Victor Allgeier - President, TTC Group, Inc. Simon Raab - Chairman, President & Chief Executive Officer Laura A. Murphy - Chief Financial Officer & Senior Vice President.

Robert Burleson - Canaccord Genuity, Inc. Jim Ricchiuti - Needham & Co. LLC Ben Hearnsberger - Stephens, Inc. Patrick Newton - Stifel, Nicolaus & Co., Inc. Hendi Susanto - Gabelli & Company Richard Eastman - Robert W. Baird & Co., Inc. (Broker) Josh Ward Sullivan - CRT Capital Group LLC Richard G.

D'Auteuil - Columbia Management Investment Advisers LLC Ben Z. Rose - Battle Road Research Ltd..

Good day, everyone. And welcome to FARO Technologies' Conference Call in conjunction with its Fourth Quarter 2015 Earnings Release. For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead, sir..

Thank you, and good evening, everyone. My name is Vic Allgeier of the TTC Group, FARO's investor relations firm. Today, after the market close, FARO released its fourth quarter and fiscal year 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 Simon Raab, Chairman, President and Interim Chief Executive Officer, and Laura Murphy, Chief Financial Officer. Simon and Laura 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, anticipate, plan, potential, continue, goals, objective, 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 today's press release and in the company's Form 10-K for the year ended December 31, 2015.

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 Simon..

Thank you, Vic, and good evening everyone. Thank you all for attending our Q4 2016 call. It's been my honor to serve FARO's shareholders and its employees for many years in a variety of capacities, most recently as Chairman and now as Chairman and Interim CEO. FARO is at a critical juncture in its evolution as a global industrial technology company.

We are not waiting for a new CEO to make the changes that FARO requires to return to its remarkable track record of growth and innovation. In today's call, it will be my intention to describe the number of important organizational, marketing, sales and product development initiatives, many of which have already begin.

But first are the Q4 2015 financial results. I have with me our CFO Laura Murphy (02:33), who joined FARO in August 2015. She will review the financials and then I will provide more color on the renewed FARO that lies ahead..

Thank you, Simon, and good evening everyone. Reported sales for the fourth quarter of 2015 at $91.3 million were lower by $12.9 million or 12% compared with $104.2 million for the fourth quarter of 2014. Adjusted for an unfavorable foreign exchange impact of $5.4 million, fourth quarter sales 2015 were 7% lower than the prior-year period.

Turning to product and service sales. In the fourth quarter of 2015, product sales at $77.6 million were lower by $11.8 million or 13% compared with $89.4 million in the fourth quarter of 2014. Adjusted for an unfavorable foreign exchange impact of $4.6 million, fourth quarter 2015 product sales were 7% lower than the prior-year period.

In the fourth quarter, total company sales through distribution were 8%. Focus laser scanner sales through distribution were 43%. In the fourth quarter of 2015, services revenue at $13.8 million was lower by $1 million compared with the prior-year period.

Adjusted for an unfavorable foreign exchange impact of $0.8 million, fourth quarter 2015 service revenue was lower by 1% compared with the prior-year period, reflecting lower training revenue. Turning to sales by region.

In the Americas, sales in the fourth quarter, at $40.4 million, were lower by $0.9 million or 2% compared with $41.3 million in the fourth quarter of 2014. Adjusted for an unfavorable foreign exchange impact of $1.1 million, fourth quarter 2015 sales in the Americas were slightly higher compared with the prior-year period.

These results primarily reflect lower Laser Tracker sales and the macroeconomic situation in Brazil, offset by a higher average Arm selling price due to the continued momentum of the Laser Line Probe HD. In Europe, sales in the fourth quarter at $32 million were lower by $9.4 million or 23% compared with $41.4 million in the fourth quarter of 2014.

Adjusted for an unfavorable foreign exchange impact of $3.5 million, fourth quarter 2015 sales in Europe were 14% lower compared with the prior-year period. Fourth quarter sales in Europe primarily reflect lower unit sales across the portfolio due to delayed customer capital budgets.

In Asia, sales in the fourth quarter at $19 million were lower by $2.4 million or 12% compared with $21.4 million in the fourth quarter of 2014. Adjusted for an unfavorable foreign exchange impact of $0.8 million, fourth quarter sales in Asia were 7% lower than the prior-year period.

Consistent with the past several quarters, the sales decrease in Asia reflect the delay and cancellation of customer capital spending budgets, particularly in China and Japan. Turning to orders. New order bookings in the fourth quarter at $100.4 million were lower by $8.8 million or 8% compared with $109.2 million in the fourth quarter of 2014.

Fourth quarter 2015 reported results represent a book-to-bill ratio of 1.1. Turning to gross margin. Gross margin for the quarter at 53.3%, compared with 55% in the prior year period, was unfavorably impacted by lower production volume as well as a $0.7 million severance charge for workforce reductions.

Excluding this severance charge of $0.7 million, gross margin would have been 54%. Turning to operating expenses. Selling and marketing expenses in the fourth quarter of 2015 were $21.2 million or 23.2% of sales, compared with $24 million or 23% of sales in the fourth quarter of 2014.

This decrease of $2.8 million primarily reflects lower sales commissions and favorable exchange rates, partially offset by higher account manager and marketing headcounts. General and administrative expenses in the fourth quarter of 2015 were $10.4 million or 11.4% of sales compared with $10.4 million or 10% of sales in the same period last year.

