Cognex Corp Q3 FY2025 Earnings Call

Greetings, and welcome to the Cognex Third Quarter 2025 Earnings Conference Call. 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, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO. Today, we plan to share several key messages with you, including progress on our strategic objectives to be the AI leader in the industry, end market trends, our performance in the third quarter and our expectations for the fourth 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 cover 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. Q3 was another strong quarter for Cognex. We delivered outstanding financial results, which reflect our commitment to profitable growth and disciplined execution. At the same time, we remain focused on advancing our strategic objective to be the leading provider of AI technology for industrial machine vision. Turning to Page 3 of our earnings presentation, let's look at some highlights from the third quarter. I'm pleased to share that our third quarter key financial metrics all came in at the high end of our expectations. We delivered double-digit revenue growth and achieved our highest adjusted EBITDA margin since Q2 of 2023. In addition to the strong financial performance, we are making meaningful progress against our strategic objectives. First, we continue to execute our sales force transformation, acquiring new customers in underpenetrated verticals such as packaging, using easy-to-use AI-enabled products. I'm also very pleased with the progress we've made this year driving productivity in our sales organization by using new CRM tools and updated processes. Second, we are advancing our technology leadership in AI. This quarter, we're excited to announce the launch of our new solutions experience product line in logistics, which we are calling SLX. This release introduces our latest AI vision tools to solve novel applications in this fast-growing vertical. Turning to Page 4, you can see that the SLX epitomizes our mission to make advanced machine vision easy. By combining industry-leading AI with intuitive deployment workflows, we can solve critical logistics applications with minimal user training. Our initial rollout of SLX devices targets specific applications, including object classification and side-by-side detection, both of which complement barcode reading in mixed application workflows. Purolator, a leading freight, package and logistics provider, recently deployed SLX as the next step in their automation strategy, enabling advanced package detection within its sortation process. Since implementation, Purolator has significantly reduced costs tied to processors and seamlessly scaled the solution across its terminals and network. These new products extend our reach beyond traditional barcode reading into higher-value vision applications in logistics. They help accelerate automation adoption by offering customers scalable, easy-to-use solutions that improve efficiency. With SLX, we're also laying the foundation for other application-specific solutions. Next, let's review our current trends across key end markets, as shown on Page 5 of the earnings presentation. Please note that my discussion on end market performance excludes the onetime benefit from the commercial partnership in our Q3 2025 results and an additional month of Moritex revenue in Q3 2024 results. Although the macroeconomic backdrop remains uneven and geopolitical uncertainty persists, we continue to see momentum in consumer electronics, logistics and packaging, while automotive remains soft. Starting with logistics, this market remains a strong growth driver. Q3 marks our seventh consecutive quarter of double-digit year-over-year revenue growth, which was led by large e-commerce customers this quarter. The current cycle is being driven primarily by automation of existing facilities rather than new capacity expansion. We believe automation penetration is still low in this vertical and the ROI on our products is very strong. Next is automotive. As expected, automotive revenue continued to contract, although year-over-year declines moderated throughout the year. The market remains challenging, but we continue to anticipate a less steep decline in 2025 relative to last year's 14% contraction, and we believe we are nearing the bottom. Looking ahead, we continue to see promising long-term opportunities in the automotive market as customers prioritize improving vehicle quality and driving down operating costs. Next, let's talk about packaging. The business delivered solid revenue growth across most geographies in Q3. Packaging remains a large underpenetrated market with less cyclicality than other verticals. We're making progress with new products and expanding sales coverage, positioning us to capture incremental opportunities and drive further penetration. We maintain a positive full-year outlook for packaging. Turning now to consumer electronics. In Q3, revenue grew significantly year-over-year, driven by broad-based strength. This market is showing clear signs of recovery following a prolonged down cycle, and we are well-positioned to benefit from ongoing supply chain diversification and evolving device form factors. We maintain a positive outlook for the full year as we expect consumer electronics to deliver its first year of revenue growth since 2022. Finally, turning to semiconductor. Q3 revenue increased modestly year-over-year against a very strong comparison, although we maintain a cautious full-year outlook. Longer term, we expect semi growth to benefit from the AI-driven investment cycle, reinforcing our confidence in this market. Cognex's deep relationships with leading semi equipment manufacturers position us well for future growth. In summary, Q3 underscores the strength of our strategy and execution. We remain focused on being the #1 provider of AI technology for machine vision, delivering the best customer experience in our industry and doubling our customer base over the next 5 years. These strategic objectives, supported by operational discipline and continued innovation, position us to drive long-term profitable growth and create sustainable value for our shareholders. Let me now hand it over to Dennis to walk through the financial results and the outlook for the fourth quarter.

