Cognex Corp (CGNX) 2003 Q4 法說會逐字稿

Good evening and welcome to the Cognex Corporation fourth-quarter and fiscal 2003 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the floor over to your host, Mr. Richard Morin, Cognex Corporation's Chief Financial Officer. Sir, you may begin.

Thank you and good evening everyone.

Earlier tonight we issued a press release announcing Cognex's earnings for fourth quarter and full year of 2003. For those of you who have not yet seen this report, a copy is available on our Website at www.cognex.com. The press release contains detailed information about our financial results, and because of that, we are not going to repeat most of that material.

I would like to add that any forward-looking statements we made in the press release, or any that we may make during this call, are based upon information 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, including our most recent Form 10-K, for a detailed list of these risk factors.

And now I will turn the call over to Bob Shillman.

Thanks, Dick, and hello everyone. As many of you may recall, it was in our conference call ten quarters ago that I play some sound effects of a thunderstorm to describe the business climate at that time. You will be happy to know that today Wolfman Bob is going to play a very different tune for you, and here is Louis Armstrong, "What a wonderful world." (Plays music).

Business is much rosier today than it was two years ago. Today we reported significant increases in bookings, revenues and profits for both the fourth quarter and the full year of 2003. More important, in recent weeks we received a large number of large purchase orders from some of our top OEM customers giving us a great start to 2004.

I can tell you, for example, that year-to-date our average daily bookings year-to-date -- that is this month to date -- versus the same period in Q1 of '03 are up about 200 percent, and year-to-date versus the average daily booking in Q4 of '03 are up about 150 percent. So this quarter is starting off at a tremendous rate.

And additionally, I am pleased to report to you that this past Friday the U.S. District Court in Las Vegas ruled in Cognex's favor in our lawsuit against the Lemelson Partnership. Lemelson's Machine Vision patents have been declared invalid and unenforceable and not infringed by Cognex. This is a fabulous victory for Cognex and for all users of Machine Vision.

As you may have seen from the press release we issued earlier today, Lemelson has reaped an enormous amount of money over the past ten years or so by wrongly suing or threatening to sue manufacturers for infringement of its patent portfolio. Cognex initiated a lawsuit against Lemelson even though we had not been sued or threatened. We took on this fight because we believed that Lemelson's extortionist practices had to be stopped, and we knew that only Cognex had both the technical ability and the gumption to stop it. Our success in this case demonstrates that Cognex stands by its corporate values. In this case, two of our corporate values, integrity and perseverance. We did the right thing by standing up to injustice, and we did not quit until the job was finished.

Now I would like to take a few more minutes to highlight some of the accomplishments we achieved in 2003 and then discuss our business outlook for 2004.

OEM revenue increased 51 percent in 2003 as compared to 2002, which represents the first increase in OEM revenue on an annual basis in three years. In 2003, end-user revenue increased by 22 percent over the prior year to 93.6 million, which is essentially equal in absolute dollars to the record set in fiscal year 2000. This is very exciting because a significantly higher percentage of our end-user revenue came from outside the cyclical semiconductor and electronic industry.

Our service inspection division had a record year in 2003. Revenue for SmartView increased by 22 percent to 29.1 million, primarily due to market share gains in the paper industry against our competitors. In 2003, we set new bookings records and revenue records for In-Sight, our family of low-cost vision sensors. Orders for In-Sight increased by 35 percent over the prior bookings record, which was set just last year. We kept a tight rein on spending during the year, and as a result, operating income increased to 13 percent of revenue in 2003 from a loss of 9 percent in the prior year.

Lastly we successfully completed two acquisitions in 2003. The first to close was the Wafer ID business at Siemens, which brought us several significant new customers and enhanced our position as the top supplier of Wafer ID for semiconductor manufacturers worldwide. And on December 1st, we acquired the Machine Vision business of Gavitec. This acquisition expanded our product line of Machine Vision systems that are specifically designed to read codes directly marked on parts, which is in the area referred to as industrial ID. The Gavitec acquisition also strengthened our position in Germany, which is the largest market for Machine Vision in Europe. It added new engineering talent to Cognex that complements the skills of our existing staff and gives us an outstanding team to continue developing new industrial ID products.

