Victor Allgeier - Investor Relations, TTC Group Jay Freeland - President and Chief Executive Officer Bob Seidel - Vice President, Corporate FP&A.

Ben Hearnsberger - Stephens Inc. Holden Lewis - Oppenheimer Mark Jordan - Noble Financial Jim Ricchiuti - Needham & Company Ben Rose - Battle Road Research Patrick Newton - Stifel, Nicolaus Hendi Susanto - Gabelli & Company Robert Mason - Robert W. Baird.

Good morning everyone and welcome to FARO Technologies Conference Call in conjunction with its First Quarter 2015 Earnings Release. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during a question-and-answer session.

[Operator Instructions] For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead..

Thank you and good morning everyone. My name is Vic Allgeier the TTC Group, FARO's Investor Relations firm. Yesterday, after the market closed FARO released its first quarter 2015 results. By now you should have received a copy of the press release. If you have not received a copy, please call Nancy Setteducati at 407-333-9911.

The press release is also available on FARO's website at www.faro.com. Representing the Company today are Jay Freeland, President and Chief Executive Officer; and Bob Seidel, Vice President, Corporate FP&A. Jay and Bob will deliver prepared remarks first, and then will be available for questions.

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

It is possible that the Company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are set forth in yesterday's press release and in the Company's Form 10-K for the year ended December 31, 2014.

For comparability, where indicated, results exclude the impact of foreign currency transactions which is a non-GAAP measure. I will now turn the call over to Bob..

Thank you Vic and good morning everyone. Our reported sales for the first quarter of 2015 were $69.9 million, a decrease of $8.5 million or 5% as compared to $73.4 million in the first quarter of 2014.

Excluding approximately $7.0 million of unfavorable foreign exchange impacts, primarily from the euro and yen, relative to the US dollar, our first quarter 2015 year-over-year sales growth would have been 5%. We grew product sales in Japan and Brazil represented other key drivers impacting our year-over-year sales growth in the quarter.

Our regional sales and marketing teams reported lower capital spending in Japan, given limited government stimulus bonds available at the start of 2015. Brazil sales were negatively impacted by the Petrobras investigation, which has unfortunately led to industrial bankruptcies, unemployment, and decreased capital spending.

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

Our Focus3D laser scanner delivered 23% unit sales growth globally over the same quarter last year. Market demand for our new FARO Freestyle3D again held laser scanner significant exceeded our expectations. Turning to total product and service sales.

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

The 23% increase in unit sales of Focus 3D laser scanner and strong launch of FARO Freestyle 3D was offset by lower unit sales of Arm, particularly in Europe and laser tracker particularly in Americas and Asia. First quarter 2015 sales to distribution represented 9.9% of total sales, up 1.8 percentage points from the first quarter 2014.

In the first quarter of 2015, total service revenue was $14.9 million, an increase of $1.3 million or 10% as compared to $13.6 million in the prior year period excluding approximately $1.5 million of FX headwinds.

Service revenue would have posted solid 21% year-over-year growth driven mostly by a strong increase in customer service and warranty revenue in the Americas region as our install base continues to grow. Turning to sales by region.

In the Americas, sales in the first quarter were $30.4 million, an increase of $0.8 million or 3% as compared to $29.6 million in the first quarter of 2014. Excluding approximately $0.5 million of unfavorable exchange rate impacts, the Americas’ year-over-year sales growth would have been 5%.

This increase was mainly driven by higher service revenue and a higher Arm average selling price partially offset by the lower laser tracker unit sales. In Europe, sales in the first quarter were $22.2 million, a decrease of $1.6 million or 7% as compared to $23.8 million in the first quarter of 2014.

Excluding the negative impact of a $5.4 million due to the euro exchange rate, Europe’s year-over-year sales growth would have been 16%.

The European team delivered strong unit sales growth in laser tracker of 64%, keyed by significant wins in the euro space vertical as well as laser scanner of 48% primarily driven by continued expansion of our distribution network.

In Asia, sales in the first quarter were $17.3 million, a decrease of $2.6 million or 13%, as compared to $19.9 million in the first quarter of 2014. Foreign exchange rates primarily again negatively impacted sales by $1.1 million in the first quarter, decreasing sales growth by 5%.

The sales decrease was mostly driven by lower unit sales of laser tracker, a weaker aerospace demand, a decline in Arm unit sales and lower capital spending in Japan. Turning to new orders. First quarter 2015 new order bookings of $69.1 million, decreased by $1.8 million or 3% from $70.9 million in the first quarter of 2014.

Excluding approximately $7.0 million of unfavorable foreign exchange impacts, new order bookings would have increased approximately 7% as compared to the same quarter of last year. This represents a book-to-bill ratio of 0.99, which is consistent with our long-term target ratio of 1 to 1.

In the Americas, orders in the first quarter were $30.1 million, an increase of $1.0 million or 3% as compared to the first quarter of 2014. In Europe, orders in the first quarter were $23.2 million, a decrease of $1.3 million or 5% as compared to the first quarter of 2014.

Excluding approximately $5.5 million of unfavorable foreign exchange impact, Europe orders would have increased by 17%. In Asia, orders in the first quarter were $15.8 million, a decrease of $1.5 million or 9% as compared to the first quarter of 2014.

Excluding approximately $1.0 million of unfavorable foreign exchange impacts, Asia orders would have decreased by 3%. Turning now to gross profit margin.

In the first quarter of 2015, gross profits were $39.6 million, a decrease of $0.5 million or 1%, primarily driven by lower unit sales of Arm and laser tracker, partially offset by an increase in gross margin. Our gross margin of 56.6% increased 2.0 percentage points as compared to 54.6% in the prior year period.

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

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

Selling and marketing expenses in the first quarter were $19.1 million, or 27.3% of sales as compared to $17.4 million or 23.8% of sales in the first quarter of 2014.

