Cognex Corp (CGNX) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Cognex Corporation first-quarter 2004 earnings conference call. At this time, all parties have been placed on listen-only mode, and the floor will be open for question following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Richard Morin, Chief Financial Officer. Sir, the floor is yours.

Thank you very much. Thank you, and good evening, everyone. Earlier tonight, we issued a press release announcing Cognex's earnings for the first quarter of 2004. 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 here tonight.

I would like to emphasize that any forward-looking statements we made in the press release, or any that we may make during this call 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, 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 good evening, everyone. Welcome to Cognex's first-quarter conference call for 2004, and what a great way to start a year. As you can see from the press release, we had significant increases in revenues and profits, both year on year and on a sequential basis. For those of you who noticed that the increase in revenue from Q4 '03 to Q1 '04 was 15 percent, I want to let you know that that is a very significant number because, in the past, because of seasonal changes, we usually have a decrease in revenue, even in good times, from Q3 to Q4. So a 15 percent uptick is rather substantial.

More importantly, our operating income exceeded 20 percent of revenue for the first time in 13 quarters, and that has been one of our principal goals since the beginning of this recovery. The high level of operating income was due to two factors. One is the increase in revenue, and two is the fact that we have kept a very tight hold on spending.

Demand from our OEM customers in the semiconductor industry was very strong in this quarter. The rebound in this business with these customers drove bookings up nearly 50 percent on a sequential basis. Much of this increase was from a surge of orders we received as our OEM customers turned on their production pipelines, in response to demand that they were seeing for their products. We are also very pleased to see continued growth in our end-user market, where bookings increased by nearly 15 percent from Q4 to Q1, and in the first few weeks of Q2, business continues to be strong, and all indicators suggest that this is going to continue for the next several months.

Even though business has improved considerably, we have decided to hold spending at the current levels in every department except in our end-user sales and marketing groups, where we will invest in order to ensure continued growth into 2005 and beyond. Because of that spending, we expect that operating expenses in Q2 will increase from 5 to 10 percent of Q1 on a sequential basis.

Turning now to new product development, we're developing both customer-specific products, as well as products for general markets. In the first category, we have a number of projects under discussion with our OEM customers in the semiconductor industry. It has been three years since these customers have asked us for new products, and it is good news, because it indicates that these customers believe that the pickup in business is sustainable.

In addition to those customer-specific projects, we had significant engineering efforts focused on developing products for new markets and applications that are in the early stages of adopting machine vision, but which are expected to grow rapidly in the future, and I am going to give you some details on those products right now.

One of the fast-growing markets is referred to as industrial ID, which involves the reading of codes that are marked directly on the surfaces of manufactured parts. Until now, the largest opportunity for this kind of capability has been the reading of tiny codes etched by laser onto the surfaces of semiconductor wafers, so that they can be automatically tracked through the fabrication process. And for many years, Cognex has been the leader in this important and difficult application. In Q1 alone, we had over $5 million of revenue for wafer ID.

Now, other manufacturers in a variety of industries are discovering the benefits of identifying and tracking their parts through the manufacturing process. Direct part marking is so important, in fact, that in certain industries it has been mandated by the federal government.

Our acquisition of Gavitec's machine vision business in December of 2003 expanded our ID product line to include a hand-held ID reader. And our engineering team, which now includes the Gavitec group, is developing next-generation ID products, the first of which we expect to introduce in the next few months.

A very important new area for product development at Cognex is also expert sensors. Expert sensors represent a new type of product for Cognex. Until now, all of Cognex's vision systems had capability that was both broad and deep. They could be used to solve a wide variety of complex vision problems. Expert sensors, on the other hand, have a narrow focus. They are designed to solve only one type of problem, but to do it exceptionally well. Other differences between our vision systems and our vision sensors are that our expert sensors will be lower in cost, selling for about $1,000 or so, and they will be much easier to use than even our easy-to-use vision systems. They will be able to be installed and configured by an electrician, not by an engineer.

