FARO Technologies Inc (FARO) 2006 Q1 法說會逐字稿

Good morning, everyone, and welcome to the FARO Technologies teleconference call in conjunction with its first quarter 2006 earnings release. For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead.

Thank you and good morning everyone. My name is a Vic Allgeier of The TTC Group, FARO's investor relations firm. Yesterday, FARO released its fiscal first-quarter results. By now you should have received a copy of the press release. If you have not received the release, please call Sharon Trowbridge at 407-333-9911.

Representing the Company today are Simon Raab and Jay Freeland, co-Chief Executive Officers and Barbara Smith, Chief Financial Officer. Jay and Barbara will deliver our prepared marks and they along with Simon will be available for your 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 fourth in yesterday's press release and in the Company's filings with the SEC.

I will now turn the call over to Jay for some introductory remarks. Thank you.

Thank you, Vic. I want to start today's call by thanking all of our investors for your patience during the last four months. I'm sure that our silence during that time relative to the financial performance of the Company was of great concern to many of you. We recently completed the internal investigation into possible violations of the Foreign Corrupt Practices Act in China and I am pleased to report that there was no impact on our previously reported 2005 financial results. The investigation required the involvement and coordination of multiple parties in order to ensure a thorough and rigorous process.

Proper execution on an issue as serious as this is essential. We continue to cooperate fully with the Securities and Exchange Commission and the Department of Justice. However, based on current information, it is not possible to predict at this time when the SEC or DOJ investigations will be resolved, what the outcome might be, what sanctions if any will be imposed, or the effect that such matters may ultimately have on the Company or its consolidated financial statements. As a result of filing the 10-K and the 10-Q, we are now in compliance with NASDAQ and the delisting process ends.

I also want -- from a business perspective, the issue we uncovered in China gave us a lot to think about and act on. As stated in our 10-K, actions coming out of the investigation included employee terminations, reassignment of responsibilities and accelerated consolidation of in-country financial operations to Singapore. Despite all of this, orders for Asia in total were still up by almost 9% with China continuing to be a significant contributor.

I also want to align the focus of today's call. We're here this morning to discuss the first quarter. Because tomorrow is the last day of the second quarter, we will be restricted from discussing any aspects of the business related to the second quarter or outlook for the remainder of the year. We anticipate filing our second-quarter results in early August where we will discuss second-quarter performance and may provide full-year guidance.

I will now turn the call over to Barbara for her review of the first quarter financials.

Thanks, Jay. Sales in the first quarter were $32.1 million, a 16.3% increase from $27.6 million in the first quarter of 2005. New orders grew 21.2% in the first quarter to approximately $33.1 million compared to approximately $27.3 million in the first quarter of 2005. On a regional basis, first-quarter sales in the Americas grew 18% to $12.9 million compared to $10.9 million in 2005. Sales were up 6% in Europe to $12.5 million from $11.8 million in the first quarter 2005. Sales in the Asia-Pacific region grew 37% to $6.7 million compared to $4.9 million and the year-ago quarter. The overall sales increase was driven primarily by the positive effect of the new salespeople added worldwide between first quarter '06 and first quarter '05.

The top five customers by sales volume in the first quarter of 2006 were Boeing, which represented 2.4% of sales, followed by DaimlerChrysler, France Engineering Topography, Audi Ag, and Electroimpact. The top 10 customers in the first quarter of 2006 represented only 10.4% of our sales once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was very strong at 58.8% in the first quarter, compared to 56.6% in the fourth quarter of 2005 and slightly higher than the 2005 full-year average of 58.1%. Selling costs as a percent of sales decreased to 32% in the first quarter from 33.7% in the fourth quarter of 2005. This 1.7 point improvement was driven by capturing the productivity of the new salespeople hired in the second half of '05.

Administrative expenses in the first quarter were 17.6% of sales, compared to 12.6 in the first quarter of 2005 due to $1.6 million in incremental, professional and legal expenses primarily related to our internal investigation into possible violations of the Foreign Corrupt Practices Act in China. As stated our 10-Q, we anticipate at least $3.5 million of expenditures and 2006 related to this investigation.

Net income was $496,000 or $0.03 per diluted share in the first quarter, compared to $3.5 million or $0.24 per diluted share in the first quarter of 2005 marking our 15th consecutive profitable quarter.

Cash and short-term investments were $22.3 million at April 1, 2005 as compared to $25.8 million at December 31, 2005. Accounts receivable were $28 million at April 1, 2006, compared to $28.7 million at December 31, 2005. Our use of cash in the first quarter was driven primarily by a reduction in accounts payable related to our change in payment terms implemented in the fourth quarter of 2005.

