Cognex Corporation Stock

All right. Good morning, everyone. I'm Sean Keresey. I'm the Managing Director on our Investment Banking side. I'm joined today by Dennis Fehr, Chief Financial Officer of Cognex. And on behalf of the Morgan Stanley folks, welcome to our 14th Annual Laguna Conference.

So Cognex is one of the leading industrial companies in machine vision, an early innovator in AI and a key element of the factory floor. You're coming off Q2, which was a record for you guys. You upgraded, what was it, 4 of the 5 key end markets for yourself, which is great to hear.

So again, thanks for joining us. Maybe just to kick us off, give us a little bit about what Cognex does and where you guys are kind of at in the industrial supply chain?

Sure, absolutely. First of all, thanks a lot for having me. Good morning, everyone. Thanks for being here early morning. As already introduced by Sean, my name is Dennis Fehr, Chief Financial Officer at Cognex. And at Cognex, we solve some of the most challenging machine vision tasks in the industry. That means we are helping our customers across different verticals. We'll probably talk a little bit more about these to inspect, inspect their either finished products or some of their components they use to identify, think about like parts in the production or also in the logistics, warehouse automation, e-commerce, type of space, and then we also help to gauge and to measure.

So think about and guide, think about like robotic arm guidance, for example. So in that regard, we're playing really in a diverse set of end markets from semi packaging, electronics and of course, logistics, our largest end market.

That's great. And so as you talk to customers now, you've had a few new product launches. What are the kind of problems that they're trying to solve? And what is Cognex enabling them to unlock in sort of those problem sets?

Yes. No. Let me talk through maybe a few examples on an industry-wide basis. But to some extent, many of them, you could also apply to some of the other verticals. So perhaps starting on the packaging side. So first, what do we say with packaging? That means fast-moving consumer goods and kind of pharmaceuticals. It's called packaging because very often you kind of inspect not the product itself, but basically where the product is packaged. And here, a lot is about kind of resolving for throughput. That means the speed the line can run on and then for quality, right?

So I think one of the biggest issues, think about like a shampoo manufacturer and so on. One of the biggest issue for them is like if they deliver a product and it sits on the shelf and it just doesn't look like there's scratches, they are wrong labels or only partially labeled, things are opening, just a bad quality experience. In that regard, we are helping them, especially with speed and quality.

Then in logistics, in warehouse automation, we are really helping to resolve topics like labor shortages and then especially cost out. So that means like optimizing like how much does it cost to ship a single parcel and to run it through an e-commerce distribution network. And then maybe lastly, on the semiconductor side, here, we're really helping our customers to expand capacity. So right now, that's very much a capacity build-out type of play.

And I think the exciting thing on top of all of these underlying customer needs, we are layering in new AI-based vision tools, which really drive additional penetration. That means we are able to unlock applications for our customers, which in the past, they could not solve with machine vision and they needed either human beings for it or they couldn't solve it at all. So in that regard, definitely a lot of kind of secular growth drivers here.

Okay. And on the secular growth drivers, when we think about the semiconductor and electronics end market, what is kind of the mix that you're seeing? And in particular, like is that broader capacity additions? Are we doing supply chain relocation, new devices, form factors? What's kind of the mix that's driving your business?

Right. So on semi, I would really point towards the build-out of the AI infrastructure, right? So I mean semi is the one market where we point to its much less of a penetration play, but it's a capacity expansion play. So here, obviously, you see the news, you see all the investment going into that space. And then you read also about memory cost increases and so on, and we are basically helping our customers to ramp up their capacity.

On the electronics side, it's a very different story. It's a much more broader-based kind of growth driver. I think a lot of investors ask, especially those who maybe know us for many years, maybe they think and ask us about like, hey, is your electronics this year driven mainly by new form factors like foldable phones. And my answer continuously is it's a factor, but it's not the factor, right? So in that regard, the electronics growth, which we are seeing this year is very broad-based, first by customers. So it's not tied to one single customer, and it's not driven by one single kind of item like a foldable phone, but really from, in general, kind of ramping up kind of device quantities, it's about more devices outside of phones, so think about like AI gadgets, wearables, glasses, for example.

And then also here in electronics, we have a portion still small today, but growing at interesting growth rates is kind of helping the data center supply chain, right? So before I talk about the chips itself in semi, but here, it's about like kind of a full server rack assembly verification. In that regard, electronics is a very broad-based play at the moment.

Maybe this is a good spot to talk about some of the applications you're seeing in the data center. Can you kind of give everyone a preview or an overview of what you're seeing there?

Right. I think what we really saw over the last, I would almost say like 6 months or so since we launched a new product called the In-Sight 3900 together with OneVision, which is our cloud-based AI training tool that we are now able to solve tasks for these, let's call it, contract manufacturers. At the end, these are the contract manufacturers for the hyperscalers who build the server racks for them. And if you build a server rack, while itself, I would say, it's not a very complicated production process, obviously, there are a lot of things which need to be at the right places, a lot of connections at the right places.

And certainly, you do not want to find them when you start shipping these or have shipped the server racks into the data centers, you want to find them at the factory. In that regard, we're really helping our customers to do a full server rack verification. That means we have one of our machine vision systems mounted on a robotic arm going around of the server, taking pictures and then verifying between 100 to 200 inspection points. And that's really enabled by what I said before, by new AI technology, what we call OneVision, and this wouldn't have been possible 6 months ago.

So in that regard, we are very excited that we can now provide such kind of solutions to our customers. And therefore, we also feel very positive that we can drive additional growth from penetration in the data center supply chain.

And maybe just to round out the discussion of end markets packaging, automotive and kind of other, how do you see those contributing to the mix going forward?

Yes. I would really want to highlight the packaging. I already talked a bit about it. It's really a market where we have very purposefully diversified in over the last couple of years. So if you would go back -- let's go back 10 years, maybe 2017 or so, you would not find packaging even as mentioned by Cognex as a major market, right?

In 2025, it was already our second largest end market. And here, it's really all about driving penetration, right? So in that regard, it's about finding new customers. So we did a lot of push over the last 3 years or so in growing our customer base, and we were very successful on the packaging side. And then it's also bringing some of the latest AI applications to our customers to help them solve task at high speed, right?

I mentioned before, packaging is a high-speed kind of requirement market. In that regard, very excited about this market because by itself, it's not a very cyclical market, right? So electronics typically is a rather cyclical market, but packaging is not. In that regard, we have been really looking forward to find ways to diversify our growth from highly cyclical or volatile markets into other markets, which provide more stable growth and packaging is one of these success examples we can point to.

And we hit on OneVision, and I recall having the opportunity to use OneVision at the Investor Day a couple of years ago. Why is OneVision such a game changer for you? And how does it kind of open up different applications for your customers and keep you sort of differentiated relative to your...

Right? So maybe before I talk about OneVision, let me say a few words generally about our AI journey and bringing AI into our products, right? So we are almost -- I could say like almost 10 years into our AI journey. So we have been really pioneering this technology with an acquisition late 2017, early 2018, where we bought a company called ViDi in Switzerland, and that really formed the nucleus of our today's AI vision team and brought our first AI-enabled product in 2022, which essentially is what we call training on device, right?

So that means our customers really want to solve vision tasks on the device for two reasons. One is the latency, the speed topic and then the other one is cybersecurity concerns. And you could almost argue like nowadays, maybe a third item comes on to it is token cost, right? If you solve things on the device, you're not having token cost versus if you do it in the cloud, you also get a variable cost into your processing versus if you solve it on the device, you pay upfront for the device and you don't have variable cost.

In that regard, that's really where we started, where customers really wanted it the most. And what does it really solve for the customer? It solves two things. A, it's much easier for them to configure the system; and two, it enables to solve tasks, which are much harder to do it in a -- without AI, let's say, or just impossible to do.

But now where does OneVision come into play is that if you do things on the device, what is the preferred aspect for our customers, you're limited by the compute power of the device. Now of course, compute power gets more and more powerful in devices, but still it's limited. So in that regard, if you want to do the hardest to solve tasks, you need to be in the cloud. But somehow, again, customers don't really want to be in the cloud, especially not when they run it live on their production line. And that's why we created OneVision, which essentially is a training in the cloud. It means we only let our customers or help them to train their machine vision models in the cloud based on our proprietary machine vision models, which we provide as a pretrained starting point.

And once they have completed the training, they just bring back the fully trained model onto the device. They're not in the cloud anymore, and they can solve very hard applications like the full rack server verification or if you think about like inspecting transparent surfaces, glass bottles or transparent plastic wraps in the packaging industry, especially an important factor.

In that regard, we are really providing this bridge for the customers to use the power of the cloud to avoid the pitfalls of the cloud. And that's kind of very unique in the industry. I think we can really say that nobody else is able to provide such an offering today, and that's why we are so excited about OneVision.

Excellent. That's great. On to China, which is a fast-growing region for machine vision broadly. And I think a lot of that answer probably plays into the competitive advantage there. How do you assess Cognex's positioning overall within that market? And how do you kind of measure yourself versus some of the alternatives that are coming out of that region?

Great. I would say we really have been able to shift from defense into offense over the last 18 months, right? If you go back to 2024, we clearly saw that Chinese local competitors starting to trying to catch up. And at that time, we basically countered that, and we lowered prices on our what we call N-2 type of products, the older generation products where kind of they play in, in terms of technology level. And I would say that was a defensive move at that time to defend market share and that was successful to some extent at that time.

But since then, we have really kind of made some key investments into the China market from the way how we structured our sales organization. We invested into China for China product. We invested into strengthening our local distribution network. And now we can really say, at least our perception is that this year, we are growing faster than the market, right? So we have more than 40% growth so far in China this year. And that points to that we are playing the offense that we are able to take share there.

And in general, we feel like it's an exciting market. And so in that regard, I feel very positive kind of how it has developed. And of course, the market in general has become easier. So that certainly helps. But at the same time, we're now able to do both. We are able to grow, and we are also able to take price. And that, I think, really points to quite some strength.

Very good. Maybe I'll just pause for a second. Any questions from the room? I'll circle back if there's none at this point, but I just want to make sure everyone gets a chance to ask any questions. Acknowledging it's a little bit early. Well, speaking of offense, you've added 9,000 customers in 2025 and another 4,500 in 2026. Maybe just talk a little bit about the customer acquisition, the model, how you're changing going to market, especially with your new tools like OneVision.

Sure. I think one of our top 3 strategic objectives, which we announced last year at our Investor Day was to say we want to double our customer base. And maybe I'll first talk a bit about the rationale behind it, and then I talk a bit more about like where are we on this journey and where we will go next, right? I think I already kind of alluded a bit to it, right? If you look back into Cognex history, in general, I think we have seen on the one side, over 10, 15 years, right, all the way up to 2021, kind of 15% CAGR, but not anywhere close to a straight-line growth, actually very volatile growth. That means very strong growth in peak years, but then also contractions in down years. And some of that was clearly also driven by high customer concentration and then by high exposure to more cyclical or volatile end markets.

So in that regard, on the one side, obviously, we love to be strong with what we call our Tier 1 accounts, and we certainly still love to be in the electronics space. But very clearly, from a management perspective is also to say like is there a path to diversify the growth engine to drive more consistent growth and less volatile growth. So that's kind of behind the thinking of that expanding the customer base. That means there is a diversification of customer play into here. And it's not the only angle which we're driving to drive diversification, but that was the first one which we really tackled the strongest.

And here, I think we feel like we have been quite successful in what we would call the land and the land and expand strategy, right? So that means adding 9,000 customers last year that was 3x of what we have been able to add in 2024, adding 4,500 customers in the first half of the year. So that means like this first step, I think we feel like we have built that engine. And core of that was to reorganize our sales organization. That means like first bringing all sales organization into one team, but then have specific profile. So that means like we have one seller profile, which is really looking for this new type of customers. And then we have a different seller profile, which is really focused on existing established end users.

And the third one is for machine builders. So that means like the sales force structure as it is in place has been really playing into that, and we are very happy with that. But now really the next step is about to expand, right? And that's kind of where our mind more and more shifts to. So in that regard, would we think about like is the next strategic objective to double the customer base again? Probably not. It's really now about like expanding on these customers, which we have been winning already. And here now other things come into mind. So first of all, serving them with the right technology, the OneVision is an important piece to that. But it's going beyond that. It's also right what do customers want? They certainly also want to have the right level of service, but that's where our other strategic objective of being the #1 in customer experience plays a role. But then they also want to have a point full solutions and they don't want to just buy products.

And we see ourselves really as a, say, product technology company, and we are not looking to provide integration services to our customers. But it's also clearly there are many other companies in the market kind of system integrators who can provide that service. So that's an area where we see still an opportunity for us where we can refine our go-to-market. And that means we are right now building out a new, call it, entitlement/loyalty/support program for system integrators and also machine builders so that we provide the best possible support for our customers there. And by that, basically helping to go from land to expand. And that's kind of where I would say the go-to-market and maybe the overall strategic objective is evolving into step-by-step as we are making progress.

And so the profile of your customers within -- let's just maybe pick a few out of these 4,500. They're smaller, but the trajectory and their scope of end market applications or applications in general for what they do is pretty broad down the road. Is that kind of a fair way to think about the strategy?

Yes. So maybe I go back to the example of the packaging, right? So for many, many years, we have been playing very successful with some of the largest names in the space. So think about companies like P&G, Unilever and so on. So just examples. And then -- but this market is very regionally diversified in the sense that you have a lot of smaller businesses all the way down to mom-and-pop shops, right?

From companies who are producing soups for local fast food chains or convenience stores, and they maybe have 20 to 30 employees. And that's kind of what we have not reached in the past. And that's really where we can drive additional growth and where we can drive additional customer penetration into. And in that regard, that's really where we have been able to penetrate. And I pointed to that growth and this kind of much more stable growth in that area, and that's kind of how the strategy unfolds in that area.

That's helpful. I'll pause there on end markets and model. Any questions from the audience?

Okay. A lot happening on the financial model as well. So you've evolved meaningfully in generating stronger margins, very different Cognex from a year or even a year or 2 ago. Cash generation and operating leverage is also kicking in. As you look beyond the current margin and the current cost-out program, how should you have investors think about the margin story evolving?

Yes. So first of all, I would say we are very pleased with what we have achieved over the last 18 to 24 months. I think right, if you think back 2024, 17% adjusted EBITDA margin, I would say, really very far away from what Cognex has done historically and could do. And certainly, it was very clearly that when Matt and I came into the roles that's really the area where we have to work on. And the biggest issue, which we saw was really that our OpEx efficiency was pretty low at that time. And I think the success of bringing up the bottom line margins from that 17% to our guidance midpoint for this year, 30%.

So that means a significant expansion of the margin, the bottom line in a comparatively short time was, first of all, is really going hard after OpEx efficiency and very clearly was about cost -- running cost out programs. But I think at the same time, having in mind that we did not want to sacrifice on growth. So in that regard, it was really all about thinking about like what's the right productivity level throughout the organization. And as we started to see accelerating top line growth this year, combined with taking out costs, we really see very strong leverage, right?

In Q2, we had 100% revenue fall through to the bottom line. And I would say really quite beyond our expectations, especially in time of the speed how we got there. But now are we at the point where we think we can not go further?

No, absolutely not. I think, if we look at our operations of how we run the business, I think we have now been 18 months into transforming our operating model, and we made quite some progress. But clearly, there's another level we can go to, right? So that means we are not at the end of the journey in terms of driving efficiency into our processes. But it will show differently in the P&L, right? So that means now especially in the second half of this year, we're really showing OpEx in absolute terms reducing. And that's not what I would expect for 2027 going forward. But it's really all about like being able to drive further growth without meaningfully expand the OpEx line. And when I say meaningfully, I would say maybe in line with inflation, right?

So that means think about like '27 inflationary growth on the OpEx side while still outgrowing on the top line and by that still driving fall-through into the bottom line. And then certainly, our eyes is also on the gross margin line, where we have seen throughout the year quite some positive effects from the mix, right, as really some of the highly attractive end markets for us in terms of margin performance have been leading the growth. Pricing is still a lever where we can work on, right? I think an area where we haven't been too active in the past is Cognex. And we think as many other industrial companies, we can use pricing as a compounding lever over time. So it's not like big numbers every year, but over 3 or 4 years, I think we can really turn pricing also in a meaningful kind of compounding effect into the gross margin.

So all in all, I would say like we are clearly not at the end of our margin expansion story, but also very clearly is that we see this as profitable growth. We're not seeing a profit or growth. We're really seeing it as both together. And as a management team, we are very clearly focused to make sure that we are getting both and that we are not sacrificing one for the other.

With the shift or kind of, I guess, would be better said as an expansion of your go-to-market model, how do you guys evaluate sales productivity in that mix?

Yes, it's a great question. And that's where we really spend a lot of time on it, and we created a lot of data analytics, and we keep on challenging ourselves, right? So I mentioned before about like 3 different seller profiles, right? So a team which is looking for -- or the seller profiles, which is looking to win new customers versus those serving end users versus those serving kind of machine builders. And they have very different kind of objectives in terms of the productivity, right?

We look at it very simple when we say sales productivity, at the end apply, okay, what is bookings versus dollar expense in a dollar number. But very clearly, we have a different expectation from somebody who is hunting for new customers than somebody who is serving established customers or is trying to penetrate existing customers deeper. So in that regard, we have very clearly articulated productivity targets for each of these seller profiles. And for this year, we have a clear productivity improvement objective for each of these, and we can say like we're actually ahead of these productivity targets.

And we think that next year, there's another productivity improvement in the year after. So in that regard, again, to this point, do we need to drive OpEx growth as we drive top line growth? Not very much. Of course, again, inflationary adjustments may be needed, but not beyond that because we really have a lot of kind of productivity growth. And there's clearly things, as I mentioned before, like how we work with the system integrators. That's an area where we support marketing automation is a big piece for us, where I would say we probably still have more work to do.

I think we run a couple of pilots where we said like, hey, here's how we think this could shape out. So we had some very interesting learnings from these and now basically going back to the drawing board and putting these learnings into an updated concept. And I believe marketing automation is an area where over the next maybe 2 years or so, we probably can also drive further efficiency gains. And the great thing is it's an efficiency gain on OpEx and it also drives growth. So that's really coming back to the profitable growth story.

You kind of mentioned the inflation area expectation within I wish something kind of like bill of materials.

Yes.

Are there any constraints to kind of the growth or I guess, said differently, the more durable growth that you expect for the next several years?

I think the biggest area where we are looking at right now is memory components. And then to some extent, we're also starting to look into the broader, call it, maybe more passive type of electronics components. But memory is really the area where we see the most cost inflation happening. I think it's probably not a new theme for anyone, but really very high inflationary pressure there. And while memory is not a big component of our bill of material, we see it as a headwind, right? So we said a 75 basis point headwind to gross margin in Q3. But then at the same time, we're also able to drive really pricing on the other side and to pass on this increased cost to our customers.

So we think these effects as transitionary, I would call it. So that means like, yes, there will be lasting perhaps in the bill of material cost, but we'll be able to offset it through pricing. So far, I would say we're not seeing kind of a shortage, but we are seeing tight supply, right? So memory is tight on supply and some other areas as well. But so far, we have been able to manage quite successfully. So we would not see that this would kind of restrict our growth in the future.

So nothing that impacts kind of the sales time line that you generally expect?

No.

Maybe on that topic, what's changed with your sales time line over, call it, the last several years as you kind of shift how you go to market a little bit, you're targeting more of the mom-and-pops as opposed to kind of the larger customers that required a lot of engineering support. Has that compressed meaningfully? And how do you kind of see that evolving?

I would say it has not changed so much, right? At the end, I would say the sales cycle, whether you go to a smaller customer or a larger customer, it's more driven by the application than what customer it is, right? If you go into more complex application, sales cycle tends to go longer versus easier applications a bit shorter. And the smaller companies, they more tend towards the more easier-to-use applications, but not always, right? So in that regard, it's clearly it's not limited to. No, I think -- yes, I'll leave it there.

Fair enough. Any questions from the room? Okay. Capital allocation. You guys spent a lot of time with this at your Investor Day. You kind of continue to work towards really, really strong margins, strong free cash flow generation. How do you guys think about, call it, return of capital, balancing that with M&A and obviously, organic investments?

Right. So I would say over the last 18 months, we have been very strongly focused on share buybacks, right? So we returned close to $250 million or even a bit ahead of that just through share buybacks without the dividends over the last 18 months. And I think we bought at attractive share prices in the high 30s and low 40s. In that regard, I felt like we got a very good return on that capital allocation. And certainly, share buybacks plays also a role into the future, but opportunistically. So that means like when we see a pullback in the market, that's the moment in time for us to deploy capital through share buybacks.

But then also very clearly, we said at Investor Day that we want to basically have more or less an equal split between share buybacks and M&A, and we want to make M&A as part of the growth story as part of the diversification of the growth. And we haven't been active in M&A over the last 18 months or so. And I would say right now, we probably feel like we are probably in a very good position and good time to do M&A, right? I think we have been able to return to growth. We have been able to drive significant margin expansion. We are in a much better shape there. We have been making a lot of progress on transforming our operating model.

So I would say probably timing for M&As couldn't be better right now than during the last 18 months. But then, of course, it always comes back to do you find the right target for the right price. But very clearly, I would say if we find the right target for the right price and especially to help us to diversify our growth engine and to go into adjacent markets, then we would definitely deploy capital there and very much looking forward to that day.

Yes. It's a strong market out there, but I mean, again, finding the right adjacency is probably the key question, right?

Look, any questions from the audience? We probably have time for one. Okay, well, that brings us just about to the allotted time. Dennis, thank you so much for joining us at the Laguna Conference. On behalf of Morgan Stanley, we appreciate everyone attending this morning and enjoy the rest of the conference. Thank you.

Thanks a lot, Sean. Thanks a lot, everyone, for attending.

Hi, everybody. Thanks for joining us. Just in case you're wondering if we're in the right room here. We're hosting a fireside chat with one of the largest players in machine vision and one of the earliest innovators in industrial AI, which of course, is Cognex -- joining us from the company is the company's Chief Financial Officer, Dennis Fehr. Dennis, thanks for being with us today.

Ken, thanks for having me.

Yes, of course. So maybe just to start for anybody who might be a little unfamiliar with Cognex. Could you just give us a real quick brief overview of what the company does, where it sits in the industrial supply chain and kind of what you're seeing in the market today?

Great. So maybe first, a quick intro on myself, Dennis Fehr, Chief Financial Officer, about 2.5 years with the company. So Cognex, as already said, we're about 45 years into machine vision, probably the category creator. And we see ourselves as the tech leader, especially also leading with the latest AI machine vision tools. We use machine vision in factories and in warehouses to inspect like think about like defect inspection.

We do identification like barcode reading and what we call optical character recognition. We do also robotic arm guidance and measurements. And we do that in about $7 billion market, which is growing at about a 10% to 11% CAGR, as somebody like Interact Analysis would say. We are serving that market largely through a direct-sales force, serving some of the most iconic names in manufacturing and in warehouse and logistics.

But we have recently also started to revitalize our channel program to serve system integrators and machine builders better. And then we are a high-margin business. So our long-term average is about 28% adjusted EBITDA margin. And for this year, we are guiding to 29% to 31%. So we're also in a nice period of margin expansion.

Great. That's a really great intro and a great overview. Maybe just to start off on my end, you reported earnings last week. You put up a really strong beat and raise. You introduced a new full-year 2026 guide range. The stock did sell off on the day. And I think part of the comments I've gotten back was nominally, it does look like the fourth quarter guide implies -- or it implies the fourth quarter earnings kind of steps down from a 3Q level. So curious if you just talk through that a little bit. What are the kind of the puts and takes on how you think about the visibility into the end of the year relative to the strength you've been seeing in the end markets?

Great. So maybe I'll start with a bit of a macro picture and then maybe go from there some more of the quarterly sequential view there. So big picture macro, right? So we upgraded 4 of our 5 end markets in terms of our growth outlook, and we see really a strong demand environment. If we look at PMIs, we are now about 6 months into PMI being in an expansion territory. And they are around 55%. So that means like if you think 6 months just in, if you look at past cycles, you would have seen PMIs peaking somewhere in the low 60s, maybe in the mid-60s.

So in that regard, we feel like, in general, on the cycle, there's still quite some way to go, right? We still feel like we are in the early stages of the upcycle. And in general, we feel quite robust about the macro environment. And we think that we see some of that reflected in the numbers which we put out there. So we reported a second quarter with record quarterly revenues. So for the first time in this $290 million range. And then we put out a third quarter guide with a midpoint of $310 million. That means another quarterly record if we make that number.

So in that regard, we see 2 strong quarters. And these are 2 quarters, however, we need to point out are quarters which are driven by electronics seasonality. So typically, electronics is showing up with strong numbers in the second and the third quarter, and electronics does not have a meaningful impact in Q1 and Q4. And electronics is the largest growing end market if we take absolute dollars.

So in that regard, clearly, it's a growth driver in second and third quarter, but it's not reflective of driving growth in the fourth quarter just by seasonality. So if you look at the fourth quarter, it is also a number we put out there, which was slightly ahead of consensus before we went into the earnings season. And certainly, now it doesn't have the electronics contribution from growth, but it's still a growing quarter.

So in that regard, we would say like we wouldn't take this as an indication that the growth rate year-over-year and that there is a sequential step-down from Q3 into Q4 is any signs of a weaker demand environment. We think it's more a seasonality effect.

Understood. That's really helpful. Dennis, you and the CEO, Matt Moschner, I think, has made a really impressive impact on streamlining the cost structure over the last, call it, 2-plus years. First, you're expecting to realize about $35 million of cost savings annualized by the end of this year. We also are exiting around $22 million of low-growth, low-margin business over the next year as well. You raised the long-term EBITDA margin target by about 300 basis points through the cycle. So obviously, there's still a lot of work to be done on what's been announced, but I'm curious, how do you think about the further opportunities to optimize the cost structure from here as we execute against the current initiatives?

Yes. No. So first of all, very pleased about the results, right? So we -- if you look back, 2024 was a year where we just were in the high-teens of adjusted EBITDA margin, 17% to be precise. And now in this year, we're guiding to the 29% to 31% for this year. So in that regard, over a comparatively short period of time, we achieved quite some margin expansion. And what were the ingredients for that, right? On the one side, very clearly returning back to the growth, the top-line growth, right? So for this year, or for the first half of the year, somewhere in the mid-teens of growth.

And then at the same time, the ability to take out OpEx, right? So you mentioned we have this $35 million OpEx reduction target. And we really see this that 2026 total absolute adjusted OpEx numbers will be below the 2025 absolute numbers. And that means we get very, very strong leverage, right? In the second quarter, we had 100% flow-through from revenue to the bottom line. And for the full year, we said that probably in the high 80s, 87% probably flow-through of revenue into the bottom line.

And now as we start to look forward, right? So where would we go from here? So we mentioned that we're probably good with resetting the cost base. So we are not looking to take out further cost in '27. But at the same time, we also don't see the need that we need to add significantly more cost as the top line further grows. So in that regard, we can further drive automation initiatives. We can drive additional process improvement initiatives. And that basically sets us up that we could keep an OpEx growth somewhere at an inflationary level.

And that would mean we would still see strong margin -- top-line flow-through to the bottom line, probably not on an 87% basis. But you would think like in a long-term steady state, maybe 60% and then '27 could be somewhere between the 60% and this 87% in that regard, still strong flow-through and then certainly depends on what the top line will do in '27, maybe too early to talk about that yet. But in general, are we at the end of our margin expansion story? No, clearly, we are not. I think we clearly have that ambition to go further.

I mean to that point, that long-term target, of -- what is it, I want to say, 25% to 31%? You did 32% EBITDA margin this last quarter. The midpoint of the third quarter guide is 33%. So I guess, is there a ceiling on where EBITDA margins can go in terms of through-cycle performance?

So basically, when we think about a 25% to 31%, you think about this as an annual number, So certainly, quarters like the second and the third quarter where we have strong electronic seasonality, they may be outside of that range. But then for the full year, our guide of 29% to 31%, the midpoint would be 30%, that's still well within the range.

And certainly, we will look then further, so in that regard, for us right now, the focus is about let's achieve in the next 5 months, what we put out there. And then once we have the full year behind us, we will reevaluate and we'll basically come out whether we will change that range or not.

Understood. Maybe just switching over real quickly to the end markets. You talked a little bit about consumer electronics. It's about 20% of your total revenue. And despite, I think, historically, a decent amount of that exposure had been in China, but it feels like you've seen more upside from that sector that's moved out of China and into broader Asia and even Europe on some of the supply chain moves. Even with all the moving pieces and the inflation, what's been the biggest driver of growth in that vertical? And where do you think that could settle out through a cycle?

Yes. No, I see that the great thing of consumer electronics in this year is that it's a very broad-based growth, right? So that means if we look back at prior cycles that were typically very focused on certain things like a change of technology, like display technology, if we go back to 2017, for example. But right now, we see it very broad-based. So that means we have factors like reallocation of supply chains. That means things moving out of China.

That was a probably bigger theme last year than it's this year, but it's still helping this year. We have new form factors. We have new devices overall, right? So that means you see a different completely new form factors. It means saying not a different phone form factor, but think about like glasses and other wearables, which are in the making and part already launched. And then we see data centers as well, bringing a complete new component into the -- what we so far called consumer electronics end market, right, which per se is not consumer electronics. It's really a complete new set of an end market to some extent, which we haven't served in the past.

So in that regard, what we see, it's a very diversified growth. So in that regard, that keeps us actually very positive and very confident that this would not be like just a 1-year growth in consumer electronics or electronics broader and that we could see that extending for a bit longer period. So in that regard, I would say we feel really more positive about this end market than probably we did in prior cycles.

Yes. I guess just to touch on the form factor change, right? You do have a large customer within that sector. There's been a lot more news about them potentially kind of introducing a foldable phone later this year. How do you think about the opportunity from that? I mean you've already -- you've got some experience through other suppliers or manufacturers on foldables. I'm just curious how you think about how big of a catalyst that could be.

I mean I would say, at the moment, I would more point you back to the broad-based growth, right? So that means there are many different factors which drive growth and form factors or phones may be one of them, but it's not -- we're not thinking about it like this is the one and the big thing which really drives, right? As mentioned before, we are thinking at the moment really about how strong the growth is from a broad-based perspective. And again, we see this actually quite positive.

Yes. That makes sense. Maybe switching over to another end market that's been showing some solid growth. Semiconductors is about 10% of your portfolio today? It seems the market is finally seeing a reacceleration in orders. And obviously, supply chain tightness has kind of exacerbated that to a certain extent. You want to talk a little bit about what you're seeing from the sales perspective on semis versus maybe the challenges internally that you're trying to overcome in terms of delivering on higher supply-chain challenges?

Sure, absolutely, I think very well known to everyone, there's a huge demand out there, especially on the memory side. And that drives, first and foremost, very outsized demand for our products, right, as we serve really the broad spectrum of machine builders in the semi space. So our customers would be the semi CapEx names out there. And we are very well spec'd into their machines. So in that regard, we feel like we can really grow with this market as this market is expanding with pretty good certainty there. And it's really the market which has the highest growth rate in terms of percentage in this year.

And it's kind of what we -- to some extent, also expected, right? When we came into the year, we were not sure about the timing, but we were sure that it would be happening for all the good reasons I mentioned just before. So in that regard, it's driving a strong demand, it's driving strong growth for us, and that is really, overwhelmingly obviously, a positive thing for us. But at the same time, we also use memory chips in our products. However, it's not, let's say, a major factor in our bill of material. But since we are seeing really more like 2x to 3x of price increases over a 2025 baseline.

Certainly, it starts to show up into the P&L. So that means we said -- originally, we said it might be 50 basis points in the third quarter, and we upped that up to 75% -- 75 basis points. But at the same time, we also very clearly are confident that we are offsetting that with our own pricing actions. So in that regard, we see it as a temporary effect in the P&L. And then again, overall, I want to say that it's overwhelmingly, we are a net beneficiary from that trend because what it does to our top line and what it does to margin accretion to our business, we clearly think that this, let's say, this memory side is actually a good thing for Cognex.

Right. Makes sense. [indiscernible] I want to open it up real quickly to the floor in case there's any questions. If not, then we can always continue. Any questions so far? All right. That's fine. We'll continue. I've got a long list here. So look, I've continued to get questions from investors on whether AI development is an opportunity or a competitive risk to you guys longer term.

I view you as one of the first true innovators in industrial AI just being -- like you said, you kind of created the market of machine vision. You've been a public company since the '90s, right? How do you kind of respond to that process of is the democratization of AI and people being able to make their own models, how do you view that as a potential risk longer term? Or is it a catalyst for you?

So we think it's much more an opportunity and a catalyst than it's a risk, as you already rightfully said, we created the category. And then about 10 years ago, and that's almost how long we are already in our AI journey, we really started to embrace AI and saw what it may mean as a potential catalyst for bringing machine vision inspection task onto the factory floor, so in late 2017, early 2018, we acquired a company in Switzerland called ViDi, and they really kind of formed the basis for our AI development.

And then we launched our first AI-enabled product in 2022. And since then, each additional product, which we have been launching has had some form of AI machine vision to it. So in that regard, it's really a technology which we have embraced a lot, and it brings 2 opportunities, right? It brings an opportunity of penetration, and it brings the opportunity of adoption. And let me unpack that a little bit more. So on the penetration side, it really enables to do machine vision inspection tasks, which will not be possible with prior rules-based machine vision tools. And we just showcased in our recent earnings call like the data center full rack assembly, that wouldn't have been possible a year ago.

That was only reasonably possible by launching our deep learning OneVision cloud platform and in combination with a new machine vision system on the edge, the In-Sight 3900, which is powered by Qualcomm. But it means you now have the training modules on the cloud and you have the power and the speed of the newly launched edge device. And only that combination actually made it possible to introduce such a full rack for server inspection. So in that regard, it clearly -- it creates market, right? So in that regard, this step into the data center supply chain is for us a market creation step, which might not be there. So we think this is incrementally positive, and that's the penetration aspect.

And then there's the adoption piece is that it's very clearly that machine vision is not something easy to use. We try to make it as easy to use as we can. But if you want to do a harder inspection task, then it comes with challenges to set it up and so on. And here, AI can also help. So a simple example is that last year, we launched an AI assistant, which basically helps with auto-config and auto-setup in some of the devices which we have. Now that's not available yet in all abilities of our portfolio.

But that's basically a starting point in that journey as well. That means bringing AI and making it easier for customers to adopt it. And right, so that they don't need to have big factory automation engineering teams by themselves. But somebody with -- maybe like you and me one day can set up a machine vision system for a medium- to complex machine vision task, and that's kind of what we are striving to do, and that's where AI can help.

We have a question here. Go ahead.

Following up on that, are you seeing multimodal LLM approaching into the traditional machine learning vision space where people are trying to use LLMs instead of actually training a vision model for...

Not really. I mean, certainly, you can say like, is there a risk, right? The problem is still that machine vision for factory automation is highly specific, right? You really need to identify small defects and then it's very specific, right? So that means you would need -- you really need to train. That's what we do, right? We pretrain models with highly specific factory automation-related data.

And so in that regard, while these large language models are getting larger and larger, they're also trying to do more and more things. That means they are not really equipped to solve the most specific factory automation tasks. So in that regard, we don't perceive them as a risk. And therefore, to your initial question, right? We think the opportunity is so much larger than the risk.

And to that point, I think something that we've talked about in the past is because you are a first mover into this industry, you've got decades of high-fidelity image libraries for industrial widgets that you can't train an LLM off the Internet to get with high accuracy or precision...

You nailed that down.

Maybe just sticking on the AI side. You introduced one vision at your Analyst Day last year. I was really happy to see that you've made it commercially available at some of these past trade shows that we've seen this past year. Maybe talk about the trends and what is it One vision for people who don't know? And how does that -- how do you think about attach rates kind of associated with that service and what it really opens up for you?

Right. So OneVision really extends our ecosystem to enable basically running the most complex inspection task on a device, right? So that means if you think about -- if you want to do a complex machine vision task like the server rack assembly verification, then you need to run them in a deep learning mode to train, and you probably have to label a lot of inspection points you want to do. And that compute power you will not have on a device.

But at the end, you want to do the inspection on a device because you don't want to have the cybersecurity implications and you may have latency issues if you go to the cloud. So what we created with OneVision is basically an online training platform where the customers can upload their proprietary data, train their models and then redeploy the model from the cloud into the edge. So we call that an edge-to-cloud and cloud-to-edge strategy, giving the customers what they need.

They need the cloud training capabilities, but they want to have the speed of the edge and the data security of the edge. And we give them both with OneVision. And that basically is what makes it so exciting is that we really are the first one going out with such kind of an offering to the market. And while we just recently launched it basically 2 months ago and making it fully commercially available, we see good attach rates, and we are pretty pleased where we are in this even so short journey.

Yes. We have about a minute left. Just want to open it up for any final questions for Dennis. Okay. Maybe just last one for me. You do have a target of around 300 basis points of inorganic growth through the cycle. When I typically think about your M&A track record, it's typically been for companies that are pre-revenue and getting you into the door on a new type of technology vertical, something to scale on, seems like that has shifting more towards companies that are truly already generating revenue and more in the software side. So maybe talk a little bit about what you're seeing out there and just how quickly you feel like you could go after some of those opportunities.

Right. I mean, in general, I think we are pretty pleased with the technology stack which we have. So we feel pretty confident about our AI capabilities, about the ecosystem, which we have been building. So that means we don't feel like we need to do a lot of kind of tech bolt-on acquisition. But at the same time, we have been talking at the last earnings call about the opportunity to further drive growth through diversification.

And that's where M&A could come into play and to look at entering additional adjacencies where we could either leverage our existing technology where there would be technology synergies or where there would be sales channel synergies. So that's kind of the opportunity which we have. And so in that regard, that's an opportunity and certainly nothing to announce at the moment, but we'll keep you posted, and we're definitely looking in this area to make potential acquisitions.

Perfect. Well, I think that's us at time, but I really want to appreciate everybody for their time, and thanks to you, Dennis.

For all the time with us today. Great. Thanks a lot, Ken. Appreciate it.

Thank you.

Greetings, and welcome to the Cognex Corporation Second Quarter 2026 Earnings Conference Call.[Operator Instructions]. 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. You may begin.

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, including progress against our strategy, opportunities to drive diversified growth, end market trends, our strong second quarter performance and our expectations for the third quarter and full year.

After prepared remarks, we'll open the line 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. Q2 was another strong quarter for Cognex and further evidence that our strategy is driving results. We delivered record quarterly revenue, significant adjusted EBITDA margin expansion and strong double-digit adjusted EPS growth. The demand environment remains favorable with no material negative impact from macroeconomic or geopolitical events. We continue to benefit from an improving industrial cycle while also seeing accelerating adoption of automation and AI-enabled machine vision.

Importantly, our performance reflects more than cyclical recovery. It reflects focused execution against the strategic objectives we have outlined for Cognex, along with the operating discipline required to convert growth into profitability. Our focus remains on profitable growth, operational excellence and productivity across the organization.

Turning to Page 3 of our earnings presentation. I'll start with a strategy update. First, we are extending our technology leadership in AI-enabled machine vision using the OneVision platform to enable new AI-driven applications and expand into high-growth end markets, including the data center supply chain. Recently, we announced the general availability of OneVision with hundreds of customers already using the platform to reduce deployment complexity, shorten time to value and scale AI-driven vision applications.

Second, we are focused on delivering the #1 customer experience in the industry. As part of this journey, we are building the most comprehensive and easy-to-use machine vision ecosystem. Recent product launches have meaningfully expanded the breadth of our portfolio, giving customers access to new cutting-edge capabilities, all within the same In-sight Vision Suite software environment.

Customers can now address entry-level inspection applications with the In-sight 2800, perform advanced 3D inspection with the Insight L38, perform complex inspections with the new Insight 3900 and gain maximum flexibility for the most demanding applications with the Insight 6900. Just as importantly, we are making our products easier to evaluate, deploy and support by enhancing Intuitive product setup, expanding self-service resources and continuing to drive efficiency through a unified software ecosystem.

Third, we are focused on driving growth through diversification. We are targeting growth across a broader set of customers, channels, adjacencies and end markets. While these initiatives will take time, they are central to building a more resilient and scalable business. Let's take a closer look at each of these areas on Page 4. Starting with customers, we are very pleased with the progress we have made towards our objective of doubling the customer base.

In 2025, we added approximately 9,000 new customers and momentum continued in 2026 with approximately 4,500 new customers added year-to-date. This success meaningfully diversifies the customers we serve and broadens our opportunity set. As we look ahead, our focus will increasingly shift towards a land and expand strategy, building on these new relationships, identifying the right high potential accounts and capturing a greater share of wallet over time. As we continue our Salesforce transformation, we are revitalizing our channel partner program to strengthen our overall go-to-market.

By working more intentionally with our global network of systems integrators, machine builders and services partners, we can better identify new opportunities, fulfill demand more effectively and bring Cognex products to a broader set of customers, applications and end markets efficiently. We will also continue to explore opportunities in adjacent markets, both organically and inorganically, where our deep domain expertise can extend to solve critical automation challenges and create meaningful long-term growth.

Finally, we have a strong track record of identifying attractive new end markets and scaling them into meaningful growth platforms. Logistics is a great example. When we entered the logistics market about 10 years ago, it represented only a single-digit percentage of total revenue. Today, logistics is our largest vertical. We are applying that same playbook as we expand into the data center supply chain market. Today, data center represents only a low single-digit percentage of revenue, but is growing more than 30% year-over-year.

While still early, we believe the data center supply chain has compelling strategic characteristics. It is aligned with powerful secular growth trends, requires high levels of quality and throughput and creates opportunities for Cognex to help customers improve productivity through automation. It also reinforces how our AI leadership can open new growth platforms over time. Turning to Page 5. Let's look at real-world example of how our technology is helping customers solve complex inspection challenges in this market.

This is a server rack inspection deployment using our newest technologies, including the Insight 3900 in OneVision. For this application, Cognex vision systems will be mounted on robots to inspect fully assembled server racks and confirm that all major components are installed correctly and meet strict quality requirements. This demonstrates the broader applicability of our AI-enabled machine vision systems beyond our traditional end markets and also provides an entry point into AI infrastructure manufacturing, a rapidly growing market.

Turning to end market performance on Page 6. The demand environment remained favorable in the second quarter. Growth was led by semiconductor, electronics and packaging, along with continued momentum from large logistics customers. Manufacturing indicators continue to improve across key regions in the second quarter, and the U.S. Purchasing Managers Index has now remained in expansion territory for 7 consecutive months. This improving macro backdrop, along with better visibility into the second half, gives us confidence to raise our full year outlook for nearly all end markets. Starting with logistics.

Momentum continued driven by large e-commerce customers. Q2 marked our 10th consecutive quarter of double-digit growth. Given the strength of our first half performance, we are raising our full year outlook for logistics to high single-digit growth while continuing to expect growth rates to moderate in the second half. Packaging delivered strong performance. Excluding the divestiture of the Japan-focused trading business, packaging grew double digits.

Based on this momentum, we are increasing our full year packaging outlook to double-digit growth. Electronics growth was very strong with double-digit growth driven by broad-based demand across customers and geographies. AI is driving a new wave of innovation in electronics as manufacturers incorporate increasingly sophisticated functionality into next-generation devices. For 2026, we are increasing our full year outlook for electronics and now expect double-digit growth. Automotive revenue declined high single digits in the quarter, but was nearly flat year-to-date.

Growth in Asia and the Americas was offset by continued weakness in Europe. We are maintaining our full year outlook for automotive of flat to low single-digit growth. Finally, Semiconductor delivered exceptional performance with strong double-digit revenue across all geographies. Demand continues to be driven by AI infrastructure investment. And based on this strength, we are increasing our full year outlook for semiconductor to double-digit growth.

In summary, we are encouraged by the demand environment and pleased with our execution. Cognex is benefiting from both cyclical recovery and structural automation trends while continuing to diversify the business, expand margins and position the company for sustainable growth through 2027 and beyond. With that, I'll turn it over to Dennis to walk through our Q2 financials and our outlook for the third quarter and full year. Dennis?

