Q2 2025 Cognex Corp Earnings Call
Conference Operator: Greetings and welcome to the Cognex second 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, Greer Aviv, head of investor relations. Thank you. Please go ahead.
Matt Moschner: Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our investor relations website. We are joined here today by Matt Moschner, our CEO, and Dennis Fehr, our CFO. Today, we plan to share several key messages with you, including how we're positioning Cognex for long-term success, an update on our technology leadership and end market trends, our performance in the second quarter, and our expectations for the third quarter. After prepared remarks, we'll open the lines for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will contain forward-looking statements, including statements regarding our expectations.
At this conference is being recorded. It is now my pleasure to introduce your host Greer Aviv head of investor relations. Thank you, please. Go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us.
Our earnings release was published yesterday after market close, and our 10-Q was filed this morning.
The earnings materials are available on our investor relations website.
We are joined here today by Matt moschner. Our CEO and Dennis fehr, our CFO.
Today, we plan to share several key messages with you, including how we're positioning cognex for long-term success.
An update on our technology leadership and end market trends. Our performance in the second quarter and our expectations for the third quarter.
After prepared remarks, we'll open the lines for Q&A.
Both are published materials, and the calls 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.
Matt Moschner: 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.
Today's earnings materials will contain forward-looking statements including statements regarding our expectations.
Matt Moschner: Thanks, Greer. Good morning, everyone, and thank you for joining us today. I'm excited to speak with you as the new CEO of Cognex. While this is my first earnings call in this role, I've had the privilege of being a Cognoid for over eight years. Since I joined in 2017, I've worked alongside many of the talented individuals who continue to drive our success. And I've developed a deep understanding of our business, technology, culture, and the values that make Cognex so unique. At Investor Day last month, I outlined three strategic objectives that will guide Cognex's future, which can be seen on slide three of the earnings presentation. For those who could not join us at Investor Day, I will briefly recap those strategic objectives and how I'm positioning Cognex for long-term success.
Our actual results May differ from our projections due to the risks and uncertainties that are described in our FC FCC filings, including our most. Recent forms 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 cognex. While this is, my first earnings call in this role. I've had the privilege of being a cogno for over 8 years.
Since I joined in 2017, I've worked alongside many of The Talented individuals who continue to drive our success.
And I've developed a deep understanding of our business technology culture and the values that make Cognex so unique.
And investor day last month. I outlined 3 strategic objectives that will guide cognex as future.
Which can be seen on slide 3 of the earnings presentation.
For those who could not join us on Investor Day, I will briefly recap those strategic objectives and how I'm positioning Cognex for long-term success.
Matt Moschner: First, we will target to be the number one provider of AI technology for industrial machine vision applications. Our continuous innovation in this area will help customers solve increasingly complex vision problems, like cosmetic defect inspections, faster, more accurately, and with less setup time. Second, we're committed to providing the best customer experience in our industry. Our goal is to deliver a seamless engagement from first interaction to full-scale deployment through our direct sales model, a unified product ecosystem, and upgraded global customer support capabilities. And third, we're focused on doubling the number of customers that we serve by scaling our go-to-market engine to reach new markets and geographies while better serving small and mid-size manufacturers. Our salesforce transformation is already generating good results and is an important component of this strategy.
First, we will Target to be the number 1 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 the first interaction to full-scale deployment through our direct sales model, a unified product ecosystem, and upgraded global customer support capabilities.
And third, we're focused on doubling. The number of customers that we serve by scaling. Our go to market engine to reach new markets and geographies, while better serving small and mid-size manufacturers.
Our Salesforce transformation is already generating good results and is an important component of this strategy.
Matt Moschner: To support the execution of our strategic objectives, I announced my newly formed leadership team on July 17th, as outlined on slide four. This team has decades of experience in our industry and with Cognex. And together, we will drive an ambitious profitable growth agenda, delivering even greater value to our customers and further strengthening our leadership and industrial machine vision. Q2 represents an early but meaningful step forward in this journey, marked by continued adjusted EBITDA margin expansion and strong free cash flow generation. Turning to slide five, let's begin with a few financial highlights from the second quarter. The momentum we saw in Q1 continued in Q2, with revenue of $249 million increasing 4% year on year, representing our fourth consecutive quarter of organic growth. Broader factory automation was stronger in Q2, driven by consumer electronics and packaging.
To support the execution of our strategic objectives. I announced my newly formed leadership team on July 17th. As outlined on slide 4.
This team has Decades of experience in our industry, and with cognex, and together, we will drive an ambitious profitable growth agenda, delivering even greater value to our customers and further strengthening our leadership and Industrial Machine Vision.
Q2 represents an early but meaningful step forward in this journey marked by continued adjusted Eva margin expansion and strong free, cash flow generation.
Turning to slide 5, let's begin with a few financial highlights from the second quarter.
The momentum we saw in q1 continued in Q2 with revenue of 249 million increasing 4%, year-on-year representing our fourth consecutive quarter of organic growth.
Matt Moschner: Our commitment to bottom-line profitability is reflected in our strong Q2 performance, with adjusted EBITDA increasing 9% year 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 in key verticals such as packaging. Second, we continue to drive AI innovation, which I will talk more about in detail as we turn to slide six of the presentation. At Cognex, we have over four decades of technology leadership, and this remains the core to our identity.
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, Eva increasing 9% year-over-year in our adjusted, but a margin expanding by 80 basis points to 20.7%. This is the highest quarterly margin we've achieved in the past 2 years.
In addition to the strong financial performance in Q2, we are executing against our strategic objectives.
First, we continue to reach new customers through our sales force transformation and expansion. And we're seeing promising gains including increased Revenue growth in key verticals such as Packaging
Second, we continue to drive AI innovation, which I will talk more about in detail as we turn to slide 6 of the presentation.
Matt Moschner: As we shared with you at Investor Day, we're proud to continue that legacy with OneVision, a cloud-based platform designed to transform the way manufacturers build, train, and scale AI-powered vision tools with unmatched ease of use. OneVision reflects our commitment to making advanced machine vision easy, not just powerful, but practical and scalable. Although still in early stages, feedback from initial OneVision adopters has been positive. A standout example is Paldo, one of Korea's largest noodle manufacturers. Paldo'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. Paldo wanted to further enhance their quality control inspection performance by driving down false reject rates to very low levels, which can be difficult to achieve without moving to more complex PC-based systems.
At cognex we have over 4 Decades of Technology leadership. In this Remains, the core to our identity.
Proud to continue that Legacy with 1 Vision. A cloud-based platform designed to transform the way manufacturers, build train and scale, AI powered Vision tools with unmatched ease of use.
1 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 1 Vision adopters has been positive. A standout example is called out 1 of Korea's largest noodle manufacturers.
Paulo'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
Matt Moschner: But with OneVision, Paldo was able to collect images directly from their production line, train a powerful new model in the cloud, and seamlessly deploy it back to the edge. This streamlined approach eliminated the need for a new complex system. It expanded our device footprint with Paldo and positioned us to support their growth across additional lines. With OneVision, 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.
Paulo wanted to further enhance their quality control inspection performance by driving down, false reject, reject rates, to very low levels, which can be difficult to achieve without moving to more complex. PCB systems
But with 1 Vision Paulo 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 streamline approach eliminated the need for a new complex system. It expanded our device footprint with Paulo and positioned us to support their growth additional lines.
With 1 Vision. We're setting a new Benchmark for how game-changing AI Vision tools are deployed 1 that simplifies complexity without compromising performance
As we expand this capability to additional cognex products in the future, we expect it will further strengthen our position as the technology leader in our industry.
Turning now to an update on our end markets, which you'll find on page 7 of the earnings presentation
Our discussion of 2025 Trends is based on current observations while acknowledging ongoing, macroeconomic uncertainties.
Matt Moschner: Strong second quarter growth in consumer electronics, logistics, and packaging was somewhat offset by a modest slowdown in semi and ongoing weakness in automotive. Starting with logistics, revenue continued to grow double digits year over year, marking our sixth consecutive quarter of growth in this market. Importantly, growth was across a broad base of customers. For the full year, we continue to expect strong growth in logistics, driven by ongoing investments by large e-commerce players and further penetration of the broader logistics market. Next is automotive. As expected, automotive continued to decline year over year, as it remains our most challenged vertical, reflecting broad headwinds to this industry. Looking to the full year, we remain cautious about the outlook for auto, as we have previously discussed, and continue to anticipate a more modest decline in 2025 relative to last year's 14% contraction.
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 6 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.
Matt Moschner: Turning to packaging, our business showed positive momentum in Q2, with revenue up mid-single digits year over year. Growth was driven by contributions from both healthcare and FMCG. Our salesforce transformation is delivering impactful results, helping us reach a broader cross-section of packaging customers. For the full year, the outlook for packaging is incrementally more positive. Turning to consumer electronics, Q2 revenue increased year over year, reflecting broad-based strength. We continue to expect electronics revenue to be relatively similar in Q2 and Q3, implying another quarter of strong year-over-year growth in Q3. As a result, our full-year growth outlook for electronics has improved. Moving to semi, we saw a slowdown in Q2, with semi revenue declining modestly year over year against a strong comparison. This result is in line with the cautious full-year outlook we adopted last quarter due to the uncertainty from trade policy and tariffs.
