FARO Technologies Inc (FARO) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to today's program, FARO Technologies conference call in conjunction with its third-quarter 2014 earnings release.

(Operator Instructions)

Please note this call may be recorded. I will be standing by should you need any assistance.

For opening remarks and introductions I will now turn the call over to Mr. 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 third-quarter 2014 results. By now you should have received a copy of the press release.

If you have not received a release please call Nancy Setteducati at 407-333-9911. The press release is also available on FARO's website at www.faro.com.

Representing the Company today are Jay Freeland, President and Chief Executive Officer, and Peter Abram, Senior Vice President and Chief Financial Officer. Jay and Peter will deliver prepared remarks first and will then be available for questions.

I would like to remind you that in order to help you understand the Company and its results management may make some forward-looking statements during the course of this call. These statements can be identified by words such as expect, will, believe, potential, continue, predict, target, growth targets, goals 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 set forth in yesterday's press release and in the Company's filings with the SEC.

I'll now turn the call over to Peter to review the financial results for the quarter.

Thank you, Vic, and good morning, everyone. From top-line sales to the bottom-line earnings-per-share third-quarter financial results met or exceeded all of our internal expectations and analyst consensus estimate on the continued strong growth of the laser scanner product line and sharp focus on margin and operating expenses.

Now turning to the detailed results, sales in the third-quarter of 2014 were $82.2 million, an increase of $14 million or 21% as compared to $68.2 million in the third quarter of 2013. Sales through distribution this quarter represented 12.1% of total sales. Product sales in the third quarter were $67.6 million, an increase of $12.6 million or 23% as compared to $55 million in the third quarter of 2013.

The increase was primarily driven by strong year-over-year sales performance in the laser scanner product line across all geographic regions as well as the release of the new laser line probe driving sales growth in the ARM product line. Service revenue in the third quarter was $14.7 million, an increase of $1.5 million or 11% as compared to $13.2 million in the third quarter of 2013. This increase was primarily driven by higher warranty and service repair revenue on the continued growth of our installed base.

Turning to a regional overview of sales, in the Americas region sales in the third quarter were $35.1 million, an increase of $5.3 million or 18% as compared to $29.8 million in the third quarter of 2013. This increase was primarily driven by continued strong unit sales growth in the laser scanner product line and double-digit sales growth in the ARM product line with the release of the new laser line probe.

In the Europe/Africa region sales in the third quarter were $26 million, an increase of $4.5 million or 21% as compared to $21.5 million in the third quarter of 2013. This increase was primarily a result of the more than doubling of laser scanner units sold, double-digit unit sales growth in the tracker product line and higher service revenue on an increase in warranty sales.

In the Asia-Pacific region sales in the third quarter were $21.1 million, an increase of $4.2 million or 25% as compared to $16.9 million in the third quarter of 2013. The increase was primarily driven by more than doubling of the laser scanner units sold and double-digit unit sales growth in the metrology product lines.

Sales to new customers in the third quarter represented 34% of total sales. The top five customers by sales line in the third quarter of 2014 represented only 3.3% of sales. The top 10 customers in the quarter collectively represented only 5% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

The effective changes in foreign exchange rates on sales was a decrease of $0.8 million in the third quarter of 2014 as compared to the third quarter of 2013. This decrease was primarily driven by the weakening euro and yen against the US dollar.

Turning to business development and new orders, new orders increased 22% in the third quarter to $77 million as compared to $63.3 million in the third quarter of 2013 primarily driven by the sales growth of our laser scanner product line. This represents a book-to-bill ratio of 0.94 for the quarter, which is slightly below our target of 1.0 primarily driven by lower metrology order generation in the Europe/Africa region. As you may recall Europe and Africa had a very strong quarter to quarter in Q2, so this is not overly concerning for the Company.

In the Americas region orders in the third quarter were $32.9 million, an increase of $7.1 million, or 28% as compared to $25.8 million in the third quarter of 2013. In the Europe/Africa region orders in the third quarter were $24.1 million, an increase of $2.5 million or 12% as compared to $21.6 million in the third quarter of 2013. In the Asia-Pacific region, orders in the third quarter were $20 million, an increase of $4.1 million, or 26% as compared to $15.9 million in the third quarter of 2013.