Expenses remained flat with higher compensation expense and severance charges for workforce reductions, offset by favorable exchange rates and proactive discretionary reductions. Depreciation and amortization expenses were $3.2 million, or 3.5% of sales in the quarter, up $1.2 million from fourth quarter of 2014.

This increase reflects the company's recent infrastructure investments with this year's opening of our Exton, Pennsylvania facility and the recent completion of our global ERP implementation.

Research and development expenses in the fourth quarter of 2015 were $7.1 million, or 7.8% of sales, compared with $8.1 million, or 7.7% of sales in the prior-year period.

While maintaining a consistent R&D reinvestment rate as a percent of sales, this decrease of $1 million mainly reflects favorable foreign exchange rates and the timing of spending for current product development activities. Turning to profitability.

Operating income in the fourth quarter of 2015 was reported at $6.8 million, compared with $13 million in the prior-year period. Income tax expense in the fourth quarter of 2015 was a benefit of $1 million compared with an expense of $1.9 million in the prior-year period.

This reflects the change in income distribution between low and high tax rate jurisdictions. Net income was $8.9 million or $0.52 per share in the fourth quarter of 2015, compared with income of $11.1 million or $0.64 per share in the fourth quarter of 2014. Excluding the impact of $2 million in severance costs, EPS would have been $0.60 per share.

Now for the balance sheet. Cash and short-term investments were $150.4 million at the end of fourth quarter 2015 compared with $174.3 million as of December 31, 2014.

This decrease of $23.9 million primarily reflects stock repurchases totaling $22.8 million, while strong cash flow from operations at $28 million under the company's capital expenditures and two acquisitions in the fiscal year 2015.

In the fourth quarter, we'd repurchased 89,241 shares of common stock on the open market and an amount of $22.8 million. At the end of the quarter, we had authorization to repurchase an addition of 18.3 million of shares. Accounts receivable were $69.9 million at the end of fourth quarter 2015 compared with $84 million at the end of 2014.

DSO was 70 days at the end of fourth quarter 2015, down from 74 days at the end of 2014. Inventories totaled $79.3 million at the end of fourth quarter 2015. Finally, I'll conclude with head count numbers. We had 1,288 employees at the end of the fourth quarter 2015, representing a year-over-year increase of 65 employees or 5.3%.

Geographically, we have 493 employees in the Americas, 508 in Europe and 287 in Asia. Global head count decreased by 98 employees compared with Q3 2015, reflecting the previously announced cost reduction actions taken to better align the organization's cost structure.

The financial information included in this call is preliminary as the company has not yet issued its audited financial statements and may differ from those results. I will now hand the call over to Simon..

first, going vertical, which means driving sales growth by aligning sales, marketing, product management and agile R&D focused on specific vertical markets.

Second, modernizing the sales process by transitioning our current direct sales approach of the onsite demonstrations to one of multimedia, web-based demonstrations and cloud-based customer relations development. Third, create new product drumbeat to reinvigorate the entrepreneurial spirit that grew this company from its modest origins.

And fourth, leverage operations through global horizontals to increase operating efficiency by harmonizing and globalizing manufacturing and business support functions. FARO has been historically functioning as three regional businesses that have been selling and servicing global products.

Our vision is to renew FARO by reorganizing all functions, processes and people to a truly harmonized global mindset, better positioned to service our customers and increase shareholder returns. So let's start at the top. Our top-line growth has not met our own internal goals, nor have we achieved any particular leverage of that revenue through scale.

Our CAGR over the last 10 years is approximately half of the 20-year CAGR. We need to take action to reverse that trend. Our parallel challenge is to leverage our scale and realize an increase in operating margin concurrently with that growth.

Fully vertical means reorganizing the product development and sales organizations to effectively serve specific customer segments and take market share. Over the past several quarters, we've spoken briefly about product sales and addressable market opportunity by broad sector of the verticals.

It has become apparent that in order to grow the business to the next level, we need to better define our end market applications and realign our selling, marketing, R&D products to the appropriate end markets. This realignment will enable a more focused total product offering and selling approach to meet customer-specific needs.

We have staffed the vertical teams with dedicated resources and end market expertise to better tailor our total customer solution. This realignment not only allows us to become more customer focused, but also differentiates FARO from our competition by identifying and offering unique vertical-specific solutions.

To renew FARO sales by going vertical, Joseph Arezone will assume the newly created leadership role of Chief Commercial Officer.

Joe has risen through the sales leadership ranks in his 18-year FARO career, most recently as the Managing Director of our Europe and Asia regions and has always demonstrated a key understanding and talent in leading diverse sales organizations.

In order to grow our topline and build important and lasting commercial relationships, we are transitioning from our current all-measurement tools to all-people approach to a far-more vertically focused sales organization, supplied with products that have been fully developed, priced and packaged for specific applications and workflows.

In the medium term, FARO will focus on six verticals and will restructure the organization all the way from product development to sales to ensure that those verticals are effectively served.

As currently contemplated, the verticals will be in metrology, factory automation, product design, BIM-CIM, public safety and 3D consulting and solution development. Today, we currently serve customers in all these verticals in one form or another. However, our offerings and marketing efforts have been too generic and diffuse.

