FARO Technologies Inc (FARO) 2012 Q1 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies' conference call in conjunction with its first-quarter 2012 earnings release. Later you will have the opportunity to ask questions in our Q&A session. (Operator Instructions). Please note today's call is being recorded. For opening remarks and introductions, I will now turn the program over to Vic Allgeier. Please go ahead.

Thank you, and good morning, everyone. My name is Vic Allgeier of the TTC Group, FARO's investor relations firm. Yesterday after the market closed, FARO released its first-quarter results.

By now you should have received a copy of the press release. If you have not received 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 at 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 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 Securities and Exchange Commission.

I will now turn the call over to Keith.

Thank you, Vic, and good morning, everyone. Sales in the first quarter of 2012 were $65.2 million, a 24.1% increase from $52.6 million in the first quarter of 2011. On a regional basis, first-quarter sales in 2012 in the Americas increased 29.7% to $25.1 million, compared to $19.3 million in the first quarter of 2011.

Sales increased 21.2% in Europe to $23 million from $19 million in the first quarter of 2011. Sales in Asia-Pacific region increased 20.4% to $17.1 million from $14.2 million in the first quarter of 2011.

The effect of changes in foreign exchange rate on sales was a decrease of $700,000 in the first quarter of 2012 compared to the first quarter of 2011.

New orders increased 11.1% in the first quarter of 2012 to approximately $62.1 million, compared to approximately $55.9 million in the first quarter of 2011. On a regional basis, first-quarter orders in 2012 in the Americas increased 6.9% to $21.8 million, compared to $20.4 million in the first quarter of 2011.

Orders increased 6.5% in Europe to $22.8 million from $21.4 million in the first quarter of 2011. And orders in the Asia-Pacific region increased 24.1%, $17.5 million, compared to $14.1 million in the year ago quarter. The top five customers by sales volume in the first quarter of 2012 were Boeing, PT Smart Mitra Solutions, [Chang Chong City Star Commerce], IHI Corporation and General Motors, and together represented only 2.6% of our sales.

The top 10 customers in the first quarter of 2012 together represented only 4.2% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 57% in the first quarter of 2012, compared to 57.6% in the year ago quarter, and represents continuing sequential improvement in our product margins over the past three quarters of 2011 as a result of both better average selling prices and lower manufacturing costs, with some fluctuations among the product lines during that time period, but having an overall positive trend.

On a quarter over quarter basis, gross margin from product sales decreased to 62.3% in the first quarter of 2012 from 63.7% in the first quarter of 2011, as a result of a change in the historical sales mix caused by the increase in the sales of laser scanner product, which currently has a lower gross margin.

Gross margin from service revenues was 30% in both periods.

Selling expenses were 24.6% of sales in the first quarter of 2012, compared to 26.9% in the year-ago quarter. Selling expenses increased to $16 million in the first quarter of 2012 from $14.2 million in the first quarter of 2011, primarily as a result of an increase in compensation of $800,000, marketing and advertising costs of $400,000 and travel-related costs of $400,000.

Administrative expenses in the first quarter of 2012 were 10.2% of sales, compared to 12.5% of sales in the first quarter of 2011, remaining flat at $6.6 million in each period.

Legal and professional fees related to the patent litigation and the FCPA monitor in connection with the DOJ and the SEC settlement were unchanged at approximately $500,000 each period. The monitor is currently in the process of performing her follow-up review and we expect to incur fees in the range of $500,000 to $750,000 in the second quarter of 2012.

The Metris litigation is also scheduled for a jury trial on July 30, 2012 and we expect this will increase our legal fees in the third quarter of 2012, but cannot estimate the impact at this time.

Research and development expenses increased to $4.4 million in the first quarter of 2012, or 6.8% of sales, compared to $3.6 million, or 6.9% of sales in the first quarter of 2011. Research and development expenses increased primarily due to an increase in compensation of $500,000.

The operating margin for the first quarter 2012 increased to 12.9% from 8.2% in the year-ago quarter, primarily as a result of the continuing effects of leveraging the current operating structure. Other income and expenses net remained flat at income of $100,000 in both periods, and represents the effects of changes in foreign exchange rates on the intercompany balances denominated in different currencies.

Income tax expense increased to $1.9 million in the first quarter of 2012 from $1.2 million in the first quarter of 2011, primarily as a result in an increase in pretax income. The effective income tax rate decreased to 22.1% in the first quarter of 2012, compared to 26.5% in the first quarter of 2011, and included the reduction in the income tax rates of 5% and 3.5%, respectively, related to the tax benefit of the exercise of employee stock options.

Net income increased to $6.7 million, or $0.39 per share in the first quarter of 2012, compared to $3.2 million, or $0.20 per share in the first quarter of 2011.

