FARO Technologies Inc (FARO) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies' conference call in conjunction with its first quarter 2008 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 of the TTC Group, FARO's investor relations firm.

Yesterday after the market closed, FARO released its first quarter results. By now you should have received a copy of the press release. If you have not received the release, please call [Darren Saylor] at 407.333.9911. The 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, Vick, and good morning, everyone.

Sales in the first quarter of 2008 were $46.1 million, a 14.4% increase from $40.3 million in the first quarter of 2007. On a regional basis, first quarter sales in 2008 in the Americas decreased $100,000, or 0.4%, to $19.1 million compared to $19.2 million in the first quarter of 2007. Sales grew 25.9% in Europe to $18.9 million from $15 million in the first quarter of 2007. Sales in the Asia-Pacific region increased 32.8% to $8.1 million from $6.1 million in 2007. The effect of changes and foreign exchange rates on sales was an increase of approximately 6.9%, or $3.2 million, in the first quarter of 2008.

New orders grew 23% in the first quarter of 2008 to approximately $47 million compared to $38.2 million in the first quarter of 2007. On a regional basis, first quarter orders in 2008 in the Americas grew 7% to $18.4 million compared to $17.2 million in the first quarter of 2007. Orders increased 27.6% in Europe to $19.4 million from $15.2 million in the first quarter of 2007. Orders in the Asia-Pacific region increased 58.6% to $9.2 million compared to $5.8 million in the year-ago quarter.

The top five customers by sales volume in the first quarter of 2008 were the Boeing Company, Northrop Grumman, (Inaudible) Computer System, Korea Aerospace Research Institute, and the U.S. Military and represented only 5.4% of sales. The top ten customers in the first quarter of 2008 represented only 8.4% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 60.1% in the first quarter of 2008 compared to 59.2% in the year-ago quarter. This increase was due to an increase in unit sales of product lines with lower unit costs than in the prior-year period as a result of continuing productivity improvements.

Selling expenses were 31.3% of sales in the first quarter of 2008 compared to 30.5% in the year-ago quarter, primarily due to an increase in sales and marketing personnel.

Administrative expenses in the first quarter of 2008 were 12.2% of sales compared to 12.5% in the first quarter of 2007. General and administrative expenses in the first quarter of 2008 increased by $600,000, primarily related to increased compensation costs and costs related to additional leased space, offset by a reduction of professional fees related to the FCPA matter and patent litigation.

Research and development expenses were $2.7 million for the first quarter of 2008, or 5.9% of sales, compared to $2 million, or 4.9% of sales, in the first quarter of 2007. The increase is primarily related to compensation expense and reflects the Company's continued investment in new growth platforms.

Operating margin for the first quarter of 2008 was 8.5% compared to 8.6% in the year-ago quarter as a result of the previously mentioned increase in gross margin, offset by slightly higher selling and administrative expenses.

The first quarter of 2008 also included an accrual for interest expense of approximately $400,000 associated with the Company's FCPA resolution.

Income tax expense was $900,000 for the first quarter of 2008 compared to $800,000 in the first quarter of 2007. The Company's effective tax rate for the first quarter of 2008 increased to 21.8% compared to 20.5% for the first quarter of 2007, primarily as a result of an increase in taxable income in jurisdictions with higher tax rates.

Net income was $3.4 million, or $0.20 per share, in the first quarter of 2008 compared to $3.2 million, or $0.22 per share, in the first quarter of 2007, marking our twenty-third consecutive profitable quarter.

The number of fully diluted shares outstanding in first quarter of 2008 was 16.7 million compared to 14.7 million in the first quarter of 2007. The increase of approximately 2 million shares is primarily related to the sale of 1.65 million shares of common stock in the Company's registered direct offering in August 2007 and the exercise of stock options by employees throughout 2007.

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

Cash and short-term investments were $102.6 million at March 29, 2008 compared to $103.2 million at December 31, 2007. Accounts receivable was $48.1 million at March 29, 2008 compared to $54.8 million at December 31, 2007. Day sales outstanding at March 29, 2008 increased to 95 days from 84 at December 31, 2007, primarily as a result of an increase in international sales. Inventories increased to $49 million at March 29, 2008 from $40 million at December 31, 2007. This increase in inventories was primarily related to an increase in raw materials and finished goods investments.

