Cognex Corp (CGNX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Cognex second quarter 2008 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Richard Morin. Sir, you may begin.

Thank you, and good evening everyone. Earlier tonight we issued a press release announcing Cognex 's earnings for the second quarter of 2008. For those of you who have not yet seen this report, the 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 may use non-GAAP financial measures if we believe it useful to investors, or if we believe it will help investors better understand our results of 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, and good afternoon, or good evening, everyone. It happens to be afternoon. I am in our office in San Diego, California, and Dick and his staff, Sue Conway, are all in Boston. Welcome to the call. Well as you can probably see from the press release, we reported revenues of $67 million in Q2, and income from continuing operations of $0.21 a share. I am pleased to say that these results represent a nice increase over the prior quarter, and a substantial increase over the second quarter of 2007.

Let's go down the P&L now. First revenue. In the Semiconductor and Electronic Capital Equipment market, which we call semi, revenue was approximately 12.5 million in the second quarter. That group has been in steady decline since early '06, and that trend continued in Q2. Revenue was down by approximately 5% from both Q1 and the prior year's Q2.

In the Surface Inspection market, revenue was nearly $9.5 million, which was a very good quarter for our Surface Inspection Systems Division, which we call SISD. This represents an increase of 50% over Q1, and 40% over Q2 of '07. Business is currently quite good in this market, particularly in the metals area, where we are winning many new accounts, particularly in China and elsewhere in Asia, and in fact, if you haven't seen it, there is a very exciting press release about a major account win in Taiwan. It was China Steel, which is the largest steel manufacturer in Taiwan. They recently placed a multi-million dollar order for multiple SmartView Surface Inspection systems. I am sorry I can't give you the exact dollar amount for competitive reasons, the customer, China Steel, asked us not to do that.

This is the largest single Surface Inspection order we have ever received on a dollar basis. It is for seven SmartView systems that are scheduled to all be installed during the second half of this year. These SmartView systems are going to be used to inspect steel surfaces at various stages of production, to insure that the steel meets their highest quality standards. Just for your information, a lot of the steel is used in automotive applications, hoods, trunks, lids, and decks, and visible parts of the car.

Moving on to Factory Automation, that is our largest market segment. We reported record revenue of $45 million in Q2, and it represents an increase of 10% over the old record, 41 million which was just set last quarter. It is an increase of 30% over the equivalent quarter a year ago in '07. Most of the revenue increase in Factory Automation was from Europe, where revenue increased by 3.5 million, or 21% over just the last quarter, and by 6 million, or 43% over Q2 of '07.

These increases were due to strong demand during Q2 in that region, as well as the impact of foreign exchange rates, but even if you exclude those foreign exchange rates, Factory Automation revenue would have increased business in Europe by approximately $2 million, or 13% on a sequential basis, and approximately 3 million, or 23% on a year-on-year basis, so the sales team is doing a great job in Europe.

On the cost side, there are three special items in Q2, that I would like to give you some more insight in. First, we recorded a loss of $3 million, about $0.08 a share, related to the sale of our lane departure warning business, which we described in our press release, which was issued earlier this month, I think it was on July 2nd.

The second special item was a loss of $647,000, due to FX changes, and unfortunately, hedging these balances is not an exact science, and this quarter we had a loss due to the exchange rates.

Third special item in Q2 was a higher than expected effective tax rate. We plan to have a rate of 24% in Q2, which is the same rate that we had in Q1, however the actual rate was 25%. Due to a change in our estimate of where income will be recognized in 2008, from a tax standpoint.

This is continually reevaluated throughout the year, and there are a number of assumptions that go into it, many of which are not under our control. So our current expectation is to have an effective tax rate of 25% in '08, and that is the rate we recorded in Q2, and there was an additional catch-up amount for the lower rate that we recorded in Q1. Excluding the FX loss and the higher taxes, income from operations for Q2 would have been $0.22 a share.