I will now move on to a few balance sheet and cash flow items. Cash and short-term investments were $138.6 million at March 31, 2012, compared to $129.5 million at December 31, 2011. Accounts Receivable was $48.7 million at March 31, 2012, compared to $57.5 million at December 31, 2011.

Days sales outstanding at both March 31, 2012 and December 31, 2011 was 68 days.

Inventories increased to $74.8 million at March 31, 2012 from $67.2 million at December 31, 2011. The increase in inventories was primarily related to an increase in certain raw materials with long lead times related to the production of the Focus Laser Scanner.

Finally, I'll conclude with our headcount numbers. We had 911 employees at March 31, 2012 compared to 885 at December 31, 2011, an increase of 26 employees or 2.9%. Account manager headcount at March 31, 2012 was 164 with 52 account managers in the Americas, 52 account managers in Europe and 60 account managers in Asia. Geographically, we now have 361 employees in the Americas, 306 employees in Europe and 244 employees in the Asia-Pacific region.

I will now hand the call over to Jay.

Thanks, Keith. Sales grew close to 25% in the first quarter, a nice way to start the year. All three regions had double-digit gains, above 20%, with the Americas leading the way at 29%. Gross margin declined slightly quarter over quarter, but it increased sequentially from Q4 as we continue to improve pricing and manufacturing costs for certain product lines.

Net income increased more than 100%, demonstrating continued leverage from our operating model.

Orders in the first quarter grew at 11%. Asia had solid double-digit gains with good growth in all of our major markets. In the Americas, there were selected timing issues. Orders that appeared to be closing in Q1 were pushed to Q2 and closed. That resulted in an unusual single-digit orders growth rate in the Americas for Q1.

In Europe we experienced some market softness, also resulting in a single-digit orders growth rate, but we expect that to improve through the rest of this year. We made a leadership change in the European sales organization to drive renewed focus on returning Europe to double-digit growth. And as discussed in the last earnings call, we're also adding new account managers and other sales support personnel in each region to help drive our growth.

The Focus Laser Scanner is performing well. We continue to build out the distribution channel, which represented 37% of laser scanner sales in the quarter. We're also seeing good sell-through from this channel.

Approximately 65% of the distributors returned two or more times over the last 12 months, with the bulk of the end customers from those sales coming in the surveying and construction space. We are experimenting with additional verticals for the laser scanner, looking to identify the best fit customer needs as well as the best channel to serve those markets.

In both my letter to the shareholders and this year's Annual Report, and the investor day we held in Lake Mary in February, I talked about the Cambrian explosion at FARO. This program is aimed at accelerating our own R&D activities by leveraging the component-level technology and know-how we already possess to develop new product offerings to address existing and new potential verticals. The program is off to a nice start with Bernd Becker, our Chief Technology Strategist and evangelist, leading the effort with me.

We have set aggressive timelines and the team has already identified several great potential products. Expect the first of these offerings to be introduced sometime next year.

Many of you asked about the status of the monitor and when she will finish her work at Faro. The monitor started her second and final review a couple of weeks ago and she will be visiting locations in each of our regions as part of her review. It will be several weeks before we learned the final results and see her report to the SEC and DOJ. We should be able to discuss the final outcome during the second quarter earnings call.

The Metris patent litigation is scheduled to go to trial on July 30. This is a jury trial and the judge in the case has asked both parties to make one more attempt at settlement prior to the trial's beginning. However, we've had no success in prior attempts, so I believe the trial will go forward.

The judge has already ruled that we don't infringe on the first patent in question. We continue to believe we do not infringe on the second patent, and that the patent is invalid and unenforceable. We will provide more updates during next quarters earnings call.

We feel very good about 2012 and believe that 20% to 25% sales growth remains the right target for our Company as the go forward. We're not seeing anything in the market that would indicate this isn't still the right goal.

We are continuing to drive leverage throughout the operation as we look to further improve our margins, and we have a solid pipeline of R&D initiatives in place. As always, my thanks go out to the FARO team, our customers, suppliers, and investors, and I'll now open the call for questions.

(Operator Instructions). Mark Jordan, Noble Financial.

Good morning. Congratulations on a good start to the year. Jay, a question relative to seasonality. Clearly, there was a distinct seasonality, historically, with just in the Arm business with 20%, 25% -- 25% to 30% of revenues spread across the quarters. With Scan involved, do you see that same type of seasonality existing? Or do you think it will smooth out more because of the Scan product line?

Over time, I think it will smooth out a little bit just because the types of verticals we are selling into don't appear to have the same type of dynamics that, say, the manufacturing environment does. That being said, it's also a little bit early to tell. I guess the initial data would indicate that's probably the case.

But it is still only a year and a half, give or take, a year and three quarters since we introduced that version of the product, and the highest volume of the sales really didn't start occurring until the third quarter of last year when we had worked out all the kinks in the manufacturing process. So I think the early data would indicate yes, but it's probably too early to say that we know exactly how much impact we'll see.

