Jay Freeland - President & Chief Executive Officer Peter Abram - Senior Vice President & Chief Financial Officer Vic Allgeier - Investor Relations, TTC Group.

Jim Ricchiuti - Needham & Company Ben Hearnsberger - Stephens Patrick Newton - Stifel Nicolaus Richard Eastman - Robert W. Baird Ben Rose - Battle Road Research Mark Jordan - Noble Financial Hendi Susanto - Gabelli & Company Jeremie Capron - CLSA.

Good day everyone and welcome to today’s program, FARO Technologies Conference Call in conjunction with its third quarter 2014 earnings release. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions).

Please note, this call may be recorded. I will be standing by should you need any assistance. For opening remarks and introductions I will now turn the call over to Vic Allgeier. Please go ahead..

Thank you and good morning everyone. My name is Vic Allgeier with the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed FARO released its third quarter 2014 results. By now you should have received a copy of the press release. If you have not received the release, please call Nancy Setteducati at 407-333-9911.

The press release is also available on FARO's website at www.faro.com. Representing the company today are Jay Freeland, President and Chief Executive Officer; and Peter Abram, Senior Vice President and Chief Financial Officer. Jay and Peter will deliver prepared remarks first, and will then be available for questions.

I would like to remind you that in order to help you understand the company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as expect, will, believe, potential, continue, predict, target, growth targets, goals and similar words.

It is possible that the company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are set forth in yesterday's press release and in the company's filings with the SEC.

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

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

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

Product sales in the third quarter were $67.6 million, an increase of $12.6 million or 23% as compared to $55 million in the third quarter of 2013.

The increase was primarily driven by strong year-over-year sales performance in the laser scanner product line across all geographical regions, as well as the release of the new laser line probe driving sales growth in the arm product line.

Service revenue in the third quarter was $14.7 million, an increase of $1.5 million or 11% as compared to $13.2 million in the third quarter of 2013. This increase was primarily driven by higher warranty and service repair revenue on the continued growth of our installed base. Turning to our regional overview of sales.

In the Americas region, sales in the third were $35.1 million, an increase of $5.3 million or 18% as compared to $29.8 million in the third quarter of 2013.

This increase was primarily driven by continued strong unit sales growth in the laser scanner product line and double-digit sales growth in the arm product line with the release of the new Laser Line Probe.

In Europe/Africa region, sales in the third quarter were $26 million, an increase of $4.5 million or 21% as compared to $21.5 million in the third quarter of 2013.

This increase was primarily a result of the more than doubling of laser scanner units solid, double-digit unit sales growth in the tracker product line and higher service revenue on an increase in warranty sales.

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

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

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

Turning to business development and new orders, new orders increased 22% in the third quarter to $77 million as compared to $63.3 million in the third quarter of 2013, primarily driven by the sales growth of our laser scanner product line.

This represents a book-to-bill ratio of 0.94 for the quarter, which is slightly below our target of 1.0, primarily driven by lower metrology order generation in the Europe/Africa region. As you may recall Europe and African had a very strong quarter-to-quarter in Q2, so this is not overly concerning for the company.

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

In the Asia-Pacific region, orders in the third quarter were $20 million, an increase of $4.1 million or 26% as compared to $15.9 million in the third quarter of 2013. Turning to margins and expense. Gross profit in the third quarter was $46 million, an increase of $7.2 million or 19% on the strong year-over-year sales increase.

Gross margin in the third quarter was 56.0%, a decrease of 90 basis points as compared to 56.9% in the third quarter of 2013. Gross margin from product sales in the third quarter of 2014 was 60.6%, a decrease of 60 basis points as compared to 61.2% in the third quarter of 2013.

This decrease was primarily the result of a less favorable sales mix with the strong sales growth of the laser scanner product line. Gross margin from service revenues in the third quarter of 2014 was 34.8%, a decrease of 450 basis points as compared to 39.3% in the third quarter of 2013.

The decrease in the gross margin year-over-year was primarily due to an increase in headcount in customer service to support the growth in our product sales.