The last topic in my prepared remarks concerns our guidance for Q3 in the current tone of business in each of the three primary markets that we serve. In the Semiconductor, Capital Equipment business that we serve, or where we sell our products to capital equipment makers, demand continues to be soft, and the timing of a pick-up is uncertain. In Surface Inspection, the order rate has been very good for the past three quarters. I believe every quarter, well I can't tell you what every quarter was, but I will tell you, very strong bookings like we have never seen in the past, for three quarters in each quarter. We are continuing to close new accounts, and we believe we are increasing our market share.

For Q3 we believe the revenue will reflect the higher level of business that we are seeing in the marketplace, as we convert orders that are on our books and backlog into shipments. Lastly, in Factory Automation, we are planning for Q3 revenue to be down on a sequential basis, due to the seasonality that we typically see during the summer months. This year however, that decline may be steeper as the slower business trends we have been experiencing in the US, now appear to be spreading into Europe, where we have recently seen some softening. We expect the Factory Automation revenue will increase year-on-year, but not as much or not as great as it would have, only due to economic headwinds.

Taking all of these above factors in consideration, and many more that we haven't talked about, we now expect total revenue for Cognex in Q3, to be somewhere between 62 million and $65 million, and at that range of revenue, we are now expecting earnings somewhere between $0.14 and $0.18 per share.

That is it for our prepared comments. We will open the phone now for any questions you may have.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS). Our first question comes from Robert Eastman Robert W. Baird.

Yes. This is his brother, Rick.

(laughter)

Hi, Rick.

Just a couple things. One is could you just give us the FX impact on the quarter in revenue?

In total, the FX impact relative to both Euro and Yen on revenue was approximately $3 million, and then there was an increase in OpEx of about 1.4 million, and an increase in COGS of about $600,000.

Okay, excellent. And then a question I have on the geographies. Could you just walk us through perhaps maybe in local currency, or just in revenue dollars, what pieces of the business were driving the growth in the various geographies?

Oh, today?

It is possible. For instance, the Americas was down 1.3. Did most of that come vision products, ID products, or can you give us a sense of just overlap the revenue by product with the geography possibly?

I have a revenue and a breakdown by geography, and another one by industry and by product, but I don't have it defined, in other words I can't tell you that.

We don't have that, I mean, it is available within the system but we haven't really put together the analysis for the call here, that shows by region, by specific industry.

Okay, and then can I ask a question on service? Is that, the fact that service was down year-over-year double digits, is that a timing issue? Does that have anything to do with the SISD business, or what are we looking at there?

There are a combination of factors there, one of which of course relates to SISD, and the acceptance and installations as they do. The other thing too is that relative to some of our products that are getting easier to use or whatever, we no longer, because they are easy to use, we no longer have to defer revenue at the time of sale, and we record the support costs as an ongoing cost with no revenue.

All right, so that likely is to kind of stay around the same dollar level until our SISD installs jump up, and then we would have more service?

Well, I think to a certain degree on the MVSD side, we will continue to see the service, the level of service revenue decline, probably through slightly through the second half of this year, and then it will reach a, if you will, a steady level, Rick.

The SISD really is almost impossible to predict because a lot of times, it is not only tied into when we in fact complete the installation, but when in fact the customer gives us the sign off and the final approval.

Okay. All right, and then just last question in Europe, you commented that you are seeing some of the US slowness maybe carryover into Europe. What industries? Is that Europe auto?

Yes, actually, it was principally in the auto industry, and certainly in some of the machine tool builders and system integrators that we sell to, so we saw it from auto companies, but on the integrators and the machine tool builders, some of it may have been auto, some may have gone into other industries. It is impossible for us to tell because we don't know specifically where these integrators may be selling their final product.

All right, very good. Just one last comment. I think Dr. Bob, nice choice on Bob Willett.

Oh, thank you very much.

Thank you.

Our next question comes from Jim Ricchiuti with Needham & Company.

Hi, thank you. Just wanted to question on the Americas, get a sense as to how that business looks in Q3? Do you expect further weakening just as a result of the economy softening in Europe, softening here?

