FARO Technologies Inc (FARO) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies Conference Call in conjunction with its second quarter 2018 earnings release. For opening remarks and introduction, I will now turn the call over to Chief Financial Officer, Bob Seidel. Please go ahead.

Thank you and good morning to everyone. Yesterday after the market close, we released our financial results for the second quarter and first 6 months of 2018. The press release is available in FARO's website at www.faro.com.

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, anticipate, plan, potential, continue, goals, objective, intend, may 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, 2017 and Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.

I will now turn the call over to Simon to provide an update on our company's strategic initiatives and afterwards will return with a review of our financial results. After the prepared remarks, we will open the call for questions.

Thanks, Bob, and good morning everyone. In our second quarter earnings release last year, we announced the completion of a challenging comprehensive global reorganization of FARO. We refocused our sales, marketing and product management teams into vertical markets. We realigned our support functions to be globally harmonized leveraging best practices. Our R&D teams introduced all new next generation hardware and software products across every technology platform. The team has delivered important performance over the past 4 quarters. We've taken tangible steps each quarter towards our long-term financial objective of mid-teen sales growth, 60% gross margin and mid-teens operating margin.

In the second quarter, gross profit increased year-over-year by $10.9 million or 23.4% and operating expenses grew only $4.8 million or 9.5%. This resulted in a $6.1 million increase in operating income or 7 percentage points of increase in operating margin. We believe that we remain on track to meet our long-term financial goals. Our quarterly sales of $98.2 million grew 18.8% year-over-year. For the first time since releasing the metric, our trailing 12-month orders per sales FTE increased quarter-over-quarter to $706,000.

Our gross margin of 58.7% increased 2.1 percentage points year-over-year and our operating income of $1.9 million improved from a loss of $4.2 million last year. We delivered EPS of $0.07 per share in the second quarter of 2018 compared with a loss of $0.22 per share last year. The hard work, dedication and time to completely reorganize the company and deliver the new product has produced 4 quarters of mid-teens growth and profit improvement.

All our vertical segments delivered strong year-over-year sales growth in the quarter. Our 3D factory segment delivered an outstanding quarter of 13.3% year-over-year sales growth; construction BIM was up 25% and the emerging verticals, which include public safety forensics and product design was up 50.3%.

I sense our success in the quarter not just by how we delivered the quarter's financial results compared with our expectations, but also how we build for the future with our new product drumbeat and acquisition.

In the second quarter, we expanded our Quantum Arm platform portfolio in order to better match the technology needs and budgets of our customers.

In May, we introduced the new versions of the Quantum Arm and laser line probe, which provides our customers with an entry-level value priced offering to make that step into 3 dimensional measurement at a lower price point, especially for those customers in emerging markets.

With our reorganization behind us, we dramatically accelerated our pace of acquisition by closing 5 transactions to date in 2018. While our R&D activities are actively creating a new product drumbeat from FARO research labs, we are broadening our hardware and software capabilities with these acquisitions to strengthen existing verticals and build new verticals. We purchased Laser Control Systems based in United Kingdom and Lanmark Controls based in Massachusetts to strengthen our capabilities in galvanometer-based light direction. We will combine these businesses with our prior addition of galvanometer technology to create a market-leading photonics technology platform.

In March, we purchase Photocore, which is a strategic investment into photogrammetry software. The proliferation of high quality, high resolution digital photography provides the potential for 3D data extraction from images using photogrammetry across all verticals. In April, we made a strategic minority investment in Present4D, which is a software solutions leader in virtual reality. This technology offers our public safety forensics and construction BIM verticals with enhanced virtual reality opportunities especially for training and inspection application.

In mid-July, we acquired Open Technologies, which provides us with a rich portfolio of compact 3D structured light scanning solutions and reverse engineering software for our core industrial manufacturing and product design applications. In addition, Open Technologies' strong presence in the digital dental market opens us to new vertical possibilities. These products enables dentists and dental technicians to leverage the digital 3D world for the design and manufacture of dental appliances.

Our software engineering team introduced several important core FARO software products in the quarter as well. In April, we released our FARO CAM2 2018 software platform newly designed with continuous deployment in order to bring product improvements rapidly and continuously to our users.

In May, we expanded our construction BIM focused software offerings with our all new FARO As-Built software platform that enables efficient and cost effective transfer of 3D reality capture into construction BIM CAD design tools. As-built is specifically designed to minimize the effort and time required to create an As-Built documentation essential for AEC professionals in building facility and infrastructure design.

