Cognex Corp (CGNX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex fourth quarter 2007 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions on how to participate will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Richard Morin, Chief Financial Officer. Sir, you may begin.

Thank you, and good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the fourth quarter of 2007. 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.

During tonight's call we intend to discuss our financial results as reported under GAAP. However, it is possible that we may use a non-GAAP financial measure if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. For your reference, you can see the Company's income statement as reported under GAAP in exhibit 1 of the earnings press release, and a reconciliation of certain items in the income statement from GAAP to non-GAAP in exhibit 2. I would like to emphasize that any forward-looking statements we made in the press release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change, and actual results may differ materially from those projected or anticipated. You should refer to the Company's SEC filings, including our most recent form 10-K for a detailed list of these risk factors. Now I will turn the call over to Bob Shillman.

Thanks, Dick. I would like to welcome each of you to Cognex's fourth quarter conference call for 2007. It is Valentine's Day, and we have a sweet gift for everyone, a nice fourth quarter.

We reported revenue of $65 million, and earnings of $0.25 per share for Q4. Revenue increased by 19% on a sequential basis, and 12% over the fourth quarter of 2006. By the way, this is the first quarter in over a year that we reported an increase in both revenue and earnings on both a sequential and year-on-year basis. The increase was primarily due to higher revenue from the factory automation and surface inspection markets both of which set new records for quarterly revenue in Q4. Somewhat offsetting the higher revenue in factory automation and surface inspection was the semiconductor and electronics capital equipment market, which we call semi. Demand in semi continued to be soft in Q4 due to the industry downturn started in early 2006. Semi revenue decreased by 8% on a sequential basis and 24% year-on-year, and so far in 2008, spending by those customers continues to be slow, and the timing for pickup remains uncertain, which is typical for this market. The weakness in our semi business is symptomatic of the industries and not of all of our products or competition or the sales channel.

In the surface inspection market, revenue was $12 million in the fourth quarter which was over 125% higher than in the prior quarter, and 50% over the amount reported for Q4 of 2006. This dramatic increase was due to two things, the wins we had during 2007 in the metals industry in China and elsewhere in Asia, as well as deferrals from prior periods that were recognized as revenue in Q4. Factory automation revenue increased by 13% on a sequential basis, and 23% year-on-year, driven primarily by strong business in Europe. However, what I am more excited about is the positive trend in factory automation that we saw in Q4 is continuing into 2008. Year-to-date, our orders in the factory automation market are up 43% over the comparable period in 2007. We are seeing growth in all the primary geographic regions we serve, as well as on all of our factory automation product categories. This is a strong indication that our sales channel is now working as it should.

As we reported in the past, our ID business, this is the business of producing vision systems whose sole purpose is to read numbers or letters or symbols off of surfaces ranging from paper or metal parts even, that's been growing very quickly. Our factory floor ID bookings grew by 55% in 2007, and although it is early in 2008, it appears that that rate of increase is actually growing. Comparing quarter to date Q1 of '08, to Q1 quarter to date of '07, orders of our In-Sight industrial ID products are up 52%, and DataMan bookings are up by an amazing 184%. Taken together, bookings for ID on the factory floor have increased by 119% in the first month and a half or so of 2008, as compared to the same period of '07.

Our initial success in the ID area was in the high-end market, which is reading codes that are very difficult to see, either because of the material that they're etched on or due to the speed of the parts moving by. A good example of a win we announced a few weeks ago, a large industrial printing and mail fulfillment company selected Cognex ID readers to integrate into their document assembly equipment, to ensure that all of the pages of the document that they are mailing are accounted for, and that they're matched with the right inserts and that they're inserted into the correct customer envelopes. It's a very high speed application, and it is critical of the multiple pages of personalized information be mailed to the right recipient. Orders from this customer in 2007 totaled nearly $500,000, and there is potential for more business from them over the next few years as they roll out Cognex ID to their other plants worldwide.

More recently, we have been winning opportunities in the lower end of the market, which has traditionally been served by companies that make barcode readers. For example, Cognex recently displaced one of the world's largest manufacturers of barcode readers at a leading tier 1 supplier to automotive companies. This was an existing Cognex customer who was using our Vision system in their manufacturing and for tough ID problems, however, they were using less expensive barcode readers from a traditional supplier for their easier ID problems. But once our sales engineer gave them a preview of our new entry level lower cost ID reader, which would will be formally introduced later this quarter, they decided to buy all of their future code reading needs from Cognex.

