Victor Allgeier - Investor Relations, TTC Group Jay W. Freeland - President & Chief Executive Officer Peter G. Abram - Senior Vice President & Chief Financial Officer.
Ben Hearnsberger - Stephens Inc. Mark C. Jordan - Noble Financial Group, Inc. Bobby Burleson - Canaccord Genuity Group Inc. Brad Moss - Needham & Company Robert Richardson - Stifel, Nicolaus & Co., Inc. Rob Mason - Robert W. Baird & Co. Hendi Susanto - Gabelli & Company, Inc..
Good morning everyone and welcome to FARO Technologies Conference Call in conjunction with its Fourth 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.
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 the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed FARO released its fourth quarter and year-end 2014 results. By now you should 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 Peter Abram, Senior Vice President and Chief Financial Officer. Jay and Peter will deliver prepared remarks first, and then will be available for questions.
I would like to remind you that in order to help you understand the Company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as expect, will, believe, plan, potential, continue, growth model, goals and similar words.
It is possible that the Company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are set forth in yesterday's press release and in the Company's filings with the SEC. I will now turn the call over to Peter..
Thank you Vic and good morning everyone. In the fourth quarter FARO continued its momentum with another consecutive quarter of sales and earnings per share growth that exceeded analyst consensus estimate.
Despite strong foreign exchange headwinds sales were above internal and external expectations and strong unit sales growth of all three product lines and a higher average Arm sales price with the higher attachment rate of the new Laser Line Probe. Now turning to the detailed results.
Sales in the fourth quarter were $104.2 million, an increase of $14.3 million or 16% compared to $89.9 million in the fourth quarter of 2013. Sales through distribution this quarter represent a 9.3% of total sales. With the stronger U.S.
dollar foreign exchange rates negatively impacted sales by $5.7 million in the fourth quarter, decreasing sales growth by six percentage points. On an annual basis sales in 2014 were $341.8, an increase of $50 million or 17% as compared to $291.8 million in 2013.
Foreign exchange rates negatively impacted sales by $6.5 million in 2014 increasing the sales growth by two percentage points. Product sales in the fourth quarter were $89.4 million, an increase of $13.2 million or 17% as compared to $76.2 million in the fourth quarter of 2013.
The increase was primarily driven by unit sales growth of more than 30% for laser scanners and mid-teens growth for metrology including a higher average arm sales price with the higher attachment rate of the new Laser Line Probe.
On an annual basis, product sales in 2014 were $284.1 million, an increase of $45.3 million or 19% as compared to $238.8 million in 2013. Service revenue in the fourth quarter was $14.8 million, an increase of $1.1 million or 8% as compared to $13.7 million in the fourth quarter of 2013.
This increase was primarily driven by higher product sales boosting warranty and training revenue slightly offset by a decline in break/fix revenue. On an annual basis, service revenue in 2014 was $57.7 million, an increase of $4.7 million or 9% as compared to $53 million in 2013. Turning to our regional overview of sales.
In the Americas, sales in the fourth quarter were $41.3 million, an increase of $5.2 million or 14% as compared to $36.1 million in the fourth quarter of 2013. Foreign exchange rates negatively impacted sales by $0.4 million in the fourth quarter decreasing sales growth by one percentage point.
The sales increase was mainly from higher unit sales of laser scanner and laser tracker coupled with higher average arm sales price due to the higher attachment rate of the new Laser Line Probe. On the annual basis, Americas sales in 2014 were $139 million, an increase of $18.6 million or 15% as compared to $120.4 million in 2013.
Foreign exchange rates negatively impacted sales by $1.1 million in 2014 increasing sales growth by one percentage point. In Europe, sales in the fourth quarter were $41.4 million, an increase of $4.6 million or 12% as compared to $36.8 million in the fourth quarter of 2013.
Foreign exchange rates negatively impacted sales by $3.7 million in the fourth quarter increasing sales growth by nine percentage points. The sales increase of 12% or 21% adjusted per currency was mostly driven by strong unit sales growth of arm and laser scanner as well as a higher average arm sales price.
On an annual basis, Europe sales in 2014 were $120.1 million, an increase of $16.7 million or 16% as compared to $103.4 million in 2013. Foreign exchange rates negatively impacted sales by $1.8 million in 2014 decreasing sales growth by two percentage points.
In Asia, sales in the fourth quarter were $21.5 million, an increase of $4.5 million or 26% as compared to $17 million in the fourth quarter of 2013. Foreign exchange rates negatively impacted sales by $1.6 million in the fourth quarter decreasing sales growth by eight percentage point.
The sales increase of 26% or 34% adjusted for currency was driven primarily by strong unit sales growth across all product lines partially offset by a lower average Laser Tracker sale price. On an annual basis Asia sales in 2014 were $82.7 million, an increase of $14.7 million or 22% as compared to $68 million in 2013.
Foreign exchange rates negatively impacted sales by $3.6 million in 2014 decreasing sales growth by five percentage points.
Sales to new customers in 2014 represented 37% of total sales and the top five customers by sales volume in 2014 represented only 2.2% of sales, the top 10 customers in 2014 collectively represented only 3.3% of our sales once again indicating our lack of dependence on any one or handful of customers.
Turning to business development and new orders, new orders increased 11% in the fourth quarter to $109.2 million as compared to $98.6 million in the fourth quarter of 2013 primarily driven by 14% quarter growth in the Americas and strong orders in Laser Scanner and Laser Tracker plus a higher average Arm sales price.