Thanks, Matt, and good morning, everyone. Q2 was a strong financial quarter with record revenue and excellent flow-through to the bottom line. Page 7 highlights our performance across 3 key financial metrics. First, adjusted EBITDA margin was 32.2%, expanding 1,150 basis points year-over-year and marking the eighth consecutive quarter of margin expansion.

Second, adjusted EPS increased 80% year-over-year, representing the eighth consecutive quarter of double-digit EPS growth. And third, trailing 12-month free cash flow conversion rate was 114%, meeting our greater than 100% target for the seventh consecutive quarter. Our strong bottom line performance reflects continued execution of our profitable growth strategy and faster progress on cost reduction initiatives, resulting in about 100% revenue flow-through in the quarter. Turning to the income statement on Page 8. Revenue increased 17% year-over-year or 16% in constant currency, reaching a record quarterly revenue level for Cognex. This was also our eighth consecutive quarter of year-over-year revenue growth.

Looking at geographic revenue trends on a year-over-year constant currency basis. China was again our fastest-growing region with revenue increasing 42%, led by semiconductor and electronics. Year-to-date, revenue in China is up 40%, driven in part by investments made over the past 12 to 18 months. In the Americas, revenue grew 27% with strength across nearly all end markets.

Americas revenue also benefited from certain electronics customers ordering through entities based in the Americas rather than Europe. This change does not reflect an underlying shift in business mix or customer demand. Excluding this procurement change, Americas revenue still grew double digits.

Europe declined 15%. Excluding the procurement change in ordering entities, Europe declined low single digits. Weakness in automotive was partially offset by strength in semiconductor. Other Asia grew 14%, driven primarily by semiconductor. Staying on Page 8. Adjusted gross margin expanded 350 basis points to 71.5%, driven by favorable mix and volume. Tariff refunds were not a material contributor to the strong gross margin performance. Adjusted operating expenses declined 3% year-over-year or 5% in constant currency, supported by accelerated cost reduction actions in the quarter.

We now expect approximately $35 million of annualized net cost reductions by the end of 2026. This is closer to the lower end of our originally $35 million to $40 million range, reflecting a balanced approach of disciplined cost management in times of strong growth. Looking ahead, our emphasis is increasingly shifting from cost reduction to our productivity optimization.

We see meaningful opportunities to further drive efficiencies through automation and continuous process improvement initiatives by continuing to grow with largely existing resources. Adjusted EBITDA was $94 million, up 81% year-over-year and our highest level since Q2 2021. Adjusted EBITDA margin reached 32.2%, expanding 1,150 basis points year-over-year and exceeding the midpoint of guidance by more than 250 basis points, driven by favorable mix and accelerated cost reduction.

Adjusted diluted EPS increased 80% year-over-year to $0.45, driven primarily by operating leverage. Cash generation remains strong. We generated $68 million of free cash flow in the quarter compared to $40 million in the prior year period, representing approximately 70% growth. Over the trailing 12 months, free cash flow totaled $268 million and free cash flow conversion was 114%. We returned nearly 80% of free cash flow to shareholders through both share buybacks and dividends over the trailing 12 months. Moving to Page 9.

I'll review our third quarter guidance. For Q3, we expect revenue of $300 million to $320 million, representing approximately 12% growth at the midpoint. Excluding the $13 million onetime benefit from the commercial partnership in Q3 2025, our guidance implies 17% revenue growth at the midpoint. Adjusted EBITDA margin is expected to be between 32% and 35%, with the midpoint representing an increase of 860 basis points year-over-year. Excluding the commercial partnership benefit, the midpoint implies adjusted EBITDA margin expansion of 1,140 basis points.

Adjusted earnings per share is expected to be $0.50 to $0.54, with the midpoint representing approximately 58% year-over-year growth. Excluding the commercial partnership benefit, the midpoint implies adjusted EPS growth of 86%. On Page 10, we are issuing full year 2026 guidance. While we continue to monitor macroeconomic and geopolitical risks, including memory market conditions and the broader inflationary environment, our guidance reflects improved visibility into the second half and confidence in our ability to execute our profitable growth strategy.

For 2026, we expect revenue of $1.13 billion to $1.15 billion, representing approximately 15% growth at the midpoint or 16% excluding the commercial partnership benefit. Adjusted EBITDA margin is expected to be between 29% and 31%, with the midpoint representing an increase of 850 basis points year-over-year or 930 basis points, excluding the commercial partnership benefit. This is well ahead of our prior target of exiting the year at 25% run rate and reflects disciplined execution of our cost reduction initiatives, along with an improved demand environment. At the midpoint, our outlook also implies approximately 87% flow-through on incremental revenue, up from 70% in 2025, highlighting the substantial operating leverage achieved through our transformation efforts.

Adjusted earnings per share is expected to be $1.64 to $1.68, with the midpoint representing approximately 63% year-over-year growth or 71% excluding the commercial partnership benefit. I would note that 2026 adjusted EPS includes approximately $0.11 per share of investment income. As interest rates and cash balances evolve, the benefit from investment income may fluctuate, making year-over-year EPS growth comparisons more challenging on a multiyear basis.

Investors should consider this contribution when evaluating EPS growth trends. I'll now briefly update you on baseline revenue assumptions for Q3 and Q4 to support comparability. As shown on Page 11, there are several known items that impact year-over-year comparisons but do not reflect the change in underlying demand. First, portfolio optimization. As discussed last quarter, the divestiture of our Japan-focused trading business, along with other noncore product exits reduces revenue by approximately $5 million beginning in Q2 and each of the following 3 quarters.

These actions are intentional and support improved mix, margin and long-term profitability. Second, as expected, we saw approximately $7 million of electronics order timing shift into Q2 from Q3. Third, Q3 and full year 2026 include the previously mentioned $30 million headwind from the onetime commercial partnership benefit. In summary, Q3 headwinds include order timing and portfolio actions, not a change in underlying demand, while Q4 reflects planned portfolio exits.

We encourage you to reflect these factors in your models, along with the strong Q4 2025 comparison. Overall, Q2 was another strong proof point for our profitable growth strategy. We delivered record revenue, significant margin expansion. Strong EPS growth and robust free cash flow. Demand remains healthy. Our operating model transformation is delivering results, and our financial model is demonstrating strong leverage. We believe Cognex is exceptionally well positioned to deliver on our commitments and create long-term shareholder value. Now Matt and I are ready for your questions. Operator, please go ahead.

[Operator Instructions]. Our first question is coming from Joe Ritchie of Goldman Sachs.

Congrats on the continued progress.

Thanks, Joe.

So my first question, I wanted to expand on the data center opportunity that you referenced earlier, Matt. I'm really curious because like, obviously, data center growth has been robust for the last couple of years. And I'm just -- what I'm wondering, is it -- is the opportunity ahead of you now because there are changes in the products that you're offering? Is there just greater adoption of machine vision for data centers today? Just maybe just expand on what's creating the opportunity for you.

Yes. No, Thanks, Joe. We've been serving the data center market for several years, but it was always a smaller portion of our business. And the application that we serve there was automated and secure drive removal and destruction, right? Think of this as kind of the ongoing maintenance of the data center. What's changed, obviously, is the very aggressive build-out of new facilities and in particularly very high-tech AI-oriented facilities that are placing demands on the supply chain that are driving demand for Cognex vision.

And you can think of it really in 3 major application areas. On one hand, we're working with the manufacturers of the componentry. These are electronic parts, metal parts, sort of the physical infrastructure of a server and of a rack. There's then the assembly of those things into that rack and then there is the deployment and maintenance and operations of that.

I would say the majority of where the revenue is coming today, and we, in our prepared remarks, sized that as low single digits of revenue growing at about 30% is mostly in that first bucket, right?

We're still mostly doing quality assurance and visual inspection for the component trait, right? These are connectors, these are electrical parts, these are PCB boards, these are metal enclosures. We're starting to see activities flow through to CMs that are assembling those into servers, but still quite early in terms of doing more complete automation once those are deployed into facilities. So I think we're still more on the early side of the growth wave that could come from the investment and build-out of data centers. I would still characterize it as quite nascent.

On the technology side, I mean, for sure, as you saw on the slide, these are very complicated inspections, right? On one hand, hundreds of points to be inspected, very fine features and very well suited for AI. And we're seeing that. I'm not sure we could have solved these problems a couple of years ago without technologies like OneVision.

So you put those 2 things together, it's a market we know. It's one that is experiencing a huge wave of growth. And I think our technology is very well positioned to capture that probably for the next several years.

That's super helpful, Matt. And then maybe just my follow-up question for Dennis. Look, obviously, organic growth has been very strong, expected to continue to remain strong throughout the year. Interesting, like your OpEx was actually down on a year-over-year basis. Is the expectation for OpEx through the second half of the year to remain down on a year-over-year basis? I just want to make sure that I have that right in the forecast.

Yes, Joe, yes, absolutely, I can confirm that. And that's really in line with our $35 million net cost reduction target, which we reemphasized and reconfirmed, right? So I think we made great progress already last year where we had 33 million gross cost reduction, right? Some of them did not show up in the P&L as we had some of the incentive comp headwinds. But in this year, we're really seeing net cost reduction. And so in that regard, bringing down the OpEx in this quarter in the second quarter of 5% in constant currency really kind of shows the strength of the execution there.

And we then from there, expect probably a bit smaller step down into the third quarter into the fourth quarter, right, as the step down from the first into the second quarter was already accelerated compared to what we saw previously. So in short, yes, we definitely expect OpEx to stay well below prior year's levels and also in the second half also below the first half.

And that's really kind of part of the strength, which we are seeing in the leverage, right? So 100% revenue flow-through in the second quarter, 87% revenue flows through at the midpoint for the full year. Really great to see these numbers and the strength of the execution there.

The next question is coming from Tomo Sano of JPMorgan. Please go ahead.

Matt, at the most recent Automate show, I remember you noted the sense of urgency about the automations. Could you talk about what demo's future generate the strongest customer reactions? And how is that translating into the pipeline and deal ASP, please?

Yes. Thanks, Tomo. It was nice seeing you at the Automate show. It was great to be there. Great energy. And as you said, I was to summarize the show in one word, it's really urgency. And what is driving that urgency? I think it's really the realization from manufacturers in North America, but frankly, around the world that their ability to automate and drive efficiency, productivity, at the same time, higher levels of quality is table stakes now. It's how they're going to survive and thrive, and it's no longer optional.

And so that was very much kind of what was the mood in the air, if you will. Specifically, your question on which demos that we were showing resonated, I think for sure, we were featuring our latest generation of AI tools running on our latest generation of embedded systems. Those are the products that we launched in the spring of this year, OneVision being our cloud training service and then the 3900 and the 6900 really being the upgraded embedded system hardware to run those models all within the same software environment, which is our In-sight Vision Suite application. So that is what we featured.

I would say that the headturners were really the inspections, right? Cognex has, for years, led in the area of 2D vision inspection. We've always said that, that was -- there was still a big untapped market for inspections done by humans that were in the past, not technically feasible to solve with machine vision, and we're increasingly solving some of those problems with our latest generation of AI tools.

And so we showed very complex PCBA inspections using our 3900. I think that was very well received, again, back to the data center comment, inspecting these very large server boards as they're being built into servers and put into racks, I think very relevant technology. And then on the other hand, we had a demo on our 6900 where we allowed users to kind of mark up pieces of art, right? And Art is very difficult because it's highly variable in its feature set.

There was a bit of glare. And so our systems really performed very well, where we were able to pick up very nuanced defects with no incremental training. And so I'd say those 2, the 2D inspection demos featured very well. And that's an area we've really invested in over the last several years where our AI advantage, I would say, is most pronounced at the moment.

And a follow-up on Dennis, if you could talk about the current environment through the margin expansions, like how should we think about the lead times and supply chains, inventories? Is there any like bottlenecks and margin impacts expected in the second half or not?

Yes. No, happy to talk about that. So first, in the quarter, we saw we saw strength in the gross margin driven by favorable mix. And then I would also say that certainly on the bottom line, right, the OpEx efficiency, which we had there. But to your question on the supply chain side, right, we have been talking about in the prior call that we expected an impact from memory price headwinds in the second half of the year.

And while we are offsetting as much as we can with that through pricing, we clearly have seen that memory prices are further increasing. In that regard, we would now say about 75 basis points of gross margin headwind being included in our Q3 guide. And probably some of that may still also show up in the fourth quarter. While in -- I would say, if you think about '27, we would think like we would fully offset that through pricing.

So think about it more like a timing impact that memory prices are going up, we're increasing prices and then memory price is going up further and we'll increase prices further. So I wouldn't say like it's a midterm headwind, but it's a headwind for the second half of the year.

And then perhaps that we currently would expect that mix still favorable in the second half of the year, but probably not as strongly favorable in the first half of the year. So in that regard, our Q3 guide as well as our full year 2026 guide expect a gross margin not as strong as in the first half of the year. But nevertheless, we can show strong bottom line performance as we further drive OpEx efficiencies, as just mentioned before.

The next question is coming from Tommy Moll of Stephens.

I noted you're halfway toward the 9,000 customers you added in 2025. And I'm curious what KPIs you could share around that progress. Clearly, on the net customer adds, there's a lot of progress. But can you share anything in terms of the win rate for these leads that get put into the top of the funnel or the speed of converting those leads? And then relatedly, where are we on the need or lack thereof to continue to hire new cohorts of additional sales folks?

Yes. Sure, Tony. Thanks. Yes. And really happy with the progress we've made last year and the first half of this year acquiring new customers. It's a key piece of our strategy to diversify, frankly, and build a stronger foundation of growth. At the same time, as we said in our structured remarks, we're thinking, as you rightly point out, as we acquire those customers, how do we expand our business with them, how do we better understand their potential so that we can direct our internal resources to really focus on the accounts where we see higher potential and maybe think of different paths to market or ways to serve on those with lower potential.

And so there's a bit of that internally where as we acquire new customers, we, I would say, have a much better way of understanding potential in terms of how we pursue additional opportunities with them. I would say in terms of market verticals, packaging continues to be an area where we are acquiring customers in a very strong way.

On one hand, these are manufacturers that have -- that are more regional, perhaps more fragmented to serve their local markets and the production of consumer products and other health care products, a segment that we didn't serve as well in years past. And so I'd say there is a disproportion of customer adds in the packaging area.

And then I think your question around as we acquire customers, as we grow the customer base, how does that imply to our sales organization. It's an area where we've invested significantly over the last 5 years to grow our direct sales channel. It's one of the biggest assets we have as a company, hundreds of very talented technical vision experts that consult around the world. But I would say, at the same time, our expectation is not necessarily to continue to invest in that area as we expand our customer count.

And this is really where we are emphasizing our channel partners and how do we revitalize the relationships we have with systems integrators, machine builders, services partners to drive productivity in our sales organization while we acquire new customers and diversify that growth basis. So hopefully, that's helpful.

And maybe let me add to that and just reemphasize what I said also in the prepared remarks, right? I think 2026 and especially the first half is the time we're really working or have been working to take out costs out of the organization. And I think from here, it's really about growing the existing resources, and that applies to sales, but also to the broader part of the organization. So in that regard, we clearly are looking forward to deliver strong leverage as we continue to grow.

Yes. That's very helpful. And Matt, you mentioned the point about strengthening the channel relationships, which also falls under this diversification theme that you've talked about at length today. What details can you share there on channel? Should we think of this as enhancing the prior framework you had for channel relationships? Or are there some new strategies here that you could comment on?

Yes. I think it is more enhancing what we've had and also taking a more coordinated, I'd say, global approach to how we manage those partnerships. We have great partners all over the world. And when I say partners, it's kind of an umbrella term for resellers that are an extension of our sales force, systems integrators and machine builders that add -- that incorporate Cognex vision into their much larger kind of solutions and machines and then systems -- I'm sorry, services partners that are very key to how we deploy at scale machine vision with customers around the world.

So partners is kind of that umbrella term for really those 4 main categories. And yes, you can think of us as being a little more coordinated in terms of how we think about the role that they play in each of our geographies, having better scorecards around investments that we're making with them and how do we measure success of those investments.

And again, partner with them to be much more coordinated around our joint go-to-market efforts. So I think it is much more about enhancing what we have than a fundamental shift. Yes, and doing it in a way that is, frankly, very complementary to our own direct selling efforts. So I think it would be a mistake to think that an investment in our channel partners is somehow an investment away from our direct sales activities. They are really one and the same as we think about our overall go-to-market strategy.

The next question is coming from Joseph Giordano of TD Cowen.

This is Chris on for Joe. So this is the first time that Cognex has issued full year guidance alongside 2Q results. What has changed in the outlook that gives you confidence and visibility to provide the full year at this stage?

See, I mean, on the one side, and Matt talked about it, we see really strong demand across most of our end markets, and it has led us to increase the outlook for for these end markets. So there's clearly like strong conviction in the demand environment. At the same time, I really want to emphasize that there's still a short-cycle low visibility company in that sense. That means typically like a 3 to 4 months type of visibility.

So we would not be a company issuing full year guidance at the end of the prior year or the beginning of the year. So we need to have really good visibility into the second half of this year. And that also means that we are not yet seeing everything into Q4, right? So we have a good view into -- a good portion of the remaining 5 months, but not into the full part of the full year.

And that means like year-end demand, right? So we believe considering the demand environment where we are, it will be a strong year-end demand. But we haven't baked a lag in an exceptional year-end demand. And then certainly, there's still also uncertainties still around memory prices, for example, how these will develop in that regard.

There are still some uncertainties out there. But nevertheless, we felt as part of our efforts over the last 1.5 years to enhance investor communications and being as transparent and forthcoming as we are, we felt like that we want to provide that view if we are able to. And so in that regard, we felt confident enough to put out this guide, while we may not know everything at this moment.

And we spoke about data center on the call. Could you help us put a framework around sizing that opportunity perhaps relative to some of your other end markets and maybe provide some color on how meaningful you anticipate data center-related revenue could become?

Yes, Chris, I think we're not prepared necessarily to do a full sizing on full potential. We're in the process of that. As I said before, it's still a very nascent opportunity. And I think many years of future growth ahead of us. We're sizing it today as low single digits of revenue with a growth path right now of 30%.

And so you can kind of extrapolate that, whether that accelerates or decelerates, we're not prepared to say full potential. But again, I think it's an application area, and it's a market that really plays to a lot of the advantages we have. and where we've created value for customers in the past, right? The cost of poor quality is extremely high, right?

These racks are tens of millions of dollars and the cost of downtime is enormous when they're not generating results and tokens. So that's great. The demand to roll them out quickly and scale quickly is high. And so that places a strain on the production capacity up in the supply chain, and that's certainly an area where we help with automated inspections during the manufacturing process.

And then a lot of the component suppliers are Cognex customers already and very familiar with vision and how to apply vision to their own quality inspection process. So we're very optimistic that the technology we have and the value we typically provide is very well positioned for this market. But as we get a better sense for the full potential, we will be updating you on future calls.

The next question is coming from Jacob Levinson of Melius Research.

Just expanding on electronics here, I think the expectation is that given all these memory price increases that the actual volumes in consumer electronics are going to slow from here. So how do you balance that with some of this new data center business you talked about and your own efforts of new products and the sales force changes and your customers' CapEx plans. I'll leave it at that, but it seems like it's -- there's some nuance there.

Yes. Thanks, Jake. Yes. No, it's certainly a risk we're thinking about, but I would say it's not one we're really seeing evidence of playing out in the business today, meaning higher memory prices putting downward pressure on demand for automation with our electronics customers. So it's a risk. I would say it's not one that we're seeing manifest yet in the business. Demand remains strong, but that certainly could change.

And then I would say our growth plan and strategy in electronics is multifaceted, right? It's not just about consumer demand and line counts. That's certainly a component. But there -- as we've talked about before, there continue to be shifts in the geographic locations of supply chains out of China to the broader ASEAN region in India, and we expect that to continue, and that's a tailwind for growth. Our own technology developments are letting us penetrate further into applications primarily in 2D inspection.

We expect that to continue. And then we are broadening our customer base in this area. As on one hand, there are new entrants to consumer devices that are looking to embed the latest generation of AI technology through consumer hardware. And you can imagine Cognex would be supporting those efforts.

So our growth in electronics and then on top of the data centers, as you mentioned. So our growth in this area is multifaceted. I think to the extent that memory prices put downward pressure on consumer demand, certainly could happen. I wouldn't say we're seeing it yet. And if it does, there's other tools that we would exercise to try to overcome that headwind should it arrive.

And maybe to add to that, right, I think historically, certainly end user demand and volume throughput for our customers is a factor, but it's not the largest factor in terms of our electronics demand, right? I think about that changes in production are a big factor as well in terms of new form factors, new device types, shift in supply chain locations, adoption of latest technologies. That's probably the much bigger factor, which drives our demand in consumer electronics. In that regard, I just want to also make sure that you're not over-indexing just on the end user demand.

Okay. That's helpful. And just on the -- on some of these new AI featured products, if you will, you've had certainly a big uptick in these new product introductions. I think there's always been this promise that the capability and the cost of those products was going to bring that to a level that broaden your TAM pretty considerably, especially with some of those customers that maybe don't have the expertise in-house to adopt the older technology.

Just trying to get a sense of what kind of uptake you've seen. And I know you talked about packaging as an example of market, but just trying to get a sense of what kind of uptake you've seen with these products in some of these markets you haven't traditionally been as large in.

Yes. absolutely. I think, Jake, just to be clear, your question is about as we've been able to roll out AI, more powerful tools into our products, how has that driven penetration? Is that right? -- in the end markets? Yes, yes. Great. Great. Yes. No, for sure. I mean, I would say in all of our 5 verticals, it's been helpful. But most notably, I think you rightly point out in packaging, right? These are historically very difficult areas to perform vision given the high variability of packaging designs.

And so our latest generation of tools, whether it's classifying, defect detecting, segmenting, doing optical character recognition, we have great AI-based tools in all those areas and very well positioned for packaging applications. So for sure, that's an area where we're driving penetration of vision. We've talked about logistics in the past, where today, our logistics business is still primarily traceability, which is reading barcodes to track items through fulfillment centers.

SLX, which was the product that enabled vision for logistics last year, seeing great traction. And again, all those tools are fully AI-based, couldn't solve the problem without that technology. Consumer electronics, very difficult inspections on -- you can think of fully populated PCBAs, where you're looking for small parts, very densely populated on a board, looking for missing parts, broken sider joints, again, perfect application for AI that we're deploying. Semiconductor, right, very, very difficult surfaces, right, shiny metallic even silicon wafers.

And again, AI is very good at finding defects, scratches, dents, other things that those wafers are being handled and processed. So quite frankly, I think our AI progress on the inspection side is quite broad. Now the one area I didn't mention was automotive. But there, I think we're -- automotive, as we've said in the past, is probably our heavily -- most heavily penetrated market today with automation, but still opportunities there, too, maybe on a smaller scale.

So yes, I wish I could say it was one area in particular, it is quite broad-based. And the uptake on the new products has been strong. These are leading technologies solving novel applications, in many cases, first of their kind. And so we're seeing strong demand, strong pricing that is commensurate to the ROIs that those problems have. So hopefully, that's helpful, Jake.

The next question is coming from Guy Hardwick of Barclays.

Congratulations on excellent results. So Dennis, on the guidance, thanks for giving us the full year guidance, but obviously it means we can back out what's implied for Q4. It looks like the step down at the midpoint would be 13% organically Q4 versus Q3. It's been quite a long time since Cognex has had a double-digit step down.

Is it fair to suggest that Q3 guidance reflects exceptional demand that you referenced, but Q4 doesn't. And therefore, it appears to have quite a bigger step down than perhaps it should have? Or is this something -- or are you just baking in conservatism into your guidance there?

I would say this year is a year where you see strong growth in electronics, of course, also some of the other verticals like semi packaging. But nevertheless, electronics is a strong growth driver and that drives more seasonality, right? So that means in years where you have stronger electronics growth, you would expect then also a stronger seasonality effect. So in that regard, that's one of the factors here. I would say I look at a bit also like first half, second half, right?

So if you look at implied revenue for the second half, that's $580 million versus the $560 million in the first half of the year. So you see actually an increase of the second half revenue and then you have effects, right? I had some electronic shift into the first half, you have a stronger effect of the portfolio optimization in the second half of the year.

So if you would adjust for that, probably that growth from the first half into the second half is even more than the $20 million, probably more towards the $40 million. In that regard, I think in general, we feel like we see that demand momentum continuing. The only thing I would maybe otherwise point out is that certainly Q4 last year is comparatively the strongest comp, which we have as that was the first quarter where we saw a much more favorable demand environment. But yes, I think in general, we feel good about the demand environment.

And just as a follow-up, I understand that Cognex put in a price increase, I believe, in April. Does that gather momentum through the year? And how does that potentially impact gross margins?

So in general, we are pleased with the pricing progress which we're making, right? If you think back, 2024 was a year where we had pricing headwinds impacting gross margins. Now '25 was a neutral year. I would say in the first half of this year, pricing was a net positive on gross margin, not one of the largest factors, right? So we haven't called it out.

Now for the second half of the year, as I alluded before, memory price impacts are negative in the second half of the year. But again, it's just more a timing effect that might we see memory price increases, we reacted to it with price increases by ourselves. We see good traction with that. But probably memory prices increased further, probably a bit more than what we had baked into our first round of price increases.

So we'll adjust for that and we'll add to that accordingly. So in general, I think we will probably still end 2026 with a net positive on pricing. And that's clearly, if you think back about the bigger picture on '24 being a headwind neutral '25 and net positive in '26 despite the memory price headwind. I think we are quite pleased about the pricing progress which we are making.

The next question is coming from Jairam Nathan of Daiwa Securities.

So I just wanted to ask you a question on strategy. Cognex has generally tried to focus more on online high-speed kind of applications. And based on at least there's a picture in the slide for racks, server racks, it seems like this could be a little of a shift. And I'm not saying this bad, but I'm just wondering if that is the case internally and if that could open even more applications.

Yes. No, thanks. For sure. I mean one of the advantages that we have with our technology is very accurate inspections, but at line speeds, right, doing -- performing those inspections at subsecond, in some cases, sub-100 millisecond cycle times, which is which is and will continue to be a focus area for Cognex.

But continuous flow manufacturing is one thing, right, where you have parts that are flying by, whether it be a bottling plant or a logistics conveyor. But I think what we tried to convey in the image for the data centers is also somehow a continuous manufacturing line where what you typically see is discrete stations of assembly, but those stations still have pretty high demand on cycle times.

Now those cycle times tend to be seconds or minutes, but it is, I would still consider it somehow a continuous flow manufacturing operation. Now what we're seeing is automation in that manufacturing process. What was a lot of manual labor potentially transitioning to more robotic-oriented assembly. And so we're putting a lot of investment in terms of how do we have our vision systems work more natively with the leading providers of robotic manipulation.

And I think you're seeing that get deployed in the manufacturing process of data centers, but also many other things. So Jairam, I wouldn't say it's really a departure from where we focused, which, as you rightly point out, is in-line manufacturing. But the types of that in-line manufacturing can be variable from continuous flow to more station-based manufacturing, which we would have featured in the data center example. Did that help?

So just if I could ask Dennis a question on pricing. So given the constant changes with supply chains and commodity costs, some of the companies seem to be going for dynamic pricing where they don't kind of -- the pricing is kind of increased more regularly. Is that something Cognex would consider just to offset some of these inflations?

I mean, yes, I would say dynamic pricing sounds to me like in ticket selling where you would really do like whatever -- every minute of price adjustment. So it's probably not as much as we are pushing it. But clearly, in an inflationary environment, which we are in, at least what we think from a supply chain perspective, thinking about more frequent price adjusting is clearly a strategy.

But Certainly, at the same time, right, there is a sales cycle and you don't want to disrupt also the sales cycle with too many price increases throughout that time. In that regard, there might be an opportunity here to think about price increases, which are aligning with the sales cycle of a few months. But like every few weeks, price adjustments or every day a price adjustment is probably not helpful in the sales cycle either in that regard. Small opportunity perhaps, but not a major shift.

Yes. I would also say Cognex captures value through price based on the value created in each of those applications. And the variety of applications that we solve is is very, very high. And so on one hand, when we say we're working on our pricing initiatives, it's not just about list price increases. It's also about how we're equipping our sales force with better tools to quantify the value and how we plan to capture that value.

And so it's more like pricing execution. So keep that in mind as well. It's not just about continuous list price increases. It's also about how do we better quantify, how do we better articulate and capture the value that our products are creating in an extremely highly variable set of applications.

The next question is coming from Amit Mehta of UBS.

This is Satap on for Amit Mehrotra. So I wanted to discuss on the sales growth, like you have been delivering very strong growth, and it has been consistent across most of the end markets.

So can you help us break it down like what is driving this in terms of share gains and expansion into newer markets versus the underlying market demand? And in addition to this, like ISM and other macro indicators have been supportive as well. But do you see the scope for underlying market demand to continue to improve from here?

Yes. Thanks for the question. It's always hard to piece out how much of our growth is market forces versus the quality of our own execution. I think it's a healthy portion of both. I mean, on one hand, -- the demand environment is strong as marked by our seventh month of PMIs, Purchasing Manager Index in expansion territory.

And I think Cognex continues to be well aligned with sort of the secular growth trends of automation, scarcity of labor, rising input costs, higher emphasis on product quality. I mean those things remain. And so you put those together, and yes, it drives strong demand for automation and particularly machine vision and Cognex being the leader.

But on the same token, I think we are executing very well. We've talked about our sales force transformation over the last several months. And that's really a couple of things. One, we did a lot of work on the organization of our sales force to make sure that they were organized for success, process and tools, making sure that they had leads, that they had -- we are fully leveraging our CRM systems that we've invested in.

And then, of course, there's always the investments we've made in product. We've had great new product introductions over the last 18 months, 4 in 2025 and maybe our biggest set of launches in April of this year on the AI side. And so yes, I think you put those things together, I think our team is executing really well. And really the strongest evidence is in the new customer adds that we continue to drive.

And at the same time, as I mentioned previously, new customer adds is one thing. We're also spending a lot more time thinking about, I said in the structured remarks, land and expand, what are the potential at the accounts that we already serve and how do we expand our share.

And so there, we've invested to get better data, and we'll be tracking that more rigorously internally. So yes, I think it's a strong demand environment. I think we expect that, that could persist into 2027. It's still too early to call. but we are continuing to drive internal growth initiatives, and those are paying off really strongly as well.

That is very helpful. Just as a follow-up on that, on the semiconductor market, the growth rate has been very strong. The underlying demand seems very good. So as we look ahead maybe over the next 1 to 2 years, do you believe these levels of demand are sustainable? Are you getting a little bit higher visibility in this market than what you have in the prior cycles?

Yes, thank you. Couldn't be happier with the performance of our semi business. This is a market that Cognex has been in for decades. And what that really means is the strength of the relationships that we have with leading semi machine builders and OEMs that deliver the capabilities to upstream and downstream producers of chipsets.

So yes, and it's an area that in the last several years, we've been investing in new technologies, whether it be traceability, barcode reading, inspections. And so -- and then the acquisition of Moritex in 2023, Moritex as a business was heavily indexed more to semi OEMs selling advanced optics and lighting. And so I think you put all that together, I feel like we're very well positioned to continue to capitalize on the growth momentum that we see in semiconductor.

For sure, I'd say this cycle feels different, perhaps more durable than previous semi cycles. I could imagine how that would extend well into next year and beyond. I think that's really predicated on the continued levels of investment in AI infrastructure. And should that continue, I would fully expect that, that would flow through to strong demand for Cognex products as we work with our large semi OEM partners.

Maybe as we got the memory and semi question across now different end markets and different themes, maybe to summarize it. So there are clearly puts and takes, right? I think on the one side, clearly, memory cost was first a headwind for us on the cost side. We feel confident that we can offset that through pricing, taking out some of the timing effects, and we had the notion of potential demand impact on electronics, which could happen. And we also said at the same time, end user demand is only one factor which drives our electronics demand.

And then at the same time, right, we have the positives, which is very clearly visible in the semi business. As Matt just outlined, we have a positive in the electronics business in the data center market. So in general, I really want to emphasize that the environment for us is really net very favorable for us, and it's not a net headwind for us. In general, we're actually quite positive about what we see in this -- from these trends.

Thank you. This brings us to the end of today's conference. I would like to turn the floor back over to Matt Mosher for closing comments.

Great. Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress in the third quarter.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.

Okay. Thank you, everyone, for joining us again. My name is Joe Giordano. I cover industrials and industrial technology here. As you will be reminded in every single meeting at this event, it is Extel season. We value your vote. If you found our work helpful, we appreciate it. For me, it's the multi-industrial category. Excited to have Cognex with us again. You guys have been a good participant every year. We have CFO, Dennis Fehr. We have Greer here to answer your hard questions in the front row here. I will keep it interactive if people want, just raise your hand, and we can go that route. Otherwise, I will kick it off. Dennis, thanks for being here.

So I think we'll start on just the operational momentum that the firm has. I think that's the most significant part of the story right now. I mean it's been pretty significant. So maybe give us a brief update of what's going on internally, and then we can touch on some of the outlooks and markets.

Yes. No, great. First of all, thanks for having us, and thanks, everyone, for your interest in Cognex and for following us. So I think really big picture, right, I think over the last, let's say, 12 to 24 months, 2 things happened at Cognex. A, we had a leadership transition, right? So we have a new -- a new leadership team was met, the CEO coming into the role officially perhaps 12 months ago and unofficially perhaps 15 months ago. And then myself, I'm there for for 24 months or so. That means like a lot of transformational change, which we are driving towards the operating model, bringing different type of management philosophy about how we think about the financial framework, about how we want to run the company.

And then certainly, what we see at the same time is that probably since November last year, we saw a market inflection happening. That means supporting our growth strategy also from a market side, which probably for a more extended period of time before that was a headwind or has really turned into a tailwind. And I think the results or early results of these 2 things coming together is strong EPS growth, right? We showed good growth in 2025 and a good path for 2026. And we clearly think that there is more runway for us to drive further EPS growth as we think ahead for the next 18 months or so or so or longer.

I want to get into the markets, but I do want to just touch on -- it's kind of a unique situation when you guys came in, right? So Cognex long history, unique culture. And when you're going to come in and do kind of changes like this, how did you balance having kind of the authority to go make big changes with like being respectful for why people are there in the first place and kind of balancing the future of the firm with the past or the history of the firm?

Right. See, I think the one great thing about the Cognex culture is why we certainly pride ourselves in being a bit quirky and we do annual reports, which are not the normal way how maybe companies do. I think one thing very clearly strong is the openness to change within Cognex, right? It's really kind of going back all the way to the days the company was founded and was founder run, right? It was a very long-time founder-run organization, which really drove this strong culture, right? It certainly also maybe you could argue maybe limited in certain areas, perception of like where could you grow, how could you grow, how you change the operating model, but instill the strong culture of embracing change. So in that regard, I would say like probably compared to maybe prior roles I had, I think driving change at Cognex is really supported by the culture. So in that regard, I felt like striking the balance of driving change, but preserving the culture has been actually comparatively easy, I would say.

Interesting. So logistics has been a source of strength the last couple of years. It's come from kind of a market you didn't participate in not terribly long ago to the largest one now. Where do you think we stand in that market, like big picture?

Yes. So see logistics market, which we have seen now for 9 consecutive quarters of double-digit growth. It was a market where we made really a good step forward through the technology, which we have introduced over the last maybe 3 to 4 years in terms of machine vision tunnels, enhanced barcode readings and so on. And then certainly, it was also the first market to recover from the trough, right? So it was one of the first markets, end markets, which kind of went into the down cycle in 2022, but it was also the first market to recover.

So in that regard, we saw probably for like 6 out of the 9 quarters I referenced, we saw really broad-based market growth. That means we saw strong growth with our top customers like Amazon, but also on a broader scale. I think what we have been seeing since the second half of last year that it started to more like getting into a phase to digest that growth, especially on the broader scale of the market versus like larger scale customers have still been growing and are still growing at this moment. But our perception is that the market is more now settling into a phase maybe for another -- can be 6 months, can be 18 months, a phase to digest growth.

And then beyond that, we see actually a lot of opportunities to see strong growth in logistics. It's a market which is highly underpenetrated from an automation perspective. It's highly underpenetrated just from kind of tracking and tracing through barcode reading and then we have an additional growth opportunity there by introducing machine vision for inspection tasks in logistics in that regard, long-term growth outlook for logistics is great. But I would say for 2026 and maybe '27, it's too early to say probably more phase to digest growth.

One thing that I thought was interesting with logistics specifically when you have your large customers there, if I think about the landscape of the market coming out of COVID was kind of like a crazy build as much as you can kind of phase and your sales there for that customer compared to now, when I think of today's market, it seems kind of like, okay, like warehouse starts are kind of in the middle of where they were, and it doesn't feel frenzied at all and your sales to that customer kind of the same now as it was when it felt very frenzied. So in a weaker market, you're still generating that kind of sales level. So it makes me think like what is different about the market today versus when you first started really making inroads there?

See I think if we think about the last peak of the cycle in 2021, a lot was driven by greenfield build-outs. But these greenfields were not fully automized end-to-end. So that means like we're still clearly driving penetration into some of these buildings and facilities today. And we still have a long runway to go, right? So that means I mentioned before, like introducing vision on top of barcode readings. In that regard, it maybe really described to say like the market has found really a new low point, right? Maybe I would not say that we are at the low point right now. But clearly, it's much more durable and much more sustainable in that sense than it probably was previously.

Any kind of new technologies that those types of customers, that cohort is increasingly asking for you now versus when they first started putting stuff in?

Absolutely, right? So we launched end of last year a product family called the SLX that's really bringing machine vision into logistics, right? So think about the traditional machine vision tasks in logistics was really tracking and tracing. So that means like making sure parcels going through the right places or finding the right places and being parcels or being at components or parts to be shipped to be put into the right parcels. But -- that's just one thing of automation. The other thing is that you have other challenges in a logistics environment, for example, jam detection on a conveyor belt or you have site by site. It means you have parcels jammed together and you make sure that you really identify it as 2 and not only as 1 or that you identify hazardous goods inside of a parcel and you treat them very differently than parcels which don't have that. So in that regard, this type of additional vision applications is really kind of the next level of automation frontier in the warehouse automation side.

I want to shift to consumer electronics for a minute. I always kind of struggled understanding the growth algorithm for that market, historically for Cognex like I understood why it would be steady, but I didn't really understand why it should kind of consistently grow. It seemed more sporadic to me. But if I think about that market today, it does seem like we should kind of be into maybe a multiyear growth cycle with new form factor phones and more complex designs and potentially new to market applications from physical AI type applications. So just curious what your view is there? And how should we think about it over the next couple of years?

Yes. Absolutely. I think consumer electronics feels very different in this cycle than it has felt at least the last 2 cycles before, right? So if we think back in 2017, it was really driven by one large customer changing display technology. So it was like a very volatile up cycle, but then also once this technology change was adopted, there was also a very strong compression afterwards. So it was very, very, very cyclical. And if you go back to 2021, again, they are much more driven by one large customer. At that time, you could argue a bit more like driven by strong end user demand, but very clearly very concentrated growth. And what we are seeing so far is it's a very broad-based growth.

So that means it's geographies, it's customers. And then beyond customers, it's like the devices, what are being -- what machine vision is being used to inspect, right? So of course, there are smartphones, there are tablets, there's even desktop PCs and laptops. There are new companies entering the realm with kind of, call it, AI gadgets, which they are looking to launch. And then we have something which is also new for us is kind of the data center supply chain, right? It's still a small market, but it's growing very, very rapidly for us. So that means topics like inspector -- sorry, connector inspections, rack assembly inspection type of applications where certainly also bringing AI-based machine tools, machine vision tools there really help with such kind of inspection. So in that regard, we see a very broad-based growth, and that makes this cycle feel more durable. Potentially a longer cycle, yet to be seen, but very clearly gives us a very different outlook into this market than what we have seen in the past where especially the down cycle was very strong. So I would expect that to be different in this cycle.

Can you talk about your exposure to semiconductors? Like where you play? I mean I'm guessing every conversation in this building today is going to talk about how much spending is happening over the next foreseeable future here. So any reason to think that you wouldn't continue to participate in that?

No, absolutely not. I mean I think we are very strongly entrenched in that market, right? So if you think back maybe 20 years, we almost were like a semi-cap company, right? So that means very -- 70% of the business of the company at that time were a semiconductor business. So that means we have very long-term relationships with the machine builders, right? So that means where do we play? Basically, our machine vision products, they go inside of the machines, which are then being used for the wafer production or further down in the processing of the chips itself. So in that regard, very deeply entrenched, very often highly technically designed and spec'd in. So that means there's very little incentive for our customers to change because change typically means like cost of money, reengineering and so on, running it through their customers. So in that regard, what we really see at the moment is a very strong capacity-driven cycle. And I think clearly, it feels like it's kind of a semi-super cycle. So in that regard, that feels like a very good case to say like Cognex will grow with this super cycle for the years to come.

Yes. Let's shift over to margins since that's been a big part of the story here. Gross margins are high, but have been stable. So most of the benefit here at the EBITDA and you shifted your focus to EBITDA, mostly been on the OpEx side. What changed here philosophically to unlock what's happening here?

I think, first of all, it's a bit what you mentioned, and I alluded a bit before about new leadership team coming and taking a different view on the P&L, right? So that means in the past, the company was really centered around top line growth and gross margins, right? It means on the one side, certainly gross -- high gross margins are great. You create a lot of leverage when you grow, and that kind of was a bit like the core DNA of the company to have outsized growth, combined with strong gross margins. And then eventually, it will result in a strong fall-through. But at the same time, when you focus and center so much about gross margin, you -- especially in the down cycle, you start to forget about your largest cost block in your P&L, which is the OpEx side. And that means also like in terms of when you do portfolio decisions, it may lead to wrong allocation decisions, right, because you focus on your high gross margin products. But if they come with a high SG&A tax to it, then maybe it's not your best product line for your bottom line.

So in that regard, really shifting away from gross margin as the core fundamental, let's say, margin aspect, I think, is one key. And then second, certainly that we drove a strong focus on OpEx efficiency as a leadership team. And I think we have made good progress there over the last 12 to 15 months. We certainly have still a bit way to go, right? So we talked about $35 million to $40 million of net OpEx reduction for this year. And I think we are probably 80% through of executing these actions. We'll start to see mostly in Q3, some of these results. And then I think we have very strong line of sight towards the rest of the 20% of the actions, which then will kind of follow in the next couple of months. So in that regard, I think we do a good job or have done a good job in '25 and are on a good path in '26 to take cost out on the OpEx side. But then as we start to think about 2027, it will be all about productivity.

So that means like as from today's perspective, you could make a good case that top line growth will still be attractive in '27. That means for us as a leadership team to make sure that the OpEx growth will stay, let's say, in line and -- or let's say, in line, I mean, significantly below the top line growth and drive further leverage.

Yes. So I mean you guys are organic -- I know you have some weird offsets this year with stuff that was done last year. But organically, high-single digits and OpEx down or flattish to down at the end of the day, it's wonderful. It leads to a lot of leverage, but also makes me think like stuff should have been done, right? Like it's unusual to be able to do that. So what levers do you have kind of like on a more consistent basis now that you've kind of gone through the initial wave of easy stuff, easy-ish stuff. What can you kind of do, especially that you're growing, right? It's harder to take this stuff out as you're doing it.

Right. I think very clearly, what we're doing in '25 and '26 is rightsizing, right? So that means bringing it back to a level where it should be. And that clearly is a bit of a different playbook than when we start to think about maybe second half of '26 or 2027, but it's really all about driving this productivity. And here, it's all about process and it's about automation, right? And it's a bit like that change in terms of how we look at it from a management perspective that we really think about the operating model of the company and how can we evolve the operating model here, right? Over the last 15 years or so prior where the company also enjoyed, right, under Rob's tenure, the company grew whatever, 15% CAGR in this 15 years, phenomenal top line growth.

And he achieved that by going after new vertical markets. But the operating model of the company fundamentally didn't change. And I think for us to go really to the next level in terms of both top line size, but then also eventually thinking about like how can we improve peak to peak and trough to trough, we need to change the operating model of the company. Otherwise, we will just stay the same in terms of our financial profile. So I think we are pleased as a leadership team that we are -- in all fairness, we're just getting back to where we have been as a company, right? We're not at new heights at this moment. But I think for us as a leadership team now is about to show to ourselves and to you guys here to show that we can improve peak to peak and trough to trough. I think we probably have an easier case, trough to trough just compared to how much compression we have seen in the last trough, but the peak-to-peak improvement is now that what we have to show next as a leadership team.

