Cognex Corp (CGNX) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cognex fourth-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 introduce your host, Mr. Richard Morin, Cognex's Chief Financial Officer. Sir, the floor is yours.

Thank you, and good evening, everyone. Earlier tonight, we issued a press release announcing Cognex's earnings for the fourth quarter and full-year of 2004. For those of you 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 recent Form 10-K, for a detailed list of these risk factors. And now, I'll turn the call over to Bob Shillman.

Thanks, Dick. 2004 was indeed a great year for Cognex. Revenue was $202 million, which represents an increase of 35 percent over the $151 million reported for the prior year. And we were highly profitable with earnings increasing at an even faster rate. We reported earnings of 80 cents per share for 2004, which is more than double the 36 cents per share that we reported in 2003.

The revenue growth in 2004 is attributed to two particular areas. First, demand from our customers in the semiconductor and electronics capital equipment industry was significantly higher in 2004 than any of the previous three years. As many of you know, demand from these customers historically has been highly cyclical with slow periods followed by exceptional growth. Well I'm happy to say that 2004 was one of those growth periods as revenue from these customers increased by 64 percent over 2003. However, unlike prior cycle peaks, where those customers represented two-thirds or more of our total revenue, in 2004, they only represented 42 percent of our revenue and that's a direct result of our continuing success in penetrating other markets.

The second growth area in 2004 was sales of our Modular Vision Systems to discrete manufacturers in a wide variety of industries. I am pleased to report that this business grew quite nicely during the year with revenue from these customers increasing by 29 percent over the 2003 levels. Much of the growth in the discrete manufacturing area over the past several years has been from In-Sight, our first family of low-cost vision sensors. I'm happy to report that in 2004, In-Sight once again set new bookings and revenue records. For the year, In-Sight bookings were in excess of $60 million and revenue was slightly more than $55 million, each of which represents an increase of approximately 40 percent over the prior year's performance. This growth is attributed to both increase in business in the discrete manufacturing area as well as to record sales of the In-Sight wafer reader to semiconductor capital equipment customers.

While 2004 was a slow year for the Surface Inspection industry in general, I'm happy to report that Cognex significantly increased its share of the market. We believe that our market share is now greater than 50 percent, which is a significant increase from the 25 percent or so market share that we reported just a few years ago. In addition, Cognex set a new annual bookings record of $30 million for SmartView, our new service inspection product.

Net income for 2004 was 19 percent of revenue, which is an impressive increase over the 11 percent of revenue reported for 2003. This significant increase in profitability for the year is due to two things -- revenue growth, as well as our tight rein on spending, as we invested only in strategic areas such as sales and marketing.

Key initiatives in 2004, including adding to our team of cordica (ph) and salespeople, increasing spending and marketing communications, and hiring additional people to build and manage the distribution network for Checker Model 101, the first product in our family of expert sensors, which was launched in Q4 of 2004.

With regard to distribution of our product, we entered 2005 with nearly 40 sales engineers in the United States and more than 30 U.S. distributors trained on Checker. Although we only recently started to ship production units, I'm pleased to report that the initial feedback is excellent. Customers with early shipments tell us that we have really hit the mark and the distributors that we've lined up are very enthusiastic. It takes a lot of technology to make VisionPro truly easy to use, and early indications are that we have a real winner with Checker 101.

The only negative item in 2004 to report was the slowdown in the second half of the year from our customers in the semiconductor and electronics capital equipment industries. This significant slowdown negatively impacted our results for the fourth quarter, causing revenue and earnings to decline on a sequential basis. However, our Q4 results were up compared to the prior year's fourth quarter and also we were in line with the guidance we gave to investors during our October call.

Even more importantly, bookings from other industries in the fourth quarter nearly offset the shortfall we experienced in this semi-equipment market, leading us to believe that although Cognex's overall performance will continue to fluctuate somewhat in the future with our semiconductor cycle, that those variations will be smaller than in the past due to our continued success in growing our business into other applications and industries.

