Cognex Corp (CGNX) 2002 Q2 法說會逐字稿

Please stand by.

Good day everyone and welcome to the Cognex second quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Richard Morin, Chief Financial Officer. Please go ahead, sir.

Thank you and good evening everyone. Before I turn the conference call over to Bob Shillman, I'd like to emphasize that during this call, we will be talking about expected or anticipated future events. Any forward-looking statements that we make are based upon information that we believe to be true as of today. Things often change, and actual results may differ materially from those projected or anticipated. You should refer to the company's SEC filings for a detailed list of risk factors. And now I'll turn the call over to Bob Shillman.

Thanks, Dick, and good evening, everyone. Welcome to Cognex's second quarter conference call 2002.

Revenue for the second quarter was nearly $27 million, and excluding an inventory benefit in Q2, as well as excluding investment losses, we had a net loss for the quarter of $1.4 million, or three cents per share. As you can see from the press release that we issued earlier this evening, our future results are down significantly from the results we reported a year ago, primarily due to the worldwide slowdown of capital equipment spending. However, these results do represent an improvement over the prior quarter, and are also in line with the guidance that we gave investors in our April 23rd conference call.

In addition, bookings in Q2 increased on a sequential basis, and our was greater than 1.0 for the second quarter in a row. This increase in demand was from both OEM, as well as end-user customers, and was across all of our customer base. The largest increase in absolute dollars were in the semiconductor and electronics industries, which were the area - areas most severely impacted by this slowdown, and were up from a very low base. Geographically, orders increased in each of the three primary regions that we serve.

Before I go into more detail about the toner business at Cognex, and our outlook, I'd like to turn the call back to Dick who will walk you through the second quarter income statement and balance sheet.

Thanks, Bob. And as Bob said a moment ago, Cognex reported revenue for the second quarter of $26.7 million, which is in line with the guidance we gave to investors in April. Revenue in Q2 decreased 29 percent from the comparable quarter in the prior year, primarily due to lower sales to customers in the semiconductor and electronics industries. Revenue from these industries decreased 46 percent year on year in absolute dollars, and represented 41 percent of our total revenue in the second quarter of '02, compared to 55 percent in Q2 of '01. On a sequential basis, revenue in the second quarter increased 22 percent from the prior quarter. This increase is primarily due to higher sales in Q2 to our OEM customers, as well as higher sales of our surface inspection products.

OEM revenue for Q2 was $8.5 million, which is a decrease of 49 percent from the second quarter of 2001. This decrease is due to the slowdown in capital equipment spending by manufacturers in the semiconductor and electronics industries. On a sequential basis, OEM revenue increased 54 percent from a very low base, primarily due to an increase in sales to customers who make capital equipment for the semiconductor industry. OEM revenue represented 32 percent of our total revenue for Q2, compared to 44 percent in last year's second quarter, and 25 percent in the prior quarter.

In the second quarter, revenue from end-user customers was $18.2 million, and represented 68 percent of our total revenue. Revenue from end-user customers was 12 percent lower than Q2 of last year, primarily due to lower sales to manufacturers in electronics industries. End user revenue in the second quarter increased 12 percent on a sequential basis, primarily due to higher sales of our surface inspection products. Geographically, revenue in the U.S. represented 46 percent of total revenue for the second quarter of 2002, Japan accounted for 26 percent, and Europe 24 percent. In absolute dollars, revenue in all three of the primary geographic regions that we serve decreased as compared to the second quarter of 2001. The largest decline year on year was in Japan, because that is where most of our top OEM customers in the semiconductor and electronics industries are located.

On a sequential basis, revenue increased from both OEM and end-user customers in the U.S. Revenue also increased in Japan due to the higher in Q2 to OEM customers in that region.

In the second quarter, we reported a gross margin of 65 percent, which includes a benefit of $1 million, or some three percentage points relating to inventory that was sold in Q2 that we have written down in 2001. In Q4 of 2001, we had reported a charge for inventory that we did not expect to sell, due to customer transition plans during the extended downturn. In the second quarter of 2002, our customers, in fact, purchased some of this inventory, and we realized the benefit for the sale of inventory that essentially had a zero cost basis. Excluding this benefit, our gross margin for Q2 was 62 percent, which is down from the gross margin of 67 percent that we reported in the second quarter of 2001. This decline of gross margin year on year is primarily due to the lower sales volume in Q2 of 2002. Also, sales of our surface inspection systems, which have a lower gross margin than our products, represented a larger percentage of the total business in the second quarter of 2002 they did in Q2 of last year.

