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Cognex Corporation (NASDAQ:CGNX)

Q4 2012 Earnings Conference Call

February 11, 2013; 05:00 p.m. ET

Executives

Dr. Rob Shillman - Chairman

Rob Willett - President & Chief Executive Officer

Richard Morin - Chief Financial Officer, Executive Vice President of Finance and Administration

Analysts

Tom Hayes - Thompson Research

Zach Larkin - Stephens Inc.

Ben Rose - Battle Road Research Ltd.

Jagadish Iyer - Piper Jaffray

Jim Ricchiuti - Needham & Co.

Richard Eastman - Robert W. Baird

Operator

Good day ladies and gentlemen and welcome to the Cognex, fourth 2012 earnings call. At this time all participants will be in a listen-only mode, but later we will conduct a question-and-answer session, which instructions will be given at that time. (Operator Instructions).

And now, I would like to introduce your host for today, Richard Morin. Richard, please go ahead.

Richard Morin

Thank you and good evening everyone. Earlier tonight we issued a news release announcing Cognex’s earnings for the fourth quarter 2012, and we have also filed our Annual Report on Form 10-K. For those of you who have not yet seen these materials, both are available on our website at www.cognex.com. They contain highly detailed information about our financial results.

During tonight’s call, we may use a non-GAAP financial measure; if we believe it’s useful to investors or if we believe it will help investors better understand our results or business trends. For your reference, you can see the company’s income statement as reported under GAAP in Exhibit 1 of the earnings release and a reconciliation of certain items in the income statement from GAAP to non-GAAP in Exhibit 2.

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

Now, I’ll turn the call over to Cognex’s Chairman, Dr. Bob Shillman.

Dr. Bob Shillman

Thanks Dick and good evening everyone. I’d like to welcome you to our year-end conference call for 2012. Right now I’m in San Diego, where first of all it’s sunny and that’s the important thing and no two feet of snow. But more importantly, that’s where our advanced R&D team is and currently they are working on some very existing new technology that will be incorporated into one of our future products. I hope to tell you about their inventions and that new product in the near future.

But for now I’m going to hand the microphone over to my partner, Rob Willett, Cognex’s, President and Chief Executive Officer, who will give you details on our Q4 and year-end financial results.

I’ll be available at the end of the call to answer any questions you may have for me. But right now I’m going to hand the microphone over to Rob. It’s all yours.

Rob Willett

Thank you Dr. Bob. Good evening everyone. Earlier tonight Cognex reported its third consecutive year of record revenue. Revenue for 2012 was $324 million, which represented a slight increase over 2011. Normally we would expect our growth rate to be might higher; however, the downturn in SEMI, solar industry contraction and unfavorable currency exchange rates reduced revenue by a combined total of $23 million. Backing that out, revenue growth was closer to what we would expect in a year of economic uncertainty.

Highlights in 2012 included our continued strong execution in the factory automation market, which set a new annual revenue record. We were particularly pleased with the contribution from ID products, our fastest growing strategic initiative. Our market expansion efforts in China also continue to make good progress and other good news came from the surface inspection market, which set a new annual revenue record.

We were highly profitable in 2012, reporting margins that tracked at or above our long-term targets. Gross margin was 75% for the year, our operating margin was 26% and net margin was 21%, even with the investments we made in new product development and sales force expansion to drive future growth.

We ended 2012 stronger than anticipated with fourth quarter revenue that exceeded our guidance. In addition, reported earnings were $0.02 per share above the Thomson Reuters First Call consensus estimate, and that’s after our higher than expected tax provision.

Looking at the fourth quarter in more detail, reported revenue was $82 million, the lion’s share came from factory automation, where revenue was $62.3 million and accounted for 76% of our total business. ID products continued to outpace the rest of our business and constant currency ID products revenue increased 22% year-on-year and 12% over the prior quarter.