Looking to the full year, we remain cautious about the outlook for auto as we have previously discussed and continue to anticipate a more modest decline in 2025 relative to last year's 14% contraction.
Turning to packaging our business. Showed positive momentum in Q2 with Revenue up, mid single digits year-over-year.
Growth was driven by contributions from both Health, uh, Healthcare and fmcg.
Our sales force transformation is delivering impactful results, helping us reach a broader cross-section of packaging customers for the full year. The outlook for packaging is incrementally more positive.
Turning to consumer electronics, Q2 Revenue, increased year-over-year, reflecting broad-based strength. We continue to expect Electronics, Revenue to be relatively similar in Q2, and Q3 implying another quarter of strong year-over-year growth in Q3.
As a result, our full-year growth outlook for electronics has improved.
Moving to semi we saw a Slowdown in Q2 with semi Revenue, declining modestly year-over-year against a strong comparison.
This result is in line with the cautious full-year outlook we adopted last quarter, due to the uncertainty from trade policy and tariffs.
Matt Moschner: 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 and the outlook for the third quarter. Dennis.
In summary, we're focused on executing against our strategic objectives in delivering, on our long-term, Financial framework to drive shareholder value. I'm confident in our Direction, proud of our team and excited about what's ahead.
let me now hand it over to Dennis to walk through the financial results in the outlook for the third quarter, Dennis
Dennis Fehr: Thank you, Matt. Today, I want to share three key financial highlights for the quarter that can be found on page eight of our earnings presentation. First, adjusted EBITDA margin of 20.7% expanded 80 basis points year over year and was above 20% for the first time since Q2 of 2023. Second, adjusted EPS increased 12% year over year, the fourth consecutive quarter of EPS growth. Third, our free cash flow conversion rate on a trailing 12-month basis strengthened to 130% of adjusted net income. These results highlight our focus on profitable growth and cash flow generation, the pillars of our long-term through-cycle financial framework we shared at our Investor Day in June. We are encouraged by the progress we see here, but we also acknowledge there is still work to do and remain committed to executing against our priorities, discipline, and focus.
Thank you, Matt.
Today I want to share 3 key financial highlights for the quarter that can be found on page 8 of our earnings presentation.
First adjusted everyday, our margin of 20.7% expanded 80 basis points, year-over-year, and was above 20% for the first time since Q2 of 2023.
Second adjusted EPS, increased 12% year-over-year, the fourth consecutive quarter of eps growth.
Third, our free cash flow conversion rate on a training 12-month basis strengthened to 130% of adjusted net income.
Financial framework we shared at our investor Day in June.
The encouraged by the progress. We see here.
But we also acknowledge that there is still work to do and remain committed to executing against our priorities, this discipline, and focus.
Dennis Fehr: Taking a closer look at our second quarter results on page nine, 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 in packaging. The Americas grew 8%, led by continued strength in logistics and growth in packaging. South Asia increased by 5%, driven by strength in consumer electronics, where we saw evidence of supply chains shifting out of China. Lastly, Greater China declined by 18%.
Making 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 bordering through entities based in Europe instead of China.
This change of ordering entities does not reflect any underlying change in business mix or customer demand.
Excluding this procurement change, Europe grew slightly led by strength and packaging.
The Americas grew 8% led by continued strength in logistics and growth in Packaging.
Other Asia increased by 5% driven by strength and consumer electronics where we saw evidence of Supply chains shifting out of China.
Dennis Fehr: Excluding the procurement change and ordering entities, Greater China revenue declined modestly due to shifts in consumer electronics supply chains. Looking now at gross margins, an adjusted gross margin of 68% was in line with our guidance. A 230 basis point year-over-year decline was primarily due to a less favorable industry mix. As expected, tariffs had a modest negative impact on gross margin this quarter. Our continued focus on discipline cost management resulted in a 2% year-over-year reduction in adjusted operating expenses, or a 3% reduction on a constant currency basis. As we mentioned on prior quarter calls, we will remain laser-focused on tight cost management, as this is a key lever on our path to profitable growth. We expect operating expenses to continue to grow slower than revenue.
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 chains.
Looking now at gross margins.
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, terrorists had a modest negative impact on gross margin. This quarter
Our continued focused on discipline cost management, resulted in a 2% year-over-year reduction in adjusted operating expenses.
For 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 level on our path to profitable growth.
We expect operating expenses to continue to grow slower than Revenue.
Dennis Fehr: Revenue growth, combined with this discipline cost management, drove 80 basis points of adjusted EBITDA margin expansion year over year to 20.7%, our highest quarterly margin since Q2 of 2023. Diluted earnings per share on a GAAP basis were 24 cents, up 15% from 21 cents a year ago. Adjusted diluted EPS was 25 cents, representing 12% growth from 23 cents a year ago. This growth was driven by an expanded top line and cost discipline, as well as a 2% year-over-year reduction in our average diluted share count. Free cash flow generation was strong again this quarter, totaling $40 million, which included a one-time $60 million payment for a transition tax we noted last quarter. Trailing 12 months free cash flow generation of $180 million is up 138% compared to the 12-month period ended Q2 2024 and represents a free cash flow conversion rate of 130%.
Revenue growth combined with this discipline cost management drove, 80 basis, points of adjusted level, our margin expansion year over year to 20.7% our highest quarterly margins since Q2 of 2023.
Diluted earnings per share on a gap basis. For 24 cents up 15% from 21 cents a year ago.
Adjust the diluted EPS was 25 cents. We presenting 12% growth from 23 cents a year ago.
this growth was driven by an expanded Topline and cost discipline as well as a 2% year-over-year reduction in our average diluted share count
We cash flow generation was strong. Again this quarter totaling 40 million dollars, which included a 1-time 16 million payment for a transition tax. We noted last quarter
Raining 12 months, free, cash flow. Generation of 180 million is up 138% compared to the 12th month. Period ended Q2 2024.
And represents free cash flow conversion rate of 130%.
Dennis Fehr: 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.
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 dollars 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 3 metrics going forward.
First Revenue second adjusted avidar margin and third adjusted earnings per share.
Do you believe these metrics best reflect our increase focused on profitable growth?
Dennis Fehr: This range reflects 9% year-over-year growth at the midpoint, with both our logistics and broader factory 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 cents, with the midpoint of this range representing 35% year-over-year EPS growth. This outlook represents another meaningful step forward on our journey of profitable growth. A few other noteworthy items to consider as part of our outlook.
Starting with Revenue in Q3 we expect revenue between 245 and 265 million.
This range reflects 9% year-over-year growth at the midpoint.
if both our Logistics and broader Factor our automation businesses contributing to next punch,
Ordered. Last chord, we expect consumer electronics. To be relatively evenly weighted across our seasonally strong second, and third. Quarters this year.
Next.
Adjusted epiderm 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 disciplines.
Lastly, adjusted earnings per share are anticipated to be between $0.24 and $0.29. If the midpoint of this range represents 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.
Dennis Fehr: First, as we look ahead to the remainder of the year, we anticipate Q4 revenue to return to more typical seasonal patterns, which historically have shown a sequential step down in the high single-digit range. The fourth quarters of both 2023 and 2024 were exceptions to this trend. In 2023, this was mostly driven by our acquisition of Moritex, which closed in October of that year, while in 2024, we saw accelerated demand late in the fourth quarter. Second, while the tariff landscape remains fluid, the recent trade agreements with China, Indonesia, and Vietnam do not change our previous commentary on the expected full-year impact of tariffs. Specifically, we continue to expect no material impact on adjusted EBITDA margin and earnings per share and continue to estimate a 50 basis point dilution to gross margin.
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 the exceptions to the strength.
In 2023, this was mostly driven by our acquisition of more attacks, which closed in October of that year. While in 2024, we saw accelerated demand laid on the fourth quarter.
Second, while the Tariff landscape remains fluid, the reason trade agreements with China, Indonesia and Vietnam, do not change our previous commentary on the expected full year impact of terrorists.
Specifically, we continue to expect, no material impact on a, just a margin and earnings per share and continue to estimate a 50 basis. Point dilution to cross margin
Dennis Fehr: Third, during the third quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation. This arrangement is expected to result in a one-time benefit to revenue and profit in Q3, which is excluded from our guidance. We 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.
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 1-time benefit to revenue and profit in Q3, which is excluded from our guidance.
Currently expect the benefit to revenue to be between 8 and 14 million dollars in Q3
Lastly, let me touch on the 1. 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 adjust the EPS in 2025.
We expect an insignificant impact to adjust the EPS in 2026 and Beyond.
Dennis Fehr: 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.
Currently expect a 1-time higher reported tax rate in 2025 and will update you when we have more clarity and to 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 cost, is expected to result in a cash tax benefit of 12 to 15 million dollars this year, which is expected to step down annually and phase out over the next 5 years.
Now, Matt and I are ready for your questions.
Operator. Please go ahead.
Conference Operator: 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 Melius Research. Please go ahead.
