Cognex Corp (CGNX) 2004 Q2 法說會逐字稿

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

Thank you and good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the second 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. I'd 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 Form 10K for a detailed list of these risk factors. And now I'll turn the call over to Bob Shillman.

Thanks, Dick, and good evening, everyone. I'd like to welcome each of you to Cognex's second quarter conference call for 2004. Before I begin, I want to point out that Dick and I are making this call tonight from New York City. We are here along with other members of our senior management team to celebrate Cognex's 15-year anniversary of being listed on the NASDAQ stock market. It was exactly 15 years ago tomorrow that we went public. At that time our IPO price was $1.38 per share, that's after adjusting for subsequent stock slips, and I guess today we closed at around a little over 32. That yields a compound annual growth rate of 23% over the 15-year period and something that we're quite proud of.

Tomorrow morning I, along with my two co-founders, Bill Silver and Marilyn Matz, who are senior executives in the company still, will open NASDAQ to commemorate this important milestone for our company.

Now let's turn to the earnings press release that we issued earlier today. I'm very happy with our financial results for the second quarter. We reported significant increases in revenue and profits, both year-on-year and on a sequential basis. And, more importantly, net income is once again 20% of revenue, which has been one of our goals since the beginning of the recovery. This high level of profitability was due to both the increase in revenue as well as our keeping a tight rein on spending. Although revenue increased by 13% on a sequential basis in Q2, our operating expenses increased only by 4%, and I am pleased to say that we expect to continue to increase revenue at a faster rate than our operating expenses.

Revenue for Q2 is nearly 50% higher than the level achieved in last year's second quarter and, as you can see, on the additional information schedule, which we included in our earnings release, most of this increase is due to significantly higher sales to customers that made capital equipment for the semiconductor industry whose businesses continue to rebound from the deep cyclical downturn.

As you review the schedule, I want to point out that the detail we normally provide has changed. Instead of reporting OEM and end-user revenue as we have in the past, we've expanded the revenue by industry section to include a new categorization method. It now includes a separate category for customers who made capital equipment for the semiconductor and a separate categorization for those who make capital equipment for the electronic industry. This change was made because we now sell to OEM customers in new industries and markets other than semiconductor and electronics, and this trend is expected to continue in the future, so no longer will OEM revenue mean simply revenue from semiconductor plus electronic capital equipment companies.

By the way, if you add these two particular new segments together, you will notice that even in good times, such as these, the total of those two important segments is still less than 50% of our business, whereas in the past it has been as high as 80% of our business. This is the result of the company's strategic decision a few years ago to apply our technology to other growth markets.

Customer demand in the second quarter - bookings were strong. As we expected, bookings from customers who make capital equipment for the semiconductor or the electronic industries declined on a sequential basis from the unsustainably high levels that we saw in Q1. As you may recall, from listening to our prior conference calls, we reported receiving a surge of orders at the beginning of 2004, as those customers ramped up production in response to demand that they were seeing. Nevertheless, book-to-bill ratio for the last quarter, Q2, was about 1.0, and the order rate is at a significantly higher level than it was in any quarter of 2003.

Looking forward, the outlook for business continues to be very good, although it is likely that end-user bookings will soften a bit during the seasonally slow summer months. Our customers in the semiconductor and electronic industries remain positive, however, about the tone of business.

One final point is for our inside product, our easy-to-use factory floor product, we recorded record bookings and record revenues for that product.

Those are my prepared remarks. We'd be happy to take any of your questions now.

Thank you. The floor is now open for questions. If you do have a question, you may press star, 1 on your telephone keypad. If, at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key. And we do ask that you please pick up your handset to minimize any background noise. Once again, if you do have a question, please press star, 1 on your telephone keypad at this time.

Thank you, our first question is coming from Suresh Balaraman of ThinkEquity Research.

Good afternoon, guys.

Hi, Suresh.

Hey.

In terms of operating expenses, especially SG&A, is there a level at which you think it will kind of start to flatten out and begin we can start to see more operating leverage?

We expect that we'll probably see, as was indicated in the press release, the G&A might increase -- SG&A -- might increase another 5% or so next quarter. But after that we are assuming, by that point, that we'll have hired the incremental salespeople and finished that portion off and that subsequent increases will be somewhat lower than that level.