Thank you, Matt. Before reviewing Q3 results, I'd like to address 2 items impacting comparability this quarter. As we discussed last 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, which contributed $30 million of revenue this quarter. In addition, our Q3 2024 results included an additional month of Moritex financials as we aligned accounting schedules, which added approximately $5 million of revenue to the prior year quarter. A detailed revenue bridge illustrating these factors is available on Page 6 of our presentation. Revenue growth, excluding the impact of both the commercial partnership and the additional months of Moritex a year ago was 13% on a constant currency basis. We believe this number provides the most transparent and accurate representation of our underlying top-line performance for the quarter. Turning to the quarterly details, I'll begin with a discussion of reported financial results, followed by the financials adjusted to exclude these 2 items. Starting with the as-reported financials on Page 7, third-quarter revenue of $277 million expanded by 18% year-over-year or by 16% on a constant currency basis. Looking at geographic revenue trends on a year-over-year constant currency basis, Americas revenue expanded by 27% in the quarter, led by continued strength in logistics and the onetime contribution of the commercial partnership. Europe grew 24%, driven primarily by certain consumer electronics customers shifting their ordering from China-based entities to those in Europe. As noted last quarter, this change in ordering entities does not indicate any underlying shift in business mix or customer demand. Excluding this procurement change, Europe grew modestly as strength in packaging and the onetime contribution of the commercial partnership were partially offset by continued weakness in automotive. Greater China revenue increased 9%. After adjusting for the shift in ordering entities and the additional month of Moritex included in last year's Q3, growth in Greater China was very strong with broad-based momentum across all end markets, except automotive. Other Asia revenue declined 5% in the quarter. After adjusting for the additional month of Moritex revenue last year, Other Asia grew 4%, driven by consumer electronics supply chain shift. Staying on Page 7, adjusted EBITDA margin expanded 730 basis points, driven by operating leverage, disciplined cost management, and the onetime benefit from the commercial partnership. GAAP diluted earnings per share were $0.10, down 39% from a year ago, primarily due to a onetime discrete tax expense accrual of $33 million related to the One Big Beautiful Bill Act. Adjusted diluted EPS of $0.33 increased by $0.13 or 69%. I will now cover the underlying business performance, adjusted to exclude the 2 items impacting comparability. Starting with the financial highlights of the third quarter, Page 8 of our earnings presentation details our performance on 3 key financial metrics. One, adjusted EBITDA margin was 22.1%, representing an increase of 450 basis points year-over-year to our highest margin since Q2 of 2023. Two, adjusted EPS increased 47% year-over-year, the fifth consecutive quarter of double-digit EPS growth. And three, our trailing 12-month free cash flow conversion rate reached 133%, meeting our target of greater than 100% for the fourth consecutive quarter. Our focus on disciplined cost management and profitable growth ensured that this quarter's strong revenue performance translated into strong bottom-line EPS growth and robust free cash flow. These financial results represent another key milestone towards the through-cycle financial framework we outlined at our Investor Day. Turning to the income statement, adjusted to exclude the 2 items impacting comparability on Page 9 of our earnings presentation. Revenue increased 15% year-over-year and 13% on a constant currency basis. Adjusted gross margin was 67.7%, down 170 basis points year-over-year, driven by unfavorable mix and the impact of tariffs. Adjusted operating expenses grew 1% year-over-year and declined 1% on a constant currency basis, driven by continuous cost management, partially offset by a meaningful headwind from incentive compensation in the quarter. We have now delivered the combination of revenue growth and adjusted OpEx reduction for 3 consecutive quarters. While we are pleased with these results, we continue to drive efficiency across the organization and incurred $3 million of reorganization charges in the quarter, which are excluded from adjusted operating expenses. Looking ahead, on an annual basis, we expect adjusted operating expenses to grow at a slower pace than revenue. The mentioned combination of revenue growth and continuous focus on cost management drove adjusted EBITDA margin to 22.1%, near the upper end of our guidance range. Adjusted diluted EPS was $0.28, representing 47% year-over-year growth. This strong EPS performance was driven by robust revenue growth, disciplined cost management, and the lower diluted share count compared to last year. We generated $86 million in free cash flow in Q3, exceeding the total amount generated during the first 9 months of 2024 in a single quarter. Trailing 12 months free cash flow reached $214 million, surpassing the $200 million mark for the first time since Q1 of 2023 and increasing 132% compared to the 12-month period ending Q3 of 2024. Trailing 12-month free cash flow conversion was 133%, easily meeting our target of greater than 100%. We continued to drive working capital efficiencies in Q3, and our cash conversion cycle declined sequentially for the sixth straight quarter. Turning to capital allocation, we returned $37 million to shareholders this quarter through a combination of share repurchase and dividends. Over the past 12 months, we have returned $224 million to shareholders, more than 100% of our free cash flow. Over the long term, we remain committed to returning capital as an important component of the disciplined capital allocation strategy we outlined in June. We ended Q3 with $600 million in net cash and investments, providing flexibility to pursue M&A opportunities while continuing to return capital to shareholders. Moving to Page 10 of our earnings deck, I’ll now review our financial guidance for the fourth quarter. In Q4, we expect revenue to be between $230 million and $245 million, representing growth of approximately 3% at the midpoint. The implied sequential decline is primarily driven by the seasonal step down in our consumer electronics business and is in line with our historical Q4 seasonality over the past decade. Adjusted EBITDA margin is expected to be between 17% and 20%, with the midpoint consistent with the level achieved in the prior year. Adjusted earnings per share are expected to be between $0.19 and $0.24, with the midpoint of this range representing approximately 7.5% year-over-year growth driven by revenue growth and the reduction in share count. We continue to expect no material impact on full-year adjusted EBITDA margin and earnings per share from tariffs announced as of today. Our Q4 guidance implies mid-single-digit full-year 2025 revenue growth, excluding the benefit from the commercial partnership. Looking ahead to 2026, average PMI readings in Q3 for major economies, including the U.S., Eurozone, China, and Japan were between 48 and 51, signaling that industrial activity has yet to show sustained expansion. These conditions suggest we remain in the initial stage of the cycle. As we shared at Investor Day, this stage is characterized by moderate growth with similar growth dynamics in 2026 as we are experiencing in 2025, excluding the onetime benefit from the commercial partnership. To clarify, this outlook is not formal revenue guidance, nor does it reflect changes in business conditions or visibility. Rather, it represents our view of the cycle based on macroeconomic indicators and our through-cycle financial framework. In this early-cycle environment, we remain committed to disciplined cost management while driving margin expansion and EPS growth, combined with strong cash generation.

