FARO Technologies Inc (FARO) 2005 Q4 法說會逐字稿

Good morning everyone and welcome to the FARO Technologies Conference Call in conjunction with its fourth quarter and fiscal 2005 earnings release. For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead, sir.

Thank you and good morning everyone. My name is Vic Allgeier of the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed FARO released its Fiscal Fourth Quarter results. By now you should have received a copy of the press release. If you have not received a release please call Sharon Trowbridge at 407-333-9911.

Representing the Company today Simon Raab and Jay Freeland, Co-Chief Executive Officers; Barbara Smith, Chief Financial Officer; and Greg Fraser, Executive Vice President. Barbara and Jay will deliver our prepared remarks, and they and Simon and Greg will be available for questions.

I would like to remind you that in order to help you understand the Company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as we expect, we believe, we predict and similar words. It is possible that the Company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are the risk factors set forth in yesterday's press release and in the Company's filings with the SEC.

I will now turn the call over to Barbara.

Thank you, Vic. Good morning, everyone.

Sales in the fourth quarter were 34.5 million, a 21.1% increase from 28.5 million in the fourth quarter of 2004. That brought our full-year sales to $125.6 million, a 29.5% increase from $97 million in 2004.

As we noted in our press release, 2005 was the fourth consecutive year of sales growth in excess of 25%.

The orders grew 12.3% in the fourth quarter to approximately 34.7 million, compared to approximately 30.9 million in the fourth quarter of 2004. New orders for all of 2005grew 28% to $124.2 million from 96.7 million in 2004. The lower year-over-year growth in the fourth quarter 2005 follows record growth of 44% in the fourth quarter of 2004.

On a regional basis, fourth quarter sales in the Americas grew 33% to $16.2 million compared to $12.2 million in 2004. Sales were down 12% in Europe to $10.9 million from $12.5 million in fourth quarter 2004. Sales in the Asia Pacific region grew 25% to $7.5 million compared to $5.9 million in the year ago quarter.

As previously reported, sales growth in Europe lagged the other regions for most of 2005. Actions were taken in the back half of 2005 to increase the number of account managers and inside sales specialists necessary to generate the required number of qualified leads and resulting sales orders.

On a regional basis for the full year 2005, sales in the Americas grew 34.1% to $56 million, compared to $41.7 million in 2004. Sales grew 4.2% in Europe to $44.9 million from $43.1 million in 2004. As expected the highest percentage growth in 2005 came from the Asia Pacific region at 103% with sales of $24.8 million compared to $12.2 million in 2004.

The top five customers by sales volume in 2005 were Boeing, which represented 2.5% of sales, followed by Airbus, General Motors, Daimler-Chrysler and Siemens Power Generation Division. The top-10 customers in 2005 represented only 8.9% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 56.6% in the fourth quarter, compared to 58% in the year ago quarter. This decrease was due to product mix and regional distribution of sales and the seasonal sale of demonstration equipment, which carry lower margins.

Gross margin in fiscal 2005 was 58.1% compared to 61.8% in 2004. The biggest effect on gross margin in 2005 was the change of product mix with relatively higher unit sales of the Gage Laser Tracker and Laser Scanners, which all carry somewhat lower gross margins.

Selling expenses were 33.7% of sales in the fourth quarter, up from 29% in the year ago quarter. That put our selling expenses for the year at 29.7% of sales compared to 26.7 in 2004. As we said in the prior releases, selling expenses in 2005 were higher as a percentage of sales primarily due to the accelerated expansion in Asia, the deployment of the sales force for the new Laser Scanner LS product line and increases in headcount in Europe.

Administrative expenses in 2005 were 12.4% of sales compared to 12.1% in 2004, despite higher legal expenses related to the patent infringement case, our expansion in Asia and a full year of SOX 404. We’re optimistic that we can leverage administrative expenses going forward, now that we have established our regional headquarters and manufacturing operations to support the Asia Pacific region.

Our operating margin was 2.1% in the fourth quarter, down from 9.8% in the year ago quarter because of the previously mentioned decrease in gross margins and higher SG&A expenses for the quarter. For fiscal 2005, our operating margin was 8.1% compared to 15% in 2004.

Net income was $183,000 in the fourth quarter compared to $4.9 million in the fourth quarter of 2004. Net income for fiscal 2005 was $8.2 million or 6.5% of sales compared to $14.9 million or 15.4% of sales in 2004. It should be noted that we had a tax benefit of $1.7 million in 2004 as we recognized tax assets which had previously been deferred in the form of a valuation allowance. On a pro forma basis, removing the effect of the release of valuation allowance, net income as a percent of sales in 2004 was 14% as compared to 6.5% in 2005.

Cash and short-term investments were $25.8 million at December 31st, 2005, as compared to $22 million at October 1, 2005. Accounts receivable were $28.7 million at December 31, compared to $22.5 million at December 31, 2004. DSOs at December 31, 2005 improved to 78 days compared to 84 days at the end of 2004 and 91 days at the end of 2003.

Inventories were $28.7 million at December 31, 2005, compared to $16.4 million at December 31, 2004. Approximately $4.1 million or 34% of the $12 million increase in inventory was for sales demonstration equipment related to our sales headcount expansion. The remaining increase in inventory was in support of higher sales, the new Laser Scanner product lines, developing establishment of production and service operations in Asia.

I will now give some statistics regarding our headcount numbers. We had 664 employees at the end of 2005, an increase of 211 or 47%, from 453 at the end of 2004. Account manager headcount at the end of the year was 148, with 41 account managers in the Americas, 55 account managers in Europe and 52 account managers in Asia. Geographically, we now have 301 employees in the Americas, 225 in Europe and 138 in the Asia Pacific region.

In summary, I would describe 2005 as a dynamic and challenging year. We acquired a new company, established manufacturing capabilities and established the sales force to support the new product lines. At the same time, we expanded our presence in Asia, adding nearly 100 new associates in that region, establishing a regional headquarters and manufacturing operations.

Clearly the growing size and complexity of the business requires that we make dramatic improvement in our ability to predict and accurately forecast these changes. Having said that, after my first nine months at FARO, I believe there is tremendous opportunity to leverage the investments made in 2005.

Our efforts will clearly be focused on improving our ability to predict our sales growth, product mix, gross margin, effects of foreign currency, while also improving our working capital management which will allow us to maintain our financial strength as is illustrated by our strong balance sheet with $25 million in cash and no debt.

I will now hand the call over to Jay.