Is there a way to use price more as a lever? Like in the past, if you look at all the growth that you've had over time, it's maybe more than 100% volume, right? And maybe price was even slightly negative.

No, absolutely. See I think...

Is there a way to use that as a tool now?

Absolutely. See, I think the company in the past more approached pricing reactively, right? So it means in times like '21, '22 when you had inflation and maybe the company kind of looked to pass through inflation. I think we are thinking pricing very differently, right? We are thinking it much more in a sense like what can we achieve over 3 to 4 years' time horizon. And we clearly think that there is an opportunity to use this as a compounding effect over this multiyear time of period. And right, on the one side, certainly, pricing, you have also today effects like memory chip pricing are increasing. We're also reacting to that and looking to pass through some of that. But at the same time, there's a lot we can change in terms of the operating model.

Again, that means I call it data-driven decision-making. That means like what data and information are we giving our sellers at hand to make the best possible pricing decisions in their day-to-day life, right? Certainly, we have pricing approval processes and so on, where you can also influence your pricing decisions. But a lot of pricing decisions are still being made by sellers in the field. And that means giving them the right information like what is a good price for this type of customer in that type of region, that already helps a lot. And these are kind of these changes which we are driving in the company to just make, in this case, better decisions and then certainly aligning pricing better to the product life cycle. So there are many, many areas we can really optimize and are optimizing the pricing playbook. So in that regard, clearly, our objective is to turn a pricing headwind, which we have seen especially in 2024 into a tailwind over the next couple of years.

I guess associated with that is the sales force change, which kind of went with your whole changing of the parts of the pyramid that you're attacking. So maybe talk briefly about that. I know we've talked about that in prior years, but where are we on what was previously the emerging customer initiative? I know we're not talking -- using those words anymore. But what have you -- what has been done? And why was it necessary?

Right. So maybe first, why are we talking about winning more customers, right? So it started really like if you think back at 2021, I said before like the last 2 cycles still were driven by 2 large customers in terms of the growth. So I think the company at that time realized that if you want to eventually double yourself again in terms of the revenue size, you can't just rely on 2 or a few customers because obviously, you will hit a ceiling much, much faster and then you're exposing yourself to this customer concentration. So I think the conclusion and strategic objective at that time, and that hasn't changed for us to say like, let's broaden the customer base. Just the means were different, right?

So the Emerging Customer Initiative was about hire more salespeople, reach more customers, put them into a separate organization and just kind of almost you could argue, brute force it in the sense like -- but it's a very, very expensive way to do it because hiring a lot of people cost a lot of money and then you drive a lot of inefficiencies with 2 different sales organizations. So that means when we went away from Emerging Customer Initiative to what we call sales force transformation, we didn't change the objective. The objective remained to say like, let's penetrate a broader set of the customer market and type -- SME type of customers. but the means were very different, right?

So that means, again, here, like much more focused on data and process orientation. That means like from way like how we analyze our sales districts, right, so the sales district, whatever, Northern Ohio or something like that to really think about like what type of customers are there, how many customers are there? What type of seller profiles do you need? Are these more machine builders? Are these more sophisticated end users? Are these more like SME type of end users? And what type of sellers do we deploy? How many do we really need? And then how do we generate marketing automation, lead generation and so on.

So I think we made tremendous progress in terms of everything sales organization related. That means like we optimized and restructured the sales organization. We eliminated excess capacity there. We rewrote the sales playbooks in that regard. So I think we feel like pretty good about that piece. I think where we still have definitely more to do and much more opportunity is marketing automation, lead generation, top of funnel generation and so on. So in that regard, I would say now what gives us the confidence to say we're doing well, I think it's 2 things. One thing, new customer acquisition last year was pretty good with 9,000 new customers won compared to 3,000 the year before. And then really in electronics and packaging end market is this broad-based growth, right?

That's really what the strategic objective at the end is, and that's what we are really seeing happening in this market. So in that regard, I think we can see early success or maybe it's not early anymore, right? We could argue we are on this as a company since '23 if we include the Emerging Customer Initiative. But clearly, we see signs of success, but are we at the end? No, we are not. I think we still have a tremendous opportunity in sales productivity and that kind of coming back to the margin question before, that gives us the confidence that we can drive further top line growth without expanding OpEx at the same level, actually at a much, much lower level.

So I want to go to AI. And the reason I waited on this is because you guys have been in AI for the entirety of the company's existence, and it feels -- this is not a new thing for you. But how are you using it both internally from a -- to leverage it from a cost standpoint, from an efficiency standpoint? And how are you designing it into like the new products?

Yes. So there are really 2 pieces to the AI story, right? There's the product side and then there's the, let's say, process efficiency side of the AI story. On the product side, as a company, we embraced AI very early on, right? So we made an early acquisition late 2017, early 2018, which really formed like the core team of our AI vision team, of our AI vision models and also starting to collect all the proprietary datasets. In that regard, I think we can clearly claim that we are the leader in AI machine vision technology. I think we have shown this through products which we have launched since 2022, which are AI-enabled on the edge, right?

So we have the AI on the edge that means running on the device. And we are also a leader with our software offering and the deep learning technology. And now we have started to combine these 2 worlds with what we call OneVision, right? So OneVision is basically think about like a virtual training room for everything what's running on a device. And it's really very unique in the industry. And so in that regard, we are very differentiated there. And then I guess on the process efficiency, we do what probably many other companies do, which is really fully leaning in, right? So we have -- basically since 2 years, we already adopted AI-assisted coding. We have now a very, very high 90% plus usage rate of these rates. We are deploying AI really very meaningfully throughout the company from sales training to, like I said, software coding towards back-office applications in that regard, fully leaning in there.

So if I talked historically to Cognex about what makes it -- like what gives you your moat, right? And it's always been that this is really hard to do, to program these things to make them -- the task that they do at speed is very challenging. And I think there are those that want to make the case that having Claude code or whatever, can I just buy a camera now and myself who doesn't know how to code, can I kind of recreate what you're doing much more easily today versus historically? So how would you respond to that?

Right. So I think basically, the tech side is clearly where we have the deepest moat. And then I think it's very hard to say like let's use some kind of open source type of software or use one of the coding assisting type of tools out there. Why is that? So first of all, at the end, you need to create a machine vision model, which runs on a device, right? So that means you cannot create something which kind of has billion of parameters and you need to have something which really fully utilizes the compute power, but cannot go beyond the compute power, which you have available on the device. And then it's really highly, highly specific, right? That means at the end, we are talking about tiny defects, right?

Think about like a cookie packaging with a transparent foil and you have like a needle type size of hole in there. But that means tiny defects, highly specific and then very fast. So that means you need speed, you need accuracy, and it needs to be highly specific. And that means you need a lot of data to train it. And it means like it's just not publicly available in that sense that you kind of just stitch it together. So in that regard, this whole theme of like, hey, is AI more a risk or more an opportunity for us, it's very clearly answered that it's a tremendous opportunity in terms of driving penetration means our newly launched AI vision tools can just solve tasks which couldn't be solved in the past without AI, and that basically creates markets. So in that regard, I think we see AI as a friend. We are embracing it, and we are leading it.

Have you seen any meaningful changes in who's participating? Because I do see big automation companies showing some capabilities, but I don't know how -- it's hard to see how actually relevant they are in the market.

Right. No, not really. I mean, I think if you take a very big picture then over the last 20 years, you had Keyence on factory automation and SICK on logistics and warehouse automation. And if you want to zoom in a little bit more, maybe you could argue that maybe 5 years ago, you saw the advent of some Chinese competition. But hasn't really changed, right? So you have maybe Keyence and us as the key and top players and then you have the rest, so to say, and maybe there have been name changes, but no, not really.

Yes. Maybe we'll just close on capital deployment. It hasn't been part of the story for the most part historically. There's been a couple of deals along the way, but you seem more open now to opportunistically buy back stock when it makes sense or we're talking about the potential for deals? And how do you see balance sheet usage over the next couple of years?

Yes. See, I think we outlined our capital allocation strategy at the Investor Day where we said, yes, at the end, it's somewhere between M&A and opportunistic share buybacks. So that means like we're really looking at good entry points to buy back shares. And I think we found some nice points over the last 18 months where we have been really been able buying back shares at attractive levels like Q1 in the low 40s, almost $100 million deployed, could call that a steal almost. And then certainly, we are out there in the market to look on the M&A side. We have more flexibility there, right? In the past, we were very focused on kind of smaller tech bolt-ons and high gross margins. Right now, we're much more open in both senses that we say like bottom line profitability matters and then much more open in terms of what type of sizes we would also do.

But clearly, we consider M&A as the icing on the cake, right? We think like organically, we have a lot of growth opportunities, and we have also organically a strong margin expansion still ahead of us, right? We already expanded quite a bit, but we still can expand more in that regard. We don't feel any pressure on M&A. And yes, it's the icing on the cake.

I'll leave it there. Thanks, everyone, for listening, and enjoy the rest of your day.

Greetings, and welcome to Cognex Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 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 strategy, end market trends, our strong performance in the first quarter and our expectations for the second 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. It's hard to believe that nearly a year has passed since my appointment as CEO was announced. Since then, my leadership team and I have moved with urgency to focus our strategy, strengthen execution and position Cognex for sustainable, profitable growth.

I'm proud of the progress the team has made and excited about the huge potential still ahead of us. That progress is clearly reflected in our Q1 results as we delivered an exceptional start to the year. In Q1, revenue, adjusted EBITDA and adjusted EPS each achieved double-digit year-on-year growth, meaningfully exceeding our expectations and consensus.

Turning to Page 3 of our earnings presentation. I'll start with a strategy update. First, innovation. We're advancing our technology leadership with the launch of 2 breakthrough AI vision systems, reinforcing our goal to be the #1 provider of AI-powered machine vision . I will cover these new product introductions in more detail shortly.

Second, on portfolio optimization, we successfully completed the divestiture of our Japan-focused trading business on April 1, ahead of schedule and in line with our expected proceeds. Third, on cost and productivity, we remain on track to achieve the $35 million to $40 million in net cost reductions we announced last quarter. These actions help streamline our organization and will support durable margin expansion. Dennis will provide more details on this later in the call.

Turning to Page 4. I am pleased to announce 2 new embedded vision systems, the In-Sight 6900 and In-Sight 3900. Both breakthrough technologies share the same foundation, more AI computing power at the edge, seamless integration with OneVision and all built on the same In-Sight Vision Suite Software platform. With OneVision now broadly commercially available, these launches enhance our edge-to-cloud AI vision ecosystem and reinforce our leadership in delivering high-performance, scalable and easy-to-deploy AI solutions.

Both strengthen our position in approximately $3.5 billion of our $7 billion served market. Starting with the In-Sight 6900. This product is designed for customers who need our most powerful AI vision tools, but don't want the cost, footprint and integration burden of a PC-based architecture. Powered by NVIDIA, the 6900 combines our broadest set of image formation hardware with proven advanced AI vision tools, allowing customers to configure their system for demanding compute-intensive inspection applications. Its flexible architecture supports interchangeable cameras, lenses and lighting, which help customers dial in the exact configuration they need with less friction.

Second, the In-Sight 3900 is the industry's fastest embedded AI vision system built for customers who want maximum inspection capability with the simplicity of a fully integrated smart camera. Powered by Qualcomm, the 3900 delivers industry-leading speed, accuracy and resolution at the edge. Both products are major steps forward in embedded AI vision, bringing more capability to the factory floor with less complexity.

Turning to end market performance on Page 5. Momentum from late last year carried into Q1 with broad-based demand across our end markets, led by electronics, semiconductor and packaging and continued growth with large logistics customers. The Purchasing Managers' Index, or PMI, remains in expansion territory, while at the same time, macro uncertainty and other risks have increased. Geopolitical conflicts, rising energy costs, memory chip availability and pricing and changes to interest rate expectations are all relevant areas we continue to monitor as we look forward to the second half of the year. We are, therefore, only slightly adjusting our full year end market outlook at this time and expect to provide more clarity during the next earnings call.

Starting with Logistics. 2026 is off to a strong start with Q1 marking our ninth consecutive quarter of double-digit growth, once again led by large e-commerce customers. We continue to see encouraging traction with our SLX device portfolio, validating our strategy of layering additional vision capabilities on top of barcode reading. As the year progresses, we expect growth to normalize to mid- to high single digits as comps strengthen.

Turning to Packaging. This end market delivered double-digit revenue growth in Q1, driven by broad-based strength. Considering the strong start in 2026, we now expect high single-digit growth, supported by continued momentum from our sales force transformation and the strength of our AI-enabled ecosystem. As a reminder, this outlook reflects a reduced revenue base following the divestiture of the Japan-focused trading business.

Next is Electronics, which delivered double-digit growth in Q1, driven by broad-based strength across customers and geographies. For 2026, we continue to expect high single to double-digit growth, supported by ongoing supply chain shifts, a consumer refresh cycle and new device form factors.

Turning to Automotive. Q1 revenue increased mid-single digits on a constant currency basis. Performance continues to be different by geography with meaningful growth in the Americas, offset by ongoing softness in Europe and some growth in Asia. For the full year, we continue to expect flat to low single-digit growth.

Finally, in Semiconductor, Q1 revenue grew double digits, exceeding our expectations and driven by very strong growth across Asia. Based on the strong start, we are narrowing our full year growth outlook to a high single to double-digit range. Our deep relationships with leading semiconductor equipment manufacturers continue to position us well for sustained growth in this market. In summary, we are very pleased with the strong start to the year as focused execution drove broad-based outperformance across revenue, margin and bottom line earnings.

Q1 results reflect meaningful progress against our strategic objectives and position us well to navigate a dynamic macro environment. With that, I'll turn it over to Dennis to walk through the Q1 financials and our second quarter outlook. Dennis?

Thanks, Matt, and good morning, everyone. Our strong Q1 performance reflects disciplined execution and continued progress against our profitable growth strategy. You can see this on Page 6, which highlights our [indiscernible] results across 3 key financial metrics.

First, adjusted EBITDA margin was 26.9%, expanding 1,010 basis points year-over-year, marking the seventh consecutive quarter of margin expansion. Second, adjusted EPS increased 113% year-over-year, representing the seventh straight quarter of strong EPS growth. And third, trailing 12-month free cash flow conversion rate was 119%, meeting our greater than 100% target for the sixth consecutive quarter.

Turning to the income statement on Page 7. Revenue increased 24% year-over-year and 21% on a constant currency basis. This marked our seventh consecutive quarter of year-over-year growth. However, it is worth noting that Q1 2025 represents a softer comparison due to pull forward into Q4 2024.

Looking at geographic revenue trends on a year-over-year constant currency basis. The Americas grew 22%, driven by strength in packaging, electronics and logistics. Europe increased 23%, led by packaging and logistics. Greater China grew 36% with broad-based strength across all end markets, except automotive. Other Asia grew 6%, driven primarily by electronics and semiconductor.

Staying on Page 7. Adjusted gross margin expanded 420 basis points to 71.8%, driven primarily by favorable mix and volume, slightly offset by tariffs. Adjusted operating expenses increased 9% year-over-year or 4% on a constant currency basis, including approximately $5 million of higher incentive compensation and commissions tied to strong outperformance and higher stock-based compensation.

As a reminder, Q1 2025 benefited from $6 million favorability related to these items. Excluding these effects Q1 2026 adjusted operating expenses declined year-over-year, demonstrating our continued focus on cost management alongside strong revenue growth. We continue to drive productivity and efficiency as we execute our operating model transformation and made further progress on our cost reduction actions, incurring $4.8 million of reorganization charges, which are excluded from adjusted operating expenses.

We remain confident in achieving $35 million to $40 million of annualized net cost reductions by the end of 2026, excluding FX and in delivering continued margin expansion. Adjusted EBITDA was $72 million, up 100% year-over-year. Adjusted EBITDA margin reached 26.9%, expanding 1,010 basis points year-over-year and exceeding the midpoint of guidance by more than 600 basis points, driven by strong revenue growth and favorable mix.

Adjusted diluted EPS more than doubled year-over-year, up 113% to $0.34, driven by operating leverage and the lower diluted share count compared to last year. We generated $241 million of free cash flow over the trailing 12 months, up nearly 50% year-over-year. Trailing 12-month free cash flow conversion was 119%, the sixth consecutive quarter meeting our greater than 100% target.

Following very strong working capital performance in 2025, we continue to drive efficiencies in Q1 with the cash conversion cycle improving 57 days year-over-year and 128 days from the peak 2 years ago. We believe we have now reached an optimal cash conversion cycle.

Turning to capital allocation. We returned $113 million to shareholders this quarter, including $99 million through opportunistic share repurchases that reflect attractive buying opportunities, mostly at the beginning of the quarter. These actions contributed to a reduction in our average share count of approximately 2 million shares. Over the long term, we remain committed to returning capital as a core element of the disciplined capital allocation strategy outlined at Investor Day.

Moving on to Page 8. I'll now review our financial guidance for the second quarter. In Q2, we expect revenue to be between $280 million and $300 million, representing growth of approximately 16.5% at the midpoint. Adjusted EBITDA margin is expected to be between 28% and 31%, with the midpoint representing an increase of 880 basis points year-over-year.

Adjusted earnings per share is expected to be between $0.40 and $0.44 with the midpoint of this range representing approximately 68% year-over-year growth. I now want to briefly baseline Q2 to Q4 revenue to help with comparability. As shown on Page 9, there are a few known items that impact year-over-year comparisons, but don't reflect a change in underlying demand.

First, on portfolio optimization. The divestiture of our Japan-focused trading business, along with other noncore product exits reduces revenue by approximately $5 million in Q2 and each of the following 3 quarters. These actions are intentional and support improved mix, margin and long-term profitability. Second, Q2 is expected to benefit from about $7 million of electronics order timing that shifts in from Q3. That's purely customer order timing related and doesn't change our full year expectation for this end market.

Third, Q3 includes a $13 million headwind from the onetime commercial partnership benefit that occurred in Q3 of last year and should be taken out of the revenue base for comparability. So in summary, Q2 reflects timing benefits largely offset by the planned portfolio exits, while Q3 headwinds include order timing, normalization and portfolio actions, not a change in demand. We encourage you to reflect these factors in your models, along with the strong Q4 2025 comparison.

As we look ahead to the full year, we are encouraged by the strong start we delivered in the first quarter and the momentum we are seeing from our execution. That said, as a short-cycle business with limited visibility, particularly to the second half of the year, we recognize that the broader macro environment remains uncertain. As visibility improves, we will reassess and update our profitability targets for the full year as appropriate. In the meantime, we are focused on what we can control, including delivering $35 million to $40 million of annualized net cost reductions by the end of 2026, streamlining our portfolio and the ongoing transformation of our operating model.

Taken together, we believe our disciplined execution, cost actions and innovation road map position us well to deliver on our commitments and create shareholder value. Now Matt and I are ready for your questions. Operator, please go ahead.

[Operator Instructions] Today's first question is coming from Joe Ritchie of Goldman Sachs.

So can we just start with the stronger-than-expected start on organic growth for the year. So putting up 21%, pretty great start. I guess if you were to just kind of peel back the onion a little bit, Matt, and give us a little bit more detail on how much you think that came from end market inflection versus some of the internal initiatives and product launches. Just curious to get a little bit more detail on what surprised to the upside this past quarter.

Yes. Thanks, Joe. Yes, obviously, very encouraged by our Q1 results and Q2 guide. It's obviously very hard for us to exactly parse out the contributing factors, but I think there's a number of things all rowing in the same direction at the moment. You mentioned a few of them. I think we're seeing broad-based demand from our customers, right?

And that's indicated by several months now of the PMI and expansion territory. That's always encouraging. I haven't seen that for a couple of years now. How durable is that? We'll have to see. There's a lot of uncertainty in the market and in the world. And so we're trying to be realistic and cautious even to extrapolate that full year. But right now, the demand environment looks strong.

I think you mentioned NPI. We had a great year of NPI last year. We launched really 4 really foundational sets of technologies. And as we announced today and a few days ago, we've continued that trend of releasing very powerful AI-centric vision systems. So I certainly think NPI is contributing.

And then where we spent a lot of time in the last quarter and really in the last year has been transforming our go-to-market and really our sales force itself. And I think we're about 9 to 12 months into that, and I think we're definitely seeing the dividends from a go-to-market motion that is really hitting its stride.

So I think you put those things together, great execution on NPI, our sales force transformation kicking in and a strong demand environment are all contributing to what we saw in Q4, Q1 and our forecast for Q2.

Yes, that's all great to hear, Matt. And I guess maybe my second question is for Dennis. Clearly, the EBITDA margin also better than expected this quarter. Gross margins stayed above 71%. The operating leverage or the SG&A leverage you got this quarter was material.

Just how are we thinking about those 2 pieces as we move forward? Clearly, the demand environment feels better in the first half. But how are you thinking about both gross margins and SG&A growth going forward?

Yes. No, similar here, very pleased with what we have seen in the first quarter and also the guide which you put out for the second quarter, a strong year-over-year performance, also good sequential performance here.

Now certainly, volume and mix plays a big role. On the mix side, clearly, stronger factory automation end market helps us on the gross margin side. And we expect to see that to continue now in the second quarter, probably still too early to talk about the second half of the year, right? I want to remind everyone the limited visibility which we have. So we'll talk a bit more about that in the next earnings call.

Other items contributing on gross margins, clearly also the portfolio optimization, which we would start to see from the next quarter on. But then there's certainly also some headwinds to the gross margins, right? So we saw the impact from the tariffs, which we had already last year. So that's not fully reflected in all the numbers.

But while memory cost is not a major headwind for us and a major component, so to say, in the bill of material, there are clearly some timing effects here. So that means we'll be able to offset some of that or most of that through pricing, but we still expect like a 50 basis points headwind from memory costs in the third quarter.

And we're certainly also cautious about general inflationary pressures, right? So we see the increase of the energy prices globally. We don't know yet exactly what this will mean in terms of like second and third degree type of impact through the supply chain. But there's clearly a view that we may see more inflation in the second half of the year, and that's something which we definitely keep on mind.

On the OpEx side, I would say we are focused on executing our cost reduction actions. And certainly, you saw some of that in terms of the sequential step down from Q4 into Q1. But then certainly, Q1, especially on the year-over-year comparison, still had quite some headwinds, especially from FX, $6 million strong headwind there and then some of the normalization on incentive comp and commissions.

In that regard, expect more some further sequential step downs, probably a bit less into the second quarter, but especially into the third quarter. In that regard, in general, we feel like we're making good progress on the cost actions, and we are seeing certainly the favorability in the gross margin side, and that helps with the margin improvement. And in general, that sets us up definitely for the strong results in the first half.

Our next question is coming from Joe Giordano of Cowen.

Just as you get to the end of the year and you wrap this $35 million to $40 million cost out, what becomes like the priorities as you get into '27? I know early in this year, and we're asking questions about next year. But just how does the mindset shift? Is it still kind of a focus on cost? Is it like let's figure out profitable growth, push there? Like how do you adjust as you wrap this program?

Yes. No, thanks, Joe. I mean at Cognex, we like to think we can walk and chew gum, right? So you can imagine that we are very focused on both the top and the bottom line even today, and I would say, even over the last year. So we have a very robust set of growth initiatives that we're executing. Even at the same time, we're focusing on those initiatives and making tough choices on areas that we want to stop or reduce capacity around.

So I would think of it that way. I wouldn't think of it as an either/or. It's a both and. And -- but I think you're right. There's definitely a mindset shift that we're taking as a leadership team and across the company, last year and still, probably persisting this year, there's a focus on efficiency, productivity, really focus, right, make sure that we're focusing our resources in the right areas.

As we conclude the cost reduction program, I hope to maintain that focus even if there isn't a formal kind of target out there. But yes, net-net, I'm sure our focus becomes much more obsessive around growth. But I would say our culture is always to be obsessive about growth. So very robust set of growth initiatives alive and well today. We'll continue those through the year and into next year even as we conclude the cost program that we've announced.

And maybe to add on that, right, if you think back 2025 was the year where we really embarked on that cost reduction initiative and progress, right? So you saw, we reported $33 million gross cost reduction for 2025. So not all of that found its way through as we had headwinds on FX, normalization of incentive comp and so on. But that was really the beginning into kind of a broader-based cost initiative program, which touched really from everything from sales to engineering to the back office.

And then when we came out at the beginning of the year and talked about the $35 million to $40 million net cost reduction annualized by end of this year, we put the focus a little bit more narrow, more focused around sales force transformation, the back office, harvesting some of the portfolio optimization, which we have now concluded.

So in that regard, I think we are basically, I would say, wrapping up the cost reduction in this year.

However, I think if you think about 2027, the word which comes to our mind and which we are talking a lot to our organization is productivity. So that means -- as we scale the top line, this does not mean that OpEx has to scale in line with the top line. It's really the focus.

We want to really see that across all parts of the organization. We are seeing that we're getting more out of what we have. So in that regard, I would say we clearly see more opportunity to drive leverage when we think about 2027. And I think as we have said at our Investor Day last year already, the expectation is clearly that OpEx line grows at a much slower pace than our top line.

And if I shift over to the balance sheet, it's a tough time now just given where valuations are. So I'm curious as to how you want to think about optimizing your balance sheet there.

And I guess, in the context of the simplification and cost out that you're doing, how reticent are you about adding more complexity through M&A to kind of -- I guess it has the potential to derail some of the momentum you have internally as that kind of plays out.

Yes. So first, I think quite pleased that we were able to buy back shares in this quarter, $99 million at what I would call it a really add value, right? So we were in the market, especially at the beginning of the quarter, have been able to buy back in the low 40s. I think we really found value there. I was not sure, frankly speaking, after the last earnings call, if we would be able to find such a value position. But I think we made use of this opportunity. And we will certainly keep looking out if we can find value again in the months and quarters to come.

I think that's very much in line with what we have been saying at Investor Day last year that we will be opportunistically buying back shares. And then, yes, at the same time, certainly, we -- M&A is one of the other capital allocation priorities, which we laid out. But I would say we -- our focus remains unchanged here. We will remain kind of a disciplined financial framework when we evaluate potential M&As. There needs to be a strong strategic fit so that we can generate the right synergies.

And yes, as you said, like there's good momentum here. So I think we don't feel like the strong need that we have to do M&A. So we'll only do it if we really can find something where we really have strong conviction. And at the same time, I would say like while many things go our way at the moment, it's very clearly that we have still a lot of opportunity ahead of us in terms of organic growth, in terms of further optimizing some of the ratios of OpEx to revenue and so on. So in that regard, I think we definitely want to keep on going.

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

We appreciate the baselining data you provided there on Slide 9 today. And I wanted to ask a follow-up on the consumer electronics time shift that you're calling out from Q2 or rather Q3 to Q2. Are we to take away from that, that Q2 is most likely the peak revenue quarter for that end market this year or potentially is that not necessarily the case? I'm just trying to understand what you're communicating here on the time shift.

Yes. No, I think, Tommy, you got really straight to it. I think that's what we are currently seeing, right, with that timing shift from Q3 into Q2, right? So that means seasonality this year is geared a bit stronger towards Q2.

However, I want to really remind everyone on the call that the electronics kind of revenue typically is really very focused towards the end of the second quarter or the beginning of the third quarter. So such timing shift is really like a few weeks. So think about something like 2 to 3 weeks of timing shift. It's not like months of timing shift. In that regard, I really don't read too much into that.

But Tommy, you're spot on in the terms that Q2 is really the peak this year in terms of what we expect from consumer electronics.

Yes. I would only add, Tommy, what we're seeing in consumer electronics right now is broad-based strength, right? So I think it would be a mistake to point to any one customer contributing. We've really taken the excellence we have in that market more broad to new customers in new geographies.

And so it's a market that we see firing on a number of different cylinders right now and many of which we've talked about in previous calls around shifts in the supply chain, continued strength in consumer demand for these devices, new form factors. You put all of that together.

Cognex has launched great technology for these manufacturers as well. And we're also starting to see some contribution from the demand driven through the electronic component supply chain from data center build-outs as well. So you put all that together, and I think we remain very optimistic about consumer electronics as an end market throughout the year.

That's helpful. And as a follow-up, I wanted to ask to ask about AI. This is a topic that you covered extensively at last year's Investor Day, both in terms of the opportunities and the risks there. Today, you highlighted some of the Insight portfolio expansion. And so I'm curious if you could just give us a refresh maybe from Investor Day, what opportunities -- what additional opportunities are you finding here? What additional risks are you uncovering here?

Yes. Thanks, Tommy. Great question. I would say the perspective we shared in June is still the perspective I'd say we have today, which is that AI presents a huge opportunity for Cognex and for our customers. Obviously, there are some risks that we've discussed in the past around to the extent it enables new competitors or somehow weakens the competitive moat.

I think we haven't quite seen that as much, right? We've seen it accelerate our business. We've certainly used these tools, as Dennis was alluding to, to drive productivity and efficiency internal to how we operate, not just in engineering, but across a number of other functions. But hopefully, by now, you see what we're trying to do in transforming our product strategy and product experience, right?

AI on one hand, is transformative in that it lets us solve new problems, problems that have historically been too complex for a variety of reasons, but it's allowing us to do that without asking customers to tolerate a whole bunch of upfront engineering costs and downstream maintenance complexity.

And so what we presented in June was -- and then on top of that, how are we using the momentum that is happening at the frontier, some of these larger models, how are we taking advantage of that ourselves to accelerate the development of our own vision tools, which are inherently much more specific and relevant to industrial applications and why that's a durable advantage.

So I really do think the story -- the narrative we presented in our strategy in June is still the one we're pursuing and still strongly believe in. You're seeing that accelerate through the products. We launched that last year and this year. Our strategy is very much to lead in Edge AI, right? Edge AI, meaning training and deploying at the line on device, complemented by OneVision when you need it as an edge-to-cloud kind of seamless workflow. So I think you put all those things together, and I still think AI for Cognex is a huge accelerator even while we keep a close eye on what the potential hazards and risks could be.

Maybe to add on that, bit adjacent here, the usage of AI to drive the productivity I've been talking about before, right? So we already talked last year about using AI-assisted coding like in software engineering to drive efficiencies there. And I think for us, very exciting. We just recently launched some very, very great AI agents in the service side.

So that means helping customers find information faster, getting answers immediately. And yes, it's really just great to see what opportunities AI provides to us here also in streamlining our entire operations and helping us to transform our operating models in that regard, clearly, there's a lot of opportunity there.

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

I have to say congratulations on the progress over the last year. It's been amazing to see how fast it's come together. So certainly deserves all the credit that you can see in your stock price.

But Matt, I mean, you touched a little bit on this with the NPIs and some of the AI focus, but it sure seems like there's maybe a sharper focus in those new products that are coming out. So maybe you can help us understand if you think about practically what's happened behind the scenes in the R&D organization, what's really changed?

Because I just -- I've always thought of Cognex as being a company that's had a pretty regular flow of products, but the growth rates would certainly suggest that there's maybe a greater adoption of the stuff that you're putting out there these days.

Yes. Thanks, Jake. Yes. No, it's not necessarily about quantity. It's also quality, right, what we call our hit rates and often measured by things like a vitality index, right, what percentage of our revenues is from those new products. And I think on that measure, both of those measures, both the quality and the vitality is we're definitely seeing nice improvements, right?

We made some organizational changes last year in our engineering teams, which I think we're starting to see the benefits of. And even over the last many years, I was very involved with our engineering teams. And we are many years into what you might call a re-architecting of the tech stack itself to be much more ready for the AI era. And I think we're also seeing that pay off, right?

There's a huge paradigm shift from non-AI to AI-based visual inspection from one that was very centered around programmatic interfaces and pressing a whole bunch of buttons to configure it full to what is now much more human-like trained by example. It's much more about image data, image visualization.

And so I think we've -- and we saw that coming 10 years ago. And so I think our products that we're launching now don't feel like we're taking an old product for a new application. They feel very fit for purpose and very much built around the workflow that is demanded from an user of advanced AI.

So yes, I think all those things are coming together. And then we've made some other smart choices, I think, right? We've really rallied around a common software ecosystem, which we described in June at an Investor Day. I think customers are very much responding to that around insight.

OneVision and making sure that all our new products are compatible with OneVision, I think it was also a very smart move. That's proving to be a very powerful tool for customers to adopt advanced AI much more quickly than in the past. Yes. And then we've been working with great technology partners, right? We disclosed NVIDIA and Qualcomm. These are really world-class edge computing chipset providers.

And so you can imagine that we would have a very close engineering relationship with them and really working at the bleeding edge of what they have to offer and bringing that into our products. So again, it's not just one thing, but I think it's a basket of things that we've been doing well for the last year or even more that are starting to really pay off.

That's all super interesting. Just on a different topic on the logistics side. I think historically, that business has been a lot of barcode reading, but it's hard for us to know from the outside exactly how much that market is growing these days. But it sure seems like you're gaining some traction on some of the other products that you have in the portfolio. So maybe you can just speak to that a little bit.

Yes, definitely. I'd invite you and others to any trade show that we're at. I think you can really experience the products, those that came to MODEX and LogiMAT, which are the 2 large European and American trade shows, you can really see it in action.

But yes, Jake, I think you're right. We've been wanting to bring our vision technology to logistics for as long as I've been here, we think now is the time with AI, and we're launching great vision tools since last fall, and we're seeing great uptake on that. And even better, not only are we solving problems that our customers have always wanted to solve, but the ROI on those solves are really strong.

And so we're able to flow that through to some nice pricing differentials between a vision system and what traditionally we sell as a barcode reader-only system. And so that's very encouraging. At the same time, I would say the barcode reading problem isn't fully solved, and we continue to invest there. And I think we're still leading in image-based barcode reading, which today is still, as you rightly point out, the vast majority of applications and the vast majority of our business.

So yes, I think we're playing a really great game right now in logistics. You're seeing that in the numbers in the consecutive quarters of double-digit growth. It's our largest market now. It's also probably the market where we see the highest penetration potential. And so we'll continue to fund that as appropriate to keep driving growth and share gain.

Our next question is coming from Guy Hardwick of Barclays.

Congratulations on tremendous results. I wanted to ask about semiconductor. So I think you said earlier that your deep relationships with leading semiconductor equipment manufacturers positions us for sustained growth. So I was wondering whether visibility is improving in that business and that you can maybe with more confidence, forecast double-digit growth into next year or even the year after.

And for Q1, I mean, you said double-digit growth, but just can you maybe give a little bit more information as to how -- was it close to 20%? Or was it close to 10% or maybe it was stronger than that?

Yes, Guy, thanks. Yes. No, it's definitely a hot market right now for us and for many others. I'd like to think that our semi business is a natural hedge against maybe some other cost increases or cost headwinds we're facing on the supply chain side.

But yes, we've had great relationships with leading semi OEMs for decades now, and they consume our technology really across the board from vision tools to optics and lights to completed systems. And like any OEM, you work really hard to specify in your technology and they kind of lock in those designs and you sell them through for years. So it tends to be a very stable delivery stream.

Is our visibility improving? Maybe a little, but nothing I'd really call out in particular. We have very regular interactions with our OEM customers. What they're seeing is a pretty rapid uptake in demand for their machines, maybe a little earlier in the year than we had anticipated a quarter ago. And we're also obviously trying to drive a deeper penetration of our technology with them.

But -- so that's how I'd put it. Sustained growth, yes, I would say that's fair to say. I don't think we expect this to be a boom and a bust anytime soon. I think it does feel much more durable than maybe semi cycles in the past have, and we're leaning into that from a product development and a sales resourcing standpoint. And I think our technology is proving to be very valuable. I'd maybe defer to Dennis in terms of the specifics on how he would frame the growth.

Right. So really the 3 end markets, which kind of lifted the revenue growth rate here were electronics, semi and packaging. So you can really expect that semi was well above the 20s in terms of the growth rate in the quarter year-over-year. And then maybe to add to it that we see semi clearly also as a natural hedge against what we see in the memory cost side, right?

So the one side, again, it's not a massive impact to us, but still there is some impact, but a lot of our customers are on the memory side. And clearly, as we see this accelerating, we see the revenue growth there as a hedge overcompensating actually what we see on the cost side as well.

And just a follow-up on the consumer electronics side. I'm just wondering what potential kind of sustained growth you could see from form factor changes and also sort of contract manufacturer capacity changes from out of China to ex-China.

Yes. I mean I would say, again, it's hard to parse out exactly what the contributing factors are, but there are a number of things, a number of tailwinds that we're watching right now, new consumer form factors being one of them. But just as a reminder, change in form factor has to be followed by heightened consumer demand. And so particularly some of these newer types take longer to adopt.

And so that might result in lower machine counts initially. And so when we think about our growth strategy in electronics, we try not to tie it to any one product announcement or any one customer. And thankfully, as we've said before, our growth is really broadening in this area, new accounts, new devices, new lines, new geographies, new stations. And that's really where we're trying to go is broaden the growth story, which in the past maybe has felt more singular around specific device types.

Our next question is coming from Piyush Avasthy of Citi.

Maybe like starting with the updated 2026 view, like it seems like you're projecting your end markets to roughly grow like mid-single-digit to high single-digit range, like 1Q '26 growth was really strong and 2Q guidance is around like mid-teens growth.

I understand that comps get harder in the second half, but seems you're baking in some decent deceleration. Like I just want to understand if this is just conservatism on your part given limited visibility? Or are there any concerns that demand could slow?

No, Piyush, I'd say it's really a question of visibility, right? I'd just remind the group, we're still relatively early in the year. This is our Q1 call. We're a short-cycle business, as we've said in the past, and we want to just be a little cautious with quite a bit of uncertainty still ahead of us.

And so we want to just be cautious in terms of how and when we signal our view of the market. I wouldn't say it's much more than that. It's really about visibility and the typical visibility we have at this point in the year and a recognition that there's geopolitics, energy prices, component supply chain price increases, potentially interest rate uncertainty. There's a lot that needs to play out. And I think we'll be better prepared on the next earnings call to provide a clearer view on how that will trend for the rest of the year.

The same really applies also on the profitability side, right? So certainly also the Q1 actuals and the guide for the second quarter puts us on the path here to potentially come back with higher numbers.

But again, we would like to have visibility into the second quarter then certainly also a clear reminder that Q4 is a very strong comp in that regard. But yes, we'll be in a better position to talk to you about it on the next earnings call, and we'll share with you at that time what we see for the full year.

Got it. Helpful. And it's like a similar question on margins. Like last quarter, you suggested a run rate of 25% EBITDA margin by the year-end. I think 1Q '26 and 2Q guidance already suggests margin above 25% threshold.

So you have your cost reduction actions in play, underlying demand environment seems to be helping, and you mentioned focusing on productivity. So do you think like 25% EBITDA is the floor at this point and that 31% ceiling has more upside as you continue to progress on your productivity actions and your new products hit the shelf?

Yes. See, Piyush, I think when we put out the initial financial framework last year at Investor Day, we always took the philosophy, let's put out numbers, which we can reach within 12 to 18 months. And we're certainly pleased that in the last earnings call, we could already up that number, had achieved the greater than 20% number a full year ahead.

And certainly, we'll keep on looking to see what possibilities we have to first achieve the numbers and then to think where we go from there. But I would say, again, it's just that we would like to have that visibility into the second half of the year before we put out any new numbers. So in that regard, just give us these 3 more months to establish that visibility and then we'll be in a better position to talk to you about how we think for the full year and beyond.

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

I just wanted to check on regionally, I think it's -- again Americas is certainly strong for you and others. I wonder if you could talk about some of the other regions, Europe and specifically Asia and China. Just I thought it was surprising with Europe, you're really not seeing much hesitancy despite the Iran conflict, but I wonder if you could comment on that. And then just the latest on the China trends.

Yes. Let's start with Europe. Yes, very pleased with the growth trends we're seeing in Europe. And you're right, we're seeing customers perhaps surprisingly carry on with their investment plans with seemingly very little disruption, but even in light of a lot that's happening in the region.

And what we've done is we've built a lot of flexibility into our go-to-market model, right? And so as we see risk or maybe softness in certain market verticals, we're able to very quickly kind of shift our focus and resourcing of our sales team into other areas.

And I think that has really helped us, right, in particular, in Europe, as we've said for many quarters now, the European automotive market, which historically has been a big component of our business in that area has really struggled to find growth and find its footing generally and still continues to be a weak spot for us.

But as we saw that, we've been shifting resources to other market verticals, right, in particular, our packaging vertical, which has really delivered quite a bit of growth in Europe and even new markets, right, particularly the investments that are going into aerospace and defense. We mentioned data centers and trying to find some new sources of growth. So I think you put all those things together, and we're able to mitigate maybe the softness in some areas with strength in others. But for sure, it's encouraging to see that our customers are continuing to spend and invest in automation even in light of a lot of uncertainty.

So shifting maybe to Asia, maybe it's hard to talk about Asia as a whole. There's so many different nuances based on the country. We'll talk about maybe China, right? We're seeing great strength in China right now. And a lot of that has, I'd like to think, been driven by the investments we've made in the country over the last 12 to 18 months. we have tried to localize ourselves and be a much more nimble player and provider of machine vision in China.

We have local distribution and manufacturing now. We have engineering teams in country now. We've really focused on forming some technology partnerships to move faster in the region and make more region country-specific products available quickly. We've obviously had an excellent channel and sales force in China. So I think you put all those things together, and it's resulting in some nice growth and allowing us to compete more effectively now than maybe we were a couple of years ago in China, and that's great to see. Across the rest of Asia, we've made good investments in the ASEAN region.

We're seeing a lot of that benefit from the regional shifts in supply chain activity, perhaps out of China or in addition to China and we're participating in that growth in the various [indiscernible] countries. Korea, Japan, historically strong markets for us, maybe Japan, relatively less so. And then, of course, India, right? So all areas that we're focused on and driving investments into that I think net-net have started to pay off.

Yes. All very interesting. And my second question, I wanted to ask a rare one on automotive just because you and other automation peers have cited some growth returning. I am hesitant to call it a trend, but what are you seeing in that market? Is it just easy comps you're seeing? Or is there something more to this mid-single-digit growth?

I think there is something more to it. Yes. On one hand, comps always help because it's been a couple of years now of no to negative growth in the automotive market as a lot of those OEMs have retooled their strategy, if you will. But there are great underlying growth drivers.

I was visiting with a few of our OEM customers in Europe. And they still have a high need to automate and particularly installed vision to drive higher levels of quality, right? They're not where they want to be and machine vision is a great way to drive higher levels of quality assurance. Their costs are going up for a variety of reasons. Raw material prices are going up, Tariff concerns are on the horizon, labor costs are rising, and they view automation and machine vision as a way to mitigate those cost increases and drive efficiency in their production. And then labor scarcity, right?

They struggle to hire skilled trades people in the quantities they need. And so again, automation is a great lever in machine vision , in particular, to mitigate the effects of potential labor shortages. So on one hand, I think the industry, particularly in Europe, feels like it still has not yet found its footing in terms of what the next iteration of product strategy and global trade will bring, but they're not waiting for clarity. They're moving on investments that they know they have to make to drive quality and efficiency.

And time and time again, when I speak to senior leaders in automotive accounts, that's really the mandate that they have is we have to carry on even in light of a lot of uncertainty, and they view automation and machine vision as a key lever to do those things.

Our next question is coming from Quinn Fredrickson of Baird.

Just within logistics, can you maybe expand a bit on trends across your large e-commerce customers versus the base logistics customers, both what you saw in the quarter and then your mid- to high single-digit outlook for the year? It sounds like large customers are performing well, but any details on the base side?

Yes. Maybe I'll just quickly touch on both large and large accounts base accounts. Yes, I mean, I think it's interesting. What we saw over the last couple of years was a real focus on process improvement within existing facilities. And I would say that focus remains.

How can we get more out of the existing capacity that we have. The larger players perhaps have more capacity, financial strength, ambition to continue to grow capacity. And so we are seeing that at our larger accounts. They're both -- they're doing both, driving productivity on existing as well as still pursuing greenfield build-outs.