Looking forward into 2005, we believe that sales of our new product offerings, together with our investments in sales and marketing, will allow us to grow our factory floor business quite substantially, though it is too soon to tell if that growth will entirely offset the slowdown that we're currently experiencing in the semi-cap industry. Nevertheless, irrespective of the depth or duration of the slowdown in the semi-cap industry, we expect to remain highly profitable in 2005 and beyond. Now I'll open the conference call for any questions you might have for myself or Dick and his team.

(Operator Instructions). Suresh Balaraman of ThinkEquity Partners.

Thanks. Dr. Bob, when you talk about the semi and electronic capital equipment in bookings, you are down pretty substantially in this quarter. And do you think the next quarter, which is calendar of Q1 would be the bottom? And can you give us a sense of how big the bookings or how small the bookings would be in calendar Q1 and semi and electronics capital equipment? Thanks.

Well, I will tell you that -- I'll answer the second part first. The run rate that we're seeing in Q1 is about the same as the run rate you saw in Q4 '04 in the OEM business -- in the semiconductor capital equipment OEM business. Regarding when we reached the bottom, based on the comment I just made, I think we are at the bottom. And the customers that we're talking to expect an upturn in the second half of the year, though I don't know what they're basing that on.

Are there other segments that can experience seasonality and lumpiness that can take your calendar Q2 levels below the calendar Q1 levels or overall level of business, do you think?

Well, traditionally August is a slow month, but we usually make up for that in October, November, December. So I don't believe other than August being a slow month in Europe and parts of Japan, I don't believe there is seasonality in our other businesses.

I'll come back for more questions.

Sure.

Alex Paris of Barrington Research.

Good afternoon. Just a couple of quick questions. Checker, do you have any estimate on what you're expecting for 2000 sales?

Well 2005 sales (multiple speakers), I will be disappointed if we don't sell $10 million this year.

Okay. And are you aiming at any particular sector or the initial orders that you're seeing feedback, is there a pattern of a particular industry, like at the autos or just basic manufacturing or from electronics also or what?

The orders that we have are not sufficient to base any conclusion on. However, the product was designed primarily for the automotive industry, not just for the big three or big four or whatever, but for the subcontractors that provide products to them, and also the packaging industry -- consumer packaging industry.

Okay. And the DataMan -- that's just the handheld equivalent of the fixed-mount inspection reader for 2D symbology and marketing. Is that right?

Well, that's correct. And we have the naming issue, frankly. I was just studying that today and we have an In-Sight product that can read that's a stationary reader or we call them a fixed-mount reader. And then DataMan is the handheld. We will likely -- I think in the future just use DataMan to mean any I.D. reader, but we haven't made that decision yet.

Can you see anything happening here from the Department of Defense -- that supposedly any orders this year in January have to be marked -- any shipments? Or any of your customers clutching up and say hey I need a reader yesterday?

Yes, those tend to be in the aerospace area and also in the electronics area. We are getting some substantial -- I should say starting to get substantial orders and commitments from customers who make jet engines and the I don't know that we sell directly to the DOD. I believe that we don't.

The records --

It's driven by the DOD. A lot of this is driven by the DOD.

The record SmartView orders in the fourth quarter, did that contain any of that Chinese steel order that you got?

Yes, that was included in the total for the quarter.

Just one more question. At your last conference call, you said your average orders from OEM semi-electronic customers was an average of two to three months and a couple of them had four to five. Can you guess at where they are today?

Do you mean their inventory levels?

Yes, the customer inventories of your product.

I believe that most of them are below 4, but the large ones are somewhat greater.

That's -- for the most part, it's probably these days, it's probably around four months or so, and we've got a couple of outliers that are in the 6 to 7 month range.

That sounds like they went up during the quarter. Wouldn't they be eating into your inventories during the fourth quarter if they(multiple speakers) ordering?

No, I think that's based on their lower sales expectations, Alex.

Oh, I see.