Turning to margins and expense, gross profit in the third quarter was $46 million, an increase of $7.2 million or 19% on the strong year-over-year sales increase. Gross margin in the third quarter was 56.0%, a decrease of 90 basis points as compared to 56.9% in the third quarter of 2013.

Gross margin from product sales in the third quarter of 2014 was 60.6%, a decrease of 60 basis point as compared to 61.2% in the third quarter of 2013. This decrease was primarily a result of a less favorable sales mix with the strong sales growth of the laser scanner product line.

Gross margin from service revenues in the third quarter of 2014 was 34.8%, a decrease of 450 basis points as compared to 39.3% in the third quarter of 2013. The decrease in the gross margin year-over-year was primarily due to an increase in headcount in customer service to support the growth in our product sales.

Selling expenses were 23.2% of sales in the third quarter as compared to 24.0% in the third quarter of 2013 on higher sales generated per account manager and an increase in sales through distribution on the growth of the laser scanner product line. Selling expenses in the third quarter were $19.1 million, an increase of $2.7 million or 17% as compared to $16.4 million in the third quarter of 2013. This increase is primarily due to increased compensation expense on higher sales commissions and headcount.

General and administrative expenses in the third quarter were $8.8 million, or 10.7% of sales as compared to $7.3 million, or 10.7% of sales in the third quarter of 2013. This increase of $1.5 million was probably due to an increase in compensation expense reflecting higher headcount, slightly higher professional fees related to the Company's advisory services and the start of the Exton facility leasing costs.

Research and development expenses in the third quarter were $7.4 million, or 8.9% of sales as compared to $5.9 million, or 8.6% of sales in the third quarter of 2013. This increase of $1.5 million is primarily driven by higher compensation expense on headcount growth to support research projects on both next-generation and new product development. As communicated previously the FARO senior management team made a strategic decision to accelerate its spending in this area in 2014.

Operating income in the third quarter was $9 million, an increase of $1.4 million or 18% driven primarily by year-over-year sales growth. Operating margin in the third quarter decreased to 10.9% as compared to 11.1% in the third quarter of 2013 but continued to sequentially improve over Q2 of this year.

Operating margin was unfavorably impacted in the quarter by the 90 basis point decline in gross margin with our sales mix shift and one-time G&A expenses. Other income and expense in the third quarter of 2014 was $0.1 million of income as compared to $0.8 million of expense in the third quarter of 2013. This favorable change primarily raised rates to net foreign currency transaction gains and losses resulting from changes in foreign exchange rates on the value of the current intercompany account balances of the Company's subsidiaries denominated in different currencies.

Income tax expense in the third quarter of 2014 was actually $2.1 million of income, a decrease of $3.9 million as compared to $1.8 million of expense in the third quarter of 2013. In the third quarter of 2014 we reported a discrete tax benefit of $4.5 million due to the reversal of a valuation allowance originally established against net operating losses in certain foreign subsidies. These foreign subsidiaries established a pattern of profitability which resulted in the Company concluding in the third quarter that the valuation allowance should be reversed.

The effective income tax rate decreased to a negative 23.3% in the third quarter of 2014 as compared to 25.9% in the third quarter of 2013. Again primarily due to the discrete benefit reported in the quarter.

Net income increased to $11.2 million or $0.64 per share in the third quarter of 2014 as compared to $5 million, or $0.29 per share in the third quarter of 2013. Excluding the discrete tax benefit of $4.5 million net income would have been $6.7 million, or $0.38 per share exceeding analyst consensus by $0.04 in the quarter with revenue exceeding the high end of the analyst expectations.

I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $181.9 million as of September 27, 2014, as compared to $189.6 million as of December 31, 2013. Accounts receivable was $68.9 million as of September 27, 2014, as compared to $66.3 million as of December 31, 2013.

Days sales outstanding as of September 27, 2014, increased to 75 days from 67 days as of December 31, 2013 primarily related to the Europe/Africa region. We expect improvements in this area by yearend as we have added additional collection staff.

Inventories were $78.1 million as of September 27, 2014, as compared to $68 million as of December 31, 2013. This increase of $10.1 million was primarily related to higher sales levels with an increase in finished goods of $6.4 million, demonstration inventory of $2.3 million and service inventory of $2.6 million partly offset by an increase in inventory reserve of $1.2 million.

