FARO Technologies Inc (FARO) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies' conference call in conjunction with its second quarter 2012 earnings release. For opening remarks and introductions I will now turn the call over to Vic Allgeier, please go ahead.

Thank you, and good morning, everyone. My name is Vic Allgeier of the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed FARO released its second 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 -- we expect, we believe, we predict, we target, our growth targets, our goals, our guidance and similar words.

It is possible that the Company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are the risk factors set forth in yesterday's press release and in the Company's filings with the SEC. I will now turn the call over to Keith.

Thank you, Vic, and good morning, everyone. Sales in the second quarter of 2012 were $66.8 million, an 11.8% increased from $59.7 million in the second quarter of 2011. On a regional basis second-quarter sales in 2012 in the Americas increased $3.8 million or 17.4% to $25.7 million compared to $21.9 million in the second quarter of 2011.

Sales decreased $700,000 or 2.9% in Europe to $23.2 million from $23.9 million in the second quarter of 2011. A weaker euro relative to the US dollar on average resulted in lower sales of approximately $3 million as sales denominated in euros were translated into US dollars. In euro terms sales increased 9.4% to approximately EUR18.2 million from EUR16.6 million in the second quarter of 2011.

Sales in the Asia-Pacific region increased $4 million or 28.8% to $17.9 million from $13.9 million in the second quarter 2011. The effect of changes in foreign exchange rates on total sales was a decrease of approximately $3.4 million in the second quarter of 2012 compared to the second quarter of 2011. New orders increased 13.6% in the second quarter of 2012 to approximately $71 million compared to approximately $62.5 million in the second quarter of 2011.

On a regional basis second-quarter orders in 2012 in the Americas increased 17.1% to $27.4 million compared to $23.4 million in the second quarter of 2011. Orders increased 4.5% in Europe to $25.8 million from $24.7 million in the second quarter of 2011.

Orders in the Asia-Pacific region increased 23.6% to $17.8 million compared to $14.4 million in the year ago quarter.

The top five customers by sales volume in the second quarter of 2012 were Airbus, Mitsubishi Electric Corporation, P.T. Smart Mitra Solutions, General Electric and Electroimpact, which represented only 3.1% of sales. The top 10 customers in the second quarter of 2012 represented only 4.9% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Gross profit increased $3.6 million or 10.6% to $37.1 million in the second quarter of 2012 from $33.5 million in the prior year quarter. Our gross margin was 55.5% in the second quarter of 2012 compared to 56.1% in the year ago quarter primarily due to a decrease in gross margin from product sales to 59.7% in the three months ended June 30, 2012 from 61.1% in the three months ended July 2, 2011 as a result of lower average selling prices due to promotions in preparation for new product introductions and an increase in the sales of Laser Scanner products sold through our distributor channel.

As a percentage of sales selling expenses decreased to 23.7% of sales in the second quarter of 2012 compared to 25.6% in the year ago quarter. Selling expenses increased $500,000 to $15.8 million in the second quarter 2012 from $15.3 million in the second quarter 2011 primarily due to an increase in compensation and commissions expenses of $300,000 and marketing and advertising cost of $200,000.

As a percentage of sales administrative expenses increased to 12.2% of sales in the second quarter of 2012 compared to 11.6% in the second quarter 2011. Administrative expenses in the second quarter of 2012 increased by $1.2 million to $8.1 million from $6.9 million in the second quarter of 2011 primarily as a result of an increase in professional fees of $1.2 million related to the FCPA matter in connection with the DOJ and SEC settlement and $400,000 related to patent litigation offset by a reduction of bad debt expenses of $400,000.

The Monitor completed its follow-up review and submitted it is final report to the SEC and DOJ on June 29, 2012. The Company expects that the monitoring period will not be extended beyond submission of the final report, but the Company has not yet received any response from either the SEC or the DOJ to the final report. Either or both of them could require additional steps, including extension of the monitorship under the terms of the agreement that the Company entered into with the SEC and DOJ. The Company does not expect to incur further expenses related to the FCPA matter going forward.

Research and development expenses increased to $4.5 million in the second quarter of 2012 or 6.8% of sales compared to $3.8 million or 6.4% of sales in the second quarter of 2011. The increase is primarily related to an increase in compensation expenses of $400,000, subcontractors expense of $400,000 and materials expense of $200,000 offset by $400,000 related to the closing and relocation of the R&D facility in Andover, Massachusetts to our existing facility in Kennett Square, PA in the quarter ended July 2, 2011.

