Cognex Corp. Q3 2008 Earnings Call Transcript

Oct.29.08 | About: Cognex Corporation (CGNX)

Cognex Corp (NASDAQ:CGNX)

Q3 2008 Earnings Call

October 29, 2008 5:00 pm

Executives

Bob Shillman - Chief Executive Officer

Richard Morin - Chief Financial Officer

Robert Willet - President, Modular Visions System Division

Analysts

Antonio Antezano - Macquarie Research Equities

Alexander Paris - Barrington Research

James Ricchiuti - Needham & Company

William Pike - Pine Street Securities

Chuck Murphy - Sidoti and Company

Operator

Good day ladies and gentlemen, and welcome to your third quarter ’08 earnings call. (Operator Instructions) Now, it’s my pleasure to announce your host, Richard Morin.

Richard Morin

Thank you and good evening, everyone. Earlier tonight, we issued a press release announcing Cognex’s earnings for the third quarter of 2008. For those of you who have not yet seen this report, the copy is available on our web site 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 a non-GAAP financial measure if we believe it to be 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 on the GAAP in exhibit one of the earnings press release and our reconciliation of certain items in the income statement from GAAP to non-GAAP in exhibit two.

I’d like to emphasize that any forward-looking statements we made in the press release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change and actual results may differ materially from those projected or anticipated. You should refer to the company’s SEC filings including our most recent Form 10K for a detailed list of these risks factors.

Now, I’ll turn the call over to Bob Shillman.

Bob Shillman

Yes thanks, Dick and good evening everyone. Welcome to the call. As you might see, if you have the press release in front of you, we reported revenue of 63 million for Q3 and earnings of $0.27 a share. Included in those earnings are $4 million of discrete tax items which added $0.09 to EPS for Q3 and excluding this benefit, earnings were $0.18 per share for the quarter. Now, let’s turn first to the revenue and after that I’ll address expenses.

Business in the semiconductor and electronics capital equipment market which we call SEMI continued the steady decline that began early 2006. SEMI revenue was approximately 10 million for Q3 which represents a decrease of 30% year-on-year and 20% on the sequential basis.

We have lower expectations for SEMI going into this quarter and unfortunately, the level of business proved to be even less than we had anticipated. From discussions with customers, the pickup that the industry hoped for in the second half of ’08 did not materialize and our SEMI sales team is still working hard to get new accounts, and our VisionPro Software product is helping in that regard. However, there doesn’t appear to be any light on the horizon in the near term in the SEMI business.

The opposite is true or the surface inspection market or SISD as we call it which had a very good quarter in Q3. SISD’s revenue was approximately 11 million for the quarter which was more than double the amount we’ve reported in Q3 of ’07 and 16% over what we reported in Q2.

Business has been very good for SISD in 2008 primarily in the metals industry in Asia where we have been gaining share. For example, we received a multimillion order from China Steel for seven surface inspection systems, all of which were shipped and the product revenue recognized in Q3.

And the third market that we serve, factory automation, which is our largest market, we reported revenues of 42 million in the third quarter. The revenue in factory automation increased 19% year-on-year due to higher revenue from America, Asia and Europe.

The largest increase in absolute dollars was from Europe and it was a result of both increase customer demand and the positive impact of foreign exchange rates. On a sequential basis, factory automation revenue declined by 6%, primarily due to the seasonality that we typically see in factory automation markets during the summer months. Demand from overseas was also somewhat softer as the slower business trends we experienced in the U.S. factory automation market in the first half of the year started to spread internationally.

Turning now to expenses, we tightened our expenses in Q3 as the factory automation began to face stronger economic headwinds. Given the recent financial crisis and its implications on the global economy, and manufacturing spending, I now believe that it is prudent to plan for a deeper decline in business going forward into 2009.

Because of that, we are taking a careful look at our planned expenses for ’09 and less important projects will be put on hold or canceled altogether. However, we intend to continue to fund strategic initiatives for the long-term growth and health of the company. We are going to be taking this course of action. We have taken this course of action in the past and as a result, we came our stronger than the competition when conditions improved.