This represents a book-to-bill of 1.05 for the quarter slightly above our target of 1.0. On an annual basis new orders increased 16% in 2014 to $340.9 million as compared to $293.3 million in 2013 representing a book-to-bill of 1.0 in 2014.
In the Americas orders in the fourth quarter were $44.4 million, an increase of $5.5 million or 14% as compared to $38.9 million in the fourth quarter of 2013. In Europe, orders in the fourth quarter were $42 million, an increase of $3 million or 8% as compared to $39 million in the fourth quarter of 2013.
In Asia orders in the fourth quarter were $22.8 million, an increase of $2.1 million or 10% as compared to $20.7 million in the fourth quarter of 2013. In the Americas, Europe and Asia orders in 2014 grew to $140.3 million, $121.3 million and $79.3 million respectively representing growth rate of 17%, 18% and 12% respectively.
Turning to margins and expense. Gross profit in the fourth quarter was $57.3 million, an increase of $8 million or 16% on the strong year-over-year sales growth. Gross margin in the fourth quarter was 55%, an increase of 10 basis points as compared to 54.9% in the fourth quarter of 2013.
Gross margin from product sales in the fourth quarter was 58.8% an increase of 80 basis points as compared to 58% in the fourth quarter of 2013.
This increase was primarily driven by strong sales of the new Laser Line Probe increasing average Arm sales price and shifting sales mix favorability to the Arm, partially offset by $1.5 million excess in obsolete inventory charge that the company took in Q4 related to its European operations.
Gross margin from service revenue in the fourth quarter was $31.9 million, a decrease of 560 basis points as compared to 37.5% in the fourth quarter of 2013. This decrease in gross margin was primarily the result of a strategic decision to increase customer service resources to improve turnaround times in Europe and Asia.
Gross profit in 2014 was 188.9 million, an increase of $27 million or 17% on strong year-over-year sales growth. Gross margin in 2014 was 55.3% a decrease of 20 basis points as compared to 55.5% in 2013. Gross margin from product sales in 2014 was 59.5 an increase of 40 basis points as compared to 59.1 in 2013.
This increase was primarily the result of higher average Arm sales price, partially offset by a less favorable mix in the strong sales growth of laser scanner. Gross margin from service revenues in 2014 was 34.3%, a decrease of 480 basis points as compared to 39.1% in 2013.
The decrease in the gross margin was primarily due to adding additional resources in Europe and Asia to support the growth in our sales.
Selling and marketing expenses were 23% of sales in the fourth quarter as compared to 24.4% in the fourth quarter of 2013, on higher sales generated per account manger in Europe and Asia as well as an increase in sales through distribution on the growth of the laser scanner.
Selling and marketing expenses in the fourth quarter were $24 million, an increase of $2 million or 9% as compared to $22 million in the fourth quarter of 2013. This increase is primarily due to increased compensation expense on higher sales commissions and headcount.
On an annual basis selling and marketing expenses were 23.4% of sales in 2014 as compared to 24.6% in 2013. General and administrative expenses in the fourth quarter were $10.4 million or 10% of sales as compared to $8 million or 8.9% of sales in the fourth quarter of 2013.
The increase of $2.4 million was primarily due to higher compensation expense reflecting increased headcount, higher professional fees related to the Company’s ERP implementation and severance costs with the change in our European Managing Director.
On an annual basis general and administrative expenses in 2014 were $36.5 million, or 10.7% of sales as compared to $30.6 million or 10.5% of sales in 2013. Research and development expenses in the fourth quarter were $8.1 million or 7.7% of sales as compared to $6.2 million or 6.9% of sales in the fourth quarter of 2013.
This increase of $1.9 million is mainly due to higher compensation expense on headcount growth. On an annual basis research and development expenses in 2014 were $27.5 million or 8% of sales as compared to $22.4 million or 7.7% of sales in 2013.
As communicated previously the FARO senior management team made a strategic decision to accelerate spending in this area in 2014..
Other income and expense in the fourth quarter was materially unchanged as compared to $0.1 million of income in the fourth quarter of 2013.
Other income and expense primarily related 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.
On an annual basis other income and expense for 2014 was $0.2 million of income as compared to $1.3 million of expense in 2013, primarily driven by the U.S. dollar strengthening versus the Swiss Franc, Turkish Lira and Indian Rupee.
Income taxes in the fourth quarter was $1.8 million, a decrease of $1.3 million as compared to $3.2 million in the fourth quarter of 2013. The effective income tax rate decreased to 14.6% in the fourth quarter as compared to 27.9% in the fourth quarter of 2013. Primary drivers of the lower tax rate or the full-year impacted the U.S.
R&D tax credit that was extended retroactively in December and year-to-date transfer pricing true-ups. On an annual basis, income tax expense for 2014 was $3.9 million a decrease of $3.5 million as compared to $7.4 million in 2013.
The effective income tax rate decreased to 10.3% in 2014 as compared to 25.5% in 2013, driven primarily by discreet tax benefit of $4.5 million in the third quarter of 2014. Excluding the discreet tax benefit of $4.5 million, the effective tax rate in 2014 would have been 22.4%.
