Cognex Corp (CGNX) 2006 Q4 法說會逐字稿

Good evening. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cognex fourth quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, CFO of Cognex, Richard Morin. Sir, you may begin.

Thank you, and good evening, everyone. The first thing I'd like to do is apologize for the delay. We had some technical difficulties with the communications lines, but everything seems to be in order at this point. Earlier tonight, we issued a press release which included Cognex's unaudited earnings report for the fourth quarter of 2006. For those of you who have not 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 2006, we are required to include stock option expense in our financial results. Since this expense was not included in 2005, to help listeners compare our results on a consistent basis, we will exclude the impact of stock option expense from our discussion during the call. For your reference, you can see the Company's income statement as reported under GAAP in Exhibit One of tonight's press release, and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit Two.

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.

Yes, thanks, Dick. I'd like to welcome everyone to our year-end conference call for 2006. Tonight we reported revenue of $59 million for the quarter, and earnings excluding stock option expense of $0.26 a share. I'm pleased to say that these results were within the guidance we gave to investors in October, although I certainly would have been happier to report that revenue grew year-on-year. Revenue in Q4 was down from a year ago in all three of the primary markets we serve, which are Factory Automation, Surface Inspection, and Semiconductor and Electronic Capital Equipment. This shortfall was primarily due to slower capital spending trends by manufacturers in the semiconductor, electronics, and automotive industries, which were among the largest users of Cognex Vision systems. Despite the disappointing revenue level we were very profitable in Q4. The operating margin for the fourth quarter, again excluding stock option expense, was 23% compared to 24% in the fourth quarter a year ago. And the bottom line in Q4, again after excluding stock option expense, and also excluding the benefit of a one-time tax item, was consistent with Q4 of 2005, at 19% of revenue.

Looking forward in -- to Q1 of '07, we are seeing further softness in the semiconductor and electronics industries, and are not yet seeing enough growth in factory automation to offset that softness. Because of that, we expect revenue and earnings to decline in the first quarter. We currently believe that revenue for Q1 will be in the range of $55 million to $58 million, and at that revenue level, earnings are expected to be in the range of $0.12 to $0.16 per share. And if we look at that excluding stock options, it would give us $0.17 to $0.21 per share. Now, we've given a lot of information along with the press release, so there's really no need to repeat any of that. So we're going to open up the conference call to any questions you may have. And I'm going to hand most of the questions -- most of the answers to my -- to the team here, in particular Jim Hoffmaster, since he has intimate details -- knowledge of the running of the Company day to day, as I have been focusing most of time on strategic issues and acquisitions. And now that the floor is open for questions, I think I'm going to ask you a question, Jim. Jim, given Cognex's results, what are we doing to get factory automation sales in our MVSD division back on the growth track?

Thank you, Bob. I would like to tell everyone about three major initiatives we have underway to get MVSD factory automation sales back on the growth track. First of all, we made some important changes to the sales organization in the U.S. As previously announced, we appointed two proven Cognex sales executives to key positions, and they have moved quickly to realign the U.S. sales organization. As of January 1st, we have a dedicated team in place to support distributors, and a separate dedicated team in place to pursue direct business with our key customers. In 2006, we experienced strong growth of sales through our U.S. distributors. The problem was our direct sales organization spent too much of their time training those distributors and helping them achieve that growth. As a result, our direct business suffered. Now we have a dedicated team in place to support distributors, and a separate dedicated team, about 30 strong, to pursue direct business with key customers.

And that's just only in North America.

Yes. I'm going to talk about sales force in the rest of the world next. The second initiative we've undertaken is to add more salesmen to the worldwide sales team. We're adding a total of 35 salesmen, which includes 18 salesmen dedicated to selling Checker, and a total of 10 salesmen in Asia. The third initiative we have underway involves new products. We have some very exciting, new DataMan and Checker products in the pipeline for release early in '07. Our DataMan and Checker sales more than doubled in 2006, and we expect sales of these products to grow at least as fast in 2007. In addition, we have some exciting, new In-Sight and DVT products in the pipeline for release throughout the year. Of course, there are many more sales and marketing initiatives underway to help fuel growth, and these three major initiatives are the most important.