We keep pushing every vertical, horizontal and region to improve its business processes and efficiencies to propel us towards our financial objectives. In the first quarter, we kicked off an entrepreneurial initiative to instill a continuous improvement lean culture across the company named FARO Best. Business process excellence is essential to leveraging our sales growth and improving operating margin.

At the start of 2017, we began an aggressive expansion of our sales force because of the direct correlation in our business between Feet on the Street and product demos and sales growth. The growth initiative involved pre-investment and selling expense in the first half of 2017. New sales team members generally mature over a period of a year before becoming fully productive team members. At the end of the second quarter of 2018, our period ending sales headcount was 673, an increase of 46 or 7% compared with 627 at the end of second quarter of 2017.

Our full-time experienced headcount or sales FTE increased to 591 at the end of the second quarter of 2018 compared to 516 at the end of the second quarter of 2017, an increase of 15%. The difference between our period ending and FTE sales headcount represents a start-up sales headcount of 82 and a start-up selling expense of approximately $2.1 million or $0.10 per share for the second quarter of 2018.

The effectiveness of our sales force is closely tracked by our global sales leaders with our trailing 12-month orders per trailing 12-month FTE metric. We hold ourselves accountable to our investors and analysts by reporting this all verticals corporate metric on quarterly earnings calls. Our trailing 12-month sales FTE headcount was 572 at the end of the second quarter of 2018, an increase of 99 or 21% compared with 473 in the second quarter of 2017.

Our new order bookings for the second quarter of 2018 was $106.5 million, contributing to a trailing 12-month order total of $403.7 million. The ratio of our trailing 12-month new order bookings per trailing 12-month sales FTE headcount was approximately 706,000, an increase of 8,000 per FTE from the prior quarter.

Our second quarter performance marked an important milestone by being our first quarter-over-quarter increase in our trailing 12-month new order bookings per trailing 12-month sales FTE headcount since introducing this metric in 2017. It's our expectation that this improvement in the second quarter begins an upward trend in this metric.

Our double-digit new order bookings and sales growth over the trailing [4] quarters provided a positive indication of the success of our strategic sales force initiative. As communicated in our fourth quarter earnings call, we intend to increase our period-ending sales headcount by 15% to 20% during 2018 in equal increments by quarter.

In the first half of 2018, we were generally in line with this projection by increasing our ending sales headcount by 42 compared with the end of the fourth quarter of 2017. This 15% to 20% sales force hiring rate will be accompanied by a higher investment in start-up selling expense pressuring our near-term earnings potential.

We continued with our clear top priority to be the technology leader in our space by increasing our R&D spending by $1 million or $0.04 per share year-over-year as we continue to invest in new technology acquisitions and accelerating the development of next generation products to remain the technology leader in the market. Our teams continue to push our future, new product innovations and we remain very excited about the new technology pipeline for 2018.

Our 3D Machine Vision vertical is developing new opportunities for automated Machine Vision sensors such as our previously announced Dynamic Machine Vision Sensor or DMVS and for [laser radar] sensor such as our Vector 3D. We expect to introduce 7 new products in the third quarter alone, continuing our new product drumbeat and reinforcing customer and sales force confidence, and our commitment to remain a technology leader in 3D.

We deeply appreciate the patience of our shareholders and the hard work of our employees around the world. I'm very proud of our accomplishments and look forward to presenting our progress in coming quarters. Bob?

Thank you, Simon.

Sales for the second quarter of 2018 were $98.2 million, an increase of 18.8% compared with $82.7 million for the second quarter of 2017. Our second quarter sales increase was primarily a result of growth in product unit sales across all segments and higher average selling prices highlighted by a strong quarter for our 3D factory segment.

New order bookings for the second quarter of 2018 increased by 19.7% to $106.5 million from $89.0 million for the second quarter of 2017. With new order bookings at $106.5 million and sales at $98.2 million, our book-to-bill ratio was 1.08 for the second quarter of 2018, which is consistent with our book-to-bill ratio for the same prior-year period.

Product sales were $75.7 million for the second quarter of 2018, an increase of 21.1% compared with $62.5 million for the second quarter last year, mainly due to an increase in product unit sales across all segments and higher average selling prices in our 3D factory segment.