Net income increased to $11.1 million or $0.64 per share in the fourth quarter as compared to $8.3 million or $0.48 per share in the fourth quarter of 2013, this exceeds analysts consensus estimate by two pennies. Foreign exchange rates negatively impacted net income by $0.5 million or $0.03 per share in the fourth quarter.
On an annual basis, net income increased to $33.6 million or $1.93 per share in 2014 as compared to $21.5 million or $1.25 per share in 2013. Excluding the discreet tax benefit of $4.5 million, net income in 2014 would have been $29.1 million or $1.67 per share.
Foreign exchange rates negatively impacted net income by $0.9 million or $0.05 per share in 2014. I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $174.3 million at the end of the year, as compared to $189.6 million at the end of 2013.
Accounts receivable was $84 million at the end of the year as compared to $66.3 million at the end of 2013. Day sales outstanding increased to 74 days at the end of the year from 67 at the end of 2013, primarily related to a modest increase in terms. Inventories were $80 million at the end of the year as compared to $68 million at the end of 2013.
This increase of $12 million was primarily related to an increase in finished goods of $6.2 million and raw materials of $4.5 million.
We consciously increased raw materials and finished goods inventory to support our sales growth, new products and an increase in our safety stock to cover any risks related to higher laser scanner demand, ERP implementation and the Exton, Pennsylvania relocation.
Total liabilities were $81.6 million at the end of the year as compared to $75.5 million at the end of 2013. This increase was due to an increase in accrued liabilities primarily from higher compensation and benefits on higher headcount. Finally, I’ll conclude with some statistics regarding our headcount numbers.
Worldwide sales and marketing headcount increased by 57 or 13% to 490 at the end of the year from 433 at the end of 2013 and global account manager headcount decreased by 2% or 1% to 219 at the end of the year. On a regional basis in the Americas account managers increased by 12% or 16% to 87.
In the Europe account managers decreased by 4% or 6% to 59 and in Asia account managers decreased by 10% or 12% to 73. We had 1,223 employees at the end of the year as compared to 1,078 at the end of 2013, an increase of 145 employees or 13%.
Geographically, we now have 502 employees in the Americas, 426 employees in the Europe and 290 employees in Asia. I’ll now hand the call over to Jay for his comments..
Other income and expense in the fourth quarter was materially unchanged as compared to $0.1 million of income in the fourth quarter of 2013.
Other income and expense primarily related 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.
On an annual basis other income and expense for 2014 was $0.2 million of income as compared to $1.3 million of expense in 2013, primarily driven by the U.S. dollar strengthening versus the Swiss Franc, Turkish Lira and Indian Rupee.
Income taxes in the fourth quarter was $1.8 million, a decrease of $1.3 million as compared to $3.2 million in the fourth quarter of 2013. The effective income tax rate decreased to 14.6% in the fourth quarter as compared to 27.9% in the fourth quarter of 2013. Primary drivers of the lower tax rate or the full-year impacted the U.S.
R&D tax credit that was extended retroactively in December and year-to-date transfer pricing true-ups. On an annual basis, income tax expense for 2014 was $3.9 million a decrease of $3.5 million as compared to $7.4 million in 2013.
The effective income tax rate decreased to 10.3% in 2014 as compared to 25.5% in 2013, driven primarily by discreet tax benefit of $4.5 million in the third quarter of 2014. Excluding the discreet tax benefit of $4.5 million, the effective tax rate in 2014 would have been 22.4%.
Net income increased to $11.1 million or $0.64 per share in the fourth quarter as compared to $8.3 million or $0.48 per share in the fourth quarter of 2013, this exceeds analysts consensus estimate by two pennies. Foreign exchange rates negatively impacted net income by $0.5 million or $0.03 per share in the fourth quarter.
On an annual basis, net income increased to $33.6 million or $1.93 per share in 2014 as compared to $21.5 million or $1.25 per share in 2013. Excluding the discreet tax benefit of $4.5 million, net income in 2014 would have been $29.1 million or $1.67 per share.
Foreign exchange rates negatively impacted net income by $0.9 million or $0.05 per share in 2014. I will now briefly discuss a few balance sheet and cash flow items. Cash and short-term investments were $174.3 million at the end of the year, as compared to $189.6 million at the end of 2013.
Accounts receivable was $84 million at the end of the year as compared to $66.3 million at the end of 2013. Day sales outstanding increased to 74 days at the end of the year from 67 at the end of 2013, primarily related to a modest increase in terms. Inventories were $80 million at the end of the year as compared to $68 million at the end of 2013.
This increase of $12 million was primarily related to an increase in finished goods of $6.2 million and raw materials of $4.5 million.
We consciously increased raw materials and finished goods inventory to support our sales growth, new products and an increase in our safety stock to cover any risks related to higher laser scanner demand, ERP implementation and the Exton, Pennsylvania relocation.
Total liabilities were $81.6 million at the end of the year as compared to $75.5 million at the end of 2013. This increase was due to an increase in accrued liabilities primarily from higher compensation and benefits on higher headcount. Finally, I’ll conclude with some statistics regarding our headcount numbers.
Worldwide sales and marketing headcount increased by 57 or 13% to 490 at the end of the year from 433 at the end of 2013 and global account manager headcount decreased by 2% or 1% to 219 at the end of the year. On a regional basis in the Americas account managers increased by 12% or 16% to 87.
