FARO Technologies Inc (FARO) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies' Conference Call in conjunction with its second quarter 2010 earnings release.

For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead, sir.

Thank you, and good morning, everyone. My name is Vic Allgeier, the TTC Group, FARO's investor relations firm.

Yesterday after the market closed, FARO released its second quarter results. By now, you should have received a copy of the press release. If you have not received a release, please call [Nancy Setteducati] 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'll now turn the call over to Keith.

Thank you, Vic, and good morning, everyone.

Sales in the second quarter of 2010 were $45.7 million, a 32.4% increase from $34.6 million from the second quarter of 2009.

On a regional basis, second quarter sales in 2010 in the Americas increased $4.1 million, or 33.7%, to $16.4 million, compared to $12.3 million in the second quarter of 2009.

Sales increased 19.9% in Europe to $18.1 million from $15.1 million in the second quarter of 2009.

Sales in the Asia Pacific region increased 56.7% to $11.2 million from $7.2 million in the second quarter of 2009.

The effect of changes in foreign exchange rates on sales was a decrease of approximately $1.1 million in the second quarter of 2010 compared to the second quarter of 2009.

New orders increased 24% in the second quarter of 2010 to approximately $43.9 million compared to approximately $35.4 million in the second quarter of 2009.

On a regional basis, second quarter orders in 2010 in the Americas increased 22.1% to $14.9 million compared to $12.2 million in the second quarter of 2009.

Orders increased 21.2% in Europe to $18.3 million from $15.1 million in the second quarter of 2009.

Orders in the Asia Pacific region increased 32.1% to $10.7 million compared to $8.1 million in the year-ago quarter.

The top five customers by sales volume in the second quarter of 2010 were Advanced Integration Technologies, IHI, Global Tooling Systems, Westinghouse Electric, and Daimler AG, and represented only 3.3% of sales.

The top 10 customers in the first quarter of 2010 represented only 5.5% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 59.3% in the second quarter of 2010 compared to 56.1% in the year-ago quarter. This increase was primarily due to a change in the sales mix between higher-margin product sales and lower-margin service revenue resulting from an increase in higher-margin product sales.

As a percentage of sales, selling expenses decreased to 26.3% of sales in the second quarter of 2010 compared to 35.1% in the year-ago quarter.

Selling expenses declined by $100,000 to $12 million in the second quarter of 2010 from $12.1 million in the second quarter of 2009.

As a percentage of sales, administrative expenses were 13.2% of sales in the second quarter of 2010 compared to 17.8% in the second quarter of 2009.

Administrative expenses in the second quarter of 2010 decreased by $100,000 to $6 million from $6.1 million in the second quarter of 2009 primarily as a result of a decrease in compensation costs of $200,000 and training and recruiting costs of $100,000, offset by an increase in professional and legal fees of $200,000 primarily related to patent litigation.

Research and development expenses were $3 million for the second quarter of 2010, or 6.6% of sales, compared to $3.3 million, or 9.5% of sales, in the second quarter of 2009. The decrease was primarily related to a decrease in compensation costs and subcontractors' expenses.

Operating margin for the second quarter of 2010 was 9.9% compared to a negative margin of 10.3% in the year-ago quarter as a result of the previously mentioned increase in sales and gross margin.

Foreign currency transaction losses were $1.8 million in the second quarter of 2010 compared to a gain of $800,000 in the second quarter of 2009 primarily as a result of the effects of the decline in the euro on the value of the intercompany account balances with the company's European subsidiary.

Income tax expense increased to $900,000 for the second quarter of 2010 compared to a benefit of $600,000 in the second quarter of 2009 due to an increase in pretax income.

The Company's effective tax rate for the second quarter of 2010 was 32.1% compared to a benefit of 22.2% for the second quarter of 2009 primarily as a result of an increase in taxable income and jurisdictions with higher tax rates.

Net income increased by $3.9 million to $1.8 million, or $0.11 per share, in the second quarter of 2010 compared to a net loss of $2.1 million, or $0.13 per share, in the second quarter of 2009.

The number of fully diluted shares outstanding in the second quarter of 2010 was $16.3 million compared to $16.1 million in the second quarter of 2009.

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

Cash and short-term investments were $106.9 million at July 3, 2010 compared to $100.1 million at December 31, 2009 and includes $65 million of US treasury bills.

Accounts receivable is $40.3 million at July 3, 2010 compared to $42.9 million at December 31, 2009.