Selling expenses were 23.2% of sales in the third quarter as compared to 24.0% in the third quarter of 2013, on higher sales generated per account manger and an increase in sales through distribution from the growth of the laser scanner product line.

Selling expenses in the third quarter were $19.1 million, an increase of $2.7 million or 17% as compared to $16.4 million in the third quarter of 2013. This increase is primarily due to increased compensation expense on higher sales commissions and headcount.

General and administrative expenses in the third quarter were $8.8 million or 10.7% of sales as compared to $7.3 million or 10.7% of sales in the third quarter of 2013.

This increase of $1.5 million was primarily due to an increase in compensation expense reflecting higher headcount, slightly higher professional feels related to the company’s advisory services and the start of the Exton facility leasing costs.

Research and development expenses in the third quarter were $7.4 million or 8.9% of sales as compared to $5.9 million or 8.6% of sales in the third quarter of 2013. This increase of $1.5 million is primarily driven by higher compensation expense on headcount growth to support research projects on both next generation and new product development.

As communicated previously, the FARO senior management team made a strategic decision to accelerate spending in this area in 2014. Operating income in the third quarter was $9 million, an increase of $1.4 million or 18%, driven primary by year-over-year sales growth.

Operating margin in the third quarter decreased to 10.9% as compared to 11.1% in the third quarter of 2013, but continued to sequentially improve over Q2 of this year. Operating margin was unfavorably impacted in the quarter by the 90 basis point decline in gross margin with our sales mix shift and one time G&A expense.

Other income and expense in the third quarter of 2014 was $0.1 million of income as compared to $0.8 million of expense in the third quarter of 2013.

This favorable change primarily relates to net foreign currency transaction gains and losses, resulting from changes in foreign exchange rates on the value of the current intercompany account balances, of the company’s subsidies denominated in different currencies.

Income tax expense in the third quarter of 2014 was actually $2.1 million of income, a decrease of $3.9 million as compared to $1.8 million of expense in the third quarter of 2013.

In the third quarter of 2014 we recorded a discrete tax benefit of $4.5 million due to the reversal of a valuation allowance originally established against net operating losses in certain foreign subsidies.

These foreign subsidiaries established a pattern of profitability, which resulted in the company concluding in the third quarter that the valuation allowance should be reversed.

The effective income tax rate decrease to a negative 23.3% in the third quarter of 2014 as compared to 25.9% in the third quarter of 2013, again, primarily due to the discreet benefit recorded in the quarter.

Net income increased to $11.2 million or $0.64 per share in the third quarter of 2014, as compared to $5 million or $0.29 per share in the third quarter of 2013.

Excluding the discreet tax benefit of $4.5 million, net income would have been $6.7 million or $0.38 per share, exceeding analysts’ consensus by $0.04 in the quarter with revenue exceeding the high end of the analysts’ expectations. I will now briefly discuss a few balance sheet and cash flow items.

Cash and short-term investments were $181.9 million as of Sept 27, 2014, as compared to $189.6 million as of December 31, 2013. Accounts receivable was $68.9 million as of September 27, 2014 as compared to $66.3 million as of December 31, 2013.

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

Inventories were $78.1 million as of September 27, 2014 as compared to $68 million as of December 31, 2013.

This increase of $10.1 million was primarily related to higher sales levels, with an increase in finished goods of $6.4 million, demonstration inventory of $2.3 million and service inventory of $2.6 million, partly offset by an increase in the inventory reserve of $1.2 million.

During this quarter and given our cash position, we consciously built incremental finished goods for the purposes of covering any risks related to the SAP Go-Live in the Americas and the upcoming Exton move in the Americas.

Accounts payable and accrued liabilities were $72.7 million as of September 27, 2014 as compared to $75.5 million as of December 31, 2013.

This decrease of $2.8 million is attributed primarily to a decrease of $5 million in accounts payable on higher year end expense accruals, partially offset by a $3.3 million increase in accrued liabilities, primarily due to higher compensation and benefit on higher headcount.

