Cognex Corp (CGNX) 2005 Q2 法說會逐字稿

Good afternoon, and welcome to the Cognex Corporation second quarter 2005 earnings conference 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.

At this time, it is my pleasure to introduce Richard Morin, 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 second quarter of 2005. For those of you who have not yet seen this report, a copy is available on our website at www.Cognex.com.

This is the first earnings release since our acquisition of DVT, on May 9th. And because of that, for this one quarter only, we've included a lot of detailed information in the press release about our results, both including and excluding DVT, to help you understand the effect of the acquisition.

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, included 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. Good evening, everyone. I'd like to welcome each of you to Cognex's second quarter conference call for 2005. Q2 of 2005 was an exciting quarter for Cognex, due primarily to the acquisition of our largest competitor on the factory floor, as well as to the strong growth of our base business in that market.

Our financial results for the quarter were quite good, with revenue and profits increasing significantly on a sequential basis, whether or not you include DVT in the results. Excluding DVT, as show in exhibit 2 of this evening's press release, revenue would have increased by 14% and profits by 38% over the prior quarter, which was in line with the guidance we gave to investors before we made the acquisition.

Including DVT, as shown on exhibit 1, revenue increased by 26% on a sequential basis, and profits by 47%, which was better than our guidance at the time of the acquisition, due to higher than expected revenue from DVT. Which, by the way, added a full penny to EPS after the purchase price amortization. Even including the purchase price amortization, in other words.

DVT brings to Cognex a very capable, experienced and successful team of people, which I'm pleased to say is even better than we expected. In addition to a good group of dedicated engineers and support personnel, there's a whole structure in place for managing distributors.

As a matter of fact, we recently appointed Bob Settle, who was the person in charge of managing distribution for DVT, to Vice President of Worldwide Distribution for Cognex. In this role, he'll be responsible for consistent implementation of the distribution management program for all Cognex distributors worldwide, which now numbers nearly 200.

We are now in the process of training the 150 or so distributors that came to us through the acquisition of DVT, to sell both Checker and In-Sight. DVT, In-Sight and Checker are sold to discreet manufacturers in the factory automation market, which had very strong growth in Q2. Revenue increased by 38% on a sequential basis and 52% year-on-year, due to the additional revenue from DVT, as well as due to higher revenue from our In-Sight product line, which had a great second quarter.

Revenue from In-Sight sold to the factory automation market, was up more than 10% over the prior quarter and increased by nearly 45% year-on-year.

Other good news was in our service inspection market, where our SmartView product had record revenue in the second quarter. In addition, we sold our 600th SmartView system in Q2, which is only seven months after reaching the 500th system mark.

I did attend Semicon and my comments are short. I felt that the show was slow. There didn't appear to be much traffic in the hall that I walked through, nor at the Cognex booth. It was an okay show, from our perspective. We got some new leads from some new OEMs and some end-users, but it wasn't great.

The equipment companies that I spoke to indicated their belief is that a pick up is going to happen in the first half of 2006. But, I want to remind you that when I reported on this about a year ago, those same people were saying it'd be the second half of 2005, leading us, once again, to believe that no one really knows when there will be a pick up. And we are not planning on that pick up in most of our planning at Cognex.

I'll wrap up before I open up the conference call for any questions. I want to point out that in the reported data that we give you, we are no longer reporting certain things, for example, revenue by industry, on exhibit 5 of our earnings release. Instead, we are reporting revenue by the three primary markets that we currently serve; discreet factory automation; semiconductor and electronics capital equipment; and surface inspection.

The reason for this change is good news. We no longer know the end uses for all of our sales, and therefore, it was becoming too difficult to categorize into which bin they fell. In addition, through the acquisition of DVT, we now have a significantly larger number of distributors and we don't know in every case, or in even most cases, where their products are ending out.

Similarly, we're no longer going to report on the number of new customers, for the same reason. We just don't know how many new customers there are, since many of them will be coming through distribution.

Never the less, we'll continue to give you as much insight--no pun intended--into our business and trends, that we can, on a quarterly basis.

That's it for the formal presentation. And operator, we're prepared to take questions at this time.

[OPERATOR INSTRUCTIONS] Jim Ricchiuti, Needham & Company.

Thank you. Congratulations on the quarter. The margin profile for DVT, for the three-month period, is that what we could expect? Was there anything unusual in the gross margins or is that an operating margin or is that pretty much in line with what you had been expecting? It sounds like it could have been a little better.