Looking forward, our outlook is very cautious because of the high degree of uncertainty in today’s environment and our estimates for revenue in Q4, therefore is between 53 million and 58 million. In that range of revenue, we expect earnings will be somewhere between $0.03 and $0.10 a share.

As I mentioned, we’ve been through tough times in the past and although the reasons for this current challenge are quite different from the past, we have a strong balance sheet. And most importantly, we have no debts and a business model that consistently generates cash and that will see us through to better times.

At this point, I’ll wrap up from my prepared comments and we’ll open it up for the phones for any questions that you might have for me or the team who’s here.

Question-and-Answer Session

Operator

(Operator Instructions) I do show a few questions, our first, coming from Antonio Antezano with Macquarie Capital.

Antonio Antezano - Macquarie Capital

Good evening.

Bob Shillman

Hi, Anthony.

Antonio Antezano - Macquarie Capital

I was wondering in terms of your outlook for Q4 by each segment, now that we are at the end of October, if you can give us a bit more color in terms of what you expect for SEMI, factory automation and surface inspection in Q4.

Bob Shillman

Actually, Antonio, we expect all three to be down. SEMI is continuing to decline, we think factory automation will see some declines, as well.

And while SISD is doing well, they had a near record quarter in the third quarter and we don’t expect them to match that in the fourth quarter. But still have a good quarter but not quite at the third quarter level.

Antonio Antezano - Macquarie Capital

When we think about what you just mentioned about controlling spending for next year, what will be the impact on R&D, given that you had to focus on new product development and whether that would be also affected by this lower spending next year?

Bob Shillman

Well, we still expect some rather higher spending as the percent of revenue in R&D and it’s quite likely, despite the fact that revenue is going down, expenses will also be flat.

Richard Morin

Yes, there are couple of major areas that we’re going to look to continue development and spend dollars in the IT market which has been very successful for us and also the Vision system on the chips. So those are a couple of key strategic areas where we’re going to want to continue to invest some of our R&D dollars.

Antonio Antezano - Macquarie Capital

Thank you. I’ll go back to the queue. Thank you.

Operator

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

Chuck Murphy - Sidoti & Company

Good afternoon guys.

Bob Shillman

Hi, Chuck.

Bob Shillman Morin

Hi, Chuck.

Chuck Murphy - Sidoti & Company

Could you just talk for a minute about currency, what its impact was on sales and operating profit in the quarter and what you expect, the impact to be going forward?

Bob Shillman

Well compared to the prior year and prior quarters, the foreign exchange rates during the third quarter gave us less of a pick up on the sale side or whatever and I’m trying to figure out. Actually about net revenue, foreign exchange compared to Q2, we lost about 1.3 million in revenues due to foreign exchange rates, Q2 to Q3.

Chuck Murphy - Sidoti & Company

How much?

Bob Shillman

About 1.3 million in revenue. Yes.

Chuck Murphy - Sidoti & Company

Okay and what about for operating profit?

Bob Shillman

Roughly 600K.

Chuck Murphy - Sidoti & Company

Okay and I’d imagine what the euro, being so weak these days if that would continue, if not, be a little bit more of an impact?

Bob Shillman

Yes, I mean it’ll probably has to continue in Q4 and Q4 might be more in line where Q4 last year was, as opposed to certainly the beginning of the year and Q2 and early Q3, I think it hit the high, somewhere around 157 or so.

Chuck Murphy - Sidoti & Company

Okay and can you give us a little more detail on why the OpEx would be up sequentially in the fourth quarter.

Bob Shillman

Yes, we’ve got a couple of very specific projects that we’re spending money on. VSOC, we’ve hired some additional engineering staff and we have some outside contract services that we’ll—that the payment will be due and earned in the fourth quarter.

The other thing is that we’re expecting higher legal and professional fees due to, we’ve got a couple of our lawsuits, one is going into discovery and other one is going to court. So that’ll increase the legal fees as compared to the third quarter.

