Cognex Corp (CGNX) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Nikki and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cognex first quarter 2006 conference call. [OPERATOR INSTRUCTIONS] Thank you. It is now my pleasure to turn the floor over to your host Mr. Richard Morin. Sir, you may begin your conference.

Thank you. Good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the first quarter of 2006. For those of you who have not yet seen this report, a copy is available on our website at www.cognex.com. The press release contains detailed information about our financial results, and because of that, we are not going to repeat most of that material.

Beginning in the first quarter of 2006 we are required to include stock-based compensation expense in our financial results. Since this expense was not included in the first quarter of 2005 or in the prior quarter, to help listeners compare our results on a consistent basis, we are going to exclude the impact of stock option expense from our discussions during the call today. Four your reference you can see the Company's income statement, as reported under GAAP, in Exhibit 1 of tonight's press release. The income statement excluding the stock-based compensation expense is in Exhibit 2, and a reconciliation of these two statements is included in Exhibit 3.

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.

Now I'll turn the call over to Bob Shillman.

Thanks, Dick, and welcome, everyone to our Q1 conference call. As you may see, if you have the press release in front of you -- we just issued it -- Q1 of 2006 was a good quarter for Cognex, but not quite as good as we would have liked. We reported revenue of $59 million, and non-GAAP earnings of $0.23 per share, both of which represent significant increases over the 43 million of revenue $0.11 EPS reported for the first quarter in 2005.

We're also nicely profitable, with non-GAAP net income equal to 19% of revenue. However, revenue for Q1 decreased from the prior quarter, and it was below our expectations. Turns out, this was due to lower revenue from the Surface Inspection Market, which was anticipated by us, but slower business trends out of the automotive industry, which was unanticipated.

The automotive industry is one of the largest verticals in our Factory Automation business, and Factory Automation revenue in Q1 declined on a sequential basis due to that slow down in the automotive industry, and growth year-on-year was not as strong as we would have liked to it -- to have been for the same reason. In addition, our two leading products on the factory floor, In-Sight and DVT, were negatively impacted by that. Factory Automation bookings were slow in the beginning of Q1, and there were no big automation projects in other industries to make up for that shortfall in the automotive sector.

It's hard to say why this happened. It's possible that manufacturers were just reluctant to release money until they had a better sense of the economy. But the good news is that bookings for Factory Automation ended the quarter at a higher level, and that appears to be carrying on into April thus far. In addition, our sales team has told us that the pipeline for projects in industries other than automotive has started to fill up, leading us to be more optimistic today than we were at the beginning of the year.

Turning now to the second of the three primary markets we serve, I'd like to take a moment and clarify some comments made on our last earnings call regarding our semi business. Our comments were not about the impact of industry conditions on this quarter or next, but rather they addressed our long-term outlook for the semi industry, and that outlook is that over time we believe price pressure will erode any meaningful upside that we may see in unit increases. The reason for this is that customers continually look for ways to reduce costs, and they're doing so today by purchasing a lower-cost solution from either us or from competitors. I'm pleased to say that the vast majority of our customers are choosing to stay with us. However, it is at a lower price point than in the past, and, thereby, lowering our revenue base in this market over time and essentially, it's a fixed number of units, and that's really the issue, other than the ups and downs of that industry.

Now, in the near term, as you can see from the Q1 semi revenue we reported tonight, we continue to participate in the industry pick up. Semi revenue increased significantly year-on-year, although, to be fair, it was off of a very low base, and -- but it was also up nicely over the prior quarter. We are seeing good business in the wafer prober area, as well as in the front end and in electronics assembly area. The outlook from our customers continues to be positive, as a few months ago they told us they expected their businesses would be strong through June, but more recently, with discussions -- even until today -- as a matter of fact, we had a large customer visit. The feedback we've received is that they believe their business is going to be strong until and through September.

The last area of business that I'm going to address today is the Surface Inspection market. The revenue was lower in Q1 than it was in Q4 '05, but it was in line with our expectations. More importantly, orders in Q1 of 2006 -- the SmartView -- were up significantly over the prior quarter, again, though, off of a very low base.