Looking at factory automation from a geographical perspective, Asia was our best performing region in terms of percentage growth. Factory automation revenue from Asia grew 16% year-on-year in the fourth quarter, as a result of strong contributions from Korea and China. On a sequential basis, Asian factory automation declined 21% due to volatile spending among consumer electronics manufactures.

In the Americas, factor automation grew 1% year-on-year and 4% over the prior quarter. While growth in this region was modest, for most of 2012 we are cautiously optimistic that momentum is improving.

Factory automation revenue from Europe decreased to 3% year-on-year, however it increased to 12% over the seasonally slow third quarter. Strong execution by our sales team and the European factory automation market drove gains in a tough environment.

In Japan the factory automation market continued to weaken throughout 2012. As a result, our revenue in this area declined 17% year-on-year in the fourth quarter. Japanese factory automation increased 1% sequentially.

In surface inspection, fourth quarter revenue was $14.4 million and was the second highest quarter ever for that segment. As we said in the past, surface inspection is a lumpy business. Revenue declined 11% from the record level reported in the fourth quarter of 2011, but increased 22% over the prior quarter.

Revenue from the semiconductor and electronics capital equipment market was $5.5 million in the fourth quarter. This represents an increase of 5% year-on-year and a decrease of 20% on a sequential basis.

We saw unexpected up-site to SEMI in the quarter due to the receipt of a couple of relatively large orders. It’s too soon to say if that signal is the beginning of a broader recovery.

Turning now to innovation, we continue to invest heavily in engineering to increase new product offerings and accelerate times to market. These investments are bearing considerable fruit. If you look at the 18-month period ending in mid-2013, we are launching more new products than at any other time in our company’s history.

So far in 2013 we added two important bar code readers to our ID product like. Cognex’s vision based technology is a disruptive force in ID. Because of its performance advantages we are gaining share from outdated laser scanners that have for many years been the industry standard.

The DataMan 503 extends our ID product line into the high performance, high priced end of the logistics market. Here customers need to accurately identify their products, moving through their distribution centers on wide convey lines at very high speeds.

We will still enter the large existing market for lower performance and lower price point ID products with our recently introduced DataMan 50. DataMan 50 delivers higher re-grade and greater reliability than low-cost laser based readers currently used in these applications. This incredibly small form factor enables integration into very tight spaces, opening opportunities on production lines and in assembly machinery.

Moving to other product news, we made our industry leading OCRMax technology significantly more colorful and simple to set up. These advancements increase the speed and ease of use of our high performance optical character reading software, making it available to a broader range of customers. There are more major product launches slated for introduction in the coming weeks.

The last topic in my prepared remarks is our outlook for the first quarter of 2013. We are seeing strength in areas such as ID products, even with the continued economic uncertainty. However, surface inspection revenue is expected to be lower than Q4, which was the second highest quarter ever. We also normally see a decline in factory automation from Q4 to Q1. As a result, we expect the first quarter revenue will be between $78 million and $81 million.

Gross margin should continue to be in the mid 70% range. Operating expenses are expected to increase by approximately 5% on a sequential basis. The effective tax rate is expected to be 19% for a tax benefit of $555,000 related to the retroactive reinstatement of the federal R&D tax credit for 2012.

Now, lets open the conference call up for your questions. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions). Looking at our first question, it’s coming from Tom Hayes from Thompson Research. Please go ahead Tom.

Tom Hayes - Thompson Research

Thank you. Good evening gentlemen.

Rob Willett

Hey Tom.

Tom Hayes - Thompson Research

Just wondering, you have principally nice growth in the margin front on the service component of your business this year. I was just wondering if maybe you could provide your thoughts on the Calais to that growth we saw this year and then the sustainability of that growth going into 2013?

Rob Willett

Yes, hey Tom. I think a couple of points I would point to. One is service revenue at Cognex comes from two areas. One is from the surface inspection business and now you know, I think the team has done a really nice job of understanding and managing that business much better than we have in the past and I think they’ve built in a lot of sustainable productivity improvements that I do expect to continue.