This increase of $1.7 million or 10% is mostly related to headcount addition and advertising costs to support and warranty the FARO Freestyle3D acquisition in a vertical market approach.

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

Research and development expenses in the first quarter were $6.4 million or 9.1% of sales, as compared to $5.4 million or 7.4% of sales in the first quarter of 2014. This increase of $1.0 million or 17% is mainly related to headcount additions and higher project materials.

We remained dedicated to reinvesting in the research and development and innovate new products to disrupt the marketplace as we did recently with the launch of the new FARO Freestyle3D in January. Turning to profitability.

Operating income in the first quarter was $1.9 million, a decrease of $5.1 million or 73% as compared to the first quarter of 2014. Our sales decline of $3.4 million was partially offset by a 2.0 percentage point increase in gross margin to have a net impact of only $0.5 million on operating income.

The operating income decrease is primarily driven by an increase of $4.6 million to mostly fixed operating expenses, strategically aimed to build the infrastructure for growth, employees and people, our Exton facility, research lab and an enterprise resource planning system.

Our first quarter operating margin of 2.7%, which has a reminder relative to seasonality, is generally the lowest quarter for the fiscal year, declined 6.8 percentage points versus the first quarter of 2014. Other expense was $1.3 million in the first quarter of 2015 as compared to $0.1 million in the first quarter of 2014.

This increase of $1.2 million was mostly a result of the rapid appreciation in the Swiss Franc relative to the US dollar and the value of our inter-company account balances. Income tax expense in the first quarter of 2015 was a benefit of $0.1 million as compared to an expense of $1.8 million in the same period last year.

The favorable decrease of $1.9 million relates primarily to lower pre-tax income and a discrete tax benefit of $0.2 million in 2015 from the exercise of certain employee stock options. The effective tax rate decreased to a benefit of 16.9% in this quarter, as compared to the expense 27% in the first quarter of 2014.

Net income decreased to $0.7 million, or $0.04 per share, in the first quarter of 2015 as compared to $5.0 million, or $0.29 per share in the first quarter of 2014. I will now briefly discuss a few balance sheet and cash flow items.

Cash and short-term investments were $161.1 million at the end of the first quarter of 2015 as compared to $174.3 million as of December 31, 2014. The decrease in cash was mostly related to $12.0 million to acquire ARAS 360 and kubit.

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

Inventories were $88.1 million at the end of first quarter of 2015 as compared to $80.0 million as of December 31, 2014.

This increase of $8.1 million was primarily related to an increase in finished goods of $5.5 million on the lower unit sales, while demonstration and service inventory was up $2.3 million due to the recent launch of Laser Line Probe HD and FARO Freestyle3D as well as account manager headcount growth.

Finally, I will conclude with our headcount numbers. We have 1308 employees at the end of first quarter of 2015 representing a year-over-year increase of 196 employees or 18%. Geographically, we now have 523 employees in the Americas, 481 in Europe and 304 in Asia.

Worldwide sales and marketing headcount increased by 66 or 14% to 523 at the end of first quarter of 2015. Account manager headcount increased by 15 or 7% to 233 at the end of first quarter of 2015. On a regional basis, in the Americas, account managers increased by 11 or 14% to 87.

In Europe, account mangers increased by 6 or 9% to 74 and in Asia, account managers decreased by 2, or 3% to 72. I’ll now hand the call over to Jay for his comments. .

Thanks Bob. Needless to say, sales growth of 5% excluding currency impacts is below our internal long-term goal. We faced difficult macroeconomic challenges against our top-line results in the first quarter.

Our account managers encountered significant challenges in closing deals in the quarter with customers opting to defer capital spending on uncertain business outlooks.

While we expected modest exposure in Europe due to weakness in the euro during the first quarter of last year, decline in the euro during the first quarter was substantially larger than anticipated. When combined with rapidly declining economies in Japan and Brazil, the business environment in the first quarter was soft.

Even though market demand for FARO’s products remained strong, getting purchase orders approved by our customers proved to be very difficult.

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

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

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

Our Arm and laser tracker unit sales have been directly impacted by our manufacturing customers deferring our capital spending due to the same macroeconomic headwinds that we face. As compared to the first quarter of 2014, our Arm unit sales are down 8% and our laser tracker unit sales are down 25%.

These metrology products are mostly sold in the manufacturing companies within the automotive, aerospace, machining and metal working vertical markets. We will continue to make every effort to close deals deferred from the first quarter.

However, we do expect slower capital decision-making processes to continue in the near-term given the uncertain current macroeconomic climate in several of our key geographies. So let’s talk about where the positive signs are for FARO.

First, our Focus3D laser scanner posted 23% unit sales growth in the quarter demonstrating continued strong market acceptance.

We continue to expand our direct sales force and distributor network across the globe to drive sales growth and with the recent acquisitions of ARAS 360 and kubit; FARO is better positioned to penetrate our targeted AEC and law enforcement vertical markets by now offering the turnkey hardware and software solutions to the customer.

Second, the customer demand for our new hand-held laser scanner, the FARO Freestyle3d exceeded our expectations. We are excited by the strong initial market reception to this disrupted new product.

Third, our Arm customers continue to provide highly positive feedback on the improved scanning performance with the blue light design of our Laser Line Probe HD. As a sales initiative, we are actively reaching out to owners of older generation FARO Laser Line Probes to demonstrate the blue light advantage and image clarity and scan type.

And our new Laser Line Probe HD continues to increase our Arm average selling price and gross margin. Gross margin has remained stable in the trailing quarters and even increased this quarter.

Our balance sheet is extremely strong with no debt and over $161 million in cash and treasury builds; we continue to view our cash on hand as a critical element to leverage our growth whether it’s your investments in additional account managers to further penetrate vertical markets, strong R&D reinvestment or attractive acquisitions.

