FARO Technologies Inc (FARO) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies Conference Call in conjunction with its Fourth Quarter 2007 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 Vic Allgeier, TTC Group, FARO's Investor Relations Firm. Yesterday after the market close FARO released its fourth quarter results. By now you should have received a copy of the press release. If you have not received a release, please call Darin Sahler at 407-333-9911. Press release is also available on FARO's website at www.faro.com.

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 will now turn the call over to Keith.

Thank you, Vic, and good morning everyone.

Sales in the fourth quarter of 2007 were $59.2 million, 34.9% increase from $43.9 million in the fourth quarter of 2006. That brought our 2007 annual sales to $191.6 million, a 25.7% increase from $152.4 million in 2006.

On a regional basis, fourth quarter sales in 2007 in the Americas grew 22.6% to $21.9 million compared to $17.9 million in the fourth quarter of 2006. Sales grew 48.7% in Europe to $27.2 million from $18.3 million in the fourth quarter of 2006. Sales in the Asia Pacific region increased 30.1% to $10.1 million from $7.7 million in 2006.

Comparing year-over-year growth, 2007 sales in the Americas increased 27% to $80 million from $62.9 million in 2006. Europe sales for 2007 increased 28.6% to $78.3 million from $60.9 million in 2006. In Asia, sales increased 16.7% in 2007 to $33.3 million from $28.6 million in 2006.

New orders grew 31.3% in the fourth quarter of 2007 to approximately $65.4 million compared to approximately $49.8 million in the fourth quarter of 2006. On an annual basis, new orders grew 21.8% to $197.8 million in 2007 from $162.4 million in 2006.

On a regional basis, fourth quarter orders in 2007 in the Americas grew 10.8% to $22.6 million compared to $20.4 million in the fourth quarter of 2006. Orders increased 47.3% in Europe to $32.7 million from $22.2 million in the fourth quarter of 2006. Orders in the Asia Pacific region increased 40.3% to $10.1 million compared to $7.2 million in the year-ago quarter.

Again, comparing year-over-year orders growth, new orders in the Americas increased 19.4% to $80.5 million in 2007 from $67.4 million in 2006. Orders increased 27.6% in Europe to $84.7 million in 2007 compared to $66.4 million in 2006. And orders grew by 14% in Asia in 2007 to $32.6 million from $28.6 million in 2006.

The top five customers by sales volume in 2007 were The Boeing Company, Daimler, The US Military, Volkswagen and Caterpillar and represented only 3.8% of sales. The top ten customers in 2007 represented only 5.8% of our sales once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 60% in the fourth quarter of 2007 compared to 58.8% 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 as a result of continuing productivity improvements. Gross margin in fiscal 2007 was 60% compared to 58.7% in fiscal 2006.

Selling expenses were 27.3% of sales in the fourth quarter of 2007 compared to 29.2% in the year-ago quarter due to improved productivity of the sales force. In fiscal 2007, selling expenses declined to 29.3% of sales compared to 29.7% in fiscal 2006.

Administrative expenses in the fourth quarter of 2007 were 11.8% of sales compared to 14.2% in the fourth quarter of 2006. General and administrative expenses in the fourth quarter of 2006 included $1.5 million of professional fees related to the Company's Foreign Corrupt Practices Act (FCPA) matter and patent litigation. In fiscal 2007, general and administration expenses were 13.3% of sales and include a $2.65 million charge for estimated fines and penalties with respect to the FCPA matter and $1.1 million of professional fees related to the Company's FCPA matter and a resolution of the patent litigation. Fiscal 2006 G&A expenses were 16.1% of sales and included $6.8 million of professional related to the FCPA matter and patent litigation costs.

Research and development expenses were $3.1 million in the fourth quarter of 2007 or 5.4% of sales, compared to $1.8 million or 4.2% of sales in the fourth quarter of 2006. R&D expenses for fiscal 2007 were $10.3 million or 5.4% of sales, an increase of $3.1 million from $7.2 million or 4.7% of sales in fiscal 2006. This increase was driven primarily by costs associated with the recent launches of the Quantum FAROArm and Fusion FAROArm product lines.