Total operating expenses were $30.2 million for the second quarter of 2012 or 45.2% of sales compared to $27.8 million or 46.5% of sales in the year ago quarter. Operating profit increased $1.1 million or 19.4% to $6.9 million in the second quarter 2012 from $5.8 million in the year ago quarter. Operating margin for the second quarter of 2012 was 10.3% compared to 9.6% in the year ago quarter.

Other income expense net increased by $300,000 to an expense of $400,000 in the second quarter 2012 from expense of $100,000 in the second quarter 2011 and primarily represents the effect of changes in foreign exchange rates on the intercompany account balances denominated in different currencies.

Income tax expense increased $1.7 million in the second quarter of 2012 compared to $1.4 million in the second quarter of 2011 due to an increase in pre-tax income. The Company's effective tax rate for the second quarter of 2012 was 27% compared to 25.3% in the second quarter of 2011 which included a reduction of 4.7% related to the tax benefit of the exercise of employee stock options in the prior year period.

Net income increased by $500,000 or 11.8% to $4.7 million or $0.28 per share in the second quarter 2012 from $4.2 million or $0.25 per share in the second quarter 2011. The number of fully diluted shares outstanding in the second quarter of 2012 was 17.1 million compared to 16.8 million in the second quarter of 2011.

I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $139.7 million at June 30, 2012 compared to $129.5 million at December 31, 2011 and include $65 million of US treasury bills.

Accounts receivable was $53.2 million at June 30, 2012 compared to $57.5 million at December 31, 2011. Days sales outstanding at June 30, 2012 increased to 73 days from 68 days at December 31, 2011 primarily as a result of an increase in the collection cycle in Europe.

Inventories increased to $72.3 million at June 30, 2012 from $67.2 million at December 31, 2011 primarily due to an increase in raw materials related to the production of the FARO Laser Scanner, but declined sequentially by $2.5 million from the end of the first quarter of 2012.

Finally, I will conclude with some statistics regarding our headcount numbers. We had 938 employees at June 30, 2012 compared to 885 at December 31, 2011, an increase of 53 or 6%. Account manager headcount increased 10.6% to 177 at June 30, 2012 from 160 at December 31, 2011 with 58 account managers in the Americas, 56 account managers in Europe and 63 account managers in Asia. Geographically we now have 374 employees in the Americas, 317 employees in Europe in 247 employees in the Asia-Pacific region.

Before I hand the call over to Jay I'd like to provide a summary of the EPS shortfall of $0.28 compared to the Street estimates of $0.46 by stating that we had a sales miss of $6 million, $3 million of that was related to foreign exchange translation related to the euro at a 50% margin. After deducting commissions and net of tax that is approximately $0.13 per share. The additional Monitor cost and Nikon litigation also on an after-tax basis added approximately $0.06 per share. I will now hand the call over to Jay.

Thanks, Keith. We had good results in the second quarter despite a challenging economic environment. Growth in Asia continued to be very strong with orders and sales both growing approximately 25%. Orders and sales in the Americas both increased approximately 17% leaving the Americas with 23% sales growth year to date.

In Europe we experienced a combination of a weaker economic environment and a weaker euro. Sales growth in euro was 9.4% translation into US dollars which resulted in a slight decline of 2.9%. We believe we will continue to see pressure in that region throughout the remainder of this year and, as a result, it may prove difficult for us to achieve our historical growth rates of 20% to 25% in fiscal 2012.

We've continued to make changes in Europe, including restructuring the sales organization both at the leadership level as well as the account manager level. Underperforming account managers have been changed out as have weaker regional leaders.

We named a new VP of sales at the beginning of the second quarter and he has refocused the organization on the most particle metrics and has provided more oversight to ensure we are maximizing our selling activities in the region. In total approximately 30% of the account manager force has turned over in the first six months of this year.

Market demand for our products, particularly the Edge arm and the Focus Laser Scanner continues to be strong. Attach rates for the Edge arm laser line probe continue to be approximately 60% globally. The Focus Laser Scanner remains best-in-class with no viable competitive alternative. We added several new distributors for the Focus during the second quarter, many of them in Asia.

We remain on course to have the survey and distribution network for the Focus completed at the end of this year and we are also continuing to experiment with new distribution channels into additional verticals such as architecture, insurance and forensics. We believe we will start penetrating those markets before the year is over.

Demand for the Focus Laser Scanner continue to grow and our distributors are increasing their contribution to FARO's top-line. In the second quarter sales to distributors for the Focus Laser Scanner reached 58%, more than double our rate in the second quarter of last year. Our sell-through is improving as well with 94% of distributors reordering at least two times in the last 12 months.

In the second quarter 2012 we also held our second digital 3D documentation conference in Switzerland attracting more than 250 attendees and included displays of applications covering construction, surveying, building information management, historical preservation and many others.