Thanks, Jim. Okay, operator. Mary, if you can come back on and start sending the questions to us.

[OPERATOR INSTRUCTIONS] Alexander Paris, Barrington Research.

I just wanted to get a little feel for the semiconductor electrical equipment market for you. I think it's about 30% or 32%, depending on whether you look at the fourth quarter or the full year. Roughly, how does that break down between semiconductor equipment and electronic equipment, like your pick and place machines and so forth, and circuit board inspection and so forth?

We're getting to that. I don't think -- about two-thirds of our bookings are semiconductor, and one-third -- in that space. And one-third are electronics capital equipment.

Just in line with that, the slowdown is that -- you mentioned capital spending. So there is -- your customers are delaying or pushing off orders, but not necessarily canceling them. Is there an inventory liquidation? Is that significant, not only from your end markets, like semiconductors and circuit boards and so forth, but also your OEM customers of your inventories of your product?

Yes. No, we -- Alexander, this is Dick Morin. We get reports from our key OEM customers in both semiconductor and electronics industry, or whatever, on a monthly basis. We review their inventory levels. And for the most part, the inventory levels are mostly in the one to two month supply range, meaning that it's one to two months worth of their current sell-through. So there isn't a huge inventory overhang that they have of Cognex Vision boards that they have to work through. They've been managing their inventory much better than they did perhaps like five or six years ago.

So the problem is primarily, as you said, capital spending decisions by your customers.

That is correct. We're not facing an inventory overhang that we need to eat through.

Okay. Thanks very much.

Antonio Antezano, Bear Stearns.

Regarding your gross margin guidance, I couldn't help but notice that now you're guiding for low 70% range versus in prior quarter it was low to mid 70% range. And just by doing a quick exercise here, that would mean that to get to your guidance of EPS, we would need to assume probably a decline of about 200 basis points for gross margin. And I was wondering if that would be just driven by the decline in the OEM business, which I think posts a higher gross margin? Or if there is anything else that would also affect your overall gross margin in Q1 '07?

It's principally due to the reduced volume, Antonio.

Right. But that's -- so it's a mix issue, right? Because -- or, in other words, when you look at the outlook for Q1, '07, I don't know if you could just expand a little bit more in terms of what are you expecting for each of these three markets?

Well, we're expecting that SISD will not grow over the fourth quarter. It will be at best flat. We are expecting that the semi-cap side will continue to decline. And while there may be some increase in factory automation, it won't be enough to offset the semi decline. So overall, we'll see on the MVSD side, which has the higher gross margins, we'll see a decline in that revenue, lower volume, and higher percentage relationship of the SISD group.

If we talk just in terms of the OEM factory automation of surface inspection, just to make sure I understand what you're saying, because that's probably we're more used to explaining the business in that way. Semi-cap, factory automation, and surface inspection. So basically, you are saying semi-cap, you expect a sequential decline. Factory automation, [inaudible] a slight increase. And basically, surface inspection, flat?

Yes.

All right. Okay. And then regarding the announcement in terms of these new initiatives in sales and marketing, when should we expect to really feel the impact of these changes, because in Q1 definitely probably it's not there. But is that something that you expect in Q2 and Q3? Have you quantified your expectations for that? How are we going to assess, I guess, the impact of these initiatives?

Antonio, this is Jim Hoffmaster. I'll address when we can expect the impact of those initiatives in sales and marketing. First of all, you're correct. We don't anticipate significant traction in the first quarter, or we'd be more optimistic about the first quarter. I believe that the second quarter and certainly by the third quarter is when we'll see those initiatives fully in gear. And we have that in our sights, but we don't give guidance beyond the first quarter.

All right. Thank you. I'll go back to the queue.

Jim Ricchiuti, Needham & Company.