I'd say maybe we're seeing relatively less of that in base accounts where they're still mostly focused on process improvements in the existing network. But on both, I would say their interest and willingness to take advantage of vision as a way to drive process improvement is very high. And we're having great discussions with both large and small operators in terms of how machine vision can help drive productivity in their operations.

So I wouldn't discriminate on that front. And you put that together. And while recently, it feels like quite a bit of our growth has been driven by large accounts, I'd say our focus is not exclusively there. We're really trying to drive broad-based growth using vision as the lever to do that, and I feel like we're on the right track there.

Okay. And then just second one would be on supply chain. One of your vision peers was calling out lengthening lead times for memory and image sensors. Is that something you're seeing as well? And how are you positioned to navigate that, if so?

Yes, we are. We are very well set up to manage this and have been managing it, I think, well for the last several months since we started catching wind of some of this around memory, but potentially beyond that.

At Cognex, we historically and still today maintain very strong relationship with our suppliers. We speak with them almost daily. And so we can move really, really quickly to either shift the parts that we're consuming, drive a different product strategy, work with them on delivery allocations as necessary, work the broker market and then obviously think about ways to mitigate through pricing actions.

So it is an area that we're putting a lot of energy into. And I would say we are seeing lengthening lead times in some areas, not broadly in some areas. But I feel like we're mitigating it very well at the moment.

And then always keep in mind, similar to what I said before on the semi side and in general, if you see something like that happening, capacity constraints, it basically sets the suppliers up for capacity expansions either through greenfield investments or through driving more productivity, which then basically stirs demand for machine vision . So there's always a bit like this natural hedge to it. So in that regard, I would say bottom line is that it's not necessarily a negative to us.

Our next question is coming from Jamie Cook of Truist Securities.

Congratulations on a nice quarter. I guess, Dennis, question, understanding there's a lot of uncertainty in the back half with memory costs, with tariffs, et cetera. But can you just speak to broadly what you're seeing from a pricing perspective, both from your side and what your competitors are doing? So given the strong demand out there, like why wouldn't we be able to pass through any of these incremental cost headwinds?

And why wouldn't the margins -- gross margins in the back half be better than the first half like you implied last quarter? And then my second question is just, obviously, demand is trending better than expectations. Is there anything that you saw in April or in the beginning of May to suggest you know what I mean, that demand is waning or tempering?

Yes. No, thanks, Jamie. So maybe on pricing, maybe let me take a step back first, right? So if you think back 2024 second half, we really talked about pricing pressures, especially in China, and we saw some negative impacts there to gross margin. We then saw pricing stabilizing in 2025. And that's also when we really started to gear up here internally with our internal pricing initiatives setting out and defining our pricing playbook. And I think in general, we feel like we have made good progress here. You see that in some of the tariffs, right?

So we clearly said on the one side, there is a tariff headwind, but we have been able to offset that down to the -- on the bottom line level. And so in that regard, I'm not suggesting and the comment I made before was it's really a timing topic, right? So that means that the one side, you see inflationary pressures like from memory and potentially other areas, and they find their way maybe a little bit earlier into the P&L than maybe some of the pricing offsets, which -- where we have the opportunity.

In that regard, we don't think like there is a long-term structural reduction to the gross margin. But in general, we have been saying we want to use and turn pricing from a headwind into a tailwind. I think in general, we feel positive of the trajectory which we have. But at the same time, it's also clearly that we think about pricing in the sense like this should be like a compounding effect over a multiyear period, supporting further margin optimization in the same time period.

So that's a bit how we think about pricing. So think about back to the inflationary pressure, there are more like timing puts and takes and less like structural pressures on the gross margin.

Now to the question for underlying demand changes. So I would say what we see in the first weeks of the quarter in terms of demand is pretty much in line with the guide which we just put out for the second quarter. Now again, we, of course, will look for demand signals for the second half, right? We talked about some of the uncertainties out there, especially related to the energy price increases, which maybe have a stronger effect on some of the Asian countries, perhaps Europe, probably much less so in America.

So we'll keep on monitoring. But to be clear, as of this moment, we are not seeing any negative demand signals there. In general, we see -- as we stated at the beginning of the call, we see strong demand there. PMI is still in expansion territory. So in general, things look good, but certainly, we'll keep on watching here.

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

Great. Well, thanks, everyone, for joining us this morning and for your continued support. We look forward to updating you on our progress in the second quarter. Bye-bye.

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

Good morning, everybody. Welcome. Thanks so much for joining us. Many of you left the snow. So I appreciate you coming to sunnier pastures here. We're delighted to have Cognex here to present their story. This is a stock that's off to a really good start this year, very encouraging demand signals that they talked about on their last conference call and a guide that was really nicely in line or better than where we were looking for. Company's CEO, Matt Moschner, is here to take us through the story. Matt, I'm going to turn it over to you for a presentation, and then we'll certainly have a breakout afterwards. Matt? Thank you.

Great. Thanks, Brian. Welcome, everybody. It's my pleasure to present Cognex, the world leader in industrial machine vision. As mentioned, my name is Matt Moschner. I'm our CEO, and I'm based in our Boston headquarters. We'll get through the legalese. But what I thought I would do is just start with what is industrial machine vision. And I have one of our flagship devices here. It's our In-Sight 3800. And you can think of machine vision as really the technology that allows machinery and robotics to perceive the world around them and make decisions based on that perception. Cognex, the brand, is based on cognition and us being the cognition experts. And what is cognition. Cognition is the gathering of visual of data, in this case, image data. the storage, the processing and driving insights from those data. And we do that better than anyone else in the world, and we do it in some of the harshest industrial environments that exist.

Why invest in Cognex? Well, we think there's at least 7 reasons. For one, we're the technology leader in our industry, and we invest against that promise. Historically, as much as 14% or 15% of revenue. And we invest in world-leading visual analysis software in the ability to host it on market-leading industrial hardware. And that has allowed us to build a brand synonymous with driving forward performance in our industry, but also more recently, being a leader in the application of advanced AI to our market. The next is we operate in a large growing market. By our estimates, we're a $1 billion company in a $7 billion served market. That's really -- if you were to sum up all of the applications and the business value of those applications for the areas our products can solve, we think that is $7 billion. And we think that market is growing at 10% to 11%. It's a very attractive market, but plenty of room for us to grow within it.

A key differentiator for us in an area as a company we've invested the last several years is having a direct sales relationship with our customers. Most of our customers don't wake up in the morning, expecting to buy a machine vision system. Often, they have a problem. And that problem is rooted in quality issues, in wanting to increase the throughput of their manufacturing or distribution operation or to somehow drive a higher level of efficiency through automation. And our sales force, we call them salesnoids, our consultants, our consultants on how to apply machine vision to solve those problems. And having that direct relationship with our end users and our systems integrators and OEM partners is key to how we go to market and how we prove and demonstrate the value of our technology.

We also, over our 45-year history, have built relationships with the leading manufacturers and brand owners, if you will, of the world. These are firms that create some of the most sophisticated automobiles, consumer electronics that make some of the most sophisticated machinery that goes into advanced semi fabs. And our brand as the technology leader, but also as the technology consultant in machine vision has allowed us to build strong relationships with those leading manufacturers. But at the same time, as we've expanded our channel in recent years, we've seen a great opportunity to expand the number of customers that we serve. And I'll share in a bit our goal of doubling the number of customers that we serve over the next 5 years.

We're a high-margin business, and particularly a high gross margin business. And a lot of that has to do with how we pair market-leading visual analysis software with industrial embedded systems. And that, coupled with an inherently capital-light business model allows us to generate profits, but also convert those profits into consistent and healthy cash flows while at the same time, maintaining a very clean balance sheet. Now underpinning all of this, I mentioned we're a 45-year-old high-tech company. How do we -- that's pretty unusual in this day and age. And how do we do that? How do we continue to keep our business fresh and how do we continue to maintain our growth mindset? Well, it's really through a very unique culture that we've fostered over the year. And it's a culture that emphasizes excellence, of course, innovation.

We have a motto that we like to move fast and move fast is really maintaining an organization that is lean, has few layers and empowers our employees to do what's right and do what's right for the customer. So I mentioned, I stepped into the role of CEO over the summer in early July of last year. One of the first things I did was assemble a leadership team, largely staffed from our deep bench of internal talent. And really, I'd say, look at this leadership team in a few ways. One, really streamlining each of the key segments of our business so that we could really think about how can we be efficient and effective in the work that each of these areas does. I've elevated engineering. My background is in product development, and I'm an engineer, and I've led engineering at Cognex for many years and keeping engineering close to the office of the CEO to make sure that we're driving our technology agenda forward aggressively, and I have a great leadership team of software, hardware and AI vision engineers. And then elevating the role of customer success, right?

So the way I'd encourage you to think about Cognex is really the technology leader but probably one of the strongest channels of automation in the industry. And channel, I mean not just a direct sales relationship I have, but also about 500 service and support personnel around the world. And that's applications engineers, project managers, solutions engineers and elevating the role of customer success is really to showcase the importance that, that pillar is for our future growth profile.

So Cognex by the numbers. As Brian mentioned, we just announced our full year 2025 and Q4 results, which were very strong, both on the top and bottom line. So we ended the year just shy of $1 billion at $994 million. If you look over the last 10 years of our history, we've had an average adjusted EBITDA in the high 20s. Last year, we made good progress getting back to the low 20s, and we have a plan to continue to expand our adjusted EBITDA margins.

I mentioned we're the technology leader, and we proved that through protecting our IP and maintain a very healthy portfolio of patents and other trade secrets. And having been in business, this is our 45th year, which we're very excited to celebrate. It's quite a diversified business in the end. This is a geographic distribution. You can see that we have a good balance across regions. And if you look at where we are as a company, roughly 1/3 of our Cognoids are in Asia, roughly 1/3 in Europe and roughly 1/3 in the U.S. And so we truly are a global automation player, and we go to where our customers need us to be across our 2,700 roughly staff, and I mentioned we're based in the -- in New England just outside of Boston.

So let's talk a little bit about our market. We estimate our served market to be $7 billion, growing at 10% to 11%, and we have 5 primary verticals that we serve. Automotive, right? So you would find Cognex machine vision, both in the final assembly of today's automobiles, but also within the supply chain as those parts, subassemblies are delivered to the final assembly line, and we've been working with the world's leading auto OEMs across the world, in the U.S. and Europe, Japan, Korea, China and elsewhere. Logistics, our largest market vertical by revenue in 2025 is really how do we help drive efficiency in areas like e-commerce, in retail distribution as retail brands like Target, Walmart, Kohl's like to have a direct relationship with their customers and are building and maintaining their own network of distribution as well as Parcel and Postal.

Electronics. So this is as the world's advanced AI and other technologies are brought into consumer devices, we help in the assembly of these devices, which are quite sophisticated in their behavior, how they're made and shipped in millions, tens of millions, if not hundreds of millions of quantities. And you'd find machine vision in the quality assurance in the robotic guidance and other aspects of traceability in electronics.

Packaging. So packaging is really consumer products, right? So from shampoo bottles to razor blades to diapers to other food stuffs to healthcare, so medical devices, pharmaceutical production, other life sciences lab automation in our packaging market and has been a good grower for us in recent years and last year included.

Semiconductor, of course, given the boom in AI and the demand that has driven for advanced chipsets and memory. I know it's top of mind for many folks in this conference. How do we enable the production of these advanced wafer types and other packaging of both the core processors as well as memory. You'd find Cognex machine vision both in the quality inspection and traceability. And we have a set of other markets like aerospace and defense, data centers and other areas that you'd find Cognex machine vision.

So what are my strategic objectives for the business? And we shared these for some of you that might have joined in person or virtually our June Investor Day of last year. Well, first, if you think of what we do, it's really visual inspection. And so it's quite an existential imperative for us to make sure that we're investing to be the leader in AI technology for our market. And there's a number of different ways that we measure this. The best way is the quality of the products that we infuse AI into. And I'm happy to say, last year, we had a number of new product launches that are very AI first in their behavior that have been quite successful.

We've made acquisitions in this area, and we continue to invest in people and tools to be the leader in AI for industrial machine vision inspections. The second is it's not good enough to be the technology leader, right? We also have to be the easiest and best company to do business with. And we're calling that our customer experience from the second that a customer has a project or an application to learn about machine vision, whether that's our website or whether that's through an initial consult with one of our sales engineers all the way through the purchasing, deployment and maintenance phase of our systems, we're really taking a holistic view of that end-to-end customer journey and we're investing not just to be the technology leader, but also the leader in how customers -- to be a leader in the customer experience that we deliver in each of our verticals.

And as I mentioned, as we've scaled our go-to-market channel, we're also looking to diversify and grow our customer base from today, which is roughly 30,000 to 40,000 customers to 2x that number over the next 5 years. And if we do that, if we can continue to be the leader in AI, improve our end-to-end customer experience and invest to grow our customer base, our goal is really to be the #1 or #2 share leader in all of our major markets. This is a slide we shared for those that joined us for our year-end and Q4 earnings. We're really going to drive visibility and rigor and accountability into how we're tracking to each of these 3 strategic objectives. And I'm happy to say last year, we made very good progress against each of them.

On the AI technology front, we launched 4 primary new products, the DataMan 290, bringing AI to our barcode reading and traceability portfolio, really focused on how do we make the easier even -- the easy even easier in deploying barcode reading at scale faster than ever before through AI setup, auto setup and advanced code filtering. The In-Sight 8900 which is our smallest form factor, really best suited for OEMs and allowing our OEM customers to access our latest generation of AI. OneVision, probably the biggest headliner for us last year, launching the first in the industry -- it's all right. I thought that was actually a real drill. A cloud training service for our most advanced AI models. We launched that in June to a limited set of customers, and we're excited to launch that to all of our customers this spring and the SLX, which is bringing AI vision tools to the logistics market. And I mentioned logistics is now our largest end market and has been for the last 2 years, our fastest growing.

So bringing AI vision to that market is an exciting growth vector for us to continue that -- those trends. Number 1 in customer experience across our industry, I won't go through these bullets, but think of this as really how do we help our customers learn about machine vision in more of a self-service way. We launched a newly redesigned website in late January of this year with assistance to help specify but also find information. We're standardizing the look and feel of our products, and we're enhancing our 24/7 customer support.

And then finally, doubling our customer base. We made a big step forward last year, adding 9,000 new customers. That's up from 3,000 in 2024. I think really a credit in a few areas. One, the investments we've made in our sales force. Obviously, the investments we've made in our products and making them easier to use and perform at higher levels, but also in marketing programs that allow us to reach more customers much more efficiently than before.

We also -- when I started as CEO of Cognex in the summer of last year, initiated a comprehensive portfolio review as well as a review of our cost structure. That has culminated in really 2 things: one, an optimization of our portfolio, really looking at areas that are low growth, no growth or low margin and exiting a few of those, exiting or divesting and we are sizing that as roughly $22 million of revenue that we will either exit or divest in 2026, but also transforming the operating model and finding ways to be more efficient and effective in our work. And to that end, announcing a $35 million to $40 million annualized OpEx reduction by the end of this year. And really putting those things together, right, taking a holistic review of the business and really being deliberate about where we want to invest and where we want to participate, exiting those areas that are no longer attractive and then rightsizing the cost base of the business is really, really setting us up well for future growth, but also future profitable growth, I would say. And that's really ultimately our top priority as a management team.

We also -- one of the other things we've really been working hard on the last 6 or 9 months has been transforming our go-to-market. And we've been at this for at least 5 years. For those that have followed the story in that time period, you would have seen the big investments we made in something we called our emerging customer initiative. And what was that? It was really a recognition that there are many, many more customers, as many as 3 to 5x more customers that we could serve and realizing that our technology and using and deploying machine vision was getting a lot simpler. And we use that as a rallying credit to make pretty significant investments in our sales organization. And we did that by creating a separate sales organization by focusing mostly on hiring programs and really arming that sales channel with some of our easiest-to-use products.

And I would say, generally speaking, that thesis was the right thesis. But what I think we saw this year or last year was some of the inefficiencies that it was driving. And so we've really been focused on moving from emerging customer to our sales force transformation, and it's quite a dramatic transformation in that, moving from a separate organization to one global sales force, to focusing on hiring programs and capacity and headcount to productivity and using data to be more efficient in terms of how we sell, try Cognex Vision faster and more completely. And then recognizing that even though we have a very broad direct sales channel, recognizing the value that our partners bring. Our partners bring in terms of value-added engineering, systems integrators, OEMs and other distribution partners and thinking of those as one go-to-market versus separate pieces of our sales channel and really changing what our success criteria are.

On one hand, emerging customers was really about acquiring new customers. I would say that's still a priority, but also thinking about how do we grow our customer base, both through new accounts but also retaining existing accounts. That's a big focus for us. And then optimizing our cost per dollar booked, right, really thinking about how can we be more productive and efficient sales organization versus just a broader one. This, I think, was put in place in the spring and over the summer, I think a lot of what we've seen in terms of the acceleration of growth particularly in Q3 and Q4 of last year, I would attribute to this, and we're seeing nice momentum build in how our sales force transformation is making us more efficient, but also drive top line growth as well.

At the same time, right, if you think about those 2 things together, we completed our portfolio review and announced the divestiture of exiting of a certain portion of revenue our $35 million to $40 million annualized 2026 OpEx reduction. And our sales force transformation really gave us the confidence to take the financial framework that we announced in June of last year during our Investor Day and upgrade our profitability targets from 20% to 30% adjusted EBITDA to 25% to 31% adjusted EBITDA while keeping our revenue growth as well as our free cash flow conversion the same. And so very excited about that upgrade.

I think that's really a reflection in the confidence we have in our business. and the confidence we have in our leadership team to drive not just growth but profitable growth and very confident that we can use that in the next leg of our long-term value creation story.

My last slide, and then it looks like we might have a little time for questions is really the outlook for growth this year. And this is a relatively new piece of information that we've shared publicly, which is really our initial view on the next year's growth, in this case, 2026. And I would really caveat this to say, we're a short-cycle business. If you look at our backlog, it really doesn't extend much past 90 days. And so I wouldn't take this as full year revenue guidance for Cognex, but I would take it as an indication of our sentiment for how our end markets could grow this year. It's built on a variety of data. It's built obviously on a number of conversations we have with customers and their growth plans. It's based on macroeconomic factors like the purchasing managers index and other manufacturing activity indices. And it's based on the momentum we see in each of these areas in our business today.

And so what is that initial view? You can see our 5 verticals ranked by their relative revenue split based on 2025. And what we've done here is really juxtapose our 2025 full year revenue growth with our 2026 initial view. And what I'm excited about is we're seeing, for the first time in many years, each of our end markets return to growth, albeit at different levels. And you're seeing that if you were to take the approximate midpoint of each of these things, a mid-single to high-single-digit growth rate, which that, coupled with a lot of the efficiency measures and cost reduction work we've done, I think, sets us really well for the future of the company, and it gives us a lot of flexibility in terms of how we think about investing, how we think about expanding our margin profile over the next year to several years. So happy to engage as we've already engaged this morning on our growth outlook by each of these market verticals. And with that, maybe Brian, we'll open it up to a few questions. Thanks very much.

You have one in the back? Yes.

So as we think about the medium term, not this year, in the next couple of years, how do we think about the competitive intensity and the entrance of new competitors coming into the market. We know that Hyundai ordered 30,000 of their humanoid robots. And that's -- they signaled it will grow beyond that. As the market leader today, how do we think about your competitive advantage or moat as these new entrants come in? And how are you going to deal with that competition?

Yes. Great question. So the question was really the competitive dynamic? Have we seen any meaningful shifts recently? Or how do I expect that to play out in the future. So I would say the -- I would characterize the competitive dynamic today as stable, right? If I think about the competitive set or the leading competitors we had 10 years ago when I joined Cognex and the leading competitors today, that group is very, very similar. There's really 1 competitor we have out of Japan that has been really the mainstay across that time period. We've seen domestic competitors coming out of China, in particular, that have improved in their technology over the last several years. And then we've seen some new entrants coming with the advent of AI.

And really, that was in the late teens that we're using really 2 things. some of the maturation in AI tools for visual analysis but also cloud infrastructure really coming to its own. That has not really materialized in the ways that I think some thought it might. And so our competitive set, again, I would say, is relatively stable between 1 large competitor in Japan, 1 or 2 large competitors in China. And so how do we compete? Well, we compete by investing in our own technology base and capabilities. We compete by investing in our sales channels and making sure that we have excellent direct relationships with our customers and understand their needs extremely well. And I think we compete increasingly what are we hearing from customers through our global services and support network.

What does that mean? The world of manufacturing and distribution is going through tremendous change right now, change not only in terms of the technologies being used to produce, but the geographies in which they're being produced. And so as companies are looking for alternate locations to manufacture or distribute, they're looking for a vendor like Cognex of automation, to also have that global presence. And so I'd say that's an area that we're seeing really emerge for our customers is why do they choose Cognex. They choose Cognex because we can -- we are where they want to be, whether that is an Asian manufacturer wanting to move to South America, a U.S. producer wanting to move to Europe or vice versa. We're a partner that's truly global that can facilitate some of those supply chain shifts that they see as necessary for their future. And so you really put those things together, technology leadership, sales channel and global presence on service and support. Thanks for the question.

Yes. Think of the timing for the EBITDA margin goal and [indiscernible] pricing power.

Yes, yes and yes. So think of these as -- what we say, 5-year through-cycle targets. What does that mean? So we are a cyclical business in the sense that we've historically sold into large CapEx projects. And so as those investment cycles happen, so too, our business does. We look at that as typically a 5-year period through cycle. And so a lot of these financial measures are in that period through cycle. Now what is driving the 25% to 31%. Majority of that is leverage on OpEx. So OpEx efficiency is what we would call it. So controlling -- reducing costs, controlling costs as we return to growth. There is a bit of mix in there. Again, as we optimize our portfolio, as we shed low growth, low-margin portions of the business and double down to higher, more attractive pieces of our business. And then I think you mentioned a really important piece, which is pricing.

I think that's a big focus for us. as of last year and into this year. And so I think pricing as well as COGS productivity, we size at about 200 to 300 basis points as well. So I would say all of the above. But yes, cost actions, cost efficiency and leverage on growth primarily.

Great, Matt. Thank you very much. We're going to bring it down for future questions in the breakout session downstairs. Thank you.

Thank you.

[indiscernible] chat with Cognex. I am Piyush Avasthy, analyst at Citi. With me today is Dennis Fehr, the CFO of Cognex. Welcome, Dennis.

Thank you. Thank you for having me. Thanks, everyone, for your interest in Cognex.

Dennis, Cognex is a strong player in machine vision end market. You sit right in the middle of factory automation. From your vantage point, give us your thoughts on the global automation cycle. Automation spending tends to be cyclical. What seems that automation end markets are more stabilized and inflecting, we do see instances of shifting supply chains and shoring activities. We are hearing about physical AI. But as you speak with your customers, what are they telling you about their CapEx plans and their intent to invest in automation? Like how do we gauge the durability of this automation investment cycle?

Yes. Thanks, Piyush, for the question. So if you look at the cycle -- maybe first, looking back, where we're coming from. I would say we come out of a -- on the one side, 2021, an extreme peak kind of the COVID craziness, you could almost say it; and then a pronounced down cycle, right, '22, '23, '24, you could call the down cycle, which hasn't really happened in this regard in machine vision before. Until you would have seen down cycles 1 to 2 years and was the first time a 3-year down cycle.

And then we started to see kind of early signs, at least in the warehouse automation in '24, extending into '25 was actually good growth in warehouse automation. But the factory automation, which is still kind of 75% of our business basically hadn't really shown growth until late last year especially in Q4 2025, where we saw really strong year-end demand across our factory automation end markets.

And along with that, we saw, on the one side, good customer sentiment globally, I would say, that we felt like much more positivity. There, we saw the PMI in the U.S. picking up, and in general, we saw a good start in semiconductor into 2026, which we so far actually only expected for the second half of 2026. So there were clearly a good news and good positive signs. But now I think it comes back to your question about like the durability, right?

And that's, Piyush, where we are still a bit cautious. So I would describe maybe cautious, optimistic, would use these words. Because we just haven't seen no positive data points over time, right? We have seen positive data points end of 2025. We saw positive data points starting into the new year. But then at the same time, January and February are usually also a bit like odd months in that regard. If you think like a lot of Asia right now is in the Lunar New Year's holiday, so it's a bit unclear like how will that be after they are coming back you see Europe starting slowly into Q1 and then accelerating throughout the quarter, so that happening and at what speed it's happening throughout March, especially.

So in that regard, I really think like from our vantage point, we want to see more data points over time before we really would say like, hey, "Here's an acceleration beyond," right? In Q3 last year, we talked about mid-single digits growth. Now in the last earnings call from our initial view on the end markets that kind of implied like mid-single digits to high-single digits. But kind of the durability and the acceleration here, it's very hard to gauge it more than so time will tell more.

Got you. And you reported last week where you provided your initial 2026 view of the different end markets you operate in, which kind of suggests roughly mid-single digit to high single-digit growth for the company. Can you unpack that a bit? At your Investor Day, you laid out 2 growth vectors, end market growing and then Cognex increasing its penetration. As we think about your 2026 growth framework, is it possible to separate growth from improving end markets versus your own self-help?

Yes. No, absolutely. Maybe before I get to that, I think when you think about growth, it's usually also good to think about what's the right baseline. So maybe let me first talk about the baseline and then let me talk about some of that growth cyclical recovery versus penetration. I think on the baseline, we had in 2025, we had a onetime revenue event in the third quarter coming out of a commercial partnership. So we reported $994 million of revenue, but then you need to take out that type of one-time revenues.

So it's probably more like $982 million and then in the last earnings call, we also talked about that we are doing a portfolio optimization and then we are exiting $22 million of revenue on an annualized basis. So since that is not starting January 1, but more towards the end of the first half of the year, I would take maybe about $17 million just as an example. So that brings really your baseline starting point at $965 million. So now if you take that 5% to 7% growth, just as an illustrative number, not as a guide, that would basically bring you to $1.15 billion to $1.35 billion in 2026.

So maybe first, I want to clarify that baseline. And then second, in regards to now the question of the growth, where is it coming from? It depends a little bit on the end market. So in general, at our Investor Day last year, we said 10% to 11% through cycle growth and 4% of that underlying cyclical and industrial market growth and then 6% to 7% growth from penetration.

Now if you look at 2026, one market where we see strong benefit from penetration is packaging. So we grew already high single digits in 2025 in packaging, and we [ said ] mid-single to high-single digits in 2026. And the underlying market growth is really pretty low, right? It's not a market where you see strong cyclical activities anyway, and it's not a fast-growing market by itself. So that's really a market where we see strong benefit from penetration.

And what does penetration mean? Basically means 2 things. It means on the one side, launching new AI-enabled machine vision applications and tools, which allow us to bring more inspection tasks into this market. And then second, it means reaching more customers, which we haven't reached in the past.

And then there's another vertical end markets where it's much less about penetration, that's semiconductor. So I mentioned before that we see a good start in semiconductor into 2026, and it's really capacity driven. That's not penetration driven. Today, semiconductor is already an end market with high penetration. So here, we really see activity on the capacity side.

And in general, we feel very strong about the semi cycle. So here, when we entered the year or when we talked a lot, the last earnings call, we are strong believers in acceleration in semi. For us, it's just not quite clear when it will really happen. Is it beginning of the year? Is it the mid of the year? Is it towards the end of the year? So here, again, we're coming back a bit to like we would like to see more data points as we have a good start, but let's see that it's really kind of that the durability is there.

Helpful. And you mentioned the 10% to 11% organic growth CAGR. Are you still confident in that growth outlook? Your different end markets tend to be on different investment cycles. Like logistics had 2 good years with double-digit growth. And this year, you expect growth to moderate. But now you have consumer electronics that is driving strong growth. It seems like most of your end markets have to align for you to hit that 10% to 11%, maybe not. But yes, I'll appreciate your thoughts on that.

Sure, absolutely. Also at our Investor Day, we talked a bit about like how we think about the length of the cycle. So we think about like 5 to 7 years is the average length of a cycle. So in that regard, definitely, it's not required that all the end markets kind of go through the exact kind of beginning and end of the cycle. If we then think about like that we define our overall cycle 5 to 7 years, right? Some could peak earlier and some others peak later, but they would all kind of fall still within this 5 to 7 years' time frame.

So in that regard, it's really a matter of the definition of the time line, and that makes us positive on the one side that this kind of underlying industrial growth, which we baked into this 10% to 11%, right, which is 4% that this will happen. But at the same time, I think much more important is actually the penetration opportunity. And I think what makes us here extremely optimistic is really this continuously innovation on the AI front. We last year launched OneVision. So OneVision really brings kind of an additional level of power of AI to our customers, right?

So the one side, customers really like to have software on device kind of embedded systems. They don't like the cloud for many reasons. Speed, latency is a big issue with the cloud. Cybersecurity is an issue. So they really want to do things on the device. But on the device, you can do a lot what we call edge learning, but it's kind of -- for most of the inspection task it works. But the moment where you go into very complicated inspection tasks, that's not enough. So you would need the cloud. And that means in the past, they would need to go into like system integration type of work.

Now with OneVision, we are bridging that gap. That means you can basically use the model on your device, you send it into like a virtual training center in the cloud. You retrain that model with deep learning and then you bring it back to the device. At this moment, you don't need the cloud anymore and you just run it on your device. And that unlocks so many more inspection applications that it opens up this penetration opportunity I talked before. So in that regard, I would say, much more confidence outside of the industrial recovery, which we are seeing, I think, is on the penetration side and the opportunity which we have there.

Got it. You answered -- kind of answered my next question, but I would put it in a different way, like you talked about the AI opportunities. But on the flip side, we do hear potential concerns that AI can lead to new entrants in the machine vision market with, let's say, dumb cameras with infused AI. Are you seeing that? And how do you defend your market positioning against that, especially when you go like to not like sophisticated customers like Amazon and Apple, but maybe like the smaller businesses?

Right. I think here it's important to understand, again, what are customers looking for. So first of all, they're looking for high accuracy and they're looking for high speed, right, in-line manufacturing, very small defects at high speeds, 1,000, 1,500 parts per minute. And that kind of frames the first kind of big need of the customers. And then the second one is what I already mentioned before is like they don't really appreciate the cloud for the speed issue that it just prevents some of kind of the basic needs, but then the cybersecurity issue.

In that regard, what they're really looking for, it's a bit of buzzwords these days, but they're looking for physical AI. They're not looking for AI sitting in the cloud. And that means while they are the large hyperscalers, they're training massive large models with millions of data, right? But these models are on the one side, they're super large. So that means you will have -- basically, it's impossible to run them on a device.

And then second, they're still very generic in that sense that they're being trained on a zebra all the way to maybe a pin in a manufacturing environment. But what you really need is highly specific training regarding manufacturing environment. And that's kind of the proprietary machine vision models, which we have is all the pretrained models, and they are optimized to run on the device.

They're not having millions of kind of criteria and training points. They're really highly specific, and that really enables to solve the needs which the customers have. And kind of this combination of physical AI makes it so much harder for somebody to disrupt. And therefore, we actually think we are kind of a big beneficiary of AI, and we don't feel threatened.

Helpful. Let's go to margins. So you delivered greater than 20% margins ahead of schedule, and you're now guiding run rate of 25% EBITDA exiting 2026. So obviously, that $35 million to $40 million OpEx reduction helps get to your 25% margin target, but operating leverage is also helping.

So my question is on the sustainability of that 25% margin as you're raising your through-the-cycle adjusted EBITDA margin range to 25% to 31%, which I'm assuming means that if growth is flat or even down, you can still sustain that 25%. So maybe talk to us about like what gives you the visibility or confidence in that?

Yes. No, great question. So maybe let me clarify the base assumption here. So we basically said we exited the year 2025 at 20.7%, excluding the commercial partnership there. Then we said like let's get to 25% run rate by end of the year. We basically baked as a key assumption into there a mid-single-digit growth. And then we said like through the portfolio optimization and the $35 million to $40 million cost out run rate basis by end of the year, that basically brings us there.

Now in terms of that mid-single-digit growth assumption at the moment, we feel pretty confident in that number. I think as we mentioned before, we have the penetration opportunity. We are seeing at the same time that we are rather at the beginning of a new industrial cycle, right? So that means we actually have rather a few years ahead of us where we see markets working in our favor versus against us. We certainly have a good start into the year, right, with some of the strong year-end demand, which we saw in 2025, helping us in Q1, good start into semi. So in that regard, I think this mid-single-digit growth assumption feels pretty solid for us.

And then the rest is really about confidence in execution. And here, I think we feel very positive of what we have achieved in 2025. We took out $33 million gross cost reduction, right? There were some incentive comp headwinds as that normalized after a pretty bad year in '24. We had some FX headwinds, some inflation headwinds. But in general, the $35 million to $40 million is a net number, except for FX. So that means some of these potential inflation is already baked in.

So that means I think we feel like we have already shown we can do it. And at the same time, we have a clear execution plan, right? So that means we work very programmatic as an organization. That means we have very clearly identified work streams, and each work streams we have very clearly defined objectives. We have very clearly defined KPIs, which we track on a periodic basis. And we have clear ownership in the organization. And I think with that, I think we feel pretty confident that we will achieve the cost out target.

Perfect. Let's dig a bit deeper, and this is like a 2-parter, so it's a little long, so stay with me. At your 2025 Investor Day, you had a slide on your margin bridge, which showed margin going from 17% in 2024 to your targeted 25%. And then the 2 main buckets you highlighted were COGS, productivity and pricing and then the OpEx efficiency and synergies.

You had the same slide this quarter showing margin expansion from 17% in '24 to 20.7% that you delivered in '25. So let's start with the first bucket, like COGS, productivity and pricing was down 10 bps this year versus your 200 to 300 bps potential. I think a lot of that could be tariffs, could be mix. But if you could comment on what led to that drag and how much you can make up for that next year as it seems there is good potential on the COGS line?

Yes. So that was really mainly related to pricing actually, much less so tariffs, right? So if you recall that last year, we said tariffs, we expect basically a neutral effect on adjusted EBITDA margin and on EPS. There is some effect on gross margin, but not on the bottom line basically. So less tariffs, it's really pricing and pricing actually much more related to what happened with pricing in '24 than what happened with pricing in '25. So we talked about it late 2024 that we saw pricing pressures in China specifically. And we saw at that time that we made a conscious decision as a company to defend market share in China with lowering prices on older generation products to compete with local companies.

And then we saw in 2025, a, that the strategy worked, that market share remains stable and that at the same time, we saw that pricing levels reset and kind of found its way into the P&L, but we didn't see further pricing pressure. So we actually left 2025 with what we would call pricing stability. And now looking forward, basically, we believe that there is an opportunity in pricing. And so in that regard, I think we still feel that we will be able over time to get closer towards our target. But it's also clear that the bridge, which we laid out was a multiyear bridge, right? It's not a single year bridge.

Got it. And the other bucket, OpEx efficiency, you delivered 290 bps versus the 500 to 600 bps potential. So pretty good progress there. And I'm assuming the cost actions that you mentioned would kind of take you closer to that 500 to 600 bps. But my question is like how do you balance these cost actions while still being aggressive towards penetrating new markets and your R&D investments?

Yes. Great question. It's the classic question, right, is there a trade-off between growth and cost. And I think our answer to us, we are not trading off growth against cost here. I think, first of all, we felt like some of the $33 million gross cost reduction, which we did in 2025, that was really excess capacity, which we took out. But then now much more important, and that already was part in '25, but even so more in 2026, it's really optimizing the operating model of the company. I think -- as a new leadership team, I think we're really embracing kind of digitalization, process optimization using AI in our back offices, using AI in the R&D, software engineering.

And then a big piece of that is what we call the sales force transformation. And here, the sales force transformation is really all about like let's optimize how we manage the sales force, much more streamlining around processes, around data tools, about driving KPIs into the sales force and optimizing lead to order process. So in that regard, we do not feel we're trading off growth against cost. We think both can be true actually.

I'll pause here to see if there are any questions in the audience.

So maybe going back to semicon. Your guide here for 2026 is relatively wide versus the other end markets, mid-single digits to double digits. You sound pretty confident on the acceleration happening there, but maybe you can break that down a little bit more. What gets you to the high end of that range, closer to that double-digit growth? And what keeps you at the low end? Is it just the timing of projects that you see coming on?

It's really timing, right? So the main question for us is much less like if there is an acceleration. I think from everything what we see across our customer groups, like if you look at some of the semi-cap manufacturing companies, I think they're all doing very well at this moment. It's more a question like how fast and how long will it take until some of these increased capacity and increased demand is basically finding its way down to us.

In that regard, we provided this high range of the initial outlook for this year based on a question regarding timing, right? Is it happening mid of the year, the acceleration is happening more towards the end of the year? Or is it even happening earlier in the year. So that's kind of more the questions which we are asking ourselves, the timing around it then underlying question whether it will happen or not. And I think as we will progress, I guess, in the 1 or 2 next earnings call, we will probably be able to narrow this range a little bit as we'll get a little bit more sense about timing.

Any other questions? I'll continue. So let's get to your other end markets. Let's go to logistics. We -- you expect the growth to moderate in '26 after 2 years of double-digit growth, but you did say on your earnings call that you expect this market to grow mid-teens through the cycle. Maybe give us your thoughts on where you think you are in the cycle? Do you believe that growth could stay moderated given the outsized growth you had in the last 2 years? Like what are your smaller and larger customers telling you?

So I think in general, as we indicated on Investor Day, our logistics is really the market which we are in the long-term, most excited about. Why? Because it has very low penetration, very low level of automation across a broad set of potential customers. And that means the penetration opportunity there is the largest. I indicated earlier that we saw logistics returning to growth the earliest from all of our end markets, right? So we saw that actually happening beginning of 2024. So we basically ended 2025 with 8 consecutive quarters of double-digit year-over-year growth. So we had a pretty strong run already in logistics for 2 years.

In general, I would think while coming back to the cycle duration before, right, with a 5 to 7 years time horizon, we think there's a good reason that logistics could really have a long cycle because of that low level of penetration, right? So we saw -- in 2021, we saw a lot of -- the peak of the cycle was driven by square footage capacity expansion. But this cycle is not about that. It's not about adding more facility. It's really building out and automizing all these existing facilities.

And that means the CapEx requirements for our customers is actually much lower, right? They don't need to spend CapEx on concrete and on steel. It's really all about the automation piece. And that means it makes it just more durable in that sense. And again, there's really quite a pressure on our customers really to take out cost and to optimize the fulfillment operations. So in that regard, we are, in general, over the longer period, quite optimistic about logistics. But at the same time, you said we're a little bit more cautious about this year, right?

So we brought down the growth expectations there from kind of our initial view on 2026 more into the mid- to high single digits. So why is that? In general, after 2 years of strong growth, we think there might be a year for digestion of that growth. And certainly, comps are getting stronger. So in that regard, there's clearly a base effect in there. But it does not mean that we think very differently about logistics in the long-term. We're actually quite optimistic about it.

Helpful. And then consumer electronics, double-digit growth last year, you expect high single-digit to double-digit growth this year. I think you have talked about supply chain shifts, change in form factors, consumer refresh cycle. Going back to the cycle, like do you have the visibility on the longevity of this investment cycle? Like would you say the momentum can continue? Or could you expect a moderation like when we get past 2026?

Right. So clearly, consumer electronics is the one market, which typically has the strongest cyclicality of all of our end markets, right? Typically, packaging is the market with the lowest cyclicality and consumer electronics can say like has one of the highest cyclicality. So in that regard, clearly something to continuously ask ourselves.

I think when we look at 2025, we're coming basically in 2025, first time back to growth after 3 years of down or flat. So also here was a pronounced down cycle. first year into more an up cycle driven by shifts in supply chain, basically moving device assembly outside -- from China to outside countries. And then a very broad-based growth, right, not tied to a single customer or a few large customers. And especially that nature of a broad-based growth, that gives us a positive view on durability, right?

If you just have high customer concentration, the risk of strong cyclicality and -- is much higher. Now we think that the supply chain shifts will continue. That will be a trend we think can last another 2 to 3 years. We'll see exactly how it plays out. But -- there's still more to be done on device assembly than components manufacturing is still a big piece to happen.

And then at the same time, we are seeing also quite a recovery in end consumer demand that really end consumers buying more devices as they're kind of hitting a refresh cycle after buying a lot of equipment throughout the COVID period. So in that regard, there are good reasons why we could expect another 2 to 3 years in consumer electronics. But clearly, it's something to continuously ask ourselves.

Got you. And then packaging seems it's steady. You mentioned that. And you guys are doing a good job in penetrating the end market, and it seems you're getting some traction there. Would you say that this end market, which you kind of guided for mid-single-digit to high-single-digit range, is it something that's kind of sustainable? Or is it like something you're just kind of scratching the surface and there's a lot more potential to outgrow this?

I would really say it's probably where we scratched the surface so far. I mean it's a market which as a company, we traditionally have not focused very strongly, right? So if you look back, right, we come from the semi side and eventually went into automotive, consumer electronics and logistics, but packaging was always kind of the thing on the side. And I think as a management team, we have much more focus on this market.

I think on the one side, it's a boring market because it has so much less cyclicality, right? And that was not really the playbook of Cognex in the past, right? It was focusing on large-scale customers who can grow very rapidly in the up cycle. So it was a market much less focused. But I think there's so much opportunity there with penetration and then it's such a stable market. And that's really something, I think, as a management team, we're actually quite excited about, right? Because clearly, for us, reducing volatility and cyclicality of the company is something which we think is a positive, and that's where packaging can play a big role for us.

Got you. And let's move to autos. The auto prospects, I feel are very well telegraphed. But other than the cycle recovering and -- are there like opportunities to increase maybe market penetration and/or win market share? How can you better position Cognex for outsized growth when the cycle inflects?

Yes. So auto has been a very challenging environment probably for many companies. For us the last 2 years with '24 declining in the double digits and then '25 still in the high single-digits decline. But we basically called it a bottom at the end of 2025 as we started to see sequentially stabilization in the numbers on the quarterly development. And it was really a positive news.

So on the one side, I would say, as a company, we are very well established in automotive, both with the large OEMs, Tier 1, Tier 2 suppliers, machine builders in that space. So in that regard, I would feel pretty positive that we kind of are very entrenched in this market that if the market would start recovering, we would be well positioned there. But then certainly, there are a few opportunities there as well are coming back to penetration with AI. We launched a first AI-enabled 3D product, the first in the world actually, late 2024. And these are type of products and applications where in automotive, you can actually increase the share of wallet.

So in that regard, clearly, there is an opportunity. But at the same time, I would be much more cautious about the automotive market at this stage because we haven't really seen a lot of life, right? We now call it the bottom. North America looking a little bit better than the rest of the globe. But nevertheless, I would say we would still want to see much more to happen in automotive because before we're getting excited there.

Got you. I'll try to combine like all your end markets and like throw some buzzwords. You mentioned physical AI, there's like dark warehousing and there's like lights out manufacturing. Like are you seeing the trend kind of accelerate where labor probably never replaces and you have like fully automation. And obviously, you guys play a big part in it. So give your insight like how you feel those trends or those themes progressing.

I think absolutely. And that's kind of coming back to the thesis which we have is the big penetration opportunity which we have, right? I mean, in general, there is the pressure on the global manufacturing industry to take out cost to optimize quality. But then I think you have, on the one side, kind of the acceleration in the robotics space and you have the acceleration in general with AI penetration being on the machine vision and directly our core products, but also in the general theme.

So in that regard, I think these are kind of -- or it's one of the big secular kind of tailwinds which we have in our industry. And therefore, I would say it plays directly into our thesis.

Got you. And like you mentioned North America. So maybe like give us a quick snapshot of like what you expect in '26 for Americas, Europe, they were pretty strong in '25. But then I think China and Asia were a bit soft, but then you're talking about consumer electronics, maybe that kind of helps China and rest of Asia. So maybe give us your thoughts on like the underlying demand trends that you are like on a high level, like what you're thinking of Americas, Europe and rest of Asia.