Our first expert sensor is named the CPS-1000, which stands for the Cognex People Sensor. And as the name says, it senses and counts people. The initial use will be in building security applications such as at banks and airports. The CPS-1000 is a very unique product for Cognex, for two reasons. First, it is our first vision product designed for the commercial market rather than for our traditional factory floor market. And secondly, it is our first product that uses 3-D vision. This CPS-1000 has been in development for about a year, and I am happy to announce that prototype units have been successfully installed and tested at three beta sites and, based on those results, we were just granted our first OEM purchase order from Horton Automatics, a leading manufacturer of automatic doors and portals. We expect to ship 20 units within the next few weeks and 50 more later this year.

A different engineering team at Cognex is developing another group of products in the expert sensor family, a product that we are currently calling Checker. Checker will be used on the factory floor, where it will compete not with vision systems, but in the $1.5 billion market for presence sensing systems and devices. It is expected to broaden the use of machine vision on the factory floor and, because of that, we expect it to be the most successful product in Cognex's history. Development of Checker began less than a year ago, and we already have prototype units working in the lab. Beta units will be in the field within the next few months, and we are on target to introduce the product through third-party distribution in the second half of 2004.

That ends the prepared remarks. Of course, we have given out a detailed press release that has lots more detail, and now we will spend time on any questions that you may have for myself or Dick or his team.

(OPERATOR INSTRUCTIONS). Alexander Paris, Barrington Research.

Good afternoon. Great quarter. Just a couple questions, one on this parts marking business. You have been in the wafer ID. Are there other industries that you have already delivered some parts marking readers to?

Yes, we have already successfully displaced (indiscernible) in French competitors or beaten them at the door in automotive, some significant automotive accounts.

And these are through your fixed reader before your acquisition, or is that just since the acquisition?

No. These were hand-held units, and I can tell you, in addition, we have some In-Sight 1000's, which are -- we have gotten some large orders, 100 orders from one company in Germany, another 100 orders from an automation company for transmissions and an almost equally-sized order in the automotive. But that was for In-Sight, and those beat out DVT; these were not hand-held. But recently we have won, as I believe, at Ford and at Rolls-Royce for the hand-held readers.

And is that In-Sight -- that was your basic In-Sight then adapted specifically to be the reader, or could you just use it as it was before?

No, the In-Sight -- that's a good question, Alex. In-Sight has a lot of different flavors. The In-Sight 1000 is a code reader; it is the same hardware, and it's the only software it has is code reading.

Just secondly, a broader question. Just to get a feel for how particularly the semiconductor business is developing, I get the feeling that a lot of customers' equipment makers waited a little bit too long, and there was a frantic catch-up in the first quarter. And now, just judging from your sequential assumptions, they are at least taking a breather. And I guess my question is, because I have seen at least one street analyst make the comment that this little sequential slowing is a sign that we are a lot more than halfway through the semiconductor equipment cycle.

Is that a breather? It sounds from what you said, you are already seeing some customers that are convincing you that the customer forecasts are starting to fill in for the second half already. Is that true?

I'm a little confused about what you mentioned. We have not seen any slowdown at all. Now, mind you, we don't see the pickup until other people do. We are a late indicator and not an early indicator on that, but our bookings in Q1 were dramatic, in particular (ph).

Well, I was looking at your sales, sequential sales. That's certainly slower than the sequential sales were in the first quarter.

Well, yes; there was a lot of -- okay. If you are taking a look at what we're expecting for sales in the second quarter, yes, it was a bigger jump in Q1. In early January, we saw a lot of those orders as the OEMs tried to fill in the pipeline or whatever. The level of orders, while it has declined from the early January level, it's continued at a level that is still much higher than we were for most of 2003 and 2002.

I was looking at the big figures from the CIMA (ph) or whatever it is last night, where I think the overall orders were up 0.3 percent in March compared to, I think, 7 percent or something in February. I'm just trying to get a feel for this. Is this still reasonably early in the upturn from the equipment manufacturers, in terms of ordering, and maybe just taking a little breather, and then on again in (multiple speakers)?

From what we've seen, the levels have been --

With the breather -- maybe I'm missing something, Alex. Where do you see a breather?

Well, I'm just looking at the overall industry orders reported last night. They were up 0.3 percent by some North American semi equipment manufacturers.

Oh.

Yes, we are still seeing good strength the last couple of months.

