Cognex Corporation (NASDAQ: CGNX) Q3 2025 Earnings Call dated Oct. 30, 2025
Corporate Participants:
Greer Aviv — Head of Investor Relations
Matt Moschner — President and Chief Executive Officer
Dennis Fehr — Senior Vice President of Finance and Chief Financial Officer
Analysts:
Damian Karas — Analyst
Andrew Buscaglia — Analyst
Tommy Moll — Analyst
Jake Levinson — Analyst
Piyush Avasthy — Analyst
Guy Hardwick — Analyst
Joe Giordano — Analyst
Ken Newman — Analyst
Brendan Sheehan — Analyst
Kevin Wilson — Analyst
Presentation:
Operator
Greetings, and welcome to the Cognex Third Quarter 2025 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. Please go ahead.
Greer Aviv — Head of Investor Relations
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 with you, including progress on our strategic objective to be the AR leader in the industry, and market trends, our performance in the third quarter and our expectations for the fourth quarter. After prepared remarks, we’ll open the lines for Q&A.
Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today’s earnings materials will cover 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 — President and Chief Executive Officer
Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q3 was another strong quarter for Cognex. We delivered outstanding financial results which reflect our commitment to profitable growth and disciplined execution. At the same time, we remained focused on advancing our strategic objective to be the leading provider of AI technology for industrial machine vision.
Turning to Page 3 of our earnings presentation, let’s look at some highlights from the third quarter. I’m pleased to share that our third quarter key financial metrics all came in at the high end of our expectations. We delivered double-digit revenue growth and achieved our highest adjusted EBITDA margin since Q2 of 2023.
In addition to the strong financial performance, we are making meaningful progress against our strategic objectives. First, we continue to execute our salesforce transformation, acquiring new customers in under penetrated verticals such as Packaging, using easy-to-use, AI-enabled products. I’m also very pleased with the progress we’ve made this year driving productivity in our sales organization by using new CRM tools, and updated processes.
Second, we are advancing our technology leadership in AI. This quarter we’re excited to announce the launch of our new Solutions Experience Product line in logistics, which we are calling SLX. This release introduces our latest AI vision tools to solve novel applications in this fast growing vertical.
Turning to Page 4, you can see that the SLX epitomizes our mission to make advanced machine vision easy. By combining industry leading AI with intuitive deployment workflows, we can solve critical logistics applications with minimal user training. Our initial rollout of SLX devices targets specific applications including object classification and side-by-side detection, both of which complement barcode reading in mixed application workflows.
Correlator, a leading freight package and logistics provider, recently deployed SLX as the next step in their automation strategy, enabling advanced package detection within its sortation process. Since implementation, Perlator has significantly reduced costs tied to process errors, and seamlessly scaled the solution across its terminals and network.
These new products extend our reach beyond traditional barcode reading into higher value vision applications in logistics. They help accelerate automation adoption by offering customers scalable, easy-to-use solutions that improve efficiency. With SLX, we’re also laying the foundation for other application specific solutions.
Next, let’s review our current trends across key end markets as shown on Page 5 of the earnings presentation. Please note that my discussion on end market performance excludes the one-time benefit from the commercial partnership in our Q3 2025 results, and an additional month of Moritex revenue in Q3 2024 results. Although the macroeconomic backdrop remains uneven and geopolitical uncertainty persists, we continue to see momentum in consumer electronics, logistics, and packaging, while automotive remains soft.
Starting with logistics. This market remains a strong growth driver. Q3 marks our seventh consecutive quarter of double-digit year-over-year revenue growth which was led by large e-commerce customers this quarter. The current cycle is being driven primarily by automation of existing facilities rather than new capacity expansion. We believe automation penetration is still low in this vertical and the ROI on our products is very strong.
Next is automotive. As expected, automotive revenue continued to contract, although year-over-year declines moderated through the year. The market remains challenging, but we continue to anticipate less steep decline in 2025 relative to last year’s 14% contraction, and we believe we are nearing the bottom. Looking ahead, we continue to see promising long-term opportunities in the automotive market as customers prioritize improving vehicle quality and driving down operating costs.
Next, let’s talk about packaging. The business delivered solid revenue growth across most geographies in Q3. Packaging remains a large underpenetrated market with less cyclicality than other verticals. We’re making progress with new products and expanding sales coverage, positioning us to capture incremental opportunities and drive further penetration. We maintain a positive full year outlook for packaging.
Turning now to consumer electronics. Q3 revenue grew significantly year-over-year, driven by broad-based strength. This market is showing clear signs of recovery following a prolonged down cycle, and we are well-positioned to benefit from ongoing supply chain diversification and evolving device form factors. We maintain a positive outlook for the full year as we expect consumer electronics to deliver its first year of revenue growth since 2022.
Finally, turning to semiconductor. Q3 revenue increased modestly year-over-year against a very strong comparison. Although we maintain a cautious full-year outlook. Longer term, we expect semi growth to benefit from the AI-driven investment cycle, reinforcing our confidence in this market. Cognex’s deep relationships with leading semi equipment manufacturers position us well for future growth.
In summary, Q3 underscores the strength of our strategy and execution. We remain focused on being the number one provider of AI technology for machine vision, delivering the best customer experience in our industry, and doubling our customer base over the next five years. These strategic objectives, supported by operational discipline and continued innovation, position us to drive long-term profitable growth and create sustainable value for our shareholders.