I guess, we are expecting a couple of things, I think, in the third quarter, one of which is clearly you will see the typical slowdown in Factory Automation, that comes from the summer months with European countries and their vacations.

The other thing that we are thinking, or we are expecting to see, based upon what we saw late in the second quarter, is that there may be a slowdown on top of that related to the general economic conditions.

Great. Dick, I am also trying to just get a sense of the economy has taken a bigger bite out of the Americas business in Q3, and specifically what markets have things really begun to soften even further?

Well, first of all, let me interrupt. I am looking at revenue in Americas and FAA, and compared to Q1, we are up about almost 12% in the Americas.

Okay, and Bob, is some of that, the Americas you have made certainly some real improvements within that operation over the last couple of quarters.

Yes.

To what extent is it the internal improvements you have made? I am trying to get an idea just, do we see the economy maybe taking a bigger hit going forward in that part of the business even with the improvements you have made in the business, or do you feel that you still have enough momentum from some of the changes you have made within the organization take place?

Well my expectation, and I have to look more at the model that Dick has created that Americas are not going to go down any more substantially. We have already seen, I'm looking at a chart that shows automotive bookings which started declining in about Q2 '05, and I think they are stabilized now, however, Europe, we are concerned in Europe. Europe showed an increase revenue-wise in Factory Automation from Q1 to Q2 of about 20%, a little over 20%, and we are concerned that that will be slowing, if indeed or when, I should say when the economy slows down in Europe, and we are already hearing signs of that now.

Okay. One final question if I may. Bob, how is the recession to some of the Euro products going, and can you comment a little bit about some of the investments you have made in Asia, particularly in China and Japan, and to what extent can you see that perhaps helping business going forward, or do you see, are you a little concerned about the economy in that part of the world as well?

No, really the economy is now the worry that we have of the products, all of the new products that we have announced. There are still some in testing that aren't released to the general salesforce, some new versions of Checker that aren't generating any revenue as of yet, because they aren't in the hands of the salesforce, so we don't know enough about those products yet.

But the products that we introduced, the In-Sight, Mini the new version of Checker is also doing very, very well, DataMan is doing very well, our readers, we seem to be dominating at least the high end business for ID, so the products are fine, and the salesforce is now back to where it should be, and the distributors are all aligned now, and seem to be satisfied with the way we are managing it, under Eric's role.

The biggest issue now is the price of oil, and the economy in all of these countries, however, we have not seen any change in China. We are doing very nicely in China and in Asia, both MVSD and SISD.

So are you going to continue to invest in sales infrastructure in that part of the world?

Absolutely.

So continue to increase headcount?

That is correct. And also in Eastern Europe.

Okay. Terrific. Thank you.

You are welcome.

Our next question comes from Jonathan Raclin with Barrington Asset Management.

Good afternoon.

Hi.

Bob, a question. There seems to be a substantial increase in the amount of contamination of food products, either grown in this country, or coming in from overseas. Wondering if there are any opportunities in the product tracking area for anything in that field for you?

Well, the first comment is that I would think that there is not a substantial increase in these things. It is probably like everything else, it is a substantial increase in the reporting of these things.

Okay, that is fair.

I think there's probably just as many change in traffic lights, just as many kidnappings today as there were in 1950. You just hear about them every day now, so you feel there are more and more missing this and more salmonella, I think probably the same or less, because we have better controls. Nevertheless it makes people much more aware of the situations of contamination, and that is a good thing for Machine Vision. Now the contaminations we have been hearing about recently is salmonella, for example, and a bacteria, and Cognex and Machine Vision isn't going to help with that.

However certainly in the food processing area, for baby food, there are always big concerns about glass, and proper labeling, and in the medical area, about mislabeling and things like that, so these are very good areas of opportunity for Cognex, and where we have recently been spending more of our Sales and Marketing time.

Good. Okay, thank you.

You are welcome.

Our next question comes from Jim McAree with David J Greene. Good evening, gentlemen.

Hello, Jim.