The other area is what we call vision solutions business at Cognex, which is really how we service the very large and important accounts to have technically sophisticated needs division and we partner with them on some of their most difficult manufacturing problems and to apply our vision tools.

And that business is also being better managed I think than it has in the past and margins we can see continue to strengthen there, I think over the long term. However, I would say that that business is project based. So at times you know and even over yearlong periods you’re going to see fluctuations in that business based on when revenue comes.

Tom Hayes - Thompson Research

Okay great. Any such thing on the R&D and SG&A front; you indicated in your release that they were both partly lower because of reduced bonus accruals. I was just wondering if you can maybe just give us some degree of magnitude for that lower bonus accrual, so we can just factor that in?

Rob Willett

Well I guess the thing on the bonus accruals, what we have is last year we beat our overall targets on the bonus plans. We have an improvement this year. We did not meet our original plan and I’m just flipping through a couple of pages here. So on the MVSD R&D side, our bonus accrual this year was about $1 million less than it was last year and on the surface – yes okay, R&D was about $1 million, I’m sorry.

Tom Hayes - Thompson Research

Okay. Alright, thank you.

Operator

Okay, thank you. And our next question is from Zach Larkin with Stephens.

Zach Larkin – Stephens Inc.

Hey, good afternoon everyone. Thanks for taking my call and congrats on a great quarter.

Rob Willett

Thank you.

Dr. Rob Shillman

Thank you Zach.

Zach Larkin – Stephens Inc.

Hey Rob, I wondered if you could talk maybe a little bit more about the weakness you mentioned in Asia, particularly in the consumer electronic segment. Is that something that you guys are viewing as just transitory in nature on the specific quarter, something you’d expect to come back and maybe just rank how we should think about that segment going forward?

Rob Willett

Yes. In China certainly we have a number of very large customers, both contract manufacturers and brand owners in the consumer electronic space and revenue from that market can be volatile, because spending is based upon product design cycles and introduction schedules. So that’s what kind of drove our lowest sequential Asia SA revenue that you’re referring to in Q4.

We think our long-term prospects in that market is very good and continue to be very good, but your going to see lumpiness based around product introductions and investment schedules from big names.

Zach Larkin – Stephens Inc.

Okay. So thanks very much for that color and then it looks like if you just kind of look at the trends in Europe, it appears that we’ve had a fair bit of stabilization at least in the quarter. Would you characterize that comment as correct and maybe give a little bit or any color on order rates and what you’re seeing out of that region.

Dr. Rob Shillman

Yes, I mean I think we are fairly pleased with how our team in Europe is performing. I’d say we are outperforming the underlying market based on good sales execution that we are seeing. Our channel into factory automation also includes OEMs, export a lot from the region and also ID products that are gaining traction. So overall, I’d say we’re feeling good about the way we’re executing in that market.

But I think your question is more about what are we seeing in the market overall and I would say it’s a mixed picture. I would say Southern Europe automotive and particularly Southern European companies are dependent on European buyers, it looks very poor. Their performance is under a lot of pressure.

Where its much better from our perspective is in Eastern Europe automotive for instance and German automotives, where we are continuing to see much more stability like your pointing to and then I would also say we are seeing strength in consumer products, where some larger brand owners and also machine builders. They generally experience stable business; relatively economically resilient in nature and they are certainly investing in factory automation and vision and that’s what we see.

Zach Larkin – Stephens Inc.

Okay, and then just maybe one final question if I could. You commented Rob on the guidance that we should expect, web and surfaces inspection that will be coming down Q-over-Q, which I don’t think will be a huge surprise. Do you see the revenues in that segment being kind of in the $12 million to $13 million range that we’ve seen in prior quarters in ’12? Is that maybe a reasonable range to think about it as we are thinking about 1Q ’13?

Rob Willett

Your question is around surface inspection specifically.

Zach Larkin – Stephens Inc.

Yes sir.

