FARO Technologies Inc (FARO) 2014 Q4 法說會逐字稿

Good morning everyone and welcome to Faro Technologies conference call in conjunction with its fourth-quarter 2014 earnings release. (Operator Instructions). Please note, this call may be recorded. For opening remarks and introductions, I will now turn the call over to Vic Allgeier, please go ahead.

Thank you and good morning everyone. My name is Vic Allgeier of the TTC Group, Faro's investor relations firm. Yesterday after the market closed, Faro released its fourth quarter and year end 2014 results. By now you should've received a copy of the press release. If you have not received a copy, 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 then will be available for questions.

I would like to remind you that in order to help you understand the Company and its results, the 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, plan, potential, continue, growth model, 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.

Thank you, Vic, and good morning everyone. In the fourth quarter, Faro continued its momentum with another consecutive quarter of sales and earnings per share growth that exceeded analyst consensus estimate. Despite strong foreign-exchange headwinds, sales were above internal and external expectations on strong unit sales growth of all three product lines and a higher average arm sales price with the higher attachment rate of the new Laser Line Probes.

Now turning to the detailed results, sales in the fourth quarter were $104.2 million, an increase of $14.3 million or 16% compared to $89.9 million in the fourth quarter of 2013. Sales through distribution this quarter represented 9.3% of total sales.

With the stronger US dollar, foreign exchange rates negatively impacted sales by $5.7 million in the fourth quarter, decreasing sales growth by 6 percentage points. On an annual basis, sales in 2014 were $341.8 million, with an increase of $50 million or 17% as compared to $291.8 million in 2013. Foreign exchange rates negatively impacted sales by $6.5 million in 2014, decreasing sales growth by 2 percentage points.

Product sales in the fourth quarter were $89.4 million, an increase of $13.2 million or 17% as compared to $76.2 million in the fourth quarter 2013. The increase was primarily driven by unit sales growth of more than 30% for laser scanners and midteens growth for metrology, including a higher average arm sales price with the higher attachment rate of the new Laser Line Probe.

On an annual basis, product sales in 2014 were $284.1 million, an increase of $45.3 million or 19% as compared to $238.8 million in 2013.

Service revenue in the fourth quarter was $14.8 million, an increase of $1.1 million or 8% as compared to $13.7 million in the fourth quarter of 2013. This increase was primarily driven by higher product sales boosting warranty and training revenue, slightly offset by a decline in break fix revenue. On an annual basis, service revenue in 2014 was $57.7 million, an increase of $4.7 million or 9% as compared to $53 million in 2013.

Turning to a regional overview of sales, in the Americas sales in the fourth quarter were $41.3 million, an increase of $5.2 million or 14% as compared to $36.1 million in the fourth quarter of 2013. Foreign exchange rates negatively impacted sales by $0.4 million in the fourth quarter, decreasing sales growth by 1 percentage point. The sales increase was mainly from higher unit sales of Laser Scanner and Laser Tracker, coupled with higher average arm sales, priced due to the due to the higher attachment rate of the new Laser Line Probe.

On the annual basis, Americas sales in 2014 were $139 million, an increase of $18.6 million or 15% as compared to $120.4 million in 2013. Foreign-exchange rates negatively impacted sales by $1.1 million in 2014, decreasing sales growth by 1 percentage point.

In Europe, sales in the fourth quarter were $41.4 million, an increase of $4.6 million or 12% as compared to $36.8 million in the fourth quarter of 2013. Foreign exchange rates negatively impacted sales by $3.7 million in the fourth quarter, decreasing sales growth by 9 percentage points. The sales increase of 12%, or 21% adjusted for currency, was mostly driven by strong unit sales growth of arm and Laser Scanner, as well as a higher average arm sales price.

On an annual basis, Europe sales in 2014 were $120.1 million, an increase of $16.7 million or 16% as compared to $103.4 million in 2013. Foreign exchange rates negatively impacted sales by $1.8 million in 2014, decreasing sales growth by 2 percentage points.

In Asia, sales in the fourth quarter were $21.5 million, an increase of $4.5 million or 26% as compared to $17 million in the fourth quarter of 2013. Foreign exchange rates negatively impacted sales by $1.6 million in the fourth quarter, decreasing sales growth by 8 percentage points. The sales increase of 26%, or 34% adjusted for currency, was driven primarily by strong unit sales growth across all product lines, partially offset by a lower average laser tracker sale price.

On an annual basis, Asia sales in 2014 were $82.7 million, an increase of $14.7 million or 22% as compared to $68 million in 2013. Foreign exchange rates negatively impacted sales by $3.6 million in 2014, decreasing sales growth by 5 percentage points.

Sales to new customers in 2014 represented 37% of total sales, and the top five customers by sales volume 2014 represented only 2.2% sales. The top 10 customers in 2014 collectively represented only 3.3% of our sales, once again indicating our lack of dependence any one or handful of customers.