Day sales outstanding at July 3, 2010 decreased to 81 days from 85 days at December 31, 2009, primarily as a result of improved collections in the Americas region.

Inventories increased to $39.4 million at July 3, 2010 from $38.6 million at December 31, 2009, primarily as a result of an increase in raw materials.

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

We had 753 employees at July 3, 2010 compared to 734 at December 31, 2009, an increase of 19.

Account manager headcount increased from 146 at December 31, 2009 to 148 at July 3, 2010, with 41 account managers in the Americas, 52 account managers in Europe, and 55 account managers in Asia.

Geographically, we now have 300 employees in the Americas, 253 employees in Europe, and 200 employees in the Asia Pacific region.

I will now hand the call over to Jay.

Thanks, Keith.

Global market conditions continued to improve in the second quarter, and we saw the effects of this on our top line.

Sales in Asia remained particularly robust, growing more than 50% again for the second straight quarter. We're seeing strength not just in China but also in Japan, where markets last year were pretty weak.

Europe improved even more this quarter, growing more than 30% on a local currency basis, which helped offset the rapid decline in the euro over the course of Q2.

We also grew sales by more than 30% in the Americas, thus capping a very good quarter across all three regions.

We also had solid orders growth of 24%. There weren't any significant drivers for the difference between sales growth and orders growth other than certain transactions pushing into Q3. What I think we saw this quarter was a balancing effect from the 45% growth we generated in the first quarter.

Year to date, our orders growth and sales growth are exactly the same at 33%, which matches the typical book-to-bill ratio for the Company.

Overall, manufacturers are spending their CapEx budgets in investing their facilities again. Pricing has remained stable, just as it has been for the last several years. We still get plenty of competitive price pressure, but that pressure has caused only a handful of losses that we know of.

Customers choose FARO because we provide them with the total solution -- cutting-edge technology, ease of use, reliability, and outstanding customer service. Historically, and still today, price is much lower on the decision tree because we're able to deliver compelling ROI, which is typically in the five to six-month range.

Sales to new customers rose to 46% in the second quarter, much closer to our historical and targeted ratio of 50%. During the first quarter, only 35% of our sales came from new customers; however, I felt confident that this was an anomaly created as the world stabilized from the financial crisis and as the global economic recovery started.

More specifically, in Q1, our existing customers were the first to start buying again because they already knew the value of FARO's equipment from their firsthand experiences.

At the time, I predicted that our sales to new customers would rebound to normalized levels within a couple of quarters. Q2 almost got us there. Based on the current environment, I still believe we'll be back to 50/50 by the end of the year, if not sooner, demonstrating continued belief in the ROI our technology generates.

Our cost controls remain tight in the second quarter, creating good leverage in every department. Selling costs as a percentage of sales represent our largest line item, and they're running at their lowest levels ever. Nearly all of our account managers have improved their productivity, and we anticipate continued improvement going forward.

As I've stated before, we believe that we can get to at least 200 million per year annual run rate before we start hiring incremental account managers again. All other departments are also running below last year's levels, demonstrating that the actions we took last year are having a real and sustained impact.

We have a very active 12 months ahead of us in terms of new product releases, and the engineering teams have kept that schedule on track.

Our decision to maintain engineering spending throughout the downturn is beginning to provide benefits. A few weeks ago, we announced the launch of a very important accessory product, our new best-in-class break-resistant SMRs. SMRs are the reflectors used with a Laser Tracker to receive and return the measurement signal from the Tracker. They are critical to the performance and output of the Tracker. With this release, we have combined high accuracy and high durability with low cost for the first time in the market.

We talk a lot about the pending releases of our core products, but accessory releases such as this one are just as critical to delivering ease of use and total solutions to the customers.

Finally, for the last two years, I've discussed the possibility that the monitor we were assigned when we settled our SCPA matter with SEC and DOJ would start their work.

Well, the monitor's work began this past quarter. The monitor is focused on ensuring that we are in compliance with the terms of our settlement with the DOJ and the SEC. The total cost of their work is difficult to estimate; however, as we have stated in previous calls, we believe it could be at least $1 million over the coming 12 months.

Assuming the world does not experience another global economic decline, we remain cautiously optimistic with respect to the second half of this year. Customer activity is good, and the team is executing well. We continue to improve our efficiencies and gain leverage across the company.