Orders in Q1 for SmartView were also at a higher level than in the second half of 2005. We saw growth, especially in the paper industry, as manufacturers invested in surface inspection for improved quality. Unlike other industries, there are no new paper plants being built, because of the extremely high capital cost of new mills, so, instead, manufacturers invest in upgrades and we are benefiting from those investments.

In the quarter, orders were also higher in the plastic film industry, due to very high demand for larger LCD displays. We also had some competitive -- important competitive wins in this area, one example is a large manufacturer based in Japan that selected Cognex last year to do a high-end application because the competitive solution did not work very well. But this customer was so pleased with SmartView and with our service that we gave them, that they recently gave us additional order for four systems for their standard application at a lower price -- which is a lower-priced product -- but even though they're lower -- the even-lower-priced competitor could meet the requirement in that application.

Overall bookings increased on a sequential basis in Q1, and business trends this far in April have been very good. As a result, we are now expecting revenue for Q2 of '06 to increase on a sequential basis and to end up somewhere between 62 million and 64 million, and at those revenue levels, earnings should increase between -- and end up between $0.25 and $0.27 a share. Now, of course, that excludes the impact of approximately $0.05 per share for the stock-option expensing.

In view of our confidence and belief in -- on how our business is fairing and is going to fair in the future, we have purchased approximately 880,000 shares of stock for about $25 million during the quarter, the average price was about $28.50 per share. In total, we paid out over $63 million from our current authorized plan, which leaves $37 million remaining to be spent, and we intend, depending on price and situations, of course, to continue to repurchase our shares.

I'd like to now open up the conference call for questions you may have for me or other of my partners here. In addition to Dick Morin, joining us tonight is our President and Chief Operating Officer, Jim Hoffmaster, and his staff. I'd like to take questions, if you like. Any questions?

The first question comes from Alexander Paris from Barrington Research. Please go ahead.

Good afternoon.

Hi.

Just looking at your revenue shortfall from your expectations, it sounds like it was mostly in the auto industry, and was it any specific orders delayed or just sluggish orders all the way across the industry?

Yes, it's across the Factory Automation industry.

Okay.

But automotive.

Pardon me?

Go ahead, Jeff.

It was -- it's -- it was -- Bob said Factory Automation, what he meant was it was pretty much across the automotive industry, and not any specific orders that were canceled or pushed out. It was just soft ordering level during the entire quarter.

Yes, I apologize, I didn't hear the question.

Then, looking at your revenues there, I don't think the auto industry is -- are you focused more on the domestic, like, General Motors and Ford? Or are you as much international in your autos as you are in your electronics?

I would say we are -- this is Jim Hoffmaster. We get a little more automotive business out of North America than we do other geographies, however, the disparity is not that great. We participate widely in the automotive industry on a global basis, not only with the auto makers, but with the parts suppliers. And we did see -- I would add, that we saw more of a shortfall among the U.S. makers than we did among some of the foreign suppliers.

And you were talking about orders just within the quarter. They were up for SISD. And did you say they were up for also the semi area, too?

Yes. Both of those areas were up.

But Factory Automation, was that up, too, improving?

On a sequential basis, no.

Total Factory Automation was slightly down on a sequential basis.

Okay. Just one other real quick question. Your guidance for the second quarter, the revenues, is that less than you would have guided earlier? That is, are you assuming some of this slow down in the autos or -- is going to continue, so this is less than you would have expected?

I guess if the automotive industry had been increasing as opposed to declining, yes, we probably would have given higher guidance for Q2. We don't see anything yet that indicates that the automotive industry bookings is turning positive. Some of the other areas in factory automation are, but not yet of the automotive.

So your sequential growth in the second quarter is really going to come from SISD because you're getting good orders in the first quarter and from the semi area, right?

And other areas of the factory automation.

Right. Okay. Thank you.

The next question comes from Jed Dorsheimer from Canaccord Adams. Please go ahead.

Hi. Thanks. A couple questions. The semi business. Dr. Bob, I was wondering if -- I know you have broad exposure and you mentioned the front end. I was wondering, are you seeing any particular areas of strength in that market, i.e., memory or any -- can you elaborate in any greater detail?

Well, a lot of the growth is in the prober area right now. But I don't know -- Jim, do you know, if they're using the probers, for what particular area?

