Cognex Corp (CGNX) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Cognex second-quarter 2003 earnings release conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. Richard Morin , Cognex Chief Financial Officer.

Thank you and good evening everyone. Earlier tonight we issued a press release announcing Cognex earnings for the second quarter of 2003. For those of you who have not seen this report, a copy is available on our Website at www.Cognex.com.

The press release contains detailed information about the quarter, and because of that, we are not going to repeat most of that material. I would like to emphasize that any forward-looking statements we made in the press release or any that we may made during this call are based upon information that we believe to be true as of today. Things often change, and actual resorts may differ materially from those projected or anticipated. You should refer to the Company's SEC filings, including our 2002 form 10-K, for a detailed list of these risk factors.

And now, I would like to turn the call over to Bob Shillman.

Thank you and hello everyone. I would like welcome you to Cognex second quarter of 2003 earnings conference call.

As you can see from the press release, we had a very nice quarter in Q2. We reported revenue of 36.6 million and net income of 3.3 million or 8 cents per share. Both revenue and profits increased as compared to the second quarter of 2002 as well as to the prior quarter.

Bookings were also up both year on year and sequentially. In fact, orders in Q2 increased 13 percent over the second quarter of 2002 and increased 10 percent over the immediately prior quarter. As Dick just mentioned, to answer some of the questions you may have about the current quarter we included detailed information about our financial results in the press release.

Before I open up the call for any additional questions you might have, I am going to first report on some positive developments here at Cognex. First off, there is an acquisition update. A few months ago, we announced we were buying the wafer ID business at Siemens Dematic. This acquisition was completed during the second quarter, and all of their customers are now buying Cognex from Cognex. With this acquisition, we gained several significant customers in Europe, and our position as the top supplier of wafer ID to semiconductor manufacturers worldwide has been enhanced.

Wafer ID has always been important to chipmakers, and it is becoming even more important with the transition to 300 millimeter wafers. In fact, most of the attention for Cognex at the Semi-Con West (ph) tradeshow, which was held just last week in California, was on our wafer ID product.

In addition, now that I am talking about acquisitions, I would like to tell you that we are pursuing three or more companies right now, and we expect to close one or more of them in the second half of this year.

Now for an update of our new product developments, one of our new product developments. Cognex engineers are continuing to work hard and design new products and enhancements for our traditional customer base. In addition, they are also developing technology to open up brand-new opportunities for us.

One of the new products is the CPS 1000, which is the Cognex people (inaudible) product that was first announced in April. I am now pleased to report the development of this new product is progressing very well. It is on schedule. As you know from reading our press release, our first OEM customer for this is Horton Automatics, a leading manufacturer of automatic doors. Horton recently held a demonstration for their top distributors and building architects to show how the CPS 1000 will control their automatic doors and portals.

The participants in that show were astonished at we accomplished, and they believe that it is exactly what their customers are looking for. They are eager to get it out in the marketplace as quickly as possible, and we expect the beta units to be available by the end of this year and to be shipping production units for revenue in the first half of 2004.

Now I like to turn to some general topics, one general topic, and that is the expense of the stock options. Cognex has granted stock options to its employees since the Company's founding in 1981. We believe then and we still believe now that it is an important part of the entire concentration package. It motivates people to work hard for the benefits of shareholders, which they become, and it gets them to share in the success of the Company. I believe that stock options will continue to do that and are still the best way of motivating people in that direction. Because of that, we will continue to rely on stock options, granting stock options throughout the Company, not only to senior executives as many companies do, but really from every level upwards.

Now we, of course, do have a different number of options we give to people based on the responsibility they have and the tenure in the Company and some of the lower levels have to be with the Company over a year before they are eligible for stock options, but nevertheless stock options are very important. Now I am talking about stock options because the issue is one of expensing stock options or not to expense stock options.

