Cognex Corp (CGNX) 2004 Q3 法說會逐字稿

Thank you and welcome to the Cognex Corporation third-quarter 2004 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Richard Morin, CFO. Sir, you may begin.

Thank you and good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the third quarter of 2004. For those of you who have not yet seen this report, the 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're 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. Now, I will turn the call over to Bob Shillman.

Thanks, Dick. As you can see from the press release that we issued a short while ago, we reported excellent results in the quarter. Both revenue and profits increased over the third quarter of last year as well as the prior quarter. Net income as a percentage of revenue was in excess of 20 percent, which is a long-standing goal for Cognex. And once again, we reported earnings that were in line with the guidance we gave to investors during our July call. Other highlights in the third quarter are as follows. We recorded revenue for In-Sight, about $14 million, our very successful family of low-cost vision sensors. We introduced a suite of Industrial ID readers, which includes 2 different versions of the handheld machine and one fixed mount, all which run Cognex's patented ID Max (ph) reading software. We completed development of Checker (ph). That is our new expert sensor for industrial applications, which will compete with photo detectors in a totally new and quite large market for machine vision. Reproduction units of Checker are now at selected customer sites, and the feedback we have been receiving is very good. We already started training our sales and support personnel on this new product. Last, but not least, bookings from our end-user customers rebounded significantly in September, from the seasonably slow summer months.

I'm going to give you some examples of order size and the applications that we are now closing with In-Sight. At a major tire company to read serial numbers on tires, $130,000 order, to be followed by one that is even larger than that. And an application for inspecting drug delivery patches, as well as inhalers, $150,000. These are all for In-Sight which sells for about $4000 to $5000 per unit. Electrical -- verifying assembly of electrical connectors, $105,000. Taking to make sure that bottles are in cases and the caps are on correctly on the bottling machine manufacturing line, $116,000, and again reading ID $165,000 for reading 2-D codes on engine blocks.

Unfortunately, those are the highlights. Unfortunately, the results of significant lowlight in Q3. During the quarter, business with our OEM customers in the semiconductor and electronics industry slowed dramatically. Orders from these customers were down 38 percent on a sequential basis, and in addition -- I guess I should say subtraction -- they lowered their forecast for Q4 as well. Even though demand from other industries is expected to increase on a sequential basis in Q4, the expected decline from our OEM customers will be difficult and perhaps impossible to overcome in just one quarter. As a result, we now believe that revenue for the fourth quarter will be in the range of 42 million to $46 million, which is below our prior internal estimate, and down by approximately 15 to 25 percent in the results reported today for Q3. At the 42 to $46 million revenue level, we will still be very profitable but on a percentage of revenue basis somewhat less profitable than the first nine months of the year. Because of our continuing success in penetrating other markets with our products, as time goes on our results will be less dependent on the vagaries of the semiconductor and electronics capital equipment markets.

Cognex is doing great now, and we expect to continue to do well. We are a consistent cash generator, both in good times and bad, and because of our profitable business model as well as because of the hard work of our team, we have amassed nearly $400 million of cash and investments and, of course, we have no and never did have any debt. We expect to invest that cash to increase shareholder value through expansion of our business by our acquisitions or through stock buybacks or other investments that can yield a higher return. Now I would like to open up the conference call for any questions you might have for Dick or myself or (indiscernible).

Thank you, sir. The floor is now open for your questions. (OPERATOR INSTRUCTIONS) Saresh Balaraman of ThinkEquity.

Good afternoon, guys. In terms of the Q4 outlook for the semiconductor and actually the back-end semi-cap segment, are you back to the levels you had during the downturn? Do you think it could be further down in Q1 in that segment? And a follow-on on that, do you also have other businesses that have any seasonal patterns in Q4? Thanks.

I guess the question, if you could go back, what were you asking about the back-end versus Q1? I sort of missed what you were looking for Saresh.

Sure. In terms of the semi-cap back-end segment when we look at some of the guidance in the same-store chain (ph), most of those guys are pretty much within the same ballpark of where they bought them in the last downturn in Q4. I was wondering if you guys would be (indiscernible) downturn levels in Q4, or do you think that you too may be seeing above that in Q4?

Compared to when they bottomed out the last time?

You want to compare Q4 or Q3?