We are still not providing financial guidance, as has been our practice for the last 18 months, but we will continue to keep you up to date with respect to market conditions, customer sentiment, and of course, overall performance.

As we enter the second half of the year and look to continue our performance, I'd like to offer my thanks to the FARO team, our customers, and our investors.

I appreciate your attention, and I will now open the call to questions.

(Operator instructions)

We'll take our first question from the site of Mark Jordan with Noble Financial. Please go ahead.

Could we talk a little bit about the euro exposure which generated that uniquely large loss this quarter? Specifically, could you outline what is the actual dollar value of your typical exposure, and is there a way for you to dampen the potential volatility in that number moving forward?

Hi, Mark. It's Keith. Let me give you a little bit of background on the FX issue.

The United States, as you know, basically sells to Switzerland to Singapore, and when we sell to Switzerland, we have a receivable that's denominated in US dollars. Switzerland then takes the product, further manufactures it, and sells it to Germany, and now Switzerland has a receivable in euros.

That same sort of thing happened when we sold to Singapore and Singapore sells to Japan and to China and to Thailand and other countries. So we have an exposure there to the extent that we have receivables and payables among the subsidiaries in currencies other than their functional currencies. So we could have a US dollar receive -- or Switzerland could have a euro receivable and during the course of the quarter, that euro receivable has become less in value, so they have to record a transaction to reflect that.

So, typically, we have transactions throughout the quarters for payments on those accounts, as well as additional sales on those accounts, and what has happened throughout that second quarter was that the dollar got much stronger compared to the euro and the Swiss franc. So we had some FX exposure and some transaction losses on those intercompany transactions.

What we typically do, we try to have natural hedges in place by having some of our expenses denominated in local currencies, so typically rather than using financial instruments to hedge, we try to have some natural hedges.

What we typically would do is to pay down these intercompany balances throughout the quarter, and typically, that's what we intend to do going forward. We've paid down some of those balances to reduce our exposure, and that's typically our hedging program is to provide more of a functional hedge rather than a financial hedge.

Yes, this is Jay. What I'll add, too, is we have already paid down a chunk of those balances to reduce that exposure going forward in Q3 and Q4. The other thing I would say is that I think you used the word unusual, Mark. That's probably appropriate. Part of this is as sales started ramping up again in Q1 and Q2, receivables are growing prior to the collection, as well, so those inner companies, it was harder for them to make the payment until they'd collected some cash from the growth in Q1 and so you had a couple quarter effect there I think being magnified as -- now that they have the cash in hand and were at this higher growth rate and the cash has started coming in from that growth, now they've got the ability to pay down those receivables also on a normalized basis, too.

Okay. Could you give us an update on where you are on your patent litigation?

Yes. We've had the first of what will probably be several evidentiary hearings. First one was a couple weeks ago. And this is tied to concerns we had over inequitable conduct and what had happened at the time with what is now a third-removed party. The party that originally patented the technology was then sold to Metris, who has since been sold to Nikon, so the case is now with Nikon.

Next court dates are next week, and they will continue those evidentiary hearings at that point in time, and others will be scheduled beyond that if needed.

As I've said in the past and continue to say, we have been open to settlement and very open to settlement all along the way and just haven't got a lot of support for that from the other side at this point. So right now, this is slowing playing out.

Again, these are evidentiary hearings only and slowly playing out there at the moment, and the evidentiary hearings are occurring because the judge did say that there was valid reason, that FARO had valid points to be able to get those hearings, which was, I think, a positive item in that regard. But ultimately, we still would like to get this settled and move on.

Okay. The final question for me is if you look at the performance in the Americas, both from a revenue standpoint and an order standpoint, revenues were flat sequentially while you saw growth in the other two geographies. Quarters were down again with growth sequentially in other two geographies. What was particular in the US market that would have created a weaker relative performance?

Yes, there's nothing specific to point to, Mark. I think we do know there's a little bit of timing there. I referenced before that we had some orders that kind of moved into Q3, some transactions that pushed out. We think we probably pulled a little bit into Q4, and that gave the Q1 effect, also, so I think it's a timing thing more than anything else.

When you talk to the team, overall, they feel very good about the market, about the customer behavior. We've seen pockets here and there of customers still being nervous about releasing cash, particularly some of the bigger ones, but certainly not like last year. And, again, it's more pockets than anything else.

So what I look at is when we look at the rest of the year, again, assuming there's not some major economic calamity, things look pretty good in that regard, and so I think you've got more of a timing issue than anything else.

