FARO Technologies Inc (FARO) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies conference call in conjunction with its first-quarter 2015 earnings release. (Operator Instructions).

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 first-quarter 2015 results. By now, you should have 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 Bob Seidel, Vice President, Corporate FP&A. Jay and Bob will deliver prepared remarks first and then will be available for questions.

I would like to remind you that in order to help you understand the Company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as expect, will, believe, 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 Form 10-K for the year ended December 31, 2014.

For comparability, where indicated, results exclude the impact of foreign currency transactions, which is a non-GAAP measure.

I will now turn the call over to Bob.

Thank you, Vic, and good morning, everyone.

Our reported sales for the first quarter of 2015 were $69.9 million, a decrease of $3.5 million or 5% as compared to $73.4 million in the first quarter of 2014. Excluding approximately $7.0 million of unfavorable foreign-exchange impacts, primarily from the euro and yen relative to the US dollar, our first quarter of 2015 year-over-year sales growth would have been 5%.

Weaker product sales in Japan and Brazil represented other key drivers impacting our year-over-year sales growth in the quarter. Our regional sales and marketing teams reported lower capital spending in Japan, given limited government stimulus funds available at the start of 2015. Brazil sales were negatively impacted by the Petrobras investigation, which has unfortunately led to industrial bankruptcies, unemployment, and decreased capital spending.

I would like to highlight several positive indicators in our first-quarter sales. Excluding approximately $5.4 million of unfavorable foreign-exchange impacts, our reported sales of $22.2 million in Europe would have represented a 16% sales growth versus the prior-year quarter.

Our Focus3D laser scanner delivered 23% unit sales growth globally over the same quarter last year. The market demand for our new FARO Freestyle3D, a handheld laser scanner, significantly exceeded our expectations.

Turning to total product and service sales, in the first quarter of 2015 total product sales were $55.0 million, a decrease of $4.8 million or 8% as compared to $59.8 million in the first quarter of 2014. Excluding approximately $5.5 million of unfavorable foreign-exchange impacts, our first-quarter 2015 year-over-year product sales growth would have been 1%.

The 23% increase in unit sales of Focus3D laser scanner and strong launch of FARO Freestyle3D was offset by lower unit sales of Arm, particularly in Europe, and Laser Tracker, particularly in Americas and Asia. First-quarter 2015 sales through distribution represented 9.9% of total sales, up 1.8 percentage points from first-quarter 2014.

In the first quarter of 2015, total service revenue was $14.9 million, an increase of $1.3 million or 10% as compared to $13.6 million in the prior-year period. Excluding approximately $1.5 million of FX headwinds, service revenue would have posted solid 21% year-over-year growth, driven mostly by a strong increase in customer service and warranty revenue in the Americas region as our installed base continues to grow.

Turning to sales by region, in the Americas, sales in the first quarter were $30.4 million, an increase of $0.8 million or 3% as compared to $29.6 million in the first quarter of 2014. Excluding approximately $0.5 million of unfavorable exchange-rate impact, the Americas year-over-year sales growth would have been 5%. This increase was mainly driven by higher service revenue and a higher Arm average selling price, partially offset by lower Laser Tracker unit sales.

In Europe, sales in the first quarter were $22.2 million, a decrease of $1.6 million or 7% as compared to $23.8 million in the first quarter of 2014. Excluding the negative impact of $5.4 million due to the euro exchange rate, Europe's year-over-year sales growth would have been 16%. The European team delivered strong unit sales growth in Laser Tracker of 64%, teed by significant wins in the aerospace vertical, as well as laser scanner of 48%, primarily driven by continued expansion of our distribution network.

In Asia, sales in the first quarter were $17.3 million, a decrease of $2.6 million or 13% as compared to $19.9 million in the first quarter of 2014. Foreign-exchange rates, primarily the yen, negatively impacted sales by $1.1 million in the first quarter, decreasing sales growth by 5%. The sales decrease was mostly driven by lower unit sales of Laser Tracker, a weaker China aerospace demand, and a decline in Arm unit sales from lower capital spending in Japan.

Turning to new orders, first quarter of 2015 new order bookings of $69.1 million decreased by $1.8 million or 3% from $70.9 million in the first quarter of 2014. Excluding approximately $7.0 million of unfavorable foreign-exchange impact, new order bookings would have increased approximately 7% as compared to the same quarter last year. This represents a book-to-bill ratio of 0.99, which is consistent with our long-term target ratio of 1 to 1.

In the Americas, orders in the first quarter were $30.1 million, an increase of $1.0 million or 3% as compared to the first quarter of 2014. In Europe, orders in the first quarter were $23.2 million, a decrease of $1.3 million or 5% as compared to the first quarter of 2014. Excluding approximately $5.5 million of unfavorable foreign-exchange impact, Europe orders would have increased by 17%.

In Asia, orders in the first quarter were $15.8 million, a decrease of $1.5 million or 9% as compared to the first quarter of 2014. Excluding approximately $1.0 million of unfavorable foreign-exchange impact, Asia orders would have decreased by 3%.

Turning now to gross profit and margin, in the first quarter of 2015 gross profit was $39.6 million, a decrease of $0.5 million or 1%, primarily driven by lower unit sales of Arm and Laser Tracker, partially offset by an increase in gross margin. Our gross margin of 56.6% increased 2.0 percentage points as compared to 54.6% in the prior-year period.

Product margin of 59.7%, up 1.7 percentage points from the prior-year quarter, decreased overall gross margin by 1.2 percentage points from a higher average -- from a higher ARM average selling price, from sales of the Laser Line Probe HD, and higher laser scanner gross margin due to a more favorable sales channel mix.

Gross margin from service revenue in the first quarter of 2015 was a strong 45.3%, up 5.4 percentage points from the prior-year quarter, and increased overall gross margin by 0.8 percentage points, primarily due to higher Americas service revenue leveraging the cost base.

Turning to operating expenses, selling and marketing expenses in the first quarter were $19.1 million or 27.3% of sales, as compared to $17.4 million or 23.8% of sales in the first quarter of 2014. This increase of $1.7 million or 10% is mostly related to headcount additions and advertising costs to support the launch of the FARO Freestyle3D, acquisitions, and our vertical market approach.

General and administrative expenses in the first quarter were $9.8 million or 14.0% of sales, as compared to $8.4 million or 11.5% of sales in the first quarter of 2014. This increase of $1.4 million or 16% is primarily due to headcount additions, higher advisory fees, and relocation costs to our new Exton facility.