I am pleased with the progress we're making to better manage our inventory which showed a reduction of $1.3 million in the first quarter. Inventories were $27.4 million at April 1, 2006, compared to $28.7 million at December 31, 2005.

I will conclude with some statistics regarding our headcount numbers. We had 664 employees at the end of the first quarter an increase of 7 compared to the end of 2005. Account manager headcount at the end of the first quarter was 158 with 46 account managers in the Americas, 61 account managers in Europe and 51 account managers in Asia. Geographically, we now have 295 employees in the Americas, 237 in Europe, and 132 in the Asia-Pacific region.

I will now hand the call back to Jay.

Thanks, Barbara. There are four primary elements to the FARO equation which impact our Company success. Market demand for our products, operational excellence, a culture of innovation and world-class people. It is important to point out that while we have been immersed in an internal investigation in China for the past few months, each of these core elements remains in top form.

First, let me say that the overall demand for FARO's products remain strong. The Americas posted another double-digit performance of 25.7% new orders growth in the first quarter. I'm also particularly pleased by Europe's 23.1% orders growth. Europe's full-year 2005 new order growth rate was 9.1%, so the strength in the first quarter of this year is a positive sign. As I mentioned earlier, Asia experienced slower new orders growth during the first quarter as they retooled parts of the operation. However, the strength in other parts of the world allowed the Company in total to grow new orders 21.2% in the first quarter within our target model.

The second piece of the FARO equation is operational excellence. At the beginning of this year, we stated that 2006 was all about leverage. With that in mind, we embarked on a detailed plan to drive increased productivity across the infrastructure and human capital investments we made in 2005. By the end of the first quarter, we are already receiving the benefits of the initiative in the following ways.

Gross margin was 58.8%, in line with historical averages. Our product mix continues to ship gradually but focused productivity initiatives such as product cost reductions from design changes and the elimination of almost all overtime in U.S. manufacturing, allowed us to manage the impact of the change in mix and maintain healthy gross margins.

Controllable expenditures; overall headcount was held to a 1% increase from year-end 2005 and budgeted expenses were squeezed in noncritical areas. Finally, working capital management. Our continued focus on processes and turns in the first quarter allowed us to control our capital expenditures, maintain low levels of past due receivables, and reduce our inventory.

The third piece of the FARO equation is a culture of innovation. The FARO team continued to innovate in the first quarter, introducing three new products to the market. The Laser Scanner LS 420 opens new markets with its low introductory price. The new versions of our Laser Trackers X and Xi provide twice the distance accuracy and 66% greater temperature range than the predecessors. And finally, the FARO PowerGage gives us direct access to the $1.5 billion on-machine inspection market. Innovation has always been at the heart and sole of this Company and that continues to be the case today.

The last piece of the FARO equation is world-class people. Despite the distractions posed by the China investigation, our team managed through all of it, delivering the results discussed during this call. I'm extremely proud of the organization's performance and ultimately our team around a world is what keeps FARO ahead of the competition.

In closing, I would like to thank our employees and our investors for their continued support of this Company. I believe the first quarter results were strong despite the additional costs of the China investigation. We remain well-positioned to continue penetrating the CAM2 market successfully and will update you again on our progress in early August.

Thank you for your attention and I will now open the call to questions.

(OPERATOR INSTRUCTIONS) Jed Dorsheimer with Canaccord Adams.

Hi. Thank you. A couple of questions. Jay, I know you don't want to get into any specifics regarding guidance for Q2, but I was hoping that maybe you could just talk about maybe the high-level some of the trends that you're seeing in the industry? Specifically, Europe seems to be an area where in the summertime there is a bit of seasonality and yet Europe seems fairly strong from an orders perspective as you noted. I was wondering if you could talk about maybe some of the underlying trends that are driving that order growth and go through some of the other geographies too?

Yes, well, let me give a couple of comments, Jed. I will speak mostly from a historical perspective if you don't mind. But that is probably a way to look at it. Number one, the one current comment I will make is that as I stated before, I am very encouraged by the growth rate in orders for Europe in the first quarter. I do think that is a positive sign. Historically, you are correct, the third quarter in Europe would be a little bit slower than it was in the other quarters, mostly because of the August shutdown. The third quarter, typically, is very similar to the second quarter from an orders revenue standpoint; first quarter is usually a little bit lower than the middle two and the fourth quarter is usually a little bit larger. Typically, we run, 20, 25, 25 and 30 to 35 depending on what the other two did. That would be the ratio in each of the quarters during the course of the year.