For Q4.

Our prediction for Q4 versus the low. When was low? 2001, wasn't it?

Our predictions for Q4 are that they would be above the lows experienced in the prior downturn. Part of that is due to the fact that these customers for the most part didn't go into as significant a wild buying pattern, if you will, than they did the last time, and they don't have the same levels of inventory that they had back then. So we are still predicting in the forecast through the discussions that we are getting with these customers are that their buying levels in Q4 will be above where they were at the low point in the last downturn.

Can you just quantify that a bit in terms of numbers?

No, I don't think so. On your other question, were there any part of any of our other industries or whatever, we're going to see some kind of seasonal difference in the Q4, what we do expect is on our end-user business that cuts across a wide variety of industries, we do expect to see the typical Q4 uptick. Q3 is normally softer due to the seasonal slowdown during the summer months, as Bob mentioned in his opening remarks. And typically, we see a pickup in Q4 from that slowdown that reflects the fact that there isn't the seasonality of the summer shutdowns, plus a lot of companies to the extent that they have unspent capital budgets in the fourth quarter, they tend to make use of that before going into a new fiscal year.

Thanks, guys.

Alexander Paris of Barrington Research.

Good afternoon. A couple questions. From the shortfall in your expectations on the fourth quarter, I know you didn't give guidance in the third quarter, but it would seem to be less than what you had expected. I think you said that. Is the shortfall due to the OEM business was even worse than you thought a month ago? Or is the end-user not up as much as you thought and so, therefore, not offsetting the OEM decline?

No, it is all due to the OEM business softening, and we were at a ThinkEquity conference a while ago and we reported it then. And that softening has continued.

I think you said 25 percent lower than you started. Now, I think didn't you just say it was down 38 percent?

We were down -- Q3 was down 38 percent from the Q2 levels on the semiconductor and electronics OEM customers.

We didn't talk about how it compared to our expectations.

But I think you said in your release. You said it looked like they were going to be about 25 percent less than you had expected at the beginning of the quarter, I think. Well, anyway, the shortfall is all in the OEM electronics and semi business, right?

That's correct.

Within the downturn, I think the last time you said something on it, you were saying the degree of the decline was in the order of the front-end semi, the largest; the back-end less than that, and electronics OEM less than that. Was that still what it looks like?

This time around, the largest decline was on the back-end, and then the electronics assembly machine, the front-end less so.

Okay. So that was at least the three electronic assembly machines?

The front-end semi didn't have the decline like the --.

It depends on what quarter to what quarter, Alex. Ask me specifically. From Q2 to Q3, front-end was flat. The largest decline was back-end at probers and wire bonders.

Maybe I turned those 2 around. It was back-end, front-end, and then electronic assembly equipment.

That's correct.

And that was the same thing it is now?

Well, no, because now front-end is flat. Q1 to Q2, front-end did take a steep decline, but Q2 to Q3, front-end is flat.

Okay. Within the downturn -- within the end-user business, isn't there some semiconductor and electronic business within the end-user business, so it is not just OEM?

That is correct.

So it that also down?

That would mainly be our wafer reader, and yes, it is down.

So the end user then is right on target?

Yes, but the end-user has other major applications that are growing.

Do you still feel that the inventories in your customers' hands in the OEM business is still around 2 months, or is the outlook a little bigger?

Except for 1 or 2. One or 2 of them has over a quarter's worth.

They're now in the 2 to 3-month range for the most part, although there are a couple of outliers that are now almost 2 quarters worth, 5 to 6 months.

Do you still think that at the rate they are going, there is a good chance that they will run through those inventories before year-end?

No, not those that have 5 or 6 months, no, I don't think so.

Well, your previous caller, you were comparing the fourth quarter against the previous bottom to downturn. That assumes that the fourth quarter is the bottom-year, and that is not necessarily the case then; is that right?

Don't know (indiscernible).

The debate is between is this a cyclical downturn in these industries or is a breather from probably getting overenthusiastic in the first half of the year? I think you said before you were more in the breather, heavy breather case.

We didn't see the huge increase in orders in the first half of the year. They were very good, but it wasn't anything like what we saw in the '99, 2000 time frame.

I see. All right, thank you very much.

Janet Ramkissoon of Quadra Capital.