Research and development expenses in the first quarter were $6.4 million or 9.1% of sales, as compared to $5.4 million or 7.4% of sales in the first quarter of 2014. This increase of $1.0 million or 17% is mainly related to headcount additions and higher project materials. We remain dedicated to reinvesting into research and development to innovate new products to disrupt the marketplace, as we did recently with the launch of the new FARO Freestyle3D in January.

Turning to profitability, operating income in the first quarter was $1.9 million, a decrease of $5.1 million or 73% as compared to the first quarter of 2014. Our sales decline of $3.4 million was partially offset by a 2.0 percentage point increase in gross margin to have a net impact of only $0.5 million on operating income. The operating income decrease is primarily driven by an increase of $4.6 million in mostly fixed operating expenses strategically aimed to build the infrastructure for growth, including people, our new Exton facility, research labs, and an enterprise resource planning system.

Our first-quarter operating margin of 2.7%, which, as a reminder relative to seasonality, is generally the lowest quarter of the fiscal year, declined 6.8 percentage points versus the first quarter of 2014.

Other expense was $1.3 million in the first quarter of 2015 as compared to $0.1 million in the first quarter of 2014. This increase of $1.2 million was mostly a result of the rapid appreciation in the Swiss franc relative to the US dollar and the value of our intercompany account balances.

Income tax expense in the first quarter of 2015 was a benefit of $0.1 million as compared to an expense of $1.8 million in the same period last year. The favorable decrease of $1.9 million relates primarily to lower pretax income and a discrete tax benefit of $0.2 million in 2015 from the exercise of certain employee stock options.

The effective tax rate decreased to a benefit of 16.9% in this quarter, as compared to an expense of 27% in the first quarter of 2014.

Net income decreased to $0.7 million or $0.04 per share in the first quarter of 2015, as compared to $5.0 million or $0.29 per share in the first quarter of 2014.

I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $161.1 million at the end of the first quarter of 2015, as compared to $174.3 million as of December 31, 2014. The decrease in cash was mostly related to $12.0 million to acquire ARAS 360 and kubit.

Accounts Receivable was $62.3 million at the end of first-quarter 2015, as compared to $84.0 million as of December 31, 2014. Days sales outstanding increased to 81 days at the end of first-quarter 2015 from 74 days as of December 31, 2014, on a modest increase in payment terms across regions.

Inventories were $88.1 million at the end of first-quarter 2015, as compared to $80.0 million as of December 31, 2014. This increase of $8.1 million was primarily related to an increase in finished goods of $5.5 million and lower unit sales, while demonstration and service inventory was up $2.3 million due to the recent launch of Laser Line Probe HD and FARO Freestyle3D, as well as account manager headcount growth.

Finally, I will conclude with our headcount numbers. We had 1,308 employees at the end of first-quarter 2015, representing a year-over-year increase of 196 employees or 18%. Geographically, we now have 523 employees in the Americas, 481 in Europe, and 304 in Asia.

Worldwide sales and marketing headcount increased by 66 or 14% to 523 at the end of first-quarter 2015. Account manager headcount increased by 15 or 7% to 233 at the end of first-quarter 2015. On a regional basis, in the Americas account managers increased by 11 or 14% to 87. In Europe, account managers increased by six or 9% to 74, and in Asia, account managers decreased by 2 or 3% to 72.

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

Thanks, Bob.

Needless to say, sales growth of 5% excluding currency impacts is below our internal long-term goal. We faced difficult macroeconomic challenges against our topline results in the first quarter. Our account managers encountered significant challenges in closing deals in the quarter, with customers opting to defer capital spending on uncertain business outlooks.

While we expected modest exposure in Europe due to weakness in the euro during the fourth quarter of last year, the decline in the euro during the first quarter was substantially larger than anticipated. When combined with rapidly declining economies in Japan and Brazil, the business environment in the first quarter was soft. Even though market demand for FARO's products remains strong, getting purchase orders approved by our customers proved to be very difficult.

In Asia, our sales were down 13% versus prior year on significantly lower sales in Japan, due to the manufacturing stimulus program not releasing funds for Q1 purchases, combined with a 16% decline in the yen to the US dollar exchange rate.

In Europe, the primary headline is the 18% year-over-year decline in the euro to US dollar exchange rate. But as Bob said, excluding the currency impact our Europe sales would have reported 16% year-over-year growth without that.

In Americas, our first-quarter sales growth of 3% was negatively impacted by the Petrobras investigation, which has meaningfully slowed capital spending in Brazil and, equally important, it has deferred capital spending budgets in the US.

Our Arm and Laser Tracker unit sales have been directly impacted by our manufacturing customers deferring their capital spending, due to the same macroeconomic headwinds that we face. As compared to the first quarter of 2014, our Arm unit sales are down 8% and our Laser Tracker unit sales are down 25%. These metrology products are mostly sold into manufacturing companies within the automotive, aerospace, machining, and metalworking vertical markets.

We will continue to make every effort to close deals deferred from the first quarter; however, we do expect slower capital decision-making processes to continue in the near term, given the uncertain current macroeconomic climate in several of our key geographies.

So let's talk about where the positive signs are for FARO. First, our Focus3D laser scanner posted 23% unit sales growth in the quarter, demonstrating continued strong market acceptance. We continue to expand our direct sales force and distributor network across the globe to drive sales growth, and with the recent acquisitions of ARAS 360 and kubit, FARO is better positioned to penetrate our targeted ADC and law enforcement vertical markets by now offering a turnkey hardware and software solution to the customer.

Second, the customer demand for our new handheld laser scanner, the FARO Freestyle3D, exceeded our expectations. We're excited by the strong initial market reception to this disruptive new product.

Third, our Arm customers continue to provide highly positive feedback on the improved scanning performance with the blue light design of our Laser Line Probe HD. As a sales initiative, we're actively reaching out to owners of older-generation FARO Laser Line Probes to demonstrate the blue light advantage in image clarity and scan time. And our new Laser Line Probe HD continues to increase our Arm average selling price and gross margin.

Gross margin has remained stable in the trailing quarters and even increased this quarter. Our balance sheet is extremely strong with no debt and over $161 million in cash and treasury bills. We continue to view our cash on hand as a critical element to leverage our growth, whether through investments in additional account managers to further penetrate vertical markets, strong R&D reinvestment, or attractive acquisitions.

Finally, we acquired two niche but highly valuable software companies in the first quarter. The pipeline of potential acquisitions continues to be robust and there are several real opportunities we are currently pursuing aggressively. The strength of our balance sheet continues to enable the Company to look at these strategic acquisitions.