In the Europe account managers decreased by 4% or 6% to 59 and in Asia account managers decreased by 10% or 12% to 73. We had 1,223 employees at the end of the year as compared to 1,078 at the end of 2013, an increase of 145 employees or 13%.
Geographically, we now have 502 employees in the Americas, 426 employees in the Europe and 290 employees in Asia. I’ll now hand the call over to Jay for his comments..
Thanks Peter. We had a great fourth quarter, as the FARO team continued our strong sales trend by capitalizing on solid market conditions and leveraging our market leading products to break $100 million in sales in a quarter for the first time. All regions focused on the vertical market strategies to exceed the sales targets.
Despite strong foreign exchange challenges and all product lines exceeded their unit sales growth targets. As we grew the top line by 16%, our team is discipline to held gross margin at 55%, maintained operating margin even with the higher reinvestment in R&D and infrastructure and delivered 30% net income growth to our shareholders.
I am proud of the hard work dedication and execution of the FARO team to deliver fourth quarter results in line with our long-term mid-teens growth model.
The strong sales and income growth for the fourth quarter caps an outstanding year for the company with the release of new market leading products and improved market conditions we rebounded sharply from the modest 7% sales growth we had in 2013 to report record sales growth in 2014 as 17% or 19% excluding the impact of our currency.
We maintained gross margin above 55%, increased operating margin in the year 11% and grew net income by 56% or 36% excluding the Q3 discrete tax benefit. Beyond these financial metric though our team met or exceeded it’s short-term and longer-term strategic objectives in 2014 across all areas of the company.
The FARO mid-teens growth model is sustained by reinvesting in research and development in order to launch cutting edge disruptive new products. In 2014, we increased R&D spending by 23% to $27.5 million or 8% of sales and launch several new exciting products as a result. The first is the FARO focused X 130 Laser Scanner in March.
The X 130 provides an ultra portable easy-to-use and lower cost offering to accelerate adoption of laser scanning technology. This mid-range laser scanner incorporates all the technology advancements we achieved with the longer range X 330 launched in the fall of 2013, but at a lower entry price for our customers. Next was CAM2 Measure 10.3 in April.
This software package upgrade improved these experiences for FARO, Arm and Laser Tracker customers and accelerated the measurement process with new features such as cross sections analysis, one cloud registration, deviation markers and enhanced live color scanning. In June we released SCENE 5.3 and WebShare Cloud 1.5.
This collective software upgrade provided our FARO Focus Laser Scanner customers with new processes to make 3D documentation projects faster more efficient and more effective.
In September we released the Laser Line Probe HD, the launch of this world class laser line probe set a new standard in 3D laser scanning technology, enabling the FARO Edge ScanArm HD to deliver rapid point cloud collection with higher resolution and accuracy.
The new LLP is receiving strong customer approval and it increased our average Arm sales price in the fourth quarter.
Finally we released CAM2 SmartInspect 1.2 in November; this software reinforces FARO’s continued commitment to simplify 3D measurement as the industries first full featured portable software for basic geometric measurements without CAD for Arms Laser Trackers.
While delivering record sales and accelerating new product introductions, the FARO team also achieved key milestones on time and on budget on four major 2014 strategic growth and infrastructure initiatives.
In April the Americas team opened a new service center in Mexico near Monterrey to provide Latin America with reduced turnaround times and lower transportation cost for annual product calibrations and repairs.
At the end of the third quarter, the Americas team achieved the major milestone by going live with their new ERP system and completing the first leg of the company’s global ERP implementation.
At the start of the fourth quarter, Europe added a second production shift at its Stuttgart manufacturing facility to meet the rapid increase in demand for the Focus Laser Scanner and to prepare for the recently announced new handheld FARO Freestyle.
And lastly in the fourth quarter, we opened our new Exton, Pennsylvania technical center to modernize our Laser Tracker and Imager manufacturing ensuring substantial manufacturing capacity for these product lines and upgrading our optical metrology research capability.
To realize the company’s long-term growth targets, we plan to augment our internal product development with external acquisitions that fit the FARO’s culture, provide offerings to expand in the key vertical markets and can be executed at sensible purchase price multiples.
At the end of July, we executed on this strategy by acquiring the CAD Zone a leading software provider in the Law Enforcement, Accident and Crime Scene Reconstruction market. This acquisition partners CAD Zone’s point cloud software with FARO’s marketing leading laser scanning technology to provide turnkey solutions for law enforcement.
In the third quarter the FARO team worked with CAD Zone to integrate the acquisition into the FARO brand family and provided the ad resources to launch CAD Zones new version 10 software suites at the end of September. With our solid 2014 results, we got 2015 started by launching the FARO Freestyle, a new hand-held Laser Scanner.
This new product expands our 3D documentation portfolio to further penetrate our two target vertical markets, Law Enforcement and Architecture, Engineering, and Construction was easy to use hand-held Laser Scanner offers unprecedented real time visualization three meters of range and captures up to 88,000 points per second with accuracy better than 1 millimeter at an affordable price.
On February 5, FARO continued the execution of our law enforcement vertical market strategy by acquiring ARAS 360 Technologies, a global leader an accident and crime reconstruction, simulation and animation software.
ARAS newest product Reality has a 64-bit crash and crime software solution that enables customers to quickly generate precise diagrams with stunning details and graphic realism. ARAS 360 combined with CAD Zone creates complementary software solutions that integrate with FARO Laser Scanning Technology to provide a turnkey solutions to law enforcement.