Let me now hand it over to Dennis to walk through the financial results and the outlook for the fourth quarter. Dennis?
Dennis Fehr — Senior Vice President of Finance and Chief Financial Officer
Thank you, Matt. Before reviewing Q3 results, I’d like to address two items impacting comparability this quarter. As we discussed last quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation, which contributed $30 million of revenue this quarter. In addition, our Q3 2024 results included an additional month of Moritex financials as we aligned accounting schedules, which added approximately $5 million of revenue to the prior year quarter. A detailed revenue bridge illustrating these factors is available on Page 6 of our presentation.
Revenue growth excluding the impact of both the commercial partnership and the additional months of Moritex a year ago was 13% on a constant currency basis. We believe this number provides the most transparent and accurate representation of our underlying top-line performance for the quarter. Turning to the quarterly details, I’ll begin with a discussion of reported financial results, followed by the financials adjusted to exclude these two items.
Starting with the as reported financials on Page 7. Third quarter revenue of $277 million expanded by 18% year-over-year or by 16% on a constant currency basis. Looking at geographic revenue trends on a year-over-year constant currency basis, America’s revenue expanded by 27% in the quarter, led by continued strength in logistics and the one-time contribution of the commercial partnership. Europe grew 24%, driven primarily by certain consumer electronics customers shifting their ordering from China-based entities to those in Europe.
As noted last quarter, this change in ordering entities does not indicate any underlying shift in business mix or customer demand. Excluding this procurement change, Europe grew modestly as strength in packaging, and the one-time contribution of the commercial partnership were partially offset by continued weakness in automotive.
Greater China revenue increased 9%, after adjusting for the shift in ordering entities, and the additional month of Moritex included in last year’s Q3 growth in Greater China was very strong. This broad-based momentum across all end markets except automotive. Other Asia revenue declined 5% in the quarter, after adjusting for the additional month of Moritex revenue last year, other Asia grew 4%, driven by consumer electronic supply chain shift.
Staying on Page 7. Adjusted EBITDA margin expanded 730 basis points, driven by operating leverage, disciplined cost management, and the one-time benefit from the commercial partnership. GAAP Diluted earnings per share were $0.10, down 39% from a year ago, primarily due to a one-time discrete tax expense rule of $33 million related to the One Big Beautiful Bill Act.
Adjusted diluted EPS of $0.33 increased by $0.13 or 69%. I will now cover the underlying business performance adjusted to exclude the two items impacting comparability. Starting with the financial highlights of the third quarter. Page 8 of our earnings presentation details our performance on three key financial metrics. One, adjusted EBITDA margin was 22.1%, representing an increase of 450 basis points year-over-year to our highest margin since Q2 of 2023. Two, adjusted EPS increased 47% year-over-year, the fifth consecutive quarter of double-digit EPS growth, and three, our trailing 12 month free cash flow conversion rate reached 133%, meeting our target of greater than 100% for the fourth consecutive quarter.
Our focus on disciplined cost management and profitable growth ensured that this quarter’s strong revenue performance translated into strong bottom-line EPS growth and robust free cash flow. These financial results represent another key milestone towards the through-cycle financial framework we outlined at our investor day.
Turning to the income statement, adjusted to exclude the two items impacting comparability on Page 9 of our earnings presentation. Revenue increased 15% year-over-year and 13% on a constant currency basis. Adjusted gross margin was 67.7%, down 170 basis points year-over-year, driven by unfavorable mix and the impact of tariffs.
Adjusted operating expenses grew 1% year-over-year and declined 1% on a constant currency basis, driven by continuous cost management, partially offset by a meaningful headwind from incentive compensation in the quarter. We have now delivered the combination of revenue growth and adjusted opex reduction for three consecutive quarters. While we are pleased with these results, we continue to drive efficiency across the organization and incurred $3 million of reorganization charges in the quarter, which are excluded from adjusted operating expenses.
Looking ahead on an annual basis, we expect adjusted operating expenses to grow at a slower pace than revenue. The mentioned combination of revenue growth and continuous focus on cost management drove adjusted EBITDA margin to 22.1% near the upper end of our guidance range. Adjusted diluted EPS was $0.28, representing 47% year-over-year growth. This strong EPS performance was driven by robust revenue growth, disciplined cost management, and a lower diluted share count compared to last year.
We generated $86 million in free cash flow in Q3, exceeding the total amount generated during the first nine months of 2024 in a single quarter. Trailing 12 months, free cash flow reached $214 million, surpassing the $200 million mark for the first time since Q1 of 2023, and increasing 132% compared to the 12 month period ending Q3 of 2024.
Trailing 12 months, free cash flow conversion was 133%, easily meeting our target of greater than 100%. We continued to drive working capital efficiencies in Q3, and our cash conversion cycle declined sequentially for the sixth straight quarter. Turning to capital allocation. We returned $37 million to shareholders this quarter through a combination of share repurchase and dividends. Over the past 12 months, we have returned $224 million to shareholders, more than 100% of our free cash flow.
Over the long term, we remain committed to returning capital as an important component of the disciplined capital allocation strategy we outlined in June. We ended Q3 with $600 million in net cash and investments, providing flexibility to pursue M&A opportunities while continuing to return capital to shareholders.