Thank you. The floor is now open for questions. If you would like to ask a question, please press *1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that's *1 to register a question at this time.
Our first question is coming from Jacob levenson. Ofelia's research. Please go ahead.
Jacob Levinson: Hey, good morning, everyone.
Hi, good morning, everyone.
Dennis Fehr: Hi, Jake. Good morning.
Matt Moschner: Hey, Jake. Morning.
Hey Jay, good morning, Hey Jake, good morning.
Jacob Levinson: This is the first quarter I can recall that you've had revenues going up and costs going down, which is certainly a good thing. And I know you've obviously laid out some targets, margin targets at the analysts' day, but maybe either Matt or Dennis, can you help us understand behind the scenes within the organization? What's really changing from a process perspective or maybe change incentives that is helping drive a better outcome in the margins?
All right, this is uh this is the first core I can recall that uh you've had revenues going up and costs going down, just certain certainly a good thing. And I I know you you've obviously let out some targets margin targets at the analyst I, uh, but maybe either mad or Dennis. Can you help us understand?
Behind the scenes within the organization, what's really changing from a process perspective, or maybe changes in incentives, that is helping drive better outcomes than margins?
Matt Moschner: Yeah. Hey, Jake. This is Matt. I'll start and 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 follow-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.
Yes, thanks for noticing. Yeah, I mean we, you know, our primary objective is is to grow the business. We know that when we can do that. Um, you know, we we get tremendous fall through to the bottom line and so, you know, we've really um, driven an intense focus on the ways in which we're going to grow and really making sure we're we're funding those growth initiatives. Um and and that's not just in product development. It's in how we think about our Channel um and and we're doing all those things and you're seeing seeing some of that, the numbers. Um, but at the same time, you know, Dennis and I and and the broader leadership team.
Matt Moschner: 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 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.
Matt Moschner: 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?
Dennis Fehr: Yeah, in that regard, really pleased to see kind of this meaningful step in that regard. And to your question, what changed? I think one thing Matt highlighted to us, I think really a problematic approach to it, that we're really focused across the entire P&L and across the entire organization and put that program in place to really think about very thoughtfully where we can optimize cost. And then I think at the same time, Matt also alluded a little bit to it, kind of it's really a focused effort of the entire leadership team. And I think there's a clear sense in the organization of the direction where we want to go, and we feel really positive about how the organization is responding and how everyone is pulling into this direction. So we're pleased with that.
Are very focused on our cost position and, you know, that's not a new thing. We've started that many, uh, many months ago, uh, when I really stepped into the operating, uh, Chief Operating role earlier this year. And, um, and we've organized ourselves, uh, to, to really go after that, and be thoughtful about it. We've made great investments in the business over the Last 5 Years. And we're using many of those Investments to make sure that we're driving the efficiency and productivity, uh, that, that we'd like to. And I would say it's really known it's not in 1 area. Uh, it's it's across the board from engineering to sales to to back office functions um to facilities. So we're trying to take a very thoughtful view of it. Uh and make sure that we are uh driving efficiency and cost reductions in the right areas to make sure we're not 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 to the to the margin uh range that we committed to an 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, 1 thing that highlighted to us I think we
Really problematic approach to it that we're really focused um across the entire pnl and cost the entire organization. And um put that program in place to to really think about like very thoughtful where we can optimize cost.
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 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 the this direction. So we're, we're pleased to stand.
Jacob Levinson: That's all really helpful, Cullen. 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. They have different form factors. Can you help us understand what does that mean when you've got a change? I assume it means there's a change in manufacturing technique, and maybe you've got retooling of lines and whatnot. But what does, when you have some new technology, if you will, what does that really mean for you folks in terms of machine vision?
Oh, that's all really helpful color. Uh, just on a, a separate topic. You know, 1 of your, your larger Electronics. Customers has some, uh, new products coming out. Uh, next year, I think that that are that are foldable, you know, different form factors. Uh, can you can you help us understand like 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 what is when you have some new technology if you will? And what does that really mean for you folks, in terms of Machine Vision,
Matt Moschner: Yeah, Shiradi, I'll take that. Thanks. Just remind us all that these are really complex products to manufacture, and it takes months, in many cases years, to bring those technologies to market. And so what might be a new product that may or may not be coming out next year, we would likely have been engaged on the manufacturing design strategy years ahead of that. So just remind us that it is more of a long-cycle project-based business with some of those large providers. We noted growth in consumer electronics, and what's driving that? It's really, 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 Moritex in the fall of '23.
Matt Moschner: We've been working with a lot of the players in this area as they consider some of the geographic shifts in manufacturing across border, and that's been helping. And as a global company, we're well placed for that. But 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.
Yeah, sure, maybe I'll take that thanks. Um, you know, I would 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, what might be, you know, a new product that, that may or may not be coming out next year. We, we would likely would have been engaged on the manufacturing design strategy, you know, years ahead of that. So, you know, just remind us that it is more of a long cycle Project based business with some of those large providers. Um, you know, we noted growth and consumer electronics. And um, you know what's driving that it's really, you know, we've been focusing on, uh, adding more value and, and, and delivering more complete Solutions in this market. A lot of that had to do with the acquisition of more attacks and the fall of 23. Um, you know, we've been working with a lot of the players in in this area, uh, as they consider, you know, some of the geographic shifts and Manufacturing, uh, cross border. And, and that's been that's been helping and, you know, as a global company, we're well placed for that. Um, but I would, you know, to, to the extent. There's there's new new, uh, product releases or or, or, or, or phone design.
Dennis Fehr: Maybe just to add on that, on the revenue side, while we are 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.
I I wouldn't, I wouldn't comment on that. I would just remind us all that those things take time and we, uh, typically engage far ahead of those product releases, right? Maybe just to add on that. Like on the, on the revenue side, I'd want to 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.
Jacob Levinson: Perfect. Thank you. I appreciate it. Good luck, guys. Pass it on.
Matt Moschner: Thanks, Jake.
Perfect. Thank you. I appreciate it. Good luck, guys. Pass it on.
Jacob Levinson: Thanks, Jake.
Conference Operator: Thank you. The next question is coming from Damian Karras of UBS. Please go ahead.
Thank you. The next question is.
Of UBS. Please go ahead.
Damian Karras: Hey, good morning, everyone, and congratulations on the progress. I don't think we've heard a thought about any 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 how much of that is new customer-driven versus how much is just the underlying market improving and existing customers kind of replacing or augmenting 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.
Hey, good morning everyone and congratulations on the progress.
I don't think we've heard of auditing 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, existing customers kind of, you know,
And just you know, I guess your confidence that some of this Improvement isn't just 1-off activity but rather a more sustainable trend.
Matt Moschner: Yeah, maybe I'll start. Damian, good to hear from you. So I mentioned a few things in consumer electronics in the previous question, right? This is a market we have great presence in. 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 consumer electronics. And then there's a geographic story there as those technology providers evaluate shifting production in new geographies. So that's how I would describe consumer electronics. Packaging, right?
Yeah, maybe I'll start, um, Damian good to hear from you. So, you know, I, I mentioned a few few things in consumer electronics, and, and the previous, um, in the previous question, right? This is a market, you know, we have great presence in. We work with, uh, great, uh, uh, Partners in that area. And and we've really focused on how can we increase our share of wallet if you will, um, by delivering more complete Solutions. Uh, so that's, that's a part of it and going deeper, uh, into, uh, into into taking share of what what they do from a, an advanced automation standpoint. So, I think you're seeing that in consumer electronics, where broadening the customer base. I think we said it's a broad-based growth story and consumer. Uh, sorry in kusto, um,
Matt Moschner: Just to remind the group, 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, as Rob used to say, razor blades to shampoo bottles. And 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. This tends to be a more regionalized set of manufacturers and brands, both in healthcare and in fast-moving consumer goods. So certainly, the strengthening of our channel has helped. But I would say the needs of each of those areas have also driven demand for vision, right?
Consumer electronics. Um, and then there's a geographic, uh, story there as uh, those, um, those technology, uh, providers, uh, you know, evaluate shifting production and new geography. So that's how I would, I would describe consumer electronics, packaging, right? Just to remind the group, um, you know, packaging is now our third largest vertical. It really is made up of 2 areas, 1 Healthcare. So that's Med devices. Pharmaceuticals life sciences and and fast-moving consumer goods. This is a lot of, you know, it's Rob used to say razor blades to shampoo bottles
Matt Moschner: If you look at healthcare, particularly med devices and pharmaceuticals, we're seeing a lot of CapEx flow into both of those areas on the heels of some very popular pharmaceutical drug releases, particularly around 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, I think Cognex Vision has always played a large role when it comes to traceability and regulation that drives the need to drive traceability, particularly around food. And then brands really wanting to up their game from a quality standpoint. And we maintain great relationships with a lot of the machine builders, particularly in the packaging area. And we noted some products we launched in Q1, the Insight 8900, which really play well in that area.
