FARO Technologies Inc (FARO) 2011 Q4 法說會逐字稿

Good day, everyone and welcome to the FARO Technologies fourth quarter 2011 earnings release. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer. (Operator Instructions). This call is being recorded, and I will stand by if you should need assistance. I will now my pleasure to hand 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 fourth quarter results. By now you should have received a copy of the press release. If you have not received the 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 expect, believe, predict, target, plan, growth targets, goals, guidance, will, and similar words. It will 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 2011 were $77.1 million, a 31.7% increase from $58.5 million in the fourth quarter of 2010. That brought our 2011 annual sales to $254.2 million, at 32.5% increase from $191.8 million in 2010.

On a regional basis, fourth quarter sales in 2011 in the Americas increased 40.4% to $31.3 million compared to $22.3 million in the fourth quarter of 2010. Sales increased 30.5% in Europe to $31.2 million from $23.9 million in the fourth quarter of 2010. Sales in the Asia Pacific region increased 18.7% to $14.6 million from $12.3 million in the fourth quarter of 2010. The effect of changes in foreign exchange rates on sales was a decrease of $300,000 in the fourth quarter of 2011 compared to the fourth quarter of 2010.

Comparing year over year growth, 2011 sales in the Americas increased 34.7% to $97.5 million from $72.4 million in 2010. Europe sales for 2011 increase the 33.2% to $99.6 million from $74.7 million in 2010. Asia sales increased 27.9% in 2011 to $57.1 million from $44.7 million in 2010. The affect of changes in foreign exchange rates on sales was an increase of $7 million in fiscal 2011 compared to fiscal 2010.

New orders increased 14.4% in the fourth quarter of 2011 to approximately $77.1 million compared to approximately $67.4 million in the fourth quarter of 2010. On an annual basis, new orders increased 29.2% to $255.7 million in 2011 from $197.9 million in 2010.

On a regional basis, fourth quarter orders in 2011 in the Americas increased 34.4% to $33.6 million compared to $25 million in the fourth quarter of 2010. Orders decreased 2.1% in Europe to $27.5 million from $28.1 million in the fourth quarter of 2010. Orders in the Asia Pacific region increased 11.9% to $16 million compared to $14.3 million in the year ago quarter.

Again, comparing year over year orders growth, new orders in the Americas increased 33.5% to $100.5 million in 2011 from $75.3 million in 2010. Orders increased 26.3% in Europe to $96.9 million in 2011 compared to $76.7 million in 2010. And orders increased by 27% in Asia in 2011 to $58.3 million from $45.9 million in 2010.

The top five customers by sales volume in 2011 were the US military, Airbus, Spirit AeroSystems, G2Metric and Boeing, and together represented only 3.6% of sales. The top ten customers in 2011 together represented only 5.1% of our sales, onceagain indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 56.5% in the fourth quarter of 2011, compared to 59% in the year ago quarter and in line with the 56.1% gross margin in Q2 and Q3 of 2011. Gross margin from product sales decreased to 60.8% in the fourth quarter of 2011 from 64.1% in the fourth quarter 2010 as a result of the change in the historical sales mix caused by the increase in the sales of a Laser Scanner product, which currently has a lower gross margin. Gross margin from service revenues was 30.9% in the fourth quarter of 2011, compared to 31.5% in the fourth quarter of 2010.

Gross margin in fiscal 2011 was 56.5%, compared to 59.1% in fiscal 2010. Gross margin from product sales decreased to 61.2% in fiscal 2011 from 65.3% in fiscal 2010, again, as a result of a change in the historical sales mix caused by the increase in the Laser Scanner product, which currently has a lower gross margin. Gross margin from service revenues increased to 32.4% in fiscal 2011 compared to 30.9% in fiscal 2010.

Selling expenses were 23.3% of sales in the fourth quarter of 2011, compared to 26.8% in the year ago quarter. Selling expenses increased to $18 million in the fourth quarter of 2011 from $15.7 million in the fourth quarter of 2010, primarily as a result in the increase in compensation of $2.2 million. In fiscal 2011, selling expenses decreased to 24.4% of sales compared to 26.4% in fiscal 2010.

Administrative expenses in the fourth quarter of 2011 were 8.9% of sales, compared to 12.5% in the fourth quarter of 2010, decreasing by approximately $400,000 to $6.9 million from $7.3 million in 2010, primarily as a result of a decrease in legal and professional fees of $400,000 related to patent litigation in the FCPA monitor in connection with the DOJ and SEC settlement.

In fiscal 2011 general and administrative expenses remained flat at $26.8 million, representing 10.5% of sales, compared to 14% of sales in fiscal 2010. Increases in compensation costs of $1.7 million and increases in recruiting relocation costs of $300,000 in fiscal 2011 were offset by decreases of $1 million in bad debt expenses, a decrease of $400,000 related to the FCPA monitor, and a decrease in legal and professional fees of $600,000 related to patent litigation.