Operating margin for the fourth quarter of 2007 was $13.8% compared to 8.8% in the year-ago quarter as a result of the previously mentioned increase in gross margin and lower selling and administrative expenses. Operating margin for fiscal 2007 increased to 10% from 5.4% in fiscal 2006.

Income tax expense was $1.1 million for the fourth quarter of 2007 compared to $800,000 in the fourth quarter of 2006. The Company's effective tax rate for 2007 increased to 21.5% compared to 16.2% for fiscal 2006 primarily as a result of the increase in non-deductible expenses for US income tax purposes associated with the FCPA matter. The Company's effective tax rate excluding the effects of the $2.65 million penalty would have been 17%.

Net income was $8.4 million or $0.50 per share in the fourth quarter of 2007 compared to $3.7 million or $0.25 per share in the fourth quarter of 2006 marking our 22nd consecutive profitable quarter. Net income for fiscal 2007 increased to $18.1 million or $1.15 per diluted share from $8.2 million or $0.56 per diluted share in fiscal 2006.

I will now briefly discuss a few balance sheet and cash flow items.

Cash and short-term investments were $103.2 million at December 31st, 2007 compared to $31.5 million at December 31st, 2006. This increase was primarily the result of net cash proceeds of $53 million related to the Company's registered direct offering on August 14th, 2007 and cash flow from operations.

Accounts receivable is $54.8 million at December 31st, 2007 compared to $42.7 million at December 31st, 2006. Days sales outstanding at December 31st, 2007 decreased to 84 days from 102 days at December 31st, 2006. Inventories increased to $40 million at December 31st, 2007 from $30.7 million at December 31st, 2006. This increase in inventories was primarily related to an increase in raw materials in finished goods inventories.

Finally, I'll conclude with some statistics regarding our headcount numbers.

We had 780 employees at December 31, 2007 compared to 641 at December 31st, 2006, an increase of 139 or 21.7%. Count manager headcount at December 31st, 2007 was 149 with 53 account managers in the Americas, 51 account managers in Europe and 45 account managers in Asia. Geographically, we now have 366 employees in the Americas, 255 employees in Europe and 159 employees in the Asia Pacific region.

I will now hand the call over to Jay.

Thanks, Keith. I'd like to start this morning by congratulating the entire FARO team. 2007 was a spectacular year in so many ways and it's the hard work of all our employees around the world who enable our success.

The fourth quarter was, as it always is, extremely active on all fronts. We saw significant orders and sales growth in all three regions, gross margin remains strong and the global sales team continued to improve their productivity. Sales per account manager averaged $1.3 million in 2007, up from $850,000 per account manager only two years ago.

During our last earnings call I stated that we remained firmly on track for a strong fourth quarter. I also stated that we expected our full year results would remain well within the guidance range we had been providing all year. Obviously, our results for 2007 were in fact in line with that guidance. I bring this up because we've always stated that FARO's performance cannot be gauged quarter-to-quarter but rather needs to be viewed for the full year. We expect to have fluctuations from one quarter to the next. As such, our annual growth in sales gross margin and income is the best way to measure the Company's financial success.

For the last three years we've had a stated strategy of achieving and maintaining a 50/50 balance between the sales from new customers and sales from existing. In 2007 we remained on track, generating 52% of our sales from new customers and 48% from our existing accounts. Our team spends plenty of time with our existing customers but this is still very much an early stage penetration story, so getting our products into the hands of new users is extremely important to long-term adoption rates around the world.

2007 was an exciting year for us from an R&D perspective. We introduced two new Arms, a new scan Arm, a new color laser scanner and several new accessories. We continue to invest in the technology which drives this business and we'll keep doing so in 2008 and beyond. That investment in our core products helps fuel the ongoing growth we've come to expect. Though we don't disclose revenue by product line, I can tell you that early orders volume from the products introduced in 2007 is very promising. Innovation remains at the core of our Company and you'll continue to see exciting new products from us over the next 24 months.