We have received a P O for a small number of units, 15 or so, and we expect another 50 to come by later on this year. This is a strange example because we did not win this business due to price nor due to performance, but we won it because of our relationship that we had with the customer and the fact that we have broadened our product ID line to meet all of the requirements on the factory floor, so the customer could consolidate and rely on one supplier for all of their vision and ID needs.

In 2007 we spent a great deal of time, effort and money on new product development. Our goal was to broaden our product offering and to make our products easier to use and integrate, and we now believe the initiatives will help us expand our business in our core markets and gain share. We recently held sales kick off meetings for our worldwide sales team and distributors, and they received in-depth analysis and experimentation with our new products that we'll be rolling out in the next several months, and the reports are that everyone, including our own end-user sales people and the distribution partners left the meetings energized and ready to sell.

Looking forward, I believe that 2008 is going to be a great year for Cognex. For the first quarter we expect that revenue will be between $58 million and $61 million and earnings will be between $0.13 and $0.18 per share. Although these numbers are down somewhat for the results we just reported for Q4, they do represent a significant increase over our results for the first quarter of 2007. Now I am going to open the line for any detailed questions you might have and my team and Dick Morin's team are here to take those questions and help us answer them.

(OPERATOR INSTRUCTIONS). Our first question is from Antonio Antezano from Bear Stearns.

Hi, Antonio.

Regarding product development that you highlight in the press release and also in your presentation today, outside the ID business, what type of other initiatives do you have for this year?

I am not going to give too many things away to competitors, but I will tell you that we are coming out with a very, very small version of In-Sight called the In-Sight Micro. We have challenges in our company between the different groups. You see, we had this product called In-Sight, and then a separate team came out with Checker, which is much smaller, and Checker of course you may know is a much less sophisticated, much less capable product. It is a vision sensor, not a vision system, so it made sense that it could be much smaller. That size challenged the In-Sight team, and then Insight came out with the In-Sight Micro which is smaller than the Checker.

It is a full-vision system which is the size of a small remote camera head, smaller than your cell phone. It is designed for robotic applications and tight spaces and OEM machinery, and it is going to make a major difference in our thrust into Japan, where we've been competing with Omron and Keyence, who have small cameras that they've been using, not small vision systems, but small cameras hooked up to a remote controller. This In-Sight Micro along with a new software interface called Easy Builder we believe is going to make a major impact and really give traction to our business in Japan which as you know for the past two or three years has not been doing well and mainly from lack of product.

I think I missed something about China, but when I was looking at the breakdown by geography, I noticed that rest of the world grew more than 70% year-over-year, I wonder if that's reflecting China or something else?

China is included in those numbers.

What is your outlook for China for 2008 or what percentage of revenues China, what would be this year or next?

I don't know if we give those numbers.

If we start giving that to China, then Japan and then everything, you'll know what we're expecting to do for the whole year, and we just don't want to do that. I can tell you that China is our fastest-growing region right now. That's not only because the denominator is low, just tremendous opportunity for us in China. We have a great team kicked off there, ready to sell, ready to already trained and high energy and doing well.

Just one final question regarding the, I guess the gross margins, I am wondering if you expect these same level of gross margin going forward since it seems you're now getting a lot of help from the OEM which is supposed to have high margin and you're delivering excluding stock option expense is close to 74%, I was wondering what do will be your outlook for gross margin for this year?

Low to mid 70s is our projection. By the way, you're absolutely right. The OEM business has high gross margin, but for the past few years, our gross margin, our product gross margin, in the factory floor, excluding the surface inspection is also very high.

There has been inspection used to have like a lower gross margin?

That's correct, 45 to 48.

That's right. And that surface inspection business was very strong in Q4, and even with that, you got a very good gross margin, so I was wondering if there was something else there?

If you take a look at it, Antonio, what happened is the gross margin for the surface inspection business in Q4 with $12 million of revenues turned out to be much higher than it would typically be, because of the fact that they had so much more volume. They did $12 million of reported revenues in Q4 versus $5 million in change in Q3, some of that due to the deferrals or whatever, but what you've got is your $12 million worth of revenues and your fixed costs are essentially the same, so during the quarter instead of being around 50% gross margins, they were in the mid-60s, and the MVSD gross margin continues to be in the high 70% range.