On a sequential basis, gross margin increased from the 61 percent that we reported last quarter, primarily due to an increase in sales of our products. Looking forward, we expect the gross margin to be in the low to mid 60 percent range for Q3.

spending in the second quarter of 2002 decreased 15 percent from Q2 of last year, primarily due to the cost containment measures that were implemented in 2001. As a percentage of revenue, spending increased to 24 percent of revenue, as compared to 20 percent in Q2 of last year, due to the impact of the lower sales volume in the second quarter of 2002. On a sequential basis, spending in absolute dollars increased two percent from the prior quarter, yet decreased as a percentage of revenue because increased at a faster rate than did expenses.

In SG&A, spending in Q2 decreased 13 percent year on year. As I just stated for , this decrease is due to the cost containment measures that were implemented in 2001. As a percentage of revenue, SG&A increased to 53 percent of revenue as compared to 44 percent last year, due to the lower revenue level in Q2 of 2002. In absolute dollars, SG&A spending increased nine percent on a sequential basis, primarily due to higher spending in sales and marketing which was undertaken to increase sales opportunities. SG&A in Q2 of 2002 as a percentage of revenue declined from 60 percent of revenue in the prior quarter because revenue increased at a faster rate than did expenses.

Looking forward, we expect that operating expenses in the third quarter will be essentially flat on a sequential basis as we continue to closely manage our spending.

We reported a loss of nearly $4 million in investment and other income for the second quarter as compared to income of $2.9 million in Q2 of last year. In Q2 of 2002, we sold certain equity securities and realized a loss. In addition, we recognized an impairment charge in Q2 for the decline in value of other investments that had since been sold at a loss. We had purchased these stocks with the intention of owning them for a long term, and continued to hold them even though they were trading below our original cost basis. However, over the past month or so, the value declined even further, and expectations for growth were lowered, leading us to believe that it would take much longer than we initially anticipated for them to fully recover. As a result, we decided to sell these stocks and reinvest the funds in interest bearing securities. Excluding the loss on investments, as well as the inventory benefit mentioned earlier, the loss for the second quarter would have been three cents per share. Although this is down from earnings of five cents per share in the second quarter of last year, it is an improvement over the loss of six cents per share that was reported in the prior quarter, and is in line with the guidance that we gave to investors in April.

Now, I'd like to turn to the balance sheet.

Our financial position remains very strong at the end of the second quarter, with $406 million in total assets and $377 million in shareholders' equity. Our cash and investment balance was nearly $300 million and, of course, we continue to have no debt. Day sales outstanding for the second quarter was 64 days, compared with 72 days that were reported at the end of the prior quarter, and the 57 days that we reported at the end of last year's second quarter. Although our was up compared to the end of Q2 of 2001, it is down quite a bit from the prior, and within our targeted range.

Our inventory balance decreased $1.6 million, or seven percent from the end of 2001, as we were able to use inventory to meet customer requirements. At this point, I'd like to call - turn the call back over to Bob Shillman.

Thanks, Dick. Here's some other points of interest before we open the line. We signed 287 new customers in the second quarter. This is an increase over the 268 accounts that we added in Q1 of '02. Of those 287 new accounts in this Q2, 29 are OEMs and 258 are end-user customers. Eleven of the 287 new accounts represent what we believe are significant accounts, which we define as customers that are expected to generate more than $100,000 of ongoing annual revenues in the future. Of these 11 significant new accounts, four are OEMs and seven of them are end users.

I'd like to give you an update now on In-Sight, which is our very successful family of vision sensors. The news on In-Sight continues to be very good. Revenue from In-Sight in Q2 increased 21 percent on a sequential basis, and represented 24 percent of our total business. And I'm very pleased to report that a number of our potentially large customers, who initially purchased a small number of In-Sight units, are beginning to give us recurring orders for multiple units. For example, one well-known manufacturer of consumer products uses In-Sight to make sure that the label is correctly placed on the package, and that the package is folded and sealed properly. They initially bought approximately 15 In-Sight sensors when it was first introduced in 2000. They purchased another 60 or so units in 2001, and so far in 2002, they've given us orders for more than 70 In-Sight sensors. In-Sight is attractive to manufacturers in a wide variety of industries, and is not limited to the end-user market. We have been successful in selling In-sight to OEMs as well. In particular, OEMs in the semiconductor industry are adding our In-Sight 1700 series, which is a wafer reader, on their next-generation capital equipment, much of which is targeted for the front end of the chip making process.