Okay. Keith, relative to the tax rate, was that a one quarter benefit? And should we expect a more normalized 27% rate for the balance of the year?

Yes. I think we are going to be in that 27%, 28% rate for the remainder of the year.

Okay. And then final question, relative to gross margin on product, obviously it was a little bit higher than I was looking for here. Should one assume that that rate is at least sustainable as you gain volume in the second and third quarters?

Well, if we -- (multiple speakers) I think so. I think we talked about -- it was probably the second quarter when it dipped and then sort of stabilized. And Keith and I both, our view is that we had probably hit sort of the bottom end of the platform at that point, and we should start seeing slow progressive improvement. And we've seen that in the last three quarters in a row now.

So I think you'd expect to see at least some continued movement upwards, at the rate at which obviously depends on a whole variety of factors, product mix and otherwise. But I think we still feel good about slow upward margin -- movement from here.

Okay. Thank you very much.

Jim Ricchiuti, Needham Financial.

Thank you. Good morning. Jay, I was wondering if we could talk just a little bit more about what you are seeing in your -- how much of the softness that you referenced is due to the economic environment, which we're all hearing about? And how much is perhaps still specific to the issues that you're facing internally with the leadership transition?

I think there's a little bit of both, plus probably a third factor. So, the economic situation, there's definitely a little bit of pressure there. And it's still -- it's more -- it's certainly nothing like we saw in 2009.

There's a general feeling when you talk to the team over here of, okay, customers are watching closely what's happening in southern Europe. It hasn't necessarily changed their overall buying patterns. It may cause some delays, but not with all of the customers, either. Some have plowed forward and said look, none of that matters to us; we're still moving forward. So that's a piece of it.

For sure, a leadership change is beneficial there, as we talked about in the last call. The managing director for Europe is no longer with FARO and we are actively engaged with our headhunter to fill that position.

In the meantime, I also made the change to the sales leadership. We've put in place an individual who's been a FARO sales leader and all the way down to account manager over the last 13 years. She's very familiar with the products, very familiar with the Company, very familiar with the sales process, and really understands where the best practices are.

And I think it will allow us to refocus the team, particularly on the metrology side, which does tie directly into that manufacturing space. So, set aside a little bit of softness there, I think some of that is we need better execution from our team.

And then the third area, there is a little bit of pressure just because the laser scanner growth -- if you look at Europe in particular last year, the orders growth, the laser scanner in the first quarter was phenomenal. I mean, in total the region grew more than 40% -- or 50% in orders in the first quarter of last year. So you had a little bit of the -- not quite the hangover effect from a massive growth in the first quarter of last year, but at least there's a little bit of normalizing, I think, there as well because it was such a substantial movement in the first quarter last year.

It's probably too soon in this leadership transition, but are you seeing any improvement in profitability of that portion of the business?

On the laser scanner side?

Well, just in the European business. Sorry.

Oh, sorry. Yes. I think we'll see slow and steady improvement there as well. I'm actually here again this week and I think we're -- again, sort of like the gross margin, we're going to see slow and steady improvement as we go through the year.

I think the most critical piece here, the refocusing of the sales team, particularly as it relates to the metrology side, which does still carry very, very strong gross margin with it, improvement there obviously has a pretty quick trickle-down effect.

Okay. Thanks. I'll jump back in the queue. Thank you.

Richard Eastman, Robert W. Baird.

Yes. Good morning. Could you just, just as a follow-up to that last question, in the Q, there is a pretty substantial swing in the operating profit in Europe, from a loss to a $2 million plus profit in this quarter. What accounts for that?

Well, I think there's some improved margin and I also think there is a little bit of improved cost control. There is clearly some leveraging effects that we've been experiencing throughout the entire Company. But primarily, it's leveraging that European structure and some increases in that gross margin rate.

And a question on the -- I want to double back for a second on the gross profit margin on the product side. I understand the change year over year better than I do sequentially. So if I look at the gross product margin -- gross margin on products from the fourth quarter to the first quarter on substantially lower sales, we did 150 bps better in gross margin. What's the mix impact there that's so substantial?

Well, I don't think we talk about specifically gross margin by product. But I can tell you that we've been making improvements in that product gross margin over the past three quarters when we started to introduce the laser scanner. I think in the second quarter of 2011, we were around 61% and we dropped down to 60% and then back to 61% again.

But, as I said on the call, we've been seeing some improvements in the average selling prices and some decreases in our actual unit cost, so it got us to that 62.3% for the products in the first quarter.

Is part of the -- Keith, is part of that -- I think in the fourth quarter you had about 50% of the Focus Laser Scanner went through distribution, and you said 37% this quarter. Is that a measurable impact?

Well, that's true. And the impact of the distribution versus direct sales mix on the laser scanner will continue to impact that product margin because of the discounting effect for the distributors.

