Cognex Corporation

Greetings and welcome to the Cognex fourth quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kareer Abib, 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 am 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 update to our financial framework after prepared remarks will open the lines for Q amp a. Both are published materials and the call today will reference non gap measures, you can find a reconciliation of certain items from gap to non gap in our press release and earnings presentation. today's earnings materials will contain forward looking statement, 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 continue to deliver steady growth, along with strong year-end spending across many of our factor automation and markets. Let's start with an update on our strategy. Turning to page four of our earnings presentation, we made great progress in 2025 against each of our three 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 unlock 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 in the competitive ID Factor automation market with new AI-enabled auto setup and advanced code filtering. In March, we launched our Insight 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 within approximately 3.2 billion of our 7 billion served markets. 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 lifecycle, from initial engagement through post-sales support. Examples of investments in this area include new AI-powered chat assistants 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 five years. We expect to achieve this by continuing to advance our Salesforce transformation alongside investments in improved lead generation tools, such as a new Cognix.com website, which I will discuss in more detail momentarily. This multi-pronged approach is already yielding strong results as we acquired approximately 9,000 new customer accounts in 2025, three times the rate of new accounts added in 2024. This momentum provides a strong foundation for achieving our five-year target. A key element of our go-to-market and customer service transformation is the launch of our new Cognix.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 five. 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 non-core 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 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 code generation, 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 six, our ongoing Salesforce transformation is a great example of how we are upgrading the operating model of Cognex. The previous emerging customer initiative emphasized adding headcount and deploying easy to use products through a standalone sales organization. In contrast, our current Salesforce 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 one organization with three 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 Cognix 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. One year in, 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 seven of the earnings presentation. the margin progression from 2024 to 2025. We ended 2025 with an adjusted EBITDA margin of 20.7%, excluding the one-time 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 level for driving bottom-line profitability is OPEX efficiency, which is where I want to begin. Over the past year, we have been laser-focused on driving organizational efficiency throughout Cortnex. We achieved $33 million of gross cost reduction, which was partially offset by $11 million of incentive comp, $4 million of FX headwinds, and $10 million of wage adjustments, resulting in a net reduction of $8 million. Regarding Cox productivity and pricing, we saw 2024 pricing headwinds, especially in China, were 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 eight, 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 three key levels. First, OPEX efficiency. expect to realize an additional 35 to 40 million dollars of identified net cost reductions excluding fx in 2026. second organic mix the announced portfolio optimization will improve mix and partially offset the non-recurring favorability seen in 2025 and third cox productivity and pricing with 2024 pricing headwinds fully reflected in the pnl and ending 2025 as pricing stability, we are well positioned to turn pricing into a tailwind. Turning to page nine, 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% 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 three 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 ensured 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 continue strong margin expansion in 2026. Driven by revenue growth and favorable mix, adjusted EBITDA margin reached 22.7% all above the upper end of our guidance range. Gap diluted earnings per share were 19 cents, up 18% from a year ago. Adjusted diluted EPS was 27 cents, 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 year. 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 campus, which allows us to further rationalize our real estate footprint. In addition, we recorded a $30 million E&O charge following a reserve update aligned with our strategy to focus on select products. Those items are excluded from our non-GAAP results. Next, I will cover our full-year 2025 results, both as reported and excluding the one-time benefit from the commercial partnership. Starting with the 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 one dollar and two cents turning to page 14 i will now cover the underlying business performance excluding the one-time benefit of the commercial partnership revenue of 982 million dollars increased seven percent year-over-year as reported and on a constant currency basis marking the first year of a substantial organic growth since 2021 adjusted everyday margin of 20.7 percent expanded 360 basis points driven by revenue growth and discipline 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 31st, 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 was $642 million in net cash and 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 one-time 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 remained soft. Starting with logistics, 2025 was another very strong year with double-digit revenue growth led by large e-commerce customers. We were driving strong adoption of our standardized machine vision tunnel and layering new vision applications on top of code reading, increasing their ROI for customers. Looking ahead to 2026, after two years of outsized growth, we expect more moderate growth in the mid to high single digit range. Longer term, we believe logistics can 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 under-penetrated and less cyclical market, it remains a priority. Our Salesforce 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 a 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 and $255 million. We're presenting rolls of approximately 13% at the midpoint against a weak comp. Adjusted everyday hour 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 22 and 26 cents. is the midpoint of this range, representing approximately 50% year-over-year growth. In summary, 2025 marks a 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 discipline 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.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 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 going to be from Joe Giordano of TD Cowan. Please go ahead.