Today's first question is coming from Damian Karas of UBS.

I wanted to begin by asking you about the consumer electronics part of your business. How much of the current demand strength you're seeing is a result of rising customer output and product rollouts versus your customers migrating their footprint to other regions? And curious what you're hearing from some of your CE customers in terms of their plans to make further shifts of their supply chain and what that could mean for your business in 2026?

Damian, this is Matt. Thanks for the question. Yes, we're very pleased with the performance of our consumer electronics business this year. And as we said in the comments, it being a growth year for us in consumer after several years of a down cycle. And so where is that coming from? I think you hinted at a few of them. I was actually in ASEAN and India a few weeks ago, observing some of the shifts in manufacturing from Mainland China, working with a lot of the machine builders that underpin this industry. And yes, I would say there is quite a bit of activity that we're participating in as supply chains diversify in this market. And whether that's countries like Vietnam, Malaysia, India, I think all are really trying to participate in that migration. But I wouldn't say that's the only growth driver, right? I think we've set our business, it's growing broad-based, right? It's not just a few customers, it's many customers that are seeing increased activity. I think we are seeing things like changes in device form factors and entirely new form factors, particularly as consumers are wanting to take advantage of advanced AI technology in different ways. At the same time, advanced AI vision for some of the more complex cosmetic inspections is also maturing, and we're seeing our ability to solve new applications that maybe historically weren't addressable. So I think you put all those things together, and yes, I think we feel very optimistic about where we are and how we can participate across multiple growth vectors. And as a global company, I think customers are looking to us to help them produce, whether it's in one geography or around the world. And so we're excited for how that could carry into 2026.