Finally, I'll conclude with some statistics regarding our headcount numbers. We had 825 employees at March 29, 2008 compared to 780 at December 31, 2007, an increase of 45, or 5.8%. Account manager headcount increased from 149 at December 31, 2007 to 160 at March 29, 2008, with 54 of the account managers in the Americas, 58 account managers in Europe, and 48 account managers in Asia. Geographically, we now have 389 employees in the Americas, 264 employees in Europe, and 172 employees in the Asia-Pacific region.

I will now hand the call over to Jay.

Thanks, Keith. Growth in the first quarter maintained the same strength we've been seeing over the last two years, with orders increasing 23%. Asian growth, at 58%, led the way, with solid performance from Europe as well. No doubt, growth in the Americas was slower than usual, at 7%, but we continue to see all the right signals from customers in all three regions. One of the ongoing benefits as we get bigger and more geographically disbursed is our ability to maintain our overall growth objectives, even when the performance in the individual regions varies. Certainly, that was the case in the first quarter. In total, this remains an extremely under-penetrated market opportunity, and we continue to lead the charge in growing the space.

Sales grew less than we had planned in the first quarter, driven by a large influx of orders near the end of the quarter which had customer-defined delivery requirements in April. Had those delivery dates been designated March instead of April, our sales growth would have been more closely aligned to our full-year projection. Regardless of the quarterly fluctuation, our sales guidance of 20% to 25% growth remains realistic and continues to be our guidance for the year.

Make no mistake, current economic conditions around the world remain a concern, particularly in the U.S. However, when you consider our orders growth in the first quarter, what we have in our pipeline, and what we hear from our customers, we believe that our full-year target remains achievable.

One of the concerns people raised with me at the start of the year was whether or not we could maintain our historical growth rate in this economic environment without sacrificing price. However, our first quarter gross margin of 60.1% is a pretty good indicator that this should not be a major concern. Our solutions offer significant increases in productivity and are valuable to our customers, regardless of economic conditions. Customer ROI relative to the price they pay for our products continues to be extremely strong for those who adopt our technology. As a result, we see no reason to change our previously issued 2008 gross margin guidance of 58% to 60%.

I continue to be encouraged by our internal research and development activities, and our product releases from the last four quarters have proven to be well received in the field. However, and as you know, I also believe there are opportunities from external R&D in the form of acquisitions, particularly in the areas of non-contact measurement and software.

Last night, we made a very exciting move in this regard. As announced in our press release, FARO has acquired global technology rights from Dimensional Photonics International for industrial and manufacturing applications. DPI is a leader in high-speed, high-accuracy, digital-shape scanners. Their technology is unique and well protected. In a nutshell, DPI utilizes a combination of lasers and cameras to create extremely accurate 3-D renderings of objects being measured. We've looked at a lot of similar non-contact technology over the last 12 months, and this is by far the best one out there. The stated accuracy for the DPI product is 25 microns; however, it has performed far better than that. The accuracy range is at least equal to our current world-class Arm technology. However, unlike an Arm, it achieves that level of accuracy without making any contact with the object it is measuring. Though it uses lasers and the natural surface reflections of the object being measured, DPI's technology is very different from our existing non-contact technology. Our existing laser scanner, LS, is used for capturing huge volumes of data at high speed. DPI's technology is far more accurate but, for example, is not meant to digitize and measure the volume of an entire room or facility, which we are capable of doing with ERS. The current (inaudible), or LLP, is also not as accurate as the DPI product, but it's currently far more portable for the end user.

With over 20 current and pending patents and a strong relationship with the Massachusetts Institute of Technology, acquiring these rights presents a great opportunity for FARO. It is also very similar to outright acquisitions we've done in the past - a small company with great technology but in need of market presence, manufacturing capacity, and ongoing research and development resources.

We'll be using a third party for production in the near term but also anticipate bringing that function in house at the appropriate time. DPI's current product is similar to FARO's current products from the standpoint that it is a final assembly process and requires minimal plant and equipment expense. At this time, we anticipate that assembly can be managed at one of our existing facilities once we make the move to bring production in house.