Metrology will include building and verifying, not just inspection in the manual fabrication environment. Factory automation will include building and verifying in an automated factory environment. Product design will include marketing and development of robust reverse engineering and modeling solutions.

BIM-CIM or Building Information and Construction Information Management will be focused on all the new burgeoning 3D documentation areas, not covered by conventional surveying applications. Public safety will focus on crash, crime and fire applications.

And finally, 3D consulting will be comprised of a network of 3D measurement service organizations that along with FARO Labs will provide solutions in early market development for new applications. Sales process modernization is the next most important area of focus because of its ability to directly influence top-line results.

The sales process for our 3D solutions have been predominated by the need to do onsite demonstrations of our products. This process is very inefficient as often multiple demonstrations are required to successfully navigate our customers' capital equipment purchase processes.

We have started a sales process modernization initiative to bring the power of the Web and the cloud to bear on this outdated process.

We intend to keep this process proprietary, but suffice it to say that we intend to multiply the number of demonstrations an account manager can do in a month, increase the closing ratio of sales per demo and leverage the Web to enhance and personalize the customer interaction that is key to our sales process.

Developments in this modernization are underway as we speak and will be fully integrated into our CRM platform. Of similar importance are the products and solutions we deliver, and new product drumbeat means we must return to systematically, regularly introducing important products and solutions to each market we serve.

I remember the entrepreneurial innovative focus that we brought to the market to disrupt the then current paradigm of fixed CMMs and the clear focus needed to accelerate our first product to market.

In the current competitive landscape, innovation to solve our customers' needs is critical, but speed to market and regular rhythm of new product delivery is vital for sustained growth, customer loyalty and stable and healthy margins.

I want to reinstill that entrepreneurial, regular new product delivery cadence by globalizing R&D to share best practices, becoming more agile to quickly address specific customer needs in the verticals and introduce the kind of products that they didn't realize they needed until they saw it.

As part of this renewal effort, our current regionalized and platform-oriented R&D group will be globalized into an agile product development group, responding to the specific needs of each vertical. This includes the complete reorganization of our product management team to meet those needs.

In addition, a strict schedule of new product introductions will be established in all verticals to ensure that a steady stream of leading technology rewards our customers' loyalty. FARO has lost some of its edge in certain markets and excelled in others. However, we have the capacity to retake the technology to lead in all of these verticals.

Our recent introduction of the groundbreaking Cobalt Array Imager technology into the factory automation market is just a taste of what is to come.

Only by assuming the mantle of the clear technology leader, we'll be able to justify the premium prices and provide the value propositions necessary to return our gross margin performance back to our historical highs.

So with all that top-line effort, little is gained unless we leverage our scale and implement systems to increase our operating margin. This can only be achieved by leveraging Global Horizontals. The sales process modernization initiative is just the first step in reducing our SG&A relative to sales as we grow our topline.

FARO has successfully grown its business into the highly diverse and complex commercial environment in Europe and Asia. Unfortunately, this has also resulted in regionalization of certain processes, and we have accordingly lost advantages of scale.

Hence we are reorganizing the company into Global Sales and Marketing verticals and Global Horizontal operational groups. This global structure will replace our regional structure and as part of that process, every selling, marketing and operational function is being harmonized across the globe.

Harmonization is essential to permit the installation of systems to enable sales growth without a corresponding growth in SG&A.

After significant growth investments in the global ERP system, which was successfully implemented in 2015 and the completion of our state-of-the-art Exton facility, it is a high priority for the management team to deliver real operating leverage to increase shareholder value. We must improve operating efficiencies across every function.

Our Renew FARO initiative is intended to break down the confining inefficient lines out of our regional support structure and create globally functional operational horizontals.

From customer service to accounting, to procurement to IT, we are consolidating each into a single global horizontal with harmonized work processes by leveraging the best practices across the region. We must decrease our cost of doing business and improving the operating margin.

To drive this global functional harmonization, Kathleen Hall, will assume the new leadership role of Chief Operating Officer. Kathleen joined FARO as an accomplished business executive with the broad range of global business management and functional experience.

Kathleen has been the Managing Director of the Americas region for the past three years and has clearly demonstrated her extensive operational expertise and comprehensive knowledge of our customer expectations. Over the past few months, we aggressively challenged each leader of team and process with the mandate of taking FARO to the next level.

The senior leadership team and I have been working closely to identify, define and prioritize how to renew sales growth and increase operating efficiency. We're confident in these renewal initiatives and are preparing to execute in the coming months.

Since my return to the helm, we've received some questions from investors and analysts and I'd like to proactively answer now for the benefits of all of our listeners. First, how is the CEO search going? Well, the search firm has been contacted and we have actively begun examining possible CEO candidates.

However, handing over a company in mid-reorganization to a new CEO is really not practical, nor is it reasonable for FARO to passively sit through the search and onboarding process before implementing our initiatives. I will remain on as long as it takes to get this renewal done and find a great CEO who will lead FARO to its next growth chapter.

Second question is what about M&A during this period? Well, we are proceeding without hesitation to find acquisition targets in our verticals. In fact, the going vertical initiative has clearly surfaced a variety of important targets that would not have been obvious before.

It's part of the global vertical leadership's responsibility to indentify targets in their respective industries. This has already resulted in important conversations on target technologies. In summary, we are excited about all these new initiatives and are looking forward to updating you on our progress in the coming quarters.