Dr. Rob Shillman

Yes, yes, well I think you said $12 million to $14 million. Yes, I mean I think a year ago they were around $11.5 million, so I would expect them to be just slightly up on that.

Zach Larkin – Stephens Inc.

Okay. Alright, thank you very much. Congrats again on the quarter.

Rob Willett

Thank you.

Operator

Thank you. And we’ll take our next question coming from Ben Rose from Battle Road Research.

Ben Rose - Battle Road Research Ltd.

Good afternoon gentlemen. Rob, in the automotive sector, in the U.S. in particular, I was curious to see what you may have seen in terms of demand in this quarter and what your view is regarding follow on demand in 2013?

Rob Willett

Yes Ben, your question relates to automotive in where?

Ben Rose - Battle Road Research Ltd.

I’m sorry, in North America.

Rob Willett

North America specifically, yes. So I would say American automotive appears to be picking up and we are making in-roads into automotive in general. I think we expect to see automotive in America grow, but not very strongly, just somewhere I would say in the mid to high single digits kind of looking forward.

But there’s still a lot of uncertainty I would say around that level of spending and obviously with some players reporting better performance and better investment. But I mean, I’d say we’re you know cautiously optimistic about American automotive.

Ben Rose - Battle Road Research Ltd.

Okay, and then the follow-up question would be, I realize we are in the pretty early days of the recent introduction of the new DataMan products for logistics, but is there any commentary that you can make regarding kind of the market’s initial reactions in your perspective and perhaps what we might expect in the first quarter in terms of maybe any orders that are out there for you.

Rob Willett

Yes. So as I mentioned in my prepared remarks, we introduced the DataMan 503 in the quarter at a very major trade show here in the U.S. that some people on the call I think attended, ProMat, and we were not surprised, but gratified I would say by the reception that we got. Just this is breakthrough technology and it certainly drew a lot of end users and integrators to Cognex, who perhaps haven’t thought of us before in that space. So that’s very, very positive.

At the high end, I think what you got to bear in mind though is the logistics market. It’s a large market that’s relatively conservative in its adoption of technology. So we are definitely making in-roads, but I wouldn’t expect to see huge sales of that product in this quarter or next quarter. I think it’s a journey and we are making solid progress into logistics.

And then on the lower end of the market, we’ve introduced the DataMan 50, which brings a lot of the power of Cognex’s vision to the lower price points in ID, and this might integrate particularly into machines and into our manufacturing lines with a very small form factor, which means it can sit in places our products can’t, and that’s a market that I’d say has been relatively under served in terms of performance and lead rates and power and the DataMan 50 is a product that takes us to those places.

There I think potentially we could see some pretty rapid adoption as we start to launch that product into the market, so but we know we are really just at the early stages of introducing it. So again, I wouldn’t expect much in the quarter, but I think in the second half of the year we could expect more.

Generally in ID we’ve seen some good growth rates. ID product revenue grew 24% over 2011 in constant currency last year. So we are shooting for 30 and I think depending on the macro economic environment, we should be able to achieve that if things get better, but if things continue to stumble along, I still think we can expect 20% growth rate out of our disruptive ID technology.

Ben Rose - Battle Road Research Ltd.

Okay. Thank you very much.

Operator

Okay, thank you. And we’ll take our next question coming from Jagadish Iyer from Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Yes, thanks Rob, thanks. But just two questions; I wanted to find out, how should we be thinking about the ‘13 revenues between your three end markets, semi factory automation and as well as the web and surface inspection in terms of the trajectory as we progress through the year.

Rob Willett

Yes, hi Jagadish. I think our focus is on factory automation. That’s represented as I think we said, a little more than 75% of our business coming through the back end this year, and that’s where we’ll focus and we expect to report our highest growth rates in that area of the because.

As you know, we don’t give full year guidance or anything, but we do expect that to be the best performer and that we are long term target to 20% growth rate, but I don’t think under the current macro economic conditions we can expect that kind of growth rate, but we do expect good performance and out performance by Cognex’s vision and factory automation.