That's really helpful. And then I wanted to ask you about China, which I think if I heard correctly, you saw 9% growth. And so I guess if I just think about what we've heard from a lot of our other industrial companies that have reported third quarter so far, we seem to be bucking the trend there where I think a lot of others are experiencing some softness in China. So can you just elaborate on what you're seeing? What's driving the broader strength there?

Yes, certainly. In the third quarter, we experienced significant year-over-year growth in Greater China, which includes Taiwan. This growth is widespread across various sectors, with the exception of the automotive sector. Our strategic investments in China, including enhanced localized distribution, sales channel investments, and on-the-ground engineering, are starting to yield positive results. A large portion of our business, about three-quarters, comes from multinationals operating in China, while the remaining quarter consists of domestic Chinese manufacturers. These customers prefer working with Cognex not only because of our superior technology but also due to our extensive global presence, especially as they consider production in China and other parts of Asia amidst recent trade developments. We're pleased with the momentum we've built. Additionally, the competitive landscape in China has stabilized, leading to more consistent pricing. Considering these factors, we had a strong quarter and I am optimistic about the potential benefits of our investments in China as we move into next year.

The next question is coming from Andrew Buscaglia of BNP Paribas.

I was hoping you could discuss some of the trends you're seeing in logistics. I mean, obviously, that's been very strong for some time now. But how much more of this existing capacity reinvestment from customers can you benefit from? And at what point do you need there to be another leg up in new warehouse build-outs to grow?

Yes, it's a great question. As mentioned in our prepared remarks, most of our growth is driven by improving productivity in our existing facilities, and I still see potential for growth there. We believe this market is still at the beginning of its automation journey. If you visit a modern warehouse today, you'll notice a lot of vision systems, but they mainly focus on tasks like barcode reading and sorting. The product we released yesterday is exciting for us and the industry because it marks a significant advancement in integrating vision and visual inspection into warehouses. It's important to understand why this hasn't been fully realized yet; it's a challenging problem due to the variation encountered in these facilities, processing millions of SKUs at high speeds while being very cost-sensitive. We're enthusiastic about increasing the use of vision in logistics, which I would describe as an open opportunity that can primarily be tackled by advanced AI. We feel well-positioned for that, and the SLX represents the first step in this journey. Many of our customers continue to focus on productivity, meaning we're not quite past the point of maximizing productivity from existing facilities. Currently, our strengths lie in retail distribution and e-commerce, while we're still relatively new to markets like parcel logistics and airport automation, where there's substantial investment. We believe there are opportunities for growth in those areas. Overall, we remain optimistic that the logistics growth narrative is far from over, although the path to achieving it may be uneven—especially considering how long larger customers can sustain significant investments. In the medium term, we feel confident about the growth story, though the journey may be bumpy or non-linear.

Yes, it’s interesting to see that semiconductors grew a little bit. We weren’t expecting much growth this year, so it’s notable that you maintained your outlook in that area. Could you explain what’s driving that small increase? Also, can you discuss how you might benefit from the memory market? It seems like you have some exposure there, especially with the current advantages from AI. It would be great if you could elaborate on that.

Yes, I believe the demand for chipsets, memory, and other active components is on the rise, driven by the need for new devices and the foundation of advanced AI, which is leading to exciting new computing capabilities. We plan to participate in these developments. It's important to remember that we engage with the market by selling our vision to major equipment manufacturers that create the machines handling the wafers or final packaged products. We primarily address the market by ensuring traceability of high-value silicon wafers, focusing on their quality through visual inspection. The growth in this sector tends to be somewhat nonlinear, as the ordering of machines depends heavily on the construction of specific facilities. Currently, we're witnessing positive activity and an underlying demand for chips, though there are shifts in production locations. We observe a resurgence linked to the CHIPS Act and initiatives in the U.S., as well as efforts in countries like India to build domestic semiconductor production capabilities. This geographic shift is significant as more regions and nations get involved in making advanced chipsets. Cognex will be present in this space, serving the market through our large equipment manufacturing partners as we do now.

The next question is coming from Tommy Moll of Stephens Inc.

I wanted to ask about automotive, Matt, I think I heard you say it feels like you're nearing a bottom there. What details can you give us? What visibility do you have into next year? And to the extent you can distinguish what you're seeing in North America versus Europe, that would be appreciated as well.