We also continue to look outside the Company for potential technologies which will complement our portfolio. There's a lot of interesting technology available and we're looking at all of it. The key is determining which is the best fit for FARO, not just in terms of potential products but also in terms of talent and culture of the company we're reviewing. We are very patient buyers and will only take action when we see an opportunity which comfortably matches our criteria.

In previous calls I've talked about the Power of One initiative, an internal program we launched in 2006. The program's financial metric is quite simple, every employee finds one idea that can generate $2,000 in savings for the Company regardless of where that idea comes from. However, it's not just a financial program. It's bigger than that. It is also meant to drive cultural change. We've had great success with the program since launching it. In 2007 we spent a significant amount of time driving participation and finished the year with over 90% of the global employee base being involved, that compares with 45% in 2006. We also generated approximately $6 million from completed projects which was redeployed to more productive uses and, in some cases, dropped [through] to the bottom line. This is double the $3 million in projects we completed in 2006.

On the legal front, we remain very close to resolving the ongoing FCPA matter which first surfaced almost two years ago. We continue to cooperate with both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in order to conclude the matter. As stated during our last call, we booked a $2.65 million reserve in the third quarter of 2007 for the estimated fines and penalties that we anticipate could be necessary to resolve the matter with the DOJ and the SEC.

As also stated last quarter, we expect that the resolution of the FCPA matter will include a monitor for the next two years following such resolution to review our ongoing compliance. Our preliminary estimate of the aggregate cost of this monitoring obligation will be in the range of approximately $1.5 million to $2.5 million during that time period. Of course the actual costs incurred with respect to the monitor may vary.

Separately, the class action matter remains outstanding and we continue to believe that our directors' and officers' insurance policy is adequate to defend this action.

Looking ahead to 2008, we are maintaining our forecast guidance range of 20% to 25% growth in full year sales. We are also maintaining our forecast guidance range of full year gross margin of 58% to 60%. We will continue our practice of guiding to those numbers only and will, as always, provide updates on our progress towards those targets at the end of each quarter.

With respect to our sales growth guidance range of 20% to 25%, there's no doubt that recent macro economic challenges around the world are of some concern. Like most companies, we monitor the situation and we review it relative to the industries we serve, our target customers and our global sales model. However, despite the current global economic conditions, we still see plenty of positive signals below the waves on the surface. We believe that those signals indicate that our top-line growth estimate of 20% to 25% is both appropriate and achievable in 2008. This remains a highly under-penetrated market with significant needs for the products we offer. There's a tremendous amount of opportunity out there and we intend to continue growing with that.

With respect to our gross margin guidance range of 58% to 60%, we're leaving some room for flexibility. Clearly, our actual 2007 gross margin is at the top end of the target range for 2008. We are, as always, allowing room for price flexibility or other potential circumstances which may not be foreseeable at this time. However, I can also assure you that the FARO team continues to execute on existing and new productivity programs, always looking for ways to improve our gross margin.

In summary, I'd like to thank the global FARO team one more time. You continue to deliver on your commitments and your ongoing passion for FARO keeps us on top. Our recent honor of being named the 18th Fastest Growing Tech Company in America by Forbes' Magazine is just one example of what your commitment and dedication brings us.

For those in the investment community, I also offer my thanks for your ongoing support of this fantastic enterprise and I look forward to another successful year in 2008.

I appreciate your attention and I'll now open the call to questions.

(OPERATOR INSTRUCTIONS) Mark Jordan, Noble Financial.

Good morning, gentlemen. Congratulations on a good end to the year. First question relative to selling expense, you obviously saw a significant improvement in that metric vis--vis sales in the fourth quarter versus the third, dropping down to 27.3%. Could you give us what your goals might be for next year for a full year in terms of improving efficiency there and also talk about what you think might be the appropriate long-term metric for you to drive the Company towards?