The rest of the regions tend to hold pretty true to that track record throughout. And so I think that that historical pattern and that has been the case for several years now would be the way to look at it.

Great, thank you. You know, as we move over to Asia-Pacific, thank you for giving the account managers per region as it's a helpful way to look at sales trends, but I was wondering, as you talk about some firings and a shift in responsibilities with some of personnel, I was wondering if you could talk a little bit more specifically about some of the changes in Asia and what may be gives you the confidence that growth is going to come back or that continued growth is going to be able to be seen? Or do we need to be a little concerned about transition and will some of those transitions have a lag time similar to some of the new hires? Thanks.

Well, I think a couple ways to look at that one, skin the cat here. Number one, I think that the important pieces of when you just look at reassignment, let's talk about that and the things that we have done here. In particular, controls and the financial controls as we referenced in the call today and then in the Q is of vital importance obviously. That does not imply reassignment necessarily of other vital controls, but the ones that are most critical on the finance side and the HR side are back in Singapore at this point.

From a growth standpoint, as we indicated, Asia was a little bit slower in the first quarter and that is probably not unexpected to the group when you look at what you issues we were going through. I think that generally speaking, we are adequately staffed in Asia relative to what the team needs to do. And so that gives me -- when I look at it, that gives me my comfort without being able to talk specifically about what the forecast is for the rest of the year. I think that when you look at that account manager number and you look at the total headcount number for Asia, I do feel that that is adequately staffed for the region. And as I stated, China is still a significant contributor. They were in the first quarter to the overall volume.

Thanks, maybe as a follow-up, as you look at your account managers, how many in -- what percentage in 2006 do you think will be I guess 100% from a quota perspective, in other words, do you think all of your account managers will be producing the expected level, the curve has been achieved, or is it sort of 80% or how should we look at that?

Yes, I think, Jed, the way to look at that, the way I would look at it is if you look at the whole company, typically around two-thirds of the salesforce would be at their quota or at the expectation that we had laid out for them, and one-third would be the below and obviously, there are varying ranges. Some of you -- we always have some people who are significantly above the quota. We always have some who are significantly below and then there is this cluster that is in between, but roughly speaking around the world it would be a two-third, one-third historical rate.

And do you typically from a metric, do you expect when we say at the rate, is that somewhere between like 1.2 and 1.5 million is what is expected to be generated per account manager?

Yes, on average, that is about the range that we have talked about. Obviously, higher priced products like the tractor, the person carries a slightly higher bogey and the products such as an arm or a lower-priced product such as a GAGE, they would carry a lower bogey and expectation.

Great, and just one last question for Barbara regarding some of the G&A expenses. You noted $3.5 million expected to be recognized due to the investigation costs. It looks like about $1 million was already taken out, so 2.5 million left for the remainder of the year. Is the fourth quarter of 2005 a good benchmark to I guess add that additional cost to? Or are there any other costs that we should be aware of throughout the year? In G&A specifically?

Let me make sure I understand.

I guess I am looking for the baseline. Is Q4 a representative baseline to build the additional expenses off of?

Yes, Jed, I think that that is probably correct. If you recall, we have the patent litigation that has been impacting us for the last number of quarters, and I think what we saw in the fourth quarter was probably representative of what we expect to see on a run rate basis, yes.

Great. I guess, well, can you talk about any of the long-term -- is the long-term model still intact in your opinion without giving brackets around timing?

Jed, this is Jay. What I will say is that the long-term growth model that we have laid out for the Company's goals, what we look at as a team that has not changed. As you know, we have pulled back guidance for the current year, but I would say that the long-term goals are still in place.

Great, I will pass it on at this point. Thank you.

Andy Schopick with Nutmeg Securities.

Yes, a little bit of a follow-up to that, because I really wanted to understand how the additional anticipated 2.5 million is likely to be expensed in the subsequent quarters of the year. Whether we are going to see the bulk of it in the second quarter, whether it will be fairly linear in terms of how you expect to expense these anticipated costs?

Yes, Andy, unfortunately, we really can't comment on how much we expect to see in the future quarters at this point in time.

Other than that you expect an additional incremental 2.5 million to hit the P&L this year?

Correct.

Can you enlighten us at all about what these expenses really relate to? I don't know if they are legal in nature, or what exactly is involved that is causing you to incur this incremental additional expense in connection with this investigation, I guess?

Yes, Andy, it is primarily legal and professional fees. And I really can't get into much more detail than that, but that is the bulk of the expenses.

Okay, one other thing, Barbara. Will there be any -- is management anticipating doing any kind of a prerelease perhaps in late July, prior to the former release of your June quarter results in August or will it just be all done at one time?

