Cognex Corporation

only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, head of investor relations. Thank you.

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

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

the quarter that can be found on page 8 of our earnings presentation. First, adjusted EVDR margin of .7% expanded 80 basis points year over year and was above 20% for the first time since Q2 of 2023. Second, adjusted EPS increased 12% year over year, the fourth consecutive quarter of EPS growth. Third, our free cash flow conversion rate on a trailing 12-month basis strengthened to 130% of adjusted net income. These results highlight our focus on profitable growth and cash flow generation, the pillars of our long-term through cycle financial framework we shared at our investor in June. We are encouraged by the progress we see here, but we also acknowledge there's still work to do and remain committed to executing against our priorities, discipline, and focus. Taking a closer look at our second quarter results on page 9, revenue of $249 million expanded by 4% year over year or by 3% on a constant currency basis. Looking at geographic revenue trends on a year over year constant currency basis, Europe expanded 13% primarily due to certain consumer electronics customers ordering through entities based in Europe instead of China. This change of ordering entities does not reflect any underlying change in business mix or customer demand. Excluding this procurement change, Europe grew slightly, led by strength and packaging. The Americas grew 8%, led by continued strength in logistics and growth and packaging. Other Asia increased by 5%, driven by strength and consumer electronics, where we saw evidence of supply chains shifting out of China. Lastly, greater China declined by 18%. Excluding the procurement change and ordering entities, greater China revenue declined modestly due to shifts in consumer electronics supply chain. Looking now at gross margin. Adjusted gross margin of 68% was in line with our guidance. The $230 basis point year over year decline was primarily due to a less favorable industry mix. As expected, tariffs had a modest negative impact on gross margin this quarter. Our continued focus on disciplined cost management resulted in a 2% year over year reduction in adjusted operating expenses or a 3% reduction on a constant currency basis. As we mentioned on prior quarter calls, we will remain laser focused on tight cost management as this is a key lever on path to profitable growth. We expect operating expenses to continue to grow slower than revenue. Revenue growth combined with disciplined cost management drove 80 basis points of adjusted average margin expansion year over year to .7% or highest quarterly margin since Q2 of 2023. Diluted earnings per share on a gap basis were $0.24, up 15% from $0.21 a year ago. Adjusted diluted EPS was $0.25, representing 12% growth from $0.23 a year ago. This growth was driven by an expanded top line and cost discipline, as well as a 2% year over year reduction in our average diluted share count. Free cash flow generation was strong again this quarter, totalling $40 million, which included a one-time $60 million payment for a transition tax we noted last quarter. Failing 12 months free cash flow generation of $180 million is up 138% compared to the 12-month period ended Q2 2024 and represents free cash flow conversion rate of 130%. We remain firmly committed to a disciplined capital allocation strategy, where returning capital to our shareholders is an important component. Over the past 12 months, we have made significant progress on this journey, returning over $200 million to shareholders, or over 110% of our free cash flow through share repurchases and dividends. These actions have contributed to a reduction of more than 4 million shares in our average share count year over year. Turning to page 10, I will now walk you through our financial guidance for the third quarter. As we shared with you at our Investor Day, we will be guiding to the following three metrics going forward. First, revenue. Second, adjusted EBITDA margin. And third, adjusted earnings per share. We believe these metrics best reflect our increased focus on profitable growth. Starting with revenue, in Q3, we expect revenue between $245 and $265 million. This range reflects 9% year over year growth at the midpoint. It's both our logistics and broad effect to our automation businesses contributing to the expansion. As noted last quarter, we expect consumer electronics to be relatively evenly weighted across our seasonally strong second and third quarters this year. Next, adjusted EBITDA margin is expected to be between 19.5 and 22.5%. The midpoint of this range represents approximately 340 basis points of margin expansion compared to last year, reflecting solid revenue growth and continued cost discipline. Lastly, adjusted earnings per share are anticipated to be between $24 and $29. It's the midpoint of this range representing 35% year over year APS growth. This outlook represents another meaningful step forward on our journey of profitable growth. A few other noteworthy items to consider as part of our outlook. First, as we look ahead to the remainder of the year, we anticipate Q4 revenue to return to more typical seasonal patterns, which historically have shown a sequential step down in the high single-digit range. The fourth quarters of both 2023 and 2024 were exceptions to this trend. In 2023, this was mostly driven by our acquisition of Moritax, which closed in October of that year, while in 2024, we saw accelerated demand late in the fourth quarter. Second, while the tariff landscape remains fluid, the recent trade agreements with China, Indonesia, and Vietnam do not change our previous commentary on the expected full-year impact of tariffs. Specifically, we continue to expect no material impact on adjusted EBITDA margin and earnings per share and continue to estimate a 50 basis point dilution to cross-margin. Third, during the third quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation. This arrangement is expected to result in a one-time benefit to revenue and profit in Q3, which is excluded from our guide. Currently expect the benefit to revenue to be between $8 and $14 million in Q3. Lastly, let me touch on the one big beautiful bill act recently passed by Congress. We are in the early stages of evaluating the impact of US tax law changes and currently anticipate the following tax implications for our business. First, the bill is expected to be neutral to adjusted EPS in 2025. We expect an insignificant impact to adjusted EPS in 2026 and beyond. Second, we currently expect a one-time higher reported tax rate in 2025 and will update you when we have more clarity into the final impact on the rate. However, we do not anticipate any change to our adjusted effective tax rate. And third, the provision to fully expense US research and development costs is expected to result in a cash tax benefit of $12 to $15 million this year, which is expected to step down annually and phase out over the next five years. Now, Matt and I are ready for your questions. Operator, please go ahead.