And the other thing too, is our accounting professional fees, product fees will be going up in the fourth quarter because the auditors will be coming in and spending more time here doing their preparation for year-end testing and (inaudible) testing or whatever. So it’s mainly in the area of engineering, engineering services and legal and professional fees.

Chuck Murphy - Sidoti & Company

Okay and I guess, if you have to think about Q1 then go kind of back down sequentially or is it just too early to say?

Bob Shillman

We expect it to come down sequentially. I am not yet sure as to what the scheduling will be on some of the lawsuits relative to some of them should be over. The discovery would be over and you might be in the period of lower legal fees. That one I don’t know but overall, I would expect it to soften in the first quarter.

Chuck Murphy - Sidoti & Company

Okay. All right and my final question for Bob. Any sense of there kind of being a base level for the semi-business and anywhere where it might bottom.

Bob Shillman

Yes, zero.

Chuck Murphy - Sidoti & Company

I mean there’s not kind of like a certain level that you feel comfortable that even in a downturn, you could manage to get?

Bob Shillman

You know, I’ve got to tell you and we have discussions with our customers all the time. Mostly the (inaudible) and this is the worst I’ve ever seen in the past 20 years I think.

So I’m looking at the bookings now, it’s the lowest it’s been in, since, excuse me. It’s the lowest it’s been, I can’t go back far enough.

Richard Morin

In Q1 of '03. In ‘01, Q3 of ’01, I think about the lowest was around what, $3.5 million, too?

Chuck Murphy - Sidoti & Company

Yeah. Okay.

Richard Morin

That’s going back.

Bob Shillman

That goes back a long way. I have it in front of me, I have the last five years and this is the lowest bookings quarter in five years and maybe more than that. I don’t believe, no, this is not the loss of business to our competitors or things like that just to the capital equipment vendors are not selling.

Chuck Murphy - Sidoti & Company

Okay. Alright, well I appreciate your honesty and I’ll turn it over to somebody else. Thanks.

Bob Shillman

Thank you. Sorry for the bad news. The good news is we’re in more and more businesses than SEMI, which is leaving the company.

Operator

Thank you. Our next question comes from Jim Ricchiuti from Needham & Company.

James Ricchiuti - Needham & Company

Hi, good afternoon.

Bob Shillman

Hi Jim.

Richard Morin

Hi Jim.

James Ricchiuti - Needham & Company

You know, I just wanted to follow up on the comment about the other businesses. I’m curious how you saw the demand begin to change in September and October in the discrete factory area. Did you see much of a pullback late in the quarter into Q4?

Richard Morin

Well typically what we see Jim, I mean as you know because you’ve watched us for a number of years, we typically have for factory automation, we typically have a very slow summer. And we start to see a major pick up in September and getting into October. And we really haven’t seen that level of pick up this year.

As a matter of fact as we take a look at October, it’s running a little bit lower than what the first month of the third quarter was, was July or whatever. So we didn’t get the big rebound that you typically see after the seasonal summer months.

Bob Shillman

I’m looking at the charts right here Jim for factory automation and for all of our different products and it’s not dramatic but nevertheless at the start of Q4 of the past 4 weeks or so are basically down from the run rate in Q3.

So and it should be higher, not dramatic but it’s not a good sign. It’s in the wrong direction.

James Ricchiuti - Needham & Company

And Bob, that shouldn’t, in each of the major geographies, I mean you actually did a little better than I was thinking in Europe.

Bob Shillman

I have this by region, one second. I have it by region, you’re right.. Europe is okay. Europe is okay for Q4. Yeah but I’m looking at the geography. I’m just looking at the automotive by Europe.

Richard Morin

That’s right. No, I think—

Bob Shillman

But I don’t have it by geography.

Richard Morin

Yeah. No, I’ve got it by geography here and essentially all the geographies are down but Europe is down less than any of the others. Although, no the U.S. is the lowest, is the best if you will, in that regard, then Europe but Asia and Japan are down quite a bit or much more than the other two regions.

James Ricchiuti - Needham & Company

Okay. You alluded to taking other steps to curtail spending and I’m wondering at what level of risk are you comfortable with—poor question, poor phrasing of the question. But would revenues have to come down another 10% or so, you think, before you took additional steps?