Service revenue was $22.5 million for the second quarter of 2018, an increase of 11.8% compared with $20.1 million for the same prior-year period. This increase was primarily due to the continued increase in warranty and customer service revenue, driven by the growth of our installed serviceable base.

In our 3D Factory segment, sales for the second quarter of 2018 were $65.0 million, an increase of 13.3% compared with $57.4 million for the second quarter of 2017. This increase was mostly driven by an increase in product unit sales, higher average selling prices and continued growth in service revenue.

In our Construction BIM segment, sales for the second quarter of 2018 were $23.6 million, an increase 25.0% compared with $18.9 million for the second quarter of 2017, primarily reflecting a strong increase in product unit sales.

In our Emerging Verticals segment, sales for the second quarter of 2018 were $9.7 million, an increase of 50.3% compared with $6.5 million for the second quarter last year, mostly due to higher product unit sales in both our public safety forensics and product design verticals. Our sales headcount investments in these emerging verticals are delivering new opportunities in previously unaddressed markets.

Gross margin for the second quarter of 2018 increased by 2.1 percentage points to 58.7% compared with 56.6% for the second quarter of 2017, an increase by 0.8 percentage points compared with the first quarter of 2018. The year-over-year increase was related mainly to higher average selling prices and improved manufacturing efficiencies.

Selling and marketing expenses were $30.1 million for the second quarter of 2018, an increase of 15.6% compared with $26.0 million for the second quarter of 2017. This increase was driven mostly by an increase in ending sales headcount of 7%, higher sales commissions due to our sales growth and increased marketing activity. Selling and marketing expenses as a percentage of sales were 30.6% for the second quarter of 2018 compared with 31.5% for the same prior-year period.

General and administrative expenses for the second quarter of 2018 were $11.3 million, a decrease of 4.7% compared with $11.9 million for the second quarter last year. This decrease was primarily driven by active control of headcount and outside professional services spending. As a percentage of sales, general and administrative expenses decreased to 11.5% for the second quarter of 2018 compared with 14.4% for the same prior-year period.

Research and development expenses were $10.0 million for the second quarter of 2018, an increase of 10.4% compared with $9.0 million for the second quarter of 2017. This increase was mostly related to additional engineering headcount to support our recent acquisitions, accelerate new product development activities and expand our construction As-Built capabilities. Research and development expenses decreased to 10.2% of sales for the second quarter of 2018 compared with 10.9% of sales for the same period last year.

Operating income increased by $6.1 million to $1.9 million for the second quarter of 2018 compared with an operating loss of $4.2 million for the second quarter last year. Operating margin increased to 2.0% for the second quarter of 2018, up 7.0 percentage points year-over-year.

Net income was $1.2 million or $0.07 per share for the second quarter of 2018 compared with a net loss of $3.6 million or a loss of $0.22 per share for the second quarter of 2017.

Turning now to working capital. Accounts receivable was $71.6 million at the end of the second quarter of 2018 compared with $58.8 million at the end of the second quarter of 2017. Day sales outstanding were 67 days at the end of the second quarter of 2018, up 2 days from the same prior-year period.

Total inventories were $98.7 million at the end of the second quarter of 2018 compared with $93.1 million at the end of second quarter 2017, mostly driven by an increase in finished goods to support our sales growth and higher sales demonstration inventory to outfit our new sales hires.

At the end of the second quarter of 2018, cash and short-term investments totaled $144.6 million of which $88.4 million was held by foreign subsidiaries. A more complete presentation and discussion of our second quarter of 2018 results is available on our Form 10-Q for the quarter ended June 30, 2018.

We appreciate your attendance on today's call and we'll now open the call for questions through the start of market trading.

We ask that you hold your questions -- to fit your questions to 2. Thank you.

(Operator Instructions) And we will take our first question from Greg Palm with Craig-Hallum.

Yes, thanks. I guess first curious from the last time that units actually grew within the 3D Factory segment on a year-over-year basis. And can you give us any more sort of commentary whether that growth was driven by new products, existing lines, whether you're active in growing headcount there? Any more details would be helpful.

Sure. Well, the entire line was replaced, the new versions of all products came out for that; of course, the technological leadership was important. At the same time, we expanded the line to have both the high and low end products. So what we did is we were able to access what was typically covered by used equipment or previously owned equipment sales to all new equipment at both ends of the line. So I would say it's a broad spectrum of products and new and technology-leading products as well.