Research and development expenses increased to $4.2 million in the fourth quarter of 2011, or 5.4% of sales, compared to $3.9 million or 6.6% of sales in the fourth quarter of 2010.

R&D expenses for fiscal 2011 increased $2.5 million or 19.7% to $15.2 million for the year ended December 31, 2011, from $12.7 million for the year ended December 31, 2010, primarily due to an increase in compensation of $1.9 million, subcontractor expenses of $200,000, and expenses of $400,000 related to the closing and relocation of the R&D facility in Andover, MA, to our existing facility in Kenneth Square, PA. Research and development expenses as a percentage of sales decreased to 6% for the year ended December 31, 2011, from 6.6% for the year ended December 31, 2010.

Operating margin in the fourth quarter of 2011 increased to 16.7% from 10.6% in the year ago quarter, primarily as a result of the effects of leveraging the current operating structure. Operating margin for fiscal 2011 increased to 12.9% from 8.8% in fiscal 2010.

Other income and expenses net decreased to an expense of $400,000 in the fourth quarter of 2011 compared to an expense of $1 million in the fourth quarter of 2010, primarily as a result of a decrease in foreign currency losses due to the effects of changes in foreign exchange rates on the intercompany account balances denominated in different currencies. On a year to date basis, other income and expense decreased to expense of $1.2 million in fiscal 2011 compared to an expense of $2.7 million in fiscal 2010, primarily as a result of a decrease in foreign currency losses due to the effects of changes in foreign exchange rates on the intercompany account balances denominated in different currencies.

Income tax expense increased to $2.9 million in the fourth quarter of 2011 from $377,000 in the fourth quarter of 2010, primarily as a result of an increase in pretax income. The effective income tax rate was 23.8% in the fourth quarter of 2011, compared to 7.2% in the fourth quarter of 2010, which included the release of a valuation allowance of approximately $1.2 million related to the net operating losses of a subsidiary in Germany and the prior year period.

Income tax expense increased $8.3 million from fiscal 2011 compared to $3.1 million of fiscal 2010, primarily as a result of an increase in pretax income. The Company's effective income tax rate for fiscal 2011 was 26.3%, compared to 22.1% in fiscal 2010.

Net income was $9.5 million or $0.56 per share in the fourth quarter of 2011, compared to $4.8 million or $0.29 per share in the fourth quarter of 2010. Net income for fiscal 2011 was $23.4 million or $1.39 per share, compared to net income of $11.1 million or $0.68 per share in fiscal 2010.

I will now discuss a few balance sheet and cash flow items. Cash and short term investments were $129.5 million at December 31, 2011, compared to $115.7 million at December 31, 2010. Accounts receivable was $57.5 million at December 31, 2011, compared to $51.9 millionat December 31, 2010.

Days sales outstanding at December 31, 2011, decreased to 68 days from 81 days at December 31, 2010, primarily as a result of a reduction in DSOs in Europe. Inventories increased to $67.2 million at December 31, 2011, from $42 million at December 31, 2010. The increase in inventories was primarily related to an increase in raw materials related to the production of the Focus Laser Scanner.

Finally, I'll conclude with some statistics regarding our head count numbers. We had 885 employees at December 31, 2011, compared to 781 at December 31, 2010, an increase of 104 employees or 13.3%. Account manager head count at December 31, 2011, was 160, with 48 account managers in the Americas, 50 account managers in Europe, and 62 account managers in Asia. Geographically, we now have 353 employees in the Americas, 299 employees in Europe, and 233 employees in the Asia Pacific region.

I will now hand the call over to Jay.

Thanks, Keith.

We had record results in the fourth quarter and likewise for the full year 2011. Orders were $256 million, sales were $254 million, and net income was $23 million. Despite feeling some economic pressure around the world as well as gross margin pressure as we ramped up the Focus Laser Scanner, we met all time record highs for sale and earnings. Customer demands for core products are strong, and customer demand for Laser Scanner is even stronger. In total I feel our 2011 results are a firm indication that our existing operating structure has a great deal of leverage.

The Americas had its best year on record, with more than $100 million in orders, making it the first region to achieve that milestone. Substantial orders in sales growth were the direct result of robust demand for our products. Our Latin America markets continued to do well, with our new operation in Brazil contributing to the Americas growth. The market in the United States was even stronger and drove the largest portion of growth in the region. In addition to top line success, the Americas team continues to meet all delivery targets, and its the best customer service turnaround times we've ever had. Both of these are critical factors for our customers in their decision making process and provide another competitive advantage for FARO.

Asia also had a strong year, despite the natural disasters in Japan in the spring and Thailand in the fall. We experienced minimal disruptions from earthquake and tsunami in Japan, but the floods in Thailand had some impact of delaying orders in Q4. However, we are hearing from the local sales teams the rebuilding process may create new opportunities in both countries. Tightening of the credit markets in China had a minor impact on sales in the fourth quarter, since many of our customers in China use credit facilities for their purchases, butit has not slowed our growth meaningfully. The overall economy in China is still growing a relatively substantial rate, and we expect this market will continue to provide significant growth for us.