Now both of the acquisitions in 2003 were small. We paid less than $10 million for each, but we expect them to grow very quickly in what are now fast-growing markets.

We continued to develop new products in 2003, many of which are expected to open up new applications and new markets for Cognex where Machine Vision has never before been successfully employed. One new product area for us is what we call Expert Sensors. These are ultra low-cost sensors that are designed to do one thing extremely well and, therefore, are very easy to use.

In our last conference call, we talked about our people sensor for the building security market, and today I going to tell you about our new generation of Expert Sensors that are engineering team led by our co-Founder and Chief Technical Officer Bill Silver are working on, that we truly expect open up new opportunities for us, large opportunities, on the factory floor.

Cognex engineers are now developing unique Machine Vision sensors that will compete in the 1.5 billion market for presence sensing products. This is a market that is served today by photo sensors and other presence sensing devices. At a selling price to any customers in the range of $500 to $1000, we believe that Cognex Expert Sensors will compete very favorably in this market in cases where multiple photo sensors and costly parts (inaudible) are now used to answer such questions as, are there sixth cans of beer in a sixpack? Expert Sensors will be easy for manufacturers to set up and get running on their production lines, and they will be more reliable and overall lower in cost than existing methods.

Although these new Expert Sensors will have a low selling price, I am happy to report to you that they will have a high gross margin that is in line with our other Cognex (inaudible) these systems. We expect to introduce the first of these sensors in the second half of 2004, and we will likely distribute them through third-party operations.

Turning now to our business outlook. The order rate as we exited 2003 was good, and bookings have increased significantly since that point. We are planning some up year in 2004 for revenue, for operating income and for profit. Spending increases in 2004 will be limited to targeted areas that will help drive revenue. We are planning for operating expenses in Q1 to increase on a sequential basis in the range of 5 to know more than 10 percent as we hire additional end-user sales engineers and increase our spending on marketing. Also, we will anchor a full quarter of Gavitec-related expenses as compared to just one month in Q4. We expect our businesses will benefit from these investments somewhat during 2004 and to a far greater extent in 2005.

Now how much our business will actually improve in 2004 depends largely on the extent of the rebound in the OEM market. We are feeling very positive about the OEM business, now much more so than we were just a few months ago, primarily for these reasons. Three reasons. First, much of the bookings increase that we have seen in recent weeks has been from our OEM customers. Secondly, our OEM customers have significantly increased their forecast of demand for the first half of 2004. And thirdly, we are hearing that leadtimes on components are extending, and the contract manufacturers are taking longer to meet customer demand, which maybe an early indicator that manufacturers of high-tech products will soon start to add capacity and (inaudible) the fact that we are holding most expenses at the Q4 level. As our OEM businesses expands, we expect to see significant leverage on the operating profit line.

And now I am going to turn it back over to Wolfman Bob, and here is another (inaudible) great. We will then take questions. (Plays music).

That is true, Louie, but the only people who are not laughing today are the people in the Lemelson partnership and a lot of our competitors. Everyone on the Cognex side of the table is smiling and we are happy. So let's take some questions now. Who is next? Operator, bring them on?

(OPERATOR INSTRUCTIONS). Stuart Muter, Adams Harkness & Hill.

Congratulations on the lawsuit outcome. A couple of questions. In terms of the mix of orders, could you talk about that a little bit please? (inaudible)

Well, you've got to be more specific. Orders are up just about in every area. Do you mean in the semiconductor electronic side of the business?

By product type, are there trends? You are saying is it primarily semiconductor and electronics, or is surface inspection recovering? I am looking for some qualitative commentary.

Sure. Most of the up bookings are due to significant increases in the wire bonding side of the business, in the wafer probing side of the business, and also in the surface mount placement business.

So I take it, surface inspection in terms of bookings had a flattish quarter?

We will tell you that in a minute. It is certainly on target, and the growth in that industry has always been lower. We expect it to be lower.

It is also lumpy.

That is right. It is up 12 percent versus Q3. Q4 was up 12 percent.

Excellent and another question. In terms of the mix of revenues by geography, Japan was down. So that was interesting sequentially. Could you talk about what is going on there?