Specific terms of the deal were not announced, but I'll tell you that it involves an up-front cash payment and an ongoing royalty stream with a well-defined ending. As stated in our press release, we will establish a new technology center of excellence outside of Boston to add the resources required for our planned development efforts. We already have several specific development projects identified, which we will start work on as soon as the technology transfer process is complete. Job postings for our initial R&D team will be available by the end of the week, and recruiting will kick off simultaneously.

This transaction represents an extremely exciting growth opportunity for FARO. DPI's technology fits with our core mission and vision for the Company while maintaining good barriers to entry in the marketplace. It also ties extremely well to the measurement and optical expertise we already possess. There are significant opportunities we've identified from an R&D standpoint to change the game in how the technology's applied, and I look forward to providing additional updates as we go forward.

Finally, we're still putting a few legal matters behind us. We entered into a memorandum of understanding in the first quarter to settle the class action matter. This settlement was fully covered by our directors' and officers' insurance policy and is currently in the procedural steps of court approval. With regard to the Foreign Corrupt Practices Act matter, it is important to note that we have executed settlement agreements with both the U.S. Department of Justice and the U.S. Securities and Exchange Commission and are waiting for their formal approval. We expect this to occur shortly. We'll conclude the investigative portion of the matter.

As previously disclosed, resolution of the matter includes a monitoring obligation in connection with FCPA compliance for two years, starting with the final resolution. Our preliminary estimate of the total cost of the monitor is between approximately $1 million and $2 million. However, because the scope of the monitoring obligation has not yet been determined and the outside monitoring firm has not yet been selected, the actual costs incurred may vary from that preliminary estimate.

In summary, and to wrap up Q1, we are maintaining our 2008 forecast guidance range of 20% to 25% growth in sales and gross margin of 58% to 60%. We will continue our practice of guiding to those numbers only, and we'll, as always, provide updates on our progress towards those targets at the end of each quarter.

My thanks go out to the global FARO team, our customers, and our investors. This continues to be an exciting growth company with tremendous prospects, and I look forward to our ongoing success. I appreciate your attention, and I will now open the call to questions.

(OPERATOR INSTRUCTIONS). We'll take a question from the site of Mark Jordan of [Global Financial].

A question relative, initially, to selling expense. Obviously, over 31% is fairly high here. You're continuing, also, to add to your sales force. Where do you--? Where will that selling expense as a ratio of sales potentially go this year? And do you still think that your longer-term target should be 25% of sales?

Yes. I still believe the long-term target of being about 25% of sales is correct. As we've talked about before, we certainly won't short change growth, if it needs to be a little higher than that. But I still think that's the right target. No doubt, we spent a little more in raw dollars in the first quarter than we did in the year-ago quarter. Obviously, that's related to increased heads. If you look at the percentage relative to the first quarter, and, quite frankly, from many of our expenses in the first quarter, on a pure percentage basis, if that incremental shipment volume had actually gone through-- If we hadn't had all those delivery dates set for April, the percentages actually would have been, obviously, much more in line with where we anticipate the continued declines being. So, over the year-- We don't forecast, obviously, expenses below the gross margin line. But, certainly at 31.5%, you would expect to see that coming down, because we still feel that the long-term goal of 25% is appropriate.

In looking at Dimensional's Website, is it correct then--? You are getting the products that they have that do not include the dental arena?

Correct. The most important current product is the AFI-5000. There is a digital shaped scanner as well that is part of the package. What we get rights to is all of the technology, regardless of the application, so we are not going to be selling into the dental market. That is not part of the rights. But we do have rights to all the technology associated with that equipment, as well as what they currently have today. So, when you think about ongoing R&D, all of those are available to us as we start working the platform.

Just looking at Dimensional's strategy, did they just make a decision that they could not effectively address this side of the marketplace and decided to use the funds that you'll be paying them as the funds that you'll be paying them as to fund the development of their business in the dental market.

Yes. I certainly don't want to speak directly for their CEO, but they have definitely made the decision that the focus on industrial is better served by somebody who has that presence, like FARO.

And could you give us some sense of-- You mentioned that this will have a negative drag of performance; Clearly, you'll be more in a start up, R&D type mode. Could you tell us what incremental R&D this might require over the next-- through '08 and '09?