Turning to business development and new orders, new orders increased 11% in the fourth quarter to $109.2 million as compared to $98.6 million in the fourth quarter of 2013, primarily driven by 14% order growth in the Americas on strong orders in Laser Scanner and Laser Tracker plus a higher average arms sales price. This represents a book to bill of 1.05 for the quarter, slightly above our target of 1.0. On an annual basis, new orders increased 16% in 2014 to $340.9 million as compared to $293.3 million in 2013, representing a book to bill of 1.0 in 2014.

In the Americas, orders in the fourth quarter were $44.4 million, an increase of $5.5 million or 14% as compared to $38.9 million in the fourth quarter of 2013. In Europe, orders in the fourth quarter were $42 million, an increase of $3 million or 8% as compared to $39 million in the fourth quarter of 2013.

In Asia, orders in the fourth quarter were $22.8 million, an increase of $2.1 million or 10% as compared to $20.7 million in the fourth quarter of 2013. In the Americas, Europe and Asia orders in 2014 grew to $140.3 million, $121.3 million and $79.3 million respectively, representing growth rates in 17%, 18% and 12%, respectively.

Turning to margins and expense, gross profit in the fourth quarter was $57.3 million, an increase of $8 million or 16% on strong year-over-year sales growth. Gross margin the fourth quarter was 55%, an increase of 10 basis points as compared to 54.9% in the fourth quarter of 2013.

Gross margin from product sales in the fourth quarter was 58.8%, an increase of 80 basis points as compared to 58% in the fourth quarter of 2013. This increase was primarily driven by strong sales of the new Laser Line Probe, increasing average arm sale price, and shifting sales mix favorability to the arm, partially offset by a $1.5 million excess and obsolete inventory charge that the Company took in Q4 related to its European operations.

Gross margin from service revenue in the fourth quarter was 31.9%, a decrease of 560 basis points as compared to 37.5% in the fourth quarter of 2013. This decrease in gross margin was primarily the result of a strategic decision to increase customer service resources to improve turnaround times in Europe and Asia.

Gross profit in 2014 was $188.9 million, an increase of $27 million or 17% on strong year-over-year sales growth. Gross margin in 2014 was 55.3%, a decrease of 20 basis points as compared to 55.5% in 2013. Gross margin from product sales in 2014 was 59.5, an increase of 40 basis points as compared to 59.1 in 2013. This increase was primarily the result of higher average arm sales price, partially offset by a less favorable mix in the strong sales growth of Laser Scanner.

Gross margin from service revenue in 2014 was 34.3%, a decrease of 480 basis points as compared to 39.1% in 2013. The decrease in gross margin was primarily due to adding additional resources in Europe and Asia to support the growth in our product sales.

Selling and marketing expenses were 23% of sales in the fourth quarter as compared to 24.4% in the fourth quarter of 2013 on higher sales generated per account manager in Europe and Asia, as well as an increase in sales through distribution on the growth of the Laser Scanner. Selling and marketing expenses in the fourth quarter were $24 million, an increase of $2 million or 9% as compared to $22 million in the fourth quarter of 2013. This increase is primarily due to increased compensation expense on higher sales commissions and headcount. On an annual basis, selling and marketing expenses were 23.4% of sales in 2014 as compared to 24.6% in 2013.

General and administrative expenses in the fourth quarter were $10.4 million or 10% of sales as compared to $8 million or 8.9% of sales in the fourth quarter of 2013. The increase of $2.4 million was primarily due to higher compensation expense reflecting increased headcount, higher professional fees related to the Company's ERP implementation, and severance costs with the change in our European managing director. On an annual basis, general and administrative expenses in 2014 were $36.5 million or 10.7% of sales as compared to $30.6 million or 10.5% of sales in 2013.

Research and development expenses in the fourth quarter were $8.1 million or 7.7% of sales as compared to $6.2 million or 6.9% of sales the fourth quarter of 2013. This increase of $1.9 million is mainly due to higher compensation expense on headcount growth. On an annual basis, research and development expenses in 2014 were $27.5 million or 8% of sales, as compared to $22.4 million or 7.7% of sales in 2013. As communicated previously, the Faro senior management team made a strategic decision to accelerate spending in this area in 2014.

Operating income in the fourth quarter was $13 million, an increase of $1.6 million or 14%, driven primarily by the year-over-year sales growth. Operating margin the fourth quarter decreased slightly to 12.5% as compared to 12.6% in the fourth quarter of 2013. Operating margin was unfavorably impacted in the quarter by 260 basis points due to $1.5 million E&O charge, ERP implementation expense and the Europe severance costs. On an annual basis, operating margin for 2014 increased to 10.9% from 10.3% in 2013.

Other income and expense in the fourth quarter was materially unchanged as compared to $0.1 million of income in the fourth quarter of 2013. Other income and expense primarily relates to net foreign currency transaction gains and losses resulting from changes in foreign exchange rates on the value of the current intercompany account balances at the Company's subsidies denominated in different currencies. On an annual basis, other income expense for 2014 was $0.2 million of income as compared to $1.3 million of expense in 2013, primarily driven by the US dollar strengthening versus the Swiss franc, Turkish lira and Indian rupee.