I'll go in reverse order, Mark. The long-term target is to still get that metric down to 25% of sales. We have stated for awhile now that the target to get there is the end of 2009 on a run-rate basis. I've also stated before that that probably has a little bit of risk to it given that the model is obviously highly dependent, still, on that direct sales and marketing team that's in the field given that it's still very much a missionary sales process.

In the fourth quarter, no doubt you got some leverage. You had, obviously, significant increase in sales volume relative to the headcount that we have as a team and because it's such a variable cost element for us you obviously get some leverage as the sales go up that way. The run-rate in 2008, as you know we don't forecast costs other than the sales line and the gross margin for the year so I'm not going to give you a direct number. Do I believe that we'll make some continuous improvement in '08 and in '09 to get towards that 25%? Yes. I think that's probably going to happen. We are definitely still going to keep adding account managers and inside sales reps and marketing people to drive the volume of the Company and we stated before that if overall headcount is going to increase 5%, 10% give-or-take in a year, and we don't obviously ever project what that will be one year to the next, you can certainly expect that the sales and marketing team would increase a fair amount larger than that, probably not at the full 25% growth target that we've laid out there, the top end of the range, but you might see it increase 17% or 18% to go along with it.

So I'm not going to give you an exact percentage for 2008 but you know the number, the target, for run-rate at the end of '09 and, like I said, we obviously -- the goal is to make moderate, continuing improvement along the way.

Thank you. You mentioned on the call that R&D was still being influenced by spending related to the third quarter new product introductions. Moving into '08, do you expect R&D on an absolute dollar basis to plateau given the fact that you completed those two major products or should we see -- continue to track fairly steady as a percent of revenues?

Yes. I think continued growth is the right way to look at it. We've historically run in the 5% to 7% range and we still feel that's the appropriate range for the Company. Obviously, the last year and one-half or so it's been much closer to the 5% mark and has even been a little bit below that. So as sales continue to increase, with a goal of staying within the 5% to 7% range, obviously the absolute dollar would go up with it.

Could you also talk about the tax rate that we might look at? Again, with the normalized tax rate of 18%, should we assume that that should have an upward bias as the Company becomes more profitable worldwide?

Right. Our effective tax rate depends on the particular region's sales and profitability at any particular quarter but going forward I would anticipate a range in the 18% to 22% area.

And a final question, if I may, on the cash flow statement there's a line that said the effective exchange rates on cash and equivalents and it was a minus $5 million number. Could you discuss the dynamics of how that is created and the significance of it say to the P&L?

Well, it's basically -- instead of just taking the difference between balance sheets at any endpoint dates, we really have to consider the effect of the foreign exchange rates on those balance sheets as well. So you could have situations where just looking at year-over-year changes on the balance sheet will result in one number when, in fact, there is foreign exchange effects built into the changes in the balance sheet and when you do that that's basically where that FX effect on cash number falls through.

Thank you very much.

Jeff Bash, private investor.

With a 15% order growth rate in Q2 and 13% in Q3, the performance for Q4 far exceeded my expectations. Was there, earlier, a holding back on orders waiting for the new products or other factors such as currency devaluation issues that caused this huge shift in the order pattern or anything else you might be able to identify?

I think there's a couple things. Number one, I don't believe there's anything tied to "hold back" on the orders because we were pretty tight-lipped about what -- people knew we were working on a new Arm, particularly they knew we were working on one new Arm. The marketplace had no idea we were working on the lower-cost Arm, as well. But we had given no indication as to when that might come out other than we obsoleted ourselves roughly every five years and we're roughly at the five year mark. So I don't think there was any hold back there.

On the FX side, hard to tell. I would guess, no, only because we're pricing in local currency anyways around the world. So I wouldn't imagine that has too much impact. No question we saw a lot of buy-in in the fourth quarter in the typical pattern of the use-it or lose-it mentality from a CapEx purchasing standpoint and I think that probably drove the bulk of it.