I am looking at those numbers now. Yes, Q4 was down, but I expect that to be remedied in Q1 in this year. Certainly --

Part of that was that the Q3 booking, which turned around into Q4 revenues, had been down a little bit, and we saw the increase in the bookings in in Q4 and so far in early Q1.

So business is strong in Japan. one more question if I could sneak in please. How about some guidance for investment and other income. It looks like you had a foreign currency loss this quarter. Excluding that out, is that about roughly the quarterly run-rate we should expect?

Yes. I think it might increase slightly based upon invested funds or whatever, but current rates are just absolutely abominable in the investment market.

Excellent. Again, congratulations.

Thank you, Stuart.

Alex Paris, Barrington Associates.

Good afternoon. A couple of things. Just a real quick question, first on figures. Depreciation and capital spending for 2004?

Depreciation and capital spending for 2004? Depreciation expense, I don't have -- I did not bring my (inaudible) with me, but our depreciation and amortization for '03 was approximately a total of $6.4 million, which included some amortization relative to purchase price. I would think that that would increase in '04 as we amortize some of the purchase price from the Gavitec acquisition, which occurred only in December of this year. We did not have much amortization hitting '03.

I am sorry. I meant 2003.

(multiple speakers). Then I gave you the number for 6.4 million of depreciation and amortization, and our capital expenditures were approximately $2.5 million.

And your tax rate of 31 percent, is that a good one to use for 2004?

Starting out, yes. But we will have to watch that closely if, in fact, revenues continue to increase, we may have to make some adjustments to that as we get further along in the year. As a starting point, I think that is a pretty good one.

Some questions on the OnPart (ph) marking business. A couple of years ago I guess you did not appear to be relatively enthusiastic about that. Lately, however, the Department of Defense has mandated the 2-D marking and so forth. Do you now see that the industry is now looking a lot better than it may have looked a couple of years ago?

That is our view. We have always been in the reading business. As a matter of fact, that was how the company started. What we intend to do with Cognex is apply the technology to problems that are marketable where we can make money, and that turned out to be the reading wafers in the early years, and nobody really cared much in the subsequent years about reading other things in industrial applications. Oh, one or two things in tires maybe.

But we always had the technology for it. The question is when do you bring the technology out of the box and when you do an acquisition? And we felt that we are now on the knee or the edge of the hockey stick now. I do not believe any of these business are going to be enormous incidentally. There are other people out there who held every application as a huge opportunity. I don't think that is the case. I think it will be a sizable business, maybe over $100 million or $200 million a year in the whole market, but it won't get there overnight.

But certainly the DOD is passing these kinds of rules, and car manufactures instituting direct part marketing, we are seeing a lot more requests from customers. That is what led to the acquisition of Gavitec. We were in there at Rolls-Royce or from other companies. We already had products that were a fixed mount. In other words, they are amounted in a fixed position and parts moving under them automatically, and those customers then asked us for handheld units, and that is why we went forward and bought Gavitec, and we are going to now port all of our software technology onto that handheld platform.

Has Gavitec been in that since they started in 1997 in two days symbology of market leaders?

Yes. They have been in the business, a rather entity. Good engineers. Good products. Good technology, but obviously just getting up the ground. It did not have a lot of marketing or sales expertise, and they really wanted to form a relationship with Cognex and so we did so.

I think this is going to be a fast-growing area. Ultimately I believe that all the UPC scanners, the 1-D barcode scanners will be replaced by 2-D. 2-D has some significant advantages, and at some point, we may play in those markets as well, not just the industrial reading market. But obviously if you have a product that can read industrial ID, then you can certainly read the ID on a can of Campbell's soup. That is no question.

The other bigger growth area we have been talking about, this low-cost sensor. I am little confused on that. I thought when you were first talking about that, you were seeing the potential of this real low-cost sensor for breaking out into new markets outside of manufacturing. The door (ph) contract, for example, was that based upon this low-cost sensor?

That is one of them. Not the same low-cost. We have a new group in the company called Sensors, and there are a number of different sensors we are coming out with. Some of them will be application-specific, such as this 3-D door sensor which, frankly, has uses beyond revolving doors. A lot of other uses that the marketing team is now looking after and tracing. But I think the bigger opportunity is for this general-purpose presence sensor, which we have an internal name for, but I cannot reveal that quite yet, and that will be coming out in mid of this year.