Were the OEM electronic manufacturers as aggressive in ordering in the first quarter -- you know, for circuit boards and so forth?

No. Most of our growth (multiple speakers) in the OEM sector came from wire bonders and wafer probers.

So that kind of -- from the electronic OEM companies, that's still ahead, then, hopefully. And do you get -- was this push by the semiconductor people -- was that kind of a catch-up and actually adding capacity, and less so than adopting new technology?

The products that we are selling into are not new technology. I would assume capacity.

So presumably, you are spending for 300 mm and things like that, which had been a little slower than some people thought getting out the door?

Well, many of our products go into -- and particularly on the prober, they are going to the 300-mm prober.

Okay. So it's hard, you say, for the semiconductor, even though there is a pretty good spurt, there's still much more growth ahead?

Well, we expect so. And not only that, we've heard from at least one of those customers, one or two, that they have bookings to support it for the year.

I see. Okay. Okay, just one quick -- the tax rate, you said, 29 percent -- is that going to be for the whole year?

That's what we expect for the whole year right now, yes, Alex.

Mark Roberts, Wachovia Capital Markets.

I've got a couple of questions. My first question is, in the first quarter here, revenues by industry sector from the semiconductor and electronics sectors were about 61 percent of total revenues. With the new product rolling out, particularly the Checker and the expert sensors, what would your estimate be for the full year? Is it going to stay kind of a 60/40 split? Or would you expect industrial to be up a greater percentage over the course of the year?

It all really depends on how long the recovery lasts in semiconductor electronics, Mark. We have no idea. If orders continue, then it's an obvious statement that it will still stay 60/40. This is the first time in a long time that we've had over 50 percent in semiconductor electronics.

Okay.

And over 50 percent in OEM, if you look at the third line down.

My second question -- Bob, you were talking about increasing in sales and marketing expenses. And you've also talked in the past about, as you move to lower-priced sensors, the CPS-1000 and some of the lower-priced expert sensors that you're going to use, indirect distribution channels for that. Is the increase in sales and marketing that you're talking about for this year -- is that additional people? Or is that a change in compensation structure to get these indirect channels onboard?

No, it would be primarily spending to get more leads, more lead acquisition and lead tracking kinds of things, putting more salesmen on the street. But it was not to close other kinds of third-party channels.

And my last question -- would you anticipate, as the mix of business from the new lower-priced sensors comes in, kind of the sales and marketing burden, if you want to call it that, on the product? Is an indirect channel going to be a higher or lower percentage of sales and marketing than what you are historically used to?

It will have lower spending in our own sales and marketing organization. That will be the reason for going indirect. Now, we would give them a discount on that, but nevertheless, we still expect to see high 70's or even 80 percent margin on the product to the distributors.

This should certainly boost our gross margins and boost our operating profit as a percent of revenue, these products. But again, it's going to take time for these to pick up speed, and to get to what would be equivalent of a $150 or $200 million run rate. So it will be a while, but they are going to be accretive in that regard.

Another thing to add on, that some of these products will not go through a third party, like the CPS-1000 is an OEM product that goes directly to the OEM through our direct salesperson. So we don't need distributors for all the kinds of products we are going to come out with. But for the factory floor one, which is Checker, we're close to signing up a very large organization to do that for us.

Jim Ricchuiti, Needham & Co.

Congratulations on the quarter. Bob, it looks like even in the last quarter, you had a little slower performance in Japan, and that looks like it came on very strong this quarter. Can you talk at all about the concentration of customer sales in Japan? Is it pretty diverse?

No. Most of the business in Japan that we have is the OEM business. I don't have the breakdown here, but Dick is going to figure it out. But I would guess 85 percent of the revenue or 85 percent of the bookings was OEM, and that's why it came on so strong.

We are doing okay in the end-user business. It is picking up now. We have just beaten, on a $1 million order -- let me get some details on this -- I can tell you this, maybe I can tell you this piece. Yes, at a Japanese company, we expect about over $1 million of revenue from a particular customer, I cannot say, for sorting LEDs. And the competitors were all Japanese -- they were Fast (ph), Kia (ph) and Omran (ph), so the Japan business is -- the end-user business is also picking up.