Reading the kind of the third quarter preview of what you expect, it looks to me, Bob, you are ramping up R&D and SG&A pretty substantially. Could you give us some sense as to what you are seeing, or why that ramp up?

Well, I can tell you the R&D ramp-up is not related to headcount. Dick will give you some more details on the R&D but it is not related to additional headcount, which we are being very careful about, especially in higher expense areas around the world, if we do expand, we are hoping to do that in places that are closer to our growing customer lists, which are in Asia or Eastern Europe.

The SG&A ramp-up is due mainly to opening new offices and adding to the salesforce. But I will ask Dick to give you more detail on that if he wants.

Okay, the principal increases that we are expecting in OpEx for Q3 will not be in the G&A area. There is some, there will be some in R&D. We are looking, we have got a couple of projects where we are going to be using some outside services. We will be adding some headcount, but most of those additions will be occurring in lower cost regions, and on the selling side it is mainly adding additional salespeople, their related travel and expenses, and also as we are opening a new sales offices, the rent, et cetera that has incurred there.

Could you maybe highlight where the new sales offices are going to be located?

Sure. We are opening another one in [for a fact], another one in China, --

That would be our fourth or fifth, Dick?

Well, this will be our third major one, no, fourth major office if you will. We have various offices where the salesman is essentially working out of his home or whatever.

Yes.

We are looking to open an office in Vietnam, also planning a somewhat larger office in Hungary.

And expanding the office in Shanghai.

Yes.

Very good. Thank you.

You are welcome.

Our next question comes from Alexander Paris with Barrington Research.

Good afternoon.

Hi, Alex.

Could I get a little bit more feeling for the Factory Automation, like in the second quarter, the dollar sales of the US versus Europe? Can you give that out?

Sure. I can tell you that. In the Americas, I don't have it broken down by North and South, but it is mainly North America including Canada, but it's mainly the US, so let's see. I can tell you, well I have to add up some lines here. It is approximately $17.9 million was the revenue in the North America.

And Europe?

Europe turns out to be almost 22.5 million.

And then Asia is pretty small?

Asia, not including Japan is about $6 million.

Okay.

And Japan, since we are going through it, Japan is about $11 million.

And then traditionally, is US about the same size as Europe, or is it just a lot lower because our economy is down?

No, it has been in the past our major area, but now Europe is the most fruitful area for Cognex.

Okay, and just another question. In the ID business, some of that goes into Semi, and some is in Factory Automation, is that correct?

That is correct. We have a product called wafer ID. That is separate and I don't think we lump that in with our ID, although one could. We sold about $4 million of wafer ID in Q2.

So most of the ID, is in fact your Automation then?

That is correct. That is correct, and let's see if I have that, I have industrial ID, yes, I would say that if I total up the other IDs that we have, non-wafer ID in Q2, we sold approximately $9.5 million of ID.

That still one of your fastest growing product areas?

Fantastic. I can tell you what that growth is. Yes, just In-Sight industrial ID was about 23% growth over Q1.

The one thing I would comment on that is there is a possibility that we don't truly capture the total amount of In-Sight that is being used for ID purposes, because a lot of times we will be selling In-Sight, and we are not exactly sure what the end application is, and those would get lumped into In-Sight Factory Automation, so the number that Bob just reported relative to ID, is that is where we specifically know that it is going into an ID application.

Yes, let me expand on that a little bit, Alex. It turns out we have a line called In-Sight Factory Automation, which is our general purpose In-Sight product, which has many, many tools, including in many cases ID, but we don't know whether the individual, whether the customer bought it because of ID, or whether they bought it because of Patquick, or PatMax, or PatFlex, or whatever, so when we don't know it, we put it in the general pool, of which we sold $23 million in Q2, but when we know it specifically, we put it under In-Sight industrial ID, and that was almost about $4 million last quarter. So in reality what we are say is the ID numbers I give you, they are the most conservative. There might be more money than that in that bucket, if we actually knew.

Just one other thing. The new products, I think you mentioned quickly, the ones that are already out and selling is the In-Sight Mini, a new Checker?

