Good morning, everyone, and thank you for joining us today. I'm excited to speak with you as the new CEO of Cognex. While this is my first earnings call in this role, I've had the privilege of being a Cognoid for over eight years. Since I joined in 2017, I've worked alongside many of the talented individuals who continue to drive our success. And I've developed a deep understanding of our business, technology, culture, and the values that make Cognex so unique. At Investor Day last month, I outlined three strategic objectives that will guide Cognex's future, which can be seen on slide three of the earnings presentation. For those who could not join us in Investor Day, I will briefly recap those strategic objectives and how I'm positioning Cognex for long-term success. First, we will target to be the number one provider of AI technology for industrial machine vision applications. Our continuous innovation in this area will help customers solve increasingly complex vision problems like cosmetic defect inspections faster more accurately and with less setup time second we're committed to providing the best customer experience in our industry our goal is to deliver a seamless engagement from first interaction to full-scale deployment through our direct sales model a unified product ecosystem and upgraded global customer support capabilities and third we're focused on doubling the number of customers that we serve by scaling our go-to-market engine to reach new markets and geographies, while better serving small and mid-sized manufacturers. Our Salesforce transformation is already generating good results and is an important component of this strategy. To support the execution of our strategic objectives, I announced my newly formed leadership team on July 17th, as outlined on slide four. This team has decades of experience in our industry and with Cognex, and together we will drive an ambitious, profitable growth agenda, delivering even greater value to our customers and further strengthening our leadership and industrial machine vision. Q2 represents an early but meaningful step forward in this journey, marked by continued adjusted EBITDA margin expansion and strong free cash flow generation. Turning to slide five, let's begin with a few financial highlights from the second quarter. The momentum we saw in Q1 continued in Q2, with revenue of $249 million, increasing 4% year-on-year, representing our fourth consecutive quarter of organic growth. Broader factory automation was stronger in Q2, driven by consumer electronics and packaging. Our commitment to bottom-line profitability is reflected in our strong Q2 performance, with adjusted EBITDA increasing 9% year-over-year and our adjusted but a margin expanding by 80 basis points to 20.7 percent. This is the highest quarterly margin we've achieved in the past two years. In addition to the strong financial performance in Q2, we are executing against our strategic objectives. First, we continue to reach new customers through our sales force transformation and expansion, and we're seeing promising gains, including increased revenue growth in key verticals such as packaging. Second, we continue to drive AI innovation which i will talk more about in detail as we turn to slide six of the presentation at cognex we have over four decades of technology leadership and this remains the core to our identity as we shared with you at investor day we're proud to continue that legacy with one vision a cloud-based platform designed to transform the way manufacturers build train and scale ai powered vision tools with unmatched ease of use one vision reflects our commitment to making advanced machine vision easy, not just powerful, but practical and scalable. Although still in early stages, feedback from initial one vision adopters has been positive. A standout example is Pauldo, one of Korea's largest noodle manufacturers. Pauldo's noodle production includes a multi-step inspection process, with the final step focused on verifying the width of the packaging seal, a critical factor in preventing package rupture. Pauldo wanted to further enhance their quality control inspection performance by driving down false reject rates to very low levels, which can be difficult to achieve without moving to more complex PC-based systems. But with one vision, Paldo was able to collect images directly from their production line, train a powerful new model in the cloud, and seamlessly deploy it back to the edge. The streamlined approach eliminated the need for a new complex system. It expanded our device footprint with Pauldo and positioned us to support their growth across additional lines. With One Vision, we're setting a new benchmark for how game-changing AI vision tools are deployed, one that simplifies complexity without compromising performance. As we expand this capability to additional Cognex products in the future, we expect it will further strengthen our position as the technology leader in our industry. Turning now to an update on our end markets, which you'll find on page 7 of the earnings presentation. Our discussion of 2025 trends is based on current observations while acknowledging ongoing macroeconomic uncertainties. Strong second quarter growth in consumer electronics, logistics, and packaging was somewhat offset by a modest slowdown in SEMI and ongoing weakness in automotive. Starting with logistics, revenue continued to grow double digits year over year, marking our sixth consecutive quarter of growth in this market. Importantly, growth was across a broad base of customers. For the full year, we continue to expect strong growth in logistics, driven by ongoing investments by large e-commerce players and further penetration of the broader logistics market. Next is automotive. As expected, automotive continued to decline year over year, as it remains our most challenged vertical, reflecting broad headwinds to this industry. Looking to the full year, we remain cautious about the outlook for auto, as we have previously discussed, and continue to anticipate a more modest decline in 2025 relative to last year's 14% contraction. Turning to packaging, our business showed positive momentum in Q2, with revenue up mid-single digits year over year. Growth was driven by contributions from both healthcare and FMCG. Our Salesforce transformation is delivering impactful results, helping us reach a broader cross-section of packaging customers. For the full year, the outlook for packaging is incrementally more positive. Turning to consumer electronics, Q2 revenue increased year-over-year, reflecting broad-based strength. We continue to expect electronics revenue to be relatively similar in Q2 and Q3, implying another quarter of strong year-over-year growth in Q3. As a result, our full-year growth outlook for electronics has improved moving to semi we saw a slowdown in q2 with semi revenue declining modestly year over year against a strong comparison this result is in line with the cautious full-year outlook we adopted last quarter due to the uncertainty from trade policy and tariffs in summary we're focused on executing against our strategic objectives and delivering on our long-term financial framework to drive shareholder value i'm confident in our direction proud of our team, and excited about what's ahead. Let me now hand it over to Dennis to walk through the financial results in the outlook for the third quarter. Dennis?