Right. Thank you. I will go back to the queue. Thank you.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Alexander Paris from Barrington Research.

Great quarter.

Thank you, Alex. Finally.

When I hear you're bullish, that's really something. You usually call it like you see it.

That's right, and I have been here for this entire week, and spending a lot of time with Eric and the sales team, and I am confident we've fixed the problems, we've fixed the problems, we had four significant problems in the Company that we faced in 2007, and I will go over those later if you like. It is going to be part of the annual report video, and we identified each of those four problems, some of them we can't do anything about, the slowdown in North American auto, but we can realign the sales and have them chase other things, and the biggest problem that we had that we had that we could solve is the realignment of the salesforce and the sales channel. We have very good channel partners, very good distributors, and due to our own mistakes, we had -- we made some significant mistakes which caused it to be far less efficient than it should be and too many conflicts and Eric has straightened it out.

Maybe you can straighten me out a little bit in terms of the ID business. Talk about the In-Sight ID product, the Data Man Products and now talking about an even smaller one. Can you in a couple of words put those into perspective today?

It is a little confusing. It is a little confusing. We have, actually there are three products, three different products for ID. There is a wafer reader, which we're not even talking about in this discussion. We didn't even include that in ID, because we lump that with semiconductor and electronics OEM, but there is a machine -- there is a device we sell that's specifically reads codes off of wafers, we're the world leader in that, and I don't know, that builds business can go between 10 and $20 million a year, something like that. I am not even referring to that.

Then there are two factory automation ID readers. One is called a version of In-Sight. You know what In-Sight is. In-Sight is a family of general purpose vision systems, but there is one version of that family that only reads. It is a fixed position reader. It is bolted to the factory floor and looks at engine parts moving by or whatever and reads those numbers. It is a hardened product. It is not handheld. It is factory rugged. That's the In-Sight ID reader, and it is factory automation.

Then we have DataMan readers, which are not rugged, physically rugged, they're able to read everything, but they're not industrialized. They're lower cost. Those come in two versions, mountable or handheld, and the handheld ones are now going to come in three versions, one, a top-end version that can read everything that you show it, and then there are two lower-priced versions for reading easier to read things, so we can compete with those lower-priced solutions, where the customer doesn't need it to read rusted parts or something.

It it is a complicated market out there, and what we've done is partition the space so we can get a premium price for when the customer needs the premium and very high speed, very high accuracy on degraded parts, but then there is a very large business out there for reading ink on paper which many people can do. We can do a little better, but that is price sensitive, and we've come out with DataMan or will be coming out with DataMan for that, and it is a different version number.

Great. Thanks. Another question. Solar market, is that going to develop as a significant inspection market for your or automation market for your types of products?

I know our software vision group is pursuing customers in the solar panel area, and we believe that we have the right software technology already in the bag, the same things we've been selling for the semiconductor people, for working on solar. I just can't tell you how big it is going to be. I don't know.

Thanks very much.

It is sort of like fiber optics, right?

Right. Right. Thank you.

You're welcome.

Thank you. Our next question comes from Chuck Murphy from Sidoti & Company.

Good afternoon, guys.

Hello, Chuck.

Congratulations on the quarter.

Thank you.

Can you give us a sense, as far as the guidance goes, can you give us a breakdown of what you're expecting for each of the different product groups, what would potentially be down and up in the first quarter?

Sure. Typically what we see in the first quarter is the factory automation part of the business declines. In Q4, we tend to see a lot of orders from customers who are looking to spend the last remnants of their capital budget before going into the next fiscal year, so typically we see a decline in factory automation. SISD, we clearly believe that we will see a decline in SISD revenues. They set an all-time record of $12 million in the fourth quarter, and we don't expect to duplicate that in Q1. On the semi side, we've continued to see the semi business which declined every quarter in 2007 and we see no hope for a rebound in the first quarter.

Okay. That helps. And as far as the new products go, is this new technology for kind of solving the same problem or are you solving new problems for new markets with these new products?

Well, the products I have already talked about are solving the same problems, but opening up new markets, because they're smaller or lighter or cheaper. However, I haven't talked about some new Checker products. Are we talking about the Checker? Two brand new products, brand new technology, for entering totally new markets for Cognex. These came out of the brain of Bill Silver and his small team, just dramatic products that will do things in the photosensor space, that photosensors can't do for about the same price, they're going to do things like measuring speed and measuring position that nothing else in the world can do, and those will be -- those are going to be beta tested at the end of this quarter, and probably released I would say the end of Q2, something like that.