Over the past year or so, we have had a number of wins of well-known, highly respected capital equipment companies in the semiconductor field. We look forward to talking more about these wins once our OEM customers have introduced their products to the marketplace, and have given us permission to use their name.

General business update. Overall our business is improving, and I believe that we are in the early stages of recovery. Bookings in the second quarter of 2002 were higher than our original plan. In the third quarter, we expect revenue to be somewhere between $31 million and $33 million, and at that revenue level, although we will continue to lose money from operations, we do expect to be near breakeven at the bottom line. However, what I currently read in the news and hear from other managers makes me very - causes me to be much more cautious. Manufacturers are not experiencing the increase in demand that they hoped they would see, and many analysts are predicting the capital spending in the second half of 2002 will be soft due to a lack of end-user demand, or possibly even decline somewhat before opening up again. The consensus for the high-tech industries will be at a much slower pace than in prior upturns, and that we may bounce along the bottom for quite some time. Unfortunately, I believe that these predictions will prove to be true.

While our top OEM customers are giving us orders that are higher than originally anticipated, these orders are only to meet their short-term needs, and they are not giving us commitments that go out beyond a few months. Visibility is not improving in the pipeline as it has in the past cycles. Therefore, we intend to be very cautious with our spending, and to manage expenses under the assumption that this will be a very long recovery.

At this time, I'd like to open up the conference call for any questions that you may have for Dick, myself, or the team.

Thank you. Our question-and-answer session will be conducted electronically. For those of you that do have a question today, please press the star key followed by the digit one on your touchtone telephone at this time. We will proceed in the order that you signal us, and take as many questions as . Again, if you do have a question, please press star one now.

And we will take our first question from Richard with Robert W. Baird.

Hi, Bob. Just a question regarding - when you talk about the orders being placed for short-term needs, how do you know that? Is it - is it the technologies they're purchasing, or the length of the purchase orders, the number of units? What are you looking at there? It seems a little contradictory, given continues to move higher here.

Well, what we're seeing are orders that are placed for delivery either one month or two months away. That's the easiest way to put it. In the past, we've had - we've been able to book orders that were 90 days or 120 days into the future, and we get those kinds of orders with delivery schedules, and currently the orders that we're receiving are for delivery 30 to 60 days.

OK.

The other thing, too, Rich, is that we do follow up with our large OEM customers tracking their current inventory levels, and speaking with them, and they're indicating to us that they're not seeing, you know, long-term commitments for their equipment purchases, and the other thing, too, that gives us a little bit of a clue is that what they're - as you saw, and as I indicated, we sold $1 million worth of inventory legacy products that we had reserved for last year because a lot of these OEM customers were in transition plans, and it turns out that what they're buying now, because we're able to use that $1 million, they're still buying our legacy product to go into their older product, and it's not a longer-term commitment because they're not selling the newer stuff yet. So, it's a whole combination of things that lead us to that conclusion.

And is there - often times midyear when an industry hits the brakes, there does emerge some sort of an inventory channel issue. How shall we read that? I mean, obviously your selling legacy inventory suggests the opposite, but going forward do we have that concern? That the inventory channel might get fuller than we like?

No, we don't - we don't see that at this particular point at all.

OK, .

They are purchasing only what they immediately need to make their shipment. So, that's the good news, that if - when and if things pick up - I'm sure it's when, not an if - but it's likely to be in '03, I suppose. When things pick up, we will see that pickup immediately. It's not as if are going into inventory. Nobody is buying for inventory from what we can tell.

OK, and can I just ask one more question? The end market breakdown that you traditionally give, and includes the surface inspection ...

Sure.

Can you give that for the quarter?