During this quarter and given our cash position we consciously built incremental finished goods for the purposes of covering any risks related to the SAP go-live in the Americas and the upcoming Exton move in the Americas. Accounts payable and accrued liabilities was $72.7 million as of September 27, 2014, as compared to $75.5 million as of December 31, 2013. This decrease of $2.8 million is attributed primarily to a decrease of $5 million in accounts payable on higher yearend expense accruals partially offset by a $3.3 million increase in accrued liabilities primarily due to higher compensation and benefits on higher headcount.

Finally, I will conclude with some statistics regarding our headcount numbers. Worldwide sales and marketing headcount increased by 49, or 11.4% to 478 as of September 27, 2014 from 429 as of September 28, 2013. Globally account manager headcount of 221 as of September 27, 2014 remained flat to September 28, 2013.

On a regional basis in the Americas region account manager headcount increased by 7 or 10% to 81 as of September 27. In the Europe/Africa region account manager headcount increased by 2, or 3% to 67 as of September 27, 2014.

And in the Asia-Pacific region account manager headcount decreased by 9, or 11% to 73 as of September 27, 2014. We had 1,172 employees as of September 27, 2014, as compared to 1,055 as of September 28, 2013, an increase of 117 employees, or 11%. Geographically we now have 469 employees in the Americas region, 407 employees in the Europe/Africa region and 296 employees in the Asian region.

I will now have the call over to Jay for his comments.

Thanks, Peter. We had a strong third quarter achieving quarters of sales growth of more than 20% for the second consecutive quarter. At the same time we focused closely on product line margins to increase earnings per share by 121%, or 31% excluding our discrete tax benefit.

I am extremely pleased with the performance of the FARO team who delivered third-quarter financial results which once again exceeded our internal expectations and at the same time delivered on key milestones for our long-term strategic priorities. For the full year we expect our sales growth will be consistent with our targeted long-term organic growth model of mid-teens annual revenue growth consistent with our message throughout 2014.

Market demand for the X 130 and X 330 laser scanner product lines remain strong with unit sales more than doubling in the Europe/Africa region and Asia-Pacific region. At the same time pricing has remained stable for those products delivering nice upside to the third-quarter results.

Our metrology team launched the next-generation laser line probe at the start of September creating the most disruptive best-in-class scanner in the market. The new device has a data capture rate which is 10 times better than the other products in the market while also having 65% better image resolution and a 40% lower price.

The new LLP greatly enhances the dimensional accuracy and scan speed in creating 3D models for reverse-engineering applications and at the same time maintains the micron-level accuracy required for most metrology applications. To give a real-life example of the value of this device the Americas team has a customer who has been using our previous-generation LLP. Historically it took them 32 passes back and forth to collect all the data they needed for a particular part.

When the FARO account manager demonstrated the new LLP using the exact same part, he only needed one pass to get all the data they need it. That customer committed the purchase on the spot. The launch of the new laser light probe continues to differentiate the FARO brand and help drive double-digit percent sales growth for the ARM product line in Q3.

Unit sales growth for the laser tracker product line were very strong within the Europe/Africa region with modest growth overall. Our sales team continues to see competitive pricing pressure in the metrology market especially within select geographical markets for the tracker product line. However, they continue to work through the market dynamics and successfully grow their business.

Similar to the second quarter, global market demand continues to be robust for FARO products. Each region posted strong double-digit percentage sales growth in Q3 compared with last year.

The Asia-Pacific team lead our global business with 25% sales growth by achieving double-digit percent unit sales gains in metrology and triple-digit laser scanner unit growth. Sales in the Europe/Africa region increased 21% on strong tracker sales and more than doubling their unit sales in the laser scanner product line but also experienced slightly weaker ARM demand especially in Germany. The Americas delivered 18% top-line growth by leveraging the launch of the new laser line probe to post mid-teens unit sales growth in the ARM product line while continuing to realize strong laser scanner sales increases.

In summary, our sales team and distributor network topped a strong second quarter of 20% sales growth by delivering 21% in the third quarter. We drove unit sales growth across all regions and product lines, especially the laser scanner.