Thank you, Matt. Today, I want to share three key financial highlights for the quarter that can be found on page eight of our earnings presentation. First, adjusted EBITDA margin of 20.7% expanded 80 basis points year over year and was above 20% for the first time since Q2 of 2023. Second, adjusted EPS increased 12% year-over-year, the fourth consecutive quarter of EPS growth. Third, our free cash flow conversion rate on a trailing 12-month basis strengthened to 130% of adjusted net income. These results highlight our focus on profitable growth and cash flow generation, the pillars of our long-term through-cycle financial framework we shared at our Investor Day in June. We are encouraged by the progress we see here, but we also acknowledge there is still work to do and remain committed to executing against our priorities with discipline and focus. Taking a closer look at our second quarter results on page 9, revenue of $249 million expanded by 4% year-over-year or by 3% on a constant currency basis. Looking at geographic revenue trends on a year-over-year constant currency basis, Europe expanded 13%, primarily due to certain consumer electronics customers ordering through entities based in Europe instead of China. This change of ordering entities does not reflect any underlying change in business mix or customer demand. Excluding this procurement change, Europe grew slightly, led by strength and packaging. The Americas grew 8%, led by continued strength in logistics and growth in packaging. Other Asia increased by 5%, driven by strength in consumer electronics, where we saw evidence of supply chains shifting out of China. Lastly, Greater China declined by 18%. Excluding the procurement change in ordering entities, Greater China revenue declined modestly due to shifts in consumer electronics supply chains. Looking now at Gross Margin. Adjusted Gross Margin of 68% was in line with our guidance. A 230 basis point year-over-year decline was primarily due to a less favorable industry mix. As expected, tariffs had a modest negative impact on Gross Margin this quarter. Our continued focus on disciplined cost management resulted in a 2% year-over-year reduction in adjusted operating expenses, or a 3% reduction on a constant currency basis. As we mentioned on prior quarter calls, we will remain laser-focused on tight cost management, as this is a key lever on our path to profitable growth. We expect operating expenses to continue to grow slower than revenue. Revenue growth, combined with disdisciplined cost management, drove 80 basis points of adjusted EBITDA margin expansion year-over-year to 20.7%, our highest quarterly margin since Q2 of 2023. Diluted earnings per share on a gap basis were $0.24, up 15% from $0.21 a year ago. Adjusted diluted EPS was $0.25, representing 12% growth from $0.23 a year ago. This growth was driven by an expanded top line and cost discipline, as well as a 2% year-over-year reduction in our average diluted share count. Free cash flow generation was strong again this quarter, totaling $40 million, which included a one-time $60 million payment for a transition tax we noted last quarter. Trailing 12 months free cash flow generation of 180 million dollars is up 138% compared to the 12 month period ended Q2 2024 and represents free cash flow conversion rate of 130%. We remain firmly committed to a disciplined capital allocation strategy where returning capital to our shareholders is an important component. Over the past 12 months, we have made significant progress on this journey, returning over $200 million to shareholders, or over 110% of our free cash flow, through share repurchases and dividends. These actions have contributed to a reduction of more than 4 million shares in our average share count year-over-year. Turning to page 10, I will now walk you through our financial guidance for the third quarter. As we shared with you at our Investor Day, we will be guiding to the following three metrics going forward. First, revenue. Second, adjusted EBITDA margin. And third, adjusted earnings per share. We believe these metrics best reflect our increased focus on profitable growth. Starting with revenue. In Q3, we expect revenue between $245 and $265 million. dollars. This range reflects 9% year-over-year growth at the midpoint, with both our logistics and broader factor automation businesses contributing to the expansion. As noted last quote, we expect consumer electronics to be relatively evenly weighted across our seasonally strong second and third quarters this year. Next, adjusted EBITDA margin is expected to be between 19.5% and 22.5%. The midpoint of this range represents approximately 340 basis points of margin expansion compared to last year, reflecting solid revenue growth and continued cost discipline. Lastly, adjusted earnings per share are anticipated to be between 24 and 29 cents. This is the midpoint of this range representing 35% year-over-year EPS growth. This outlook represents another meaningful step forward on our journey of profitable growth. A few other noteworthy items to consider as part of our outlook. First, as we look ahead to the remainder of the year, we anticipate Q4 revenue to return to more typical seasonal patterns, which historically have shown a sequential step down in the high single-digit range. The fourth quarters of both 2023 and 2024 were exceptions to this trend. In 2023, this was mostly driven by our acquisition of Moritex, which closed in October of that year, while in 2024 we saw accelerated demand late in the fourth quarter. Second, while the tariff landscape remains fluid, the recent trade agreements with China, Indonesia and Vietnam do not change our previous commentary on the expected full-year impact of tariffs. Specifically, we continue to expect no material impact on adjusted EBITDA margin and earnings per share and continue to estimate a 50 basis point dilution to cross margin. Third, during the third quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation. This arrangement is expected to result in a one-time benefit to revenue and profit in Q3, which is excluded from our guidance. Currently expect the benefit to revenue to be between eight and fourteen million dollars in Q3. Lastly, let me touch on the one big beautiful bill act recently passed by congress we are in the early stages of evaluating the impact of u.s tax law changes and currently anticipate the following tax implications for our business the bill is expected to be neutral to adjust the eps in 2025 we expect an insignificant impact to adjust the eps in 2026 and beyond second we currently expect a one-time higher reported tax rate in 2025 and will update you when we have more clarity into the final impact on the rate. However, we do not anticipate any change to our adjusted effective tax rate. And third, the provision to fully expand US research and development costs is expected to result in a cash tax benefit of 12 to 15 million dollars this year, which is expected to step down annually and phase out over the next five years. Now, Matt and I are ready for your questions. Operator, please go ahead.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that's star one to register a question at this time. Our first question is coming from Jacob Levinson of Melius Research. Please go ahead.