Already we have prototypes at work been tested now. This is $1000 or a sub-$1000 device that can readily be set up by any factory engineer, perhaps an electrician, and which will very accurately and reliably and very quickly 60 frames per second determine if parts are present or not in the right position.

Is that essentially a single purpose 1 4 absence or not in a --?

That is right. Presence or absence. That is great. And we're looking at applications which are now being solved by multiple photodetectors, where the photodetectors have to be aimed properly, where there are reflectance problems, where the items whether they are six packs of beer or cartons of eggs, where they have to be perfectly positioned, this product requires no prepositioning. This product will also self-trigger. It will (inaudible).

Can you use that for presence and absence in carriers of wafers, for example?

I believe so.

It sounds to me like this is a low-cost single purpose In-Sight instrument?

Let me think about it. First of all, I would be careful with the term single propose because it is multiple propose. It can do many things. It can do the same things for many different companies. So unlike the door sensor, which is specifically designed for doors, that is what we call single purpose.

Is it a low-cost In-Sight?

No. In-Sight has far more flexibility. In-Sight can measure things, take dimensions of things. This product will not dimension things. In-Sight has tremendous power. In-Sight it turns out is a vision system. We will probably change the name back to Vision System to make the distinction between a vision sensor and a vision system.

So it is back to what I asked originally. This is primarily for the absence or presence of something.

Yes and there are enormous opportunities as I indicated today. They are about 1.5 billion markets for these kinds of --presence sensing is about $1.5 billion. Maybe half of that can be done easily with one or two photodetectors, and you are not going to use this new product. Probably half of that cannot be done with simple photodetectors.

Some of this application is already being done by some Machine Vision systems that are probably a lot more expensive.

That may be the case. I know where you are going. I don't believe that this is going to cannibalize any of our existing business.

I was thinking about cannibalizing your customer's business. You do have systems where you are checking the liquid level, for example, in the bottle that you use Machine Vision for that, right?

I believe in some cases, yes; but in most cases, no. In most cases, people try to do that with photocells. That is an application where this expert sensor would play nicely.

So this is primarily then opening new markets?

Yes. This is not going after the Machine Vision market. We're trying to expand the existing market. This is going after an existing market that someone else that our competitors are now serving with photodetectors and other presence sensing.

You're not even calling this a Machine Vision system?

That is correct.

So obviously I am confused. Isn't there a camera and a computer involved with it?

Yes, there is.

Doesn't that make it a Machine Vision system?

You will never see it that way. Well, it depends what you mean by a system. You can call it many things. You can call it a computer. You can call a (inaudible) camera. What you call it is not as important as what is. It is something that looks like a photodetector -- that is what is going to look like -- and it is going to be as easy-to-use -- easier to use -- than a photodetector, and it's going to be more reliable and solve a broad range of problems that a photodetector has difficulties solving. That multiple photodetectors have difficulty solving.

Thank you very much.

Jim Ricchiuti, Needham & Co. .

Good afternoon. If I look at the business last year and maybe exclude the electronics and semiconductor revenue, it looks like the rest of the business grew grew almost 24 percent. I guess some of that was an easy comparison, but I guess where I am going with this, is with a better economy and new products that go into this mix, is there any reason to believe they would not grow at roughly the same rate in '04?

Right now, things look very rosy.

I am curious from what you are hearing from your OEMs, what are they pointing to in terms of driving demand? Clearly capacity is getting tight, and leadtimes are stretching out. I am curious if there are any specifics that they have given you as to what they see as driving this recovery?

I would love to answer that. I have not been in contact with my OEMs for about two or three months, so I don't know. One sense is that it is an uptick in cellphones, and a lot of new cellphones are being purchased. PC sales I guess are still pretty good and consumer electronics -- I would have to guess it is those things, but I don't know.

The last I heard from talking to a couple of the sales guys in Japan, there has been an uptick in orders placed, some of which, a good chunk of which is ending up from what they understand from their customers is ending up in China.