Okay. Thank you very much.

Thanks, Mark.

Our next question comes from the site of Larry Solow with CJS. Please go ahead.

Hi. Good morning. Could you guys maybe talk a little bit about -- I know historically through the downturn, leads and demos have remained very strong and was just sort of an extended selling cycle. Have you seen any change in that or are leads and demos still running pretty strongly through the first half of the year?

They are. Yes, they're running exactly where we would want them to and would match appropriately to the growth that we're seeing.

Okay. And I actually joined the call late. I was on another call, so did you talk about -- have you seen anything more recently, maybe even just anecdotally? During the quarter sequentially, were there any positive/negative changes or maybe even in July, are customers more hesitant, less hesitant? Anything -- any color on that?

Yes, I mean I think certainly what we saw in the first half was a vast improvement in the overall environment, and as you know, it really actually started in Q4, but we're finally seeing the actual growth correlation to it in Q1 and Q2 here. So that overall environment has been very favorable.

Again, customers, they're investing in their plants again. Delays that they just kept putting off, putting off, they're finally going ahead and pulling the trigger. They do feel better in many cases about their businesses, and you're seeing -- admittedly, some of the economic messages are mixed, but you're seeing good performance out of a lot of the customers that we sell to day in and day out.

Nice growth in Asia, good rebound not just in China but in Japan, as well, and a lot of favorable sentiment as they look forward out there.

So really for me, the biggest thing at this point is, again, unless there's some major economic meltdown which would be kind of out of our control, similar to what happened going into 2009, the overall market environment looks very good. Leads are growing, customer sentiment still remains pretty strong, and certainly significantly stronger than last year, and so that's what we are focused on right now.

Okay, and you guys released during the quarter with a (inaudible) Airbus, and it seemed like a nice little deal. I guess they're already an existing customer of yours and then this just would provide about a million a year additional. Is there a potential for more than just what the lease said? How do you look at that?

Yes, you're right; they were an existing customer. They've been a good customer for a long time. So this was them reaffirming their commitment to FARO and their belief in the technology.

And it will -- I can't say it's a straight-line million bucks per year, obviously. The orders come and go quarter to quarter based on their needs and the rollout schedule. We will certainly see benefits here in 2010 from the deal.

There is absolutely the opportunity for that to grow, and the reason I say that is the order -- the thing that was interesting about the order and the commitment from Airbus is that -- I shouldn't say commitment because the orders are placed quarter to quarter. We didn't book one -- make sure everybody's clear on that -- we didn't book one giant order in the first quarter when that was signed. We book it as they place the demand on us.

But the units that they're purchasing are not just for themselves. Many of these units will end up being put into the supply chain, as well, and as that process begins and it rolls out, either within the supply chain that's receiving them or other members of the supply chain, that's where I would see the potential for incremental activity as those other suppliers see what Airbus is doing or as they start -- the ones who are being handed the technology or the technology being promoted within them, they start seeing the benefits and they start ramping up from there.

Okay. And then just looking at your P&L, do you think your operating expenses are -- I know you were going to bring back management comp. Has that returned sort of to a sustainable level and then the only additional increase would be obviously on variable compensation on higher sales or--?

Yes, we are looking to continue getting leverage out of the structure, so we've added minimal heads. We've added a few in the sales side, not just the CAM [handlers] but the support that goes with them. A couple of headcount, as you see, in the first half of the year are actually backfills for roles, where it's just the timing or the person had resigned or had left at the tail-end of the year and we hadn't gotten them back into the position or anything like that. But we're not looking to add incremental positions at all at this point, and as we go forward, we still expect to get that leverage.

So, yes, had a little bit of increased comp not from base salaries but accruals tied to bonuses assuming we actually meet our financial targets this year, and that's slightly different from last year where you didn't pay any bonuses. Other than that, it's flat across the board, and I expect to continue getting leverage throughout the year.

And so you're right, yes, you get some incremental commissions on the sales line, but even there, you look at our selling costs, the percentage of sales are obviously getting nice leverage compared to -- really not just last year but even previous years when we were still running in the 30, 31% range, maybe 29 for a while. So we're getting good leverage there, too.

And that is the theme here of the streamlined and kind of newer, leaner organization as we go forward is looking for every possible way to avoid adding the head almost -- you kind of wait till you're at almost the breaking point and then you try one more time to systemize it before you finally break down and add the additional person.