Thanks, Barbara. 2005 marked the fourth consecutive year that we’ve achieved greater than 25% top line growth and if I were to summarize the year in total, I’d call it a year of investment for growth.

In April 2005 we outlined a new five-year plan for remaining the leader in the large, underserved and rapidly growing CAM2 market. A new five-year target financial model was developed to address continuing changes in our industry and to establish new performance goals after achieving our original five-year target financial model in 2004.

In order to position the Company for achieving these new goals, we invested aggressively in a number of growth related initiatives in 2005. We acquired iQvolution, which provides another key component for our portable measurement product line and gives us the opportunity to expand well beyond our traditional manufacturing customer base.

We established a new regional headquarters and manufacturing plant in Singapore to support our initiative of growing sales in Asia to a level similar to our volume in the Americas and Europe. We also launched production in December of 2005 well ahead of our scheduled 2006 startup.

We strengthened our sale organization to drive continued penetration of the customers and industries we serve. Sales headcount increased nearly 70% in our current territories, in three new countries and across a brand new product line, the Laser Scanner LS.

We established the software diversity program to take advantage of polarization we see occurring in the marketplace as a result of continued consolidation amongst competitors. And we released several new products, including the TargetCam, which enhances the field of view of our Laser Tracker, Cam2 Measure X1, our robust new platform for our market-leading software, and the latest most reliable and most accurate version of our Laser Line Pro.

The combination of all these events had a short-term impact on profitability. However, the timing was necessary in order to provide the right platform for maximizing our top line and bottom line growth in 2006 and beyond.

I’ll speak more about how we leverage these investments and our forecast for 2006 later in my remarks.

I’d also like to highlight some additional successes from 2005. Approximately 59% of our sales in 2005 were to new customers, versus 53% in 2004. This metric is important, because it tracks acceptance of our technology as an industry standard.

Although one might expect a high rate of sales to new customers in a relatively new region like Asia Pacific, which came in at 71% versus 82% in 2004, it is also encouraging to see that our customer base in established markets like the Americas continues to increase its share of new customers coming in at 61% versus 58% in 2004.

We had several multiunit orders for our products from companies such as Boeing, Airbus, Siemens and [Sauter Work] Woodworking. We’re looking carefully to see if these may be examples of certain of our products reaching a level of acceptance that will ultimately lead to a change in our sales model, which would not require a demonstration for every individual product purchase.

Our FARO Gage product ramped up nicely in its second full calendar year after release. We don’t give revenues by product line, but I can tell you that unit sales of the Gage increased 75%. We would like to see the Laser Scanner LS take off at this rate or better and have structured the sales force to enable our efforts with that product as well.

We managed to keep our G&A costs as a percentage of sales flat with 2004, despite incurring $1.7 million of incremental legal costs associated with our patent infringement suit. Our 2006 operating plan assumes that these costs will continue and they remain a necessary component of our long-term strategy in the market.

Now let me turn to some future-looking subjects. Early in this call I described 2005 as a year of investment for growth. On the other hand, we expect 2006 to be a year of growth through leverage. As mentioned in our press release, we’re forecasting 20 to 25% sales growth in 2006 compared to 2005, to approximately $150 to $157 million.

We expect gross margin in 2006 to be 56 to 59% and net income to be 6 to 10% of sales. These net income estimates include an estimated tax rate of 18% and approximately $1.5 million in litigation expenses.

As we said in our press release, we expect lower earnings in the first half of 2006 compared to the second half of the year. This is largely driven by the ramp up of new sales people hired in the second half of 2005.

With a six to nine-month learning curve, most of these people won’t become fully productive until the second half of this year. As a result, we expect to see their positive impact on the top line and in reduced selling expenses as a percentage of sales in the third and fourth quarters.

We believe that the infrastructure we developed last year will be adequate to support our needs for the next two years. We’ll continue to hire selectively and only as absolutely necessary, but the heavy lifting is done. The entire leadership team is measured on leveraging the operation and has several pieces of their 2006 variable compensation tied to that strategy.

We continue to build this Company for the long-term with our 2009 financial targets in mind. These five-year targets, which were established in April of 2005, include annual sales growth of approximately 25% per year, gross margins of 60 to 65% and net income of 13 to 20%.

We believe that our 2006 forecast of 20 to 25% sales growth, 56 to 59% gross margin and 6 to 10% net income positions us appropriately in our quest to achieve those long-term goals as we have achieved in the past.

In closing, I’d like to thank our employees around the world and our investors for their continued interest in and dedication towards our success. I want to finish my comments by reiterating those successes and how they position us for 2006 and beyond.

Sales grew just shy of 30% in 2005, the fourth consecutive year of top line growth in excess of 25%. We anticipate 2006 sales growth to be in the 20 to 25% range. Gross margin at 58% was within historical levels, despite global expansion, a shifting mix of products and continued competitive pressure in the marketplace.

We added to our portfolio via acquisition as well as internal R&D and we expanded our sales and operating presence around the world, positioning the team for long-term growth supported by localized manufacturing and service.

Last year’s performance contained a broad mix of successes and challenges. Our focus for 2006 is leveraging that structure we created through the tough choices we made in 2005 and driving towards the long-term financial model we designed for our Company.

Finally, I’d like to reiterate our philosophy on guidance. As Barbara commented, the growing size and complexity of the business requires that we make dramatic improvement in our ability to predict and accurately forecast these changes. We’re aggressively working to repair this issue. While resisting the temptation to stop providing guidance as some companies have chosen to do, we will continue to provide an update to our annual guidance at the end of each quarter, but will not provide specific guidance for any one individual quarter.

We will however, hold another strategic conference call in April similar to the one we held last year. This call will be used to provide additional detail on the continued evolution of the CAM2 market and highlight actions we’re taking to support our growth strategy.

Thank you for your attention and I’ll now open up the call to questions.

[OPERATOR INSTRUCTIONS] Mark Jordan of AG Edwards.

First question I have relates to operating expenses. Could you aggregate what level of expenses were incurred in 2005 which could be deemed nonrecurring, which would be I guess inefficiencies related to expansion, start up costs on the new regions, incremental Sarbanes-Oxley and cost of that sort, and also the losses relative to the scanner operation and aggregate those and your expectation that those will not reoccur in ’06?

I’ll take a stab at the question and Jay might want to add in. I think rather than characterizing a list of expenses that would not be recurring, I think let’s take them a piece at a time.

Litigation expense, we had approximately $1.7 million in 2005 related to litigation. Jay mentioned that we expect an additional $1.5 million in 2006 as we continue to resolve that issue.