Income taxes in the fourth quarter was $1.9 million, decrease of $1.3 million as compared to $3.2 million in the fourth quarter of 2013. The effective income tax rate decreased to 14.6% in the fourth quarter as compared to 27.9% in the fourth quarter of 2013. Primary drivers of the lower tax rate are the full year impact of the US R&D tax credit that was extended retroactively in December and year to date transfer pricing true-ups.

On an annual basis, income tax expense for 2014 was $3.9 million, a decrease of $3.5 million as compared to $7.4 million in 2013. The effective income tax rate decreased to 10.3% in 2014 as compared to 25.5% in 2013, driven primarily by a discrete tax benefit of $4.5 million in the third quarter of 2014. Excluding the discrete tax benefit of $4.5 million, the effective tax rate in 2014 would have been 22.4%.

Net income increased to $11.1 million or $0.64 per share in the fourth quarter as compared to $8.3 million or $0.48 per share in the fourth quarter of 2013. This exceeds analyst consensus estimates by two pennies.

Foreign exchange rates negatively impacted net income by $0.5 million or $0.03 per share in the fourth quarter. On an annual basis, net income increased to $33.6 million or $1.93 per share in 2014 as compared to $21.5 million or $1.25 per share in 2013. Excluding the discrete tax benefit of $4.5 million, net income in 2014 would've been $29.1 million or $1.67 per share. Foreign exchange rates negatively impacted net income by $0.9 million or $0.05 per share in 2014.

I'll now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $174.3 million at the end of the year as compared to $189.6 million at the end of 2013. Accounts Receivable was $84 million at the end of year as compared to $66.3 million at the end of 2013.

Days sales outstanding increased to 74 days at the end of the year from 67 days at the end of 2013, primarily related to a modest increase in terms. Inventories were $80 million at the end of the year as compared to $68 million at the end of 2013. This increase of $12 million was primarily related to an increase in finished goods of $6.2 million and raw materials of $4.5 million. We consciously increased raw materials and finished goods inventory to support our sales growth, new products and an increase in our safety stock to cover any risks related to higher Laser Scanner demand, ERP implementation and the Exton, Pennsylvania relocation.

Total liabilities were $81.6 million at the end of the year as compared to $75.5 million at the end of 2013. This increase was due to an increase in accrued liabilities primarily from higher compensation and benefits on higher headcount.

Finally, I'll conclude with some statistics regarding our headcount numbers. Worldwide sales and marketing headcount increased by 57 or 13% to 490 at the end of the year from 433 at the end of 2013. Global headcount manager headcount decreased by two, or 1%, to 219 at the end of the year. On a regional basis in the Americas, account managers increased by 12, or 16%, to 87. In Europe account managers decreased by four, or 6%, to 59. And in Asia, account managers decreased by 10, or 12%, to 73.

We had 1223 employees at the end of the year as compared to 1078 at the end of 2013, an increase of 145 employees or 13%. Geographically, we now have 502 employees in the Americas, 426 employees in Europe and 290 employees in Asia.

I'll now hand the call over to Jay for his comments.

Thanks, Peter. We had a great fourth quarter as the Faro team continued our strong sales trend by capitalizing on solid market conditions and leveraging our market-leading products to break $100 million in sales in a quarter for the first time.

All regions focused on the vertical market strategies to exceed their sales target despite strong foreign exchange challenges, and all product lines exceeded their unit sales growth targets. As we grew the top line by 16%, our teams' discipline held gross margin at 55%, maintained operating margin even with a higher reinvestment in R&D and infrastructure, and delivered 30% net income growth to our shareholders.

I'm proud of the hard work, dedication and execution of the Faro team to deliver fourth-quarter results in line with our long-term midteens growth model.

The strong sales and income growth for the fourth quarter caps an outstanding year for the Company. With the release of new market-leading products and improved market conditions, we rebounded sharply from the modest 7% sales growth we had in 2013 to report record sales growth in 2014 to 17%, or 19% excluding the impact of our currency. We maintained gross margin above 55%, increased operating margins near 11% and grew net income by 56%, or 36% excluding the Q3 discrete tax benefit.

Beyond these financial metrics, though, our team met or exceeded its short-term and longer-term strategic objectives in 2014 across all areas of the Company.

The Faro midteens growth model is sustained by reinvesting in research and development in order to launch cutting-edge, disruptive new products. In 2014, we increased R&D spending by 23% to $27.5 million or 8% of sales, and launched several new exciting products as a result.

The first is the FARO Focus X130 laser scanner in March. The X130 provides an ultraportable, easy-to-use, and lower-cost offering to accelerate adoption of laser scanning technology. This midrange laser scanner incorporates all the technology advancements we achieved with a longer range X330 launched in the fall of 2013, but at a lower entry price for our customers.

