FARO Technologies Inc (FARO) 2013 Q4 法說會逐字稿

Good morning, everyone. And welcome to FARO Technologies' conference call in conjunction with its Q4 2013 earnings release. Please note that all participants are now in a listen-only mode. Later, you will have the opportunity to ask questions and answers during a question-and-answer session. (Operator instructions.)

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

Thank you and good morning, everyone. My name is Vic Allgeir, of the TTCGroup, FARO's investor relations firm. Yesterday after the market closed, FARO released its 2013 fourth quarter and year end results. By now you should have received a copy of the press release. If you have not received the release, please call [Nancy Sedadugatti] 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 then will 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, will, believe, assume, anticipate, plan, should, potential, continue 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 turn the call over to Keith.

Thank you, Vic. And good morning, everyone. Sales in the fourth quarter of 2013 were $89.9 million, an 11.4% increase from $80.7 million in the fourth quarter of 2012.

That brought our 2013 annual sales to $291.8 million, a 6.7% increase from $273.4 million in 2012.

On a regional basis, fourth quarter sales in 2013 in the Americas increased 9.5% to $36.1 million, compared to $33 million the fourth quarter of 2012.

Sales increased 12% in Europe to $36.8 million from $32.9 million in the fourth quarter of 2012.

Sales in the Asia Pacific region increased 14.4%, to $17 million from $14.8 million in the fourth quarter of 2012.

The effect of changes and foreign exchange rates on sales was a net increase of approximately $100,000 in the fourth quarter of 2013, compared to the fourth quarter of 2012, and included a positive effect on sales in Europe of $1.9 million, partially offset by reductions in Asia of $1.6 million, and the Americas at $200,000.

Comparing year-over-year growth, 2013 sales in the Americas increased 10.9%, to $120.4 million from$108.6 million in 2012.

Europe sales for 2013 increased 3.3% to $103.4 million, from $100.1 million in 2012.

Asia sales increased 5%, in 2013 to $68 million from $64.7 million in 2012.

The effective changes in foreign exchange rates on sales was a net decrease of $2 million in fiscal year 2013, compared to fiscal year 2012. The effect on sales was a reduction in Asia of $5.2 million, and the Americas of $400,000, partially offset by a benefit of $3.6 million in Europe.

New orders increased 20.1% in the fourth quarter of 2013, to approximately $98.6 million, compared to approximately $82.1 million in the fourth quarter of 2012.

On annual basis, new orders increased 6.2% to $293.3 million in 2013, from $276.2 million in 2012.

On a regional basis, fourth quarter orders in 2013 in the Americas increased 16.1%, to $38.9 million compared to $33.5 million in the fourth quarter of 2012.

Orders increased 27.5% in Europe, to $39 million from $30.6 million in the fourth quarter of 2012.

Orders in the Asia Pacific region increased 15%, to $20.7 million compared to $18 million in the year ago quarter.

Again, comparing year-over-year orders growth, new orders in the Americas increased 9.2%, to $119.5 million in 2013, from $109.4 million in 2012.

Orders increased 5.6% in Europe to $103.3 million in 2013, compared to $97.8 million in 2012.

And orders increased by 2.2% in Asia in 2013, to $70.5 million from $69 million in 2012.

The top five customers by sales volume in 2013 were Boeing, the US military, General Motors, VRSI and Volkswagen, and together represented only 2.2% of sales. The top 10 customers in 2013 together represented only 3.3% of our sales. Once again, indicating our lack of dependence on any one or a handful of customers.

Our gross margin increased to 54.9% in the fourth quarter of 2013, from 53.4% in the year ago quarter, primarily due to an increase in product gross margins to 58% in the fourth quarter of 2013, from 56.1% in the four quarter of 2012 as a result of lower manufacturing costs and slightly higher average selling prices, including a decrease in the sales mix of the laser scanner product sold to distributors, to 53.1%from 65.7% in the prior year quarter.

Gross margin from service revenues remained flat at 37.5% in both quarters.

Gross margin in fiscal 2013 increased to 55.5% from 54.7% in fiscal 2012. Gross margin from product sales increased to 59.1% in fiscal 2013, from 58.7% in fiscal 2012, as a result of lower manufacturing costs, partially offset by lower average selling prices.

The sales mix of the laser scanner products sold to distributors were approximately 55%, in both 2013 and 2012.

Gross margin from service revenues increased to 39.1% in fiscal 2013, compared to 34.8% in fiscal 2012, primarily as a result of increased warranty sales.

Selling expenses were 24.4% of sales in fourth quarter of 2013, compared to 22.8% in the year ago quarter. Selling expenses increased to $22 million in the fourth quarter of 2013, from $18.4 million in the fourth quarter of 2012, primarily as a result of an increase in compensation, travel, and recruiting expenses.

In fiscal 2013, selling expenses increased to 24.6% of sales, compared to 23.6% of sales in fiscal 2012.