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

In response to our first quarter sales decline, we implemented deliberate cost-reduction initiatives that decreased our cost base through workforce reductions and non-essential spending cuts where appropriate.

Our goal is align our cost structure to expected sales volume for the rest of the year, creating an appropriate amount as leverage without sacrificing the long-term strategic position of the company.

Despite the expected sales challenges, our strong cash position allows us to continue solid reinvestment in R&D to accelerate the development of disrupted products in the pipeline; we’ll continue to hire account managers for growing geographies and vertical markets.

We will be taking cost out of our business but with the aim of doing so in a measured manner, so as not to impact product development, customer service quality, or long-term sales growth. We have consistently communicated a mid-teen sales growth target over the long-term, not as guidance for any single quarter of fiscal year.

We still believe in and focus our strategic decision-making on mid-teen sales growth over the long-term; however, we do see continued currency and macroeconomic challenges in several key geographies as well as slower capital decision-making by our customers impacting our top-line sales growth and net income in the near-term.

Consistent with our prior established practice, we remind our investors that we do not provide specific financial guidance on future quarter annual sales or any other aspect of our financial statements. As we look forward to the second quarter and the remainder of 2015, the FARO team is facing global headwinds for sales growth.

As I mentioned earlier in the first quarter, we did see positive signs for FARO’s future with 16% Europe sales growth excluding currency, 23% sales growth – unit sales growth of the Focus 3D laser scanner and strong demand for our new FARO Freestyle.

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

In closing, I would like to thank the FARO team around the world who do that everything that guide everyday to customers who place the confidence in our products and to our shareholders for the continued confidence in our ability to disrupt the marketplace.

We may face challenges in some of the months ahead, but we have committed world-class team that will execute as much energy and passion as always. I’ll now open the call to questions. .

[Operator Instructions] And we will take our first question from Ben Hearnsberger from Stephens Incorporated. Please go ahead.

Hi, thanks for taking my question. First, Jay, I wanted to dig into the cost cuts. So we’ve been expecting a higher level of OpEx this year, because you’ve got the ERP implementation, you’ve got the product refresh cycle underway. You’ve got a lot of things contributing to higher expected operating expenses this year.

I guess, given this, where do you feel like, you have room to rationalize your business? And then can you give us a sense or maybe the size and the timing of the expected cuts?.

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

And then to leverage that through the rest of the year. You are right, strategically; the places we do not want to touch would be on the sales side and on the research and development side of the business. We have a very aggressive development pipeline right now.

We have several new products in the pipe, as you referenced, part of that were fresh cycle we’ve been working on for the last 12, call it 14 months now. And those product release cycles hit tail end of this year and then really next year, so there is a lot of excitement around that.

So, not surprisingly, administrative costs are an easy hit when it comes to cost reductions. Cost delays and cost avoidance and not back-filling certain roles that have been opened up as a piece of it as well as doing some headcount reductions. And then, you are right, we do have some cost though that that we are going to slowdown the progress on ERP.

We are not going to slowdown the progress on research and developments. So we’ll continue to invest in those as appropriately. But the cost actions that we are taking are meaningful. They will be felt within FARO for sure and we are doing as swiftly as we can. Most of the actions will be complete within the next month at the latest.

Some of them have already started, not surprisingly, many of them have already started and then obviously anything that falls into that bucket of not back-filling open roles and freezing open roles things like that have already taken effect. They took effect several weeks ago. .

Okay, thank you for that and then, on the tracker product, it looks like that was a big reason for maybe the shortfall in revenue.

Can you give us a sense or remind us how big the tracker is or just give us a sense how big the tracker is in terms of your revenue? And then, would you characterize the shortfall there as more of an in-market issue or are you seeing any competitive issues with the new Leica product, the new Leica tracker product that was released late last year?.

Yes, so, the relative size of the tracker, we don’t give revenue by product line, so, tracker continues to be a number three, very close to the standard of number of two and they tends to be still be kind of neck and neck with each other. So just from a relative size standpoint, we are still in that range.

I would consider the tracker; it’s more of a market issue than anything else. Obviously, there is always some competitive pressure, whenever somebody has a new product, it always causes everybody to pause and look for a moment, that’s sort of standard of business. And you’ve got a track our unit sales rev in Europe was substantial.

So, look at despite the fact that we are having the zero headwinds, our primary competitors based in Europe and our tracker unit sales in Europe were up 60 some odd percent in the quarter.

Is that correct, Bob?.

That’s correct. .

So, yes, there were some market pressure for sure in the Americas, definitely in Asia and some of it is in Japan. Japan is a good tracker market for us. So we are hung up in the – overall crisis there. So I do, still at this point see it more of a market issue with some of the competitive side mixed then, but more of a market issue. .

Okay, thanks and then a couple of housekeeping questions.

Can you give us the percentage of scanner sales through distribution? And then the LOP tax rate on your Arm product this quarter?.

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

Okay, thank you gentlemen. .

I will say though Ben, that just as a side note, the tax rate continues to be meaningful because the new LOP is a primary driver for the price increase we’ve seen on the Arm. If you look at Arm as a standalone product without the LOP, it’s still a pretty competitive price market right now.

But when you add the LOP between our low cost and the high performance of the LOP, we’ve seen great demand within the customer base for that and that is driving our price and it help contribute some of the gross margin increase still. .

That’s really helpful. Thank you. .

Thanks, Ben. .

Take our next question from Holden Lewis of Oppenheimer. Please go ahead. .

Great, thank you. A couple of things I wanted to get, I guess some perspective on, the impact of currency in Q4 being about $6 million I believe, versus $7 million in Q1, I mean the difference wasn’t that great, but it seems to sort of not impact Q4 much, but as being sort of credited for impacting Q1 significantly.