All of FARO’s 1200 plus employees around the world are working to maintain – are working to the company’s short-term and strategic goals. FARO’s core financial strategy remains focused on delivering mid-teens long-term revenue growth through a commitment to solid reinvestment research and development.
As demonstrated by our two acquisitions over the past six months we will look beyond our research labs where it make sense to expand our product offerings with external acquisitions. Our sales and marketing teams are positioned to further penetrate our key vertical markets.
And our business leadership teams are focused on margins and operating expenses. Our research and development teams continue to work aggressively on new product launches.
The entire organization is committed to completing the global implementation of our new ERP system and realizing the operational efficiency of single global enterprise system by the end of 2015. In closing, the FARO team delivered on its 2014 goals and has positioned to execute in the year ahead.
I would like to thank all of you for your continued support and particularly the FARO team for their dedication for the company mission. I’ll now open the call to questions..
[Operator Instructions] We will take our first question from Ben Hearnsberger of Stephens. Your line is open. Please go ahead..
Hi, guys thanks for taking my question..
Good morning Ben..
Good morning.
A couple of housekeeping questions, first I know you mentioned sales through distribution, but can you give us scanner sales through distribution?.
Yes, Ben, so the laser scanner sales through distribution were 55.5% in Q4 and for the full-year 55.9%..
Okay, thank you.
And then can you give us the attach rate of the new LLP product?.
I do not have that number Ben, for the quarter..
Okay, all right. So maybe stepping back on the G&A expense it was up a $1.5 million year-over-year and a little bit higher than we expected, can you kind of breakout how much of that incremental expense is transitory and then how much is necessary to kind of support the high growth that you guys are seeing..
Yes, so there was three - on the OpEx there was three primary drivers in Q4 of that expense that I would say are less kind of running the business and more I won’t say one-time, but extraordinary type expenses. So the ERP implementation represented about $700,000 of expense in Q4 with the go live of the Americas.
We did have a charge of approximately $0.5 million for severance in Europe, but majority of that related to the MD that we removed in October. And then we also had some increase sales incentives of approximately $600,000 that related to the year-end push and the acceleration in some of the commission plans..
Okay, thank you.
And then my last question on the refresh cycle, is the expectation that will continue to see R&D expense at the high end of that range as this refresh cycle continues to play out this year and then we’ll see it come down next year after we get passed the refresh cycle?.
I think that’s the right way to look at it. Obviously, you are right, 5% to 7% has been our target range historically in the last two years, we’ve run above that because we are on a pretty aggressive cycle right now. I think you would expect to see that over the course of 2015 and then probably starts to slowly taper back in 2016.
We still increase the overall R&D spend obviously, then we’re going to continue and invest there 50% on a sales basis will probably start to come down..
Great. Thank you, gentlemen..
We will go next to Mark Jordan of Noble Financial. Your line is open. Please go ahead..
Thank you, good morning.
Question first on income taxes and tax rates, I think we [indiscernible] viewed the company’s roughly at 27% rate, obviously backing up a one-time, last year it was 22.4% with the R&D tax credits from a planning standpoint, where should we be looking for tax rates for 2015?.
Yes, Mark so obviously we - one of the components that had in Q4 was the U.S. tax credit and that retro back to January 1. That they only extended that to the end of 2014, so we don’t know whether that will extend in the 2015.
So the way we are thinking about the tax is going forward 22% is artificially low, but I would say that with some of the changes that we’ve made in our transfer pricing and our IT relationships this year that we previously talked about. The right way to think about tax is probably in the 24% to 26% range..
Okay.
Also the ERP implementation certainly had 700,000 in the fourth quarter, should we assume that and how much will that go through 2014, excuse me 2015?.
So we will see some elevated expenses in 2015 for the Europe and the Asia implementations. So you should expect to see a slight elevation there for 2015 dropping off in 2016..
Okay. Final question for me the service margin in the fourth quarter was down, you stated that you put more infrastructure in place to be more response to the customers worldwide.
Should we look at the service gross margin on a normalized basis more in 32% to 35% range versus I guess in prior years you didn’t up many times above that range?.
I think that’s probably right in the 32% to 35% that’s probably the right new norm at least for the foreseeable future as what we are continuing to invest in that area around the globe..
Okay.
And then finally, maybe a question or suggestion you’ve been making some significant investments in a law enforcement marketplace for the couple of software acquisitions would you quantify over time that revenues drive from that market segments as it would include those I guess Tracker and also software sales?.
Yes, I think Mark at some point in the future without saying when, but at some point I think you will see us start looking at you know what number one was just the opportunity by each of the verticals and we talked a bit about law enforcement we think at least sort of $300 million per year type of opportunity or more and it really depends obviously on the adoption of shifting from 2D technology to 3D technology in that space.
When we feel like what the right point in time the ability to describe or the willingness I shouldn’t say to describe the revenue generated in the primary segments AEC, law enforcement, auto, aerospace it may make some sense and we’ll do at a point where we feel like its critical to help understand the business model on a go forward basis..
Okay. Thank you..
Thanks Mark..
We will go next to Bobby Burleson of Canaccord Genuity. Your line is open, please go ahead..
Hi, congratulations on the strong end to 2014..
Thanks Bobby..
Thank you..
So I was just wondering a couple of things, are you seeing any signs of changing kind of pricing environment from competition out of Europe given the extreme moves we’ve seen in FX..