Got it. But just to be clear, it was driven from kind of the existing arm and tractor lines, it wasn't driven by any of the kind of the newer Machine Vision applications?

That's right.

Got it, okay. And then I guess the second one from me, any commentary you can provide on the cadence of orders, I know book-to-bill was really strong again, which I guess kind of implies that the quarter on a revenue basis actually could have been better, if you were able to ship anything. So any commentary on whether it was end of quarter orders or something else would be helpful as well.

It's always end of quarter orders. We have a very -- not atypical to the industrial market and other markets for that matter is that the orders all pile in at the end of the quarter relating to budget and negotiating tactics et cetera. So we have a very late load up of orders and we can only manage a certain number of them, but this quarter was, as we pointed out, not atypical to Q2 of last year as well.

And we will take our next question from Jim Ricchiuti with Needham & Company.

So as you pointed out, the pace of acquisitions has picked up in recent months. So I'm assuming it's fair to say, these acquisitions are not material from a revenue standpoint. And 2 questions, one, in aggregate do you expect these acquisitions to contribute to incremental growth in 2019 or should we think about it even further out with some of these in terms of the meaningful benefits? And then the follow-up question is just relating to OpEx so maybe we'll just start with that first question.

Yes, they are all technology bolt-ons. I would expect that to start showing benefits clearly in 2019 in certain verticals, they will be important particularly in the emerging verticals. The technology bolt-ons that we do are really in order to allow us to continue to develop the technologies on each of the platforms, the Open Technologies one we recently made does introduce us into a dental 3D digital market, which represents an important new market. But I wouldn't expect that to show anything important until 2019.

And then on the question of OpEx, just given these bolt-on acquisitions, given the headcount additions that you are making in the core business, I'm wondering, how we might think about operating expense going forward? Bob, is there any help you can give us? It sounds like there is a potential for some near-term pressure just given what you've got going on.

So certainly we don't provide specific guidance, but I think what you see is this year we have established a good track record on G&A. You see our pattern there, we're very focused on controlling our G&A spend of our underlying business excluding acquisition. The R&D, you'll see that -- you saw the tick-up between Q1 and Q2 as we invested more to support acquisitions and support our construction As-Built. So both of those we are very focused on controlling. In terms of the selling and marketing, we indicated we would be adding about another 40 to 50 people in the second half of the year. Previously, we talked to you about the fixed costs related to those individuals, which you can put into your forecast and also then any sales commissions for the sales increase. In terms of the acquisitions, most of those acquisition dollars will come in the form of research and development and then also as we add the selling and marketing carrying it forward. We'll be focused on integrating those acquisitions in the second half of the year. If they become material to any spending part of the income statement, we'll certainly point that out as we go through the year.

And our next question will come from Ben Klieve with Noble Capital Markets.

A question on the gross margin line, specifically on service gross margins. I'm curious if you can, one, help me understand the dynamics here that lead that margin line to be a bit lumpy in between roughly 43% and 47% here over recent history. And what causes the lumpiness from one quarter to the next and then specifically, what did you see that caused the 150 basis point decrease from the first quarter to the second?

So in terms of service margin, it is variable quarter-to-quarter as our revenue stream, there are portions of it that's recurring. We point that out in our Q, now with ASC 606 what is a recurring stream in terms of warranty. And then the piece that's more variable quarter-to-quarter is the rate upon which our customers send back equipment for customer service repair and non-warranty repair and training. Most of it in the quarter that will drive volatility is just that pattern of customer sending back their equipment for repair and replacement of parts. So the fixed cost is pretty stable, it's mostly the revenue stream that varies quarter-to-quarter with the customers' economic situation or their needs. We are focused absolutely on this area then of our P&L as we see this is an opportunity for us to really focus to help drive to get closer to that 60% gross margin level in the long term.

And then Simon you talked about the rollout of the new Arm product, I'm curious the impact from that new product here in the second quarter, were you able to roll that out in the enough time that it had kind of a full run rate on the quarter here or can we expect that to ramp -- the impact from that new line to ramp here in the third quarter and maybe even into the fourth?

Q2 were all the new Quantum Arms; later in the quarter, we did introduce the lower-end version of the Quantum Arms and now the line is complete. But all through the quarter, it was all Quantum Arms as well as the new laser line probe. So the growth is primarily because of the clear superiority of that product in the marketplace. As you know FaroArms are affordable measurement devices, which represent a core product and the clear superiority of the product, both from the laser line probe, the software as well as the accuracy and certifications of the device have made it a clear choice and now with the broader spectrum of the product line for lower price entry points, it's had quite a profound effect on the marketplace. I would also say that it's probably one of the most reliable Arms that we've ever produced. And all these are contributing to a strong build and reputation as well as performance.