Moving to Page 10 of our earnings deck. I’ll now review our financial guidance for the fourth quarter. In Q4, we expect revenue to be between $230 million and $245 million, representing growth of approximately 3% at the midpoint. The implied sequential decline is primarily driven by the seasonal step down in our consumer electronics business and is in line with our historical Q4 seasonality over the past decade.
Adjusted EBITDA margin is expected to be between 17% and 20%, with the midpoint consistent with the level achieved in the prior year. Adjusted earnings per share are expected to be between $0.19 and $0.24, with the midpoint of this range representing approximately 7.5% year-over-year growth driven by revenue growth and reduction in share count. We continue to expect no material impact on full-year adjusted EBITDA margin and earnings per share from tariffs announced as of today.
Our Q4 guidance implies mid-single-digit full-year 2025 revenue growth excluding the benefit from the commercial partnership. Looking ahead to 2026, average PMI readings in Q3 for major economies, including the US, Eurozone, China, and Japan, were between 48 and 51 [Phonetic], signaling that industrial activity has yet to show sustained expansion. These conditions suggest we remain in the initial stage of the cycle. As we shared at Investor Day, this stage is characterized by moderate growth with similar growth dynamics in 2026 as we are experiencing in 2025, excluding the one-time benefit from the commercial partnership.
To clarify, this outlook is not formal revenue guidance nor does it reflect changes in business conditions or visibility. Rather, it represents our view of the cycle based on macroeconomic indicators and our through-cycle financial framework. In this early cycle environment, we remain committed to disciplined cost management while driving margin expansion and EPS growth, combined with strong cash generation.
Now Matt and I are ready for your questions. Operator, please go ahead.
Questions and Answers:
Operator
Thank you. The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Damian Karas of UBS. Please go ahead.
Damian Karas
Hey, good morning, everyone.
Matt Moschner
Hey, Damian.
Dennis Fehr
Hey Damian.
Damian Karas
I wanted to begin by asking you about consumer electronics part of your business. How much of the current demand strength you’re seeing as a result of rising customer output and product rollouts versus your customers migrating their footprints to other regions? And curious what you’re hearing from some of your CE customers in terms of their plan to make further shifts of their supply chain and what that could mean for your business in 2026.
Matt Moschner
Hey, Damian, this is Matt. Thanks for the question. Yeah, we’re very pleased with the performance of our consumer electronics business this year, and as we said in the comments, it being a growth year for us in consumer after several years of a down cycle. And so, where is that coming from? I think you hinted at a few of them. I was actually in ASEAN in India a few weeks ago, observing some of the shifts in manufacturing from mainland China, working with a lot of the machine builders that underpin this industry. And yeah, I would say there is quite a bit of activity that we’re participating in as supply chains diversify in this market. And whether that’s countries like Vietnam, Malaysia, India, I think all are really trying to participate in that migration.
But I wouldn’t say that’s the only growth driver, right? I think we said our business is growing broad-based right? It’s not just a few customers; it’s many customers that are seeing increased activity. I think we are seeing things like changes in device form factors and entirely new form factors, particularly as consumers are wanting to take advantage of advanced AI technology in different ways.
At the same time, advanced AI vision for some of the more complex cosmetic inspections is also maturing, and we’re seeing our ability to solve new applications that maybe historically weren’t addressable. So I think you put all those things together, and yeah, I think we feel very optimistic about where we are and how we can participate across multiple growth factors.
And, as a global company, I think customers are looking to us to help them produce, whether it’s in one geography or around the world. And so we’re excited for how that could carry into 2026.
Damian Karas
That’s really helpful. And then I wanted to ask you about China, which I think, if I heard correctly, you saw 9% growth. And, so I guess if I just think about what we’ve heard from a lot of our other industrial companies that have reported third quarter so far, we seem to be bucking the trend there, where I think a lot of others are experiencing some softness in China. So you just elaborate on what you’re seeing, what’s driving the broader strength there.
Matt Moschner
Yeah, absolutely. No thanks for noticing. In Q3, we saw strong year-over-year growth in greater China, which, as a note, includes Taiwan for us. And I would say it is broad-based across verticals with perhaps the exception of automotive. Why? We’ve made great investments in China and the greater China region. We have landed more localized distribution. We’ve invested in our sales channel, we have local engineering in country to try to be a more nimble company in that country and in that region. And I think you’re starting to see some of those things pay off.
As a reminder, a good portion of our business, I think we — the past we’ve said three quarters roughly are multinationals operating in China and roughly a quarter being domestic Chinese manufacturers. And so, they like working with Cognex, not just because of our excellent technology, but also our global footprint, particularly as our customers are thinking about potentially producing in China and other Asia regions, given some of the trade and tariff news of recent months.
So, yeah, we’re encouraged by the momentum. I would also say the competitive dynamic in China has stabilized in many ways, and we’re seeing pricing stabilize as a result. And so you put those things together, and yeah, we had a great quarter, and I remain pretty optimistic about how the investments we’ve made in China could pay off for us heading into next year.
Damian Karas
That’s great to hear. Thanks for all the color.
Operator
Thank you. The next question is coming from Andrew Buscaglia of BNP Paribas. Please go ahead.
Andrew Buscaglia
Hey, good morning, everyone.