Administrative expenses in the fourth quarter of 2013 were 8.9% of sales, compared to 8.7% in the fourth quarter of 2012, increasing by approximately $900,000 to $7.9 million from $7 million in 2012, primarily as a result of an increasing compensation of $600,000 in reserves for bad debt expense of $500,000, partially offset by lower legal and professional fees of $200,000 related to patent litigation that was settled earlier in fiscal 2013.

In fiscal 2013, general and administrative expenses increased to $30.6 million, representing 10.5% of sales, from $29.1 million or 10.6% of sales in fiscal 2012, primarily due to an increase in compensation of $1.8 million, reserves for bad debt expense of $1.2 million, recruiting costs of $1 million, and travel of $200,000, partially offset by a decrease of $2.9 million in legal and professional fees primarily related to the FCPA monitor and patent costs.

Research and development expenses increased to $6.2 million in the fourth quarter of 2013, or 6.9% of sales, compared to $4.6 million or 5.7% of sales in the fourth quarter 2012.

R&D expenses for fiscal 2013 increased $4.8 million, or 27.5%, to $22.4 million for the year ended December 31st, 2013, from $17.6 million for the year ended December 31st, 2012, primarily due to an increase in compensation of $2.5 million, sub-contractor expenses of $1.6 million, and materials of $600,000.

Research and development expenses as a percentage of sales increased to 7.7% for the year ended December 31st, 2013, from 6.4% for the year ended December 31st, 2012.

Operating margin for the fourth quarter of 2013 decreased to 12.6%, from 13.9% in the year ago quarter, primarily due to the effects of increased selling and R&D expenses.

Operating margin for fiscal 2013 decreased to 10.3%, from 11.5% in fiscal 2012.

Other income and expenses net increased income of $100,000 in the fourth quarter of 2013, and compared to an expense of $500,000 in the fourth quarter of 2012, and primarily represents the effects of changes in foreign exchange rates on inter-company account balances denominated in different currencies.

For the year-to-date basis, other income and expense increased to an expense of $1.3 million in fiscal 2013 compared to an expense of $600,000 in fiscal 2012, primarily as a result of an increase in foreign exchange transaction losses due to the effects of changes in foreign exchange rates on the inter-company account balances denominated in different currencies.

Income tax expense was $3.2 million in the fourth quarter of 2013, compared to $2.9 million in the fourth quarter of 2012. The effective income tax rate was 27.9% in fourth quarter of 2013, compared to 26.8% in the fourth quarter of 2012.

Income tax expense decreased to $7.4 million for fiscal 2013, from $7.9 million in fiscal 2012, primarily as a result of a decrease in pre-tax income. The company's effective tax rate for fiscal 2013 was 25.5%, compared to 25.7% in fiscal 2012.

Net income increased to $8.3 million or $0.48 per share in the fourth quarter of 2013, compared to $7.8 million or $0.46 per share in the fourth quarter of 2012.

Net income for fiscal 2013 was $21.5 million, or $1.25 per share, compared to net income of $23 million or $1.34 per share in fiscal 2012.

I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $189.6 million at December 31st, 2013, compared to $158.2 million at December 31st, 2012.

Accounts receivable was $66.3 million at December 31st, 2013, compared to $62.6 million at December 31st, 2012.

Day sales outstanding at December 31st, 2013 decreased to 67 days, from 71 days at December 31st, 2012, primarily as a result of improved collections in all regions.

Inventories were flat at $68 million at December 31st, 2013, and December 31st, 2012. Reductions in raw materials were offset by increases in finished goods and demo inventory.

Finally, I will conclude with some statistics regarding our headcount numbers. We had 1,078 employees at December 31st, 2013, compared to 961 at December 31st, 2012, an increase of 117 employees or 12.2%.

Account manager headcount increased 22.8%, from 180 at December 31st, 2012 to 221 at December 31st, 2013,with 75 account managers in the Americas, 63 account managers in Europe, and 83 account managers in Asia.

Geographically, we now have 436 employees in the Americas, 367 employees in Europe, and 275 employees in Asia Pacific. I will now hand the all over to Jay.

Thanks, Keith. The positive momentum we experienced in the third quarter of 2013 continued in the fourth quarter, with orders growing 20% and sales more than 11%. There's solid customer demand across most of our primary market verticals, including aerospace, heavy industrial, many in the surveying-related markets and law enforcement.

Likewise, all three geographic regions experienced similar strength in demand, delivering double-digit growth and orders. Europe had the strongest quarter with more than 27% orders growth.

While economic conditions in Europe remain difficult, customer purchase patterns are improving as the need for productive solutions such as those offered by FARO appears to be outweighing general economic concerns. Market conditions in the Americas also remain strong, as they were for most of 2013. However, credit markets in China and India continue to be tight, putting pressure on FARO's overall performance in Asia despite the positive double-digit growth demonstrated in the fourth quarter.