Yes, it continues to be a challenging market for us, though I believe we are nearing a bottom. You're right to highlight the geographic differences in growth. In the U.S., we're witnessing more activity compared to Europe, which appears to be recovering at a slower pace. There are various geopolitical factors affecting trade and tariffs in this industry that explain this disparity. We're definitely observing significant differences in growth rates between the Americas and Europe, with the Americas showing stronger performance. We also cater to major automotive manufacturers in Asia, including Japan, Korea, and Mainland China, where the situation is mixed. It varies based on specific OEMs and their transitions among powertrain types, influenced by geopolitical dynamics. So, while it’s hard to predict, I believe we are nearing a bottom and this year should outperform last year. Our teams are collaborating with each OEM on their automation strategies, which we view as healthy in the medium to long term. The industry is still facing challenges such as quality control issues and recalls, but vision technology can help address those. There is also a struggle with the availability of skilled labor, and automation can alleviate that problem, as well as help mitigate rising production costs and tariffs. In the near term, things are improving and stabilizing, and we maintain an optimistic outlook for the long term.

Dennis, a question for you on margins. If we look at what you just reported in the third quarter, and this will be ex-Moritex, ex the commercial partnership, you delivered teen top line growth with only 1 point of adjusted OpEx growth. Clearly, that's not repeatable over a long time horizon. And so if we take that as one bookend, the other bookend you gave us is basically a reminder of your long-term framework just that OpEx grows at a slower rate than sales. That's a pretty wide range for us to think about. If we're thinking next 12 months, is there anything you could do to situate us somewhere within that wide range in terms of what's reasonable?

Yes, that's a fair question, Tommy. To clarify regarding the quarter, if we consider constant currency, we would be down by 1 point. This reflects some challenges with incentive compensation. Last year was not strong, but this year appears to be improving in that area. In previous quarters, we mentioned that we had been down by 2 or even 3 points in year-over-year comparisons. This is essentially our current run rate, excluding incentive compensation. We're focused on driving this forward. We also discussed taking on additional reorganization charges this quarter, which we believe is important for positioning ourselves for future success. This ties into my earlier comments about our perspective on the business cycle. Generally, we operate in a short-cycle business, so we lack visibility into 2026. We follow macroeconomic indicators like PMI, which indicate that we're in the early stages of the cycle, pointing to moderate growth. In such an environment, our focus remains on improving operational efficiency. This should still lead us towards attractive adjusted EPS growth. For this year, we're looking at mid-single-digit growth on the top line, excluding the commercial partnership, but the adjusted EPS guidance, excluding that partnership, suggests over 20% EPS growth. This outlines how we foresee attractive growth rates, and I hope this provides more clarity for your question, Tommy.

Our next question is coming from Jake Levinson of Melius Research.

I wanted to return to logistics briefly. I know you have experienced significant growth in that area over the last few quarters, but it has placed some pressure on your gross margins due to the engineering resources required for implementing machine vision for certain customers. My question is, as you introduce these AI-enabled products, will that actually reduce your cost to serve those customers in the future?

Yes. Thanks, Jake. Absolutely. I mean SLX really strikes at the heart of really 2 pieces of the P&L. One is on the gross margin side. We see that the ROI on visual inspection is very strong. And so we're able to command better pricing for a given product cost. So we're excited about that. And you might even expect similar margins as we see in vision in our factory automation business for logistics. And then really, I think one of the special parts of that product is it was completely rebuilt with simplicity in mind, right, really a low-touch, no-touch deployment that maybe takes Cognex out of the loop entirely in terms of doing feasibilities, but also scale deployment. So yes, I fully expect we'll see benefits on the gross margin line as well as on the OpEx line as we can grow without having to grow our field service resources to deploy those systems in a similar way.

Okay. That's helpful. And just wanted to touch quickly on the commercial partnership that you announced. I think if memory serves, you've had more of a presence in sort of the medical device space as opposed to lab automation. But are there more opportunities like this to partner with some of these OEMs, whether it's the medical space or others? And how does this fit into the larger strategy around expanding into some of these newer markets?

I wouldn't say that. I think this is a more specialized case where we found an opportunity with a partner in a more niche area for us. So no, I wouldn't say I'd want you to extrapolate that as any sort of new playbook for growth for Cognex. I wouldn't say that.