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

On a regional basis in the Americas region, account manager headcount increased by 7% or 10% to 81 as of September 27. In the Europe/Africa region account manager headcount increased by 2% or 3% to 67 as of September 27, 2014 and in the Asia Pacific region account manager headcount decreased by 9% or 11% to 73 as of September 27, 2014.

We had 1,172 employees as of September 27, 2014 as compared to 1,055 as of September 28, 2013, an increase of 117 employees or 11%. Geographically we now have 469 employees in the Americas region, 407 employees in the Europe/Africa region and 296 employees in the Asia region. I will now hand the call over to Jay for his comments..

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

I’m extremely pleased with the performance of the FARO team who delivered third quarter financial results, which once again exceeded our internal expectations and at the same time delivered on key milestones for our long-term strategic priorities.

For the full year we expect our sales growth will be consistent with our targeted long-term organic growth model of mid-teens annual revenue growth, consistent with our message throughout 2014.

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

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

The new LLP greatly enhances the dimensional accuracy and scan speed in creating 3D models for reverse engineering applications, and at the same time maintains the micron level accuracy required for most metrology applications.

To give a real life example of the value of this device, the Americas team has a customer who has been using our previous generation LLP. Historically it took some 32 passes back and forth to collect all the data they needed for a particular part.

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

Unit sales growth for the laser tracker product line were very strong within the Europe/Africa region with modest growth overall. Our sales team continues to see competitive pricing pressure in the metrology market, especially within select geographical markets for the tracker product line.

However, they continue to work through the market dynamics and successfully grow their business. Similarly to the second quarter, global market demand continues to be robust for FARO products. Each region posted strong double-digit percentage sales growth in Q3 compared with last year.

The Asia Pacific team led our global business with 25% sales growth, by achieving double digit percent unit sales gains in metrology and triple digit laser scanner unit growth.

Sales in the Europe/Africa region increased 21% on strong tracker sales and more than doubling their unit sales in the laser scanner product line, but also experienced slightly weaker on-demand, especially in Germany.

The Americas delivered 18% top line growth by leveraging the launch of the new Laser Line Probe to post mid-teens unit sales growth of the arm product line, while continuing to realize strong laser scanner sales increases.

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

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

Demonstrating this commitment we grew our research and development spending by $1.5 million or 25% to $7.4 million or 8.9% of sales in the third quarter. Sequentially that represents a 10% increase from the second quarter. Going forward we plan to continue reinvesting 7% to 9% of sales dollars back into research and development.

We see this level of spending as vital to driving sales growth and staying ahead of our competition, by continuously releasing new cutting edge technologies like the recent launch of our latest generation Laser Line Probe.

In last quarter’s press release and earnings call we announced the acquisition of the CAD Zone to provide our forensics customers with a turnkey, easy to use hardware and software solution for laser scanning.

During the third quarter FAROs leadership team partnered with the CAD Zone to integrate the acquisition into the FARO brand family with new marketing letters for our product packaging and since improved cross selling of the products by both teams.

At the end of September, CAD Zone released the all-new version 10 of its software, with more realistic, high-resolution 3D graphics. We are pleased with the initial results of the acquisition and are positioned to capture the market benefits of integrating a leading crash and crime software suite with our X 130 and X 330 laser scanner product line.

We continue to evaluate additional acquisition opportunities, which offer innovative hardware and software solutions to enhance the FARO portfolio, enable our sales teams to further penetrate our addressable markets.

At the end of the third quarter we took a significant step forward in building the infrastructure for our future growth, by implementing the first leg of our global SAP ERP project.

All 469 employees in the Americas organization delivered strong third quarter sales and at the same time achieved a major operational milestone by going live with SAP at the end of the quarter. We are now conducting business in SAP within the Americas region and continue to execute on our roadmap to fully implement SAP globally by the end of 2015.

This project is critical to providing FARO with the tools, resources and data to make the necessary daily business decisions to drive the company forward.

In the fourth quarter of this year we will open the doors of our new Exton, Pennsylvania facility to modernize our laser tracker manufacturing processes, ensure substantial manufacturing capacity for our tracker and imager product line and significantly upgrade our optical metrology research capability.