And um, you know, both have different Dynamics. Uh, what we've said in packaging is we do see evidence of of the growth story driven by the Investments we've made in our sales Channel. You know, this tends to be a more regionalized set of Manufacturers and Brands, um, you know, both in healthcare and in and in, um, fast-moving consumer goods. So certainly, you know, our 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, or seeing a lot of capex flow into both of those areas, uh, on the heels of some, some, uh, you know, very popular, uh, uh, uh, uh, pharmaceutical drug releases, particularly around, you know, obesity and and uh, and, and, and cancer. And, and really playing on some of the demographic shifts, uh, in in various regions. So we like to Trends, we're seeing, uh, in healthcare and then, on packaging. Um, you know, I think, uh, you know, cognex Vision has always played a large role when it comes to traceability and regulation that drives the need to to to to drive traceability
Matt Moschner: So yeah, I think we're encouraged by the progress we're making in both packaging as well as consumer electronics.
Particularly around food. Um, and then, you know, Brands really wanting to up their game from a, from a quality standpoint. And, um, you know, we maintain great relationships with a lot of the machine Builders particularly in the packaging, uh, area. And we, we noted, you know, some products, we launched in the q1, uh, the inside 8900, which really play well in that area. So, yeah, I think we're encouraged by the progress. We're making in both packaging, uh, as well as, as well as consumer electronics.
Damian Karras: That's really helpful. And as a follow-up, you talked about new products. I mean, you showcased the AI devices and one vision 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 one vision to the broader customer base?
That's really helpful.
Uh, and and as a follow-up.
You know, you talked about new products. I mean, you showcased uh the AI uh, devices and 1 Vision. Um at your investor day, be curious to hear what kind of early feedback. You've been getting on um the AI technology um, and solutions that
And, uh, any sense for when you might open up 1 Vision to the broader customer base?
Matt Moschner: Yeah, we're really excited about one vision. Hopefully, the example we gave today is helpful to the group to understand. It's very indicative, I think, of how one vision is helping our customers and letting us drive simplicity in delivering more advanced vision capabilities. So we're trying to be very thoughtful about how we engage the market on it. 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 it will have greater compatibility with a broader set of Cognex vision systems, and I'm quite excited about it.
Yeah, we're really excited about 1 Vision. I hopefully, the example we gave today is is uh, you know, helpful to the group, to understand it's very indicative. I think of how 1 vision is helping our customers and letting us, uh, Drive Simplicity, um, in delivering uh, more Advanced Vision capabilities. So we're trying to be very thoughtful about uh, how we engage, uh, the market on it. It's a very new style of Designing vision and we want to make sure that um, our customers, understand it, our comfortable with it uh, as well as our sales Channel, being able to adequately um, sell and promote it. So yeah, you're going to see us take a take a methodical phased approach throughout the year and it's a next year. It's an area where we're going to continue to invest. And uh what you'll see is that you know, um it will have a greater compatibility with a broader set of cognex vision systems and I'm I'm I'm quite quite excited about it.
Damian Karras: Terrific. Good luck out there.
Terrific. Good luck out there.
Matt Moschner: Thanks, Damian.
Jacob Levinson: Thanks.
Conference Operator: Thank you. Our next question is coming from Joe Giordano of Cowan. Please go ahead.
Thanks, Damian. Thanks.
Thank you. Our next question, is coming from Joe Giordano of Cohen, please. Go ahead.
Joe Giordano: Hey, guys. Thanks for taking my question.
Jacob Levinson: Thanks, Joe.
Joe Giordano: Yeah, I'm curious on logistics. Are you seeing that more on the greenfield side coming back, the brownfield kind of investment in existing facilities? What's driving that now, and where are you seeing kind of the most inflection?
Hey guys. Uh, thanks for taking my question. Um,
Yeah, I I I'm curious on Logistics. Are you seeing that more on like the Greenfield side coming back? The Brownfield like kind of investment in the existing facilities like what's driving that uh now and where are you seeing kind of the most inflection?
Matt Moschner: Yeah, I think what we said at Investor Day is our growth strategy in logistics is multipronged. It's not just about new capacity additions. We are seeing that, and maybe that's what drove us significantly four or five years ago during COVID. But what we're seeing today is much more balanced growth, right? Certainly, participating as new facilities come online, it pulls through a good share of Cognex machine vision. But we're seeing a lot of traction now in vision. You'll recall, as we said at Investor Day, most of our business today is still in traceability and barcode reading. And with our latest generation of AI vision tools, we're really seeing the ability to scale vision both 2D and 3D in logistics, and we're seeing customers respond really well to that.
Matt Moschner: And then as our technology advances and our relationships with those operators mature, we're also going back to existing facilities to drive process improvements and greater efficiencies within their existing fulfillment network. So yeah, it's exciting. I mean, it's broad-based from a customer standpoint, but also if you think about 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.
Fading his new facilities come online. Uh, it pulls through a good share of a cognex Machine Vision. But, you know, we're seeing a lot of traction now, uh, in in Vision, you know, you'll recall, as we said, an investor that most of our business today is still in traceability, and barcode reading and, uh, 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, um, you know, as our technology advances and our relationships with those, um, those operators and, uh, uh, matures. You know, we're also going back to existing facilities to drive process improvements, uh, and greater efficiencies, uh, within their existing, uh, fulfillment Network. So, yeah, it's exciting. I mean, it's, it's broad-based from a customer standpoint, but also, if you think about, um, 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 in in new technology areas, uh, entirely.
Joe Giordano: And when you think about something like one vision, I'm just curious, what does that mean for you? 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 driving a different type of sale.
when when you think about something like 1 Vision, I'm just curious like
What does that mean for you from like, is it sold differently? Is it a different pricing mechanism? Um,
I it seems like a nice a nice Improvement on how the products are used though. I'm just curious like what it means for you in terms of like
In terms of driving a different type of sale.
Matt Moschner: Yeah, it's a very different type of technology. I mean, I think what we said at 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, 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.
Matt Moschner: So yeah, our go-to-market right now, I would say, is more familiar to how we've gone to market in the past. To the extent that evolves in the future, I think we are thinking about that, but nothing to go into detail today.
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, um, talk in detail about the pricing model of when vision. And I and I don't think we're ready yet. Um, but you can, the way you can think about how we go to market is very much, um, uh, as part of, uh, the bundle of technology that, uh, we would, uh, today. And so, when we engage a customer on a new application, you know, we really start at the edge, uh, and we and we have designed our technology to work very well on device. Uh, so that there's no need for any sort of, uh, separate PCS or clouds. But when vision is very much compliments, uh, that, uh, sales activity, when the customer needs more advanced vision. And we like to say, 1 vision is helping us Bridge Edge to deep learning and it does that, uh, quite well. So yeah, our go to market right now. I, I, I would say is, is is um, more familiar uh, to how we've gone to Market in the past, to the extent that evolves in the future. I think we are, we are thinking about that but nothing to uh, nothing to go into detail today.
Joe Giordano: Thanks, guys.
Thanks guys.
Conference Operator: Thank you. The next question is coming from Tommy Mole of Stevens. Please go ahead.
Thank you. The next question is coming from Tommy mole of Stevens. Please go ahead.
Jacob Levinson: Good morning, and thank you for taking my questions.
Joe Giordano: Hi, Tommy.
Good morning, and thank you for taking my questions.
Jacob Levinson: Hey, 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 I just want to clarify, for the base quarter and third quarter, should we use the revenue that includes or excludes the one-time payment? So I think I heard you say typical seasonality would be a high single-digit quarter-over-quarter decline. I just want to get the third quarter base right.
Hi Tommy. Hey 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 1 quarter forward but pretty sure I I I did hear
You offer a comment there and so just want to clarify.
For for the base quarter and third quarter.
Should we use the revenue that includes or excludes the 1-time payment? So I think I heard you say.
Typical seasonality would be a high single digit quarter-over-quarter decline. I just want to get the third quarter base, right?
Dennis Fehr: Yeah, no, great question, Tommy. Yeah, it's based on the guidance, which is excluding the one-time effect.
Yeah, no great question, Tommy. Yeah, it's based on the the guidance which is excluding the 1-time effect.
Jacob Levinson: 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.
Okay, thank you.
Uh, 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.
Um, 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.
Matt Moschner: 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. We have great relationships with customers in this area. And so you would imagine that we would have multi-year discussions on their plans and to the extent that they can align 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.
Yeah, sure Tommy. Yeah, no, you're right. To say it is a longer cycle business, right? These are bigger Investments and build outs of of of new capex. Um, you know, we have great relationships with customers in this area and so, you know, you would imagine that we would have multi-year discussions on their, um, their plans, uh, into the extent that they can align, you know, what we're delivering to them. So, yes, I think it's fair to say we engage on customers plans across many years, but typically, you wouldn't see ordering activity until those facilities are committed. The capex is approved. And, um, and that still is is is more within the 3 to 6 month period of
Matt Moschner: 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 very tightly linked with them in that way.
Of of visibility for us. So so, yes. I but I, but I wouldn't say necessarily that we're seeing that Trend change 1 way or another. I I don't think we see it getting longer. I wouldn't say we see it getting shorter. Uh, but we are or we are engaged on the multi-year plans of our customers and, um,
And and and and we continue to stay, you know, very tightly linked uh with them in that way.