In the quarter, about 70 percent of our Japanese revenue came from OEM customers in Japan.

I was a little interested in the comments you made about, on the semiconductor side of the business, that there seems to be some new interest in developing some new applications or products. I was not quite clear on that, but I recall not too long ago, Bob, you were saying, I think, for some of your semi customers that you didn't get the sense that they were looking in that direction. Has something changed?

Well, yes, I would have to say -- that we sent Marilyn Matz, head of engineering for that group, over to Japan with some of her brightest engineers, and meeting with customers, and they are now interested in new capabilities that we showed them. I can't tell you -- let's see if I can go through some of these things.

No, I cannot go through them. But I can tell you that there are probably eight projects, but they are not funded get. And that's an important point; the OEMs are telling us now that they do want some new technology, some new capabilities and new functions in their products, and we know we can do it for them. We'll see how serious they are about it. But this is a change; this is the first time -- again, they have not signed up yet. But this is the first time that they have expressed this kind of strong interest in over three years.

On some of the other businesses, the surface inspection business -- that was down sequentially. Is that normally a seasonal pattern on the Web manufacturing side?

I don't know that it's so much seasonal; it's sort of a lumpy thing, and always has been and will continue to be. There were a number of projects that -- a couple of them had originally been scheduled for Q1, and were subsequently requested to be pushed into Q2 by the customer or whatever. And a couple of them have already shipped, so I don't (multiple speakers).

-- lumpiness of the business, and we are quite confident that we are going to hit the number this year.

It sounds like the semi and electronics -- clearly, the momentum has continued to be strong thus far in the quarter. How about some of the other markets? You mentioned surface inspection, that you think that you will see a little bit of a pickup there. How about some of the other markets?

Well, we do not categorize the other markets, really. There are applications like automotive and consumer and medical; we lump them all in factory floor or end user. And that's growing nicely. I can tell you that In-Sight is just doing fabulously, where we're booking at over a $50 million a year rate now, and winning major accounts. I can give you some examples of purchase orders. We used to, in the past two or three years -- of course, when we first introduced the product, the purchase orders were typically for one or two units. And now we are seeing -- I'm just reading down this list -- here's an order for 88 units, here's an order for -- well, I guess, in the first quarter, one customer alone took 159 units, another customer 99 units. So we are seeing volume sales of In-Sight, not only to end users but also to OEMs.

Bob, can you say what kind of applications those last three were for? I'm just kind of curious.

The very large ones were for wafer reading, and going directly to particular customers without any handholding. So the margins on these -- the bottom-line margin is very high.

And as far as expert sensor -- I may have missed this, but you threw out a revenue number. You think it's going to be a fairly significant revenue contributor.

I didn't throw out a number. I just said that -- I certainly said that I expect it to be the most successful product we have (ph), and what I mean by that is that it's going to ramp (ph) -- In-Sight has been right now -- In-Sight is the most successful product, ramped up to $50 to $60 million in three or four years, and I think that Checker has the capability of doing more than that.

Is it on track with the development schedule?

Oh, yes. We are on track, and the beta units will be shipped, I think, in June.

So potentially you could see revenues in the second half of the year, and ramping in '05?

Yes. And I would think this will ramp up faster, actually, than prior products because this distributor's going to have to buy just a lot of them. They have a lot of outlets and demo units, so I think we're going to see significant unit orders from -- if we line up this distributor. If we don't, there are other ones that we have been talking to. But one of the benefits of distribution is that you ramp up quickly.

Okay. And with the higher revenues that you are expecting, you've kept a pretty good hold on expenses. And at some point, as you get into the second half of the year, if you see business remaining this strong, or picking up a little bit more, do you feel that you can still maintain the expenses? Or will you have to maybe perhaps invest a little bit more in some people and other things?

I would have to say right now that, until we can deliver consistently 20 percent operating profit and 20 percent or more net profit, that we are not going to spend any more money, except in the sales and marketing. I think we have -- our model is changing. Our model used to have about 18 to 20 percent of expenses were engineering, and we are coming out with different sorts of products that don't require that high an amount of engineering. And I think we can drive that engineering part down, not by decreasing the headcount here, but by just keeping the headcount and spending relatively constant and just growing the top line. I'm pretty convinced we can do that.