Europe had a very good sales year, finishing just under the $100 million level. However, we felt moderate pricing pressure and the affects of a somewhat sluggish economy in the fourth quarter. Despite some headwinds, we continue to believe Europe remains just as much a growth opportunity as the Americas and Asia.

The Focus Laser Scanner had a strong finish a phenomenal year, culminating with the recognition of being named one of Popular Science magazine's 100 most innovative products of 2011. It was certainly a nice way to wrap up the year. We continue to add distributors for the Laser Scanner and expect the process to be completed this year for the surveying space. In 2012, we expect to start to add distribution capacity for other verticals that have established channel networks. At this beginning of Q4, we turned on two embedded features in the Focus that added a compass and height sensor, allowing for a small increase in price that met minimal resistance.

The combination of the FARO Edge arm with the new disruptive Laser Line Probe accessory has been received extremely well. The fourth quarter was the first quarter when the Laser Line Probe was available for the entire quarter. Our goal for the product was to drive up the attach rate. Due to its small size, lightweight and low price every arm customer should have Laser Line Probe with their kit. Historically, roughly 20% of our customers would buy a Laser Line Probe with their arm. In the fourth quarter approximately 60% added a Laser Line Probe. The product provides a long awaited solution for our customers and good margins for FARO.

Our R&D work is never finished. We have another disruptive product release coming in the first half of 2012. It completely replaces an exist price. In concept the disruption is similar to the Edge arm. The primary hardware will be disruptive in form, ease of use and ergonomics, but the price will not move much if at all. However, there will be accessories that are extremely disruptive, both on technical level as well as in price, just like we did with the Laser Line Probe for the arm this will be another exciting release.

I'm also excited about a new approach to R&D that we are pursuing to compliment our more traditional product development and enhancement. We are planning to embark on a new strategic push to develop many requests for new products and applications we have been receiving directly from our customers. Some of these new products will serve existing customers. Some will serve customers and verticals we don't touch at all today. All of them will be disruptive and provide interesting opportunities for our sales teams. This will be exciting and challenging as we draw on our customers experience to broaden the application base for our products. It is an absolute requirement to ensure FARO stays at the front of the market. Way out front.

I would like to take this opportunity to talk about the promotion of Bernd Becker to the newly created position of Chief Technology Strategist and Evangelist, reporting directly to me. Bernd came to FARO as one of the cofounders of iQvolution, a cutting edge laser scanner company, and together with his brother Reinhard Becker, our current engineering leader for FARO Laser Scanner team and cofounder of iQvolution, they created one of the most disruptive products 3D measurement space has ever seen. Bernd has long provided the strategic vision and creative force behind the Focus product and laser scanners in total. In his new role he will be responsible for driving our broader 3D technology platform strategy as well. He will be responsible for continuing development of our existing products and, more importantly, new products and applications that will provide the next generation of growth opportunities in the continually expanding 3D market. In addition, he will also bring new insights and perspectives as we evaluate our competition and consider M&A opportunities.

You may have also seen the 8-K we filed last night, announcing Siggi Buss, our Managing Direct in Europe 2005 and Co-Managing Director before that, is stepping down. Siggi joined FARO when we acquired a software company back in 1998. Since then he made enormous contributions to FARO and has provided strong leadership to the team over there, and we are very grateful for his efforts to FARO. We have a very capable and experienced team in place to provide for continuity until the position is filled, and the search for his replacement is under way. In the interim I will have the team in Europe report directly to me.

We feel good about 2012. We have said and continue to say that 20% to 25% sales growth is the right target for our Company. I'm not seeing anything in the market for 2012 to indicate that this isn't still the right goal. We'll be adding new sales personnel to help drive our growth, we'll continue to spend aggressively on R&D, and we'll continue to drive leverage through the operation as we look to further improve our margins. 2011 was a great year, and I expect 2012 will be a great year as well. The core operation is functioning extremely well, and we're embarking in a brand-new approach to R&D that will help fuel the high growth in the future. It's a good time to be in the space and even a better time to be at FARO.

As always, I would like to thank the FARO team for their passionate dedication and execution, as well as our customers, suppliers and investors. I'm looking forward to seeing many of you during our investor conference next week in Lake Mary, and I will now open up the call for questions.

(Operator Instructions). Our first question will come from the site of Jim Ricchiuti with Needham & Company. Your line is now open.

Thanks. Good morning. Jay and Keith, I jumped off briefly so you may have touched on this in your overview, but just in terms of the sluggishness that you noted in the press release in Europe, I wonder if you can just elaborate on that? If you can say what countries and perhaps what markets, and how have things tracked in Europe thus far in the March quarter?