Can you give us a sense of what the flow-through from currency was and why the picture in Q1 versus Q4 might be so different?.

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

If you look below the revenue line, particularly as it relates to the euro, less for the yen, but particularly as it relates to the euro, we are still very naturally hedged. So, that falls through, correct Bob, correct me if I am wrong at the gross margin line below continues to be negligible in terms of the income impact of the euro. .

That’s correct. That’s either our gross margin line will relatively hedge each others of our global footprint how we produce products from a drowsy business Arm tracker in the US and produce laser scanner in Europe.

As he indicated, as Jay indicated, the deal of exposure in Asia-Pacific that we don’t have those types of local operations and if you look at the $7 million of currency impact, which you see is, $5.4 million that was in the Europe on the top-line, about $1.1 million was in Asia.

And so, if you think of that $1.1 million, it goes right to the bottom-line as an impact throughout because we can offset that. .

So, that European piece, or I am sorry, that Asian pieces is primarily or virtually a 100% flow-through to the bottom-line?.

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

But the euro, but the euro piece really is fully hedged and it’s negligible?.

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

Okay, and then sort of similarly, if I look at your sales in service of $14.9 million in Q1, again, the level is not that much different than what it was in Q2. Q3, and Q4 last year, but the gross margin is appreciably higher.

What’s the difference in this $15 million versus the $15 million of the prior three quarters? And is that margin on service is sustainable at this level?.

Really, there is two big drivers on our service margin and really, I’ll talk about in two buckets.

One is, is that, in the Americas region, what we had is, we had a real expansion or an increase in our service revenue significantly and the cost base generally goes with our service is more semi-variable in that, it doesn’t necessarily go up, it’s almost relatively fixed cost.

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

The other area was really in Asia where we’ve somewhat restructured some of the sales – service headcount there and we saw really a reduction in cost there. So really what you see is, you see a pick up in revenue in the Americas, slight reduction in cost in Asia and really had a fairly significant impact to overall gross margin year-over-year.

But service margin contributed that 20 percentage points to our margin increases too. .

Okay, and does that level where you finished out the quarter, does that feel like a new level to you that’s sustainable or is there something else in there that may cause that to sort of reach trends coming backwards?.

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

The service margin is a little bit more volatile from the perspective that it’s depending on the mix of sales within and just totally the volume in terms of kind of the volume and timing of the products coming back or either repair or timing of our training. So that’s a little bit more volatile.

But the overall gross margin has been relatively stable as we’ve seen. .

Okay. Thanks, I’ll jump back in the queue..

We’ll take our next question from Mark Jordan from Noble Financial. Please go ahead..

Good morning gentlemen. Question relative to the sales force in Europe. I believe that you from my notes ended the year with 59 reps in the Europe. You ended this quarter with 74. You showed very good unit sales in the Europe.

I was wondering was that influx of new people, is there a learning curve here we should expect that the higher productivity moving forward? Or how did you get seemingly a very good performance out of a fairly large number of new people?.

Yes, so, you are right, Mark. Some of it is, there is some learning curve. So that the longer they are here, most start performing and obviously those who don’t usually depart or forced to depart.

So some of it is that, some of it is continuing to fill out the distribution network and channel and as they become efficient, the last year we were still doing some channel development there. So that has an impact and the other thing that we start seeing some impact of those, probably little early to see the full impact of it.

But, in Europe, we have started transitioning to the metrology account managers carrying all products instead of just one or the other. We had done that transition in Asia in 2013 into 2014 and it was very successful and it created more leverage out of the account manage base.

And so, we are starting our process in Europe now and I would suspect we would continue to see some of the benefits of that incrementally through the course of 2015 as they get more comfortable in that role. .

Okay. In the quarter, you obviously had a currency charge relative to the unit strength of the Swiss Franc.

Going forward, are you going to change your method of operation to hedge in a company currency imbalances to minimize any future hits?.

I think the, our view on talking about the other income expense of about $1.3 million, really what that was related to which was a extremely rapid rise in the Swiss Franc, where as you know, the Swiss Franc decided to kind of let their currency really flow, was not going to support that against the euro that has been, I think that was just surprised for most people that were out there.

Just with the type of business that we have and we are global in nature with our manufacturing footprint between Europe and Americas, we got caught within either company balance there. Certainly, we’ll be managing that very closely going forward.

I think it was an event that happened to the surprise of a lot of people, because the Swiss Franc out wasn’t supported by the government and strange and stable. In terms of hedging, right now, we have no hedges in place.

I am not going to forecast whether we will or won’t but we’ll certainly look for the most effective way to prevent any kind of impact or EPS for the shareholder going forward on something like this. But I would say again, this was really an issue with a very rapid rise in the Swiss Franc. .

Yes, and I would say, Mark, you may recall, four – I came back four years ago now, maybe even five, we had a similar issue for a few quarters in a row where we had these fluctuations that were tied to not clearing the inter-company accounts and paying the payables each faster. The Franc is one where we haven’t had the focus on it very much.

And so, I think, between that rise and just not having operationally to have the focus on it in the same way that all the others had paying the attention that we are giving them, but they got just a piece of it. So, I think it can be managed now through the appropriate process again.

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

That’s right. .

Okay. The last question from me. Given, historically, you’ve shown a very distinct seasonal pattern on quarterly sales.

If you were to look at expectations for the balance of this year on a constant currency basis and they – the appropriate adjustments for some of the economic problems you’ve mentioned, would you assume that sort of on a constant currency basis, therefore that historical sales trends on a quarterly basis would re-occur in 2015 as they have in prior years?.

It’s always hard to gauge that. My gut, Mark, would say, yes, only because, virtually, every year that pattern has been pretty consistent, even in 2009, I think, when we had the massive downturn in the first quarter, I think the pattern was pretty similar.