While pressing to exceed our financial expectations for the quarter, the FARO team kept its eye on the future by achieving key milestones on several strategic priorities. Our top priority remains a passionate commitment to research and development to ensure we continue our legacy of delivering disruptive products to the marketplace.

Demonstrating this commitment we grew our research and development spending by $1.5 million, or 25% to $7.4 million or 8.9% of sales in the third quarter. Sequentially that represents a 10% increase from the second quarter.

Going forward we plan to continue reinvesting 7% to 9% of sales dollars back into research and development. We see this level of spending is vital to driving sales growth and staying ahead of our competition by continuously releasing new cutting-edge technologies like the recent launch of our latest-generation laser line probe.

In last quarter's press release and earnings call we announced the acquisition of the CAD Zone to provide our forensics customers with a turnkey easy-to-use hardware and software solution for laser scanning. During the third quarter FARO's leadership team partnered with the CAD Zone to integrate the acquisition into the FARO brand family with new marketing literature product packaging and improved cross-selling of products by both teams.

At the end of September CAD Zone released the all-new version 10 of its software with more realistic high-resolution 3D graphics. We are pleased with the initial results of the acquisition and our position to capture the market benefits of integrating a leading crash and crime software suite with our X 130 and X 330 laser scanner product line. We continue to evaluate additional acquisition opportunities which offer innovative hardware and software solutions to enhance the FARO portfolio and enable our sales teams to further penetrate our addressable markets.

At the end of the third quarter we took a significant step forward in building the infrastructure for our future growth by implementing the first leg of our global SAP ERP project. All 469 employees in the Americas organization delivered strong third-quarter sales and at the same time achieved a major operational milestone by going live with SAP at the end of the quarter.

We are now conducting business in SAP within the Americas region and continue to execute on our road map to fully implement SAP globally by the end of 2015. This project is critical to providing FARO with the tools, resources and data to make the necessary daily business decisions to drive the Company forward.

In the fourth quarter of this year we will open the doors of our new Exton, Pennsylvania facility to modernize our laser tracker manufacturing process, insure a substantial manufacturing capacity for our tracker and imager product lines and significantly upgrade our optical metrology research capability. The facility construction and buildout continues to be on schedule both in time and dollars and when complete provides FARO with a state-of-the-art 90,000 square foot technical center.

The entire FARO team pressed to deliver third-quarter financial results and yet did not lose sight of achieving our key milestones for our longer-term strategic priorities. In the third quarter I am pleased that we more than doubled laser scanner sales in Europe, Africa and the Asia Pacific regions, launched the new laser line probe, integrated CAD Zone into FARO, executed SAP in the Americas and remain on track to open our new Exton manufacturing and technology center in the fourth quarter.

While sales exceeded our expectations over the past two quarters with year-over-year increases of above 20% with a tough comp from the fourth quarter of last year we continue to see sales growth overall for the 2014 year to be consistent with our longer-term organic growth model of mid-teens annual revenue growth. We are committed to aggressively growing sales, investing in research and development, launching new disruptive products, keeping focus on our margins and searching for the right strategic acquisition opportunities.

In closing, I would like to thank all of you for your continued support and particularly the FARO team for their dedication to the Company mission. All your hard work and success continues to be recognized most recently by Forbes three weeks ago naming FARO one of their top 100 small companies. I will now open the call to questions.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Thank you, good morning. It looks like you are seeing a particularly strong demand for the laser scanner product and I wonder if you can comment on just the distribution channel in particular, which it looks like you showed 20% or so sequential growth? Is this a function of just very good productivity from your existing distributors or is this also you are seeing a nice contribution from some of the newer distributors you have added in the past six months or so?

I think it's a combination of both. So we're seeing the demand for the product continue, which is driving through our current distributors, Jim, and then again as we have appointed -- as we said we appointed a number of new distributors earlier this year and they are, I think, starting to produce.

Yes, I think from a market standpoint the thing that is exciting for me and for the rest of the team is that I still feel like despite the growth rates we are achieving, Jim, and sort of the scale that we've achieved on scanner, I still think we are actually in the early adopter phase of the opportunity. And so when you think about going forward and the new products that we will release, the new scanners that we will release, I don't think we have actually crossed the chasm yet.