As you know, we had some things in second and third quarter that either from the second quarter had been pulled into the first or from the third had been pushed to the fourth and we sort of anticipated that ramp-up which is why, at the end of the third quarter, we were still very comfortable with what the full-year range was going to look like. But most of it, I really believe, is that traditional use-it or lose-it. The budgets are there and they get into the fourth quarter and say, "Yep, I've still got it. I don't need it for a machine tool. I don't need it for something else and we're going to go ahead and add the equipment we've been talking about for the last six months, four months, depending on the product."

You expressed some concern about the future relative to the US economic situation and there have been comments from companies like Cisco expressing similar concern, yet you didn't lower the guidance. Do you really feel comfortable with the 20% to 25% or you were just reluctant to lower it from a historical pattern or can you add any additional color on that?

Yes. There was not reluctance. I can tell you that. I'm not reluctant to do anything when I know it's the right way to go. So we really believe that that is still the right growth rate. Some of that is the softer side of just dialogue with our existing customers and understanding what they're budgeting for this year. We obviously get a chance to look at that from day one and seeing what they are putting together. No question there was -- in the US in particular there is a little bit of concern when you just look at, generally speaking, subprime, the write-offs, the lower availability of cash and knowing that commercial industrial loan dollars over the last five years have increased almost three-fold, and some of those T&I loans clearly are -- we are the benefit of from smaller customers in particular.

On the flip-side, though, number one we are still unbelievably under-penetrated. We've used this 5% number a lot over the last several years and it's still, at best, 5% penetrated when we look at, again, the SIC codes and we look at the comparable codes over in Europe and when we look at potential customers in Asia. And the signals that they are sending are not that they are going to slow down necessarily on their spending relative to the productivity programs or anything of the like.

And the other thing, of course, is that given that our sales are roughly 40% from the Americas, and not all of that is US-based obviously, but the bulk of it is, and then 60% from Europe and Asia right now which, though they've had -- clearly the Asia economies are still booming, particularly China and India, which we're in both of; European economies, Germany in particular, the growth rate not that different from what they are predicting for industrial output here in the US. But that balancing effect certainly helps.

And I guess the final thing I would look at is that the industrial output in the US - I think they are forecasting about 1.9% this year, and it's similar in Europe for the EU's, it's about 2% there, I think - if you look at that growth and index it over the last, say, four years, it's been relatively the same number over the last four years in both territories and our growth, when you index it against it, has been sizably factors of 10 above that during that time period. So that combination of all those things gives me comfort, Jeff, that the 20% to 25% is still the right way to go.

Good. Now in terms of multiple orders, are you seeing any progress from the, let's say, sort of lack of material progress in the past on that issue because that's really what would drive a lower percentage of selling expense to sales.

Sure. We're seeing them. As a ratio to our overall sales it's still not meaningful. That still will come with time and, quite frankly, as we continue to add more account managers, obviously you are diluting the pool of people out there who are getting new accounts mostly relative to guys who have been around for awhile who are getting some of the repeat orders.

We have some that are -- I'll never say predictable because they are not, but we have some who have been consistent over the last few years of continuing to add and they are picking up multiple units at a time. Certainly we still feel that's going to expand but in terms of being meaningful to the Company today, ratio-wise it's still not meaningful.

And the final question on the FCPA matter, it's public knowledge that Lucent had an FCPA problem which, if you read the public information, seems to have been vastly larger than the Company's yet their penalty is no larger than FARO's provision for its matter, such that I would conclude that if FARO really had to pay what you reserved, it would be patently unfair relative to Lucent. Can you comment on that?

Yes. I can comment shortly, obviously, or briefly. The first thing I'll say is that the cases are very different. And even though the dollars involved are sizably different, the biggest differential - and I can't comment a whole lot further than this given that we're still finalizing this - but what we see in reviewing this with our lawyers and, of course, we've looked at that case, is that the biggest difference in the Lucent case is that though there was a direct benefit being conveyed to the third party, it was not direct cash payments and there is a, unfortunately, there is a significant distinction between those from what we've seen and understand. And that's about as far as I can go with it but based on our review that is, unfortunately, the delta between the two and why the fines may look disproportionate relative to the size.