We understand that the business processes of the new renewed FARO will create some challenges for those providing coverage on our business.

As is consistent with our practice – our past practice, we will not be providing guidance, but we will make every effort to be as transparent about the changes and anticipated impacts on our financial performance. In closing, I'd like to thank all of our employees worldwide for their continued dedication and loyalty to FARO.

And I'll now open the call for questions..

Thank you. We will take our first question from Bobby Burleson with Canaccord. Your line is open..

Hi, good afternoon and thanks for taking my questions. So I guess the first one is, you're moving to a vertical market focus. You mentioned that that surfaced some interesting acquisition candidates.

I'm wondering if you're more focused on hardware or software or is acquiring more of a channel a priority for you?.

Certainly, we're always interested in technology, both hardware and software and of course channel. And we've had experience in all those kinds of acquisitions. Based on the conversations at this time, it's really most about software and hardware..

Okay. Great. And do you see synergies? I mean, a lot of times when I'm discussing FARO with folks out there in the industry, they talk about buying software and scanners through the same reseller.

And I am wondering whether or not you see the possibility of maybe bundling or getting some of the software under one roof and bundling that in your own sales?.

To understand your question correctly, are you referring to third-party software that we sell with our equipment?.

I'm referring to third-party software that either you sell with your equipments or your resellers sell with your equipment?.

Right. We're always open to looking at those packages and we do sell a few that are a fairly significant part of our sales. They – usually we get them at a very significant discount, and usually they are evolving due to other market forces.

And most often, they are being purchased by people who had installed bases as they're used to using that software. Now the question of whether we have it internally or externally, in our mind, is a little bit moot because they have developed their own wider applications that are some – of less interest to us.

In general, we make the profit that we want off of them. And it's impossible to be actually a software owner or provider for all the install bases that are out there. For example, there are a number of reverse engineering softwares that we have established bases of users. You could buy one and then try to pitch it.

But then you're always going to be left with the other part of the market that wants to be bundled with this other software, but then you're going to do this process of – how many of them do you buy and how many of them do you bring under the roof and to what advantage? So I would say that we're being selective about that..

Okay. And just one last one, in term of my checks on demand, more broadly, but not specifically just FARO, it seems like in January, there was some year-over-year decline in terms of revenue in sort of adjacent companies.

And I'm wondering whether or not the trajectory that you guys saw in Q4 year-over-year, whether or not you feel like you're at a bottom in terms of year-over-year trends, or if there's potentially a little bit more of a decline to get here (27:23) especially in light of the Chinese New Year being over and maybe having a little bit more visibility?.

Okay. So as you know Bobby, we don't provide guidance on that. We're still pretty early in the quarter to get a sense of what the global economies are present – or how they're presenting themselves. We listen to what other industrials are reporting and saying as it relates to Asia and particularly in China. For us, yet it's still fairly early days..

Okay. Great. Thank you..

Thank you..

And we'll go next to Jim Ricchiuti with Needham & Co. Your line is open..

Hi. Thank you. Good afternoon.

I'm wondering Simon, if you can talk a little bit about when we might anticipate these changes in your go-to-market strategy, which are fairly significant? When you think this will be largely complete? And what I'm trying to get at, I guess, is to what extent do you have to manage some of the risk for disruption as you shift your go-to-market strategy in the near term?.

Yeah. I think that's a great question and something that we've been very concerned about too. We have verticals that we call growing verticals and we have verticals which we call emerging. For example, we don't have a long history in factory automation, but we definitely have some important new products.

The question is how do you implement and how do you go worldwide on an emerging vertical? And these will be paired with our growing verticals, for example, automated, factory automation will be paired with metrology, which is an established growing vertical.

And it's kind of a parent-child responsibility there, and they will be leaned as we grow from bottom up. So we're trying to mitigate the apparent need to certainly build a global infrastructure for any one of the new verticals. So it will be fairly organically built and then cleave off from the parent vertical.

With respect to how much time it takes, we've made a lot of progress in the last three months deciding what we want to do. We're going to have our all-hands meeting this quarter for implementation. Everything is contemplated – everything from our internal accounting structure to the way the sales force is structured.

We see a lot of lateral moves into different verticals. We see a smoothening of the existing infrastructure or operational infrastructure in the different regions blending into a global one, so we don't see a huge disruption there. We're trying to mitigate the need to replicate parts of the organization unnecessarily to feed the necessary verticals.

I think the part that will take the longest is the redirection of R&D to make sure that it's supplying as I specified before those particular products for the vertical, the pricing, packaging, et cetera, that is necessary for the vertical. That's going to take us a little bit longer than I would like.

I think actually, the organizational stuff will be done well in advance of the products. However I do believe that we will have a very strict drumbeat this year of new products. They will be associated to some of the verticals, more in some than in others. And I expect that the whole process could take about a year or so..

Do you anticipate your head count changing or do you feel the need to potentially expand head count or is this a case where you think you can reallocate resources?.

Right. So, one of the primary concerns we had of course was head count and I spoke to that a little bit later, how do you populate a global vertical, a new global vertical like factory automation.

Do you install the 200 people around the world instantly or do you grow them a little bit more organically? We have already in our budget for 2016, irrespective of our change in strategy, we already have quite a bit of head count growth built into that. And we think it's just going to be some changes, lateral moves and additions.

There will be additions in that, but I don't think they will be any greater than you might have expected for year-over-year..