It seems to me that the principal reason for stock options is motivation, and we don't want to change that. It has been extremely helpful to Cognex in our earlier years and even our current years and acquiring and retaining great health and enthusiastic employees that work hard. It is the American way to work hard and to profit from that. So we will continue to do it in spite of the fact that we may have to treat them one way or another for accounting purposes.

We still expect not expense them for accounting purposes until such time as the regulatory agencies require us to do that, but even at that time, I don't see any problem with expensing them so long as we are also able to present in a fair and unambiguous and clear included manner what the results would have be or would have been if we did not have to expense them. So we feel that providing data in any form to shareholders is fine so long as they are representative of the results of the Company, and I guess a good piece of news is that the stock options, if you do treat them as an expense, can be a separate line item, so it can easily be recasted without those. Well, I believe irrespective of how the results are reported that the important thing for people to look at, the operating results of the Company without the effect of things such as stock options which have no cash effect on the Company.

The next subject I would like to talk about that has been in the news recently is one of dividends. With the change in the tax laws, I believe that it now makes sense for Cognex to consider issuing dividend. It will be a topic for discussion at the upcoming board meeting later this month. I believe that a dividend makes sense, not only because now we will not suffer from that double taxation as I assume dividends will only be taxed at 15 percent, which is far less than they would otherwise be taxed, and in addition we can afford to do that. We have to do the $280 million of cash or liquid assets on-hand. We are generating, for example, in this quarter alone we have positive cash flow from operations of over $4 million, and we continue to generate cash in good times and bad times. So by giving a dividend, I think that will open up our shares funds that can only purchase dividend yielding stocks, and aside from that or in addition to that, it would be another incentive or another reason for people to buy Cognex stock.

The last item in my prepared remarks is an update on the order trend in Q2 as well as our outlook for the second half of the year. In the quarter just past, orders from OEM customers in Japan increased on a sequential basis, and the increase is primarily due to higher level of orders from OEM customers in both the back-end of the semiconductor industry as well as our customers in the electronics industry.

In June, we saw a pickup in orders from OEM customers in North America. This was good news because most of those orders were from equipment manufacturers in the front-end of the process, and we had yet to see improvements in this area in 2003. In Europe, bookings from end-user customers for our margin addition systems increased in Q2 over the prior quarter. Orders were higher in a number of areas that but were particularly strong in the automotive industry.

The semiconductor industry was also up, primarily due to our acquisition of Siemens wafer business in Q2. Orders for In-Sight, which is our very successful family of low-cost vision sensors, increased by 22 percent in Q2 over both the second quarter of last year as well as the prior quarter.

Our Surface Inspection Systems Division had an outstanding first half of the year in 2003 both in the metals industry and the paper industry. In the first quarter, FISD (ph) had record bookings in orders, and orders in Q2 were only slightly lower than in Q1.

Overall we are feeling positive about meeting our internal targets for the second half of 2003. We are ahead of plan both in revenue and operating profits in each of the first two quarters of the year and obviously, therefore, for the first half of the year as well. We have every reason to believe that we will meet or exceed our plan for the entire year.

The Company is well-positioned and regardless of how quickly business conditions improve. If the recovery is slow, we have already returned to profitability and intend to remain so for the rest of the year. If business picks up quickly, we have a great deal of operating leverage in our current business structure. We can significantly increase revenue without needing to make a corresponding increase in either R&D or G&A. In fact, as you can see from the press release, most of the increase in revenue during the first half of 2003 as compared to the same six months in the prior year, approximately 70 percent of the revenue went directly to operating profits.

So at this time, I would like to open up the conference call to any questions you may have for myself or Dick or his team related to (inaudible). The operator will come on and help us do that.

(CALLER INSTRUCTIONS).

There are 40 people on the line. It is impossible if there is not a question.

(CALLER INSTRUCTIONS).

Would one of the people who are out there just hit star one to see if this is actually working.

Paul Meeks.

Well done. Just a quick housekeeping detail. What was your depreciation and amortization in the quarter?