The gross margins are a little higher than we had expected to be. Though historically, DVT has had excellent gross margins. They are in line, by the way, with our gross margins for that same product line. You know, our margins of 70% are an average across product lines and across business units, and of course, as we've mentioned in the past, the service inspection systems division has considerably lower margins.

So, they were a little higher than we expected. We believe that there's room to increase the operating margins, because there's room for reducing some of these expenses.

Okay. And Bob, the improvement on gross margin, it sounds like your revenues were also a little better than expected with DVT.

That's correct. They had just a spectacular June and--.

Their month of June set a Company record for bookings and revenues. It was just--it was a very nice and pleasant surprise--.

It was a pleasant surprise, you know. We saw projections, which we usually don't believe entirely when you're going to buy a company. And we said, well, that'd be nice if that happens. But they used those projections appropriately to ensure that we paid a fair price. We paid a lot for this company, as we've said in the past, but we got a lot for it.

Realizing that a lot of their products, much of their revenue is going through distribution, almost all of it, is there any color you can provide on the overall--and this includes your business as well, Bob, as to what's happening in the factory floor or [inaudible]? Is there any particular industries? I know it's going to be tougher for you to comment on that, but is there any color you can provide on where the strength appears to be coming from?

Well, no, I can't tell you which industries. I just don't know. I know that for us, we looked at it and it was still automotive and electronics-related. But I can tell you that more and more industries are finding the benefits of machine vision. And not only the benefits, the imperative.

Without machine vision you have to use people and then your products will become cost prohibitive. Without machine vision, the products that you make won't be as high quality and people won't buy it. And machine vision has gotten to the point where I thought it would have been 10 years ago. It just took a lot longer.

The fact that distributors are now successful with it means that we, and DVT, have been very good at designing products that are easier to use and sell than the products have been in the past. And also, we've both been successful at lowering the cost of these products, both the cost of goods and the selling price, so that more and more people are willing to try them. And, we continue to believe that this growth is sustainable for a number of years.

Jim, just to give a little bit more to that, DVT has been strong in selling into the automotive area. And as we take a look at the regions that had a real strong month, it sort of coincides with the automotive industry. Plus, they've been increasing their footprint internationally as well.

Okay. Two quick questions. Checker, an update on where we stand with that, how were revenues for Checker in the quarter? And also, just a follow-up question. Just on the bookings in the [semicon] electronic area, it looks like you had a nice increase in bookings, yet I was at the Semicon West show as well and I had kind of the same reaction, Bob. Just in terms of what you saw, if you could answer that as--?

Sure. Two separate questions. Let me address the Checker. Disappointed, all right? The revenue, the number of units we're shipping and the revenue are increasing, but you know, there's no [hockey stick] yet. And I expect that to happen. So Checker, the product is not disappointing, it's just the sales are disappointing. And I talked about that in the past about why we believe that's the case and we're still working it. But, the product's fine.

On the other hand, the semiconductor industry, yes, the bookings increased quite substantially this quarter compared to Q1. I don't think that's a trend. I can tell you that came from two or three customers who just ordered a lot of good stuff. Was it in Q2 that we got that million dollars from Sony?

Yes. That was--.

We got a number of orders totaling over a million dollars, just from Sony, and that's for SMD part placement. And that helped. I wouldn't read a trend into it.

Alexander Paris, Barrington Research.

I think my long-term memory--I'm at that age where it's better than my short-term memory. But, a long time ago you said that 70% of the long-term potential for the machine version industry is in what you called in the end-user industrial market.

I said that.

Is that still the case?

No, probably 80%.

Oh, 80% now. Okay. And, with In-Sight, Checker and Legend, I guess, from DVT, plus I guess you have like 190 distributors; 150 from them and then you had 40--.

You're just about right! You've got the numbers.

Okay. And distributors plus the products, is that enough to really make some big penetration in that market?

Well, we're penetrating it now. I mean, the growth has been--what numbers did I just read off recently, when we did year-on-year comparisons? We're growing at a rate of more than 25% a year in the end-user business.

But it should accelerate if there are some synergies here, right, with your acquisition?

Well, no, they were growing at 25% and we're growing at 25%, so the total will grow at 25%. There may be some acceleration in the bottom-line, if that's what you mean. And that's correct. That's correct. But the growth rate on the top-line would be the same.