Okay. And if I guess one more question and I'll jump back in the queue. I wonder if you – how you might characterize the demand environment as you went through Q4 and we know a lot of your sales do come in the back end of the quarter. But you seem to indicate some choppiness in Europe.

And I'm just trying to get a sense as to that the overall tone of the business, particularly in light of the changes you're trying to implement?.

So as you mentioned that the – quite – a higher volume of our sales happen to hit the last several weeks of the quarter, at least for the shorter term, that will continue with this new organization and I don't anticipate any change to that..

Just to speak to the other part of your question, which was the – how the market is looking, I mean, I think Laura personally answered that in the question before. It's pretty hard to predict. I mean, we do softness clearly around the world like everybody else is seeing it. And it's really difficult to predict where that's going to go.

So I mean, PMI is under 50 and the similar construction market deficiencies in the APAC region, we just don't have a good visibility into that..

Okay. Thanks very much..

Thanks Jim..

And we'll go next to Ben Hearnsberger with Stephens. Your line is open..

Hey, thank you very much for taking my question.

Laura, I had a question on the laser scanner unit and revenue growth, I'm sorry if you already mentioned it, but would you mind repeating that?.

Sure. One moment. So, the laser scanner was at 20% down from prior year..

Is that units or revenue?.

That will be the unit sales, yes..

Okay. And then on the restructuring, I mean clearly, this is a more extensive restructuring than we were expecting and I think most were expecting. It sounds like it's about – it's got about a year timeline on it.

When can we expect to get a sense of the restructuring charges?.

Are you referring to the restructuring that we announced in third quarter?.

No.

this is in anticipation of what's expected over the coming year?.

Okay. So, you're talking about the reorganization..

Yes..

That Simon spoke about..

That's correct..

So, we're still in the early days of that, we've just been working on it over the last few months, as Simon indicated. And we will be coming back to you and reporting to you with visibility to the information at the Q1 call and then update as to how we're progressing on that overall reorganization..

But I think I can – I think I can add a little color to that, to give you some comfort with that. Clearly, on an organization level like this, it's really about the people and where you need them and how you need them. And as I've indicated, I don't expect to see head count growing much more than you would expect for a typical year of growth.

And I think you can look at our historical numbers for that, right now, it doesn't look like that. I think there is possibility for some mid-level management hires as part of the vertical management. We don't see also a significant increase in the R&D teams. The teams are going to be more agile. They would be organized differently to be more productive.

So I don't see a huge restructuring or any kind of charge – hesitant to use that term, but it's the right term, but – the cost of doing the reorganization is not expected to result in any significant charges.

It is true that we are going to probably implement systems as I mentioned in the speech I gave beforehand that the idea is – of harmonization is that with harmonization, we can put in systems and/or tools that will provide efficiencies.

For example, those might be an HR System that is global versus our three regional ones that might be product lifetime management systems and R&D tools. So I would expect some capital expenditures relating to taking advantage of the harmonization. Apart from that, nothing untoward..

Okay. That's helpful.

And really the spirit of the question is, last quarter, it really felt like the company or the organization was much more in a hunker-down mode, seeing 8% head count reduction to kind of weather the storm, and now its sounds like even regardless of the outlook or how the end markets are progressing, there is going to be some level of investment in this reorganization.

And it sounds like we can expect more detail at the hard dollars around that maybe on the upcoming call..

Yeah, I think so. And let's just speak to that. It's an interesting approach – strategic approach. If you think five times are hard you can retrench. I don't usually shirk my challenges that way. I'd rather say, okay, what do I got to do in the medium-term and long-term to make sure that I am successful and things turn around.

I mean, one of the chronic comments about FARO is that it has a lot of cash. And in that context, you know there's acquisitions to be made, there is reorganization to happen. We're going to try to avoid unnecessary CapEx, which we're going to try to keep it under the – significantly under the 3% that we've kind of spoken to in the past.

So, our strategy is this, let's get prepared for the future, let's start to get it right, get back to the kind of things that we used to do really well. And you'll note that the risk that the – the risks and other things that we did in the third quarter were under a different management with a slightly different view of the future.

So mine is much more positive about the future and the need for us to prepare for it..

Okay. That's really helpful. I had one last question, on the cloud-based sales strategy versus onsite demonstrations, I think the idea has typically been that this is a very hands-on sales process, it sounds like you're trying to move away from that, for obvious reasons, there is a lot of dollars tied into those onsite demonstrations.

I guess is there a model you're trying to emulate out there somewhere and have you tested this strategy at all? Are you in early testing? And could you give us a sense for the close rates you're seeing on this change in strategy?.

Yeah. So I want to be careful because I consider a lot of this fairly proprietary, but let me speak first to that. There is no model out there that I've seen that does what I think we need to do.

We have this unique combination of needing to display capital equipment, present information on the computer screen, use user parts, be in an environment that they need. So we're going to approach that in some very, very novel ways.

And we're going to enhance the personalization of that relationship to avoid the repeat demos, to enhance the ability for that information to be used, those demonstrations to be used in a universal way within the customers' environment. And so it's a – I'm pretty proud of some of the ideas that we've put together. We've already started prototyping it.

We can't speak to returns on that investment yet. But we expect it to show some significant improvements in close rate..

Okay. That's really helpful. Thank you very much..

Sure..