Right. So -- and I assume that question is not vertical market specific, but yes, sure. So Americas, I think, had a strong year in 2025, mostly driven by the warehouse automation side, right? We moderated that view on warehouse automation a bit. So that means that we will probably mean that we would see a bit less growth in the Americas. At the same time, markets where we are strong like packaging has a good opportunity there. And definitely, if automotive pressure will go away, that will help as well. But in general, I would say Americas, probably a little bit less growth, just considering the warehouse automation.

And then I would say China, Europe, you first want to highlight that there were some shifts in terms of ordering activity by large consumer electronics customers. In the past, they placed purchase orders from Chinese entities. And in '25, some purchase orders came from European entities. That didn't really change like where the products went. So they went to China and Asia, but that skewed a little bit like the reporting number. So probably the Europe growth number, which you see there, it's much higher than it's underlying is. And the China number is much lower than actually it is.

So in that regard, I think China, actually, we were quite positive, especially towards the end of last year. And I think also what we see going into 2026. I think China actually looks pretty good. And in that regard, now combined with what we see in semi, consumer electronics, also the other Asia looks pretty promising. So I would say, in general, I think big positive view on Asia and China. And I would say Europe is still a little bit tentative, I would say. I think we clearly see the opportunities in the packaging market there. But I wouldn't be surprised if we still see headwinds in the automotive side in Europe. So in that regard, a little bit more cautious overall.

Got you. And free cash flow conversion remains strong. Your balance sheet is in good shape. You have teased us with 3% inorganic growth potential. I will not ask when we get to see M&A because I know your answer. But maybe what assets do you think will be a strategic fit for Cognex? Is it regional penetration that you're looking for? Is it software? Is it more into physical AI? Like what assets do you believe further augment your current portfolio?

Yes. So I think if you look back the last 10 years or so what Cognex mainly did in M&A were small kind of tech bolt-on acquisitions. It's clearly still an opportunity for us, but probably much less likely as we have strong confidence in our overall platform architecture and our AI capabilities. But then there are clearly opportunities about certain geographies, certain, I would say, specialized end markets where we could find acquisition opportunities within the machine vision space. But then there's clearly also an opportunity to look for generating additional sales synergies by adding additional products into our portfolio, which we could sell with our existing sales force.

In that regard, I would say, probably here's one of these areas where you see clearly a shift in terms of the mindset about how we think about M&A, right? So in the past, very tech focused, very gross margin oriented in terms of kind of the financial profile of a potential target acquisition versus we are shifting much more towards like saying like, yes, we could acquire also revenue and then much more focused on bottom line profitability and the potential, which you would see there in terms of potential acquisition targets. So in that regard, I think there's clearly a shift in terms of focus and direction.

But I want to re-emphasize it in that regard that we think M&A is something optional and something almost like you could say the icing on the cake. I think we have a tremendous opportunity in our core business with organic growth, with margin expansion, which is largely under our own control. So what we can do on the cost side. So in that regard, we'll only pursue M&A if it really makes strategically sense, if there is a good financial case to be made. And if we would be sitting here in 2 or 3 years, and we wouldn't have done an M&A, but we have delivered on our core business performance, then I would be very happy and we would be fine with that as well.

Got it. Any questions from the audience? I'll continue. So I think you mentioned higher lead to opportunity conversion. Can you elaborate on what is driving? I think there has been a continued focus on sales transformation within the organization. If you could expand on changes you're making to your internal sales force. And I think you mentioned twice the customers served and like 9,000 new customers in 2025. How much growth is that generating? And if there is a milestone for 2026 with respect to new customers, if you want to share that?

Yes. So 2 pieces here, right? On the one side of sales force transformation, what we are doing there and then customer acquisition. And certainly, they are very closely linked. So that's why appreciate you asking it together. Let me first tackle bigger picture, sales force transformation here. I think if you go almost back like 20 years or so, you would find Cognex was basically like a company selling into semi-cap company. So that means very concentrated sales, more like a key account kind of sales force approach, very concentrated customer base. And that's kind of the core sales DNA of Cognex for many, many years.

Even so as Cognex diversified over time into different markets like consumer electronics and logistics, was very much focused on large accounts and bringing that successful playbook, which Cognex had of serving almost in a white glove service, large accounts, right? And that certainly drove a lot of success. But I think someone like 2021, 2022 as a company, we realized that there's so much more opportunity out there to serving a much broader customer base.

And I think the positive sense was that at that time was the realization is that you can't serve a broader base of the market with the same playbook you're serving kind of these large accounts with this white glove service. You need to change something. So the original approach was to say like let's hire a different type of seller and basically increase coverage that you can serve more customers with much more salespeople.

So in that regard, I would say the very positive of that, it was a fundamental shift in mindset and recognition that you need to address different customers in a different way. The big disadvantage was it was a heavy drag on the P&L, right? So in that regard, it was an investment into the down cycle. So that means the cycle went down, top line delevered and at the same time, heavy investment and that led to margin erosion a lot, right? So in that regard, we realized it's not sustainable to do that.

And that means like the approach of sales force transformation is still to say like, yes, we want to serve a broader base of the market, and we need to have different sales playbooks depending on whom we are serving and how we are serving them. But let's root that not in manpower, let's root that into data, let's root that into a different management style. Let's root that really into clear accountability of each sales engineers like here are your KPIs, you're being measured on, here's your leader board, how you're compared against your peers. Here's how we feed leads into the sales organization.

We just launched a completely refreshed website. And on the one side, certainly, it looks nicer. And one aspect is, therefore, make it customer find things easier, point clearly taken. But at the same time, the whole purpose here is the back-end automation like if somebody interacts on the website, how do we convert that into a lead? How do we make the sales organization follow up and convert that into an opportunity. So that means much more automation-driven approach.

And that basically comes back to your earlier question, is there a trade-off between cost and growth? No, it's not because with this automation, we drive much more sales efficiency. And basically, think about it like bookings per head, like how far can we drive bookings per head for our sales organization. So these are some of the key aspects. We simplified management structures as well. We think more holistically also about how we make use of system integrators and machine builders, how do we serve there. So that really helps to bridge that balance between growth and cost. But then it certainly also helps us to drive the customer acquisition.

And I think we saw a tremendously successful year in 2025, 9,000 new accounts acquired at 3x the rate of 2024. I won't be able to share you a number for 2026. But I would say, as we feel like that this engine of acquisition is running well, I think we start to think about like, okay, where do we go from here, right? So is the next step to double further? Or is it more land and expand? And I think for us, we are much more thinking that the next step is probably land and expand. So that means much more thinking about, okay, now we got the foot into the door with these customers. Now how do we expand there? How do we increase share of the wallet? How do we increase penetration?

So in that regard, I would say, clearly, we would probably want to see another 12 to 18 months of good customer acquisition, but probably eventually, we will pivot much more towards like, okay, how do we now expand the share of wallet.

Got you. We are on time, but I have like one final question. We are asking this to every company. You can be very brief. Like what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Yes. I guess everyone will be shocked when I say it's AI. And I think for us really in many ways, right? For us, I think we are such a big beneficiary of AI, bringing AI into our machine vision systems and driving this penetration opportunity and at the same time, using AI as part of our margin expansion.

Perfect. We appreciate you joining us, Dennis. I'll let you go back to the beach.

Thanks a lot.

Okay. We'll get started. For the next presentation is Cognex Corporation. I'm delighted to have the CFO, Dennis Fehr with me. My name is Guy Hardwick. I cover industrial technology and distributors. So delighted to have Dennis here. What we will start, though, with our first 3 ARS questions, just to set the stage. So if we could perhaps put up the first ARS question, please. That is, do you currently own this stock? Majority of the room own it. Okay. The second question, please. What is your general bias towards the stock right now? [indiscernible] positive.

And then the third question, please. In your opinion, through cycle EPS growth at Cognex Core will be [Audio Gap] universally bullish about peers. Okay. That kind of sets the stage nicely, Dennis. So I was joking with you earlier that you joined the German brain drain -- U.S. Corporate America, but perhaps a discussion for another time. So maybe perhaps you could just start with how would you characterize demand from what you're seeing so far in Q1, if you're able to comment on that?

Yes. No, happy to. Maybe start with first very bigger picture and then go a bit more into the details of kind of near-term demand, right? So in general, we come out of a very pronounced down cycle, right? So last peak of the cycle was in 2021. '22 flattish, '23 very down, '24 flat again. So almost like 3 years of down cycle, which is almost unknown for that type of industry. And really 2025 in that regard marked the first year for us as a company to grow organically at a significant rate again, mid-single digits.

So in that regard, I would say, a positive momentum on the growth side, especially if we think towards the end of the year, where we saw in the fourth quarter of 2025, we saw strong year-end demand across our factory automation end markets. And that's really kind of driving part of the overachievement in Q4 against our guidance and also the strong guide, which we put out for Q1. So not all of this strong year-end demand was fulfilled in terms of revenue -- turning into revenue in the fourth quarter. Some of that became into the first quarter as well.

And then we saw basically, in general, we see customer sentiment is improving almost globally. We saw PMI upticking in the U.S., which is a positive, but I'm still a little bit cautious. It's just a onetime we saw that. We saw a strong start of semi into the new year, which we thought may only happen in the second half of 2026. So there are many good things which we're actually seeing. At the same time, we clearly want to be a bit cautious that we want to see a couple of more data points over time, right, kind of this onetime good news, are they staying? Is it durable? And how durable is it? Do we see an acceleration of growth happening?

And in that regard, January and February are also a bit of strange months in that regard, right? We have right now large parts of Asia and the Lunar New Year holiday. So that means we really want to see how all these markets coming back after the break. Typically, Europe is starting slowly into the first quarter and then accelerating through the quarter. So how will that play out? So in that regard, I would say like we are certainly optimistic by some of the points which we are seeing out there.

But at the same time, we really want to see more data points over time before we would feel much more positive that it's a durable acceleration of growth. The other point I want to make is that I want to make sure everyone gets the baseline right of like what's the starting point of the growth because we had some onetime effects into 2025. We announced some exiting of revenue. So maybe I spend a minute on that. So in 2025, we reported $994 million of revenue that included that onetime effect of a commercial partnership, which is not recurring. So that basically brings the starting point rather down to $984 million.

And then we announced that we would exit about $22 million of revenue through a portfolio optimization. Now that's an annualized number and not all of that revenue will go out January 1. So let's take out maybe $17 million as a starting point. So that basically brings the baseline number down to $965 million. And then if you now would apply a growth rate, maybe for illustrative purposes, I use 5% to 7%, then you basically would land at $1.15 billion to $1.35 billion in 2026 as a revenue number. So important that everyone also thinks about the baseline of growth.

But you're not an order book business. So any sort of projection of revenue is really based on where you think the growth -- the kind of the blended growth of what your end markets look like? Maybe if you go through that and how you -- maybe that range of 5% to 7% or whether there's upside to that 7%, depending on what might happen in your key end markets?

Yes. No, thanks for making that point. It's absolutely right. We are a very short-cycle business. So we typically have like a backlog range of a couple of weeks. So even a full quarter is not covered by backlog, we have a very high portion of book to ship. So in general, when we think about like how a quarter and especially like maybe how a year goes, we really look at broader market trends. We use some of the economic indicators like PMI, we look at our end markets.

And we provide an initial view, right? So in our last earnings call, we put out an initial view on our key end markets. But then we are really looking at these data points, are things accelerating? Is there a deceleration happening? And that's one of the reasons why we typically don't provide an annual guidance, but really just provide more sentiment of what we are seeing. So in that regard, very well pointed.

So maybe let's talk about these key end markets. So I think at the -- the highest growth expectation is semiconductor, maybe consumer electronics at the low end, automotive, which seems to be stabilizing. Maybe we can go through those key end markets?

Sure. Happy to do that. So our largest end market is logistics. Think about like 26% of revenue in 2025. It's a market where we have seen strong growth over 8 quarters, basically, that 8 quarters of double-digit growth. And with that, certainly, there's a base effect happening that we're now working against stronger comps. And at the same time, after 2 years of outsized growth in that market, we are basically thinking a little bit like, okay, 2026, maybe mid-single to high single digits of growth, driven by driving further automation in existing capacity of facilities.

So that means logistics is not about adding more facilities. It's right now really automizing existing facilities. That on the one side, gives us basically a positive view that growth in logistics can be very durable in the sense of several years because the automation rate is very, very low in these facilities, and that gives a long run rate. But just in terms of the growth expectation, as we have seen now almost 2 years of strong growth, we think growth will be a little bit more moderate there.

Isn't it highly skewed by one very large e-commerce retailer who could make up for as much as 40% of the total logistics automation market. So does that -- their expectations for CapEx in '26, does that factor in importantly in your guidance? Or -- I know it's not guidance in your directionally where you think logistics goes?

It clearly does. I mean I think it's well known Amazon is a large customers of ours, and they have a high share in our total logistics business. So in that regard, we typically, of course, look at like what's happening on their side, and we look broader also into what other players are doing. So in that regard, we definitely try to understand like what is CapEx on their side. But at the same time, CapEx disclosures on their side are general for the entire company, not specifically to different parts of their business. So in that regard, there's also only so much information there. But definitely true that clearly, what's happening with a large customer like Amazon drives a lot in our logistics business.

Okay. Can you talk about the semiconductor end market, which in the last couple of years have become double-digit percentage of revenues? I guess our space has been impacted by the memory price inflation, but the other side of the coin is that expectations for semiconductor CapEx are rising. And can you just say how Cognex benefits? And where does Cognex products fit in semiconductor industry? What is the use? Is it lithography? Or is it other areas?

Right. Yes. So I think very interesting, maybe fun fact here that probably 20 years ago, Cognex was really almost like a company solely focused on semi cap. So probably 70% of our business was in semi, and we focused on that. So we basically have a different stages of manufacturing from wafer alignment to continuously identification of serial numbers throughout the entire process. So OCR reading in that regard. So that means we have a very high penetration into the semi market.

So that means other than in logistics, where growth really comes through additional penetration in semi, it's all about underlying capacity growth. And in that regard, there, we see clearly the strong demand for high-bandwidth memory chips. And we saw semi growing very, very fast for us in 2024. We thought 2025, this market would need to digest that growth and basically went into 2025 with the expectation of no growth. I think to a positive surprise, we saw a mid-single-digit growth.

And then we basically expected that we would start to see, again, growth happening in the second half of this year. And as I indicated before, we're actually starting to see very positive signals right now in semi. And so there is clearly a positive note to that. And we'll keep on watching it if it's durable. But clearly, from a, let's say, 2 to 3 years perspective, we see a lot of growth opportunity in terms of underlying capacity growth.

Okay. Consumer electronics, I understand it's amongst your highest margin business, partly because there's a high software content within your CE portfolio. So maybe can you talk about that? And is it driven really by form factors? And it does have the same trends of semiconductor with the existing customers -- dependent on the existing customers' CapEx plans.

Right. So consumer electronics is really the big positive surprise for us in 2025, right? We went with rather muted expectation into '25, and then we saw it growing double digit. And I think very positively speaking, we saw it growing broad-based. So that means it was not coming from a large single customers, but really from many customers in different, let's say, subsegments of the consumer electronics markets, right, really from device assembly all the way into a component manufacturing, component inspection there.

And I think there were several drivers in 2025. One was the relocation and reallocation of global supply chains. It means moving outside of China, more into India and other ASEAN countries. We also saw in general that there's clearly out of the pandemic era where a lot of people bought new devices that there's kind of an overhang on the consumer side of coming into a refresh cycle. So that means end-user demand has been very robust, and that helped certainly as well.

I would say form factors is clearly a topic which could drive additional growth into '26 and beyond. But I would, at this stage, probably call it a little bit an X factor in that sense that it will depend very much on consumer adoptions. Do consumers like new form factors or do they not like these form factors. And that's something we can't judge at this moment. So in that regard, I would consider it as an X factor.

And what point in the year do you know what the consumer electronic revenue is going to be? I think traditionally, it's been sort of around Q1, Q2...

Correct. So typically, we would know that, somewhere like when we report our Q1's earnings, that's where we start to see things shaping up. But then I think that holds true for the 2 factors I mentioned at the beginning, kind of that global supply chain shifts and as well as the general broader end consumer demand, but we may not know it for the new form factor because that may only be known when we go into the Christmas business and consumers are really making these purchase decisions.

Okay. What about sort of general factory automation, which I think for Cognex is heavily packaging and some other markets. Is that really a penetration story rather again than like-for-like CapEx? It's really growth from driving customers, right?

Yes, absolutely. So packaging, we combine here fast-moving consumer goods and pharmaceuticals. So -- we call it packaging because it's totally package inspection. And I like to call it -- on the one side, it's one of our most boring end markets because the cyclicality of it is very stable. It doesn't have like consumer electronics here new technological advancements, which drive big shifts into this market. So by itself, it's -- the underlying market is very stable. But to some extent, we really like that market for that because it drives really also stability into our numbers.

And so that the growth there is really coming from penetration. And here, it's really all about new AI tools, which we have been releasing and are still releasing and continue to release. Like last year, we announced a new product called OneVision, which is basically bringing deep learning functionality to the device and making it much easier for our customers to use such kind of powerful tools for their inspection applications. So it's really for us bringing penetration and bringing new applications to our customers, which drive penetration.

Okay. And just lastly on the end markets. Automotive, just briefly, I guess, no longer a headwind. Is that the message?

Yes, that was really the good news for us coming out of the last earnings call that we saw, especially in 2024, we saw double-digit declines. We still saw year-over-year declines in 2025. But on a sequential basis, we saw stability into the numbers. And then even on the positive side, we saw a small growth in North America. Europe is still declining. So in that regard, we are seeing in automotive a bit a geographical diversification of the growth. North America kind of picking up earlier. Europe is still a bit challenged. But in general, I would say getting that headwind out of the overall growth algorithm definitely helps us also when we think about 2026.

I have to ask you about the memory price inflation headwind. So what more can you tell us about that? And are these -- your high-end products, edge devices, are they not that memory intensive? Are they more processing intensive? Because you seem to be downplaying it as being an issue based on what you saw on the call.

Yes. From a cost perspective, I think we're pretty fine. It's a smaller piece in the overall bill of material from a cost structure perspective. And in that regard, I think as a company, we are not looking at it as like a risk in terms of like to our margins and that side. We're more taking a stance from it from overall supply availability, right? So in that regard, at the moment, we can see that prices are inflated and certainly, supply is short, but supply is still there.

But nevertheless, kind of the scenario, what we are preparing ourselves for is like what if supply gets even tighter. So that means we have a good playbook as a company. We went through some of these experiences in 2021 with the chip shortage. We had a fire in 2022 at one of our contract manufacturers. So we have a good playbook with our supply chain organization. But I would say, as a company, we're probably less concerned about the cost impact. We are more looking at it from an overall risk perspective to say like, let's make sure supply is there. And if it costs more, then we'll be able to manage that.

If DRAM prices are up 100%, which is kind of the base case in our European semiconductor analyst models, is that something you can just simply pass on in pricing?

I mean, first of all, again, it's not a big impact into the bill of material and overall material cost. And then certainly, we, in general, think that we have pricing flexibility and pricing power in that regard, overall, again, like -- from a P&L perspective, in terms of the direct impact, much less concerned. And on the other side, let's make sure that it doesn't get into a situation where there's too less supply.

And then there's the other side of the coin, which you mentioned before. It can, of course, be a potential big driver for our semi business. And in that regard, there's clearly something positive to it as well. So we certainly would hope that we can come out of that as a beneficiary. Too early to call it yet, but at the moment, it's probably more on the positive for that.

Okay. So 8 months ago, you held an Investor Day and you gave a through-the-cycle margin target of 20% to 30%. Just 8 months later, you've raised that to 25% to 31%. You've also announced a major cost saving program. Maybe you could just encapsulate or explain why this sudden just 8 months later, a significant upgrade to that target.

Yes. No. So nothing fundamentally changed in terms of how we think about the business, how we think about the margin expansion opportunity, how we think about top line growth expectation. It's more about execution, time and execution. So in that regard, when we put out that framework, we basically wanted to put out a framework where we had a credible path to get there within 18 months. So that means the low end of the range, the 20%, that's what we defined as our first milestone to get there within 18 months, and we actually achieved it ahead of time.

And then already at Investor Day, if you would go back to some of the slides there, we already said at that time that when we are exiting this cycle, we want to be at least a 25% margin. So in that regard, the 25% was already on our mind at Investor Day, but we didn't feel at that time it's prudent to put out a 25% because we felt like it takes us too much time to get there. Now we spent these 8 months very well. We executed ahead of our plan.

And we have now also clear visibility into the next actions in terms of portfolio optimization and cost-out optimization that we now, again, can basically say within this 18 months or so time period, we can come back into the lower end of that guidance range or that financial framework. So in that regard, it's really about confidence, first of all, successful execution and then confidence into future execution, which made us adjust that financial framework to the 25% to 31%.

Can we talk about AI? Is Cognex an AI winner or AI loser? If you go back to 2017, 2019, Cognex made some acquisitions in AI, SUALAB and ViDi, but that was before generative AI. So in 2026, where are you positioned in AI and how you're deploying it in your products?

Yes. I mean, yes. I think first, maybe important point. We're almost a decade into AI, right? So 2017, we're now in 2026, embraced it early on as a company. We're probably one of the first -- today, kind of the buzzword is Physical AI. So we're one of the very first Physical AI companies before probably that word was even created. We launched the first AI-enabled products in 2022. And since then, each of -- each product, which we launched new had AI features and AI components.

And we have a wide range of what we call AI vision tools, which are based on our proprietary machine vision models. So in that regard, we think ourselves as a winner in the AI era. As mentioned before, bringing AI into machine vision unlocks a lot of new additional applications, and we are the leading company in this space. So in that regard, it opens up additional top line opportunities, and we are very positive about it.

Can you talk about the sales force transformation and how it differs from the prior initiative, I think -- and on the customer acquisition strategy, maybe you can combine that.

Sure. See, I would maybe take even a bigger step back, right? So first, as a company, we for a very long time, embraced and have been very good with serving large customers and providing them with what they really needed. That means almost like white glove service, you can say, in many aspects, but didn't really focus on a broader part of the market. And we realized in 2021 as a company that there's probably a much larger market opportunity out there, which we so far haven't gone after.

But it really requires a different playbook from a sales perspective if you go after that broader market. So in that regard, the first step into that was the so-called emerging customer initiative, which was on the one side, like let's bring in a different type of seller and deployed it to the market with lots of people, boots on the ground. And I think the positive of that, it was really kind of a transformative thinking to say like let's do things very differently.

But at the same time, it came as a heavy burden to the P&L. And it kind of was not really right to create like a second type of sales organization. So sales force transformation is much more about like let's still go after this broader market, but let's do it in the most efficient way as we can do it in a one combined sales organization with 3 distinctly differently seller types and then very much rooted in data and process.

And that's kind of a bit of a bigger theme, which Matt and I are driving within Cognex is this kind of like let's transform the operating model of the company. Let's really look at all the processes which we have from the sales process to how do we do engineering, how do we run the back office? Like what does best-in-class look like and let's bring that best-in-class in terms of process efficiency to Cognex, and that's really a core piece to our margin expansion story.

And is the core opportunity on the SG&A line?

I would say, yes, clearly, that SG&A is an opportunity. At the same time, we already said at our Investor Day last year that we think also on the R&D side, having now AI-assisted coding, having invested into a uniform platform strategy that while we have been in the past around mid-teens in percent of revenue on the R&D line, also on the R&D side, we can bring that to the low teens. So clearly, the larger opportunity is on SG&A, but there's also an opportunity in R&D.

And what about gross margins, for years gross margins has been trending downwards, and they look like they're stabilizing, but are those transitory impacts? Or is it sustainable?

Two things here. So on the one side, if we look back over the last couple of years, gross margin trended down strongly driven by mix, right? So we brought on Moritex and then we had strong growth in logistics, which has lower gross margins. And then it's correct that basically we saw a stabilization. And now looking forward, if we look at kind of our initial market outlook for 2026, we basically see factory automation and logistics growing at a similar pace. So that means basically mix headwinds in gross margins would go away. So in that regard, think a bit more about like stabilization with some upside opportunity against the 2025 gross margin.

Okay. And to what extent is AI being deployed internally to help you achieve those cost savings? Material?

I would definitely argue so, yes, right? I mentioned already about AI-assisted coding and software engineering, great opportunity there. We are deploying it across our sales force automation processes, especially around lead generation. And then we rolled out, for example, across our customer service organization or if you land at our new website, you will find a chatbot there, which kind of takes away like some of the easy to solve questions from customers. But then even more important, it has really a whole back-end automation in regards to the lead generation. So in that regard, absolutely, yes. And we are looking at more areas on the back office side to bring more AI tools there.

Okay. Can we just do the last 3 ARS questions, please? In your opinion, what should Cognex Core do with the excess cash? Okay. Number six, internal investment, 100%.

That's a strong message. Thank you.

In your opinion, on what multiple 2026 earnings should Cognex Core trade on? I think we're nearing the answer to this.

I think the scale is too low.

Maybe the EBITDA for this one, even then that wouldn't be high enough. 2/3, Well, we've reached the end of the allotted time. Thank you so much, Dennis, for a very comprehensive discussion. Thank you for joining.

Yes. Thanks a lot. Thanks, everyone, for your interest in Cognex. Thank you.

Greetings, and welcome to the Cognex Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being receded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our annual report on Form 10-K for 2025 was filed this morning. The earnings materials are available on our Investor Relations website. I'm joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO.

In addition to our usual operational update, we will provide a strategic update, highlighting the completed strategic portfolio review. Our ongoing operating model transformation and an update to our financial framework. 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 and 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. 2025 marked a return to profitable growth for Cognex with constant currency revenue growth of 8% year-over-year and adjusted EPS growth of 38%. We built momentum throughout the year, advancing our strategic objectives while staying focused on long-term value creation. Logistics continued to deliver steady growth, along with strong year-end spending across many of our factory automation end markets.

Let's start with an update on our strategy. Turning to Page 4 of our earnings presentation. We made great progress in 2025 against each of our 3 primary strategic objectives. First, we remain committed to leading an AI for industrial machine vision with nearly a decade of experience in this area, we are building cutting-edge tools that unlocks new applications and dramatically simplify the user experience.

With our talent and proven track record of delivering breakthrough technology, we are uniquely positioned to win in the AI era. During 2025, we introduced several transformative capabilities that strengthen our AI technology leadership. In January, we introduced the DataMan 290, helping us win share on the competitive ID factory automation market with new AI-enabled auto setup and advanced code filtering.

In March, we launched our In-Sight 8900 which brings the power of embedded AI to OEM customers. In June, we announced OneVision, bringing deep learning and edge learning together on a single cloud platform and creating new models deployable to embedded systems at the edge. And in October, we introduced SLX, our new solutions experience product line that brings our latest AI vision tools to logistics customers. These product launches strengthen our position with an approximately $3.2 billion of our $7 billion served market, using cutting-edge AI capabilities to deliver greater value for customers and in the process, gain market share.

Second, we remain focused on delivering the best customer experience in our industry. Our commitment spans the full customer life cycle from initial engagement through post-sale support. Examples of investments in this area include new AI-powered chat assistance on our website, which can answer questions faster, centralizing customer support materials to enable self-service standardizing the user interface design across more of our vision products and offering enhanced 24/7 technical support.

Third, we aim to double our customer base within 5 years. We expect to achieve this by continuing to advance our sales force transformation alongside investments in improved lead generation tools such as a new cognex.com website, which I will discuss in more detail momentarily. This multipronged approach is already yielding strong results as we acquired approximately 9,000 new customer accounts in 2025, 3x the rate of new accounts added in 2024.

This momentum provides a strong foundation for achieving our 5-year target. A key element of our go-to-market and customer service transformation is the launch of our new cognex.com website, which went live in late January. More than a refresh, it fully reimagines how we deliver on our promise of advanced machine vision made easy. This newly designed site is packed with our latest product information, quick links to technical support, new set of videos and hundreds of knowledge articles, which engage customers more deeply at all stages of their journey with Cognex. It also has more advanced automated tools that allow us to convert customer engagement on the site to high-quality leads for our sales engineers.

Now let's turn to Page 5. In the fourth quarter, we completed a comprehensive review of our portfolio and have started the process of exiting product lines, which generate approximately $22 million of no growth or low margin revenue. This includes the divestment of a Japan-focused trading business that was acquired with Moritex and discontinuing our mobile SDK, edge intelligence and other noncore product lines. We are also taking further actions to drive improvements in our operating model and in partnership with external consultants have identified an additional $35 million to $40 million in annualized cost reductions by year-end 2026.

As part of this process, we completed a holistic review of our entire cost structure. We remain focused on increasing productivity in key areas such as sales and marketing using new digital tools, software development using AI-assisted cogeneration, and automating back-office processes while leveraging global value locations for scale and cost advantage. These changes help to simplify our organizational structure and empower Cognoids to do their best work with less overhead. These steps will allow us to sharpen our focus on the core business to support growth while further expanding margins. Dennis will provide more detail on what this means for our financial framework.

Turning to Page 6. Our ongoing sales force transformation is a great example of how we are upgrading the operating model of Cognex. The previous emerging customer initiative emphasized adding head count and deploying easy-to-use products through a stand-alone sales organization. In contrast, our current sales force transformation prioritize making our existing sellers more productive with better CRM tools, a streamlined product portfolio and a much simpler organizational structure. This transformation began January of last year when we integrated our sales activities into 1 organization with 3 distinct selling styles. We have launched new marketing tools to enhance top-of-funnel lead generation and new management practices, which improve lead to opportunity conversion rates.

Our comprehensive product ecosystem makes learning Cognex products easier and shortens the sales cycle overall. And finally, we are collaborating more intentionally with our global network of systems integrators, machine builders and service partners to find and fulfill new business more effectively. When year-end, we are seeing both customer growth and sales productivity accelerate, which is very encouraging. More broadly, the announced portfolio optimization and operating model transformation are key drivers of further margin expansion.

Taken together, these efforts enable growth and create durable operating leverage across the P&L, which Dennis will now discuss. Dennis?

Thanks, Matt. Let me start with walking through the adjusted EBITDA margin progression in 2025 before I discuss where we go from here.

Turning to Page 7 of the earnings presentation, the margin progression from 2024 to 2025. We ended 2025 with an adjusted EBITDA margin of 20.7%, excluding the onetime benefit from the commercial partnership. We achieved our first milestone reaching greater than 20%, a full year ahead of plan, driven by focused execution and strong cost discipline.

As we shared at Investor Day last June, our largest lever for driving bottom line profitability as OpEx efficiency, which is where I want to begin. Over the past year, we have been laser-focused on driving organizational efficiencies throughout Cognex. We achieved $33 million of gross cost reduction, which was partially offset by $11 million of incentive comp, $4million of FX headwinds and $10 million of wage adjustments resulting in a net reduction of $8 million.

Regarding COGS productivity and pricing, we saw 2024 pricing headwinds especially in China, we are fully reflected in the 2025 P&L and were partially offset by favorable volume change. Organic mix was favorable for the year. However, we do not anticipate the full extent of this favorability to recur in 2026. Taken together, we are pleased with the progress made this year on adjusted EBITDA margin expansion. And as Matt mentioned, we will execute additional initiatives in 2026 as we work toward our next milestone.

Moving to Page 8. Building on the actions already completed, we are setting our next milestone at a 25% adjusted EBITDA margin targeted on a run rate basis by the end of 2026. The path to 25% is anchored in 3 key levers: first, OpEx efficiency. We expect to realize an additional $35 million to $40 million of identified net cost reduction, excluding FX in 2026.

Second, organic mix. The announced portfolio optimization will improve mix and partially offset the nonrecurring favorability seen in 2025. And third, COGS productivity and pricing with 2024 pricing headwinds fully reflected in the P&L and ending 2025 with pricing stability, we are well positioned to turn pricing into a tailwind.

Turning to Page 9. Considering our strong momentum of margin expansion, we are updating the financial framework we introduced at our Investor Day. We are raising our through-cycle adjusted EBITDA margin range to 25% to 31% and from the prior 20% to 30%. Our through-cycle revenue CAGR remains 13% to 14%, and we continue to expect greater than 100% free cash flow conversion. This updated financial framework reflects our confidence in our execution and durability of the margin expansion we are driving. As we further progress on our margin expansion journey, we will continue to evaluate our margin ambitions and will update this framework accordingly.

Let's turn to the operational update with our financial results. I'll begin with a review of our fourth quarter results, followed by an update on our performance for the full year. Starting with the financial highlights of the fourth quarter. Page 11 details our performance on 3 key financial metrics: one, adjusted EBITDA margin was 22.7%, representing an increase of 420 basis points year-over-year, the sixth consecutive quarter of year-over-year expansion.

Two, adjusted EPS increased 35% year-over-year, the sixth consecutive quarter of year-over-year double-digit EPS growth; and three, our trailing 12-month free cash flow conversion rate reached 138%, meeting our target of greater than 100% for the fifth consecutive quarter. Our disciplined focus on cost management and profitable growth ensure that this quarter's strong revenue performance translated into meaningful EPS growth and robust free cash flow.

Turning to the income statement on Page 12. Revenue increased 10% year-over-year and 9% on a constant currency basis. Looking at the geographic revenue trends on a year-over-year constant currency basis, America's revenue expanded 11%, led by strong end-of-year demand in packaging and continued growth in logistics.

Europe grew 13%, driven by strength in packaging. Greater China revenue increased 7%, driven by growth in consumer electronics and semiconductor. Other Asia revenue was flat in the quarter as growth from the consumer electronics supply chain shift was offset by semiconductor against a very strong comparable.

Staying on Page 12. Adjusted operating expenses increased 5% year-over-year and 2% on a constant currency basis, reflecting ongoing cost discipline offset by incentive compensation headwinds in the quarter. Looking forward, as we continue to drive cost efficiencies across the organization and incentive compensation already reset in 2025, we are confident to achieve the OpEx reductions discussed earlier and continued strong margin expansion in 2026.

Driven by revenue growth and favorable mix, adjusted EBITDA margin reached 22.7%, well above the upper end of our guidance range. GAAP diluted earnings per share were $0.19, up 18% from a year ago. Adjusted diluted EPS was $0.27, representing 35% year-over-year growth. This strong EPS performance was driven by robust revenue growth, disciplined cost management and a lower diluted share count compared to last.

In the fourth quarter, we recognized a $5 million gain on the sale of a property on our Natix campus that previously served as our training center. We are consolidating ongoing sales training into existing space at that comp, which allows us to further rationalize our real estate footprint.

In addition, we recorded a $30 million E&O charge forming a reserve update aligned with our strategy to focus on select products. Both items are excluded from our non-GAAP results. Next, I will cover our full year 2025 results, both as reported and excluding the onetime benefit from the commercial partnership. Starting with as reported results on Page 13. 2025 revenue of $994 million increased 9% year-over-year and 8% on a constant currency basis. Adjusted EBITDA margin of 21.5% expanded 440 basis points and adjusted EPS increased 38% year-over-year to $1.02.

Turning to Page 14. I will now cover the underlying business performance, excluding the onetime benefit of the commercial partnership. Revenue of $982 million increased 7% year-over-year as reported and on a constant currency basis, marking the first year with substantial organic growth since 2021. Adjusted EBITDA margin of 20.7% expanded 360 basis points, driven by revenue growth and disciplined cost management, marking the first year of margin expansion since 2021.

Adjusted EPS increased 31% year-over-year to $0.97, reflecting the strong operating leverage in the business. We generated $237 million of free cash flow in 2025, the highest since 2021 and up 77% year-over-year. Trailing 12 months free cash flow conversion was 138% comfortably above our greater than 100% target. We continue to drive working capital efficiencies in 2025, with our cash conversion cycle improving 57 days year-over-year and 116 days from the 2023 peak.

Turning to capital allocation. We returned $206 million to shareholders in 2025, including $151 million of share repurchases. As of December 31, we had approximately $150 million remaining on our current share repurchase authorization. Yesterday, our Board approved an increase of $500 million to the existing authorization. We intend to continue to be opportunistic with buybacks. Longer term, we remain committed to capital returns as a core pillar of the disciplined capital allocation framework we outlined last June.

The end of the year with $642 million in net cash on investments, providing flexibility to pursue accretive growth opportunities by continuing to return excess capital to shareholders.

Now Matt will discuss our vertical market performance for the year. Matt?

Thanks, Dennis. Let's review current trends across our key end markets, as shown on Page 15. Please note that my discussion on 2025 end market performance excludes the onetime benefit from the commercial partnership. Although the macroeconomic backdrop remains uneven and geopolitical uncertainty persists.

In 2025, we saw momentum in consumer electronics, logistics and packaging, while automotive remains soft. Starting with logistics, 2025 was another very strong year, with double-digit revenue growth led by large e-commerce customers. We are driving strong adoption of our standardized machine vision tunnel and layering new vision applications on top of code reading, increasing the ROI for customers.

Looking ahead to 2026. After 2 years of outsized growth, we expect more moderate growth in the mid- to high single-digit range. Longer term, we believe logistics going to be our fastest-growing vertical with growth in the mid-teens through cycle.

Next, let's talk about packaging. Packaging delivered solid high single-digit revenue growth in 2025 as a large underpenetrated and less cyclical market, it remains a priority. Our sales force transformation and AI-enabled product ecosystem position us to capture incremental opportunities and deepen penetration. For 2026, we expect mid- to high single-digit growth as we bring more machine vision into packaging.

Turning to consumer electronics. Revenue grew double digits in 2025 as the market emerged from a prolonged down cycle. We see continued upside from ongoing supply chain shifts new device form factors and a consumer refresh cycle. For 2026, we expect high single to double-digit growth, driven by a continuation of these trends.

Next is automotive. The automotive market remained challenging in 2025, with revenue down high single digits, in line with our expectations. Looking at the sequential development, we believe the market has reached the bottom and expect 2026 to be flat to low single-digit growth. Longer term, we see attractive opportunities for additional penetration as customers prioritize improving vehicle quality and reducing operating costs.

Finally, in semiconductor, 2025 revenue grew mid-single digits ahead of our expectations. For 2026, we expect back half weighted growth with full year expansion in the mid-single to double-digit range, supported by the AI-driven investment cycle and reinforcing our confidence in this market. Our deep relationships with leading semiconductor equipment manufacturers position us well for continued growth.

Let me pass the call back to Dennis to discuss our outlook. Dennis?

Thanks, Matt. Moving to Page 16. I'll now review our financial guidance for the first quarter. In Q1, we expect revenue to be between $235 million and $255 million. We're presenting roles of approximately 13% at the midpoint against a weak comp. Adjusted EBITDA margin is expected to be between 19% and 22%, with the midpoint representing an increase of 370 basis points year-over-year. As discussed previously, please note that Q1 2025 OpEx benefited from FX and stock-based comp tailwinds that will not repeat this year. Adjusted earnings per share are expected to be between $0.22 and $0.26 is the midpoint of this range representing approximately 50% year-over-year growth.

In summary, 2025 marks the year of substantial turnaround with our top line growing organically and our margins expanding, both for the first time since 2021. We exited 2025 with strong momentum across most of our end markets, and that strength has continued into 2026. As a short cycle business, we have limited visibility, and we therefore remain focused on our priorities, including continued disciplined cost management, a streamlined portfolio and transforming our operating model. These actions position us to drive profitable growth, maximize free cash flow and allocate capital with rigor to create long-term shareholder value.

By the numbers, we are targeting a 25% adjusted EBITDA margin run rate exiting 2026 and at least 20% adjusted EPS growth, underscoring our ambition to significantly expand bottom line profitability.

Now Matt and I are ready for your questions. Operator, please go ahead.

[Operator Instructions] Our first question is going to be from Joe Giordano of TD Cowen.

This is Michael on for Joe. I just had 2 parter here. So I just wanted to dive a bit deeper on the $22 million revenue divestments. Could you just frame out the timing of when this should be expected? And how is that -- if that's included in the guide as well? And then I just have a quick follow-up to that.

Yes. No, happy to do that. So maybe first, focusing like key takeaway on here, right? It's really all about focusing on -- or getting our non-core product lines, which do not have growth or low growth and -- which have low margins. So in that regard, it's really focusing on about improving the revenue mix and helping in that regard to offset some of the onetime favorability we have seen in 2025.

The majority of that revenue, which we're exiting is related to that Japan-focused trading business, which we acquired along with more attacks. We're currently expecting to close that transaction by the end of the -- or within the second quarter. So that means you would start to see that in the second half of this year. Keep in mind that exiting that revenue will change a bit the the mix of the end market, right? So the majority of that revenue would come out of the packaging vertical and a smaller portion would come out of the logistics vertical.

So in that regard, keep in mind when you model to reduce these 2 verticals, whereas the growth expectations, which Matt stated, or the initial view on this growth expectations in these vertical markets basically would remain unchanged on that lower.

Great. That's helpful. And just a quick follow-up to that. Can you just give us a better understanding how the company determines what's considered core versus noncore, like, for instance, like things like Edge Intelligence were a highlight of the Investor Day a couple of years ago. So just would love to better understand the trend behind these priorities.

Yes. Thanks, Michael. Yes, this is Matt. this is a process that we started almost a year ago as we really thought about where do we have advantage, right? We start with where we have core IP, core skill, a deeper understanding of a certain application area is really the foundation of what we would define as core. And then we look at other financial metrics that Dennis mentioned, really, what is the size of that market? What's the growth potential with the relative profit pool profitability and our ability to capture those profits.

You put those things together and you put them really in the context of each other, as part of a portfolio of activities. And I think what you quickly see are those that a, we have maybe a stronger right to win and then b, perhaps a weaker financial trajectory. So that's how we did it, right? We have a pretty clear framework as to how we do that. And I think you're seeing the results of that work from last year in these results.

The next question is coming from Joe Ritchie of Goldman Sachs.

My first question is on the cost reduction program for 2026. Dennis, maybe as you kind of think through the bridge for EBITDA margin expansion for the year, what are kind of the offsets we should be thinking about for 2026 to this cost reduction plan? Or -- and then also, how do you see that progressing as the year goes along.

Yes. No, absolutely, Joel. So right, I mean, we mentioned at the Investor Day last year that the largest lever is OpEx efficiency. And I think we really followed through on that in 2025, as we outlined in the work for 2025. And that enabled us at the end to hit the greater than 20% adjusted EBITDA milestone a full year ahead of time.

Now looking at '26, clearly, it's again the largest level, which we have and then coming to your question, basically what would be offsetting effect. It's on the mix side, right? So I mentioned in the prepared remarks that we saw favorable call it, like onetime effects and mix in 2025, we're partially reducing that headwind with the portfolio optimization, which we do, but it's not fully offsetting that. So really the headwind which we see is on the on the mix side. And then we would see perhaps as we mentioned as well some favorability from pricing. But I would say that it's probably really a smaller piece of the equation. So really think big picture about '26, it's more OpEx efficiency, partially offset by mix.

Got it. That's helpful, Dennis. And then Matt, just a question for you. Look, it seems like you're getting a lot of traction on the -- on your customer growth initiatives, and it sounds like lead generation is certainly improving. Can you just maybe double-click on what's changed over the last 6 to 12 months? And then as we move forward, it seems like you're seeing a lot of that opportunity on the packaging side of the business. Would you expect that to maybe broaden across your other end markets as well?

Yes, Joe, happy to. Yes, for sure, we're seeing great momentum in our ability to acquire new customers. I'd maybe take a step back. in these earnings, we really wanted to showcase the work we've been doing on our sales force transformation. And I really can't overstate how significant of a transformation that is to our go-to-market. There's really 4 pillars as we highlighted on the slides, which is -- it's a brand-new organization, right? What we had was more of a fragmented structure where we've combined and standardized how we structure our teams around the world.

That's been huge in terms of driving productivity, segmentation of activities and cross-selling. The second is process, right? We have made huge investments over the last many years in business systems to really kind of digitize Cognex. We're seeing those pay off as we were able to arm our sales noises with better data, better leads, better prospecting tools, better lead conversion metrics. So process is key, and we're again standardizing those with things like dashboards and things that you'd expect. Product, right? We've been working hard on our product portfolio, and we use this for ecosystem. And I want to encourage all to think of that as not lip service, right? That is really a deliberate effort to drive consistency in the user experience of our products, that helps us train our sales noise that helps us sell the full portfolio with fewer people and less complexity. That is paying off. And the fourth is partners, right? We we've really doubled down on how we work with and collaborate with the world's leading systems integrators, OEMs and service partners. And you put those 4 things together, board process product and partners.