Okay.

We are expanding our products in two different ways. One is making our products easier to use and it is something called Easy Builder which the salesforce now knows about. We haven't announced it to the world yet. It is a front end to our product, to all of our Vision systems that make a Vision system as easy to use as possible.

It is an incredible front end, and let me give you an example. If you took a calculator and you wanted to examine the calculator, you're building these calculators, and you want to find if the keys are there, traditionally any vision system you would have to teach the vision system where the keys are and write code or lots of GUI to measure the distance between them. Under Easy Builder you put the calculator or whatever it is you want to measure, under the camera, under the Vision system, and immediately the vision system finds all of the features, because we know enough about from history, we know enough about what people want to find now, so the Vision system is pre-taught what to look for.

It doesn't have to know it's a calculator. It could be a key pad on the telephone. It could be pills in a bottle. It will find all the items, and then you just click on and drag some icons and tell it what to do with that information. Incredible. This is going to be a unifying graphical interface for all of our products from the PC Vision to Vision systems to Vision sensors, so by making our products easier to use, we are going to get a tremendous amount elasticity. There is elasticity in the market. That's one thing.

Final question. As far as the ID products go, I calculate it to be roughly $23 million for 2007, how big of a market do you think that could become for you over the next two years, let's say?

Very good question. It depends on how aggressively we go out with channel partners and find OEMs. It is an enormous market. If you think about, it wherever you go today, there are barcode readers. Wherever you go, if you buy anything on any retail store or any loading dock, there are barcode readers. Those are all one dimensional readers, they're called one dimensional readers, and the way those work is by a laser beam. Within the next four or five years all of those, all of those are going to be replaced with two-dimensional readers using camera or machine vision technology, for a variety of reasons. I won't go through it now.

We're the leader in that technology. We're not the leader in the distribution. We don't have the contacts, but we're actively pursuing that, so it right now I think if you looked at the barcode industry and added up the revenues of all the barcode readers in the world, it is probably a $1 billion a year right away. Maybe more. This new technology is rapidly gaining hold because it could do many more things, a barcode reader can not read a 2D code. All of these new codes that are coming out that everyone wants require a camera system to read it and we're the leader in that. Our goal is to grow no less than 50% per year.

Okay.

And the market is there for us.

You kind of mention it would take four to five years to really have 2D take over?

That's my estimate. Five years from now you're not going to see laser based readers anywhere. Frankly, I think they're more expensive, they're harder to service, and there are sorts of drawbacks in addition to the fact that the companies -- everybody is moving towards these 2D codes. All right. That's all I had. Thanks.

Sure.

Thank you. Our next question comes from Richard Eastman from Robert Baird.

Could you just spend a minute or two on the geographic role difference between the Americas and Europe? Is the difference there in Europe, is it product driven? Is the distribution more screwed up there than it was here? Straightened out or are we seeing or with the Americas growth are we seeing some economic impacts in the business year-over-year?

I can answer some of that. First of all, I can tell you that in factory automation, all regions grew. North America was least. But it did grow. Japan was the greatest. Next was Europe and Asia, North America grew the least. One of the reasons --

You're just taking a look -- I think what you're looking at right there is '08 versus '07 year-to-date.

Year-to-date '08 is only like --

A month and a half. You might as well talk about that.

I think what Rick is doing, he is looking at total revenue -- are you talking specifically factory automation, Rick?

You know what, in your revenue breakdown by geography, where you have the Americas, Europe, and Japan, you put the percentages in there, but if you look at the growth year-over-year in the fourth quarter Americas was up seven, Europe up 36%, basis aren't that different, and I am just curious what's driving the growth in Europe and secondly, there was modest growth in the U.S., and I was trying to dig into that a little bit.

There are two pieces to what's happening in Europe. One, Europe has had an outstanding year this year, and they did not have the same channel issues that we had here in the United States, so they've had an outstanding year. The other thing that also helps Europe is that they saw a benefit year-on-year, if you take a look at the total year, if you're looking at an improvement in the exchange rate that gave them 8.5 to 9% of that total 36 or whatever percent growth came from foreign exchange.

Very good. And in the U.S.? is that more the same in terms of the end market softness?