Hi. Good morning, everyone.

Hey, Jake. Good morning.

Hey, Jake. Good morning. This is the first quarter I can recall that we've had revenues going up and costs going down, which is certainly a good thing. And I know you've obviously laid out some targets, margin targets at the analyst day, but maybe either Matt or Dennis, can you help us understand behind the scenes within the organization what's really changing from a process perspective or maybe change incentives that is helping drive a better outcome and margins?

Yeah. Hey, Jake, this is Matt. I'll hand it off to Dennis. thanks for noticing yeah i mean we you know our primary objective is is to grow the business we know that when we can do that um you know we get tremendous fall through to the bottom line and so you know we've really um driven an intense focus on the ways in which we're going to grow and really making sure we're we're funding those growth initiatives um and and that's not just in product development it's in how we think about our channel um and and we're doing all those things and you're seeing seeing some of that the numbers um but at the same time you know dennis and i and the broader leadership team are very focused on our cost position and you know that's not a new thing we've started that many uh many months uh ago when i really stepped into the operating uh chief operating role earlier this year and um and we've organized ourselves uh to really go after that and be thoughtful about it we've made great investments in the business over the last five years and we're using many of those investments to make sure that we're driving the efficiency and productivity that we'd like to. And I would say it's really not in one area. It's across the board from engineering to sales to back office functions to facilities. So we're trying to take a very thoughtful view of it and make sure that we are driving efficiency and cost reductions in the right areas to make sure we're not defunding the growth story of the company. I don't think we are, but at the same time, making sure that we get to the margin range that we committed to at Investor Day.

And yeah, in that regard, really pleased to see kind of this meaningful step in that regard. And to your question, what changed, I think one thing Matt highlighted to us, I think really a problematic approach to it that we're really focused across the entire P&L and across the entire organization and put that program in place to really think about like very thoughtful where we can optimize costs. And then I think at the same time, Matt also alluded a little bit to it, kind of it's really a focused effort of the entire leadership team and i think there's a clear clear sense in the organization of the direction where we want to go and we're really positive about like how the organization is responding and how everyone is pulling into this direction so we're pleased with that oh that's all really helpful color uh just on a separate topic i know one of your your larger electronics customers has some uh new products coming out uh next year i think that that are foldable, different form factors.

Can you help us understand what does that mean when you've got a change? And I assume it means there's a change in manufacturing technique and maybe you've got retooling of lines and whatnot. But when you have some new technology, if you will, what does that really mean for you folks in terms of machine vision?

Yeah, sure. Maybe I'll take that. Thanks. Just to remind us all that these are really complex products to manufacture. And, you know, it takes months, in many cases, years to bring those technologies to market. And so, you know, what might be, you know, a new product that may or may not be coming out next year, we would likely would have been engaged on the manufacturing design strategy, you know, years ahead of that. So now just remind us that it is more of a long cycle project-based business with some of those large providers. You know, we noted the growth in consumer electronics. And, you know, what's driving that? It's really, you know, we've been focusing on adding more value and delivering more complete solutions in this market. A lot of that had to do with the acquisition of Moratex in the fall of 23. You know, we've been working with a lot of the players in this area as they consider, you know, some of the geographic shifts in manufacturing cross-border, and that's been helping. And, you know, as a global company, we're well-placed for that. But I would, you know, to the extent there's new product releases or phone designs, I wouldn't comment on that. I would just remind us all that those things take time, and we typically engage far ahead of those product releases.

Maybe just to add on that, like on the revenue side, I'd rather be engaged over a longer cycle. Revenue, you would really see probably in the year where new products are being released and less than kind of many years ahead.

Thank you. I appreciate it. Good luck, guys. Pass it on. Thanks, Jake.

Thank you. The next question is coming from Damian Karas of UBS. Please go ahead.

Hey, good morning, everyone, and congratulations on the progress. I don't think we've heard of broadening factory automation improvement in a while. So maybe you could just provide a little bit more color around the trends that you are seeing in packaging and consumer electronics. Are you maybe able to give us a sense or, you know, how much of that is new customer driven versus how much is just the underlying market improving and, you know, dissing customers kind of, you know, replacing or augmenting, you know, systems in their installed base? And just, you know, I guess your confidence that some of this improvement isn't just one-off activity, but rather a more sustainable trend.