That is right. And there are two new versions of DataMan. Well, new versions and they are targeted at less complex, but more price sensitive applications.

And that is for [Mark Sweeney]?

That is correct, and those are all called DataMan. There are three versions on the market.

Those are up, and you have good reception in all of those?

I believe so. I have not looked most recently.

I have got the numbers comparing Q1 to Q2, and we have seen excellent increases. Granted that Q1 was when we first issued those products, or whatever, but in Q2, the In-Sight micro did--

What about the ID, the three different ID products?

The new ID products we did about 10 times as much in Q2, as we did in Q1.

Yes, modest growth.

Just one other question if you don't mind, maybe difficult to answer but particularly with your new Mini products and new Checker products, as you get a little bit more pessimistic about the economic impact, could you see or have you seen, or would you visualize essentially trading down when the consumer goes from end to discount stores, manufacturers under pressure would trade down to Checker and In-Sight Minis, just to try to get some very quick efficiency improvements at a modest price?

No, no. We haven't seen that ever happen, and we designed the product so that they would not. Every time we come out with an inexpensive product, it is designed in such a way with the marketing in mind, that it does not cannibalize the higher priced product.

Let me give you an example. The obvious example is In-Sight. In-Sight can do many many, many different kinds of vision problems, whereas Checker can only do a very small, very specific kind of problem. So if someone needs an In-Sight, they have to buy an In-Sight. You can't buy a Checker to do an In-Sight problem.

So it is not as if people stop buying the Hummer, I don't need that image any more, but I still need to get around town, and they buy a Camry or something, it is not that way. The market is very interestingly segmented, by those who need many tools, and those who need only one tool, and if they only need one tool, they have been buying only one tool.

Similarly in the data acquisition area, in the area of DataMan, reading marks, that the high end DataMan, I forget the model number, reads very complex, hard to read marks, and if that is what you are marking, if you are marking on engine blocks and pistons and cylinders, and parts of cars or metal, you need that high end DataMan, because it has very specific lighting that works every time, and you could not make that change to save a grand by buying the next version down, which won't leave those marks. It just won't do it.

That was a good answer. But my question was a little bit different in that you are going to these smaller products so you can increase the penetration of the market, by getting people you didn't have before.

No, no, that is a different. Yes, okay maybe I answered the wrong question.

Would that be accelerated because of the slower economy? I am talking about the people that have never bought Vision, now certainly things are --

Oh, yes, certainly. If companies are looking for ways to cut costs, automation is generally the way to do that, and our product is a very small cost aspect, cost element of automation, a very low cost aspect, so if it is headcount that people are worried about, and labor costs then certainly they automate, and once you automate there is more opportunity for Machine Vision, so and even in low labor areas, okay? We are seeing tremendous reception for our products even in lower labor rate areas, because they know that inflation is going to raise those labor rates, where it doesn't raise the cost of automation.

In addition, you get much higher quality, so although countries like the Far East, let's say China, were making lower quality items, and competing just on price, well people want higher quality. They don't want flaws and things, and so even if the machines are more expensive than direct labor, which is not the case, they would still have to turn to automation to meet the quality standards that people now expect.

You buy a DVD player today for $30, you still expect it to be perfect, and if you can't get that from China, you will buy it from Korea, so in a way what I am saying is a softening economy should in some sense increase the need for Machine Vision, though there are other aspects of course that diminish the need for anything, and I don't know which one is going to be better.

All right, thanks very much.

You are welcome. Overall I would say a bad economy is bad for everybody.

Our next question comes from Chuck Murphy with Sidoti & Company.

Good afternoon, guys.

Hello, Chuck.

Could you just talk a little bit about the Semi business? I mean I realize a mature part of it is just due to kind of general market conditions, but is there something more going on there, or should we expect it to rebound sharply, whenever the market turns in it's favor? How should we look at that?

Well, we view the Semi business, what we call the Semi business as a cyclical declining business.

Okay.