I was hoping to maybe better understand some of the issues that you're dealing with in the factory automation business. I wonder, is there a way for you to give us a sense as to how much of the factory automation business is handled direct, and how much is through distribution?

Sure. Do you have that handy yet?

Yes.

Yes, Jim, we'll get that for you in one moment.

And I've got a couple of follow-ups while you're doing that. As you add salespeople worldwide, are these going to be structured around vertical markets? And I wonder if you could talk a little bit -- besides automotive, it sounds like things are weak in some of the other vertical markets that you sell into in that segment of the business. And I wonder if you could just give us a little bit more flavor as to where you see growth, where things are a little slower than expected.

Bear with us for just another moment, Jim. So it looks like about -- that direct bookings for the MVSD side is approximately 72% of total MVSD bookings, with the distribution being approximately 28% in the fourth quarter.

In the fourth quarter. Okay. Now, is there any kind of a shift here in strategy, as you've -- I mean, I think initially when you acquired DVT, at least my expectation was that more of that business -- more of your overall business was going to go through distribution, including products like Checker. And it sounds like you're re-evaluating some of that, and putting some more direct salespeople into that product line.

Yes. This is Bob. I'll answer that part while -- okay.

I want to make one correction. I misunderstood -- I misunderstood your question, Jim. And I thought you were asking what the direct percent -- what the distribution percentage was of total MVSD revenues. But if we just look at Factory Automation, and that's where I misunderstood where you were going.

That's more than half.

It is about 30%.

30% of Factory Automation, Dick, is through the distribution channel?

But that includes PC Vision. That's not really what he's asking. I believe what you want to know is of the DVT inside product line, what percent goes through distribution, and what percent goes through direct.

That's where I'm going, Bob.

Okay. That answer is different.

And I know that answer. That answer is approximately 50/50. For the fourth quarter of 2006, that was approximately a 50/50 split.

Now, that would -- to me it seemed like it would be a higher percentage going through distribution. At least that's what I thought when you made the acquisition. And what I'm wondering is, have you had to adjust your strategy?

No, 50% is quite large, because DVT only represented 30 million of that total. What was that total? The total of In-Sight and DVT, is what? What is the total of In-Sight, DVT.

DVT was roughly $30 million of the -- of roughly $100 million.

Right.

So in fact, Jim, what happened is, I think we were very successful in growing the sales through distribution.

Right.

The problem was we did that at the expense of growing direct sales. Particularly, in the United States. So our strategy going forward is, first of all, I'm very pleased that we were successful with the distributors. It was a great concern that we had initially that because of our lack of history with them, we might not do well. We did do well with them. Our challenge now is to keep that relationship strong, keep them growing, and re-energize, re-engage our direct sales force with identified key accounts. Bring -- and start developing new business with them to grow the direct piece also.

And without naming the -- sorry. Without naming the direct account, obviously, can you tell us a little bit about the industries or the markets you're going to be targeting in '07?

No, the industries are no different than the ones we've been going after. It's pharmaceutical, food packaging, consumer products, and automotive. Those are the primary markets we're going after. The industries haven't changed. But within each industry, we are telling the distributors that these are house accounts, everything else is yours.

Okay. Okay.

That's how we're doing it. Now to answer your earlier question, Jim, regarding the Checker distribution, we did make a mistake in the past. We thought naively, when we looked at the distribution, that those distributors that DVT had, well over 100, would be ideal for Checker. When we brought Checker to the market, we discovered that that distribution channel was not ideal. Because the distribution channel that Dvt had set up, including our own independent distributors, were great for selling Vision sensors. That's very complex -- not complex, but very capable broad -- with broad capability products like DVT and InSight. Those distributors were -- looked down at Checker, because Checker is not a whole Vision system. It's an expert sensor, it only does one thing. So when you give people a product that they were used to selling at $4,000, with broad range of capability, and then gave them Checker, which sells for a third of that price with very specific, limited capability, they would prefer, of course, to focus their time on selling the broad product. And that's what happened. It was as if we gave Chevrolets to a BMW distributor. Right?