Their sales have gone down faster. And we did in fact have some shipments that did occur to those OEM customers that in the fourth quarter, based upon firm backlog at the end of the third quarter. And to a certain degree, those shipments were probably -- for some of them, they ended up taking in more from us then they ended up turning around and selling during the quarter.

Okay, I'm sorry. Just one more quickie. The 26 percent tax rate in the first quarter -- is that a good rate to use for the whole year?

Well, that's our current anticipated rate for the whole year. The current accounting pronouncements require you to use what your annual effective rate is and that's what we presently think the year will turn out to be, Alex.

Okay, thank you very much.

Jim Ricchiuti of Needham & Co.

Thank you. I wonder if you could comment on the strength you saw in the automotive market in the fourth quarter. Is that seasonal? It looks like it was also up nicely from year-ago.

My understanding is that it is not seasonal. It has to do with more feet on the street and more products.

Okay. Bob, is that -- I wonder, is that In-Sight related or is it just broadly -- (multiple speakers) --

It's In-Sight related and probably and there was one large quarter from a tire manufacture of a tire tracking application -- a very interesting application, a larger order, and it was In-Sight.

And on -- looking at In-Sight revenues, it looks like it was up about 17, 18 percent year-over-year, which seems like a pretty strong number considering the weakness in the semiconductor portion of that business.

Well don't forget though in the first two quarters of the year, there was significant purchasing by the semiconductor companies, and a fair amount of revenue came out of the In-Sight wafer reader.

Okay. And lastly, on the Surface Inspection business, as a percent of revenues, it was up significantly, yet your margins were pretty healthy, your gross margins for Q4. Can you comment about -- to what extent you're seeing some improved margins in the SISD business?

Yes, a couple of the key things on the margins -- we had two things that really affected it. One, we had some favorable purchase price bearings as it continued, based upon our having produced and purchased much more over the course of the year than was originally anticipated when we set up our standards based upon the prices from the contract manufacturers. So we continued to benefit from that. And there was also a product mix benefit in that we had an increased level of software license revenues in Q4 as compared to Q3, which really didn't have any related cost of goods.

Dick, is there any way you can quantify the last part -- the software license revenues that wasn't in Q3?

The delta was probably about $1 million.

Okay, okay. Just with respect to the commercial business as you look out over '05 -- obviously you don't have great visibility in that business either -- but yet, you seem to believe that it should be a pretty good year for you. Is that based on just the overall strength in the economies, (inaudible) Europe, Asia and U.S.? Or is it -- I assume it's also partly due to the new products?

Yes, we typically don't think in terms of macroeconomic issues, Jim. We have just introduced DataMan that was recently introduced in the Fiesta, it's starting to take off, and all these direct part marketing applications. Checker is going to add, I believe, $10 million of revenue. In-Sight typically has grown substantially year-over-year. So it's based on product performance as new products primarily -- growth in new products as opposed to any issue about the economies.

Bob, can you --

And also I'm adding salespeople. We added -- I can tell you we added 29 new sales engineers around the world in 2004, most of those being in the end-user space.

Yes, and actually I was going to follow up on that. Is there any -- can you give a sense as to how you see that expanding in '05? Are you going to be expanding in that area -- adding some additional salespeople and perhaps in what areas?

Well, one of the larger initiatives is going to be to sign up distributors for some of our products. We have found that In-Sight is easy enough to use, that it can go through distributors. And of course we built or we're building the distribution network primarily for Checker; but at the same time we're finding that some of these people can handle In-Sight as well. These are people who used to sell, for example, DVT. So I don't have the exact number of salespeople that we expect to increase our sales force by this year. But a lot of effort is going to go into signing up distributors for -- primarily for Checker. We're going to have many more feet on the street by the end of -- even by the middle 2005 than we ever have.

Okay. One last question and I'll turn it over to somebody else. On the distribution side, do you have an ideal number of distributors you'd like to see by say mid to end of next year? And is that -- what you've signed up right now, has that been primarily North American?