Dennis Fehr
Hey, Andrew.
Matt Moschner
Hey, good morning.
Andrew Buscaglia
I was hoping you could discuss some of the trends you’re seeing in logistics. I mean, obviously, that’s been very strong for some time now, but how much more of this existing capacity reinvestment from customers can you benefit from? And at what point do you need there to be another leg up in new warehouse build-outs to grow?
Matt Moschner
Yeah. No, it’s a great question. I mean, as we said in the prepared remarks, most of our growth is driving productivity in existing facilities, and I still see room to grow there. I think we’ve also said we think this market is still in the early innings of its automation story. And I believe that to be true. You go into a modern warehouse today, you see a lot of vision systems, but today they’re mostly doing things like barcode reading and helping with the sortation process.
I think the product release we had yesterday is a really exciting one for us, and I think for the industry, because it really is the first meaningful step in bringing vision and visual inspection to warehouses. And, it’s good to remember why that hasn’t happened yet because it’s a really, really hard problem, right? Given the variation that you see going through some of these facilities, millions of SKUs at very high rates that are very cost-sensitive.
So we’re excited about how we can drive vision penetration in logistics. I think that is I don’t mischaracterize it as a white space, and I think one that really can only be addressed by advanced AI. And so I think we’re well-positioned for that. And the SLX is the first step in that journey for us. I think a lot of our customers are still have very much a productivity focus, right? So I don’t think we’re yet over the hump on how we can get more and how they can get more productivity from existing facilities.
And then I would just say, right now our strength is in retail, distribution, and e-commerce. I think we’re relatively newer to areas like the parcel market, and helping other areas like airports as they look to automate, where we’re seeing quite a bit of investment. So I think those are areas where we could grow as well. So I think we remain optimistic that the growth story of logistics is not yet over. But I would just say, maybe a bit nonlinear, particularly as some of the larger customers that we serve, how many more years can they have outsized investments? And so over the medium term, I think we feel very good about the growth story, how we get there might be lumpy or non-linear, is how I characterize it.
Andrew Buscaglia
Yeah. Interesting. Okay. And then, it was surprised to see semis grow a little bit. I think we weren’t expecting much if any, growth at all this year, which you maintained your outlook in that space. I guess what are the — what’s driving that little pick-up there? And then can you talk about maybe your — how you would benefit from the memory market? I would imagine you guys would have exposure there. That seems to be certainly benefiting from AI. If you talk about that a little bit, that’d be great.
Matt Moschner
Yeah. I mean, I think the underlying demand for chipsets, for memory, for other active components is growing, and I think will given the demand for new devices, and the underpinnings of advanced AI as we see a really exciting set of new computing capabilities being announced. And yes, we would participate in all of those things. It’s useful just to remind ourselves how we participate in this market, which is really through selling vision to large equipment manufacturers that produce the machines that handle the wafers or the finished packaged products.
So that’s really how we address the market. And the sorts of applications that we solve are really traceability. These are very high-value pieces of silicon wafers that you want to make sure have good traceability that have good quality. So we do visual inspection. And so that’s, those are primarily how we serve the market.
The growth in this market I would also characterize as somehow nonlinear, right? The ordering of those machines is very much dependent on the build-out of specific facilities. But, but right now we’re seeing good healthy activity, and I think there’s good underlying demand for chips. But also, I think there is a bit of changes in where things get made and where the fabs are located, right? We see, build out going back to the Chips Act in the last administration here in the U.S. we’re seeing ambitions in countries like India to have domestic semiconductor production capacity. So I think there’s also a geographic angle as more regions and countries participate in the manufacturing advanced Chips Acts. So, and I think Cognex will be there, and we’ll serve that market as we do today through our large equipment manufacturing partners.
Andrew Buscaglia
Got it. Thank you.
Operator
Thank you. The next question is coming from Tommy Moll of Stephens Inc. Please go ahead.
Tommy Moll
Good morning, and thank you for taking my questions. I wanted to ask about automotive. Matt, I think I heard you say it feels like you’re nearing a bottom there. What details can you give us? What visibility do you have into next year? And to the extent you can distinguish what you’re seeing in North America versus Europe, that’d be appreciated as well. Thank you.
Matt Moschner
Yeah, no, I think it is a — remains a challenging market for us, although, yeah, I think we are nearing a bottom. But I think you’re right to point out the geographic differences in growth. And, here in the U.S. we are seeing, more activity, I would say relatively more activity than Europe, which seems to be taking a longer time to recover. And, it’s not hard to imagine why there’s different geopolitical considerations around trade and tariffs for this industry. And so we’re definitely seeing larger differences in relative growth rates in the Americas, in Europe, with relatively more strength in the Americas than Europe.
We also serve large automotive manufacturers in Asia, in Japan, and Korea, mainland China. And I think there, I think it’s again, mixed. I think it depends on specific OEMs, their transitions between powertrain types, the geopolitics of those things. And so, yeah, I think it’s hard to call. I think we are nearing a bottom. I think this year is going to be better than last. And our teams are working with each of those OEMs on their automation plans, which we still see over the medium and long-term as being healthy, right? This is an industry that is still struggling with quality escapes, right? And recalls, vision helps with that. It’s an industry that struggles with labor and qualified skilled labor; automation helps with that.