Richard Eastman, Robert W. Baird.

Can we just follow up on the expense number -- you just made the comment about keeping expenses pretty much where they are. Is that what you're intimating?

Well, here's the story. Expenses have gone up, partly because this quarter reflects the full quarter of the Gavitec acquisition, and I think there are about 15 people or so over in Gavitec. In addition, the expenses are up, because we did raise some salaries. In addition, expenses are up because we are accruing now for bonus. We expect this year to be very successful, and we are accruing for bonus.

And commissions are up, based on the increase in revenues or whatever. But I think what Bob was alluding to is that, as we are looking to incrementally go out and make specific additions, it's only going to be principally in the areas of sales and marketing on end-user markets, in order to generate additional bookings in revenues, leads, et cetera. We are not hiring a bunch of additional accountants or engineers at this particular point (multiple speakers).

Right. My comment was really headcount-related. Of course, expenses will go up, based on inflation and bonuses and other things like that. But headcount-related -- we made a mistake in 2000. In '99/2000, we just hired too many people, and unfortunately we had to let them go. So we're going to be very careful in adding headcount. We're going to just work harder. We're going to find ways to be more efficient and work harder.

Can I ask you -- given the second-quarter guidance on the expense line, you would imply 25, maybe 25.5 million of op expense, which would put you at 46 or 47 percent of sales. Do you envision, in this business cycle, that that op expense drops below 40 percent?

Dick says -- I have to rely on Dick for this -- tough. Tough to do.

Tough to get it under 40.

And then let me ask you, in terms of the end-user business, In-Sight had a fabulous quarter. Excluding In-Sight -- and I think you touched on the SISD business a little bit, but also the PC-based vision business -- those two areas a bit week, maybe, year over year. And I am curious if they came in a little bit below plan. And the intent is you said SISD should pick up, and should the PC-based business pick up some, as well?

I don't see where you're seeing the PC drop down. The PC business is the OEM semiconductor and electronics. If that's down, I'm screwed.

Well, the math would suggest, if you have three pieces to the end-user business, SISD, In-Sight and PC-based --

Oh no, no. PC-based is not an end-user. PC-based is both; it's a product that is based on a PC and can be sold to end users or OEMs. It's primarily OEMs.

On the additional information in the press release, PC-based vision systems represented 51 percent of revenues in the quarter, and the revenues were 48 million compared to the December quarter, where it represented 41 percent of only 42 million in revenues. So, clearly --

But your end-user business was about 23.6 million, and Surface Inspection was 5.7, and In-Sight or vision sensors were 13.4, so the --

No, end-user also includes Surface Inspection. It's a very complex -- I understand your confusion, and --

Let me just ask you this. I guess, if I just look at the end-user business and (multiple speakers) it grew about 16 percent, I think, year over year, which seems a bit lower than your targeted number. And is that just timing? Is that --?

Let me just suggest one thing, Rick. The In-Sight business is not just end-user. A lot of In-Sight on the wafer ID product, a lot of that is going to OEM customers. So you can't just look at In-Sight and say that's part of the -- in your calculation of the end-user business. Okay?

The only product that you can say is definitely end-user is Surface Inspection. (multiple speakers).

If you look at your breakdown, which is In-Sight versus end-user, and you give that breakdown, and if you look at end-user year over year, it's up about -- again, this is percentage points, but it's up about 16 percent, it appears. And it looked a little soft, and part of that is probably SISD. Is that fair?

That is correct.

Okay. So that should be expected maybe to accelerate a little bit, in terms of year-over-year change, going through the rest of the year?

Yes.

Okay. And one other question. On the OEM side of the business, there was a question asked earlier about the cycle, and you were cared and you were careful, maybe, to suggest that the visibility later in the year is a little difficult to read. In the '97 and 2000 semi-cycles, your OEM business correlated pretty closely to the semi-cap book-to-bill. Can you just give us some feel for how you perceive your OEM business to track that number here? Because, obviously, that's what people are focused on. That ratio obviously peaked in December, and it's been tailing off. And I'm just curious; I mean, why would your business not be expected to track that in the short term here?