And is that -- is the 37% of sales in this quarter -- does that work higher through the year? Is that what you'd expect in terms of more of that product moving through distribution?

Yes. I think that's our plan 2012, though we'll probably end up closer to maybe a -- to 75% sales mix towards distributors. But it's clearly -- the trend is toward more distributor sales rather than direct sales.

I see. Okay. And then, Jay, can you -- I know you don't really speak to numbers here, but was Focus Laser Scanner sales in Q1, were they higher than Q4?

I don't know if we've actually disclosed that in previous quarters either, Rick. Keith, have we given a feel for that in the past?

No, we've never actually disclosed any of it.

Yes. What I can tell you is that we're seeing very good growth there still today. And we're seeing good growth metrology, too. Obviously, the Laser Scanner has a very, very good growth.

Okay. Given that we're kind of making up our own numbers in terms of dollars of sales, can you just directionally say if they were up?

Were laser scanner sales up?

Yes, sequentially.

Yes, sure. I mean, I'm not going to say whether -- you have to understand there is growth in the laser scanner, then, yes, they are up over last year. I will say I won't say by how much, but there is good growth in the laser scanner.

Okay. And your comment about US orders being delayed, but then closed in the second quarter -- early in the second quarter, were those orders skewed towards Focus Laser Scanner or metrology?

It was a little of both, but more heavily skewed towards metrology. And it was one of those that the team [that sells], they really felt those were ready to close. Our normal process would have indicated, yes, they would. The fact that they have closed relatively quickly after that, I think is still a decent indicator of the overall market.

Okay. Great. Thank you.

Jeff Bernstein, Capital AH Lisanti (sic).

Yes. Hi, guys. And congratulations is due on bringing the revenue beeps to the bottom line for the last couple quarters. Can you talk a little bit about -- on the manufacturing side, are you seeing cost reductions in manufacturing? Is it really the volume leverage that's lowering the unit cost? Can you go into that a little bit?

Yes. I think it's probably a little bit of combination of both on the lower unit prices as well as primarily, though, from the lower overhead costs as a result of the increase in the volume.

And can you give us any kind of feel for what happened with ASP's -- order of magnitude, price increase? Is it -- are you sort of still discovering what the optimal pricing is?

Well, I think on the Arm side, it's been holding up fairly well. I think we talked about some of the effects of the increase of the accessories sales on the margins for the Arms. And I think we talked about last quarter we had a slight increase in the average selling price for the laser scanner as a result of the compass and the height sensor feature being turned on.

That's great. Thanks.

And next we have a follow-up from Jim Ricchiuti, Needham.

Jay, the bookings that you referenced in the Americas that slipped and then subsequently closed in Q2, was that concentrated among a few metrology customers? Or was it spread out among a number of them?

No, it was pretty spread out. It followed similar to our normal -- when you look at our sales volume in the quarter, that 2% make up the top five and 4.5% make up the top 10, it's very, very scattered. It's not like we had any one big deal that we were waiting on. It's spread across a pretty good group.

Okay. And then, just turning to the Scanner, where are you in terms of the buildout of the distribution channel? Does that change? Does the increase begin to accelerate over the next couple of quarters in terms of adding new distributors? It sounds like you've got a pretty -- fairly aggressive target in terms of what percent of revenues you expect to come from that channel toward the end of the year.

Yes. I'd say we're at least probably 75% of the way they are now as it relates to focus on the construction and surveying space. So I think second quarter to third quarter we get that wrapped up.

There's always going to give some give and take in that market, as we identified a handful of others that we find are just fixes. And obviously if you have some that are performing you make some change outs. But that kind of that kind of normalized rate, I think we get there by the end of the third quarter.

That being said, as we look for the other potential verticals that we can get into, and we've started some experiments there. If we find there they -- a different type of channel, whether it's distribution or otherwise, that is better than trying to run everything through our own people -- because our folks don't have access to that channel. You used insurance as an example. Our folks don't really have any access to that channel today.

So as we identify others, we may suddenly say, well, hey, look, the distribution channel is built out for construction and surveying for now. But here's the new vertical and the right way to serve it is through a different distribution channel, and we're in the process of establishing that now. So we'll kind of keep everybody posted as that goes, but there may always be some development there as we are looking for new spots to sell.

So are you suggesting that insurance is the next vertical that you're focusing more attention on with the product?

I won't say it's necessarily the next one. It certainly is high on our list of priorities to identify how to get in there, because we think there is a real opportunity there. But we're getting good activity in the Process, Power & Piping, or oil and gas segment, as you want to call it, and certainly in the manufacturing world today, as well. We've got several customers who've started using the Scanner, and they're scanning their facilities.

And essentially what they're doing is, every six months they are scanning the facility just to get a new updated 3-D rendering of everything that's in there. They're not even taking to CAD. They're just taking the data and storing it so they have it, and posting in a -- utilizing FARO WebShare on the Internet, so in a secure site so that those facilities can be viewed from anywhere in the world by anybody inside the manufacturer.