It goes up and down but it is overall declining, and at least our position in it, and it is declining because of the customers who used to buy on average $4,000 per unit from us. That included hardware and software, and cameras and lighting, and all sorts of things. Now have moved to just many of them have moved to just buying software alone, buying cameras at a cheaper supplier, and hardware that they will do themselves, but because of the extreme price pressure that these OEMs, these machinery builders are being put under primarily because of China, they have discovered they have found that, they have determined they want to do it themselves, and in the past four years or so, technology has moved to a point where they can do it themselves.

So whereas in the past, these products could only really be purchased from a vision company, whether it was a Cognex, or one of our good competitors, because we had all of these components, and only we had these components, now these companies are finding, well the key element is vision, but we are going to buy these other things elsewhere, and we looked every year at our average sale to these customers, and the average sale was getting lower, and fortunately, we saw this seven years ago or eight years ago, and that is what we started our factory floor business, which completely has made up for more than made up for any decline in the Semi business.

Okay.

So our play in the Semi business is primarily at this point, primarily software, however, we see that turning in our favor, when we start introducing products based on our new vision chip called VSOC, which is a very expensive and complex product to bring to market, to manufacture and to design, and that is what I am doing matter of fact in San Diego , putting in place the plans to start introducing this product.

This will get us back into the hardware plus software business, because this VSOC cannot be readily duplicated by certainly by the OEMs will have difficulty, and probably by our competitors that will have very big difficulty, so we hope to be in the business of once again supplying unique hardware, very small, very specific hardware including the CMOS sensor and processing right on it, to do things that you can't do any other

And so that hardware is only good with your software?

That is correct.

Okay.

The customer will once again want to buy them both from Cognex.

And what is the difference in performance, or what have you, between your existing hardware and the new VSOC?

Well first of all, not every customer will need the advantages of VSOC, but we believe it will open up many new opportunities. VSOC has the ability to acquire images, and analyze them at perhaps 100 times the rate, the parent cameras and software can do it, 100 times the rate, and those applications, and people are always increasing the throughput of wire bundles, or dye bundles, or probes always trying to increase the throughput, and this will mean that there is no limit. You couldn't move the product fast enough.

I have got you.

But let me say that if the OEMs don't add, want to add more features if they are happy with the features and performance they are getting, then there is no advantage to these things. We are introducing these new technologies, and probably in applications where they are currently not able to use Machine Vision, just not fast enough, or not powerful enough.

Okay.

So just to be clear, what I am saying is that the old Semi business that Cognex was in, will not revive. We will find new businesses, either in Semi or elsewhere, but that business is almost at this point a commodity business.

Okay, got you. And my other question was in regard to the competitive environment in Asia. I think before you started the talk about I guess how Machine Vision might compare to other types of technology. I mean, are you seeing more competition from the photoelectric sensors in Asia, than you might in other parts of the world?

Yes. To answer that question, the new competitors on the factory floor are primarily not vision companies anywhere. We have become, if you really want vision, if you just look and try to find a vision company, there aren't many that have revenue over $20 million a year, and we have clearly the leader when it comes to Machine Vision. However on the lower end, on the Checkers, and perhaps on some versions of In-Sight that are coming out, we do find that we are competing with the TNT Banners, Omrons of the world.

Okay.

And they have a distinct advantage, in that they know how we'll make low cost products very cheaply, and they have been doing it for years. They have very good distribution organizations, primarily third party distribution, and so they have the feet on the street, and that is going to be the challenge.

The challenge for us is not technology. We can always, I can say it very, very authoritatively and confidently, that we always have better technology than a sensor company, when it comes to Machine Vision.

So I guess what is kind of your comeback to their having the lower prices, just that your system is more advanced, and can handle higher speeds?

That is correct. Our systems will be able to do things that there's can't do, and that is currently the case by the way, and in most cases, our products are able to do things where theirs wouldn't work, because of variations in color or lighting or illumination, but the customers don't always know, and they may spend a lot of time and effort controlling the illumination, for example, and if you buy our product you don't have to do that, so it's a cost saving, but if you look at a price list, you will find their products cheaper, and that is a marketing challenge to us to describe to the customer that the price isn't the whole thing. It is the installation. It is the price of ownership that is important, but in some parts of the world, they may not believe that, or may not understand.