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

Good morning, everyone. Hey, Jake. Good morning. Hey, Jake. Good morning.

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

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

Yeah. And that regard, really pleased to see kind of this meaningful step in that regard. And to your question, what changed? I think one thing Matt highlighted to us, I think really a problematic approach to it, that we're really focused across the entire P&L and across the entire organization and put that program in place to really think about like very thoughtful where we can optimize costs. And then I think at the same time, Matt also alluded a little bit to it, kind of the, it's really a focused effort of the entire leadership team. And I think there's a clear sense in the organization of the direction where we want to go. And we feel really positive about like how the organization is responding and how everyone is pulling into this direction. So, I'm pleased with that.

That's all really helpful, color. Just on a separate topic, I know one of your larger electronics customers has some new products coming out next year, I think that are foldable, you know, different form factors. Can you help us understand that? What does that mean when you've got a change? And I assume it means there's a change in manufacturing technique and maybe you've got retooling of lines and whatnot, but what is when you have some new technology, if you will, what does that really mean for you folks in terms of machine vision?

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

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

Perfect. Thank you. I appreciate it. Good luck guys. Pass it on. Thank you.

The next question is coming from Damian Carras of UBS. Please go ahead.

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

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

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

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

Thanks. Thank you. Our next question is coming from Joe Giordano of Cowen. Please go ahead.

Hey, guys. Thanks for taking my questions. Yeah, I'm curious on logistics. Are you seeing that more on like the Greenfield side coming back, the Brownfield, like kind of investment in existing facilities? Like what's driving that now? And where are you seeing kind of the most inflection?

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

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

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

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

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

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

Okay, thank you. As a follow-up on logistics, I wanted to ask about the planning cycle there. As I understand a lot of this business, you have decent visibility on and the planning cycles are pretty methodical. Are you having any conversations regarding projects into next year at this point? Or how would you characterize the level of visibility that you have for what's ahead versus what the typical would be? Thank you.

Yeah, sure, Tommy. Yeah, no, you're right to say it is a longer cycle business, right? These are bigger investments and build outs of new CapEx. You know, we have great relationships with customers in this area. And so, you know, you would imagine that we would have multi-year discussions on there. Their plans and to the extent that they can align, you know, what we're delivering to them. So, yes, I think it's fair to say we engage on customers' plans across many years. But typically, you wouldn't see ordering activity until those facilities are committed. The CapEx is approved and that still is more within the three to six month period of visibility for us. So, yes, but I wouldn't say necessarily that we're seeing that trend change one way or another. I don't think we see it getting longer. I wouldn't say we see it getting shorter. But we are engaged on the multi-year plans of our customers. And we continue to stay, you know, very tightly linked with them in that way. Thank you both. I'll turn it back. Thanks, Tommy.

Thanks,

Tommy.

Thank you. The next question is coming from Andrew Vascolla of BMP Paribas. Please go ahead.

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

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

Yeah, and maybe to add on that, so I think in the second quarter, particularly in the US and packaging and maybe in logistics, there have been a couple of projects where we thought they could have been accelerated due to a tariff. Don't always exactly know it, so I would say really maybe a low single digit million dollar number. At the same time, we haven't really seen that the funnel for Q3 even changed in that regard. And now being here already at the end of July, we also haven't seen any demand trends and booking trends changing throughout July, so that kind of offsets that a little bit. And then at the same time, we had some commentary about consumer electronics that shift happening in Asia, right, from China to other Asia. So we are seeing, I would say, probably some of these early signs of some of this relocation of manufacturing happening. And I think, as Matt also said, I mean, long term, that's really a great trend and a great opportunity for Cognac.

Yeah, okay.

Okay, and then the other question is why not include that one time potential benefit from the channel agreement? Is it just you don't know the timing, it might slip and you don't want to count on it, or yeah, I guess why not include it?

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

Okay. All right. That's helpful. Thank you.

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

Good morning. This is actually Kevin Wilson on for Jamie. Thanks for the time.