Next was CAM2 Measure 10.3 in April. This software package upgrade improve the user experience for FaroArm and Laser Tracker customers and accelerated the measurement process of new features such as cross section analysis, point cloud registration, deviation markers and enhanced live color scanning.

In June, we released SCENE 5.3 and WebShare Cloud 1.5. This collective software upgrade provided our Faro Focus laser scanner customers with new processes to make 3D documentation projects faster, more efficient and more effective.

In September we released the Laser Line Probe HD. The launch of this world-class laser line probe set a new standard in 3D laser scanning technology, enabling the Faro Edge ScanArm HD to deliver rapid point cloud collection with higher resolution and accuracy. The new LLP is receiving strong customer approval and it increased our average arm sales price in the fourth quarter.

Finally, we released CAM2 Smart Inspect 1.2 in November. This software reinforces Faro's continued commitment to simplify 3D measurement as the industry's first full-featured portable software for basic geometric measurements without CAD for arms and laser trackers.

While delivering record sales and exhilarating new product introductions, the Faro team also achieved key milestones on time and on budget on four major 2014 strategic growth and infrastructure initiatives. In April, the Americas team opened a new service center near in Mexico near Monterrey to provide Latin America with reduced turnaround times and lower transportation costs for annual product calibrations and repairs.

At the end of the third quarter, the Americas team achieved a major milestone by going live with their new ERP system and completing the first leg of the Company's global ERP implementation. At the start of the fourth quarter, Faro Europe added a second production shift at its Stuttgart manufacturing facility to meet the rapid increase in demand for the Focus laser scanner and to prepare for the recently announced new handheld Faro Freestyle.

And lastly, in the fourth quarter we opened our new Exton, Pennsylvania technical center to modernize our laser tracker and image remanufacturing, ensuring substantial manufacturing capacity for these two product lines and upgrading our optical metrology research capability.

To realize the Company's long-term growth targets, we plan to augment our internal product development with external acquisitions that fit with the Faro's culture, provide offerings to expand into key vertical markets, and can be executed at sensible purchase price multiples. At the end of July, we executed on this strategy by acquiring the CAD Zone, a leading software provider in the law enforcement, accident and crime scene reconstruction market. This acquisition partners CAD Zone's point cloud software with Faro's market-leading laser scanning technology to provide turnkey solutions for law enforcement.

In the third quarter, the Faro team worked with CAD Zone to integrate the acquisition into the Faro brand family and provided the added resources to launch CAD Zone's new version 10 software suite at the end of September.

With our solid 2014 results, we got 2015 started by launching the Faro Freestyle, a new handheld laser scanner. This new product expands our 3D documentation portfolio to further penetrate our two target vertical markets, law enforcement and architecture engineering and construction. This easy-to-use handheld laser scanner offers unprecedented real-time visualization, 3 meters of range, and captures up to 88,000 points per second with accuracy better than 1 millimeter at an affordable price.

On February 5, Faro continued the execution of our law enforcement vertical market strategy by acquiring ARAS 360 Technologies, a global leader in accident and crime reconstruction, simulation and animation software. ARS's newest product, Reality, is a 64-bit crash and crime software solution that enables customers to quickly generate precise diagrams with stunning details and graphic realism. ARS 360 combined with CAD Zone creates complementary software solutions that integrate with Faro laser scanning technology to provide a turnkey solution to law enforcement.

All of Faro's 1200-plus employees around the world are working to maintain -- are working to the Company's short-term and strategic goals. Faro's core financial strategy remains focused on delivering midteens long-term revenue growth through a commitment to solid reinvestment, research and development. As demonstrated by our two acquisitions over the past 6 months, we will look beyond our own research labs where it makes sense to expand our product offerings with external acquisitions.

Our sales and marketing teams are positioned to further penetrate our key vertical markets and our business leadership teams are focused on margins and operating expenses. Our research and development teams continue to work aggressively on new product launches. The entire organization is committed to completing the global implementation of our new ERP system and realizing the operational efficiencies of a single global enterprise system by the end 2015.

In closing, the Faro team delivered on its 2014 goals and is positioned to execute in the year ahead. I would like to thank all of you for your continued support, and particularly the Faro team for their dedication to the Company mission. I will now open the call to questions.

(Operator Instructions) Ben Hearnsberger, Stephens.

A couple of housekeeping questions first; I know you mentioned sales through distribution, but can you give us scanner sales through distribution?

Ben, so the laser scanner sales through distribution were 55.5% in Q4 and for the full year 55.9%.

Okay, thank you. And then can you give us the attach rate of the new LLP product?

I do not have that number for the quarter.

Okay. All right, maybe stepping back on this G&A expense, it was up $1.5 million year-over-year and a little bit higher than we expected. Can you kind of breakout how much of that incremental expense is transitory and then how much is necessary to kind of support the high growth that you guys are seeing?