Depreciation and amortization for the quarter was approximately $1.7 million.

It could be that we have covered all the issues, but I doubt it. Somebody ask me how the weather is?

How is the weather, Bob?

Russ Piasa (inaudible).

I will bite. Maybe you could give us a little color on the acquisitions that you are looking at? Or maybe you can't?

Yes, I can. Actually there were four that come to mind. There were three of them in Europe and one in the United States. They are all directly involved in machine vision, so we do stick to our knitting. Three of them are in areas where we are currently not a player, where we don't have products in that space. One of them is a complete overlap and fits in very well because we will take on the product and nothing else on the customers. We would not even have to take on the product just the customers.

But for competitive reasons and NDA reasons, I cannot disclose anymore. But they are all -- let me think -- two of them are quite small, below $2 million and about breakeven, and the other two are making money. And the revenues of the other two are $8 to $10 million, $8 to $12 million. Okay. I have never been on a call with so few questions with so many people.

William Pike.

We are really out here. Don't worry about that?

Okay, Bill. Either no one is there -- (multiple speakers)

I think maybe we are all getting to know the Company pretty well. You have been very consistent, and that is a compliment. Maybe you can talk a little bit more about the people sensor? I understand the Horton product you have explained pretty well, but my sense knowing you and Cognex that perhaps this is the first of a larger product line with more diverse users. Perhaps you can share a little bit -- I know you will not want to be too specific about your strategy going forward and what this might mean and areas we might look forward to?

(multiple speakers). Yes, there was much more I could have said, but competitors -- of the 40 people, probably five of them are competitors. Hi, guys. I am not going to go into more detail on the people sensor, other than to say that we continually drive down price. We have hired -- (inaudible) in the press release about the new VP of Manufacturing about six months ago who understands high-volume low-cost manufacturing. So we're driving this company to sell small but highly intelligent sophisticated widgets. That is where we are going, and people sensor is one of them. I cannot tell you anymore applications without leading the cat out of the bag.

Could you tell us do you see may more applications from which you just have to the best, or is it just hard to find applications?

No, there are miniapplications. This is the first one that came along with a very good distribution channel associated with it. Actually it is an OEM, but there are many more applications, even for this specific launch, for this people sensor. There are many more applications other than the security doors that we talked about.

So it is a whole new area for Cognex, but however, having said that, Machine Vision, as we said from the beginning from 1981, has a huge number of applications, though I don't expect any of these to double the Company overnight. Any one of these applications is a $10 to $20 million market, but that is -- you have to take one at a time or two at a time, but $10 or $20 million market, if you have enough of them, you can build a good business. And also you can hopefully with patents and trade secrets, we will be able to maintain our competitive edge and, therefore, get maintain our gross margins. Incidentally we expect our gross margins to go up on these products.

Stuart Muter.

A couple of questions. On the people sensor, do you expect the margins to be consistent with your other products?

Well, that is not a specific enough question because we have products that range from 40 percent margin or low 50s in the service inspection to products like In-Sight that are in the '70s. So I will answer the question more specifically than you even asked it. We expect the people sensors to be in the '70s or higher gross margin.

One more question. On the wafer ID market, how big do you think the opportunity is per new 300 millimeter fab?

I would have to honestly tell you I don't know. (inaudible ) now, and we can probably get back to you. My gut feel -- I don't know if my gut feel is good enough I just don't know. Less than $10 million per fab.

Jim Ricchiuti.

I was mysteriously trying to get a question in, Bob, I missed something you said on the acquisitions that you are looking at. You said I think a couple of small ones, 8 to 12 million of revenues? Is that right?

Yes. There are four acquisitions that I can think of right now that we are pursuing discussions with. Two of them are sub $3 million companies, close to breaking even, and two of them are $8 to $12 million companies making money.

In-Sight, it looked like you had a real strong quarter for that product. It looks like close to 10 million of revenues. Can you talk a little bit about the strength you are seeing for In-Sight, and where it is coming from, and just generally what the outlook looks like for the balance of the year?