So what we decided to do and what was the right thing after we realized that, is that there may be other kinds of distributors. There are, they're called sensor distributors out there, who are not Vision capable. They sell things like photo detectors and other proximity detectors. Checker may indeed be right for those kinds of distributors. And we have signed some of those up. But in addition, we decided we're going back -- I shouldn't say going back. But for Checker, we are, I would say experimenting with hiring direct end-user salespeople of a different caliber, of a different stripe, different capabilities and different level of background to sell Checker. So we have a different salesforce that we're building now to sell Checker.

And the timing on that salesforce being in place?

I've seen the numbers -- .

I expect -- .

Go ahead.

Jim, we'll have most of them in place by the end of Q1.

Right. And lastly, and then I'll gets back in the queue. If we look at your discreet Factory Automation business, in past I think you've talked about it being a growth business in the high teens, possibly as high as 20%.

That's right.

Do you still feel that's the -- that's the -- ?

Yes. Yes, look, there is a slowdown. But nevertheless, we screwed up in the salesforce. Okay, we -- and we've taken the appropriate actions. Certain people aren't here. We've promoted other people. We didn't screw up in the integration so much of Dvt. As a matter of fact, I think that's gone very well. The people that we wanted to stay, have stayed. They're happy [Cognoids] now. The products are doing fine.

The biggest mistake -- there were two big mistakes we had. The first mistake was assigning our direct salesforce to manage and to work with distributors, which distracted them enormously from closing their own business. It helped the distributors. But now the distributors are up and trained. And we have a separate small organization to help those distributors on an ongoing basis, so we're not dropping them. The distributors are doing a great job. But now we want those salesmen, our end-user salesmen, to have their own quotas, irrespective of distributors, and not to spend their time at all with distributors. That was one -- that was one mistake we made. The second mistake was that we assumed that Checker could go through Vision distributors and that was a mistake. And we fixed -- we believe we have a solution to both of them, and that we will see that solution, the benefits of that solution, this year.

Okay. Thanks a lot.

Richard Eastman, Robert Baird.

Just a little bit of a follow-up on the -- how many distributors do you currently have at the end of the year? Just a number.

Approximately 80 on a worldwide basis.

Okay. 80 worldwide.

No, no?

No. No. We have 20 -- .

One second.

Jim, I'm sorry. It's 172.

172. It's approximately 80 in North America.

It's got a one in front of it. That's important.

Yes. I'm sorry. I've been too focused on the U.S. these last 30 days.

Is the strategy -- you had talked about Asia adding 10, I believe, direct salespeople for Asia. Is that specific to the Factory Automation side of the business?

Yes, it is. We've also added some in OEM.

Yes, but the majority of them are in Factory Automation. And -- .

Because obviously, you've -- maybe, I don't want to say avoided direct sales into at least the China market, parts of Asia, in the past. So this is a bit of a change of philosophy there, as well?

No, I'd never say we avoided it. But what we said is we're not going to make a major commitment there until we understand the market, and understand the risks associated with building a business there. And that was before Pat Alias, one of my Board members and former head of Sales and Marketing, and I took a trip to Shanghai , and we saw a tremendous opportunity. Frankly, they're absorbing Vision, they're using Vision in less automated factories than I would have ever thought. And when we came back from that trip, we met with Jim, and briefed him on our experience. And decided to really spend some money in China.

Okay. Okay. And then also when you look at '06 year-over-year, can -- have you been able to identify the decline in dollars attributed to the domestic auto industry? Is it a $10 million, $12 million number, or -- ? Just to get a sense of how much revenue slipped out?

Yes, we have been able to identify that, and -- .