And we'll go next to Patrick Newton with Stifel. Your line is open..

Yeah. Thank you, Simon and Laura. Just to dovetail off the prior question.

I'm curious if you could comment on whether you have any at least beta customers or who you approach I think with it, and how the reactions have been, because I think on the surface, if you're successful in this, it seems like there's obviously very high reward, but it also seems like a very high risk kind of given the history of hands-on.

And then could you also comment whether this strategy is ubiquitous across the firm or if you're starting out with certain product lines or certain verticals to transition?.

Yeah, great question because it speaks really to the strategy that we're using for the implementation of that. It will be global. It's impacted by some of the areas where – for example, a broadband may not be as available as it would be. We are not going to transition out of our direct demonstration based environment.

I'm not sure if we revealed in the past close rates, no, I don't think we should. So – we have a certain percentage of close rates on a given number of demos right now. And the ability to close one or two more sales out of all the demonstrations you make, has the ability to actually create very significant increases in sales.

So, we're talking about a small incremental change in the close rate, will have dramatic impact on sales for the same amount of work and costs that we have today because we have a certain close rate, which is a smaller percentage of the demos. The other issue is that we often have to go back and do multiple demos because not everybody could be there.

It has to be vetted the first time. So we want to eliminate the repeated – unnecessarily repeated demo context that stretches out lead times and closing times. And of course, now I've forgotten the other part of your question. I'm not sure if I answered it..

I think you got everything.

You said it was global and across the verticals, so – okay, and then a couple of housekeeping questions, Laura, what was the new customers, existing customers as a percentage of sales? And then what was the account managers by geo?.

So the new customer sales was at 20% in the fourth quarter and the account manager data for the fourth quarter was 239..

Can you break that up by the various – by the Americas, Europe and Asia?.

Yes. So, it's 87 in the Americas, 76 in Europe and 76 in Asia..

Great. Thank you. And then I guess just going back to the new customer sales. Something that we've always tracked is new customers we have seen is your lifeline and it's been a trend that if you go back to the 2008 timeframe, you were roughly 50-50 new and existing customers and it's been slowly declining.

But in the last two quarters, it's been quite pervasive, and clearly that's the lifeline of your future revenue.

I'm sure that's tied to your laser scanner business, which I think by my math, Laura, you said units were down 20%, but I'm backing into revenue being up just slightly sequentially overall, but is that – why that number is so low and is that metric concerning to you at all?.

So you are correct, that it is primarily the laser scanner and then the other part of it would be in some of the emerging markets, in particular in Asia..

Do you have any concern on the metric?.

So that is part of the impetus to go ahead and do this reorganization is to increase our topline to higher CAGR as we've done historically and get the leverage off of the – off expenses..

Okay.

And then just another product question is with the Cobalt 3D Imager, could you help us understand what the list price is? How orders are trending and the general availability of the product? And then anything you can give us to help quantify the market opportunities stemming from that from the new product?.

Okay. So, that was a lot of data you've asked for. The selling price of product is around $30,000, but we sell it in array, that's for a single unit, and arrays are multiple units. We do have quantity pricing for multiple unit arrays. They come on what we call trees (44:24) and are installed into the manufacturing environment.

We also have versions that go on the end of robotic arms for the purposes of near-line inspection products that we've already talked about it at shows and we'll be introducing soon. So, we see a lot of opportunities for that imager. We're competing against a number of companies that have lesser technology.

You could add those up to probably $500 million to $1 billion in sales potential annual business level. So we see it's a rather large market. We believe that the array technology is unique in the field and provides tremendous opportunities for efficiencies in manufacturing. So we're quite excited about how it will get implemented in the market.

We're interested in selling it not only direct, but through integrators who set up lines for factories. It also has applications in the reverse engineering market because of the high accuracy or wide range, blue light technology that gives us the – provides a very high-resolution reverse engineering information as well.

So it has a number of applications which are being investigated. This actually speaks to the whole vertical, the verticalization of the company, if you will, that that same technology, packaged in different ways, can be sold then to different verticals for different applications.

And that really speaks to why we're making the change because in the past, we just produced an array imager and hoped that everybody figures out how to use it.

Instead now – our generic one, instead now, what we're going do is we're going supply that imager and configurations packaged with software and priced appropriately to work in the different verticals. So it's a little old to say that how that – the impact that that can have, but I think it will be profound..

Thanks for the details.

And then just the general availability or order of commentary around that product?.

Yeah, it's too early to say. We're taking orders and we are in the process of manufacturing. So we'll have to see how it ramps up..

Okay. And then just couple of items on the P&L for you, Laura, just can you comment on what drove the other income gain of $1.3 million because that was a positive surprise of about $0.06 relative to our estimate.

And then just to make sure that we're modeling the severance charge of $2 million correctly to get that – to the $0.60 number that you talked about in the press release, we're back into about a $600,000 tax impact, is that correct? And then, you also talked about $700,000 then in COGS, and I had assumed the other $1.3 million is in G&A, if you could cover all that?.

Okay. That's a multiple questions. So the first question was what was in the other income and expense. That is primarily CTA, currency translation. The other question was on the $2 million on severance. And as you referenced, $700,000 is sitting COGS and the rest is pretty much across the board in all the OpEx expenses.

The last question, I think you asked was....

There has to be a tax implication in order to get to that $0.60, I think if you just pulled $2 million out, it's $0.64.