I don't. I do know that one area we've seen a lot of strength is wafer ID. And as far as the prober strength, I did -- I was meeting recently with one of our key customers in that area, and one thing they mentioned to me was that, whereas a year or two ago they felt the up cycle was driven by memory chips, now they feel that it's much broader based product range, including products -- LCD drivers and products for flat panel displays. But much broader base was their comment to me.

Great. And, then, as you move to more of a -- the use of dist in your business model, as factory -- ?

The use of -- I'm sorry, the use of what?

Distribution.

Distribution.

Oh, yes.

Was curious, this increase in inventories, is that going to be, sort of, the normal level that we should be looking at? Or should we expect these levels to be, sort of, a one-time?

Yes, the increase during the quarter, what we did is we did two things. We're transferring a lot of our manufacturing operations from Natick into Ireland. And what we did is we put up a little bit of safety stock to take care of any hiccups or problems with the transfer. And we also set up some additional inventory for the distribution network of some of the Cognex-related product, the In-Sight and Checker or whatever that we didn't -- which is a duplication of what we used to have in Natick. So I think, pretty much the increase that we saw here in the quarter is a one-time thing or whatever, and inventories will pretty much follow what the level of business is going forward.

Great.

But this is Bob, and I want to add that the Company's philosophy is to never disappoint a customer, to have things in stock for them. And we run a very unusual business, where product lifecycles are very, very long. So there is very little risk. And as you've seen, as a matter of fact, we're benefiting from the fact that we wrote things off but, then, customers kept on buying them, despite the fact that it was years ago that we wrote them off. So the Company, I can't recall -- I think in the 25 years we've had, perhaps, $200,000 inventory -- or 300,000 that was written -- that was totally thrown out. There was not a lot. I may be off on that number. But by and large, our -- the inventory that we have is a product that has a very long lifecycle, and, so, even if the inventories were going to be at these high levels, it wouldn't be a worry to me, though Jim and Dick disagree. They like low inventory.

Thanks for the additional color. Last question. Looking at the -- moving to the Factory Automation, again, the DVT business. Was curious, if we look at the contribution of DVT products in the Factory Automation, do you expect that business to grow next quarter, or would you, because of the automotive markets, would you expect that to decline or remain flat? Thanks.

Say it again? Did you get it, Jim?

No.

So DVT, do you expect DVT to be up or down next quarter?

Up.

Thank you.

It's always a good answer, but I'm going to give you some color on that, too. We are probably, even internally, not going to be measuring DVT versus In-Sight. We call them vision sensors now, and they're all going to be pretty much -- pretty soon going to be colored the same color, and you won't notice a difference. So it was important for us to initially track how these products are doing to make sure that we integrated them properly and didn't have product overlaps. But pretty soon we're going to stop keeping track of how many DVT's we sold versus In-Sights. We don't care.

And I'd add just a little additional color. And, that is, so if you ask the question for the combination of DVT and In-Sight, my answer is up.

Right. Right.

Thank you. I'll pass it on.

Okay. Did we answer everybody's questions?

The next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Good afternoon.

Hey, Jim.

Question just back on the automotive sector, I know it's been a challenge in the past, because a lot of this product or some of this product goes through distribution. But can you give us a sense what percent of revenues you think you might be getting from automotive?

I think last quarter was probably around 10 or 12%, as I recall. I am just doing that from memory, and --

That's just that -- the product you know of, not the product that's going through distribution?

Yes, I think what we knew of was probably around 12 -- yes, it was probably around 11 or 12%, and it was probably a little bit more than went through distribution. Now it looks like what we know of is less than 8.

8.

Less than 8.

Right. 8%.

Okay. How would you characterize the rest of the Factory Automation business, what you're seeing out there? Maybe -- I don't know if you want to talk a little bit in terms of some of the specific industry groups, because you are selling into a number of different areas.

I think one of the things pretty much most of the other industry groups are doing fairly well -- one of the things that we did see is in Q4 going into Q1, we didn't have, for whatever reason, and we don't really -- the guys in the field don't really know, but they didn't see a lot of opportunities for large projects in any of the other industries or whatever. That pipeline is starting to fill up. They're seeing a lot more requests for quotes on significant projects that involve multiple units or whatever. But pretty much some of the other areas are doing better than automotive.