We've been able to identify it specifically relative to, let's call it the old Cognex-related products. Because for most of 2005, we did not receive point of sale information from the DVT distributors. But on the Cognex product side, call it InSight principally, if you will. It was probably in the range of probably around $12 million, $12 million or $13 million. We do know that by looking at the results, the results of certain regional distributors that DVT had last year versus this year, declines or softness, you can tie it to certain regions that are heavily into the automotive industry. And speaking with those distributors, they in fact commented that their total sales of all their products into the automotive industry slowed. But we don't have a specific number on that.

Okay. So minimum of $12 million year-over-year slipped out.

Correct.

And then have you seen any noticeable improvement in your European operations from any uptick in their economy? More macro-oriented? Just Europe in total?

What time frame are you referring to in particular?

Well, actually in the fourth quarter. Just year-over-year in the fourth quarter.

We saw some growth in the fourth quarter in Europe. But it wasn't particularly strong.

Okay. And then just a last question on the number of -- as you kind of reorganized the direct sales effort, and I guess this has come together fairly recently. But are you tracking the number of proposals or demos that your direct salespeople are doing, or are quoting on? Do you track that number? Is the number of quotes up, or proposals up, or demos up so we can talk about a closure rate? Or do we not -- ?

Well, these changes were effective as of January 1st. So comparing them to -- there's no history yet to compare them to. But sales management certainly tracks the -- first of all, we track the number of leads that we provide to them. We track lead follow-up. We track calls and the quote pipeline for sure.

Okay.

But there is no meaningful comparison data that I could use at this moment.

Okay. And then I'm truly done here. Just the last thought is, as we gain traction or we expect to gain traction in Factory Automation throughout the year, would it be a reasonable assumption, if all goes according to your plan, that Factory Automation could be up just, say, double-digits? 10%-plus? Is that the kind of expectation you would have for '07 over '06?

Yes. I would expect Factory Automation business to be up double-digit by the end of '07 versus the full year '06.

Okay. Very good. Thank you.

Jed Dorsheimer, Canaccord Adams.

Most of my questions have been answered, but just two. One, Dick, what was the services gross margins during the quarter? I missed that.

You didn't miss it. We -- .

We didn't tell you.

We didn't comment on it.

Jed, while he's looking that up, I want to let you know I got another vehicle.

Oh, congratulations.

Yes.

Let's see. Service -- service gross margin during the quarter was approximately 44%.

Pretty good.

Yes, good quarter.

Wow.

And then given the fact that, I guess, the overall with service margins up at the 44% level, it would imply that the product margins saw a decline. Is that volume-related? Or are we -- is it a mix shift issue that's causing those to be under what they have been traditionally?

No, actually, if you compare the service margin quarter on quarter, they -- third quarter to fourth quarter, they were essentially flat, as was product margins.

Got you.

And also you have to take into account the stock option expense that [inaudible] margin -- .

And then one last question. Thank you for clarifying that for me. Bob, maybe you could comment on this. When you were in China, in seeing these automation -- the uses of automation over in China, were you seeing the, I guess, the existing customers, such as GM or Ford, for example, that are moving particularly in the automotive -- while the overall automotive industry has been relatively weak, looking at China in particular, I think there's some areas of strength. So are customers who are familiar with the Cognex Vision systems and using them either here or in Europe for manufacturing, that are building facilities over in the China area, are they going with a different solution where it presents a -- some low hanging fruit? Or maybe you could comment on that.

Sure. The systems that we saw were in two different types of plants. Two categories. One is very low-tech plants that were making parts of chairs and the casters that you see in your chairs. And they were antiquated plants. Nevertheless, they had DVT Vision in there, Cognex Vision systems, doing the inspection on these machines. Incredible. Plants that you'd be afraid to go in, because parts are flying all over the place. No kidding. And nobody's wearing any protection. I guess the EPA or the OSHA has not been visiting these plants yet. So that was one category. Very low-tech companies using machine Vision. I was amazed. The second category were transplants. We went to a major automotive plant. You could eat off the floor. It was immaculate and filled with Cognex Vision. The only Vision systems I saw -- that's not to say there aren't others. I suspect our competitors, especially at the low end, are trying to sell things. But what I saw were DVT and Cognex Vision, and lots of opportunity. Lots of opportunity. And that's why when we came back, we decided I think we're going to have 10 end-user salesmen in Japan -- in China next year. So starting this year.