Okay, great, and also, Dr. Bob, can you give us an answer -- insight into the inside bookings level? Is it similar to what you guys had last quarter, or was it up sequentially?

I am looking at bookings now, and bookings, I just mentioned, were at record level in the history of In-Sight, and this goes back to Q1 of 2000. So that's just about four years ago, and it is therefore up sequentially also. This is a record. It is up sequentially.

Can you give us some kind of an annual run rate number?

No, because I gave you the bookings number.

Okay, great, thanks.

Good try. Let me tell you, we expect to sell $60m of In-Sight revenues.

Okay, great. Thanks.

You're welcome.

Thank you. Our next question is from David Wu of Wedbush Morgan Securities.

Yes, good afternoon, Bob, very good quarter. Dr. Bob, can you tell us about how much were the electronics in the semiconductor accounted your first quarter bookings and what did it amount to in Q2?

We will tell you that very quickly -- and it's -- oh -- you want total electronics and semiconductor as a percent of our bookings, is that correct?

Yes, please.

That takes another little calculation -- hang on.

Okay, while you're at it, can you -- after that can you talk about -- you said end-user tend to be a slower -- a seasonally slower quarter in Q3. What kind of indication are you getting from your semiconductor and electronic OEM customers?

Well, I can't speak to the electronic customers, but I just came back from SemiCon, and we see no reason -- I've looked at the charts I have, projecting for what I see no reason for a slowdown, and I don't believe in the history that we've seen seasonality effects in either of those -- in either the semiconductor, capital equipment, OEMs, or electronics.

Yes, and talking with some of our marketing people and salespeople who have just returned from Japan, we don't see any indication of a slowdown there, either, in Q3. It's looking very good on both the semiconductor side and also on the electronics side for the capital equipment and manufacturers.

I can now answer your question -- in Q1, 79% of our bookings were semiconductor or electronic-related -- OEM and end-user. In this Q2, the total of all of our bookings, semiconductor and electronics, end-user or OEM, is 67%. That decline, by the way, 67% -- the decline is due to exceptionally high semiconductor-related OEM bookings in Q1.

If you can help me with one more thing -- what's the break -- if you look at that category of products, how big is semiconductor OEM versus electronics -- end-user and OEM segment?

Okay, you want the semiconductor OEM versus -- I can tell you, the semiconductor OEM is dramatically higher.

Semiconductor --

[inaudible]

What is the ratio between the semiconductor OEM and the electronic OEM?

Probably pretty close to 2 to 1, I would think.

We have the same sense, that it's quite a bit higher -- the semiconductor OEM is quite a bit higher. And we'll give you the number when we get it. Go ahead.

Okay. Do you expect when you've finished with increasing backlog into Q3 going into seasonally strong quarter Q4 for your non-electronics and semiconductor end-user business?

Yes, Q3 historically is a little bit soft on the end-user business simply because of the summer months, which are a little bit weaker here in the U.S. but a lot weaker in Europe. Q4 has always been a very strong quarter for that same end-user business.

I see.

A lot of those customers haven't come back from their summer vacations. They are also spending less of their capital budgets before the end of the year.

The end of the year, thank you very much.

To get back to your question, it turns out that of all of our semi or electronic OEM business, 67% is semi. So two-thirds is semi, one-third is electronics and, therefore, Dick was right -- 2 to 1.

Two to one, great, thank you.

That's why we keep Dick around. He knows the numbers.

Thank you. Our next question is coming from Mark Roberts of Wachovia Securities.

Thank you, good afternoon.

Hey, Mark.

Dr. Bob, can you remind us, just the last time we kind of went through one of these big semi cycles, when it started down, were you all kind of leading indicators of a downturn or lagging indicators of a downturn? I seem to recall the conference call that you were relatively early in saying that you were seeing a slowdown in demand in semi OEM orders.

Generally, our bookings lag what happens in the OEM business -- what happens in semiconductor electronics business.

Back in 2000, we did start to see a couple of cancellations, and you came out fairly early, as a result of that, Bob, and said that, you know, you thought the worm had turned.

Well, that's right, but I don't think -- I don't want to debate here -- I don't think it was a result of order bookings at Cognex. What we saw is our customers competitors, in particular, in the wire bonding center, we saw the Kulicke and Soffa was reporting somewhat lower numbers, and our customers who are competitors of theirs kept on ordering at high rates. We told our customers that that was unsustainable, and we wanted them to rethink their orders. They didn't rethink their orders until two quarters later when they canceled them, of course, and we reported on all that. So I would say our business is generally not a leading indicator.