The facility construction and build-out continues to be on schedule, both in time and dollars, and when complete provides FARO with a state-of-the-art 90,000 square foot technical center.

The entire FARO team pressed to deliver third quarter financial results and yet did not loose sight of achieving our key milestones for our longer-term strategic priorities.

In the third quarter I am pleased that we more than doubled laser scanner sales in Europe, Africa and the Asia Pacific regions, launched a new Laser Line Probe, integrated CAD Zone into FARO, executed SAP in the Americas and remain on track to open our new Exton Manufacturing and Technology Center in the fourth quarter.

While sales exceeded our expectations over the past few quarters with year-over-year increases of above 20%, with a tough comp from the fourth quarter of last year we continue to see sales growth overall for the 2014 year, to be consistent with our longer term organic growth model of mid teens annual revenue growth.

We are committed to aggressively grow in sales, investing in research and development, launching new disruptive products, keeping focused on our margins and searching for the right strategic acquisition opportunities.

In closing, I’d like to thank all of you for your continued support and particularly the FARO team for their dedication to the company mission. All of your hard work and success continues to be recognized, most recently by Forbes three weeks ago naming FARO one of their Top 100 Small Companies. I’ll now open the call to questions..

(Operator Instructions) We will take our first question from Jim Ricchiuti from Needham & Company. Go ahead, your line is open..

Thank you. Good morning..

Good morning Jim..

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

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

Yes, I think from a market standpoint the thing that’s exciting for me and the rest of the team is that I still feel like despite the growth rates we are achieving Jim and sort of the scale that we’ve achieved on scanner, I still think we are actually in the early adopter phase of the opportunity.

And so when you think about going forward and the new products that we will release, the new scanners that we will release, I don’t think we’ve actually crossed the (inaudible) yet.

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

We will take our next question from Ben Hearnsberger from Stephens. Please go ahead, your line is open..

Hi, thanks for taking my question. So it looks like Europe was pretty strong despite some negative macro news we’ve heard out of there recently.

Can you maybe speak a little bit more to the environment that you are seeing in Europe and what you’ve seen so far in the early 4Q?.

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

There was a little bit of weakness in Germany as it related to arm and I think some of that could be timing, some of that could be just – it’s a fairly competitive marketplace in Germany. Not a surprise given that its sort of the industrial manufacturing hub of Europe.

And so we do see a little bit more competition in Germany in particular and the arm as a product line. On a go forward basis though, the one concern of course that everybody still has is just there is obviously some FX headwind at this point. We had a little bit of FX headwind in the third quarter.

We’ll probably have some again in the fourth quarter just based on what we know right now. Our team there focuses on just selling product into the market and feeding where they see the pull (ph). .

We will take our next question from Patrick Newton from Stifel Nicolaus. Please go ahead, your line is open..

Yes, good morning Jay and Peter. I guess one clarification to make sure I didn’t miss this and then my question.

Peter, did you give new customer sales as a percentage of total revenue and distribution as a percentage of total scanner revenue?.

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

Perfect. And then I guess Jay, a question for you on the new LLP product release in the quarter. You specifically called out in your prepared remarks the strength there and I guess what’s interesting is it was available for less than a month, given I believe you launched it on September 3.

You talked about arm growing double digit year-over-year, so can you talk about linearity in the quarter. Did the LLP launch result in higher than normal demand in the month of September specifically, and then do you think there was a pull-in of demand at all into the September quarter due to this launch..

Yes, I think obviously there was great demand when the LLP was released. We knew that was going to be the case.

When they went through the beta testing, that’s always kind of your final spot checker as to what the market is going to think about the product and so as we are going through beta testing and this tail end of the second quarter into the early part of the third quarter, we knew that the product was going to be well received.

If you look at the month of September in particular, maybe the number I would focus on is that the attach rate for LLP just in that month was 63%. So 63% of the arms being sold in the month of September, the Edge Arm is being sold where it had the new LLP attached to them and I think that’s a fairly good indication of the demand.