Thanks again for a great quarter.

Fred Russell, Frederic E. Russell Company.

I don't want to congratulate you on a great quarter because I know that's not the way you run your business but you are doing a great job. Do you see any difference in the nature of your customers and their orders, what they are looking for, what their problems are, how FARO approaches these problems in their marketing pitch or presentation this year versus last year? Do you see any trends? Specifically, do you see that smaller businesses are getting interested in what FARO has to offer versus last year or previous years?

The types of problems that we see and the types of issues that we're solving for the customers haven't changed a whole lot. Obviously, the specific of how, say, somebody at Boeing is using a Tracker versus how a small machine shop is using a Gage, obviously that is very different but the general concept of the time savings or the scrap and re-work reduction between those two and then the ease of use because it's a portable piece of equipment? Those fundamentals really don't change regardless of how they are going to use the product, what the application is, which is great. Because from a training of the sales force standpoint and helping them understand the concept of how to go in and start the problem-solving process, it gives you an easy base line to work off of. So that part hasn't changed a whole lot. It's just a different dynamic of how they're going to use the tools, relative to the specific application.

No question because of the Gage product, in particular, smaller customers definitely are starting to understand the product better and some of that is our marketing, also, as we continue in the US to look at the SIC codes and where we've sold and how many are still available that we've never touched and same thing in Europe with comparable codes and what we do in Asia, no question that smaller companies -- we're starting to get some more traction from them and it is absolutely common for us now to sell equipment to a one-man shop. It happens all the time. Again, particularly machine shops buying a Gage, it happens all the time and it's just as likely to happen as say the Cats and the VW's of the world who are our largest customers, they just have the benefit of having more plants to spread it over which is why they show up as a larger customer than smaller guys.

How much does a Gage cost and when you say smaller customer, what kind of revenue, annual revenue, are you talking about?

Well, we do look at them -- obviously I'm not going to split how we've sold and what the ratio has been but we've got folks who are certainly well under the million dollars of revenue mark for purchasing our equipment. And we've got plenty in that smaller size range that go $1 million to $5 million. And we do look at the SIC codes and break downs that are less than $1 million, $1 million to $5 million, $5 million to about $50 million and then $50 million and up at that point is totally a different ballgame even though still, obviously, a Boeing is going to be much larger than a company with $51 million of revenue.

The average price of the Gage today typically runs about $23,000, it's a little higher when you add accessories. And the biggest driver still for that adoption, there's kind of two things there. One is, obviously hand tools which is the more traditional way to do the job of a Gage, these guys have to have lots of them, they do -- they can break, you drop them and you've got this renewed maintenance on them, things like that. And it can run you several thousand dollars a year just in the replacement or in the maintenance costs alone. And the beauty of the Gage is you're getting all the abilities of those tools and then some in a single package and we do still see a lot of the smaller machine shops, if they are serving upstream to a larger customer, if that customer starts putting demands on them such as, "You need to inspect everything." Or, "Hey, we want to see that this has passed inspection prior to shipping the parts to us." The Gage can do all that electronically and capture it and immediately send it up there and you just can't put enough people with enough hand tools in a facility to go from say a 5% inspection rate to 100% inspection rate and provide all the data ahead of the shipment.

What do you think is a reasonable pay-off on investment rate of return on investment in a typical FARO product. Is it two to three years? Is it shorter?

Yes. It's definitely shorter. What would be typical, if you look at an Arm, five to six months is not uncommon depending on the size of customer. Obviously, a smaller customer may take a little longer, could be 12 months. Flip-side is the pay-back in some respects for smaller customers is that they get to stay in business because they are able to meet that increased inspection demand or the new pressure that's been put on them. Tracker pay-off tends to be a little bit longer, 9 to 12 months is not uncommon there, but we've seen as quick as a couple of shifts sometimes depending on, we've got some auto manufacturers who use the product to measure the stamping die say for doors or something else and, look, it doesn't take many doors that are out of alignment to go down the line and have them figure it out at the end of the line and they've already got 300 doors stamped and pressed and you've more or less paid for the product in one or two shifts at that point so that's an extreme but that's kind of the range we look at.