In terms of the Sarbanes-Oxley 404, we expect an ongoing expense related to our compliance with that regulation of about $1 million to $1.2 million per year.

In terms of startup expenses for the manufacturing operations and headquarters in Singapore, there were very few that were one-time that would not be repeated. Most of the one-time items would be capital equipment that would be amortized over time. There obviously were some additional travel and other related expenses as we supported that team as they were coming up to speed.

In terms of losses related to the scanner operations, we don’t disclose the losses associated with an individual product line. However, I would say that we deployed the sales force midyear and we really didn’t start to see the impact of sales of that product line until the fourth quarter of the year, so the opportunities for us in 2006 is that we now have the sales force deployed and they will be obviously ramping up their productivity and we look forward to the sales from that new product line to contribute in 2006.

I agree with that. One thing I would say, Mark, is that if you were to look for items that may be a one-time item for 2005, many of those that you listed out have more of a one-time cash impact than they do a one-time net income impact. We had several items that were one-time cash outlays, things like the acquisition of iQvolution, the startup costs associated with manufacturing there, the startup associated with the Singapore facility that you would not anticipate in a year where we leverage that structure that was put into place.

Okay. One of the issues here clearly is controlling your operating expenses relative to sales. What controls do you have in place that gives you confidence that as sales grow as 2006 evolves that you’re able to bring operational leverage to the bottom line?

Some of the changes that we’ve been making, we are putting in a more rigorous forecasting process, which includes forecasting not only sales, but forecasting in much greater detail the mix of the sales; much tighter controls around headcount additions, with no authority in the regions for additional headcount without those being approved up through the system. We have regular reviews of each of the various regions on how their financial results are tracking against their specific region goals.

So those are just a few examples of things that we’re working on.

And I think the big one there certainly is on the headcount side, when you look at the number of heads that we added in total for 2005. The budget for heads this year is miniscule relative to that. And to Barbara’s point, headcount additions have to get approved through here, even if they’re already in the budget. We’re taking that tight of control over it.

In 2005 we had to do it to get all those salespeople in place to get the production people in place, both in Germany for the Laser Scanner, as well as in Singapore. So, there is this acceleration of putting those people into place to have the structure to be stabilized for what we need to do now in ’06 and ’07. And I think that’s where you get these large pieces to leverage out of this.

Okay. A question on the sales growth guidance. If my numbers are correct, your number of account managers increased from 95 to 148 during the year, which is a 56% increase. That’s following on ’04 where you had a relatively high – not as high a growth rate in that measure also.

I guess the question would be, is your revenue expectation conservative, given the fact that you have such a high rate of growth of that sales force, where you would expect a slowing of the growth rate you’ve shown over the last four years to be within that 20 to 25% range.

Mark, a couple of things along those lines. Number one, I will say that yes, we are absolutely trying to be more conservative. Two main reasons. Number one is you’re right, we’ve added a lot of new people. Many of them were in the back half of the year, particularly in the fourth quarter. So because of that learning curve if it takes them nine months that puts me into the third quarter with them and if it takes them six months, that puts me into the second quarter and that’s too hard to predict right now. So that’s a piece of it.

A piece of it is, quite frankly, the Company has gotten bigger. Predicting 30% sales growth or 25 to 30% sales growth is a little less uncomfortable right now until we see what that’s shipped and the product mix is and the new territories that we’ve established and we get that traction there. So it’s a combination of both of those items I think.

In addition, I would add to that that the expectations per salesperson are different in Asia.

That’s correct.

Okay. Final question and I’ll let someone else have a chance. Could you give us an updating on where you are in the patent litigation issue, both from a timing and how that case has evolved since our last conversation?

I’ll answer that question. The latest event was a delay in the trial in order to reexamine what’s called marking issues, which are the issues relating to the definition of damages when the marking is done of a patent number on a product. There have been significant problems on the case in that regard and the judge has ordered a new discovery, which we expect will result in some significant reductions in that period.

I want to point out though that only relative to if we lose the case, we still maintain that we did not infringe the patent and feel our case is strong. Albeit there’s some [indeterminants] in jury trial, but we’ll continue to do what we have to do.

In addition, as you may know, and as part of that, there are a number of infringements by Hexagon. For us, we have about 60 patents. Hexagon in that technology area has three or four. And part of the process is we’re going to stand up for our IP as well. And so there are those, a couple of other pending cases which are only in preliminary stages. Right now the trial has not been rescheduled.

Sid Parakh of The Robins Group.

Just a quick question on the revenue guidance, just a clarification actually. Does the 2009 guidance of 25 to 30% revenue growth still hold, or is that being changed to 20 to 25%?

Sid, this will sound coy, but it’s approximately 25%. I think the right thing to look at, certainly internally. Are we always marching towards the higher number? Absolutely. For what we would expect, I think still saying approximately 25% is the right way to look at it. And again, this year in ’06 and ’07, are positioning years that help us accelerate towards the back side of that set of revenue targets, both the revenue target and the gross margin and net income targets.

Right. So what I’m hearing is we should see a trend of accelerating revenues year-over-year.

That is what we’re looking to do, but right now I think it would be appropriate to look at it as approximately 25% and at least next year and the year after I think you’re in that 20 to 25% range.

Okay, that sounds good. Now also, I don’t know if I have this right, but there are about 148 account managers now?

There are.

Okay. Now what sort of sales quotas do each of these people carry? And I’m just trying to get an estimate of how much sales are you anticipating for account managers?

Historically it’s been approximately the $1 million to $1.2 million range and I think estimating around $1 million give or take is the right way to look at it. Again, you’ve got a blend of people who’ve been onboard for more than a year, which always deliver more than $1 million per person and folks who will have been onboard only a full year when they get to the end of 2006, and they will contribute significantly less than $1 million per person. But on average assume that the million is correct.

One of the leverage items that we’re working on that will have some impact in 2006 greater impact as we go into 2007, is what else can be done to increase what the overall expected hit rate is of the account managers that are out there? And that’s a function of process. It’s a function of the expectation and in some respect it’s a function of the continued acceptance of the product in the marketplace.

As each year goes by, it should become a little bit easier and a little bit easier to sell. Predicting exactly when that timing hits is the difficult part. But those are one of the other leverage areas we’re looking at is how do you increase that number over time? But assuming roughly $1 million per person is appropriate.

Okay. And then does this tie into the fact that you might have to make less number of demonstrations going forward to close large customers?

Yes, certainly that is the goal. We don’t see that yet. We do still obviously still have a very high percentage of sales going to new customers, which are always going to require a demo. Even at many of our existing customers you’re in a different part of the facility, maybe even in a different plant all together. That still requires the demo and the handholding that goes with it.