Yes. Some of that -- I don't have all the details in front of me -- some of the In-Sight product actually is picking up in Japan right now. Yes. Strong in Japan is a point. I know with selling, if I looked at all the segments In-Sight is going into, the primary segment is automotive, though not by that much more than other segments. That seems to be the primary segment.

In addition, Europe. In-Sight is picking up in Europe. In-Sight is just a tremendous product, and I want to thank John McGarey (ph), who runs our group, and all the engineers out in our Portland operation for coming up with this product and making it such a winner for us. It is currently ahead of plan.

So it is fairly broad-based? It is not you see the demand across your market segment?

In-Sight is not an application-specific product unlike the products that (inaudible) is now working on. The one particular team at (inaudible) is focusing on application-specific product. That means products that do one particular thing, do it very well under all sorts of circumstances like a people sensor. There are needs for something to detect and count people and detect their speed and something like that. Unlike most products, In-Sight is a general-purpose vision system that can be sold horizontally across many many applications.

As I recall, the first quarter was a little bit weaker from the standpoint of what we were expecting from In-Sight. Is this catch up, or are you just -- you had very strong bookings I think in the early part of the quarter that you alluded to in your last call.

I can't remember. I noted that In-Sight was about 24 percent of our revenue last quarter and 27 percent was even a bigger number this quarter. Q1 for In-Sight was slightly down from Q4 of 2002. But I don't believe this is catchup, no.

On the surface inspection side of the business, do you have any concerns just with respect to the European economy slowing down? I know you addressed a number of different geographies with your SISD (ph) business, but just in general you seem to show good growth there as well, and I was just wondering if you feel that is sustainable?

Well, of course, we expect to meet or beat the plan matter-of-fact. We are -- I guess I can tell you. The bookings for that division are in the bag now for the whole year. It is doing that well. (inaudible) -- maybe we will not get anymore for the rest of year, but it is unlikely. It looks like a banner year for (inaudible). We have those, we have those.

So I would say even if the economy softens, we will make the year for (inaudible), but, of course, global economic conditions do affect business. But we have not seen any slowdown, and a matter-of-fact what we are generally doing is eating our customer shares at this point anyway.

Our bookings for the Surface Inspection division, we have had good success all around the world in all regions or whatever in the first half of the year.

Any sense on what your market share is right now?

Of course, we know the market share is each of our segments.

Do you want to tell us?

I would tell you that if I had the slide in front of me. We traditionally talk about this in every presentation we give to shareholders when we have analyst meetings or whatever. I will see if I can figure it out. We were about 25 percent of the market in service inspection. Now we are slightly more than one-third.

In the In-Sight area, we are the largest player, that is vision sensors, though there are many players around the world. I really forget the numbers. I just don't remember the number.

Increase in (inaudible) market share, is that over the past year?

Yes. Partly that is because we purchased Honeywell out of the business and took on their customers. We are winning now against ABV and also against (inaudible) based on better technology. We are not typically the lowest priced spread. As a matter-of-fact, we believe we have the highest margin product. Now that does not say anything about selling price, but we are the highest margin. Our product is probably the most modern design of all the two major competitors out there.

One final question, if I may. In the past, you talked about you have been somewhat cautious about how you see the recovery in the semiconductor and I think in the electronics markets as well. I am wondering just giving what you are seeing now if you are somewhat more optimistic. If you are, what do you think has changed?

No, I am not optimistic about the recovery in the semiconductor business or the computer business or telecom. What has changed is Cognex is becoming a much more broadly based company that sells machine vision into many areas in addition to semiconductors and electronics.

So you don't see this recovery picking up -- Oh, yeah. You see it picking up, but you have not changed your view that it still going to be a pretty lackluster recovery in that portion of the business?