I won't talk a lot about the first quarter, because we try not to forecast too deeply into any of the individual quarters. What I will say is that it was sort of across the board. I think there was a general -- with everything happening from a macroeconomic standpoint, it certainly wasn't a pause. We obviously had decent volume in the quarter, itjust wasn't a whole lot of growth. So I think we saw that as across most of the verticals that are here. You had a little bit of impact -- obviously Germany in particular, which is still a big piece of what we do in Europe.

As we look at 2012, like I said, we haven't seen anything yet that would indicate we shouldn't have our normalized growth rates in 2012, and that's spread across all the quarters generally speaking. And leave it at that. I think, look, there's a little bit of economic pressure here. We've seen it over each of the last four, five, six quarters, so yes, we felt a little bit more in Q4. I'm actually over here right now. When you talk to the team at the moment, they still all feel very good about where we're headed here in 2012 though.

And Jay, just looking at new products -- and we'll put the Focus in the mix; that's still clearly new product -- is there a way for you to aggregate the new products and talk in terms of Q4 and say what percent of the revenues came from these products?

Well, again, I'll do it generally speaking. I'll say that a decent chunk comes from new products, because the Edge arm is brand new in 2011 -- brand new as of the middle of the second quarter there -- with the LLP being released in the middle -- Laser Line Probe -- in the middle of the third quarter. So I would consider all of our arm sales then in Q4 to be new product. Obviously the Laser Scanner I still consider to be new product as well. Laser Scanner is still number two in terms of sales volume, arm is still number one. Obviously the Laser Scanner move to number two happened earlier than 2012 when it overtook our previous number two, which was the Laser Tracker. So if you look at it that way and say that a decent chunk of the sales in Q4 were from new products, even though one of those, the arm itself, is selling into the verticals that are obviously not new for us. The Laser Scanner for sure is selling into some new verticals that we weren't in a year ago or two years ago.

And last question, just as looking at the Edge, how would you characterize the reception to the product versus similar generation launches for other arm products? Has it been stronger in line?

Yes,I'd say the strongest one since I've been here, relative to the arm. The things -- the feature sets people are noticing the most are not surprisingly, number one, the touch screen interface. We're getting a lots of feedback from customers saying, look, one of the great things about the Edge is if I don't need to compare against the CAD model -- and there are plenty of measurement applications were you do not need to compare against CAD model -- you can take that arm where ever you want, not have the laptop sitting there near the machine too or on the machine too or anywhere else, and just use the touch screen to take your measurements. So that has been received extremely well.

We're definitely getting feedback that customers noticed the ergonomic profile has improved. We took a lot of the weight out of the hand and pushed it further backwards into the arm and into counterbalances that back downstream in the arm itself. And then for sure -- and when you look at the attach rate going from 20% up to 60% in a single quarter, the feedback on the Laser Line Probe has been extremely, extremely positive. It's interesting that it is not the most accurate laser line probe on the market. It's pretty darn close, and certainly accurate enough. The form factor and ease of use, the price point, all of those things make it the -- in my opinion certainly, and I guess feedback will be getting customers -- the most compelling solution out there.

Okay. Thanks a lot.

Thanks, Jim.

Our next question will come from the site of Richard Eastman with Robert W. Baird. Your line is open.

Good morning, Jay.

Hey, Rick.

And Keith. Sorry.

Hey, Rick.

Can you speak, Jay, maybe give us some sense of how the Laser Scanner fared in the quarter from a sales perspective? We know in the third quarter that you took some backlog down there, butwere the fourth quarter sales of the scanner above or below the third quarter?

I won't say specifically above or below third quarter. They certainly were similar to what we saw in all the previous quarters in terms of the volume and the expectation that we had. We certainly have increased what our expectations are for that product going into 2012 here based on the success it's had so far.

Q4 is one of those periods we said, look, we will watch this closely, because you have many of the distributors now have product at hand. So as shipments went out, there was the potential to see a lull as distributors started then putting the product in the marketplace, actually demonstrating it and so forth, and I certainly would not say that we saw a lull. So what we have now are distributors getting comfortable with the product. They've had it in their hands for a full quarter to demonstrate it to customers. We're definitely seeing sell through. We are not at a point where I will talk about the percentage of sell through, but in -- at the end of Q3 I think what I had said relative to sell through is that I can't say it's a trend yet, but the data was meaningful, and the data was positive in a meaningful way.

I will say that has continued to improve. The number of distributors that are out there that are actually demonstrating sell through is increasing. So all of those are good signs and positive signs. We get another quarter to here into 2012, we probably will be able to give a little more specific data on that. But it's good sell through, and so as a result I think we're going to see the growth we're expecting out it have in 2012.

Is -- do you feel that -- I can kind of do my own math on what the calendar year sales of the scanner were. But do you feel that product line starts to look from a growth rate perspective similar to core products as you move forward and the base is bigger?