In response to our first-quarter sales decline, we implemented deliberate cost-reduction initiatives and decreased our cost base through workforce reductions and nonessential spending cuts, where appropriate. Our goal is to align our cost structure to expected sales volume for the rest of the year, creating an appropriate amount of leverage without sacrificing the long-term strategic position of the Company.

Despite the expected sales challenges, our strong cash position allows us to continue solid reinvestment in R&D to accelerate the development of disruptive products in the pipeline. We will continue to hire account managers for growing geographies and vertical markets. We will be taking costs out of our business, but with the aim of doing so in a measured manner so as not to impact product development, customer service quality, or long-term sales growth.

We have consistently communicated a mid-teens sales growth target over the long term, not as guidance for any single quarter or fiscal year. We still believe in and focus our strategic decision-making on mid-teens sales growth over the long term. However, we do see continued currency and macroeconomic challenges in several key geographies, as well as slower capital decision-making by our customers, impacting our topline sales growth and net income in the near term.

Consistent with our prior established practice, we remind our investors that we do not provide specific financial guidance on future quarter annual sales or any other aspect of our financial statements.

As we look forward to the second quarter and the remainder of 2015, the FARO team is facing global headwinds to sales growth. As I mentioned earlier in the first quarter, we did see positive signs for FARO's future with 16% Europe sales growth excluding currency, 23% sales growth -- unit sales growth of the Focus3D laser scanner, and strong demand for our new FARO Freestyle.

We are executing the cost-reduction actions now to proactively respond to reduce near-term sales volume. As the market evolves, we will continue to act quickly. We continue to believe that the long-term fundamentals of the Company and the market we serve are strong.

In closing, I would like to thank the FARO team around the world who gives it everything they've got every day, to our customers who place their confidence in our products, and to our shareholders for their continued confidence in our ability to disrupt the marketplace. We may face challenges in some of the months ahead, but we have a committed world-class team that will execute as much energy and passion as always.

I will now open the call to questions.

(Operator Instructions). Ben Hearnsberger, Stephens Inc.

Thanks for taking my question. First, Jay, I wanted to dig into the cost cuts. So we have been expecting a higher level of OpEx this year because you have got the ERP implementation, you have got the product refresh cycle underway, you have got a lot of things contributing to higher expected operating expenses this year. I guess given this, where do you feel like you have room to rationalize your business? And then, can you give us a sense for maybe the size and the timing of the expected cuts?

Yes, so, good morning, Ben. I won't give you obviously a feel for the size. That would lean a little towards -- too close to guidance in terms of how we operate. Like I said, the goal is to match the cost structure as close as possible to the near-term revenue stream that we anticipate internally, and then to leverage that through the rest of the year.

You are right. Strategically, the places we do not want to touch would be on the sales side and on the research and development side of the business. We have a very aggressive development pipeline right now. We have several new products in the pipe. As you referenced, part of that refresh cycle we have been working on for the last 12, call it 14 months now, and those product release cycles hit tail end of this year and early next year, so there is a lot of excitement around that.

So not surprisingly, administrative costs are an easy hit when it comes to cost reductions. Cost delays and cost avoidance and not backfilling certain roles that have been opened up is a piece of it, as well as doing some headcount reductions.

And then, you are right, we do have some costs, though, look, we're not going to slow down the progress on ERP. We are not going to slow down the progress on research and development, so we will continue to invest in those as appropriately.

But the cost actions that we are taking are meaningful. They will be felt within FARO, for sure, and we are doing them as swiftly as we can. Most of the actions will be complete within the next month, at the latest. Some of them have already started. Not surprisingly, many of them have already started, and then, obviously, anything that falls into that bucket of not backfilling open roles and freezing open roles, things like that, have already taken effect. They took effect several weeks ago.

Okay, thank you for that. And then on the Tracker product, it looks like that was a big reason for maybe the shortfall in revenue. Can you give us a sense or remind us how big the Tracker is or just give us a sense for how big the Tracker is in terms of your revenue?

And then, would you characterize the shortfall there as more of an in-market issue or are you seeing any competitive issues with the new Leica tracker product that was released late last year?

Yes, so the relative size of the Tracker -- we don't give revenue by product line, so Tracker continues to be a number three, very close to the scanner at number two, and they tend to still be neck and neck with each other. So just from a relative size standpoint, they are still in that range.

I would consider the Tracker, it's more of a market issue than anything else. Obviously, there is always some competitive pressure. Whenever somebody has a new product, it always causes everybody to pause and look for a moment. That's standard in business.

If you look at the Tracker unit sales growth in Europe, it was substantial, so you look at despite the fact that we're having these euro headwinds, our primary competitor is based in Europe and our Tracker unit sales in Europe were up 60% some-odd in the quarter. Is that correct, Bob?

That's correct.

So, yes, there is some market pressure for sure in the Americas, definitely in Asia, and some of it in Japan. Japan is a good Tracker market for us, so we're hung up in still the overall crisis there.

So I do still at this point see it more of a market issue, with some of the competitive side mixed in, but more of a market issue.

Okay, thanks. And then, a couple of housekeeping questions. Can you give us the percentage of scanner sales through distribution and then the LLP attach rate on your Arm product this quarter?

Okay, the laser scanner percent sold through distribution this quarter is 53%. That's consistent with last year at 53%. The attach rate we have not given out previously in the calls and on our disclosures, so we are not going to release that at this time.

Okay, thank you, gentlemen.

I will say, though, Ben, just as a side note, the attach rate continues to be meaningful because the new LLP is a primary driver for the price increase we are seeing on the Arm.

If you look at Arm as a standalone product, without the LLP it's still a pretty competitive priced market right now, but when you add the LLP, between our low cost and the high performance of the LLP, we have seen great demand from the customer base for that and it is driving up price and it has helped contribute to some of the gross margin increase, too.

That's really helpful. Thank you.

Holden Lewis, Oppenheimer.

A couple of things I wanted to get, I guess, some perspective on. The impact of currency in Q4 being about $6 million, I believe, versus $7 million in Q1, the difference wasn't that great, but it seems to not impact Q4 much, but is being credited for impacting Q1 significantly. Can you give us a sense of what the flowthrough from currency was and why the picture in Q1 versus Q4 might be so different?

I guess a couple of thoughts there. One is just relative size of the quarters. Yes, the dollar amounts are similar, but when you look at the relative revenue size, obviously it's got a much higher percentage impact just from Q4 to Q1. So that's a piece of it and, quite frankly, I think that's probably the primary driver of it.

If you look below the revenue line, particularly as it relates to the euro, less so the yen, but particularly as it relates to the euro, we are still very naturally hedged, so the fallthrough -- correct, Bob, correct me if I'm wrong -- at the gross margin line and below continues to be negligible in terms of the income impact of the euro.