Jacob Levinson: Thank you both. I'll turn it back.
Thank you both. I'll turn it back.
Matt Moschner: Thanks, Tommy.
Jacob Levinson: Thanks, Tommy.
Conference Operator: Thank you. The next question is coming from Andrew Vascaglia of BNP Paribas. Please go ahead.
Thanks. Thanks Tommy.
Joe Giordano: Hey, good morning, everyone.
Hey, good morning, everyone.
Matt Moschner: Hi, Andrew.
Joe Giordano: 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.
Andrew Andrew.
Um,
maybe on Logistics. Um, and some of the other markets like consumer electronics and and packaging sort of picking up, you know, would would you not say some of that might might be due to some pull forward on tariffs and, and uh, maybe in logistics around tariffs.
Um, do you see any Clarity from tariffs, um, helping customers?
Um, move forward with some decision-making or any any change there if you can comment.
Matt Moschner: Yeah, sure. We're keeping a close eye on it. Obviously, it's a dynamic situation. We have a team that's been in place, gosh, since last fall, really monitoring the situation and the news, but also our response, right? And so we're working hard, and I think we've done a great job to mitigate both the cost, primarily the cost effects of tariffs on us. But I think your question is more on demand, right? And what are we seeing from customers from a demand perspective? I think Dennis will maybe offer some commentary in terms of where we may have seen some pull forward of demand in light of tariffs. I wouldn't say it's been really outsized. We're monitoring our forward funnel, which continues to be healthy, and I would even say normal in light of some of the recent tariff announcements.
Matt Moschner: And we continue to engage with our customers, right? In some sense, the impact is to increase their costs and potentially increase the costs of our products to them, and we're being very transparent with them on that. But I would also just remind the group, right, as costs go up, 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. So 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.
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 uh the situation on and and and the the the news, but also our response, right? And so we're we're working hard and I think we've done a great job uh to mitigate both the cost uh primarily the cost effects of tariffs on us. But I think your question is more On Demand right and what are we seeing from a customers? From a demand perspective, I think tennis will maybe offer some commentary uh in terms of where um we we we may have seen some pull forward of demand in light of uh of of of tariffs. Um, you know, it's I I wouldn't say it's been really outsized. We're monitoring our forward funnel uh, which continues to be um, healthy and and I would even say normal uh in light of some of the recent tariff, uh announcements.
Matt Moschner: 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.
Dennis Fehr: 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 tariffs. You 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 changed in that regard. And now, right, being here already at the end of July, we also haven't seen any demand trends and booking trends changing throughout July. 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.
You know, and we continue to engage with our customers write in some sense, you know, the 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 as costs go up. Um, you know, these organizations are really looking to how they can mitigate those costs and Automation and Machine Vision. Um, you know, has been and will continue to be a great way to do that. So, on 1 hand, I think they are, um, you know, looking at us as as, um, you know, a potentially higher cost Bill material for them as as we have to kind of mitigate costs on our end. But also seeing us as maybe 1 of the best ways to mitigate costs within their manufacturing and supply chain overall. And so you know from a demand perspective it's it's hard to say but over the the medium long term, I'm still quite optimistic that. Um the situation uh now with tariffs and trade um is going to be be a nice Tailwind for the business as we're engaged to not just help Drive efficiency but also diversity and Supply chains. Overall
Yeah, and maybe to to add on that. So I think in the second quarter, particularly in the, in the US, um, and packaging and maybe in in logistics, there have been a couple of projects where we thought they could have been accelerated due to a terrorism. Don't always exactly know it. So I would say, really maybe a, a low single digit million dollar number at the same time. Um, we haven't really seen that the funnel for Q3 even changed in that regard. And now, right, being here,
Dennis Fehr: 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 Cognex.
Already in at end of July. We also haven't seen like, any demand Trends in Booking Trends changing for July. That kind of offsets that a little bit and then, at the same time, right? We had some, some commentary about consumer electronics. That shift happening in Asia, right from from China to to other Asia. So we are seeing, I would say probably some of these early signs of, of some of this, um, relocation of, of manufacturing happening. And I think as as Matt also said, I mean long term, that's that's really a great Trend and a great opportunity for Cox
Joe Giordano: Yeah, okay. Okay, and then another question is, why not include the 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 what why not include it?
Yeah. Okay.
okay, and then
Another question is why um why not include the what that 1 time, potential benefit um from the channel.
Um, agreement is there. Is it just you? You don't know the timing. You might it might slip and you don't want to count on it or or yeah. I guess, what? Why not included.
Dennis Fehr: Yeah, maybe let's first unpack what it really is, right? It's a partnership. It includes a multi-year kind of software license agreement. That means we will recognize the one side.Some
Conference Operator: minimum, minimum license, over a couple of years in a single quarter. And we have also some, some component inventory which we are transferring. So that's really, to some extent, you can say, like, right, it's not a a one-quarter thing, right? It really is 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 we really wanted to show that separately to 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 what the number would be including. That's kind of what's the rationale to it, just to to, create the clarity there.
Yeah, maybe. But let's first unpack. Was it what it really is, right? It's, uh, uh, it's a, it's a partnership. It includes, um, a multi-year kind of software license agreement. That means we will recognize the 1 side. Um, some minimums, um, minimum license over a couple of years, in a single quarter, and we have also some, some component inventory in which we are transferring. So there's really to some extent, you can say like, right? It's not a, a 1 quarter thing, right? That
You know.
Conference Operator: Okay. All right. That's helpful. Thank you.
Okay.
All right, that's all well. Thank you.
Conference Operator: Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead.
Thank you. The next question is coming from Jamie Cook of truist Securities. Please go ahead.
Matt Moschner: Hey. Good morning. This is actually, Kevin Wilson on for Jamie. Thanks for the time.
Hey, good morning. This is Ashley. Uh, Kevin Wilson on for Jamie, thanks for the time.
Conference Operator: Hey, Kevin.
Conference Operator: Hey. on M&A, you, spoke at the investor day, with your new capital allocation framework. you mentioned potentially looking at non-vision adjacencies as acquisition opportunities, perhaps in sensing components, or other automation technologies. in the context of your new framework, I'm wondering if you can expand on what adjacencies you're considering outside your core vision business and then more broadly just how the 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.
Hey uh on m&a, uh you uh, spoke with the investor today uh with your new capital, allocation framework. Um, you mentioned potentially looking at non Vision, adjacencies as acquisition opportunities uh perhaps in in sensing components uh or other automation Technologies um in the context of your new framework. Uh I'm wondering if you could expand on what adjacencies, you're considering outside your 4 Vision business and then more broadly, just how the the pipeline for m&a.
Or conversations with potential targets uh, changed since you have changed maybe since you came out with your new, uh, framework, thanks?
Matt Moschner: Yeah, Kevin. this is Matt. we we certainly did at investor day, provide some guidance in terms of how we're thinking about M&A, what its contribution to our growth, outlook is. but I think what we also said was we were going to be very thoughtful and continue to hold a very high bar in terms of, how and where we would we would we would pursue M&A. you know, Cognex over the last 10 years or more has always, you know, viewed M&A as a as a way to add capability to the business. And Dennis and I and the the broader leadership team, you know, continue that belief. I think, you know, with the acquisition of Moratex, that was a bit of a different move for us. It was a larger deal that brought with it, you know, products, technology, revenue, around the world.
Yeah. Kevin, um, this is Matt, um, we we certainly did at investor day uh providing provide some guidance in terms of how we're thinking about m&a, what its contribution to our growth. Uh uh Outlook is um but I think what we also said was we were going to be very thoughtful and continue to hold a very high bar in terms of how and where we would, we would, we would pursue m&a, um, you know, cognex over the last 10 years, or more has always, you know, viewed m&a, as a as a way to add capability.
Matt Moschner: And, and, you know, I think we all viewed that as going very well and adding the value that we wanted it to. And, you know, I think it should give us all some confidence that 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 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, you know, that we are the the preferred owner, that that we can leverage the assets of Cognex and drive, advantage value for our shareholders, and and and affect the bottom line quickly. and and to that end, we're holding a very high bar.
Matt Moschner: So, yeah, we we have and will continue to have a very, rigorous M&A process. you know, we're, as a leader in our industry, you know, we we know a lot of the the key key players, and and we plan to stay in touch with with those players. And, you know, as as we have updates, we'll share them.
To the business and Dennis and I and the the broader leadership team, you know, continue that belief. I think you know with the acquisition of more attacks that was a bit of a different move for us. It was a larger deal that brought with it. Um, you know, products, technology Revenue, um, around the world and, and, you know, I think we all viewed that as going very well, and adding the value that we wanted it to and, you know, I think should give us all some confidence that that those are plays we can run as well beyond just maybe the smaller bolt on, uh, technology, um, Acquisitions that. We've done, uh, more so in the past. So, um, what are we looking for? Right? We're we're looking for really good strategic fit, uh, and alignment with the objectives that I shared. Uh, that's number 1, we're obviously looking for, um, uh, a clear evidence, um, that we can drive value. You know, that we are the preferred owner that that we can Leverage The assets of cognex and drive, uh, uh, Advantage value for our shareholders, um, and, and, and affect the bottom line quickly. Um, and, and to, that end, we're holding a very high bar. So, yeah, we we have and
Conference Operator: And I think we we also said around investor day that, like we said, it's like 3% plus kind of on an annualized basis as through the cycle, additional growth. We know it's very clear, like, this could be a single deal, which maybe happens in three years or in four years, right? So in that regard, we're not feeling like kind of any deal mode where we think, like, we need to execute a deal right now. Just coming out of this investor day, as as Matt said, we'll take the time, we'll find the right target, we'll be disciplined about it, to to find something which makes sense. And at the same time, we also have, no work to do in in the operating business.