When you reach that point in time on the adoption curve when there are already a couple of Arms in the facility and now they’ve decided hey look, we’ve seen the productivity we get out of these two or three Arms. We know we want to spread it to the other six or seven workstations here or the next three or four plants down the road. That’s when you start getting some of the leverage where you don’t necessarily have to do demos. And that can come through both our existing channels or other channels over that time period.

Okay. And also, can you talk a little bit about the pricing environment and especially say the competitive environment after the acquisition of [inaudible]? I know that relates only to your Laser Scanner product, but I’d like you to sort of maybe go over all the different product lines some.

I don’t think I’ll talk specifically about every individual product, Sid. What I’ll say is, generally speaking is with the [Like] acquisition it affects the Laser Scanner and the Laser Tracker, in terms of similar products in the marketplace. And obviously we already bump up against Hexagon in certain market spaces on the Arms side, because of their ownership of [Roamer and Simcore].

I would describe the pricing environment is competitive, but when you’re looking at a product such as ours, where the key factors in the custom decision making criteria are the accuracy, the ease of use, the liability and the service network that goes with it, this is not to say that price is not a factor, because certainly there are plenty of markets where they’re not just buying blindly.

But the pricing environment is competitive, but not to the point where we see ourselves frequently needing to drop well below our normal list price or our normal discount levels in order to get in the door. We do still discount strategically at accounts that we want to get into, but it’s not a pervasive, significant discount across the board on every single deal.

And maybe one last question. Can you talk a little bit about the new product introductions in the future and what percentage of new revenues do you expect from these new product lines?

I can speak to some of the new products. Obviously, the addition of the Scanner technology in last year’s new acquisition has been highlighted. Important to note though that we have significant new product developments coming out of all of our divisions in all of our products. There’s been a preponderance of the new optical technologies, Line Scanner, additions of TargetCam for the Tracker, a combination of products. And there will be some new products which I’m not in a position to completely describe, which take care of some of the missing pieces that we might find in a primary portable market category. And this year you should see a couple of additional introductions in that area.

With respect to their contribution to sales, I’ll let Jay answer that question.

I think, Sid, the way I would look at it is, we do have a very strong belief that the core technology portfolio that we posses today, the products that we have on the market, are more than sufficient to sustain the growth rate that we have projected for at least the next couple of years.

That being said, as Simon described, we do have some new products coming out that we cannot get into a lot of detail on, but they would be enhancements, describe that as you will, to the existing product line and we would look at it as a combination. Some of it would be replacing sales that we have today and some of it is getting incremental sales, because it maybe taps you into a different part of the market than you’re in today, utilizing the same technology that’s already out there.

To project what the percentage is that’s coming out of those new products, I can’t say that. Because number one, we haven’t baked the plan around needing new products, specifically new products when we look at the numbers that we’re forecasting for the next couple of years.

Jed Dorsheimer of Canaccord Adams.

A couple of questions, Jay. To start, a lot of questions on guidance. And I was wondering, could you help us in taking a look at the markets in maybe a little bit of a different way? And while you’re looking from a bottoms-up analysis from your accounts perspective, are there metrics that you’ve looked at from a top-down perspective that give you the confidence that the demand is going to be there?

There are multiple metrics that you can look at in the marketplace certainly. If you purely looked at organic growth of our nearest competitor, their organic growth this year was sizably below what ours was in terms of what they reported for 2005, but they still had growth none the less.

You can look at things like machine tools data, which has been released recently. In the last couple of weeks there’s been an update for 2005, and there is substantial growth in many of the countries that we play in today and moderate growth in many of the other countries that we play in.

The bigger piece that I look at Jed though, is even if you look at just pure market share of the sales that are occurring today in the space that we’re in, it’s not to say it’s not important to us, but in many respects it’s not a terribly meaningful metric. The potential market and the addressable market for the product, we still believe is anywhere from $3 to $5 billion and no matter how you shake that out between ourselves and our main competitor, we’re nowhere close to what that dollar amount is or what that opportunity is.

And as we sell into each new customer and they start realizing the benefits of utilizing the product in their facility, that’s adding to that addressable market that we’re selling into because it’s a new customer that wasn’t utilizing the tool before.

So when I look at the top line opportunity, I look at all of those factors and I look less at statistics purely related to is industrial growth up or down and is the auto industry up or down, because the reality is we’re so under-penetrated to any one given customer around the world that I think we’re well below the radar of being truly affected by massive economic swings in one direction or the other.

Got you. And I don’t know, maybe just as a follow-up. Europe has been fairly disappointing I guess. Could you maybe go into – and maybe you did in the script and I may have missed it. But could you sort of outline what’s going on over in Europe and I guess maybe a little bit more detail about what specifically is going to trigger the increased buying? Is that more of an account manager issue for you guys or is it more of just a market issue relating to Europe?

I think, Jed, if I describe Europe, it’s two pieces from last year. Number one is performance of the existing account managers was not quite as strong as we had seen I the past. And I believe that is directly related to, from a marketing perspective, the leads. And we acquired a fairly definitive map on it. It takes X number of leads to get X number of demos and it takes X number of demos to get the sales that we require. The leads going to those account managers and where they were focusing their effort was not the same as it was in 2004, and so we were suffering from a year-over-year performance from that existing team.

And the other piece was just the pure math on coverage and where we need to get our sales from. The European team did not add the bulk of their account manager additions until the second half of the year, which will give them the opportunity to be productive in 2006, as we had stated before, but did minimal for them in 2005. And that delay definitely cost them in terms of their year-over-year growth.

If you look at a region like the Americas, the flip side of the Americas was they did all of their account manager adds, spar one or two, in the first half of the year, focused on how to get them up to speed and those new folks were helping contribute in the fourth quarter as well.

Got you. And then from a competitive perspective, are you seeing – I guess if you look at the CMMs that you sell and the laser products that you sell, your tolerances are at, as I would classify, sort of the higher end for very tight tolerances. But at the same time, it looks like some of the optical guys are coming up and starting to approach levels that may be competitive. Are you seeing any competitive issues from other competitors that aren’t selling necessarily a CMM, but are selling optical products?

I’ll comment on that. Clearly we have also steered our research and development towards optical technologies. We believe that that’s a natural evolution, just from a technology point of view.