A couple of questions if I may. Dick, first, can you talk a little bit about the currency loss in the quarter and if you could give us a sense of what the exposure might be for the next couple of quarters?

Yes, the currency loss for the quarter we gave back a good chunk of the gains that we had previously. And the main cause of that was the fact that during the month of September, which was the largest month of our revenues during the quarter, that the dollar deteriorated against the euro, going from around 120 to 124 during that month. And the revenues were recorded or the receivable was recorded based upon the average rate, and then at the end of the month we found ourselves losing that amount based upon those receivables.

I would like to pop in here and say that it is not all of that as it looks, because if you look at the first 9 months, we made $73,000. So the goal is really to be neutral on foreign currency, and we're doing that.

I know that, Bob. That is why when you have a year -- a year ago it was a big gain and now you have a big loss. This is why I'm just trying to get a sense of what the exposure might be for the next couple of quarters. I'm not sure exactly how you are engaging in these hedging compounds.

Our contracts are designed to try and smooth out the level over the course of the year. Unless the dollar really tanks vis-a-vis the euro and the yen over the next 3 to 6 months, I don't imagine that our FX gain or loss will be much different than what you saw in the quarter or whatever.

Not to belabor the point, but can you just give a sense of on a relative basis how much of exposure do you -- what percent of the exposure is to the euro versus the yen?

I don't know that I can -- let's see.

Just ballpark, nothing too elaborate.

Well, let me just do a --.

It should be less because we have more revenue from Japan than (indiscernible). (indiscernible) it depends on the contracts we sign; I don't know.

The euro roughly -- represents roughly 25 percent of our revenues and receivables, and the yen would probably be somewhere around 20 to 25.

Okay. Just a different question. With the recent tax bill, do you have a sense of how that might impact you, in terms of the tax rate?

Yes. We expect that the deduction that will be allowed for manufacturers in the U.S. on U.S. business, because among the definition of manufacturers is software developers. That is one of the specific areas that they included. That should help us drive down our effective tax rate in the U.S. Unfortunately, that 9 percent deduction doesn't all kick in in the first year. It takes you 5 or 6 years to get to that. But a preliminary view of the tax law as passed would indicate that we should see a reduction in our effective tax rate going forward.

How much are you earning on the cash these days?

Around 2 percent.

Okay. Just in terms of for you, Bob, in terms of the tone of the business, can you give us a sense of how, just in terms of linearity, how business deteriorated in the quarter? Did it come sort of all of a sudden, or has it just gotten progressively worse as the quarter progressed?

Yes, it started in late August and declined rather rapidly at that point. We hope that this is the bottom. I am looking right now at the OEM bookings numbers, and that is probably a 30 percent decline from July and August, and another 20 percent decline August to September.

Okay. All right, I will give somebody a chance and I will come back. Thanks.

Jim Ricchiuti of Needham & Company.

So you saw flat business in the front end. I assume in the guidance you're giving you're expecting a fairly sizable decline in that portion of the business in Q4?

No, actually that portion -- we're not a very big player. There is not much use of vision in the front-end yet. So we are not thinking about substantial decline on that.

Is it mostly coming, Bob, still from the back-end, the electronics portion?

That is correct. Back-end and electronics would be where I would predict the largest decline will be.

Last time around, it seemed like your OEM customers were much slower to put on the breaks, but yet it still seems like a few of them have again fallen into that trap again. Is that OEM customers in Japan or is it -- I wonder if you could just give a little more color on that?

I don't think that they delayed this time. They were not slow. As a matter-of-fact, the fact that their inventories are generally, most of them are below a quarter's worth of our product shows that they did not overly stock or were slower at hitting the brakes.

There was just a couple of customers where they've got some real -- going out beyond the quarter.

That's right.

Dick, just a comment you made about the end-user market. You expect a Q4 uptick just based on the fact that some of these guys will probably look to extend what is left in their budget. I guess what I am trying to get a sense of is if we are seeing a bit of a rough patch in the economy, do you see the potential for that to hit you in Q1 if, in fact, they're just going to spend what they've got in their budgets now?

Well, typically, if you look at the last 4 or 5 years, our Q1 has historically on the end-user side been lower than Q4, and for the first time in 5 years, that trend reversed itself in '04 where, in fact, we had a pick-up in Q1 over '04 on the end-user side, and that coupled with the pick-up on the OEM semiconductor and electronics capital equipment made for a real strong first quarter for us.