Okay, then just excuse me. You may have already touched on this, but did you mention anything about the ongoing, the minor, the legal couple things you have, the ongoing patent case and then the potential for a monitor put in by the DOJ?

Yes, the monitor has started their work. They did start at the tail end of last quarter, and it's hard to predict what the cost will be because these are a couple of lawyers with billable hours based on site work and so forth. It could be a million bucks over the next 12 months. That's kind of the timeframe we're looking at is a first report and then a follow-up report 12 months from now. And so that's where we are with the monitor.

The patent case, we have had some evidentiary hearings now. We've got follow-up hearings next week. We continue to try to settle the case and have made offers to settle and just not getting any reception from the other side. We feel very good about our case, so we're not settling because we're nervous about our case; we're settling to be smart about this from a business standpoint and move forward. But right now, we feel very good about our position, and so we're going to keep hammering forward on that side if we have unwillingness on the other party.

This is great. I appreciate it, and we look forward to seeing you in a couple of weeks at our conference. Thanks a lot.

Sounds good. Thanks, Larry.

(Operator instructions)

We'll take our next question from the site of Richard Eastman with Robert W. Baird. Please go ahead.

Good morning, Jay, Keith.

Hi, Rick.

Hi, Rick.

Say, could you just talk for a minute about kind of that front log number that we think of as the demos? Is that number -- did the demos in the quarter run ahead of -- on a percentage basis ahead of the order number?

I don't know if we've ever disclosed kind of the ratio or the timing of those before, so I won't say if it's ahead or behind it. But like I said -- I can't remember if it was Mark or Larry -- I will say that they are definitely running at the rates that we need or want for the -- it corresponds well to the growth that we're seeing and what we want in the second half of the year here.

So that side of it has been very good, and similar to last year, we were running at those rates, but they weren't transacting. Obviously this year, customers are transacting and closing the deal with us in conjunction with those demos.

All right. Well, that's -- I got that. So let me ask you what -- I mean since you know what your sales target is for the second half or orders target, can I presume that the demos that you're comfortable with, the growth rate is north of 20%? In other words, you're doing 20% more demos year over year in the second quarter to deliver that type of growth? Is that just a fair assumption?

It is if you think about it in the respect that many of the demos that we do in a quarter close in that quarter, also. So, again, it sustains -- if you look at the growth we've had the first two quarters, it sustains that well, and based on the activity, we feel good about where Q3 and Q4 are headed. Again, barring a major economic collapse, the rest of the activity does kind of sustain itself and give us that direction that we want.

Okay, and then --

I know that's not exactly the answer you're looking for, but I'm not going to --

Well, I'll jump to that conclusion myself.

And then the other thought I had, you mentioned again year to date I think that order number and book to bill and sales number is appropriate way to look at it, but you did mention that some orders got pushed into the third quarter, and I'm curious, is that a commentary about the closure rate fading towards the end of the quarter?

I don't think so. I really look at it just as, again, more of a timing thing than anything else. I think we, historically, that always happens to us that you'll have -- typically what happens is that you get to the end of the quarter -- that's why we still have this profile where the last two weeks are -- 50% of our sales are during the final two weeks of the quarter.

And what's happening -- and I guess the good news is in some respects -- I won't say it's perfectly normal yet, but it's definitely returned to that normalcy -- is if you have a customer that's suddenly they've got a machine tool issue or something else happens those last couple of weeks and they need it to actually produce product, they will delay our purchase for a few weeks in order to put the money to something else or the company says during the final two weeks, "You know what? No more cash out the door," or, "No more orders placed. I want to control our commitments until we get out of this fiscal quarter."

We still see that quarter in and quarter out, so I can't say it's not unusual for us to see that happen. So we saw some of those in Q2 here. And the fact that Q1 was so large, did we have a few that might've been Q2 orders that ended up in Q1 instead because the customer said they were ready? That's possible, too.

Sure. Okay. And then do you look at the gross profit margin trend maybe from this point forward? Is that going to be fairly stable given the mix of customers and products that you would expect over the second half, or is there some room for improvement there due to mix or--?

There's always room for improvement certainly, not just from mix but just from product cost and all the other obvious areas.

Is it more sustainable or predictable going forward? Hard to say. Now what I will say is that -- and I think we talked about this last year -- that the sales decline was so tightly wound with the products themselves and service revenue remained stable. That caused a big -- that drove most of the drop in gross margin last year from a percentage standpoint, and what we kept saying was, well, we assume when the sales return, it will almost all be in product, and that will drive growth margin right back up.