Well, I'm not going to comment about book-to-bill, because I don't see the chart in front of me. But certainly, if semiconductor-related equipment -- certainly, Cognex's bookings and sales should track the sales of semiconductor equipment. It might lag it by a quarter or something, but yes, of course.

We normally do lag.

Yes. The stock doesn't, because people take it into account, of course. But yes, of course. The product that we sell to the capital equipment makers in the semiconductor field track their sales. They don't buy it if they are not going to sell it. Yes, that's fair to say. (multiple speakers).

And your OEM customers are -- I know that their inventory levels of your product have varied a little bit, but have they -- are they still pretty lean on their inventory of your vision product?

They are extremely lean. I just went through a report from the field on all of our key OEM customers, and with only one or two very minor exceptions, they all have less than a month's worth of inventory on hand.

William Pike (ph), Pine Street Securities (ph).

First, I don't think I heard anyone tell you did another great annual report.

Thank you, Bill.

You guys are in a class by yourselves. Keep them coming. Most of my questions are answered. Could you just talk about the increase in the number of shares outstanding? How much of that came from option exercise or whatever else it might have been?

I would guess that, except for a small piece that might have gone through the employee stock purchase plan, the rest of it was all through option exercise.

And what do you foresee for change over the next quarter or end of the year, as best you can judge at this point?

Well, I think a lot of that will depend upon what the price of the stock is going to do. Most of our employees for the last three years have had underwater options, and in the first quarter was the first time that a lot of them saw a little bit of light, and they took advantage of it. Whether or not -- I would expect that that would continue, but maybe not quite at the same level.

There's good news and bad news to that. The bad news is, of course, that it dilutes earnings because the denominator gets larger. But the good news is that it generates more cash. What did we bring in (multiple speakers)?

We collected some 20 million -- a little over $20 million in cash from employee option exercises in the quarter, and on top of that, we'll save another $4 million in taxes as a result.

Why do I sense that cash is not a big problem at your shop?

The only problem is finding something to do with it.

: Well, in which regard, at this price do you have any interest in buying back further stock? You have often done that to pick up your options. Or are we too high here?

There is a board meeting coming up, and it's always on the agenda. But to be honest with you, I think that the price is too high.

(OPERATOR INSTRUCTIONS). Siddhartha Kippor, Principal Management.

Specifically to the expert sensors market, you specified that that is a 1.5 billion market, at least the addressable market is (multiple speakers).

That's right. That is our estimate for the sales of systems and devices that are called presence sensing.

And what would you guess, or, based on your numbers and analysis that you have done, what portion of that 1.5 billion will be available to Cognex?

We have done no analysis, to be honest with you. The only thing we did is make sure it was big enough, okay? And it certainly is big enough. I'd take a wild guess that half of that is available. But that's just a wild guess. We know that -- we have spoken to distributors and system integrators who have solved problems or tried to solve problems with a variety of available presence sensors, whether they are capacitive or inductive or whether they are photosensors, and they have told us that in many applications, maybe half or three-quarters of the applications, require more than one photosensor. And as soon as you get into multiple photosensors, it becomes complex to set them up, to configure them properly, to aim them. And also, in most of these cases, the part itself it's moving by (ph), the thing that you are trying to sense, or the pieces on it you are trying to sense, in order to do that with these dumb (ph) photosensors or dumb other sensors, the part itself has to be very carefully controlled and fixtured. So it appears, when it gets shuttled into the place at the location where the measurements are being taken, it appears exactly the same as the prior one.

With vision, that's not a requirement at all. So there's a dramatic savings in not having to fixture parts. And there's a dramatic savings in not having to communicate between all these other multiple sensors to do the job that people are trying to do. One Checker should be able to do it.

So it would not be inconceivable to expect that this could become a large contributor to your total revenue in the next few years?

Not only not inconceivable, it's our wish and our desire and our expectation.

Well, that's good to hear.

Right, because, look, In-Sight is giving us $50 to $60 million now -- this year, probably somewhere between 50 and 60; I don't want to be specific because I don't know. And that was after four years. I would think that Checker and Checker the next generation should double that, could double that. So yes; we are moving in the direction of the very low-cost, very easy-to-use devices that have a significant value to them that are not commoditized.