On one hand, dramatically different from where we were, let's say, even 2 years ago with emerging customers. But you have to get really all of those for right. And I think we are. We have a great leadership team in our sales organization right now, Carl Gerst came out of product and is now leading global sales as of a year ago, and he's really moving fast with an ambitious agenda and has a great team behind him. And I think you're seeing those results 1 year later. And quite frankly, we saw those even a bit earlier last fall. And the results are an acceleration of our customer acquisition.

But it's also our ability to be much more flexible to your question on packaging, how we direct our sales activities as we see opportunities across the end markets, right? If we continue to see weakness in one and we see strength in others, we have tremendous flexibility now, maybe more so than we did in the past to redirect our sales activities towards those high-growth areas and then actually the data to be able to show that it's working.

So it's a longer answer to your question, but I really can't overstate the impact of our sales force transformation and the leadership that we have in place at the top of that organization.

The next question is coming from Jamie Cook of Truist Securities.

I guess 2 questions. One, just on the organic top line assumptions for 2026. Dennis, if you could provide any color, it looks like we should expect sort of mid- to high single-digit growth organically. But I guess the bigger question within that is with some of the success that you're seeing on the sales force transformation, you talked about adding 9,000 customers in 2025 versus versus 3,000. I don't remember when that was, but just are we starting to factor in more market outgrowth? And should we do that in 2026 given some of the successes. And then I guess my second question. Just back on the portfolio optimization and the announcements you've made this quarter. I mean where are you in this process? Is this like the first inning of the ball game and there's more to come or we feel like we've fully identified sort of the noncore low growth product lines?

Yes. Thanks, Jamie. Let me start with your first question. So maybe first, let me clarify. We're not providing full year guidance, right? I think what we try in the sense and the spirit of providing transparency to to our investor community, we try to provide a view from today's angle based on data which we have available, right? So we talked in the last earnings call about like, hey, what are PMI data suggesting and are certainly continuously looking both a data which we are seeing in our business as well as macro factors.

So in that regard, I would say, we're certainly encouraged what we have been seeing towards the end of the year 2025, where we saw the strong year-end demand. And some of that turned into revenue in the first quarter in 2026 and helps with basically that growth in the first quarter against the weak comps. And at the same time, we also saw some PMI uptick happening just in January. So these are certainly encouraging data points. But at the same time, clearly, I want to say, like, these are not yet a trend, right? So in that regard, we keep mindful about what we see and that we certainly would want to see certain more data points to either update our view to perhaps the high single digits. And -- so in that regard, I would say kind of that mid-single to high single-digit range is kind of what we would say from today's perspective. But again, we are a short-cycle business, things can change fast.

So we want to provide kind of a continuous update on what we see, but it's by no means the full year guide.

No, I wouldn't -- Jamie, if you allow me to take the second one, which is where are we, particularly as it relates to the portfolio optimization. I'd say -- these things don't happen overnight. We really have been working on this since almost a year ago. even well before the CEO transition where we've got teams in place to really look hard at the portfolio. And I think we took a very thoughtful and rigorous approach to that. and you're seeing the fruits of that work. And so in that vein, I would say we are very much sort of at the end of that cycle of analysis. And I think you're seeing the announcements of those those ideas.

So yes, as it relates to the portfolio analysis, that's it. I think as a product-oriented company, there's always work to do and making sure that your portfolio is fit for purpose and that it lets you run the company efficiently. There probably is more work we actually do just generally speaking, on cleaning up things like SKUs that really don't need to exist in eliminating complexity in other areas. I consider that more just work to be done and less of sort of a strategic thing that we did. And so you might see the effects of that trickle out through the rest of the year. But as it relates to the portfolio optimization, I think what we're announcing today is towards the end of that process.

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

This is Brock on for Andrew. I was wondering if you could go a little bit deeper into the end markets -- you mentioned momentum in logistics and consumer electronics for CE, what's kind of driving the demand there? I know you mentioned a refresh cycle, maybe some form factor on your devices and for logistics momentum, is that currently more greenfield or brownfield. If you could just give a little bit more detail into what you've been seeing in the conversations you've been having?

Yes. Sure. Brook thanks for joining us. Yes, I'll go deeper on CE and logistics, for sure. Consumer electronics, as we really started to highlight at the tail end of last year, I think we're seeing encouraging growth trends and really more broad-based, and that's certainly exciting. And I think consumer electronics, as an industry plays very much to our strengths in technology. These are very demanding applications that require precision and the highest levels of quality, given that many of these devices are quite expensive and have high price points in the market. And so we see a lot of those customers at both end users, the product owners as well as the systems integrators really favor Cognex.

But there's many underlying trends that are supporting that growth. Certainly, the shifts in the supply chain outside of the traditional manufacturing locations of China to Greater Asia, Asia, India, even other parts of the world. And given the global company that we are, I think we remain a strong partner to enable those geographic shifts as they happen. New vision capabilities. We brought to market some transformational AI tools last year, specifically designed for consumer electronics, I think we're seeing those those play out nicely.

Consumer demand, right? Consumer demand is very strong for these sorts of devices currently. A lot of that is driven by some of the new AI features that are being brought to consumer devices that are very exciting and driving maybe a refresh cycle that we haven't seen for many years. And then last but certainly not least, we're seeing new form factors. Again, particularly as consumers want to interact with the latest AI software tools, we're seeing technology providers really experiment with different form factors, whether it be foldable phones, glasses, pendants. And so these are devices that get made in the millions, the hundreds of millions with extreme precision and high quality. And that's that's just such a good place for Cognex Vision to play.

So that's consumer. I think on logistics, again, a very exciting market for us. We're capping our eighth quarter of double-digit growth, which is I think a testament to our commercial efforts and our sales team that sells into this market, but obviously, our technology. As you'd expect, we're starting to get into territory of tougher comps. And in all of our markets, we kind of expect growth to moderate after such a long stretch of outsized growth, and we're seeing that. But I'll tell you, I remain optimistic about logistics. We have great customer relationships. We have a great team in place, we have great technology. And there are just huge white spaces that I think we're starting to tap into, particularly with products like the as we start to dive deeper into the vision for logistics, which is really enabled by AI.

And so you put those things together. And I think this year, we're suggesting it might be a bit of a lower growth year on logistics. I think it's still early to see how that plays out. But long term, I still think we feel very, very strongly and excited about the logistics market overall. Hopefully, that answers your question, Brook.

Yes. It's super helpful. And then just a follow-up, just an update going into 2026 on your capital allocation priorities. Your free cash flow has been very strong. Is there any update on M&A or acquisition targets?

Yes, in general, the capital allocation priorities remain unchanged versus what we presented at Investor Day. Certainly, we are very pleased with the strong cash flow generation, which we had, especially in 2025, 77% up it was really driven on the 1 side by driving bottom line profitability at the same time also by optimizing the working capital.

Now looking forward, I would say, we probably right where we are, where we want to be on working capital, right? So cash conversion cycle, somewhere in that 150 to 155 days is really where we feel like it's a really good point for us is Cognex. So in that regard, probably we'll see a bit less of contribution to the free cash flow from working capital optimization. And at the same time, we think can definitely still achieve the greater than 100% cash, free cash flow conversion rate within 2026.

So in that regard, still looking forward to a strong year of cash conversion, but more rooted in margin expansion and working capital reduction. And yes, clearly, a similar capital allocation power, it is than previously communicated.

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

Congrats on the solid execution this quarter. First -- maybe first question for you guys. Dennis, it doesn't seem like you guys are seeing any impact from higher memory costs, but I just wanted to clarify if there is any cost increases that are embedded within the guide and maybe just if you could remind us the percent of COGS memory intensity.

Yes. Thanks, Ken. We don't disclose specifics around memory pricing, but I would say we don't expect any material impact from increased pricing tied to those supply chain issues. I would say we're pretty good at managing this. We really put teams in place many years ago when we saw a tightening of the supply chains on the tail end of COVID. We had some supply chain issues ourselves that have really forced us to double down and take many steps into our supply chain. And I think our ability to manage disruptions like this is really very strong, I would say, world class.

We have great relationships with our suppliers, and we keep very close to what they're seeing in the market. And so -- now I wouldn't say that we're seeing increased memory prices affecting our business. We are seeing them. And I would say, we're not going to really give what percentage of memory is the bill of material, but I would say it's not an overly significant portion and I wouldn't say that we've experienced really any material procurement issues today. So we'll keep an eye on it. But at this point, I think we feel comfortable that we have the tools to manage it and that it is already reflected adequately in our forward guidance.

Got it. That's very helpful. And then for my follow-up here. I just wanted to clarify, is there any way to help us think about the cadence of how we should expect to realize that $35 million to $40 million of cost benefits. Is that just an equal weighted type of benefit through the year? Or does some of that hit a little heavier in the first half?

Yes. No, I fully understand the question. So clearly, we're focusing on executing a good majority of that in the first half of 2026. So that means you will start to see some of these effects to show up more towards Q3 of this year and then perhaps a smaller portion towards the end of this year. in that regard, start to look for effects in the third quarter. And in general, I think, as mentioned before, it really would set us then up for this adjusted EBITDA run rate of 25%. And maybe let me elaborate a little bit more on that one.

So first, it's very clearly it's run rate as every exit 2026. It's not a full year number, right? So in that regard, it's probably are pretty much what we have been saying before about how we think about margin expansion in 2026. And I think really the message we want to give is that there is durability and that we have confidence in the margin expansion and that -- this will continue and can continue also into 2027.

So in that regard, take that comment mostly of our lag 2027 can have another increase or another year of margin expansion and that we are not done in 2026.

Our next question is coming from Tommy Moll of Stephens.

Automotive looks like is going to move from red to green in 2026, which is nice to see -- what context can you give us there, in particular, by geography, maybe starting with North America, just the latest and greatest on the demand side and the conversations you're having?

Yes, sure. As you mentioned, Tommy, as we've said before, it's very much a geographic story, and it does that story tell us differently in each area. So you asked about the U.S. and the Americas. What I would say is I would characterize an area where we're seeing relatively more activity in strength through, we're having good discussions with all the major OEMs, you would have seen them really try to cleanse their P&Ls of previous investments in the EV boom. And I think that's giving them flexibility to really think about the next iteration of powertrains and those next generations are both perhaps a different powertrain but also certainly a more connected [indiscernible]. And so we're having those discussions with them, and there's quite a bit of activity that we're seeing start to come back in the U.S. Maybe if you don't mind, I'll move on to Europe and Asia. In Europe, for sure, it's where we see the greatest level of weakness and where the recovery seems to be slower. In Europe, as I -- just to build on some of my prior comments, we are shifting our sales activity into other verticals in Europe so that we can compensate for that weakness. But nonetheless, that's where it is. And in Asia, it's a bit mixed.

I would say it's very much OEM dependent, whether you're talking about the Japanese OEMs, the Korean OEMs, the Chinese OEMs. And so we're staying close to all of them. And I would say both their investment levels, their powertrain choices are different. And so we're trying to keep -- Asia is a bit more mixed. And hopefully, we can provide some more clarity as the year year goes on. Hopefully, that's helpful Tommy.

Yes. Dennis, I wanted to ask about the raised through-cycle EBITDA margin expectation several percentage points if I just look at the midpoint from your Investor Day versus the update you provided us today. If we think about the bridging items there, is it as simple as you gave us 3 bullets under transforming the operating model that net to the $35 million to $40 million annualized. Is that the bridge? Or are there other operational changes that you've made to give confidence in that raised through-cycle expectations.

I mean, yes, I think the price is really what we showed at Investor Day. So we're not really changing compared to what we've said at Investor Day, strongest level on the OpEx efficiency and right you provided target value for each of these buckets, and we're so striving to achieve those. I think really what has had a change to Investor Day is that we reached our first milestone, right? And I think as the company as a leadership team, we are quite encouraged and we achieved our first milestone a full year ahead of time. and that basically kind of drove us now to say, like, let's take a look at the next milestone.

So in that regard, it's nothing changed in the bridge in the way how we want to get there. But it's really all about like having enters milestone, and let's look at the second milestone. And the key levers to achieve the second milestone is really the cost optimization, which we have announced, combined with the portfolio optimization as well.

Yes. And Tommy, I would just say any time you think about being more efficient, reducing cost, it's easy to say, oh, you're just taking capacity out. And there were elements of that, right, where maybe we would have overinvested in capacity a little too far ahead of growth. But the other 2 areas that you have to look as a portfolio, we're doing that. You're seeing those RXs in today's earnings. But the biggest and the hardest is changing the operating model. And I think if you just read the newspaper, there's just so many opportunities to be more efficient and be more productive. And that's really, I would say, where we go next and where you start to see more outsized benefits on efficiency over the longer term, right, where you can be more productive and automate more and do things more efficiently.

And I think as an AI-first organization, I think we are embracing, I would say, a lot of the state of the art that's happening not just in how you engineer products and software and do software development, but how do you interact with customers and how do you generate leads and how do you provide excellent tech support in more efficient ways. And so I think on that end, when it comes to operating model efficiency, we are probably earlier in our journey. And so you put those 3 things together, and I think we have a lot of conviction in at least the '26 numbers that were just rest assured that we're not settling. We are continuing to think about the longer term and how we'd be more productive, efficient organization.

Our next question is coming from Piyush Avasthy with Citi.

Congrats on the quarter. Just on just following up on the last question, like the AI cystic coding for software development, like I know like at your Investor Day, you kind of had talked about R&D being like a lower going to like low teens as a percentage of sales from like close to mid-teens that you reported in '25.

So it seems you're like this integration can really help you reduce the time line to lower the R&D. Is that true? Or we shouldn't get too excited yet?

Let me give you -- bear with me, I'm going to give you a longer winded answer. Cognex, we take pride in our customers expect from us market-leading technology and capability. And and we will continue to deliver that. And our ability to move the market and invent is very much driven by our investment in our world-class engineering organization. And so I don't want anyone to misconstrue the comments that I'm about to make as us retreating from that objective because I think we really want to be the gold standard and push the market for to be the best in the emerging technologies that we know can help industrial machine vision.

But for sure, there are just so many ways to be more efficient and more productive when it comes to technical design. And that's not just software, I would say, it's also hardware, and we're pushing on both -- but we are years into using these tools, particularly as you mentioned on the software AI-assisted coding angle. And as we all see from the headlines and recent news announcements, those tools just keep getting better. And we have an organization and a culture that embraces change and particularly as it relates to advanced AI, I would say. And so yes, we are. And we're doing it, I think, in the right way because we need to make sure that when we ship products, they have the utmost quality and in security. And so there's a fine line, you have to balance and all these things. But I think we are fully utilizing, I think it is early days in terms of what the full potential is. And it's not just about software. I think it's really full stack. How we design and how we do more with the same or maybe slightly less heading into the future.

Got it. Very helpful. And this is like following upon like Jamie's question, like your 2026 view, again, you guys said like mid-single digit to high single-digit range. But if I look at your 1Q '26 top line guidance, you're kind of suggesting 13% top line growth. So are there any larger projects or onetimers in 1Q that is helping growth in the quarter? And do you expect the growth to decelerate as we move through the year? Or is it just a limited visibility and you guys have been a little bit more prudent.

Yes. No, I understand the question, Piyush. I think 2 things. On the 1 side, Q1 is still driven by some of the year-end spending, which we saw in 2025. That means just like revenue comes into the first quarter instead of being recognized in the fourth quarter. And then I really want to say keep in mind that Q1 2025 was a weak quarter where we saw at that time, a lot of logistics demand being pulled forward into Q4 of '24.

So in that regard, there's a bit like this mix that this time we see kind of a reverse of shifting from quarter-to-quarter, right? So last year, it was moved from Q1 into Q4. And this time, we see move from Q4 into Q1. And that makes this 13% probably look a little bit larger than what it is. So in that regard, we not expect to think like, hey, there's a deceleration of things. But clearly, there's kind of this underlying timing effects, which kind of may be make it look like that. But in general, I will have our typical seasonality with Q2 and Q3 driven by consumer electronics, so stronger quarters there.

And then Certainly, we can't say how -- how to think about Q4 this year, whether we would see a similar effect on the end spending like this on 2025, that's just much too early to talk about that. So then regard it comes back to what I said before, we certainly are encouraged by seeing such an spending by seeing the PMI coming up. But let's see more data. Let's see more data points, let's see more trend and at the same time, we'll control what we can control, and that's our cost basis and our portfolio we're going hard after these topics and that gives us the confidence in our margin expansion.

The next question is coming from Guy Harwich of Barclays.

Congratulations on the great results. Looking at the -- your outlook, your initial outlook slide for 2026, it looks like on a weighted average basis, your end market growth is sort of mid- to high single digits. First of all, is that fair? And I apologize because I joined the call late, but the $22 million divestments. Is any of that reflected in the Q1 guidance? And how should we be treating that is excluding net of organic growth for this year or like a business divestment?

Yes, a few thoughts here, Guy. So first, yes, probably like that mid-single to high single digit is a fair statement. And in the short view, I said earlier in the call, and we are a short-cycle business, all driven about what we see today. That view could change. PMIs could change, data could change business trajectory could change. So it's not a guide. It's just a view of what we see from today's perspective. And then towards the question of the revenue exit. So there's some divestment included in there in regards to the Japan focused training business, which we think can close in the second quarter of this year and then think about like how to apply some of these growth rates and a very simplistic statement is take the '25 revenue numbers, subtract the $22 million of exiting business and apply the growth factors on top of it. That's maybe the very simple statement you may do a little bit timing adjustments there. But just that's kind of how we thought about when we put out that slide.

The next question is coming from Jairam Nathan of Daiwa.

So Matt, Cognex has always, I think, done a good job in entering markets ahead of everyone else like logistics, and it looks like -- so I'm just trying to understand what opportunities could you have with physical AI. There seems to be a lot of focus on sensing and vision is a key part of that, things like AMRs, humanoid robot. So just wondering if there is -- do you see any opportunities in terms of fiscal AI.

Sure. Yes. We're probably the oldest physical AI company in the world. We've been given robust size, the ability to perceive the world around them for about 44 years. And that gives us a lot of strength. We know those applications really well. But your question is really more about adjacencies in new markets. And yes, as an organization, we have a very good way of looking at those things, evaluating them and understanding if we have a strong right to win in them. We like the 5 verticals that we -- the market verticals we participate in, and we see tremendous growth to continue to expand in those verticals. I think we're not the share leader in every geography, market vertical or product segment, and we aim to be. And so that's our top priority is winning the core. But as it relates to new markets, we're looking at what's the future of automation in these massive data centers that are going to be built out over the next several years.

There's a resurgence in investment in defense, in particular, in aerospace, particularly in parts of the world like Europe as those industrial bases come back to life. And these are highly engineered parts that require the highest levels of quality and precision. And so we're certainly looking at potentially aerospace and defense as a market that could come back to life in a way it hasn't been in many years. And then certainly, robotics, like you mentioned it. And we've been serving the robotics market for decades, I would say, maybe not in the way that we're seeing today with humanoids, but much more as it relates to high-speed in-line manufacturing, right? And we've done that in consumer electronics. We've done it in logistics. We've done it in automotive. And you can expect us to continue to invest in how we can be a better provider of vision for the world's robots. And so yes, an area we're thinking about and investing in, I would say, less so with the angle of humanoid in full disclosure, we don't see that as such a strong place for us and such a little too far from home in terms of in-line manufacturing, but many, many other areas for industrial robotics that could use visual perception and where we see ourselves as really having a great rate to win.

And as a follow-up, and then it's just on the trading business within Moritex. Typically, these businesses are low gross margin businesses. So should we -- could we see a bump from gross margins in the second half with that [indiscernible]

Yes, you're right that [indiscernible] business are less attractive on gross margin side when we saw that in general, that Moritex had lower gross margins. So in that regard, that certainly will help a bit on the gross margin side into the second half.

Thank you. I would like to turn the floor back over to Mr. Moschner for closing comments.

Excellent. Well, thank you for joining us this morning and for your continued support of Cognex. We look forward to updating you on our progress in the first quarter.

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

Okay. So good morning, everyone. My name is Chad Dillard. I am the lead analyst here at Bernstein, covering the machinery and the electrical equipment sector. And today, I'm really pleased to have Cognex on the stage. And joining me for Cognex is Dennis Fehr, who is the CFO of the company. And we're going to have a fireside chat over these next 40 or 45 or so minutes. [Operator Instructions]. So before we jump into Q&A, I'd love for you, Dennis, just to take us through Cognex for some of the folks that may not be as familiar with the company, just give a really broad overview, and then we'll jump into questions.

Thanks, Chad, and good morning, everyone, from my side. Thanks for your interest in Cognex. And yes, a few words to Cognex, a few words to myself. So who is Cognex? What do we do? We are a pure-play machine vision company. That means think about embedded -- software embedded on device, high-speed cameras, machine vision systems; helping to identify, to inspect, to gauge in factory automation or factory environments and logistics and warehouse automation as well.

We're about a 40 years old company, headquartered in just outside of Boston in the town of Natick, have a global footprint. We do about 40% of our business in the Americas, 20% in Europe and 40% in Asia. We have been and think about ourselves as the technology leader in the space, basically leading with solving the most difficult tasks to solve in terms of inspection, the most hardest code to read, fastest speed. That's kind of our legacy and how we are positioned.

We are operating in a market of about a $7 billion TAM, which has been growing for most of the decades in kind of a low to mid-single teens as a growth rate there, so as the company. And we traditionally have been working with the most sophisticated, the largest companies in the space, naming some of the most iconic companies, our customers like Amazon, for example, in the logistics space and some big, big names in the consumer electronics space, but have been over the last 2 or 3 years, further kind of expanded our strategy to go after a broader market and that more and more through a direct sales force, which we see as a competitive differentiation and also a way how to competitively win.

We traditionally are a high-margin business, so kind of more software type of gross margins and bottom line margins. So 10 years historic average, 28% adjusted EBITDA. And we run a capital-light business model. That means we are highly cash generative and have low CapEx, less than 2% of revenue per year.

On myself, as introduced, Chief Financial Officer of Cognex. I'm with the company since about 20 months. So it has been a good journey, has been driving a couple of priorities around profitability, capital efficiency and Investor Relations. And I would say I'm part of a new management team with Matt Moschner, the CEO, basically taking up that role mid this year after being 8 years with the company. So we're driving a lot of change and a lot of P&L improvements through the company, and we'll be excited to talk more about that.

Okay. Let's dive right in. So yes, let's talk a little bit more about that change since it's a relatively new management team. You guys came out with some recent strategic priorities. I'd love for you to just lay those out for all of us and then we can dive a little bit further?

Sure, absolutely. So the 3 strategic objectives we talked about at our Investor Day mid this year. So first is to be the #1 leader with AI technology and machine vision. It's kind of extending our legacy as the technology leader in the space, right? So think about that for 40 years or so, what we call rules-based software coding, so to say, was kind of the state-of-the-art, and we have been and still are the leader in that type of approach, and that's more and more complemented by AI-based vision tools and vision models.

So we embraced AI very early on with an acquisition late 2017, early 2018 and bought a company called ViDi in Switzerland, and that built our basis for AI. So that's the first strategic objective. The second is about doubling the customer count that ties back to -- I introduced before, we traditionally have been very strong with large global customers, very sophisticated customers and very sophisticated problems to solve. And we think that there's a broader market we can go after, and that's kind of tied to that strategic objective.

And then the third strategic objective is that one thing is to win new customers. The other thing is to keep them. And that's where basically to be the #1 in customer experience in this industry plays a role, right? So think about it like a flywheel. You add new customers and then you keep them and you increase the share of wallet over time, you penetrate them further, and that's kind of where the -- being the #1 in customer experience plays a role.

Great. Okay. So maybe diving a little bit more into that doubling of your customer base. Can you talk about just what changes in the organization do you need to make to realize that goal?

Sure, absolutely. See, I think it's a journey which we really embarked on somewhere like in 2023, where if you look back, I talked about it how we have been kind of leading and being very good with large-scale customers. That, on the one side, certainly brings a big advantage. If you win these customers, you gain a big volume, you can grow with these customers. They have the most challenging topics to solve. So that means it kind of really positions you and keeps on challenging you that you're staying a technology leader.

But it certainly has also some downsides, right? So one downside is clearly that is there a ceiling? How far can you grow with just large customers? And then it drives more volatility and more cyclicality into the business. So that means you see strong ramp-ups in growth cycle, but you also see larger compression in down cycle. So in that regard, there was this kind of the strategic narrative if we want to go beyond and then you want to do more, you want to serve more customers. And that basically created the idea of what was called the emerging customer initiative. That was an initiative launched and announced in 2023, and it has 2 or 3 key components to it.

It was, a, let's put more salespeople -- direct sales force people, more boots on the ground. That means go out, have more sales capacity, reach more customers with a bit of a different approach. That means thinking about like, okay, you need to have easier-to-use products to serve broader customers and therefore, kind of combined with the product strategy. And as the thinking was like, okay, this is a very different approach, maybe you saw slightly different products. So it was really made this emerging customer initiative, a stand-alone initiative, a stand-alone sales organization.

And that had great benefits. So really acquiring new customers, really that target kind of we saw a nice ramp-up. We also saw that kind of this new type of sales engineers, which were mostly hired as graduates out of college, we started to show productivity signs. And there were good things about it. But at the same time, we also realized that this may not be, a, the most efficient way to do it. And then you get kind of dissynergies with your existing sales force because now you have this kind of completely other part of the sales force and you have 2 different leaders. You have one global leader for that part and now a global leader for the other part.

So that means we pivoted and slightly adjusted that what we call the sales force transformation. So the objective by itself is still similar. That means we want to increase the customer count and we said we want to double the customer count. But there is a second piece to it, which is all about sales force efficiency. So that means what we did is we took these 2 different sales organizations, we merged them into one.

And we are much more focused now about like to say like let's really drive sales efficiency. That means we are thinking a lot about how can we automize and drive efficiency all the way from lead generation, how we are converting leads into opportunities and then opportunities into orders. And that's a sort of data-driven and there's a lot of adjustment into how we manage the sales force.

And we still have different selling profiles. So that means like we still have people that are more focused on acquiring new customers and they're selling kind of an entry-level type of product basket. But then you have also 2 other type of seller profiles in our sales organization who are then catering to other forms of customers or if you help these customers on in their journey, they eventually might be served by other parts of the sales organization.

And then we broadened a bit the approach of the easy-to-use product. So that's still there. We're still trying to first sell easy-to-use products to new customers. But then at the same time, we're working on this more holistic customer experience kind of the end-to-end journey, like how easy is it to find Cognex to place an order with Cognex, how easy it is to get support from Cognex. So we're trying everything easier, and we call that advanced machine vision made easy.

Okay. So let's actually start at the base. Let's talk about the product cycle, right? So that you're going to need to -- I imagine you're going to need to change that to some extent to reach the customers that you want. So I guess, how do you approach developing products differently? Because I have to imagine you have like the white glove service with like your large clients, some of the smaller guys to profitably reach them, you probably need to have a little bit more DIY. So let's have a conversation about that?

Yes. Right. I think that really touches a bit to this point of customer experience and easy-to-use products, right? As you rightly say, so the more sophisticated customers who have maybe full teams of factory automation engineers and in these teams, very likely specialists around machine vision, machine vision engineers. You don't need to do this type of make it easy for them. They will figure it out. They are the experts in the area.

But then it really comes to about like building guided workflows for these folks who are much less familiar with machine vision systems. And that's where kind of this theme of customer experience plays a big role. And in our sense, also kind of a unified software ecosystem plays a big role. So if you think back 5 years or so, right, we had different kind of software stacks for each of the product lines. Now that's all on one software stack basically. And that means you start to [Technical Difficulty] easy-to-use product on the same software environment. If you go to the next level of sophistication, you're still in the next -- in the same software environment.

That means it's so much easier for customers to first enter the ecosystem and then kind of move into the ecosystem and kind of add sophistication level. And in that regard, clearly a very distinct different approach. So it was a very strategic move, probably like 3 to 4 years back, to go to this ecosystem and then to start to build out these kind of guided workflows and kind of self-tuning auto setup. So that means if we sell one easy-to-use product, think about more like an experience like you buy a smartphone, you take it out of the box and it basically guides you through a setup process and a lot of the setup is done by the device itself.

And we demoed at our Investor Day such kind of a self-setup. So it's basically we built an AI-enabled auto tuning and self-setup. So basically, if you buy one of the machine vision systems, basically it goes through 4 steps. You get a few questions, answer these questions and then the device basically configures itself, and that makes it so much easier for our customers to use it, and that's where product development plays a big role to bring that type of mindset into that development.

Okay. So you've got the product development set up. So now let's talk about the sales angle. So I guess how does -- how do you change -- I guess, who do you recruit differently now versus under your prior model? And then more broadly, can you talk about what sort of incentive structure that you're putting in place to achieve the outcome that you want?

Yes. No, it's a great point. And I think one thing is how do we hire, right? So I talked a bit about emerging customer initiative where we hired college graduates. And we wanted to build a kind of a seller profile, a sales engineer profile who sells much more transactional and less consultative. And now as we merged into this one sales organization, we still have these 3 distinct seller types, and we would hire differently for each of them, right?

We have one more selling type selling kind of this easy-to-use product, very transactional. So you're looking for either graduates or maybe people with 1 to 2 years professional experience. And you basically, you feed them through your lead generation, you feed them these leads and they go out and they run, right? And then you have a second seller type, which is more like working with some of the mid to more sophisticated type of customers where it's really a consultative selling.

That means you walk the line, the production line with your customer and you basically really talk it through where your problem, you have cost and quality issues and you bring them ideas and you basically start to create your funnel and your lead with this kind of consultative selling approach. And then there is the third one, which is very technical. It's almost like, right, we're working with machine builders, and they are basically specking in our machine vision devices into their machine. So that's a very technical selling. It's really on an almost application engineer to a design engineer on the customer side type of conversation. It's really about like how do you want to solve this technical challenge you have.

And these are kind of the 3 different buckets, how we have structured the sales organization. And that, in our mind, drives winning more customers and then keeping retaining them. But again, I think this portion of driving efficiency into the sales force through this automatic lead generation and to basically streamlining the way how we manage the sales force, right? Start to think about like sales dashboards, each sales engineers have their KPIs, how they're performing this week against this KPI, how are they stack ranking against their peers in their districts or in their regions? It's a very different type of approach of how the sales force is managed today than it was, I would say, 18 months ago.

Okay. So here's the next question. So the umbrella of the question is like how do you manage your brand identity? And you've got, I guess, legacy Cognex has been more focused on kind of the high-end bespoke. You're going towards -- I don't want to use the word simpler. So obviously, not simpler product type...

Less complex product types.

Yes. I guess like what's the most important factor in like executing like what seems like -- maybe like a bit of like a tight walk rope between those?

I think it's clearly -- see on the one side, I think we are clearly positioning ourselves and that's our core and our legacy, so to say, as being the technology leader. And I think that's very core to the brand identity. But then I think where we maybe expand the brand identity is that now all of a sudden, you're also becoming an easy to use and easy to interact with company, right? And I would really emphasize both aspects to it, right?

One thing is like you have a product which is easy to use, easy to set up the guided workflows. But the other piece is like the easy to interact with. And I think that's where we probably is the most transformative for the company itself, right? Because these very sophisticated companies where you're very entrenched with their engineering organization where there's good personal relationships, that plays a very different role than if you go to a new customer and you want them that their end-to-end journey is really kind of seamless, right?

"Oh, okay, I got a demo of your product. Now how do I order it? How easy is it for me to order? How easy it is for me to get it, to set it up, to install it. And if I need support, how easy it is for me to get support." And that kind of -- that's really kind of an expansion of the brand identity, and that's kind of what the strategic objective of being the #1 in customer experience plays a big role, and it's really an expansion of the brand identity.

Got you. Got you. Okay. So in your sales, are you using any third-party distributors? Or is that fully in-house?

Right? So we're today probably like in a 70% to 80% of what we call direct sales approach. But then the other 20% to 30% don't think about it like distributors, think more about like integrators. So that means they're providing a value-added service to the customers. So they might be pulled in, for example, to help with a broader system integration connection, maybe to their shop floor management systems or to their -- all the way to pulling cables and mounting brackets and things like that.

So in that regard, that is a piece which we do not necessarily want to do, right? So I think that would be dilutive to our margin profile. And at the same time, it would be also a kind of a fixed cost block in certain regions, which you may or may not always be able to fully utilize in that regard. It's really a very conscious decision for us to say like that we don't want to have in our P&L, let's use third-party partners do that. And it's clearly also an area where we still have opportunity for us, like how do we manage that channel? I think we'll definitely have also some good ideas there.

Got you. Okay. So is there any way to kind of benchmark the progress that you're making on these targets? Maybe what share of your revenues come from new customers? Just kind of like get a sense for where you are today versus doubling that base? And then I guess, secondly, you've given out these 10% to 11% top line CAGRs. How much of that depends on this customer plan?

Right. So basically, maybe on the customer accounts, we have basically announced it on an annualized basis. So we're just approaching kind of the next cycle to announce that. So I'm not yet talking about it. But the last -- end of last year, we were about 10% up in customer count and expect a certain acceleration in that regard.

But in general, I think we feel like we're making good progress. We like what we see, especially on acquiring new customers, finding new accounts. But then I think I feel like even more relevant is like as a CFO, like what do I see in the P&L? And maybe first, I talk a bit about the objectives and then maybe where do you really see it to show up, right?

So we put out a financial framework, which included -- or includes a growth algorithm where we basically say a 10% to 11% organic growth and then plus a 3% M&A growth through the cycle. So now if you look at this 10% to 11% revenue growth through the cycle, we further split that into 2 core components. There's a 4% underlying market growth. So that means how much are our customers growing? So we [ tack ] that about 4% across our verticals. And then we had a 6% to 7% from additional penetration. And that additional penetration comes from 2 angles.

So one thing is bringing AI into machine vision that enables more use cases, which you could not solve with traditional ways of rules-based software algorithm. So that means we can sell now more applications to customers, and therefore, you get more penetration. And then the second piece is to go to more customers. So in that regard, it's a core piece in our growth algorithm, but then it more applies to some verticals more than others. So key focus areas are the packaging vertical.

So think about fast-moving consumer goods and health care, for example, pharmaceuticals, food and beverage and then also in the automotive industry. So that's kind of 2 of these key verticals, and they're probably a bit more than 1/3 of our total business. So in that regard, in these verticals, that aspect plays a big role.

Okay. So last question on the customer. I know we're spending a lot of time on it. But as you think about the customer acquisition costs for these new customers, like how does that compare versus your legacy customers? I guess what I'm trying to get at is, to what extent is this move margin accretive?

Yes. So I think there -- maybe I go through on a P&L structure, right? So first, starting on the gross margin side. So it's gross margin accretive, right? You typically have selling to smaller customers at lower quantities, so you have better prices, right? So ASPs are higher, also the type of products which we are selling. So in that regard, gross margin accretive.

And then it comes back to the dollar of your sales -- or cost of sales organization per dollar booking, right? So in that regard, it's comparatively more expensive to acquire a new customer because very likely you're getting smaller order sizes and then these are smaller customers. So that means inherently, your dollar per booking is higher. At the same time, to some extent, the cost of this type of sales engineer is a bit lower because they are less of experience profile that helps a little bit offsetting that.

But at the end, really the business case really works when you acquire the customer and keep the customer. And that's why the second piece of the customer experience is so important, right? It doesn't help us if we just do a onetime sell to a customer. That's very likely where you can't make a lot of money, right? [Technical Difficulty] where you start, where you keep that customer and where you then do further penetration, have repetitive selling, getting larger orders. That's where the business case really starts to become attractive and where it becomes to margin accretive basically.

Got it. Okay. So let's switch gears. Let's talk about 2026 to the extent that you can. I guess what are some early thoughts on the evolution of your business into the coming year? If you could provide some color on the top line, maybe talk about the profitability as well?

Sure. Thanks. So maybe I take -- before I talk about '26, I'll take a step back. And right at the end, we think about like we're a cyclical type of business. So we showed on our Investor Day, and it's basically rooted in almost like 50 years of industrial manufacturing data that you have in factory automation and machine vision and Cognex specific, you have cycles.

You have an average length of 5 to 7 years of the cycle. And that means if you think back the last peak -- the peak of the last cycle was 2021, driven by logistics and consumer electronics. And then we saw basically a downturn of the cycle, especially '22, '23, and it basically started to flatten out into '24. So we think that it's very likely -- I mean, sometimes you only know this in retrospective, but it's very likely that we are beginning of a new cycle. So '25, I would say, start of a new cycle.

And then we basically laid out a framework of that cycle and said, like typically, we have seen that a cycle unfolds in 3 phases: an initial phase where you see moderate growth, a second phase of the cycle where you see strong outsized growth and then kind of the tail end of the cycle, which is kind of flat or even down. So that means it is in early stage of the cycle. We see this year a growth rate in the mid-single digits, which we are using as we work very hard on P&L optimization, right?

So we had a pretty low profitability last year for our standard was just 17%. And we basically -- our implied guidance we gave the Q4 guidance for this year was greater than 20%. And so we're working on P&L optimization, and we are basically showing this [Technical Difficulty] mid-single-digit growth, we can drive outsized P&L performance. So in that regard, that's kind of how we start to think about 2026. We are a short-cycled business with limited visibility, I should add that. So that means we typically have in -- in factory automation, we may have just 3 months visibility. And then in warehouse and logistics automation, we have maybe 6 months -- 6 to 9 months visibility.

So in that regard, when we think about 2026, we look at where are we today, we see mid-single-digit growth, and then we use an addition macroeconomic indicators like the PMI and PMI is still in most geographies below 50. So that means it doesn't show kind of an expansion. So that means our baseline as a management team at the moment is to say, "Okay, it looks like the next 6 months or perhaps 9 months will be mid-single-digit growth." But of course, we are a short-cycle business. That means there can always be inflection, and it could definitely go further up. We clearly also talked about some of our end markets, and we see that end markets are generally getting better.

So in that regard, I would really emphasize that's a baseline case. And then we clearly also said and I felt like that maybe got a bit lost that we said like we can drive outsized EPS growth in a mid-single-digit growth environment, right? So we're growing our EPS this year greater than 20% on a [Technical Difficulty] and we think we can repeat that or exceed it in 2026. And that's what we're really working very hard on.

And the key to that is really tight cost management, OpEx efficiency, right? So sales force transformation plays into that. But in general, it's really across the whole organization that we are looking for efficiencies and driving OpEx efficiency. And I think we have executed well in 2025, but it's also clear that we have more work to do, and we are poised to deliver on that in 2026.

Okay. Great. So let's dive a little bit more into like end market by end market, like how are you thinking about what seems like the trough and the shape of the recovery. So maybe just beginning with consumer. Can you talk about that?

Sure, absolutely. Consumer electronics is our third largest end market. It's also, to some extent, the most interesting one. I sometimes say packaging is our most boring end market and then consumer electronics, almost the most interesting one because it really has typically shown strong inflection points in both directions. And consumer last peaked in -- consumer electronics last peaked in 2021 and then really contracted a lot in 2022 and since then basically hasn't grown until we saw first signs of growth this year.

So in that regard, it's really the most exciting also because it's the one which kind of shows the first signs of changing from flat to a growth in the broader factory automation outside of logistics, which has been growing for the last 2 years, but we'll get to that.

So consumer electronics, what makes us excited about this vertical? It's really that in a broader sense, if you think about it, change is good for Cognex. So change in the sense of our customers launching new products, they're changing their supply chain or changes in regulatory requirements in certain industry. So that means whenever change occurs, it drives good business for Cognex.

So what are we seeing this year? So we definitely see a change in terms of the alignment of supply chain. So that means a lot of our customers in consumer electronics looking to diversify their supply chain from China to other places. First of all, starting on the device assembly. That means thinking about like where devices assembled. And that's maybe places like India, it could be places like Vietnam, and that's kind of driving some part of that initial growth, which we're seeing this year, and we think this can extend into 2026.

And then beyond that, we think components will be the next item to look at. Naturally, customers want to diversify the entire supply chain and not only the assembly. So that means component manufacturing would be the next item, potentially '27, '28 to make moves, and that's good for Cognex. And then the other thing is that we -- after a long time, we also start to see like product lineups, new product lineups coming out, which are rooted in changes to hardware form factors, right? If there are just changes on software, that's not really driving business for Cognex at the moment. Where there are changes to the physical manufacturing or additions, that is good for Cognex, and that's what we are seeing as well.

So in that regard, we think we could really see a couple of years of nice growth in consumer electronics. Again, it's sometimes hard for us to exactly call what that will be and when it will be because of the nature of the business. But in general, it's definitely the market where right now the most positive in the sense of like how the growth dynamic could change in that market.

Any product cycles to get excited about over the next 12 to 18 months?

Yes. I think, see that, there are clearly -- so first of all, maybe I should say a step back. What we see this year is a broad-based growth in consumer electronics. So it's not about just phones or it's not about laptops or TVs, it's really -- it's broader based. And that is, first of all, nice because, obviously, it drives diversification and makes the cycle potentially stronger.

But then clearly, in the smartphone side, we have seen 2 things, right? We have seen new form factors coming out, and there's been buzz about additional form factors, can't really call that, but that buzz is there. And then certainly, what we also see is that there was a lot of kind of consumer spending on devices in the COVID area, and we are seeing kind of a natural refresh, which kind of drives good business for our customers and that's good for Cognex.

So let's broaden out the conversation. Let's talk through logistics? Let's talk through the packaging?

Great. So let's start with logistics...

And automotive, if you can too.

Yes, sure. We'll take them one by one. But I'll go to logistics first. Logistics is our largest end market now. We have seen it growing very strongly since basically beginning of 2024. So the first vertical market to recover from the down cycle and have seen strong growth last year, see strong growth this year. I would say until mid of this year, it was a broad-based growth. I would say, in the second half of this year, the growth was more geared towards larger customers.

And in general, we think very positively about the long-term outlook for logistics because it is an industry which today has a low penetration of automation. And that basically gives a long run rate. And we have seen in the 2021 peak that was a lot about building out additional square footage, building out steel concrete, but it was not fully automized. It's a low automation rate. And that means there's really this multiyear opportunity by automation into this existing square footage.

And therefore, we are very positive actually that we would see a multiyear growth cycle in logistics. However, we also know that growth is not linear. So in that regard, we could imagine that 2026 might be a year with a lower growth rate. Could it be flattish? Perhaps. Could it be down? Probably not. But it does not change our view on the long-term outlook for this market. So in that regard, probably more a sense that after 2 years of outsized growth, maybe take a breather and then kind of start to plant the next mountain.

Okay. Good. Oh, yes...

Which one you want me...

Yes, go through -- yes, go through packaging and then others.

Okay. So let's go to packaging next. So packaging, I mentioned before, I would describe our most boring end market, right? So packaging is like fast-moving consumer goods. Think about shampoo bottles or cosmetics in a bottle. Think about food packaging like cookies in a plastic box with a transparent packaging and then in a carton, pharmaceuticals, right? So it's -- why do we call it packaging because it's typically all about package inspection like is the cookie sealed or not? Does the shampoo bottle has a scratch? Does the glass bottle has some glass chipped away? So that type of kind of inspection tasks.

And by itself, the underlying verticals are very stable, right? They don't go through big cycles. They typically have low single-digit growth. We think we can grow there with penetration, bringing sophisticated AI tools into these inspection tasks. So I visited a cosmetic manufacturer in France earlier this year, and they fill their cosmetic into glass bottles and they want to make sure nothing falls into it and especially little glass pieces from these bottles. And that's very hard to detect, right? It's transparent, something little chipped away, moves very fast, right? It could be thousands -- thousands of these little bottles per minute.

So in that regard, you need to be extremely good. And that's where really the latest AI vision tools help to solve these problems, and that's how we can drive penetration in this industry. So that regard, we expect this to be a steady grower. And it's at the same time, also an area where we can reach more customers and therefore, feel like it's a market where we would expect steady growth over these years, and that makes it a bit boring, but exciting at the same time.