Be glad to. For the quarter, our revenue about 24 percent was from semiconductor, 18 percent went to electronics, 11 percent to automotive, four percent to general manufacturing, five percent to consumer products. On the surface inspection side, eight percent of revenues was in paper, and we had seven percent of our revenues going to surface inspection in the metals industry.

OK.

Other , 14 percent, and that was split between medical, packaging, pharmaceutical, et cetera.

OK.

And , there was six percent that went into - six percent of our revenues went into surface inspection in the non-woven industry.

OK. OK, very good. Thank you.

You're welcome.

We will take our next question from Jim with .

.

Bob, wonder if you could look at some past cycles and if you'd looked - looking at some of your top OEM's, or - are there any of those customers that have been leading indicators, and I wonder if you'd look at where these guys are now, today. Is there a pattern there? Do you see any of those guys showing signs of recovery? They give you a little more confidence that this is real, or you know, is this still very iffy at this point?

The leading indicators in the past have been wire bonder companies, that's from the backend, and indeed we are seeing an increase in sales to our wire bonder customers, but it's very iffy. I think the increase is temporary. That's - my theory is the increase is temporary.

OK. Just with respect to In-Sight, that's been a real bright spot here. Can you give us the sense as to how the - that product breaks in terms of your end markets. You're making some progress in the semiconductor area. You talked a little bit about the success you've had in the consumer products area. Can you talk a little about the other markets?

I don't have the detail in front of me. I could ...

Yes.

... tell you that we have expected to sell somewhere between 25 and 30 million this year of In-Sight, and we're going to do better than that. Although we do track it, it's becoming less important. The product is a very - I mean, it's becoming less important to track it by particular application, since many of these sales go through system integrators, and we don't know even what the application is. The good news is it's a horizontal product that can do many things in many different applications. It's been primarily automotive related, more recently, but as I - as we indicated in our comments, it's becoming an OEM product also, which is a very positive surprise for us. It's a hell of a - it's a win. But it's hard, you know, having said that, it's hard to overcome, for any product to overcome the significant slowdown with our top ten OEM customers.

Did your bookings strengthen throughout the quarter, or did they - was it kind of sporadic?

Well, if you - if you looked at the faces of the people that talk to us every night when we get the bookings report, which goes up and down, "Yes! A great bookings day. Things are already - things are recovered," and the next day it slips to half of that and we're all, you know - so I have to say at this point that it is sporadic. The general trend is upward. We are doing better than we were in Q1.

You think your bookings could be up in September? At this point do you have any visibility on that?

Yes. I would expect the bookings are going to continue to increase, but that's like saying, you know, that things - the patient is much better if he's out of the emergency room, now he's in the ICU. So, as I indicated, we think the worst is ...

Yes.

... behind us, but the rate of recovery is slow, too slow.

Painfully.

Painfully slow.

OK.

And I believe it's going to continue to be painfully slow until some major, you know, new product announcement or new consumer product gets people to buy more and spend more, and I don't see that happening before the middle or the end of next year. I further believe that with the recent wave of layoff announcements, that that will have a negative effect on the U.S. economy as a whole, although not everybody's losing their job. When your neighbor loses your job - his job - his or her job - you tend to start worrying. So it's not just the layoffs, but it's also 50 percent of Americans, if I understand it, are in the stock market one way or the other, either in retirement plans, or investment programs or something, but when you see that number coming in every month from your broker with less money, with less value, it's pretty certain that you're going to be less free with your spending than you would otherwise be, and although the papers keep on saying the leading economic indicators are all positive, I think the leading economic indicators timely. There's something wrong here because I don't see how things can be positive when everybody's network is going down the tubes.

OK. Well, it's a little better today anyway.

Yes.

OK. Thank you.

You're welcome.

We'll now move to Fred with .

Thank you. Bob, can you tell about the electronics industry, and are you seeing any follow-through of that. I noticed, on a relative basis it has lagged .

As I take a look at the - one second. I'm just going to flip a page.

I'd say the business - off the top of my head, with , which used to be our - which was historically our largest single application is virtually at zero.

Yes, and that hasn't changed.

I believe that hasn't changed.

Not much. No. No.

Right, and I don't expect that it will. From what we understand from talking to the companies, they closings, and in one shift where they are open, they're running one shift. So, it's going to be quite some time, I believe, before people start buying electronic capital equipment, equipment.