Yes,I -- obviously I don't think it will be quite the same growth rate, just because it was coming off such a ridiculously low installed base in 2011. That being said, I do believe the Laser Scanner has the opportunity to out sell the other products on a percentage basis. So when we say, look, we do expect 20%, 25% growth across all the product line, for sure if there is one that had the potential for upside beyond that, it certainly is the Laser Scanner, because even though we have a larger install basis, it is still a very new product and it is being received really well in the marketplace.

We had our -- we have now turned into an annual event -- the 3D Documentation Conference. Last year we had it in Europe. We just had it in the Americas a couple weeks ago, and we had close to 300 participants at the conference who are all focused on how to use the Laser Scanner and how to -- either they're using it for their own purposes inside their Company or they're using it as a service provider. But the feedback we received during that session, and we've gotten multiple rounds of feedback since then, has indicated that this market is real and we have barely scraped the surface on where that product can go from a sales standpoint.

Okay. Just one last question, Jay. How should we model or think about the product gross margin as we move into and through 2012 -- calendar 2012? We started off calendar 2011 at a pretty good rate. 3D Focus kind of builds, maybe put some pressures there. We improved the margins. But can we make continued progress off of the fourth quarter gross margin -- product gross margin, or are you optimistic enough to say that we can make progress off of all of calendar 2011's gross margin on the product side?

Rick, this is Keith. I think -- first of all we don't give guidance with regards to margin. But I can say that I think we're making quite a few modifications with regards to manufacturing of the Focus. I think our margins from a manufacturing -- pure manufacturing cost standpoint should improve. However, to the extent that we continue to add new distributors, not only for the surveying market but for other markets, as Jay mentioned in his call, I think depending on that mix, that could have an impact on the margin. But again, we expect that to fall to the operating margin. So I think I wouldn't expect any degradation in the actual product cost.

Okay. So -- okay. No, that's helpful, and we saw progress in the fourth quarter, so again, this is probably more of a mix issue going forward than it is a production cost issue.

That's right.

Okay. Great. Thank you.

And our next question will come from the site of Mark Jordan with Noble Financial. Your line is now open.

Good morning, gentlemen. Question, Keith, on the tax rate in the fourth quarter. You had the lowest tax rate of the year. Could you talk about how that was generated, and could you give us some thoughts relative to the upcoming year of what kind of rate we should be assuming?

Yes. In the fourth quarter, as you know, tax rates are typically projected for the entire year, and there were some true up adjustments in Q4. I think going forward for 2012 I would expect the rate to be very much in line with the 26% to 28% rate that we've been using for fiscal 2011. We did get some benefit from some option exercises in 2011. But I think the 26% to 28% range is probably a good target for 2012.

Okay. Secondly, Asia Pacific fourth quarter sales were flat. You didn't see, as you saw in your other geographies, your normal seasonal uptick. Was there a specific reason in that market for that flat sequential performance despite the fact that you were -- you had made some additions to the rep base there?

I mean, I don't think there's any reason for us to be concerned about what the volume looks like going into 2012, number one. When you look at the fourth quarter in Asia, the couple of things that we mentioned before, in particular, the -- in Thailand, the issue there -- the flooding there, it did definitely have some impact on us in Q4. Not just in Thailand, but you also have customers in Japan who had momentary pauses as they got themselves pulled together after the disaster there, which did affect many of their plants.

Thailand, though we don't talk about it a lot for FARO, it is one of the bigger countries in our portfolio from a sales standpoint. So the team there, as I indicated, they're definitely seeing what appears to be, I guess, more opportunities now going into 2012. Customers are restarting, and they've actually -- they're doing more things than we originally planned on for 2012, so that's a good thing. But outside of that, I wouldn't read anything into the Asia number in Q4 from a concern standpoint. We certainly feel pretty good about where we're at going into Q1 and the rest of the year.

Okay. Final question, relative -- you made -- Jay, you made a comment about making investments in your sales force in the upcoming year. I think you increased your rep base a little over 8% this year. Moving into 2012, to support the 20% or 25% overall revenue growth rate, what kind of increase in terms of head count for sales reps do you think you'll have to put in place?

Yes, without giving a specific number, it will be anywhere between low teens to high teens from a percentage increase standpoint, and it really depends on the timing of finding the right people. They will be mostly focused on the -- on the metrology side of the business. So everything -- we'll have a few adds in the Laser Scanner side, but we're doing a lot there with distribution network at the moment. There's definite opportunity and uncovered territory or territories where there is an opportunity to dive deeper with more people in place. We are definitely see that now from a market demand standpoint. So those heads will tend to be focused on that area more than on the Laser Scanner side

Thanks very much.

Thanks, Mark.

(Operator Instructions). Our next question will come from the site of Ajit Pai with Stifel Nicolaus. Your line is now open.

Good morning.

Hi, Ajit

Two quick questions. I think the first one is, going back to the gross margins of the Focus Laser Scanner, I think you've said historically that over time despite using the indirect channel, you expect the gross margin of that product to come up to the historical corporate average. Now is that still the case that over time you can get the costs out or [increasing] volume you can [actually] get it there. And in terms of one quarter or two, but if that's the case how many quarters will it take to get there?