I’m trying to get a sense as to you don’t want to cut too deeply at this point, and I’m trying to get a sense of at what point will you take other steps based on what you’re seeing in the business?

Bob Shillman

Well generally speaking, the sooner you take steps, the better off you are and we’ve evaluated in a lot of past the projects that we’re doing. And we’re putting people, we’re shifting people around to more productive aspects and things that will pay off in the longer term.

James Ricchiuti - Needham & Company

Now on the sales side, the sales and marketing side, Bob, you’ve been moving pretty aggressively to invest in Asia, particularly in China and Japan, does that change at all?

Bob Shillman

Well you are right except for the Japan. We have not invested heavily in sales in Japan and we hope the relationship that we’ve just formed with Mitsubishi will help us out there. But no, I don’t, we don’t anticipate cutting back on expending and building teams in the developing countries primarily in Asia and Eastern Europe because I think we can get share.

Even if business is way off, we can get share and now is a good time to do it you know. We could maintain a tremendous level of profitability by cutting expenses dramatically and I don’t think that’s necessary.

Certainly our profitability is going to fall if we maintain our expenses but we’ve done this in the past and we can afford, given our historic high level of profitability, we can afford to continue to invest. Maybe not as heavily as we would have otherwise, of course.

But we can afford to go forward with many, many fewer cuts, more programs in tact in sales in particular into those territories. And again it’s, you’re right the economy in even those territories has stopped but nevertheless, if you build your team now, it’ll be there when things improve.

And also if you have the right people in offices where in those territories, you’ll get more. You’ll get share. So that’s our plan.

James Ricchiuti - Needham & Company

Last question, just on Mitsubishi, do you see much of a contribution from that relationship in 2009?

Bob Shillman

No. No, a couple million dollars, $2 or $3 million would be okay. More than that would be great

James Ricchiuti - Needham & Company

Okay. Thanks a lot.

Bob Shillman

Yep.

Operator

Your next question comes form Alexander Paris from Barrington Research.

Alexander Paris - Barrington Research

Good afternoon.

Bob Shillman

Hey Alex.

Alexander Paris - Barrington Research

I think maybe I should spend half an hour looking for something positive

Bob Shillman

Yeah. Yeah. I was going to say why did you say good afternoon. Why is that? Well part of the good news is we had a great quarter. I mean we made a ton of money right?

Alexander Paris - Barrington Research

The market’s up a day and a half. When you were just talking a minute ago about Europe being pretty good, were you just talking about the factory automation, not overall?

Bob Shillman

You know, I was looking at the wrong slide and I didn’t quite answer the question. It turns out automotive has been reasonably strong in Europe, much stronger and growing actually in Europe. Whereas in the U.S. started to decline sort of in the second half of ‘05 and hasn’t recovered from that. It keeps on declining, it’s very low.

But Europe has been holding up. That’s what I was talking about. In Europe automotive has been holding up.

Richard Morin

But Europe factory automation has done extremely well this year. at the start of the fourth quarter is however, softer than start of the third quarter.

Alexander Paris - Barrington Research

Could you give a rough idea just on a, throughout the cycle kind of basis what factory automation is, what part of, what percentage of factory automation is in Europe? It’s fairly significant, isn’t it?

Richard Morin

Yeah.

Bob Shillman

My guess is 40%, maybe more not including surface inspection.

Richard Morin

Factory automation, let’s see. Europe, year-to-date in 08 in MBSD . Just let’s see, more than 40%, has been 41 ½% of our factory automation business, year-to-date has come, bookings have come from Europe.

Alexander Paris - Barrington Research

Does that worry you a bit with Europe presumably going into recession there?

Richard Morin

I’m sorry, I didn’t get the question.

Alexander Paris - Barrington Research

I said does that worry you a little bit, that 41% in Europe with Europe, particularly Europe and U.K. heading down?

Bob Shillman

Well no. it still could be 41%, unfortunately Alex, have a lower base. Yeah of course it gets us concern, Jesus.

