Cognex Corp (CGNX) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cognex first quarter, 2009, earnings call. (Operator Instructions). I would now like to turn the call over the Richard Morin, CFO.

Thank you, and good evening, everyone. Earlier tonight we issued a press release announcing Cognex's earnings for the first quarter of 2009. 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're not going to repeat most of that material. During tonight's call 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 One of the earnings press release and 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 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 10K for a detailed list of these risk factors. Now I'll turn the call to Bob Shillman.

Thank you, Dick, and good evening, everyone, or if you're on the West Coast, where I am, good afternoon. . I'm here now in our office in San Diego joining me, is my partner and President of MVSD Rob Willett, who will take some of your questions as well. Well, as you can see from the press release or if you don't have it in front of you. We reported revenue of $42 million in Q1 which resulted in a loss of $0.09 cents per share. These results represented a significant decrease from the results we reported from the first quarter of 2008 and the prior quarter and the results are due to the very difficult business climate. Looking at the top line, we experienced significant declines in revenue year-on-year from both semi-conductor and electronic capital equipment market, or semi as we call it, and the factory automation market.

Revenue from both these markets also declined on a sequential basis as did the revenue from the third market we serve, which is service inspection. The highlights or in this case the low lights for each market are as follows, In semi, bookings were approximately $500,000 for the month of March. Set-up is basically dead. In the surface inspection market, for quite a while our business seemed fairly resistant to the economic market. However, that changed at the end of the first quarter when we started softening in actual orders booked. Unfortunately that trend has continued so far in Q2. Our salesmen tell us that the need for our products is still there and we have won a number of projects; however, the funding is being held up at the board or senior management level as those customers are just waiting to see what the impact of the economic conditions is going to have on their specific business.

Finally, factory automation, which is the third and largest market segment that we serve was helped in this quarter by $4.4 million of deferred revenue that we recognized upon completion of the single customer contract. Excluding this deal, revenue in all four of our primary geographic regions declined on both the year-upon-year and on a sequential basis. Largest decline in absolute dollars was in Europe where business has held up fairly well through the end of '08, but dropped off significantly after the new year. That's the end of my prepared remarks about revenue. It's just frankly too depressing to talk about it any further. If you need more details, we have provided various revenue breakdowns in exhibit four over the earnings press release that we just issued. And of course, we're happy, not happy, but we're certainly willing to address your questions during the Q&A session.

Now I'm going to switch the discussion to things we can control. At the top of that list is managing expenses. Over the past six months we've taken steps to more closely align our costs to the lower level of business. The cuts that we made were primarily in our marginal (inaudible) business division, our area of our business that experienced the sharpest decline. those cuts were deep, but we did not go so far as curtailing or delaying those projects that we believe are crucial for our long-term success. The initial benefits were apparent in Q1, excluding stock option expense, the combined total of RD&E and SG&A declined 2% year-on-year and 6% from the prior quarter.

We expect our RG&E and SG&A to further decline over the next two quarters as the actions we've taken work their way onto the P&L. Our most recent cost reductions were announced two weeks ago and they include the following areas. We eliminated approximately 85 employees and contractors. We made cuts in certain executive salaries. We cancelled most current open positions. We added additional days to our mandatory shut down schedule. We'll be reducing leased office space. We lowered our 401K contribution match and we made cuts in discretionary spending. These actions are in addition to those we announced in November of last year and our estimate of the combined savings from these new cuts plus those we took in November is approximately $21 million on an annualized basis.

Next on the list that we can control is prioritizing our objectives. Despite our cost reductions, we'll continue to invest in the ongoing strategic initiatives that we believe hold the greatest promise for our future growth. There are three I'm going to talk about. The first one is Mitsubishi which we believe will increase our sales into the factory automation market in Japan. Which is the world's largest factory floor market for Mitsubishi. In March we introduced the Cognex Insight EZ product line to Mitsubishi's distribution network at a joint press conference. It was received very well by the media and by the distributors who were in attendance. We're in the process of training and certifying these distributors and I'm happy to say that three have passed all our tests which are rigorous and will be distributing our products very shortly. On the engineering side, a project that is very important to us is the development of our vision system on a chip, VSOC. And we got am word from the FAB that the yield is above our expectations. So, things are really on schedule and we're very pleased with that project.