And these are customers that are buying the 3-D scanner; not using an outside service, but coming into it?

Correct. That being said, there's probably some who will decide to do it from an outside service; maybe some of the smaller ones. But at that price point, and the ease of use, particularly if you're not doing anything to bring it to CAD, anybody can take a scan, pull out the SD card and upload it to the web. I mean, that's about as easy as it gets.

And then, just given the ASP of the product, it sounds like this would be one per facility?

It depends on the size of the facility. It could be one per; you could have a couple in each facility and they want to have a backup just in case. You may have a pool of them and you have a team of folks who will roam facility to facility. That's probably less likely.

It's more likely you've got a facility manager who has one or two on site and then gauge the project again every six months.

Okay. And I wonder if we could just talk a little bit about the strength that you're seeing in Asia. Where is it coming from, perhaps what countries and which verticals?

Yes, well, all of the verticals are pretty well represented when you look at the numbers. For us, the big three countries remain Japan, China and India. What I will say is that China is still -- it's sort of like the GDP rate. It's mildly noticeable, though it's not dramatic in terms of the impact on our business.

But the pressure on the commercial credit side, there's still a little bit of pressure there. We have a lot of customers in China who need those facilities because the bulk of our sales in China are 100% upfront or close, so they use the (technical difficulty) [credit] facility to get the cash and be able to make the sale.

There has definitely been tightness and there over the last two quarters, Q4 and Q1. And it did cause a little bit of slowdown in China. But, like I said, it's sort of like the GDP rate. If they're running at 160 miles an hour and now they're at 150 miles an hour, either way they're going well over the speed limit.

But the booking strength, you showed the strongest strength in bookings in the Asia-Pacific region. Where was that coming from? And that was that both metrology and Scanner?

Yes, it is from -- all the countries are growing well, but the big three are all contributing fairly equally. I can't say that one versus the other has dramatically improved that growth rate. And it is very good across both metrology and laser scanner.

Was there a significant uptick in Japan, just in light of what happened a year ago?

I can't say there was, not necessarily as it related to what happened a year ago, because we saw a little bit of impact from that last year, but actually not a lot. So I can't say that, yes, we had a massive upswing in the orders growth rate because they were so low in the first quarter of last year, because that really wasn't the case either.

Okay. Thank you.

Richard Eastman, Robert W. Baird.

Hey, Jay. Back again. Hey, just two things. On the Focus Laser Scanner product line again, was the book-to-bill in the quarter greater than 1 on that product?

I don't think we've disclosed the specific book-to-bill product. Keith, do you want to talk about that?

Yes. We typically don't provide, basically, either sales by product line or orders by product line.

Okay. Let me -- so without asking for a number again, how did the Tracker sales perform in the quarter? Were they kind of in keeping with metrology growth rate -- I mean, Arm growth rate, or -- (inaudible) that you categorize it.

Yes. Again, I don't think --

Okay. And then just in this last quarter -- last question -- how do you feel about the backlog, Jay, at the present level? I mean, is it going to kind of stick around this level?

Yes, I mean I think it's probably close. Obviously, the book-to-bill was a little bit lighter than we usually see this quarter, but going forward we still think roughly 1 is the right book-to-bill for us. And it has varied, we understand, as much as 5 or 6 points in a quarter over the last few quarters, particularly Q3 last year when we started -- finally started shipping all the laser scanners out as we got all the kinks out of the production process.

But, generally speaking, I think kind of a 1 to 1 is the right ratio. And the overall volume of backlog in this range, give or take, is probably right.

I see. Great. Okay. Thank you again.

Jim Ricchiuti, Needham.

Sounds like you're going to be adding some headcount, at least account managers, it appears, in Europe. Just in general, how should we think about headcount going forward? You've talked in the past, Jay, that it becomes -- it's becoming more challenging to get out in front of customers with the number of account managers you have right now. Where do you see that going?

Yes, the adds will actually be in all three regions, not just in Europe. We had some adds, small number of adds, in the first-quarter; we had some replacements here and there in the first quarter as well.

My target is, generally speaking still, you would expect kind of a high teens percentage year-over-year in terms of the growth in account managers. That is to keep pace with the anticipated growth and to help drive the current year growth as well. So, I think that's still the right target for the Company.

This plan that we have in place certainly reflects that, and if you look at the openings that we have out there, I think it matches that as well.

And where are you putting more of the new resources of the three regions?

Generally speaking, the emphasis is on metrology, given that we are building out a pretty decent sales channel on the construction and surveying side of the laser scanner.

That being said, if we identified a really solid market for the laser scanner that would be best served by FARO personnel, then we would probably add to the account management vase base of the FARO personnel. But we haven't seen quite the same necessity there at this point, like we have on the metrology where there's real opportunity.