And, indeed, you look at the first two quarters, that's exactly what's happened is that the growth is coming from the product side, as it should. That's the right place for it to come from.

So assuming that trend continues in Q3 and Q4, which again it should, then that should keep the gross margins up in that 59, 60-ish range, which is where we want to be in the near term, with the longer term being still to get well over 60.

Could it move a percentage point? Obviously, there's a point of fluctuation in there no matter what you do going forward, but we feel pretty good about that higher end where it is now.

And, Keith, was there any FX impact at the gross margin line?

No, there's really no material effect at the gross margin line.

Yes, okay.

And then just the last question. Jay, we talked -- you had mentioned earlier that this will be a pretty active year on the new product front. When you look through that pipeline and the newer products that are staged in that pipeline, are they slanted directionally towards any of the product lines, the Arm, the Tracker, the Gage? I'm just curious if there's a particular R&D emphasis on any one product line that you think could have a more material impact on the growth of that line.

Yes, in some respects, I hate to say this, and in some respects, I love to say this. I think it's across the board.

Without disclosing any of the individual products, what I have said I think before is that every product is getting a dramatic workover, and I haven't -- every product but one, and I haven't said which one isn't. However, the ones that we have chosen I think will all have dramatic impact on the business, on the marketplace, on our ability to continue disrupting from a technology standpoint, and so forth. So I feel very good about that.

And so the reason I hate to say that it's all of them because it sounds kind of wishy-washy, but it actually -- it was that aggressive. So last year when we were still hitting the gas pedal with all of the engineering spending, it was across the board because we saw that much opportunity across all of our products, and sometimes you get pigeon-toed. You look at it, you say, "Man, you know what? We really can only make dramatic change on one," and you focus all your efforts there. We have focused the efforts across the whole spectrum.

Okay. And is there -- have you made progress on the scanning product line in terms of the concept? The strategy there was price elasticity and cost elasticity. I mean have we made some progress there? Is that still the plan there in that product line?

That is still the plan. I think we've made progress, and there's always the opportunity to make substantially more progress.

Okay. All right. Very good. Thank you.

Thanks, Rick.

Thanks, Richard.

And our next question comes from the site of Ajit Pai with Stifel Nicolaus. Please go ahead.

Hi. This is [Robert Walker] in for Ajit.

You mentioned that you won't need to hire account managers until at least you hit the 200 million in run rate. But with the book to bill below one and an accelerating manufacturing environment, which you mentioned as normal linearity, growing leads, improving sentiment, did you guys cut too deep, and why aren't you looking to add at this point?

I don't think we cut too deep. What we cut to was our -- you really end up with -- what was left was our proven A players for sure. We had -- when you look at the cuts that we made, I think there were potentially some budding A players but they needed time. Always a possibility.

The reason I don't think we cut too deep is that even with the improved productivity of the account managers, the run rates that they're on right now and what they've generated, it's still below what we expect from a run rate basis out of our account managers. Without getting into each individual product line or account manager, it's lower still even on the current run rates than we would come to expect.

So we believe, just based on that, we will get more productivity out of them and, again, the book to bill is only a matter of -- it's balanced. It's actually one -- it's perfectly one to one for the year to date, so the order side of it is just some timing differences that occurred in Q1 and Q2, I think, not that there's a slowdown that we would say, "Well, we're foreseeing seeing that." We're certainly not saying that or seeing that at this point.

Again, the timing of when we start adding them, it's really a function of how rapidly the world is ramping up. Do we wait till we're exactly at 200 million? Possibly. If it was -- if we thought the ramp was occurring even faster, might we start adding sooner than that? Possibly, though I don't see that happening certainly during 2010 because we're already at a pretty good ramp and, again, we're not at full productivity out of the team from a run rate standpoint that we want to be at.

So we watch it very, very closely. There's still a timing factor that it will still take roughly 12 months for new account managers to really get good, so we have to watch that carefully and see when we think we're going to be clearing sort of that 200 mark where we might say, okay, now it's time to start adding account managers so they're at full tilt when we clear that line. But right now, we feel very good about the headcount we have and that there is still productivity to come without jeopardizing our growth potential.

Sure, okay, thanks. And just -- I guess you mentioned the past, obviously, the mix shift and the impact that can have on gross margin. In case I missed it, can you quantify kind of the gross margin impact of any sequential mix shift you guys saw kind of quarter over quarter?