I think what we had a couple of things that we didn't get our channel conflict straightened out in the U.S. until we started going into the fourth quarter of this year or whatever. I think that's part of or a good part of why there isn't such a big increase in the U.S. side.

Okay. And when we talk about the new products and what we'll be introducing this year, we've kind of we've kind of talked about this for a little bit. In the past when we've seen new products, the market acceptance of those newer products has been generally taken some time, and --

Yes, yes, that's right.

And I am curious with this portfolio with new products coming out, do you feel your marketing intel is better and that these products can have a bigger impact sooner on sales than maybe what we've seen in the past?

You're asking a very good question. Certainly the new products in the ID category are designed specifically for existing customers that we're talking to or markets that we know about, so I expect those products to take off rather quickly. Where I was overly optimistic, was in Checker. That was coming out with a brand new kind of vision expert sensor or vision sensor that the world had not known about, that was neither a vision system nor a photo sensor, and it took a lot of education, and we're finally getting to the $10 million a year rate with that product, and similarly, it could be that these new invention that is Bill Silver and his team have come up with, the two new inventions, they may indeed take time also.

They are revolutionary in what they can do, and because that far it does take time to educate the marketplace, so I don't think we have any hard projections on either of those products. One is called Checker TG for trigger, and the other is called Checker SD, for speed and distance, and we are not -- I am not out there telling the world that we're going to sell $10 million in the first year. We have not built a lot of those into the plan.

Understood. Okay. How are the bookings in sith in the -- SISD in the fourth quarter? Obviously, the book to bill would be below 1, but I'm just curious, were the bookings sufficient to support your outlook for '08 for that business?

Yes. Bookings in the fourth quarter were good and clearly keep us at the $30 million or whatever run rate. I have to say that our partner and Vice President, Senior Vice President and General Manager of Surface Inspection, Mark (inaudible) and Justin and his team have done a great job with that product line and enhancing the product line, and we're very successful now in China and it is not easy to do business in China, and I want to thank the whole Chinese team. We're doing fine in that business. The problem with that business is slow growth. That's the only problem in that business.

Just the last question, I noticed in the press release I think in the SG&A section, there was some reference to patent related costs. What is that?

There are a couple of things that we spent money on in Q4, one of which was actual patent filings and the preparation of patents or whatever which was higher than it had been in the previous quarter, and we're also involved in litigation on a patent suit that's disclosed in our 10-K and the 10-Qs with Veritec Acacia.

Which is a patent troll.

Very good. Thank you.

You're welcome.

Thank you. Our next question comes from Alexander Paris from Barrington Research.

Richard, just on the tax rate, the 23% for the first quarter and it is -- just looking forward, what you expect in terms of revenues from lower tax countries, maybe like perhaps China, is that 23% or so, is that good for the whole year?

That's our current estimate for the whole year, okay?

Okay.

China doesn't have a low tax rate. The tax rate in China is equivalent to the tax rate here in the United States unfortunately.

Probably nobody pays it. We do pay it. Well, the Chinese don't.

Or the firing squad.

Don't ship anything with lead in it, you know.

Speaking of China, there is a lot of opportunities. You seem enthusiastic about it. I know you're doing business in the metals area and so forth, and surface inspection, aside from that, where would you see in your regular business, the outlook for growth in China, the electronics area?

No. Most of our business in China outside of the surface inspection is on the factory floor. We have, to my knowledge, we don't have any OEMs in semiconductor?

No. I think we sold some of the wafer readers to a couple of the fabs in China.

It is all factory floor related.

To the extent some of our OEM customers are shipping --

That's different. Factory floor.

Can you say what the In-Sight Micro, the rough price, would that be your lowest price product, would it be below Checker?

How many do you want to buy? No, it is not below Checker, no.

Can I get a volume discount?

Yes, you can. Yes, you can. You can be certain that our products, we select the philosophy of value pricing. We try to get a price that's equal to the product's value, and in most cases, the product gross margins are designed to be 80%.

Okay. And on ID going in five years from 1 D to 2D, you have people like Simple Technologies and others who have a big investment on the low end, 1D, higher, are they look -- would they be potential competitors or going to come from other machine vision companies or not going to sit there and foster business disappear?

The big competitors are the companies in the barcode business. As you know, Simple Technology was recently purchased by Motorola. This is another company that we partnered with for awhile but we compete occasionally, it's Handheld Products that was bought by Honeywell, and there are a variety of others, probably eight or ten players in barcode reading around the world, and they're all potential competitors and Simple will be a tough one.