Alexander Paris - Barrington Research

I mean more than in Burma?

Bob Shillman

Yeah, yeah because things goes down where you were previously doing a lot of business, it’s much more painful than things going down where you’re doing zero business.

Alexander Paris - Barrington Research

Okay. In China, is at a positive view. The general revenue is at all significant in China yet?

Richard Morin

I don’t know whether I have the total here in China but it has been growing. It has been growing quite a bit but I think what we’re seeing so far in the fourth quarter is all of Asia is down compared to the third quarter. I don’t have the details country-by-country available to me right here.

Alexander Paris - Barrington Research

Let me, just going into the semiconductor industry, I know zero is not a good target. It’s as low as possible but it’s been going on since early 2006. So this is two years old now, this downturn as far as you’re concerned, your end market and semiconductor.

Richard Morin

Well I’m looking at a chart right in front of me and Q106 was the high, not the high end forever but since Q106, it’s been on a downward trend. So almost thee years.

Alexander Paris - Barrington Research

Yeah, I don’t remember that before that that was the particularly, I mean they didn’t go crazy with capital spending before that. I just wondered if something, I know that something’s changed in the industry as far as your profitability.

But there’s some changes, people working with fewer fabs and using used equipment? Or is there some material change in the industry that would explain why it’s been so bad so long?

Bob Shillman

I don’t know. You know, we had people in the company who could probably guess and I could guess. I think it has to do with lessening demands for the leading edge products that require finer line widths unless that happens.

You know, unless there’s an increasing need for the leading edge technology, the next generation technology then there’s plenty of fabs in the world who can make the last year’s stuff and you don’t need any more equipment.

Alexander Paris - Barrington Research

The ID business, is that growing, still growing despite the factory automation may be slowing?

Bob Shillman

Yes. That’s one of our, one very bright area in our business is factory automation, is ID.

Alexander Paris - Barrington Research

I knew we could find something positive.

Bob Shillman

Yeah that’s right. Yeah.

Alexander Paris - Barrington Research

How about the commercial products? You had one got out of it. Is there anything that…

Bob Shillman

The good news is it’s no longer going down. It’s zero. We got out of that.

Alexander Paris - Barrington Research

Yeah. Very low base right?

Bob Shillman

Yeah. Yeah, no we got out of that.

Alexander Paris - Barrington Research

No bright ideas of something just around the horizon?

Bob Shillman

No.

Alexander Paris - Barrington Research

Okay.

Bob Shillman

No. The bright idea for the future is there are two of them that seem to be shining and that is the ID business that we continue to win very nice orders and even our automotives are still buying ID. And also our vision system on a chip, which is still speculative.

I mean we have betas working and alpha chips working in the company and people assigned to it and that will, we hope, be a breakthrough product for the company and allow us to get into many different businesses. But you’re not going to see revenue from that for in ‘09 at all.

Alexander Paris - Barrington Research

Right. Well given this environment and I would imagine the overall machine vision industry has probably having some trouble that assuming the Feds are not going to bail out any of your competitors, are there any acquisitions that you could make that would get you into new markets or?

Bob Shillman

Well it’s an interesting question. We have never, you know, not done a deal because of price. So you know, a number of shareholders and other people have told me, ah it must be a great opportunity to buy things.

Well, we, you know, we’re always looking and price never stopped us. If we see something good, we buy it. So the fact that prices are down does not increase the number of companies that we look at. For Rob and I and (inaudible) spend a fair amount of time looking but there aren’t that many things that fit our criteria, which are rather stringent.

Alexander Paris - Barrington Research

But there could be, given the environment, private companies that never thought about selling before that suddenly may think about selling. Are there any new technology or technologies out there that you’d like to buy that you don’t have?

Bob Shillman

Nothing that we can talk about now.

Alexander Paris - Barrington Research

Okay. But it’s possible

Bob Shillman

No. Oh, it’s possible. It’s possible and we’re always looking for new things. We have, you know, a nice balance sheet. We bat around to buy things and then spend the money buying back stocks, you know.