Yeah, maybe I'll start. um damian i could hear from you so you know i i mentioned a few few things in consumer electronics and the in the previous um in the previous question right this is a market you know we have great presence in we work with uh great uh uh partners in that area and we've really focused on how can we increase our share of wallet if you will um by delivering more complete solutions so that's that's a part of it and going deeper uh into uh into into taking share of what what they do from an advanced automation standpoint. So I think you're seeing that in consumer electronics. We're broadening the customer base. I think we said it's a broad-based growth story in consumer, sorry, in consumer electronics. And then there's a geographic story there as those technology providers, you know, evaluate shifting production and new geographies. So that's how I would describe consumer electronics. Packaging, right, just to remind the group, you know, packaging is now our third largest vertical it really is made up of two areas one health care so that's med devices pharmaceuticals life sciences and and fast-moving consumer goods this is a lot of you know rob used to say razor blades to shampoo bottles and um you know both have different dynamics uh what we've said in packaging is we do see evidence of of the growth story driven by the investments we've made in our sales channel you know this tends to be a more regionalized set of manufacturers and brands both in healthcare and in fast-moving consumer goods. So certainly, the strengthening of our channel has helped. But I would say that the needs of each of those areas has also driven demand for vision. If you look at healthcare, particularly med devices and pharmaceuticals, we're seeing a lot of CapEx flow into both of those areas on the heels of some very popular pharmaceutical drug releases, particularly around, you know, obesity and cancer and really playing on some of the demographic shifts in various regions. So we like the trends we're seeing in healthcare. And then on packaging, you know, I think, you know, Cognex vision has always played a large role when it comes to traceability and regulation that drives the need to drive traceability, particularly around food. And then, you know, brands really wanting to up their game from a from a quality standpoint. And, you know, we maintain great relationships with a lot of the machine builders, particularly in the packaging area. And we noted, you know, some products we launched in Q1, the Insight 8900, which really play well in that area. So, yeah, I think we're encouraged by the progress we're making in both packaging as well as consumer electronics.

That's really helpful. And as a follow-up, you know, you talked about new products. I mean, You showcased the AI devices and OneVision at your investor day. I'd be curious to hear what kind of early feedback you've been getting on the AI technology and solution set, and any sense for when you might open up OneVision to the broader customer base?

Yeah, we're really excited about OneVision. Hopefully the example we gave today is helpful to the group to understand. it's very indicative i think of how one vision is helping our customers and letting us drive simplicity in delivering more advanced vision capabilities so we're trying to be very thoughtful about how we engage the market on it's a very new style of designing vision and we want to make sure that our customers understand it are comfortable with it as well as our sales channel being able to adequately sell and promote it so yeah you're going to see us take a take a methodical phased approach throughout the year and into next year. It's an area we're going to continue to invest. And what you'll see is that, you know, it will have a greater compatibility with a broader set of Cognex vision systems. And I'm quite excited about it.

Terrific. Good luck out there.

Thanks, Damien. Thanks.

Thank you.

Our next question is coming from Joe Giordano of Cowen. please go ahead hey guys uh thanks for taking my questions um yeah i i i'm curious on logistics are you seeing that more on like the greenfield side coming back the brownfield like kind of investment in existing facilities like what's driving that uh now and where are you seeing kind of the most inflection yeah i think what we said at investor day um is is you know our growth strategy and logistics is multi-pronged it's not just about new capacity additions we are seeing that.

And maybe that's what we, what drove us, you know, significantly, you know, four or five years ago during COVID. But what we're seeing today is much more balanced growth, right? Certainly participating as new facilities come online, it pulls through a good share of Cognex machine vision. But, you know, we're seeing a lot of traction now in vision. You know, you'll recall, as we said in Investor Day, most of our business today is still in traceability and barcode reading. And, you know, with our latest generation of AI vision tools, we're really seeing the ability to scale vision, both 2D and 3D and logistics. And we're seeing customers respond really well to that. And then, you know, as our technology advances and our relationships with those operators matures, you know, we're also going back to existing facilities to drive process improvements and greater efficiencies within their existing fulfillment network. So, yeah, it's exciting I mean it's broad based from a customer standpoint but also if you think about you know how we're driving sales at each of those customers I think it's not just new capacity it's also existing facilities and new technology areas entirely.

And when you think about something like One Vision I'm just curious like what does that mean for you from like is it sold differently is it a different pricing mechanism it seems like a nice a nice improvement on how the products are use, though. I'm just curious, like, what it means for you in terms of, like, in terms of driving a different type of sale.

Yeah, it's a very different type of technology. I mean, I think what we said in Investor Day was we weren't prepared yet to really talk in detail about the pricing model of One Vision, and I don't think we're ready yet. But the way you can think about how we go to market is very much as part of the bundle of technology that we would today. And so when we engage a customer on a new application, you know, we really start at the edge. And we have designed our technology to work very well on device so that there's no need for any sort of separate PCs or clouds. But One Vision is very much complements that sales activity when the customer needs more advanced vision. And we like to say One Vision is helping us bridge edge to deep learning, and it does that quite well. So yeah, our go-to-market right now, I would say, is more familiar to how we've gone to market in the past. To the extent that evolves in the future, I think we are thinking about that, but nothing to go into detail today. Thanks, guys.