Oh, yes, I don't have the mix shift between products and services in front of me sequentially, but they're out there. They're in our filings, so you can usually pull those filings from our quarters and see what had happened primarily in '09 when our sales declined 30%.

Just about all of that 30% decline came from products, and products have the margin in the 65, 66% range. So as sales started to come back, all of that increase in sales, 25, 30% increase in sales, all that's coming from the products. So all that's in that 65, 66% gross margin range. But I don't have the sequential --

Sure. Just in terms of -- I mean in the product mix, in terms of your Tracker Arm Scanner?

No, we typically wouldn't disclose changes in the mix within the product line itself.

Yes, I think the only time we really talked about it recently, I think at Q4 we mentioned that the Tracker mix was slightly higher on a relative basis from what we saw historically saw and it returned -- kind of a normalized mix returned in Q1, and I think we're seeing that again now.

Again, we don't disclose the actual mix, but that was the one point where there's a little bit of an anomaly that we actually said it was higher without saying exactly how much higher, but it is what I would consider normal mix across the products right now the last couple of quarters.

Okay, so fair to say that no major sequential mix shift among the products that kind of negatively hurt the Q over Q kind of margins there?

Right.

Okay. And then just, finally, any update on the expected launch of your high-end imaging product and when we should expect that revenue to become material? Thank you very much.

Very soon on the launch. That sounds awful. I hate to say that because we just don't like to telegraph exactly when it's happening, but very soon, and it's on the schedule that we were planning.

When will the revenue become material? Given the size of the company, I mean I think you would expect it would probably be a couple of years. I mean even the laser scanner is, you would say, really not 100% -- it's not fully material yet, and that's been in the company for five years. And it's not a reflection on the laser scanner in the marketplace because it has grown well every year over those five years, but it's starting at such a low baseline compared to Arm and Tracker and Gage and ScanArm that it just takes a little while to ramp up.

Could the imager go faster than that? Maybe. That one's a little bit harder. See, the thing that's different with the imager is that that product is being fed into an existing market that has already crossed the chasm. So high accuracy metrology with needs for portable devices that are very flexible and adaptable, which is exactly what that imager is is an established market. The laser scanner when it came out was going into a early adopter market. In many respects, it still is because you're really finding where's the best place to utilize it, how do customers utilize it.

The technology was probably a little ahead of its time at the time that it was a purchase, so that keeps things a little bit slower. So the imager could be different only because it is being sold into an existing marketplace where there are known customer needs.

When we started the beta testing, we had multiple existing customers with their hands up saying, "I've got an application exactly for that. I want to be in the beta test so that we could bring it there." And that's very different from the LS, which was, "Okay, let me show you what this can do, and let's talk about how you might use it." That's a very different equation, obviously.

Thank you very much. That's very helpful.

Thanks, Robert.

(Operator instructions)

Looks like our next question comes from the site of [Barry Randall] with Crabtree Asset. Please go ahead.

Hi, good morning. I heard your explanation to the first caller with respect to the foreign exchange issue, and so I don't need any -- well, maybe I still need an education, but I understand what you said there.

But I do -- I am curious about the issue that since the end of the quarter, the euro actually has defied expectations and appreciated.

So in terms of the accounting, if, for example, the euro remains roughly where it is, which is -- it's up about 10% this quarter to date -- suppose the euro remains roughly the same versus the dollar from now until the end of September, would we see when you reported your earnings a comparable positive effect?

I'm not asking you to predict the euro movement, but just so I understand the effect that it has on your P&L, would it be a comparable positive effect in the same way that it was a negative effect when the euro depreciated in the second quarter? Could you elaborate a little on that?

Sure. You have the accounting correct. To the extent that the euro gets stronger, some of those FX losses would reverse. However, to the extent that the intercompany balances have either increased or decreased as a result of further sales transactions or further payments on those accounts, you wouldn't get the equal and offsetting gain to recoup that loss, but the accounting is correct.

But you wouldn't -- okay. So on a cash flow basis, you would have some offset but not a full offset? Is that a fair statement?

That's right.

Is that correct?

Yes, right.

Okay, I appreciate that. Thank you.

Sure.

(Operator instructions)

And it looks like there are no further questions on the phone.

Very good. Thanks, everybody, for joining us today, and we will chat with you again at the end of Q3.

This concludes today's conference. You may now disconnect and have a wonderful day.