What do you think might be a catalyst that could accelerate FARO's growth? When could FARO get to the point where the Company is selling to companies and the company realizes that they must buy a FARO just to stay competitive?

God knows I wish I could absolutely predict that. What I visualize happening that will drive the catalyst is, number one, the product will become the standard for not just measurement but it will become a de facto standard that in certain types of manufacturing processes, you just need or want to have a FAROArm or a Gage or a Tracker involved. And the more customers that we get that we have today who take the product and make it a standard part of their manufacturing process, not just an inspection device, and it's still inspecting but you are making it a common piece of the manufacturing process, the more that that happens the more that word of mouth will spread, the more we have that to take out to the other customers who don't use the product yet; and then for the existing ones, at that point they are hooked on it and then they do start ordering in multiple batches. And I've used an example before of a fairly large customer who just picks up the phone now and calls and says, "Send me three more Gages. Send me two more Gages. Send me five more Gages," because they've done exactly that. They have put it -- they have engrained it so deeply into the manufacturing process that they are now at the point where they can't live without it as a piece of the normalized process. It's not just inspecting for certain defects or certain quality elements.

Are there certain industries that would be highly prone, therefore advantageous, to FARO for that automatic de facto standard for that automatic incorporation into the manufacturing process?

I'm not going to pick any one because I think, in my view, they are all applicable. And that's just the marketing of me coming out. Any product that has tight tolerance in its design it absolutely makes sense to have the product and since the bulk of the world has adopted to CAD in their design and newer and younger engineers the last 15 years at least who are coming out of school now design at very, very tight tolerances and all of those have the applicability of an Arm or a Gage or a Tracker.

I want to come down and visit you. I say that because there doesn't seem to be too many people on this phone call so I want to make a personal appeal. You're doing a great job and we have about 100,000 shares so keep up the good work and we'll be talking off line, I hope.

Sounds good. We're happy to host people here and show off what we've got so call the office and we'll get you set up.

Thank you.

Richard Eastman, Robert W. Baird & Company.

Couple of questions for you, is there any dynamic at play here given the fourth quarter level of orders from some of the new products that you've introduced, particularly later in the year? I'm thinking along the lines of higher ASP's or any particular marketing push on new products. But is there anything -- would you attribute any of the fourth quarter strength to that new product flow?

I can't say that -- like I said, the orders that we've gotten are promising because the pick-up, the adoption was pretty quick. I can't say that it's a meaningful piece of the fourth quarter number though, either. So do I think that that bodes well as we go forward? Absolutely. No question about it. But I can't say that it was a significant contributor to the fourth quarter volume.

Is the ASP, I'm thinking in particular on the two Arm products, does the ASP just generally fall in line with kind of an average ASP on products from last year? That they are displacing?

Actually, the Quantum doesn't displace anything because it's so much higher accuracy. So that one relative to, kind of, the bread and butter on the Arm side call, which is the Platinum, the Quantum is a higher price because of the higher accuracy and it's a step [fold] price increase relative to the step fold accuracy increase.

The FusionArm actually is a lower accuracy Arm and so as a result, relative to the Platinum, as a result the price is lower and you're targeting a slightly different manufacturing element there in particular where they still have tight tolerances but they don't need the tolerance of a Platinum or a Quantum so for a slightly lower price you're getting step fold lower accuracy. So in that introduction we actually had one that was higher priced, one that was lower priced relative to the average price.

So we're kind of netting out. And then you ran in '07, I know you don't disclose sales contribution by product line but can you just give us a general sense of how the Scanner -- how much the Scanner is contributing to sales? Has that gained some traction through the year and can that have a material influence on the growth rate going forward?