Correct. I don't have a crystal ball, but until I think there are some new applications for computer chips, if all we are going to have PCs and cell phones and PDAs and if, indeed, people are pretty happy with the products that they have and don't want to upgrade, which is what I see in my neighborhood and the people I've talked to, most PCBs are running and are fast enough they don't let anybody touch it. Once you program your phones, you really want to buy another one.

There is a lot of hesitancy to switch, and it is a hurdle. It is a learning curve we have to go through in order to do that. People are willing to do that, but only if there are substantial advantages. And the new products that are coming out don't seem to me or people of my generation when they are getting to old, don't seem to see those as major advantages. Do you really want to send a fax from your telephone?

So I am concerned that people have for the time being the computerized and telecommunications and printing products what they want, and irrespective of Moore's Law making things smaller and faster, you don't want your phone to be smaller. My PC does not have to be faster. So that is a worry that I see in that industry, and that is why three or four years ago we started developing products for other applications.

There are always going to be chips made in the world, no question about it; there are always going to be enhancements to the chips, but the growth in the capital equipment sector I believe will be sub double-digit, single digit growth in those businesses.

Paul Betts.

Actually my question has been answered, but maybe I can make a comment. I would encourage you about the dividends, and it would also help employees. But I would also remind you that stock options do have a dilution effect, and you can offset that at least by buyback of shares equal to the dilution that is put out there without turning your shares for acquisition, and you might remind the Board of that.

Thank you. I will do that. Incidentally, we have purchased back shares. I forget the aggregate number, but we have spent probably $40 million over the five past five years purchasing shares back. Roughly we can look it up, but we believe in that. We believe in buying back shares of 65 million. (multiple speakers)

(inaudible) of around 20 million a piece, and we just did fourth quarter of last year we did another 25 or 26 million.

And belief me, I want everyone to know that we don't give stock options that simply. We think about it. We know there is a cost. It's not just a piece of paper. It does have value, and that is why people want them. Although we are generous, generally speaking compared to other companies, we are still very careful about the numbers we give out knowing that those become shares outstanding.

Let me also say queue in on previous comment, I think the number of questions were minimal because you do send out the stuff ahead of time. and your performance has been very consistent over the years.

Right. Thank you. There are three alternatives. Either everybody hung up, or this teleconferencing service is not doing what they are supposed to do, maybe a screw up in the equipment, or third, maybe by putting all the data out in the press release, people don't have to ask us how many OEMs there because we already have it here. I hope that is the case, and I appreciate your comments all. And once again, I think the dividends is something you want to propose. I hope they are authorized.

With regard to the dilution of stock options, I just want to reiterate that we are aware of that. But we are also aware that if we don't give stock options, then we are likely to have to pay more for those same employees.

I would encourage you to give them. I am just reminding you can remove the (inaudible) from the shareholders, and thanks for a good job.

I look forward to seeing you at the upcoming conference at Adams Harkness.

Mark Roberts.

Good afternoon. Bob, I do have one question going back to the people sensor product. There is a lot of buzz in the industry about internal security, Homeland Security and the need for greater facilities, monitoring of facilities and control. Is the people sensor product, and I realize you don't want to tip your hand to competitors, but is this sensor product, is the read range long enough it will be applicable to use as a facility, a security monitoring solution, say married up with the digital CCTV System?

That's an interesting question. It really depends on what you mean by could it be used for monitoring. The answer is yes. Could it be used to recognize people -- which I think is a non business by the way, and I can go into that in detail if you want -- the answer is no. This is a device that will generally be looking down or at a downward angle and recognize that there are people, count them and determine their direction and speed. So it could be used to monitor facilities to see if people are coming or going out and how many people, but it is not designed to recognize faces because we don't believe that is a useful thing to do.

Okay. That answers my question. Thank you.

Mark Shapiro.

I just wanted to ask you a question. Last time I spoke with you guys, you indicated on In-Sight that you were seeing a lot of smaller orders, one and two type orders, the larger POs and larger orders, while they were out there had not really been coming through. Are you starting to see that pipeline loosen up a little bit?

