Image source: The Motley Fool.

DATE

Thursday, Aug. 6, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Head of Investor Relations - Greer Aviv
• Chief Executive Officer - Matt Moschner
• Chief Financial Officer - Dennis Fehr

TAKEAWAYS

• Revenue -- $291 million, up 17% (16% constant currency) reflecting broad-based strength in major end markets.
• Adjusted EBITDA Margin -- 32.2%, increasing 1,150 basis points due to revenue growth and favorable product mix.
• Adjusted EPS -- $0.45, representing 80% growth over the prior year.
• Customer Diversification -- 4,500 new customers added year-to-date, following 9,000 additions in 2025 as part of a strategy to double the customer base.
• Data Center Revenue -- growing more than 30% year over year, representing a low single-digit percentage of total revenue.
• Logistics Segment Outlook -- raised to high single-digit growth for the full year following a 10th consecutive quarter of double-digit growth.
• Packaging Segment Outlook -- increased to double-digit growth for the full year, excluding impacts from the divestiture of the Japan-focused trading business.
• Electronics Segment Outlook -- raised to double-digit growth for the full year driven by demand across customers and geographies.
• Semiconductor Segment Outlook -- increased to double-digit growth for the full year due to AI infrastructure investment.
• Automotive Segment Outlook -- maintained at flat to low single-digit growth for the full year, with European weakness offsetting growth in Asia and the Americas.
• China Revenue -- increased 42% in constant currency, led by the semiconductor and electronics markets.
• Americas Revenue -- grew 27% in constant currency, aided by a shift in customer procurement entities from Europe to the Americas.
• Europe Revenue -- declined 15% (low single digits excluding the procurement change), reflecting automotive sector weakness.
• Cost Reduction Target -- $35 million in annualized net cost reductions expected by the end of 2026.
• Full-Year 2026 Revenue Guidance -- $1.13 billion to $1.15 billion, representing 15% growth at the midpoint.
• Full-Year 2026 Adjusted EBITDA Margin Guidance -- 29% to 31%, reflecting an 850-basis-point increase year over year at the midpoint.
• Full-Year 2026 Adjusted EPS Guidance -- $1.64 to $1.68, representing 63% growth year over year.
• Free Cash Flow -- $68 million in the second quarter, representing 70% growth compared to the prior year period.
• Adjusted Gross Margin -- 71.5%, expanding 350 basis points year over year due to favorable mix and volume.
• Portfolio Optimization -- $5 million quarterly revenue reduction starting in the second quarter reflecting divestitures and noncore product exits.
• Electronics Order Timing -- $7 million shift into the second quarter from the third quarter.
• Commercial Partnership Headwind -- $30 million for the full year 2026, representing a one-time benefit in the prior year period.
• Cash and Investments -- $755 million with zero debt as of July 5, 2026.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• Dennis Fehr stated, "we would now say about 75 basis points of gross margin headwind being included in our Q3 guide," as increasing memory prices impact production costs.
• Matt Moschner noted that automotive revenue declined high single digits in the quarter, stating, "Growth in Asia and the Americas was offset by continued weakness in Europe."

SUMMARY

Management reported record quarterly revenue and significant adjusted EBITDA margin expansion, citing a favorable demand environment and the execution of strategic initiatives. The company raised full-year 2026 outlooks for nearly all end markets, including electronics, packaging, and semiconductor, while maintaining its forecast for automotive. **Cognex Corporation** (CGNX -3.55%) highlighted progress in doubling its customer base and expanding its technology leadership through the general availability of the OneVision AI platform. Strategic focus has shifted toward a land and expand approach with new customers and the revitalization of global channel partner programs to drive organizational productivity.

• CEO Moschner noted that the OneVision platform has already been adopted by hundreds of customers to "reduce deployment complexity, shorten time to value and scale AI-driven vision applications."
• The company is expanding into the data center supply chain, which management characterized as being in the early side of a growth wave with applications in quality assurance for server connectors and electrical parts.
• Management reported a land and expand strategy for its 4,500 new year-to-date customers, aiming to capture a greater share of wallet through high-potential accounts.
• CFO Fehr indicated that while the company is reacting to memory price increases with its own price adjustments, it expects a timing impact in the second half of 2026 before fully offsetting costs in 2027.
• The company reported an emphasis on growing with existing resources as cost reduction efforts move toward productivity optimization through automation and process improvement.
• CEO Moschner described the semiconductor cycle as potentially more durable than previous cycles due to sustained investment in AI infrastructure.
• Dennis Fehr stated that the company typically has three to four months of visibility and remains a short-cycle company, despite issuing full-year guidance for the first time.