So I think right now, it is a little too early to tell as to what Q1 is going to bring. But so far what we are seeing for Q4, we saw the nice rebound in September getting away from the summer shutdowns or whatever. What we are seeing and expecting for October through December would indicate that we will see the normal pick-up that we have experienced in the past in Q4.

Bob, can you talk a little bit about Checker and how you see that ramping in '05?

Yes, the product looks very good. We are now planning on volume manufacturing of it. It's out in customer sites, preproduction units, and all indications are this is going to be a very, very successful product. The risks are the distribution channel. Will the distributors that we've picked be able to move as much product as we want them to move, and has Jim built a big enough, strong enough team to manage the distributors and to train the distributors. We've been bringing on quite a few people to do that, and I just want to say that that is something the company has never done. That doesn't mean we can't do it.

There are a lot of things we have never done before, but certainly -- and there is no indication that they are not doing it. I don't want to give -- I'm not trying to send a subtle message here. That's the only thing I'm worried about. The product is fine. The product is a winner. The pricing points are right, but what I am concerned about and nothing I can do about is worrying about distribution.

Did you say who the distributors are?

I don't know if we have announced the distributors by name yet, but these are distributors who are handling factory floor control products, motion control products, PLC's, those kinds of programmable controllers. These are distributors and we have known these distributors for years, or known of them for years, and we didn't have a product for them. And we have often spoken to them and they all wanted a product that could be sold by a distributor salesmen to electricians and technicians, not to engineers. Could drop it off, and that's what we plan to do incidentally, drop them off and you use it. If you like it, buy it; if you don't like it, give if back to us. It's that kind of product, and I'm very confident of the product.

It's just that it's an unknown and we won't know until a few quarters into it. Other people have successfully sold products, vision systems, through distributors, but this isn't a vision system, so it should even be more successful because it is so easy to sell and so easy to integrate, and list price of around $1000. So I'm hopeful that we are going to sell about 10 to $12 million in the first 12 months of this year. It's an aggressive goal, but that is my hope and my expectation, and I'm putting pressure on Jim and the team to deliver that kind of number.

One final question, Bob. Any thought to a buyback here, just given the conditions you see there? I'm just curious if you have --.

Well, let's see how the press release was received, and the answer is may be. We've been authorized to buy back $100 million worth of stock. I think we've already bought back about 40 of that -- that particular authorization 25, so there is plenty more to go and we have the cash and the willingness. It's a different part of your brain that has to work on that. It's the investment part of the brain; when is the right price; what is the right price to buy; what is the return on that versus the return on the cash? And we will bring it up at the next Board meeting, I am sure, to see at what price we will take some more stock in. It looks sensible to me.

Okay. Thanks a lot.

Mark Roberts of Wachovia Securities.

Thank you, good afternoon. I noticed as a mix of revenues, the service revenues were higher this quarter than what they had been last quarter. Based on your gross margin guidance, would we assume the service revenue mix would go even higher in the fourth quarter?

A lot of reason for the service revenue increase is that a good portion of the service revenue is based upon deferred revenue, deferred service contracts, etc., that are sold at the time the product is selling, and our product sales have gone up over the last 9, 12 months. And in this past quarter, the product revenue sort of flattened, but now we're getting the benefit of the increased amortization of that deferred service revenue.

Okay. Explain to me why the service revenues have such a lower margin?

Because there isn't the kind of value-add that's involved in the software, and we can't charge that kind of pricing levels for providing tech support over the phone or for providing educational classes when people come in and get trained on how to use Cognex vision.

Okay, great.

Yes, if you can get 30 percent gross margin on service, that is doing pretty well in just about any industry.

So would we expect to see -- I guess following up on that, how long is the average service contract for?

Well, on tech support, some are 6 months, others are 12. Then you have got education services where it depends on whenever the customer wants to take the class or whatever.

But there is none of them that are 4 or 5 years.

Oh, no. No.

All right, thank you.

Richard Eastman from Robert Baird.

A couple things. One, I just wanted to clarify, I think Dr. Bob, you had mentioned the inventory at 2 to 3 months maybe on average, but 1 to 2 customers of 6 months or so. Is that for all of the OE business or just semiconductor?