Yes, so there was three -- on the OpEx there was three primary drivers in Q4 of that expense that I would say are less kind of running the business and more -- I won't say onetime, but extraordinary type expenses. So the ERP implementation represented about $700,000 of expense in Q4 with the go live of the Americas.

We did have a charge of approximately $0.5 million for severance Europe, the majority of that related to the MD that we removed in October. And we also had some increased sales incentives of approximately $600,000 that related to the year-end push and the acceleration in some of the commission plans.

Okay, thank you. And then my last question on the refresh cycle, is the expectation that we'll continue to see R&D expense at the high end of that range as this refresh cycle continues to play out this year, and then we'll see it come down next year after we get past the refresh cycle?

I think that's the right way to look at it. Obviously, you're right; 5% to 7% has been our target range historically. In the last two years we've run above that because we are in a pretty aggressive cycle right now. I think you would expect to see that over the course of 2015, and then probably starts to slowly taper back in 2016.

We still increase the overall R&D spend, obviously. But we are going to continue to invest there. But the percent on a sales basis will probably start to come down.

Great, thank you gentlemen.

Mark Jordan, Noble Financial.

A question first on income taxes and tax rates; I think we kind of viewed the Company with roughly a 27% rate. Obviously, backing out the one-timers, last year it was 22.4% with the R&D tax credits. From a planning standpoint, where should we be looking for tax rates for 2015?

Yes, Mark, so obviously one of the components that hit in Q4 was the US tax credit, and that retro'd back to January 1. They only extended that to the end of 2014, so we don't know whether that will extend into 2015. So the way we are thinking about the taxes going forward, 22% is artificially low. But I would say with some of the changes that we've made in our transfer pricing and our IP relationships this year that we previously talked about, the right way to think about taxes is probably in the 24% to 26% range.

Also, the ERP implementation? You said you had $700,000 in the fourth quarter. Should we assume that that -- and how much will that spill through 2014 -- or excuse me, 2015?

So we will see some hollow-dated expenses in 2015 for the Europe and the Asia implementations. So you should expect to see a slight elevation there for 2015 dropping off in 2016.

Final question for me -- the service margin in the fourth quarter was down. You stated that you put more infrastructure in place to be -- so you could be more responsive to the customers worldwide. Should we look at the service gross margin on a normalized basis more in the 32% to 35% range versus, I guess in prior years you've been many times about that range?

I think that's probably right, in that 32% to 35%. That's probably the right new norm at least for the foreseeable future as we are continuing to invest in that area around the globe.

Okay. And then finally maybe a question or a suggestion; you've been making some significant investments in the law enforcement marketplace with a couple of software acquisitions. Will you quantify over time the revenues derived from that market segment, as it would include both tracker and also software sales?

Yes, I think, Mark, at some point in the future, without saying when, but at some point you will see us start looking at what -- number one what's this opportunity by each of the verticals. And we talked a bit about law enforcement we think is at least sort of the $300 million per year type of opportunity or more. And it really depends, obviously, on the adoption of shifting from 2D technology to 3D technology in that space.

When we feel like we're at the right point in time, the ability to describe -- or the willingness I should say -- to describe the revenue generated in the primary segments, AEC, law enforcement, auto, aerospace, it may make some sense. And we'll do it at a point where we feel like it's critical to help understand the business model on a go forward basis.

Okay, thank you.

Thanks, Mark.

Bobby Burleson of Canaccord Genuity.

Hi, congratulations on the strong end to 2014.

Thanks Bobby.

Thank you.

So I was just wondering a couple of things. Are you seeing any signs of a changing kind of pricing environment from competition out of Europe, given the extreme moves we've seen in FX?

We have not, which is interesting. And just in Europe in general, we've had a lot of people who -- we are hearing from other people, are you worried about Europe in general as well? And our answer would be no. We've not seen anything there.

The one area where I'd say there's a little bit of pricing pressure in tracker, which we've seen last year too, it's not so much price pressure as a standalone event. It is more attached to our primary competitor has a high-end tracker and a low-end tracker, and occasionally we'll be in a transaction where they are offering their low-end tracker. And if it's a strategic account, we will occasionally move our price on the high end to maintain the account. And in many cases we will not move at all because we know the lower end tracker is not sufficient for the customer's needs.

So it's not exactly price pressure. It's a little bit artificially driven based on the product offering. But other than that, I think the pricing environment has been relatively stable even with the FX.

And obviously, as we indicated, the scan arms or the new HD LLP, the impact on price that it had for the arm in Q4 was an increase in price in Q4, because of the attach rate and the value of that product and the associated gross margin, too.

Right, right. Okay, great, and then if I can just ask a couple more quick ones; the midteens kind of revenue growth target, long-term target, can we put that in context with the FX headwinds this year? Are you seeing enough growth acceleration where that type of a growth target isn't necessarily in jeopardy near-term because of FX? Or should we kind of haircut our expectations?