And generally speaking, mitigating the increased in costs associated with production and tariffs and things like this and automation helps with that. So in the near-term, I’d say it’s improving and stabilizing, and over the long-term, I think we remain optimistic.
Tommy Moll
Dennis, question for you on margins. If we look at what you just reported in the third quarter, and this will be X — Moritex X, the commercial partnership. You delivered teens top line growth with only a point of adjusted opex growth. Clearly, that’s not repeatable over a long time horizon. And so if we take that as one bookend, the other bookend you gave us is basically a reminder of your long-term framework. Just that opex grows at a slower rate than sales. That’s a pretty wide range for us to think about. If we’re thinking next 12 months, is there anything you could do to situate us somewhere within that wide range in terms of what’s reasonable?
Dennis Fehr
Yeah. No, fair question, Tommy. I would say maybe first clarifying on the quarter, right? If you take constant currency, we would be down by a point and that considering that we had some incentive comp headwinds, right? So last year was an underperforming year, and this year looks a bit better in that regard. And in prior quarters, we have been talking about that we have been two or even three points down compared on the year-over-year comparison. That’s kind of if you think about like constant currency excluding incentive comp, that’s kind of the run rate which we are for this year, and we keep on driving that, right? So we talked about taking on additional reorganization charges in this quarter.
Clearly, that’s for us to set ourselves up for the future and to drive success, right? And that kind of put that a little bit also in context in my prepared remarks of how we think where we are in the cycle, right? So we talked about, like, within general, we are short cycle business, so we don’t have a lot of visibility into 2026. So we use these macroeconomic indicators like PMI, and they tell us we’re in the early stage of the cycle, and that means moderate growth, and then moderate growth environment for us means to be keep on working on opex, and drive efficiency throughout the organization. And that basically then sets us up still for hopefully attractive eps, adjusted EPS growth, right?
So if you look at this year, mid single-digit growth on the top line, excluding the commercial partnership, but adjusted EPS, if you take the implied guidance, excluding the commercial partnership, that’s more than 20% of EPS growth. And that’s kind of how we think the playbook could look like for 2026. That means the moment macro indicates moderate growth. So let’s keep on working on the opex side and do what we have to do so that we show that adjusted EPS shows attractive growth rates. I hope that helps a bit with narrowing it down to your question, Tommy.
Tommy Moll
Yeah. Sure does. Thank you both, and I’ll turn it back.
Operator
Thank you. Our next question is coming from Jake Levinson of Melius Research. Please go ahead.
Jake Levinson
Good morning, everyone.
Matt Moschner
Hey Jake.
Dennis Fehr
Hey Jake.
Jake Levinson
Just wanted to go back to logistics for one second. I know folks have seen some pretty nice growth there the last couple quarters, and but it’s been, it’s put some pressure on their gross margins. If our call just given the engineering resources that you need to use with implementing machine vision for some of those customers. The question I guess, is as you roll out some of these AI-enabled products, does that actually lower your cost to serve those customers going forward?
Matt Moschner
Yeah. Thanks, Jake. Absolutely. I mean SLX really strikes at the heart of really two pieces of the P&L. One is on the gross margin side. We see that the ROI on visual inspection is very strong, and so we’re able to command better pricing for a given product cost. So we’re excited about that. And you might even expect similar margins as we see in the vision in our factory automation business for logistics.
And then, really, I think one of the special parts of that product is it was completely rebuilt with simplicity in mind, right? Really a low-touch, no-touch deployment that maybe takes Cognex out of the loop entirely in terms of doing feasibilities, but also scale deployments. So yeah, I fully expect we’ll see benefits on the gross margin line as well as on the opex line as we can grow without having to grow our field service resources to deploy those systems in a similar way. Yeah.
Jake Levinson
Okay. That’s helpful. And just wanted to touch quickly on the commercial partnership that you announced. I think if memory serves, you’ve had more of a presence in sort of the medical device space as opposed to lab automation. But are there more opportunities like this to partner with some of these OEMs, whether it’s the medical space or others? And kind of how does this fit into the larger strategy around expanding into some of these newer markets?
Matt Moschner
[Speech Overlap] I think this is a more specialized case where we found an opportunity with a partner in a more niche area for us. So I know, I wouldn’t say, I’d want to — I’d want you to extrapolate that as any sort of new playbook for growth for Cognex. No, I wouldn’t say that.
Jake Levinson
Okay, fair enough. Thank you very much. I’ll pass it on.
Operator
Thank you. Our next question is coming from Piyush Avasthy of Citi. Please go ahead.
Piyush Avasthy
Good morning, guys.
Dennis Fehr
Hi, Piyush.
Piyush Avasthy
Matt, maybe like on your investor day, you laid out a 6% to 7% growth contribution from increased machine vision penetration. It’s just been like a couple quarters, but maybe some early feedback on how that is progressing. I see you have been, it has been associated more with packaging. Maybe comment on how you can see this supporting your other end market, and then there’s this reorganization, maybe just comment on like how you balance these cost actions while still being aggressive towards penetrating new markets.
Matt Moschner
Yeah, thanks. Let me take the penetration question first. And you’re right, we said there were 6% to 7% of penetration growth on top of core growth of each of our industries, that led us to a 10% to 11% through cycle organic growth rate. So I think you had that right. Where are we seeing it? And a big part of that penetration, as we said, I think was a lot that’s very technology-driven, right? As we innovate, we are solving often for the first time applications that haven’t been solved before. I think I mentioned logistics as very much one of those.