Andy, this is Jay. I can't definitively state that right now. We did stop doing prereleases during tail end of 2005.

I know.

I can't guarantee that we would do a prerelease at the end of July, or if we will continue with the path that we are on.

Okay, thank you.

Liam Burke with Ferris, Baker Watts.

Barbara, I had a question for you on the working capital. You mentioned the big step down from the end of the year to first quarter on the payables, and you said it was as a result of the change in terms. What was that specifically or was it a specific vendor or what was involved there?

If you recall in some of our prior conference calls we talked about -- we made a change in general in our payment terms for our suppliers, and it does vary but in general, increasing from net 30 to 45 and 60 day terms and we implemented that across the board last year. And the rationale for that was to more closely match what terms we are able to extend to our customers. So we made that change and got the benefit of that in the fourth quarter. We saw our cash balance pick up towards the end of the year. And then of course, those payables became due in the first quarter.

Okay, great. Thank you.

[Graham Rain], [Bears Capital].

Hi, I just had a couple of questions, one being do you guys anticipate any capacity issues in converting orders to sales? And also, about your internal audit function, do you have an idea of how much that is going to cost on an annual basis, and when that's sort of going to be firmly in place?

Yes, Graham, I will talk for a moment about the production capacity. I will it Barbara talk about the audit function. We still believe and we did put this in the Q and the K, certainly between Singapore, Switzerland, Lake Mary, and Kennett Square, that we have more than adequate capacity to handle all of the production demands for 2006 at a minimum. So for the course of this year, I have no concern about that whatsoever.

Barbara, do you want to talk about the audit?

Graham, unfortunately, I can't talk about the anticipated expenses related to the audit function. I can say that we have hired an internal auditor director and we have historically used some outsource services for this type of work.

Thank you.

Mark Jordan with A.G. Edwards.

Good morning. Back to your estimate of expenses to wrap up the investigation of $3.5 million. Does that include an estimate as to what the fine or penalty might be?

Mark, no it does not. We really can't make any sort of projection of that at this time.

Okay, is there any historical precedent? You were very explicit in your Q in terms of how much of the revenues in China were tainted which was obviously not that large an amount. Is there any historical precedent as to what fines have been in other instances where if they were tied to sort of the ill-gotten profit gains or any other benchmark?

Yes. Unfortunately, Mark, there are so many different variations historically that it is hard, number one, to base any of them as saying that would be a rule of thumb to follow. And then number two, it is just because of that it just makes it way too speculative to try and even determine what that might be if anything at this point.

Right. It was positive obviously to see the growth in orders in Europe but also to some extent Europe was an underperformer last year. Is the absolute sales productivity in Europe in the first quarter where you want it to be, or could you give a qualitative comment on sales productivity in Europe?

Yes, I think that clearly there was an increase in the productivity from that team. Now, I still believe there is room to go. As you know, we hired a significant number of account managers particularly in Europe and Asia in 2005, particularly in the back half. We have always talked about there being roughly a minimum six-month more like a twelve-month learning curve for those people to come up to speed. And you always have a little bit of turnover in any organization anyway so I do believe there is always room for improvement there. But I am pleased obviously with where the first quarter was pointing directionally.

Okay, for the scanner, there have been a number of software announcements and obviously that product is being fleshed out. Could you talk about what success you've had in selling that now that you are roughly at a year into the program?

Yes, Mark, what I will say is and we still as you know don't disclose revenues by productline or volume by productline, but I will say that the Laser Scanner, we still are in the process of developing that specifically to hit the market exactly the right way for the product and what you saw with the releases of the different software packages is that unlike the Arm and the Tracker which for the most part you can utilize the same hardware or software the entire package in virtually any vertical, the Scanner is a little bit different. Each one of the verticals, you can use the same Scanner and the same software capturing software, but the modeling software or how you are utilizing the data at the point clouds as they come out of the capturing software, does tend to be very specific and have some very specific commands in each of the verticals and so that is what you saw us lining up there.

So, yes, there is a little bit of learning that goes with that, that some of it is here is how the market is developing also. The Laser Scanner is significantly early stage. It is definitely at the beginning of the bell curve. It has not crossed the chasm yet by any stretch of the imagination, and so you are probably going to see some continuous experiments along those lines as we refine the market and it continues to grow. We are seeing traction there which is good but it will continue to take programs like this to keep refining that and honing it.

Finally, could you just give a little detail. You obviously had a large other income gain, could you detail specifically what that was?

That was primarily the ForEx gains.

Okay, thank you.

Private investor, [Jeff Bass].

