FARO Technologies Inc (FARO) 2007 Q2 法說會逐字稿

Good morning everyone, and welcome to the FARO Technologies conference call in conjunction with its second quarter 2007 earnings release. For opening remarks and introductions, I will now turn the call over to Vic [Algier], please go ahead.

Thank you and good morning everyone. My name is Vic [Halgier] of the TTC Group, FARO's investor relations firm. Yesterday after the market closed, FARO released its fiscal second quarter results. By now you should have received a copy of the press release. If you have not received a release, please call Darren Saylor at 407-333-9911. Representing the company today are Jay Freeland, President and Chief Executive Officer, and Keith Bair, Senior Vice President and Chief Financial Officer. Keith and Jay will deliver prepared remarks first, and will then 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, we target, our growth targets, our goals, our guidance, 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'll now turn the call over to Keith.

Thank you Vic, and good morning everyone. Sales in the second quarter of 2007 were $47.6 million, a 25.3% increase from $38 million in the second quarter of 2006. On a regional basis, second quarter sales in 2007 in the Americas grew 20.6% to $19.9 million compared to $16.5 million in the second quarter of 2006. Sales grew 26.5% in Europe, to $19.1 million, from $15.1 million in the second quarter of 2006. Sales in the Asia Pacific region increased 34.4% to $8.6 million from $6.4 million in 2006.

New orders grew 23.5% in the second quarter of 2007 to approximately $50.4 million compared to approximately $40.8 million in the second quarter of 2006. On a regional basis, second quarter orders in 2007 in the Americas grew 15.2% to $20.5 million compared to $17.8 million in the second quarter of 2006. Orders increased 27.8% in Europe to $20.7 million from $16.2 million in the second quarter of 2006. Orders in the Asia Pacific region increased 35.3% to $9.2 million compared to $6.8 million in the year ago quarter.

The top five customers by sales volume in the second quarter of 2007 were Honda, R&D Americas, Northwest Laser Tracker, Daimler-Chrysler, Sumisho Computer Systems, and Caterpillar. The top 10 customers in the second quarter of 2007 represented only 5.2% of our sales. Once again, indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 61.3% in the second quarter of 2007 compared to 59.3% in the year ago quarter. This increase was due to an increase in unit sales and product lines, with lower unit costs than in the prior year period. This gross margin was slightly above our previously issued guidance of 57% to 59% as a result of the continuing productivity improvements.

Selling expenses were 29.4% of sales in the second quarter of 2007, down from 30.5% in the year ago quarter, primarily as a result of improved sales force productivity. Administrative expenses in the second quarter of 2007 were 11.6% of sales compared to 18.7% in the second quarter of 2006. This decrease was primarily due to a reduction in professional fees related to the STPA matter and patent litigation to $500,000 in the second quarter of 2007 from $2.6 million in the second quarter of 2006.

Our operating margin was 13.6% or $6.5 million in the second quarter of 2007 compared to 2.5% or $1 million in the year ago quarter. This increase is primarily due to the previously mentioned increase in sales and gross profits and lowering operating expenses as a percentage of sales.

Net income was $5.8 million or $0.39 per share in the second quarter of 2007 compared to $900,000 or $0.06 per share in the second quarter of 2006, marking our twentieth consecutive profitable quarter.

I'll now briefly discuss a few balance sheet and cash flow items. Cash and short term investments were $40.2 million at June 30, 2007, compared to $31.5 million at December 31, 2006. Accounts receivable was $45 million at June 30, 2007 compared to $42.7 million at December 31, 2006. Day's sales outstanding at June 30, 2007 decreased to 86 days from 102 days at December 31, 2006. Inventories increased by 3.8% or $1.2 million at June 30, 2007, to $31.9 million compared to $30.7 million at December 31, 2006. The increase in inventories was primarily related to an increase in sales volume.

Finally I'll conclude with some statistics regarding our headcount numbers. We had 744 employees at June 30, 2007, compared to 641 at December 31, 2006, an increase of 103 or 16.1%. Account manager headcount at June 30, 2007 was 141 with 45 account managers in the Americas, 51 account managers in Europe, and 45 account managers in Asia. Geographically we now have 341 employees in the Americas, 251 employees in Europe, and 152 employees in the Asia Pacific region.

I will now hand the call over to Jay.

Thanks Keith. Needless to say, I'm pleased with our second quarter results, as they reflect the hard work and determination of the FARO team. They are a function of the amazing opportunity this market presents for us, and they provide some insight into the true health of the company.