Next we rolled out several new products since the beginning of '09. We introduced DataMan 200, which adds Ethernet connectivity and also liquid lens to our DataMan line of industrial readers. Ethernet connectivity is unique to our product., in an ID reader of that size. . It enables easier integration, and faster communication between the reader and the plant controllers in the information network. DataMan 200 is also the only fixed mount reader currently using this new technology called liquid lens. This lens greatly reduces set up time and maintenance. More importantly, it increases the distance from which a (inaudible) can be read. Excuse me, which has been a limitation on image-based readers. In far more applications now, DataMan 200 will be able to match the reading distance of laser-based readers, which are the predominant means of reading codes today in which we expect to be displaced by image-based readers in the near future. We introduced a new product for Checker, called the Checker 3G, which is the next generation of checker. It enables users to set up and change jobs right on the line and have them running in a matter of minutes, all without the use of a personal computer. This will save manufacturers time and money and can be quickly and easily done even by a novice user. We added features to our VisionPro software product such as tele capabilities and insight micro product lines also have color now to broaden the product offering and to bring us incremental revenue.

The third area we can control is our culture. We were very careful when identifying cost savings. Not to cut those areas that would affect our culture, which is one of our unique strengths. We'll continue to host events such as Cognex Night at the Movies, Ask the President, and we'll continue to give President's awards to our top achievers and run President's Club for our top salesmen. Employee morale has always been key focus of mine and my partners and it's even more important today given the downturn. Just being happy to have a job is not good enough. We're working hard and fast on important goals. We need a team that is energized and motivated in order achieve those ambitious goals.

The fourth item we have some control over is the preservation of our cash. In addition to the cost cutting measures that I just described, our board of directors, today, declared a quarterly cash dividend of $0.05 per share lowered by $0.10 cents to the $0.15 we paid in the prior quarter.. Of course, our shareholders are disappointed by this in particular, especially myself being the largest shareholder who has very little other income, certainly no salary, nevertheless, this is unfortunately necessary because the current level business doesn't support a 15% share dividend. This step alone, cutting the dividend will save approximately $4 million per quarter. We're in an enviable position of having a strong balance sheet with a large cash reserve and it's prudent for our long-term success to maintain that reserve.

Overall business conditions today are dismal. Customer demand continues to decline, visibility remains limited and I don't see any sign of sustained improvement in the near future. Given those facts, we're not going to give revenue or earnings guidance for Q2 other than to say that we expect revenue to decline both year-on-year and sequentially in Q2 and we believe-- we now believe we will report a loss for that quarter. In fact, unless there's any kind of improvement at our current run rate, it's unfortunate but likely, we'll report a loss for the entire year. Look, we've seen tough times before, nothing quite like this, but we've managed through them very well. We are confident that with our leading edge technology, our aggressive sales force, our trained distributors, our strong balance sheet that we're in a very strong competitive position and there's no question we'll weather even a very long economic downturn.

That's the news from here. Even though it's sunny outside here in California, the economic climate continues to be dismal. We hope to report better news to you sometime in the future. At this point, I'll wrap up our prepared remarks and open the call for any questions that you

Thank you. (Operator Instructions). We'll wait a moment for the first question.

I have a question, operator?

Go ahead.

Where are the questions?

The first question comes from Richard Eastman from Robert W. Baird.

Hi, just a couple things. One, Dr. Bob, the VSOC product as it makes its way, yields good, coming out of the fabs. Is there a ready market there for that product? Do we have anything contractual established? Are there any revenue volumes or is it basically going to be piloted at this point into various products.

Thanks Richard, that's a very good question. The first use of VSOC is planned in one of our own products. It's going to be in one much our readers-- I don't want to give too much detail on this, but-- the ID group is already designing a product that will take VSOC. Other than that, we do not have any contractual commitments with anyone yet, and we didn't expect to have any. We are holding discussions with potential high-volume users, but I believe that is going to probably two or three quarters away before we can have an announcement. I believe it's partly based on those customers and I'm really assuming this, because I haven't spoken with them, on their interest in the technology and what they've seen, but they want to wait and see if we can produce this chip in volume.

Okay and then, also on the factory automation side of the business, this $4.4 million of deferred revenue. I wasn't aware that you had that type of project in MVSD, rather I was kind of assuming to see something in SISD Is that unusual? Or, will that recur where we're deferring revenue.