We have not which is interesting and just in Europe in general we’ve had a lot of people who were - we hear it from other people are you worried about Europe in general as well and our answer would be no, we’ve not seen anything there.
The one area where I would say there is a little bit of pricing pressure in tracker which we’ve seen last year too, its not so much price pressure as a standalone event, it is more attached to our primary competitor has a high-end tracker and low-end tracker and occasionally we will be in a transaction where they are offering their low-end tracker and if it’s a strategic account, we will occasionally move our price in the high-end to maintain the account and in many cases we will not move at all, because we know the lower end tracker is not sufficient for the customers need.
So its not exactly price pressure, it’s a little bit artificially driven based on the product offering, but other than that I think the pricing environment has been relatively stable even with the FX and obviously as we indicated the scan arms for the new HD LLP, the impact on price that it had for the Arm in Q4 was an increase in price in Q4 because of the attach rate and the value of that product and the associated gross margin.
So..
Right, right. Okay great. And then just second half a couple of more quick ones.
The mid-teens kind of revenue growth long-term target, can we put that in context with the FX headwinds this year, are you seeing enough growth acceleration where that type of a growth target is necessarily in jeopardy near-term because of FX or should we kind of hair cut our expectations?.
I think generally speaking the mid-teens are the right number to think about just period, we still view it number one as an organic growth rate, so we would anticipate the ability to achieve mid-teens without acquisitions.
I think clearly there is some FX headwind, there continues to be some that we are facing this year, obviously we faced it last year and yet still we’re able to recover.
So I think the team is keenly aware, in fact even more so now perhaps than even particularly in Europe of how to respond, how to respond more quickly as you see the FX movement to ensure that the dollar value of their revenue for the quarter matches our expectations.
In the past we may not have been quite as effective at making that adjustment real time, so to speak and catching up..
Okay great. And just one last quick one, when we think about previous caller asked about software, when we think about 3D measurement software metrology kind of platform level software that’s out there.
Could something like that within FARO type business help you become more strategic with your customers like I know you make a lot of sales at sort of the shop floor level very diversified by revenue.
But how would a software platform help you guys in terms of a broader strategy with growth and with their customers?.
Yes, so on the 3D documentation side obviously that’s a little different the strategy is very focused on application level software to tail at a product to the verticals and there are lots of other opportunities out there to do similar or create similar packages for the verticals just like we did in law enforcement.
On the metrology side there are when you look at ourselves and our competition. There is no real sort of enterprise level, lack of better word software platform that drives a change in behavior or strategy for customers that we have seen..
Okay..
We both have software that runs our devices, our primary competitor has software that runs more than just their own devices. The decision making though what we see regardless is still at sort of that lower level.
If you had a software platform that was more integrated say to the entire manufacturing process that would probably elevate it slightly the decision making. But then it is a different connection in terms of what the product offering that needs to attach that as well..
Okay so any kind of build out of more kind of cradle-to-grave types metrology software platform might require additional hardware on your end to really fulfill the synergies?.
It might to make it most effective I think that’s right and while it’s something we would look at. I am a never say, never type of guy, we also know that within at least metrology it is not the primarily driver for adoption with our customers either.
We test, we stress tested that last summer, software is important but it is not a standalone decision driver..
Okay great thanks for answering my questions..
Thank you..
We will go next to Brad Moss of Needham & Company. Your line is open. Please go ahead..
Hey good morning Jay and Peter. It’s Brad in for Jim.
Just first question Peter just wondering if there is any meaningful impact on gross margin from FX or is it mainly just a service infrastructure in the inventory charge?.
It’s primarily just what you name, so we are relatively well hedged on the gross margin side. We saw a little bit as it relates to the Yen, because we don’t have as much of a cost base there, but it’s primarily hedged..
Okay, and then Jay.
Can you just talk about the total demand as you went through Q4 in your major automotive and aerospace verticals and if you’ve seen any change there in metrology in Q1?.
We won’t comment on Q1 obviously, but relative to Q4 the demand was really strong across all of the vertical. So if you look at metrology, the primary verticals are auto, aerospace and what we call MMA, which is all the Metalworking Machining shops around the world.
Demand was good in all of them, the verticals remain very strong, auto through 2014 certainly got stronger and stronger through the year, so which is positive. And if you look at metrology, while we don’t disclose obviously revenue growth by metrology versus 3D Doc or by product line, what I can say is that the unit growth was extraordinarily strong.
So our revenue growth was strong, unit growth was very strong recognizing there is a little bit of that price pressure that I have mentioned on the tracker side offset by improvement in the arm price, because of the LLP. So it was very good come out of the quarter..
Great.
And then just last one from me given these recent investor acquisition in law enforcement market, can you just talk about the outlook there in 2015?.
Yes, so it’s still a small piece of the company revenue in total, obviously we think there is a lot of potential in that market given the two acquisitions.
The things that excite me about the space are number one the need for the technology is there, if you think about crash investigations, crime scene investigations, they have been using a variety of different technologies for decades and they are critical to proving the case so to speak all the way up through the court level.
Point cloud data continues to become more and more accepted in the court room, which of course has a pretty quick trickle down into law enforcement. And at the same time there is two other things happening. Number one is it’s not a just specialty law enforcement groups anymore.