Our next question is coming from Piyush Avasthy of Citi.

Matt, during your Investor Day, you mentioned a growth contribution of 6% to 7% from increased machine vision penetration. Although it's only been a few quarters, could you share some initial feedback on how that is developing? It seems to be more tied to packaging. Could you elaborate on how this could support your other end markets? Additionally, regarding the reorganization, how do you balance these cost measures while still being proactive about entering new markets?

Thank you. Let me address the penetration question first. As mentioned, we anticipate a 6% to 7% penetration growth in addition to core growth across our industries, which leads us to a through-cycle organic growth rate of 10% to 11%. We're seeing this penetration primarily driven by technology innovations that address applications which have not been solved before. For example, logistics is one of those areas where we're making significant strides. The SLX is creating new vision applications in logistics. In consumer electronics, we're introducing innovative tools for cosmetic defect inspection that were previously unattainable, driving penetration here as well. Regarding packaging, our focus is on educating the market and smaller regional manufacturers about the benefits of vision. We're investing in our sales channels to achieve this. These are three areas where we're enhancing penetration through technology, our approach to channels, and expanding sales coverage, and I'm enthusiastic about the progress in each area. As for your second question on cost management and reductions within our growth strategy, we take a long-term perspective on growth and investment, which is essential for a technology company. Simultaneously, we’re several months into ensuring that we manage our costs effectively given our current growth cycle. Over the past six months, we have proactively adjusted our cost structure across various areas of the company, including sales capacity, engineering capabilities, operational footprint, and administrative functions. This has involved a collaborative effort among our leadership team. I believe we've approached this wisely, and Cognex employees are engaged in this process. We are excited about leveraging this strategy to drive profitable growth in the medium and long term.

Let me add to that by explaining how we manage this. We are taking a systematic approach, which means we have clearly identified focus areas and defined work streams. Instead of implementing a single large-scale reduction in force, we are examining each area individually to find efficiencies, implementing those efficiencies, and then revisiting them after some time to assess their effectiveness and identify areas for further improvement. Our approach is not just about cutting costs in the short term and possibly causing disruption; rather, it is a balanced program that aims to support both top-line growth and bottom-line improvement.

Very helpful. And I know you just gave guidance for 1 quarter ahead, but you did spoil us last time with some incremental color on 4Q. So as we think of like 1Q '26, anything you want to remind us in terms of seasonality, any material deviation from the end market commentary that you just highlighted today? That would be helpful.

Yes, Piyush, great question. Certainly, as you mentioned, we typically don't give longer-term guidance. Keep in mind, we are a short-cycle business, but there's certainly some modeling comments I can provide. So first, keep in mind on the top line side is that from a seasonality point of view that Q1 often is like the lowest quarter in the year. So that means in that regard, you may want to look at really a year-over-year comparison, right? Don't look at a sequential comparison; look on top line and year-over-year. And then when we think about bottom line and here, maybe particularly OpEx, maybe I can remind you that in Q1 this year, we had some favorability in OpEx from exchange rate as well as from stock comp. So these ones may not repeat in Q1 2026. So I think on the OpEx side, it's probably better for you to model sequentially and not on a year-over-year basis. So maybe, yes, 2 comments, top line look year-over-year on the seasonality and on the OpEx side and at the bottom line rather look sequentially and not year-over-year. I hope that's helpful.

The next question is coming from Guy Hardwick of Barclays.

I would like to ask about automotive, which is obviously your softest market. There has been some maybe more slightly positive commentary with some major CapEx announcements by OEMs. And I guess, typically, if you're looking at 2026 and where the model launch cycle looks perhaps a little better in the second half of the year, you sure you have to put the CapEx in like 12 months ahead. So I was wondering whether there's any lead indicators from your customers in terms of models or product refreshes or CapEx plans, which may give you some cause for optimism for 2026 in auto.

Yes. Thanks, Guy. Yes, I would say we engage with all the major OEMs on their automation plans and on their platform plans, if you want to call them that. And you're right, there have been some big announcements from large OEMs, I would say, in all regions in terms of how they plan to replatform for the future, whether that be hybrid powertrains or fully electric or really just, I would say, bringing a more software-defined customer experience to the car. And as they do that, you would expect a healthy dose of automation and significant retooling, I would say, in terms of how those vehicle platforms are made. But I wouldn't comment on specific expectations for auto next year. I think that would be premature. I would just echo the comments I made, which is we are seeing differences in business momentum across geographies, relatively stronger in the U.S., relatively weaker still in Europe and somewhere in the middle in Asia. So we work with them all. We're staying close to it, but I think a bit too early to call at this point.

