COGNEX CORP (CGNX) Q2 2026 Earnings Call Transcript

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

Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO. Today, we plan to share several key messages, including progress against our strategy, opportunities to drive diversified growth, end market trends, our strong second quarter performance and our expectations for the third quarter and full year. After prepared remarks, we'll open the line for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will contain forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K. With that, I'll turn the call over to Matt.

Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q2 was another strong quarter for Cognex and further evidence that our strategy is driving results. We delivered record quarterly revenue, significant adjusted EBITDA margin expansion and strong double-digit adjusted EPS growth. The demand environment remains favorable with no material negative impact from macroeconomic or geopolitical events. We continue to benefit from an improving industrial cycle while also seeing accelerating adoption of automation and AI-enabled machine vision. Importantly, our performance reflects more than cyclical recovery. It reflects focused execution against the strategic objectives we have outlined for Cognex, along with the operating discipline required to convert growth into profitability. Our focus remains on profitable growth, operational excellence and productivity across the organization. Turning to Page 3 of our earnings presentation. I'll start with a strategy update. First, we are extending our technology leadership in AI-enabled machine vision using the OneVision platform to enable new AI-driven applications and expand into high-growth end markets, including the data center supply chain. Recently, we announced the general availability of OneVision with hundreds of customers already using the platform to reduce deployment complexity, shorten time to value and scale AI-driven vision applications. Second, we are focused on delivering the #1 customer experience in the industry. As part of this journey, we are building the most comprehensive and easy-to-use machine vision ecosystem. Recent product launches have meaningfully expanded the breadth of our portfolio, giving customers access to new cutting-edge capabilities, all within the same In-Sight Vision Suite software environment. Customers can now address entry-level inspection applications with the In-Sight 2800, perform advanced 3D inspection with the In-Sight L38, perform complex inspections with the new In-Sight 3900 and gain maximum flexibility for the most demanding applications with the In-Sight 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 a 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 In-Sight 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 seven 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 tenth consecutive quarter of double-digit growth. Given the strength of our first half performance, we are raising our full year outlook for logistics to high single-digit growth while continuing to expect growth rates to moderate in the second half. Packaging delivered strong performance. Excluding the divestiture of the Japan-focused trading business, packaging grew double digits. Based on this momentum, we are increasing our full year packaging outlook to double-digit growth. Electronics growth was very strong with double-digit growth driven by broad-based demand across customers and geographies. AI is driving a new wave of innovation in electronics as manufacturers incorporate increasingly sophisticated functionality into next-generation devices. For 2026, we are increasing our full year outlook for electronics and now expect double-digit growth. Automotive revenue declined high single digits in the quarter, but was nearly flat year-to-date. Growth in Asia and the Americas was offset by continued weakness in Europe. We are maintaining our full year outlook for automotive of flat to low single-digit growth. Finally, semiconductor delivered exceptional performance with strong double-digit revenue across all geographies. Demand continues to be driven by AI infrastructure investment. And based on this strength, we are increasing our full year outlook for semiconductor to double-digit growth. In summary, we are encouraged by the demand environment and pleased with our execution. Cognex is benefiting from both cyclical recovery and structural automation trends while continuing to diversify the business, expand margins and position the company for sustainable growth through 2027 and beyond. With that, I'll turn it over to Dennis to walk through our Q2 financials and our outlook for the third quarter and full year. Dennis?

Thanks, Matt, and good morning, everyone. Q2 was a strong financial quarter with record revenue and excellent flow-through to the bottom line. Page 7 highlights our performance across three 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 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 one-time 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 three 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 one-time 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, our first question is coming from Joe Ritchie of Goldman Sachs.

Congrats on the continued progress.

Thanks, Joe.

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

Yes. 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 served there was automated and secure drive removal and destruction — think of this as the ongoing maintenance of the data center. What's changed, obviously, is the very aggressive build-out of new facilities, particularly very high-tech AI-oriented facilities that are placing demands on the supply chain that are driving demand for Cognex vision. You can think of it in three major application areas. On one hand, we're working with manufacturers of the componentry — these are electronic parts, metal parts, the physical infrastructure of a server and of a rack. Then there is the assembly of those parts into the rack, and then there is the deployment, maintenance and operations of that equipment. I would say the majority of where the revenue is coming today — and we sized that as low single digits of revenue growing about 30% — is mostly in that first bucket. We're still mostly doing quality assurance and visual inspection for the componentry: connectors, electrical parts, PCB boards, metal enclosures. We're starting to see activity flow through to contract manufacturers that are assembling those into servers, but it's still quite early in terms of doing more complete automation once those are deployed into facilities. So I think we're still on the early side of the growth wave that could come from the investment and build-out of data centers. It's nascent. On the technology side, these are very complicated inspections: hundreds of points to be inspected, very fine features and very well suited for AI. We're seeing that. I'm not sure we could have solved some of these problems a couple of years ago without technologies like OneVision. Put those two things together — it's a market we know, it's experiencing a huge wave of growth, and our technology is well positioned to capture it for the next several years.