And then lastly -- or there might be semi as well as a market, but maybe I'll talk to automotive first. So automotive clearly was the biggest challenging market in the last 2 years, you can say, right? So we saw a very good year in '23 from EV batteries, right? So a lot of -- was the high moving towards the EV transition, building out more battery plants and battery plants need a lot of inspection, complicated, sophisticated inspection. So in short, good for Cognex.

Good year in '23. That transition kind of got a little bit slowed down. And therefore, a lot of investments didn't move forward in '24. And basically, that business on the EV side almost disappeared. But then shortly after also the traditional ICE side of the vehicles also started to show signs of weakness and the tariffs came into play, a lot of uncertainty for car manufacturers. And that means auto declined 14% in 2024, and it's going to decline in the single-digit percentage this year as well. We'll disclose more about that at the next earnings call.

But positively speaking, if you can find something positive in there, we start to see signs that it's stabilizing. So we still see year-over-year declines. But if you start looking sequentially, it looks more stable. So we would like to have probably 1 or 2 more quarters to say like it has found its bottom, but it feels like we are close to that. And so in that regard, it takes away a headwind if we think about '26, so that market definitely has a better outlook. While it may not be a big growth driver, at least the headwind which we have experienced in '24 and '25 is expected to go away into '26.

Okay. Take us home.

Okay. Let's do the last one, semiconductor. What is that? So basically, think about we are selling machine vision systems to the semi-cap manufacturers. They're building machines to produce chips, all sorts of chips, right, from very simple for standard controllers going into a certain car to high bandwidth [Technical Difficulty] and we are basically working with these machine builders who are very much spec'd in there.

And we have seen nice growth last year. So '24 semi was our largest growth market, very strong growth. And then we saw a pattern which is kind of what we think may happen in logistics in '26 is that in '25, kind of that market takes a bit of a breather. And we are originally coming into this year thought, it would be flat and no growth. And now we see a little growth, which is better than what we thought it would be. And we think that we could see further acceleration in this market into the second half of 2026, if not earlier. So in that regard, also a market where we have a rather positive outlook.

That was grid around the world. Okay. So let's -- in the last couple of minutes that we have, I want to a couple of moments on AI. And I want to take this from the opportunities perspective first, and then we can talk about the threats. So on the opportunities side, can you talk about how you're integrating AI into your product cycle?

Absolutely. So I talked a little bit about it before already how we made that acquisition of ViDi, that company, in 2017-2018. We launched our first AI embedded product on our devices in 2022. And basically, since then, each new product, which we have launched basically has some AI features and AI components to it.

And again, what does it mean? It really means you can do additional applications, which you couldn't before. I gave this example with the glass bottles, these little glass chips as one example. Another one could be, I went to a consumer goods manufacturer, they do dust sheets. And in the past, we could inspect like the dimensions of the dust sheet. Was it cut properly? But we couldn't inspect [ white on white, a white structure on a white background ], very hard to [Technical Difficulty] rules-based code to say what of the structure is good, what is bad. But with AI, you can train it and you can teach it and say like this is good or no, this is folded -- this is a normal structure, but here it's folded and it's not good.

So in that regard, basically enabling them to sell more machine vision systems to such a customer. So that's really what AI does. And I would say, over the last 2 to 3 years, AI basically progressed in -- on the product side, on the feature side, maybe in 2 angles. One is deep learning and the other one we call edge learning. So think about edge learning, you basically -- you are on device, you're not connected to a cloud. You use the existing compute power of the device and you can train it.

We have our easy-to-use products. You maybe train 5 to 10 pictures, right? It has a prebuilt model in there, so 5 to 10 pictures [Technical Difficulty] good quality of the model and off you go, you can expect doing pretty good task with that for that inspection. But then there is very hard type of inspections like the glass bottles, you may need deep learning. And that means for deep learning in the past, you needed to have the power of the cloud. That means you couldn't do it on the device.

And basically, what you did is you did what we call a PC-based vision. You had a laptop standing somewhere on your line and then you train in the cloud and you're always connected to the cloud. And customers don't like that, frankly speaking. They have cybersecurity issues. They may not have Internet. They may have only local area networks in their factories. They have latency issues. So that means going through the cloud actually is a problem for them.

So in that regard, there was kind of a missing link between edge and the cloud. And this year, we launched OneVision and OneVision solved that for our customers. Basically, what it means is like they can use the device, take the pictures on the device, upload it to the cloud, train in the cloud and bring an improved model back to the device. And at that moment, you don't need the cloud anymore, right? So that means you're going from an always-on to an "I only need to be online to train like a virtual training room. And once I'm trained, I can just exist back on the device." So that means we are bridging the edge with the cloud. And that, again, drives tremendous opportunity for additional applications. But at the same time, it makes it so much easier for our customers to go after these applications.

Got it. Okay. So we've got one more question left. So in the age of AI, how does Cognex differentiate itself so it doesn't become disintermediated by the next AI -- native AI competitors?

Sure. No, absolutely. So it's a great question, and we talked a lot about that at our Investor Day. So in that regard, first of all, what are we solving for our customers, right? We need high accuracy. We need high speed because production lines can move pretty fast. We also need scalability because very often think about like you produce maybe today, you produce a shampoo and maybe tomorrow, you produce the shower gel and maybe you have a different version of shampoo. So you have variability.

So that means you need to have scalability. You cannot just have a solution which solves, you calibrate it for one thing and then that works, but for the next thing, it doesn't. And then certainly, you need customer experience and needs to be easy to be used and it needs to be cost effective. So in that regard, sometimes getting asked some of the large language models out there, are they going to disrupt what we do? And large language models, as the name says, they're trained on a lot of generic pictures. And that means they maybe can distinguish a zebra from a lion, right? But we are talking about very specific factory automation-related identifications and high accuracy.

So that means we have our proprietary vision model, which we are training with very proprietary information that's highly specific to this area. And these are predeployed models to our devices, and that enables to train them just with 5 to 10 pictures and still have a much better accuracy than these large language models. So that means we beat on accuracy. We beat on speed because you can't go through the cloud, you can't use 3 seconds to make a compute, right?

So you need basically think about like 50 milliseconds kind of response, which you would not achieve with a large language model. They're too big, too generic, too general. And then certainly, the question of the cost, right? Do you need to have clusters of GPUs? Or do you just use kind of that chip processor on a single device. So it's much cheaper in that sense. And then this topic of variability and scalability, where, again, kind of our proprietary machine vision model plays a big role. So in that regard, we feel pretty confident that AI is an opportunity, a great opportunity and much less a threat.

Great. Okay. Actually, I've got one more question. Okay. So Amazon has a plan to have 1 million robots. What is Cognex' role in Amazon's robot project? What is the business opportunity for Amazon?

Right. So I probably a bit hard to talk about very specific customers, but I'll try to give maybe a general sense. I mentioned before that logistics and warehouse automation is -- logistics vertical is low in automation, right? So that means you see still a lot of people walking around moving things. You see people maybe manually scanning things and manually identifying things.

And here is a clear trend over the last 12 to 18 months is that more automation with the sense in mind to take out cost at the end, right ideas to like how much does it cost to ship a parcel or run a parcel through a package through a network of an e-commerce player. So in that regard, Cognex provides several solutions for that. So first, like kind of end-to-end continuous identification code reading on conveyor belts. And then also clearly, we're working with all major robotics manufacturers, some of them who have this as their business to sell externally. Some of them might be just in-house. And they basically use us to be the eyes of the robotic arm or of whatever form the robot will have.

So in that regard, you will find Cognex machine vision systems, very often where you have maybe a kind of a like a picking application, like a robotic arm takes something and moves it into a certain position where it's then being processed. So you will very likely find a Cognex machine vision system either directly mounted on that arm or somewhere overhead so that it basically tells the robotic arm where does it need to go, right? Because it's not enough to just think like, "Oh, this little bit piece is here. You may need to hold that piece very specifically." So we are talking really about very precise guidance of these robots.

So in that regard, when you think about the opportunity for Cognex, think about very much about this guidance type of systems, very likely in kind of a fixed robotic environment, probably less so in the mobile robot environment.

Okay. Is there a question up here?

[indiscernible].

Sure. Yes. So market share overall somewhere in the mid-teens. So it's like a fragmented market. So think about like the 2 largest players together clearly have maybe 30%, 35% together, and then you have a lot of highly fragmented market. Part of our growth algorithm that 10% to 11% growth, which I mentioned before, would indicate some share gain in the market, but I would say it's not the key driver of the growth, right? So that means there is some portion that the market by itself is already growing itself.

That could change certainly with M&A, right? So we said also that we may look at 3% or so growth from M&A, and that could be certainly also part that we would acquire some companies playing in that space. So that means M&A might change that.

Okay. Excellent. That's a wrap. Thank you, Dennis. Appreciate it.

Cool, Chad. Thanks a lot. Thanks a lot, everyone, for your interest.

All right. I think we're live. All right. Great. So welcome to the afternoon session. Really excited today to have Cognex' Dennis Fehr here with us today, CFO of Cognex.

Dennis, I don't know if you wanted to open up with any prepared comments or we can get right into it, however you want to do it.

Maybe a few words. So thanks of all -- first of all, for everyone being here, your interest in Cognex. Thanks for following us. Excited to be here. I think maybe for those of you who don't know the Cognex story so well, Cognex, we think of ourselves as being the technology leader in machine vision.

It's kind of a subsegment of factory automation, where we are working traditionally with the most sophisticated, most complex use cases and customers and have been driving more towards the direct sales approach over the last couple of years broadening our customer base. And in general, we differentiate through our software and more and more also through customer experience, and that allows us to drive attractive growth and bottom line margins.

Yes. So Dennis, it's a good overview. Look, Cognex has like -- has had incredibly good fundamentals over a long period of time, almost 70% type gross margins. In the past, you've had EBITDA margins that have been north of 30%. It's interesting. You've been the CFO now for about 20 months. What's been interesting to me is, you've now introduced a new through-the-cycle financial framework.

I think you've implemented some structural cost actions. And you're changing the way I think the company is running with more financial rigor. When you think about the kind of changes that have been put in place, like what have you been learning through this 20-month period? What's the new Cognex going to look like, and then we'll go from there.

Right. Yes, I think you're making a good point that Cognex traditionally had very attractive margin profiles and lost it a little bit in the last down cycle. And when I joined 20 months or so ago, I outlined 3 CFO priorities. And my first one was to drive profitability. And clearly, while we are not where we have been traditionally, I think we have seen nice increments on 5 quarters of double-digit adjusted EPS growth. I have been seeing it really impacting adjusted EBITDA margin in a positive way.

And so in that regard, start to see changes there. And the second priority I put out was about increasing capital efficiency. And here also, I think we can see like on a trailing 12-month basis, greater than 100% free cash flow conversion rate. We have stepped up also significantly on share buybacks and have been actually returning more than 100% of our free cash flow to shareholders in the form of dividends and mostly buybacks. And then my last one, third priority was about enhancing kind of investor communication.

I hope we did a good step on that one on Investor Day with outlining a new financial framework, kind of strategic objectives and clear outlining and articulating how we want to get there. So in that regard, I feel like clearly looking back at these 20 months, I can say we are seeing impact. But at the same time, it's also clearly that we're not there as a company where we have been traditionally or historically. And that's clearly for us for right, Matt, with the new CEO coming in earlier this year, we still have work to do, and we acknowledge that and -- but at the same time, we're excited about what we can still do.

Yes. So look, for those that are not familiar, you outlined at your Investor Day a new through-the-cycle framework of 13% to 14% revenue growth, which embedded 10% to 11% organic growth and 20% to 30% EBITDA margins. So let's kind of peel back the onion and how we're kind of thinking about these targets longer term, and then we can start thinking about the near term as well, right? So from a longer-term perspective, 20% to 30% EBITDA margins, super wide range, right? And it seems like this year, you're probably going to end at the lower end of that range. How are you thinking about like the progress from 20% to 30%?

Yes. See, I think maybe as an additional context, 2024, we ended with about 17%, 1-7. So in that regard, clearly below that range and also absolutely acknowledging that 20% to 30% is a large range. But for us, it was important to put out a range where we have a credible line of sight to get to. And when we came out at Investor Day, we said like we want to be in this range latest in 2026. And if you take on our Q4 guide, implied guide for the full year, that basically would mean that we're already achieving the 20% a year ahead of our schedule.

So, in that regard, we are definitely positive in the progress which we are making. And then for us, we are thinking really in milestones when we think about the time ahead, right? So the next big milestone from here would be to achieve 25% kind of sustainable number. And sustainable, I mean like -- I would like to be at 25% also at the bottom of the cycle and not like in the middle or in the upper part of the cycle.

So, in that regard, as we're now more in '25, more at the lower end of the range of this 20%, we're certainly still 2 to 3 years away from this 25%. But it's kind of the next number I have in my mind where I would like to get to. And the question of how fast we get there is really then about growth, right? I can get there in my mind also about cost management, but certainly, the more growth I can get the faster I can achieve this 25% and it will be then the question, does it take 2 years? Or does it take 3 years to get to the 25%. And then certainly, eventually, I would like to see even higher numbers, but that's the kind of the milestone after the next milestone.

Okay. So let's -- so interesting. A couple of things that you said there, right, which were -- some of it is going to be growth dependent. So the big question is how much growth, right? Because I don't think it's 10% to 11%. I think it's probably something lower than that. So why don't we start there? So if you get to like a 25% type margin in the next 2 to 3 years, what do you envision from a growth perspective to get there?

Right. So I think what we -- when we talked about the growth framework, we clearly said that's a through-the-cycle growth. And then at Investor Day, we talked about that there's 3 phases of a cycle. So there's an initial phase of the cycle, typically like mid-single-digit growth. And that's kind of what we said on the last earnings call, that's where we feel like we are right now. And we believe that with this mid-single-digit growth, we can still drive a bottom line growth of 20% -- bottom line growth, I mean, like adjusted EPS.

So we can still drive outsized growth by really taking OpEx and either flattening that or even shrinking it. And then when we eventually will reach the second phase of the cycle, which typically has more outsized growth, then we are thinking more about like OpEx growth maybe half or less than half of the revenue growth, and that would basically then also lead to outsized bottom line growth. In that regard, when I say like I can reach 25%, I don't need to be in the second phase of the cycle, but it would just take a little bit longer more 3 years than 2 years if we would not hit the second phase of the cycle.

Yes. So for somebody who's covered Cognex for a minute, like the way you're talking about the financial leverage is a lot different than the way the company used to be run before. It used to take a lot more organic growth to really kind of see the bottom line performance as well. So it's great to see, I think, like the operational discipline and the rigor that you guys are bringing to the organization.

When -- so we'll get to growth in a second. So when you think about the levers then just on the cost structure, so let's just start with OpEx, right? How are you thinking about how much opportunity there is? Is it toggling back just on variable expenses? Like where -- like what is the opportunity within OpEx?

Right. So when we described at Investor Day, our path to get to this 25% to 30%, we put out an adjusted EBITDA margin and what's really very heavily geared on the OpEx side, right? So we said 500 to 600 basis point OpEx efficiency and then almost the same 500 basis points additional leverage. So that means that's really where the majority of the bottom line improvement comes from. And then certainly, OpEx is a wide field. So I sometimes get asked like which part of the OpEx you're really referring to? Is it SG&A? Is it GA selling? Is it on the R&D side?

And I said it's everything basically. I think we clearly have opportunities on the R&D side, where with our new platform strategy, which we are harvesting right now, right? That was basically something worked on for the last 3 or 4 years to have a common software architecture across all product lines. That means we're creating engineering efficiency there. Now we are introducing kind of AI-assisted coding for our software engineers. So we have huge productivity gains in the R&D side.

And then on the SG&A side, I clearly think GA, there's work, and we have done quite some work there, and we'll have more opportunities there. And I think the biggest piece probably is the selling side. I think some of you may have followed us now for at least the last 2 or 3 years, remember the days when we talked about emerging customer initiative. And that was a lot about more boots on the ground and with that also more OpEx in the P&L. And since then, we shifted more towards talking about sales force transformation.

And here, some people think we just rebranded the one thing into the other. But I think it's a very, very different approach at the end. I think both emerging customer initiative and sales force transformation had the same objective. That means going beyond existing core of the customers and going to broader customers and increase the count of customers. Objectives are the same, but the approach is very different.

Emerging customer was a lot about more people and then give them easy-to-use product to sell in a stand-alone sales organization, where sales force transformation basically is focusing very much about sales force efficiency and thinking about how can we leverage kind of process and tools and data-driven analytics to make a more efficient sales force, also changing the management style of our sales organization. It's not a stand-alone organization anymore. It's bringing it all together with 3 distinct different selling styles.

And then it kind of goes beyond just easy-to-use products to a more holistic customer experience. So in that regard, while sales force transformation still has this objective to increase the customer count, it has also a very strong objective to increase the sales force efficiency. And that gives us basically coming back to the EBITDA and margin expansion discussion, that gives us this opportunity to do both to increase customer count and be efficient on the OpEx side as we are going away from this more boots on the ground concept.

Yes. Super helpful. So if I parse out those 2 elements, I know there are more than 2 elements, but 2 main elements. You take a look at the R&D perspective, you used to spend 14% to 16% in any given year. I mean, it was like clockwork, right? It sounds to me like -- not to put words in your mouth, but that sounds to me like there's probably a few hundred basis points of opportunity just in R&D.

Yes. I think there's probably kind of a low teens, and that would give you maybe 200, 300, 400 at most basis points, but it's a good number to bring down to the bottom line.

Okay. Great. And then on the OpEx side, with the shift, and that was a really good explanation of it. It sounds like -- I'm remembering about where we sit today, and I fully recognize that your business is short cycle. Is that kind of like the right framework then for next year? Like how -- give us a little bit more color on that mid-single-digit comment.

Yes. No, thanks for bringing that up. I think I would like to shift everyone attention first to that we are a short-cycle business with also only so much of visibility into our end markets. So think about like from a funnel perspective in factory automation, where we have like a 3 months visibility. And then if we, as a management team, want to extend that view, we use kind of macroeconomic data like the PMI and the PMI gives us a snapshot in time to say where is PMI today that maybe lets us get a view like from month 4 to month 6, maybe to month 8, gives us an indication.

So in that regard, when we talked about the last earnings call and we said like, hey, PMI today doesn't show an inflection. That means on that basis, we, as a management team are basically thinking about how do we run the business in such a macro environment. And I think what we wanted to bring across is that like as long as we are seeing that macro environment is not inflecting, we will keep on being very tight on cost. We will work the OpEx side to achieve that mid-single-digit growth with maybe 20% or so adjusted EPS growth.

Now keep in mind, this is a snapshot in time. In 3 months or in 5 months, PMIs could look different. And we, as a management team, don't have that crystal ball to say like how will that look in 5 months. So could in 5 months, PMI show a very different picture about either more growth or less growth? Of course, it could. But I think what I really want that everyone to think about is if we can achieve on a mid-single-digit growth, 20% adjusted EPS, you can also imagine what that EPS growth could be if PMI would start to inflect. So I think about the opportunity there.

Yes. I think that's a really good way to contextualize it. And the reality is you are a short-cycle business. You've only given -- historically have only given guidance 1 quarter out, although you're giving more information now than we've seen historically, which is great. Let's then take -- let's talk about your different end markets, right?

So let's start with logistics. So logistics has seen a nice rebound for the last, I think, 7 quarters, right? You've seen double-digit growth in that business. It seems like a lot of that is coming from just increased penetration of the warehouses at this point with automation. Talk to us about what you're hearing from your customers, the sustainability of this business continuing to grow at this clip into next year.

Right. So yes, overall, the last 2 years have been very great in logistics, and it's part of a different type of cycle than we saw in the 2021 peak, where it was all about building out more capacity in terms of square footage. So this cycle is all about more automation and taking cost out of the network and trying to optimize basically the cost per parcel or package shipped. In that regard, we think that provides the basis for a much longer-lasting cycle as we can see that the penetration of automation is comparatively still low in that industry.

And that gives us really a view that we could see really like this multiyear, 5, 6 years growth. But then at the same time, growth is never linear. And in that regard, after 2 years of outsized growth, I think there's a natural base effect that growth rates would come down. And then second, would be someone think like, oh, the industry may take a pause and maybe would see a lower growth just to absorb everything what was done before more capital is than being allocated in maybe 2027.

So in that regard, we started to feel like that in the broader market, we already started to see some of that in the second half of 2025, where growth was more geared towards larger customers. So in that regard, that makes us think could be 2026 a year where logistics growth rates are a little bit lower for both the base effect and then a general like just absorb all of that.

And then at the same time, we're seeing other verticals like consumer electronics, which hadn't been growing for 3 years and which we are seeing to start coming back to growth. So we're basically thinking right now that maybe '26 will be more about logistics slowing down a little bit and maybe consumer electronics picking up some of that.

All right. So talk about that because consumer electronics has also been growing in 2025, and you benefited to some degree from manufacturing getting -- going from one region to the next, right? So China to India, et cetera. So you kind of think about the 2026 growth rate, you've got form factor changes, which are also super important. And I know we will find out a lot more in like the April time frame from your big customers. But what gets you -- like what are you sanguine about in 2026? And why do you think the growth rate will accelerate?

Yes. No, our first, consumer electronics, first time, a small growth in 2025 after 3 years of basically no growth or decline, if you want to say so, also kind of compared to historical levels, pretty compressed. And we saw in this year really a couple of things. So first of all, I think what we really like to see this year is that it's broad-based. So that means not limited to 1 or 2 larger customers, but that we are seeing it broader in the industry.

And there are different angles to that. There are clearly shifting -- shifts in supply chains, which are happening this year, which we think can extend into next year as well in terms of where our device was assembled. And then we think there could be in '27 and '28 kind of the component piece like where are being components manufactured. And that could be even that you would see them not shifting within Asia, but from Asia actually even into the U.S.

So in that regard, the theme of recalibration of global supply chains, we think clearly has a runway beyond 2026 also into '27 and '28. You already mentioned kind of form factor additions. That's clearly an interesting play. But then it also -- it seems what we are seeing and reading as well as that clearly, the pandemic drove a lot of kind of outsized end-user consumer spending on such devices.

And there seems to be a natural refresh cycle coming up already starting to see this year, some of our customers talking about that publicly, and that could certainly also accelerate into '26 and '27. So in that regard, I would say all the fundamentals more pointing towards that consumer electronics is going to accelerate, but also very clearly from a low bottom, right, from a really compressed level, which certainly gives the upside.

Yes. No, that's great to hear. I mean, look, I remember the form factor change, the iPhone X in 2017, all that shift to OLED. When you think about those form factor changes, I know it's probably hard to gauge, but is there anything that is comparable to what we saw in that -- 2017 time frame was a great year for Cognex and the growth rates were incredible, largely driven by electronics. So yes, is there anything that you see out there right now that is really kind of shifting that could really accelerate the growth rate?

And see, I think there's certainly -- clearly, if you change for the entire product lineup, you make a complete makeover that certainly drives really outsized growth. And when you change maybe one -- or add one form factor rather than another, it's clearly a different type of growth. But clearly, I think that's not a 2026 topic probably, but I think there are a lot of companies out there that are working on what's coming beyond the smartphone, right?

I mean at the end, we are almost like 20 years on this kind of smartphone era. And I think -- I definitely think there will be the day coming where we all look back and say, like, oh, yes, we all walk around with these weird things. And I can't say whether it's glasses, right? Clearly, there are some company out there, Meta had some early successes with their classes. So it will be interesting to see what comes after smartphone. But I think clearly, the companies are thinking and pushing into this direction that this form factor of the smartphone is not the end of the consumer electronics innovation cycle. I clearly believe into that.

Okay. Great. I'm going to keep going on some of the end markets and -- but I'll open it up to the audience for questions as well. Let's talk about the consumer packaging has been a nice -- seen nice healthy growth in 2025. It seems like a lot of that is driven by internal initiatives. So maybe just no pun intended, unpack like what's been going on there.

Yes. No, see, I think packaging, maybe for those who are not so familiar with packaging, we basically describe like food and beverage and then fast-moving consumer goods. And we call it packaging because it's all about package inspection type. So it's really an application name, but vertical markets behind there, fast-moving consumer goods, pharmaceutical, food and beverage. And it's really, to some extent, you could argue compared to logistics and consumer electronics is a much more boring market because it doesn't go through these innovation cycles where you all of a sudden have new innovations coming up.

You don't have kind of this potential outsized growth, but it can be a very steady kind of attractive growth for us in that way that it provides more stability into our growth numbers, which traditionally have been very cyclical, right? Just underlying these verticals are much less cyclical by itself than consumer electronics, right? So in that regard, we like that to bring more stability into the growth and into the number overall. And the success in this year is really driven by our kind of sales force initiative in that regard. And it's nice to see that, right? I mean certainly, especially if you go back to 2023, there have been outsized investments and certainly would like to see the return on that.

And is that -- like is it fair to say that, that business for you is still fairly underpenetrated and because of the investments that you've made, like this should be a growth avenue for you going forward?

I think absolutely. I just would caution, it's not a market where I would expect you would see like 20%, 30%, 40% growth rate. But if I -- we can get it to that it's growth for 3, 4, 5 years at high single digits every year that I would call success in that market.

Great. Auto -- wherever you want to go with auto. But I guess maybe -- I'm sure I can do this, but if you could just level set how much auto is down for you? And then like whether you've now -- it seems like you've now seen like a bottoming, but go ahead...

Right. So we said last year, it was down 14%. It was the one market which was down. All our other markets were flat or up. And then this year, we talked about it would be declining at a lower rate. So think about more like high single digits. But I think positively that especially when we start looking at it sequentially, that it starts to show signs of stabilization. I think we probably may want to see another quarter or maximum 2 more quarters before we call it really a bottom.

But I think we are close or at the bottom. And interestingly, we start to see a geographical diversification, right? So that means the Americas is actually the market recovering the fastest and where we see back to growth already versus Asia kind of more neutral and then Europe still going down. So in that regard, a bit geographically different. But clearly, it's a market where I think I'm not having too much expectations for 2026. So base scenario, I would call it flat.

And then I think a question would be, right, if you look at some of the automotive metrics that certainly the fleets which are out there, they're getting more older and older because consumers are holding back because of high interest rates. So certainly, the moment where interest rates come down again, would there some an inflection point that consumers would start to replace some of their older vehicles. I can't call exactly when that will be, but that opportunity is clearly there. Is it in '26? I think not, but beyond that, perhaps.

Is your business over-indexed to a particular region? Like are you over-indexed to the U.S. versus China versus Europe? And then similarly, EVs versus legacy ICE platforms?

Yes. First question maybe on regions, and I take this as a general question, not just for auto.

Auto. Auto, yes.

No, it's fairly nicely distributed. So in that regard, almost like similar shares, Americas, Europe and Asia. So that means sometimes getting asked, are you also good with like Chinese OEMs. So we're also doing good business there. Think about India, Japan -- even Japan, where otherwise a tough market for us. We're having good business there. So yes, it's -- I think we're generally geographically diversified on auto.

Great. I'll open it up to the audience, see if there's any questions or else I'm happy to keep going. Okay. So I'm sorry, somebody has a question? Okay. So let's talk about gross margins. I know it's -- I know that it's not part of your financial framework anymore, right? It's organic growth, EBITDA margins.

But gross margins this past quarter, adjusted for the 1 month of Moritex and the commercial agreement, [indiscernible], right, for the quarter. What -- like what was -- what caused like there's a deterioration of like roughly 170 basis points? Like what was -- what drove that deterioration this quarter?

Right. So yes, maybe coming back to your initial statement on gross margin. So basically, we think at the end, first of all, that we create value for our shareholders if we drive bottom line. That means adjusted EPS growth first and foremost. And that certainly comes both through top line growth and then overall managing the P&L. And that's where we're focusing on. And I think the third quarter was pretty strong in that regard, right? Adjusted EBITDA margin, 450 basis points up year-over-year, adjusted EPS almost 50% up year-over-year.

But clearly, gross margin declined by about 170 basis points. So a fair question to say like, hey, what's happening on the gross margin line. And clearly, right, to achieve bottom line, we can work on OpEx and gross margin as a piece. I think if you now zoom out a bit beyond Q3, then you see over the last couple of years, gross margins declined from mid-70s now into the high 60s. And I think the strongest effect in there is clearly is a mix, right? So you had 2 strong effects.

So first, the Moritex acquisition late 2023, which basically took down gross margins by 200 to 300 basis points and then a mix effect by logistics growing and factory automation not growing. And these are really the strongest drivers if you take this longer-term view. But then there are 2 other effects, which I would call really gross margin deterioration versus the first 2 I just described are really mix, right, and not really a deterioration in itself, right?

One effect as we talked mostly late '24 about was China pricing, right, so that we saw a much stronger competition and pricing happening in China. And the good news is that I think in this earnings call, we already talked about it that we saw pricing in China stabilize. And I think we definitely rather see on a global scale that pricing can be rather an opportunity than a tailwind going forward -- sorry, a headwind going forward. It clearly has been, but I think there's an opportunity for us as a company to turn that around.

And then the second effect in gross margin, again, it's more a dilution effect that's tariffs, right? So we basically have been saying that we are able to offset the cost of tariffs on the bottom line on a -- think about like a dollar-for-dollar basis, but that clearly has a dilutive impact to gross margin of about 50 basis points. And so in that regard, I would say there have been topics about which kind of brought gross margins down on deterioration, but not on a level of 170 basis points.

The strongest effect of that one is mix, right? So if you think about on Investor Day, I presented this adjusted EBITDA margin walk and one piece of there was COGS and pricing. And we said we want that to be positive. Clearly, if I would show you that chart today, it would show a negative. But I still think that, that can turn around into a positive. And I think Matt and myself are pretty committed to that.

Okay. Great. So if I think about kind of the framework then for 2026, based on what I've heard you say today, it looks like from a growth perspective, mix is probably going to be less of a headwind, correct, right? Because logistics maybe not growing, but [indiscernible] may be growing faster. China pricing stabilizing, less of a headwind. And then tariffs, I mean, have you seen most of the impact from tariffs already? I guess...

We still have like first quarter, right, like it started in mid of April last -- this year, sorry. And so you will still have like a few basis points. But basically, where you're getting to like if you think about 2026 gross margin, would you see that further sliding? Or would it stabilize? I would say like we would think much more about a stabilization than a further sliding.

Okay. Great. That's where I was getting to. It sounds like it's bottomed.

On an organic side, for sure. I would say the inorganic side as a different conversation, right?

Sure. And so last question, the inorganic side, right? And we only have about a minute left. But maybe part of your longer-term framework is to do more M&A. Talk about the pipeline and like how you guys are thinking about potentially putting more capital?

Right. So when we did Investor Day, we talked about the growth algorithm, and we said 10% to 11% CAGR on organic and then we said like 3% plus on M&A. I think what we wanted to bring across was that -- is that we said like we are ready to consider opportunistic M&A as part of the growth algorithm.

But at the same time, we didn't want to bring across like, hey, we're trying to offset anything of the core -- of the core growth, but more like to say like we are open to these M&As if we find the right target where we feel like it has a good fit. It brings strong synergies and Cognex is the right owner. So in that regard, we don't feel a pressure that we could sit here still in 2 years, and we wouldn't have done an M&A, and I would still feel good as long as we delivered on the rest of our financial framework.

Great. So we've run out of time, but thank you very much for coming here today. Dennis, great seeing you.

Yes. Thanks, Joe, for having us. I appreciate it.

Thank you. I appreciate it.

Good morning, everyone. I'm Tommy Moll, I'm analyst here at Stephens. We appreciate your joining us in Nashville this week for the annual investor conference. To my left, I'm joined by the CFO of Cognex, Dennis Fehr. Dennis, thank you for your time and insight today.

Yes. Thanks, Tommy, for having us. Thank you, everyone, for being here and your interest in Cognex.

So this conference is intended for both specialists and generalist investors. And with that in mind, I'll start with some introductory questions for the generalist in the audience who maybe aren't yet familiar with Cognex and then we'll move to some of the more specific questions. If at any point you want to ask a question directly by all means show up a hand and ask 1 or more than 1 question that might be on your mind.

But just to kick us off, Dennis, Cognex is a machine vision competitor. Tell us what that is for those who may not have dug into your market before?

Yes. No, absolutely. So think us about like a software company, software on device. And that means we are working in factory automation and warehouse automation. And maybe to give you a few examples what we do, I would reference a customer visit I did earlier this year. So I was in France and visited a famous kind of cosmetic manufacturing or brand and they are manufacturing only in France. And so we went into that factory and walked the line and saw a couple of applications. So basically, what is this company doing? Obviously, they create they would call it magic probably in kind of a cream form. And at the end, it goes into glass bottles and then these glass bottles at the end get packaged into kind of some carton packaging and being sold on shelves, right? So think about that.

In that regard applications could be, for example, that they need to feed in these glass bottles into the production line, and they have some robotic arms, basically, they have pallets of these little glass bottles coming up and the robotic arms coming and picking these glass bottles up and placing them on the production lines. We have the guidance of that robotic arm that would have a machine vision system to really identify where are the bottles and where to place them. So it's one of our application's guiding.

And then from there, it goes further, that these glass bottles going further down the production line, eventually, they may fill the cream to it, and then you will want to know like, oh, maybe along this way, was there any damage to the glass bottle right? One of the big issues would be a little glass splinters maybe even drop into the cream or some outside defects. So that means we do such kind of inspections. That means we have the cameras placed there and the cameras would look at these glass bottles and would see other damages in the glass. So there's an inspection application as well.

And then as it is also a kind of highly quality environment, they would like to have some serialization of their products. So they have little numbers printed on these glass bottles, very hard to see. And it would basically in each step of the production would read out the serial number so that they basically can tie back the step of the production to that particular glass bottle. So it means there's some kind of identification application with our cameras as well.

And then maybe the last application, as an example, would be a measurement application, a gauging. In this case, for example, before they pack the glass bottle, the filled glass bottle into the kind of that carton wrapping, they want to make sure that the carton is really cut out in the way they want it. So because if they feed in the carton into the machine and it's not cut in the way, then they get a jam that means they want to inspect and measure basically is the dimensioning of this carton in the right way? So there is some kind of this gauging application as well.

So think about it along this production process, there are different areas and applications, which we can solve, and that's kind of what we bring to this type of customers. And we are active in different verticals, maybe to wrap that up, right? So this was an example. We call this market really packaging because it's all about packaging, so it's food and beverage, health care, cosmetics, we are active in the logistics vertical. Think about warehouse automation, a lot is about code reading there and then automotive is a big market of us, consumer electronics kind of device manufacturing and then semiconductor, semiconductor manufacturing. So these are kind of our top 5 verticals, so a diverse set of markets we sell into.

Let's think about how artificial intelligence factors in here, Dennis, first on the opportunity side. This is something that Cognex has talked about for a while now. Give us a sense of how AI can improve the ease of use and expand the use cases?

Right. So we think AI is one of a great opportunity for Cognex, right? So we are a 40-year-old company, and we have been basically the technology leader in that time. And that was basically when we talk about what we would from today's perspective called rule-based software architecture. That means you have very smart people sitting there writing codes, saying what if this, then that, right? Back to that example, maybe with the glass bottle inspection, we would try to write a code to say, if you see this, then it's good or bad. And you can do a lot of things with that. But it can become very complicated to write such a specialized code.

And then the question is, is it repeatable? And that's here we're really AI model. So basically, we created our proprietary vision model. Basically, which then is loaded on devices and then the customer only needs to train a few of their own examples. In this case, like, for example, some of these glass bottle inspection, you would need to show a couple of pictures, good, no good and the model would learn that. And with that, you basically achieve higher accuracy, that means you can solve for more use cases for the customers, maybe which you couldn't do in the past.

Like in the past, without AI, it would have been very hard to inspect like the top edge of the bottle for glass damage inspection because they are so small, in rules-based, you could just not do it and with AI-based you can. So that means all of a sudden, you have an additional use case. It means the customer instead of having a person looking at it, out of a sudden basically can put one of our cameras there, and that means we are creating basically market with that, and that's the great opportunity which we see is bringing AI-based technology into the machine vision market.

Now on the potential threats from AI in particular open source substitutes, how do you protect against what I would call a good enough solution that may cost a lot less than Cognex?

Right. I mean, I think I would feel like that's probably one of the biggest misunderstood part in some of the Cognex story over the last 12 months or so. A lot of people thought like, oh, are you being disrupted by AI, all these hyperscalers creating these large models and will these large models all be able to do what you can do very easily. And I think we showed at our Investor Day in June this year that the different -- there are really 4 distinct topics which you need to have to be successful in this market. So first, you need to have high precision, right?

So that means you can't miss a damage on that bottle and then glass has fallen and you miss that. So that means precision, very high accuracy, you need to have. And for that, you really need to drain it on -- create this proprietary vision model, which we have. It really is very highly specialized to the applications, which we do in our markets and kind of generic language models can't solve this. They might be trained on a variety from pictures of horses to mountain landscapes, but our models are really trained on very concrete and detailed factory automation examples. So precision matters and we are -- we can prove we are better there.

Then second, speed matters a lot, right? So in this example, where I visit this French customer, the bottles move so fast, you can't see them with your eye, right? It looks like maybe they move very slowly, but they move so fast, your eye can't see the individual glass bottles anymore. In that regard, you can't use a very large language model because the processing time would be much too high. So you need to have a very specialized model like ours, and then you need to bring it on device. You can't do it with the cloud because your connection time, your latency is too long. And therefore, you need to have that capability to match the hardware with the software, so to say.

And then you want to have scalability. That means, right, you have a manufacturing line, but today, you produce product A, but tomorrow, you may want to shift to product B, right? And then the bottle might look different, the colors are different, the shapes are different and you don't want to recreate everything. So you want to have scalable models. And that's where our models help a lot.

And then the last piece is ease of use. You don't want to have very complex. You want to have as much as you can plug-and-play solutions. And that's, I think, where we -- especially here, we invested a lot and where also AI helps kind of self-tuning, self-setup where we created this type of features. And I think that's how we differentiate, and that's why we're not worried about this type of larger generic type of models or good enough type of approaches.

Thank you, Dennis. I want to move on to discuss some of the elements from your recent Investor Day, just starting at the top and working our way down the P&L. In terms of the multiyear sales outlook, you framed it in the low double-digit range in terms of the compound rate. One of the key levers to enable that was doubling the customer count over roughly 5 years. What are the elements of the strategy that you're pulling together to achieve that?

Right, so here, I would say the growth algorithms, which we introduced in -- at the Investor Day, really looked at the vertical markets, which were -- which I mentioned before, which we're serving. We then basically looked at and said, like, what's the underlying growth rates in those vertical markets. And they are clearly not in a -- in this low double-digit range. They're maybe in a low single-digit range. But then we see a strong opportunity by increasing market penetration. And market penetration can come from 2 areas, the AI side, which we just talked about, like that means creating more applications and with that, driving more penetration.

And then the second piece is what Tommy just referred to it, that means it's like bringing machine vision to more customers. So we traditionally, as Cognex, we have been serving kind of like large-scale, sophisticated customers, and we saw that there's a long tail of the market as well. And -- that almost brings me to, I would say, the second point, which is probably has been most misunderstood about Cognex in the last 12 months or so, right? I talked about the AI and how we think that's an opportunity. And then the second piece is about our transition from emerging customers to sales force transformation, right?

So that means maybe in 2023, we launched an initiative called emerging customers. And that means like we said, like, let's put boots on the ground and go to more customers. So it was all like expanding sales force to serve more customers and give them easy-to-use products. It was a good strategy to say, like, let's tackle that long tail of the market with really the focus to create more customers. But since then, we have really evolved what started as an emerging customer initiative to what we now call sales force transformation. And we think that's not just a rebranding that's really kind of a next step in the evolution along that line.

So if you think back emerging customers, boots on the ground versus if you think about sales force transformation, it's -- first of all, it's not stand-alone. It's really creating a combined structured sales force with very dedicated sales profile. That means we thought a lot about like what type of sales profiles do we need selling to what type of customers. We structured that in 3 groups. Basically newer, let's say, smaller customers than kind of the larger existing customers and then machine builders, which are very kind of spec in type of sales approach. And then on top of here, and here's really a very distinct view is that we are focusing a lot about sales efficiencies and data-driven sales analytics. That means bringing CRM tools and then also the way how we manage our sales organization in terms of KPIs, leader boards, and how they perform on a day-to-day basis, on a weekly basis, on a monthly basis.

And that means that we moved basically from more boots on the ground towards a focused and sales efficiency driven kind of sales force transformation. And that means the sales force transformation, we not only want to reach more customers, but we also want to increase the efficiency of our sales force and basically to optimize the dollar spend per dollar booked, and that's really what is key difference between where emerging customer initiatives started, and that's why we think it's really part of an evolution. And I think a lot of people maybe thought it's just a rebranding when it's not.

Moving down the P&L here. I'll hit a couple of the elements in your expense lines, and then you can answer it in whichever order makes the most sense. But on the gross margin line, you moved away from an explicit target there. On the R&D line, you're emphasizing much more than previous the efficiency of that R&D spend. And more holistically at the OpEx line, you've talked about more dynamically managing those expenses through a cycle. So I've thrown 3 different themes at you to hit on them in whatever order you choose.

Right. So maybe start on that gross margin piece first. So first of all, I think, right, we are say, attractive gross margin company traditionally slightly above 70% right now, maybe in the high 60s gross margin range. So it's an important level for us, right? But I think in the past, Cognex, I would say, almost over-indexed on gross margin, and I would say almost from also internal decision-making to say like are we focusing on gross margin? Or are we looking at shareholder value creation, which we think is much more in terms of adjusted EPS growth.

In that regard, I think there's a bit of a shift in terms of financial management of the company happening which, however, does not mean like we're not caring about gross margin, right? We just think like it's one lever, but it's also very clearly that high gross margin we have, COGS, our COGS are smaller in absolute dollars than our OpEx. That means there's much more we can work on in OpEx than on COGS. And that's why I think OpEx has become a much higher focus on where we talk much more about it in the last -- especially since Investor Day, where we clearly also outlined that our path to higher profitability is through OpEx efficiency, right?

So in that regard has been clearly a focus area here. And I think over the last 3 quarters, we made great progress here with revenue up in each of these quarters and adjusted OpEx in absolute terms down. So really driving nice efficiencies and flow through to the bottom line. And yes, it has different components when we think about the OpEx efficiency. So there's clearly the R&D piece to it, where we have 2 things. So first of all, thinking about how we do capital allocations in R&D, that means bringing more financial metrics when we make decisions about into which R&D projects we allocate funds and where not. So I think that's a shift something which you can't see from the outside, but it's happening on the inside.

And then there's clearly efficiencies, which we drive, right? So we -- first of all, over the last couple of years, we migrated from a product line software stack to more a platform architecture. That means we are creating synergy effects across product lines and software coding and then adopting AI-assisted coding. It's a big productivity driver in our engineering function as well. And that allows us basically that we think we can achieve the similar level of innovation with going forward or as a midterm target kind of rather a low teens in percent of revenue R&D spend versus the mid-teens in the past.

And then, yes, we already talked a bit about the sales force efficiency, where we really transitioned from that more boots on the ground towards like let's drive really sales force efficiency, optimize that dollar spend per booking. And that means we think we can also drive an optimized SG&A in percent of revenue over time. And that's kind of -- is very much part of driving profit bottom line growth, both on adjusted EBITDA margin percent as well as in terms of adjusted EPS.

Dennis, to compare what you've described in terms of margin others in the market is sometimes difficult because there aren't a whole lot of great direct comparisons. But Keyence is one that often comes up, in particular, in terms of the gross and operating margins there. Why would you say that your aspirations are perhaps more modest by comparison?

Right. So I think, there are 2 things, right? So first of all, where are we against our own historic comparison, right? So historic average has been 28% adjusted EBITDA margin. And last year in 2024, we have been only at 17%. So we first have work to do to get back to where we have been historically. I think with our implied guide for Q4, we're kind of starting to see maybe a 2 in front of that number. And then certainly, our next milestone would be to get to like a 25% number where we said like that's the number which we want to see as kind of the minimum even also in a down cycle, right? So that means avoid that we are getting compressed on adjusted EBITDA margin.

And then certainly, the question then comes like why would you -- where could you go from there? And then people point at Keyence and say like, hey, how can they achieve even higher gross and operating margins? I would say on the gross margin side, it's a simple statement. They work in different markets than we do. I mean, right, I would say our factory automation gross margins are very comparable to what they have, and they are factory automation only. They're not in warehouse automation. So it means there's just a mix effect.