The next question is coming from Joe Giordano of Cowen.

Can you discuss how AI is making deployments easier and assisting nontraditional players in delivering solutions? We're noticing this trend with automation companies. Could you explain the competitive landscape, how it's changing, and who is trying to enter the market on the fringes, and what implications that has for you?

Yes, sure. Maybe I'll just talk about us for a minute. We're on our fourth generation of AI vision. We've been at this for almost 10 years, starting with the acquisition of ViDi Systems in early 2017. And we have great teams focused on taking some of the latest best open-source models and adding our customizations, if you want to call it that, to make them more relevant and run effectively in industrial vision applications. So think of that as very much our secret sauce, and Reto, who leads our vision tools development, I think, talked at length at Investor Day about how we do that and why we think we do it in a differentiated way. So I'd call that out. And it's really about model performance on accuracy, on speed, on scalability, and I still see Cognex as leading in those areas. But you're not wrong to say AI is leading to somehow a democratization of folks that are trying visual inspection more and more within industrial environments. So in that context, I see it as actually a great growth engine for getting more users of vision within factories. And then it's on us to make sure that those vision tools are Cognex vision tools. So are we seeing significant changes in the competitive dynamic? We're not, but we keep a close eye on it. And I'm very happy with the progress we're making in AI.

And then since you guys have kind of evolved the strategy a little bit, the only part that we haven't really seen a ton of evidence of yet is on the M&A side. So can you maybe talk us through what you're seeing out there? I know valuations are challenging, but a lot of buzz out there on robotics now, humanoids, all these different things. Like where does it make sense for Cognex to participate going forward?

Joe, happy to take that question. I think as we outlined at Investor Day, certainly, M&A is part of our capital allocation strategy. And certainly, with the strong cash flow generation, which we have seen this year, we definitely have the potential to do M&A. But at the same time, it's also very clear that we are setting ourselves a very high bar in terms of a strategic fit and then b, the financial profile of the potential target company. So in that regard, I think definitely, there are areas where we could bring in, especially like adding a broader product basket to our direct sales force where we can really create a lot of synergies from our perspective. But yes, at the same time, I really want to be mindful about that we don't feel like a pressure to have to do an M&A and that we will be very mindful about the financial metrics and financial framework around it, and that could mean that an M&A wouldn't be on the cards for the next 2 or 3 years. It will really depend on actionability and if we can find the right target.

The next question is coming from Ken Newman of KeyBanc Capital Markets.

Dennis, I just wanted to kind of come back to those 2026 comments that you made at the end of your prepared remarks. I understand it's not a formal guide, but when you say similar growth trends ex the commercial partnership, is that comment relative to how you see the full year of 2025 playing out? Or is that more so relative to what you've seen in the last couple of quarters? I just asked because you do seem a bit more constructive on most of the end markets that you're operating in. You're even kind of calling out being close to a bottom in auto. I'm just trying to understand the thought process there.

It's primarily about returning to the short-cycle business, particularly in factory automation, where we have limited visibility of about three months. We consider the end markets, and consumer electronics appears promising. We discussed logistics and whether there is a consistent growth trend among large-scale customers, while automotive may be reaching its lowest point. There are various factors to consider, but we prefer not to get too bogged down in the specifics of each market; instead, we take a broader perspective on what the macroeconomic indicators suggest. Currently, the PMI data does not indicate that 2026 will look similar to 2025, which is an important point for us. This analysis is vital for managing the company, particularly regarding operational expenditures and investment decisions. We presented this information as a framework to explain our current management approach and to offer guidance while emphasizing that this should not be viewed as formal guidance.