Yes. Ob, it's hard to predict perfectly. But let me just give you a couple of thoughts there. On the areas that we do forecast, that being sales and gross margin, we don't anticipate this having a significant impact on those two lines over the course of '08 and possibly even in '09, though we ob-- we have a product that's immediately sellable, and we'll be working on a couple of these R&D opportunities we've identified, which I think have some leverage from a speed standpoint, which is a good thing. Obviously, the bulk of you expense on a venture like this is going to be R&D. I do still believe that all of the expenditures that we make will fit within the 5% to 7% R&D range that we've consistently targeted as our goal over the long haul. So that gives you a flavor for where we think that will go. And the other thing I'll be open with, because you're going to see the postings on Friday anyways, is that we anticipate immediately posting five to six positions for that team, and then you would expect to see some incremental adds after that as we get the ball moving. But, again, all within that 5% to 7% of sales range.

Okay. Could you talk about the technology itself? How far does the range that this technology is effective in terms of--? Is it a--? It has a 12-foot diameter. What is the range that this technology would have?

This is one of the things that's very exciting about the uniqueness of how VPI has created the product. By utilizing lasers to create-- Essentially, they're creating fringes. It's according to fringe technology. And these fringes-- You're measuring the distances across the fringe as they move. The beauty of laser versus traditional white light applications and things like that is that the laser is in focus to infinity. So, from an accuracy standpoint, you can go, literally, to infinity. And as long as you have the camera to capture the image at that distance, you have the ability to still take that same measurement and create relatively high accuracy measurements. And the same way, you can go, obviously, much, much smaller with that in terms of the field of view. So, the key there is that, yes, it's scalable in either direction. And that does open up a significant number of new opportunities for us in terms of how we measure and how our customers measure in the marketplace, both very close to the object as well as further away from the object that is being analyzed.

Does this cannibalize any of your existing products, or is this truly complementary?

It is certainly complementary today. Over time, could it continue to be used in some of the work that we do today with, say, and LLP or even with an Arm? Maybe? That's really hard to predict. As we use the technology right now and, certainly, as we're planning to utilize it, it is a different application from how you would use an Arm or a gauge and certainly different from how you'd use a laser scanner or a laser tracker. But the tool box of what it brings to us and all of that optical expertise meshed with some of the existing products we have today, that creates a significant opportunity going forward as well.

Is this a similar technology to what Metris does, I guess, as a U.K. company?

Metris has multiple divisions. They're actually a Belgian company. They have multiple divisions. And this is similar to other types of-- Again, I use the word white light technologies that are out there. And there are other technologies out there that use cameras associated with another object that creates a pattern to pick up the image but is unique in-- Again, that's why they have such good patent protection. It's very unique in terms of how it's applied. So I'll say it's only similar in general concept to some of the others that are out there.

Okay. So you think you have a real technological leadership or barrier here?

I really do. In particular, again, it's the accuracy associated with it that makes a significant difference from any of the others that are out there that are nowhere close.

Okay. One last question. You obviously added a number of heads on the marketing side here in the first quarter. I guess that, from your standpoint, is an endorsement of the fact that you truly see 20%-plus growth opportunity in this business here this year.

No question.

Okay. Thank you.

We'll move next to the site of Rob Mason of R.W. Baird.

Yes. Jay, would you be able to walk through the order trends as you went through the first quarter? Again, the North America growth is minimal. I was just curious how your various geographies kind of progressed through the quarter.

Yes. Generally speaking, the pattern's not dissimilar to what we've typically seen, first off, where you get roughly 40% or 50% of your activity occurs in the first month, and then the other 50% to 60% occurs that final month. And it's really a question of how late in the month it occurs. Europe and Asia followed the pattern pretty closely, generally speaking. The Americas, no question, though the market is still there-- When you look at the pipeline in the Americas, it's fantastic. And when you listen to what the customers are talking about, it still feels like it always has. No doubt, though, that the current situation, and I think even some of just the general press activity, creates that near-term panic. And what it does is it causes people to sit on their hands, and they wait as long as they possibly can. And we certainly saw that-- From those who placed orders in the Americas in the first quarter, they were waiting as long as they possibly could. And, no doubt, it caused many of them to just sit on their hands going into the second quarter, waiting to see the additional turns or the additional signs. So Europe and Asia, I anticipate, continuing to be very, very strong through the year. The Americas-- I think everybody would agree that we're going to see-- that it's a tougher market right now. The opportunity hasn't changed. I think you'll see it free up again as you get in-- certainly, if not in the second quarter, as you're into the third and fourth. But, again, that's a little bit hard to predict also, because they aren't-- Most of the customers aren't giving any signals that are other than the fact that they're sitting on their hands in the current environment.