Okay, are you seeing these --

We don't see it coming.

Okay, so compared to what you saw in second half of 2000, you're not seeing any of those sorts of signs of weakness in the order flow, generally, for semi cap equipment?

That's correct. I'm not going to make a comparison with 2000, but I will say, right now, things look very rosy.

Okay, good. In looking at total revenues for the year, it looks like, if you back out the semiconductor and electronics-related revenues, if you're kind of extrapolating for the full year, would about a 60-40 split or a 55-45 split seem reasonable?

I'm looking now --

Just a point of clarification, Mark. When you say "backing out semiconductor and electronics" -- are you talking about just simply backing out -- are you considering just the capital equipment manufacturers in --

No, I'm adding three categories together -- your semiconductor capital equipment, electronics capital equipment, and electronics other.

You should also add semiconductor other, right?

Yes.

So that would be --

So that's about 60%.

Now we know what you're talking about, what was the question?

Would you anticipate that that mix of revenues would be about the same for the rest of the year or are you anticipating that it would be shifting one way or the other?

I have no reason to think that it wouldn't just continue on those relative ratios.

Okay.

I don't know that it would change -- it might tip slightly more on some of the semiconductor and electronics capital equipment might be down a little bit but not dramatically simply because of the big upsurge in orders that we had in the first quarter that have been part of Q1 and Q2 shipments. The order level has come down a little bit on that or whatever, but I can't -- you know, I don't think that there's going to be, you know, huge and dramatic shifts or whatever, but it might just be a little dampening on that percentage.

Okay. Great, thank you very much.

You're welcome.

Thank you. Our next question is coming from Alexander Paris of Barrington Research.

Good afternoon, good quarter again.

Oh, thanks a lot.

Just to summarize on this semiconductor area, because the last three weeks you've got all the media talking about the semiconductor business is slowing down, and then the last I saw, from the SIA, the semiconductor capacity utilization rate was 93%. So, just to summarize what you've been saying, are you saying there was a really big spurt, maybe a catch-up spurt, early in the year? There has been some sequential slowdown as customers are taking a breather, but, as far as you can see, from customer talk that that was just a breather, and so things still look pretty good?

I'm going to go better than that for you -- I will -- the surge from Q4 to Q1 was dramatic. So the slight drop that we're seeing from Q1 to Q2 still leaves Q2 much higher than any of the quarters in Q3 -- in 2003.

Okay.

You got it?

Yep. And the outlook still looks like we're nowhere near a peak, I would presume, from the sentiment that you're hearing.

I've been looking at the orders coming in last week, and they're fine.

Okay. On the last conference call I think you were talking about a major new directions, I think, the very low-cost sensor, the direct-part marking and then the new commercial business. Just to review of timing, is that the door business -- that's actually shipping this year?

Yes.

Yes, we already have purchase orders and units have shipped.

Oh, great.

I don't want to lead anyone to think that it is going to be an enormous business, it's not. In particular, the door sensor called the "People Sensor," is a high-end product for certain kinds of security doors -- those used in airports and banks and brokerage houses, things like that. The larger business is for the more mundane kinds of doors that you see in shopping centers, malls, hotels, and whatnot, and we now have significant interest in the development of a lower-end product, which we are doing.

And then, secondly, the direct-part marking, I think you announced since the last conference call some new upgraded software for that, and you've been talking about the Department of Defense new ruling that took effect in January. When do you expect to be seeing some demand from the Department of Defense for your readers?

I don't think it will be from the Department of Defense. The Department of Defense is requiring their vendors [audio break] parts, so it's vendors and the people who service the Department of Defense that will be issuing these purchase orders. Airplane manufacturers -- we are already selling our product to many jet engine manufacturers and parts manufacturers. We are already starting to sell our product, and it is being accepted as the standard now in the industry.

Right, but the government is going to need some readers to read the markings, aren't they?

I don't know if the government reads them or if the repair depots -- I don't know the -- you know -- know all the details of that business. It's still a small business, it's expected to be larger, but it is likely the government is going to be a customer but, right now, we are not calling on the U.S. government, we are calling on the companies that make products that the government buys.