The other thing that we are starting to see that we have not seen for some period is far most of '03 a lot of the OEM orders we were getting were one-off orders that as they got orders, they would place them on us to replace inventory and keep their inventory levels fairly constant or whatever.

What we are starting to see over the last four to six weeks is a couple of these OEMs are now setting up, going beyond just one-off orders or whatever. But their orders are now extending out a couple months, and they are starting to order material from us which is designed to fill a production plan forecast that they have as opposed to specific one-off orders.

Okay. I want to make sure I understood this correctly, the year-to-date bookings that you gave, was that in the OEM business, or was that throughout the entire business?

The numbers that I gave you were OEM. I happen to have the year-to-date, and so I might as well mention those. If I compare year-to-date the average daily bookings year-to-date in Q1 '04 versus Q4 '03, we are up about 50 percent.

Okay. I was curious about In-Sight that you again showed very good sequential growth there. Can you elaborate a little bit on where that is coming from in terms of end markets market applications?

In-Sight is selling well in a tremendous number of applications, primarily -- although it is not the major (inaudible), 10 percent, which is the major (inaudible) but not a majority, into automotive but it is selling well into the electronics area. Incidentally we have an In-Sight that reads wafers. That is doing extremely well. In-Sight is doing well across the board, about 35 percent growth year on year. We are just so proud of that product and the team in Portland led by John McGarry and his engineers, very very hard-working smart team out there and so appreciative. We're booking that at the rate of $45 to $50 million a year now.

And the last question, Bob, any further activity on the acquisition front?

Nothing new to report. There is nothing on the front burner right now as a matter-of-fact. There is nothing about to be closed. We certainly are spending two full -- two guys, myself and Dave Shatts (ph) -- spend most of our time on this, and we would be disappointed if we did not due two this year or more this year.

Another quarter like this you may be doing a solo next year?

Doing a sailboat?

A solo.

Yes. As a matter-of-fact, I am running saxophone, and there is a good chance of that.

Thanks a lot.

Mark Roberts, Wachovia Capital.

Good afternoon. Bob, hopefully what you're learning on the sax is not the blues.

No. Very good point. As a matter-of-fact, the one that I do best is "America the Beautiful," so that might be on tap for next quarter. Not the blues.

I've got a couple of questions here. It looks like a lot of the rebound in the Q1 is coming from what I would consider traditional semiconductor electronics guys, and that made up about 47 percent of your revenues in '03. What breakdown between semiconductor and electronics customers as a percentage of revenues would you anticipate in '04 based on what you are seeing so far? Is it going to be up or down relative to last year?

Do you mean comparing semiconductor to electronics?

No. If you look at your breakout by industry sector in '03, if you add semiconductor and electronics together, it was about 47 percent of revenues.

Now I understand.

And I just was wondering whether that ratio was going to be up or down or about the same for '04?

Based on what we see now, it is going to be up.

Part of that increase not only comes from the OEMs, but we are also selling to end-users in the electronics industry as well, so it is not all OEM-related.

Okay.

But you might then ask, we have 38 percent OEM business in '03, and so I am asking a question, do you expect it to be 38 percent? No. Based on the what we see now, I think it will be up slightly. (multiple speakers). Over 40 probably.

It should be up, but it won't be above the 50 percent. (multiple speakers).

Okay. Either for the year or for the quarter, can you breakdown the gross profit between revenue product revenues and service revenues?

Sure.

For the quarter, product margin was around 72 percent and service margin was around 30 percent.

Great. Okay. Just a follow-up on I notice on the balance sheet -- is that a summary because you typically had other current assets running in the $20 million range, and in the balance sheet you presented, that is not there. Is that combined with something else, or does that now disappear?

It is all lumped in other assets. Other current assets is probably around 22 million at the end of the year.

Okay.

There is a big jump in other assets from last year. It had to do with the two acquisitions that were made during the year.

Okay. And my last question, as you moved toward lower price products, particularly the new sensor line and even to some extent In-Sight, you have talked in the past about moving away from a direct sales model and moving more towards an indirect sales model. Yet I noticed that it looks like you're expecting increases in SG&A pretty much in line with the increase in revenue. For us modeling it, when will that transition start to take place and how will it affect SG&A?