INDUSTRY GLOSSARY

• OneVision: A cloud-based platform for training and scaling AI-driven machine vision applications.
• In-Sight Vision Suite: A unified software environment for managing and deploying Cognex vision systems.
• PMI (Purchasing Managers Index): An indicator of economic health for the manufacturing sector, where a reading above 50 indicates expansion.
• PCBA (Printed Circuit Board Assembly): A board with electronic components soldered onto it, used in hardware such as server racks and mobile devices.
• Constant Currency: A financial calculation that adjusts for foreign exchange rate fluctuations to show underlying business performance.
• ASEAN: The Association of Southeast Asian Nations, representing a key geographic region for supply chain diversification.

Full Conference Call Transcript

Operator: Greetings, and welcome to the Cognex Corporation Second Quarter 2026 Earnings Conference Call.[Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. You may begin.

Greer Aviv: Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO. Today, we plan to share several key messages, including progress against our strategy, opportunities to drive diversified growth, end market trends, our strong second quarter performance and our expectations for the third quarter and full year. After prepared remarks, we'll open the line for Q&A. Both our published materials and the call today will reference non-GAAP measures.

You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will contain forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K. With that, I'll turn the call over to Matt.

Matt Moschner: Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q2 was another strong quarter for Cognex and further evidence that our strategy is driving results. We delivered record quarterly revenue, significant adjusted EBITDA margin expansion and strong double-digit adjusted EPS growth. The demand environment remains favorable with no material negative impact from macroeconomic or geopolitical events. We continue to benefit from an improving industrial cycle while also seeing accelerating adoption of automation and AI-enabled machine vision. Importantly, our performance reflects more than cyclical recovery. It reflects focused execution against the strategic objectives we have outlined for Cognex, along with the operating discipline required to convert growth into profitability.

Our focus remains on profitable growth, operational excellence and productivity across the organization. Turning to Page 3 of our earnings presentation. I'll start with a strategy update. First, we are extending our technology leadership in AI-enabled machine vision using the OneVision platform to enable new AI-driven applications and expand into high-growth end markets, including the data center supply chain. Recently, we announced the general availability of OneVision with hundreds of customers already using the platform to reduce deployment complexity, shorten time to value and scale AI-driven vision applications. Second, we are focused on delivering the #1 customer experience in the industry. As part of this journey, we are building the most comprehensive and easy-to-use machine vision ecosystem.

Recent product launches have meaningfully expanded the breadth of our portfolio, giving customers access to new cutting-edge capabilities, all within the same In-sight Vision Suite software environment. Customers can now address entry-level inspection applications with the In-sight 2800, perform advanced 3D inspection with the Insight L38, perform complex inspections with the new Insight 3900 and gain maximum flexibility for the most demanding applications with the Insight 6900. Just as importantly, we are making our products easier to evaluate, deploy and support by enhancing Intuitive product setup, expanding self-service resources and continuing to drive efficiency through a unified software ecosystem. Third, we are focused on driving growth through diversification.

We are targeting growth across a broader set of customers, channels, adjacencies and end markets. While these initiatives will take time, they are central to building a more resilient and scalable business. Let's take a closer look at each of these areas on Page 4. Starting with customers, we are very pleased with the progress we have made towards our objective of doubling the customer base. In 2025, we added approximately 9,000 new customers and momentum continued in 2026 with approximately 4,500 new customers added year-to-date. This success meaningfully diversifies the customers we serve and broadens our opportunity set.

As we look ahead, our focus will increasingly shift towards a land and expand strategy, building on these new relationships, identifying the right high potential accounts and capturing a greater share of wallet over time. As we continue our Salesforce transformation, we are revitalizing our channel partner program to strengthen our overall go-to-market. By working more intentionally with our global network of systems integrators, machine builders and services partners, we can better identify new opportunities, fulfill demand more effectively and bring Cognex products to a broader set of customers, applications and end markets efficiently.