Okay, and this contract you've got with Oji Paper -- maybe I was just not on the ball, but the Winder Advisor -- is that a new product that goes along with your SmartView?

Yes, it is an option to the SmartView product that controls the machine that rewinds the paper before shipping it to customers -- rewinding it to the right position so that the flaws and defects can be cut out and the paper seamed together. So that is -- it's not a breakthrough product, it's a good product, and it's nice to see that our new products are being sold.

It sounds like it's newer than a SmartView, and you've got a follow-on product from the company who already bought the SmartView, is that right?

That's correct. Oji Paper -- what was record about that order was not so much the dollar value, which we could not -- we didn't get the permission to disclose, but with the fact that we got so many follow-on orders, I don't know, two or three, from a major Japanese paper company. It's the first time that we've had that size purchase order from a single company.

The main advantage of the Winder Advisor, Alex, is that it allows the user, in trying to -- if you are rewinding the paper, a huge roll of paper, and you're trying to find the spot, and you stop it, the paper has a certain amount of momentum, and you could be anywhere within 10 or 15 feet of the spot that you'd want. Our Winder Advisor will get the paper to stop within a couple of inches of the exact spot where it's required to make whatever correction or modification that is necessary. So it really does save an awful lot of time for the operator, for the people, in the paper mill in order to make those corrections.

So SmartView finds the defect, and Winder rewinds it to the point where the defect is?

Yes.

You're right. That's right. That's the way to do it. As the paper is being made, it's being made at very high speeds. As a matter of fact, we were just installed in a mill where I believe it's moving at 68 miles an hour, and it's, as I recall, more than 28 feet wide, and we're looking at millimeter-size defects. So what SmartView does is detects all these defects and sends a signal to a marker that marks -- sprays some ink, I believe, on the edge of the paper where those defects are. But you can't stop the process to remove the defects at that point. It's moving at 60 miles an hour, and the paper machine is making paper. So all of that paper gets wound up now. It's all in a big roll. What the company then has to do is take that used roll with automation to another piece of machinery that rerolls it at a fast speed -- but not 60 miles an hour -- and then we look at those marks, and tell it when to stop while those markers going by --

-- and then what do they do at that point? They cut it out of there or what?

Yes, they may stop it and cut the defects out and reseal the paper together, that's correct.

I see.

So the benefit of this product is that it allows them to do this offline, which is very important. You can't repair the paper while it's moving, and you don't want to stop a piece of capital equipment that costs, I think, $20m, a paper mill, whatever it is, or probably more -- so it's done at a different stage, and this machine, the machine that we -- Vision System and software that we sell to them now -- allows the system to operate much faster. They can rewind the paper at a very high speed, and we read the marks that we put down in anticipation of finding those defects, and -- because it's rolled backwards, you see. So we see those marks, and it stops within, I think, three inches of the defect instead of many, many feet that they'd have to cut away.

Okay. Just one other question -- this $2m Accretech order that you received from Japan -- are they a new client or is that -- or not?

Oh, no, that's a new name. Accretech is a recent name. I think it's maybe a year or two ago for a company called TSK, which stands for Tokyo Seimitsu.

Okay.

And so it's now called Accretech. They are the world's leading provider of wafer probers.

Okay, just one other question -- you announced an enhanced version of PatMax software. I guess I was mistaken about that -- in applying for it, you said that's used only for wafer alignment?

Well, first of all, the press release didn't have as much pizzazz as it should have had. It wasn't a new version, it was a totally new software capability that fits in the PatMax family, and what it can do is miraculously find patterns where humans can't even see them, and this has -- this is required on some wafer processing steps in the scanning electron microscope steps where a human can't even see these images, PatMax ultra-low contrast for -- [inaudible] -- PatMax XL, extremely low contrast, is the only product that works properly for these kinds of wafers. It's significant.

I was at the trade show in San Francisco; heard many people come by from the semiconductor industry looking at the demonstration and couldn't believe it. As a matter of fact, I can't believe it. If somebody had showed me those images, and I'm not -- I'm knowledgeable about machine vision, I would say that we would not have the ability to do that, but I want to give credit to one of our chief scientists, [David Michaels], for inventing the technology -- and his team -- to handle these ultra-low contrast images, finding patterns where humans can't see.