Sales through our relationships to Trimble and South Conn were good in the fourth quarter, as well as all of 2013, but not at the levels we expected. As a result, we are starting to serve these markets more aggressively, through alternative channels as well, most notably our own FARO personnel. We believe that we have substantial opportunity to grow that market by significantly increasing our direct involvement, and that's the path we are pursuing in 2014.

Although price pressure in the Arm market stabilized in the third quarter, the prices were still substantially lower than normal. Price levels did not improve Q4. We assume these conditions will also not improve in 2014 and have planned the business accordingly. While there's been a moderate impact on sales growth and gross margin, we have seen almost no impact on our win/loss ratio.

In addition to being as competitive as necessary on the pricing side, we are working aggressively to reduce costs in the Arm. Tracker pricing remains strong and the higher pricing we introduced for the X330 laser scanner last fall has held up well. As a result, both of those products are offsetting the margin pressure from the Arm. Moving forward we believe we will see improvement gross margin despite the ongoing price pressure in the Arm market.

The team controlled SG&A costs well in the fourth quarter. One exception, however, was a large increase from incremental selling costs connected to our expansion of the sales organization. This expansion is in anticipation of support requirements to meet our 2014 revenue expectations. As a result, our expenses of percentage of sales in the fourth quarter increased almost two full points.

The additional sales headcount was spread almost evenly across all three regions, and as always, was targeted at expanding coverage in highly under-penetrated territories. Performance of the sales team, while still not at full productivity, is improving every month. Our sales model is critical to the ongoing success of FARO and we anticipate a mid-teens percentage increase in the size of the sales organization for several years to come.

We increased our research and development spending again in the fourth quarter as well, coming in at almost 7% of sales. In the third quarter of last year, we started a more aggressive and strategic push in R&D to go along with our M&A strategy. We continued to look for targeted acquisitions to expand the business meaningfully, but every company we have looked at to date has failed to meet our expectations at the technology, people, or financial level. I still believe that finding good acquisitions for FARO is not a matter of if, but only a matter of when.

The incremental R&D spending is spread across multiple projects, all of which are focused on either solving customer problems that are not being solved today or solving customer problems more efficiently than they are being solved today. These projects will create several new products with release dates starting in 2013.

While 2013 was a very productive R&D year, with the release of our next generation laser line probe, the new X330 laser scanner, a web-share, cloud-based and the point cloud server and the latest generation metrology software, 2014 should be even more productive. We are planning several product releases in 2014, which include new generations of our existing products, new products not currently in the portfolio, and new generations of software.

We anticipate that R&D spending in 2014 will increase again modestly as a percentage of sales. We have a lot of cash available and we continue to believe that the best place to deploy the cash is in acquisitions or short bursts of R&D acceleration. The incremental R&D spending will give us greater control over our future and strategically positions us for continued growth while we still search aggressively for good-fit acquisition candidates.

As we look at 2014, we feel good about the position of the company. We have an aggressive product release year coming and we are reshaping the strategy we use to focus the business. We have historically focused on products first but for the last several months we have started diving deeper into the best -- into our best vertical markets to understand all the technologies used by those customers and translating that information to develop new products for R&D or through M&A.

Our sales organization is best-in-class and has the broadest reach in the industry. The strong long-standing relationships we have with our existing customers provides tremendous fuel for growth. At the same time, new customers continue to become more aware of the advantages of using FARO's products and technologies.

While we don't provide specific financial guidance, we believe that achieving meaningful double-digit topline growth is still possible in this environment. While it may not be the 20% to 25% per year we experienced in earlier years when the company was much smaller, we believe there's still significant opportunity to outperform in double-digit fashion.

In summary, we continue to be the world's most trusted source for 3D measurement, imaging and realization technology, and we expect 2014 to be a great year. Thank you for your attention and I will now open the call for questions.

(Operator instructions.) Our first question is from Mark Jordan from Noble Financial. Your line is open.

Good morning, Jay. A question relative to the unfulfilled orders that you carried over in the backlog into the start of the new year. A relatively sizable number, around $9 million. Are those all for early 2014 deliveries -- first quarter deliveries? Or do some of those orders stretch out over longer time frame?

No, they are all for first quarter. You are right, it's a little bit higher than we've had in the past. A lot of it was timing when customers could accept delivery. They were all delivered well before Q1 ends.

A second question which relates to your last statements about not giving guidance. You really refrained from that as we went into the recession a few years ago. Clearly, we have moved beyond that. You do allude to the fact that you expect to be able to move back towards double-digit revenue growth versus the 6% plus this year. My question is, looking at your sales growth of headcount of reps of over 22% this year, and the fact that they have been on board for a while, you should be getting a sense of improved productivity, is there any way that -- or do you have a sense that you could give a little bit better guidance with regards to the top line outlook, again with the fact that you have had those reps in hand for a number of months now?