We're starting to see a little more in the way of opportunities and people asking about it. We have not seen that yet be converted into a significant amount of real orders, but there are more quotations going out for projects. It seems that that opportunity is loosening up a little bit.

I just want to interject on Mark Roberts' question about security. He mentioned building security, and I hesitated for some reason. I just did not mention that the first applications for the people sensor are at airports for security purposes to ensure that only the right people and the right number of people go through secure doors.

I would not say that we are in the security business yet; we're in the machine vision business. We explored any possible opportunity to use vision, and certainly security is a hot area these days, and machine vision can clearly play a role. Whether you are going to be counting people or looking at vehicles, we will be there.

Richard Fury (inaudible).

I wanted to ask what the nature of the recovery in Japan is, whether it is in your mind sustainable? You have seen several over the last few years. Is this one different, or is this one more of the same?

I don't know if I would say it is a recovery. We just have some business pickups in Japan. It's not based on our Japanese recovery. It is based on the fact that (inaudible ), my partner who runs sales in Japan, has done a superb job at spending a lot of time training the team out there, and now they are coming up to speed. This has nothing to do with any pickup, any macro thing. I don't think there is a macro thing.

The other thing is what is your guess about what a sustainable payout ratio might be on the dividend, or would it just be like .5 percent type yield or a 1 percent yield type dividend?

That is a good question, and Dick is saying, don't you say a thing about it. It is too early, it is inappropriate for me to comment on it because people -- because I don't know I might say the wrong thing. Less than 10 percent. Right?

Less than a 10 percent yield.

Yes.

That really pins it down.

You are probably in the right ballpark. I let people know how I think about these things. (multiple speakers). You've got to compare it to something. So we have done our survey, we look at some other companies that provide dividends, but I don't know if you can use other companies because dividends vary in companies and are different than Cognex. You can do that to get an idea, but I don't think it applies.

The next thing you can do is what are you trying to achieve? We're trying to achieve a way of making our company more attractive to investors. So what means is it has to be competitive with other kinds of instruments these days that yield dividends. We don't have to give us much interest as those other instruments because there is potential upside of a growing company. Of course, there is some downside, but we tend not think about that because we are entrepreneurs, and we're here to grow the company. So we "know" -- that is in quotes for those of you who are (inaudible) forward-looking statement -- we know we are going to grow over time. So if people are already happy with our stock, they will even be happier if we provide a dividend.

So I want it to be competitive to some degree with other interest-bearing instruments. The fact that this interest-bearing instrument will be only tax of 15 percent versus others that generally have a higher tax, means that it does not have to yield that much to be competitive on an after-tax basis.

I am sorry I asked the question.

I am a professor. So having that, you can probably pick up a number I am going to propose for the (inaudible).

Right.

It will be enough to get people excited about the stock. Absolutely.

Eric Indy.

Good quarter. I have two unrelated questions. The first one in the press release you talk about strong end-user demand outside the U.S.. Maybe you can talk a little bit about the tone of business for end-users inside the U.S. or perhaps the lack of tone?

You know, we have it. End-user business has yet to really start to see a pickup here in the U.S.. (multiple speakers ). That was a good comment that you made. The end-user business has been very good in Europe and in Japan, but we have not really seen an awful lot of strength in the U.S. yet. Although so far in July, there seems to be a lot more quotation activity in that level, in that area rather, so that we're hoping that is a sign it is going to start to pickup. There are two things or a number of reasons why it could be slow. One is the sales force is not improperly motivated or trained on the wrong sales force. The other one is wrong products. The other one is the economies slow and people budget to type. We believe that after looking at all three of these things, we know it's not the product because the product is selling great in other areas of the world, and there is no real difference from one country to the other with regard to what we need for the product. So the product is fine.