Yes, we've signed up primarily -- the ones that are signed up, I think I said it was 30, are in North America and Europe; and Asia are about a quarter behind or maybe two quarters behind the United States. Dick, do we have a particular number for how many distributors? I don't know that we do or if we want to disclose what that is.

No, I don't know that we have any set number or target. We just -- we've got the 30 or some odd now, and we're looking to add new distributors and start moving to adding distributors or whatever overseas. But there is no set figure or target at any particular point in time.

I think, to be frank with you, that Eric Ceyrolle, who is managing both Europe and the Far East, is now involved in their planning phase.

Great. That's it for now. Thanks.

Thank you. Mark Roberts of Wachovia Capital.

Thank you. Good afternoon. Couple of questions. First of all, Dick, on the foreign currency breakout, is that an aggregate number or is that gain specifically from certain treatment of foreign currency in that there are other foreign currency effects up above the operating income line?

Yes, there are foreign currency impacts on almost any line in the P&L to the extent that we deal in foreign countries or whatever. If you compare, for example, more than half of the increase in operating expenses in Q4 over Q3 occurred simply due to the fact that the dollar deteriorated compared to the euro and the yen, and so expenses that were translated at the average rate during the quarter, when it got into U.S. dollars, turned out to be much more significant.

But what is on that line -- one of the principal things on that line was we were able to settle some intercompany payables when the euro in fact strengthened vis-a-vis the dollar by about 6.5 percent during the quarter. So because our Irish subsidiary has been profitable this year and been generating cash, we were able to settle a good chunk of that intercompany balance on a current basis during the quarter, and realize that 6.5 percent gain.

Okay. If you were to net the other foreign currency effects against the 1.6 million, can you give us at least a round -- a rough number as to what the net effect of foreign currency was in the quarter?

Yes, it probably would have been the amount that you see on the FX gains, I probably would have decreased by about 1, 1.1 million.

Okay. So the net positive effect of foreign currency was really not 2 cents. It was something a little less than a penny -- or about a penny?

Well, if you take the -- you're taking the million 6 there and reducing it by about 4 or 500 K?

Should I -- okay, is it reducing by 4 or 500 K or do I reduce it by 1.1 million?

No. You reduce it by 4 or 500 K.

Oh, okay, okay. Alright, That's helpful. And the next question, Dr. Bob, on next year, you have a -- seems to me a broader product line than what you have had historically. Is that adding to your stability and visibility into sales and revenue projections? Or is that adding more complexity and uncertainty?

Well, that's a very good question. The most predictable kind of business was our old OEM business, where people gave us forecasts that went out a year or two years or more. So I can tell you this -- that the more products that we have specifically for the non semi markets, the more likely our revenue is going to grow and not be affected or be quite a bit less affected by these ups and downs of semi. But I don't know if it's as predictable. Right, because in particular, backlog will be shrinking when you get into more of these end-user kinds of products, as we are. Customers order them and they expect them to be shipped in a week or two weeks. So you don't have the predictable backlog that you would have when you have large OEM customers that give you these forecasts.

What I would say to that, if I might is what you get with the OEM type business is the predictability can be difficult relative to the cycle swings or whatever, which are much less when we're dealing with these other markets that we're getting into. But the one thing that you don't have that you did have with OEM customers -- OEM customers will normally give you at least 60 to 90-day P.O.'s and a forecast, as Bob said, going out at least a year or so. These other customers in the end-user market factory floor, they have a particular application that they're looking to do on their factory floor and they're looking for something that's going to turn around within a couple of weeks, not a couple of months. So that you don't quite -- while it might be -- it's not subject to the same cycles of the semiconductor industry, you don't get quite the same level of visibility with P.O.'s extending out a number of months.