Will continue to have a very, uh, rigorous m&a process. Um, you know, we're uh, as a leader in our industry. Um, you know, we we know a lot of the, the keep key players and, and we plan to stay in touch with, with those players and, you know, as as we have updates, we'll share them.
Conference Operator: We like the meaningful step forward, which we took, but we also clearly said we still have work to do, and, we'll we'll keep on working on that.
And I think we we also sat around in this the day that like we said, it's like 3% plus kind of on an annualized basis through the cycle, additional growth. You can also very clear like this could be a single deal, which maybe happens in 3 years or in 4 years, right? So in that regard, we're not feeling like kind of any deal mode where we think like we need to execute a deal right now. Just coming out of this investor there. As, as Matt said, we'll take the time. We'll find the right. Target will be disciplined about it, um, to to find something, which makes sense. And at the same time, we also have um, know work to do in in the operating business. We like the meaningful step forward, which we took, but we also clearly said, we still have work to do and uh, we'll, we'll keep on working on that.
Conference Operator: 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 are, have a similar profile that you're looking at, moving forward, or or is that sort of just a one-time opportunity with that specific strategic part, or and I'll pass it on. Thanks.
Matt Moschner: Yeah. Maybe I'll give you a a bit of context on on why we did it, right? So, you know, as a management team, we're always looking at ways to better, allocate our resources, right? And in this case, you know, we're in a market, of lab automation that is a great application for our vision. We've had a lot of success there. But, you know, for us, in in many ways, it was a bit subscale, particularly, from a channel perspective. And so, you know, we found a a channel partner that had, better presence in that area, had better scale, had had good relationships that maybe could could, manage that channel and those customers more effectively than we could. And so that's that's maybe the playbook behind, the the deal.
Thanks uh that's helpful and then just a follow-up on the uh medical lab automation item uh in the third quarter. Um is that type of Licensing Arrangement um are are there other opportunities that are have a similar profile that you're looking at uh moving forward or or is that sort of just a 1-time opportunity with that specific strategic partner and then I'll pass it on thanks.
Matt Moschner: And so, you know, we have a we have a partner that, you know, plans to to continue to use Cognex Vision and sell it through to the customers, that we have, but has a broader portfolio of offerings for those customers. And so it felt like a very, very good fit. So to the extent there are other opportunities, we're, we're we're we're being very thoughtful, right? as you'd imagine, one of the things I'm doing is taking a very broad look across the portfolio to say, are we, as focused as I'd like, are we deploying our resources, in the ways that that have the best impact for the business that we want to run? And and and and in many cases, the answer is yes. There's there's some areas that the answer is weaker. And and when we see that, we really go after it.
Matt Moschner: And, you know, this is one of those areas.
Conference Operator: And more more considering it like, perhaps even doubling down on the existing strategies that we want to have a strong direct sales channel in the markets, which we really think are very important for us. We're redeploying resources there. so it's not a shift in strategy. I would more think about, like, a doubling down on what we already said in the past.
We're being very thoughtful, right? Uh, as you'd imagine 1 of the things I'm doing is taking a very broad look across the portfolio to say, are we? Uh, as focused as I'd like, are we deploying our resources, uh, in the ways that that have the best impact for the business that we want to run and and and, and in many cases the answer is. Yes. There's there's some areas that the answer is weaker and and when we see that, we really go after it and you know, this is 1 of those areas.
And more more, considering it like, uh, 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. So we are redeploying resources there. Um, so it's not a shift in strategy. I would more think about like a doubling down on what we already said in the past.
Conference Operator: Makes sense. Thank you.
Makes sense. Thank you.
Conference Operator: Thank you. Our next question is coming from Ken Newman of KeyBank Capital Markets. Please go ahead.
Thank you. Our next question is coming from Ken Neumann of keybanc capital markets, please go ahead.
Dennis Fehr: Hey. Good morning, guys. Congrats on the, solid quarter.
Hey, good morning guys. Congrats on the, uh, solid work.
Conference Operator: Thanks, Ken.
Jacob Levinson: Good morning.
Conference Operator: Yeah. Maybe first, sorry if I missed it, Dennis, but, I'm curious if you've 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 from price path through into next year if all the current policies on tariffs stay in place as they are today.
Thanks k.
Yeah.
Maybe first, uh, sorry if I missed it, Dennis, but um, I'm curious if you just had any color on what price contributed to, the organic Revenue, this quarter and kind of what's implied in the new 32 guide. Really, I'm just trying to get a sense of what you think is potentially sustainable from from Price pass through into next year. If all the current policies on tariffs, stay in place as they are today.
Conference Operator: Right. So I think there are probably two two pieces to it, right? There's maybe the US and the the tariffs specifically, and then there's the broader global picture here, right? So I think maybe on the on the tariff-specific or or US-specific side, right, we've been talking about it. On the one side, we've been working on the supply chain, and we had a team in place since last year. And the team has been really moving fast. And I think that's part of why we have been able to basically keep the outlook with no no no material impact to adjusted EBITDA margin or adjusted EPS the same level, even so that the tariffs are slightly went up, right, with the the recent trade deals because the team really did a great job on working on the supply chain.
Conference Operator: And while we're not having a meaningful exposure to China, still there is some, and and the team really did a nice job there. And then at the same time, we are certainly also working, on the customer side and and finding agreements there. But I wouldn't say, like, overall, that drives now this meaningful impact for us, what we what we included here in the Q3 guidance. I think then, however, when we look at the broader picture outside the US and the tariff dynamic, I think if you if you think back over the last 12 months, we have often talked about kind of pricing headwinds in China and that this has impacted, gross margin and bottom line to some extent. And I think here on the one side, we think that pricing pressure eased somewhat.
Right. So I think that probably to, to piece this turn, right? There's maybe the US and the the terror specifically and then there's the broader Global picture here. Right. So I think maybe on the on the terror specific or are you a specific side right? We've been talking about it on the 1, we've been working on the supply chain and we had a team in place since last year and the team has been really moving fast and I think that's part of why we have been able to basically keep the Outlook with no, no, no material impact to adjusted evid their margin or adjusted EPS the same level even so that the terrorists are slightly wind up right? With the the recent trade deals because the team really did a great job on working on the supply chain and or we're not having a meaningful exposure to China is still. There is some and and the team really did a nice job there. And then at the same time we are certainly also working um, on the customer side and and finding agreements there, but I wouldn't say like, overall that drives now.
Conference Operator: At the same time, we're also doing a good job here working on the supply chain side to offset these pricing pressures. In that regard, I think overall, I would say pricing perhaps is a is a is a neutral from coming from a negative over the last 12 months, more towards to moving towards a neutral now. And then certainly, we keep on exploring our opportunities there. And, we'll we'll keep you updated in the next couple of quarters on how that goes.
This meaningful impact for us. What we, what we included here in the Q3 guidance. I think then. However, when we look at the broader picture outside the US and the Tariff Dynamic, think if you if you think back over the last 12 months, we have often talked about kind of pricing headwinds in China. And that this has impacted uh gross margin on bottom line, to some extent. And I think here on the 1 we think that pricing pressure is somewhat at the same time. We're also doing a good job here working on the supply.
By train side to offset these pricing pressures in that regard. I think overall I would say pricing perhaps is a, is a, is a neutral from coming from a negative or what the last 12 months more to moving towards a neutral now and then certainly we keep on exploring our opportunities there and uh, we'll we'll keep you updated in the next couple of quarters on how let's go goes.
Conference Operator: Yeah. No. That makes sense. for my follow-up here, maybe just to approach the the margin guide or maybe the longer-term view on margin guide, a little differently. You know, just given all the work that you've done on leveraging costs, you know, I think the midpoint of your of your 3Q guide is implying, you know, an incremental EBITDA margin of, you know, above 50, closer to 60 percent. Do you feel like this is a decent baseline going forward given how the markets are recovering, or are there any, you know, one-time things that we should kind of be aware of as we think about more normalized operating leverage into '26?
Yeah, no, that makes sense.
Um,
For my follow-up here, maybe just to to approach the the margin guide or maybe the longer term view on margin guide. Uh a little differently you know just even on the work that you've done on leveraging costs. Um you know I think the midpoint of your of your 3Q guide is implying. You know, an incremental even down, margin of, you know, above 50 closer to 60%, do you feel like this is a decent Baseline? Going forward, giving
How the markets are recovering or are there any you know, 1 time, things that we should kind of be aware of as we think about more normalized operating, leverage into 26.