Thank you, and Dick, can you tell me a little about the nature of these securities you sold, these equities. Were they private companies, or what type of investment?

They were - they were publicly traded. They were all publicly traded companies. There were none that were private, and none that were, you know, acquired as part of a acquisition strategy or whatever.

OK, great. Thank you.

You're welcome.

And as a reminder, if you do have a question today, please press star one at this time. We will now move to Will with .

Hello.

The - looking at the cost ...

Will, can you pick up the phone?

Pardon me?

You're on a speakerphone. Can you pick it up?

All right. Sorry. Looking at the costs, were they where you expected them to be, and I'm talking mostly about SG&A, and - because if you - if you saw the - that it came up substantially, and what do you expect that line to do over time, given your outlook of a painfully slow recovery?

They were exactly where we expected them to be because the increase over Q1 was all on very specific, targeted sales and marketing expenses that we reviewed and approved before anybody went out and did it. So I mean, it was all very specifically designed in order to try and capture additional business. You know, going forward, we don't - we don't foresee any increase in the - in the level of spending from Q2 in Q3, or whatever, and we're going to continue to watch and manage those expenses very closely, especially as it relates to what we see in ongoing bookings or whatever.

Well, as a matter of fact, if you were going to break even - there's no opportunity, in other words, to bring the - that down from the $14.2 million at 830 plus revenue rate.

Why do you say that?

I'm asking. That's a question.

We're going to be very carefully looking at the bookings and the associated expenses, and we will take appropriate action to bring this company to operating profitability as soon as possible.

OK, and then you mentioned that nothing's going to change till mid to late '03, as far as the new product that's going ...

No, no. You misunderstood, or maybe I misspoke. I don't see anything that is driving consumer demand. That is one of the problems that our industry is facing. Until there are, you know, either new cell phones or new PDAs or new - some sort of new thing that's going to stimulate people to run out and buy it, there's not going to be a huge increase in ...

There's not going to be the capital.

Right. There's not going to be huge increases in chips being used, and therefore not a huge need to do capital. That's the concern, and so it's, you know, the whole semiconductor industry is driven by consumer electronics - consumer electronics, and also corporate buying. I don't see that Intel's three gigahertz, or whatever, five gigahertz is going to make a difference, to be honest with you. If, you know - If people offered Chevrolets with 600 horsepower engines, that there would be - some people would buy it, but most people are pretty happy with 300 horsepower. Our corporation has not recycled PCs, or updated PCs, for probably three years now, and I don't expect that we will.

And how do you expect 300 millimeter, and the finer line width, to play out for Cognex in the next year?

There is opportunity Cognex because pieces of capital equipment that are making 300 millimeter, that never needed machine vision, now do need machine vision. Those machines that are making it, need it not only to look at wafers and cells, but also look at the operations of the machines. So, it's not just that wafers are bigger and therefore you bigger, it is more sophisticated. So, we are seeing upsize, and matter of fact the upsize of In-Sight has been spurred on at the front end because of 300 millimeter. So, 300 millimeter, when it - when it gets widely accepted, and it's been, of course, pushed off for two, three, four years - I can't keep track anymore - but it has not been, you know, mainstream yet. We'll provide additional to progress.

300 millimeter more than the line width.

Huh?

Is that what your saying?

No. I would think they both go - either one of those ...

And is that the increase in bookings that you've seen sequentially here, and also if - if we also continue to have that increase in bookings, as modest as it is, is that what's driving it, ...

No.

... do you think?

No. I would guess, and I'm just going to guess - maybe Dick has some input - that the increase in bookings was due to the fact that our OEMs had used up all of their inventory, are just simply buying at their run right now. That's what - I believe, that's what ...

Yes. I will - I will confirm that. There has been - certainly some of our bookings are related to 300 millimeter, and if you compare it to what it was last year, which was zero, then it's an infinite increase, or whatever, but its relatively - it's relatively small. Most of the dollar increases Bob said did come from our OEM customers that are - and as, you know, Dick gave us the results of selling inventory that we had reserved, they're still buying some of our old products ...

Because they had down their current inventory.

... because their inventory had gone down, and they're buying on an as-needed, day-to-day basis.