First of all, any effect is going to be small in 2004 because the amount of revenue that we are going to likely get is going to be small. Now I would be disappointed if we did not sell something like $10 million of this new sensor in the first twelve-month period. So the most we're talking about is $5 million, and that will be going through distribution.

Oh, that is what we are contemplating now and are close to signing a contract on that. But I will let Dick answer the specific question on the effect on SG&A?

We would not expect that we would have to spend that much in incremental SG&A ones that product gets out there because it will be going through distribution. But to a certain degree, while revenues will be increasing, the SG&A won't be increasing at that same rate on those particular sales, although we might have a slightly lower reported gross margin because you have got to give the distributor the discount to make up for some of those (multiple speakers).

What we are debating here right now, you can listen to an open debate -- I am quite confident we're going to hit the high 70s gross margin after discounting. So I believe our product gross margins will not go down, or our reported gross margins will not go down. As a matter of fact, they will go up. That is our expectation.

Although this product is low selling price, it is also very low in development costs, thanks again to the great work of my CTO Bill Silver.

And my last question -- I promise this is the last question -- in looking back over the last six or seven years at where peak revenues were, what would be peak revenues that you would envision before you would need to actually expand manufacturing capacity, as well as perhaps you can add overhead capacity?

I do not believe there is such a number. We can easily add manufacturing capacity by picking up the phone to Flextronics. We essentially do no in-house manufacturing. In the products that we do have some in-house on, it is final test and assembly, and those tend to be the OEM products, not the end-user products. The end-user products coming to us are in a box, ready to ship. So there is no reason that I anticipate adding manufacturing capacity.

But in your contracts with Flextronics, is there a certain ceiling where if you go above that the pricing changes?

No.

No. As a matter-of-fact, I have two people in the room who negotiated the contracts, and if anything, the pricing would come down I would think to higher volume, but the answer is no.

Paul Ovitz (ph), Capital Flows (ph).

How are you, Dr. Bob ?

Can't you tell?

I have one comment and two very quick questions. The comment is that I would like to thank you guys. I know you always say I am buttering you up, but the persistence of Cognex with the Lemelson suit is to be really recognized -- this is a particularly draconian problem because they went after the customer environment of a number of our companies, and I think those efforts that you made have implications for the overall enterprise environment and the standards going forward.

I very much appreciate your congratulations and your feelings on this. This is how we feel about it, and we have gotten some numerous e-mails from our customers, our customers' customers congratulating us on this. My only hope is, although it was a selfless thing, we did it because it was right. My hope is that many companies out there that understand this issue and the seriousness of the issue will respond by putting us at the top, if we are not already at the top of their list of vision, they should put us at the top.

My first question was going to be exactly the gross margin question because if I model this even with the newer low-end products and, of course, the important thing is operating margin, but even with that in my modeling for this year, I see gross margins going up. I guess you have answered that one.

The second question had to do with the new sensors, the Expert Sensors. My impression was, although that are not good for dimensioning things, that these things go beyond -- that they are actually capable of recognizing shape in two dimensions or three dimensions.

That is correct.

That goes far beyond the light beam interruption or level of detection kind of stuff.

That is exactly right, and it can do these things while the part is moving at very high speeds. This product, and I just saw a demo a couple of weeks ago, can take 60 frames per second, so it can take multiple looks at the same item moving by. It is just an incredible piece of engineering development that these guys have done, and the part doesn't have to be fixtured. It does not have to always appear in the same orientational position, and we will still determine if the pieces are there correctly. And all for under $1000. It is just dramatic, dramatic.

Thank you.

Janet Resterson (ph), Quadra Capital.

Dr. Bob, I would like to extend my congratulations as well on the win. And just a trivia question before I ask my real question Have you guys tallied up, how much this cost you in legal fees over the last four and half years I think it was?

You don't want to know. Put it this way, you have seen it all. Okay? You have seen it all, and we still had great results. Yes, it is always an issue. What you're really saying is, Bob, why did you -- or somebody could say it -- why did you spend shareholders money on something where there was de minimus benefit to Cognex?

That is not the question at all. I share the sentiments of the previous questioner. Actually I think this ruling probably has much wider implications than a lot of people might realize at this point.