Do you see them in ma market yet? They're not doing 2D symbology yet?

Yes, they are.

So you are seeing them?

Yes, yes. They're smart. They see the future. At some point they may be a customer.

Just one other question. It is too broad, I guess. I was looking at these technology area, the earnings in the fourth quarter were up 26% in ES&P the best ones, 13 out of the 14 industries, the one that was down was semiconductor which is important market for you. Is there anything really different going on? Is that just the same old cycle that's just slow to turn?

The good news, Alex, it is getting less important to us because we are growing our other businesses. And the bad news is it is a cyclical industry.

Right. But it is no worse than it was before? Well, -- Nothing really new or disastrous?

I don't know.

As far as your customers are concerned.

No, our customers are still holding market share, but their customers, which are the fabs, I don't know how many new fabs are being built, but the capital equipment, semi capital equipment business is way off, and the stocks that I happen to look at, I don't own them, but capital equipment companies, they're doing very poorly right now, and the chip companies are, too, from what I see. We're being tarred with that brush. We still get affected to some degree because 30% of our business, is that about right, is semiconductor related to that, but we're broadening and at some point it will be less and less.

Thanks again very much.

You're welcome.

Thank you. Our next question comes to us from James McAree from David J Greene.

Thank you. Hey, Dr. Bob, looking at the investment intensity, we're seeing the new products that you promised from investments.

Yep.

And could you talk a little bit more about where you might be adding people and if your focus on these new products is going to continue?

The key to success in high tech is new product development, okay? There is only so much you can get out of the old products. We sell them for a long time, but nevertheless the growth is in new products and new opportunities, and so this is still an engineering-intensive business. Though we learned that distribution is crucial, you can have all the products you want without a good distribution strategy, and you're going to fail, but we are still investing heavily in engineering, I think 15% of revenue goes into engineering, the last time I looked, and we don't anticipate cutting that back. Where we are investing, where you haven't seen the pay off yet, is the vision system on a chip. I have talked about this a little bit. We have our first prototypes back from the fab, and they're working. This is under the direction of my partner and Senior Vice President of Research and Development, John McGarry and his team in England, Pierce Plummer and Paul Margetz who have done a superb job.

We have we believe the world's first Vision system on a single chip of silicon. It is not going to be productized, it's not available on the market for quite some time but maybe at the end of this year. The first products will be in Cognex products, but we envision this chip will be embedded in many things in the future whether it is going to be automobile navigation systems or whether it's going to be banking term terminals, it is the ultimately low priced high-performance vision system, and we've been spending heavily on that, and the return of that will be in years to come. A lot of current R&D, closer to reaching the market, are the things we're doing in the ID space, and also in this new sensor space, which is competitive or superseding photo detectors.

And could you talk about your hiring plans? I think if I recall you wanted to add to your salesforce, and in my notes I had a number of about 30 people, and sounded like it was going to be weighted in the Far East. Could you maybe update me a bit on that?

That's correct. Dick will give you the details on where we're going to do it, on how many in each office, but it is mainly outside of North America, the manufacturing is being done now in eastern Europe. We're looking at those countries there to open offices. We're opening an office already in India. We have a small office and expanding with three offices in China now or two?

Two main offices, and we have sales guys in different regions that are essentially operating out of there, but we're looking the principal new hires will be in Asia and also in eastern Europe.

Can you find the quality trained people that you need or what's kind of the pace?

The good news is there are quality people out there, ready to sell. The bad news is, it appears we haven't experienced this yet, but loyalty is nothing, is a new concept in those countries, that for an extra $0.50 or $1 they quit.

But you're a pretty creative guy, Bob. You can structure some long-term agreements.

You got that right. You got that right. I'll promise to marry their sisters.

Thanks so much.

You're welcome. I did marry -- I have four brother-in-laws over there, so I did marry somebody's sister.

Our next question is a follow-up from Antonio Antezano from Bear Stearns.

Hi, again. I don't know if it was asked but regarding uses of cash and especially in terms of acquisition activity.

Right.

Whether there is any comment there?