We will also continue to explore opportunities in adjacent markets, both organically and inorganically, where our deep domain expertise can extend to solve critical automation challenges and create meaningful long-term growth. Finally, we have a strong track record of identifying attractive new end markets and scaling them into meaningful growth platforms. Logistics is a great example. When we entered the logistics market about 10 years ago, it represented only a single-digit percentage of total revenue. Today, logistics is our largest vertical. We are applying that same playbook as we expand into the data center supply chain market. Today, data center represents only a low single-digit percentage of revenue, but is growing more than 30% year-over-year.

While still early, we believe the data center supply chain has compelling strategic characteristics. It is aligned with powerful secular growth trends, requires high levels of quality and throughput and creates opportunities for Cognex to help customers improve productivity through automation. It also reinforces how our AI leadership can open new growth platforms over time. Turning to Page 5. Let's look at real-world example of how our technology is helping customers solve complex inspection challenges in this market. This is a server rack inspection deployment using our newest technologies, including the Insight 3900 in OneVision.

For this application, Cognex vision systems will be mounted on robots to inspect fully assembled server racks and confirm that all major components are installed correctly and meet strict quality requirements. This demonstrates the broader applicability of our AI-enabled machine vision systems beyond our traditional end markets and also provides an entry point into AI infrastructure manufacturing, a rapidly growing market. Turning to end market performance on Page 6. The demand environment remained favorable in the second quarter. Growth was led by semiconductor, electronics and packaging, along with continued momentum from large logistics customers. Manufacturing indicators continue to improve across key regions in the second quarter, and the U.S.

Purchasing Managers Index has now remained in expansion territory for 7 consecutive months. This improving macro backdrop, along with better visibility into the second half, gives us confidence to raise our full year outlook for nearly all end markets. Starting with logistics. Momentum continued driven by large e-commerce customers. Q2 marked our 10th consecutive quarter of double-digit growth. Given the strength of our first half performance, we are raising our full year outlook for logistics to high single-digit growth while continuing to expect growth rates to moderate in the second half. Packaging delivered strong performance. Excluding the divestiture of the Japan-focused trading business, packaging grew double digits.

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

Demand continues to be driven by AI infrastructure investment. And based on this strength, we are increasing our full year outlook for semiconductor to double-digit growth. In summary, we are encouraged by the demand environment and pleased with our execution. Cognex is benefiting from both cyclical recovery and structural automation trends while continuing to diversify the business, expand margins and position the company for sustainable growth through 2027 and beyond. With that, I'll turn it over to Dennis to walk through our Q2 financials and our outlook for the third quarter and full year. Dennis?

Dennis Fehr: Thanks, Matt, and good morning, everyone. Q2 was a strong financial quarter with record revenue and excellent flow-through to the bottom line. Page 7 highlights our performance across 3 key financial metrics. First, adjusted EBITDA margin was 32.2%, expanding 1,150 basis points year-over-year and marking the eighth consecutive quarter of margin expansion. Second, adjusted EPS increased 80% year-over-year, representing the eighth consecutive quarter of double-digit EPS growth. And third, trailing 12-month free cash flow conversion rate was 114%, meeting our greater than 100% target for the seventh consecutive quarter. Our strong bottom line performance reflects continued execution of our profitable growth strategy and faster progress on cost reduction initiatives, resulting in about 100% revenue flow-through in the quarter.

Turning to the income statement on Page 8. Revenue increased 17% year-over-year or 16% in constant currency, reaching a record quarterly revenue level for Cognex. This was also our eighth consecutive quarter of year-over-year revenue growth. Looking at geographic revenue trends on a year-over-year constant currency basis. China was again our fastest-growing region with revenue increasing 42%, led by semiconductor and electronics. Year-to-date, revenue in China is up 40%, driven in part by investments made over the past 12 to 18 months. In the Americas, revenue grew 27% with strength across nearly all end markets. Americas revenue also benefited from certain electronics customers ordering through entities based in the Americas rather than Europe.