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

Yes, Joe, absolutely I can confirm that. And that's really in line with our $35 million net cost reduction target, which we reemphasized and reconfirmed. We made great progress already last year where we had $33 million gross cost reduction; some of that did not show up in the P&L as we had some incentive comp headwinds. But this year, we're really seeing net cost reduction. Bringing down OpEx in the quarter by 5% in constant currency shows the strength of execution. We expect probably a bit smaller step down into Q3 and Q4, as the step down from Q1 into Q2 was already accelerated compared to what we saw previously. So in short, yes, we definitely expect OpEx to stay well below prior year levels and also in the second half below the first half. That's part of the strength we are seeing in leverage — 100% revenue flow-through in Q2 and 87% revenue flow-through at the midpoint for the full year. Great to see these numbers and the strength of execution.

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

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

Yes. Thanks, Tomo. It was nice seeing you at the Automate show. Great energy. If I were to summarize the show in one word, it was urgency. Manufacturers around the world realize their ability to automate and drive efficiency while improving quality is table stakes — it's how they'll survive and thrive. Specifically, the demos that resonated were our latest generation of AI tools running on our newest embedded systems: OneVision as our cloud training service and the In-Sight 3900 and 6900 as upgraded embedded hardware to run those models within the same In-Sight Vision Suite environment. The head-turners were the inspections. Cognex has led in 2D vision inspection for years. There's a big untapped market of inspections done by humans that were not technically feasible to solve with machine vision, and we're increasingly solving those with our AI tools. We showed very complex PCBA inspections using the 3900, which was well received — relevant for data center boards and servers. We also demonstrated on the 6900 where users could mark up pieces of art, which are highly variable and present glare challenges. Our systems performed well, picking up nuanced defects with no incremental training. So the 2D inspection demos featured well. That's an area we've invested in over the last several years where our AI advantage is most pronounced.

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

Happy to talk about that. In the quarter we saw strong gross margin driven by favorable mix and OpEx efficiency. On the supply chain side, we've been expecting an impact from memory price headwinds in the second half. We're offsetting as much as we can through pricing, but memory prices have been increasing further. We would now say about a 75 basis point gross margin headwind is included in our Q3 guide, and some of that may still show up in Q4. For 2027, we would expect to fully offset this through pricing. Think of it as a timing impact — memory prices go up, we increase prices, memory prices go up further, we'll increase prices further. So not a medium-term headwind, but a headwind for the second half. We also expect mix to remain favorable in the second half, but probably not as strongly favorable as in the first half. So our Q3 guide and full year 2026 guide reflect a gross margin not as strong as in the first half, but strong bottom line performance as we drive further OpEx efficiencies.

The next question is coming from Tommy Moll of Stephens.

I noted you're halfway toward the 9,000 customers you added in 2025. 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?

Sure, Tony. We're happy with the progress acquiring new customers — it's core to diversifying and building a stronger foundation of growth. As we acquire customers, we focus on how to expand with them, identify accounts with higher potential, and direct resources accordingly. Internally, we now have much better ways of understanding account potential to prioritize opportunities. Packaging continues to be an area where we're acquiring customers strongly — manufacturers that are regional and fragmented, producing consumer and healthcare products that we didn't serve as well in the past. Regarding the sales organization, we've invested significantly over the last five years to grow our direct sales channel — hundreds of technical vision experts worldwide. However, our expectation is not necessarily to keep expanding headcount at the same pace as we grow the customer base. We're emphasizing channel partners and revitalizing relationships with systems integrators, machine builders and service partners to drive productivity in our sales organization while we acquire and diversify customers. That approach helps us scale without just hiring more direct sales reps.

To add, 2026 and especially the first half was about taking costs out. From here, it's about growing with existing resources, which applies to sales and the broader organization. We expect to deliver strong leverage as we continue to grow.