Our next question will come from Ben Rose with Battle Road Research.

To start off, Simon, I know that some time ago you had said sort of a 60% gross profit margin as kind of a target for FARO. With this quarter kind of bumping up against that target, could you speak sort of longer term, what the prospects are for gross profit improvement? Could we see perhaps something exceeding 60% given the progress you're making on the product gross profit side, specifically?

I do see the possibility of that. I mean, as I've always said from the beginning, it's strongly related to the technical superiority. You cannot charge premium prices unless you are technically superior in the product category. So that's extremely important to that process. The second most important thing, of course, is the production efficiencies. We have implemented, as I noted in my announcement, the FARO Best initiatives, which in production means lean manufacturing and efficiencies of that type. So we expect that to put an upward or downward pressure on cost. At the same time, we are entering a little bit of a componentry market. As you noticed, we talking about the Photonics group, which provides componentry for light direction to a number of industries. The selling expenses are lower there but the margins can be higher because of the nature of the underlying technology. And so I see generally a prospect that as long as we maintain technical superiority, keep working on efficiencies, that we could exceed the 60%. It's certainly a goal of ours despite the fact that we've said 60% is our 2019 expectation.

And with regard to Open Technologies, specifically, looks like there are some vertical markets that they address specifically for the 3D creation of crowns, implants and prosthesis, et cetera. Do you see these more of a -- and I understand that they also bring expertise in kind of the core markets that you focus. But with regard to the former, do you see these as sort of an opportunistic pickup to address some of those markets or could we see kind of a more formal focus on that particular market for FARO for growth?

Yes, I do believe it's the latter. We do view custom manufacturing and -- just because it's teeth, it's really not that different than producing car parts, except the difference here is that it's highly a bespoke in the sense that everyone is made as a custom product for the user. So that means that the product design, 3-dimensional information is extremely important. The trend in the digitization, if you will, or the 3-dimensionalization of the entire dental profession is profound. And we felt that we are experts in 3-dimensional measurement, there's no reason why we shouldn't enter that with the same kind of aggressiveness that we've entered the application of 3D in other areas such as BIM. So it will be an important contributor going forward. At some point, it might qualify to stand on its own as a segment. In the meantime, we are seriously looking at all the elements of that marketplace to play a role in it.

Okay. I'm sorry, and finally just one question on the automotive sector in particular. Historically, when we've seen some discussion about changes in terms of order flow for the automotive OEMs, there does seem to be some decrease in terms of their appetite to invest in various different technologies. Given your position in that sector, could you maybe just speak to what you're seeing there and sort of maybe state of the state general health, in terms of the spending, I guess, from an OEM and from supplier standpoint, from what you're seeing in the core kind of FaroArm market?

Well, as you know, the first evidence would be clearly the Arm numbers are significantly up worldwide. I recently heard there was about 480 odd new electric car startups in China alone. There's a tremendous amount of energy around that market. So that's certainly driving demand. In the past, we have generally seen that when there's a downturn in the market, that people are looking to squeeze out more efficiencies, reduce problems in manufacturing that usually involves portable equipment. So our growth has generally been fairly steady irrespective of changes in the automotive market because we are a go-to low cost, high efficiency quality enhancing tool with broad application and adaptability in the factory. So I would say that everything looks really strong right now. There is a lot of activity out there despite maybe ups and downs in particular, automotive segments, there's a lot of activity.

(Operator Instructions) We will take our next question from Hendi Susanto with Gabelli & Company.

Congratulation on delivering double-digit top line growth for 4 quarters in a row. Bob, how should we think about the path forward to your year-end 2019 goals of mid-teen operating margin? You pointed process efficiencies as a major driver, and if I look at your OpEx, then OpEx will have to be around like 45%. What kind of lever should we think about that?