It's highly unusual. It's due to what I believe are ridiculous rules and requirements for revenue recognition. We've been shipping this product, I think for over a two year period and had shipped probably 90 or 95% of the product in 2008, yet auditors, because of a strict interpretation of the rule and the way the first set of auditors were interpreting the rules, we had to follow that and weren't allowed to recognize a penny of revenue until that last 1% was shipped.

And, this is a problem with the revenue recognition rules and that's what I can tell you. I think we're facing one more. There's one more on our books where we shipped just about everything, but a very strict reading of the contract and the customer says "we're all set" and they paid us for everything. We haven't recognized it yet. It's---what happens when too many bureaucrats get involved.

Is that one of the largest single pieces of business you had in factory automation?

Let me-- let me put a little bit of additional explanation on that particular thing. This happened to be a very-- a special contract with a customer wherein we provided custom type product. Not anything we sold on a normal basis. Because there was a combination of software and hardware, under the accounting rules, we did not have what is considered vendor specific objective evidence of the various pieces in the contract. As a result, here at MVSD we had to wait until the contract was completed, which Bob mentioned. We began shipping I believe it was midway through 2007.

Okay.

We have at least one other similar contract where it is another situation where we are providing customer-specific software updates or whatever. We're selling both software and hardware and again, we do not have the required vendor specific objective evidence for all-- for this multipart contract, and therefore we have had to defer revenues. That second piece, we will not be recording-- unlikely that we'll be recording any revenue in 2009. It'll be 2010, the earliest we can record revenue on that one.

Okay, very good and one last question. Just on the gross profit margin and I know this will be in your queue, but the MVSD gross margin must have declined substantially, and is that just again a function of through put? Assuming SISD was about the same..

SISD had a decline during the quarter as well. Part of the decline at SISD-- well part of the overall decline is SISD represented a greater percentage of total revenues. Secondly, SISD gross margin declined a couple of the larger orders that went out were-- we had a lower product margin on those due to competitive situations. We also had some inefficiencies in the service area. We started up a new service agent in China. We had inefficiencies. On the MVSD side we had two things that really affected the MVSD gross margin. One of which, Rick, as you mentioned was the lower level of through put. Secondly we also had incrementally an increase in the charge for access and obsolete inventory in the quarter.

I sees.

Okay, thank you.

The next question comes from Antonio Antezano of [McCleary]

Good afternoon.

Hey, Antonio.

I was wondering in your guidance for sequential declining revenues, giving some of the market data we've seen and some other companies talking about, probably more stable versus the second quarter, what areas do you see sustained weakness that is driving this guidance for sequential decline in revenues.

Well the first thing that's going to happen, Antonio, is in factory automation, we're not going have the $4.3 million of deferred revenue on that particular contract that we recognized in Q1. Right away you can wipe that off the board. What we've seen so far, is that our bookings on the factory automation side are lower than where we were in Q1 at this same period in time, Semi continues to be soft. We do expect that SISD revenues in the second quarter will be higher than they were in Q1. But the combination of factory automation being down and losing the--- on just the straight bookings level and not having that $4.3 million of deferred revenue, I think that will more than offset the increase that we're expecting on SISD.

Right and then regarding the savings of expect to save $21 million how should we think that in terms of timing, when should we get to that run rate?

Well the entire $21 million being a run rate, that's what we expect it to be, that we'll see in 2010. What you'll have in Q2, we do expect that our total operating expenses will, if you exclude the one-time charge that we're going to have-- restructuring charge, that we're going to have for severance that we have to pay during the quarter and certain lease termination costs, other than that, we do expect that OpEx will decline quarter-on-quarter. Second quarter from the first.

And final question, Dr. Bob, if you could comment on the departure of Eric [Sayroli] from the company.

Yes. Eric was a very, is, was a very valued employee. Been with the company 18 years. He was trained by my partner and current board member Pat Alias. A great sales leader, very enthusiastic individual, very hard working and he told us about a year, year and a half ago that he wanted to do something else, wanted to return to Europe, both he and his wife like Europe. They prefer their lifestyle in Europe than in the United States and although we were able to keep Eric on board for longer than he initially told us, it wasn't going to last. He's ready to go back to Europe. He wants to sail the world. You may not realize this, but the social benefits provided by France and other such socialistic countries don't give you much incentive to work. I believe, I won't say the number, but for a number of years, they continue paying salary, or very close to your salary without you haven't to do anything. It's hard to compete in a world where people are paid to not work.