You're right. I think we've always said that in our long term model we're going to -- we're targeting the 60% to 65% gross margin. And I think over the long term, I don't think I can nail down if it's going to be one or two more quarters before you see that, regardless of the distribution mix for the Laser Scanner product, that you're going to see gross margins kind of in that range.

I think typically what we're emphasizing is cost reductions on the bottom side and cost reductions on the labor and overhead side. I think to the extent that the distribution mix, not just in the surveying industry but in the insurance and forensics and the other markets that we're targeting, depends on the distribution mix of that -- of those channels, as well. But over the longer term two or three year targets, we're targeting that 60% to 65% overall gross margin.

For the product, which would mean that your average gross margin for the overall Company should rise up to beyond to reach the same or beyond what you have delivered historically as a peak?

Well, I think, without getting into specific product margins, I think we've always talked about the order of the margins, with the arm being the highest. I think quite a bit for the Laser Scanner is going to depend on the distribution mix. But the 60% to 65% gross margin has been one of our longstanding targets, and I think that -- I'm not going to put a specific number of quarters, but clearly that's stale achievable goal for us.

Got it. And then just maybe the gross margin for the services side. Even that appeared to come under pressure in 2011. What is driving that?

Well, we just opened a facility in Brazil. That primarily had the biggest impact, or a lot of upfront cost related to getting that service center started up, so I think you'll start to see those margins you know improve a little bit.

Got it. And then the Focus Laser Scanner, has there -- last quarter you said there hadn't really been a meaningful competitive response. Have you seen any other change in the competitive behavior from the competitors that you face in that market?

We have not seen anything yet. I continue to say obviously we expect something at some point, but we haven't seen anything, and it's been pretty quiet.

Right. And then the last question would be just looking at the verticals that you serve. You gave us some good graphic color about what happened in Thailand and some of the slowdown in Europe. But in terms of vertical, are you seeing any change in increased spending or reduced spending by the four key verticals that you have historically? Not necessarily the new vertical on the service side, but when you look at automotive, you look at aerospace, and you look at some of the other verticals you're looking at, is there any vertical where we can actually expect an acceleration rather than deceleration against more [difficult] comparisons.

Yes, I think -- here's one way to look at it, since we historically haven't talked about the impact from each individual vertical. But what I say is, number one, we still don't necessarily need the verticals to be growing for us to grow. We still are a heavy productivity play in even kind of the primary four that we have already sold into in the industrial world.

From a macro perspective, what we are definitely seeing is that in the Americas we are definitely seeing an increase in spending for sure, even beyond where they were before. In Asia, same thing, although,look, Asia's been growing. They're spending on a pretty regular basis now for a while. Europe is the one spot where spending growth may not be as much as it was. It may even be flat for a while. But again, even though it may be flat on the spending side, we still feel confident about 2012, because that hasn't historically been a driver of our own growth, because there is this focus on productivity and there is definitely still CapEx money available at all of the different verticals we sell into -- particularly the big four verticals -- in order to improve their own productivity. They've got money to spend on technology, just not people. And we're definitely still seeing that.

Okay. Thank you so much

Thanks, Ajit.

Our next question will come from the site of Richard Eastman with Robert W. Baird. Your line is open.

Sorry, back for a second. Jay or Keith, did you see any cancellations in the quarter for purposes or anything else at distributors or just in the market? And the reason I'm asking is the backlog number seems like it should be a bit higher relative to the fourth quarter order and sales performance.

I can't say we've seen anything meaningful. I mean, you always have a few cancellations here and there. We've had a few cancellations from distributors where they may have ordered a couple too many out of the gate, and they're getting themselves ramped up, but nothing that would be material or meaningful from my perspective due to the backlog or the quarter.

Okay. And then just the last question. Jay, could you just explain -- you made some comments around this new approach on R&D, and we have -- this is -- let's see, the title is new Technology Strategies and Evangelist or something? Bernd Becker? But is this new approach, is it targeted at driving more R, more new technology, new research? Or what exactly are you putting the emphasis on there?

So for Bernd's role, and the part that I get excited about is -- first of all, let me backtrack for a second. We obviously I think we've got a pretty good and demonstrated track record in being disrupted in the products already inside the portfolio, and that doesn't change. The teams are always working on being the next gen -- the next disruptive gen, even for products that we already have in house.

The piece where I want to take advantage of the strength we have from a technology perspective, from an engineering perspective, from a brain power perspective, and from a market presence perspective starts looking at other three dimensional measurement technologies that belong in the portfolio that we may not have there today. And so there's a couple ways to look at that.

One is the market presence side or the market strength side. We have customers who are asking us on a regular basis can you do X, can you do Y, can you do Z, and we say, no, we don't have that in the portfolio today. But we internally have some of the capability to do that, and I'll get to that in a second. Or we don't have the capability to do it, and we need to get more focused on our M&A approach to how we would put our hands around some of that. And one example I've used in the past, and the one I'll keep talking about just to stay consistent is, if you look at a manufacturing plant, if you have automated measurement needs, we don't do that today. However, we certainly have the capability to create that.