Great. Thanks. Would you be willing to give us an update on Checker?

Why not?

Checker is going according to plan. As we had indicated, I think we expect it to do between 6 and 8 million for the year, and we're right on target.

Okay. Now, you were -- you came out of Q4 with pretty decent strength in that area, or bookings. I wonder, if you -- did that carry forward into Q1?

Yes, we grew slightly from Q4 to Q1.

Okay. And, any additional color on where you're seeing the demand for that product?

Very broad based.

Right. This goes through distribution entirely.

Okay.

And we just don't know.

Okay. And just a quick follow-up on the SISD business. Sound like you -- some strength in papers and film. Any activity in the metals side?

Yes.

Yes. There was. It wasn't quite -- it wasn't as large as SISD was -- but we -- not -- as the paper was, but we did have a couple of orders during the quarter for metals companies.

Okay. One final question, if I may, just on acquisitions. Any activity on that -- in that area that we should be thinking of in the next couple of quarters?

Yes. This is Bob. I anticipate that in Q2 we will have some news that we've -- that we've closed nice piece of business, acquisition, in a totally new area for the Company, which will hardly require us to change our logo from Cognex Vision for Industry to something else -- Vision for the World.

We haven't decided on what the tag line will be, but as the Company grows, of course, we have new products. We have products called DoorMan that open door doors, people counters that are used to ensure that the right number of people enter or leave a facility. So Vision for Industry may not -- and this new acquisition is non-industrial, and it's going to have to change that logo. So I'm happy to tell you, yes, though I want to report to the Street that it will be a small acquisition, but it will get us into a business that we believe is quite fast growing and rather important.

Thanks a lot, Bob.

You're welcome.

The next question comes from Richard Eastman from Robert Baird. Please go ahead.

Hi. I just want to circle back, and I realize we're kind of losing the distinction on DVT sales, but that 5.4 million number is down, I guess, by my math 30%, and -- year-over-year.

No.

I think you did 7.7 last year in the first?

I'm sorry, I'm looking at it -- it's down about 11% from Q -- I'm looking for the numbers right now --

Yes, last year Q1, you're right, Rick, it was right around $7.5 million, as I recall.

And can I just -- I mean, is that -- I know it's only a couple million bucks, but is that all auto business, or is there -- as you track the distribution network as it exists today, is there any cannibalization or product going through there that's a lower price point product, like Checker, so your volume units are still up, but your sales are down? Why is that number so low?

Let me handle one part of that question and then Jim may follow on with something. The DVT product that's -- the DVT numbers that you're referring to is DVT-product related only, and it does not include other products, other Cognex products, whether it's Checker or In-Sight that is sold through the DVT distribution network. The one thing that I would caution you relative to making comparisons with Q1 of last year is that in Q1 of last year, DVT was in the process of being sold, and I would think that they made as -- or turned around as much and sold as much as they could to make the quarter look as rosy as possible. Just before the wedding they wanted to do a little bit of window dressing. I would guess that there's a fair amount of that in that Q1 number.

Let me phrase it this way -- if -- we had made some assumption that DVT, like Factory Automation, all right, this is pre-auto, but -- would grow in the 20% range, that would have put DVT's revenue closer to 34, 35 million. And we're, obviously, well below that. And are you convinced that it is not a function of anything you've done with the distribution network?

This is Jim Hoffmaster. Let me answer that. Yes. I am convinced that it's not a function of anything we've done fundamentally with the distribution network. My understanding is that the major factors are the fact that Q1 was pre-acquisition, and Dick's already spoken to that, Q1 of '05 was pre-acquisition.

Secondly, as near as we can tell, DVT probably had a very -- as near as we can tell, DVT had a similar mix of automotive business to non-automotive business, as we do. So their business has clearly been affected by that. And we've made no changes to pricing or otherwise that would change the revenue coming through that for the DVT product. It's always gone completely through distribution, both pre-acquisition and throughout '05, and it's still going the same way.

Now, on the other hand, we went from 40 distributors to 180 worldwide in the course of last year, so I don't feel that we're getting the maximum performance out of that sales organization. We made a major change. I think we did a good job of navigating those changes last year without any major disruption, but we're not yet humming on all eight cylinders. So I think there's some improvements that we can make in how we work with the distributors. I'm happy to say I was with 16 of the owners just a few weeks ago, last week, in fact, for a dinner, and, in general, they're quite happy and optimistic about business. So, while I think we can do better with them, there's no reason to believe that there is a fundamental problem there.