Our manufacturing capacity is fully supporting our normal quote cycle of four weeks or less and we are starting to reduce the sizeable inventory for the Laser Scanner that we added in 2011 to meet the accelerated demand we were seeing in the market. In total the scanner continues to be our second-highest volume product, a position it achieved last year only three quarters after its launch.

Two weeks ago we launched the new Vantage FARO Laser Tracker, the latest generation of the Tracker product line. This marks another disruptive product release for FARO. The Vantage Tracker is 25% smaller and lighter than the previous generation, it features an expanded measurement range and offers unique gesturing capability for requiring the laser beam if it is lost during measurement.

We have launched the Vantage under the campaign slogan of No Compromise, ensuring customers that this delivers the accuracy and performance that our customers expect. The Vantage Tracker is another example of the aggressive push we're making in our research and development initiative.

The trial for our patent dispute with Nikon started on Monday, attempted one more court mandated settlement during the second quarter but had no progress in that regard. We continue to believe that we have a strong position in this suit and look forward to resolving it.

Finally, as Keith mentioned, the Monitor assigned to us in our FCPA settlement with the SEC and DOJ has completed its final review of the business. We believe it's a very good report and anticipate that this will end our monitorship by the government.

Like many companies, market demand is strong but we believe the economic situation in Europe will create pressure throughout the rest of this year. We're aggressively driving our sales and marketing activities, controlling our costs and continuing to innovate in our R&D labs around the world.

As I stated earlier, there is no doubt that economic conditions have deteriorated, particularly in Europe, and as a result there will be top-line pressure throughout the remainder of this year. However, I am confident that the FARO team is doing everything possible to execute, as we always have.

I'd like to thank the FARO team for their constant dedication and execution, as well as our customer suppliers and investors. Thank you for your attention and I'll now open the call to questions.

(Operator Instructions). Jim Ricchiuti, Needham & Company.

A question on the bookings number in the Americas. Is there any way that you can help us or quantify the amount of orders that had slipped in Q1 into Q2? Just give us some sense as to what -- how the bookings were trending in the Americas? I mean you clearly showed growth but there was some slippage.

Jim, this is Keith. I don't think we've actually quantified that number. There was quite a few deals that slipped, but I don't think we ever actually quantified that number.

Was it meaningful, Keith?

I think it was a meaningful number and I think that we had that slowdown, we had some deals delayed, but we did not experience that same effect at the end of the second quarter.

Jay, with respect to the way we think about the year, you I think have shown 18% top-line growth through the first six months of the year. You seem to suggest, and understandably so, that with the pressure you are seeing in Europe, the weakness on the macro side that achieving that 20% to 25% growth is going to be difficult. But help us understand, how much is the macro influencing this and how much is just the internal issues that you are facing in Europe affecting the business?

I will try to give a little color there. I may not give you an exact percentage, Jim, as to how much is being impacted by each, but let me tell you what the key drivers are. Obviously you are right; number one is the economic situation in Europe. It definitely got worse in the last six weeks of the quarter, that is not a surprise; I think we have seen that in all the general economic data and the news as well.

We haven't necessarily seen impact in Asia from it, obviously when you look at their numbers, and we don't think we are seeing impact yet in the Americas from that fall off. But no question that creates pressure, that is number one.

Number two, also in Europe continues to be just the overall execution. I reference the fact that roughly 30% of the account managers had turned over in the first six months of the year. As you know, it does take sometimes as long as six to nine months to really get salespeople ramped up.

So as a result what you have is a new sales leader, he has restructured the leadership team and you have multiple new account managers in the field now -- not just new account managers that we added to drive incremental growth, but you also have account managers that are new who were replacing underperformers and people that were removed from the Company.

So there is a portion of that is us needing to reset the deck there and get those guys fully productive. That does create the potential for improvement in the second half of the year. Obviously that is a little bit dependent also on the economic situation. So some of that is our own execution.

And then the two others that I'd point to is the Laser Tracker -- you have a brand-new Laser Tracker that came out at the beginning of Q3. No question the market knew that the tracker was on its way and as a result you had a little bit of customers holding up, waiting for the new Tracker.

You had a little bit lower pricing as we moved out some of the remaining Tracker inventory from our current portfolio because we knew once we released the Vantage that the previous generation would not be of interest at that point. So you do have a little bit of sales pressure from that, both the combination (technical difficulty) and just customers waiting for the new Vantage. So that potentially creates improvement in the back half of the year.

And the last one certainly is the Laser Scanner. As we've continued to add additional distributors and we continue to see the impact we are now at 58% of them generating our sales with the laser scanner, that probably continues to grow. The repeat reorders, that category has jumped 94%, a sizable increase from where we were even in the first quarter.