So when I think about the growth rates and the volume we are achieving right now and then I think about where it could be in a couple of years, or in that timeframe, it is even more exciting for me now than it was say two years ago and three years ago when we were just getting a feel for what the true disruptive nature of the product was at that point. Because we actually haven't fully disrupted it yet, in my opinion.

Ben Hearnsberger, Stephens.

Hi, thanks for taking my question. So it looked like Europe was pretty strong despite some negative macro news we've heard out of there recently. Can you maybe speak a little bit more to the environment that you are seeing in Europe and what you have seen so far in the early 4Q?

I cannot talk about early 4Q but I can comment on third quarter for sure. So I think in general, market demand was good. You do have to look at it by product line.

Scanner demand was really strong. Tracker demand was really strong.

There was a little bit of weakness in Germany as it related to ARM. And I think some of that could be timing, some of that could be just it's a fairly competitive marketplace in Germany, not a surprise given that it's sort of the industrial and manufacturing hub of Europe. And so we do see a little bit more competition in Germany in particular and the ARM as a product line.

On a go-forward basis, though, the one concern of course that everybody still has is just there is obviously some FX headwind at this point. A little bit of FX headwind in the third quarter.

We will probably have some again in the fourth quarter just based on what we know right now. Our team, their focus is on just selling product into the market and feeding where they see the pull.

Patrick Newton, Stifel Nicolaus.

Good morning Jay and Peter. I guess one clarification to make sure I didn't miss this and then my question. Peter, did you give new customer sales as a percentage of total revenue and distribution as a percentage of total scanner revenue?

Yes. On the customer front the new customer -- or revenue from new customers -- was 34% this quarter, 36% year to date. And on the distributor direct mix it was 59.5% through distribution, 40.5% direct, 12.1% of total revenue through distribution.

Perfect. And then I guess Jay, a question for you on the new LLP product release in the quarter.

You specifically called out in your prepared remarks the strength here and I guess what is interesting is it is available for less than a month given you launched it on September 3. You talked about ARM growing double-digit year-over-year, so can you talk about linearity in the quarter?

Did the LLP launch result in higher-than-normal demand in the month of September specifically? And then do you think there was a pull-in of demand at all into the September quarter due to this launch?

Yes, I think obviously there was great demand when the LLP was released. We knew that was going to be the case. We went through the beta testing, that is always kind of your final spot check as to what the market is going to think about the product.

And so as we were going through beta testing in the tail end of the second quarter and into the early part of third quarter, we knew that the product was going to be well received. If you look at the month of September in particular, maybe the number I would focus on is that the attach rate for LLP just in that month was 63%.

So 63%% of the ARMs being sold in the month of September, the Edge ARMS being sold were -- had the new LLP attached to them and I think that is a fairly good indication of the demand. And of course with the LLP despite having the lowest price in the market it does add incremental price to the ARM business for us and it does improve the gross margin of the ARM given the margin profile of the LLP by itself.

Richard Eastman, Robert W. Baird.

Maybe two questions that deal maybe with geography. First one, when I look at the Focus laser scanner, the significant growth you had in both Europe and Asia that you flagged, is that basically expanding the distribution channel? Because I think of the FLS product distribution as being more penetrated in the US and the Americas, so that's question number one.

Are we still expanding the breadth of our distribution for the Focus laser scanner in those two geographies? And then maybe the second question is, could you, Jay, just address -- seasonally the order growth in the Americas in Europe looked a little bit slower than what we would expect.

In fact they were both down seasonally more than expected. And just curious as to your take on the seasonality in those two regions. Thank you.

Yes, so I guess when we go in reverse order, just looking at the order rates, I think the Americas was up 28% in orders for the quarter, which we look at that and that is very strong. I tend not to look at it quite so focused on the seasonality. We know there's some seasonality and we know that there's always good seasonality in Q4.

But a 28% orders growth rate for the third quarter from our perspective was very good, very strong and it did exceed our expectation. So I am less concerned about that.

When we look at the market demand and the volume being generated by the team I feel good across the board there. When you look at the distribution side as it relates to laser scanner and the growth rates in Europe and in Asia, I think a little bit of Asia's growth is going to be continued expansion of their distributor network.