And, Jim, couldn't it also be that a decline in DVT is made up for by an increase in In-Sight?

Yes, in some cases.

Where the customer will now buy In-Sight instead of the DVT.

Right.

Which is why we're not tracking -- in the future we're not going to track each one separately. It just makes no sense.

Right.

But, again, if I do the math and I make some assumption, well, take the DVT number into account and then take out some sales for auto, I mean, it looks to me like your core Factory Automation business is up maybe 13 or 14%, and that, again, wouldn't suggest you're getting significant leverage off of the very expanded distribution yet.

That's right.

Yes.

I'd have to agree.

Yes. I think there's more leverage -- maybe I was too soft in my statement there. I think there's more leverage to be had from that distribution. And we've got a little more work to do before we're achieving it.

And we're aware of that. Jim and I have had conversations, I say, look, with all those distributors, this is it? And, so, we're aware of that. The good news is we have these distributors and there's upside. Right? There's upside. The numbers aren't bad. And, as you're pointing out, we can do better, and I expect that we will.

And, then, can I ask a second question. When you -- prior to the DVT acquisition, within the Factory Automation product line, whether it be In-Sight -- well, Checker wasn't out of the box yet --

That's right.

-- you had charged for a service component to those products. And I guess what we maybe picked up, kind of, out there that right now, the way the product's going to market that you're no longer charging for that service component on the Cognex product. And it looks like that in the service revenue that you reported. It looks like your service revenue is down almost $1 million year-over-year. Is that part of -- is that part of the issue we're seeing in the comparison here?

It could be a -- it could be a piece of it in that there is less support costs or whatever that are part of the bundle, the service price. But one thing I would -- that I wanted to comment on, Rick, is as we take a look at just straight Cognex, not the DVT product, the decline in automotive Q1 to Q1 was 21%. So if you presume that same phenomenon existed with the DVT product, that they lost 21%, then there's about another 8% or whatever. And I think a good chunk of that is probably due to the Q1 of last year window dressing.

Okay.

The other thing, too, is if you take a look at the total service revenue, or chunk of it that was down, is probably due to Surface Inspection having less installation revenues in this Q1, as their total revenue declined.

Well, you can pull that out. And if you do that -- I mean, that was a couple hundred thousand dollars.

Yes.

And, then, the MVSD service was down 7 to 800,000 year-over-year, and I just -- I just wonder if that's a drag on the revenue growth until we annualize in the fourth quarter.

Could be.

Okay.

Yes.

Okay. Thank you.

The next question comes from Antonio Antezano from Bear, Stearns. Please go ahead.

Good afternoon.

Hello, Antonio.

Hi. Just to follow up on the prior question on DVT, when I look at the progression of the DVT throughout last year, at least the numbers that we were provided with, about 7.5 million for the third quarter, I think it was 6 million in the fourth quarter, and now is 5.4. Understanding that there might be a little bit of window dressing, but I wonder what is the, kind of, the delivery, I guess, lead times for DVT type of products? Is it, like, three months, six months? How long does it take to -- ?

No, we --

Yes -- no, our -- for the great majority of the DVT orders that we receive from our distributors we ship the same day.

The same day, right?

Yes.

So, but -- so that means that I still see a decline for DVT revenues throughout the last three quarters, it was kind of a sustained decline, and I understand a weakness in automotive. But would that mean that DVT is, relatively to the Company, more exposed to the auto sector? Because I think you mentioned it's about the same.

Well, it's possible that it is. Unfortunately DVT was not collecting point-of-sale data. So we can't say that definitively. The best information I have says that they're no less -- we are no less exposed to the automotive sector with DVT than we are with our In-Sight product. But I don't have any reason to say that we're more exposed.

Right.

It certainly is possible, it would be a plausible factor. We are -- I will comment further on something that was discussed earlier. We are in the process of getting point-of-sale data, ramping up that process with our distributors, so we will, in the future, be able to report industry break out, including the sales through distribution.