Thank you. The next question is coming from Tommy Moll of Stevens. Please go ahead.

Good morning, and thank you for taking my questions. Hi, Tommy. Hi, Tommy. Dennis, I wasn't sure if I heard you correctly when you started giving some insight into fourth quarter. You know, that's more than one quarter forward, but pretty sure I did here. You offer a comment there, and so I just want to clarify. For the base quarter and third quarter, should we use the revenue that includes or excludes the one-time payment? So I think I heard you say typical seasonality would be a high single-digit quarter over quarter decline. I just want to get the third quarter base right.

Yeah, no, great question, Tommy. Yeah, it's based on the guidance, which is excluding the one-time effect.

Okay. Thank you. As a follow-up on logistics, I wanted to ask about the planning cycle there. As I understand a lot of this business, you have decent visibility on, and the planning cycles are pretty methodical.

Are you having any conversations regarding projects into next year at this point or how would you characterize the level of visibility that you have for what's ahead versus what the typical would be thank you yeah sure tommy yeah no you're right to say it is a longer cycle business right these are bigger investments and build outs of of new capex um you know we have great relationships with customers in this area and so you know you would imagine that we would have multi-year discussions on their um their plans uh and to the extent that they can align you know what we're delivering to them so yes i think it's fair to say we engage on customers plans across many years but typically you wouldn't see ordering activity until those facilities are committed the capex is approved and um and that still is is is more within the three to six month period of of visibility for us so so yes i but i but i wouldn't say uh necessarily that we're seeing that trend change one way or another i don't think we see it getting longer I wouldn't say we see it getting shorter but we are we are engaged on the multi-year plans of our customers and and and and we continue to stay you know very tightly linked with them in that way thank you both I'll turn it back thanks Tommy thank you the next question is coming from Andrew Buscaglia of BMP Paribas please go ahead hey good morning everyone Andrew Andrew maybe on

logistics um and some of the other markets like consumer electronics and and packaging sort of picking up you know would would you not say some of that might might be due to some pull forward on tariffs and and uh maybe in logistics around tariffs um do you see any clarity from tariffs um helping customers um move forward with some decision making or any any change there if you can comment.

Yeah, sure. We're keeping a close eye on it, obviously. It's a dynamic situation. We have a team that's been in place, gosh, since last fall, really monitoring the situation and the news, but also our response, right? And so we're working hard, and I think we've done a great job to mitigate both the cost, primarily the cost effects of tariffs on us. But I think your question is more on demand, right? And what are we seeing from customers from a demand perspective. I think Dennis will maybe offer some commentary in terms of where we may have seen some pull forward of demand in light of tariffs. You know, I wouldn't say it's been really outsized. We're monitoring our forward funnel, which continues to be healthy and I would even say normal in light of some of the recent tariff announcements. You know, and we continue to engage with our customers, right? In some sense, you know, the impact is to increase their costs and potentially increase the costs of our products to them. And we're being very transparent with them on that. But I would also just remind the group, right, as costs go up, you know, these organizations are really looking to how they can mitigate those costs and automation and machine vision, you know, has been and will continue to be a great way to do that. So on one hand, I think they are, you know, looking at us as, you know, a potentially higher cost bill of material for them as we have to kind of mitigate costs on our end, but also seeing us as maybe one of the best ways to mitigate costs within their manufacturing and supply chain overall. And so, you know, from a demand perspective, it's hard to say, but over the medium and long term, I'm still quite optimistic that the situation now with tariffs and trade is going to be a nice tailwind for the business as we're engaged to not just help drive efficiency, but also diversity in supply chains overall.

Yeah. And maybe to add on that. so i think in the second quarter particularly in the in the us um and packaging and maybe in logistics there have been a couple of projects where we thought they could have been accelerated due to a terrace you don't always exactly know it so i would say really maybe a a low single digit million dollar number at the same time um we haven't really seen that the funnel for use read and changed in that regard and now right being here already in at end of july we also haven't seen like any demand trends and booking trends changing throughout july so that kind of offsets that a little bit and then at the same time right we had some some commentary about consumer electronics that shifts happening in asia right from from china to to other asia so we are seeing i would say probably some of these early signs of of some of this um relocation of of manufacturing happening and i think as matt also said i mean long term that's really a great trend and a great opportunity for car mix yeah okay okay and then um another question is why Why not include that one-time potential benefit from the channel agreement?

Is it just you don't know the timing, it might slip, and you don't want to count on it? Or, yeah, I guess, why not include it?

Yeah, maybe when it's first unpacked, what it really is, right? It's a partnership that includes a multi-year kind of software license agreement. That means we will recognize the one side, some minimum license over a couple of years in a single quarter, and we have also some component inventory which we are transferring. But it's really, to some extent, you can say, it's not a one-quarter thing. It's really kind of a number which belongs to future quarters, but from accounting standards, you just recognize that at one time. So in that regard, we really wanted to show that separately to keep everyone's eye also on the underlying kind of run rate business performance. And at the same time, we also provided you with kind of what the number would be including. That's kind of what's the rationale to it, just to create the clarity there.