So those are the things that could have potentially positive impact through the back half of the year. Overall though, at least I guess to take the conservative view of it, no question that economic pressure in Europe creates a bit of a gap that still makes it harder to fill. And that is why ultimately getting to our historical rates of 20% to 25%, which we have always said we thought we should be able to do as a company in general, it probably does create pressure there in the second half to get there.

Okay. And Keith, on the sequential decline in gross margins, I get about 150 basis points I think, how much of that was due to the markdown on clearing out some of the old Tracker product?

We actually haven't quantified that specific number, but it certainly did have an impact. We ran quite a bit of promotions on the old ION Tracker, as well as the increase in sales of the Laser Scanner product through our distribution channel. So both of those really had an impact.

Which was bigger in terms of the impact?

We really haven't quantified that number.

Okay, thanks.

Mark Jordan, Noble.

I'd like to, Keith, talk about the sequential performance in revenue and order flow. Typically you have a significant increase of somewhere approaching 20% sequentially from the weaker first quarter. In the Americas was there a change in terms of either the demo demand or close rates that you saw that would have caused a weaker performance domestically?

We haven't seen anything. I think our demos per account manager are still right on track. The closure rate certainly has not changed. So, no, I really haven't seen any impact from either of those two.

Looking at your gross margins then, would you assume then on a go-forward basis that some of these issues you addressed that you would expect to see potentially a couple hundred basis point improvement on average through the second half of the year on the product side?

I think as a result of the introduction of the Vantage Tracker we will pick up some points there because we will no longer have the promotions running through on the old ION. But to the extent that we continue to grow the distribution channel for the Laser Scanner, that too will have an impact.

58% of those sales went through distributors in this quarter and that had an impact on the gross margin as well. But as you know, that certainly benefits our operating margin because we are saving all those commissions and those types of costs.

Final question, relative to litigation expense, do you have a sense of what the run rate might be for the suit on a -- for the quarter? And what was it specifically in the second?

As you know, we started the trial yesterday, so this is somewhat of an unpredictable number depending on how long that takes. But for the second quarter it was a little over $500,000 in the second quarter 2012 compared to about $200,000 in the second quarter of 2011.

And, Mark, I will add a little more color to that too. The trial itself, it's actually Monday that it started. Each side has 20 hours plus the cross examination time. So when you look at it in total the trial itself could be a couple of weeks, give or take, depending on how everything pans out.

So just to put framework around that and then obviously, depending on the outcome, that will determine is there [additional and] continued follow-up work or what else comes beyond that. So the trial itself is not expected to last a very long time, it is really more what the outcome is beyond that.

So you would expect a doubling in the expenses relative to litigation in Q3 versus Q2?

I certainly wouldn't predict a doubling. I don't know if we'd give any number out there. Again, given the trial itself is occurring right now it is possible that you could have less in the third quarter as well. That is the part that is a little bit hard to predict. Obviously it is time dependent.

Okay, thank you very much.

Richard Eastman, Robert W. Baird.

Can you just talk about the sequential sales trend in Focus Laser Scanner? Were sales up sequentially and can you just maybe give us a feel for -- again, I'm speaking sequentially. I mean were they up mid-single digits or double digits, just a sequential trend?

I don't think I will quantify it, I don't know if we ever have before. It was up sequentially for sure (technical difficulty) good volume on the Laser Scanner side. Keith, I don't think we have disclosed before whether it's single or double to even give a general feel for that have we?

No, we have not disclosed a sales growth rate. But it has increased sequentially from Q1 to Q2.

And then was the book to bill on the FLS, was that also better than one?

It was a little bit better than one. When you look at the quarter, we had a couple of new distributors come online. I wouldn't say that it is anything extraordinary but it is a little bit better than one.

And, Jay, I noticed just as a general comment, the backlog increased in the second quarter. I'm curious, was that planned? I mean typically you can have a little better book to bill in the second, but I'm curious if backlog -- my math suggests maybe you are north of $21 million. Is there a reason for that? Did you have any shipping issues or is that just a little bit higher than we expect? What happens there?

Yes, I won't say we had any shipping issues necessarily, you do sometimes get customers who say, look, I'm going to place the order, I'm not ready for the unit for a couple of weeks. So you have a little bit of that. We did have a little bit of getting the last few ION Laser Trackers out the door some of which rolled into Q3. I won't say that it is necessarily dramatic.