Good morning, Jay. Last year you did a very nice presentation on the five-year strategic plan outlook. Do you have any plans to do that in the near-term future again?

Yes if appropriate. We don't have a definitive date, Jeff. If we were to do one, it would need to be after we do the second-quarter earnings release. So if we were to do one, I would anticipate sometime in perhaps the early fall would be -- would make sense. We have not zeroed in on a today yet, though I know that that was instructive to many people at least that is the feedback we got when we did the one last year in April.

Okay, to what extent is the weak dollar generally helping sales as compared to let's say what a stable dollar situation might be?

I don't know if it has a significant impact, Jeff, around the world. I mean in total it was about $1 million in the first quarter. But generally speaking, it is not a significant driver is the way I would look at it.

Okay, the Chinese situation, I know a two or three 3 years ago the Company switched from distribution to developing a direct sales force. Do these recent problems suggest that maybe you should consider adding distribution back again or some other change in the marketing there? And the second related question is that if it turns out that the capacity is underutilized in Asia, do you have the possibility if you have excess demand elsewhere relative to capacity that you could produce over in Singapore and ship elsewhere in the world?

Yes, well, on the distribution front, obviously, the Company strategy has been and I will leave it that way is that distribution is appropriate when we want to get into a new country, test the water, test the market, make sure we understand what the dynamics are. Generally speaking and historically, we have always had much better control over our sales process and we have had better control over our ability to generate volume once you have a direct sales force that is dedicated to you, unlike the distributors who many times have multiple products that they are trying to push in the marketplace.

And if you would, I am sorry, Jeff, could you repeat the second part, I believe it was related to Singapore production capacity?

Obviously, it seems like Asia-Pacific is not going to come in at one-third of sales as you had originally hoped for the end of 2006 or maybe it's not obvious, but at least it looks that way. And if you had excess capacity there and you had excess demand, in Europe or the Americas, could you produce product there and ship to the United States if you wanted to do that?

Theoretically, we could. But given what the facility was established for which is purely to produce and distribute for the Asian market, right now I continue to view that is where we need to be. We've got the right capacity to handle the Asian market from that facility and I think that is the way we need to look at it.

And a final question, I know you're not giving guidance, but are we talking 2007 realistically before we see this company, let's say operating on all cylinders again, to put it generally? Or might it be we will see that at the end of the year or what?

Without giving any guidance on it, Jeff, I would argue that the Company is operating on all cylinders today and that we're just continuing to refine the mechanics of the cylinders. I do think, obviously, we have been through -- we have had multiple issues here over the past 12 months that the Company is working through. But I think only a company firing on all cylinders can also continue to work through those issues and continue to perform in the way that we have. Obviously, there is always room for improvement there, but I do believe that the Company is operating at a pretty good clip.

Well then let me be slightly more specific. Your sales expense as a percentage of sales is far higher than the strategic plan has and I certainly hope that you still look to get that down to 25%. That is the kind of issue I had in mind?

I understand. Obviously, I'm encouraged by the reduction in the selling expense as a percent of sales from the fourth quarter of last year to the first quarter of this year, which I think particularly for a metric like that one is the right way to look at it is the sequential quarter. Without saying what we anticipate for the year, there was a question earlier of have we changed our long-term goals for the Company and the answer to that is still no and inside those goals it includes selling expenses as a percent of sales.

Okay, thank you.

Rick D'Auteuil with Columbia Management.

Yes, just along the lines of the account managers, you mentioned earlier on this call that Asia is adequately staffed. I think it was in reference to the sales side of the equation. Would you make the same statement as it relates to the U.S. and Europe?

Yes, I believe generally speaking, I believe we are adequately staffed and some of that ties to -- I made comments earlier and we talked about at the start of the year that this year was all about leverage. Headcount last year was up substantially. Those who have been following it -- you guys all know that, so I do feel we are adequately staffed. I do feel that this year is a year about leverage and I think we showed that in the first quarter as well only increasing the headcount seven in some very specific areas.

Leverage relates to the account managers coming up to speed, and being contributing source of revenue. Where are we on that curve today? Or at the end of Q1 if you want to go back there?

I think -- I will say, leverage involves a couple of things and I will talk about those in a second. I think where they are in the learning curve is right -- I don't mean to sound coy on it, but it's where I would expect them to be at this point without giving too much of a view from a forward-looking standpoint of where they go from here. But on the leverage side, if you want to talk about that, it is not just obviously about the account managers, that is a big piece of it because we increased the account manager headcount so much in 2005, but it also includes leveraging the new facility in Singapore and the operation there to let them become a truly a stand-alone operating region in the world and not have the reliance on Switzerland for their deliveries or the U.S. for some of their administrative support. So it includes other things like that operationally across the Company.