This last quarter was the first time we exceeded $50 million in new orders in a single quarter. I'd also like to note that it was only 12 months ago that we exceeded $40 million in a quarter for the first time ever. Demand remains strong, and the sales team continues to execute accordingly. We're maintaining solid growth in our arm, gauge and laser tracker core, while seeing additional acceleration in orders for laser scanners. However, we're never satisfied with the status quo, and we continue to refresh and reshape our sales and marketing initiatives.

We further refined our lead generation and pipeline metrics, increased our account manager and inside sales support staff levels, and made several cross regional talent promotions in our marketing department to pollinate our best ideas from around the world.

Sales growth was better than 25% for the third consecutive quarter, with each region contributing nicely. Asia was a particular highlight in the second quarter, with solid growth in each of the countries in the region. Output from the Asian sales team, though still relatively new to FARO, continues to increase each quarter, bringing them closer to full productivity. We also recently established a direct sales office in Thailand, which will allow us to penetrate the sizeable industrial opportunity in that country.

Sales to new customers were 51% in the second quarter, in line with our ongoing goal of maintaining a 50/50 balance between new and existing customers. The investment and time required by our account managers to continue achieving this goal insures the foundations are in place for future growth, and ongoing ROI from our sales programs. As our products become increasingly integrated into the operations of our global customer base, the demand for additional FARO products and services will continue to grow.

As I started my comments today, a reference in acceleration in orders for the laser scanner; you may recall that last quarter I stated that we were finally seeing the volume momentum I'd been looking for over the last 18 months. The second quarter reflected similar momentum, and a solid pipeline of opportunities. Over the next several quarters we will continue defining the shape and size of this early adopter market, as we identify additional applications for the product. This is familiar territory for us, FARO went through the same evolution with all of its other products and successfully transitioned them from the early adopters to the early majority. Our top line growth today is evident of that successful transition. The latest scanner is no different, so each of progress brings the LS closer to making the leap.

Operationally speaking, at 61.3% gross margin we're now realizing some of the expected benefits from our productivity programs. To highlight one specific area of success, we've generated nice material cost productivity through our transition to RoHS WEEE or lead free compliance. We used this transition as an opportunity to re-bid and renegotiate our supply contracts around the world. We combined this by positioning a global supply chain leader in Asia to drive the company's overall cost productivity. We also continue to see the benefits from manufacturing our products in Switzerland and Singapore, where we have negotiated favorable tax agreements. Our Swiss facility (inaudible) production demands for three years now. In the second quarter the Singapore facility supported virtually all Asian delivery requirements. During the third quarter the Singapore facility is expected to handle all of the regions demands, thus completing a five year strategy of enabling full operational support in all three regions.

With respect to the company's ongoing investigation into potential violations of U.S. Foreign Corrupt Practices Act, we continue to cooperate with the Department of Justice and the Securities and Exchange Commission. However, there's still no way to predict or anticipate the final outcome at this time, and as such, I'll remind everyone that we do not have a reserve established for any financial impact that a final resolution may create.

Our earnings performance of $0.39 per share in the second quarter, and $0.60 per share year to date, gives us a lot of flexibility as we go forward. Internal R&D programs and external M&A opportunities will benefit from that financial strength. FARO has always been at technology leader and innovator, with a history of developing our own cutting edge products, as well as integrating new technologies from acquisitions. As our market evolves, so will we, always searching for the next great break through. Our team dreams in FARO blue, and when we do, we see a three dimensional measurement world which continues to develop, but remains an open book with respect to the future possibilities. Our job, FARO's job, is to continue leading that natural evolution, and as appropriate, spark the necessary revolutions.

We are maintaining our top line guidance for 2007 of 20% to 25% sales growth and gross margin guidance of 57% to 59% of sales. I recognize the gross margin guidance range is below our year to date performance of 60.1%. The team is working toward maintaining and improving our current gross margin levels through ongoing productivity programs. However, I'm still allowing for flexibility in this guidance. I intend to update our progress toward both of these ranges at the end of the third quarter.

My personal thanks and congratulations go out to the FARO team for performing so well in the second quarter. This entire team has a passion for what we do every day, and an unshakable faith in the long term potential of the company. As investors in FARO, I know that all of you share that faith and so for your support of the global team, my thanks go to you as well. I appreciate your attention and I will now open the call to questions.