All right, great. Thank you.

You are welcome.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS). We do have a follow-up question from Jim Ricchiuti with Needham & Company.

Just a question with respect to the share buyback. I wonder if you could just bring us up-to-date on the status of that right now?

Well, Dick will tell you what we bought back in Q2.

In Q2, let's see, we spent approximately $12.9 million to buyback just under 500,000 shares.

And Dick, how much is left on the buyback?

We have two open buyback programs. One of which being the 10-B-5-1 program that the Board established, that had $30 million in it, the second one was an open program totaling $50 million. Out of that 80 million, we have approximately 77 million left to spend, of authorization left.

Thank you.

Yes.

Do I have to push 1 to ask a question?

(laughter) No, Sue is going to delete you from the question queue.

(laughter) That might be wise. I have a question for the listeners. Why hasn't there been one question about the dividend? Any listeners want to comment?

(OPERATOR INSTRUCTIONS).

Are there any listeners?

Hello?

Yes?

Yes, Alex Paris.

Hi, Alex.

I think there is always an inherent fear when a growth company starts raising their dividends, the fear that their growth is not going to be as good as they had hoped.

Well, guess what?

Right.

Guess what? There aren't that many growth companies around.

It is a great way for a major principal to take out money at a 15% rate.

Well I am a shareholder too, aren't I?

I know, right, yes.

I think any shareholder would, well you can always see the glass as being half empty I suppose, but the fact is that in today's difficult world, we haven't seen many people make much money on stock appreciation.

Right.

And I am not just speaking about Cognex stock. Right. It has a lot to do with other factors other than the company itself, and we sat around and thought about this a lot, talked about it a lot, and asked some consultants and asked other peoples opinion, and the conclusion is well, gee, if we have no particular, if we have plenty of gas in the tank, and we do, then why do we have to keep on topping it up? Why don't we just give this money back to shareholders? And I would say that whether or not I was a shareholder. It just makes sense to me.

Well, they have an inherent hope that you will find a super acquisition.

Well that is not going to happen. That is not going to happen. We had a super acquisition, I mean, if something was so super out there, it wouldn't want to be acquired. Right. We keep looking, but our history is of 11 small acquisitions, 10 of them were useful, one was not and we got rid of that. We didn't spend too much time thinking about it, after we saw the difficulty in that business, but this is, we don't see any major acquisitions. We have been doing this for many, many years, and even if we do , hopefully we do, we will find one, but we still have money for that, so I don't know why it wouldn't be a great thing to give people a 2.5% return, or today it might be even higher if the price goes

That is great but high growth investors kind of look, first in terms of excitement in acquisitions and repurchase than as an afterthought on dividends.

Yes, well, most companies that acquire things don't do too well after a while.

Anyway, thanks for a good quarter.

You are welcome, and thank you for the comment and giving me the opportunity to explain in a bit more detail, our thought process on the dividend.

Our next question comes from William Pike with Pine Street Securities.

Well, I was going to ask about the dividend but somebody beat me to it, and it seems you have given an adequate answer.

Give me your opinion.

Alex asked the right question. Sometimes there is the fear that implies less growth opportunity, but it doesn't seem appropriate in your case, since even in a bad quarter, as you say you top off the tank a little bit higher.

The real question is why not more. Frankly at a stock price at the screen right now, you are 16.40 bid, 16.80 offered as we speak, on the AmeriTrade streamer, one would hope that you would buyback more stock than increase the dividend, but what was the thinking? Why not increase it more than it was? I am not criticizing at all, I just kind of am getting at your thinking here?

Okay, first of all I want to comment on Alex's comment which is probably right, that you increase the dividend, the Street looks at it negatively, so maybe we should decrease the dividend? I have been told the Street looks at that negatively.

(laughter).

I think in today's climate, there is nothing that the Street looks at positively, and maybe that is correct. Maybe the world is headed down the tubes I suppose, and if you listen to the news you will certainly get that impression, but if I listen to my salesmen, I don't.