That is throughout the semiconductor and electronics. It is all of it.

Okay. Then secondly, I wanted to ask you why was Europe actually up sequentially? What drove that third quarter? I would have thought that might have been part of the problem.

Why was Europe up sequentially.

Because they sold more.

Given that it incorporated August and what people normally think would be a slow period for Europe.

But some of that was probably in the backlog, got shipped in early July. August is the weakest month, and then September we saw pick-ups in North America and Europe, not so much in Japan.

All right, so maybe it was a backlog issue early in the quarter?

Yes.

Lastly, just some rough math to challenge you with. It looks like perhaps, given your revenue guidance for the fourth quarter, that OEM sales might be in -- call it $15 million range. Did that leave us or leave that business profitable?

Yes. Very little cost of engineering in that business and very little cost of sales, and the gross margins are very high.

Because I'm curious, you obviously built the infrastructure for the Checker product, and I'm trying to get just a general sense of the incremental margin between the 2 pieces of the business. You're probably not going to help us with that?

No, I will help it in a cursory way, but go ahead. Checker is going to lose money for quite some time, right, because we have a lot of engineering on it and we have no revenue. So it is costly to develop these things and you don't see the payback until later. Also, we have grown a salesforce to sell Checker and lining up distributors, so all of that costs time and money. But I would be surprised if it doesn't make money within second or third quarter of introduction.

Is there maybe 2 to 3 million of op expense associated with Checker? If it is going to do 10 to 12 million in sales, would that be a reasonable number?

Well, one of the problems that we have is we don't specifically allocate (indiscernible). Our salesforce isn't aligned with one particular product or whatever. They handle the entire end-user line, so it is kind of hard to say that, oh yeah, all of these people are 100 percent Checker and these others are 100 percent In-Sight or 100 percent DataMan or whatever. Because our end-user salesforce will cut across the various products.

Okay. Just one last question. In terms of Checker, if we set a sales target at a 10 million plus range for next year, would we still expect In-Sight to grow at 25 percent for next year?

Yes.

Thank you.

This is additive to In-Sight. This is not -- in my view, this is not -- this will not cannibalize any of the In-Sight, the 25 percent.

The one caution I would give you is this year In-Sight had good revenues that is based upon the wafer ID reader, and we may not have that same kind of revenue level next year based upon sales into the OEM capital equipment side.

We had a boom year for In-Sight for wafer. In-Sight comes in a variety of flavors. One of them is a wafer reader, and we did very well with that product this year.

That wafer reader gets sold to both OEM customers and end-user customers or whatever, but we really had a big impact or a nice pickup, if you will, on the OEM side. So the 25 percent compared to this year certainly reasonable on the regular end-user side, but maybe not so much on the wafer ID.

That would not make up more than say 25 percent of In-Sight sales, right?

Can I tell you that? Do we have that broken out?

Let me see if I have that here.

It is about 25 percent this year.

So we will have to adjust that.

Okay, very good. Thank you.

Edward Hemmelgarn of Shaker Investments.

Hi, Ed. I didn't know you changed your name.

Well, it generally gets butchered somehow. One quick question; what is the mix between OEM and end-user revenue? I didn't see that.

The OEM semiconductor and electronics capital equipment represented approximately 46 percent of the Q3 revenues.

It is on the last page of the release; it's the first two lines under revenue by industry. Just add those 2. Edward Hemmelgarn: Oh, okay.

We came out with this page because it was very complicated. We have other kinds of OEMs now, so we decided to be very specific in giving the numbers now.

I just wasn't aware whether you were selling anything into any of the other categories that you classified as OEM.

Yes. Right now, it is low but it is other.

All right, thanks a lot.

(OPERATOR INSTRUCTIONS)

Let me just continue on. One of the OEM products is our new people sensor, which we sell to Horton Automatics for security doors, and that is an OEM, and it is included in other.

(OPERATOR INSTRUCTIONS) Saresh Balaraman of ThinkEquity.

Regarding the dividends, is that (indiscernible) if revenues continue to run along these lines for the next several quarters?

Our expectation is that dividends will continue regardless of the Company's performance, so long as we're not bleeding. We will continue the Company's dividend policy. We have the cash and if we can't find a better use for it, we will give it back to shareholders.