And I suspect, and we’re seeing that the SLX is solving new vision applications that haven’t been solved before. So we’re driving penetration and logistics with vision. Similarly, in consumer electronics, we’re innovating with new tools today that are doing things around cosmetic defect inspection that were not possible in the past. We’re driving penetration in consumer electronics, and then packaging, you’re right. I think that is more about how do we educate the market and educate customers who are more regional, smaller manufacturers on the benefits of vision. And we’re doing that through investments in our sales channel. So yeah, those are just three areas I would point to where we’re driving penetration through technology, through channel, through sales coverage. And I’m excited about each of those.
Your second question is on cost, and how we’re thinking about cost management and cost reductions in the context of our growth story, right? We take, as we’ve said in the past, a very long-term view on growth and investments, and that’s — it’s a technology company, we have to. But at the same time, we’re many months into making sure that, given the stage of the growth cycle that we’re in, that we are managing our cost basis smartly.
And so, yeah, over the last six months, we have moved quickly to right-size our cost basis in a number of areas. I would say we really took a hard look at all areas of the company and we continue to, whether it be our sales capacity, our engineering capacity, our operations footprint, back office functions, and G&A. And it’s been a, I’d say it’s been a very collaborative approach as a leadership team, and I think we’ve done it smartly. I think cognoids are bought into the journey, and we’re excited for how we can take that into next year and drive profitable growth over the medium and long-term.
Dennis Fehr
Then maybe let me add to that, just kind of how we manage that. So we’re taking a very programmatic approach. So that means we haven’t clearly identified areas and work streams defined on which we work on. And then certainly you can see that we’re not coming out with like here’s the one big whatever reduction in force type of approach, but we’re really kind of looking at area by area and looking for efficiencies, getting these efficiencies and moving on and revisiting after some time again to see like how is that work and where can we improve further.
So it’s really think about it that we are driving a program which it’s not looking like let’s just kind of cut cost in the short term and maybe break a lot of things along the way. But it’s really a well-balanced programmatic approach, which kind of brings the right balance between supporting the top line growth and at the same time supporting also the bottom line.
Piyush Avasthy
Very helpful. And I know you just give guidance one quarter ahead, but you did spoil us last time with some incremental color on 4Q. So as I as we think of like 1Q26, anything you want to remind us in terms of seasonality, any material deviation from the end market commentary that you just highlighted today, that would be helpful.
Matt Moschner
Yeah, Piyush, great question. Certainly, as you mentioned, we typically don’t give longer-term guidance. Keep in mind, we are a short-cycle business, but there’s certainly some modeling comments I can provide. So first, keep in mind on the top line side, is that from the seasonality point of view that, Q1 often is like the lowest quarter in the year. So that means in that regard, you may want to look at really a year-over-year comparison, right? Don’t look at a sequential comparison, look on top line and year-over-year.
And then when we think about bottom line and here, maybe particularly opex, maybe I can remind you that in Q1 this year, we had some favorability in opex from exchange rate as well as from Stockholm. So these ones may not repeat in Q1 2026. So I think on the opex side, it’s probably better for you to model sequentially and not on a year-over-year basis. So maybe two comments, top line looks year-over-year on the seasonality and on the opex side, and with that, the bottom line rather looks sequentially and not year-over-year. I hope that’s helpful.
Piyush Avasthy
I appreciate all the color guys. Good luck.
Dennis Fehr
Thanks.
Operator
Thank you. The next question is coming from Guy Hardwick of Barclays. Please go ahead.
Guy Hardwick
Hi, good morning.
Dennis Fehr
Hey, Guy. Good morning.
Guy Hardwick
Hi. I would like to ask about automotive, which obviously your softest market. There has been some, maybe more slightly positive, commentary with some major capex announcements by OEMs, and I guess typically if you’re looking at 2026 and the way the model launch cycle looks, perhaps a little better in the second half of the year, you sure you have to put the capex in like 12 months ahead. So I wonder if there’s any lead indicators from your customers in terms of models or product refreshes or capex plans, which may give you some cause for optimism for 2026 in auto.
Matt Moschner
Yeah. Thanks, Guy. Yeah, I would say we engage with all the major OEMs, and on their automation plans and on their platform plans, if you want to call them that. And you’re right, there have been some big announcements from large OEMs, I would say in all regions in terms of how they plan to replatform for the future, whether that be hybrid powertrains or fully electric, or really just I would say bringing a more software-defined customer experience to the car.
And as they do that, you would expect a healthy dose of automation and significant retooling. I would say in terms of how those vehicle platforms are made, but I wouldn’t comment on specific expectations for auto next year. I think that would be premature. I would just echo the comments I made, which is we are seeing differences in business momentum across geographies, relatively stronger in the U.S., relatively weaker still in Europe, and somewhere in the middle in Asia. So we work with them all, we’re staying close to it, but I think a bit too early to call at this point.
Guy Hardwick
Okay, thank you.
Operator
Thank you. The next question is coming from Joe Giordano of Cowen. Please, go ahead.
Joe Giordano
Hey, guys, Good morning.
Dennis Fehr
Hey, Joe.