Yes, so a couple of thoughts. The first is relative to productivity, the reps, you are correct. So we -- the reps we have had on board for call it a couple of years or more, most of them performing at the types of productivity levels we would expect,$1.5 million,give or take, depending on which product they are selling. The tracker folks are always a little higher and arm folks are a teeny bit lower than that.

The newer ones for sure are not at full productivity but we see the improvement every month. We see that creeping up, creeping up.

Relative to 2014, without giving a specific number, I think when you look at the double-digit we did in Q3 and Q4, orders line in and revenue line, I think that gives us -- A, it's a lot of momentum going into 2014. The mood of the sales organization is significantly better than it was at this time last year. When we did our internal budgeting in December, the mood was strong. When I hit the sales meetings in early January and I went to all three regions and spent time with the account managers, the mood has improved even more.

When you look at that momentum in the second half thinking about double-digit growth in 2014; A, without calling out a number, I think it's reasonable, and B, I think the second half paints a pretty good picture with some improvement of where that can go.

Okay. A final question related to sales; you have replaced sales management both in the Americas and in Europe. Now that those replacements have been on the job for a period of time, what has been the most significant change in terms of management of the sales efforts in those two geographies with the new the new management in place?

Yes, I will take two different angles on it. The managing directors got changed out. The managing director for Europe has been on board for a little over a year now. And the managing director in the Americas has been on board for six and one-half, seven months now. Those roles are full [penal] roles. They own all the engineering and all manufacturing that occurs within those two regions, which is very substantial in the Americas and somewhat substantial in Europe.

So in Europe, the -- there was a leadership change at the sales leader level as well. So below the managing director, he did change out the sales leader. The existing person is still at FARO playing a critical role. He brought in a different person to attack the market or focus the team differently without losing the core of what the FARO sales model is all about. Because that part, we know, still runs well and is a significant driver to our overall growth.

In the Americas, the managing director there was a little bit different. The sales leader in place underneath Kathleen has been the same sales leader for multiple years now. There's less of a transition there and a lot more of her time is spent on the engineering and manufacturing side, getting comfortable with the sales side.

But it was a little bit different when you look at the performance of the Americas team. They were already performing a little bit better than Europe was. Europe needed a little more of a shake-up, so it was the sales leader and, in fact, some of the regional leaders below that have swapped seats, as well. You didn't have nearly the same turnover in the Americas during first eight months with Kathleen on board in that role.

Thank you very much.

Our next question is from Jim Ricchiuti from Needham & Company. Your line is open.

Hi, thank you. Good morning. I want to go a little more deeply into gross margins. The sequential decline, there -- maybe it was a case of the Q3 margin being unusually strong relating to mix. But just given these kind of revenue levels in Q4, you'd think the product gross margin might be a little stronger. So I'm trying to understand what might have led to that, particularly since you had more of the scanners, I think, going direct versus indirect.

Okay, Jim, it's Keith. I think as Jay mentioned, we continued to face pricing pressure and we continued to face that in Q4. I think primarily, that's the major contributor to the sequential decline, not only in the Arm. But we are facing a little bit -- probably a little bit more pricing pressure in Europe than any of the other regions. That could be because it's in our primary competitor's backyard. But primarily, that's the main driver behind that gross margin decline.

Got it. That's helpful, Keith. But just given that, Jay, it sounds like you still feel there's an opportunity to move margins up from here. So maybe elaborate on that?

Yes, without giving specifics we certainly think there's room for improvement. So a couple of thoughts. One is, as I mentioned, I don't expect the Arm market pricing to improve a whole lot. We sort of planned around that. If it does, that would be nice, not necessarily mission critical.

The opportunities are; number one, tracker pricing continues to be very strong. In the list price for the new tracker that we have on the marketplace that's been out there for a year now is about $10,000 higher than the previous version. We are retaining a decent portion of that. As tracker volume continues to grow and that product has been good, there's opportunity there.

On the scanner side, the price point of the X330 is almost $10,000 higher. It's a little bit less than that, of the previous version. And if you look at Q4, there is a mix of X330s and the previous Focus 120 in the portfolio.

So as the X330 becomes a bigger piece as we phase out the 120 over time here, that gives some opportunity for incremental -- because throughout the cost structure of the X330 is not substantially different. It's a little bit higher but not substantially different from the previous gen. So a lot of that margin we should be able to retain that going through Q2.

Even those two product lines are both -- the Arm is still number one, tracker and scanners are numbers two and three, they swap back and forth from one to the other, quarter to quarter right now. So they are a little bit smaller than the Arm revenue, but they do provide the opportunity to improve the gross margin because of those two items.

Okay. And maybe just a question on the scanner business and I will jump back into the queue. Do you have any sense or maybe you could give us some color as to the sales of that product? Are you seeing more of a mix shift in terms of repeat sales to existing customers who are using the product more? Or is it still a function of just getting more of these scanners into the hands of new customers?