So where Bernd comes into play is, number one, working with me to strategize, what are those additional opportunities, what are those additional verticals, what are the additional technologies? Number two, with the engineering teams, looking at it saying, hey look, inside each of our core products are a series of subsystems which have significant intellectual property or application value or both within them that, if could not figured differently and managed differently across the spectrum, could actually provide different solutions for the customer base. And then third would be, and if we don't have the ability to generate some new products out of that, then let's recycle ourselves again on the M&A front and see what else is missing there.

So it's to put a much more, what I call, concrete thoughtful and aggressive approach towards that to take advantage of, look, we are on a nice growth curve right now, we've got a lot of cash in the bank, as we frequently talk about and we are now frequently asked about again, and we have this tremendous amount of expertise that developed over the last four to five years in the 3D space which is being applied in fairly specific methods and ways today, and all of those products and methods that we have today have significant growth potential going forward. All the products should still grow 20%, 25%, like I talked about earlier. But this is a chance to leverage that strength and that capability into something much bigger, much broader and potentially provide even greater growth opportunity as we go forward.

So that's how we look at it. We'll talk a little bit more about it during the investor meeting next week for sure and some thoughts on the approach. I'll talk a little bit about how I've coined that and the phrase I've given it and the theme behind it for the entire -- to rally the whole Company behind it, which I have done now through all the different all-hands meetings and so forth. It's going to be -- in my opinion, it's going to be pretty exciting and pretty aggressive, and it definitely has some transformative potential here for the Company, much more beyond what we are already today.

I understand. Very good. Thank you.

And we have another follow-up question from the site of Ajit Pai with Stifel Nicolaus. Your line is open.

Yes, twoquestions. The first one is the mix of new customers compared to existing customers in the quarter?

The new customers for the quarter is about 44% new for the quarter, and it's about -- I guess it averaged about 42% for the year

All right. So now when we look at that, do we see a trend? I think the target for the Company until a couple of years ago was that you wanted 50% new customers and 50% existing customers. Has that -- is that going to change now? Do you feel that the penetration levels at a point where we can expect this current mix to be the ongoing mix?

No,I think it's going to continue to shift towards new again, Ajit. And the primary driver for that is, number one, on the metrology side I do still believe we should be targeting a 50/50 split. The importance being that the more customers who are using our product today, the better opportunity for a hockey stick of growth to continue or replicate itself or even improve how steep the curve is, because the more standard the technology becomes, the better the opportunity for pull. So it's not just us pushing.

And then on the Laser Scanner side, obviously I expect the customer base there to be heavily slanted towards new customers for quite some period of time, untilwe've gotten ourselves in that space. So in some respects -- and we probably at some point are going to split this out -- to look at it as a blended average. To be meaningful, we will probably have to split to here's what we're could go on metrology side, here's what we're doing on the Laser Scanner side. It's not quite meaningful enough to do it yet, but arguably you could see the Laser Scanner be 75% or 80% new and 20%-ish existing. Now I'm just throwing order of magnitude out there. It could be like that for some period of time here, because the market is that brand-new for us and that wide open.

Got it. And then on the R&D side, I know you're going to provide more color, but the way to think about it for income statements and modeling right now the changes, usually when you increase investment in R&D, there's a lag time between stepped up investment and then getting return. So are the changes that you're proposing are they income statement, do they actually involve an increase in the short run in the budget for the R&D as a percentage of revenues or in an absolute level -- stepped up level of investment?How do you think that have in terms of modeling our operating leverage over the next couple of years?

So the target has always been to be somewhere between 5% and 7% of sales, andwith the exception of 2009 had sales had the dip obviously, we've been within that range. And there's been periods of time when we we're much closer to the 5% range, and periods of time when we were a little bit higher in it. I still believe that's a right range for the Company. We may run at the high end of that range for a while. Is it possible to run a little over 7% for a while?Yes, it's possible. It really depends on momentum, and as some of these products develop, the momentum that we push to get them into the marketplace.

That being said, we do still expect to get continued meaningful though steady improvement on the operating margin side too. So even if we did dip a little bit above -- or grow a little bit above the normalized range, we would still expect to be able to see some at least stable if not continued improvement on the operating margin side while we did it. I think we can actually do both and accomplish what I want to do here on this -- the new leap on the R&D side.

Got it. Thank you so much.

And our next follow-up question will come from the site of Mark Jordan with Noble Financial. Your line is now open.

Thank you. Let me just push that last question a little bit further. It sounds like, Jay, from your comments that the emphasis on R&D in the next year would push R&D as a percent of sales above where it was this past year, which is I guess 6.0%?