So I'm calculating about $600,000 and not tax related to that, is that accurate?.

So the – in terms of on EPS perspective, it would be worth about $0.08..

Okay.

So the only implication to get to that $0.08 as opposed to just the $2 million as taxes, correct?.

Correct..

All right. Thank you for taking my questions. Good luck..

Thank you..

And we'll go next to Hendi Susanto with Gabelli & Company. Your line is open..

Good afternoon, Simon and Laura..

Hello..

Good afternoon..

First question is for Simon, how should we think of FARO market share in 2015 compared to your competitors?.

Well, the process becomes a little bit more complicated because we're actually going to be competing in multiple verticals.

I would prefer to look at it as how do we intend to provide or productize in those verticals and I would say there that we intend to return to technology leadership, best value-price relationships for the customer and best value propositions. With respect to market share, it's a little bit difficult to say and too complicated right now.

But I think probably by the end of the year, when we have a better idea of how the verticals have developed, we probably may be able to make some statements on that. But recognize too that each of the verticals will have a multiple set of different products and different configurations.

For example, metrology is going to have scanners as well, for example, for doing large and boats and steamships and things of that sort for metrology purposes.

You are going to find scanners in public safety, you're going to find scanners in metrology, you're going to find scanners in BIM-CIM and they're all attuned to the different vertical markets in a specific way and packaged with specific software.

So, market share concepts are going to become a little bit more difficult, but we will – we'll take a run at it for you later in the year..

Okay.

And then Simon what are major attributes that you want from a new CEO?.

Well, we certainly want somebody that's forward-looking, that's technology oriented and has good respect for the market, a good sense of turning shareholder – creating shareholder value by keeping operations efficient, definitely growth orientation. Somebody probably as good looking as me, I think I am you know..

And then Laura, how much aggressiveness can FARO be in buying back shares, if you look at FARO's balance sheet now?.

So as we said in my notes that we did purchase $22.8 million last quarter, totaled 809,241 and we still have $18.3 million of authorization. And we will look at the market. And as we did in fourth quarter, we will consider opportunistically whether or not it's appropriate time to be in the market..

Got it. And Simon, I would like to understand more, you said that you want to accelerate new product introductions.

I'm wondering how much more accelerations you can achieve? I don't know whether you can give some qualitative or quantitative comments on that?.

Sure, happy to. Well, the reorganization of the engineering team is about getting more efficiencies and moving resources where they best serve the vertical needs. There was a tendency in that past to have platform-related engineering groups that the same 50 people that put together a product stay through the lifetime of the product evolving it.

We want to get the kind of returns that you get from engineering that you get in early innovation of new products, so people will be moving around.

And we've already got a plan in place for the year and we expect every vertical to do something significant at least twice a year, not to mention the more maintenance releases, but also significant contributions to the market.

A number of products are in play right now and will be announced in the next few months and so we think that's – that is doable..

Thank you..

And we'll go next to Richard Eastman with Robert W. Baird. Your line is open..

Yes, good evening. Good afternoon.

Simon, could you just speak a little bit as we reorganize into these verticals and we're reorganizing R&D, selling and marketing, are these verticals, do they offer enough scale to essentially support these vertical teams that work globally? Are you going to have to make – again this goes back maybe to the investment question that came up earlier that you addressed, but again just reorganizing into these six verticals, is the scale there to support these teams in these verticals? Or do we need to backfill some people?.

We think in general that there is a necessary structure to support the verticals. But remember that I mentioned this idea of the growing vertical and the emerging vertical where they are paired together. The management structure, one, will help build the basis and foundation of the new one and grow it. So the intention is for it to be organic.

We will start at the top level with vertical marketing and product management, so the products can be defined. And then the parent vertical will take on the responsibility of starting to build from the bottom up, and people focused. Now to begin with, there is going to be some lateral transfers from the existing verticals into others.

I think some account managers will have responsibilities in a couple of verticals, both the parent and child vertical or the growing and the emerging verticals. So we're going to try to do it in such a way that it's organic, it's self-supporting and it doesn't mess with our financial model too badly.

And when I spoke to the kind of expenses that we are going to incur, I don't expect them to be significantly more than what you would incur over the typical year over year..

And is there – as we – we can do a look back and we obviously look at the growth rate, the order growth rate and can certainly acknowledge the slower spend in the industrial markets and the impact it's had on all industrials.

But I'm curious, as we emerge the other side of this vertical strategy and rework and realignment, what is your thinking on an appropriate targeted growth rate – topline growth rate? Is this – have we stepped down as just a larger more mature company or do we still feel that the potential of the client hardware and now software opportunity – is it still a realistic target to say 20% or is it a double-digit number or how are you realigning and what's the potential goal here once we are reestablished?.

That's always a great question; it's a chronic question around here, what's the reasonable, certainly with the board what's a reasonable expansion rate, how much of that should be M&A, how much of that should be organic. So we have those conversations often.

It's clear that the last 10 years has been around a 10% CAGR and it's clear that the 20% is up around – the 20 year is around 20%. And people can construct all kinds of stories around the CAGR. We are just not satisfied with the growth rate and we believe that by simple but important contributions to the sales process modernization.

So we are actually doing the work right now for significantly greater sales, but we are not getting the returns that we want. So from an organizational point of view, we see the potential to do – for example, let's say and this is with the number, but let's say you did 10 demos and you are closing on four of them in general.