Good morning. This is Michael on for Joe. Michael, good morning. Thank you. Thank you for taking my question. Just a two-parter here. So 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, you know, how is that, you know, if that's included in the guide as well? And then just have a quick follow-up to that.

Yeah, no, happy to do that. So maybe first focusing like key takeaway on here, right? It's really all about focusing on getting out 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 one-time 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 Moritech. 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 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 two verticals, whereas the growth expectations, which Matt stated, or the initial view on these growth expectations in these vertical markets basically would remain unchanged on that lower base.

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 growth versus non-core. For instance, things like edge intelligence were a highlight of the investor day a couple years ago, so just would love to better understand the framing behind these priorities. Thank you.

Yeah, thanks, Michael. Yeah, 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 You know, where do we have core IP, core skill, you know, a deeper understanding of a certain application area is really the foundation of what we would define as core. And then, you know, we look at other, you know, financial metrics that Dennis mentioned, really, what is the size of that market? What's the growth potential? What's 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, you know, I think what you quickly see are those that, you know, 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.

Thank you. The next question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Hey, good morning. So, yeah, so 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? And then also, how do you see that progressing as the year goes along?

Yeah, no, absolutely, Joe. So, right, I mean, we mentioned 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 the walk 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 effects? It's on the mixed side, right? So I mentioned in the prepared remarks that we saw favorable call it like one-time effects in mix in 2025. You'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 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 your customer growth initiative, and it sounds like lead generation is certainly improving. Can you just maybe double click on what's changed over the last six 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?

Yeah, Joe, happy to. Yeah, no, for sure. We're seeing great, 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 Salesforce transformation. And I really can't overstate how significant of a transformation that is to our go-to-market. There's really four 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're able to arm our sales nodes 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 word ecosystem, and I want to encourage us 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 a 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 four things together, org, process, product, and partners, on one hand, dramatically different from where we were, let's say, even two years ago with emerging customers. But you have to get really all of those four 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 one 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 Salesforce transformation and and the leadership that we have in place at the top of that organization.

No, that's great. Thank you very much.

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

Hi, good morning. I guess two questions. One, just on the organic top line assumptions for 2026, Dennis, if you could provide you know, any color it looks like, you know, 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, you know, Salesforce transformation, you talked about adding 9,000 customers in 2025 versus 20 versus 3000. I don't remember what, 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 is, Just back on the portfolio optimization and the announcements you've made this quarter, I mean, where are you in this process? You know, is this like the first inning of the ballgame and there's more to come, or we feel like we've, you know, fully identified sort of the non-core low-growth product lines? Thank you.

Yeah. Thanks, Jamie. Let me start with your first question. So maybe first let me clarify, right, we're not providing a full year guidance, right? I think what we try in the sense, in the spirit of providing transparency 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 we're certainly continuously looking both at data which we're seeing in our business as well as macro factors. So in that regard, I would say We certainly encouraged what we have been seeing towards the end of the year 2025, where we saw that 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 comp. 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, 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 a high single digit range is kind of what we would say from today's perspective. Again, we're 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 a full year guide.

Yeah. 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 put 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 ideas. So yes, as it relates to the portfolio analysis, that's it. As a products-oriented company, there's always work to do in making sure that your portfolio is fit for purpose and that it lets you run the company efficiently. There probably is more work we have to do just generally speaking on cleaning up things like SKUs that really don't need to exist and 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 I think what we're announcing today is towards the end of that process.

Great. Thank you.