Yes, I'm not going to --well, could it be higher than 6.0%? It's possible. Do I think we can do it within that typical 5% to 7% range? I still believe that's possible to do. And if for some reason we felt the need to push even higher above that, I would -- at that point I would talk openly about it and give some good reason for it. But I actually still think we can keep it within that normal -- like I said, probably the high side of the range but the normalized range still. Even though that might mean a slight increase in the actual spending dollars, it would still be in the range that we've come to expect.

Okay. Finally, just you did mention repeated questions on your cash position, and I guess it continues to grow. I know historically you've stated that you want to maintain a large cash position so that you could make an acquisition if there's a technology you needed to buy. When is enough cash enough? And when do you see -- or is there a point at which you might look at doing other things with your cash other than just holding it for a potential acquisition?

I know the answer will drive everybody crazy. I cannot tell you when I think enough cash is enough or when we might do anything special with it. I still believe there are investment opportunities for us out there that are on the technology side that are the best use and application for that cash for the future growth and benefit of the Company and ultimately the shareholders, versus anything in the nearer term. It's easy to say now, because we're sitting at $130 million, and look, I think it's a lot of cash. Ifwe're sitting on $500 million, I think we would have maybe a different dialogue, but I can't say that's even the threshold either.

I think as a technology company, as high growth company, as we continue to look to grow and even accelerate that growth, you want to have enough cash available to be really flexible and move really fast when you need to. And certainly, I don't -- I think the $130 million is high. I don't think it is absurd or unusual relative to the size of the Company right now, given the types of growth plans that we have and the types of things that I think we can still do.

Final question, relative to the monitor, is that still -- do you still have one more event, and what might be the cost of timing of wrapping up that experience?

Yes, wehave one final report that's scheduled for the second quarter of this year, and I think -- it really could depend. I think we're estimating roughly about $750,000 to $1 million.

Okay. Thank you.

And we have a follow-up question from Ajit Pai with Stifel Nicolaus. Your line is open.

Yes, so when you look at your order growth rate these past couple of quarters on a year over year basis as well as on a sequential basis, there's been a very significant moderation. The [unstoppered] comparisons and the channel for the new product, the Focus Laser Scanner product, also that's -- [as] you start [lapping] the initial channel sales. So could you give us some color as to from this mid teens to low teens growth right now year over year, what gives you confidence now [than] the overall economy is -- or you have more difficult comparisons, all of that? What is the confidence you can see a 20% to 25% growth as a business model, especially for 2012? You mentioned you expect it to be within the model range. What gives you that confidence?

Let me add a teeny bit more color then and a little bit more tactical color to go with it then. So number one, we do see in at least two of our -- the two primary regions out of the three, Americas and Asia, we see good economic development there for sure. And I think the situation is much better in the Americas going into 2012 than it is going into 2011. We see that day in and day out. We see customers spending more again. And in Asia, even though we have what he these tiny blips here and there, overall the region and the health there looks good, even including today Japanese industry output was better than expected. We're seeing good -- we still see good signs there, no question about it.

Europe, for sure there's a little bit of pressure. I think it's moderate at best. I think, yes, there's a little bit of this wait and see mentality in Q4. That being said, I don't think that lasts in 2012, either.

Tactically, a few other things just to think about. Number one, you do have more and more distributors coming online, who will become more productive for us on the Laser Scanner side. So as we add new ones, that will help driver some growth -- moderate growth -- and as you have existing ones getting comfortable with their product and they actually start selling through, we do see good growth coming from those folks once they're established. The pattern is definitely there.

On the metrology side, the part of the business that really focuses on the industrial world, we have taken additional steps. Number one, obviously, from a head count standpoint, we will increase the rate of adds this year compared to last year. And there's a definite correlation for sure; as you add hedge you get revenue and income out of them, even though it takes them a little while to ramp up, it's not like they aren't selling right out of the gate. So they start generating sales, and they're run rate will continue to improve.

We've actually also done a couple things on the leadership side to get additional focus on the metrology business. So to use an example here in Europe, we actually have now a sales leader dedicated just to industrial measurement, the metrology side of the business, and a separate one that will manage that Laser Scanner distribution network and channel and the account managers on that side. Because the markets are really kind of different, the focus is pretty different, and we want to make sure we are maintaining this 20%, 25% minimum growth rate on all sides of the equation. So putting that additional focus there will help that. And you're going to see we've -- not necessarily the exact same pattern in the other two regions, but we've done additional things in the other two regions as well to give similar measured impact or the ability to measure the impact even greater on the metrology side to help drive that growth in those two regions as well.

So all of those different things and -- are positive steps and give us some comfort that we should be able to see that growth rate.

Thank you.

And there are no other questions at this time. I'd like to turn the call back over to the speaker for any closing remarks.

Great. Thanks, everybody, for your time and attention today, and like said, I look forward to seeing most of you next week at the investor conference in Lake Mary. Thanks very much.

And this does conclude today's teleconference. Thank you for your participation. You may now disconnect.