A couple of things that cropped up last year and I think you addressed, but we will get specific, that the mix between the account managers and some of the support infrastructure was out of whack at points in the last half of last year. It that fine-tuned now and more to your liking?

Yes, it is. It is very fine-tuned now. Much more to my liking. Always a work in progress at any given time, we may be backfilling a piece of one of the stores as we call them, but we are where we need to be on that, for sure.

Okay, and in the fourth quarter, the issue of outside commissions came up on some of the high producers and to have that not reoccur, what has been done to address that?

Rich, what we're doing is looking at the run rate of the sales team each quarter and making a projection of whether they will exceed their annual quota and move into the additional commission category and then making the appropriate accruals for the quarter.

So the prize will still be there, it is just your recognition of it will be over four quarters instead of back-end loaded?

That is correct but bear in mind that we do reevaluate those goals on an ongoing basis and adjust them accordingly. In other words, the goals could be raised if we see the acceptance of the product and making that appropriate.

We haven't -- I don't think you have addressed maybe you could update us on the status of the lawsuit with your competitor. The last I heard there was a July 17 time frame on the legal process I guess progressing. What is the status of that?

Simon, do you want to talk to that or do you want me to --?

I can speak to it. We basically, the trial is set for the 17th and we are all preparing for the trial.

That's all I have. Thanks.

Rob Mason with Robert W. Baird.

Jay, you mentioned the gross margin mix shift was hitting you gradually. Could you be more specific on that?

Yes, generally speaking, I will be as specific as I can because we don't disclose productlines. The products as we have some that are higher priced like the tracker and the Laser Scanner. We have some that are midpriced like the Arm and some that are lower priced like the Gage. So we talked last year about the Gage was at an accelerated run rate that it was growing significantly faster than other products when we introduced them at the same time. Gage is a lower-priced product and so there are margin differentials between those.

As markets continue to develop we just continue to monitor that and so having the right types of cost productivity programs in place and material costs, labor costs on the growth -- that hits the product at the gross margin line helps balance some of that out. And it has been gradual, which is the right way you want it too. You don't want any one higher or lower margin item to race through too rapidly. Obviously a higher margin when racing through more rapidly would be more desirable than a lower margin one, but that's what we are referring to on the mix.

Okay, can you quantify how much that impacted you on a year-over-year basis?

I can't talk to that. I apologize.

Okay, and just one last point I guess on that, just qualitatively, did any of your products decline year-over-year? Product sales?

No.

Okay, and then just to get a little more color on the issues in China. Were there any other regions that were investigated besides China?

Yes, generally, we have evaluated other countries in Asia-Pacific and then more generally all of the other countries that we operate in. Part of -- one of the things that we will do with the new audit function in place is to make sure that we have got processes -- ongoing processes remain strong and strengthened where we can to continue looking at the operations where we are in other parts of the world.

But you're satisfied that you sufficiently looked at it in China as the only location that you noticed the suspicious payments?

Yes.

Okay, and to the extent that you did terminate some employees, how many people were terminated?

We have not disclosed the number of people terminated for a number of different reasons.

Okay, was that before or after the end of the quarter?

The terminations were during the course of the quarter.

Okay, just lastly on your manufacturing footprint I think you spoke to earlier, is there any facility that is not -- I know you are expanding into Singapore as well. Is there any facility that is not fully ramped on the products that they are intended to manufacture?

No, all of our facilities now are fully capable. That does not mean that they are running at full capacity. We want to make sure we have some excess but they are all fully capable.

Okay, thanks.

[Bill Garrison], (indiscernible).

Yes thank you. Just a couple quick ones. I wondered if you could indicate how much revenue in the March quarter came from last year's acquisition of iQvolution?

Yes, I can't, only because we have not disclosed productline revenues historically and still haven't in the quarter.

Okay, and similarly, would not be able to comment in terms of a contribution from a new order standpoint either?

Yes.

Okay, in a general sense, can you at all talk about the cash generation prospects for the year, just from a balance sheet standpoint?

Yes, unfortunately, again, because that is a forward-looking item for the year, we cannot talk to it right now.

Representative: Okay, very well. Thank you.

Jed Dorsheimer.

Hi, just a couple of follow-ups. Jay, can you -- I'm not sure if you mentioned this, what percentage of your product sales this quarter were from the new products?

Yes, I can't talk to that, again, because we don't split them out by productline.

All right. Would it be fair to say that the majority of growth in the North American and Europe were coming from new products or is that not a fair statement qualitatively?