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

It's more enhancing what we have and taking a more coordinated global approach. We have great partners worldwide — resellers that extend our sales force, systems integrators and machine builders that incorporate Cognex vision into larger solutions, and service partners critical to deploying machine vision at scale. We're becoming more coordinated in how we define roles they play in each geography, using better scorecards around investments and measuring success of those investments. We'll partner with them around joint go-to-market efforts. It's an enhancement, not a fundamental shift, and it's complementary to our direct selling efforts. Investing in channels doesn't come at the expense of direct sales; they're one and the same for our overall strategy.

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

This is Chris on for Joe. This is the first time that Cognex has issued full year guidance alongside Q2 results. What has changed in the outlook that gives you confidence and visibility to provide the full year at this stage?

On one side, as Matt talked about, we see strong demand across most end markets, and that led us to increase outlooks. At the same time, we remain a short-cycle, low-visibility company — typically three to four months of visibility. We wouldn't issue full year guidance at the end of the prior year or the beginning of the year without good visibility into the second half. We have a good view into a portion of the remaining five months, though not everything for year-end demand. We believe demand will be strong, but we haven't baked in an exceptional year-end. There are still uncertainties around memory prices and other factors. As part of our efforts over the last 1.5 years to enhance investor communications and be transparent, we felt confident enough to provide this guide, while acknowledging we may not know everything at this moment.

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?

We're not prepared to do a full sizing on full potential yet; we're in the process. Today we size it as low single digits of revenue growing about 30%. You can extrapolate whether that accelerates or decelerates. It's an application area that plays to our advantages and where we've created value in the past. The cost of poor quality is extremely high — racks are tens of millions of dollars and downtime costs are enormous. The demand to roll facilities out quickly and scale is high, placing strain on production capacity in the supply chain, where we help with automated inspections during manufacturing. Many component suppliers are already Cognex customers and familiar with applying vision for quality inspection. We're optimistic about the market and our positioning. As we get a better sense for full potential, we'll update you on future calls.

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

Just expanding on electronics here, expectations are that given all these memory price increases actual volumes in consumer electronics could slow. How do you balance that with some of this new data center business and your own efforts with new products and sales force changes and your customers' CapEx plans? It seems like there's nuance there.

It's a risk we're thinking about, but we're not seeing evidence of memory price increases putting downward pressure on automation demand with our electronics customers yet. Demand remains strong, though that could change. Our growth plan in electronics is multifaceted: consumer demand and line counts are one component, but shifts in geographic supply chains out of China to ASEAN and India are a tailwind; our technology developments let us penetrate more applications, especially 2D inspection; and we're broadening our customer base to new entrants embedding sophisticated functionality into devices. So growth in electronics plus data center is multifaceted. If memory prices put downward pressure on consumer demand, we have tools to respond, but we aren't seeing that yet.

To add, historically end-user demand and volume throughput are factors, but not the largest factor for electronics demand. Changes in production, new form factors, device types, supply chain shifts and adoption of latest technologies are often bigger drivers. Don't over-index just on end-user demand when modeling electronics.

That's helpful. On the new AI-featured products, you've had a big uptick in new product introductions. There's always been a promise that capability and cost could broaden TAM, especially for customers without in-house expertise. What kind of uptake have you seen with these products in markets you haven't traditionally been large in?

Your question is about how AI-enabled products have driven penetration across end markets. It's broad-based. Most notably packaging: historically difficult due to variability of packaging designs, and our AI tools for classifying, defect detection, segmentation and OCR are well suited for packaging applications. Logistics continues to see traction with SLX enabling vision-based traceability and barcode reading in fulfillment centers. Consumer electronics involves very difficult inspections on fully populated PCBAs — missing parts, broken solder joints — ideal for AI. Semiconductor involves difficult surfaces and defects where AI finds scratches and other issues. Automotive is highly penetrated already, but there remain opportunities at a smaller scale. Uptake on our new products has been strong across these areas; these technologies solve novel applications and are seeing strong demand and pricing that aligns with the ROI they deliver.

The next question is coming from Guy Hardwick of Barclays.

Congratulations on excellent results. On the guidance, thanks for giving us the full year guidance. It implies a Q4 step down at the midpoint of about 13% organically versus Q3. It's been a long time since Cognex had a double-digit step down. Is it fair to suggest Q3 guidance reflects exceptional demand that you referenced, but Q4 doesn't? Or are you baking in conservatism into your guidance?