Yes, right now a lot of it is new customer oriented. If you look at -- the space, as we have started skinning this a little bit differently. We kept saying the surveying space. You will hear me refer to it a lot more frequently as the architectural, engineering and construction space, of which a lot of it is surveying applications, of course. And there's law enforcement,that's a fairly big one. And then the third one for the scanner is the manufacturing asset management side of your scanning facilities to get as-builts and things like that.

Right now, particularly on the architecture and engineering and construction side and the law enforcement side, it's a lot of customers buying their first unit. A lot of them are smaller firms that are first out of the gate who are sort of the pioneers, for lack of a better word, to adopt the technology and start showing the value and start demonstrating its capabilities. And just the AEC space in general does have a fairly sizable number of relatively small companies in there. So for a period of time, I think you are going to see a lot more of it rest on new customers, as the word gets out. And then some of the bigger ones, as they come into play, will have some meaningful incremental unit pick-up. But I think we are seeing a lot more of the latter first.

Okay. Thanks, I will jump back into the queue.

Our next question is from Hendi Susanto from Gabelli & Company. Your line is open.

Good morning, Jay and Keith. First question is for Keith. Earlier this month, at the investor conference, you shared that R&D is estimated to run at 7% to 9% of total sales for the next two years. Would you be able to share similar estimates for G&A and selling expenses?

I think we may have talked about R&D running a little bit higher. I'm not really sure that we put a specific timeframe -- any length of time, but I think going forward, you may see itrun in the 7% to 9% range. Typically, as we talked about earlier, we don't provide guidance. So I wouldn't be able to provide you with specific admin and selling expenses going forward.

We do have a longer term model out there, that talks about an 18% to 23% operating margin target. And in that model, we talked about sales and marketing at 25%. We talked about admin at about 10%, and R&D at 5% to 7%, which like I said, may actually get bumped up to 7% to 9%.

Okay. Got it. And then, Jay, you mentioned there are significant opportunities for double-digit growth in 2014. And then in an earlier question, you mentioned that AEC looks promising for 2014. Do you have more anecdotal insights into, let's say, your major markets and then your major Asian markets, as well? Should we think that [seasonality] in 2014 will be similar to 2013?

Yes, so let me cut it in two different ways. If you look at it by vertical, you are right, AEC has substantial opportunity. There's a real need out there, as we define the market and we keep looking at it deeper and deeper. We think it's at least $1 billion type of opportunity, when you look at the ability to penetrate the space. And you are displacing some of the traditional technology that's in there for the right applications. But it's at least $1 billion opportunity.

The more we get out there through distribution, the more we put our own people on the street, focused on selling into that space,we have discovered that we can address that space pretty well with our own people. That creates opportunity there.

Auto, in 2013 and in Q4, a little bit lighter than usual, but not terribly so. And so it's pockets. We do see momentum there. I think auto is good in 2014.

Aerospace continues to be strong. That market has been strong for us even through the downturn of 2009. That was the only vertical in 2009 that was solid. Even now, four years later now heading into five years later, that momentum continues. So aerospace will be good.

And heavy industrial is pretty good too. Again, but in pockets. So then you go to the pockets and say, let's look at the regions. From everything we see the Americas seems very strong. There's a lot of momentum in the US right now. I think there's a short term -- people got a little concerned at the tail end of the year and the first part of this year with the weather and did that have any type of meaningful impact longer term. And we haven't seen anything from that behavior-wise from our customers, necessarily.

Europe, the economic situation is definitely not any better, but it's been stable for a couple of quarters now. Most of the customers we sell to seem to be taking that mindset of, look, stability is a good thing, as long as we are not in a continued spiral, we've got a business to run,we've been holding off on capital expenditures. We have definitely seen them start opening the check books again. You saw that in Q4 with the performance out of Europe in Q4.

And then Asia, that's the one where there's still a little bit of hit or miss. The demand is there. The credit markets in China and India are still mediocre at best. They are slow. It's hard to get financing. We still make a decent portion of our customers in those two countries pay up front which many of them, because they are smaller Tier Two and Tier Three sized suppliers they are forced to go to the financing markets.

Until we see some improvements there, which probably only come from government intervention trying to force the financial markets to either loosen the process or whatever they need to do to get that moving, our customers will eventually get financing but it takes a long time. That's the one where, could Asia continue to be a double-digit growth region? For sure. It's how high can the double-digit growth be? And that hinges on the financial markets.

And really, it's a China and Indian issue. Japan is not necessarily the issue, Korea is not the issue. Southeast Asia is not the issue. It's centered on those two.

Thank you, Jay and Keith. I'm looking forward to the Analyst Day.

Thank you. We'll see you then.

(Operator Instructions). Ournext question is from Patrick Newton from Stifel. Your line is open.