Matt Moschner
Hi, Joe.
Joe Giordano
Hey, can you — when you talk about like AI making things easier to deploy, like, it’s also, I guess, helping non-traditional players start to try to deliver solutions here we’re seeing that from like automation players, things like that. So, can you maybe talk about the competitive environment, how it’s like evolving with who’s trying to participate on the fringes, and what that means for you?
Matt Moschner
Yeah. Sure. Maybe I’ll just talk about us for a minute. We’re on — our fourth generation of AI vision, we’ve been at this for almost 10 years, starting with the acquisition of E-Systems, and in early 2017. And we have great teams focused on taking some of the latest, best open-source models and adding our customizations, if you want to call it that, to make them more relevant and run effectively in industrial vision applications. So think of that as very much our secret sauce. And Reto, who leads our vision tools development, I think, talked at length at Investor Day about how we do that and why we think we do it in a differentiated way. So I’d call that out, and it’s really about model performance on accuracy, on speed, on scalability. And I still see Cognex as leading in those areas.
But you’re not wrong to say, AI is leading to somehow a democratization of folks that are trying visual inspection more and more within industrial environments. So, in that context, I see it as actually a great growth engine for getting more users of vision within factories. And, then it’s on us to make sure that those vision tools are Cognex vision tools. So are we seeing significant changes in the competitive dynamic or not? But we keep a close eye on it, and I’m very happy with the progress we’re making in AI.
Joe Giordano
And then, since you guys have kind of evolved the strategy a little bit, the only part that we haven’t really seen a ton of evidence of yet is on the M&A side. So, can you maybe talk us through what you’re seeing out there? I know valuations are challenging, but a lot of buzz out there on robotics, now, humanoids, all these different things like where does it make sense for Cognex to participate going forward?
Dennis Fehr
Hey, Joe, happy to take that question. Yeah, because as we outline it, Investor Day, certainly M&A is part of our capital allocation strategy, and certainly with the strong cash flow generation which we have seen this year, we definitely have the potential to do M&A. But at the same time, it’s also very clearly that we’re setting ourselves a very high bar in terms of a strategic fit and then of the financial profile of the potential target company. So that we got, I think definitely there are areas where we could bring in, especially like adding a broader product basket to our direct salesforce. That’s where we can really create a lot of synergies from our perspective.
But yeah, at the same time, I really want to be mindful about that we don’t feel like a pressure to have to do an M&A, and that we will be very mindful about the financial metrics and financial framework around it. And that could mean that an M&A wouldn’t be on the card for the next two or three years. Will really depend on actionability and if we can find the right target.
Joe Giordano
Thanks guys.
Operator
Thank you. The next question is coming from Ken Newman of KeyBanc Capital Markets. Please go ahead.
Ken Newman
Hey, good morning, guys.
Dennis Fehr
Hey, Ken.
Matt Moschner
Hey, Ken.
Ken Newman
Hi. Good morning. Dennis. I just wanted to kind of come back to those 2026 comments that you made at the end of your prepared remarks. I understand it’s not formal guide, but when you say similar growth trends X the commercial partnership, is that comment relative to how you see the full year of 2025 playing out, or is that more so relative to what you’ve seen in the last couple of quarters, right? I just asked because you do seem a bit more constructive on most of the end markets that you’re operating in. You’re even kind of calling out being close to a bottom in auto. I’m just trying to understand the thought process there.
Dennis Fehr
It’s really about coming back to I think I talked about that before, we are this short cycle business, and in the largest part of our business, in fact, your automation, we have limited visibility. It’s a three-month visibility,and certainly we think about the end markets, and Matt provided some of the voiceover there, and there’s some areas which we really like to see, like consumer electronics looks good, and Matt talked about in logistics, like how is there a linear growth trend on large scale customers or not and automotive maybe finding its bottom.
So there are definitely different aspects there, but sometimes we’re trying just to not to get too much into the details on each of the markets and take a broader view on, like, what is macro telling us? And just on that macro side, if you look at that, it just doesn’t point to that at the moment from the PMI, as of today, the 2026 will look very different than 2025.
And that’s just another data point which we’re taking in consideration. I think mostly important, why are we doing that, right? We want to think about, like, how do we manage the company also in terms of on the opex side, and where do we invest and where not. And so we provided it more as a framework in the sense of like how do we think, and how do we do management decisions right now? And wanting to give you a guidance, right? And I was trying to be very clear about this. Hey, this is not a guidance.
Ken Newman
Yeah. No, that makes sense. I appreciate that. And then maybe for the follow-up here, sorry if I missed it, but did you provide an update on the One Vision platform and just any color on when that becomes more commercially available?
Matt Moschner
Yeah. Thanks, Ken. Yeah, no, we didn’t, not in the prepared remarks, but I’m happy to now. It’s one of the more exciting things we’re working on. And yeah, just to remind the group, so we launched One Vision, or we announced One Vision, I would say in June, just before the investor da,y and we said that it was in a limited release. What does that mean that the technology is still under active development, we’re working with select customers, and it can be deployed against specific Cognex embedded systems today, and I would say, four, six months on from that announcement, we continue to make very good progress, progress with customers.