That's correct. That's -- at our gross margin line, we are relatively hedged because of our global footprint in how we produce products for our metrology business, Arm and Tracker in the US and produce laser scanner in Europe.

As Jay indicated, we do have exposure in Asia-Pacific that we don't have those type of local operations. And if you look at the $7 million of currency impact, what you will see is $5.4 million of it was in Europe on the topline, about $1.1 million was in Asia. And so if you think of that $1.1 million, it goes right to the bottom line as an impact for us because we can't offset that.

So that European piece -- or, I am sorry, that Asian piece is primarily -- or is a virtual 100% flowthrough to the bottom line?

That's right. We have no original -- really no original manufacturing there. We have a service base, a sales base, and if you look at where that $1.1 million really comes from, it comes from Japan where we have just the sales force really in Japan, and so that flows right to the bottom line.

But the euro piece really is fully heads and is negligible?

It is, and what will happen there is as our product mix changes over time between laser scanner and 3D, you may see a little bit of a shift, but right now where we are currently at is at the gross margin line, we are relatively hedged on the euro.

Okay, and then, similarly, if I look at your sales in service of $14.9 million in Q1, again the level is not that much different than what it was in Q2, Q3, Q4 last year, but the gross margin is appreciably higher. What is the difference in this $15 million versus the $15 million of the prior three quarters, and is that margin on services sustainable at this level?

Really, there is two big drivers on our service margin and really I will talk about it in two different buckets. One is is that in the Americas region, what we had is we had a really expansion or an increase in our service revenue significantly, and the cost base that generally goes with our service is more semi-variable in that it doesn't necessarily go up. It's almost a relatively fixed cost.

So when we see higher training, when we see higher warranty, when we see higher customer service, to a large degree that flows right into the gross profit. So that was one of the big drivers that we certainly saw just on the amount of volume with some of those -- some of the different pieces, the revenue.

The other area was really in Asia where we somewhat restructured some of the sales -- service headcount there and we saw really a reduction in cost there. So really what you see is you see a pickup in revenue in the Americas, slight reduction in cost in Asia, and really had a fairly significant impact to our overall gross margin year over year. The service margin contributed about 0.8 percentage points to our margin increase of 2.

Okay, and does that level where you finished out the quarter, does that feel like a new level to you that's sustainable, or is there something else in there that may cause that to retrench coming backwards?

As our practice, we don't necessarily provide guidance, but I would say that our overall gross margin historically over the last six quarters or so has been relatively stable.

The service margin is a little bit more volatile from the perspective that it is dependent on the mix of sales within and just totally the volume in terms of some of the volume and timing of the products coming back for either repair or our timing of our training, so that's a little bit more volatile. But the overall gross margin has been relatively stable, as you have seen.

Okay, thanks. I will jump back in the queue.

Mark Jordan, Noble Financial.

A question relative to the sales force in Europe. I believe that you -- my notes ended the year with 59 reps in Europe. You ended this quarter with 74. You showed very good unit sales in Europe. I was wondering with that influx of new people, is there a learning curve here that we should expect, that higher productivity moving forward, or how did you get seemingly a very good performance out of a fairly large number of new people?

Yes, so you are right, Mark. Some of it is -- there are some learning curves, so the longer they are here, most start performing, and obviously those who don't usually depart or are forced to depart. So some of it is that. Some of it is continuing to fill out the distribution network and channel, and as they become more efficient -- last year, we were still doing some channel development there, so that has an impact.

And the other thing that we start seeing some impact, although it's probably a little early to see the full impact of it, but in Europe, we have started transitioning to the metrology account managers carrying all products, instead of just one or the other. We had done that transition in Asia in 2013 into 2014, and it was very successful and it created more leverage out of the account manager base, and so we are starting that process in Europe now. And I would suspect we continue to see some of the benefits of that incrementally through the course of 2015 as they get more comfortable in that role.

Okay. In the quarter, you obviously had a currency charge relative to the unique strength of the Swiss franc. Going forward, are you going to change your method of operation to hedge intercompany currency imbalances to minimize any future hits?

I think the -- our view on -- you're talking about the other income expense of about $1.3 million. Really what that was related to, which was a extremely rapid rise in the Swiss franc where, as you know, the Swiss bank decided to let their currency really float and was not going to support that against the euro that has been. I think that was a surprise for most people that were out there.

Just with the type of business that we have and how we are global in nature with our manufacturing footprint between Europe and Americas, we got caught with an intercompany balance there. Certainly, we will be managing that very closely going forward. I think it was an event that happened to the surprise of a lot of people because the Swiss franc was supported by the government and extremely stable.

In terms of hedging, right now we have no hedges in place. I'm not going to forecast whether we will or won't, but we will certainly look for the most effective way to prevent any kind of impact to our EPS for the shareholder going forward on something like this. But I would say, again, this was really an issue with a very rapid rise in the Swiss franc.

Yes, and I would say, Mark, you may recall four -- I can't remember if it was four-ish years ago now or maybe even five, we had a similar issue for a few quarters in a row where we had these fluctuations that were tied to not clearing the intercompany accounts and paying the tables to each other fast enough.

The franc is one where we haven't had to focus on it very much, and so I think between that rise and just not having operationally to have to focus on it in the same way that all the others had the care and attention that we were giving them, I think that was a piece of it, too.

So I think it can be managed now through the appropriate process again. We would always consider hedging if it was correct, but I think we can do it more effectively, at least in the near term, just through our own being a little more rigorous on it and realizing that all currencies can have some movement.

That's right.

Okay, last question for me. Given historically you have shown a very distinct seasonal pattern on quarterly sales, if you were to look at expectations for the balance of this year on a constant-currency basis and make the appropriate adjustments for some of the economic problems you've mentioned, would you assume that on a constant-currency basis therefore that historical sales trends on a quarterly basis would reoccur in 2015, as they have in prior years?

It is always hard to gauge that. My gut, Mark, would say yes, only because virtually every year that pattern has been pretty consistent. Even in 2009, I think, when we had the massive downturn in the first quarter, I think the pattern was pretty similar. I know we had the huge uptick in Q4 like we always have, even though 2009 was a complete disaster economically.

So my general gut would say probably, but it's really early to tell because you also have more currency fluctuation affecting us this quarter and this year than we did in 2009, where it was just a straight market drop-off. It was a bit of a different animal, then.

So it's a little hard to say. We would not forecast, obviously, a number for the rest of the year, but could the pattern be similar? Potentially. We haven't heard anything that is indicating wildly different, I guess.