And there's a little bit of increased orders, just customers placing orders and saying we're going to take delivery over a couple of months versus taking them over all at once, particularly when you look at laser scanner distributors you will see that sometimes where they will say, hey, look, I am placing an order for X amount and I will take a certain percentage this month, a certain percentage next month and a certain percentage the month after that.

So really timing, there is no strategy. Does that backlog come down some?

It could. Obviously it depends on -- obviously it depends what's coming in the front door during the third quarter. So it is possible it could come down some. At that point you are at the -- it depends on the order rates from distributors and other customers as you go through Q3. Given that Q3 is always a little bit lighter quarter for many companies just given the August shutdowns it's possible it could come down a little bit.

Okay. And then just -- I just wanted to double back to a question, I believe you answered this. But when you are looking -- when you looked at the orders -- the order linearity in the Americas, did you see anything in the June -- the month of June in particular in the Americas that would suggest any hesitancy on the buying side?

Yes, I can't say that we did. The biggest concern for us was are we seeing any leakage from Europe into Asia and the Americas and we don't think we have seen -- we definitely don't think we have seen anything there in Asia yet. We don't believe where seen anything in the Americas at this point. The overall -- the flow, the responses from customers, the leads coming in, the demos that are being executed by the sales team all feel fairly normal still at this point.

I'm sorry, one last question. On the pricing side, thinking about the arms, kind of the core business, has there been any pricing pressure either in Europe just given the demand or even in the US on the core side to close any business, have you needed to use price there (technical difficulty)?

There was a little bit more price pressure in Europe, at least there has been for the last couple of years, than there is in the Americas and Asia. On the arm side itself, that is still a relatively stable product and when you look at the attach rate for the laser line probe it actually -- for the most part the net average price has increased still given how many arms are being sold with the laser line probe versus being sold without it.

And that obviously has margin -- incremental margin to it as well because of the size of the gross margin on the laser line probe. As Keith had pointed out earlier and I think I mentioned too, the Tracker was really the one area where there was a little bit more price pressure this quarter -- less so from a market standpoint, a little bit of it was us, like I said, ensuring that we had no ION inventory left when we launched the Vantage Tracker, we did not want to be sitting on that.

I see. Okay, very good. Thank you.

Rick D'Auteuil, Columbia Management.

Just a couple of follow-ups on the margin question. So I think you might have just answered the last one, did we enter this quarter with no inventory in the legacy Tracker?

Yes, certainly none that we feel would be excess or obsolete. We do have -- there is an interferometer version of the Tracker which a small select set of customers still buy and that is available only in the old configuration. What we have on hand is what -- we will supply that and only that.

But that should be -- contribute to further margin pressure?

No, actually that -- sorry, that is a good point, Rick. That is a little different. The IFM is a very specific type of measurement source inside the device, so it would not contribute to margin pressure there. There is actually a higher price on that Laser Tracker in the marketplace and there would not be a demand or requirement to lower it just to move inventory because that is a very specified -- specific type of unit.

So now that the Vantage is in the marketplace the price is a little higher on the Vantage than the previous generation Tracker, the list price is higher. And so certainly compared to the pricing we had in Q2 it is definitely higher. We would expect to see a little bit of margin improvement there on the Tracker side.

So just actually since you hit on that, is the Vantage -- not compared against its -- against the ION, but is it accretive to gross margins companywide with the list price or with the current price?

Yes, we certainly believe it would be given where we have the pricing and given how disruptive the unit is and just given even the initial response at the launch events we have done over the last couple of weeks. We believe that it should be accretive.

Was there some -- I know you sort of telegraphed this coming, so was there some pent-up demand for that product as you launched it?

Definitely. When I look at it in hindsight I may decide to keep myself much more quiet in the future, which I know will be frustrating to everybody on this phone call but probably beneficial in the long run. We definitely saw some of that, particularly the experienced Laser Tracker customers. Newer customers it is less a concern because they are just being introduced to the product. But the experienced ones where you know there is volume opportunity, no doubt there were people holding out for the Vantage to arrive.

Back on the Focus, it has been trending up as a greater percentage going through distribution. Do you expect that to continue or do you think it levels out in the high 50s?

I think it continues, Rick. I have always kind of thought 75%-ish was a real possibility in terms of the percentage going through distribution. Currently we are at 58%, that is up from 20 -- low 20s a year ago. So I think we will see that improve some more. Obviously dependent -- it's dependent upon how quickly both the existing distributors and some of the newer ones that we just signed up, how quickly they are able to generate volume.

But I think -- until we get deeper into other verticals which may or may not use the same type of channel, certainly at least as it relates to surveying and construction in that space I would think 75% is the right target. Whether we get there by the end of the year is a little bit harder to predict, obviously.

Has there been any progress in penetrating other new end markets with that?