Good morning, gentlemen, thanks for taking my question. This is Robert Richardson on for Patrick this morning. I'm just wondering if we could discuss operating margin in Asia? It looks like it's down sequentially in year-over-year fairly significantly. Just wondering what drove that impact? Is it an impact from tight credit standards that you mentioned? Or is that something that you see continuing?

Well, typically we don't get that granular in our discussion of the OpEx lines by region. What I can tell you though, as you mentioned and Jay mentioned, there are credit issues in the Asia region. Also Asia has continued to encounter some of the selling pricing pressures as the other regions have. And they have also continued to increase their account managers. I think their account manager growth is roughly about 33% year-over-year. And I think there's maybe a little bit of a longer learning curve for the Asian account managers than maybe the other two regions. So what's happening in Asia is fairly along the lines of what we are doing on a global basis, as far as adding account managers and continuing to feel some pricing pressure.

Great. Thank you for that. Continuing along this added headcount -- so sequentially headcount increased about similar rate that it's done throughout 2013. Just wondering on that selling expense, it seems like for a fairly typical increase in headcount that expense line went up maybe a little more than we would have expected. I know you mentioned there was some travel and other costs associated with that. I'm just wondering how we should think about that going forward?

Well, one is -- so the going forward part, we try to do everything we can to keep it as level loaded through the course of the year as possible. And most of that is driven because, when you add somebody, say, in Q1 right now, you really aren't expecting significant productivity out of them until Q4. And in some respects, we are hiring now for people we don't expect to deliver productivity -- real productivity. They will sell but not at real productivity levels until the first quarter of next year, in some cases. So we try to keep that as level as we can.

What we have also seen in the past, there's always a little bit of lumpiness there, you saw that in Q4 and Asia is a good example. In all of our regions and it's more so in Asia, perhaps.

We have a specific model of person that we are looking for. They need to be technically astute. They need to be capable of solving problem as they walk the manufacturing floor and thinking about where to deploy the technology. It's very much a solution sell with the customer. And at the same time, you need somebody who is comfortable living with a highly leveraged variable comp plan where the sky is the limit in terms of what you can earn. That's a pretty unique profile. And not everybody fits that bill. And by the way, we will ask a person to be on the road four to five days a week.

We've seen periods of time where you get a bunch of candidates and nobody fits the profile. And we are really, really selective about, look, I won't just bring you in because I need it today. If this person, we know doesn't fit the model, we will pass for a quarter or two.

And likewise, in the case that we get a batch saying oh, my goodness, all of them are highly capable or a good portion of the ones we saw clearly could do this job,we won't wait. We will go ahead and bring them in at that point. So you see a little bit of that. I think we saw a little bit of that in Asia in Q4.

And the other important thing, though, to remember is as we add the people, we are always adding into territories that are highly uncovered, for lack of a better word. Yes, we may have an account manager covering it but, our world today, not in every country, but in a good portion of our countries, we have got regions where the account manager covering that territory, it would take them 50, 100 years to talk to every one of the potential customers even one time.

And so we add when we see momentum. We add where we know there's significant opportunity and we are not stretching the list of customers or thinning out the list of customers too much on the person who is already there. And so you combine those two. And that does create some of these pockets and spikes occasionally that occur. The goal is to try and do it as level as we can. And generally speaking, a mid-teens percentage is the right expectation looking forward.

Great. Appreciate that. And then thinking about seasonality for March quarter -- I mean, your expectations that you are going to see kind of a normal seasonal demand environment?

I guess the question is, are we expecting sort of the normal? You get the sequential decline from Q4 to Q1. I have been here nine years now and I have never seen a Q1 that I don't think was sequentially down from Q4. That's not because we think Q1 is weak.

If you look at quarter-over-quarter growth, we have lots of quarters-over-quarters from Q1 that are double-digit. It is more just a factor of you get that use it or lose it mentality still on the CapEx budgets at the end of the year from a lot of the manufacturers. It always drives the fourth quarter to be a little bit higher than other the other quarters. And you sequentially drop a little in Q1, even though Q1 over Q1 will grow a good percentage rate. You restart the cycle again from there.

Great. Appreciate that. And then last one for me and I will drop off, can you provide what your revenue from new customers was? Or percentage from new customers was for the quarter?

39% for the quarter and 37% for the year.

Yes.

Great. Appreciate that. Thank you.

Thank you.

Your next question is from Rob Mason from Robert W. Baird. Your line is open.

Yes, good morning, Jay and Keith.

Hi, Rob.

I want to revert back to the fourth quarter and the seasonality question in a different manner. You did see very good strength, probably above seasonal strength, particularly in Europe in the fourth quarter. Just any sense of what maybe pent up demand there? You talked about the end of year budget mentality. Did that get magnified in any of your regions in the fourth quarter? Or was some of this just better seasoning of the sales force?