Thanks.

You're welcome.

Tim Curro of Value Holdings.

Did you disclose your backlog number, or is that something that is just in the 10-K?

Yes, we only do that once a year. Let me just add another point to Saresh's question about dividends. I can't speak for the Board, so that would be my opinion and, of course, the Board has to vote whether or not to give a dividend, but I would think that that would be our policy. Well, thanks for calling into the -- are there more questions coming? I understand that there are more questions coming in.

We do have another question from the line of Chris Dion of Atlantic Capital Management.

Hi, guys. Thanks for taking my call. My question is, the SG&A and R&D that your guys are going to have, you're calling for flat on a sequential basis. Is it fair to say that you assume then that the sort of downturn that you're seeing in semiconductor capital equipment and on the OEM business and the electronics business, you sort of believe it to be short-lived or is it a mix of the -- you're taking some cost out there but offsetting it with Checker and some of the other initiatives you've got going on? Thank you.

Well, you know, I don't know whether I believe it is short-lived or long-lived. We run our company based on a number of factors. We certainly have shifted engineers away in a dramatic way, away from the OEM business. There's still quite a few engineers involved in that. A lot of customers still need our product and want the next generation, but we have divisionalized the Company and are investing appropriate amounts in lots of other new products such as Checker and others that we haven't even talked about. So I don't anticipate, if your question was do we anticipate cost-cutting at Cognex because of the slowdown, no.

Because right now, certainly the level of SG&A that's really concentrating on the OEM business is small. As Bob indicated, a lot of the engineering effort has already been redirected, and even in the OEM side what they are working on now is a couple of very specific projects that some of the OEMs still want.

Yes, I would say even as the expected reduced revenue level for Q4, it's probably our most profitable business.

Okay. If I may, I have got one quick follow-on. With regard to the R&D expenditures, I recall I think a couple of quarters in the past you had said that some of the things you have been working on were slightly of a lower R&D level in terms of spend. We have seen it sort of stay flat for the year and just sort of wondering is there something else, some other things that you are working on or can you give us some idea of some of the things you all are working on that may have cause to keep that R&D level back up as compared to what you may have said earlier in the year?

Yes. I think what you're getting at or I think the answer to it is we did cut our R&D as a percent of revenue in the OEM business. Many of those customers are not pushing us for new enhancements to the product, because they don't seem to need them. So as a percentage basis, the number of dollars has gone down dramatically. Where the dollars have gone up are in businesses where we had did not have any and still don't have significant revenue in the expert sensor end of the business. We have quite a few engineers and marketing people working on these new products. And whether it's a people sensor or Checker or the next product that I don't want to talk about today, they are working on those products now. And there is no reason to make any cuts in manpower.

We're going to be profitable in Q4 even if there was reduced levels, and as a matter-of-fact, our profitability, although we're sort of hanging our head down, maybe it will be 10 percent of revenue, most companies would be happy to have those in great times. So as long as we are making money and as long as the engineers are busy on projects that will be productive for the Company in the long-term or the longer-term -- we don't think in long, long-term -- in the next year, then we are happy.

Great, thank you.

Gilbert Scott of Waddell & Reed.

Good afternoon. I was wondering if you have fleshed out the gross margin for the Checker product, and you mentioned that it might be unprofitable for a couple of quarters or so, but what are the breakeven in revenues from a contribution margin standpoint?

Yes, I can tell you the gross margin is expected to be in the high '70s or low '80s even, but I can't speak about the operating profit, whatever, will be profitable. My guess would be, and I haven't looked at the spreadsheets, my guess would be $5 million of revenue and it will be profitable, but that is really a wild guess. Dick, do you want to comment?

Well, this gets back to one of the issues that we discussed earlier, is that we don't really -- we don't really break out sales by the individual products because our salesmen are selling more than one individual things. So those kinds of cost get allocated based upon gross revenues or whatever. So it is hard to say how or when an individual product really gets to a breakeven point or whatever. But certainly at $5 million in revenues, that should certainly be enough to cover all of its related SG&A and engineering expenses at that time.

And the goal also, as soon as this product gets introduced, we'll leave a few engineers on that product to bunt (ph) fixes and small enhancements, but they're going to go on to the next version.