Not a fair statement, I really can't comment on it.

All right. Can you give any color regarding margins in the geographies?

No, we also don't split out our gross margin by geography, only orders and shipments.

Got you. And should we as we look at the selling expenses through the year, it looks like selling expenses actually continued to -- didn't decline all that much and revenues actually had declined a little bit quarter-to-quarter. As we look at this throughout the year and you talk about getting the increased leverage and we know that sales will increase, will you be able to -- do you thank you have hit a high watermark regarding selling, or is the variability due to commissions going to still drive that line item in absolute terms higher?

A couple of thoughts on that one. I am not going to say we have hit a higher watermark just for my own sake quite frankly. However, I will tell you the goal, as you know, is to continue driving that down. I do feel like we had adequate staffing by the end of 2005 to generate the volume that is required in 2006, so from just a raw headcount standpoint we have talked about that before.

The one thing I will state is that you're right, the selling cost as a percentage of sales, once the new salesforce is delivering and fully delivering at the run rates that they need to, that does drive down the percentage because there is so much -- they are so highly variable leveraged. But in the early stages when they are still on a draw, you don't get quite the same benefit of that variable comp. So that is what you are seeing the difference in of why you see the revenues down slightly sequential quarters. The selling expenses down slightly as well, but perhaps not quite as much -- it's not going to be a one for one right now because of those new salespeople who are still coming up to speed.

Thank you. Lastly, would you mind reminding us of the targeted goals?

Yes, the targeted goals we have published previously and I don't know if I will repeat them right now. It was a five-year goal that was laid out and they are on the website from the presentation that we gave last April.

Great, I will pass it on. Thank you.

Jay Cooper with Loeb Partners Corporation.

Yes, just a repeat here, would you repeat, Barbara, what you said about the other income source? I did not catch what your remark was?

There are basically two sources to other income, one is interest income, and ForEx gains and losses and in the first quarter, it was primarily ForEx gains?

Okay, thanks a lot.

Richard Eastman with Robert Baird.

Just a quick question, regarding the changes that you made in Asia and in particular in China to the salesforce, would you consider those fully reflected in the first quarter sales in order number? The reason I ask, I mean, obviously you made some of the changes later in the first quarter and I am curious, does as we flowed into the second quarter, will those changes be any more apparent, or were they pretty much absorbed and fully reflected in the first-quarter results?

Unfortunately, Rick, because it is so late in the second order, I cannot address that one right now.

Should we expect -- I guess most of that was done by the end of the first quarter, so they've probably all expenses associated with those reductions any charges or reserves that would have all been reflected in the first quarter as well?

And again, unfortunately, that one because it is so close to the end, I can't specifically talk to it.

Okay. And then lastly, on the gross margin line, given the mix trends that you see, the order trends that you see, would it be -- would you have confidence suggesting that the 58.8 gross margin would be a sustainable level or improve as the year unfolds?

Yes, unfortunately, I can't tell you whether I think it will sustain or improve. Obviously we are, as I stated, I am pleased by the percentage improvement from the fourth quarter and obviously, it is a better percentage than we had in the total year and I talked about some of the things we are doing that helped benefit the gross margin. I can't specifically state that that is my projection for the end of the year.

Okay and you don't feel comfortable suggesting that's maybe a base at least?

I can't. Unfortunately only because we can't talk about forward-look for the year, I can't even say if it is a baseline or not.

Okay, I will ask all of these in a month or two.

In five weeks. Yes, I am sorry, Rick.

Thank you.

Operator, do we have any other questions in the queue?

Mark McRobert with A.G. Edwards & Sons.

Yes, can you hear me? I just had a question on whether or not we are doing anything with forensics, CSI type market? And if so, are we being proactive or are we just taking whatever sales come as they just fall into our lap?

Yes, we are being proactive. One of the eight software packages that we released for the Laser Scanner several weeks ago does relate to the forensics market and we do have as you know, we have dedicated salespeople to the Laser Scanner product specifically and then each of though software products that was released is meant to focus on a particular vertical and the forensics is one of them.

Great, that's good news. That's all I had. Thank you.

(OPERATOR INSTRUCTIONS) Steven Pinsk with Noble Financial Group.

Thank you. Hi guys. And Barbara. Two questions for you. First of all, with respect to the Gage, you said that we have seen some significant acceleration in sales and penetration of that product. Given that fact, have you tested price increases to Gage the price elasticity of that product?

We have tested some price increases in targeted and selected areas. For the Gage, we do that periodically on all of the products, but you're right, the Gage we have tested that. That acceleration did continue some in the first quarter still.