So that’s okay but buying companies is a better idea, buying new technology and Rob and I are actively pursuing these but I’ll tell you there’s nothing on the front burner now. There’s nothing on the front burner.

Alexander Paris - Barrington Research

This refers to housekeeping, the tax rate for 2009, a guess as to what it would be?

Richard Morin

No. We’re still working on pulling together our bookings estimates by various regions of the world and putting together the final plan for ‘09 but if I were to give a guess right now, I’d say it’s probably going to be around the 26% level.

Alexander Paris - Barrington Research

Okay.

Richard Morin

But we’ll fine-tune that in the next month or so

Alexander Paris - Barrington Research

Okay. Well we found a couple good things. Thank you.

Bob Shillman

You’re welcome Alex. Thanks for trying.

Operator

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

William Pike - Pine Street Securities

Hi. You’ve actually kind of answered the question. I just want to ask if your caution for next year, which is obvious in the environment, have you heard from customers saying, you know, forget any orders or pulling back or just absence of orders as you look forward?

Are you getting hard specifics from people in factory automation, for example, saying we doubt we’re going to do any business but we don’t know yet? Could you give us a little color on that?

Bob Shillman

Sure. There are two reasons why we’re not walking around smiling today. One is that we see the average daily bookings for the start of Q4 below the run rate of Q3 and that shouldn’t happen. That should be higher in Q4. So that’s some really solid data. The average daily bookings are lower.

The second reason why we’re walking around with frowns is that we read the newspaper as you do and see the general situation and the economy going to hell in a hand cart. And the third reason that I’m frowning is that Obama’s leading in the polls.

William Pike - Pine Street Securities

I happen to share that view but in terms of specific customers out there who normally buy factory automation equipment, have they told you to be cautious or?

Bob Shillman

No, no, no. You know, I don’t think we have, I don’t think we have visibility to be honest with you but that level, at corporation, you know, we don’t talk to the senior people in General Motors or Mercedes or Proctor & Gamble. We just talk to the factory floor, you know, the manufacturing manager of a particular plant and they may not even know, alright.

Maybe the board hasn’t told them to get any expansion plans. I don’t know. So the answer is no, we have no specific word from any of our customers about the future but you don’t have to be, you know, you don’t have to be a rocket scientist to say let’s get ready for tough times.

William Pike - Pine Street Securities

Right. Okay.

Bob Shillman

If it turns out not to be then we’ll be golden, right?

William Pike - Pine Street Securities

Right. Thank you.

Bob Shillman

You’re welcome Bill.

Operator

Thank you. Our next question comes from Antonio Antezano from Macquarie Capital.

Antonio Antezano - Macquarie Research Equities

Thank you. Just a quick follow-up. Last year in February/March, you launched a series of new products, I think between five and ten new products and I was wondering for February/March of 2009, whether we should expect something like that or whether you can comment on that?

Robert Willett

Sure, yes. Robert Willett here. We will be bringing a number of exciting high-growth products to market in the first quarter, yes. We will, perhaps not as many as you saw last year but certainly a number of them from which we do expect significant growth over the coming year.

Antonio Antezano - Macquarie Research Equities

Right and can you give a?

Bob Schillman

It also, we are going to introduce and we’re beta testing a new product SDSI in surface inspection for different market segments that we are currently playing in and that’s a piece of good news that I didn’t share with anybody. But we have three beta sites now, which appear to be doing very well and we anticipate rolling that product out at the start of Q1.

Antonio Antezano - Macquarie Research Equities

And can you give us examples of applications for vision on chip technology

Bob Shillman

Mm-hmm. There are two applications, two broad kinds of things that we’re looking at for vision on a chip. One is to do things that can’t be done with current chips no matter how much you’re willing to pay for them. And the second group of things is things that require products or applications that require very small size and very low costs. So there are two different market applications that we’re thinking of.

The first one for example is the ability to acquire and analyze images of very fast moving parts and in order to do that, you need vision system on a chip because even if you had one picture of the item going by, that picture may not be good enough or the right part of the object to analyze it..