So in other words, the current bookings - so, we should not - if we're conservative, we should not project that the bookings will increase at that same rate, but we should probably project that the bookings will be flat, because this is the current utilization rate.

And so, in the semiconductor OEM channel, there's no excess inventory. That's good news. The fact that you haven't yet seen a pop on 300 millimeter that is significant, that's good news because there's still the opportunity when they - when the - when the product is demanded. And then but, lastly, what about inventory in that electronics OEM channel? Do you know if there's inventory in there?

There still is some. It's nowhere near the level that it was, you know, six months ago or whatever, but they're not in the same shape as the semiconductor guys.

Right. They're not bleeding it off as quickly, ...

OK.

... as I indicated, but they can place, and I think screen printers sales are zero.

Right. OK. Thank you.

You're welcome.

And we do have a follow-up question from Jim .

Bob, you talked in the past couple of calls about the acquisitions environment, and I wonder if you could just give us an update there.

Yes, they were - we were working on two international deals. Well, one was a - yes - and they both disappeared. We are now working, and are about to sign a letter of intent with another international company. It's a small company. It will be a small acquisition, and it'll be added and incorporated into surface inspection product line. That's - that I would say is a 90 percent certainty that we're going to go forward with that, and that will be closed in this quarter.

OK, and I assume you're looking at other things out there as well?

Yes. Yes. I just came out of a two-hour meeting with another sensor-based company, and there are companies to buy. The only question - most of the companies that we look at, however, are small and losing money. And the question is, how long is the investment cycle until they return positive on that, and those are the issues that we look at. We've had a -- I think a very -- a very respectable track record on acquisitions, and that's because we're very careful in doing them. So, there are lots of things that are in distress right now, venture capitalists' purses are sewn shut, and it's a good time to be out there with cash, as we are, able to buy things.

But that doesn't mean that we're going to, you know, just go out on a shopping spree. We're still going to be very careful.

Are you looking at acquisitions that give you, you know, entree into a customer, or are you looking at something that maybe a technology type of ...

The one that will be done this quarter, that we will have an LOI probably today or tomorrow, sometime this week, sometime this month, is an expansion of our technology for surface inspection in that business, so we're buying it for the technology. It is still very small revenue, but we think we can ramp it up rather quickly.

The company that I was speaking to today is new technology that we have -- we do not have at Cognex. So in both cases, they will be new products to be put into our salesmen's bag. Not so much -- neither of these come with major customers, yet, but they do come with very good prospects for worldwide customers.

And the ones that fell through, were they more customer-type of acquisitions?

Yes. Yes, that's exactly right. And let me just add, parenthetically, that I think we will -- will not spend as much time on deals having to do with French companies. Huge French conglomerate, and other people have told me the same thing, it's impossible to do a deal with the French, and we had two experiences just in the past six months where we spent a lot of time. Handshakes, handshakes got reversed, I mean, huge companies. And we won't do that again lightly.

OK, thanks very much.

You're welcome.

with has our next question.

Hi. I've always been intrigued by your -- the opportunities in general manufacturing, you know, non-semiconductor electronics. And I'm just wondering -- forgetting the fact that we're in a recession, has there been any -- is there any killer app out there in any particular business? I know you've served so many different industries, I've always wonder if one or two catch on -- if every drug company wanted to check every bottle going down the line. Are you seeing anything there that could substantially increase that business, either in absolute terms or as a percentage of the total.

Well, that's a good question, and the answer is, are there many killer apps? But you have to define what you mean by killer. If you mean a $5 million opportunity, then there are many such ones. There's nothing out there that you can sell $20 million into the pharmaceutical industry or $30 million into the tire industry.

The vision industry, and that's why there are very few players, is very -- highly fragmented, highly specialized. Now, we do have a killer product. That's very important. But the product that we're selling is the same product for identifying tires as looking at baby droppers as looking nail polish brushes. So that's more important, that we have a product that spans all of those applications, but there is no enormous one application. We do X million dollars a year in diapers. We do X million dollars a year at shampoo bottles. But there is no one that you would say is a blowout ...

OK ...

But that's also very good incidentally. It's also very good. It's very good because it means it's very defensible. You have to have a product that can span many things. It's hard to do, hard to do. But we have that kind of product.

Any applications where maybe 1x could become 2x as opposed to becoming 20x.