And on that metrology side, are you adding more to the base in the Americas and Asia-Pacific? Where are more of the resources going?

They actually will be pretty evenly split across the three regions. We have -- the concept of splitting territories when you get to a point where, at a certain sales volume, it becomes very difficult for the account manager to maintain growth in sales because of those constraints on how many demos per month, the closing rate, all of those things that we've historically talked about.

So it's really in all three regions where you're at a point where you're starting to split territories again because there's so much activity in one potential territory.

Okay. Are you seeing any benefit yet, at least a meaningful material benefit from the initiatives you have underway in Latin America?

We're seeing a little bit of benefit. I think, given that it's just a smaller region, relative to the bulk of the Americas today, it will be a while before I think it has a meaningful, several points type of impact on the Americas growth rate. But we're seeing good growth down there.

All the indications certainly are clear that going direct and adding some more people down there to tackle, particularly, the Brazilian market have been all the right calls. And certainly doing the same in Mexico last year was the right call, too.

Okay. And just last question from me -- but just looking at the Americas, and I'm just wondering if there is any color you could give us on the verticals that have -- are exhibiting good growth at the moment or, perhaps, softening in the metrology area.

Yes. I can't say -- I won't pick out any relative to the growth side of it, because it's pretty well spread. Let me give one exception that there's -- and this won't be a shock, I guess, but there is definitely some pressure on anything tied to the government. So the military installations that we sold to, any of the government agencies that we sold to, the combination of election year and some of the tightness in budgets as they've tried to cramp them down a little bit, I suspect will have some pressure there.

It's not like sales have completely stopped, but I think we'll have pressure on that side, at least through the end of the election cycle.

Okay. Thank you.

Thanks, Jim.

Rick D'Auteuil, Columbia Management.

Good morning. Just wanted to dig into -- I think in the last couple of calls you talked about introducing new products and maybe the timing of around those. And I know you used the word disruptive. Maybe you can give us an update on anything meaningful that's in the near term.

Sure. We have one in the near term that is extremely meaningful. It will be -- I've continued -- all I say is soon, because I don't want to disrupt the market before the product is ready to disrupt the market. It is coming soon.

The one -- and we have talked about this openly -- it is the Laser Tracker, and it is a substantial change to the existing Tracker that we have today. So that's coming relatively soon. Let me just -- I'll say it that way.

Certainly, it's a 2012 product and, generally speaking, it should be out, we've said in the past-- should it be out by the time we get to the end of the first half, give or take? Yes, it's in the ballpark. So when you look at the existing portfolio, they've all had now, when you include that one, that would be a massive changeover for all of them over the last 24 months.

As we look forward, we will continue to sort of revitalize and refresh the existing products. There's still opportunity there, particularly on Laser Scanner but also on Arm and on Tracker too. But part of the focus of the Cambrian explosion, as we've called it within FARO, is to identify ways to be equally disruptive with other products.

There are -- we have customers asking on a regular basis, particularly in the manufacturing side, could you do X or could you do Year, of could you do Z? And as you look at the core technology that we have, there is probably the opportunity to serve some of those needs by cross-pollination and so forth of the existing technology we have in FARO.

So that initiative is extremely important as we go forward, and we'll have a substantial amount of our own time will be spent on that, now that we've got this complete portfolio refresh out there in the marketplace.

Just digging into the Laser Tracker, when you introduced the Laser Scanner, you not only gained share -- I guess, there's obvious cannibalization of your existing solution. So you gained share and you also extended to new potential -- or new end markets.

Is the -- how would you characterize the Tracker? Clearly, you're going to cannibalize your existing -- I assume you're expecting share gain. Does it also have the opportunity to extend to new markets?

Yes and yes, certainly, to the first two points there. As it relates to new markets, it's possible. I think it could open up -- there are very specific applications in areas for a Laser Tracker. It's certainly within the types of customers we sell to. It may open up more applications inside those customers. That I believe, for sure.

Does it get us into a vertical that we're not deeply penetrated into yet? It's possible. But, again, the market for Laser Tracker is a little bit more narrow than, say, the market for the laser scanner, which has substantial potential.

Okay. Thank you.

Jeff Bernstein.

Hi. Just a quick follow-up. How much of the product is booked and shipped in the quarter? And is that changing much with the increase in laser scanner sales through distribution?

Typically, most of the sales in the quarter are booked and converted in the same quarter. If you look at any one quarter, maybe we have four weeks' worth of backlog going into the quarter and it may not be the full four weeks' worth of sales that occurred in that time period, but it's typically about that.

So, still the bulk of what we do in any given quarter converts in the same quarter. And that's why it was so important last year to really get the production cycle roped down on the laser scanner, so that we could support that.

In some respects, it could even be -- the demands could be even quicker there on the laser scanner side, because if a distributor moves a unit, they're going to want their replacement unit back on the shelf, probably quicker than a metrology customer who says, hey, I don't need it for a couple more weeks, so go ahead and ship it in a couple weeks.