Okay, thank you very much.

You're very welcome.

Thank you, our next question is coming from Richard Eastman of Robert W. Baird.

[audio break] Yes, good afternoon. A couple of questions -- I just wanted to go back for a second on revenue breakdown by industry where you talk about the semiconductor and electronics -- you're specific in terms of capital equipment in both of those segments?

Yes.

Is there also, then, a small piece of OEM business that's tucked into these other industry categories?

Exactly right, and it turns out some of them are in packaging. We sell, on an OEM basis, to companies that manufacture packaging equipment or bottling equipment, and the like. And we see that as increasing.

And there's a little piece also that's in surface inspection, Rick.

Okay. You wouldn't want to give us a flavor for that, would you?

Well, if you --

Maybe what the OEM piece is, just so that we can, kind of, you know, look at the trend here a little bit?

That OEM piece probably right now is not much more than around 5% or whatever. You can go back, and you can calculate it, actually, for Q1 because whatever we reported for total OEM in Q1, now you see that we're reporting capital equipment for semi and electronics, it totals 47. So --

So use the difference or percentage -- okay, that's fine. Another question -- in terms of the operating expenses coming out of the first quarter, the guidance was for somewhat higher operating expenses.

Yes.

And was that managed as the quarter unfolded or was that managed to the revenue line? I'm just curious why the op expense didn't grow, maybe, as planned?

We had said that opex would probably grow, and the SG&A would probably grow in the 5% to 10% range, as I recall.

Yes.

And I think it grew around 8%.

Okay, so you threw R&D in there because, without it, it was up 4 -- I think that was the number Bob mentioned as well -- Dr. Bob mentioned.

Okay.

Pretty minor -- I'm just curious if the revenue was a little bit --

SG&A increased 8% on a sequential basis, and we had said 5% to 10%, so I think the 8% falls right within the --

So you're excluding -- in op expense, you're including the R&D?

No, I think what happened is when we talked at the end of the first quarter, we had said that we were going to be increasing expenses mainly -- where we were looking to increase expenses was mainly in selling and marketing, as we were looking to hire additional end-user salespeople and as we were also looking to increase some of our marketing programs. So within that particular area that we knew that we were going to be spending additional funds in Q2, as opposed to in R&D, where we had no such plans.

Okay, okay, that's fine. And then also, in terms of the order trend, we obviously had -- it's kind of tough to come at a number, but maybe a $60m first quarter order number, you know, then $55m in the third quarter we'll slow a little seasonally, maybe we're below $55m for the third quarter. I'm curious, you know, when you check with your salespeople and coming out of SemiCon West, I mean, do you sense there's enough demand in the fourth quarter to see an order level that looks like first quarter again? Or is there any way to gauge that?

No, I can't imagine -- you mean on the semiconductor electronic OEMS?

Well, you know, all I have to work with is the total order number, but I'm just curious if we can strengthen back to the first-quarter level if you feel the market would accommodate that.

I would think that, you know, we're expecting, in Q4, expecting that our end-user business, as it has in the past, will again ramp up or whatever. So whatever the Q1 order level was, yes, I think we could get pretty close to that in Q4 with the continuing increase in end-user bookings.

Okay. So maybe if we get close to it, the mix might be more end-user less --

No, I thought you were asking about the OEM -- semiconductor electronic OEMs being as high as they were, and I don't think that's likely.

Yeah, okay. And then could you also -- Dr. Bob -- could you give us just a checker update? Are we on track there with some prototype units?

Oddly enough, the schedule has not slipped.

Okay. So we're shipping a few products and working on the distribution side?

Oh, we haven't shipped any products yet. Is that correct? We have not shipped any products yet. We expect to do that in -- some prototypes in this Q3.

Okay. And then just, lastly, did we buy back any stock in the quarter?

No.

Okay, very good, thank you.

You're welcome.

Thank you. Our next question is coming from Jim Ricchiuti of Needham.

Hi, it's [Mark Chimsky] for Jim.

Hi, Mark.

How are you doing? Just a question on the business outlook for the markets outside of the semi and electronics market. What's your overall opinion there and how has it necessarily changed from three months ago? Are you getting any confidence there?