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

We now expect approximately $35 million of annualized net cost reductions by the end of 2026. This is closer to the lower end of our originally $35 million to $40 million range, reflecting a balanced approach of disciplined cost management in times of strong growth. Looking ahead, our emphasis is increasingly shifting from cost reduction to our productivity optimization. We see meaningful opportunities to further drive efficiencies through automation and continuous process improvement initiatives by continuing to grow with largely existing resources. Adjusted EBITDA was $94 million, up 81% year-over-year and our highest level since Q2 2021.

Adjusted EBITDA margin reached 32.2%, expanding 1,150 basis points year-over-year and exceeding the midpoint of guidance by more than 250 basis points, driven by favorable mix and accelerated cost reduction. Adjusted diluted EPS increased 80% year-over-year to $0.45, driven primarily by operating leverage. Cash generation remains strong. We generated $68 million of free cash flow in the quarter compared to $40 million in the prior year period, representing approximately 70% growth. Over the trailing 12 months, free cash flow totaled $268 million and free cash flow conversion was 114%. We returned nearly 80% of free cash flow to shareholders through both share buybacks and dividends over the trailing 12 months. Moving to Page 9. I'll review our third quarter guidance.

For Q3, we expect revenue of $300 million to $320 million, representing approximately 12% growth at the midpoint. Excluding the $13 million onetime benefit from the commercial partnership in Q3 2025, our guidance implies 17% revenue growth at the midpoint. Adjusted EBITDA margin is expected to be between 32% and 35%, with the midpoint representing an increase of 860 basis points year-over-year. Excluding the commercial partnership benefit, the midpoint implies adjusted EBITDA margin expansion of 1,140 basis points. Adjusted earnings per share is expected to be $0.50 to $0.54, with the midpoint representing approximately 58% year-over-year growth. Excluding the commercial partnership benefit, the midpoint implies adjusted EPS growth of 86%. On Page 10, we are issuing full year 2026 guidance.

While we continue to monitor macroeconomic and geopolitical risks, including memory market conditions and the broader inflationary environment, our guidance reflects improved visibility into the second half and confidence in our ability to execute our profitable growth strategy. For 2026, we expect revenue of $1.13 billion to $1.15 billion, representing approximately 15% growth at the midpoint or 16% excluding the commercial partnership benefit. Adjusted EBITDA margin is expected to be between 29% and 31%, with the midpoint representing an increase of 850 basis points year-over-year or 930 basis points, excluding the commercial partnership benefit.

This is well ahead of our prior target of exiting the year at 25% run rate and reflects disciplined execution of our cost reduction initiatives, along with an improved demand environment. At the midpoint, our outlook also implies approximately 87% flow-through on incremental revenue, up from 70% in 2025, highlighting the substantial operating leverage achieved through our transformation efforts. Adjusted earnings per share is expected to be $1.64 to $1.68, with the midpoint representing approximately 63% year-over-year growth or 71% excluding the commercial partnership benefit. I would note that 2026 adjusted EPS includes approximately $0.11 per share of investment income.

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

These actions are intentional and support improved mix, margin and long-term profitability. Second, as expected, we saw approximately $7 million of electronics order timing shift into Q2 from Q3. Third, Q3 and full year 2026 include the previously mentioned $30 million headwind from the onetime commercial partnership benefit. In summary, Q3 headwinds include order timing and portfolio actions, not a change in underlying demand, while Q4 reflects planned portfolio exits. We encourage you to reflect these factors in your models, along with the strong Q4 2025 comparison. Overall, Q2 was another strong proof point for our profitable growth strategy. We delivered record revenue, significant margin expansion. Strong EPS growth and robust free cash flow. Demand remains healthy.

Our operating model transformation is delivering results, and our financial model is demonstrating strong leverage. We believe Cognex is exceptionally well positioned to deliver on our commitments and create long-term shareholder value. Now Matt and I are ready for your questions. Operator, please go ahead.

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

Joseph Ritchie: Congrats on the continued progress.

Dennis Fehr: Thanks, Joe.