When you add these 150 new distributors, is there sufficient difference between In-Sight and Legend, or is it a kind of an either/or that they're selling? And which one would be better for what?

It's a very good question. There is considerable overlap in the product lines. We have found that on the lower end, their product is superior to ours in its ease of use. As a matter of fact, we didn't even have a product at that price point.

There will be a consolidation of the product line as time goes on. We don't want the salesmen or distributors going to customer sites with two overlapping products and having a run off between ourselves. That makes no sense. So, there will be consolidation. We're going to give the salesmen and the customers the ability to buy, for the current time, whichever one they want. But the future will obviously be a single line called Cognex, whether it's In-Sight or Legend will depend where on the spectrum of performance it lies in price.

I thought you said at the time of the acquisition--or I thought I read that the Legend and In-Sight were pretty closely priced, the prices were similar?

Similar, but DVT has always been undercutting our prices and making business tough for us. And that won't happen anymore.

Okay, so the lower price is actually discount pricing, as opposed to--?

No. Let me be clear. They had a broader product line at the lower end. So they had a product offering at the lower end that we didn't have. We had In-Sight, a low-price In-Sight, but not nearly as low priced as theirs. So they had a particular product that was price and technology-wise, a very good fit for the market. We were missing that. So, we're going to keep that product for sure.

Beneath that we have Checker. Above that we have both the Legend line and In-Sight. And not all of them will survive. Where they overlap, we're going to consolidate those. So, there are two things. One is, they had a product that was lower cost and lower priced than ours, at a particular price performance point that we didn't have. In addition, they under-priced us throughout the product line. So there are two points.

Just one last question just to test my long-term memory for a few years hence. Do you have any estimates for the commercial side of the machine vision market or is that just too young to--?

Alex, it's a good question. We have estimates in each of the segments. We are now in the door activation business. I don't think we've issued a press release about that. We'll be working on that and I would assume that will be coming out in this Q3. And we also have a people sensor for security doors. So, we [have in] estimates of that piece. But, the commercial business could include many, many other types of machine vision that are not industrial, not factory floor. So we don't have an estimate for it.

I mean, you could include in the commercial end of it, vision systems in automobiles, for example. We could be enormous. So, we have no estimate, other than to tell you that the opportunities outside of factory automation are large and are getting to be realistic. The potential applications are large and some of them are getting within reach. Though, we believe that, certainly for the next two or three years, the factory automation portion of our revenue will be much larger than any of those others.

But would 3-D machine vision have greater applications in the commercial marketing, or will they take bigger pictures, like of traffic intersections and things like that?

Well, 3-D has got good applications. You're absolutely right. Our product called PeopleSensor, which we've just heard will be installed in certain airports around the country. And that will be the subject of another press release, I assume.

And that is 3-D?

That's 3-D. Yes. And that's self-developed. We developed our own 3-D and certainly for traffic--currently, traffic is not done using 3-D. Most of the traffic analysis is done using people looking at monitors, though there is [certainly] a business of looking at it with 2-D vision. 3-D vision would be, I think, quite a bit better. And that may be an area that we'll play in at some point in the future.

But these are all emerging areas. They all have opportunity. Of course, they have challenges, not just the technical challenge, but the distribution challenge. You can have a camera that can identify cars, but who's going to sell it and who are you going to sell it to? So, all of these are complex business issues, but we're good at attacking those kinds of issues, too, these days.

All right, thank you very much, and again, a good quarter.

Rob Mason, Robert W. Baird.

Just a couple of things. With the performance in DVT in the quarter, do you feel compelled to update your guidance that you issued on that acquisition, or at the time of the acquisition, either for sales or earnings contribution?

Well, I think that when we gave a range we said the--I think we said $15 to $20 million for the year--.

Well, it depends on what you mean for the year, too, Dick.

For this calendar year, we said that DVT would add probably a total of $15 to $20 million for the fiscal year. And we're a little bit on the--we did a little bit more in Q2 here that just closed, than we had originally estimated, but that sort of probably falls within getting us closer to the $20 million than the 15.

Also, we guided you--I think we guided you to EPS-neutral in the first and second quarter, and we did better than that. And this includes the expensing of the excess purchase price in amortization, which was somewhere around $700,000.

$700,000 pre-tax.

Right. So, as you get into more intensive training of the DVT distributors, is your accretion estimate going to be affected any?