I think they like it quite a bit. We’re seeing it drive great penetration in new applications that previously weren’t solved, or keeping customers within our Insight Vision Suite ecosystem longer. I think both of those are great things. I think that the usability of the technology is excellent. It offers customers great ways to collaborate on model training and great ways to track the efficacy of those models after they’re deployed. So we’re getting great feedback on that.
What comes next? Well, we will continue to engage with customers. You can think of us engaging with hundreds of our tens of thousands of customers, so still quite targeted. And we are targeting a full-scale launch in the first half of next year, and that would open up the product line to more customers in more geographies that would have broader support of more of our embedded systems. So we’re really focused on that, and we’re excited with the momentum today. I don’t have any updates for you in terms of the commercial model for the product, but just to say it is performing well against the metrics that we set for it.
Ken Newman
Appreciate it, thanks.
Operator
Thank you. The next question is coming from Tomo Sano of JP Morgan. Please go ahead.
Brendan Sheehan
Hi, thanks. This is Brendan Sheehan for Tomo. Just with the launch of the SLX portfolio, can you talk to the pipeline for the new AI-enabled use cases that you see and sort of how you see that impacting both your TAM and competitive positioning over the next year or two?
Matt Moschner
Yeah. So we see ourselves as a first mover in this style of AI vision for logistics, and I highlighted two applications, really object classification, right? So, telling the system what it’s observing, as well as side-by-side detection, which is a very common application, particularly in high-speed sortation in warehouses, where you really want to make sure that when you’re identifying an object, could be a box or a singulated item, that it’s one of them, not multiples of them.
And so that really is helpful, so that as it — as those things get sorted and diverted and shipped, you’re not shipping multiples of something. And so those are the two applications that we’re really focused on. And I would say every week and month that goes by, we find new applications for the underlying AI detection algorithms. And so how that affects our total market? We have an estimate for that, and we think it is large and growing substantially faster than, let’s say, the traditional barcode reading portion of that market.
So yeah, let’s see how it goes. We’ve engaged with customers well ahead of yesterday’s release, and the feedback has been very positive. I’m excited to get to a full release status and update you on the future on how that product line is going.
Brendan Sheehan
Great, thank you. That’s it for me.
Operator
Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead.
Kevin Wilson
Hey, good morning. This is actually Kevin Wilson on for Jamie. Thanks for squeezing me in. I want to ask on — Hey, I want to ask on Europe, I think you said grew modestly, excluding the protection procurement shifts in consumer electronics. Sorry if I missed it, was that modest growth also excluding the one-time partnership in the quarter, and then just more broadly excluding the one-time and excluding the procurement shifts? How are you thinking about demand trends, organic growth, and your visibility in Europe, and maybe if it’s possible to strip out auto, think about how that market is performing? Thanks.
Dennis Fehr
Yeah. Maybe let me start here. And then perhaps Matt will add. So I think if you look at Europe, right? So first of all, where did we saw strength? So we saw strength in the packaging market, thanks to our salesforce transformation and kind of increased outreach there and penetration with our AI, easy-to-use product. But then, at the same time, we see a stronger weakness still in the automotive side. So I talked about that before. That’s the one market in the automotive which is really still down. That kind of balance itself out a little bit.
And in general, I would say, Europe, clearly, if you look back to the PMI numbers, PMIs have been improving over the last couple of months. But really, from I would say almost depressed level, more to a like maybe close to a neutral level that we got. I would say we remain still a bit cautious about Europe and wouldn’t call that there is some a large growth coming somewhere in the near-term. At least that’s not what is suggested by the macro data, which we’re looking at.
Kevin Wilson
Thanks. That’s helpful. And then for my follow-up, now that I think we’re about one year into your sales reorganization, I wonder if you can update on your assessment of that change in strategy. I know we’ve long stopped talking about emerging customer in those terms, but with one vision and your broader expanding the customer base into less sophisticated customers, I guess what inning are we in for Connex market penetration there, and any specific goals you have for 2026 on your path to doubling the number of customers served. Thank you.
Matt Moschner
Yeah, thanks, Kev. Yeah, sure. No, I think you have it roughly right. And just to remind the group, we started on this journey of really substantially broadening our sales channel several years ago, really, this in 2023. And, as we expanded our sales force and brought on many new sales noises, we call them sales engineers. We made the decision to combine what was really two sales organizations into one earlier this year, in January. And I would say that was the right decision. And it’s going very well, where we’ve really formed new territories and new teams focused on different missions.
And those missions are, between finding new customers, driving penetration at existing customers, working more sophisticated customers like machine builders and other OEMs. So I would say I’m very, very pleased with where we are in terms of our sales strategy and sales organizational structure. I’d say as we look forward into the new year, it’s less about significant substantial change and it’s more about continuous improvement. We made big investments over the years in modern business systems and tools, primarily in the area of CRM. And I would say we’re starting to use those tools quite effectively in terms of how we identify new sales opportunities.
We get those leads to our sales noise to qualify and consult. And so, what aiming we’re in, I wouldn’t say, but I’m very encouraged by the progress we’ve made since the first of this year. And, really, the focus right now is on continuous improvement, driving efficiency, and less about any substantial changes heading into next year.
Kevin Wilson
Thank you.
Operator
Thank you. That is all the time we have for questions today. I will now turn the call back over to Mr. Moschner for closing comments.
Matt Moschner
Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress heading into the fourth quarter.