Right. All right. Then, one thing that we heard from the market, I guess, was that -- I think you guys were doing some rationalization of distributors or, I guess, doing assigning some territories to some distributors. Is that something that could have affected also DVT the past quarter?

It's possible, but unlikely that that would have had a material effect on these numbers. The rationalization we did, the distributors that we terminated, many of them were producing almost no orders for the product. So we didn't make any changes that would have a major effect on that, no.

All right. And your expectation for growth of -- I know that DVT will be, now, kind of embedded in the overall factor of the mentioned revenues, but your expectation for DVT of growth would still be similar to the, I guess, the over 20% that you have for Factory Automation in general, right?

Well, no. I'm going to answer this. Our expectation is that our overall business in Factory Automation is going to grow at no less than 20%. That's been our experience. There might be some highs and lows, but 20% seems to be what we've been able to do and what they've been able to do. Whether DVT, the piece, goes 20%, we don't care. I don't care if it is 100% of that 20% or 0% of the 20%.

All right.

So, is that right, Jim?

Yes. No, I agree, Bob.

Okay.

They're overlapping. We're eliminating in the overlapping pieces. But if people like the DVT name, and there are some people who want to keep on buying the DVT name, and we'll keep on making it for them. Other people like the Cognex and we'll make it for them. It doesn't matter.

Okay. Then, follow up question is -- Have you seen, like, a change in seasonality for any of the three businesses, like, for instance Surface Inspection? I know that orders were inspected -- because of the order in through it, you expect that it will be down, but is there, like, a seasonality factor also there in the first quarter?

On the surface inspection side, it really wasn't a seasonality. We expected revenues to be down based principally on the fact that our booking levels in Q4 were down. So that was why we sort of knew that the revenue level in Q1 was going to be down from the revenues in Q4. It really isn't a marked seasonality in the Surface Inspection business. It tends to be somewhat of a seasonality, or if it has been, in the Factory Automation, where Q1 is not normally one of the stronger quarters.

All right. Thank you, very much.

You're welcome.

The next question comes from Kim Caughey from Ford Pitt Capital. Please go ahead.

Hi. I was wondering if you could talk a little bit about the shift in revenue by geography? It looks like the United States kind of fell off and Japan picked up the pace. And I guess I'm more interested in going forward what you think the geographies might do in the next couple of quarters?

Well, the geography is very highly influenced by the semi swing. If semi is strong, then Japan's going to be strong. If semi is weak -- if semi and electronic are weak, then Japan is weak. So that's the effect you're seeing now.

Okay. And it's not so much United States falling off, it's more Japan getting strong?

No. It's just semi being strong.

Oh, semi being strong, okay.

Right. That's right. It's not Japan. As a matter of fact, our Japan factory flow of business is not strong, and we're focusing on that now and trying to figure out -- and figuring out why it is. But there's nothing -- it's not economic or a macroeconomic factor. It's just simply the semiconductor cycle.

Okay. And I'm intrigued about this new acquisition. You can't, I guess, give us -- ?

It's not done until it's done, and --

Right. I understand. It's not done until it's done. But, I mean, it does sound intriguing that it isn't necessarily a business-related item.

Well, I don't know. If we're doing it, it's business. So it's certainly business related in that regard. But it's not industrial. It is not industrial. I will tell you, I will tell everybody this. It is certainly vision that is our forte, that is the only thing. We're sort of like idiot savants -- we don't much else, but we know vision real well.

Right. Stick to what you can see.

That's right. If we can see it, we'll analyze it. And -- but this is vision for an existing application. Right? There is an existing market, a proven application, very important application, and we believe will be fast growing in the very near future. And we are going to have some of the best technology by this acquisition and product, an existing product for this market which is outside of Factory Automation.

Okay. And I'm guessing that you think that you could add to its technology, not necessarily the sales channel; is that correct?

No. In this particular case, we'll be adding to management and sales and distribution primarily.

Okay.

We do have more technology that we can add. It's a small team that we're acquiring, but expert in the field.

Okay. Great. Thank you.

Yes, you're welcome.

The next question comes from Vincent Damasco from Centennial. Please go ahead.