Let me say that for a moment, there were seven suits pending that were put on stay because of Cognex, because of our suit against Lemelson. The suit against Wal-Mart, the suit against Intel, (inaudible) Semiconductor, Linear Technology (ph). There are seven suits comprising more than 200 defendants. Those suits have been stayed for the past year or more, and now those suits disappear.

We have saved those defendants not only the legal fees over the past year and half, which would be significant, but we have saved those defendants an estimated $2 billion in what would have been settlements. That is what the settlements would have likely have been -- $2 billion. That money would have been passed onto the consumers of every item you buy at Wal-Mart and every Intel product, anything with a chip in it. We have done the right thing for this country and this economy.

I totally agree with you. But the lawsuit I am referring to, I will give you a call off-line about that.

Two questions. Given the shift to lower-end products, do you guys have a new target operating margin? There have been lots of questions on this call about margins. Have you guys reviewed or outdated your long-term --?

No. I think our model stays the same. We are doing whatever we can to get the bottom line -- let me just review something here -- yes, our operating margins, we want to be north of 20 percent, maybe as high as 30 percent, and net perhaps as high as 20 percent, from 15 to 20 percent. These products, these low-priced products, are going to get us there. I would be disappointed if this new Expert Sensor does not grow faster than In-Sight, and In-Sight was a fast growth product.

Okay. The other question is for Dick. Can you talk a little bit more about the currency gain and loss swing from quarter to quarter? I think it was the last quarter there was a gain of 828 million, and this quarter there was a loss of 749 million. Maybe you can just give us some sense of either what happened or make an assumption about what happened to the dollar, and maybe demonstrate to us how it is likely to affect your results going forward?

I would be glad to. The first thing I would like to do is make one slight correction. Those gains and losses that were reported were not 800 million and 700 million -- (multiple speakers)

I am sorry. Thousand.

We're not quite that size yet or whatever. What it principally relates to was the impact of the dollar/Euro exchange rate. We have a foreign subsidiary in Europe whose functional currency is the Euro, but has a significant percentage of its revenues denominated in dollars. And during Q3, believe it or not, the dollar did strengthen vis-a-vis the Euro as compared to the beginning of the quarter, and the versus happened in Q4, especially in the month of December, where the dollar dropped significantly.

The problem or what created a good portion of those gains and/or losses, is that while we have a foreign hedging program that hedges our foreign denominated assets and liabilities, we do not have a program, if you will, to hedge anticipated revenues. So we had revenues during the quarter that were denominated in the different currencies in the U.S. dollars, and by the end of the quarter, when we started trying to hedge those known receivables, what had happened is we had already seen in Q3 there was a pickup as the dollar strengthened into Q4, it was a loss.

Now going forward, we continue to monitor -- we are taking a harder look at updating it on a more current basis. We do expect that the dollar is probably going to stay within its current range and maybe get a little worse vis-a-vis the Euro over the course of the year, but not significantly worse from where it is now.

Okay. So should I interpret that to mean that there is a chance that you might try to hedge this risk going forward just based on your outlook for the dollar/Euro as such?

Yes. We are trying to and we are going to try and hedge them, if you will, on a more contemporaneous basis than simply waiting until the end of the month or quarter and seeing what the ending asset balance is.

Okay. Thank you very much. Dr. Bob, I will give you a call.

Sure. And I expect to get one.

Jeffrey Scott, Scott Asset Management.

Dr. Bob, congratulations. You did the right thing. A couple of comments. I liked your concert at the beginning of the call. I very much appreciate the forthrightness with which you approached all the investors. When times are good, you tell us they are good. When times are bad, you tell us they are bad. You are as honest as they come for my money, and I certainly appreciate that.

I appreciate the comment.

A very big picture question. The win over Lemelson. Over time -- let me go back one step -- you have always said that your biggest composition is internally developed solutions. Now that the Lemelson suit has been solved, does that make it easier for companies to go outside and purchase a solution rather than trying to develop themselves where it is hidden from Lemelson?