If we turn to SEMI, SEMI is a very difficult market to call really. It’s a very cyclical market and I think we were around $5.5 million in the last quarter. I think at some point we should see a pick up in that market, but we really don’t know when we are going to see that; its too soon to say.

And then if we get to surface inspection, that’s more of a business selling into paper and metals are the major end markets there and in that we do expect to see growth out of that business, but probably in the low to mid single digits this year and again, likely revenues to be lumpy I would say as we’ve always experienced, based on products and timing of capital spend.

I hope that can give you a bit of color.

Jagadish Iyer - Piper Jaffray

That’s great. This is really super helpful. Then the second thing is I wanted to find out, I know you kind of alluded to the logistics business, but I just wanted to get your thoughts in terms of how far are you from the tipping point for volumes option in terms of the logistics and when will you really see that. What kind of milestones are you kind of looking forward to it, so that we can see that, okay that’s going to accelerate sooner than later?

Rob Willett

Yes. We see logistics as a pretty fertile market for vision technology at the moment and we see it as the market, an addressable market that now is around $250 million, where our sales are around $5 million into that segment. So we have a lot of headroom that we see.

In terms of the tipping point, I mean what we are looking to happen is for a number of very large end user customers who have our technology currently under trial to move forward with some of their big capital investment plans and we are hoping and we are working towards that happening sometime around the middle of the year I would say, when we hope to get or report more specific news in that respect.

But I would say we are very pleased with what we are seeing at the moment and the reception we are getting to the new products that we are putting into that space. But again though, I’d expect huge tipping points in the revenue from logistics in Q1 or Q2.

Jagadish Iyer - Piper Jaffray

Fair enough, and just a quick thing on the housekeeping and the OpEx trends. Should we assume that you’re going to – how should we be thinking about it, because we want to look at how the OpEx is kind of going to kind of move forward going into the remainder of 2013. So how should we be thinking about it please?

Rob Willett

Yes, we are continuing to invest in engineering and our sales channel for areas where we see growth, but we are not planning for major increases until we see the automation market improving.

We are very confident in our strategies; product strategies and sales channel strategies, such as in places like in China or support ID. So we are going to go on investing at a moderate rate and expect operating expenses to increase, single digit kind of as we move through the year. But we are attentive to macro economic concerns and we’re watching our spending carefully.

But Cognex is really a growth company and we are focused on growth and at our margins when we deliver growth, its very positive for our operating margin. So what we don’t want to do is slow the momentum we have in our business, particularly in ID, where you are going to see us slowing on investing with confidence around those initiatives as we move through the year.

Jagadish Iyer - Piper Jaffray

And that’s a good resource. Thank you.

Rob Willett

Thanks.

Operator

Thank you. And we’ll take our next question coming from Jim Ricchiuti from Needham. Please go ahead.

Jim Ricchiuti - Needham & Co.

Thank you. Good afternoon. I joined the call a few minutes late. Rob, did you provide a dollar number for ID in the quarter?

Rob Willett

I don’t think I did, but I think I can, I can do that. Give us one second here Jim. Its $19.7 million.

Jim Ricchiuti - Needham & Co.

Okay. And then as you look out for this year, you still feel comfortable even off a larger revenue base that this ID can grow 20% or more.

Rob Willett

Jim as I said just a while, we target 30% growth in that space. We delivered more than 20% constant currency growth and we are launching a lot of great products into the space. So we are confident, yes.

Jim Ricchiuti - Needham & Co.

Okay and that actually leads into my next question. I think it sounds like you are going to have a pretty active new product year. So should we assume that some of these new products, the more significant ones, would you expect them to be contributing to revenues in the second half of the year.

Rob Willett

You are going to see some new products coming from us. I would say the products you’d seen already are the ones I think will contribute significantly to the second half of the year, but you are going to see a product we’ll be launching in the next few weeks or so that takes us into a new market that we haven’t served before, and that’s kind of another step for us along the line from what we were doing in logistics a year or two ago.