Well, when you talk about the additional training, that's going to be more towards getting them up and running and selling the current--.

It doesn't mean spending more money, right? I didn't understand the point.

I'm sorry. I guess, the current run rate or--?

Oh, will it increase?

Yes.

I'd hope so. We hope that it's going to accelerate Checker. And I don't think it's going to accelerate the amount of business they're going to bring in. They've been bringing in this business. Whether they have a DVT product to sell or a Cognex product, isn't likely to increase how much business they bring in, other than Checker. Checker may attack other opportunities at the customers they're at.

Okay. And do you have a flavor on the timing of when maybe the DV channel would be more synergistic to your Checker product or your In-Sight product?

I think that by the end of Q3, they'll be fully trained on all of our products.

There's currently some of the distributors that have been trained and have generated some level of revenue, but it was insignificant in the second quarter.

Okay. And then just lastly, there was a notation in the press release about some additional end-user salespeople as well. I was just curious, with the expansion of the distributions channel, where those people might be falling, the end-user salespeople?

Those were personnel that we had at--most of those personnel were added in calendar 2004. It was as we looked at doing the quarter-on-quarter comparisons. If you take a look at the second quarter of '05, versus the second quarter of '04, we had added a number of additional salespeople, that we had begun doing last year, before even considering the acquisition of DVT.

Jonathan Dorsheimer, Adams Harkness.

This is Eric Glover, for Jed. Just getting back to Checker for a second, you mentioned that the sales were disappointing this quarter, but I'm wondering, as you look toward the end of this year, and even into next year, I think you provided guidance previously of $5 to $10 million in Checker sales this year. Does that still hold? And then I think you mentioned previously, $10 to $20 million for next year.

Well, my record on this is very poor. I'm very enthusiastic about the product. Not only am I, but the sales force is enthusiastic. Everybody's enthusiastic. You demo the product. It's a piece of cake to operate. The customers we've sold it to get it up and running in, I think, 40 minutes, which is unheard of in this business. So, given all that, I said gee, I can't see doing less than $10 million in the first year, based on what In-Sight did in the first year and everything.

But you know, I think if we do $3 to $4 million this year it'll be okay. The run rate is now $3 to $4 million this year. And I would anticipate that whatever we do this year, we should be able to double it every year thereafter for a number of years, once people start understanding how useful this product is.

I think that's what it's all about. We're not selling this product to people who are using vision systems. We're selling this product to people who have in the past used photo sensors or other present sensing devices. So, there's a barrier to entry there. It's an educational barrier.

Now, we're not the only company educating them. We have competitors in that segment of the business. So, we're not doing the pioneering role ourselves. But I can't imagine that this business shouldn't grow 100% every year for quite a few number of years, because of the market size that its attacking, which is over a billion dollars.

Right. So, is it mainly a question of simply training the DVT sales force?

No. I think the question is getting the customers, training the customers to do things in a different way. This is a different way of solving lots of problems on the factory floor, that they have struggled with solving with photo detectors. And all the photo detector companies know that this is a threat to their business, by the way.

But now, having said that, DVT did not have this kind of product, so introducing it through a large channel will be helpful. It has to help.

Okay, very good. And then on your surface inspection, that business has continued to be strong for a couple of quarters now. Could you talk about what you think your share is and how much share you've probably gained over the last six-months or so?

Well, it's an interesting question and it depends on how you measure share. Because, if you measure it at the end-user companies, it's one thing. Because we sell a lot of product through Honeywell. And Honeywell then sells it to the end-users.

So, on revenue we may not be as large a share. We're still the dominant player. We're still more than 35% of the market, no matter how you measure it. But if you measure it in units, I think we're probably nearer to the 40% units at the end-user. But if you measure it in dollars, we're under that, because we discount when we see to Honeywell, of course.

So, my estimate is that we are somewhere between 35 and 43% of the market.

Okay, great. And then finally, just a quick financial question. What was the services gross margin in the quarter?

We've got to check. My guess would be 34%. But that's a guess.

For this quarter, it was about 38%. A little bit higher.

Good job, 38 is tremendous for service, tremendous!

Suresh Balaraman, ThinkEquity.

How are you guys?

Good! Same as I was last time when I saw you. Just I don't have a martini in my hand now.

It appears that the DVT has been growing at about 15 to 20% a year compounded for the last five-years or so. And I'm wondering if it's reasonable to estimate a 15% growth rate for 2006 for this company?