That's the comment. I would love to tell you that we're working on some big deals, they didn't work out. All right? I would love to tell you we have a pipeline of companies we're looking at. Right now the pipe is almost basically dry, so I expect that we're going to be buying stock back instead of buying companies until we find more companies to buy. It is disappointing, but our criteria, we're very tough. We have a rather good record on acquisitions. I don't think we have lost on any one of them, and it doesn't make sense to relax on that. We are looking for companies with unique technology or unique distribution or strong competitors. We love to buy competitors. And they have a certain kind of culture, and we can't find them right now, so maybe we're not looking right, but I will spend more time on this by the way the remainder of this year because right now the well is dry, but the good news is we're not going to waste the money. We'll buy stock back, and I hope the stock doesn't go up today.

One more question regarding the search for the COO position.

Yes.

Any update on that?

Same update. We have professional search firm helping us, and we're pretty picky. We're pretty picky. We have high standards. There are some people that we're looking at now that might be right. We're still looking. We're still looking. But we have some active candidates.

On the surface inspection what should be the run rate going forward? I think you mentioned bookings, annualized bookings will be around $30 million. Would that imply between 7 and $8 million run rate for surface inspection?

That's the run rate we've had the last couple of years in that range or whatever. We don't expect to be doing $12 million a quarter for the rest of the year.

God willing.

The last two years surface inspection has been down, so I was wondering -- if there is no fundamental issue with that business at some point we should see bigger positive comparisons for surface inspection, right? They're on and off a lot of new steel mills that being built or whatever, and we're winning business in mills where they're putting in their first inspection systems, and there is retrofit going on on the paper side. We do expect that '08 will have favorable comparisons to '07.

Thank you.

Thank you. Our next question comes to us from Ben Alexander from Alexander Capital Management.

Yes, good afternoon. Congratulations on a great quarter.

Thank you, Ben.

Some of my questions have been answered, but I did want to ask you since I was so impressed with how you did with factory automation and since we're reading in the the papers every day that the economy is either in a recession or almost in a recession, obviously has not impeded you, so would you please talk about how you might think the economic environment might affect you moving forward?

It has impeded us. If the economy was stronger, we would have done better. I am also suffering from malaise, the same feeling of slowdown in the U.S. economy, and I don't know if everybody gets a check for $800 if it will do that much difference, and thank God, it is not my job to cure it, but my job is to make sure we put our resources where we can get return on those, and that's why we're spending a lot of our time in foreign destinations now. It is a shame, but it is true.

Very good. Thank you.

(OPERATOR INSTRUCTIONS). Our next question is from Jim Ricchiuti from Needham and Company.

Nice quarter. Question on the ID business, Bob. Normally you would think that margins associated with some of the equipment in this business would be toward the lower end of what you guys would normally see.

Right.

How would you characterize the margins in this business especially as it becomes a bigger part of the business.

Well, I have said that every product we design has a targeted gross margin of 80%, and so far we're reaching the target.

Great. Okay.

You're right. Barcode readers are inexpensive, but it turns out it is cheaper -- is that -- barcode readers are inexpensive, and at the low end they are commodity items, but building a vision system doesn't take a lot of parts any more, so we're able to do it.

On the looking at your R&D spend in Q4, significantly higher than what we've seen, I think it is a record level for you guys, and you clearly got a bunch of products in the pipeline. Do we see the R&D spend taper a little bit as we get into the back half of '08 as you push more of the new products group or do you see it remaining steady?

I would say this the first time I am thinking about it, we will hold the dollars constant, but the percentage will go down as the revenue goes up. I don't anticipate spending more dollars.

Fair enough. If we look at the business overseas where you're clearly getting a lot of growth, are you -- it doesn't sound like you have seen any signs of customers getting somewhat more concerned about the overall global economy, sounds like --

No, no.

Okay.

And I don't hear that at all. I go to China three times at year, and sheesh, capitalism is gone wild. Everybody is happy. Everybody is making a lot of money, and everybody is busy, so this is not a world problem, at least I don't see it as a world problem.

Last question, Bob on Easy Builder. I just wanted to get a sense as to how important -- it sounds like this is a significant advance for you guys.

Yes.

Into the market.

Yes.

How does this roll through the product portfolio? How should we see this impact you over the next year?

Okay. Well, starting next quarter every In-Sight comes with Easy Builder, every In-Sight, so that's the front end. Now what's also unique about this, and many people on the call won't necessarily understand this, there always have been some very easy GUIs that the program Vision systems. The problem was they were very limited. Once you exceeded the limits, you had to throw away everything you did and go to some other program and modality. With Easy Builder, that's not the case.