I know, we had the huge uptick in Q4 like we always have, even though 2009 was a complete disaster economically. That means so my general gut would say, probably but it’s really early to tell. We also have more currency fluctuation affecting us this quarter and this year than we did in 2009 where it was just a straight market drop-off.

I mean, it was a bit different animal then. So, it’s a little hard to say. We would not forecast obviously a number for the rest of the year, but could the pattern be similar, potentially. We haven’t heard anything that’s indicating wildly there from my guess. .

One of the things that’s going out, even on a constant currency basis to the major headwinds that we certainly faced in the first quarter which was the Petrobras in Brazil which is the market that we participate in there. And, from reading the newspapers that’s certainly still in the works. So would face pressure there.

And certainly as you read the newspapers in Asia, there is a slow in China. There is also the economic conditions in Japan which is a good market for us is also a headwind.

Now, the manufacturing stimulus we had people that work very closely to try to get that funding and maybe towards the later of the year, we will see more of that funding come through. But some of the macroeconomic headwinds will remain at least for a quarter or two. .

Thank you very much. .

Thanks Mark..

We’ll take our next question from Jim Ricchiuti from Needham & Company. Please go ahead. .

Thank you, good morning. .

Good morning, Jim. .

I wonder if you can comment on the pricing environment in the Arm portion of the business.

Are you seeing any pick up in competitive pressures, just given currencies and from your European competitor?.

I wouldn’t say, we’ve seen any meaningful pick up in price pressure. You know the Arm, as I referenced it earlier, the Arm by itself that market has been pretty price competitive for, call it two years now.

It’s been lower average pricing than what we have seen historically and while it hasn’t necessarily gotten meaningfully worst, it definitely has not gone meaningfully better. When you attach the Laser Line Probe, that’s where we are getting some of that lift for sure.

There is a real distinct advantage for FARO with our Laser Line Probe compared to the competitor and that our price point, we obviously push very heavily for customers to really treat that as an accessory, make it accessible to them as part of a single purchase order versus, if you have a high enough priced LOP, the customer has to almost consider two different purchase orders and in this environment, or kind of in any environment, that makes it more difficult for them to get approval.

And so, we’ve been pushing pretty aggressively on that.

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

.

That’s helpful and just with respect to Brazil, is that market, first, I don’t know if you could perhaps size it, since it’s you are calling it out as one of the factors, but, is that market tend to be more concentrated in Arm sales or is laser tracker actually a bigger product for you in that market?.

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

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

It is mostly in our market in Brazil today, probably it will continue to be that way for quite a while. We sell trackers there, but it’s mostly an Arm market at this point and we don’t have any good feel and from the team in the field there too, nobody has a good feel for when this starts improving the size of the disaster there.

So it relates all the way up through the government of Brazil has everybody on edge. .

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

So, we look at it and say, number one, the product launch for us is, independent for the market environment. When the product is ready, we will release. We have not slowed the development schedule at all. We’ve had a pretty aggressive schedule. So I won’t say we’ve accelerated it either, because it was already on a pretty accelerated clip.

For me, it’s still as – we release when the product is ready, you release when we know the product is able to deliver the performance that we expect for it.

And so, you would expect to see – look there is, three products in the refresh cycle right now, which have not been released in the current refresh cycle as we’ve talked about it, which is the Arm the scanner and the imager and all of those are varying readiness points.

And so, over the next, again, where you see some at before this year is over, that’s very likely. We might see some of the delay until early part, mid-part of next year. Depends on how the alpha testing goes, the beta testing.

They are all stable in that products today and so well recognized in the marketplace, but I can’t afford a release where it’s not – I won’t say perfect, but not pretty darn closed and we know ready to perform the way it was designed for it. .

Okay, any early indication of freestyle by the way, which end-markets it’s really getting traction in?.

Yes, I mean, it’s targeted primarily at AEC and law enforcement and that’s where we are seeing the bulk of the action not surprising. .

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

Okay, thanks a lot. .

Thanks, Jim. .

We’ll take our next question from Ben Rose of Battle Road Research. Please go ahead. .

Good morning. In terms of the vertical market mix overall, obviously, a big portion of the business is focused on manufacturing.

Is there anything you can say about this quarter as it relates to the large OEM customers within your customer base versus suppliers, because I know you’ve got a pretty good mix of both and then how that maps out against in general on an industry basis?.

Yes, I think the easiest way, Bob, you can jump in, so the easiest way to look at it, I would not look at it against any one vertical from an industry standpoint this quarter. They all sort of we are doing the things that we would expect. If you look at the vertical itself, this is really a regional issue.

It’s Japan, Brazil and not so much a European market issue, it’s a European currency issue. Obviously, if you look at their performance, it’s pretty good on a euro-to-euro basis.

The sales to new customers, I think, were 33% or 34%?.

35.

35%, so, right in the range of what we own only 35%, 36%, 37% of sales new customers. So, and that’s a mix of some OEM and obviously a lot of it’s supply chain, just looking at the normal footprint of the manufacturing world.

So, if I’ve seen a meaningful drop-off there, you’ll be a little more concerned and okay, we are just relying on continuing with the biggest customers that we have and we are not getting good traction elsewhere. So I think, getting 35% revenue from new customers in this environment remains a positive sign as well. .

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

What we have seen from a vertical kind of portfolio as a whole is, as we mentioned in the call, our laser scanner sales were up 23% year-over-year. So, and we had good reception in the freestyle which goes into those verticals.

So, kind of from the portfolio of the laser scanner, I would say they are seeing growth from the AEC side and somewhat the law enforcement side as signaled by that growth. .

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

Yes, so the transition to Exton is complete. We are in the facility and we are manufacturing products there, trackers and the imagers there as well, which obviously is a tiny piece of the portfolio today. The – all the engineering team has moved there. So everybody has transitioned out of the old facility in Kennett Square. Exton is up and running.