Okay. All right.

Thank you. The next question is coming from Jamie Cook of Truist Securities. please go ahead.

Hey, good morning. This is actually Kevin Wilson on for Jamie. Thanks for the time.

Hey, Kevin.

Hey, on M&A, you spoke at the Investor Day with your new capital allocation framework. You mentioned potentially looking at non-vision adjacencies as acquisition opportunities, perhaps in sensing components or other automation technologies. In the context of your new framework, I'm wondering if you can expand on what adjacencies you're considering outside your core vision business and then more broadly just how the pipeline for M&A or conversations with potential targets changed since you have changed maybe since you came out with your new framework. Thanks.

Yeah, Kevin, this is Matt. We certainly did at Investor Day provide some guidance in terms of how we're thinking about M&A, what its contribution to our growth outlook is. But I think what we also said was we were going to be very thoughtful and continue to hold a very high bar in terms of how and where we would pursue M&A. You know, Cognex over the last 10 years or more has always, you know, viewed M&A as a way to add capability to the business. And Dennis and I and the broader leadership team, you know, continue that belief. I think, you know, with the acquisition of Moratex, that was a bit of a different move for us. It was a larger deal that brought with it, you know, products, technology, revenue around the world. And, you know, I think we all viewed that as going very well and adding the value that we wanted it to. And I think should give us all some confidence that those are plays we can run as well beyond just maybe the smaller bolt-on technology acquisitions that we've done more so in the past. So what are we looking for, right? We're looking for a really good strategic fit and alignment with the objectives that I shared. That's number one. We're obviously looking for clear evidence that we can drive value, you know, that we are the preferred owner, that we can leverage the assets of Cognex and drive advantage value for our shareholders and affect the bottom line quickly. And to that end, we're holding a very high bar. So, yeah, we have and we'll continue to have a very rigorous M&A process.

You know, we're, as a leader in our industry, you know, we know a lot of the key players and we plan to stay in touch with those players and, you know, as we have updates, we'll share And I think we also said around it yesterday that we said it's like 3% plus kind of on an annualized basis through the cycle, additional growth, and also very clear, like this could be a single deal, which maybe happens in three years or in four years, right? in that regard i'm not feeling like kind of any deal mode where we think like we need to execute a deal right now just coming out of this investor day as matt said we'll take the time we'll find the right target we'll be disciplined about it um to to find something which makes sense and at the same time we'll also have um you know work to do in the operating business we like the meaningful step forward which we took but we also clearly said we still have work to do and uh we'll we'll keep on working on that.

That's helpful. And then just to follow up on the medical lab automation item in the third quarter, is that type of licensing arrangement, are there other opportunities that have a similar profile that you're looking at moving forward? Or is that sort of just a one-time opportunity with that specific strategic part? And then I'll pass it on. Thanks.

Yeah, maybe I'll give you a bit of context on why we did it, right? So, you know, as a management team, we're always looking at ways to better allocate our resources, right? And in this case, you know, we're in a market of lab automation that is a great application for our vision. We've had a lot of success there. But, you know, for us, in many ways, it was a bit subscale, particularly from a channel perspective. And so, you know, we found a channel partner that had better presence in that area, had better scale, had good relationships that maybe could manage that channel and those customers more effectively than we could. And so that's maybe the playbook behind the deal. And so, you know, we have a partner that, you know, plans to continue to use Cognex Vision and sell it through to the customers that we have, but has a broader portfolio of offerings for those customers. And so it felt like a very, very good fit. so to the extent there are other opportunities um we're uh we're being very thoughtful right as you'd imagine one of the things i'm doing is taking a very broad look across the portfolio to say are we as focused as i'd like are we deploying our resources uh in the ways that that have the best impact for the business that we want to run and and and in many cases the answer is yes there's there's some areas that the answer is weaker and when we see that we really go after it. And, you know, this is one of those areas.

And more considering it, like, perhaps even doubling down on the existing strategies that we want to have a strong direct sales channel in the markets, which we really think are very important for us. We're redeploying resources there. So it's not a shift in strategy. I would more think about, like, a doubling down on what we already said in the past. Makes sense. Thank you.

Thank you.

Our next question is coming from ken newman of key bank capital markets please go ahead hey good morning guys congrats on the uh solid quarter thanks ken good morning yeah maybe first uh sorry if i missed it dennis but um i'm curious if you had any color on what price contributed to the organic revenue this quarter and kind of what's implied in the new three two guide really i'm just trying to get a sense of what you think is potentially sustainable from from price path through into next year if all the current policies on tariffs stay in place as they are today?