This year you see strong growth in electronics, which drives more seasonality, so when electronics growth is stronger, you expect stronger seasonality. If you look at first half versus second half, implied revenue for the second half is $580 million versus $560 million in the first half, so the second half increases. There are impacts like some electronics order timing shifting into the first half and portfolio optimization effects in the second half. Adjusting for those, the growth from first half into second half is likely more than the $20 million, perhaps toward $40 million. Also, Q4 last year is a strong comp as it was the first quarter of a more favorable demand environment. In general, we feel good about demand momentum continuing.

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

We're pleased with pricing progress. In 2024 pricing was a headwind; 2025 was neutral. In the first half of 2026 pricing was a net positive on gross margin, though not one of the largest factors. For the second half, memory price impacts are negative. We've reacted with price increases and have seen good traction, but memory prices increased further than our first round of increases anticipated, so we'll adjust accordingly. Overall, we expect to end 2026 with a net positive on pricing, which is encouraging given the trajectory from 2024 to 2026.

I would add that pricing isn't just list price increases. Cognex captures value through pricing tied to the value created in each application. We're equipping our sales force with better tools to quantify value and capture it. It's pricing execution as much as list price adjustments.

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

Cognex generally focuses on online high-speed applications. Based on the slide for racks and server racks, it seems like this could be a slight shift. I'm not saying that's bad, but is that the case internally and could that open more applications?

One of our advantages is accurate inspections at line speeds — in many cases subsecond or sub-100 millisecond cycle times. Continuous flow manufacturing is one area, like bottling or logistics conveyors. The data center example is more station-based assembly where cycle times are seconds or minutes, but still require high throughput. We're seeing manual labor transition to robotic assembly, and we're investing in how our vision systems work natively with leading robotic providers. That's being deployed in data center manufacturing and other areas. So it's not a departure from our focus on in-line manufacturing but an extension to different forms of continuous manufacturing, from continuous flow to station-based lines.

If I could ask Dennis about pricing: given constant changes in supply chains and commodity costs, some companies are moving to more frequent price adjustments. Is dynamic pricing something Cognex would consider to offset inflation?

Dynamic pricing as in continuous minute-by-minute adjustments is more like ticket selling and isn't practical for our sales cycles. However, in an inflationary environment, more frequent price adjustments aligned with sales cycles of a few months can make sense. Every few weeks or daily adjustments would disrupt the sales cycle. There may be opportunities to align price increases with sales cycles, but not continuous rapid adjustments.

I'd reiterate that Cognex captures value by quantifying application value and improving pricing execution. It's not solely continuous list price bumps; it's how we articulate and capture value across a diverse set of applications.

The next question is coming from Amit Mehta of UBS.

This is Satap on for Amit. You've been delivering very strong growth, consistent across most end markets. Can you help break down what's driving this in terms of share gains and expansion into newer markets versus the underlying market demand? Also, do you see scope for underlying market demand to continue to improve from here?

It's hard to precisely separate market forces and our execution; it's a healthy portion of both. The demand environment is strong — PMIs in expansion territory and secular trends like automation, labor scarcity, rising input costs and emphasis on quality. Cognex is well aligned with those trends. At the same time, we're executing: sales force transformation, better organization, processes and CRM leverage, and significant product investments with major launches in 2025 and in April of this year on the AI side. New customer adds are strong evidence of execution. We're also focusing on land-and-expand strategies to increase share at existing accounts and tracking those metrics more rigorously. Overall, we expect the environment could persist into 2027, though it's early to call. We're continuing to drive internal initiatives that are paying off.

Follow-up on semiconductor: growth has been very strong. Over the next one to two years, do you believe these demand levels are sustainable? Are you getting higher visibility in this market than prior cycles?

We're very pleased with our semi business performance. Cognex has decades in this market and strong relationships with leading semiconductor machine builders and OEMs. We've invested in technologies for traceability and inspection and acquired Moritex in 2023, which added advanced optics and lighting capabilities favoring semi OEMs. This cycle feels different and perhaps more durable than previous cycles, driven by continued investment in AI infrastructure. Should that investment continue, we expect strong demand for Cognex products with our large semi OEM partners, and that could extend well into next year and beyond.

To summarize across memory, semi and other themes: there are puts and takes. Memory costs are a cost-side headwind in the near term, which we expect to offset through pricing. There is potential demand impact in electronics, which could occur, but end-user demand is only one factor among many. Positives include strong visibility in the semi business and the data center market. Net, we see a favorable environment for Cognex.

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

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

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