Yes. Going forward I still certainly believe it's going to have a material influence at some point. It is not necessarily material at this point, though we've had plenty of sales, and I will state that I am extremely pleased -- earlier this year, I think it was the second quarter maybe, I mentioned that we were finally starting to see some take-up of the product that I had been hoping for probably two years prior and it was just my own fault for not realizing how far back in the early adopter stage we were with that product.

We're now starting to see that traction and in some respects the curve is following very similar to the curve we saw with Tracker in the early stages there. It's interesting that they are almost, not quite unit-to-unit, but it's very similar. And that's been a fantastic curve for us in the latter years. So I do believe it's going to add significantly in the coming years. At the moment it's still not meaningful from a materiality standpoint though the growth rate, itself, is meaningful in terms of the adoption and the pick-up even though it's still obviously a much smaller (inaudible).

And that product line, all in with the selling effort and the headcount, would likely not be profitable at the [OP] line?

We've never actually stated whether it's profitable or not at the OP line. What I will say is historically the acquisitions we've made have been break-even within a couple of years and this one I have stated before I think that this one is in that same ballpark.

And then from a backlog perspective, I guess the good news is we didn't work down backlog but I guess that's a little bit of bad news as well because I know you were trying to bring that down. We built some more backlog here in the fourth quarter. Should we think of your order growth rate in '08 also being in the 20% to 25% range or does that backlog give you some cushion in case your orders show some economic sensitivity?

Great question. Number one, yes. In my view, the orders rate should be roughly the same as what the sales rate is. So you could use the same target range there because it's just obviously a direct feed. The 19 in backlog, roughly 19 I think now, in some respects when you look at the ongoing growth we've always said a couple of weeks worth of backlog is probably about right for the business and the reality is we're still pretty close to that actually, even at the 19 when you look at the forward move next year, 20% to 25% growth on top of where we are now. Could it be a little bit of cushion if the orders growth rate was below the sales growth rate? Sure. It could be. But certainly it's not the intent either.

And then just the last question, could you just give us a number as to what currency helped -- benefited you at the sales and orders line?

I'll let Keith walk through that one with you.

Yes. For fiscal '07 it's about 3.5% of sales and roughly about the same.

And was the fourth quarter presumably higher than that?

Yes. The fourth quarter was a little over 5%.

Very good. Thanks, guys.

Jeff Bash, private investor.

I have a follow-up question on your comment to Mr. Russell about selling Gages to one-man shops. I recall you said earlier in the year as well that was your most rapidly growing aspect of your business but if we were to go into an economic downturn, these one-man shops arguably might be financially more vulnerable than large companies. Do you think that increases the cyclical risk of the Company slightly compared to the period before you had the Gage?

No question a significant downturn could obviously impact that group because they are more likely to go out and get financing for their product. I can't say that it's a meaningful enough piece that it would give a -- it would be a hit to the Company or change the nature of the Company in any one quarter. So, yes, I think it's a risk but, again, it's not necessarily a risk to 20% to 25% overall.

Thanks.

(OPERATOR INSTRUCTIONS) Fred Russell, Frederic E. Russell.

I was interested in Mr. Bash's comment and would appreciate it if management could facilitate Mr. Bash's phone number for me because I would like to exchange ideas with another friendly shareholder, friendly to FARO that is, and to me. I do hope that, too. Is that possible? Thank you.

I'd just say if Jeff wants to chime in and give it to you or if he's okay with it I know Jeff posts on some of the message boards, you guys can figure that one out. We're happy to have you guys talking to each other, though.

Thank you.

It appears we have no further questions at this time. I would like to turn the call back over to Jay Freeland.

Thanks again for the call today. Appreciate everybody's interest and the ongoing support. Thanks again for the whole FARO team that's on the phone there. It was a great '07 and now we've got our work cut out for us to make another great year in 2008. So thanks again, everybody. We'll talk to you at the end of the first quarter.

This does conclude today's teleconference. Have a great day. You may disconnect at any time.