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

Matt Moschner: Yes. No, Thanks, Joe. We've been serving the data center market for several years, but it was always a smaller portion of our business. And the application that we serve there was automated and secure drive removal and destruction, right? Think of this as kind of the ongoing maintenance of the data center. What's changed, obviously, is the very aggressive build-out of new facilities and in particularly very high-tech AI-oriented facilities that are placing demands on the supply chain that are driving demand for Cognex vision. And you can think of it really in 3 major application areas. On one hand, we're working with the manufacturers of the componentry.

These are electronic parts, metal parts, sort of the physical infrastructure of a server and of a rack. There's then the assembly of those things into that rack and then there is the deployment and maintenance and operations of that. I would say the majority of where the revenue is coming today, and we, in our prepared remarks, sized that as low single digits of revenue growing at about 30% is mostly in that first bucket, right? We're still mostly doing quality assurance and visual inspection for the component trait, right? These are connectors, these are electrical parts, these are PCB boards, these are metal enclosures.

We're starting to see activities flow through to CMs that are assembling those into servers, but still quite early in terms of doing more complete automation once those are deployed into facilities. So I think we're still more on the early side of the growth wave that could come from the investment and build-out of data centers. I would still characterize it as quite nascent. On the technology side, I mean, for sure, as you saw on the slide, these are very complicated inspections, right? On one hand, hundreds of points to be inspected, very fine features and very well suited for AI. And we're seeing that.

I'm not sure we could have solved these problems a couple of years ago without technologies like OneVision. So you put those 2 things together, it's a market we know. It's one that is experiencing a huge wave of growth. And I think our technology is very well positioned to capture that probably for the next several years.

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

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

And we then from there, expect probably a bit smaller step down into the third quarter into the fourth quarter, right, as the step down from the first into the second quarter was already accelerated compared to what we saw previously. So in short, yes, we definitely expect OpEx to stay well below prior year's levels and also in the second half also below the first half. And that's really kind of part of the strength, which we are seeing in the leverage, right? So 100% revenue flow-through in the second quarter, 87% revenue flows through at the midpoint for the full year. Really great to see these numbers and the strength of the execution there.

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

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

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

Specifically, your question on which demos that we were showing resonated, I think for sure, we were featuring our latest generation of AI tools running on our latest generation of embedded systems. Those are the products that we launched in the spring of this year, OneVision being our cloud training service and then the 3900 and the 6900 really being the upgraded embedded system hardware to run those models all within the same software environment, which is our In-sight Vision Suite application. So that is what we featured. I would say that the headturners were really the inspections, right? Cognex has, for years, led in the area of 2D vision inspection.

We've always said that, that was -- there was still a big untapped market for inspections done by humans that were in the past, not technically feasible to solve with machine vision, and we're increasingly solving some of those problems with our latest generation of AI tools. And so we showed very complex PCBA inspections using our 3900. I think that was very well received, again, back to the data center comment, inspecting these very large server boards as they're being built into servers and put into racks, I think very relevant technology. And then on the other hand, we had a demo on our 6900 where we allowed users to kind of mark up pieces of art, right?

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

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

Dennis Fehr: Yes. No, happy to talk about that. So first, in the quarter, we saw we saw strength in the gross margin driven by favorable mix. And then I would also say that certainly on the bottom line, right, the OpEx efficiency, which we had there. But to your question on the supply chain side, right, we have been talking about in the prior call that we expected an impact from memory price headwinds in the second half of the year. And while we are offsetting as much as we can with that through pricing, we clearly have seen that memory prices are further increasing.

In that regard, we would now say about 75 basis points of gross margin headwind being included in our Q3 guide. And probably some of that may still also show up in the fourth quarter. While in -- I would say, if you think about '27, we would think like we would fully offset that through pricing. So think about it more like a timing impact that memory prices are going up, we're increasing prices and then memory price is going up further and we'll increase prices further. So I wouldn't say like it's a midterm headwind, but it's a headwind for the second half of the year.

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

Operator: The next question is coming from Tommy Moll of Stephens.

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

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

And so there's a bit of that internally where as we acquire new customers, we, I would say, have a much better way of understanding potential in terms of how we pursue additional opportunities with them. I would say in terms of market verticals, packaging continues to be an area where we are acquiring customers in a very strong way. On one hand, these are manufacturers that have -- that are more regional, perhaps more fragmented to serve their local markets and the production of consumer products and other health care products, a segment that we didn't serve as well in years past. And so I'd say there is a disproportion of customer adds in the packaging area.