What percent do you want to estimate?

15%?

No, not high enough.

Oh, not high enough? That's good. Okay.

And by the way, we're not going to--this is the first and last press release that we're going to report the DVT results separated from Cognex. It's going to be too difficult to know what we mean by Cognex and DVT, since the distributors are going to be selling both.

So, not only aren't we going to report it, we're just not going to know anymore. If people say, well, how's DVT's this and that doing, we're not going to know. So, I can tell you that overall I expect our factory floor business to grow no less quickly than 25% a year.

Okay. Now, when I said 15% I meant annualized revenues, not just from the 20 million, which includes any part of the--so you're saying on an annualized basis the 15% growth is not a stretch?

I think it's too low. Do I understand the question right?

I think you're asking, Suresh, what the anticipated growth rate of the factory automation business, whether it be DVT--I think you are concentrating on DVT, whether it should be 15%. And I think our feeling is that the DVT product addressing factory automation should grow at least 20 to 25% a year.

Okay. And also, when you look at the high end of the guidance for September, assuming there's even modest growth in December, then you're looking at all-time revenues for the core Cognex Company, excluding DVT, and middle of last year we thought that revenue was so high that it was unsustainably high. And for all you know, you could be at those kind of revenue levels in December. So, my question is, do you sense that you are hitting some kind of a ceiling in the near-term, in the next six-months here, in terms of revenues for core Cognex?

Let me answer the last part first, because I understood the last part. I didn't understand the first part. I don't believe that we're near any ceiling for the revenue for Cognex. The semiconductor might be at a ceiling, other than the ups and downs, you know, if you average those out. Semiconductor might be peak in a way. But the factory floor is nowhere near the ceiling, nor is surface inspection. So, with that in mind, can you rephrase the first part of the question?

But I think you answered it right. The way I'm reading it, if you are looking at $15 million in September, and maybe a $52 to $63 million if you hit those kind of numbers in December, and if you ex out the DVT, then you're looking at the mid-50s kind of number for Cognex's portion of the business. And that is the highest you have been in forever, actually.

The highest revenue level that we hit for a particular quarter was $66 million, and we did it for two quarters in a row, back in the year 2000. The estimate for the third quarter of this year, Suresh, recognizes the fact that that semiconductor electronics OEM business has not yet rebounded and we don't yet expect it to rebound in the third quarter. And then when you look at the factory automation side, typically, the third quarter, with the summer months, is a little bit softer. An awful lot of companies shut down, especially in Europe, where they go away for three to four weeks.

Jim Ricchiuti, Needham.

Just kind of a follow-up to the guidance question. The SISD business has been very strong for several quarters right now. Did you see that? You had a good booking this quarter, to be sure, but I just wonder--?

Yes, great. It was almost record. Last quarter was a record and this would have been a record, except for Q1.

Yes. Is this just indicative of just the overall health of the industrial market [paper or steel]--?

No.

Is it share gains, Bob?

Yes. I've been told by Markku Jaaskelainen, who's doing a wonderful job running this division and running the sales force that reports to him, that it is share gain. Our product is compelling.

He is a technologist, who has, over the years had a plan to add more and more technology each quarter, to each release. It was first to go to the plastics industry and then the paper industry and then the metals. The metals are most difficult on technology. And he's done that. And the results follow automatically when you have the best product and fair pricing.

One of the things that's helped us in that regard also, Jim, is that beginning maybe about 18-months ago, there was a strengthening in prices for steel and other metals. So what that did is it gave a number of the mills foundries some additional operating cash flow that would allow them to go out and make some capital investments.

So that, plus the fact that we had new releases of the product with additional software that was better in classifying defects or whatever, those two combined to help us in the metals industry.

And he's also been focusing, the SISD business, in some newer areas and I think you've alluded to--I think you may have had one win in the LCD market. Is that true?

Yes, we had a press release on that a couple of months ago, I think it was.

Any more activity there?

Not that we can report now.

Okay. And then just final question on the SISD business. You're also looking at--I know you've got some initiatives underway to improve the margins of that business. How were the margins in the quarter? I know you don't break them out, but I wonder if you can--how you'd characterize them?

We can tell you that. The main initiative is more pressure on Markku. He hates to lose an order. But you know, sometimes, if you don't make any money on it, you should lose the order.