And of course with the LLP despite having the lowest price in the market, it does add incremental price to the arm business for us and it does improve the gross margin of the arm, given the margin profile of the LLP by itself..

We will take our next question Richard Eastman from Robert W. Baird. Please go ahead, your line is open..

Yes, just maybe two questions that deal maybe with geography. First one, just when I look at the Focus Laser Scanner, the significant growth you had in both Europe and Asia that you flagged, is that basically expanding the distribution channel, because I think the FLS product’s distribution as being more penetrated in the U.S. and the Americas.

So that’s question number one. Are we still expanding the breadth of our distribution for the Focus Laser Scanner in those two geographies? And then maybe the second question is, could you Jay just address, seasonally the order growth in the Americas and Europe looked a little bit slower than what we would expect.

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

Yes, so I guess let me go in reverse order just looking at the orders rate. I think the Americas we saw 28% I think in orders for the quarter, which when we look at that and that’s very strong.

I tend not to look at it quite so focused on the seasonality and we know there is some seasonality and we know that there is always good seasonality in Q4, but a 28% orders growth rate for the third quarter from our perspective was very good, very strong and it did exceed kind of our expectation.

So I’m less concerned about that, when you look at the market demand and the volume being generated by the team, I feel good across the Board there.

When we look at the distribution side, as it relates to laser scanner and the growth rates in Europe and in Asia, I think a little bit if Asia’s growth is going to be a continued expansion of their distributor network. A lot of it’s just – I mean, this is real demand now.

For the most part we are not signing up tons and tons of new distributors or anything close to it. You know you are at a point where you are signing up onzie, twozie for new ones that’s in all three regions and the ones that you have in place are the ones that are starting to deliver based on their sales to the customer base.

It was interesting that the 3D Doc Conference that we just had in the Americus here a few weeks ago, there is a very nice mix of existing users who were there, wanting to learn more and share what they know about the product and then there is a whole bunch of people there who have not decided whether they are going to adopt yet or not.

And so they are using that opportunity to hear from the actually end users that have the FARO product, and so for me that’s a good indication of the market demand too, to get that many coming to a user conference who actually aren’t even users yet, who are using the opportunity to make their decisions. So from my standpoint its real market demand.

This is not a channel filler or anything like that..

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

We’ll take our next question from Ben Rose from Battle Road Research. Your line is open; please go ahead. .

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

Yes. So Japan and China are really strong than the others. Particularly Southeast Asia is a little big weaker than we had liked. Thailand not surprising with everything going on, it’s a little weaker than we had like.

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

Okay thanks. And then I guess a question that I’m sure you’ve received a lot. For Peter, I guess for Jay as well, but just kind of thoughts on use of cash.

Is there any recent discussion regarding dividends or share buybacks along those lines?.

Yes. No contemplation at this point on dividend on share buybacks. We continue to earmark the cash and think it’s more useful in the acquisition and development space. So we continue to divest in the R&D, and again, we have a very healthy pipeline of acquisitions that we are evaluating and looking at. .

And anything that you would be bracing ourselves for?.

I’ll never say brace yourselves for it. What I’d say is that we continue to be very consistent in what we are looking for and the types of opportunities for the company.

We have looked at – Ben, still in the pipeline there are opportunities that are a clear strategic fit with what we are going right now and we have some that we look at where it may not be 100% tied to even metrology or 3D Doc as we think about it.

But at the same time if we were to do an acquisition like that, I think everybody would look at it and say, yes, that totally makes sense under the umbrella of 3D measurement, imaging and realization. So there are real opportunities.

There are lots of little tuck-ins that we can do and there are some more meaningful ones that are interesting, but obviously the approach and the process that we go through is a little different on those. .

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

Okay. Thanks very much. .

Thanks Ben. .

We will take our next question from Mark Jordan from Noble Financial. Your line is open. Please go ahead. .

Thank you and good morning gentlemen. Jay, the sales force headcount has been basically flat for 12 months. It’s obviously very good to see increased productivity. When do you feel that you are going to have to start growing that base again to give you the incremental capacity you would need, say for 2015 or 2016. .