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

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

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

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

Matt Moschner: Yes. I think it is more enhancing what we've had and also taking a more coordinated, I'd say, global approach to how we manage those partnerships. We have great partners all over the world. And when I say partners, it's kind of an umbrella term for resellers that are an extension of our sales force, systems integrators and machine builders that add -- that incorporate Cognex vision into their much larger kind of solutions and machines and then systems -- I'm sorry, services partners that are very key to how we deploy at scale machine vision with customers around the world. So partners is kind of that umbrella term for really those 4 main categories.

And yes, you can think of us as being a little more coordinated in terms of how we think about the role that they play in each of our geographies, having better scorecards around investments that we're making with them and how do we measure success of those investments. And again, partner with them to be much more coordinated around our joint go-to-market efforts. So I think it is much more about enhancing what we have than a fundamental shift. Yes, and doing it in a way that is, frankly, very complementary to our own direct selling efforts.

So I think it would be a mistake to think that an investment in our channel partners is somehow an investment away from our direct sales activities. They are really one and the same as we think about our overall go-to-market strategy.

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

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

Dennis Fehr: See, I mean, on the one side, and Matt talked about it, we see really strong demand across most of our end markets, and it has led us to increase the outlook for these end markets. So there's clearly like strong conviction in the demand environment. At the same time, I really want to emphasize that there's still a short-cycle low visibility company in that sense. That means typically like a 3 to 4 months type of visibility. So we would not be a company issuing full year guidance at the end of the prior year or the beginning of the year. So we need to have really good visibility into the second half of this year.

And that also means that we are not yet seeing everything into Q4, right? So we have a good view into -- a good portion of the remaining 5 months, but not into the full part of the full year. And that means like year-end demand, right? So we believe considering the demand environment where we are, it will be a strong year-end demand. But we haven't baked a lag in an exceptional year-end demand. And then certainly, there's still also uncertainties still around memory prices, for example, how these will develop in that regard. There are still some uncertainties out there.

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

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

Matt Moschner: Yes, Chris, I think we're not prepared necessarily to do a full sizing on full potential. We're in the process of that. As I said before, it's still a very nascent opportunity. And I think many years of future growth ahead of us. We're sizing it today as low single digits of revenue with a growth path right now of 30%. And so you can kind of extrapolate that, whether that accelerates or decelerates, we're not prepared to say full potential. But again, I think it's an application area, and it's a market that really plays to a lot of the advantages we have. and where we've created value for customers in the past, right?

The cost of poor quality is extremely high, right? These racks are tens of millions of dollars and the cost of downtime is enormous when they're not generating results and tokens. So that's great. The demand to roll them out quickly and scale quickly is high. And so that places a strain on the production capacity up in the supply chain, and that's certainly an area where we help with automated inspections during the manufacturing process. And then a lot of the component suppliers are Cognex customers already and very familiar with vision and how to apply vision to their own quality inspection process.

So we're very optimistic that the technology we have and the value we typically provide is very well positioned for this market. But as we get a better sense for the full potential, we will be updating you on future calls.

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

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

Matt Moschner: Yes. Thanks, Jake. Yes. No, it's certainly a risk we're thinking about, but I would say it's not one we're really seeing evidence of playing out in the business today, meaning higher memory prices putting downward pressure on demand for automation with our electronics customers. So it's a risk. I would say it's not one that we're seeing manifest yet in the business. Demand remains strong, but that certainly could change. And then I would say our growth plan and strategy in electronics is multifaceted, right? It's not just about consumer demand and line counts. That's certainly a component.

But there -- as we've talked about before, there continue to be shifts in the geographic locations of supply chains out of China to the broader ASEAN region in India, and we expect that to continue, and that's a tailwind for growth. Our own technology developments are letting us penetrate further into applications primarily in 2D inspection. We expect that to continue. And then we are broadening our customer base in this area. As on one hand, there are new entrants to consumer devices that are looking to embed the latest generation of AI technology through consumer hardware. And you can imagine Cognex would be supporting those efforts.