And you’ll notice we had some extra inventory coming out of Q4 going into Q1 of tracker in preparation for that move. So I think the team made it as seamless as they could, which is not an easy task as you know, when you are moving from one facility to the other with no other facility to buffer you to help keep production going.

So, I think they did a great job on that. Relative to ERP, you are right, we are in the middle of Europe implementation right now. We’ve not stated before what the exact goal they will be. We’ll certainly let you know when we do. Asia is next.

We still anticipate being able to have all of FARO up and running on SAP before the year is over though at this point. .

Okay, thanks, very much. .

We’ll take our next question from Patrick Newton of Stifel. Please go ahead..

Yes, good morning, Jay and Bob. Thank you for taking my questions.

I guess, first question is, I don’t know if I missed it, but can I get the contribution of your top five and top ten customers?.

Absolutely, the top five customers for Q1 2015 is 2.7% and the top ten customers was 4.3%. .

Okay.

And then, Jay, I guess just dovetailing off an earlier question, would it be reasonable to think of Brazil is being about 10% of America’s total revenue? And then also, can you help us understand the relative size of Japan or at least how big the stimulus portion is within the Japanese business?.

Relative to Brazil, I won’t give an estimate as it relates to the size of the Americas. And I’d say, it’s small. You can expect the Americas is predominantly the United States. You got some Canada, you’ve got some Mexico, you’ve got some Brazil and it’s been there.

But, it’s – like I said, big enough that, a meaningful niche in revenue in Brazil was enough to impact the Americas meaningfully as well. Japan, if you look at Asia, Japan and China are the big two for us. And they are neck and neck with each other in terms of revenue contribution.

India, and then followed by the Southeast Asian countries and Korea are sort of secondary behind that. Not meaningful quote, but there is some distance between those and where Japan and China are. So, it’s a major contributor. The stimulus program is one the governments had in place since I think 2013.

It’s one where you apply for the funds from the government and it’s earmarked for industrial technology and our account mangers, as Bob indicated are very effective that helping guide our customers do that process.

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

From what we hear from the team, the back-half of the year may improve a bit. I think, Japan maybe taken little bit of a wait and see mode on their own economy at the moment. It is not the primary driver of revenue in Japan by any means obviously.

But it is a meaningful piece, it’s enough that for some customers, for many customers if they can’t get the funding, they will delay the purchase order until they can get it. And so, that’s sort of what we are facing there. I guess, the other thing I would – sort of when you look at in general is, again, you’ll get market demand has been very good.

And so what we are dealing with is, issues like that in Japan, the economic crisis in Brazil. You’ve got a lot of customers delaying budgets, not canceling, but delaying and when we look at our win – loss analysis, we still – you don’t see a ton of losses, or an increase in losses beyond our normal ratio that we would – we have seen in the past.

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

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

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

So if you can help me kind of, maybe understand the differences there?.

Again, I think you are right. It is very early to figure out if we think it’s normal seasonality. But, my only – my comment there is that, for the 10.5 years I’ve been here, that seasonality has been relatively consistent. So we start with that. Without obviously providing guidance, we’ve always said the long-term growth goals organically are mid-teens.

Obviously, a mid-teen in the current year will probably be difficult given where we are coming out of the first quarter, we had a slight sales decline. But you are right, we would anticipate some growth and improving growth through the rest of the year. I think that’s from everything we can see, that’s – I think realistic.

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

Okay, and then I guess, on the – just looking at the June quarter or perhaps even at the December quarter, we think about some of the strength that you’ve commented around LOP adoption and how that’s really been a material competitive advantage for you.

Do you think that there was any pull in of demand into the fourth quarter due to the launch of the LOP? And that could possibly cause a greater than seasonal downtick in the March quarter? And then is there anything that would lead you to believe that the June quarter could see an above seasonal snap back?.

It’s always possible, obviously, when you introduce a new product, it can get customers more interested who may have been waiting. That’s possible. Is it enough that we would have sat there in Q4 and said, man we’ve really sucked a lot in from Q1, definitely not.

Could the recent snap back in Q2, I would hope I’d call it snap back, what I would say is that, between the market reception that we’ve gotten and we’ve gotten meaningful feedback from multiple sources including even some of the competition about the strength of that product.

And the fact that we are now aggressively targeting the existing installed base, could you see some increased acceleration there, obviously, we internally, are trying to drive that. I was saying whether we think it will happen or not, I think the product is pretty damn good.

And so obviously, pushing that pretty aggressively here in Q2 and Q3, to try and bring back the type of growth that would expect as a company. .

All right, and then just last one from me as you talked about the FLS unit growth of about 20% year-over-year. And I think we can back into revenue growth similar – or at similar level at about 18%.

So was there, any slight discounting in the quarter and then if we think about the unit growth, was it uniform across AEC and law enforcement or was there one area that really led the demand?.

Well, first of all on the unit growth, you are right, that is 23% year-over-year. There was some regional differences across the board as we noticed more but rather strong. So, from a pricing standpoint that Europe is going to translate to a lower US dollar figure than what you have seen.

So the strength that we saw in lot of the laser scanner was kind of muted on the top-line. The Americas, we had year-over-year growth there. Asia, we had a little bit more price pressure than what we’ve seen. Also because of how we go to the market with this matters as well.

The – kind of the price that you see depends upon whether you got to market direct, whether you go to market through the distributor. So, we are trying to build that distributor network out. So we’d always see this is where we are seeing the growth, that is in Europe and that would have been muted somewhat on the top-line despite currency. .

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

We think that where we see this product going at least for the right now is that for law enforcement is a little bit slower path, because you are dealing with government budgets, you are dealing with kind of getting adoption in place for us or forensics department and then from there, kind of go into the city council, those types of things.