And then I think where they are very well set up is in their SG&A efficiency, right? I think they, a, first have a very good playbook, which is kind of what we are driving also a bit into our sales force with the sales force transformation. But then b, they certainly have also a clear in this advantage. We are a pure-play machine vision company, and they are more diversified factory automation player. And that means with that, they can achieve higher sales force efficiency than we think we can do as a stand-alone machine vision company. And that's kind of a bit where our M&A thinking comes into play, right?

As part of Investor Day, we said like a part of our growth algorithm is also inorganic growth and clearly adding additional products maybe in adjacencies to machine vision could be part of that, and that would really then drive further sales force efficiency and certainly would, in the long term, enable us to go beyond the adjusted EBITDA margin target range, which we have announced so far.

Last question for you. Dennis, on the Investor Day themes. If we pull all of this together, should we -- is it fair to say that if you achieve what you set out the P&L will be less cyclical and more boring in the past? And I do want to get you on record here, can we still expect profligate spend on Halloween and annual reports?

We're having a lot of fun on Halloween and with annual report. So we definitely don't want to give up on that fund.

Sacred cows.

As CFO, you want to say like there are no sacred cows, but I would say there are just things they are fun. And so well, we'll not give up on those. And then on the cyclicality side, I mean, clearly, was going for a broader base of the market, that's clearly part of the strategy. But are we there today? No, we're not, right? So it's really a multiyear journey. And so in that regard, I would say we are definitely still a more cyclical and volatile company, both in the up and the down as many other companies, but I would expect that to change over time.

Last question for you on the P&L, and then we'll pivot to Q&A. Early 2026 commentary you offered on your most recent earnings call, you basically said if we look at today's PMIs, the rough math would suggest mid-single-digit sales growth next year, but that with continued discipline on the OpEx line, you could feasibly achieve, call it, 20% EPS growth. How do these comments tie back to some of the themes you laid out at Investor Day in terms of managing through a cycle?

Right. I mean, yes, I think, as we -- as I just concluded the prior remarks, we are a cyclical company. So that means we have basically looked at typically like your 5- to 7-year cycles, typically in 3 phases, maybe 2 years or so kind of initial phase with moderate growth and then 2 years or so with high growth, outsized growth and then kind of 2 years, the tail end of the cycle down to flat. And basically, if you think back the last -- the peak of the last cycle was in 2021, you had then kind of flat and down in '22 and '23 and probably '24 felt like the end, the tail end of the prior cycle.

And at the moment, you could think that 2025 is the initial stage of that cycle where you see that type of moderate growth. And then that's where we really said like in this phase, especially compared to where we are in profitability, that's where we really want to drive outsized bottom line growth and some of the OpEx efficiency measures, which we talked about play a key role into that. And -- but at the same time, I would really like to remind everyone, we are a short-cycle business. That means, a, we have a limited visibility from a funnel perspective, right? In factory automation, it might be only 3 months.

And then we use this PMI basically to give us a bit of a view like maybe how could the next 6 months look like, maybe PMI can move fast. So I would say like -- I would, in that regard, say like our remarks were probably like to say like, hey, based on funnel, based on PMI where it is, maybe the next couple of months or a couple of quarters, we would expect a moderate growth, and that's a time where we can still drive very attractive adjusted EPS growth. And then what's coming beyond that, that's very hard to say. That's really we'll need to watch PMIs further.

And certainly, I would say maybe give it a positive spin in that regard, the moment where we see higher growth, the flow-through to the bottom line could be even larger, right? I mean we are typically seeing 50% to 60% flow through to the bottom line of each dollar, which we grow on the top line. So in that regard, think about if you can grow mid-single digits top line and 20% or so adjusted EPS, that could become even more attractive if growth rates go further up.

Thank you, Dennis. I want to pause here to take any questions members of the audience may have. Just raise your hand and fire away.

If you think about the competitive environment in machine vision, are we seeing new competitors emerge beyond the existing competitive side, there are couple of Chinese players that continue to get more and shares [indiscernible].

Right. See, I think if you zoom out a little bit and look first over a bit longer period, you would say that competitive landscape is almost unchanged in that sense that like the biggest competitor in factory automation always has been Keyence and the largest competitor in logistics warehouse automation was always SICK, a privately held German company spelled SICK. And that has almost not changed for, whatever, 2 decades or so on. And you saw maybe name changes below that, then maybe some competitors entered, some others exited and so on. So you saw things like that happening.

And I would say a similar theme, I would almost, at the moment, think like is happening with Chinese competitors. There are clearly some Chinese competitors in factory automation rising like a Hikvision, for example. But at the same time, other competitors like Omron, for example, have been rather struggling in that space. So that means that for us, it feels more like names are changing, but not necessarily the entire landscape as -- it's also clearly it's still a very fragmented market, right, with maybe the 2 largest players with Keyence and Cognex together by far not even holding 50% of the market. So it means smaller players falling out, other joining. And so in our mind, the competitive landscape is not really changing that much, even so you see movement.

Any follow-ups or anyone else want to jump in? Sure. We'll pivot to an end market discussion, but for those in the audience at any point, just raise a hand and we'll work in here. But Dennis, starting on automotive, during earnings, you mentioned that you're nearing a bottom there. Let's break up the discussion into 2 pieces. First, on the U.S., when would the recent announced -- big investment announcements from the OEMs theoretically be actionable for Cognex? And then we'll move to Europe second.

Yes. So automotive has for us really been the most painful market over the last almost 2 years, right? So in that regard, was the market contracted the most. And yes, on the last earnings call, we said like, hey, we think like that we are nearing the bottom, and I hope that in one of the next calls, I can call the bottom. The interesting thing here is that we see -- start to see kind of a geographic diversification in that market. So that means like North America or the Americas specifically is actually right now the best performing regional market within auto and then Europe is the worst performing and somewhere Asia, somewhere in the middle within Asia, also some differences there.

So in that regard, I think we start to see that the Americas market is coming back faster. And at the moment, I would not know yet if we could call the bottom, for example, in Europe, right? The bottom we could call on the market as a total. But especially in Europe, if you see some of the announcement, if you see how profits have compressed in the last earnings call of some of the major European car manufacturers, especially some of the German manufacturers, that still looks like a market still pretty much under stress in that regard. I'm a bit more cautious about a Europe statement, but yes, Americas looks more and more positive.

When is the pain going to end in Europe? For those of us not as close to the market as you, what's going on there that's driving all of this?

I mean, I think -- see, maybe taking a step back, right? So automotive, so first of all, had the view of a large technology transition and a lot of companies invested. Now we are seeing that also that transition is not happening as fast and also you have different speeds in different geographies, right? Like China leading the pack and the U.S. probably rather going away from this transition. And then that caused a lot of pain and capital requirements for companies and make it hard for them to make investment decisions. And then I would say, especially for the European manufacturers, the tariff situation in the U.S. hit some of them pretty hard.

So in that regard, I think there's pretty much uncertainty. And I would think like at least some of the tariff deals with the EU have now been negotiated. I would think that some of that certainty should come back, but we haven't seen it yet, and I wouldn't be able to give you a time line on it, Tommy.

Moving on to consumer electronics. Trends improved year-to-date in 2025, I think you've mentioned it was the first growth year in 3 years. At the same time, investors have taken note of some recent form factor innovations. Expectations might have gotten a little bit elevated in terms of what that might mean for revenue opportunity to Cognex. So just situate us between those 2 data points, please.

Right. So I mean -- so first of all, change is good for Cognex, right? So that means change in terms of form factors, change in terms of production locations. These are things which typically drive revenue for Cognex. And if you think back about the last 2 peaks of the cycles in consumer electronics, one was in 2017, it was very much driven by a display technology changeover and then '21 was COVID really means different working patterns and different behaviors by end users. So in that regard, certainly, whenever you think about technology changes that can drive business for Cognex, also changes to supply chains moving from China to India or to Vietnam that drives.

And we are seeing some of that why it's the first time in many years, we're now seeing growth returning into consumer electronics. And this year, it's a bit more driven by the change in the supply chains. a little bit less by form factors. As it's a very different thing if you change your entire product lineup a certain component to a newer technology versus you maybe add one more production line in terms of the magnitude, what that does to a production line refitting and build-out.

But in general, I think we think positively about consumer electronics for the first time for a long time. We think about '26, there can be more form factor changes, further supply chain diversifications, component manufacturing moving into the U.S., final assembly probably still staying in Asia. And then eventually, people are starting to think about seriously about the time after the smartphones, right? So you see the meta glasses starting to being sold in millions, not in very small quantities. So it's not as a smartphone is selling today. But it's clearly that there are companies, OpenAI announced some partnerships there in that sense that people are starting to think like, hey, there could be coming the next wave. So in that regard, we think positive about consumer electronics. It's just from today's perspective for us, hard to call when and how strong that will happen.

Moving on to logistics. This is your second year of solid double-digit growth, albeit the base in 2023 was rather depressed because a lot of the key players there were digesting excess capacity. But walk us through the different customer types here within logistics and give us a sense of where they are in their adoption cycles and build cycles.

Yes. So if you think about the logistics market, you could probably divide that in further subvertical, so to say, right? We have like e-commerce customers, think about large online retailers, distribution centers and then certainly also have what we call more parcels. So think about more like FedEx, UPS, this type of the world. And then maybe you could even add like airport baggage handling. So in that regard, there are different segments, and we traditionally think our home turf is really e-commerce. On one side, there's for us an opportunity to go into more subverticals, over time. But really, the growth has been coming with the e-commerce side.

And that's driven by a very low penetration of machine vision in today's kind of e-commerce, I would say, networks. And even sophisticated players in the space have a low penetration rate. We sometimes would say for sophisticated players, they're maybe at a 25% penetration and maybe the broader market is a 15% penetration. So in that regard, there's clearly a penetration opportunity and that -- some of this is related to what we announced in the last earnings call. We introduced a new product lineup called the SLX. And think about it like in the past, the logistics market was very much code reading, high speed, high precision, high accuracy. And that's still a great market, and there's still so much more to automize in this distribution network. So we can grow just with code reading.

But then customers also see other problems happening than just code reading that means jams on conveyor belt, side by side -- 2 packages side by side and then only one code is being read, damaged packages, which you want to not only find out at the end, but maybe right when they enter your network so that you're not running through basically waste through your network. And that you can't solve with code reading, you need machine vision. And that's where we're basically teleporting, if you want to say it, existing technology, which we use in factory automation and bringing that dedicated to logistics, and that's the SLX lineup.

And that basically what gives us that positive view that logistics can be a multiyear growth driver for us. However, growth is not linear. And after 2 very strong years of growth in logistics and now especially in the second half of this year, that growth was much more focused on large-scale customers. We're a little bit more cautious about 2026. And therefore, while other markets getting better, we would definitely consider that maybe growth rates would also naturally get a little bit lower. But in '26 -- but that does not mean that we are thinking differently about this market from a long term. It's just about growth is not linear.

Any questions from the audience before we wrap it up? I have just one more prepared, but jump in if you'd like to ask anything. All right. Well, I have one to wrap it up here, Dennis, and I want you to gaze deeply into the crystal ball here. Historically, Cognex has grown top line well above the market average. But if you look at the source of that growth, it's evolved over time. If you go back far enough, it was semiconductors, pre-pandemic it was consumer electronics. More recently, it's been logistics like we were just discussing. So if you gaze into the crystal ball and think about what are industries that could -- I'm talking 5, 10 years out, pop up as significant sources of growth, what comes to mind there?

Right. So first of all, I would think like in the existing verticals, there's already a great growth opportunity, right? I just talked about the low automation penetration level in logistics. I talked about consumer electronics with that new form factors time beyond smartphones. So there are great opportunities there. And then I think a market still nascent today is -- which we are otherwise not talking a lot about is aerospace and defense. So I think that's definitely a market where there are great machine vision applications. It's a small market today, but it's definitely an interesting market, and we'll see where that goes over the years.

Thank you very much, Dennis, for all the insight. We appreciate you being here this week.

Thanks a lot, Tommy. Thanks, everyone.

Good afternoon. We'll go ahead and get started, and thank you for joining us for Cognex, President of Machine Vision and ID Reading Solutions in the industrial sector. Very glad to have Matt Moschner, who's President and CEO of Cognex with us today. We're going to be able to take your questions. So feel free to send those up and probably just raise your hand as well. I think, Matt, we'll just kind of dive right into Q&A, but maybe if you have any opening remarks, just to level set us.

Yes, sure. Maybe just a brief introduction. So Matt Moschner, I assumed the role of President and CEO, July 1, succeeding Robert Willett, who led the business for 17 years. Prior to that, our founder, Dr. Bob Shillman. We're a 44-year-old technology leader in the field of industrial machine vision. And we are going through, along with the rest of our industry, sort of a generational shift in technology. And I think now is -- it couldn't be a more exciting time to be involved with the business. We have ambitious growth plans. We have a balance sheet and a P&L to support those growth plans. And so it's very happy to be with you all today.

Excellent. Maybe just rewind just a little bit. We just wrapped up the third quarter, 13 kind of percent apples-to-apples growth, little noise around some of the adjustments. It was all good, but 13%, strong number, lot of momentum in your logistics business. ,consumer electronics also growing, packaging growing.

Absolutely, yes.

Automotive, maybe not so much. But the fourth quarter outlook seemed to suggest kind of normal seasonality as well. So some normalcy maybe in the business that we're calling out. I guess -- and that does assume that sales will be down high single digit kind of...

That's right.

Quarter-to-quarter on a sequential basis. But I guess maybe just as you go through those end markets, kind of give us a flavor for what you're seeing in demand at the current point.

Yes, happy to. So we define 5 key end markets for the business. The largest and fastest growing at the moment is logistics, warehouse automation. And so maybe it's helpful just to know what is that?

Well, we define 4 subsegments in logistics. retail, right? So this is retail distribution. This is working with brands like Walmart, Target, Kohl's, TJX to ship their products directly to consumers where -- and/or their stores where they would own and operate their own fulfillment centers, and they would use Cognex technology to do traceability and other vision inspection. So that's a big part.

The second is e-commerce, right? We've been riding the wave of the transition to e-commerce fulfillment last many years. This is the Amazons of the world, the Coupang's in Korea, the Flipkart's, the TIMUS machines in the area of fast fashion. That's been a great grower for us over the last several years.

Couple of new segments within logistics, airports automation, where we have great technology as a lot of the world's airports look to modernize and largely automate deploying Cognex vision inspection and barcode reading technology. That's been a good growth driver for us.

And lastly, a market we call parcels. So this is the sort of the legacy parcel and postal players around USPS, UPS, FedEx, DHL, relatively new market where we have less share. So logistics being our largest end market, we have -- we're about 10 years into developing technology for those customers, and it really feels like we're hitting our stride.

We have good share with the leading providers. The investments in R&D that we've been making are paying off. And I still see tremendous white space for growth. The biggest area, I would say, is really taking what is today mostly about reading barcodes, right?

If you go into a modern warehouse and you see a lot of yellow cameras, that's Cognex. Those devices are still largely using the pictures to read barcodes, and we do that better than anyone else. There's a huge opportunity for us to do 2D and 3D visual inspection in addition to reading barcodes.

We launched a product just before Q3 called the SLX. What is that? It's fundamentally about bringing our latest generation AI inspection tools to that market, and AI vision is very well suited for logistics applications. If anyone that's been in a warehouse or ordered anything online, what makes the logistics market such an interesting one for a machine vision company is the sheer variety, right?

I think the statistic is a typical Amazon fulfillment center has 9 million items, 3 million SKUs, right? So think about just the sheer variety that a system has to perceive different shapes, sizes, surface textures. And so AI tools, which we're heavily invested in, has been a huge unlock for us.

And so I think logistics has been a good grower for us, 7 consecutive quarters of double-digit growth in logistics, and I think it should continue, and we expect it to heading into next year, and we have great customer relations there.

Automotive, second largest end market for Cognex. And so you can think of machine vision has been sold into the automotive vertical for over a decade, doing quality inspection to the assembly of the mechanical systems, the electrical systems of a car has, over the last couple of years, been probably the biggest drag on growth for the company on the heels of the EV cycle that kind of was and then wasn't, a lot of the geopolitical uncertainty surrounding where vehicles are made, and really what the platform of the future is.

But I remain optimistic for the automotive sector heading into next year. As we said in our Q3, we're seeing -- we called sort of the bottom of automotive. We're seeing very much that stabilize and even return to growth in North America. Asia, I would say the one area where we're still a bit cautious on our automotive growth is in Europe, okay? And I can go into why.

The next would be packaging. So we define packaging as a vertical, which is really fast-moving consumer goods, sort of consumer products and health care, okay? Together, we call it packaging. Package consumer goods, really kind of driven by consumer demand. And I think we're all sort of attuned to some of the macroeconomic uncertainty around consumer budgets and consumer buying behaviors, but a largely underpenetrated market when it comes to the technology that we produce. And we've made big investments in our sales channel as a way to drive penetration and drive growth in consumer products.

In health care, which is the other side of packaging for us, really riding the wave of a lot of the manufacturing investments around some of the blockbuster drugs like the GLP, GLP-1s that we're seeing today as there are more of those products available. And on top of that, as the push to relocate and even domesticate the production of those next generation of pharmaceuticals, Cognex is very much involved with the mass production in that sector. So that's our third packaging, and we expect growth in both consumer goods and health care to carry into next year.

Advanced semiconductor manufacturing. So that is the next market vertical that we participate in have for many, many decades. Actually, the origin of the company was in advanced semiconductor. We work with the leading machine builders and OEMs that service the large fabs and packaging companies. And I think we're all aware of the super cycle that we're in the middle of, largely driven by advanced AI chipsets, associated memory and a lot of the capacity being built out not just in Taiwan or China, but also in the U.S. and in other parts of Asia and Europe. And Cognex is reaping the benefits of those build-outs.

And then there are several other markets that we're keeping a close eye on that are maybe more nascent for us today that I would call out. Aerospace and defense, not a huge market for us, but one that we see a lot of investment going into at the moment that we're really thinking hard about. And then the other would be data centers, the large infrastructure investments going into data centers and what is the role of automation, both in the assembly process of the servers, the server racks as well as the ongoing automation of maintenance for those data centers.

So you put that together. And for sure, there's a lot of uncertainty as we look into 2026, and I think we've articulated that well, but also quite a bit of optimism across those end markets as we look into next year.

I want to dig into those markets a little further. Maybe just before we do so, again, the current administration has put a lot of plans in place to try to incentivize more capital investment, more manufacturing investment. How do you think that starts to manifest? Is it starting to manifest? Can we see it anywhere? Or can you see it anywhere in your order funnel yet? And if not, maybe what's the time line that your customers are talking about?

Yes. I mean I would rewind even to the previous administration as well that placed quite a bit of an emphasis on domesticating semiconductor manufacturing through things like the CHIPS Act. And then, of course, this administration has done a really nice job to create incentives in a business environment where investing in domestic manufacturing makes sense as well.

We, of course, are participating in that. The thing I would say is a lot of these plans are multiyear, right, where a lot of the announcements you would have seen in new facilities and new capacity in the U.S. in manufacturing across those verticals could take multiple years, and we are working with those manufacturers in terms of what the role of automation and what the role of machine vision is in those plans. So yes, I mean, is it a tailwind? I think it is. Exactly what the time window is between policy to investment announcements to build out of facilities to go live in operations, it varies by sector.

Some -- I think of your packaging business, in particular, but broader factory automation may touch smaller enterprises. That's where you're also trying to penetrate with a new sales approach. Are you seeing any -- do the tax incentives near-term accelerated depreciation? Or is any of that starting to resonate with those customers, do you think, smaller ones?

We haven't heard those new tax programs necessarily tipping the scale on whether they would or would not choose machine vision or automation in their production facilities. I wouldn't call that out specifically. But for sure, packaging and specifically consumer products has benefited from really 2 things.

One, with the advent of AI in our products, and that's not a recent phenomenon. We've been working on that for almost 10 years. It has definitely reduced the complexity and upfront cost to deploy machine vision. And what the customer segment in the market that has likely benefited the most from that are our packaging customers, specifically consumer goods players who tend to be smaller, more regional manufacturers of whatever that is, a food stuff, a consumable product like a razor blade or a shampoo bottle.

And so as the technology has gotten easier to use, the ROI for them has improved, and we're seeing penetration in consumer goods accelerate. And then couple that with, as you mentioned, investments we've made in our own sales force. So we largely sell our products through a direct sales force. And we have hundreds of Cognex salespeople promoting the benefits of machine vision around the world.

We've increased that organization substantially in recent years, really to reach this cohort of smaller regional manufacturing players that I think are disproportionately in the consumer goods arena. So you put those 2 things together, a product that is easier to use and faster to deploy with a sales organization that is now more capable of reaching them. I think we're seeing a lot of benefit in that part of our business.

Yes. Let's go back to logistics real quick. Again, you talked about 7 quarters of double-digit growth there. That's in the context of maybe when greenfield investment has been lower as well. So obviously, a lot of brownfield investment happening. What's -- to kind of sustain that double-digit growth, what are you seeing in the brownfield arena? Is it the uptake of more machine vision applications? Or do we need the greenfield activity to start to elevate?

Yes, I don't think you need the greenfield activity. So the way I'd characterize it is most -- a big portion of our growth in logistics from, say, 2017 to 2021 was mostly funded through new capacity. These are new facilities. You all have seen them spring up next to the side of the road, big boxes that are either 3PLs, e-com or something else. That was maybe the first wave of growth.

You're right in saying as the capacity build-out trend kind of subsided post-COVID, a lot of the focus was on how do we make the facilities that we have much more productive. And that's where we've gone to work and been very successful driving penetration of vision and automation into those existing facilities.

I would say today, it is a lot of traceability and putting barcode reading scan points in more places to get better fidelity on where that item is in the building. But for sure, the second piece of that is adoption of 2D and 3D vision for the purposes of inspecting for damage, for missortations, for hazardous labels, for human readable marks.

There's a variety of visual inspections our customers and warehouse automation would like to do. We now have the technology to do it, and you're seeing good penetration there. And then on the 3D vision side, which is really about measurement, right, if 2D is about inspection, 3D is really more about measurement, there's been increased demand there really on the heels of tariffs, right?

A tariff really drives demand for knowing more precisely the dimensions and weight of the thing that's either coming into your facility or leaving your facility. And so we're seeing increased interest and demand from customers for weights and measurements as well, which we're suited to deliver.

Would you make any kind of regional distinction between the logistics growth? Has it been North America-centric? Or where are the other regions of the world in their...

Yes, I really wouldn't. Our logistics business is relatively more concentrated in North America. That's where I would say we see more maturity, particularly in e-commerce, right, a large player out in Seattle that has been driving that, and maybe in retail distribution as well.

But we have a great growing business in Europe, very sophisticated players across those 4 sectors, and we're very present in Asia as well. We've been servicing logistics in China for over a decade, Japan, Korea, in the ASEAN region, I was just in India.

They have big ambitions to grow domestically their own fulfillment and warehousing network, both for retail distribution and e-commerce. So maybe on a relative basis, the growth rates would be higher in Asia, but I think we're seeing good activity across regions.

Yes. I kind of want to go back to just -- you called out aerospace, defense and data centers, maybe some nascent markets that you're reviewing. What would be the insertion point for machine vision or ID in those applications that you're thinking about?

Yes, sure. So let's talk about each maybe separately. So aerospace and defense. So these are highly engineered products where precision matters. Maybe the throughputs are relatively lower, but the cost of poor quality is extremely high. And these are also highly regulated areas where traceability at a part level matters, right? And so those are the sorts of things, the ingredients we look at when we look at a new market.

Do they care about quality? Is the cost of quality high? And do they care to serialize? Serialize really understand every single component that goes into that thing. And I think you have those ingredients in aerospace and defense. And so machine vision systems are very well suited to solve both of those problems.

Data centers is a bit interesting, where if anyone's been to a modern data center, there aren't a lot of people around. And often, what we do is we're replacing some kind of a human operator with a machine vision system, right, trading these eyes for a machine's eyes, if you will. And data centers is really what we're targeting is given the sheer scale and pace of the build-out of these facilities, how and quality matters, right, to have a server fail, a server rack assembled incorrectly, really, that's a big deal.

So how do we participate in the entire supply chain of the electronic equipment that goes into a data center from inspecting the raw components, the boards, the servers, the server racks, the connectivity that underpins the server racks, all of that can be automated in terms of its quality assurance, if you will.

You take a picture, 2D or 3D and assure that was assembled correctly. We're seeing novel uses of robotics in the automated assembly of these things, again, as a way to keep up with the demand. So that's more on the construction side.

On the operations side of a data center, there's a lot of ongoing maintenance around drive -- failed drive removal and destruction. And today, that's a very manual task where a person has to go to the rack, pull out the drive, detect what it is and destroy it in a way that's fully traceable and documented. We're working with customers on a way to automate and drive efficiency in that process as well.

Okay. Implementation of robotic in that?

Absolutely. Yes. And vision as a means of enabling those automated robotic drive removal and destruction activities.

I see. I see. Consumer electronics, we didn't really dive in there. That was a business that had returned to growth after a couple of depressed periods, still the consumer electronics market in general, smartphone market in general, not great. So kind of what's working there for Cognex right now? And you talked about visual inspection. Have we gotten any more traction around those type of applications in consumer?

No, you're absolutely right. I think I missed that in my vertical market sweep initially. But I think what we said in Q3 was we expect consumer electronics to return to growth for the first time this year for us since 2022. So that's very encouraging. We said that growth is broad-based, which is really beyond just any one customer, which is also encouraging, and there's a lot happening in that industry.

So consumer electronics from the phone in your pocket to your ear buds, to your tablets, to your laptops, all of those things as they get manufactured and assembled, you would find a Cognex vision in those assembly processes, and there's a number of things that are driving growth in that sector.

One, obviously, we're seeing new form factors and new device types being introduced, and those device types like glasses, for example, are very precisely manufactured where cost matters, quality matters and produced in quantities of tens or even hundreds of millions, right?

So that's -- those are the ingredients that are really ripe for machine vision to play a key role in the manufacturing process, any substantial changes to form factors in phones, for example, would require a more substantial retooling of the machines that assemble that device, and as the large providers of those smartphones and other devices consider new form factors, you'd see us participating in that transition.

Technology, right? AI, we are doing things now around cosmetic defect inspection. I think that's maybe what you were alluding to with advanced AI methods that we couldn't do before. That's driving penetration of vision on those machines. That's very exciting.

And then the last thing I would say is, historically, the majority of consumer devices were really made almost exclusively in Mainland China and we're seeing some of those manufacturing footprints shift to other geographies for a variety of reasons, cost, geopolitics, tariffs, whatever it is, to ASEAN, to India, to other parts of Asia.

And so as I would say, the supply chain of consumer electronics reshuffles, that creates opportunities for Cognex for us to take share, for us to introduce new technology, for us to work with new partners, machine builders. And so you kind of put all 3 of those or really 4 of those ingredients together, I think that's really underpinning the growth we're seeing in consumer electronics at the moment.

Yes. You made a mention earlier just around deep learning capabilities, AI, Cognex has been on that road for quite some time. I think externally, it's difficult to assess who's winning in AI or with AI, of course. Maybe a few points around why you think you have a leadership position there. How do we -- how do you demonstrate that? How does it compare -- who are your competitors in that chase, do you think relative to Cognex at this point?

Yes. It's a great question. So we've been heavily invested in this new paradigm of AI-driven visual inspection for about almost 10 years, 8 to 10 years. We made a foundational -- 2 foundational acquisitions in this area. One was VD Systems, a Swiss company that was really at the forefront of industrial AI and then Sualab in 2020, which was a Korean company, also doing excellent work here. We've also built out our own team. And so it really is -- it's my top strategic priority. So we are funding this initiative very well. And it's mostly in the area of creating new tools that can do something that we've never done before, finding very hard to describe defects on very difficult surfaces.

It's also doing things we've been able to do before much, much simpler, and so we're pursuing both vectors, and at the moment, we're actually trying to tackle both, kind of push the boundary of what's possible while at the same time, making a dramatically simpler experience for the user. If we can do that, that will be a huge accelerator for us, a huge accelerator for our industry.

How do we measure if we're ahead or behind? That's a great question. Well, we benchmark ourselves and we work with customers in some cases to do that in terms of like-for-like performance of a visual inspection, and more often than not, we show that we're ahead.

We measure it on the percent of our portfolio where an AI-based technology or method is the primary feature or function of that product. We think we're ahead on that. And then we're really trying to take AI from where it is today, which is really still focused on the visual analysis task to how can it transform the rest of the product experience, right?

As all of us have become more savvy using prompt-based tools like GPT, how would you bring a prompt-based workflow to the setup of a machine vision system where there is still a big barrier for our customers today in deploying vision. They have to think like a vision engineer.

So how do you solve for that? How do you have them do their job well, which is think about the problem they're trying to solve, not have to be a vision expert. And we think AI can bridge that gap for our customers, and that can act as an accelerator of adoption for machine vision across industries.

So that's how we think about it. We're heavily invested. We think we're ahead. We have ways to measure that by benchmarking our product performance versus our peers, but that's something we have to continue to stay focused on.

Yes. A lot of what you just discussed relates to -- that's done in software -- and then that's viewed as one of your key competitive advantage, just the software algorithms, I think domain expertise is probably underappreciated to a degree as well. What role does the hardware engineering play in this, particularly when you talk about AI and edge?

Yes, it's really -- it plays a really key role. So we design, in many cases, our own hardware. And so we design -- we -- I think when Cognex is at its best, we're deploying the world's best vision analysis software and applications within the world's best industrial hardware, embedded computing, smart vision systems.

And so we do have our own in-house embedded systems design capabilities. We design our hardware very purposefully for the software that it will run. And our computing vendors tell us that we get more performance out of their chipsets than anyone else in the world.

So we know how to optimize silicon for high-performance embedded computing, and that's a huge advantage for us, right, particularly in the world of AI where the best model is -- far surpasses the computing of the best available embedded chipsets, right? And so a lot of where our IP is today is taking the best frontier transformer AI model, distilling it, adding context, adding our secret sauce so that it can run on a relatively low performing, relatively inexpensive piece of embedded hardware.

And we do that better than anyone else in the world. And that's really important because it means we can design systems that are smaller, more cost effective, can be put in more places, bridging that gap from large data center scale AI to near edge or far edge, I think, is what it's called embedded systems that can run those tools is fundamentally where a lot of our IP is created today.

Yes. Just bridging off the AI question that was all externally customer-facing. Maybe in the limited time we have left to kind of blend this in with margin objectives. How are you applying AI internally? And just speak to maybe the path you're on from a margin improvement point to the extent that can help you.

Yes, absolutely. So we're very focused on getting our margins -- our operating margins back into the financial framework that we put during our Investor Day in June, where we defined an operating margin range of 20% to 30% adjusted EBITDA.

The last couple of years, we have been underperforming versus those metrics, and we're very committed through a mixture of cost and growth initiatives to get back into that target operating range. And so I'm very optimistic that we will in the near term to get back to the 20% or greater level.

And then obviously, we're going to continue to manage our costs, drive some cost efficiency programs internally, get back to growth and get operating leverage, the mixture of those 2 things, bringing us to the mid-20s, high 20s and potentially beyond.

Cognex over the last 10 years has an average adjusted EBITDA of 28%. The last couple of years has been significantly below that, but we feel very optimistic that we can get back not just to that target range of profitability, but to the high end of it through a mixture of focused cost management and cost reductions as well as getting back to the growth story of the company.

Yes. Very good. Perfect. We're at time, so we'll stop there. There is a breakout session in the Salon A room. If you go out to your left, we can take further questions there.

That' great, thank you.

Thank you, Matt.

Greetings, and welcome to the Cognex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 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 objective 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 target specific applications, including object classification and side-by-side detection, both of which complement barcode reading in mixed application workflows. [indiscernible], 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, [indiscernible] 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 through the year. The market remains challenging, but we continue to anticipate 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. 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. Dennis?

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 expense.

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 months 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 full 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. Now Matt and I are ready for your questions. Operator, please go ahead.

[Operator Instructions] 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 in 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 said our business is 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, absolutely. No, thanks for noticing. In Q3, we saw strong year-over-year growth in Greater China, which, as a note, includes Taiwan for us. And I would say it is broad-based across verticals with perhaps the exception of automotive. Why? We've made great investments in China and the Greater China region. We have landed more localized distribution. We've invested in our sales channel. We have local engineering in country to try to be a more nimble company in that country and in that region. And I think you're starting to see some of those things pay off. As a reminder, a good portion of our business, I think in the past, we've said 3/4 roughly are multinationals operating in China and roughly 1/4 being domestic Chinese manufacturers. And so they like working with Cognex, not just because of our excellent technology, but also our global footprint. particularly as customers are -- our customers are thinking about potentially producing in China and other Asia regions given some of the trade and tariff news of recent months. So yes, we're encouraged by the momentum. I would also say the competitive dynamic in China has stabilized in many ways, and we're seeing pricing stabilize as a result. And so you put those things together, and yes, we had a great quarter, and I remain pretty optimistic about how the investments we've made in China could pay off for us heading into next year.

The next question is coming from Andrew Buscaglia of BNP.

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. No, it's a great question. I mean, as we said in the prepared remarks, most of our growth is driving productivity in existing facilities, and I still see room to grow there. I think we've also said we think this market is still in the early innings of its automation story, and I believe that to be true. You go into a modern warehouse today, you see a lot of vision systems. But today, they're mostly doing things like barcode reading and helping with the sortation process. I think -- the product release we had yesterday is a really exciting one for us, and I think for the industry because it really is the first meaningful step in bringing vision and visual inspection to warehouses. And it's good to remember why that hasn't happened yet because it's a really, really hard problem, right, given the variation that you see going through some of these facilities, millions of SKUs at very high rates that are very cost sensitive. So we're excited about how we can drive vision penetration in logistics. I think that is -- I almost characterize it as a white space. And I think one that really can only be addressed by advanced AI. And so I think we're well positioned for that. And the SLX is the first step in that journey for us. I think a lot of our customers are still -- have very much a productivity focus, right? So I don't think we're yet over the hump on how we can get more and how they can get more productivity from existing facilities. And then I would just say, right now, our strength is in retail distribution and e-commerce. I think we're relatively newer to areas like the parcel market and helping other areas like airports as they look to automate where we're seeing quite a bit of investment. So I think those are areas where we could grow as well. So I think we remain optimistic that the growth story of logistics is not yet over. But I would just say maybe a bit nonlinear, particularly as some of the larger customers that we serve, how many more years can they have outsized investments. And so over the medium term, I think we feel very good about the growth story. How we get there might be lumpy or nonlinear is how I would characterize it.

Yes. Interesting. Okay. And then I was surprised to see semis grew a little bit. I think we were expecting much, if any, growth at all this year, which you maintained your outlook in that space. I guess what are the -- what's driving that pickup there? And then can you talk about maybe your -- how you would benefit from the memory market? I would imagine you guys would have exposure there that seems to be certainly benefiting from AI. If you talk about that a little bit, that would be great.

Yes. And I think the underlying demand for chipsets, for memory, for other active components is growing, and I think will, given the demand for new devices and the underpinnings of advanced AI as we see a really exciting set of new computing capabilities being announced. And yes, we would participate in all of those things. It's useful just to remind ourselves how we participate in this market, which is really through selling vision to large equipment manufacturers that produce the machines that handle the wafers or the finished package products. So that's really how we address the market. And the sorts of applications that we solve are really traceability. These are very high-value pieces of silicon wafers that you want to make sure have good traceability that have good quality. So we do visual inspection. And so that's -- those are primarily how we serve the market. the growth in this market, I would also characterize as somehow nonlinear, right? The ordering of those machines is very much dependent on the build-out of specific facilities. But right now, we're seeing good healthy activity. And I think there's good underlying demand for chips, but also I think there is a bit of changes in where things get made and where the fabs are located, right? We see a build-out going back to the CHIPS Act and the last administration here in the U.S. We're seeing ambitions in countries like India to have domestic semiconductor production capacity. So I think there's also a geographic angle as more regions and countries participate in the manufacturing of advanced chipsets. So -- and I think Cognex will be there, and we'll serve that market as we do today through our large equipment manufacturing partners.

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. No, I think it is -- it remains a challenging market for us, although, yes, I think we are nearing a bottom. But I think you're right to point out the geographic differences in growth. And here in the U.S., we are seeing more activity, I would say, relatively more activity than Europe, which seems to be taking a longer time to recover. And it's not hard to imagine why. There's different geopolitical considerations around trade and tariffs for this industry. And so we're definitely seeing larger differences in relative growth rates in the Americas and Europe with relatively more strength in the Americas than Europe. We also serve large automotive manufacturers in Asia, in Japan, in Korea, Mainland China. And I think there, I think it's again mixed. I think it depends on specific OEMs, their transitions between powertrain types, the geopolitics of of those things. And so yes, I think it's hard to call. I think we are nearing a bottom. I think this year is going to be better than last. And our teams are working with each of those OEMs on their automation plans, which we still see over the medium and long term as being healthy, right? This is an industry that is still struggling with quality escapes, right, and recalls. Vision helps with that. It's an industry that struggles with labor and qualified skilled labor. Automation helps with that. And generally speaking, mitigating the increasing costs associated with production and tariffs and things like this and automation helps with that. So in the near term, I'd say it's improving and stabilizing. And over the long term, I think we remain optimistic.

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 teens 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. No, fair question, Tommy. I would say maybe first clarifying on the quarter, right, if you take in constant currency, we would be down by 1 point. And that's considering that we had some incentive comp headwinds, right? So last year was an underperforming year, and this year looks a bit better in that regard. And in prior quarters, we have been talking about that we have been 2 or even 3 points down compared on the year-over-year comparison. That's kind of if you think about like constant currency, excluding incentive comp, that's kind of the run rate which we are for this year. And we keep on driving that, right? So we talked about taking on additional reorganization charges in this quarter. And clearly, that's for us to set ourselves up for the future and to drive success, right? And that kind of put that a little bit also in context my prepared remarks of how we think where we are in the cycle, right? So we talked about like in general, we are a short-cycle business. So we don't have a lot of visibility into 2026. So we use these macroeconomic indicators like PMI and they tell us we're in the early stage of the cycle, that means moderate growth and then moderate growth environment for us means to be -- keep on working on OpEx and drive efficiencies throughout the organization. And that basically then sets us up still for hopefully attractive EPS, adjusted EPS growth, right? So if you look at this year, mid-single-digit growth on the top line, excluding the commercial partnership, but adjusted EPS, if you take the implied guidance, excluding the commercial partnership that's a bit more than 20% of EPS growth, and that's kind of how we think the playbook could look like for 2026. That means at the moment, macro indicates moderate growth. So let's keep on working on the OpEx side and do what we have to do so that we show that adjusted EPS shows attractive growth rates. I hope that helps a bit with narrowing it down to your question, Tommy.

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

Just wanted to go back to logistics for one second. I know you folks have seen some pretty nice growth there in the last couple of quarters, but it's been -- it's put some pressure on your gross margins, if I recall, just given the engineering resources that you need to use with implementing machine vision for some of those customers. So the question, I guess, is as you roll out some of these AI-enabled products, does that actually lower your cost to serve those customers going forward?

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 kind of 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. No, I wouldn't say that.

Our next question is coming from Piyush Avasthy of Citi.

Matt, maybe like on your Investor Day, you laid out a 6% to 7% growth contribution from increased machine vision penetration. It's just been like a couple of quarters, but maybe some early feedback on how that is progressing. I see you have been -- it has been associated more with packaging. Maybe comment on how you can see this supporting your other end markets. And then there is this reorganization, maybe just comment on like how you balance these cost actions while still being aggressive towards penetrating new markets.

Yes. Thanks. Let me take the penetration question first. And you're right, we said there was 6% to 7% penetration growth on top of core growth of each of our industries that led us to a 10% to 11% through-cycle organic growth rate. So I think you had that right. Where are we seeing it? And a big part of that penetration, as we said, I think, was a lot -- that's very technology-driven, right? As we innovate, we are solving often for the first time, applications that haven't been solved before. I think I mentioned logistics as very much one of those. And I suspect and we're seeing that the SLX is solving new vision applications that haven't been solved before. So we're driving penetration in logistics with vision. Similarly, in consumer electronics, we're innovating with new tools today that are doing things around cosmetic defect inspection that were not possible in the past. We're driving penetration in consumer electronics. And then packaging, you're right. I think that is more about how do we educate the market and educate customers who are more regional, smaller manufacturers on the benefits of vision, and we're doing that through investments in our sales channel. So yes, those are just 3 areas I would point to where we're driving penetration through technology, through channel, through sales coverage, and I'm excited about each of those. Your second question is on cost and how we're thinking about cost management and cost reductions in the context of our growth story, right? We take, as we've said in the past, a very long-term view on growth and investments, and that's -- it's a technology company we have to. But at the same time, we're many months into making sure that given the stage of the growth cycle that we're in, that we are managing our cost bases smartly. And so yes, over the last 6 months, we have moved quickly to rightsize our cost basis in a number of areas. I would say we really took a hard look at all areas of the company, we continue to, whether it be our sales capacity, our engineering capacity, our operations footprint, back-office functions and G&A. And it's been a -- I'd say it's been a very collaborative approach as a leadership team. And I think we've done it smartly. I think [indiscernible] are bought into the journey, and we're excited for how we can take that into next year and drive profitable growth over the medium and long term.

And maybe perhaps let me add to that, just kind of how we manage that. So we're taking a very programmatic approach. So that means we're having clearly identified areas and work streams defined on which we work on. And then you can see that we're not coming out with like just the one big, whatever reduction in force type of approach, but we're really kind of looking at area by area, looking for efficiencies, getting these efficiencies and moving on and revisiting after some time again to see like how has that worked and where can we improve further. So it's really -- think about it that we are driving a program, which is not looking like let's just kind of cut cost in the short term and maybe break a lot of things along the way, but it's really a well-balanced programmatic approach, which kind of brings the right balance between supporting the top line growth and at the same time, supporting also the bottom line.

Very helpful. And I know you just gave guidance 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 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 there are 2 comments, top line look year-over-year on the seasonality and on the OpEx side and look 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 and 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 -- when you talk about like AI making things easier to deploy, like it's also, I guess, helping nontraditional players start to try to deliver solutions here. We're seeing that from like automation players, things like that. So can you maybe talk about the competitive environment, how it's like evolving with who's trying to participate on the fringes and what that means 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 E-Systems and 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 [indiscernible], 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 environment. 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 or 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. Yes. 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 clearly that we are setting ourselves a very high bar in terms of a strategic fit and then of the financial profile of the potential target company. So 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 that 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 card 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 really about coming back to -- I think I talked about it before, short-cycle business and the largest part of our business, in factory automation, we have limited visibility. It's a 3 months visibility. And certainly, we think about the end markets and Matt provided some of the voice over there, there's some areas which we really like to see like consumer electronics looks good. And Matt talked about in logistics, like how -- is the linear growth trend on large-scale customers or not and automotive may be finding its bottom. So there are definitely different aspects there. But sometimes we're trying just not to get too much into the details in each of the markets and take a broader view on like what is macro telling us. And just on that macro side, if you look at that, it just doesn't point to that at the moment from the PMI as of today, the 2026 will look very different than 2025. And that's just another data point which we're taking in consideration. I think mostly important, why are we doing that, right? We want to think about like how do we manage the company also in terms of on the OpEx side and where do we invest and where not. And so we provided that more as a framework in the sense of like how do we think and how do we do management decisions right now and wanting to give you a guidance, right? And I was trying to be very clear and say this is not a guidance.

Yes. No, that makes sense. I appreciate that. And then maybe for the follow-up here, sorry if I missed it, but did you provide an update on the One Vision platform? And just any color on when that becomes more commercially available?

Yes. Thanks, Ken. Yes. No, we didn't 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 that 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, 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 Insight Vision suite ecosystem longer. I think both of those are great things. I think that 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. 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 [indiscernible] 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's one of them, not multiples of them. And so that really is helpful so that as those things get sorted and diverted and shipped, you're not shipping multiples of something. 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. 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.