But a lot of it is just, this is real demand now. For the most part we are not signing up tons and tons of new distributors or anything close to it. You are at a point where you are signing up onesie, twosie for new ones and that's in all three regions and the ones that you have in place are the ones that are starting to deliver based on their sales to the customer base.

It's interesting that the 3D Doc conference that we just had in the Americas here a few weeks ago, there was a very nice mix of existing users who were there wanting to learn more and share what they know about the product and then there's a whole bunch of people there who have not decided whether they are going to adopt yet or not. And so they are using that opportunity to hear from the actual end-users that have the FARO product and so for me that's a good indication of the market demand, too that you have them when you are coming to a user conference who actually aren't even users yet who are using the opportunity to make their decision.

So from my standpoint this it is real market demand. This is not a channel fill or anything like that.

Yes, and keep in mind we also have the direct sales force and we've been adding application specialists in the law enforcement areas and others to drive that demand.

Ben Rose, Battle Road research.

Good morning. Jay, I was hoping you could give a little bit of color in the Far East perhaps by country to talk about some of the demand, or some of the puts and takes that you are seeing in that area. And then I have a question for Peter.

Yes, so Japan and China are really strong. Then the others, particularly Southeast Asia is a little bit weaker than we would like. Thailand, not surprisingly with everything going on, is a little weaker than we would like.

They are obviously much smaller contributors to the FARO, both the regional success and certainly to the overall Company success just in terms of revenue generated. But both Japan and China, which are our two big markets in Asia right now, were very strong for the quarter.

Okay, thanks. And then I guess a question that I'm sure you have received a lot for Peter, I guess for Jay as well but thoughts on use of cash? Is there any recent discussion regarding dividends or share buyback along those lines?

Yes, so no contemplation at this point on dividends or share buybacks. We continue to earmark the cash and think it is more useful in the acquisition and development space. So we continue to invest in the R&D and again we have a healthy pipeline of acquisitions that we are evaluating and looking at.

Anything that we should be bracing ourselves for?

I will never say brace yourselves for. What I will say is that we continue to be very consistent in what we are looking for and the types of opportunities for the Company.

We have looked at and still in the pipeline there are opportunities that are a clear strategic fit with what we're doing right now. And we have some that we look at where it may not be 100% tied to either metrology or 3D doc as we think about it.

But at the same time if we were to do an acquisition like that I think everybody would look at it and say yes, that totally makes sense under the umbrella of 3D measurement, imaging and (inaudible). So there are real opportunities. There are lots of little tuck-ins that we can do and there are some more meaningful ones that are interesting but obviously the approach and the process that we go through is a little different on those.

But no commitment at this point that we can talk about.

Okay. Okay, thanks very much.

Mark Jordan, Noble Financial.

Thank you, good morning gentleman. Jay, the salesforce headcount has been basically flat for 12 months. It's obviously very good to see increased productivity. When do you feel that you're going to have to start growing that base again to give you the incremental capacity you would need say for 2015 or 2016?

Yes, we're coming up on that point. If you look at in some respects we are last year we were hiring a little more aggressively, so this year it is clearly relatively flat.

Asia is up, or I'm sorry down a little bit right now. So there is some productivity there. In Asia one of the things we have done is we have shifted to a model where the account managers are carrying arms and trackers both, where historically in all three regions you had account managers carrying one or the other.

So that's helping drive some productivity. And you will continue to see us making those types of transitions over time here across the regions when they're ready for it.

Obviously we were up substantially in 2013 versus 2012, and so perhaps we were a little ahead of the curve in 2013 to get ourselves prepared for this year. I think you will see the rates starting to normalize again. You always still think about mid-teens growth, give or take, as we add distribution to the Company and it contributes more on a revenue basis on the laser scanner side.

Obviously that changes the profile a little bit. But I would still think about mid-teens growth on the sales side if we're going to continue driving mid-teens growth from a revenue standpoint.

Hendi Susanto, Gabelli & Co.

Good morning Jay and Peter and congratulation on strong sales. First question, so may I inquire what verticals and markup application drove strong sales in the third quarter?