Yes, so I think we are coming up on that point. If you look at it in some respects, last year we hired a little more aggressively I think, so this year it is clearly relatively flat. Asia is down a little bit right now, so there is some productivity there.

In Asia one of the things we had done is we shifted to a model where the account managers are carrying arms and trackers, both where it historically in all three regions you had account markets carrying one or the other.

So that’s helping drive some productivity, and you will continue to see us making those types of transitions over time here across the regions when they are ready for it. Obviously like I said, we were up substantially in ’13 versus ’12 and so perhaps we are a little ahead of the curve in 2013 to get ourselves prepared for this year.

I think you will see the rates starting to normalize gain. We always still think about mid-teens growth give or take. As we add distribution to the company and it contributes more on a revenue basis on the laser scanner side, obviously that changes the profile a little bit.

But I would still think about kind of mid-teens growth on the sales side, if we are going to continue driving the mid-teens growth from a revenue standpoint. .

We will take our next question from Hendi Susanto from Gabelli & Company. Your line is open. Please go ahead. .

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

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

I’m not sure we’d call out any one versus the others as being substantially stronger in the quarter, but those are – if you think about where we sell, those continues to be the strong ones. .

And then if I want to clarify your previous comment about investment in sales and marketing, you may understand that sales is likely to grow at the mid-teen in order to produce mid-teen growth on the top-line.

Is it reasonable to think that as a percentage of sales it may stay at the current level for the past few quarters, lets say between 23% to 24%?.

Yes, I think that’s probably a reasonable explication.

Again, if as more revenue ends up going through distribution on the laser scanner side, that changes the profile a little bit, so you get – you take a little bit of the hit at the gross margin line, because of the discounts and the distributor, and then you make it up on the sales and marketing side, because there is no comparable increment to go with it on the sales and marketing side.

So in some respects its a little bit in flux.

As distribution, which a little harder to predict continues to grow, if that growth rate accelerates, then obviously you could get a little bit more life, a little more leverage of the sales and marketing cost side, but you’d be almost one for one offsetting that at the gross margin like as that revenue – again, because of the discount to the distributor.

Generally speaking though, if you are just thinking about model, yes, I think that 23%, 24%, 25% range is from a sales cost, it’s probably the right way to think about it. .

Thank you. .

We will take our next question from Jeremie Capron from CLSA. Your line is open. Please go ahead. .

Hi, good morning.

Jay, could you give us a date on the completed landscape and in particular what you are seeing in terms of the pricing dynamics on the arm on one end and also in terms of competitive response you are seeing for the laser scanner product?.

Yes. So if I look at sort of the three primary products, on the arms side pricing I think is relatively stable and we saw good growth in the arms side during the course of the quarter, obviously a double digit on the arm.

And obviously the more LLPs we attached to it, then the better the pricing is, because of the increment on the Laser Line Probe selling price. On the trackers side, there is a little more pricing pressure on the tracker side. Europe was particularly strong from the revenue standpoint.

Asia, the Americas saw a little more pricing pressure I think than they had seen in the past. But generally speaking, still growth on the tracker side. Laser scanner is still a whole different sort of world of itself. We are still the low price provider by a fairly large margin.

The growth rates that we’ve seen are reflective of both market demand and I think a product that really still doesn’t have a true competitive alternative when you look at the whole package; ease of use, portability, price, so the whole, the entire solution.

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

We have a follow up question from Jim Ricchiuti from Needham & Company. Your line is open. .

Jay, did you comment on the pricing environment in the arm market.

Particularly with currency, are you seeing any increased pressure coming from your competitor over there?.

Yes, on the Arm side its been relatively stable now, and so yes, there is obviously a little headwind from FX, but wouldn’t call it incremental price pressure on the arm side at this point. .

And just as a follow-up, clearly the R&D spend is at a pretty high level. You guys have rolled out some pretty interesting new products.

Can you talk a little bit about how we should think about the new product pipeline over the next say three to six months?.