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

The next question comes from Chuck Murphy. Sidoti & Co.

Good afternoon, guys.

Hey Chuck.

How should we think about cost savings, the break down of cost to goods and OpEx.

I'm sorry, Chuck, that's a great question for Dick to answer. I want to expand a little on Antonio's question. Although we're losing a great guy, he had built-- he and Pat had built a superb sales management team that knows how to manage direct salesman and also distribution. Although we're ultimately going to replace Eric, put someone in that role, right now Rob has decided he wants to get more involved with sales leaders around the world to get a handle on who's the best person out there and what they're up to and what customers are up to.

So we're seeing this as an opportunity for Rob to get more closer to the customers than the sales force. So he'll be able to make a decision. So we do have people that we think can fill the role. Rob doesn't want to put anyone in that role quite yet. The entire company is very confident that although Eric's departure is unfortunate and we'd love him to stay, he's built a great organization and we've spoken to all of them and there's stability in house and we're going to be able to do quite well. Chuck, if you can repeat the question for Dick, he'll take it.

Dick, just kind of the break down between cost to goods and OpEx for that $21 million in savings.

That's a little difficult to do, but I would guess that out of OpEx the biggest, the biggest, out of cogs, rather, the biggest savings will come from having shut down the the manufacturing and distribution center in in Georgia. Out of the $21 million, when I look at that plus other savings that we're getting in other parts of our manufacturing operations, that's probably 3.5 to $4 million worth of the total savings. And the rest comes out of OpEx.

Okay. And as far as the first quarter's numbers go, trying to if get a run rate for the business, if I just exclude that million for the tangible right down and then the re-structuring of $300,000, is everything else kind of normal?

We would expect that our operating expenses would decline from the first quarter simply by some of the cuts that we've just announced. Of course the restructuring charge in the second quarter, will be significantly larger in that it will include some of the remnants that came through from what we did in November. What you'll have the remaining people in Georgia that will be let go, the lease termination costs, et cetera, with that facility. That will all hit in Q2, plus you'll have the severance, et cetera, that we're paying and lease termination costs we're paying in Q2. So that the restructuring charge we anticipate will probably be somewhere, 4 to $5 million in the second quarter.

Okay. And question for Bob. In the past you've talked about the semi business being cyclical declining. I have to imagine is this very low level at this point is probably more of a cyclical issue or is there something more serious that it could still go down from here?

It's hard to see how it could go down, it's very depressing. It's down for three reasons. Number one, semi was in its cycle. It's a down cycle. The first reason. The most serious reason is that fabs are running way below capacity, from what I understand and they're not buying any capital equipment. The most serious reason is that fabs are running way below capacity because of the slow down in the economy.

The third reason is that most of our customers that we have or had in the past even have switched from buying a mix of hardware and software from us, to just buying software, it's a higher margin, but much lower cost-- a much lower dollar value. The combination of those three is not a pretty picture. It's very fortunate we have other opportunities from machine vision and data collection that do have significant upsides to them. I don't think we will-- certainly if the economy recovers or when it recovers, it always will, we'll see better revenue than we have now. But it's it's never going to be, I believe, more than ten or 15% of Cognex's business ever in the future.

Okay. All right and my final question regarding the dividend. Any thoughts on when you might be able to take it back up or is that even the plan in the future if things improve? Or would you be looking for different opportunities at this point?

No, the plan is always to adjust the dividend consistent with the economic climate and the cash flow and frankly, when we started with the dividend maybe four years ago, my suggestion was that it be more of a profit sharing plan. But the argument at the time was no, people buy dividend stocks, want a dependable amount of money. I think of a profit sharing plan makes more sense, but if that's not what the world wants, that's not what the world wants. But, to answer your question, when business improves-- and it will, things don't stay down-- it's our job to make sure it improves somehow, we will increase the dividends. The shareholders buy-- invest in Cognex for two reasons. Potential upside on the stock and for the rate of return and so-- and so, I certainly could use the money so I'm always in favor of increasing the dividend, subject to it being the right thing to do for the company.