Yeah, go ahead.

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

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

And I think we also said around the day that we said it's like 3% plus kind of on an annualized basis through the cycle, additional growth. And also very clear, like this could be a single deal, which maybe happens in three years or in four years. So in that regard, we're not feeling like any deal mode where we think like we need to execute a deal right now, just coming out of this investor day. As Matt said, we'll take the time, we'll find the right target, we'll be planned about it to find something which makes sense. And at the same time, we also have work to do in the operating business. We like the meaningful step forward, which we took, but we also clearly said we still have work to do and we'll keep on working on that.

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

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

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

Thank you. Our next question is coming from Ken Newman of KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Congrats on the solid work. Thanks, Ken. Good morning. Yeah, maybe first. Sorry if I missed it, Dennis, but I'm curious if you had any color on what price contributed to the organic revenue this quarter and kind of what's implied in the new 3Q guide. Really, I'm just trying to get a sense of what you think is potentially sustainable from price pass through into next year, if all the current policies on tariffs stay in place as they are today.

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

Yep, no, that makes sense. For my follow up here, maybe just to approach the margin guide or maybe the longer term view on margin guide a little differently, given all the work that you've done on leveraging costs, I think the midpoint of your 3Q guide is implying an incremental even down margin of above 50, closer to 60%. Do you feel like this is a decent baseline going forward given how the markets are recovering or are there any one-time things that we should kind of be aware of as we think about more normalized operating leverage into 26?

I mean, see, first of all, I think we said it. We're pleased with the progress. It's a meaningful step forward. It comes really two things together. Revenue top line is growing and OPEC side is decreasing on a year over year basis. And I think that's clearly there's some really underlying work, which we're doing. We talked a bit about the programmatic approach, which we're doing there. So it's really kind of in that sense, it's sustainable on the cost side. At the same time, I made this comment about the fourth quarter, right? So keep in mind there's seasonality in business. So I really want you to think on the top line side that we have this strong Q2, Q3 driven by consumer electronics. And certainly that drives leverage and de-leverage, right? So that regard, if you think back about Q1, Q1 was a strong quarter, if you think about it from a year over year comparison, but it was somewhere at a .8% adjusted average margin, right? So that means not yet in the 20%. So think about when you think about Q4, as you will see some de-leverage. And then of course, at the same time, when we think about what we said at Investor Day, our target of achieving greater than 20% adjusted average they are in 2026, we feel that we are on the path to that. And this work which we're doing in the cost structure is really bringing us there. So I would say, right, short term, keep in mind Q4 seasonality. But then if you think about 2026, and generally we're making really meaningful progress. Thank

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

Good morning, guys. Hey,

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

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

Helpful, Matt. Dennis, I'll ask Cam's question in a slightly different way. Like on margins, as you said, you guys are already doing like 20% and your 26 target is greater than 20% with our margin. Given most of your end markets are on a positive trajectory, and I understand it's still early, but why can't margins being that 25 to 30% range, which is the next leg that you guys highlighted during your investment there?

Yeah, I know, C, it's a great question. And C, that's what we're working towards, right? We laid out a clear path on how we want to get there, and we're working to achieve all milestones one by one. The first one is greater than 20%. I think it's great that we see it first on a quarter, right? So we had now first time for two years, and the second quarter, it's still there in the third. And I talked a bit about seasonality for the fourth, but the next step is to bring it there on a 12-month basis and then work from there towards the 25%. So in that regard, I think we're in the same spirit, and that's what we're driving towards. Very helpful. Good luck, guys. Thank you. Thank you.

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

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

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

be. All right. And then on the magnitude, when we said 8 to 14 million, it's over, includes minimum over five years, includes some inventory. So if you break that down, it's a meaningful number in the quarter. But if you think over five year numbers, it's not actually that big. So I really want to kind of highlight, we really took an approach to a very specialized area where we thought like in this specialized area, a channel strategy is more beneficial than the broader strategy which we have in the other markets. And therefore, we went down this path. So we certainly expect something positive from that, let's say a specialized area and from this partnership. But I wouldn't think like it would make any meaningful change to our numbers going down the road, considering that also, recognizing some of that revenue over this five years period in one single quarter. In that regard, yeah, I wouldn't call it a meaningful impact to 2026 and beyond.

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

Yeah, I think we're quite pleased with what we have done on the working capital side. I think over the last 12 months or so, our cash conversion cycle kind of stepped down by about 60 days. And a good portion of that is coming from the inventory side. And that's kind of our drive towards being efficient and being a lean company. It's both on the organizational side as well as how we manage working capital. In that regard, we think we have done meaningful progress there. There's still a little bit to go. But yeah, overall, we're just happy where we are and still have a little bit of potential there as well.

Great. Thank you.

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

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

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

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

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

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

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

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