I think generally speaking, the midteens the right number to think about just period. We still view it, number one, as an organic growth rate. So we would anticipate the ability to achieve midteens without acquisitions.

I think clearly there is some FX headwind. There continues to be some that we are facing this year. Obviously, we faced it last year and yet still were able to recover.

So I think the team is keenly aware. In fact, even more so now perhaps than ever, particularly in Europe, of how to respond, how to respond more quickly as you see the FX movement to ensure that the dollar value of their revenue for the quarter matches our expectations. In the past, we may not have been quite as effective at making that adjustment real-time so to speak, and just catching up.

Okay, great. And just one last quick one -- when we think about -- a previous caller asked about software. When we think about 3D measurements, software, the metrology platform level software that's out there, could something like that within a Faro type business help you become more strategic with your customers? Like I know you make a lot of sales at sort of the shop floor level, very diversified by revenue. But how would a software platform help you guys in terms of a broader strategy with growth and with your customers?

On the 3D documentation side, obviously, that's a little different. The strategy is very focused on application-level software to tailor the product to the verticals. And there are lots of other opportunities out there to do similar or create similar packages for other verticals just like we did in law enforcement.

On the metrology side, there are -- when you look at our sales in our competition, there's no real sort of enterprise-level, for lack of a better word, software platform that drives a change in behavior or strategy for customers that we've seen. We both have software that runs our devices. Our primary competitor has software that runs more than just their own devices.

The decision-making of what we see regardless is still at that sort of lower level. If you had a software platform that was more integrated, say, to the entire manufacturing process, that would probably elevate it slightly -- the decision-making. But then it's a different connection in terms of what the product offering that needs to attach to that as well.

Okay, so any kind of build out of more kind of cradle-to-grave type metrology software platform might require additional hardware on your end to really fulfill the synergies?

It might. To make it most effective, I think that's right. And while it's something we would look at, I'm a never say never type of guy. We also know that within at least the metrology, it is not the primary driver for adoption with our customers either. We stress tested that last summer. Software is important, but it is not a standalone decision driver.

Okay, great. Thanks for answering my questions.

Brad Mas, Needham & Company.

It's Brad in for Jim. Just first question, Peter, just wondering if there's any meaningful impact on gross margin from FX, or is it mainly just the service infrastructure and the inventory charge?

It's primarily just what you named. So we are relatively well hedged on the gross margin side. We saw a little bit as it relates to the yen because we don't have as much of a cost base there, but it's primarily hedged.

Okay, and then, Jay, can you just talk about the tone of demand you went through Q4 and your major automotive and aerospace verticals and if you have seen any change there in metrology in Q1?

We won't comment on Q1, obviously, but relative to Q4, the demand was really strong across all of the verticals. If you look at metrology, the primary verticals are auto, aerospace and what we call MMA, which is all the metalworking and machine shops around the world, demand was good in all of them. The verticals remain very strong.

Auto, through 2014 sort of got stronger and stronger through the year, which was positive. And if you looked at metrology, while we don't disclose obviously revenue growth by metrology versus 3D doc or by product line, what I can say is that the unit growth was extraordinarily strong.

So while revenue growth was strong, unit growth was very strong, recognizing there was little bit of that price pressure that I mentioned on the tracker side, offset by improvement in the arm price because of the LLP. So it was very good coming out of the quarter.

Great, and then just last one for me, given these recent events or acquisitions in the law enforcement market, can you just talk about the outlook there in 2015?

Yes, so while it still a small piece of the Company revenue in total, obviously we think there was a lot of potential that market given the two acquisitions. The things that excite me about this space are, number one, need for the technology is there. You think about crash investigations, crime scene investigations, they have been using a variety of different technologies for decades, and they are critical to proving the case, so to speak, all the way up through the court level.

Point cloud data continues to become more and more accepted in the courtroom, which of course has a pretty quick trickle-down into law enforcement. And at the same time, there's two other things happening.

Number one is the -- it's not just the specialty law enforcement groups anymore. So you've got law enforcement agencies such as the one in Boston, just to use one example, who have now bought several laser scanners. And Boston is a well-regarded police force as a trendsetter, for lack of a better word, amongst other law enforcement agencies. So they see a law enforcement group like that make a move into 3D laser scanning, and of course it makes everybody open their eyes a little bit further.

And then at the same time, many of the individual experts including a couple of the ones that we work with on a contract basis are spending substantial amounts of time doing nothing but delivering training, so to speak, to other law enforcement agencies as to why 3D scanning is important, how it can be used in the field, what the benefit is. And they are spending more time than ever doing these lectures than they have in the past.

And because the vertical itself, people talk so openly amongst each other and across the different organizations, the word spreads much more quickly in some cases than it does in others. So while it's still in early adopter phase for sure, the momentum is very exciting there.

Great, thanks guys.

Patrick Newton, Stifel.

Great, thank you for taking my questions. This is Rob Richardson on for Patrick this morning. I guess one kind of question to clarify the customer concentration. Was the 2.2% for 5% customers, was that for the full year or is that for the fourth quarter?