Okay, thanks guys.

You're welcome

Your next question comes from Jim. Ricchiuti from Needham & CO.

Hi good afternoon.

Hey Jim

The $4.4 million-- not to beat a dead horse, I'm just wondering. Did any of that-- was it concentrated in one geographic region or was it spread across a few?

It is with one customer, one stick of the contract and in one very specific geographic region being Japan.

Okay, that's helpful. What I'm wondering, is the rate of decline has clearly slowed it looks like in the Americas. Do you guys see much of a bottoming there?

Jim, I can tell you. I study these charts on a daily basis. We get very detailed reports and charts. It seems to me that we are approaching the bottom in factory automation-- both in factory automation and in semi. Well, in semi it's hard to go any lower, (inaudible) the number, the factory automation appears to be bottoming. That doesn't mean it's going to increase very quickly though. I'm not the kind of guy who's going to say that's a glimmer of hope just because we're falling slower. It is not a glimmer of better times ahead. But, it is a sign. I'm interpreting it. We talked to our head of North American sales who has told us that in his business things have reached a bottom and bottom doesn't mean zero.

And, Bob, you alluded to some of the dynamics affecting the semi business, some structural, do you see any of that at all in any segment of the factory automation business? I guess what I'm getting to is we're clearly seeing some pretty dire headlines in the automotive market and in that supply chain . Do you see any lasting damage done to that segment of the

I'd have to say yes, but we'll make up for it elsewhere. The world is going to buy a certain number of cars. So whether they buy cars made with a GM or Chrysler name plate or Toyota name plate, doesn't matter (inaudible) so long as we're still in those factories. The deal with Mitsubishi offers us only upside with regard to Japan and factory automation.

I'd say that it's a shame for those particular companies and employees that-- that are on hard times and I believe the world is going readjust, ... at one point, there was a need for three car companies to serve the whole world. GM, Ford and Chrysler. Then it grew to far more companies. It's unlikely the west can afford the three car companies. That doesn't mean that employment-- that auto-related employment or purchasing goes down. It just might mean it'll be Toyota manufacturing cars in Tennessee or BMW made in South Carolina.

This whole concept of American car companies. I don't know. I don't think there is such a thing anymore. Who owns Toyota? Isn't it mutual funds that own Toyota or BMW? These are worldwide countries. What should matter to America is jobs in America, not whether it's a GM job-- whether your check says GM or whether it says Toyota. I don't think it matters. For the government to throw money at the car companies who have been losing at the game, makes no sense to me. But just getting back to really your question the world needs a certain number of cars and Cognex will be involved in the building of those cars no matter what the name plate of those cars is.

Question on the pricing environment. Sounds like there might have been a little bit of price competition in the SISD business. How is factory automation pricing? Is that holding up well?

We haven't seen anything at all to change our gross margin assumptions. I will say when I looked at Checker, I looked at Checker numbers, the gross margins had dropped quite a bit and Rob who keeps his eyes on these things in detail, got back to me immediately. He told me that was only because we sold some demo kits. We wanted to make sure our distributors had enough demo kits which includes case, and lighting and that was a very low margin. We basically sold it at cost.. To answer your question. The factory automation margins are holding up nicely. The only reason they may be falling is lack of absorption of the overhead. But not on pricing. The products are very valuable and by and large in the US and Europe we don't have much competition.

Dick, quarterly revenue, is there a range you might be able to provide? I know it's mix related. I'm trying to get a sense when you might be.

It's complicated. It's SISD revenue. Too hard to do. I can give you a whole spread, no, we look at whole spreadsheets that tell us under various conditions, but too hard to say that. We're not that far from break even. We're not that far.

One last question, Bob I think in your last call the subject of acquisitions came up. Is that on hold at this point given the market or are you still pushing forward?

Absolutely not. Now's a good time to buy. Now would be a very good time to buy. We're looking. There are one or two things, one thing that's going pop quite soon. Very small enterprise and it fits in very well, the product fits in well with our existing product. I'm not going to tell you which division it is or anything. We're very open to buying things. We have the money, we probably wouldn't do a huge acquisition because of the risks involved, but small acquisitions which are typical of the things we've done, we're happy to do them.

Okay, thanks very much.

Sure.