I think one of the things to point out, even on a constant-currency basis, two of the major headwinds that we certainly faced in the first quarter, which was the Petrobras in Brazil, which is a market that we participate in there. And from reading the newspapers, that's certainly still in the works, so we would face pressure there.

And certainly as you read the newspapers in Asia, there is a slowing China. There is also the economic conditions in Japan, which is a good market for us, is also a headwind. Now the manufacturing stimulus, we have people that work very closely to try to get that funding and maybe towards the later of the year we will see more of that funding come through. But some of the macroeconomic headwinds will remain at least for a quarter or two.

Thank you very much.

Jim Ricchiuti, Needham & Company.

I wonder if you can comment on the pricing environment in the Arm portion of the business. Are you seeing any pickup in competitive pressure, just given currencies, from your European competitor?

I wouldn't say we have seen any meaningful pickup in price pressure. The Arm, as I referenced it earlier, the Arm by itself, that market has been pretty price competitive for, call it, two years now. It's been lower average pricing than what we had seen historically, and while it hasn't necessarily gotten meaningfully worse, it definitely has not gotten meaningfully better.

When you attach the Laser Line Probe, that's where we are getting some of that lift, for sure. There is a real distinct advantage for FARO with our Laser Line Probe compared to the competitor, and at our price point we obviously push very heavily for customers to truly treat that as an accessory, make it accessible to them as part of a single purchase order versus if you have a high enough priced LLP, the customer has to almost consider two different purchase orders, and in this environment, or in any environment, that makes it more difficult for them to get approval. And so, we have been pushing pretty aggressively on that.

Obviously, as we indicated before, we are going to be pushing even more aggressively on that here now in Q2 and Q3 against the existing customer base who still has not adopted the new technology, because the value stories that we have been able to receive from the customer base are real and meaningful, and so it's a good sell going back to those who have been sitting on the sidelines.

That's helpful. And just with respect to Brazil, is that market -- first of all, I don't know if you can perhaps size it for us since you are calling it out as one of the factors, but is that market tend to be more concentrated in Arm sales or is Laser Tracker actually a bigger product for you in that market?

Yes, so, number one, Brazil is relatively small. Let me just start by saying that. It is obviously not a huge contributor to revenue.

That being said, it's a big enough contributor that the complete -- I won't say shutdown, but, man, that economy is coming to a very slow crawl, particularly on the industrial side. It's enough of a miss to be impactful to the Americas, even though they're relatively small size. That gives you a feel for just how slow it is there right now.

It is mostly in our market in Brazil today. It probably will continue to be that way for quite a while. We sell trackers there, but it is mostly an Arm market at this point. And we don't have any good feel and from the team in the field there, too, nobody has a good feel for when this starts improving. The size of the disaster there as it relates all the way up through the government of Brazil has everybody on edge.

Okay, and just with respect to product introduction, just in the environment, how should we think about product launches just relative to the overall market environment this year?

So we look at it and say, number one, the product launch for us is independent of the market environment. When the product is ready, we will release.

We have not slowed the development schedule at all. We have had a pretty aggressive development schedule, so I won't say we have accelerated it, either, because it was already on a pretty accelerated clip.

For me, it still is you release when the product is ready. You release when we know the product is able to deliver the performance that we expect for it, and so you would expect to see -- look, there is three products in the refresh cycle right now, which have not been released in the current refresh cycle as we have talked about it, which is the Arm, the scanner, and the imager. And all of those are at varying readiness points.

And so, over the next -- again, will you see some before this year is over? That's very likely. Might you see some that delay until early part, mid part of next year? It depends on how the alpha testing goes, the beta testing. They are all stable enough products today and so well recognized in the marketplace that I can't afford a release where it is not -- I won't say perfect, but not pretty darn close and we know ready to perform the way it was designed for.

Okay, any early indication on Freestyle, by the way, which end markets it is really getting traction in?

It is targeted predominantly at AEC and law enforcement, and that's where we are seeing the bulk of the action, not surprisingly.

But we have gotten very strong market reception, considering it was just launched in January. We have just gotten very good feedback and orders from that product.

Okay, thanks a lot.

Ben Rose, Battle Road Research.

Jay, in terms of the vertical market mix overall, obviously a big portion of the business is focused on manufacturing. Is there anything you can say about this quarter as it relates to the large OEM customers within your customer base versus suppliers, because I know you have got a pretty good mix of both, and then how that maps out against, in general, on an industry basis?

Yes, I think the easiest way -- Bob, you can jump in, too -- the easiest way to look at it, I would not look at it against any one vertical from an industry standpoint this quarter.

They all were doing the things that we would expect if you look at the vertical itself. This is really a regional issue. It's a Japan, Brazil, and not so much a European market issue; it's a European currency issue. Obviously, you look at their performances, pretty good on a euro-to-euro basis. The sales to new customers, I think, were 33-ish%, 34% (multiple speakers)

That's correct (multiple speakers). 35%.

35%, so right in range of what were normally 35%, 36%, 37% sales to new customers. So, and that's a mix of some OEM and obviously a lot of it is supply chain, just looking at the normal footprint of the manufacturing world. So if I had seen a meaningful drop-off there, you would be a little more concerned of, okay, we're just relying on continuing with the biggest customers that we have and we are not getting good traction elsewhere.

So I think getting 35% revenue from new customers in this environment remains a positive sign, as well.

The only piece that I would add in terms of the vertical picture is two targeted verticals for us for our laser scanner products is AEC and law enforcement. We have completed two acquisitions there, the kubit acquisition and we have completed the ARAS 360 acquisition.

What we have seen from a vertical kind of portfolio as a whole is, as we mentioned in the call, our laser scanner sales were up 23% year over year, and we have had good reception in the Freestyle, which goes into those verticals. So from the portfolio of the laser scanner, I would say we are seeing growth from the AEC side and somewhat the law enforcement side, as signaled by that growth.

Okay. And then just one final -- excuse me, one follow-up, which is, can you tell us where the Company is at in terms of the buildout of the Exton facility? And also, I think that, Jay, you had said the SAP implementation in Europe would be ongoing this year. Maybe just some color on where that stands.

Yes, so the transition to Exton is complete. We are in the facility. We are manufacturing product there, trackers and the imagers there as well, which obviously is a tiny piece of the portfolio today.

All the engineering team has moved there. So everybody has transitioned out of the old facility in Kennett Square. Exton is up and running, and, yes, you will notice we had some extra inventory coming out of Q4 going into Q1 of Tracker in preparation for that move, so I think the team made it as seamless as they could, which is not an easy task, as you know, when you're moving from one facility to the other with no other facility to buffer you to help keep production going. So I think they did a great job on that.