Thank you. The next question is coming from Andrew Buscaglia of BNP Paribas. Please go ahead.

Hi. Good morning, guys. This is Brooke 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.

Yeah, sure. Hey, Brooke. Thanks for joining us. Yeah, 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 you know, have high price points in the market. And so we see a lot of those customers, both end users, the product owners, as well as the systems integrators really favor Cognex. But there's, you know, there's many underlying trends that are supporting that growth. You know, certainly the shifts in the supply chain outside of the traditional manufacturing locations of China to greater Asia, ASEAN, India, even other parts of the world. And, you know, given the global company that we are, I think we remain a strong partner a partner to enable those geographic shifts as they happen. New vision capabilities, we brought to market some pretty transformational AI tools last year, specifically designed for consumer electronics. I think we're seeing 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 Cognix 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 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 SLX, 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, Brooke.

Yeah, thank you. That was super helpful. And then just to 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?

Right, yeah. See, in general, the capital allocation priorities remain unchanged versus what we presented in yesterday. Certainly, we're very pleased with the strong cash flow generation, which we had, especially in 2025, 77% up. I think it was really driven on the one 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, 255 days is really where we feel like it's a really good point for us as Cognex. So in that regard, probably we'll see a bit less of contribution to the free cash flow from working capital optimization. But then 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 yeah, clearly similar capital allocation priorities than previously communicated.

Okay. Thanks for the update. Thank you. The next question is coming from Ken Newman of KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Congrats on the solid execution this quarter. Hey, thanks. Maybe first question for you guys. This 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.

Yeah, 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. You know, I would say we're pretty good at managing this. You know, we really put teams in place many years ago when we saw, you know, a tiny 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. You know, 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 I wouldn't say that we're seeing increased memory prices affecting our business. We are seeing them. And 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 foreign guidance.

Got it. Thanks, Matt. 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 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?

Yeah, no, 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 would 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, yeah, start to look for effects in the the third quarter and in general i think as mentioned before that really would set us then up um for this adjusted um every run rate of 25 percent and maybe maybe let me elaborate a little bit more on that one um 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 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's durability and that we have confidence in the margin expansion and that this will continue and can continue also into 2027. In that regard, take that comment mostly about like, 2027 can have another increase or another year of margin expansion, and that we're not done in 2026. Great.

Thanks.

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

Good morning, and thank you for taking my questions. Hi, Tommy. 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 uh on the demand side and the conversations you're having thank you yeah sure as you mentioned tommy as we've said before you know it's very much a geographic story um and it does that story

tells differently in each area. So you asked about the US and the Americas. What I would say is I'm characterized as an area where we're seeing relatively more activity and strength. 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 car. Yeah, 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, just to build on some of my prior comments, we are shifting our sales activity to 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, you know, we're staying close to all of them. And I would say both their investment levels, their powertrain choices, you know, 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 goes on. Hopefully it's helpful time.

Yeah, thank you, Matt. 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 three bullets under transforming the operating model? the net to the 35 to 40 million annualized. Is that the bridge or are there other operational changes that you've made to give confidence and that raised through cycle expectation?

I mean, yeah, I think the bridge is really what we showed at Investor Day. So we're not really changing compared to what we said at Investor Day, the strongest level on the OPEX efficiency and we provided a target value for each of these buckets, and we're still striving to achieve those. I think really what has had us change to invest today is that we reached our first milestone, right? And I think as a company, as a leadership team, we're quite encouraged that 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, nothing changed in the bridge and the way how we want to get there. But it's really all about, like, having hit the first 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.

Yeah, and Tommy, I would just say, you know, anytime you think about, being more efficient, reducing costs. 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 two areas that you have to look is portfolio. We're doing that. You're seeing those artifacts 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, 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, you know, 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, you know, 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 three things together, and I think we have a lot of conviction in at least the 26 numbers that we're just rest assured that we're not settling. We are continuing to think about the longer term and how we'd be more a productive, efficient organization.

Thank you both. I'll turn it back. Thanks, Tom.