I've noticed that you have added a couple more lines in your industry breakdown, medical and pharmaceutical. What products are you exactly selling into both medical and pharmaceutical?

I would believe that all of those products are In-Sight.

Okay, In-Sight. And the fact that you have broken this down -- is it because it didn't exist --

Probably it's because it's now above the threshold of 1 percent, and I'm looking at the analyst, Laura, who helps us with these things, and she is shaking her head. We sell into probably 100 different industries, but we lump them as other. You see a 13 percent there, but as soon as something becomes an obvious name associated with it, that that we can categorize, that's more than 1 percent, that's when we list it.

How do I interpret this statistic that you provide -- number of new customer accounts? OEM was 37, up from 15 the last quarter. Is that 37 new customers --?

Yes.

-- or a change?

No. No, the change might be negative, for all I know. I don't happen to know. It's 37 new ones; all it does, frankly, is to tell you the effort of the sales force in closing, whether the sales force is doing a good job in closing accounts. That's why we look at it. And also, as an indicator where we should invest our engineering dollars.

And in terms of international markets, are you looking to expand into China and perhaps India at any data points that you receive? Have you sold any products yet?

A very interesting question, one under debate, whether you can make money selling things in China, or whether they will just get somehow duplicated or knocked off. So we have an office in China. We opened an office -- primarily, the first motivation was to sell the Surface Inspection, because it turns out that China now is one of our largest manufacturers of steel in the world, and they are now being pressed for quality. So we are selling our product there. And I don't know if we have sold any paper product there in (ph) China. But Surface Inspection is what brought us into China, and we're exploring now. But to be honest with you, I don't have any high hopes. Although there might be a huge market, I think the huge market is the products that sell for $0.

Alexander Paris, Barrington Research.

Just talking about how big a market can get, I just want to look a little bit more at this parts marking business that you have expanded into with an acquisition. For example, if that federal mandate for marketing went into effect on January 1st, I think, have you done any work or guessing how big a market this would be if all their suppliers complied with what they are asking?

As usual, we don't spend a lot of time trying to fine-tune the numbers. We know it's big enough for us to go after. And if you want me to (multiple speakers) and besides, you'd have to make all sorts of assumptions and estimates. It's clearly a large, a very large market compared to the markets that we chase. And that's all we really have to know.

Now, I will say that we are going to -- we don't go blind into markets. We watched other people in the business and how they are doing, and we knew that our stationary, fixed readers were doing quite well, and we needed -- the customers were asking us for hand-held. We, of course, watch the other competitors in the business, and see how they are doing. And we were convinced that -- we are convinced that it's a great time to enter the business. So we could have entered this business three or four years ago, like some of our competitors did, but it wasn't a business; it was pioneering. And we prefer to be a late entrant but a fast follower -- what we call a fast follower. So we'll come out -- we've come out, and we will continue to come out with a better product than any of our competitors have. And as a matter of fact, there were some studies already -- I don't know if they've been published in the general press -- of our product versus two or three of the top competitors that have been out there a long time. And we win, hands down -- hands down -- on these studies. So we are a late follower but a fast follower, and we are going to eat those peoples' lunch.

So you were traditionally the leader in the wafer ID with this reader. Was Gavitec? Did they carve out a leadership niche in any particular area with its --

Yes. Gavitec in Germany had a couple good accounts, primarily for reading on the surface of other parts, not on wafers. They had a wafer reader. It was not as good as ours, and we just abandoned that, of course. They understood and had better expertise than we did on the illumination of parts, on direct part marking. And they have better expertise and understanding of the ergonomics of the hand-held device, and they also had some good software expertise. So that's why we bought them. It immediately gave us the hand-held product.

(OPERATOR INSTRUCTIONS). Richard Eastman, Robert W. Baird.

I just want to return for a couple quick thoughts on Checker. Obviously, the potential here is pretty large in your mind. Is this a lower-priced version of In-Sight, or is this a whole new product?