Yes, on the laser scanner side not surprisingly AEC continues to be very strong for us and certainly starting to get continued traction in law enforcement though it is a much smaller total piece of the pie. On the metrology side, the big three for us in metrology continue to be automotive, aerospace and MMA.

I'm not sure we would call out any one versus the others as being substantially stronger in the quarter. But those are if you think about where we sell those continue to be the strong ones.

If I want to clarify your previous comment about investment in sales and marketing you mentioned that sales is likely to growth at the mid-teen in order to provide mid-teen growth on the top line. Is it reasonable to think that as a percentage of sales it may stay at the current level for the past few quarters, I would say between 23% to 24%?

Yes, I think that's probably a reasonable. Again, if as more revenue ends up going through distribution on the laser scanner side, that changes the profile a little bit.

So you take a little bit of the hit at the gross margin line because of the discounts in distributor. And then you make it up on the sales and marketing side because there is no comparable increment to go with it on the sales and marketing side.

So in some respects it's a little bit in flux. As distribution, which is a little harder to predict, continues to grow if that growth rate accelerates then obviously you could get a little bit more lift or a little more leverage on the sales and marketing cost side.

But you would be almost one-for-one offsetting it at the gross margin line as that revenue, again, because of the discounts in distributor. Generally speaking, though, if you're just thinking about the model, yes, I think that 23%, 24%, 25% range is from a sales cost is probably the right way to think about.

Jeremie Capron, CLSA.

Hi, good morning, Jay, could you give us an update on the competitive landscape and in particular what you're seeing in terms of the pricing dynamics on the ARM on one end? And also in terms of the competitive response you're seeing for the laser scanner product?

So if I look at the three primary products, on the ARM side pricing I think is relatively stable. And we saw a good growth on the ARM side during the course of the quarter, obviously double digit on the ARM. And the more LLPs we attach to it then the better the pricing is because of the increment on the laser line product selling price.

On the tracker side there is a little more pricing pressure on the tracking side. Europe was particularly strong from a revenue standpoint. Asia and the Americas saw a little more pricing pressure I think then they had seen in the past. But generally speaking still growth on the tracker side.

Laser scanner is still a whole different sort of world in and of itself. We are still the low-price provider by a fairly large margin. The growth rates that we've seen are reflective of both market demand and I think a product that really still doesn't have a true competitive alternative when at the whole package, ease of use, portability, price, sort of the whole entire solution.

And we've still it's now been four years since we released the first version of the Focus. And then the subsequent the X generation laser scanners and still have not seen a meaningful competitive response either in technology or in price. And that's across all of the competitors.

Jim Ricchiuti, Needham & Company.

Jay, did you comment on the pricing environment in the ARM market, particularly with currency are you seeing increased pressure coming from your competitor over there?

Yes, on the ARM side it has been relatively stable now. So yes there's obviously a little headwind from FX but I wouldn't call it incremental price pressure on the ARM side at this point.

And just as a follow-up, clearly the R&D spend is at a pretty high level. You guys have rolled out some pretty interesting new products. Can you talk a little bit about how we should think about the new product pipeline over the next three to six months?

Not in three- to six-month increments. That would be a little too much of a giveaway for my taste.

But the product pipeline is robust. We are in the middle of a cycle of obsoleting the previous gen across all the product lines. And without saying when those releases come they are all deep in the middle of that process.

And what was the attach rate on the LLP, the previous generation when you introduced that prior version of it?

Peter, can you comment on that, was that sort of the mid-50%-ish?

It was 48%.

So 48% previously.

Okay. Thanks a lot.

Patrick Newton, Stifel Nicklaus.

Two questions if I may. Jay, on the sales side as we sit here today does your long-term growth target of mid-teens seem reasonable for 2015, or are there any trends or puts and takes that could push us above or below that target?

Yes. I'm not going to call out a single year because that feels a little too much like guidance. But I would just say generally speaking mid-teens is the right way to think about growth long-term. And we still feel pretty good about just overall market dynamics.

All right. And I guess just kind of dovetailing off of Jim's prior R&D question, you teased kind of a new product category in the past. Could you give us any update there, Jay?