Yes, thanks, gentlemen. Just a clean-up question, I guess, following the fourth quarter call, the deal slippage, the three deals about 0.5 million a piece, two international, one auto related. Did they actually close in Q1? And was that large vision auto-related business actually booked and closed in Q1?

Okay. In Q4, we talked about three orders, two of which had gotten delayed, one of which had gotten canceled. The one that was canceled was an automotive order. It got canceled in Q4 and didn't get reinstated. Of the other two, the largest of the other two was a Surface Inspection order, which, in fact, did ship in the first quarter. The other one, which was a Factory Automation order, did not ship in the first quarter, but is scheduled to ship in the second quarter.

Thank you, very much. That's all I have.

The next question comes from Alexander Paris from Barrington Research. Please go ahead.

Hope I can avoid a long answer at this late in the conference call, but I was just hoping to go get some clarification on your clarification of the -- how it looks like a deteriorating secular trend for your semi and electric business. First of all, is this semi and electronics where you're seeing these changes?

Oh, the decline in prices. I didn't know what you were getting at.

Yes.

Yes, the OEM business, whether we're selling through the pick-and-place companies or the wire bonders or probers or steppers, yes. There's pressure on price.

Pressure on paying, let's say, the same product you're buying, or you also mentioned substituting lower-priced product.

What we do -- yes, the customers in this business who sell capital equipment are under price pressure themselves. It appears that their products don't have much competitive differentiation, and, therefore, price becomes the differentiator. They then turn to their suppliers, including Cognex, for help, and want lower price. What we tend to do, rather than lowering price on that same product, will design a lower-priced product for them that has the same gross margin that we want. That's our philosophy.

All right. So it is a price pressure problem?

It is a price pressure thing.

Whatever it is, it's a price pressure. And is it -- just, finally, is it more an Asian phenomenon, where the competition is tough? Or is this happening, the same thing, to a semiconductor equipment customer in North America?

All the same.

They're all the same.

It's all the same because the products are going to the Far East, where there's tremendous negotiation power.

So if you're selling a sensor -- have been selling a sensor to a pick-and-place machine company, they still have to have that sensor, but they're insisting upon a lower price?

Yes.

Okay.

And just to give you the trend, I mean, products used to sell for -- a product that used to sell for $5,000 per unit, we have a -- we have replacement that will do the same thing for, like, $2,000 per unit now, or even less than that. So the number of units we're selling is fine, but the revenue per unit -- and the gross margin is fine, but the revenue per unit has been declining, more steeply in the past three years or so, four years.

And you can't make it up by programming in a lower cost to you to make up for the -- ?

No, no. You keep the gross margin, that's what we're able to do. And Herb and the engineering team have been doing a great job designing lower-cost products, so the margin is still high, in the high 70s for these products, but the revenue isn't there. If the revenue isn't there, and you can't make up for units, because the number of units that the world needs is constant.

And this pricing pressure is painful enough that it offsets the trend toward miniaturization and inspecting more and inspecting at higher speeds and a growing demand for inspection, that's all being offset, you think, by lower prices?

The inspecting at higher speeds and that, that's a Factory Automation kind of thing, but the capital equipment for semiconductors, they need a certain amount of units every year. It goes up and down, but if you look at it, it hasn't been growing very quickly, and the number -- and they want to pay less for them.

Okay.

Okay. So it does not make -- nothing will make up for it, in my view, other than some rapid change in the capital equipment industry, some rapid advancement of -- in photolithography or something that will cause the companies to say, gee, we really need the next generation, which is dramatically different, and then they'll come to us with new features and we'll be able to increase prices again.

Okay.

But we saw this happening, and I've reported on this for at least four years now.

Right.

This is why we started putting our eggs in the Factory Automation basket.

Okay. Thank you.

You're welcome.

The next question comes from Antonio Antezano from Bear, Stearns. Please go ahead.

Yes, a quick follow-up.

Sure.

The stock option expense was a little bit higher than the guidance, pre-tax basis. Is there anything going on there?

Gee, I don't -- I thought -- in the guidance, I thought we had said approximately.

2600, right?

Oh, the two -- yes, I think we had said that the total expense was about 2.9 million, and I think that's what it -- and there was 300,000. There was 300,000 that got charged to cost of goods sold, and 2.6 million in operating expenses, for a total of 2.9. And that's the guidance that we gave. And I think the actual was 2.9 million.