Relative to ERP, you are right. We're in the middle of Europe implementation right now. We have not stated before what the exact go-live date will be. We will certainly let you know when we do. Asia is next. We still anticipate being able to have all of FARO up and running on SAP before the year is over, though, at this point.

Okay, thanks very much.

Patrick Newton, Stifel.

Thank you for taking my questions. I guess first question is -- I don't know if I missed it, but can I get the contribution of your top five and top 10 customers?

Absolutely. The top five customers for Q1 2015 is 2.7% and the top 10 customers was 4.3%.

Okay, and then, Jay, I guess just dovetailing off an earlier question, would it be reasonable to think of Brazil as being about 10% of Americas total revenue?

And then, also, can you help us understand the relative size of Japan or at least how big the stimulus portion is within the Japanese business?

Relative to Brazil, I won't give an estimate as it relates to the size of the Americas. As I say, it's small. You can expect the Americas is predominantly the United States. You have got some Canada. You have got some Mexico. You have got some Brazil mixed in there.

But it's, like I said, big enough that a meaningful miss in revenue in Brazil was enough to impact the Americas meaningfully as well.

Japan, if you look at Asia, Japan and China are the big two for us and they are neck and neck with each other in terms of revenue contribution. India, and then followed by the southeast Asian countries and Korea, are secondary behind that at a not meaningful clip, but there is some distance between those and where Japan and China are, so it is a major contributor.

The stimulus program is one the government has had in place since, I think, 2013. It is one where you apply for the funds from the government and it is earmarked for industrial technology. And our account managers, as Bob indicated, are very effective at helping guide our customers through that process.

The release of funds was meaningfully slower in Q1, which I think is an indication of Japan's view of their own economy because that's government money being funded for these projects. And it's particularly important for a lot of the smaller customers, obviously. The big ones apply, too, but it's geared towards smaller.

From what we hear from the team, the back half of the year may improve a bit. I think Japan may be taking a little bit of a wait-and-see mode on their own economy at the moment. It is not the primary driver of revenue, Japan, by any means, obviously, but it is a meaningful piece. It is enough that for some customers, for many customers, if they can't get the funding, they will delay the purchase order until they can get it. And so, that's what we are facing there.

I guess the other thing I would -- when you look at it in general is, again, when you look at market demand has been very good, and so what we are dealing with is issues like that in Japan, the economic crisis in Brazil. You have got a lot of customers delaying budgets, not canceling, but delaying, and when we look at our win/loss analysis, we still -- you don't see a ton of losses or an increase in losses beyond our normal ratio that we have seen in the past.

This is really an issue of budgets being pushed and delayed until people get a feel for what the macro conditions look like.

That's fair. And then, I guess, Jay, if I take some answers to earlier questions, you talked about normal seasonality seems to be a reasonable expectation, although it's still too early to tell. Then you also talked about aligning your cost structure to provide enough leverage to match expected growth in 2015.

So I guess the challenge I have there is I would interpret the cost comment to mean that you do anticipate FARO 2015 revenue to grow on an absolute basis, but that would imply above seasonality through the remainder of the year off this March quarter base, so if you can help me maybe understand the differences there.

Again, I think you are right. It is very early to figure out if we think it's normal seasonality, but my only -- my comment there is that for the 10-1/2 years I have been here, that seasonality has been relatively consistent, so start with that.

Without obviously providing guidance, we have always said the long-term growth goals organically are mid-teens. Obviously, a mid-teens in the current year would probably be difficult, given where we are. Coming out of the first quarter, we had a slight sales decline, but you are right. We would anticipate some growth and improving growth through the rest of the year. I think that's -- from everything we can see, that's, I think, realistic.

I cannot put a number on it, and so from our internal estimates, what we believe the number to look like on the topline -- we would obviously have a feeling for what it should look like, the cost actions reflect that and do provide meaningful leverage through the rest of the year.

Okay, and then, I guess, on the -- just looking at the June quarter or perhaps even the December quarter, if we think about some of the strength that you have commented around LLP adoption and how that has really been a material competitive advantage for you, do you think that there was any pull in of demand into the fourth quarter due to the launch of the LLP that could have possibly caused a greater than seasonal downtick in the March quarter?

And then, is there anything that would lead you to believe that the June quarter could see an above seasonal snapback?

It's always possible. Obviously when you introduce a new product, it can get customers more interested who may have been waiting. That's possible.

Is it enough that we would have sat there in Q4 and said, man, we have really sucked a lot in from Q1? Definitely not.

Could there be some snapback in Q2? I don't know if I would call it snapback. What I would say is that between the market reception that we have gotten, and we have gotten meaningful feedback from multiple sources, including even some of the competition about the strength of that product, and the fact that we are now aggressively targeting the existing installed base, could you see some increased acceleration there?

Obviously, we internally are trying to drive that. Without saying whether we think it will happen or not, I think the product is pretty damn good, so we are obviously pushing that pretty aggressively here in Q2 and Q3 to try and bring back the type of growth that we would expect as a Company.

All right, and then just last one for me, as you talked about the FLS unit growth of about 20% year over year, and I think we can back into revenue growth similar level, about 18%, so was there any slight discounting in the quarter?

And then if we think about the unit growth, was it uniform across AEC and law enforcement or was there one area that really led the demand?

First of all, on the unit growth, you are right. That is 23% year over year.

There was some regional differences across the board, as we noted. Europe was rather strong. So for a pricing standpoint, that Europe is going to translate to a lower US dollar figure than what you would have seen. So the strength that we saw out of the laser scanner was muted on the topline.

The Americas, we had year-over-year growth there. Asia, we had a little bit more price pressure than what we have seen. Also because of how we go to market with this matters as well. The price that you see depends upon whether you go to market direct or whether you go to market through a distributor. So, we are trying to build that distributor network out.

But what I will say this is where we have seen the growth is in Europe and that would have been muted somewhat on the topline just by currency.

And by AEC or law enforcement, any notable differences in growth drivers?

I would think that where we see this product going at least for right now is that the law enforcement is a little bit slower path because you're dealing with government budgets. You are dealing with getting adoption in police force or forensics department, and then from there going to the city councils and those types of things. That is going to take us a little bit more time to get that adoption.

So the AEC markets are more private industry; therefore, it is a little bit quicker adoption, I would say, to get those sales. But certainly, I think one of the things that we are positioned for is the acquisitions we made really target both those markets in that ARAS is a leader in its field in the crash client forensic side. We now have a turnkey approach there, which should help the business, and also on the kubit side should help our AEC.

So we will start to see now where those verticals are going because we have complete packages to go to a customer with.