Do we anticipate-- Obviously, the growth target we've kept the same for the whole year. Is it possible that Europe and Asia would be generating more of that than the Americas? Certainly it's possible. Obviously, we did in the first quarter. But, again, I think that's the benefit of being at this size now and being fairly well disbursed geographically.

Are your customers in North America needing more signatures or approvals on their purchases, or are they just waiting?

I can't say that it's that. I think it's more just waiting. And, like I said, the need for productivity-- that hasn't changed. If anything, it's accelerated with some of our customers. It's more just the waiting.

Was it in any particular industry sectors that you noticed it being pronounced?

I can't say there were any sectors that were more visible than others.

Okay. And then maybe just to close there, have you sensed that the tax incentives in the U.S. are likely to have any impact on your sales as you go through the year?

I think it's too early to tell. Again, a lot of our product, because it's such a relatively low price-- When you look at other investments that companies make, it's hard to predict that that would actually have a swing on a $50,000 or $60,000 item.

Okay. And, just to the extent that your shipments-- you had some shipments that got requested for later deliveries. Did the Easter holiday have any impact? I'm mainly thinking Europe there.

It's funny. It did have a little bit of an impact in Europe. Obviously, it was earlier this year, and to Europeans, traditionally, that's a very important holiday. And you see significant holiday time around that. So we did see a little bit of impact there. I think a lot of it is just, again, sitting on the hands.

Okay. And then just on the FCPA situation, it sounds like we're nearing closure there. Are you confident that the reserve that you took last year is adequate to cover the penalty that will be due?

Yes. We believe the reserve is still appropriate, and the interest that has now obviously been booked, given the amount of time it took to go from start to closure, and, obviously, that number was taken quite specifically from them as we signed the document. So we do believe that that covers it before we start incurring the monitor costs.

Okay. And then, just real quickly on DPI, what is the length of the license agreement that you've signed?

Obviously, it runs length of patents. And you've got a combination of patents that have been there for a while, as well as patents that run-- Given you have some that are pending, obviously, it's going to run quite a long time. So it's tied to the length of the patent.

Okay. Is the form factor of the product optimized right now for the markets you intend to sell to?

Form factor, as it stands today, is good. Is it ideal? Certainly not. We see a lot of opportunity there. But it is absolutely sellable in the form that it's in today, and there are-- The customers they've sold to are a direct overlap-- Virtually all of them are a direct overlap with customers that we already have. So we've actually seen this technology for a little while. And we have, obviously, multiple customers who are aware of it.

The other thing that-- Let me backtrack for one second, Rob, too. When you look at life of the license agreement, and I mentioned, obviously, we have some of the patents still pending. And those would obviously run along time. The life of the royalty stream does not run the length of the pending patents that are getting ready to come. It is significantly shorter than that. That is tied to a specific end date on patents that are already in existence. And it's a significantly shorter time period.

Okay. I see. Thank you.

We'll move next to the site of Mr. Jeff Bash.

Hi, Jay. I did a study which sort of suggests that the stronger the fourth quarter is the weaker the first quarter tends to be-- over the last five years anyway. And that seems to have some logic to it in that, if the customers really go hog wild in the fourth quarter, they may be integrating the product before they place new orders. As such, it conceptually would suggest that, if you billed backlog in the fourth quarter and you built $6 million in the fourth quarter 2007, it would be a prudent operational strategy to try and work down that backlog in the first quarter and avoid or, let's say, level out the sales a little bit. Why wasn't that done?