No. You know, I believe that this won't have any effect on that. Rather we won or lost, people were still going to use Machine Vision, and whether they developed it themselves or whether they purchased it, I don't think it would matter. But you know what? Maybe I will ask Mike Steele (ph), who is our Vice President of Corporate, and he happens to be here, and he has been very involved in this. Mike, what is your view on that question?

I think the answer is no, and the reason being that (multiple speakers) -- no, that it won't have an impact in terms of increased machine vendor suppliers versus internal development because for a couple of reasons.

One Lemelson always went after end-users of Machine Vision primarily in the manner in which Machine Vision was used. They would send blanket letters basically saying if you were involved with any kind of manufacturing, you must be involved with the use of barcodes and Machine Vision. He never even took the time or trouble to go in and first find out whether, in fact, they use it. It was an assumption. So nobody ever believed it mattered whose vision was being used.

Whether that was developed internally or externally by the supplier did not matter. (multiple speakers)

Richard Eastman, Robert W. Baird.

I've got a couple of thoughts for you. Is there an FX translation impact on the topline?

Yes, there is.

Can we have that?

Hang on a second here.

I cannot believe that Sue knows exactly which page. I cannot believe it. (inaudible).

I don't have that handy. I am sorry.

I presume it is a positive translation gain?

Yes, it was. It will follow the same direction as the realized gains and losses down below.

Okay. You are saying the swing? So it would be a $1 million type of number?

What I meant to say is that whether it was an increase on the topline, actually it is the reverse side.

I think it would be up. I think you would show a positive trend. Okay. I can follow-up with Sue.

Also, this might be a real simplistic question, but given the legal expense number in '03, is that a big enough number that it will be material in '04 if it falls off?

Actually the legal expense in '03 was relatively small compared to '02 because most of the work done in discovery pretrial and most of the trial itself actually occurred in '02. The trial ended in January of '03, so so far in total '03, we have had relatively little in the way of legal expenses for Lemelson. If they, in fact, do appeal, then we would expect that '04 legal expenses could be somewhat higher than what we actually incurred in '03.

Okay. Just lastly, I had a question on the Vision Sensor. Let's circle back to that for a second. I am curious in terms of the distribution network that you're setting up there for that product, can you give just a profile of what a typical distributor might look like, and also is this multiple? Are we talking about 50 or 100 distributors, or are we talking about four or five?

That is a good question, and we're currently in a delicate phase of negotiations, so I cannot go into a lot of detail. But I would tell you the kinds of distributors, and there will be hundreds, and we may be able to close all hundred with one contract, because they are people who service distributors like that, all the distributors are industrial distributors who are currently handling things like photosensors, machine controls and programmable controllers.

Would they be expected to bring some support -- local support?

Yes and this is the kind of product that they could easily handle. My expectation -- I have not seen these documents yet -- but my expectation is the operator's manual for this will be no more than 25 pages. My expectation it is going to be significantly smaller than the manual that came with my phone.

All right. We will go with that.

(OPERATOR INSTRUCTIONS). Mike Whitfield, Wachovia Securities.

Good afternoon. I wanted to follow-up again on the sensors and applicability to the industrial safety market in factories and ask to what extent this new sensor line is applicable to machine safety in a factory setting, and have you established any relationships with any automation companies?

Well, it is an interesting question, and it is one that we have thought about and not for this product. It turns out we know enough to be dangerous in the safety business. That is an oxymoron I suppose. The issue is that machine safety has a tremendous number of regulations, self-testing, and when we look at it, it appears that Machine Vision, because of the extent of the software involved and the possibility of a bug involved, is not appropriate at this time for machine safety. There is too much liability associated with it that we are not willing to take on.

So I would say this product was not designed to full machine safety and probably would not be sold for that.

Okay. Great. Thank you very much.

It is a good suggestion though.

Dr. Shillman, as there appear to be no further questions, I will turn the call over to yourself.

This is Wolfman Bob signing off on the quarterly conference call of fourth quarter 2003, and everyone here is going to sing along. (Plays music and group sings song).

That is it from Dr. Bob and Wolfman Bob and the team at Cognex, and we look forward to crooning some more positive tunes to you at about the same time next quarter. Until then, goodnight and God bless America.

This concludes the Cognex Corporation fourth-quarter conference call. Thank you and have a wonderful day.