So the vision system on a chip currently running is about, I think, 300 frames per second. It’s going to be up to 1,000 frames a second, which means it can capture images many times while it’s moving by, many different images and make sure to be able to analyze them to get the answer out. And I don’t want to, for competitor purposes, I’m not going to say what the application that we have in mind is but we have a solid application that cannot be done with machine edition.

It just cannot be done with the strobe lights and not strobe lights. It cannot be done with any commercially available chips and it’s a very interesting and high-volume application.

The second group of applications that we’re talking about are applications that, as I mentioned, require small size, low power, and low cost. And those applications would be, for example, in automotive applications where they need high reliability. That means lower interconnect, and low part count, and low power. So this chip, including with our Vision Software libraries, might enable automotive companies or tier ones to design the kinds of things that people are planning in the future for vision in cars.

Vision in toys is a possibility. We’ve spoken in the past to two major, leading, toy companies about putting vision in toys. They continuously look for new opportunities to distinguish their products from other people and have toys do remarkable things. And Vision is very exciting to them. But to do that, the chips have to be very cheap and low power, so DSOC does that.

Other applications that we’re looking at are security applications that are also very high volume. But it’s well thought out where these chips can go in the future. But unfortunately it takes a lot of time to put together all the software to make it possible to turn this into a business. You can’t just sell people these chips without a lot of software on top of it that makes it easy for them to program. And we’re talking about very sophisticated programmers using these chips.

Antonio Antezano - Macquarie Research Equities

Right. So I guess we could expect some of those new applications for 2010, not in the near term?

Bob Shillman

That’s right. You might see, you know, us talking about the applications, beta sites in ’09. We’re certainly going to use one internally. We have a plan to come out with a product, I hope in ’09, second half of ’09 based on DSOC.

And so you’ll hear about the applications. You’ll see some revenue in 010.

Antonio Antezano - Macquarie Research Equities

Okay. Final question, you’re ID business, grew I guess, over 70% over year, if the math is right. And I was wondering to what extent that will be affected by the industrial downturn?

Bob Shillman

Unknown. We think there’s more legs to that business than to the other things we’re doing because there are mandates to put in product tracking, that evidently has to happen at certain companies irrespective of their plans for capital equipment.

And I think the product tracking, by the way, does not require new lines. It’s not like it’s capital intensive. Unlike most uses of Machine Vision, which they only put in when they’re reconfiguring a line or building a new line, I think ID is added even after lines are built to track objects that are moving by.

So it’s less likely to go down than the others.

Richard Morin

And just to add to that, Antonio, checking the comparison of Q4 bookings to date compared to Q3, where we said that factory automation was down in all regions. Sales of our Dataman ID product, or whatever, was up in all regions except for Asia.

So, as Bob said, there is better legs, probably to the ID business.

Antonio Antezano - Macquarie Research Equities

Thank you.

Bob Shillman

You’re welcome.

Operator

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

Chuck Murphy - Sidoti and Company

I think most of my questions have been answered. But any other areas besides ID that you feel like could grow in a downturn?

Bob Shillman

No.

Chuck Murphy - Sidoti and Company

In China or anything like that?

Bob Shillman

Inspecting beer bottles, maybe, I don’t know. Now look, a downturn, we’re basically in factory automation. In a downturn, factories try to save money, right? So.

Chuck Murphy - Sidoti and Company

So even like?

Bob Shillman

On the other hand I will tell you that surface inspection is very strong. We’re not planning on any softness in that business right now. Those plants, evidently steel where we’re doing very well, evidently the budgets are in and approved. We hope that’s the case.

Chuck Murphy - Sidoti and Company

So even like, China, you think would be difficult?

Bob Shillman

Yes. Except for our surface inspection business in China. But, yes, I think China’s going to be difficult because Chinese factories are pumping out goods mainly that comes to America.

Right? And if people aren’t buying, they’re not going to be pumping out goods. It’s a real worry. It’s a real worry and I don’t know how anybody’s going to fix it. You could make t worse, but I don’t know how to make it better.