Can you talk about what the impact of that price increase was? Did it cause sales to decline at all in a material or immaterial fashion?

Yes, that I can't comment to. I will state that we do still see a very strong market for the Gage and obviously, when we introduced the PowerGage it also addresses a broad market for on machine inspection which is another utilization of the tool in combination with the Delcam software. So we do still continue to see a strong market for it. I can't state specifically because we don't disclose gross margins by productline what the impact would have been.

Okay. Following up on the iQvolution contribution, can you speak generally as to whether it was accretive, dilutive or neutral to your results this quarter?

I can't speak generally to the financial impact, again, because they are now fully part of the FARO team and are treated like any other productline. What I will say is that the impact that we get from that acquisition is a brand-new product with tremendous three-dimensional technology, optical technology that ties to what we were already doing in other parts of the business, but brings us a broader market perspective outside of manufacturing with new applications and it brought with it some very both creative and talented technical minds that can be used for the product and can be used elsewhere in the Company.

Okay, in your Q, and maybe you addressed this somewhere else in your filing, you talked about in the first quarter of '06 the additional improper referral fees at 122,000. Can you tell us what the affected sales were that related to that improper referral fees as you did for '05 and '04?

This is Barbara. Those were referral fees paid in '06 that related to sales in 2005 prior to discovering the problem.

Okay, so what you are saying is that at least in '05, you had improper referral fees of 265,000, and some of the sales associated with that fell into '06?

We say it differently. The actual payout of the referral fee did not necessarily time exactly with the shipment. So what we presented in the K and the Q were -- reflects when those payments -- when the cash was actually paid out. The sales associated with 122,000 relates to the sales figures that we also disclosed for 2004 and 2005. So the 122 relates back to the 3.2 million in '05.

Okay, okay. Just a couple more questions. Do you have at your fingertips the new sales hires by quarter in '05?

No, I have the account managers as of December.

Is it possible to get those figures? And if not, why not?

There is no reason why we cannot get them. We publish the account manager number in each of the Qs so they would be in each of Qs from 2005, I believe.

Okay, fair enough. And you talked about hiring an internal audit manager or director, internal auditing. What about the compliance function? Have you hired somebody there, or at least beefed up that division?

Yes.

I think we should refer to the actions that we have laid out in obviously this -- we will continue to look at other actions. There are a number of steps we have taken to strengthen the compliance function such as we've instituted a quarterly certification process. Jay mentioned some things around the consolidation of the financial activity for the region of Asia and Singapore to strengthen controls there.

I understand that, Barbara. What I'm asking is is there a senior level manager who is the point person that directs to the region and assesses the information that comes back from those regions who like I said, is the point person to oversee all of that activity that you're referring to?

Well, we have a designated person in each region for which any compliance issue is directed and evaluated. Those are also then fed to the internal audit director and then obviously to the audit committee of the board if necessary. I would further say that this is a work in progress and we're going to continue to evaluate other actions that we might take.

Okay. Last question I have, Jay, you said that you have not disclosed the number of terminations for several reasons, and I'm just wondering what those reasons are? It doesn't seem to be a material piece of information?

Yes, well, in some respects the fact that it is not a material piece of information would be one. I think the other is that we have only disclosed headcount by region for mostly competitive reasons, and to talk about terminations in any one particular country when we don't disclose the headcount by country, I don't think is appropriate. I think that the important thing is that we took the actions that we thought were appropriate and specific to the issue at hand and would leave it at that.

Okay, but if I recall correctly, the terminations were not just in Asia-Pacific, they were in other regions as well. Is that correct, or did I --?

I think that what we stated in the Q, is that we had terminations in Asia-Pacific and then we had a collection of reassignment of different duties and controls between Asia-Pacific and the U.S. to make sure that we had the right control over it.

Okay, fair enough. Thanks very much.

Thank you. At this time, it appears we have no further questions. I will go ahead and turn the program back over to Jay Freeland for closing remarks.

Very good. Well again, I want to thank everybody for the patience over the last four months. I want to thank you all for participation today. I know that it is probably a little bit frustrating that we're right at the end of the quarter and obviously we would not normally have a conference call during a traditional silent period as you end the quarter. However, we also thought it was very important to at least have some dialogue relative to the Q and the K because it had been so long and that was why we wanted to do that with you today.

So with that, I look forward to speaking with everybody again in five weeks time give or take. I want you to know that we are encouraged by the results in the first quarter. We do have a healthy company and we are very pleased to be back in compliance with NASDAQ and back on the normal road there. So thanks everybody, and have a very enjoyable weekend.