But to answer your question, I don’t think some of the products we are going to launch in the next few weeks are going to have substantial revenue impact to this year. I think some of the ones that you haven’t yet seen are going to be more next year and the year after.

Jim Ricchiuti - Needham & Co.

Okay, and the business in Asia in the factory automation down sequentially, did you give any color specifically on greater China. I think your commentary about consumer electronics; I guess I’m curious about the broader factory automation market for you in China. How did that play out in the quarter?

Rob Willett

I mean, I think we see the factory automation space in China providing solid growth for Cognex overall, but in that market we are still overly dependent on electronics, and so what really can skew our quarterly revenue results in China are specific large orders from large electronics manufacturers and sub-contract manufactures.

So we saw some of those in Q3, we didn’t see many of those in Q4 and we fully expect to see those coming back in the first half of this year. So I’d say that’s the color on our own results and as I said earlier, that tends to be a result of kind of design cycles and product introduction for major brands.

A different issue I think may be in what you’re asking is about the broader factory automation market in China and I think we saw perhaps some flowing in the fourth quarter, some changes going on in the country around leadership changes and investments and capital flows. But broadly we still saw growth amount another markets like automotives, food and beverage, which is leading to be bigger parts of our revenue in China in years to come and where we are seeing good growth coming, specifically in automotive I would say.

Jim Ricchiuti - Needham & Co.

In Japan, any sign of that, do you think it’s bottomed or are you still seeing pressure there. It was down I guess certainly year-over-year. It seems to have bottomed out sequentially, but what’s the outlook there for this year.

Rob Willett

Its really difficult to call, I got to tell you. I think what we’d seen over the last one, two or more years is big Japanese consumer electronics manufactures and famous names really having a very difficult time and not investing a lot in machine vision. And we’ve seen those businesses move up, manufacturing or that market share move up sure to places Korea and Taiwan and China where we picked up a lot of it.

And then in Japan specifically, obviously we are reading about changes in macro-economic policy and investment that’s going on there, but I think its too soon to say whether that’s really going to result in big kind of investment in automation.

Going forward I think other factors to point out is, ID is a good place for us in Japan and our team is really starting to sell ID into the Japanese market well and ID products revenue in Japan grew 40% in 2012 over 2011. So it’s a small base for us and we’ve been slow to get into that market, but now we are getting some traction.

We also have our relationship with Mitsubishi, which provides us a broad channel in to the Japanese market and so the overall businesses with Mitsubishi was down much less than our business overall; in fact it was broadly, it was almost flat year-on-year.

The final comment I’ll make about Japan obviously has to do with currency though, so I think as you’re all aware, that the Japanese currency has weakened significantly and that will have an impact on our reported revenues I think, if it remains at its current rate if we go through the year.

Jim Ricchiuti - Needham & Co.

Got it and last question from me, Rob, if you just look at the year, look at 2013 versus where you saw 2012 this time last year, how much more optimistic are you about the business. Are you recognizing its still a difficult economic environment?

Rob Willett

Yes, it’s a difficult question. I could say I’m less pessimistic in that wise, but I would not use the work optimistic right, in my views about the market.

Jim Ricchiuti - Needham & Co.

Okay. Thanks a lot.

Rob Willett

Thanks.

Operator

Thank you and I’m showing just one more question in the queue coming from Richard Eastman from Robert Baird. Please go ahead. Just give one moment; your line is now opened.

Richard Eastman - Robert W. Baird

Could you just – this may be in the K, but could you just put a dollar number on your total China sales in ’12 and maybe what just give us some sense of expectation in terms of what you expect out of the investments you made there from sales and I guess on new products.

Rob Willett

That information is…

Richard Eastman - Robert W. Baird

It’s in the K?

Rob Willett

Is not in the K.

Richard Eastman - Robert W. Baird

Okay, but I asked.