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

Good morning, guys. Congrats on the great quarter. Thanks. Just following up on the last question, the AI-assisted coding for software development, You know, I know like at your investor day, you kind of had talked about R&D being like a lower, you know, going to like low teams as a percentage of sales from like close to mid teams that you reported in 25. So seeing your like this integration can really help you reduce the timeline to lower the R&D. Is that true or we shouldn't get that too excited yet?

Let me give you a bear with me. I'm going to give you a longer run at answer. You know, Cognex, you know, we take pride in our customers expect from us market leading technology and capability, and we will continue to deliver that. And, you know, our ability to move the market and invent is very much driven by our investment in our world-class engineering organization. And so, You know, 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 forward and be the best in the emerging technologies that we know can help industrial machine vision. But for sure, you know, 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, yeah, we are. And we're doing it, I think, in the right way because You know, we need to make sure that when we ship products, they have the utmost quality and security. And so, you know, there's a fine line you have to balance and all these things. But I think we are fully utilizing. I think it is still 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 setting into the future.

Got it. Very helpful. And this is like falling 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 1Q26 top line guidance, you're kind of suggesting 13% top line growth. So are there any larger projects or one timers 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 the limited visibility and you guys are being a little bit more prudent?

Yeah, I understand the question, Piyush. I think two things. On the one 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, I keep in mind that Q1 2025 was a weak quarter where we saw at that time a lot of um logistics demand being pulled forward into q4 of 24. so in that regard as that's a bit like this mix that this time we see uh kind of a reverse of shifting from quarter to quarter right so last year it was moves from q1 into q4 and this time we see moves from q4 into q1 and that makes this 13 probably look a little bit larger than what it is so in that regard We're not expect to think like, hey, there's a deacceleration of things, but clearly there's kind of this underlying timing effects, which kind of maybe may 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 to think about Q4 this year. whether we would see a similar effect on year-end spending like this on 2025. That's just much too early to talk about that. So in that regard, it comes back to what I said before. We certainly are encouraged by seeing such year-end 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. They're going hard after these topics, and that gives us the confidence in our margin expansion. I appreciate all the color, guys. Good luck.

Thanks.

Thank you. The next question is coming from Guy Harwick of Barclays. Please go ahead.

Hi. Good morning. Congratulations on the great results. Looking at your initial outlook slide for 2026, it looks like on a weighted average basis, the UN 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 as excluding as net of organic growth for this year or like a business divestment?

Yeah, so a few thoughts here, Guy. So first, yeah, probably like that mid-single to high-single digital is a fair statement. And in the short view, I said earlier on the call, again, we're 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... of the revenue exit. So there's some divestment included in there in regards to the Japan focused trading business, which we think will 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 20 five revenue numbers, subtract the 22 million of exiting businesses 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.

Okay, thank you. Thank you. Excuse me. The next question is coming from John Nathan of Daiwa. Please go ahead.

Hi. Thanks for squeezing me in here. 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. um and and vision is a key part of that um things like amrs humanoid robots so i'm just wondering if there is uh do you see any opportunities um in kind of in terms of physical ai sure yeah we're uh we're probably the oldest physical ai company in the world we've been yeah we've been giving robots eyes uh 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 and 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 five 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 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. you know, certainly robotics, like you mentioned it. And, you know, we've been serving the robotics market for decades, I would say, maybe not in the way that, you know, we're seeing today with humanoids, but much more as it relates to high speed inline 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, yeah, an area we're thinking about and investing in, I would say less so with the angle of humanoids in full disclosure. We don't see that as such a strong place for us and a little too far from home in terms of inline manufacturing, but many, many other areas for industrial robotics that could use visual perception and where we see ourselves as really having a great, great win.

Thanks. And as a follow-up, and then it's just on the trading business within Moritex, typically these businesses are low gross margin businesses. Could we see a bump from gross margins in the second half with that divestment?

Yeah, you're right that typically trading businesses are less attractive on gross margins. I know 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.

Okay, great.

Thank you.

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.