Our product margins for the SISD group during the quarter were in the low 50% range, say 55.

Okay. And then, final question, just shifting gears again, looking at some of the door activation market, PeopleSensor product line, is that all going to be going through the same distribution network, or are you going to be going through a subset of that network?

No, all of these specialty products are going through our own direct sales force. And by the way, you asked some good questions. On exhibit 5, if everybody would turn to exhibit 5, you'll see revenue by market. You don't see a line there called commercial applications or other, because it's too small. It rounded to less than 1%.

But there will be, hopefully, reasonably soon, another line there under surface inspection, would be commercial applications. And that would include the PeopleSensor, the door activation unit, and as the Company grows there'll be other lines. We do have revenue now from commercial. I just want to point out that it's not listed there, because it was below 1%.

Bob, do you feel you've got enough folks right now on the sales and marketing side and you'll see how that business develops and then expand it or do you need to expand it ahead of the revenues that you expect?

On which side?

On the commercial market.

No, I think that what we've done is taken certain of our OEM salesmen, who aren't very busy these days selling to the semiconductor companies, and they're the right people to handle those kind of commercial accounts. And that's what Chris Nelson has done.

Follow-up question from Alexander Paris.

Just a real quick one on guidance. When you made the DVT acquisition, I think you said that it would be accretive in 2006. Did you ever quantify it?

I think we said that it would be accretive probably, I think, $0.06 to $0.08.

Okay. And now are you expecting some accretion in the second half, or maybe the second quarter was just a surprise?

I'll be perfectly honest, the second quarter was a little bit of a surprise, in that the revenue level came in a bit higher than we thought, because we had said that we expected revenues to be accretive $4 million and it came in at 5.5. Obviously, if that continues the rest of the year at that kind of a level, then we would expect that DVT could be accretive for the rest of the year as well.

[OPERATOR INSTRUCTIONS]

Well, I'm pleased that there aren't too many questions. This indicates to me that the team here did a pretty good job on putting the press release together and giving you enough data that you can figure things out without needing to ask us. If there are any further questions, please give Sue Conway a call. She'll be available all day tomorrow. And, we'll wait another 30-seconds or so for anything to come to mind.

Follow-up question from Rob Mason.

Dick, just on the amortization related to the acquisition and cost included there, were there any one-time items in that number or should we just extrapolate that out for a full quarter?

No, no one-time items. It would be the charge to cost of goods sold was a little over $100,000 and against OpEx, was about $660,000, I guess.

Okay. And then just to touch back on the factory automation business, Dr. Bob, I guess we kind of covered most of the ground, but the product ID business, I know it's small, but is there any news to report there? I know there was a press release that came out during the quarter.

Well, there is news. I've been speaking, as I walk around the Company, I hear the stories. We've been selected at a major semiconductor company. I don't think I can announce that yet, or their initiatives, which I think are worldwide, for tracking wafer [boats]

We've had a fabulous presentation at a major manufacturer of jet engines that needs considerable number of readers to read the turbine blades. We have become, in the past year, the source for this kind of product.

And I'm very proud of the engineering team and the optics team that have designed products that can read these codes, which are virtually illegible to humans. You can't even see they're there. And you point the DataMan product at it and pull the trigger and it reads these things. And I believe the read rate is higher reading these codes, that are dot peened or scratched or etched onto surfaces, I believe our read rates on that kind of material are higher than if you took a barcode reader to Home Depot and started reading the labels off of products.

So, incredible technology to do this. Great [barrier] to entry and we should continue to have success and high margins in the business and very high growth.

With respect to the DOD as a driver of that, is that a situation where they can mandate that immediately or must they wait for supplier contracts to renew before that can be implemented?

I'm not 100% certain of this, but I think it's already been mandated that anything over $5,000 or anything that's mission critical, has to have a direct part mark already. Now, they're not mandating that people read it yet, but that's certainly the next step. The parts have to have marks, unique serial numbers so they can track things. And, crucially important and hard to do. So, I don't envision this becoming a commodity business at all.

Final question from Suresh Balaraman.

In terms of the tax rate for next year, should we still use the 26%? This is for 2006.

It's a little early for me to comment about the tax rate for next year, but I think there'll probably be some--there may be some upward pressure based upon DVT sales. Because more of their sales are based in the US. So, it's a little too early to tell.

Okay kids, it's time for us to get back to work and for you to buy Cognex stock. See you next quarter.

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