All right. Thank you.

[OPERATOR INSTRUCTIONS] Alexander Paris, Barrington Research.

Just getting back to autos, could you roughly -- just trying to get at the exposure of the auto industry for you. You've got -- you addressed four markets in there. What percent -- in factory automation, what percent of that is autos? And what percent of your autos is tied into the beleaguered North American producers?

Okay. Hang on one second. And I'll -- well, I'll flip through and let's see.

And while you're doing that, Dick, I'm going to say not very much anymore, Alexander. It -- we took a hard hit last year, and at this point --

Not much exposure -- .

There isn't much exposure left in the U.S. auto industry.

This is Bob, and I'm going to comment about the auto industry. People are still buying a lot of cars. And the issue is, they're buying Japanese and Korean cars, and the foreign cars. And we are not yet getting our -- what we would want to get in Japan. And we are addressing that issue. Nobody's asked that. So I'm going to ask -- I'm going to answer that question that remains unasked. We have not been doing well with InSight or DVT in Japan, because our products are lacking certain features. Nothing to do with Vision. But they're lacking features like a display that comes integrated with the product, they have to be programmed, our products have to be programmed through a PC. The Japanese prefer not to program through a PC. So we are addressing this issue, and our -- have a very large design team. We expect by Q3 to introduce a brand-new product using the same Cognex technology, of course. But a brand-new product designed specifically for Japan, and we expect that that product will be widely accepted.

Okay.

But had we had that -- this product, I believe that we still would have had a great result in automotive. It just would have been elsewhere, not in -- not North America.

So Dick has run some numbers for us, Alexander. And our auto business, as a percent of our factory automation business -- .

MVSD.

MVSD factory automation is about 19% on a worldwide basis. Our auto business continues to grow in all territories except the U.S. And in fact, in Q4, bookings in Southeast Asia with auto companies surpassed bookings in the U.S. with auto companies. So the U.S. now represents less than -- .

About 7% of our total automotive business in the fourth quarter came in the U.S. And that used to be 30% to 35% back before the decline started in the second quarter of '05. Now it's down to 7%.

No way to go but up then.

That's -- .

Well, you know, that's one way to look at it. That's the one bit of bright news in this scenario.

Just wondering real quick, the tax rate of 26%, is that a good rate for the full year of 2007?

As of right now, that's the best information that we have, yes.

Okay. Thank you very much.

[Russ Piazza], Front Street Capital.

Staying with the Factory Automation, I was wondering if you could give us a little color on maybe any changes in the competitive landscape while all this is going on.

My understanding is that no, we have not been losing sales to competition. That the DVT products and Cognex products are quite strong, and we don't see competition to those products. There is competition on the PC side. If just want to buy a PC and software and your own camera, there are other solutions, but that's the smaller business. So we have not seen any -- any new competition.

Thank you.

Antonio Antezano, Bear, Stearns.

I want to follow-up on the distribution issue. I remember when DVT was acquired. Kind of the idea was to, okay, let's use distribution network DVT to sell these low-cost Vision sensors. And you explained that now what you're looking for is for Checker probably to be sold through some Vision sensor, specific type of distributors. So is there a significant change in the [inaudible]? I mean, like DVT now is going to go after, let's say, mid price premium type of Vision systems? And you are going to build or expand a distribution that will be dedicated to sell these low-cost Vision sensors, because you also mentioned that you expect to launch a new type of Checker sensors this year?

Antonio, if I understand the question correctly, and please interrupt me if I don't. First of all, there's been no change in our strategy for selling the DVT products. We continue to -- .

Or InSight.