So in terms of how we get from where we're at today and our 2% operating margin to our goals of getting to mid-teens, it starts with mid-teens sales growth, which we demonstrated over the past 4 quarters. It then leads to taking our gross margin to 60%. We've demonstrated that too really increased that 2, 3 percentage points over the past 4 quarters. So check, and check on those 2. The G&A expenses, we've shown that we've been able to manage that line and decrease that as a percentage of sales. Year-over-year, you saw a nice reduction through active controls there. R&D expenditure at 10% of sales, we still believe that we can bring that number down and still execute on the new product development. So I'm not going to say a number, but I'll just say we feel we have additional leverage in G&A and R&D. So the nut for us to certainly crack in terms of -- is how do we leverage the selling and marketing expenses. For us, that's all about the orders per FTE. That's why we focus on that metric. You saw us pick that up from 698 to 706 and really trying to drive that forward because as we drive that back to more of our target internal numbers, that's where you'll see the true leverage of the operating expenses in that selling and marketing back more to that mid-20s, low-20s historically where we've been. We see the pathway as we stated. We believe in the long-term mid-teens operating margin. But it's really for us to continue what we've been doing: the market leader in R&D, drive top line, drive pricing in the market, and then get that orders per FTE up and [lift] that selling and marketing get that leverage.

My second question is, would you able to share more colors on the increase of product ASP? How much of it is driven by change in product mix? And I'm wondering whether the increase of product ASP in Q2 is similar to what you have been seeing or whether there are some like new drivers there?

In terms of the ASP, really where it's driven, our core strategy, Hendi, is be the market leader in technology and drive price in the market. And that's really what you're seeing across, especially, our 3D Factory segment is -- the core products there, what we've been able to do is come out with that premium pricing and deliver that in the market. The other piece that we've done is if you look at our Arm portfolio, you look at our laser scanner portfolio, we have a complete portfolio for our customers. It's not about mix, it's about technology into the marketplace that's driving that ASP.

And next we will go to a follow-up question from Greg Palm with Craig-Hallum.

Simon, last quarter you alluded to the orders per FTE and I think your commentary suggested that you had thought that sort of might trend down for the rest of the year before turning upwards in 2019. Obviously, that changed in Q2 and commentary suggests that you believe that might see upward pressure here for the remaining quarter. So I guess, just curious what's changed, whether it's just more adoption from the product lines, whether it's macro, whether it's just better productivity, I mean, any color you can provide us?

Apart from just trying to be a little bit conservative about the expectations, we were hiring at a 15% rate that kind of dilutes the sales per FTE. So it was a very positive surprise to see us go up in the dollars per FTE now. We could bounce around at the bottom of this value, if you will, or go up and down a little bit as we increase, but clearly the new product, the additional concept that is the sales force is given market-leading technology products at good prices with a broad product mix that they're going to be more effective and efficient at selling and that certainly has come through as well. So, yes, I'm positively surprised, I expect it to continue to down trend, the pickup on the new technology has been fantastic. So I think that's great news for us. The new products that we mentioned in our announcement of about 7 new products in this quarter alone, our technology add-ons and new products, standalone new products, and so we expect that also to contribute to [go with 50]. So I'm confident that at a minimum, we have bottomed out and that now we have to see how quickly we can see that dollars per FTE rise. So I'm always going to tend to be a little bit more conservative until I see the facts and we did everything we thought that should increase that number and apparently it's had its effect and now we need to see that for a few more quarters before I could call it a trend but we are hopeful.

And I guess just secondly, your comment earlier about sort of pressure in near-term earnings potential. I guess I look at that and your earnings have been pressured for the last couple of years given a lot of these investments. So is that something new and incremental that you expect in the near term or was that just sort of a continuation of what's been going on given your elevated investment levels here recently?

Right, it's a continuation, there's nothing new here. I mean, we are getting a bifurcation between the rate of growth of the operating expenses and -- the OpEx and the gross margin, which is what I talked about in my announcement that you are now getting a change and an increase between the 2, which gives you that increased operating margin, but we have been averaging on in general around $2.2 million in startup for a quarter and we just wanted to remind everybody that if you -- which represents about $0.10 and that that is an investment component. If we stop the hiring and just work on dollars per FTE, clearly that $2.2 million could come out -- 10 points could come out of or $0.10 could come out of the operating expenses and go to bottom line. So it's just a reminder that we continue to invest in headcount growth.

And at this time, we have no further questions. I'd like to hand it back to our presenters for any closing remarks.

I'd like to thank everybody for attending our Q2 call and we look forward to talking to you next time.

Thank you very much.

And this does conclude today's call. Thank you again for your participation, you may disconnect at any time.