Conference Operator: I mean, see, first of all, I think we we said it. we are pleased with the progress. It's a meaningful step forward. it comes really two things together. Our revenue top line is growing and and OPEC side is 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 it's really kind of in that sense, it's it's sustainable on the cost side. At the same time, I made this comment about the fourth quarter, right? So keep in mind there's seasonality in the business. So I really want you to think on the top line side that we have this strong Q2, Q3 driven by consumer electronics. And certainly, that drives leverage and deleverage, right?
I mean, let's see, first of all, I think we, we said that, um, we are pleased with the progress. It's a meaningful step forward. Um, it comes really 2 things together, our Revenue Top Line is growing and and OPEC side is, is decreasing on a year-over-year basis. And I think that's clearly, there's some really underlying work, which we are doing, we talked a bit about the programmatic approach, which we're doing there. So
Conference Operator: So in that regard, if you think back, about Q1, Q1 was a was a strong quarter if you think about it from a year-over-year comparison, but it was, somewhere at a 16.8 percent adjusted EBITDA margin, right? So that means not yet in the in the 20 percent. So think about when you think about Q4 that you will see some deleverage. And then, of course, at the same time, when we think about what we said at investor day, our target of achieving greater than 20 percent adjusted EBITDA in 2026, we feel that we are on the path to that. And this work which we're doing, and the cost structure is really bringing us there. So I would say, right, short term, keep in mind Q4 seasonality. But then if we think about 2026 and generally, we're making really meaningful progress.
Quarter. If you think about it, from a year-over-year comparison, but it was, um, somewhere at a 16.8% adjusted. Every, they are margin, right? So, that means not yet in the, in the 20%. So think about when you think about Q4 that you will see some deal 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, if they are in 2026, we feel that we are on the path to that and this work which we're doing uh, in the cost structures really bringing us there. So I would say, write short term, keep in mind, Q4 seasonality, but then if you think about 2026 and generally, we're making really meaningful progress,
Conference Operator: Very helpful. Thanks.
Very helpful, thanks.
Conference Operator: Thank you. Our next question is coming from Piyush Abbasti of CITI. Please go ahead.
Thank you. Our next question is coming from push Abasi of City. Please go ahead.
Dennis Fehr: Good morning, guys.
Good morning, guys.
Jacob Levinson: Hey, Piyush. Good morning. How are you?
Hey Posh, good morning. How are you?
Dennis Fehr: Doing well. Can you can you guys, like, drill down on autos, EV, and market? I understand you mentioned lower project activity from but from your vantage point, can you maybe update on what what your customers are telling you with regards to their CapEx plans beyond 2025? I'm just trying to understand where we are in the CapEx cycle and also if there is anything different that you're seeing in EV versus, like, the traditional ICE. That would be helpful.
Well, can you can you guys like drill down on Autos EV and Market? Uh, I understand you mentioned lower project activity from but from your Vantage Point can you maybe update on what what your customers are telling you with regards to their capex plans Beyond 2025. I'm just trying to understand where we are in the capex cycle and also if there is anything different that you're seeing in EV versus like the traditional eyes that would be helpful.
Matt Moschner: Yeah. Maybe I'll start. I was, I actually just got back from a trip to Detroit. I spent the the week, with many of our customers in in auto, on this very topic. And I would say, you know, the macros, there's 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 and other tariffs. And I think that's well published. but by the same time, you know, I I am very encouraged by the by the potential that Machine Vision has, and they are as well, in in a number of areas. One, as as a as a key means of offsetting some of those cost increases, their cost to operate and drive efficiency, throughout the throughout their operations.
Matt Moschner: They they they need us more now than than they ever have, I think is one one message. The second is quality, right? I think all of them, even in light of substantial cost increases because of of tariff activity, quality still remains their top priority. And we saw from some of them, particularly this year, you know, 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, Cognex Machine Vision does, you know, is is recognized for its ability to ensure quality throughout their supply chains. That's second. And then, you know, the third theme for them is is labor scarcity.
Yeah, maybe I'll start. I was, uh, actually just got back from a trip, uh, to Detroit. Uh, I spent the week, um, with many of our customers in, in Auto, uh, on this very topic. Uh, and I would say, you know, the macro is there's, there's a lot of uncertainty, uh, and the macros, uh, uh, continue to be weak. Uh, largely driven by some of the uncertainty and increased costs, uh, from trade and, and other tariffs. And I think that's Well published, um, but by the same time, um, you know, I I am very encouraged by the by the potential that Machine Vision has and they are as well, uh, in a number of areas 1 as, as a, as a key means of offsetting, some of those costs increases their cost to operate and drive efficiency, um, throughout the throughout their operations. They they, they need us more now than than they ever have. I think, is 1, 1 message
Um, the second is quality, right? Um, I think all of them, even in light of substantial cost increases, uh, because of of terrorist terrorist activity. Quality Still Remains their top priority and we saw, uh, from some of them, particularly this year. Um, you know, uh, you know, maybe not where they want to be and increased, uh, recall activity and and the cost of poor quality is very much top of mind for a lot of our Auto uh, customers and again, cognex Machine Vision, does, you know, is is recognized for its ability to ensure quality throughout their supply chains, that second
Matt Moschner: You know, they, I I heard from all of them that, as they think about their plans, they they continue to have high turnover, in their facilities and and struggle to find competent labor, to to to run their manufacturing facilities. So even in light of, I think, you know, 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 I won't I won't comment on, you know, what 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.
Matt Moschner: Obviously, you know, last year, was was a 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 and particularly the battery production. to the extent that's normalized, there still are, plans, that these OEMs have to, release, EV or EV, hybrid, vehicles. And and we're engaged in a number of those applications with them.
Um, and then, you know, the third theme for them is, is uh, labor scarcity. You know, they, uh, I I heard from all of them that, um, as they think about their plans, you know, they continue to have high turnover, uh, in their facilities, and, and struggle to find competent Labor, uh, to to, to run their manufacturing facilities. So, even in light of I think, uh, you know, 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, I won't, I won't comment on. Um, you know what, what future capex is. I think to some extent that's still highly uncertain. Now, your question on EV, uh, is a good 1. We continue to uh, stay engaged in, uh, a number of interesting applications and EV battery. Obviously, you know, last year, uh, was was a, 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 over capacity and, and particularly the battery production, um, to the extent that's normalized. There still are uh, plans, uh, that these OEM
Have to uh release uh EV uh uh hybrid uh vehicles and and we're engaged in a number of those applications with them.
Conference Operator: Helpful, Matt. Dennis, I'll ask Ken's question in a slightly different way. Like, you you on on margins, like, as you said, you guys are already doing, like, 20 percent, and your '26 target is greater than 20 percent EBITDA margin. given most of your end markets are on a positive trajectory, like, and I understand it's still early, but why can't margins be in that 25 to 30 percent range, which is the next leg that you guys highlighted during your investor day?
Help helpful match. Uh, Dennis. I'll ask can's question in slightly. Different way. Like do you on on on margins? Like, as you said, you guys are already doing like 20% and your 26 Target is greater than 20% eidon margin. Um, given most of it and markets are on a positive trajectory like
Understand, it's still early, but why can't margins be in that 25% to 30% range? Which is the next leg that you guys highlighted during your Investor Day?
Dennis Fehr: Yeah. No. See, it's a it's a it's a great question. And see, that's that's where what we're working towards, right? We we laid out a clear path on on how we want to get there. And we we're we're working to achieve all milestones one by one. So the first one is the greater than 20 percent. I think it's great that we see it first on a quarter, right? So we had now first time for two years. And in the second quarter, it's still there in the third. And I I talked a bit about seasonality for the fourth. But so the next next step is to bring it there on a on a on a 12-month basis and then work from there towards the 25 percents.
Yeah, I know. See it's a, it's a, it's a great question and see that's that's what what we're working towards, right? We we laid out a clear path on on how we want to get there. And we we're we're working to achieve all Milestones 1 by 1. So the first 1 is the greater than 20% I think.
Dennis Fehr: In that regard, I think, we are in the same spirit, and that's that's what we are what we're driving towards.
On a, on a, on a 12 month basis and then work from there towards the 25%. So in that regard, I think um we are in the same spirit and that's that's what we are what we're driving towards.
Conference Operator: Very helpful. Good luck, guys.
Very helpful. Good luck, guys.
Jacob Levinson: Thank you.
Matt Moschner: Thank you.
Thank you. Thank you.
Conference Operator: Thank you. The next question is coming from Keith Halsom of Northcoast Research. Please go ahead.
Thank you. The next question is coming from Keith how of North Coast research. Please go ahead.
Dennis Fehr: Thanks, guys. I appreciate it. Coming back to the, the one-time revenue here in the third quarter from this new partner, just trying to unpack that a little bit more and understand, you know, is this customer going to be selling your hardware going forward, or are you going to use your software on their own hardware? So we shouldn't expect to see significant revenue coming from this partnership going forward.
Thanks guys, I appreciate it. Coming back to the the 1 time Revenue here in the third quarter from this new partner, just trying to unpack that a little bit more and understand um, you know, is this customer going to be selling your Hardware going forward? Or are you going to use your software on their own Hardware? So we shouldn't expect to see significant Revenue coming from this partnership going forward.