And then Peter, given that you are refreshing virtually every product line or obsoleting, as Jay just said, how should we think about R&D spending in 2015? Is there a time period where we should start to see absolute dollars start to flatline or even contract as you kind of -- as these new product initiatives are completed?

As it relates to new product category, the answer is yes, it is proceeding well. We have always said it would be potentially as early as the end of this year, maybe the early part of next year. That is only a matter of making sure after we go through beta testing that it is robust and ready.

So this is one where it is going into verticals that we already serve and can be sold either as an accessory to an existing product or as a standalone product by itself. So I don't want to risk having a product that is not fully robust where if it was a brand-new vertical and you are trying something new you might go ahead and rip it just to test the market place and see how it feels.

I'm not sure we have the luxury to do that in this case because we need to get it right. So that being said, the development path is still very strong on that particular product.

On the R&D again we don't give specific guidance so I can't talk to the specific timing. But we are, as we've talked about, our long-term goal of getting to an 18% operating margin, R&D obviously as we go through that course will play a piece of that from a leverage perspective. But without giving specific timing we think that will flatline.

Thank you.

(Operator Instructions) Richard Eastman, Robert W. Baird.

Just to maybe clarify your statement that you made a couple of times, we talk about the ARM product being plus double digit in volume. Is it still double digit in sales revenue contribution?

Peter, do you want to talk to that, or --?

Yes, again we don't give specifics on product lines but it is slightly lower as we have had some of the pricing pressures that Jay has talked about on a year-over-year basis. So it is lower than the double-digit rate.

All right. And then, Jay, the commentary about maybe the fourth quarter and how the full year will shake out kind of mid-teens sales growth, it kind of implies a very seasonal sales pattern from Q3 into Q4. That is the implication when you look at the total revenue for the year.

So again everything you said here kind of suggests that as far as you can see the market feels seasonal in terms of how the yearend unfolds. Are you seeing anything that maybe would distract us from that or be a challenge to that?

We aren't really seeing anything that would suggest a different pattern of seasonality from prior years.

Alright, okay. And then just lastly the selling and marketing, I'm curious the selling and marketing headcount, if I got the numbers right, plus 49 and account managers are flat.

Is there any shift in strategy in terms of generating leads, or is there a reason that we have added more apparently marketing people? Is it just in support of new products or is there just a shift in strategy here in terms of how we generate leads and how we generate potential?

Yes, so there is a little bit of that. So a couple of thoughts. One is just inside sales support to make sure that they can keep up with lead demand and make sure they are feeding the account managers the right way.

As you know in our model the account managers really don't do a whole lot of their own cold calling. They are predominantly demoing based on a schedule that is set by the inside sales team that has already made the initial contact with the account and understood the potential opportunity in the potential applications.

So there's a piece of that. There's definitely some in marketing. So if you think about markets like AEC and law enforcement where we have not been in the past, that requires a different expertise not just at the account manager level and by selling through distribution.

But it also requires some incremental expertise on the marketing side that we have hired in to make sure we have that internal person or people in many cases to be able to help provide DOC and understand where else we need to be going with the product. And then the final piece would be, when you look at the account managers and the people who are in the field, we have added additional individuals called sales engineers who come in and they are spending upwards of a year sort of shadowing an account manager or two to understand what the process looks like, how to sell the product in a relatively call it a safe environment where they don't have a number fully on their head yet. And those people become the next-generation account managers and the goal is to improve the ramp-up time of an account manager when they are brand-new.

So as you know when we hire one straight off the street sometimes it can take 9 to 12 months to get them effective. So if we hire them in an earlier stage in the sales engineering role they can learn the process and then when they move to account manager be that much more productive at the point in time when they move up. So you've got some heads that are tied into that as well.

I see. Okay, so there should be some decent leverage in that number in the marketing side?

There should be, yes. Because you think about it you've got a couple -- particularly the two new markets, AEC and law enforcement. Add a little bit of critical mass to get things moving and you are right you would expect to get a little leverage out of that as we go forward.

Okay, great. Thank you again.

It appears that we have no further questions at this time. I will turn the conference back over to Mr. Allgeier.

This is Jay. Thanks very much everybody for your time. We look forward to updating you again at the end of the year.

This does conclude today's conference. You can disconnect at any time and please have a wonderful day.