With respect to optical technologies, there’s always this issue of what we call line of sight and issues of basic [inaudible] metrics with respect to their overall potential accuracy. We don’t think there will be an optical product for some time that will be able to deal with the 8 to 12-foot volume and the adaptability required typical to what the Arm provide. Clearly we’ve added things like the Laser Line Probe to the Arm so that you get some of the advantages of optical measurement with respect to that.

Our Gage product, for example, measures down at the 5 to 10 micron range for which there are no portable optical technologies which come even remotely close to that. Across the board, all of our technologies are really the leading edge with respect to performance. We don’t have any product which is behind a generation or two, unlike some of the competitive products. Our Laser Tracker is leading the field in accuracy and data acquisition performance. Certainly the new Laser Scanner is on the order of 10 to 100 times faster than some of the devices that are in the competitive market.

The additions of the optical technologies to the combinations of that would be the Tracker Arm as well as TargetCam. Also, we recognize the danger of ongoing development and drops in prices and increases in performance relating to the optical technologies.

There are a couple out there that are playing the role and we intend to compete in that area, anything that relates to the portable measurements. And I think that’s an astute observation recognized by us already, probably four or five years ago that it was going to be the directions these things go.

Great. Thank you for that insight. And then, just three last housekeeping questions. Maybe I’ll just ask them all. I think most are addressed to Barbara. Barbara, from a tax rate perspective, could you give us what that is going forward? I missed it in the scripted portion. And then, did you outline what the options expensing is and how we should look at that going forward?

And then lastly, from a modeling perspective, lawsuits, sounds like that’s probably going to, whether it’s the lawsuit with [Wilmer Simcore] or others against them I guess that are in preliminary stages, it sounds like that legal costs are probably going to remain for this year. Is that the right way to look at it and what level should we be modeling that? Thanks.

Thank you. I believe Jay mentioned in his script that we have modeled in an 18% tax rate for 2006, which is slightly higher than the 17.4 for 2005. So we think it’s appropriate and over the long-term we said that a tax rate in the 20 to 25% range is sustainable over the long-term.

On the options expensing, if you recall, we accelerated the vesting of most of our underwater options – or all of our underwater options late in the year last year. So we’re not anticipating significant expense for options. The only expense would be related to new options granted. We have modeled in about $0.5 million expense for expensing of options, primarily in the latter portion of the year.

And then finally, on the lawsuit, we had about $1.7 million in expense related to the patent litigation in 2005. We’ve modeled about $1.5 million in ’06. We are expecting to have higher litigation expense. On the class action suits we had taken the retention amount of $250,000 in the fourth quarter related to that.

Mark Degenhart of Oppenheimer Capital.

I wanted to get back to the issue of performance. It’s my understanding that a large part of the problem is actually related to Germany and possibly ratios of account manager to assistants and sales management. I was wondering if you can give us an update on that situation and if there have been any turnover issues there? And then I have a follow-up question.

I think it’s less a factor of turnover and more a factor of making sure we have the right ratio. We have a strict ratio we try to run by with our account managers, versus the inside sales specialists who support them. And that ratio is a little bit out of whack, less from any specific turnover. More from either general turnover or as we added the new account managers, making sure they had the support to go with them.

Germany remains a decent portion of our sales in Europe right now. I’m not going to say specifically how much. But it is a decent portion. And so there was a piece of the issue for sure was a large piece of the issue in 2005 was in Germany, but it was related to those items in the account management assessment that I stated.

But can you give us a sense of over the last couple of months, are they starting to get traction with the changes that have been made there?

For the account managers that have been onboard for more than a year – and actually for all the account managers. Let me start – the lead count that we were concerned about in the back half of 2005, definitely started showing signs of improvement in November and December specifically, which would start having some impact in the first quarter. You need the demo and order closure rate to go with that.

I expect that the new account managers, we won’t see significant productivity out of them until probably the third quarter. We may get some that sneak in a little bit into the second quarter, but odds are third and fourth quarter, given how late in the game they were hired, in the second half of 2005.

Okay. And my other issue is, I think a lot of investors or perspective investors in your name, focus on that ratio of sales that go to new customers. What sort of anecdotal examples can you give us? I know in the past I think it was Johnson Controls or one of the automotive components suppliers. What example can you give us of companies that in fact have decided to standardize on FARO equipment or where repeat sales are actually starting to gain traction in accounts?

Certainly, and we talked a little bit about this in the script, but if you look at, you know, there are some big ones this year who did multiunit orders who are repeat customers; people like Boeing, Airbus, Siemens, some of the autos. They all are existing customers who’ve been with FARO for a long time and continue to add to the fleet of products that they have in their facilities, whether it’s increasing number of Arms or trackers at one facility that already had them or it’s adding them to a new facility or a combination of both. And that’s around the world. We see nice traction in Europe and the Americas in particular for some of those accounts and I suspect Asia would be not far behind.

And then we have some newer ones like the order Sauter Work Woodworking where they did in fact, it was one of the large orders that we had in the second half and standardized utilizing the Arm in their facilities in the United States.

But I think you’re right, we do spend a lot of time focused on the percentage of new customers. And primarily it’s driving that acceptance of the product as a standard. It’s not to say that we don’t give plenty of attention to the existing customers as well, but the more customers in the early stage of the adoption cycle, which we still are in an early stage of the adoption cycle, the more new customers we get, the more it’s showing signs of the product becoming a standard in the industry or in multiple industries.

And then as that standard increases and you get further up the bell curve of acceptance, that’s when I believe you start seeing a shift from greater percentage of sales going to new customers shifting to the existing customers buying more and more now that they’ve realized the productivity that they thought they could get out of the product.

Steven Pinsk of Noble Financial.

I got on the call a little late, so I apologize if you’ve answered some of these questions. Going to the regional sales breakdown, could you go through those for the fourth quarter of ’05 again?

Yes. For the fourth quarter, the Americas grew 33% to 15.2 million from 12.2 million in ’04. Europe was down 12% to 10.9 million from 12.5 in the fourth quarter of 2004. Asia Pacific grew 25% to 7.5 compared to 5.9 in the year-ago quarter. And then do you want the full year numbers as well?

I think I have the full year numbers for this space. And on the DSOs, I heard it was 78 days in ’05. What was it in ’04 and ’03?

84 and 91.

Okay. And the increases in inventory, what were those components? One was sales, what were the other components?

The support of the new Laser Scanner product line and the Asia production facility and the service facilities that we put in place, particularly in the Asia region.

And to add some color to the Laser Scanner, Steven, is that the business when we acquired it did not have a full-fledged manufacturing facility, so we actually had to establish a repetitive manufacturing process to produce enough product for not only the demo equipment, but also for the orders expected in the back half of the year and starting to prep for this year as we built for the forecast.