There is a little bit. It has been slower. Right now a big piece of it is identifying definitively what's the opportunity, what's the demand look like, does it solve the problem the right way and then what is -- is there a slightly different work flow that is required to help the customer to enable that. Where are the best places to market the product, what is the best way to go to market? Marketing it and then actually trying to transact it are both a little bit different. So that is the piece that we are still sort of flushing through.

And then I think you have already outlined, but everything sold through distribution has a higher operating margin, it's dilutive to gross margin but it has a higher operating margin, is that correct?

Yes, you are not paying for the account managers, you are not paying their commissions and their travel and all those infrastructure costs related to the sales and marketing channel.

Okay. And then lastly, so I believe there is at least one more quote/unquote disruptive launch this year, is that still on track?

I would not guarantee that there is one more disruptive launch this year. I would say that we do have several things that we are working on that are back in the pipeline obviously. I call it sort of normal flow to be expected, whether it is the back half of this year or the first half of next year. I'm going to hold off on kind of committing that one.

Okay, but are you taking away the disruptive description or are you just changing the timing?

I'm not taking away disruptive description. Timing I think and just also again a little bit of it being the experience that we just went through with the Tracker, some of it is me I think being more cautious about how openly I share the what. But I would say we do have multiple things in the pipeline that are still disruptive, some of which are products that we don't have today and some of which could be next generations of other products.

Okay, thank you.

Jim Ricchiuti, Needham & Company.

Can you talk a little bit about the order rates in July year over year and to what extent, just regarding this pent-up demand that you saw for the new Tracker -- would you assume that there is some easing of orders coming in for that product as you satisfy the initial demand?

I won't talk about July specifically since we don't normally talk about the current quarter. What I will say is that the level of interest -- we have done launch events in -- multiple launch events now in the US and Europe and the initial ones starting in Asia. The response coming out of those, the requests for demos has been extremely high and it is a nice mix of a lot of existing customers but also a good mix of new brand-new don't have Trackers yet type of customers as well.

Was the demand for the previous product, was that -- was the volume typically stronger in Europe or in the US?

Honestly it is like many elements of our business, it could rotate back and forth quarter to quarter depending on the projects, depending on the timing. The Laser Tracker, it is one of those products that it is not as broad and market as the arm is and so it depends on where the project road is.

Europe has had the benefit of the Airbus contract for the last few years, which has a certain number of units that sort of roll through every year, not necessarily every quarter, so that can drive some fluctuation back-and-forth. Europe would be strong one quarter, next quarter it would be a little bit less than they had had the previous because Airbus isn't in there. And it would pick up again the following quarter.

But generally speaking, it is hard to say that one is naturally stronger than the other in any given quarter, because that does tend to swap back and forth.

Lastly, if you could talk a little bit about the verticals, your major verticals in terms of where you are seeing some changing demand, which markets perhaps are weakening, which are holding up better?

Yes, it is harder to do it by vertical. Certainly if you do it by -- obviously we know what it looks like by region. What I would say is that Aerospace is still strong, there are lots of projects that are not just existing, but new projects both and that is across both commercial and military and that is global around us, that is all three regions.

Auto has continued to be pretty darn strong too. When you look at results of the auto companies they are all doing extremely well, they are definitely investing in technology. The heavy manufacturers -- I'm not going to say it is a little bit lighter than it has been, but it is probably not quite as strong as auto and Aero. That being said, that is one of those verticals where we are not nearly as penetrated, so there is plenty of not pent-up demand, but plenty of opportunity where we haven't touched yet.

And then on the Laser Scanner side I will say that construction and surveying continues to be really strong. And again, a lot of it is less dependent upon the current market environment and it is more dependent upon brand-new technology in a space where they haven't had this before, lots of interest from distributors who want to move that product and conceptually you've got customers who already understand large volume or large distance 3D measurement.

It's a little bit different than some of the missionary sell you go through on the manufacturing side when frequently still they aren't 100% sure of why measuring earlier in the process even makes a difference to their business so that you are clearing a different hurdle on the sale side with manufacturers.

Particularly newer ones that don't have the technology today than you are with the survey and construction where they have already been doing a lot of this. This is a different, better, more efficient, more detailed depending on what the customer application is way to do it.

In your characterization it sounds like that is more companywide -- what you just talked about. If we think about what you are seeing in terms of the macro pressures in Europe, we are hearing about declining auto sales being down, potentially some production and some assembly capacity being removed. What specifically in the verticals are you seeing in Europe that are making it more challenging for you?

It has continued to be more tied to -- they are seeing what's happening. And no question, you are right, the last six weeks you have seen a couple of companies flag potentially less demand in the back half of the year, and so they have -- if they weren't already slowing down they have definitely slowed down and they are watching more carefully their purchasing decisions.