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

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

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

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

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

And so our latest generation of tools, whether it's classifying, defect detecting, segmenting, doing optical character recognition, we have great AI-based tools in all those areas and very well positioned for packaging applications. So for sure, that's an area where we're driving penetration of vision. We've talked about logistics in the past, where today, our logistics business is still primarily traceability, which is reading barcodes to track items through fulfillment centers. SLX, which was the product that enabled vision for logistics last year, seeing great traction. And again, all those tools are fully AI-based, couldn't solve the problem without that technology.

Consumer electronics, very difficult inspections on -- you can think of fully populated PCBAs, where you're looking for small parts, very densely populated on a board, looking for missing parts, broken sider joints, again, perfect application for AI that we're deploying. Semiconductor, right, very, very difficult surfaces, right, shiny metallic even silicon wafers. And again, AI is very good at finding defects, scratches, dents, other things that those wafers are being handled and processed. So quite frankly, I think our AI progress on the inspection side is quite broad. Now the one area I didn't mention was automotive.

But there, I think we're -- automotive, as we've said in the past, is probably our heavily -- most heavily penetrated market today with automation, but still opportunities there, too, maybe on a smaller scale. So yes, I wish I could say it was one area in particular, it is quite broad-based. And the uptake on the new products has been strong. These are leading technologies solving novel applications, in many cases, first of their kind. And so we're seeing strong demand, strong pricing that is commensurate to the ROIs that those problems have. So hopefully, that's helpful, Jake.

Operator: The next question is coming from Guy Hardwick of Barclays.

Guy Drummond Hardwick: Congratulations on excellent results. So Dennis, on the guidance, thanks for giving us the full year guidance, but obviously it means we can back out what's implied for Q4. It looks like the step down at the midpoint would be 13% organically Q4 versus Q3. It's been quite a long time since Cognex has had a double-digit step down. Is it fair to suggest that Q3 guidance reflects exceptional demand that you referenced, but Q4 doesn't. And therefore, it appears to have quite a bigger step down than perhaps it should have? Or is this something -- or are you just baking in conservatism into your guidance there?

Dennis Fehr: I would say this year is a year where you see strong growth in electronics, of course, also some of the other verticals like semi packaging. But nevertheless, electronics is a strong growth driver and that drives more seasonality, right? So that means in years where you have stronger electronics growth, you would expect then also a stronger seasonality effect. So in that regard, that's one of the factors here. I would say I look at a bit also like first half, second half, right? So if you look at implied revenue for the second half, that's $580 million versus the $560 million in the first half of the year.

So you see actually an increase of the second half revenue and then you have effects, right? I had some electronic shift into the first half, you have a stronger effect of the portfolio optimization in the second half of the year. So if you would adjust for that, probably that growth from the first half into the second half is even more than the $20 million, probably more towards the $40 million. In that regard, I think in general, we feel like we see that demand momentum continuing.

The only thing I would maybe otherwise point out is that certainly Q4 last year is comparatively the strongest comp, which we have as that was the first quarter where we saw a much more favorable demand environment. But yes, I think in general, we feel good about the demand environment.

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

Dennis Fehr: So in general, we are pleased with the pricing progress which we're making, right? If you think back, 2024 was a year where we had pricing headwinds impacting gross margins. Now '25 was a neutral year. I would say in the first half of this year, pricing was a net positive on gross margin, not one of the largest factors, right? So we haven't called it out. Now for the second half of the year, as I alluded before, memory price impacts are negative in the second half of the year. But again, it's just more a timing effect that might we see memory price increases, we reacted to it with price increases by ourselves.

We see good traction with that. But probably memory prices increased further, probably a bit more than what we had baked into our first round of price increases. So we'll adjust for that and we'll add to that accordingly. So in general, I think we will probably still end 2026 with a net positive on pricing. And that's clearly, if you think back about the bigger picture on '24 being a headwind neutral '25 and net positive in '26 despite the memory price headwind. I think we are quite pleased about the pricing progress which we are making.