And Steven, I’m sorry, I should add $4 million of the increase was demo equipment for the new sales force.

You had indicated, I guess made a comment that at least with respect to Asia, or at least more generally, there are some different salesperson quotas and I was wondering why that is?

Right now, Steven, there are two fundamental drivers. One is the tenure of the sales force over in Asia, relative to the rest of the world is substantially less than one year. If you look at the rest of the world there is a good balance between new and existing. But in Asia, far and above all the others, is new account managers first. So they’re still in that ramp-up period.

And then secondarily, at least for the moment, when you look at the territory coverage and where the account managers need to get, just pure infrastructure and expectations during the demo process, the demos can take a little bit longer. There’s a little bit more on-sight handholding, so the account managers aren’t doing quite as many demos per month as you’d see in the rest of the world. And so at the moment, because of the missionary style of selling, does have a direct impact on how much they can sell in any given year.

It’s also true that their salespeople, the majority of them, don’t have automobiles in Asia or in China at least.

That’s right.

They rely on public transit and things like that.

Okay. Do you break out what the backlog by region looks like? I guess you indicated it was a little over 12% in the fourth quarter as a whole.

Backlog at the end of the year, in total, was $3.5 million approximately. Which is basically one week’s worth of sales in 2006 and that is our stated standard, because all of this is build to forecast and shipped as the order comes in. We don’t want to have much more than a week’s worth of inventory if we don’t have to – or I’m sorry, a week’s worth of backlog at any given time. And the reality is that still in this marketplace we don’t have much more than three months visibility as it is anyway, so we’re not getting a lot of huge orders that have shipment dates 3, 4, 5 months out.

Okay.  In terms of the headcount addition in '05, is that something you can break out for us on a quarterly basis - how many were added in each quarter or what the number was at the end of each quarter?

Yes. We can tell you the number in total at the end of each quarter, Steve. And it was 483 at the end of March, 581 at the end of June, 632 at the end of September, and then, ultimately the [inaudible] that we have at the end of the year.

Okay, great. Just a couple more questions. What are your investment spending plans for ’06? Can you break it out a little more specifically in terms of what you budgeted for sales and marketing personnel, any additional geographic expansion investment, etc.?

I’ll give you a couple of general comments without--I don’t want to get too specific for multiple reasons, obviously. The--generally speaking from--if you just look at pure CapEx, we have historically been in the $2 million range. Is that correct, Barbara? And I think you’d see us return to more of that level or less this year after what was a sizable CapEx year for us in 2005. We are planning a small percentage of headcount additions. It is less than 10% at this point in terms of what we’re planning to add.

And all of those, as I stated before, even if we’ve identified specific areas where we want to add maybe a couple new account managers, whether it’s product-related or coverage for a territory or extra production personnel, or whatever the case is, all of them still need to get approved here even if we’ve already identified it as a head that we want to add, just to make sure that in fact the business needs and model still support that. But, we are looking for sizable leverage on a headcount basis this year after all of the investing we did last year.

Jay, just--this is Simon. Just to correct that, I think probably that our prognosis right now is probably less than 5% apart from the--during a turnover, a natural turnover.

Correct.

Probably closer to 5%.

Okay. And then, lastly, Simon, when you touched on some of the new products and next generation existing product, what are your expectations? I’m not asking for specific percentages. But, generally speaking, what are your expectations for the gross margins of those products? Do they tend to have higher gross margins? If so, are they from day one or do they take some ramping up as you get through a promotional discounting period?

Well, it’s not atypical, obviously, to hunt around actually for a price that the market will bear. And usually there’s a--if you have a comparative--a competitive market, then you can define a price better than the one that came out with the Gage. It’s substantially lower priced than our other products, but it has higher accuracy. But, it’s dealing against our competitive market which is involved with hand tools.

With respect to the new product introductions, as Jay mentioned, apart from maybe one or two that could stand alone, but be sold by just in sales force, they would have pricing which is consistent with our long-term goal to keep moving margins to the 60% point. Clearly, through last year, I was very surprised that the large growth in some of the lower margin products, like Gage, depressed some of the numbers. And as Jay also mentioned, competitively there hasn’t--there has been case-by-case pressure, but no general ones.

So, we work on margin two ways. We’re obviously--we’re going to move the prices to meet the market expectations. Premium products can demand more and more commodity type of products demand less. At the same time, we try to find those limits as we can. In addition, we’re doing everything we can to get these costs to preserve margins.

So, I think all--you would find all of our actions would be consistent with smart marketing plus trying to achieve this 10% volume.

Okay. And just a follow-up on that. With respect to the more commodity type products, does that apply to the lower product price point or is there an opportunity there because you saw such good demand to start to move prices up?

I think that’s true. I think generally, I mean, it’s no different than a lot of the models in Japan comes in with cars into the United States early in their history. It’s very competitive and now they’re some of the highest priced brands, so--as demand and customer loyalty has been developed. So, we clearly feel, for example, in the case of the Gage, that it’s a far superior product to--you could spend $15,000 on hand tools and not come close to the power of the FARO Gage in terms of accuracy or usability or power. But, clearly, we had to enter in it at a price close to that. We see those kinds of prices going up as the understanding of the product increases. So, in every one of the product lines it’s a little bit different in the dynamics.

Now, I’ll also add to that, too, that if there is still opportunity in the cost side even with the lower priced ones as well, given that there is still commonality in many of the components inside of the various Arms, that if you make a change in one, you’ve got the opportunity to make the same type of change to the others as well.

Brian Bayers of Bayers Capital Management.

Thank you. Barbara, don’t you accrue the sales comp bonuses that popped up in Q4?

We do accrue for bonuses. Part of the issue that occurred in the fourth quarter was the fact that Europe sales were much lower than we were expecting, and the America sales were much higher than we were expecting. And you have an annual bonus objective for all the sales teams. And if they exceed their annual goal, then they kick into an additional bonus. And we had a large number of the Americas team where that happened. Clearly, we are looking at ways that we can predict and accrue that on an ongoing basis rather than taking it as a one-time hit in the fourth quarter.

Okay, thanks. And then, Jay, I hate to keep harping on Europe here. But, in addition to the account manager issues that everybody’s talked about, were there any issues just sort of competitively? Was Hexagon a little bit more--throwing their weight around a little bit price-wise in Europe? Say, more than they were in Asia or the United States?