Yes. And that -- matter of fact, maybe you weren't on for my initial comments, we have a number of applications now that we sold one or two into and now we're selling 70.

I did hear that comment. I thought it related to customers, not applications. OK, that's good.

And that is a customer that packages certain kinds of product, I can't quite tell you what it is. And there are -- and that customer has seven competitors around the world who have the same need.

Got it. And the second question -- the stock market investments, are you now out of that completely, or you just sold some of said investments?

We decided to get out completely. We're out.

We're out of equity investments.

We're out.

OK, I don't recall from prior conference calls that you were ever in. Now granted, I haven't looked closely because it's not a key given your cash richness. Is that something fairly recently or is it something you've done for years and I just didn't pay attention.

Well, it's very interesting. You're observant. No, it's something we did about two or three years ago ...

2000 was when we first went in.

In the year 2000 -- calendar year 2000, we decided to buy some equities and dip our toe in the water, and we took that toe off, it turned gangrene. So it's something that we are not likely to do again. But mind you, the performance -- another way of looking at it, the performance on those stocks even when we sold them was probably better than the Nasdaq. So we can call those great performing investments.

In the -- to follow along that line, in the time that we held them, they performed better than Cognex stock did.

So, we're not morons. We're just stupid.

Well said.

OK. I think , we just don't want this overhanging on our P&L, our balance sheet, and it turns out you would have to mark them to market after a certain amount of impairment, and we said, well, forget them, we'll just sell them.

a good decision. A final question, this lawsuit thing you announced a couple of weeks ago, or last week, whatever it was. Could you put that in perspective? Who is this guy? How significant a thorn side is he and so forth?

Very good question again. Company's called Matrox, M-A-T-R-O-X, it's in -- it's in Canada, in Montreal, I think it is. They're a substantial company, of which a small percentage of their business is machine vision. However, we realize -- it's a private company. However, we believe, and have reason to believe, that they like our profitability. They're a hardware oriented company, with hardware kind of modules. That they've seen our level of profitability and targeted us for expansion.

They typically sell their product at a much lower price than ours, and that's because they're worth less than ours. But more recently, they have started packaging some rather sophisticated software along with their product and calling on the same kind of customers. We're a good target. And we haven't lost any business to them, but certainly they have done us harm by focusing our pricing down to competitive levels rather than selling our products at value levels.

And the reason, we believe, that they were able to do that is that they didn't make the same R&D investment. It's a lot easier to copy something than to invent it yourself. We have carefully studied it. We are not a litigious company. We don't like to spend money on those kinds of legal issues, nor do we like to be in lawsuits. We have never been sued on a patent because we're so clean. However, when a competitor has you in its sites and is competing unfairly, by using your technology, and we spent a lot of time before we filed that suit to get very comfortable with the fact that it is such. That the way they're doing it does infringe on our intellectual property. And , our chief technology officer, a brilliant individual who's been with the company 20-odd years, took it upon himself to personally investigate the technical details of their technology. And is not 99.9, he's 100 percent confident that this is an infringement of our patent.

And because of that, we took the unfortunate step of having to file a lawsuit.

Which begs two questions. Given how much work you've put in, and those of us who followed you know you have, how could they have done with much less R&D what it took you, you know, a million years an a zillion dollars to do unless they copied it verbatim, and I assume it's impossible to reverse engineer. Does that imply that they had a mole in there or someone, you know, left your firm and went there?

And the second question I guess you've answered, which is, how did you know they've done something so similar? But the first one is ...

I'll . We know they did something similar because the performance of their product is virtually identical to a certain aspect of our product, and I'm going to explain that in more detail. So we didn't -- I don't think we reverse engineered their product yet, I don't know that we have an intent to do it. So we just look at the failure modes of the product, and they're identical to the failure modes of one of our patents.

Now, we've invested, you know -- we invest 18, 25 percent of our revenue into R&D, depending on revenue level, of course. An enormous amount in software, which they do not do. How could they do it? Well, first of all, they have not duplicated . , which is at issue here consists of perhaps 10 or 15 patentable inventions. They have, we believe -- they're infringing on at least one of those. So has many more pieces to it than what they are selling.

They are selling one piece that is comparable to that piece of .

And that one piece, however, is enough that they could knock your pricing down?