Chuck Murphy - Sidoti and Company

Thanks a lot.

Bob Shillman

You’re welcome.

Operator

Thank you. (Operator instructions) And our next question comes from James Ricchiuti from Needham & Company.

James Ricchiuti - Needham & Company

I’m surprised that the SISD business is holding up as well as it is. Is this a situation where people are just going back and retrofitting some equipment that they had to replace? I wouldn’t think that there’s a lot of new investment going on given the economy.

Bob Shillman

You’re right. I believe most of our equipment—I don’t have the right people here to answer it in detail. But I believe that we’re not looking at the new plants. These are now retrofits into existing plants.

Richard Morin

And some are going into plants that didn’t have an inspection beforehand. So the plant has been up and running but they didn’t have an inspection system.

Bob Shillman

And a lot of this is happening in China where they were making—I’m not certain of this, but I think it’s true. They were making steel and galvanized steel without Vision Systems, without inspection. And now their customers are forcing them, if they’re going to buy from Chinese companies or if they want to because of the price, they’re forcing them to inspect it and make sure it’s the right quality. So that’s the case.

So I don’t know of any new steel or paper plants that are online. It’s retrofit into existing plants that either are replacing existing equipment or plants that didn’t have it.

James Ricchiuti - Needham & Company

And you’re having a pretty good year in ’08 in this area. But it seems a little bit unrealistic to see that business being up in ’09. Could you see the SISD business being, or just maybe not being down as much?

Bob Shillman

We’d be with flat.

James Ricchiuti - Needham & Company

Bob, what about the new product in SISD? It’s going to begin shipping in Q1? Is there a long sales cycle? Anything you can tell us about the market?

Bob Shillman

It’s a low cost product, which requires far less or zero integration on our part. And fantastic, I’m going to be visiting a plant that has it in a couple weeks, so I can tell you more about it. It’s lower cost, higher margin, and does not cannibalize existing business.

We’re planning on somewhere between $1 and $3 million of revenue for that enterprise in 2009.

James Ricchiuti - Needham & Company

Thank you.

Bob Shillman

You’re welcome. And that will be up over last year. By a dramatic percentage.

Operator

Our next question is coming from Alexander Paris from Barrington research.

Alexander Paris - Barrington Research

Just one quick question Dick. Do you have your run rate, geographically, U.S. as opposed to the rest of the world? I guess what I’m thinking is if you listen to the TV the whole world is falling apart.

But if the U.S. should happen to do better, for example. If their recession started and finished by the first quarter, would that be significant relative to the rest of the world?

Richard Morin

Are you talking about in total?

Alexander Paris - Barrington Research

In total right.

Richard Morin

In total, okay. Let me take a quick look.

Alexander Paris - Barrington Research

In other words, if you the U.S. looked a little bit better while Europe is belatedly going down and China is going down, could you shift enough emphasis of marketing to U.S. to take advantage of that?

Richard Morin

Year to date consolidated bookings, the U.S. has been about 34%, Japan 23, Europe 31, and Asia 12. So the U.S. combined still represents—wait a minute I’m sorry, I’m looking at the—

Yes, U.S. was 31, Japan 22, Europe 35. Sorry. And Asia 12. So I mean it’s a big part of the business. Europe has been larger this year and part of that increase in Europe or whatever was due to FX having an impact on it. But yes, if the U.S. stops churning it’s roughly one-third of the business.

Alexander Paris - Barrington Research

Thank you.

Richard Morin

You’re welcome Alex.

Operator

There’s no further questions in the queue at this time. I’d like to turn the conference back to your host.

Bob Shillman

Okay well, we’re all hoping for better times. My wife is doing her best to pump up the economy. She goes shopping just about every day, but if you listen to her she’s not spending a lot of money. It’s always on sale. So I don’t know. Maybe I should tell her to pay list price.

That’s it from here. We hope to report better news at the end of Q4. If I don’t see you at various conferences I will wish you all a good Thanksgiving and happy holidays.

Operator

Ladies and gentlemen this does conclude your conference for today. Everyone have a great evening. You may now disconnect.

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