A very good question. No, it is not. In-Sight actually is a vision system, even though I think in the early brochures we called it a vision sensor, because it was small enough to be called a sensor. Indeed, In-Sight is a complete vision system which has breadth of capability, which means many, many tools and depth of technology, which means the tools are very powerful. In-Sight can solve virtually any problem that there is in machine vision today, so In-Sight is that capable.

Now, there are some application-specific versions of In-Sight, like the 1700 and the 1701, that just read codes, and that would be an example of an expert sensor, where something just does one function. So In-Sight is going to continue to be a general-purpose vision system. There is a market for that; there are many companies and system integrators that need general-purpose, but there are applications that we found for presence sensing for just seemingly simple things. Are all the buttons on the cellphone? Well, that simple thing is not so simple to do with anything but a vision system, or now, an expert sensor.

So when you say presence sensing, it's a yes or no? It's there or it's not there?

That's correct.

And let me -- can I also ask -- two other items. One, are the competitors here, are they somebody like DVT or AccuSort? Who's in that sensing market?

No one yet. No, I shouldn't say that. The people who are in the sensing market would be companies that make photo detectors -- Siemens has photo detectors, and a company in the U.S. (ph) -- Banner and Rockwell, there were a number -- photo detectors have been around for a long, long time. So there were many companies in the sensing business, but no one, to my knowledge, is going to be doing it with a very low-cost, very high-performance vision system.

Okay. And then just -- I'm sorry -- lastly, I'm sure you won't want to disclose this potential distributor. But can you just give us a -- is it an electrical products distributor? Is that the channel that you would look to?

That would be one type of channel, and since we have not signed anything -- and of course, there are discussions with a number of different parties. So I just cannot give you a lot of insight into that right now -- no pun intended. But I will tell you that it is a company that has many, many feet on the street selling into these customers, and who have asked for this kind of product.

Now, this is the product that really, perhaps, 10 years ago we wanted to build, but we didn't know how. And it took the creativity, the brilliance of our Chief Technology Officer Bill Silver. It took that and it took the natural trend of smaller chip size and higher performance in the semiconductor industry to allow us to build such a device for $200 to $300.

Mike Clarkfeld (ph), High Growth Partners (ph).

I was just wondering -- with products like In-Sight and a few products you're talking about, how much cannibalization of the existing product base takes place? Or is there none of that?

I would think none. As a matter of fact, the spec on the product was totally different. The spec was it was specified to compete with photosensors. And that was somewhat difficult, because our engineers like to build in lots of capability, of course, into things. They know what capability is all about -- well, let me put this in, or let me put that in. And we were very careful in marketing and coordinating with engineering that the minimum amount went in. The resolution of the sensor is much lower than the resolution of the sensor that In-Sight uses. I think In-Sight is a 640x480, and this product is considerably lower resolution than that. The amount of memory is much less. So the price dictated what could get done, and Bill Silver figured out how to get it done. So we see no cannibalization. We will be cannibalizing the business that is currently being solved by non-vision-based sensors.

But in the In-Sight product you're talking -- the number 50 to 60 million in sales this year has been passed around a little bit on the call. Is any of that coming at the expense of -- if In-Sight were not around, it would have been other products of yours? Or is that, again, on top of?

No. Unfortunately, there are competitors in the world. If we did not have In-Sight, we would have lost that business, because there are competitors for In-Sight, and some of them do a pretty good job.

William Pike, Pine Street Securities

Just wanted ask you -- anything on the acquisition front? You normally bring that up. It did not come up. Of course, you made a few. Anything you would care to report to us?

Yes, I would like to report that we dodged another bullet. We didn't buy another company. You know, success has to do with a number of things. One of them is not making mistakes, and we were close on a deal, and when we looked more carefully at the customer base, the customers were falling apart and falling away from that company. And, although the revenue and bookings looked fine, we did some work on the future, and the future looked less fine. So we pulled the plug on that, baby.

(OPERATOR INSTRUCTIONS).

Okay, no star ones. But I think that, when it comes to Cognex and Cognex shareholders, we are all stars. So with that, I'm going to thank you all for participating on the call and for enjoying our annual reports, and I hope to see you at the shareholders' meeting or at some time in the future. Good night.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You made disconnect your lines at this time, and have a wonderful day.