Very good, thank you.

We have a follow-up from Alexander Paris.

More big picture question in the land of the blind leading the blind. It seems just looking that the people expected GDP in the third quarter will be higher than the second quarter. Non-tech capital spending has been trending higher and your end-user general industrial business is following its normal seasonal pick-up. So it seems to me that the problem is just specifically limited to the semiconductor and electronics, and particularly even if the economy keeps growing, as the semiconductor end markets keep growing. So when your clients or customers are talking to you about delaying business, are they talking about being concerned about the economy or the elections or things, or are they just talking about industry's supply and demand characteristics?

Very good question, and had you not asked it, I was going to make that as a closing comment. The downturn that we're seeing is very specific. It is specifically in the back-end semiconductor OEMs and some of the semiconductor fabs where they buy our wafer reader. That is a specific slowdown. Other than that, our customers appear to be -- I wouldn't say bullish, but they are walking around, they're building factories and buying products. We don't see -- this is not a general economic trend that we see.

Thank you.

Jim Ricchiuti.

Bob, I wonder how you would characterize '05 in terms of new product? You've talked about Checker. You obviously had some other products in the wings. I wonder if you could talk a little bit about maybe the gestation period for some of these new products. Is it going to be 6, 9 months before some of them roll through and make it to market?

The goal is, and what Jim wants to do is introduce a number of new products every year, and perhaps a new product every quarter. We know that there are opportunities for these products, and it is just getting the specs down right and making sure we understand what we have to do, because we certainly have the engineering manpower. We have the money and the finances and the P&L to support that kind of R&D. So I would expect no fewer than 3 products next year. Now, they may be still called Checker, but they will be Checkers for different things, and that is what is very exciting about Checker.

We expect to introduce more application-specific products that are very easy to sell and will sell in high-volume. So Checker, the first application for expert sensors which is the general class of product is called Checker, and what that will do is check for assembly verification. Are all of the parts there? It's not 30 parts on assembly; it is 4 or 5 parts. Are they there and are they in the right position? That's it, are they there? Next Checker in Checker version will check for other things. So I expect that those will use the same hardware, just slightly -- some have a different software library, so it should be rather straightforward to introduce those. The issue is which ones to introduce, what features should they have and how big are those markets.

When you talk about the kind of revenues you're talking about Checker in the first year, are you talking about the first application?

That's right. I am expecting now, everybody -- a lot of people around here are more conservative than I am, but I am expecting this product to be more successful than In-Sight, easier to sell. Of course, it is a fourth or fifth the price. You have to sell a lot more units, but this product should sell itself. It really should sell itself. I am expecting that it will be more successful than In-Sight on a revenue basis, not just on a unit basis, of course. And if I look to the curves (ph) of In-Sight, my conclusion is $10 million in the first 12 months for this product.

One final question, if I may. Just wonder how you would describe the acquisition environment out there, Bob. With valuations coming down a little bit, are there things out there you're looking at, or is it basically the same kind of market that you were looking at 3, 6 months ago?

Well, you would think valuations would go down, but the companies we look at, the public ones are thinly traded and oftentimes are influenced by of a small press release, and valuations are through the roof, ridiculous. They are just not supportable. On the private basis, we missed out on one; we were looking for one. We offered more than the competitor, not a competitor of ours by the way. It was going to be a potential customer of ours, and we lost out on that based, I believe, on terms and conditions and the relationship between us and the potential company. But there's better news, because the better news is now the acquiring company -- well, let me leave it there. We think there is going to be the silver lining in this cloud.

Okay. So we will hear more about that in the future?

Yes.

Thanks a lot.

Sir, there are no further questions. I'd like to turn the floor back over to you for any closing comments.

I would just like to say that things are still good here. We are all working hard. The engineers have projects that they are excited about. The new products are exciting. This is part of being in the semiconductor business. When the business turns up, it is great, and when it turns down, it is not so great. We love the business. It is just hard to keep the quarters continuously on the upswing. Certainly, we'll have no problem reporting some very nice margins and profitability in next quarter, and I assume in all the quarters of 2005. That's it from here. Thank you very much.

Thank you, ladies and gentlemen. This concludes the teleconference. Please disconnect your lines at this time, and enjoy the rest of your evening.