That’s going to take us a little bit more time to get that adoption. So the AEC markets are more private industry. Therefore a little bit quicker adoption I would say to get those sales.

But certainly, I think one of the things that we are positioned for is, the acquisitions we made really kind of a target both of those markets in that ARAS is a leader still in the kind of crash crime forensic side. We now have a turnkey approach there which should help the business and also on the kubit side, should help our AEC.

So, we’ll start to see now, where those verticals are going, because we have complete packages to go the customer with. .

Great. Thank you for taking my questions. .

Thanks, Patrick..

We’ll take our next question from Hendi Susanto of Gabelli & Company. Please go ahead. .

Good morning, Jay and Bob. .

Good morning, Hendi..

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

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

I would say, in general, when you look at, 3D reported with stratus reported and some of the things they are going through, the storyline seems very similar just on the surface and I’ll not dig in a whole lot further than that.

But, - and I think you would see that with a lot of industrial sort of tech type companies is that, none of them are going, I’d be shocked if anybody had a different storyline on the euro, Brazil or Japan unless they had meaningfully less exposure to those countries. .

Got it.

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

We will not. The countries that we are in today, we have purposely selected for the market opportunity. So we not anticipate reducing exposure there from a – again, the market demand is very strong. We felt like there is a location where market demand was weaker than we would like to see.

I might think differently about and this is not a demand issue in the near-term. It is a - either a currency issue or a budget availability issue. So, I would not anticipate anything like that in the near-term. .

Got it. And then, I know your thought on when revenue contribution from ARAS and kubit may start to materialize.

I would like also to understand that what your distribution and then sales strategy for those two?.

So, it has already started materializing. Obviously, from a pure revenue standpoint, it’s a very, very small contributor to the company, just look at the price point of the packages.

Because it’s software, there is value at the gross margin line, even with a small amount of revenue that they deliver, actually I’d say it’s meaningfully yes, but obviously, it would slowly increase through the course of the year. The distribution strategy on those is, number one, they do have some of their own account managers and sales people.

So that’s a piece of it. Number two would be that it continues to be pushed now, it will be pushed through our own distribution network, our own account managers. The training is, well underway and in some places complete.

And so, obviously, that’s some of the leverage we expect to get and for us, both of those acquisitions as well as, we should remember CAD zone last – the tail end of last summer as well, which is a great low-end, sort of the entry point solution on law enforcement. They all bring with them a very strong install base.

And so, a lot of this is also going back after that install base as it relates to whether it’s a freestyle or tying to sell them the focus laser scanner. That’s a piece of it as well. And it’s a work in progress. Obviously, that’s three software acquisitions in a relatively short period of time.

So it is something that we’ll continue to develop as we go. We will continue to experiment with different sales strategies to help them accelerate and to help our own – the hardware side accelerate too. The combined packages though are now meaningful and it is a recognized solution in the marketplace that is, we’d expect to grow going forward. .

Okay, and then last question from me, this is for Bob.

I would like to understand more about the ERP implementations in terms of how should we think of CapEx and whether it’s like multi-years and whether the ERP implementation will be in the form of subscription or the traditional software license that requires upfront payment?.

Right now, we are going through the SAP implementation and just we are not going to give specific numbers on our capital or on expense.

But I would say, year-over-year, it’s very similar to slightly higher the expense that we incurred in the quarter and on G&A, related to the ERP implementation only because we now are actively going through with Europe.

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

And we do as we had said before, we anticipate, Hendi, going live by the end of the year. So assuming the current path one is maintainable. You would expect then that’s a transition to the expense associated with SAP obviously there is higher expense than our current software package.

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

Thank you, Jay. Thank you, Bob..

We’ll take our next question from Robert Mason of Robert W. Baird. Please go ahead. .

Hey guys, good morning.

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

No. .

Okay.

And, just – again, given your comments, I assume the revenue contribution here in the first quarter was di minimus?.

That’s correct. And, right now, we certainly hope that those businesses and we believe those businesses will be growing over time. But right now, from a revenue contribution it’s really not material for us at this time. .

Okay.

Jay, could you comment on the build-out of the distribution network that’s been ongoing? Where would you think you are in that process in terms of what you would like to add this year, maybe some perspective against what you added last year?.

Yes, I think, it’s more on – obviously, there is two, the distribution network I have considered always be sort of work in progress. You’ve got opportunity to add distributors as you see value they can provide as the product becomes more accepted in the marketplace.

You may get some of the lager distributors who were holding up and they get interested and proactively come to you. We are certainly proactively going after some still. I would say that, the work of adding distributors is not decisively lower now, we’ve got a pretty well established distribution network out there already.

So, unlike, say two years ago, when we are really ramping it up, at even the beginning of last year where it was getting more distributors on board is what’s the focus now. Obviously, we’ll add some more in sort of cherry picking of opportunity. We will continue to add some account managers to also support the 3D documentation side.

We added several law enforcement account managers in the first quarter in the Americas. You will continue to see us to do that. Again, cherry picking where it will support the product in those target, predominantly the two targeted vertical with AEC and law enforcement.

While, to drive growth while at the same time still recognizing we are going to be not cautious, but we will be calculated in how we do that. .

Okay.

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

But, maybe what some of the tactics you might implement in just the pacing?.

Yes, the pacing was not similar to what we’ve seen in previous quarters. As you know, a huge portion of our revenue happen more occurs during the third month. And a lot of that occurs during the final - call it two weeks give or take.

Reading into the final two weeks, while we always have these ranges of forecast in the sales team going into the final couple of weeks, there is about their time then you could start feeling, hey, this has got probably more pressure than we’ve seen in the last couple of years and it was starting to become more account that, again a lot of – the reason we have that pattern is, a lot of customers are – their CapEx dollars are controlled every single quarter and there is only so much that’s released.