That was for the full year.

Okay, what are those numbers for the fourth quarter?

Fourth quarter -- I'm going to have to look those up for you. I don't have them right in front of me.

Okay.

But similar range, I mean typically we are always in that 35% to 40% range.

Okay, thanks. Then, still kind of talking about the distribution channel, obviously some decrease in the percentage of FLS sales that have gone through distributors sequentially. And I know you mentioned previously kind of having 19 targeted distributors that you were looking to sign up, and I think last update they were about 17 that you had signed on and just wonder if there is any change to that in the quarter.

I don't know specifically in the quarter, but what I can tell you is we have grown our distribution channel pretty significantly at 15% in 2014, as far as the number of distributors that we have across the globe. Independent distributor population and percentage continues to grow.

Got you. Okay, all right, and I guess we sort of think about your typical seasonality for -- are you anticipating the first quarter looking like a sort of typically seasonal quarter? Or have some of your new product launches and acquisitions impacted what you will kind of see as your normal seasonal trends?

Yes, again, we don't give specific guidance on the quarters or the year. But our seasonality we would expect on a regular basis. There's nothing that we would anticipate there.

Okay, great. And I guess kind of one last question, looking at gross margin for the quarter, it's down pretty substantially sequentially. It looks like a lot of that is related to $1.5 million in inventory charges and then sort of this new service center in Mexico. I just wanted to get your thoughts on how much of that sort of impact for this quarter should continue, and then how much of it was sort of a one-time impact that you saw in the fourth quarter.

So again, I can't talk specifically about this quarter, but what I will say is that the $1.5 million was the primary driver. If you strip that out, we would have been at about 56.5% on a margin basis. And that was something that was out of the ordinary.

Got you. Great, thank you for the color.

(Operator Instructions) Rob Mason, Robert W. Baird.

Maybe just to follow-up on the last question the gross margin, the product gross margin -- if you do adjust for the inventory it looks like we've trended at about 60.5% through the last three quarters. As you think about the new extant facility coming on, the new Freestyle product, the acquisitions, can you give us any feel for the influence, the puts and takes that would have on product gross margin as we go forward?

I think on that question, again without being specific on a guidance perspective, we've continued to say that the right way to think about our gross margins are in that 55% to 57%, as you said. There are some puts and takes to that. We've got some incremental costs that are coming on board.

But we also acquired the two software companies, which typically would have higher gross margins. And as we've said in the past, we're continuing to engineer cost out of our metrology product. So, again, I don't think there's material swings either way.

Okay, okay. Jay, how would you think about your expectations for direct sales, account manager headcount in 2015?

Yes, I think generally speaking sort of the midteens that you saw this past year; I think for the past year salesforce grew about 13% total. I think that's still -- whether it's 13% or 14% or 15% it's going to be in that range. That's the right number to think about.

There's still substantial opportunity to split territories in the field, particularly on the metrology side, but we're seeing growth obviously on 3D documentation, too. So, as much as we have had a pretty meaningful increase in distributors this year as Peter just indicated for laser scanner, we also had an increase in account managers, too, and going into 2015 same thing.

Just as an example, in the first quarter alone we added -- I think it was four more law enforcement account managers just for the Americas, just for selling scanners into law enforcement, because that marketplace is a little different in terms of distribution versus reliance on the direct touch. So, you know, if we are targeting still midteens growth as a Company you would expect the overall sales organization to grow probably close to that, maybe a little bit below the run rate, the sales run. But it's going to be close.

Maybe I have my numbers incorrect, but you finished the year the account managers at 219. I had actually last year finishing at 221. Was that -- maybe my numbers are off. But it showed you are flat or maybe down a little bit.

Yes, no, I think that's right. I think we were down one -- yes, down two people --

We were down two people, Jay.

Yes, so, again sometimes it's just transition. You've got turnover in the salesforce, as always, and so we're constantly backfilling the folks that departed and adding new. So I think if you looked at it on a regional basis, I think we were up in the Americas, we were down in Europe and we were down in Asia. And sometimes that is just timing of when the new ones come on.

And again, we are pretty specific about the profile we look for in account managers. Our history shown that if it doesn't if the person doesn't match the profile really closely, they have a very difficult time in our sales organization. And so you'll find the sales leadership team, they'll pass for a quarter or two on getting somebody if they know they just can't find the right ones.

Sure, sure. Maybe lastly, appreciate the added detail disclosure in the 10-K around the product categories, but did you have a scanner unit growth number? I didn't catch that.

We did not give a specific -- well, in Mike's group we said it was greater than 30% for (multiple speakers) higher.

For the year?

That was for the quarter. We did not give a specific growth number for the year.

Okay. Peter, just last -- the ERP, you mentioned, would run out into 2015 with Europe and Asia implementations coming. Should we think this similar $700,000 a quarter type impact?