I think it's more tied to -- I mean, a little bit of a seasoning of the sales force. Although the European team is not quite as green as the Asian team, but definitely less mature in terms of time of FARO than the Americas team. You get a little bit as they improve, a little bit of that.

I think it's less the pent up demand, even though there is a bit of that. We did have customers holding back the first couple of quarters last year. They started releasing some in Q3 and a little more in Q4. They wouldn't release if also there wasn't some of that use it or lose it mentality on the CapEx.

That one is it is amazingly universal in every region in the world, there's the same mentality that if I don't spend it this year, I won't get the same amount of budget money on my CapEx next year. So I will spend it on the things that I have been holding back or waiting for. But I wouldn't put the vast majority of it on the pent up demand side.

So a lot of the orders that you received in the fourth quarter weren't from quotes that had been sitting out there since the first half of the year, necessarily?

I cannot comment specifically but my sense from talking to the team, talking to the managing director and the sales leaders that that's correct. Yes, it's possible we had some revisits in there that generated orders, but my sense is it's not stuff that's been sitting open for six months or nine months.

Do you have a better sense of customers being more willing than not to -- because we did certainly see that in the first half of the year, sales cycles being much more elongated. Any better sense that customers are not planning to do that as we enter 2014?

I don't think we are -- particularly Europe, I don't think we are back to probably normalized sales cycles yet. I suspect that until their economy really improves, I think you will still see a little bit of caution. That being said, it's been stable enough long enough that the customers who have been thinking about it and are interested in buying product are definitely buying the product that they wanted. But the sales cycle, it might be shortened a little bit, maybe.

Again, some of that is also just as the sales force matures in Europe, because they are a little more green than the one in the Americas. A little bit of it is driven by that. And a little bit of it is customer behavior. I don't think it's adding normal sales cycle yet.

Okay. Fair enough. And then just --you mentioned the plan to take the scanner product direct in a bigger fashion. What do you need to do on your end, either from a manpower standpoint or otherwise, to execute on that?

So some of it certainly is the -- is just account managers. We have people with experience in that AEC space already, so refocusing some of there efforts, adding some more to go with it. That's part of -- when we talk about sort of the mid-teens sales growth -- sales force growth in 2014, they are already included in that number. It's not like it's incremental to that amount. So that's sort of the attack side of it.

Certainly on the product side of it, we've said for a long time that there's still work we want to continue doing on the scanner, all of which is in the works within the R&D organization, that would allow us to better solve the problem. The scanner solves lots of problems today when you look at the ability to address that $1 billion opportunity but it's not perfect yet. It is not where I want it to be. And so that's the other side of it too. And you will see us continue to do things there to help, whether it's AEC or law enforcement or the manufacturing side of it. And it's all geared towards the ease of use of the solution, which opens it up to a much broader category of potential users.

Okay. And then the last question, back to the price pressure that you saw during 2013 on the Arm product. Is there any way that -- it sounds like it has stabilized to a degree now, maybe it's not a year-over-year headwind. But is this any way to quantify what that impact was in 2013, either it cost you two points of growth? Or just the level of reduction that you saw in arm pricing?

Yes. Well, the one stat, I guess, we have used is that the pricing levels themselves have been 30%, and in some cases, 35% lower than normal, just to give everybody a flavor of how much headwind or how difficult that pricing market was. So I think that's the one stat we have given.

We have not given any indication as to what the impact was to the company, for a whole have variety of reasons, one of which is strategic. Because we have been able to offset it. We have offset more than what we are taking the hit for. I think that's the right way to think about. Mostly it's strategic, but I don't want to say a whole lot more about that.

Fair enough. Okay. Thanks for taking my questions.

Thanks, Rob.

Our next question is from Jim Ricchiuti from Needham & Company. Your line is open.

I wanted to go back to how we should think about growth rates. It sounds like you still see double-digit growth rate possible, maybe not the kind of growth rate we have seen several years ago. But if we look at the documentation business, the scanner business, Jay, is that your sense, just given how under-penetrated that market is, that it's still a 20% growth business?

Without saying it is, because that sounds definitive -- the documentation business, in my opinion, could grow faster than a mid-teens growth. That's not to say that I don't think the metrology side could also grow at similar rates. Our meteorology business grew pretty well in the second half.

So I think the question mark on the doc business is, it's a matter of penetration. It's a matter of continued customer acceptance. Moving from the very early -- we are not in early adopter stage by any stretch of the imagination there. It's in early majority now. But as you ride up that bell curve and the adoption rate that goes with it, that slope, if it changed, could change for the better. And that maybe presents the opportunity for the upside to that. But yes, that space is wide open.

We still have the best-in-class product by all measures on pricing, performance, size, scale, all the other things. And if we complete the types of work we are doing on the R&D side, which really allow us to penetrate that market more deeply, then I think there is the opportunity for it to grow at an even faster rate.