Great. Thank you for taking my questions.

Hendi Susanto, Gabelli & Co.

Jay, to what extent weakness that FARO is seeing similar to or different from weakness and challenging capital spending environment reported by 3D printing market leaders?

Yes, I don't know if I can say there is a direct correlation because while we sell into similar budgets and similar types of companies, obviously we are not necessarily -- we're not pulling them in. They are not pulling us in. There is not that kind of tight connection between the companies.

I would say in general when you look at what 3D reported, what Stratasys reported, and some of the things they're going through, the story lines seem very similar just on the surface and I'm not, again, a lot further than that.

But again, I think you would see that with a lot of industrial sort of tech-type companies is that none of them are going -- I would be shocked if anybody had a different story line on the euro, Brazil, or Japan, unless they had meaningfully less exposure to those countries or those (multiple speakers)

Got it. And then second question, as part of your cost reduction, will you try to reduce exposure to certain geographies or certain currencies?

We will not. The countries that we are in today we have purposely selected for the market opportunity, so we'd not anticipate reducing exposure there from a -- again, the market demand is very strong. If we felt like there was a location where market demand was weaker than we would like to see, I might think differently about it.

This is not a demand issue in the near term. It is a either a currency issue or a budget availability issue, so I would not anticipate anything like that in the near term.

Got it. And then, [I know] your thought on when revenue contribution from ARAS and kubit may start to materialize. I would like also to understand what your distribution and then sales strategy for those two?

So, it has already started materializing. Obviously, from a pure revenue standpoint, it is a very, very small contributor to the Company. Just look at the price point of the packages.

Because it's software, there is value at the gross margin line even with the small amount of revenue that they deliver. I can't say it is meaningful yet, but obviously it would slowly increase through the course of the year.

The distribution strategy on those is, number one, they do have some of their own account managers and salespeople, so that's a piece of it. Number two would be that it continues to be pushed now. It will be pushed through our own distribution network, our own account managers. The training is well underway and in some places complete, and so, obviously, that is some of the leverage we expect to get.

And for us, both of those acquisitions, as well as we should remember CAD Zone last -- the tail end of last summer as well, which is a great low-end entry point solution on law enforcement, they all bring with them a very strong installed base, and so a lot of this is also going back after that installed base as it relates to whether it's the Freestyle or trying to sell them the Focus laser scanner. That's a piece of it as well.

And it's a work in progress. Obviously, that's three software acquisitions in a relatively short period of time, so it is something that we will continue to develop as we go. We will continue to experiment with different sales strategies to help them accelerate and to help our own -- the hardware side accelerate, too.

The combined packages, though, are now meaningful and it is a recognized solution in the marketplace that we would expect to grow going forward.

Okay. And then last question for me, this is for Bob. I would like to understand more about the ERP implementations in terms of how should we think of CapEx and whether it is multi-years and whether the ERP implementation will be in the form of subscription or the traditional software license that requires upfront payment.

Right now, we are going through the SAP implementation and just we're not going to give specific numbers on our capital or on expense, but I would say year over year it is very similar to slightly higher the expense that we incurred in the quarter in our G&A related to the ERP implementation, only because we now are actively going through with Europe.

In terms of the capital that we are spending, the capital we have in our budgets and it will be a driver of our capital for this year. It was partially a driver of last year. As we noted in our 10-Q last year, one of the big drivers was certainly our Exton facility leasehold improvements, and in terms of this year, one of the drivers will be SAP.

And we do, as we had said before, we anticipate going live by the end of the year, so assuming the current path we are on is maintainable, you would expect then that to transition to -- the expense associated with SAP obviously has higher expense than our current software package.

The good news is the implementation puts us on a single instance with a, for the most part, out of the box application of SAP. For the Company, that is a substantial improvement from where we are and there is efficiency gains to be had there once it is fully in place.

Thank you, Jay. Thank you, Bob.

Robert Mason, Robert W. Baird.

Was there any one-time purchase accounting noise related to the acquisitions in the quarter that flowed through the P&L?

No.

Okay. And just, again, given your comments, I assume the revenue contribution here in the first quarter was de minimus.

That's correct. And right now, we certainly hope that those businesses, and we believe those businesses, will be growing over time, but right now from a revenue contribution, it is really nonmaterial for us at this time.

Okay. Jay, could you comment on the buildout of the distribution network that's been ongoing? Where do you think you are in that process in terms of what you would like to add this year? Maybe some perspective against what you added last year.

I think, number one, and obviously you know this, too, a distribution network I consider to always be a work in progress. You have got opportunity to add distributors as you see value they can provide. As the product becomes more accepted in the marketplace, you may get some of the laggard distributors who were holding off and they get interested and proactively come to you. We are certainly proactively going after some still.

I would say that the work of adding distributors is sizably lower now. We have got a pretty well-established distribution network out there already, so unlike, say, two years ago when we were really ramping it up and even the beginning of last year where it was getting more distributors on board, it's less the focus now. Obviously, we will add some where there is cherry picking of opportunity.

We will continue to add some account managers to also support the 3D documentation side. We added several law enforcement account managers in the first quarter in the Americas. You will continue to see us to do that. Again, cherry picking where it will support the product in those target -- predominantly those two targeted verticals that you see in law enforcement, while -- so to drive growth, while at the same time still recognizing we are going to be not cautious, but we will be calculated in how we do that.

Okay, and could you just discuss or comment on as you went through the quarter as it progressed, when it became more apparent that getting deals across the goal line, closing deals, was going to be a tougher challenge this year, and maybe when you decided or what your sales tactics you are choosing to implement? I know Bob mentioned DSOs were a little bit higher as we are stretching some terms or maybe utilizing some of our excess cash in that measure. But maybe what some of the tactics you might implement and just the pacing.

Yes, the pacing was not unsimilar to what we have seen in previous quarters. As you know, a huge portion of our revenue, half or more, occurs during the third month, and a lot of that occurs during the final, call it, two weeks, give or take.

Reading into those final two weeks, while we always have these ranges of forecast and the sales team going in the final couple of weeks, it was about that time that you could start feeling, hey, this has got probably more pressure than we have seen in the last couple of years and it was starting to become more apparent that, again, a lot of the -- and the reason we have that pattern is a lot of customers are -- their CapEx dollars are controlled every single quarter and there's only so much that is released. And so, they get to the end of a quarter and they're waiting to see do I have approval still to spend the money are not.

And you get to that point and their senior management or upper management, or if it is a smaller company, the owner of the business, will finally say, yes, I can spend it or, no, I can't, and that causes the push or the purchase, depending on the customer.