Rob Willett

And to be perfectly honest with you, I don’t have it available here in the portion that we have with us specifically too. I think we’ll have to provide that to your offline.

But I will make just a few comments Rick, one of which is our factory automation business in China, not our entire business, but our factory automating business in China was $27 million in 2012 and we also have SEMI and surface vision business also, our initiative to give you a bit of a...

Richard Eastman - Robert W. Baird

Robert, are you seeing any noticeable up-tick in growth in the use of any of your vision products inside or any of your Vision products in robotic vision of those factory automation applications?

Rob Willett

Right. There’s been a lot of it pressed around robots. The first thing is, Cognex sells Vision into the major robotic manufacturers of the world or most of them I would say, and that’s where have very strong relationship with I would say three of the four largest robot manufactures in the world and that has been a co-product of our business for a long time and most of those big robots are solid into automotives right.

But I think the press that you’re seeing a lot about at the moment Rick is around what I would call collaborative robots. I know they are getting a lot of publicity is those 60 minute and all that and we are working with some collaborative robot manufacturers today, particular among in bigger names who are already integrating Cognex’s vision into those products and then we are also in discussions with really pretty much all of the major names or most of the major names we’re hearing about.

Then I guess, if what your wondering is how does that translate into revenue, and I think its still very early stage. I think that these small collaborative robots working themselves next to people, I think those are still kind of very much at the concept phase. We may see a few thousand of those sold, but I think they’ll be sold more into kind of showcase environments.

And then I think that market may end up being a large market here in a couple of years and I think we are very well positioned to take advantage and we have very good products for them, which meet their performance and price point, but certainly in terms of revenue exceptions for ’13 or ’14, its not going to move the needle for us.

And then maybe just one other point, I get kind of tied up with that is what I would call the autonomous guided vehicle market and have small robots that move around and my comments would apply to that as well.

Richard Eastman - Robert W. Baird

Okay. And then I just I have a question and maybe this is one, you talked about this too online. But I’m curious about, we had a lot of excitement and a lot of discussion around the VSoC technology, might be two years ago now, and it seems like some of the things we picked up, that maybe some of the benefits of VSoC you’ve managed to accommodate in software upgrades. I’m curious if this VSoC technology is still kind of a fundamental technology for any upcoming new product launches.

Dr. Rob Shillman

Rob, can I answer that.

Rob Willett

Please go ahead, yes.

Dr. Rob Shillman

Okay, that’s a very good question. VSoC cost us a ton of money. I don’t have it at the tips of my fingers, to develop and to get into production. A very advanced product, and without VSoC we would not have been able to introduce the DataMan 500.

Subsequent to that, a couple of years later, we were able by various software techniques and some new chips they are commercially available to equal or exceed the performance of VSoC. So the 503, DataMan 503, which we talked about, does not rely on VSoC. It relies on the software innovations that have been made by the company and commercially available chips.

So but VSoC is far from dead. One of the products that is now being data tested, I don’t think it’s quite released yet. Rob will tell you more about it at some point. It is a product that enters Cognex into a market that we have not played in at all, which we believe is very profitably and is machine vision. It’s a segment in factory automation, but its an application that we have not been able to develop a product for and haven’t before.

Now with VSoC we are interdicting yet another brand new product based on VSoC and who knows, the next generation to that maybe not need to be a VSoC either. But VSoC is very special. It allows us to get into these specialized applications quickly and then reduce price later and perhaps even design it out. Does that answer your question?

Richard Eastman - Robert W. Baird

It does, it does. You’re very active with the technology and it’s a great entry point it sounds like, into some new verticals.

Dr. Rob Shillman

Right and despite all the money that we’ve spent on R&D, we continue as you’ve seen today, to generate fantastic results and I think they revenue records, but earnings didn’t, but that’s easily understandable. What’s hard to understand is how we broke our revenue record in such a very challenging economic environment in most parts of world?