Right. So I think there are probably two pieces to it, right? There's maybe the U.S. and the tariffs specifically, and then there's the broader global picture here, right? So I think maybe on the tariffs specific or U.S. specific side, right, we've been talking about it on the one side, we've been working on the supply chain, and we had the team in place since last year and the team has been really moving fast and i think that's part of why we have been able to basically keep the outlook with no no no material impact to adjusted everyday margin or adjusted eps the same level even so that the tariffs are slightly went up right the recent trade deals because the team really did a great job on working on the supply chain and we're not having a meaningful exposure to China still there is some and the team really did a nice job there and then at the same time we're certainly also working on the customer side and finding agreements there but I wouldn't say like overall that drives now this meaningful impact for us what we what we included here in the Q3 guidance I think then however when we look at the broader picture outside the U.S. and the tariff dynamic I think if you if you think back over the last 12 months we have often talked about kind of pricing headwinds in China and that this has impacted gross margin and bottom line to some extent and I think here on the one side we think that pricing pressure is somewhat at the same time we're also doing a good job here working on the supply chain side to offset these pricing pressures in that regard I think overall I would say pricing perhaps is a it's a neutral from coming from a negative over the last 12 months It's more moving towards a neutral now. And then certainly we keep on exploring our opportunities there. And we'll keep you updated in the next couple of quarters on how that goes. Yeah, no, that makes sense.

For my follow-up here, maybe just to approach the margin guide or maybe the longer-term view on margin guide a little differently, just given all the work that you've done on leveraging costs, You know, I think the midpoint of your 3Q guide is implying, you know, an incremental EBITDA margin of, you know, above 50, closer to 60%. Do you feel like this is a decent baseline going forward, given how the markets are recovering? Or are there any, you know, one-time things that we should kind of be aware of as we think about more normalized operating leverage into 26?

I mean, see, first of all, I think we said it, we're pleased with the progress. It's a meaningful step forward. It comes really two things together. Revenue top line is growing and OPEC side is decreasing on a year over year basis. And I think that's clearly there's some really underlying work which we're doing. We talked a bit about the programmatic approach which we're doing there. So it's really kind of in that sense, it's sustainable on the cost. side at the same time i made this comment about the fourth quarter right so keep in mind there's seasonality in the business so i really want you to think on the top line side that we have this strong q2 q3 driven by consumer electronics and certainly that drives leverage and de-leverage right so in that regard if you think back um about q1 q1 was a was a strong quarter if you think about it from a year-over-year comparison, but it was somewhere at a 16.8% adjusted EBITDA margin, right? So that means not yet in the 20%. So think about when you think about Q4 that you will see some deleverage. And then, of course, at the same time, when we think about what we said at Investor Day, our target of achieving greater than 20% adjusted EBITDA in 2026, we feel that we're on the path to that and this work which we're doing and the cost structure is really bringing us there. So I would say by short term, keep in mind Q4 seasonality. But then if you think about 2026, then generally we're making really meaningful progress. Very helpful. Thanks.

Thank you. Our next question is coming from Piyush Abasti of Citi. Please go ahead.

Good morning, guys. Hey, Piyush. Good morning. How are you?

Well, can you guys like drill down on autos, EV, and market? I understand you mentioned lower project activity, but from your vantage point, can you maybe update on what your customers are telling you with regards to their CapEx plans beyond 2025? I'm just trying to understand where we are in the CapEx cycle, and also if there is anything different that you're seeing in EV versus like the traditional eyes, that would be helpful.

Yeah, maybe I'll start. I was actually just got back from a trip to Detroit. I spent the week with many of our customers in auto on this very topic. And I would say, you know, the macro is there's a lot of uncertainty and the macros continue to be weak, largely driven by some of the uncertainty and increased costs from trade and other tariffs. And I think that's well published. But by the same time, you know, I am very encouraged by the potential that machine vision has. and they are as well in a number of areas. One, as a key means of offsetting some of those costs increases, their costs to operate and drive efficiency throughout their operations. They need us more now than they ever have, I think is one message. The second is quality. I think all of them, even in light of substantial cost increases because of tariff activity, quality still remains their top priority. And we saw from some of them, particularly this year um you know uh you know maybe not where they want to be and increased recall activity and the cost support quality is very much top of mind for a lot of our auto customers and again cognix machine vision does you know is recognized for its ability to ensure quality throughout their supply chains that's second um and then you know the third theme for them is is labor scarcity you know they uh i heard from all of them that um as they think about their plans. They continue to have high turnover in their facilities and struggle to find competent labor to run their manufacturing facilities. So even in light of, I think, some weak macros overall for auto, I think the fundamentals for what drive vision into automotive are very much alive and well, and we're engaging our customers in that area. I won't comment on what future capex is. I think to some extent that's still highly uncertain. Now your question on EV is a good one. We continue to stay engaged in a number of interesting applications in EV battery. Obviously, you know, last year was a challenging year for us in that market and for the industry overall as it had to really absorb what was quite a bit of overcapacity and particularly the battery production. To the extent that's normalized, there still are plans that these OEMs have to release EV or EV hybrid vehicles, and we're engaged in a number of those applications with them.

Helpful, Matt. Dennis, I'll ask Ken's question in a slightly different way. On margins, as you said, you guys are already doing 20%, and your 26 target is greater than 20% EBITDA margin.

Given most of your end markets are on a positive trajectory, and I understand it's still early, but why can't margins being that 25 to 30 percent range which is the next leg that you guys highlighted during getting left today yeah i know see it's a it's a great question and see that's that's what we're working towards right we laid out a clear path on on how we want to get there and we we're working to achieve all milestones one by one so the first one is the greater than 20 percent i think it's great that we see it first on a quarter right so we had now first time for two years. In the second quarter, it's still there in the third. And I talked a bit about seasonality for the fourth. But the next step is to bring it there on a 12-month basis and then work from there towards the 25%. In that regard, I think we're in the same spirit. And that's what we're driving towards. Very helpful. Good luck, guys. Thank you. Thank you.