Okay. You alluded to new products for this year -- potentially new products aimed at new markets. And now I know you don't want to show your hand, but is there any feeling, any sense you can give us -- are these adjacent markets? Are these markets that are sizable? Or are they more niche oriented? Any color along those lines?

And are these products -- some of the newer products aimed aft new markets? Is this something you are planning for this year? Or is it introduced in the second half and that contributes in 2015?

I certainly think they contribute this year. So I will start with that. And that's some of the excitement, particularly when you think of a new product, without saying when or what, that's one, we could have -- who knows, we could have underestimated what the opportunity is there.

I think the easiest way -- while there is potential from adjacent markets over time, from a focus standpoint to ensure we launch these the right way, obviously if you have -- if it's an existing product that we are doing next generation of, it is going to better attack the market that we are already in, or the markets we are already in. If you look at a new product, let's say, the things we are working on -- and I'm thinking of one in particular, certainly helps more aggressively penetrate some of the existing markets we are going after. They are big markets.

Could they expand to adjacent markets later? Very possible. We focused our efforts right now on --we know there's opportunity for it in that current market and we know have the ability to serve that current market. Let's focus the activity there first. And let's get it out the door, test it and get the customer acceptance. And start generating the revenue that we think we can. And then we'll worry about if there's an adjacent market, and if so, how do we serve that? That creates a different strategic paradigm for the company.

And just the way you are characterizing it, sounds like this would -- some of the new product would go through your existing channels, both direct and incorrect? Is that fair to say?

Correct. Yes.

Okay. Keith, tax rate, how with you we think about tax rate for this year -- this year, I should say?

I think we are in the 26% to 28% range, based upon -- historically that's typically where we have been and we don't see anything that would change that.

Okay. And the final question, just with respect to acquisitions it sounds like nothing really jumping out. You are still looking at things. How do you balance the acquisition strategy with the cash you have on the balance sheet? And potentially even looking at share buybacks? Jay, it sounds like the acquisition activity level -- the level of activity has dropped a little bit versus, say, a year ago. Is that fair to say?

I would say maybe it's dipped a little bit. There is always something on the burner or some things, depending on what time of year you are at. I will say that there are not a lot of revisits on the burner. It's always -- we are pretty clear when we look at one and decide we are not going that route. We don't do a lot of revisits out there.

So the activity may be a little bit lighter than it was a year ago. There's still multiple opportunities that we're looking at. I still believe that's the best place to put the cash, if we can find the right ones. And like I said, it's not a matter of if, but when we find the right ones.

I think our revised focus on the verticals and understanding the big verticals that we are in, Ike aerospace, or AEC, or heavy industrial or auto, what else are those customers doing? How else are they trying to solve problems or not solve problems? I think that will point us to a new list that will still be appropriate for the overall strategy we have for the company, on 3D measurement imaging and realization. So we will not stray too far off from the playing field. It will open up some opportunities that we did not consider before when we had a horizontal view versus of a vertical view of that world.

Do you have a group of folks that are focused on acquisitions? Can you talk a little bit about how you are attacking that?

Yes, so the funnel -- a lot of the ideas, not surprisingly, come to the field. You have account managers talking to customers. Because they have such deep relationships with the customers they are have a pretty open dialogue about, what else are you doing? How else do you do it? Does it work or not work? Are there gaps? We get very good feedback that way. And that comes up through the being managers or product management or through the sales leadership side.

And then the filters - Bernd, who is our Chief Technology Strategist, tends to accumulate a large portion of those ideas. And then he and I or he, I and the managing directors, and now with Jody on board in the General Counsel seat -- we will look at those on a regular basis. And understand hey, some are -- that's too nichey or we don't think that's solving the problem the right way. Some of them we say, geez, we heard that from three or four different account managers and one of them was from Asia and Europe, and so clearly that company has a different type of reach.

Bernd has a couple of people who work with him who study and understand the technology. A little bit of R&D spend will expand his team, both from the combination of looking at acquisitions, but also doing sort of the initial or raw research side of it to translate downstream into other solutions.

That's how we attack it. We don't have a specific person called, say, business development or something like that that you might be used to have other companies. Whether we need that type of role in the future remains to be seen. Right now I think we manage the pipe pretty well with the people and the process we have.

Do we assume if you do any acquisitions, that it's a greater likelihood that they will be technology related, something more similar to what you have done in the past and been able to commercialize the technology?

We are always looking at those for sure, because we know we do those really well. It is not out of the question that you may see us acquire something that has some technology to it. But the channel or the reach in the market could be even more important. We have looked at couple of those that the greatest asset is the customer base, the customer connection. Particularly if you look at newer markets that's not out of the realm of possibility, in terms of what it brings to the table.

Okay. Thank you.

Thanks, Jim.

And we have no further questions at this time.

Okay. Thank you very much, everybody.

This does conclude today's program. You may disconnect at any time. Please, have a wonderful day.