Yes. Okay. That's great. Thanks.

Joseph Garner, Emerald Advisers.

Good morning. First question, with the changes that you made in Europe, were there any unusual or onetime type of expenses, severance or otherwise, that were incurred during the first quarter?

There was nothing material in the first quarter. I think we may be booking something in the second quarter after we have all of the agreements in place.

Okay. And, Jay, I wonder if you could comment anymore in terms of some of the changes that you've been making in Europe, just to give us an idea, perhaps, of some of the things you've been able to enact at this point, and things that we can look forward to in the future there?

Yes, I think the biggest focus has been, one, just overall leadership change. And, obviously, one of those roles -- still the Managing Director role is not filled yet, so that's still a void that's being managed by me for the moment, which is driving quite a bit of time in Europe, which isn't a bad thing, actually.

Focus number one, beyond that, was on the sales side. Okay. Let's get into the pipeline. Let's see where the transactions are. Why aren't you -- if you've got it marked at 70% to close, why isn't it closing? And do you have any 80%s that fell off the table?

And, okay, let's look at all of the ones sitting at 30% and 40%. Some of these must be at 60% and 70% right now. Where is the focus on driving those and who's looking at that tactically day in and day out?

That's -- some of it is strategic, but some of that is very tactical. And it really takes a certain type of sales leader to spend a huge portion of their time doing that. So that sort of drove the sales change there -- the sales position, the sales leadership change in Europe.

Being tight on the budgets -- certainly, some of that was already in the works. There was clear knowledge already across the whole team that they needed to bring things back under control. I think, does it help I'm the one overlooking it unable or detailed sort of daily basis? Probably, but some of it I think the team was already working on the team was already working on.

That, for me, is important -- but not nearly as important at that sales side. I mean, sales obviously drive the entire model. And the market in Europe is just as good as the market in the Americas for all of the products, and there's no reason they shouldn't be, on a normalized basis, always growing at the same right that even the Americas is, at the same type of profitability -- the same types of gross margins, the same types of operating margins.

So those are the types of things that I've been focused on, and will continue to focus on until we get the new person in the slot and we get them integrated and adjusted to FARO culture.

I was wondering if you could also comment a little bit in terms of an update on the Edge Arm rollout, particularly the Laser Line Probe. Earlier on those adoption rates seemed to be pretty favorable. Could you give us an update on how that has progressed?

Yes. They've remained equally favorable. I don't know if we've seen it -- if I could say there's a meaningful adjustment upwards from the pickup rate in the first quarter compared to the fourth. I mean, the fourth quarter was already getting in the 75% range, and in a couple of spots it was higher than that.

That's probably a sort of a normalized rate for a while until we see more and more applications -- what really need are -- here's customers that took the Laser Line Probe who never took one before. Here are the applications they started using it for, build up some of those case studies and start getting that around to the remainder who aren't making the adoption to the Laser Line Probe.

You know, I still don't think we'll ever get to 100% of Arms being sold with one. Could we get to 85% or 90%? Yes, I think that's a possibility if you have the right applications. You can't show real use for the device for those who don't understand, maybe, how to use it when they first see it.

Okay. And then, final question on the laser scanner. With the percentage of sales going through distribution not having come down from where it was in the fourth quarter, is that a sign that perhaps some of the other end markets that you've talked about -- insurance, forensics, manufacturing, etc. -- so, should we look at that as, perhaps, an indicator that those markets are starting to take off a little bit for you? Or how would you evaluate how some of those second-, third-level markets that you've been going after have been developing?

I think that there is some indication of that. I would pull insurance off of that list that you went through right now, but the others -- we have a very good laser scanner sales team in place today who cover all of the markets outside of construction and surveying at the moment. So they have made good progress there.

I then think you have a little bit of -- also you've got this distribution base that have their units, finally, and they've started selling them. And they're finding and identifying who are their best customers to go after and place them with. So, could that have caused a little bit of slowdown in Q1 and expect it to come up again in Q2, Q3? Yes, there's probably a little bit of that also. I can't say it's meaningful, but there's probably a little bit of that.

Okay. And then finally, if you can quantify it all (inaudible). You talk about the orders that had slipped out of Q1 and the early Q2 out of North American marketplace. Just to get a sense of magnitude of that, would we have been looking at a double-digit type of order growth rate, conceivably, for the North American market? Or where -- if you can quantify it all, what magnitude of that timing issue?

I won't put the specific number on it, but it certainly would have been well up into the double digits.

Okay. Great. Thank you, and congratulations.

Thanks, Joe.

Rick D'Auteuil, Columbia Management.

Just a couple of follow-ups. One of the things that has -- is a little -- has been a little bit of a headwind is in the gross margin -- the product gross margin, and -- and a lot of it sort of blamed on the laser scanner mix and the fact that it sold through distribution to some extent. It seems in the past that you were holding out for that not to be a long-term dilutive to the margin mix.