Yes. No, we did not in the prepared remarks, but I'm happy to now. It's one of the more exciting things we're working on. And yes, just to remind the group, so we launched OneVision or we announced OneVision, I would say, in June, just before the Investor Day, and we said that it was in a limited release. What does that mean? The technology is still under active development. We're working with select customers, and it can be deployed against specific Cognex embedded systems today. And I would say 4, 6 months on from that announcement, we continue to make very good progress with customers. I think they like it quite a bit. We're seeing it drive great penetration in new applications that previously weren't solved or keeping customers within our In-Sight Vision Suite ecosystem longer. I think both of those are great things. I think the usability of the technology is excellent. It offers customers great ways to collaborate on model training and great ways to track the efficacy of those models after they're deployed. So we're getting great feedback on that. What comes next? Well, we will continue to engage with customers. You can think of us engaging with hundreds of our tens of thousands of customers. So they're still quite targeted, and we are targeting a full-scale launch in the first half of next year. And that would open up the product line to more customers in more geographies that would have broader support of more of our embedded systems. So we're really focused on that, and we're excited with the momentum today. I don't have any updates for you in terms of the commercial model for the product, but just to say, it is performing well against the metrics that we set for it.

The next question is coming from Tomo Sano of JPMorgan.

This is Brendan on for Tomo. Just with the launch of the SLX portfolio, can you talk to the pipeline for the new AI-enabled use cases that you see and sort of how you see that impacting both your TAM and competitive positioning over the next year or 2?

Yes. So we see ourselves as a first mover in this style of AI vision for logistics, and I highlighted 2 applications, really object classification, right? So telling the system what it's observing as well as side-by-side detection, which is a very common application particularly in high-speed sortation and warehouses where you really want to make sure that when you're identifying an object, it could be a box or a singulated item that it's one of them, not multiples of them. And so those are the 2 applications that we're really focused on. And I would say every week and month that goes by, we find new applications for the underlying AI detection algorithms. And so how that affects our total market, we have an estimate for that. And we think it is large and growing substantially faster than, let's say, the traditional barcode reading portion of that market. So yes, let's see how it goes. We've engaged with customers well ahead of yesterday's release, and the feedback has been very positive. I'm excited to get to a full release status and update you on the future on how that product line is going.

The next question is coming from Kevin Wilson of Truist Securities.

This is actually Kevin Wilson on for Jamie. I want to ask on Europe. I think you said grew modestly, excluding the procurement shifts in consumer electronics. Sorry if I missed it; was that modest growth also excluding the onetime partnership in the quarter? And then just more broadly, excluding the onetime and excluding the procurement shifts, how are you thinking about demand trends, organic growth and your visibility in Europe? And maybe if it's possible to strip out auto, think about how that market is performing.

Yes. Maybe let me start here and then perhaps Matt will add. So I think if you look at Europe, right, so first of all, where did we saw strength? So we saw strength in the packaging market, thanks to our sales force transformation and kind of increased outreach there and penetration with our AI easy-to-use products. But then at the same time, we see stronger weakness still in the automotive side. So Matt talked about that before. That's the one market in the automotive, which is really still down. So that's kind of balanced itself out a little bit. And in general, I would say Europe, clearly, if you look back to the PMI numbers, PMIs have been improving over the last couple of months. But really from, I would say, almost depressed level more to like maybe close to a neutral level. In that regard, I would say we remain still a bit cautious about Europe and wouldn't call that there is some large growth coming somewhere in the near term; at least, that's not what is suggested by the macro data which we're looking at.

No, I think you have it roughly right. And just to remind the group, we started on this journey of really substantially broadening our sales channel several years ago, really in 2023. And as we expanded our sales force and brought on many new sales noise, as we call them, sales engineers, we made the decision to combine what was really 2 sales organizations into one earlier this year in January. And I would say that was the right decision, and it's going very well, where we've really formed new territories and new teams focused on different missions, and those missions are between finding new customers, driving penetration in existing customers, working with more sophisticated customers like machine builders and other OEMs. So I would say I'm very pleased with where we are in terms of our sales strategy and sales organizational structure. I'd say, as we look forward into the new year, it's less about significant substantial change, and it's more about continuous improvement. We made big investments over the years in modern business systems and tools, primarily in the area of CRM. And I would say we're starting to use those tools quite effectively in terms of how we identify new sales opportunities. We get those leads to our sales noids to qualify and consult. And so what inning we're in, I wouldn't say, but I'm very encouraged by the progress we've made since the first of this year. And really, the focus right now is on continuous improvement, driving efficiency and less about any substantial changes heading into next year.

That is all the time we have for questions today. I will now turn the call back over to Mr. Moschner for closing comments.

Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress heading into the fourth quarter.