I don’t think they are necessarily throwing any more in any one spot than the other. To tell you the truth, when I look at it, there are few excuses for me when I look at sales growth if it’s going the wrong direction. It seems that people have asked, well, is it the economy in any one location or the other? I say, no, not necessarily that, because it’s still a very under-penetrated market. Is it a particular industry feeling the downturn? I say, well, yes, they’re feeling a little bit of it, but we’re still below the radar, so it can’t be that.

I mean, there are some things that--we know machine total consumption went down a bit in Germany, up in a lot of the other countries that we’re in. And you can look at some things like that. But overall, I just look at it and say that’s too easy an excuse. When you’ve got a market that we have where we still have so much penetration left to go, you’ve got to put it back through the fundamental process that we have for our account managers and how they interact with the inside sales people and the marketing people.

Okay. And then, just a couple more brief questions here. Can you quantify what the sale of demo equipment did to your gross profit margin in Q4? I noticed in the press release you called it seasonal. Is that something that we’re going to expect every year?

I don’t have the specific global impact of that. However, I can say that, particularly, we try to turn the demo equipment on an ongoing basis. And we do have sales of demo equipment within every month and every quarter. We did see an up tick, particularly in the Asia region, and they just have not turned it as quickly. And quite frankly, some of their sales team--it was just time for them to turn that inventory, and that had a little bit of an impact in the quarter.

But it was probably more--the margin was more related to other shifts in the mix and strong response in the Gage. And we started to see sales of the Laser Scanner, and we’ve continued to have very strong Tracker sales throughout the year.

And one of the things that we’ve done, we’re trying to drive, obviously, some consistency there, similar to wanting to accrue as many expenses as you can--as possible to try and level load them where it makes sense. We’re trying to get the team to level load when they’re selling the demo equipment. And one of the things that we’ve done is just pure ownership of that inventory bucket is now going to actually belong to Barbara and the finance team because they’ll have a better and more continuous line of sight on when’s it time to turn it, putting the pressure back onto the team that they need to get that out the door, and try to do it on a more regular basis instead of having--there are always going to be some spikes and valleys on it. But, trying to minimize the spikes and valleys, turn them into slopes instead of spikes.

Okay, great. And then, the last question relates to stock buyback. You’ve obviously seen a significant decline in share prices. Have there been more Board level discussions about being a little bit more active on that front?

We, as a company, have--we’ve thought about it. We’ve not actively engaged discussion on it. I think the viewpoint generally speaking is that it’s not the best use of our capital right now, to put it towards something like a share buyback. I think that there are mixed results just generally speaking. Companies who do it versus companies who don’t. A lot of them are doing it purely to help cover the load on options that they have on the other direction.

I’m not sure. I think for our Company, the best use of our capital and our resources right now is purely towards the operation of the business, getting the leverage that we want, continuing the R&D programs that we have, and looking for the way that would continue growing the Company. I think that’s a far better ROI right now than trying to pull back a few of the shares from the market.

Okay. Thank you.

Rob Mason of Robert Baird.

Yes. Good morning. Barbara, we had the additional inventory reserve we had to take in the third quarter. The expectation was there was going to be a slight tail on that running over into the fourth. Do we see that in the fourth quarter?

Yes. We did have, because it wasn’t a full typical inventory. We took the physical of our ABC items in Lake Mary only and we knew we had exposure because we hadn’t taken a full physical. And we did have--I think we put in our third quarter release that we expected about $500,000 to spill over into the fourth quarter, and it was slightly under that figure.

Okay. And so, going forward, we should be rectified with respect to all the issues that drove that?

Yes.

Okay. And then, Jay, I was curious if you could add a little more color. You said you saw the strength in the Americas. It surprised you, seemingly. A little more color on what drove that and maybe the sustainable factors around that going forward?

I don’t it surprised us per se. I mean, I think it was encouraging to see that their growth--they already had strong growth the previous year in the 20%--slightly over 20% range, if I remember correctly. And then, they upped it this year into the mid-30s.

I think it’s a function of a couple of things. Number one was we did, early in the year, we split from four territories into eight in the United States in order to get more coverage, and then, added the corresponding account managers to go with it. And the sales leadership added those people rapidly--added the bulk of the account managers, again, minus a couple, all in the first half of the year. Added the appropriate support resources that go with it, the inside sales specialists. They were very strict to the model to make sure they had the right alignment there. And I think that what we did not do as effectively in Europe, as the example.

And so, in the back half of the year, the Americas was continuing to accelerate. You had your folks who had been on board greater than a year continue to do well with their customer base. We did see a slight up tick in the average sales per account manager who has been on board greater than a year, particularly, relative to the other two regions. And then, we saw some productivity out of the new folks who got added, because they came on board early enough in the year.

So, I think it is a function of that. I don’t want to say it’s a mathematical model. However, there’s a lot of math in sales, despite the view by many of the sales team that there’s a lot of art as well, which I will certainly give them credit for that where it’s due. But, I think it was those items.

Okay. And then, can we infer from your gross margin guidance for ’06, that the product mix will stay relatively consistent with where it was in the third and fourth quarters?

I think we will--we are assuming some additional shifts in the mix, particularly with the Laser Scanner. That product has a lot of runway this year, particularly relative to 2005. But, we’re balancing that with other known initiatives that have already been taken for product cost and otherwise inside the existing products. So, I think, yes, there will be a continued shift in the product mix, but I think the balance is there, the offsets of some of the other items, the cost items.

Okay. And you had mentioned Gage unit volumes up nicely it seems. Do you happen to have the same unit volumes for your Arm product in ’05?

We actually--we debated do we put in the growth rate on the Gage, only because we did not want to get to a point where we steered people towards the actual volume on the product line. We do still want to protect that for competitive reasons.

Okay. And then, maybe lastly, Barbara, it looked like accounts payable ran high in the fourth quarter, above maybe where it typically runs seasonally. Should we expect that to trend back down here in the first quarter to a more normal level?

Well, we took some very specific actions to change our payment terms with all of our vendors, pushing them out to 45 and 60 days where we can, to try to more closely match that with the payment terms that we have on our receivables, which is consistent with what others are doing in the marketplace. That drove the payables up, obviously, as we made that change. You may see some small variation quarter-to-quarter, but that was one of the main reasons for that.

Okay. So, it should roughly hold at this level?

Yes, I would think so.

I think given that we’ve moved most of our supply base to the 45 to 60-day, I think we’ve got a new threshold here.

Okay. And then, just lastly, do you happen to have a forecast for your free cash flow in ’06?

I don’t have that. I apologize. I don’t have that number off of the top of my head, but we--I can say we will be positive cash from operations if we stay within the model.