We looked at the sales force, we have moved some things around, we have tweaked that, but we have come to the conclusion by talking to other CEOs and sales executives around the country who sell into industrial applications that it is an economy. It is the economy, stupid. So it's the stupid economy I don't know. That is the issue.

The second question is earlier you commented about your new product thrust being application-specific, although In-Sight is clearly is not so. Is there anything that has changed in either the software or hardware costs or your general approach to the market which has made you switch from a nonspecific to a more specific approach?

We have not switched. It is an addition. We have not switched. As a matter-of-fact, I believe we just authorized some more hiring and more spending and marketing if I am not mistaken about this in In-Sight. We have not switched.

It turns out machine vision has such broad capabilities the demand out there for a programmable product, that customers and engineers to program to look at the calculators, to look at insulin or to look at (inaudible) moving by or hair cream moving by, and there are applications where the product itself will be embedded in something else, and all it does is one of two things.

So it is not a big change in our market focus or a change in the market need. It is a realization that there are low-cost, there needs out there, many different needs out there for low-cost very simple things to be done at very high speeds. Seemingly simple; it is not simple from a machine vision standpoint but seemingly simple things. How many people are there; how many fingers or whatever? Very simple things. How is close is the car to the wall?

And those applications require very low-costs and very ease-of-use because you can't have somebody sitting there at a PC programming it. But it is not a change of direction at all. It is just an increase in our business by finding new opportunities.

It is a different technology. I have to say to make things to sell for $1000 or less, and that is our goal. You cannot just take an In-Sight product and add one function to it instead of having it highly programmable, just program In-Sight to look at the color of pins moving by let us say. You cannot just do that because you would end up with a product that is too big in size and also a product that would have too high cost of goods to sell for those applications. It requires a complete redesign of using new technology, maybe similar software capabilities, but new hardware and manufacturing to get the price down so that you can maintain or increase margins about 70 percent.

Thank you. That was very helpful. If you stand one more comment on dividends, I think people may differ on the way they look at it. From our standpoint, it's all about capital allocation. If you can use the money internally, keep it. If you cannot use it internally, intelligently then pay it about.

That is a very good (inaudible). Incidentally I am happy to stay on the phone longer. I get paid by the word. I don't get a salary anymore if you looked at the 10-K, so my agreement is that I get paid by talking. So please ask me questions.

Another reason that we are giving or a reason why we can get our dividends is we don't have a better use of $280 million. We don't even have a better use for the cash we are generating, so that supports what you are saying.

Robert Mason.

Just a couple of things. I may have missed this, but the wafer ID acquisition, the sales contribution in the quarter?

We did not break that out. We may know that. You mean specifically if we did not have bought Siemens, how many wafer ID sales would we have had? I don't think we're going to disclose that.

Just the rough dollar magnitude of the contribution?

No. I am sure we have it, but it is something we would rather not disclose. Here is the reason why. Okay? If it were large, then the guy who sold us the company is going to be pissed. Right? Well, it is greater than (inaudible), and if it is small, then the shareholders will be pissed. So I don't even know if it is high or low, and we don't care quarter to quarter.

But the reason we did this acquisition was to eliminate a competitor that was causing price erosion. That was a problem for us, and now we don't have a competitor that is causing our price erosion, and we do have his customer. So it was a very good deal and a fair deal. When we buy things, we pay a fair price. We are not bottom fishers. We pay a fair price. Sometimes in the future, it looks we might have to overpay for certain things, slightly overpay, but all the calculations and all the projections and all the reality in the ones we have done, we have made money on the acquisitions. We have been very careful.

Fair enough. If you could speak to the rebound that we have seen in the electronics business about two quarters in a row. I realize this is coming of a very low base, but we have seen a pickup the last couple of quarters in that area. I know there were a number of factors that you were facing -- excess capacity, used equipment market and what not -- that was affecting sales in that area. Have those factors subsided? Is the increase somewhat sustainable do you think?