Let me say it in a different way, Mark. That in the OEM business, we pretty -- except for the cycles, we knew to whom we were going to ship what. That was the certainty. In the end-user business, or the business which is now growing for us quite well, we know what we're going to ship, but we don't know to whom. So I think it's quite predictable that we are going to grow because we are in many, many different industries, where they need machine vision and we seem to have the right products. So we know -- or we're pretty confident that we're going to grow. We expect that we're going to grow. But we don't know who we're going to sell it to until the order comes in.

Okay, great. That's helpful. That's all my questions. Thank you.

Richard Eastman of Robert W. Baird.

Just a couple of questions. Dr. Bob, could you just quantify how much business you did in '04 in the product I.D. area and perhaps maybe the expectations for growth there?

I believe we have that number. And I think we have it broken down. I'm not sure -- Dick, you decide whether we're going to disclose the number,, but we have it broken down by product I.D.'s of semiconductor versus product I.D. for other applications. We don't expect growth in the semiconductor portion of product I.D. We do expect significant growth in the non-semiconductor product I.D.

Industrial I.D. -- if you exclude the wafer I.D., all right, industrial I.D. was about $3 million in 2004.

And then, just to get a sense of your exposure with the In-Sight product to the wafer I.D. market?

No, no, In-Sight -- there is a model of In-Sight that does read wafers.

But as we laid out, I think you said about 55 million in sales for In-Sight? What portion -- I'm just trying to get a sensitivity level to the semi cap equipment market. But what portion of that In-Sight sales number is wafer I.D. for the front end?

Okay.

About 15 million, roughly, of 55 million came from I.D. and --

I.D. for semi or I.D. total?

No, I.D. for semi -- wafer I.D. -- 15 million out of the approximately 55.

Okay, so we -- and obviously front end is a little healthier than back end, but we have some exposure there. And let me ask you, on the backlog number, just so I can understand the magnitude of SmartView orders in the quarter, would the backlog or orders have been up in the fourth quarter?

Orders were significantly up in the fourth quarter. But I think that's just timing issue.

What did you mean by --

I'm sorry, say it again. I made a mistake.

SmartView is one of your bigger ASP products. And if you pull that impact in the fourth quarter out of orders, you make a comment that orders were up 12 percent in the fourth quarter year-over-year. May have been backlog number. But I'm curious, if you pull out the impact of the surface inspection business --

Go ahead, Dick. I made a mistake. I said they were large. They were not large in Q4.

Yes, the MVSD backlog in fact declined versus Q3, but the SISD backlog increased.

No, I understand that. So the biggest impact on the order number was from the SmartView product?

Correct.

And then just two more things. One is on the op expense line. You talked about the first quarter declining sequentially. Is that largely the impact of the bonuses rolling off? I mean we paid those in the fourth quarter. We're going to see the sequential decline in the first?

That's principally due to bonuses, and if you will, incremental commissions or whatever because a number of the sales guys hit their bogeys, and they get bonus commissions as well.

In the fourth quarter, you're saying, and they'll be down in the first?

Yes, and in the fourth quarter also, we had a lot of T&E related to sales meetings and training to get the group all trained on the new products so they could hit the ground running in '05 in being able to sell the product.

Okay.

Expected that that will be down a little bit as well.

Okay. One of the impacts you mentioned on the gross profit margin line was this favorable purchase price variance. What, against a standard, but what's that related to? Is that related to some kind of subcontract production?

Yes, we have prices established and our standards established at the beginning of the year. The volume was much higher than expected and so we ended up realizing some favorable purchase price variances. And we also had an improvement in the margin on the surface inspection product during the quarter as well.

So you take that volume adjustment in Q4, is what you did at the gross margin line?

No, we take it each quarter as the inventory turns.

Okay. And then just the last question, and maybe this is -- you are probably not going to be real specific here. But if I look at sales in '05, and we look at the OEM business as it performed in '04 and look at where it exited '04, my math might suggest that the OEM business could be down 30 million, 20 million for '05. And if we -- we need to offset that OEM sales decline with Checker's 10 million and new product revenue. And so would you happen to be budgeting for an up sales year in '05? Or how do you -- which direction of zero percent growth should we be thinking?