Or InSight. Good point, Bob. We have coordinated those product lines so that we have a nice, full range of them. We have eliminated some of the duplication between them. And that full range of Vision sensor products, DVT and InSight combined, is sold through the DVT distributors, as well as the Cognex distributors that we had onboard pre-acquisition, and also by our direct salesforce. So there's no change whatsoever in that strategy. We're not looking for -- I think that strategy worked well for DVT, it's working well for us except for our problems in the U,S,, which I believe we've corrected.

The -- what we've changed is our thinking on the best way to sell Checker. Checker is a very low-end sensor. It's best sold by someone who does not sell Vision. Bob has used the example of cars, where if you're selling BMWs we ask you -- and someone comes along and offers you the opportunity to sell a Chevrolet, you're probably not very interested, and you're probably not going to do very well. And the customers who walk into your showroom aren't going to buy very many. And we've found that with Checker, the people who do best at selling Checker are people who sell dumb sensors. Dumb in the sense that they're not programmable sensors, on the factory floor. And so what we're doing on the distribution side is looking for more distributors who sell photo detectors, proximity detectors, mechanical switches, and offering them the Checker line, as well as staffing up a direct salesforce to sell Checker. Direct salesforce of dedicated Checker salesmen.

Checker only.

Checker only. They will not sell the Vision sensors.

Right. Probably my question was whether we should expect that you would expand those type of distributors that are more dedicated for low-cost Vision sensors. I guess those are distributors that in some cases are very similar to the ones that sell, for instance, the [Banners] of the world, or -- ?

That's correct. Yes. Yes. And the answer is -- the answer to that question is, yes. We are -- .

So basically [inaudible] three, three channel kind of system, where you have direct sales, then you have, let's say a tier-one distributor, and then a tier-two distributor that is more focused on low-cost Vision sensors, because -- ?

No, that's not the right way. I wouldn't say tier one, tier two. There are two types of distributors. There are Vision sensor distributors. And then are what we call expert sensors, or Checker distributors.

Checker. All right.

Right. There's not tier one, tier two, it's just a different kind of distributor. They sell different kinds of products.

Okay. Now regarding the new products, you mentioned that we should expect to see new versions of Checker and DataMan. What is the timing or whether you can give us more color on those initiatives?

I don't want to be more specific about the timing. We have very specific schedules internally and plans. But it would be premature to -- I certainly don't want to go public with that information in this forum. And have it get into our customer base.

Or into our competitor base.

Or into our competitor base.

Okay. Can you just give us how much was the sales for Checker in 2006 for the full year?

Yes. Give me a second here.

Tell them you want a 20% or 30% discount -- free. That's a good start.

I think it's about -- it looks like it was about -- .

$5.6 million.

5.6. Okay. Thank you.

We're almost at the 10 that I said we're going to get. I'm going to be right. Just a little late.

Jim Ricchiuti, Needham & company.

Yes. The SISD business, it looks like you have some easier comparisons in '07. I wonder how you would just characterize the environment for the SISD business?

I'd characterize it as rather flat. Not terribly exciting.

Okay.

It's a $30 million, $35 million business. We make money at it. It's okay, but it's not going to get us to $500 million.

Okay. Are you still working on the margin improvement in that business? How is that coming along?

Yes, and I would say [Marku] is doing a very good job of increasing the gross margins, that's coming along. We are looking at certain acquisition potentials, and as we speak.

And that was my next question. So on the acquisition front, you are looking at some acquisitions in the area of the SISD business? Or other areas?

The more interesting ones to us are in other areas. Are in what we call the core business of MVSD. But there are some interesting potentials in SISD, as well, that have some strategic impact.

Okay. Thank you.

Ladies and gentlemen, there appear to be no more questions at this time.

Okay. I think that's it. Of course, we are available for calls if you have something important you'd like to talk to us about. Sue Conway will be around all day tomorrow. And you know how to reach her. And I want to thank you for attending the call, and look forward to reporting more exciting results in the near future. Thank you very much for attending. Bye-bye.

Thank you, everyone. This concludes today's conference call. You may now disconnect, and please have a wonderful day.