Yes. Certain applications, not everyone needs all the power and flexibility of , that's correct.

Right.

Not everyone needs all of it. The product has many capabilities in many different ways, PatMax. But not everybody needs it, right? If you're doing a simple -- a rather simple vision problem, you only need -- let's say to tolerate angular skew. I'm not sure this is it -- rather, as opposed to size variation. can tolerate many different things, but not everybody needs that. So yes, they were able to exhibit their product, and it demos very nicely in those applications, and it caused us financial harm.

Well, go get them .

Thanks, and we will, .

Thank you.

You're welcome.

And as a final reminder today, if you do have a question, please press star, one. And we do have a follow up question from .

Yes, Bob, I just -- I'm out here at Semicon West and there are several major semiconductor companies who have talked about declining orders sequentially in the third quarter, , . Your sort of guidance that you expect orders to be up -- I know that visibility is limited, but is that based on sort of business in the area?

Yes. Yes. Our end user business continues to grow, and we're pretty confident about the revenue levels that we gave you.

And the orders, too?

The orders, ?

OK, great, thank you.

You're very welcome, , and were you on a speaker phone just now? Because I heard a lot of echoes, but maybe that's the empty halls of Semicon?

No, I was on a speaker phone, I apologize.

Oh, all right. There you go.

I got caught.

And our final question will come today from .

Yes, Bob, I just wanted to follow up for a second. On the end user segment of the business, how much of that business comes out of the U.S.?

, we'll find that. We have all these numbers, and somewhere in there's the number.

While you're looking, let me just throw the second part of this at you. If I look at the end user business, we have the infrastructure in place. We've got , we've got the product offering, I think. We were expanding it, but we certainly have a strong one in . U.S. economy continues to recover slowly, but recover. Is it legitimate to assume, or even forecast, double digit sequential growth for that business going forward?

Let me clarify. I think you're asking mainly about end user in our , or do you care about SISD?

No, just .

That's right, , that's right, , you -- and the last part, and your question was -- after the preamble was?

If I look at that business, I would -- is it reasonable to assume sequential ...

Yes.

double digit growth for that business.

Yes. That's our expectation. And we're spending in sales and marketing to achieve double digit growth per quarter.

OK, sequentially? OK. And do you have that U.S. mix?

OK, now I want to make sure I answer your question correctly.

OK.

I think what you are looking for is out of the total business, what portion of that is North American end user?

No, when you give out the geographies, you -- 46 percent of sales are in the U.S., and where we've suffered the most is in the OEM business, which is a large part of the Japanese business.

Right.

So, when I think of the end user segment, I'm assuming it's way more skewed towards the U.S. ...

You are right. U.S. and Europe. Japan has -- what was that? Dick will give you a number. Ask the question again. Because I'm not sure of the question now. Ask it again.

In the end user segment of the business, excluding the surface inspection business, how much of that business is done in the U.S.?

OK. In -- all right, now I understand exactly what you're looking for. In Q2 of our end -- of our non-surface inspection end user business. Forty-nine percent was in the U.S..

Oh, it is, OK. So it's not dramatically different from the whole, OK.

Why don't you give him Europe while you're at it?

Europe was about 26.

And Japan was 20 with southeast Asia, et cetera making up 4 or 5 percent.

I see. OK. All right. It's helpful to understand what the economies are doing to that number. OK, thank you.

You're welcome.

And there are no further questions at this time. I will turn the conference back over to you, Mr. Morin for any additional or closing comments.

Well, Dick and I would like to thank you for attending and maybe we'll talk to you in Q3 of next year, because that's when things -- things aren't going to get dramatically better until then, I think. That's it. Any detailed questions you may have, will be around, of course, for another two hours in her office and all of next day.

OK?

Thank you very much.

Thank you guys. Bye.

Thank you for participating in today's conference. There will be a replay available beginning at 8:00 PM Eastern time tonight and ending on the 30th of July at midnight. If you would like to listen to the replay, you may dial the toll free line at 888-203-1112, or the toll line at 719-457-0820. And enter the pass code of 615-035. Again, those numbers are 888-203-1112 for toll free, and 719-457-0820 for toll or international, using the pass code of 615-035.

There will also be a replay available via the Web at www.cognex.com. Again, that Website is www.cognex.com.