We certainly do not feel like -- when we saw the lead in to 2009 downturn there was a fairly dramatic shift that occurred pretty quickly and, quite frankly, it was over like a six to eight week period as well. In 2008 leading into that, the back half of 2008 suddenly got really ugly really fast. We certainly have not seen anything like that.

It's been sort of this long, slow -- particularly Europe has been like that all year. They are watching cautiously, the decision process takes longer, they may still pull the trigger, but instead of doing it in Q1 they did it in Q2. And you've got some who didn't do it in Q2 and maybe they will do it in Q3 or Q4.

And it's -- there is always the demand and the need for the technology to improve their facilities, improve their productivity and so forth. It is more tied to is it still okay to spend the CapEx? Do we feel like we need to clamp down harder? I think a lot of the customers are gauging how big is the shift in demand in the second half of the year. Is it down a little bit, is it done a lot, is it flat, were we expecting 10% growth and it is only 1%?

A lot of them are still I think going through that assessment and that puts them in that pause mode for sure until they get their hands around that. Once they get their hands around it, then that determines whether the pause becomes a stop or if it becomes sort of a slower trickle back in again.

But this reassessment that you may be seeing from your customers, at this point is it fair to say that is occurring more in Europe as opposed to the Americas or Asia?

Yes, fair point, Jim. Yes, we are seeing very little of that in Asia or the Americas right now. They are all watching what's going on, but it's not like in the first quarter when if you looked at Northern Europe they were watching what was going on in Southern Europe and it was definitely affecting the decision-making. It's a little different.

Asia -- we know the customers in Asia and the Americas are watching what is happening in Europe, but it has not affected their decision-making. It may be slowing their processes a teeny bit, but I can't say it's meaningful or anything that we would raise a flag on at this point.

Okay, thanks a lot.

Richard Eastman, Robert W. Baird.

Keith or maybe Jay, but Keith, could you just speak to do you have an order number for Europe in local currency? Can I -- again there seemed to be about a 12 point delta between sales and local currency sales. Would a similar thing apply on the order side?

Yes. On the orders side in euro terms we are at about EUR20.2 million versus roughly about EUR17.2 million in the second quarter 2011. So it's about a 17.5% to 17.6% increase in euro terms for the orders.

And then also, Jay, in Europe -- two things about Europe. One, did you -- as you reorganized the sales leadership, the sales effort have you split the sales teams between the metrology product and the Focus Laser Scanner? Is that separate at this point?

It is. It has always been and it is separate for sure. So you have individual account managers only responsible by product line, that has always been the case and remains the case. So you have account managers who only sell Laser Scanners.

On the leadership side you do have those groups reporting within the country manager and we have done several country manager change outs and responsibilities. So that is a fairly large leadership role, particularly when you think of some of the bigger countries over there. We have elevated or switched territories for a leader to give them that responsibility now.

And then the distribution for the Laser Scanner, that is managed separately because obviously managing the distribution process is a totally different animal. Those guys work closely with the Laser Scanner account managers in each of the three regions. They certainly still assist somewhat with the distributors as they get them up and running and they get some benefit for doing that. But for the most part that is completely -- a completely separate management channel.

If you -- in Europe as you have been moving the sales organization around and making the changes. Have you just -- have you reduced the fixed cost structure in Europe just in general? Have you made any changes to the cost structure outside of the sales changes?

We haven't really. What I would say is that if you look at the improvement in margins in Europe overall, that team has done a very nice job of controlling their costs substantially. What I say is even still from where we were at the -- going into the downturn in 2009 our total headcount three years later in a sizably higher revenue is still below where we were going into the downturn.

The teams have held back on adding people back to the organization. We've added selectively where we needed to, a lot of it was sales, a lot of it was R&D. So it has been less about kind of pealing back or cutting back there, but I will say that they have done a very good job compared to last year of controlling costs within the budget that we had assigned which overall lowers the growth of those costs, so it gives you the same impact without necessarily taking people out of the equation, so to speak.

Yes, I understand. Okay, thank you again.

Joseph Garner, Emerald Advisors.

Just a couple questions for you. Jay, first can you give us an update on Europe in terms of the senior leadership position there? My understanding is you have been spending a good bit of time in the European market as you've been working through that change. Any closer in identifying who that leader would be for that European market and how much of your time are you spending currently and do you expect to continue to be spending in that marketplace?

Yes. So you are correct, I've been spending a lot of time there. It is roughly every third week, so I will do two weeks not in Europe, could be anywhere else, and then one week in Europe. And that pattern has been fairly consistent since making the change at the beginning of February.