Okay. Thank you.

Rick D’Auteuil of Columbia Management.

Rick D’Auteuil: A couple of questions related to the sales side of the equation. In the headcount numbers that you gave us by quarter, I don’t think--that didn’t break out where the areas of hiring were. But, you made a comment earlier on that the--we need to see some of the new folks come up the learning curve and it takes six to nine months. And many of them were added in the fourth quarter. Again, I don’t know the breakdown, but just doing the math, it looks like in Q2, 98 people were added, in Q3, 51, and in Q4, 32. So, it looks like a decelerating kind of number.

And I guess I’d go back and just say, why shouldn’t we see that 98 right now starting to mature and be productive? Again, I may not have the perfect breakdown of what’s sales and what’s non-sales.

Yes. Well, I think there’s two pieces to that. You’re right. One is that the total number that I gave, obviously, is--that’s all employees. That includes production ramp up for the Laser Scanner and in Singapore as well. In the second quarter, there is a huge increase, because that was when we brought in the iQvolution business. So, you see a large spike, about 50 people, relative to iQvolution by itself when we brought that business in.

But, if you were to purely look at the account manager headcount, the increases in the second half and the fourth quarter, in particular, were significantly larger in Europe and Asia than they were in the first half of the year. And that includes if you include the support staff to go with them.

Rick D’Auteuil: Another thing, and Barbara and I had a conversation after your pre-announcement. But, even if you had smoothed out the commissions - the outside commissions paid in the fourth quarter and spread it out over a year, it seems to me that there might be some formulas that are out of whack a little bit. Has there been some consideration to maybe adjusting the rates? I don’t even know, is margin taken into consideration when you pay these commissions or if people that sell a Gage at a lower margin equally rewarded to other products that carry higher margins?

The percentage that the account managers are paid does vary by product line. We do pay them right now purely on sales volume. And the primary reason for that is that the individual account managers have very little pricing authority in the field from a discount perspective, it’s in the--it’s less than 10%. And so, given that, if I had account manager who had, say, 25 or 30% discount in the field, then I would add a component to it--to their commissions relative to the gross margin on the deal to get that balance. But right now, it is purely based on sale volume and there is a percentage attached to each product for the person when they sell it.

It’s important to point out though that we are including gross margin, which affects discounting, obviously, in the sector heads that run the different geographies. So, they are--their incentive is definitely tied to sustaining gross margin.

That’s right. I think your comment, generally speaking, is correct. The tweaking of the model that we use for estimating commissions still needs some work. Particularly, I think Asia, given the ramp up that we had there so fast, there is still some work to be done on how we were forecasting that. And a team spent some time looking at that after we cleared the year out. So, no question, there is some room for improvement on that.

Rick D’Auteuil: That’s like--the point of the question is, we talked about last year being a year of investment and ’06 being the year of leverage or operating leverage. And to me, a high gross margin business in the 55--or in the mid to high-50s that brings down--it seems to me like the selling component is taking too big of a piece out of that--what’s left, to bring us down to only 6 to 8--or say, 6 to 10% margins at the end of the day. And it feels like the model doesn’t work. And maybe some of this, again, is the outside investment that still needs to be leveraged. And where should selling as a percent of sales be on a normalized basis?

Ideally, the target model that we have thrown out before gets us back to the 25% of sales range. And right now, we’re running at around 29. You will see that start to decline this year. And the big reasons--and the leverage goes with that--obviously, we’ve already talked about the fact that a lot of the folks were at it in the second half of the year in that learning curve.

The sales force is virtually 100% variable comp. However, there are some draw factors so they get ramped up to speed. And so, that’s why you need that sales volume to start offsetting the draw, particularly in Europe. And then, going forward, that’s where you start getting the leverage though is that each dollar that is sold is fairly predictable at that point, based on the percentage of their variable comp, which is virtually 100% at that point.

Rick D’Auteuil: Of the people you’ve added, the account managers you added last year, what is the normal I guess, stick rate on an account manager? Is the fallout rate half, or what is the turnover for just people that don’t make the cut?

In any given year--it’s certainly not half. In any given year, it tends to run in maybe the 10% range, which is sizably higher than the overall Company turnover, which runs in the 2 to 3% range. And you’re right, that is the function of being on a highly leveraged plan. It doesn’t take long to--if they’re not performing, we’re already looking at it. And in many cases, they’re already looking at it themselves because they’re not bringing the money in for just pure livelihood.

Rick D’Auteuil: I didn’t mean half of the total base. I guess I meant half of the new hires. Could it be as high as half of the new hires or--?

I don’t believe it will be. If I look at this group--and this was, again, ’05 was an unusual year because so many got at it at once. I don’t believe it would be as high as half. Could half turnover over the course of four or five years? That’s possible.

But I still--I think we’ve got very strong products. We have a very strong selection process on the people that come in. They all go through the same process that includes assessments and external assessments as well as the interview process. So, I would suspect it to be lower than that. I would not want to predict a number, but it certainly won’t be half.

Rick D’Auteuil: Again, I’ll just go back to this one point in summary. If 2006 is the year of leverage, I would have expected better on even your reduced sales growth estimates between 20 and 25%, I would have expected better guidance on the 6 to 10%. That doesn’t feel like leverage yet.

Well, and I can understand that. Again, we’re trying to also be in many respects as conservative as we can in terms of what we put out there, knowing there’s still a lot of moving parts that we have a good line of sight on. But we’re trying to put that out there in the best light, knowing that we’re still working towards that 13 to 20 in the five-year model that we had developed for 2009. I understand the concern there, but again, we are trying to be as conservative as we can without being ultra conservative.

Well, Jay, also, the top end of that range is 10%, which is three points below the bottom end of our five-year range.

Right.

So, I mean, and a lot of things have to work in the right direction to start getting up there.

Rick D’Auteuil: That’s all I have. Thank you.

Thank you. And it appears we have no further questions at this time.

Well, we actually--this is Greg Fraser speaking. We actually had a couple of--or one question that came in from a couple of different people. It’s a housekeeping question on weighted average share counts. So, I’ll quickly give those, with apologies to those who don’t care. For the quarter--for the fourth quarter, basic share count was 14,242,184, fully diluted 14,467,719. For the full year, basic weighted average shares 14,169,140, fully diluted 14,442248.

I’ll just throw it over to Jay to close.

Okay. With that, with there being no further questions, again, thank you, everybody for your participation today and your continued interest in FARO. And we look forward to talking to you again on the next call. Thanks very much, everybody.