The next question comes from [Jim McCary from Newberger Berman

Hello Jim.

Hey guys. I was going to follow up a little bit on Jim Ricchiuti's previous question. Looking at the margins. And maybe just asking, Bob, are you seeing a different basis for competition in the marketplace? Are your customers evaluating the products in the same fashion as in the past? Is there any sort of change taking place?

No, I'd have to say in SISD th are small things happening. We're missing a product here and there and we're going to fill that in. But, no. In our biggest piece of business there is no change in the dynamics other than companies not issuing purchase orders.

I know this is always a hard thing to get your arms around, but in terms of and I know market shares a terrible word, but you feel like you're holding onto whatever business is out there, your fair share at this point.

Yes in Europe and North America. And possibly-- I'm not confident enough to speak yet about Japan, about Asia other than Japan. Japan we're holding onto a zero market share, that's been the problem, upside there with Mitsubishi.

Thanks, guys, appreciate it.

You're welcome

The next question comes from Richard Eastman from Robert W. Baird

Wanted to circle back. Dr. Bob, Is there any discernible growth in the product ID business? That had been holding up for you fairly nicely or has it basically acted like the other product sales in factory automation?

Thank you for the opportunity to talk about this. Rather than me doing it, I'd like to pass it on to my partner, Rob Willett, who has a lot of experience in the ID aspect of the business, so I'd like him to answer that.

Richard, I would say overall ID's been experiencing the same kind of market conditions that the overall machine vision business has, but what we are seeing is a lot of activity and a lot of momentum around a few overtime verticles and a few regulatory things that are going on. Pharmaceuticals both in Europe and America are experiences big demand for implementation of track and trace, traceability systems. Two bits of regulation in -- particularly in Europe, it's called GS1. In the United States it's called E pedigree law. Europe's kind of leading the way. We're seeing a very significant growth opportunity in pharmaceuticals. In the longer term, we're also seeing a lot of growth drivers and a lot more interest in IT around retail-type applications., and also logistics medical-- medical device and implementation of 2D bar codes. for tracking and tracing parts also. Some very major growth drivers. I would say although demand's been a little sluggish, like other aspects of the business, we're seeing pretty good longer term growth momentum for ID

I would think the direct mark business, that's probably in the same auto down draft as you might think. Is that fair?

Yes, certainly automotive where Cognex excels is reading 2D bar codes on hard metal parts on auto motives and aerospace type applications. No one can touch it in terms of readability and performance there. And, yes, we've seen significant down draft there.

Okay, all right

But you know, the potential for growing Cognex, let's say the economy doesn't improve. We're going to enter areas where lasers have been used such as logistics and retail. We assume that's going to be image-based. We see very good opportunities to grow, of course from zero it doesn't matter, but there's a lot of revenue opportunity. Forget about percentage growth. Which of course is large. There's a lot of dollar revenue growth in those sectors where we don't play at all and where we are intending to be a major player.

Okay and one last question. Dick can you give the currency impact at the top line in the quarter?

Compared to of (inaudible) or compared to the prior year?

Yes, must be negative--

Compared to- let's see, if I go, Q1, compared to Q4, the net impact on the top line was about 400 K.

That it? Well, okay, compared to the fourth quarter.

And compared to the first quarter of last year it was 440 K the other way. Negative.

Oh, okay the top line. Thank you.

One much the things, don't forget that the the big-- the big order we got to record revenue in Q1, that was Japanese-based.

Yes.

Got recorded in as part of Japanese revenue.

Oh Okay, thank you.

The next question comes from Antonio Antezano, from McCleary.

I wanted to follow up on the growth--- , potential growth in newer markets. You mentioned that in your press release. You talk about getting into retail and logistics. You were referring to those markets, when you mentioned that in the press

That's right.

And also in terms of timing, how should we think about timing in these newer markets?

Well, I think we're going to get into retail via VSOC discussing the use with VSOC in the retail market was a major player there. So I don't think you'll see any-- you won't see a press release until Q4 of this year and won't see revenue until the end of '010 probably. Would be my estimate. Rob?

Yes.

Logistics is another story. We have handheld devices now. DataMan products that can read, if we can read direct part marks, you can be sure we can read ink on paper. The question is, how are we going to distribute those products into logistics and we're talking to players there now about distribution. You might see some revenue there in Q4 of this year.