All right. So probably just me is write that. And, then, tax rate was 27%. Is that because of a change in mix for, I guess, geography?

Yes, that's principally due to the fact that more of our revenues are going through the distribution center in the U.S. and getting taxed at the U.S. rate.

Taxed at the U.S. rate. All right. Thank you, very much.

But we're going to address that.

[OPERATOR INSTRUCTIONS] The next question comes from Jed Dorsheimer from Canaccord Adams. Please go ahead.

Thanks. Two follow-up questions. One, I think the -- when you made the acquisition, that DVT margins were actually higher than that of the Cognex products. Would you still say that that holds true? And can you give any -- have you seen margins in DVT actually come down? And, then, I have I follow-up. Thanks.

No, the margins have stayed where they are. And there's no reason for them to go down. We haven't lowered price, and the manufacturing cost is -- they're doing -- they did a great job.

And what were service margins during the quarter?

I'm going to guess 35, but we're going to look up the actual number.

And then, Bob, looking at the automotive --

36.

About 36%.

36, thanks. And, Dr. Bob, looking at the automotive business, would you say that customers, domestically at least, are just not purchasing any vision systems? Or are they looking for -- are they actually, because of their budgetary constraints, using alternative lower-cost type solutions?

No, they're certainly purchasing, but Jim will give you more color.

Yes. No, they're definitely not doing the automation with alternative technologies or alternative products. They're simply cutting back on their budgets. I mean, just look at the blood letting that's going on at General Motors and Ford and Chrysler and plants are being closed. And they aren't buying anything for those plants when they're getting ready to close them.

Why would that be, Jim?

I don't know. We keep trying to convince them otherwise, Bob. But, no, there -- it's a matter of them either delaying or canceling planned projects, not a matter of them going to alternative technologies or doing it other ways. And we do continue to sell to just about every plant that expects to have a future, we continue to sell some level of product on an ongoing basis. What we tended -- what we've tended to see are the bigger projects being either delayed or canceled.

Now, the fact that automotive is slow in the United States, and to some degree, I suppose, Europe, we could be making up for this in Japan. However, we don't have the right product in Japan, and the Company is taking steps now to design a very specific version of vision sensor for the Japanese market. And, so, that should help, but, unfortunately, that's going to be a Q4 kind of product.

Well, and we also do very well with -- there are many Japanese auto plants in the U.S. We do very well with them, and we have done very well with them historically.

Dr. Bob, what changes between the Japanese market and Europe and the U.S.?

Well, I understand they need a multi-headed vision system. We have stronger competitor -- competitors in Japan. We have a company called Keyence, a fine company that has -- doesn't have quite the software we have, but they have a lot of feet on the street. They know how to -- they've been servicing that market for years. And the characteristics of how the Japanese want to use a vision system are somewhat different than they are in the United States. And we decided what we would do is start from scratch, and we've assigned the Georgia team to come out with a product specifically for Japan, and marketing people assigned to that to define a product specifically for Japan. And that's, I think, going to be introduced in Q4 or early Q1 next year.

Great. Thank you.

You're welcome.

The next question comes from Hardin Bethea of DePrince, Race & Zollo. Please go ahead.

Hey, one question related to the share count. What was the ending share count for the quarter?

Higher than we'd like it to be.

I think the ending common shares is 46.5 million.

What's the number of diluted? I guess, what's the dilution effect from -- ?

Probably just under 2 million to get the weighted average -- the weighted average shares in the calculation is approximately 48.4.

Okay. Great. And, then, I think you said you have 40 million, 40 remaining under the existing authorization for repurchase?

36.

$37 million, not shares, $37 million to be spent.

Okay. And have you purchased any stock subsequent to the end of calendar quarter?

No, because we are in the quiet period, and we're precluded from doing anything in the quiet period.

Okay. Great. Thanks.

You're welcome. That's it? Well --

There appear to be no further questions at this time.

Well, the team here would like to thank you for your attention, and for some very detailed questions. And I'd like to thank the team that's on this side for being answer those detailed questions, because without them, we couldn't. So we'll see you same time next quarter. Thank you, very much. Good night.

This concludes today's Cognex conference call. You may now disconnect.