Thank you. The next Next question is coming from Keith Halsam of North Coast Research. Please go ahead.

Thanks, guys. I appreciate it. Coming back to the one-time revenue here in the third quarter from this new partner, just trying to unpack that a little bit more and understand, is this customer going to be selling your hardware going forward, or are you going to use your software on their own hardware? So we shouldn't expect to see significant revenue coming from this partnership going forward.

Yeah. Let me clarify that. So it's a mixture, right? So on one hand, we've given them the exclusive right to and license to manufacture Cognex Vision Systems, but that would be Cognex-designed hardware and software. And so that's one piece of it. And then the ability to purchase Cognex products for the sole use in this end market. So that's primarily those two legs. We are not pursuing a strategy with them where they would be, we would be hosting Cognex software on their hardware.

That's not included, but the first two certainly would be all right and then on the magnitude right we said eight to fourteen million it's over includes minimum over five years include some inventory so if you if you break that down right it's a meaningful number in the quarter but if you think over five year numbers it's not actually that big right so i really want to kind of highlight we really took an approach to a very specialized area where we thought like in this specialized area a channel strategy is more beneficial than um the broader strategy which we have in the other markets and therefore we went down this this path so we certainly expect something positive from that um let's say specialized area and from this partnership but i wouldn't think like it would make any meaningful change to our numbers going down the road considering that also we're recognizing some of that revenue uh of the over this five years period in one single quarters in that regard But, yeah, I wouldn't call it a meaningful impact to 2026 and beyond.

Got it. Appreciate that. And then, guys, just changing gears here for a follow-up. I see inventory down about 8% year-over-year. You're going to sell some components to this partner here. How should we think about inventory as a contributor to free cash, though, for the rest of the year?

Yeah, no, I think, see, we're quite pleased of what we have done on the working capital side, right? i think over the last um 12 months or so our cash conversion cycle kind of um stepped down by about 60 days um and a good portion of that is coming from the inventory side and that's kind of part of our drive towards being efficient and being a lean company right it's both on the organizational side as well as on how we manage working couple in that regard we we think we we have done meaningful progress there. There's still a little bit to go. But yeah, overall, I'm just happy where we are and still have a little bit of potential there as well.

Great. Thank you.

Thank you. We're showing time for one last question. Our final question today is coming from James Rusciuti of Needham. Please go ahead.

A question on the growth in the packaging market. I wonder if you could talk a little bit about that and how much of that might be coming from the sales initiatives that you have going on, particularly the sales noise, including the second class that you hired, I guess, mid last year?

Hey, Jim. Yeah. No, I think, as we said in our prepared remarks, we see evidence that our investments in our channel are helping in this area, right? As we've said before, this tends to be a more regionalized business, you know, with local brands and local manufacturing servicing the unique tastes of the regions that they're in and you know having a a sales channel that can reach those customers which tend to be smaller or more mid-sized brands and manufacturers is really really important and then obviously having the right technology for those folks to be selling and as we've said in the past and and really still believe in you know particular edge learning based vision systems uh are very easy to demo uh to to set up and and test and to deploy at scale so you put those two things together um you know and you know we can reach more customers with products that are easier to use and deploy i think i think we're seeing that very much in in the packaging packaging numbers then you know in this industry there is a good presence of some some sophisticated machine builders and other oems that we have always kind of served well with with our technology and so yeah we really we see three legs to that stool and i think all at this at this point all three are working in our favor.

Thanks. And just a quick follow-up, just on the semi-market. Has your view of that market changed versus earlier in the year, just given the mixed signals we're hearing from the WFE market? And does that cautiousness, I know you don't look too far out, but does that bleed into 2026, or is it just too early to comment on that?

I think it's too early to call. You know, it's a very complex, sophisticated supply chain, as you know. And we typically engage with the large equipment OEMs. And, you know, often what we see is the demand for Cognix vision with them is, you know, in some cases asynchronous for the demand and consumption of final product, which are, you know, chips and memory and things like this. And so I think we see, you know, room to continue to grow or maintain strength from the demand side, right? The demand for advanced AI and high bandwidth memory will continue. How that flows through to orders for Cognex through the machine builders and OEMs that we serve, you know, may or may not be asynchronous to that demand. But it's still a market we're very excited about and see a lot of potential for. but I think you said it well. We're trying to be cautious full year this year, and we updated that for you, but continue to engage with Cognex technology, and this is an area, as we've said before, the acquisition of More at Texas really helped us. It brought with us great relationships in this area with some of the large SEMU-AMs in the Asia region. Thank you.

Thank you. At this time, I'd like to turn the floor back over to Mr. Motioner for closing comments.

Great. Well, thanks, everybody, for joining us this morning. We value your continued interest and engagement with Cognex, and we look forward to updating you on our progress during next quarter's call.

Ladies and gentlemen, this concludes today's event. You may disconnect Connect your lines or log off the webcast at this time and enjoy.