Not in three to six months Jim, obviously that would be a little too much of give way from my face. But the product pipeline is robust. We are in the middle of a cycle of obsoleting the previous Jan across all the product lines and without saying when those releases come, they are all deep in the middle of that process. .

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

Peter, can you comment on that. Is that sort of the mid-50-ish. .

48%..

So 48% previously. .

Okay. Thanks a lot..

Thanks James. .

We will take our next question from Patrick Newton from Stifel Nicolaus. .

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

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

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

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

Yes, so as it relates to new product category, the answer is yes; it’s proceeding well. We’ve always said it would potentially as early as the end of this year, maybe the early part of next year. That is only a matter of making sure after we go to beta testing that its robust and is ready.

So this in one where, its going into verticals that we already serve and can be solid either as an accessory to an existing product or as a standalone product by itself.

So I don’t want to risk having a product that is not fully robust, where it was a brand new vertical and you are trying something new, you might go ahead and rip it just to test the market place and see how it feels. I’m not sure we have the luxury to do that in this case, because we need to get it right.

So that being said, the development path is still very strong on that particular product. Peter, you want to talk about the R&D..

Yes, on the R&D again, we don’t give specific guidance. So I can’t talk to the specific timing, but we are as we talked about out long term goal or getting to an 18% operating margin, R&D obviously as we go through that course we’ll play a piece of that from a leverage perspective, so without giving specific timing we think that will flatten..

Thank you. .

(Operator Instructions) We will now take our next question from Richard Eastman from Robert W. Baird..

Just to maybe clarify your statement that you made a couple of times, we talk about the arm product being plus double digit in volume.

Is it still double digit in sales revenue contribution?.

Peter, you want to talk to that or... .

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

Right, and then Jay the commentary about maybe the fourth quarter and how the full year will shakeout, kind of mid-teens sales growth, it kind of implies a very seasonal sales pattern from Q3 into Q4, but that’s the implication when you look at the total revenue for the year.

So again, everything you said here kind of suggests that as far as you can see the market feels seasonal in terms of how the year-end unfolds.

Are you seeing anything that maybe would distract us from that or be a challenge to that?.

Yes, we aren’t really seeing anything that would suggest the different pattern of seasonality from prior years..

Okay and then just lastly, the selling and marketing, I’m curious the selling and marking headcount, if I got the numbers right, plus 49 and account managers are flat. Is there any shift in strategy in terms of generating leads or is there a reason that we’ve added more apparently marketing people.

Is it just in support of new products or is there just a shift in strategy here in terms of how we generate leads and how we generate potential. .

Yes, so there is a little bit of that, so a couple of thoughts. One is just inside sales support to make sure that they can keep up with lead demand and make sure they are feeding the account managers the right way. As you know in our model, the account mangers really don’t do a whole lot of their own cold calling.

They are predominately demoing based on a scheduled that’s set by the inside sales team that’s already made the initial contact with the account and understood the potential opportunity and potential applications. So there is a piece of that. There is definitely some in marketing.

So if you think about markets like AEC and law enforcement where we have not been in the past, that requires a different expertise not just at the account manger level and by selling through distribution, but it also requires some incremental expertise on the marketing side that we have hired in to mark sure we have that internal person or people in many cases to be able to help provide VOC (ph) and understand where else we need to be going with the product.

And then the final piece would be when you look at the account managers and the people who are in the field.

We have added additional individuals called sales engineers who come in and they are spending upwards of a year, sort of shadowing an account manger or two to understand what the process looks like, how to sell the product in a relatively, call it a safe environment where they don’t have number fully on their head yet and those people become the next generation account mangers.

And the goal is to improve the ramp-up time of an account manager when they are brand new. So as you know when we hire one straight off the street, sometimes you can take nine to 12 months to get them effective.

So if you hire them in the earlier stage in the sales engineering role, they can learn the process and then when they move to account manager, it would be that much more productive at the point in time when they move up. So you got some heads that are tied into that as well. .

Okay. So there should be some decent leverage in that number on the marketing side. .

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

Okay, great. Thank you again. .

If appears that we have no further questions at this time. I’ll turn the conference back over Mr. Allgeier. .

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

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