Okay and then just quick follow-up on the gross market theme. Under steady conditions, how should we think about gross margins understanding that there could be savings there from the restructuring going on. Should we assume gross margin remain below, between probably 65, 70% going forward.

Yes.

All right, thank you.

Yes, as long as revenues are at this reduced level and then once we get the revenue number up a bit higher, we should be able to climb back into the 70s.

I want to be clear on this. Except for a couple instances at 50 where the margin has fallen, the pricing hasn't fallen on MVSD. This is not a trend, this is only due to the fact that revenue is so low, absorption of the overhead.

Thank you.

You're welcome

(operator Instructions) Your next question comes from the line of Gus Richard of Piper Jaffray

Thanks for taking my question. Bob, you've been through quite a few downturns at this point. Could you talk a little bit about this one compared to other ones and which parts of your businesses you might expect to recover first and outside of orders, what early indicators you might get? The things that actually bottomed and are getting better?

Complicated question and an intelligent question. As a matter of fact all the questions today were very good. We've been through downturns in the past, but they were mainly semi related downturns. They were cyclical downturns and they were much easier to understand and much easier to if get through, because you knew in another two quarters things were going to tick up. This is very different. And this is why we decided to cut so deeply on our expenses. We don't believe this is short-term. I believe that this is a structural change in certainly the US economy and perhaps in the world economy that we lived for 20 years of growth-- exuberant growth and that is unusual. People think we're going to go back to that, I think is wrong. . We're going to go back to what was usual before (inaudible ) in the 1960s and 70s. That;s why we decided to scale the company back to where it now is for much slower growth around the world.

The first thing I think will pick up will be factory automation. I think we'll see-- other than new markets and new opportunities of course which have a rapid rise to the lower base, I believe that we're not going to see a pick-up, even when the economy, or when the economy improves, there is so much under capacity, under utilization in the semiconductor industry, we're not going to see, nobody's going to see a pick-up there, even when the economy improves, probably for another year. Talked to a friend of mine, he said, Bob, if you need equipment we have ten of these XYZ testers in crates unopened. There was a lot of stuff sold that was anticipated to be used in '08, '09 and still in crates. So, even if people start buying far more chips or different chips or whatever, it'll be a long time coming before capital equipment sales go up and therefore before Cognex's sales to those customers goes up.

The first thing we'll probably pick up might be SISD, actually. Because when things pick up. People will build more things. They need more steal, more cars. SISD and factory automation will be tied, I think-- Maybe factory automation sooner. That's my view , but I

I would agree with that.

Great, all right, thanks so much.

You're welcome.

There are no further questions. At this time I would like to turn the call back to you.

Well just want to apologize to everybody for the for the results we're reporting. This is the first time in years we had gross margins under 70%. It's very, very disappointing. Nevertheless, when we look at our competition. We're doing far better than they are. So we can't compare ourselves to what we wanted to be, what we expected to be. It's as if the world was on steroids for 20 years or at least ten years and now the rules are changed. There's no steroids. You can't compare how hard we're going hit the ball or how many home runs to how hard we were hitting it and how many home runs we had when we were on steroids.

We're going to start comparing ourselves to how our competitors and other industries we serve are doing. In that regard, we're doing better. That doesn't mean I'm happy with it, but we have to get our head around this. America has to get their head around the hay days, I fear are gone for quite some time. We have to get back to work doing the basic things. Get happy with 5% growth and employing and keeping those people who we have employed happy and productive. Because if we keep on looking back to say oh well semiconductor will be 90% of our business again. Gross margins will be 102% and you'll never be happy.

That's my view of where we, we should be. Where our heads should be. It takes some time for people to adjust to this difference, though we are not headed down the toilet here. America is not headed down the toilet. This is not heading toward a depression. Yes, unemployment will be higher, I suspect in the US and around the world, nevertheless, we are going to continue to have a profitable business in the near future and things are going to improve from the base where we, where we're pretty close to the base now. All right, that's it from here. I hope to have f better news for you, though I don't anticipate it for Q2. Nevertheless, you can count on us to keep working hard and moving fast. Thanks for your attention.

Ladies and gentlemen, that does conclude the conference for the day. Again, thank you for your participation. You may all disconnect. Have a good day.