Well, there's a couple of things. Fundamentally, you're correct. You do-- The easy answer is to say, of course, always, the first quarter orders suffer a little because you've pulled a lot into the fourth quarter, because that's how customers buy. And, certainly, there's some truth to that. Though, obviously, there's still a little bit-- You can't doubt-- Particularly, in the U.S., there's some recessionary issue there too that's forcing customers to sit on their hands. From a new business standpoint, though, I think, generally, you're correct. When you look at the backlog though, no doubt we built up in the fourth quarter. We went into the first quarter with roughly, give or take, three weeks worth of backlog. And we typically try to hold it at two. As the Company's gotten bigger, we have seen that starting to-- three weeks worth of backlog versus two. As the Company's gotten bigger, we've seen that creep up a little bit. And the reality is, when you look at the first quarter, more or less, you're flushing out all of the backlog from yearend, which we did. All of that was shipped in the first quarter. Most of it goes that first month. And what you end up seeing though is you get into the final few weeks of the next quarter. A lot of the customers are still holding the delivery dates for the next-- It's almost a wash effect, unfortunately. I still believe that we should be trying to optimize down to a couple of weeks worth of sales in backlog. But, you know, again, it's because the Company's growing so fast. It's hard to say is that exactly the right number, or is it going to end up being closer to 3 as you go-- or 3.5-- who knows, going into the next quarter? It's a catch 22. You love having backlog because it guarantees some of your shipment load for the next quarter. At the same time, I hate having backlog because we have a standard product. You want to be able to ship it all as it comes in. It's really a matter of how the customer behavior is patterning.

You apparently did build backlog by another $1 million in the first quarter, since orders were $1 million more than sales.

Yes. I mean, generally speaking, it's probably close to that. We don't disclose backlog in the quarters; only at yearend. But you're right. When you look at it and say, Well, you flushed out all of your fourth quarter backlog as you went into the first quarter, and then you don't have the comparable shipment rate relative to what the orders look like, you must have built some backlog in the second quarter. They're in the first quarter, or even in the second quarter. You're absolutely right.

With respect to--? You were asked before about where the slowdown in the Americas occurred. I raised on the last call the issue of possibly your greater focus on gauge in recent quarters might make that a likely candidate for a larger slowdown in orders than elsewhere, because it's a smaller and more vulnerable customer. Did you see any of that in the first quarter?

I can't say that we did, actually. Gauge is still the best growth product that we have. It has been for multiple quarters, as you know. I used to say it was obvious because it was coming off such a small installed base. It's obviously a pretty good installed base now. There's just that much opportunity for the product out there.

Good. Now, in DPI, apparently you're not acquiring the right to use it for dental uses. But, if by chance you wanted to develop a medical application with the technology, and I can think of one, would you have the right to do so, or are you limited just to industrial applications?

It's a broad cut of industrial and manufacturing applications. Medical and dental is not one of them. So, from an application standpoint, we will not go after that market with it. But the technology itself, in any way and any shape or form, if there's a way to utilize it in our applications, even though it might be a dental-looking product or a dental feel, that we do have the rights to. So when you think about, again, from an R&D standpoint, there are lots of applications on the industrial manufacturing side where you could use varieties of all the products we currently have.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). We'll move next to the site of Mr. Rick D'Auteuil of Columbia Management.

I just have a couple of quick ones. You stated that some of the shipments that you had hoped to get out in March went out in April. Can you conform they did, in fact, go out in April, or have there been further push-outs?

I won't confirm that they did or not go out in April, but our track record has always been whatever backlog we had at the end of the previous quarter is gone the first month of the next quarter.

Okay. And then, secondly, just on the balance sheet, the cash, with a lot of companies announcing that they learn after the fact their cash wasn't in the safest pockets, can you tell us what the short-term investments are in right now?

Yes. I'm going to let Keith talk to that because it's an important question that we obviously have looked a lot at to make sure we have the safety and security we're looking for there. So, Keith, why don't you talk to that one.

Primarily, our cash in invested in what are called variable-rate demand bonds. I know-- Typically, they're called weekly floaters. These are bought and sold at par. They're backed by a letter of credit from our bank. They're variable maturities. They're municipal, tax-exempt bonds with varying maturities. But we do have a put feature that allows us to sell our bonds back to the bank within five business days' notice. So they're classified at short term, and they're carried at par.

The put feature allows you to sell them back at par?