So you’ve got law enforcement agencies such as the one in Boston, just one example who have now bought several laser scanners and Boston is a well regarded police force as a trendsetter for a lack better work amongst other law enforcement agency.
So they see a law enforcement group like that make a move into 3D laser scanning and of course it makes everybody open their eye a little bit further.
And then at the same time many of the individual experts including the couple of the ones that we work with on a contract basis are spending substantial amounts of time doing nothing, but delivering training so to speak to other law enforcement agencies as to why 3D scanning is important and how it can be used in the field, what the benefit is and they’re spending more time then ever doing these lectures then they have in the past.
And because the vertical itself people talk so openly amongst each other and across the different organizations the words spreads much more quickly in some cases than it does in others. So well still in early adaptor space for sure, the momentum is very exciting there..
Great, thanks guys..
Thank you..
We will go next to Patrick Newton of Stifel. Your line is open. Please go ahead..
Great, thank you for taking my questions. This is Rob Richardson on for Patrick this morning.
I guess what kind of question to clarify the customer concentration was the 2.2% or 5% customer was that for the full-year or was that for the fourth quarter?.
That was for the full-year..
Okay, can you - what are those numbers for the fourth quarter?.
I’m going to have to look those up for you I don’t have them right in front of me. Similar range I mean we typically are always in that 35% to 40% range..
Okay, thanks.
And then just kind of talking about the distribution channel I mean obviously some decrease in the percentage of sales have gone through distributor sequentially and I know you had mentioned previously kind of having this 19 targeted distributors that really looking to sign up and I think last update about 17 that you had signed on and just wondering if there was any change to that in the quarter?.
I don’t know specifically in the quarter, but what I can tell you as we’ve grow in our distribution channel pretty significantly at 15% in 2014 as far as the number of distributors that we have across the globe..
Okay..
Independent distributor population and percentage continues to grow..
Gotcha.
All right, and I guess that we sort of think about your typical seasonality I mean are you anticipating the first quarter looking like sort of typically seasonal quarter or have some of your new product launches and acquisitions impact what use kind of normal seasonal trends?.
So again we don’t give specific guidance on the quarters or the year, but our seasonality we would expect on a regular basis there is nothing that we would anticipate there..
Okay. Great and I guess kind of one last question. Looking at gross margin for the quarter down pretty substantially sequentially, it looks like that’s related to the 1.5 million in inventory charges and then through this new service center in Mexico.
Just want to get your thoughts on how much of that impact for this quarter is should continue and how much of it was sort of the one time impact that you saw in the fourth quarter..
Yes, again I can’t specifically about this quarter, but what I will say is that the 1.5 million was the primary drive to y, if you script that out, we would have been net about 56.5% on a margin basis and that was something that was out of the ordinary..
Got you. Great, all right and thank you for the color..
Thank you..
[Operator Instructions] We will go next to Rob Mason of Robert W. Baird. Your line is open, please go ahead..
Good morning Jay and Peter.
Maybe just a follow-up on the last question with the gross margin, the product gross margin, if you do adjust for the inventory it looks like we trimmed it about 60.5% through the last three quarters, as you think about the new Exton facility coming on, the new Freestyle product, the acquisitions can you give us any feel for the influence, the puts and takes that would have on product gross margin as we go forward..
So I think on that question, again without being specific on a guidance perspective, we’ve continued to say that the right way to think about our gross margins are in that 55 to 57 as you said. There are some puts and takes to that.
We’ve got some incremental costs that are coming on board, but we also acquired the two software companies which typically would have higher gross margins and as we’ve said in the past, we’re continuing to engineer costs out of our metrology product. So again, I don’t think there is material swingings either way..
Okay. Okay.
Jay how would you think about your expectations for direct sales account manager headcount in 2015?.
Yes I think generally speaking sort of a mid-teen that you saw this past year, I think for the past year the sales force grew about 13% in total. I think that’s still you know whether its 13% or 14%, 15% its going to be in that range that’s the right number to think about.
There is still substantial opportunity to split territories in the field particularly on the metrology side. But we are seeing growth obviously on 3D documentation two. So as much as we have had a pretty meaningful increase and distributors this year as Peter just indicated for Laser Scanner.
We also had an increase in account managers to and going into 2015 the same thing. This is example in the first quarter alone we added I think it was four more law enforcements.
Account managers just for the Americas, just for selling scanners into law enforcement because that marketplace is a little different in terms of distribution versus reliance on the direct touch.
So if we are targeting still mid-teens growth as a company you would expect the overall sales organization that grow probably close to that maybe a little bit below the run rate of the sales around but its going to be close..
Is – may be I have my numbers in correct. But you finish the year the account managers at 219 I had actually last year finishing at 221 was that maybe my numbers are off. But I mean it shows you were flat or maybe down a little bit..
Yes, no I think that’s right I think we were down one for say down two people….
We were down two people Jay..
Yes, so again sometimes - it’s just transition you’ve got turnover in the sales force as always. And so we are constantly back fill and the folks have departed and adding new. So I think if you looked at it on a regional basis I think we were up in the Americas we were down in Europe.
And we were down in Asia and sometimes that’s just timing of when the new ones come on. And again we’re pretty specific about the profile we look for in account managers, our history has shown that if it doesn’t – if a person doesn’t match the profile really closely they have a very difficult time in our sales organization.
And so you will find the sales leadership team they will pass for a quarter or two on getting somebody if they know they just can’t find the right ones..