Matt Moschner: Yeah. Let me clarify that. Yeah. So it's it's a mixture, right? So on one hand, we've, given them the exclusive right to and and license to manufacture, Cognex Vision Systems, but that would be Cognex-designed hardware and software. and so so that's one piece of it. And then the ability to purchase, Cognex products for the sole use in this end market. So so that's those it's primarily those two legs. we we are not pursuing a strategy with them where they would be we would be hosting Cognex software on their hardware. That's that's not included, but but the first two certainly would be.
Conference Operator: All right. And then on the magnitude, right, we said 8 to 14 million. It's over includes minimum over five years, includes some inventory. So if you if you break that down, right, it's a meaningful number in the quarter. But if you think over five-year numbers, it's not actually that big, right? So I really want to kind of highlight we 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 this path. So we certainly expect something positive from that, let's say, specialized area and from this partnership.
Yeah, let me clarify that. Yeah, so it's it's a mixture right? So on 1 hand, we've, uh, given them the exclusive right to and and license to manufacture cognex Vision systems. But that would be cognex, designed hardware and software. And so so that's 1 piece of it. And then the ability to purchase, uh, cognex products for the sole use in this end market. So so that's is primarily those 2 legs. Um uh we we are not pursuing a strategy with them where they would be, we would be hosting cognic, soft software on their Hardware. That's, that's not included. But but the first 2, certainly would be all right? And then on the magnitude, right? We said 88 to 14 million and it's over includes minimum of over 5 years. Included some inventory. So, if you, if you break that down, right, it's a meaningful number and a quarter. But if you think over 5 your numbers, it's not actually
Conference Operator: But I wouldn't think, like, it would make any meaningful change to our numbers, going down the road, considering that also we are recognizing some of that revenue, of the over this five-year period in in one single quarter. So in that regard, yeah, I wouldn't I wouldn't call it, a meaningful, impact to 2026 and beyond.
That big right? So I really want to kind of highlight. We really took an approach to a very specialized area where we thought, like, in this specialized area a channel strategy is more beneficial than, um, the broader strategy, which we have in the other markets and therefore we went down this this path so we certainly expect something positive from that. Um, let's say 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 you're recognizing some of that Revenue, uh, of the over this 5 years period in in 1 single quarter. So, in that regard, um, uh, yeah, I wouldn't, I wouldn't call it, uh, a meaningful. Um,
Impact to 2026 and Beyond.
Dennis Fehr: Got it. Appreciate that. And then just guys, just changing gears here for a follow-up. I see inventory is down about 8 percent 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?
Got to appreciate that. And then, just changing gears here for a follow-up. I see inventory is down about 8% year-over-year. You're going to sell some components for this partner here. How should we think about inventory as a contributor to free cash flow for the rest of the year?
Conference Operator: Yeah. No. I think, see, we're we're quite pleased of what we have done on the on the working capital side, right? I think over the last, 12 months or so, our, 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 part of our our drive towards being efficient and and being a lean company, right? It's both on the organizational side as well as on how we manage working capital. In that regard, we we we think we we have done meaningful progress there. There's still a little bit to go. but, yeah, overall, I'm just happy happy where we are and and still have have a little bit of potential there as well.
Yeah, no, I think see, we're, we're quite pleased of what we have done on the, on the working capital side, right? I think over the last, um,
12 months or so, or cash conversion cycle, kind of, um, Step Down, by about 60. Um, and a good portion of, that is coming from the inventory side. And that's kind of part of our, our drive towards being efficient and, and being a lean company, right? It's also on the organizational side as well as on how we manage working capital. So that regard, we we think we we have done meaningful progress there. There's still a little bit to go, um, but um, yeah, overall, I was just happy happy where we are and, and still have have a little bit of potential there as well.
Dennis Fehr: Great. Thank you.
Great. Thank you.
Conference Operator: Thank you. We're showing time for one last question. Our final question today is coming from James Rashudi of Needham. Please go ahead.
Thank you. We're showing time for one last question. Our final question today is coming from James Rudy of NEM. Please go ahead.
Damian Karras: Question on the growth in the packaging market. I wonder if you could talk a little bit about that and whether that how much of that might be coming from the, the sales initiatives that you have going on, particularly, the, the sales noise, including the the second class that you you hired, I guess, mid-last year.
No question on the growth in the packaging Market. I wonder if you could talk a little bit about that and whether that how much of that might be coming from the, uh, the sales initiatives that you have going on particularly, uh, the, uh, the sales noise including the the second class that you, you hired I guess mid last year.
Matt Moschner: Hey, Jim. Yeah. No. I think, as we said in our prepared remarks, we we see evidence that, our investments in our channel are helping in this area, right? As we've said before, this tends to be a more regionalized business, you know, with local brands and local manufacturing servicing the the unique tastes of the regions that they're in. And, you know, having a a a a sales channel that can reach those customers, which tend to be smaller or more midsized, brands and manufacturers, is really, really important. And then, obviously, having the right technology for those folks to be selling. And as we've said in the past and and really still believe in, you know, particularly our edge learning-based vision systems, are very easy to demo, to to set up and and test and and to deploy at scale.
Hey Jim. Yeah. No. I think as we said in our prepared remarks, we we see evidence that um our investments in our channel are helping in this area, right? As we've said before this tends to be a more regionalized business, you know, with local Brands and local manufacturing service servicing. The
Matt Moschner: So you put those two things together, you know, and, you know, we can reach more customers with products that are easier to use and deploy. I think I think we're seeing that very much in in the packaging packaging numbers. And then, you know, in this industry, there is a a a good presence of some some sophisticated machine builders and other OEMs that we have always kind of served well with with our technology. And so, yeah, we really we see three legs to that stool. And I think all at this at this point, all three are are working in our favor.
The unique tastes of the regions that they're in. And, you know, having a, a sales channel that can reach those customers which tend to be smaller or more mid-size Brands. And manufacturers is really, really important. And then obviously having the right technology for those folks to be selling and as we've said in the past and and really still believe in, you know particular Edge learning based Vision systems uh are very easy to demo uh to to set up and and test and and to deploy at scale. So you put those 2 things together.
And so yeah we really we see 3 legs to that stool and I think all at this at this point all 3 are are working in our favor.
Damian Karras: 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, you know, there's that cautiousness. And 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?
Thanks and just a quick follow up just on the semi Market. Uh,
Matt Moschner: I think it's too early to call. You know, it's a very complex, sophisticated supply chain, as you know. and we typically engage with, the large equipment OEMs. And, you know, often what we see is our the demand for Cognex Vision with them is, you know, in some cases, asynchronous to the for the for the demand and consumption of the final product, which are, you know, chips and memory and things like this. And so I think we see, you know, room to to continue, to grow or maintain strength from from from the demand side, right? The demand for advanced AI and high bandwidth memory will continue. How that flows through, to orders for Cognex through the through the machine builders and OEMs that we serve, you know, may or may not be asynchronous to that demand.
As your view of that mortgage changed versus earlier, in the year, just giving the mixed signals. We're hearing from the wfe market and, you know, there's a cautiousness. I know you don't look too far out, uh, but does that bleed into 2026, or is it just too early to comment on that? I think it's too early to call, you know, it's a very complex sophisticated supply chain, as, you know, um, and we typically engage with, uh, the large equipment oems. And, you know, often what we see is our, the demand for cognex vision with them is, you know, in some cases asynchronous to the, for the, for the demand and consumption of the final product, which are, you know, chips and memory and things like this. And so I think we see, um, you know, uh, room to to continue, uh, to grow or maintain strength from from, from the demand side, right? The demand for advanced Ai and high bandwidth bandwidth memory will continue how that flows through uh, to orders for cognex through the, through the machine. Builders and
Matt Moschner: But it's still a market where we're very excited about, and see a lot of potential, a lot of potential for. But 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, you know, with Cognex technology. And, you know, this is an area, as we've said before, the acquisition of Moratex has really helped us. It brought with us great relationships in this area with some of the large, semi-OEMs, in in the Asia region.
That we serve, you know, may or may not be asynchronous to that demand, but it's still a market where we're very excited about uh, and see a lot of potential. A lot of potential for but but I think you said it. Well, uh, we're trying to be cautious full year this year and we updated that for you. Um, but uh, continue to engage, uh, you know, with cognex technology in it. You know, this is an area as we've said before the acquisition of more Texas really helped us, it brought with us great relationships in this area with some of the large semillas uh in in the Asia region.
Dennis Fehr: Thank you.
Thank you.
Conference Operator: Thank you. At this time, I'd like to turn the floor back over to Mr. Moschner for closing comments.
Thank you at this time. I'd like to turn the floor back over to
Matt Moschner: Great. Well, thanks, everybody, for joining us this morning. we value your continued interest and engagement with Cognex, and we look forward to updating you on our progress during next quarter's call.
great. Well, thanks everybody for joining us this morning. Uh, we value your continued interest and engagement with cognex and we look forward to updating you on our progress during next quarter's call.
Conference Operator: 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.
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.