And so they get to the end of the quarter and they are waiting to see, do I have a – still to spend the money or not.

And you get to that point and they are seeing management or upper management or if it’s a smaller company, the owner of the business will finally say, yes, I can spend that or no, I can’t and that causes the push or the purchase depending on the customer. So we really started seeing that. It was a rapid slowdown in the final couple of weeks.

We view that as market pressure during the whole quarter, but, and obviously euro pressure you could see it as the euro slid every single month during the course of the quarter. But really was the final couple of weeks. Sales tax, it go with it. There is only so much you can view at that point in time. Clearly, we have done some extended payment terms.

That’s sort of a competitive thing that was almost independent of the market environment. We’ve got some countries where our competitors are getting pretty aggressive on terms to avoid being aggressive on price and we do a little bit of that as well where it makes sense.

So, it’s so like how you are pricing, where it’s an important account, it’s not a one-off, or it’s not one that we aren’t as interested in, we will obviously follow and do as best we can to maintain our competitiveness there and always rather give a little bit on terms than price if possible.

I think you’ll see more aggressive tactics in the second quarter here and in the third quarter. Again, less about trying to be aggressive on price that’s not – it’s a competitive price environment for sure. But I can’t say that the bulk of the customer base was screaming, hey we need more price in order to drive volume.

That again seems to be less of the issue.

So it’s – all right, how do we help them create a better value story for senior management to get the budget approved or how do you go after your existing installed base of Arm users to target at the HD LOP or how do you go after further aggressively penetrate the installed base at CADs on or the installed base that we have at kubit.

So those are the types of things that you would expect to see. .

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

So, if you look at Q1, last year, it was 81 and exactly where we are at today. So, I think that gives you some insight. There is some seasonality of those DSOs. So, as we move forward, that this kind of reflect the seasonality there as well. .

Okay, that’s helpful. And, maybe just last question, just maybe as a follow-on as well. The comment about price pressure in Asia-Pacific on the laser scanner, it struck me a little bit just because, we know that product is disruptively priced already.

I am just curious where that pressure is emanating?.

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

I would say mostly, what we’ve seen in Asia, from what we got from the sales folks in the field, is really just what they saw in the quarter was more of the 130.

The customers, given the kind of capital constraints that they are seeing, they are opting for that cheaper model, which is less expensive model, which lowers the ASP and therefore hits of margin as well. So, I would see it more from the perspective of mix than necessarily competitive pressure.

Does that helps?.

No, that’s very helpful. I appreciate that. Thanks for taking my questions. .

Thanks Rob..

I think we have another question from Holden Lewis. Please go ahead. .

Thank you. In your Q, you mentioned a number of saying that’s kind of into G&A. I was just sort of curious kind of how you are thinking about going forward.

You talked about obviously, the fees related to ERP, cost related to acquisition activity, cost related to moving and I guess, I am just trying to get a sense of, do those costs peak in Q1 and then sort of taper off? It seems like they are all sort of related to events rather than ongoing operations.

So, I want to get a sense of how you are thinking about those items on an ongoing basis?.

Well, in terms of G&A, if you look at it, we are $1.4 million up year-over-year. And what I’d like to point out about that is, much of that is driven just by headcount. We are trying to really structure the business we were going into Q1, structuring the business to really create what we needed to have the mid-teens growth going forward.

So, number one, it is headcount. So, I am not giving guidance, but what I am saying is, is that, that’s really in the base of our G&A. You asked really correct in the perspective that the Exton move is more of an item that is unique to that quarter.

But the ERP implementation as I said is relatively slightly more this quarter than it was last year and you’ll continue to see ERP costs throughout 2015.

But really the – as you breakdown that $1.4 million increase, one of the things is higher compensation, just given higher headcount, and we are certainly realigning kind of our headcount going forward as well with our cost reduction plan. .

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

Should we be thinking about kind of flattish OpEx versus Q1, through like, Q2, Q3 and then when we step-up with big volume in Q4 or should we expect kind of sequential increases in OpEx? How should we think about the magnitude of what you are trying to achieve?.

What I would say, this is again, no we are not going to try to forecast for your or provide guidance consistent package. But one of the things in this cost reduction program that or cost initiatives that we are going to focus on is, we are going to focus that, the investments that we continue to make to keep kind of call it FARO culture.

So in terms of R&D, that’s one of the places that makes FARO what it is, the disruptive product. So you are going to continue to see investments in R&D. We need AMs or account managers out in the field. So you’ll continue to see that.

But where we are going to focus on is places where we can without hurting the kind of growth in infrastructure projects that we have for instance in G&A, those types of areas, we are going to try to take some cost out of the business. .

Okay, all right. Thanks guys. .

And we’ll take another question from Ben Hearnsberger. Please go ahead. .

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

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

So, I’ll go in reverse order. So, I’ll never say whether it’s a two or three year story. Obviously, we are trying to get – there is a real – we still know that price of the product today while disruptive against everybody else is not the market price to get it over the CASM and really into the early majority and the need of the market.

The price – the cost reductions that we are seeing right now are purely just sort of volume leverage as the product continues to take up. And a little bit of efficiency in the manufacturing side. I can’t say that’s lock at sign, that’s really just getting little better at what we are doing and having higher volume to support it.

The real cost takeout continues to be a function of the engineering organization and the work they are doing on the next generation scanner today, and that cost reduction is meaningful even without volume. So it’s real, it’s design changes, material changes, component changes, film process changes, things like that.

Those are what go into the next generation and again, I won’t say, when we anticipate a release of the next generation product.

But certainly we also anticipate that next generation will have the first of – maybe several, we will have to see, but, it will have a meaningful price reduction to go with it without sacrificing gross margins, because we know that’s required to get into the early majority of the marketplace. .

Okay, great. Thank you. .

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

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

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