So we really started saying that -- it was a rapid slowdown the final couple of weeks. We knew there was market pressure during the whole quarter, but -- and obviously euro pressure, you could see it as the euro slid every single month during the course of the quarter. But it really was the final couple of weeks.

Sales tactics go with it. There is only so much you can do at that point in time. Clearly, we have done some extended payment terms. That is sort of a competitive thing that was almost independent of the market environment. We have got some countries where our competitors are being pretty aggressive on terms to avoid being aggressive on price, and we do a little bit of that as well where it makes sense.

It is sort of like how we do our pricing, where we -- where it is an important account; it's not a one-off or it is not one that we aren't as interested in. We will obviously follow and do as best we can to maintain our competitiveness there. And I would always rather give a little bit on terms than price, if possible.

I think you'll see more aggressive tactics in the second quarter here than the third quarter. Again, less about trying to be aggressive on price. That's not -- it is a competitive price environment, for sure. But I can't say the bulk of the customer base are screaming, hey, we need more price in order to drive volume. That, again, seems to be less the issue.

So it is, all right, how do we help them create a better value story for senior management to get the budget approved or how do you go after your existing installed base of Arm users to target them at the HD LLP? Or how do you go after -- further aggressively penetrate the installed base at CAD Zone or the installed base that we have at kubit? Those are the types of things that you would expect to see.

One comment on the DSO is, yes, there was sales pressure for the terms, but also I think historically if you look at the seasonality of DSO, Q1 generally has the highest DSO that we generally see throughout the course of the year, just given the lower sales volume, the pressure coming off Q4 to make the Q1 sale.

So if you look at Q1 last year, it was 81 and exactly where we are at today. So, I think that gives you some insight. There is some seasonality to those DSOs, so -- as we move forward, that just reflected seasonality there as well.

Okay, that's helpful. And maybe just the last question, just maybe as a follow-on as well, the comment about price pressure in Asia-Pacific on the laser scanner, you struck me a little bit just because we know that product is disruptively priced already. I'm just curious where that pressure is emanating.

One of the comments on the ASP pressure, I should say, is also -- some of it relates to just mix between our X 130 and 330, so in terms of price pressure is really just how that mix goes between X 130 and 330, not necessarily competitive pressure, but really what we were expecting as an ASP and then generating the margin.

I would say most of what we have seen in Asia from what we've got from the sales folks in the field is really just what they saw in the quarter was more the 130. The customers, given the kind of capital constraints that they are seeing, they're opting for that cheaper model, which -- less expensive model, which lowers the ASP and therefore hits our margin as well. So I would see it more from the perspective of mix than necessarily competitive pressure, if that helps.

That's very helpful. I appreciate that. Thanks for taking my questions.

Holden Lewis.

In your Q, you mentioned a number of things in the G&A. I am curious how you are thinking about them going forward. You talked about, obviously, the fees related to ERP, costs related to acquisition activity, costs related to moving. And I guess I'm just trying to get a sense of, do those costs peak in Q1 and then taper off? It seems like they're all related to events, rather than ongoing operations. So I wanted to get a sense of how you were thinking about those items on an ongoing basis.

In terms of G&A, if you look at it, we're $1.4 million up year over year. And what I would like to point out about that is much of that is driven just by headcount.

We are trying to really structure the business. We were going into Q1 structuring the business to really create what we needed to have the mid-teens growth going forward.

So, number one [it is] take out, so I'm not giving guidance, but what I'm saying is that is really in the base of our G&A. You are absolutely correct from the perspective that the Exton move was more of an item that is unique to that quarter, but the ERP implementation, as I said, is relatively slightly more this quarter than it was last year and you will continue to see ERP costs throughout 2015.

But really the -- as you break down that $1.4 million increase, one of the things is higher compensation, just given higher headcount, and we're certainly realigning our headcount going forward, as well, with our cost-reduction plan.

Okay, and along that cost structure, I know you don't forecast, I know you don't model for us, anyway, but should we -- there is so much potential leverage for any change in revenue and you are doing this cost reduction. I guess when we think about your total OpEx, not necessarily a single line, but your total OpEx, should we be thinking in terms of with -- usually it will increase sequentially with revenues, but you are obviously doing some things to try to take it down.

Should we be thinking about flattish OpEx versus Q1 through Q2, Q3, and then maybe step up with big volume in Q4? Or should we expect sequential increases in OpEx? How should we think about the magnitude of what you're trying to achieve?

What I would say to this is again, no, we are not going to try to forecast for you or provide guidance, consistent package, but one of the things in this cost-reduction program that -- or cost initiatives -- that we are going to focus on is we're going to focus that the investments that we continue to make to keep core FARO culture. So in terms of R&D, that's one of the places that makes FARO what it is, the disruptive products.

So you're going to continue to see investments in R&D. We need AMs, or account managers, out in the field, so you will continue to see that. But where we are going to focus on is places where we can without incurring the kind of growth in infrastructure projects that we have, for instance, in G&A, those types of areas. We are going to try to take some costs out of the business.

Okay, all right. Thanks, guys.

Ben Hearnsberger.

Thanks for taking my follow-up. So in the Q, I noticed that you mentioned average unit costs on the scanner have come down, and I know that's a big piece of the story over time as you pull them down to a point where you can drop the price and drive greater adoption.

I guess, Jay, could you just give us some commentary around, is this happening more quickly than you expected? Is it on pace? Is it still a two- to three-year story in terms of bringing the price on that product down significantly?

So I will go in reverse order. So I will never say whether it is a two- or three-year story. Obviously, we're trying to get -- there is a real -- we still know the price of the product today, while disruptive against everybody else, is not the market price to get it over the chasm and really into the early majority and the meat of the market.

The cost reductions that we are seeing right now are purely just volume leverage as the product continues to take off and a little bit of efficiency on the manufacturing side. I can't say that's rocket science. That's really just getting a little better at what we are doing and having higher volume to support it.

The real cost takeout continues to be a function of the engineering organization and the work they are doing on the next-generation scanner today, and that cost reduction is meaningful even without volume. So it's real. It's design changes, material changes, component changes, field process changes, things like that. Those are -- won't go into the next generation, and again, I won't say when we anticipate a release of the next-generation product, but certainly we also anticipate that next generation will have the first of maybe several, we will have to see, but it will have a meaningful price reduction to go with it without sacrificing gross margin, because we know that is required to get into the early majority of the marketplace.

Okay, great. Thank you.

And currently, there are no further questions in the queue.

Okay, so thank you, everybody, for attendance today and look forward to updating you at the end of Q2.

This does conclude your teleconference for today. Thank you for your participation. You may disconnect at any time.