Richard Eastman - Robert W. Baird

Sure, understand. Okay, thank you. And then just one last thing, Rob, when I maybe look at the first quarter revenue guidance and I think about the FA and the SISD business, maybe kind of typical seasonal declines that they show from Q4 into Q1.

At least it suggests that your semi-OEM revenue maybe is up a little bit sequentially and is that a function of the large orders, a couple of large orders or are you maybe implying that we are at least at the bottom.

Rob Willett

I would say you should figure on our – and we are figuring on our assembly revenue broadly being flat.

Richard Eastman - Robert W. Baird

You know sequentially.

Rob Willett

Sequentially and as I said, its really too soon to say whether this is the bottom or not.

Richard Eastman - Robert W. Baird

Okay, great. Thank you much.

Rob Willett

Thank you.

Operator

Thank you. And I’m showing one more question now coming from Jagadish Iyer from Piper Jaffray. Please go ahead.

Jagadish Iyer - Piper Jaffray

Hi thanks, just a quick follow-up. I wanted to find out, was there any buyback in the quarter in terms of – and what are your plans in terms of – can you give us some light given the cash on your balance sheet. Just wanted to understand a little bit more about the buybacks. Thanks.

Rob Willett

Yes, there was no buyback during the quarter. We in fact spent close to $55 million during the quarter on dividends and we will be reviewing buyback potential during 2013.

Dr. Bob Shillman

I would like to comment a bit about that and of course now Dick’s getting nervous and Rob too. There are numbers of ways that we like to reward, that can be used to reward shareholders of course. The best way is increasing share price, all right, and the way you increase share price, the best way we can increase share price is increase earnings per share, there’s no question about that. But in challenging economic times, 2012, we didn’t increase earnings per share. So that’s pretty tough, although the share price has increased.

Another way of increasing share price or rewarding shareholders is through cash dividends and we have done that. As a matter of fact, some people would say we’ve overdone it. We anticipated the increase in tax rates and gave what we called the very special dividend already.

Another way of rewarding shareholders is by buying back shares, which some people think supports the price of the stock, but we would never do that by the way, that is never our attention, but more importantly it gives everybody a larger percentage ownership of the company.

And so we consider all three of those methods. For the first, our biggest effort and thought is on growing the company, growing earnings and the share price will take care of itself.

Secondly, what we’ve done very frequently is dividends. We’ve been doing that for many years and we have in the past purchased stock. I forget how many 100’s or 1000’s, but lots of stock has been repurchased and we have an authorization that you can purchase more and I believe we will be in the market from time-to-time doing that also. But if you have any other suggestions on the ways that we can reward shareholders, those are the three ways that we know about, but we’ll be happy to consider any alternatives.

Jagadish Iyer - Piper Jaffray & Co.

Thank you Dr. Bob. That was very clear.

Dr. Bob Shillman

You’re welcome. All right, I’m gong to wrap it up now. The sun is still shining and I have to go out and polish my Ferrari and my Lamborghini, while Rob shovels out his BMW.

So let me just summarize that we are very pleased with the results. Sure, we would have been happier to show earning growth too, but we are pleased. Our outlook is cautiously optimistic, even though when we are super optimistic, we still are careful about pending money. And I have to say that Rob is as carefully, and perhaps more careful than I am on expenses, so you should have a high degree of confidence that these expenses, whatever he projects, he will most likely undershoot those numbers on expenses and he will do better than those revenues.

So despite the uncertainty in the world and the economy, we remain very, very optimistic and positive about the products we are introducing, which are leading edge. No one has products like Cognex does, of course after they are out there few years people catch up, but we are always introducing what we call highly advantaged and disruptive productions and you will see more of those coming out in 2013 and I hope to be on those calls when Rob reports, I would actually like to be on those calls when Rob talks to you about those products and the revenue and profit they are going to be brining in.

Thank you all for attending and look forward to speaking with you at future conferences and on future conference calls. Good night.

Operator

Thank you ladies and gentlemen for your participation in today’s conference. You may now disconnect and have a great day.

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