If you did reach a limit on Easy Builder, you click here and click there and then you can modify all the code that was written. It is all in a spreadsheet which was the original interface to In-Sight, and anything you do on the spreadsheet goes up to Easy Builder, so it really is rather unique, and we have some extensive patents on this filed now. This is going to make it possible for any factory technician to now use machine Vision. Go ahead.

I was going to ask if this has been beta-ed or have customers been able to play with this yet or going to see it for the first time --

It is beta siting -- yes, it is going to be given to the salesforce I think next month. I can tell you exactly. Next month, right. It has been beta tested already, and with customers we have been dealing with, and this is what I thought I was going to sell in 1981, okay? This is what I thought machine vision was going to be like. It took a long time.

Great. Dick, question for you, Dick. What should we assume rate on with the interest rates coming down, what should we assume you get on the cash?

Probably around 3% or so.

Okay. I guess that also argues for buying back stock, doesn't it, Bob?

It sure does. At these prices, no question.

Terrific. Thanks a lot, guys.

You're welcome, Jim.

Thank you. Our next question comes to us from William Pike of Pine Street Securities.

I think you actually answered it last time. I was going to ask about China in particular if you see any economic impact? You waxed kind of enthusiastic, and I sense the opportunity is big there, but my question was there was some talk that China could slow down after the Olympics for a variety of reasons, but I sense you don't see that?

We don't see that and maybe we're just too small a player to see it. We're not looking for $600 million of revenue out of Shanghai, so, no, we don't see it.

Do you have any other competitors in China that you may not have in the rest of the world?

No. They tend to be the same competitors.

And is currency in China, how do you deal with that? Are you going to sell for dollars there or --

In China we sell in dollars, where there is a requirement to sell in the local currency, we have gone through distribution. We are in the process with the offices that we set up. We set up rep offices or whatever, and we're in the process of incorporating in China and once we get incorporated we will be able to sell in and accept the local currency, which we will then use to fund our local expenses, and we'll be able to convert that currency for the inventory purchases.

Got it. All right. That's all I had. Thank you.

You're welcome. Thank you we'll now hear from Eric Ende from First Pacific Advisors.

Hi. Good afternoon. The line for investments and other income was up very nicely despite what I thought would be flat cash balances and lower rates. Did you want to comment on how that happened, and then I have a follow-up.

I think there was -- there were a couple of things. The biggest increase in fact was an investment income where we had converted some older bonds that had lower rates, so we were getting a higher return. There was also a little bit of extra invested cash during the quarter and to a lesser degree we had an increase in other income which is rental income that we have in space the building right behind the Company headquarters.

The follow-up is, given recent events in credit markets, would you be able to reassure us as to how your cash is invested or on the other hand, perhaps you have some degree -- cash is invested?

Mortgages. Mortgages.

All right.

We're principally in state and municipal obligations. Say that again?

What kind of duration would that be or how short is it?

They're mainly less than I think they're less than three years. I think on average we're probably somewhere around 2 to 2.5 right now. Okay.

Thank you.

You're welcome. Sounds like -- two more questions?

Yes. Our next question is from Ben Alexander from Alexander Capital Management.

Thanks for taking my follow-up. Wanted to ask you, Dr. Bob, are you having any thoughts on the semi market as to why it isn't recovering, why it is taking so long to recover? You may have insights or some theory on what's going on in that market.

Nope, I really don't. If you ask me if this was five years years ago when semi was a very big part of our business, I spent a lot of time talking to those customers and their customers, but now I don't, and I don't even -- can't even speculate. I just don't know. I don't know.

Thank you.

Thank you. Our final question comes from Antonio Antezano from Bear Stearns.

Thank you for taking the last question. Now that you are using the same GUI for all your product lines, how are you going to position DVT versus In-Sight? Is there some changes we expect now going forward?

We are committed to continuing to manufacture and supply DVT to any of those customers that still want it. The DVT product is made in the United States, and we're going to continue to provide it. I think that over time customers will see the advantages of this new GUI, and over time we'll migrate to a standard platform which is going to be called In-Sight.

Thank you. I am showing no other questions from the phone lines.

Okay. Well, thank you all for attending this call, and this is one of the first that's been a pleasure, and I am going to work hard to make sure that every future one is as nice. Go home. Go to your spouse or girlfriend and have a happy Valentine's Day. Bye bye, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.