And going forward I anticipate continuing to do that until we are the new managing director in place. It is not to say that team isn't operating obviously without the person because they can execute, but for me it is to make sure that we are -- all ducks are in a row and it's an opportunity to kind of flush some additional changes through, which we have already done by being over there, particularly on the sale side which we have already seen.

What I would say is that we have seen several good candidates in the process and I think we are pretty close to having our person and then at that point it is just a matter of the timing. So do I think the position will be hired by the end of the year? I certainly still think that. Is it possible we have our person at least named by the time we get to the end of the third quarter? I think that is really possible.

Obviously when you get to a point where you feel like you have a couple of good candidates then you are in sales mode as much as you are the assessment mode of that person. So we are doing that what I believe is to the best of our ability right now. There has been a real excitement about the opportunity, I will say that.

People look at it and say look, we love the technology, we can't believe how much market opportunity there is. So the people that I've talked to are really interested in being able to come on board. And we have seen some really strong talent coming from places that you might not normally expect who have said, yes, I really want a crack at this. This is my shot at doing something pretty substantial.

Second question is there was a mention in the press release regarding an emphasis on cost containment as you work through this period. Can you elaborate a little bit more in terms of what you can do along those lines? Because my impression is that you have been running relatively lean, haven't added a lot of excess cost back into the Company since the downturn. What opportunities do you see on the cost side?

Yes, and to be fair, Joe, I think we have done a decent job there this year. It is as much keeping that focus and ensuring that we don't do anything that is not 105% necessary in the back half of the year. Are we still going to add some account managers in the second half? Absolutely. In all three regions even with what is going on in Europe.

We know there are still a couple of gaps there that we just have to fill. And unless there was some massive downturn in the marketplace I would continue doing that. We still have a few more slots in R&D that we would like to add in the second half of the year, but outside of that it is going to be relatively controlled in all the other areas.

So to be fair, it is probably as much continuing to be as tight as we were in the first half as we are in the second half.

And then on the Focus Laser Scanner, you are obviously coming, or you've been going against more difficult comparisons as you go through the ramp that you had last year. I know you don't normally talk in terms of individual product performance, but can you tell us did you see growth year over year in the Laser Scanner sales in the second quarter? And are you (multiple speakers)?

Absolutely.

Okay. Do you continue to expect to see growth in that area?

Yes. Yes, I think what the number of distributors we have on board, the sell-through that we are starting to see from them, the return visits to place more orders, the (inaudible) I said already, but the sell-through to the end customer -- we would anticipate continued growth in that product through the back half of the year, again barring some massive economic decline that sort of shut everything down.

And surveying has been the market that you have talked about most frequently early on with that product line. Have you begun to see any meaningful impacts from other end markets?

The big three have been surveying and construction, historical preservation, and then the other big one would be sort of a general category of -- for lack of a better word, the 3D documentation as we call it, where customers are just continuously capturing as builds of their facilities and whether they are using it for future planning, purely for asset management, just to have the data.

We have customers who are now -- just they scan the facility three or four times a year depending on the size of the facility and the need and they don't do anything with the data, they just tuck it away, they know they have it and they can use it if they have to. We are seeing a lot of activity there as well.

Those are kind of the big three. And then all of the others at this point would be very early-stage preliminary -- we are really just figuring out the best way to address and assert ourselves into that market.

Any significant changes in the competitive front in that market?

None.

And then last question I have for you, the Vantage Laser Tracker, can you talk a little bit in terms of how you see the market opportunity there? Is this something that we should look at? Does the available market for this change at all from what you had in the past with the Laser Tracker? Does it open any new particular avenues for you? Or is this something that we just kind of see as the new and better within the existing kind of market profile?

Yes, I think it is -- the addressable market remains the same. For sure it is definitely a more nichey market than say the arm, there aren't many objects that need measurement range from 12 feet up to 300.

That being said, given the size it's possible that we have enabled a slightly broader portion of the addressable market, those that we knew they could use one in the past but they might not have gone after it just because they weren't sure about the size of it, the ease, et cetera. I think we may have improved that a little bit.

But the overall market for sure is still -- for the Tracker is the same, but there's not suddenly opened up a brand-new vertical that might not have been available to us before.

Okay. Great, thank you very much. I appreciate it.

I am showing no further questions in queue at this time. I will turn the call back to our speakers for any closing remarks.

Very good. Thanks very much, everybody, and we look forward to updating you again at the end of the third quarter and we will be seeing some of you at the conferences over the next few weeks. Thanks.

And this concludes today's program. Have a great day. You may disconnect at this time.