As you indicated, the rebound is from -- it is like a patient in intensive care, and now it is just on the floor, on the floor of the hospital as opposed to intensive care. So the rebound on a percentage basis was large, but all the trucks that I look at, my company or other companies of sales in general for semiconductor. The peak is not near the trough of where we are down turned. So move on.

I guess if you could just on the OEM business in general or specifically maybe the semiconductor business, have you seen a return of any volume orders, or do you think inventories are still very low?

Well, we have some very good orders in-house. But nevertheless a customer that used to buy at the rate of 2 million a month is not buying at the rate of 2 million a month. He is buying at the rate of a million a month maybe.

And the other thing we are not yet seeing is we have not yet seen consistent order placements. We're not yet getting for most of these customers, we're not yet getting the ninety-day PO with releases or whatever. What we tend to see more of is you get an order now for specific needs as they are selling and using up inventory. They need replenishment with no real commitment as to what may be needed the next month or whatever. (multiple speakers)

Really no change on the front?

For the most part, no.

Jim Ricchiuti.

The strength you saw in the end-user market in Europe and Japan, Bob, is there any color you could provide around that, where it might have been coming from, different types of markets or customers?

I don't have that data in front me.

In Europe, I think a lot of it is due to the fact that a lot of it is going to automotive. But the other thing that is also happening is we have got the salesforce more focused looking at opportunities that larger customers for buying multiple units as opposed to trying to cover the whole waterfront or whatever.

The strength in Japan is it has been a tough go to be able to penetrate the end-user sensor market in Japan because of the competition over there, and we are finally starting to get some real headway there. It is coming in a number of different industries.

And, Bob, just a final question. If you look at the business, your business, and look out of couple of years, you kind of teased us with some ideas of new applications for machine vision. Can you give us a sense if you see some of these new markets in virtual new applications? Can you talk a little bit about what you might see two or three years out, and can you expand on that a little bit?

Well, the two or three years out is when one or two of these acquisitions will be paying off. If I told you that, I would probably be telling my competitors what these acquisitions are. I would rather not do that.

So we will just have to stay tuned?

I am sorry. I would love to chat with you about these things we are looking at, and these things are already functioning. So we are not talking about pie in the sky. We never look that far out there is technological risk. We know what can be done with machine vision, either because intellectually we know what can be accomplished or that we are looking at a company that is already doing it.

So this is real stuff that is already selling that I think has some significant growth potential, and those are the two areas we are looking at now, some significant growth potential. Each of these two areas that I am thinking about right now should grow 40 percent a year with the right sales force, and that is what we have, the right sales force and a little bit more software.

We're talking about some exciting opportunities, and I am hopeful we can close these deals. Sometimes you take deals, and you don't get to close them. But we are pretty good at it. I would say our hit rate is probably about 80 percent. When we want to close something, it gets done.

These are stand-alones or parts of other --

That is a very good question. One of the larger ones in Europe is a piece of a company. One of the smaller ones in Europe is a stand-alone. Another smaller one in Europe is a stand-alone, and the one in the United States is a stand-alone.

Okay. Thanks a lot.

Joan Coller (ph).

What is the Company's position on outsourcing?

Outsourcing what?

Labor, manufacturing?

We do outsource most of our manufacturing right now on the Modular Vision system side. On the Surface Inspection side, we still do some of the manufacturing ourselves, but we do have a contract that is doing most of the frames for us.

Thank you.

And that is another thing to add to that is that as orders pick up, that is why we don't have to increase internal expenses nearly in proportion because we do rely heavily on outsourcing manufacturing.

There are no further questions.

Okay. That is it. Thank you very much for joining us in this Q2 2003 call, and we look forward and hope that we can have as good news to report in Q3.

Thank you for participating in today's conference. There will be a replay available beginning at 9:00 PM Eastern time tonight and ending on the 26th of July at midnight Eastern time. 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 pass code 684607. There will also be a replay via the web at www.Cognex.com. Thank you again, and have a great day.

(CONFERENCE CALL CONCLUDED)