We didn't have any lack of confidence this year for those markets outside of OEM and semiconductor -- semiconductor and electronics. We've always been, for the past year or so, quite bullish on our end-user business and on our surface inspection business.

I think recently some of what we're seeing on -- in our direct-part marking business, causes us to be even a little more bullish on that side of the business. It's being very well received. It's something that we got into, I think, at the right time.

At the right time, at the right time.

Okay, great. And a quick question on your tax rate -- you said 29% into the third quarter. Is it safe to assume that a 29% tax rate going into the fourth quarter?

Yes, at this point in time, we are expecting it will be 29% for the year. The accounting rules require you to estimate what it's going to be for the whole year, and you're supposed to do that quarter by quarter and adjust for it. Right now we are operating at the 29% level, and we think that's going to be the rate for the rest of the year as well.

Okay, great. I think all my other questions were answered.

Thanks, Mark.

All right, thanks very much.

You're welcome.

Thank you. Our next question is coming from Suresh Balaraman of ThinkEquity.

Yeah, thanks. Dr. Bob, and I think I want to congratulate for turning around the SISD business, and I think you guys had a recent celebration that you reversed all the -- you made up all the losses that you have had in the business, and which brings us to the question -- as this business gets much bigger, what kind of impact will it have on your overall gross margins?

Well, that's an interesting question. You see, we have a fellow running that -- very competent -- Markku Jaaskelainen, who is a senior VP and general manager at Cognex. He has a lot of experience in the Web inspection business. We keep on telling him to slow down and don't bring in those revenue numbers, because it's going to just lower our overall gross margin. It's a horrible thing. So his bonus is based on the reported gross margin, so he's incentivized the whole net revenue down. But nevertheless, it appears that those orders keep on coming in and, unfortunately, they would -- they do have a negative effect, because those gross margins are substantially lower than the other products that we sell. However, the good news is the other orders are coming in at very high gross margins. For example, that's why we're still able to report 70% margins in this quarter.

Any reason to be significantly off that, even if you have end-of-the-year end-user orders coming in?

Oh, I see your point -- your question is if there was a booming business, first of all, will it boom, and if it boom, would it affect our margins? I would expect, first of all, that any boom that we're going to see in the surface business is going to be matched by a probably larger boom in our end-user In-Sight or checker. So we're not going to see any degradation.

Okay. And also I am -- just going back to your comments on the semiconductor cap equipment orders that you had in Q1 -- can you remind us what it was and any specific reason why you don't expect that to happen in -- to reach the same level in Q4? Or maybe even Q1 of '05?

Sorry, I was still thinking about your prior question, and I want to make a comment. When I said the margins were significantly lower, it's not quite true. Markku and his team in Alameda have done a superb job of redesigning the hardware, and the OEM relationship that we have with Honeywell helps us raise the margins, and, I believe, that our SISD margins are going to be north of 60% quite soon.

Wow, that's great. And the follow-up question I had was -- you said that you don't expect semiconductor-related orders to be anywhere close to the peak that you had in Q1 of '04. Can you remind us what it was in Q1 of '04 and what are the reasons you don't expect that to get back to those levels?

The main thing that happened in Q1 of '04, Suresh, was throughout '03, including in the fourth quarter, there were very little orders that were coming in from those capital equipment manufacturers. It was a one-off type business at the time. In Q1, we saw a huge surge in these orders, as those capital equipment manufacturers were setting up their production line and needed to pull in some inventory so that they could build to their forecast or whatever. The subsequent levels of orders have come down. They are currently at a level that is much higher than any level that we had seen throughout '02, '03, 01, or whatever, but it's less than what was there in the Q1, because in that Q1 there was a pickup in orders, if you will, as they needed to get the pipeline established and get certain levels of inventory within their factories. So I think that's why we're saying that, that having been established what the going rate is going to be is a normal production rate, if you will, as opposed to a production rate plus filling in the pipeline.

Okay. Can I --

Let me give you some numbers behind it, because I know you're hunting for this. I'm going to give you some relative numbers. I'm going to compare Q1 to Q4, and on the back end it went up a factor of 3. Whatever the bookings numbers were in Q4, it was approximately three times higher on the back end on Q1, all right -- about 300% -- or -- 200% with an increase -- then I'll tell you about the front end. The front end went up a factor of more than 2. So a huge significant spike from Q4 to Q1 and, at that time, we certainly knew it was not sustainable. We understood who it was from -- it was to fill their inventory. But the good news is, they're still ordering -- except for Q1, these are record rates. The bookings are still record -- well, record from the --

[inaudible]

Okay, I'm sorry -- sort of record relative to 2002 and 2003.