I don't think we're giving any guidance (multiple speakers).

Okay. But that would be -- those would be the general trends?

You understand the issue.

Yes, you're absolutely right. We expect that our semi capital equipment revenue would probably be down, and we do expect that the other part of the business can grow over this year.

One will overcome the other; we aren't prepared to discuss yet.

Understood. Thanks.

Thank you. Jim Ricchiuti of Needham & Co.

Thanks. Bob, can you give a little more color on what you're seeing with some of your back end customers?

Yes, the principal area where we're down in Q4 was in the prober area. And down to lesser extent in the wire bonder area, but still down.

And you mentioned that some of these customers or maybe more broadly, the customers in the both semi and electronics are expecting a stronger second half?

Well maybe those are the words they use, but maybe they're just hoping for a stronger (multiple speakers). I have no idea. It's the blind leading the blind. Not one of us can predict the future and if you take ten of us, we're no better at it.

Just a final question for me -- just any activity that you can speak of on the acquisition front and where and what you might be --

Yes, we are currently actively involved in a negotiation and document drafting on an acquisition that would be a nice one to have.

Would this be more in the size range of some of your more recent ones -- smallish but more strategic?

No, I'd say it's larger but complementary.

Okay, great.

Alex Paris of Barrington Research.

Going back to Checker, now that's really -- what was the price of that product?

I believe that this price is like 1295. Is that right, Dick?

1500. I think it's 1495, Bob.

1495, and we're going through distribution -- giving the distributors a rather large piece of that margin.

Okay. And it's the type of product that could be sold and installed quickly in a couple of days, right?

Yes, we are already finding that. And I can tell you one large customer -- not a large customer for Checker yet, but a large historical Cognex customer, had it up and running within an hour of taking it out of the box. Up and running and installed within an hour of taking it out of the box.

I guess what I'm getting at is with 30 new distributors and adding a lot more, I would imagine because these are small items that have been moved fast that they would take on a significant amount of inventory.

No, as a matter of fact, we are -- as you might know, we run our company in a rather novel way and break rules. Our rule is you shall have no inventory. We'll ship it to you when you need it. That way, we'll know exactly that when we sold something, it got sold. That doesn't mean to say that a guy won't put two on the shelf; that under no circumstances are our salesmen pushing people to take inventory. Our goal is to ship within the same day we receive the order to the customer.

Just one other question, going back a few years when you bought out the machine vision to Allen Bradley, Honeywell, Hitachi, I think. Wasn't all that to get more feet at least indirectly on the street in the industrial areas that these people would -- since you took over their machine vision, they would be recommending you -- aren't these people a good source of marketing your Checker through?

Well, you're asking two different questions. So let me try to clarify. We bought Allen Bradley's machine vision business because they were just standing in the way of us getting orders. There were many customers around the world who want to buy many things from Allen Bradley and the advantages of those customer said, well if Allen Bradley had the vision, we're going to buy it from Allen Bradley even if someone else is better like Cognex. So we bought that. We bought the assets of that machine vision business. We did not buy the distribution nor were they required to recommend us. So we did not do it for distribution at that time. We did not have a product at that time, Alex, that was appropriate for industrial distribution. And the first such product that is truly appropriate is Checker. Your next point is would those people with those companies be reasonable distributors for us to have, and the answer is yes.

Alright. Thanks, again.

Suresh Balaraman of ThinkEquity Partners.

Yes, thanks. And I have some follow-up questions for Dick. What tax rate should we be using for calendar '05? And also what is the apparent headcount CapEx plans and what kind of depreciation and amortization should we be modeling? Thanks.

As we indicated in the press release, currently we expect that the tax rate for the first quarter would be around 26 percent. And that's probably currently what we expect for the year. Our current headcount is 662 at the end of the year. And we don't see any major increases in CapEx next year as compared to the current year or whatever. It will be probably pretty flat.