We haven't given specific guidance on what those numbers are.

But you think you'll be finished in 2015, though?

We will, absolutely. The plan is to be finished by the end of 2015.

Okay, all right. Very good quarter, thank you.

Thanks, Rob.

Hendi Susanto, Gabelli & Company.

Good morning and congrats on strong Q4 results. First question is for Peter. How should we think of negative currency impact in 2015 in terms of -- besides the hits that you mentioned earlier? Should we expect to see some cost absorption and pricing increases, too?

Jay, do you want to talk to the price increase question?

Yes, so I think price increase -- I think on the arm side, typically in the first couple of quarters here with the HD LLP didn't come out until the very end of Q3. So on a comp basis, it takes until Q3 of this year to have year-over-year be similar. But we clearly are seeing the price increase in our arm -- with a ScanArm.

Arm by itself is still fairly consistent at the moderately lower levels that were pushed to over the last two years. ScanArm is definitely higher, though, because of the clear value proposition for customers with that new device. And it is one-of-a-kind in the market from everything we've seen.

Tracker we would expect to see sort of modest pressure, and again, it's only in those instances that I talked about before, where we may be competing with our high-end tracker against a low end. High-end to high-end in those situations are pretty close.

And then laser scanner, we are still the market leader on price by a meaningful amount, so the price -- there's no price pressure there, other than what we may do to ourselves. And on the Freestyle, again it's sort of a one-of-a-kind device. The price is extraordinarily low already and there's really -- there are some comparable products, but they really aren't in the same sweet spot that Faro's is without the same distribution network. So I suspect that price is probably stable for where it needs to be.

Yes, and then to go little bit deeper on the FX impacts, because the question earlier, I looked a little bit at the details and there is some impact on that gross margin line. The gross profit impacted not to the level of the $6 million that we saw in the top line, but we do have some impact on the gross margin that is being offset by reduced expenses as it relates to Europe SG&A. And so when you think about the bottom line, we still have very low exposure primarily related to the Brazilian real and the Japanese yen as those two currencies have moved.

So, again, topline we have some FX headwinds for sure given where the euro and the yen are. But on the bottom line, while it's not zero, it's less meaningful than on the revenue line.

Got it. And then, Jay, in the 2014 analyst day you mentioned a number of potential field expansions. May we know your latest thoughts on that after your recent acquisitions? Do you still see those fields as potential expansion? And additionally, you see some attachment to the drone market down the line?

On which market down the line, sorry?

Drone.

Drone, yes. So the vertical markets, obviously we -- I mentioned earlier in the call we have our big five that we get a meaningful amount of revenue from today. That's auto, aerospace and MMA over on the metrology side, AEC and law enforcement for 3D documentation. There are lots of other verticals that are very interesting there as well.

So, in the metrology side, in Asia in particular we do a decent amount in shipbuilding. And we do a decent amount in agriculture and farm equipment, Cat and Deere, and construction equipment, folks like that. All of those are still meaningful and we continue to push and chase.

It's a little different in metrology, because while the verticals are interesting because of just understanding what's going on in the vertical, the applications -- which is different from 3D documentation -- so sheet-metal is sheet-metal is sheet-metal, regardless of whether you're in and aerospace facility or in an automotive plant. The way they use our technology is very similar across all of them.

It's different in 3D doc for sure. The devices, the hardware can be the same, but the workflows and the software is very different and the expectations are very different.

So others that we continue to be interested in over on the 3D documentation side include mining. We are certainly doing work in mining, particularly outdoor versus down in the mine itself; pile measurements and things like that.

We continue to be very interested in insurance. And while there's not meaningful traction there, the continued momentum in law enforcement tells me that at some point we would probably see that insurance play that we've been looking at for a long time.

And then there are a variety of others that you know -- forestry has had some applications in forestry and logging and things like that. It's a tricky one because we're still scratching the surface. So we look at it and say the dedicated focus and attention, a lot of it right now on AEC and law enforcement. And then we are doing, for lack of a better word, a lot of experimentation on the others to find out where the sweet spot maybe.

Got it.

And then in the drone market, it's too early to tell. We do have -- we got some examples particularly with octo-copter. So it's a little different with a moving drone that's going at high speeds. But the ability to scan -- the scanner is light enough you can elevate it with moderately sized octo-copter, any type of helicopter like that, you know, a drone copter. And we have had customers who used it that way. It's a little tricky depending on the stability of the drone when it's in the air.

As we continue to improve scanning speed and range, there could be a play there. At 330 meters, it's got to be a pretty low-flying drone make it useful at this point. But over time there could be some opportunity. We don't expect it to be anywhere near as big as what we're doing in direct sell into the construction space or the surveying space as we do today.

Thank you.

There are no further questions at this time. I would like to go ahead and turn the call over to the management for closing remarks.

Very good, thank you very much everybody for the call today, and look forward to updating you again at the end of Q1.

And this concludes today's teleconference. You may now disconnect.