Yes.

Okay, great. But in terms of revenues -- I understand the disparity now -- but in terms of revenues there's no reason why you guys can't get to those levels over the next -- I mean -- you probably are already above those levels -- but no reason why that cannot continue to grow.

There's no reason why it can't, but if you ask us, and we tend to be rather conservative, you know, we've been burnt before, we're happy with the levels where they are now. You know, we're happy that they're not falling off as the world seems to be predicting they are.

Okay, great.

But there is no reason they can't grow. Another caller mentioned that capacity in some fabs is 95%. Well, if that's the case, then there are going to be some new fabs built, and nobody is going to keep on running things at 95%. That's not sustainable, and it means as the prices go up, they have to build more fabs. So, if that's the case, then, certainly we could reach levels that we saw in Q1.

Great, thanks, guys.

Thank you. Our next question is coming from [Paul Smets] of Capital Flows.

Yes, thank you. Good job, guys. Dr. Bob, is there any acquisition activity that went on in the quarter that you could discuss?

A lot of activity, most of it futile, okay? Yeah, most of my time now is spent on -- a fair portion of it is spent with Dave Schatz on looking for acquisitions and talking to acquisitions. So activity is happening, but we certainly didn't sign anything in Q1 or Q2 -- we didn't do anything in Q1?

No.

Okay.

[inaudible]

Okay. So nothing happened in Q2 that we can report on. No LOIs, but there were many drafts of LOIs on my desk and on Dave Schatz's computer, but nothing signed. I do expect that we will do one or two each year, and that's our target. We'd like to do more. They're hard to find -- good things are hard to find.

Of course, behind that is the perennial question about use of cash. Is that your priority for cash at the moment?

Yes. If the question is what are the possible uses of cash, the most likely uses of cash, it would be acquisition. But let me say that the acquisitions that we've done in the past and that I expect that we'll continue to do are relatively small. We're still a small company, we know what we're good at, and we're very good at absorbing small companies such as those we have in the past -- or divisions of companies -- and those usually aren't terribly expensive. The deal we're looking at now is maybe $15m. So unfortunately that cash is going to grow. It's like a cancer.

Thank you.

Yup, the return on equity is a problem, it's a problem.

Thank you. Our next question is coming from Bernard Diggins of Gardner and Lewis Asset Management.

Hi, good afternoon. Just one quick question, maybe, for Dick -- accounts receivable were up 30% sequentially versus sales, a little bit less than that. Can you just give us some color on that statistic?

We had an unusually low level of receivables at the end of Q1. Collections were real good, especially from the Japanese customers who have, unlike U.S. customers, who do year-end window dressing by holding on. The Japanese do it by making sure that they pay off all of their vendors. So it was unusually low at the end of Q1 at some 46 or 48 days, as I recall.

Right.

That was part of the increase in Q2 and also in Q2 we had slightly more of the shipments that occurred in the last month, in the month of June, than we did in May. So that percentage relationship switched a little bit.

Okay, and, Dr. Bob, if you don't like all that cash, you can dividend it out to us.

Well, as you know, we do -- we have in the past. I can't --

-- indeed --

-- every quarter, it's up to the board of directors, but we are one of the few high-tech companies that does give a dividend, and I would hope, and I expect that we'll continue to do so.

Good. Nice quarter, guys, thanks.

You're welcome.

Thank you. As a reminder, if you do have a question, you may press star, 1 on your telephone keypad at this time.

Well, I want to thank all of you for participating -- oh, is there another question coming in?

There appears to be no further questions at this time.

Once again, I want to thank you for participating in the call and for keeping track of our progress. As I mentioned earlier, we are all in New York City today to celebrate -- open the NASDAQ exchange tomorrow, celebrating our 15th-year anniversary of being listed on the stock exchange for high-tech companies, and, therefore, we will not be available for calls and, if you do have calls, why don't you try Sue Conway, I would suggest, Wednesday morning. Thank you very much and we hope to report to you great news and great results for Q3. Bye-bye.

Thank you and thank you, callers. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.