Okay, thanks.

Thank you. Our next question is coming from Paul's Svets (ph) of Capital Flows.

Thank you. Dr. Bob, I'd like to follow up -- on what I thought I heard as a comment. On the Checker, you said that you tried to keep distributor inventory low. And did I understand in the example you used, you would drop ship directly to the customer rather than the distributor?

We are currently considering that. When I said we're going to ship directly to the customer, I meant to the distributor. But it could be that we would ship -- drop to the customer. Though I don't think that's what we're doing right now.

Right now, it's still relatively early. We've been shipping to the distributor because the distributor wants to go in and -- or has wanted to go in and make the call on the customer. Our goal is to be able to ship any orders for Checker -- Bob said within 24 hours. That might be a little bit aggressive. But definitely we want to be able to do it within 48. And so we're investing in some of that inventory as opposed to having the distributors do so.

Thank you.

Thank you. Our next question is coming from Hardine Sethia (ph) of the Prince Race (ph) in Zolo (ph).

Hey, I have a question related to inventories that I guess the last two quarters have increased. Can you kind of walk me through the dynamic for maybe the first sequential increase in third to fourth? And then really where, if your comfort zone for receivables and I guess for inventories is changing at all, given what will be a growth in more industrial end markets?

To get to you on the receivables side, I'll do that one first. Typically, our average days sales outstanding rises in the fourth quarter. That was true again this year and that is because an awful lot of our customers hold onto their cash at the end of the year, do a little bit of window dressing. And we find that in the first week of January, we normally get an awful lot of cash. That happened again this year. We probably got within the first couple of days of January, we've probably got five to six days worth of DSO in cash collections.

On the increase in the inventories, it was due to a couple of factors, one of which is, we in fact had increasing inventories relative to our semi-cap equipment customers in that their order levels fell significantly during the quarter. But in fact we had to have placed orders on our contract manufacturer ahead of time. And so we had an increase in that inventory.

Secondly, we also increased inventories for Checker and DataMan and some of our In-Sight products. Checker and DataMan new products being introduced, so we increased -- or part of the increase in the inventory was simply stocking levels of those new products.

If you were to rank kind of the contribution to the increase, is the order you gave them to me a reasonable expectation for how big each one was?

I'm not sure, but let me take a quick peak. I'm not sure that I have --

While Dick is doing that, let me just give you my viewpoint and input on inventory. Our Company has traditionally designed products that have a very long life. We are still selling to one wire bonder company a product at reasonable volumes that we designed 15 years ago. Products like In-Sight and Checker will themselves very long lives, I would think no less than three to five years. And my feeling about inventory of such items that have long life is that we benefit by having them in inventory so that we can ship on a very quick notice to our customers and keep our customers happier and out of the hands of our competitors, who may not be able to ship on time. Now, again, it's only -- I have that philosophy because our products are more like -- have longer lives than bananas. If I was in the PC business, I would want no inventory. If I was selling bananas, I would want no inventory. But these products don't go bad and my pressure on the organization is always to ensure that we have sufficient inventory to meet extraordinary customer demand. Having said that, not everybody listens to me.

Okay, alright. Thank you.

Dick, did you want to get back in about which issue --?

No, I'm taking a quick look here, and it looks like on some of the legacy or -- not the legacy but some of the product for semi-cap that might have increased -- it's hard to -- from the detail that I have here, it's hard to break it all out, because some of our series products are sold to both end-users and OEMs. But it looked like the semi-cap equipment might have been around 6 -- 5 or 600 K during the quarter.

Okay.

I hope that answers your question.

Yes, no, it does actually in one way. So perfect. Thanks.

(Operator Instructions).

Okay. There being no questions remaining, I want to thank you for attending and following Cognex. And if there are any additional questions that you might have, you can feel free to call Susan Conway, who will be in the office all day tomorrow despite the weather, and look forward to addressing any of your concerns and questions and reporting on our results on a continuing basis every quarter. Good bye.

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