At one point, we were coming up the learning curve on it. It feels like, by now, you should have tackled those issues. What's sort of the update on your thoughts on what the long-term margin scenario should be there?

I think that longer-term; we're still targeting that 60% to 65% range for our total gross margin. And clearly, we're going to be getting most of that uptick from the product side, not the services side. So I think longer-term, there's still quite a bit of room for an improvement on that laser scanner product.

I think in the near term what you're seeing, Rick, is certainly the manufacturing cost level has stabilized and then slowly started declining. To your point, the learning curve is accomplished. The team is there.

They started getting units out in Q3. They had really successful production in Q4, very successful production again in Q1, so you are at where you'd see sort of your normalized -- okay, you've got natural production run rate that is stable, moving and growing in conjunction with the products, so those are all good things.

And you do have some price improvement, given the price increase that we made going into the fourth quarter, as we added those new features. The nice thing being that all of the features, the hardware was already in the device. It just wasn't turned on, so all of that should be dropping through to gross margin, which it is.

Then, the go-forward is, look, are there some sufficient gains still on production? For sure. Labor side, process side and material side, too; as we continue to improve the volume, we find better or different sources or even just better leverage with the existing sources. All of those will help.

And then the other part of it, which we've always been pretty good at, is -- as we come out with next revisions and next generations of the product, the engineering team is always looking for ways to chop out more cost that becomes unnecessary, either through technology or otherwise.

Okay. So there is still some confidence that that has a path to improvement from here.

Yes, absolutely.

Okay. And then during the downturn, we had seen the sales cycle extended for -- forget about laser scanners, because they weren't part of the mix with the new product, but has it contracted back to normal levels now in the recovery?

It certainly seems to have, in all of the regions, yes.

Okay. Okay. Terrific. Thank you very much.

Thanks, Rick.

Michael Schneider, Artisan Partners.

Good morning. Two questions. One, the headcount growth; I did hear you say you expect it to grow mid-teens. Is that a gross number or a net number?

I'm not sure I know the difference between gross and net on the question. You mean in total? Or are you talking about after replacements as well?

Yes. After replacements.

Yes, we would look -- specific to the account manager side, not for the entire organization but specific to the account manager and the related sales support, that should be a net number. So, after replacing or backfilling those who come out, it should be anywhere from lower teens to high teens, depending on the timing of finding the right people and so forth. This is one of those roles that we'll wait it out until we find the right person versus putting the wrong one in because they will fail miserably.

Okay. And then, just on productivity or sales per account manager. If you back out distribution of sales now as that channel grows, is the productivity of account manager or sales per account manager rising at the same rate of sales growth right now?

Yes, particularly the last -- if you look at 2010 and then 2011, the account manager side for metrology was relatively flat. You know, it increased a little bit, but not a ton. So it certainly was growing at or better than the growth rate on the metrology side.

We did -- we have gotten to a point as we started nearing the tail end of 2011 that the productivity probably is not sustainable because of that -- there's -- the capacity constraint on the number of demos they can do in a month, and the number of deals that will close out of that. You start getting to a point where there's probably not a whole lot more tailwind behind it, and that sort of drove this -- okay, we need to start to splitting territories again.

You've got territories screaming for more activity, but cannot be physically managed by the one account manager that covers that area, or the two that cover that area.

So, where are you in that cycle of splitting territories and just the distribution channel driving the growth rate versus the productivity increases in the account managers?

We're seeing the growth across all of them. There were some account manager adds in the first quarter. All of the territories that we are going to split have been identified. And that's been put out there and communicated, and so then the filling of those roles is a portion of the way there. We probably still have at least two-thirds of it to go, as you look through the rest of the year here.

And is that an annual process where you identify the territories that need to be split? Or is this an ongoing process? I'm just trying to understand, is this a start/stop process or one that's continuous?

What we try to do is we identify as you are tailing up at the end of the year, you identify where the opportunities are to split the territories and get those in place, and then you try to spread the hiring through the course of the year. Now, if you've got a little bit of acceleration in any one given quarter, that's purely timing of finding really good people suddenly and you bring them in.

But, ideally, the adds come through the course of the year at a relatively steady state. And then you try to identify where the best splits are near the end of the year, as we're going through the budgeting process.

Okay, and final question, so it is simplistically to say that distribution right now is growing above the 24% growth rate of revenue this quarter. And productivity, or account manager productivity is growing at some rate less than that.

I can't -- I'm not going to split it that specifically. What I'll say is that we are getting good growth out of both channels, though.

Okay. Thank you.

And we have no further questions at this time.

Okay. Very good. Thanks, everybody for joining today and we'll talk to you all again at the end of the second quarter.

This concludes today's program. You may disconnect at any time. Thank you and have a great day.