Sure. Sure and maybe lastly appreciate the added detail disclosure in the 10-K around the product categories, but did you have a scanner unit growth number I didn’t catch that..
We did not give a specific well in my script we said it was greater than 30%..
For the year?.
That was for the quarter. We did not give a specific growth number for the year..
Okay. Okay and Peter just last the ERP you mentioned would run into 2015 with Europe and Asia implementations coming.
Should we think that’s similar $700,000 a quarter type impact?.
We haven’t given specific guidance on what those numbers are..
But you think you’ll be finished in 2015..
We’ll absolutely, the plan is to be finished by the end of 2015..
Okay, all right. Very good quarter. Thank you..
Thanks, Rob..
We will go next to Hendi Susanto of Gabelli & Company. Your line is open. Please go ahead..
Good morning and congrats on the strong Q4 results..
Thanks, Hendi..
First question is for Peter.
How should we think of negative currency impact in 2015 in terms of besides the hedge that you mentioned earlier? Should we expect to see some cost absorption and pricing in increases to?.
Jay, do you want to talk to the price increase question..
Yes, so I think, price increase I think on the onside, particularly the first couple of quarters here with the - on the HD LLP didn’t come out to the very end of Q3.
So on a comp basis, it takes Q3 of this year to have year-over-year to be similar, but we clearly are seeing some price increase in arm, with a scan arm owned by itself it’s still fairly consistent at the moderately lower levels that were pushed to over the last two years.
Scan arm is definitely higher though because of the clear value proposition for customers with that new device. I mean it is one of a kind in the market from everything we’ve seen.
Tracker, we would expect to see sort of modest pressure and again it’s only in those instances that I talked about before where we maybe competing with our high end tracker against a low end. High-end to high-end in those situations are pretty close.
And then laser scanner we are still the market leader on price by a meaningful amount, so there is no price pressure there other than what we may do to ourselves.
And on the freestyle again it’s sort of a one of a kind device, the price is extraordinarily low already and there is some comparable products, but they really aren’t in the same sweet spot that FARO is without the same distribution network. So I suspect that price is probably stable before it used to be..
Yes, and then to go a little bit deeper on the OpEx impact. So the question earlier looked a little bit at the details.
And there is some impact on that gross margin line, the gross profit impacted not to the level of the $6 million that we saw on the top line, but we do have some impact on the gross margin that’s being offset by reduced expenses as it relates to Europe SG&A.
And so when you think about the bottom line, we still have very low exposure, primarily related to the Brazilian Real and the Japanese Yen as those two currencies have moved. So again top line we have some FX headwinds for sure given where the euro and ENR, but on the bottom line well it’s not zero it’s less meaningful on the revenue line..
Got it.
And then Jay, in 2014 Analyst Day you mentioned a number of potentials still the expansion maybe now your latest thought on that after your recent acquisitions, do you still see those filled as potential expansion and additionally do you see some attachment to the drawn market down the line?.
On which market down the line sorry..
Drawn.
Oh drawn, yes so the vertical markets obviously I mentioned earlier in the call we have our big fives that we get a meaningful amount of revenue from today that’s auto, aerospace and MMA over in the metrology side, AEC and law enforcement for 3D documentation. There are lots of other verticals that are very interesting there as well though.
So in the metrology side in Asia in particularly we do decent amount in ship building and we do a decent amount in agriculture and farm equipment, construction equipment folks like that. All of those are still meaningful and we continue to push and chase.
It’s a little different in metrology because while the verticals are interesting because of just understanding what’s going on in the vertical, the applications which is different from 3D documentation, sheet metal is sheet metal is sheet metal regardless of whether you are in the aerospace facility or an automotive plant the way they used our technology is very similar across all of them.
It’s different in 2D doc for sure, the devices, the hardware can be the same, but the work flows in the software is very different and the expectations are very different.
So others that we continue to be interested in over on the 2D documentation side include mining or certainly doing work in mining particularly outdoor versus down in the mine itself, your prior measurement and things like that.
We continue to be very interested in insurance and while there is not meaningful traction the continued momentum in law enforcement tells me that at some point we probably see that insurance play that we’re looking at for a long time. And a variety of others your forestry has had some applications in forestry login and things like that.
It’s a tricky one so we are still scratching the surface. So we look at and say that dedicated focus and attention a lot of that right now was on AEC and law enforcement and then we are doing a lot of better work, lot of experimentation on the others to find out where the sweat spot maybe..
Got it..
And in the June market it’s too early to sell, we do have - we’ve got some examples particularly with [indiscernible] so it’s a little different with the moving zone that’s going at high speed, but the ability to the scanners light enough we can elevate it with moderately sized octocopter any type of helicopter like that you know a Drone copter and we have had customers who have used it that way, it’s a little tricky depending on the stability of the Drone when its in the air.
As we continue to improve scanning speed and range there could be a play there at 330 meters its got to be a pretty low flying drone to make it useful at this point, but you know overtime there could be some opportunity, we don’t expect it to be anywhere near as big as what we’re doing in direct sale into the construction space or the surveying space you know as we do today..
Thank you. End of Q&A.
There are no further questions at this time. I would like to go ahead and turn the call over to the management for closing remarks..
Very good. Thank you very much everybody for the call today. We look forward to updating you again at the end of Q1..
And this concludes today’s teleconference. You may now disconnect..