Yes.

Okay. So there's really no vulnerability to principal.

That's right, unlike a lot of what you see out there, particularly with-- Obviously, there's a lot fewer right now over variable-rate bonds. We obviously are not in that situation, which is significant. The auction-rate securities - we're not in that market at all.

And maybe-- Obviously, rates have come down. So where would you expect interest income to drop? Or maybe another way to look at it - What kind of yield were you getting on the portfolio versus what you're seeing right now?

Roughly, tax-exempt, so it was somewhere between 2.2 and 2.5. What you project for the year depends on how much we utilize the cash or investments and acquisitions and that sort of thing.

Generally speaking, as you probably can tell based on where we have everything parked, our investment philosophy is we're not really trying to make money off the dollars as they sit there. All we want is the safety. We want to use the dollars for things that we can make productive from our own business standpoint.

But, I guess, a quarter ago-- Was that 2.2 to 2.5 something like 3.5?

Yes; it was a little higher.

Okay. That's all I have. Thanks.

We'll move next to the site of Frederic Russell. Go ahead please.

I'm a little confused and a little perplexed about your short-term strategy. If you want to be the safest, why not treasury obligations? It would seem to me, in line with my comments too, that to say that there's no risk in putting back a security to a bank is horribly naive in today's market. And I'd like to know, third, please - What kind of differential do you take-- does FARO take for getting-- What kind of return to you get beyond a treasury obligation with all these complications?

First of all, they are backed by a letter of credit. We do have the ability to put them back within five days. We have been in this weekly floaters for about five years or so. And currently we have not experienced, nor has our bank experienced, any issues with regards to liquidity or credit. With regards to interest rate differentials, as I said, we're receiving roughly 2.2 to 2.5 tax exempt on this municipals versus treasuries have been fluctuating, as you know, for the past quarter all over the map.

I understand that. I'm not trying to micromanage your business. But as a shareholder with a substantial position, it seems to be complacent to say that this has been a practice for five years without problems. The mortgage-backed security market didn't experience problems until-- It's been going on for years and years, and all of a sudden there were problems. And to say that a letter of credit-- to imply is the same thing as a treasury obligation is just not accurate.

And, certainly, you should not read it as complacent either. I mean, obviously we actively review this and manage it on a regular basis. We have looked at it recently, and we do still feel that that is still a comfortable position for us to be in.

I have no questions, except that, to say that there is no risk, doesn't suggest a great deal of respect for the intelligence of our shareholders.

I don't think we said there's no risk. There's risk in everything we do, obviously. We're trying to minimize risk, and I didn't say we were trying to get it in the absolute safest spot. The goal is to have it safe and to have the minimal risk we possibly can. We don't-- Obviously, everything in life has risk, and, certainly, these are in the same boat.

I have no other questions. Thank you.

We have a follow-up question from Mark Jordan of Global Financial.

Good morning again. I guess, Jay, I'm curious as to how you are going to market this - what specific marketing resources you're going to put behind the Dimensional product line in 2008?

Certainly, the existing product line is what we anticipate selling in 2008. Given that we have exposure to it already in some of our customer accounts that we're already in and then we have great coverage out there, the intent is not to set up a separate sales force. It is our intent to utilize the guys that we already have out there to make sure they are trained and up to speed on the capability of the product. From a marketing standpoint, it will be focused on where we see the best application. Certainly, not every one of our applications-- Every one of our customers is not a perfect fit for it. We're going to do some cherry picking and going after the ones that we think have the best opportunity, first. Because, also, some of that is part of the learning process when we discern from a customer standpoint how they're using it, what the needs are. We can sharing. We have some that we are very close to that, under NDA, we can start sharing ideas on where it goes. That helps feed the R&D process as well, and that's why I said earlier that we don't anticipate having a significant impact, at least this year, certainly, either on the top line or gross margin line either. Yes, I think we'll get some sales of the product in 2008. It won't be material to the results, but it will be material to how it helps drive some of the development activity going forward.

And just initially you said that you were going to focus on specific applications. Where do you think are the hot points for this product today?