But the question about why not give more back, well, you could conceivably give up all of your free cash flow, but you are not sure if the next quarter would be in a position to cover that, so there is a prudent medium and that is what we discussed at the Board meeting, about okay, we are going to increase the dividend but how much should we do it by, and the thought was if we increased it by a penny or half a penny, that is not terribly good, and I am pretty much an all-or-nothing guy. If it is good for a dime, it is good for a dollar, right? If you have a hand, and you think it's a good hand, why would you bet a dollar, when you can bet $10? So I didn't see any sense that this wasn't, not every Board member felt the same way. I didn't see any sense of increasing it a penny or half a penny.

Well even if you weren't going to increase cash flow sufficient to cover the dividend, it wouldn't be a crime. I mean, your tank is not only full, but it is a very large tank. It would not be the end of the world as you are saying in today's market you would be punished for anything, but it wouldn't be the end of the world if in one quarter cash was below --

You are right, but I argued for a greater dividend even, but after all of the discussion and the voting, there were some very conservative people who don't want to get caught without cash, and I said well, we have a quarter of a billion, that seems to be plenty, but I understand it and it was a discussion and negotiation, and we felt that this percent, I forget what the percent turned out to be of our free cash flow, but it turned out to be a very nice return, based on I think a $23 stock, it turned out to be 2.5% and we felt that especially if you calculate, take into effect the favorable tax rate on that, that is a hell of a nice return, and the people, we get more people to buy into Cognex. Why not?

Absolutely. Okay. Last question, you do you sell anything into the Mid East and if so, do you have any insights to what is going on there, or is that too basic for you?

No. We certainly do. Israel, I can't tell you, Dick can tell you how much revenue came out of Israel, but Intel has a big fab there, and KLA, and some other customers have R&D facilities there, so we do have a full-time salesman in Israel, but other than that, we don't do much with sand? We do a lot with processed sand called Silicon, but we don't inspect either sand, or oil, or camels.

(laughter). I will keep that in mind.

Yes.

Okay. And I assume your business is really independent from politics?

Oh, sure. It is high-tech, it is manufacturing, it is like anywhere else. Yes, we don't do any business currently with any military organization that I know of. Not that we have a bias against it. It is just to do that you have to have a different kind of accounting systems.

Right.

Yes.

All right, thank you.

(OPERATOR INSTRUCTIONS). Our next question comes from Richard Eastman. Your line is open.

Hello, Richard.

Just one additional bit of feedback on the dividend.

Yes.

Curious just from a viewpoint of, has the Board maybe also including yourself, have you guys over the last couple of years, determined that investing in your own R&D, and your own organic growth, is a better return than acquisitions? Does that play into this?

We would prefer, we would love to do all of them, right? In particular, internal R&D, but we are already investing, what does it turn out to be, 11 or 12% R&D, and that is a reasonable number. Furthermore, we don't right now have any sweet spot ideas for other R&D. You don't just sit in a room, and say how about this, how about that? You have to go out and talk to customers, and get ideas for what to do, and we are full up, and could we spend more in R&D? Sure.

And I am willing to do that to the extent it gets products to market sooner, and that is one of the things that my partner Rob Willett will be addressing, how to get products to market sooner instead of a year. Well why should it take a year? Let's put more people on it. Now sometimes putting more people on it slows it down so it all depends on what you are trying to do, but we are going to be increasing our R&D effort to get VSOC to market sooner.

Okay. Well very good. Thank you.

You are welcome.

Gentlemen, I am not showing any further questions at this time. Dr. Bob, I would like to hand it back to you for any closing remarks.

Sure. I want to thank everyone for listening to me preach about the economy, and even say a few words about Cognex, and hopefully we will give you at least as good a report next quarter at this time. Signing off, Dr. Bob from sunny San Diego.

Ladies and Gentlemen, thank you for participating in today's conference. This does conclude our program for the day. You may all disconnect, and have a wonderful day.