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

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

Matt Moschner: Yes. No, thanks. For sure. I mean one of the advantages that we have with our technology is very accurate inspections, but at line speeds, right, doing -- performing those inspections at subsecond, in some cases, sub-100 millisecond cycle times, which is which is and will continue to be a focus area for Cognex. But continuous flow manufacturing is one thing, right, where you have parts that are flying by, whether it be a bottling plant or a logistics conveyor.

But I think what we tried to convey in the image for the data centers is also somehow a continuous manufacturing line where what you typically see is discrete stations of assembly, but those stations still have pretty high demand on cycle times. Now those cycle times tend to be seconds or minutes, but it is, I would still consider it somehow a continuous flow manufacturing operation. Now what we're seeing is automation in that manufacturing process. What was a lot of manual labor potentially transitioning to more robotic-oriented assembly. And so we're putting a lot of investment in terms of how do we have our vision systems work more natively with the leading providers of robotic manipulation.

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

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

Dennis Fehr: I mean, yes, I would say dynamic pricing sounds to me like in ticket selling where you would really do like whatever -- every minute of price adjustment. So it's probably not as much as we are pushing it. But clearly, in an inflationary environment, which we are in, at least what we think from a supply chain perspective, thinking about more frequent price adjusting is clearly a strategy. But Certainly, at the same time, right, there is a sales cycle and you don't want to disrupt also the sales cycle with too many price increases throughout that time.

In that regard, there might be an opportunity here to think about price increases, which are aligning with the sales cycle of a few months. But like every few weeks, price adjustments or every day a price adjustment is probably not helpful in the sales cycle either in that regard. Small opportunity perhaps, but not a major shift.

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

It's also about how do we better quantify, how do we better articulate and capture the value that our products are creating in an extremely highly variable set of applications.

Operator: The next question is coming from Amit Mehta of UBS.

Amit Mehrotra: This is Satap on for Amit Mehrotra. So I wanted to discuss on the sales growth, like you have been delivering very strong growth, and it has been consistent across most of the end markets. So can you help us break it down like what is driving this in terms of share gains and expansion into newer markets versus the underlying market demand? And in addition to this, like ISM and other macro indicators have been supportive as well. But do you see the scope for underlying market demand to continue to improve from here?

Matt Moschner: Yes. Thanks for the question. It's always hard to piece out how much of our growth is market forces versus the quality of our own execution. I think it's a healthy portion of both. I mean, on one hand, -- the demand environment is strong as marked by our seventh month of PMIs, Purchasing Manager Index in expansion territory. And I think Cognex continues to be well aligned with sort of the secular growth trends of automation, scarcity of labor, rising input costs, higher emphasis on product quality. I mean those things remain. And so you put those together, and yes, it drives strong demand for automation and particularly machine vision and Cognex being the leader.

But on the same token, I think we are executing very well. We've talked about our sales force transformation over the last several months. And that's really a couple of things. One, we did a lot of work on the organization of our sales force to make sure that they were organized for success, process and tools, making sure that they had leads, that they had -- we are fully leveraging our CRM systems that we've invested in. And then, of course, there's always the investments we've made in product. We've had great new product introductions over the last 18 months, 4 in 2025 and maybe our biggest set of launches in April of this year on the AI side.

And so yes, I think you put those things together, I think our team is executing really well. And really the strongest evidence is in the new customer adds that we continue to drive. And at the same time, as I mentioned previously, new customer adds is one thing. We're also spending a lot more time thinking about, I said in the structured remarks, land and expand, what are the potential at the accounts that we already serve and how do we expand our share. And so there, we've invested to get better data, and we'll be tracking that more rigorously internally. So yes, I think it's a strong demand environment.

I think we expect that, that could persist into 2027. It's still too early to call. but we are continuing to drive internal growth initiatives, and those are paying off really strongly as well.

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

Matt Moschner: Yes, thank you. Couldn't be happier with the performance of our semi business. This is a market that Cognex has been in for decades. And what that really means is the strength of the relationships that we have with leading semi machine builders and OEMs that deliver the capabilities to upstream and downstream producers of chipsets. So yes, and it's an area that in the last several years, we've been investing in new technologies, whether it be traceability, barcode reading, inspections. And so -- and then the acquisition of Moritex in 2023, Moritex as a business was heavily indexed more to semi OEMs selling advanced optics and lighting.

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

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

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

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

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

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