Certainly, we've seen it in the aerospace side, and we've seen it in the automotive side - not a surprise. Those are two markets we're already in and, obviously, have great coverage in. But when you look at how it's been used so far, those are good applications today. Where they need very high accuracy but it covers more than just what an Arm can do, which is obviously high accuracy too-- more than what a LLP can do because it's lower accuracy for inspection of larger surface areas at decent-sized volume at the actual level that they come to. So those-- You think about-- Feel the view - 500 millimeters give or take. You're looking at a couple of feet patches at a time. Those are-- That opens up a significant door to do a couple of feet on a LLP or an Arm with measurement points across the entire three-dimensional surface, which certainly takes some time.

So I think [unintelligible] that's certainly where we see the opportunity. There may be some in the heavier manufacturing as well, where you're not talking about high-speed manufacturing process but more one-off, like the aerospace side is. That's where we see the early stage use.

Final question. What would be an ASP of one of the 5000s?

I can't state that there's been a good standard out there, just because it's a relatively low-volume product today. What I will do is we will update you on that when we get it at the end of the second quarter here and we started putting it out to market. Then I'll give you a feel for where we've priced it and whether it's taking or not. We have a good feel of what we think the price should be. I just want to get comfortable with that when we put it out and get a little traction first.

Thank you.

And we have a follow-up question from Mr. Jeff Bash.

Jay, you've talked in the past about how-- maybe even this call-- that the market's perhaps 5% penetrated and that's despite the fact that sales have been growing rapidly. This number doesn't really change, which is fantastic. But what do you think it takes to get 30% or 40% penetrated? I guess there's two questions here. Do you think the estimates of the total market opportunity are really realistic? And what kinds of things do you need to do-- need to happen in a market for this to be realized, which would suggest much more rapid growth at some point in the future.

Right. Number one, I do still believe that it's 5% penetrated. And I used a couple of these stats in calls before and on the annual report too - that 15 or 16 countries' direct presence today and there's 260 some odd-- Not all of them are a perfect fit for our product, but, certainly, many of them are. (Inaudible) in the U.S. is 5.9 million customers, and we've sold 3,000 of them. Even if only half those customers were appropriate for us from a manufacturing standpoint, you're still at 3,000 out of 3 million. And the data's still similar for Europe and similar for Asia too. In fact, we look at Asia and look at the number of-- If you do a cut based on number of manufacturing locations, just that space alone, you've got a lot of U.S. and European countries that manufacture over there. The ratio swings even higher in terms of the opportunity there.

What does it take to get to 30% or 40%? Well, the easy route, of course, is over time, no doubt we get there. What's it take to accelerate that? Well, some of it is as you continue to add people-- You know, if you accelerated the number of feet on the street, that would be an easy answer. We all know that it's not the ideal model going forward. You want a balance of people on the street as well as other channels. I do believe technology like what we just picked up here at DPI in terms of how it can be applied going forward has the opportunity to sell through other channels beyond just a direct sales force. And that's not to say our direct folks can't sell it either.

I think when you look at some of the R&D work that we're going to do on it, it does create, in some respects, the opportunity for a new model. We are selling through other parties that happen to be the actual end driver that the customer's buying from. And I think there'll be some opportunity like that with the products going forward.

The gauge is a great example too. Gauge is a very accurate product and certainly the simplest and easiest to use. We actually had a Gauge sale very recently that was purely-- A person went online and saw the online demo and bought without even coming in. And that was a new customer. We certainly get business today with customers who are existing customers, and they don't need the demo because they already know it. Getting a guy to come in and buy it sight unseen just from watching an online video of how it works, that's a great step in the right direction, not going to happen overnight. But certainly the more things like that happen, the better that acceleration occurs too. So now the difficult part, of course, is always predicting when that occurs.

We're doing a lot of things right now to try and drive other channels and other ways to market. Does it happen in four to five years? Does it happen in two years? Does it take seven years? That's still the $100,000 question. But we're certainly making the efforts to try and drive the market in that direction.

Okay. Thanks.

And it appears that we have no further questions at this time. I'll turn the program back over to Mr. Freeland.

Very good. Well, again, I just want to thank everybody for your ongoing support, and we look forward to updating you again at the end of the second quarter. So thank you very much everybody.

This concludes our conference call for today. You may now disconnect your lines, and, everyone, have a great day.