Well, there's six there that you did that were customers that were interested, imagine if you could just get one more or two more, or what if you could change the 10 demos that a sales person does to a technology to 20 or 30. So, that's true.

That's what we do organically but can the market support that? Well, it's pretty obvious when you look around that there is a lot of companies that are growing. There is a lot of new technologies, there is lot of new opportunities being created.

So I think the context for growth is there and I don't particularly want to target a number, but I certainly want to say that what we have today is not good enough and that we got to do better..

Well, wouldn't it also play into the pacing of the investment to support a growth number?.

Yeah. I think that's true. And I think you can over invest, you can get ahead of yourself. For example, if we installed 200 people in one of our new verticals, let's say public safety around the world, we'd probably be getting way ahead of ourselves.

So, we want to do that a little bit more organically but we want to be responsive; if the market meets our expectations, we want to be able to grow into it quickly. So we're trying to devise an adaptive process to deal with that. In the market place, you are getting credit for growth, you are not given really credit for investing a lot in growth.

And so you're generally forced thereby to be kind of organic and self-sustaining as part of that process. So that's what we're going to try to do, and we're going to try to make that accelerate as quickly as possible..

Okay. And when you think about the two primary product categories that FARO has penetrated, is there a channel strategy that shifts dramatically either in metrology, again we talk about bumping the closure rate, I totally understand that.

In Focus Laser Scanner we've kind of taken two steps forward and may be a step back in terms of indirect, direct, does this vertical realignment change the way that product needs to and will get to market on the scanner side?.

Yes, absolutely. I do want to speak to the distribution thing. Now some people view the early distribution through Trimble and others as having been a misstep in distribution.

I frankly view that as a very rapid penetration into a highly developed and resistant market where these distributors for these ultimate manufactures just opened the door up and we got into thousands of places that we never would have gotten in before.

And thankfully we knew beforehand that they were working on their own equipment and then one day we would be kind of out of their channel. So the question of looking for more distribution or not is certainly one of our goals. But it's not something that is paramount in our minds.

The actual selling of scanners, as the example I told to a previous questioner, the scanner will look different for each of these markets and for example, the products like the Cobalt Array Imagers sold into the factory automation mold is going to have to go through perhaps groups of integrators, it's going to – you're going to have to talk to a different channel altogether..

Okay..

And versus the one where you sell, for example, the imager to reverse engineering market where it will be the direct sale to a product development manager.

So, yeah, I see the channel becoming – well part of the reason for the verticalization is the acceptance of the idea, accepting the idea that for each of these verticals they all have a slightly different way to buy, slightly different channel and our all product saw people approach before, did not take that into consideration.

So, yes, every one of the verticals will have a slightly different or substantially different way of selling..

I see, okay, okay.

And then I just have one quick question just to be clear, with the $2 million restructured charge here in the fourth quarter, is there an expected savings amount associated to the $2 million restructure in 2016 that would drop to the EBIT line or does that get reinvested again in some of the realignment and some of the investments needed there?.

Yes, the latter. So you are correct. As we go through this verticalization and this reorganization, we will be looking to reinvest into the business to support this and to further growth the business..

Okay..

And we will go next to Josh Sullivan with Stern Agee. Your line is open..

Hi, good afternoon..

Good afternoon..

I'm just looking for some color on two of your larger end markets here in aero and auto. First on aerospace, we have this historic production ramp ahead of us on the next generation aircraft, but also some legacy capacity coming down.

How is FARO exposed to that transition over the next 12 months?.

Well, we view the aerospace market which isn't defined as a market before, kind of like another, it's a whole world because we sell products for BIM-CIM, for the factories. We sell components for automated metrology. We even sell crash components for things like automotive and aerospace. They have automated and manual components, they have metrology.

So we would speak to almost every level of the aerospace manufacturing market. It's clear that the people who are involved in the factory setup are not the same people that are doing metrology for the actual parts being assembled or the automated large components which speak to factory automation.

So if you think about it, aerospace can be touched by almost all the verticals. So we expect to see activity in all those fronts and benefit from that..

Okay.

And I guess it's kind of similar to automotive, I mean we get a lot of questions on the automotive cycle and where we are with SAAR (1:03:15) here in North America, but the OEMs keep obviously investing a lot in automation, I mean are you looking at those cycles or how are you thinking about that in the automotive world?.

We're really not looking at the cycles. We're so under-penetrated in our mind that it's really about just doing a better job at what we're doing. There are tremendous numbers of opportunities out there. A lot of demos that we wish we're closing that aren't, that we need to improve on.

So my personal feeling is that, it has less to do with cycles than it does to do with execution..

Okay. Thanks a lot. Have a good night..

Sure, thank you..

And we'll go next to James Ricchiuti with Needham & Co. Your line is open..

Two quick questions.

Laura, tax rate going forward, what should we be assuming?.

So, we had unusually low tax rate this quarter that's attributed for a variety of things, primarily that the higher tax rate jurisdictions have lower profits than the lower tax rate jurisdictions. I wouldn't anticipate that our go-forward tax rate would be any different than historically what it's at, which is in the low 20%s..

Okay, and Simon, you may not be able to answer this now, but I'll take a shot at it anyway. I mean clearly there is some frustration I think about – or disappointment about the growth rate at the company over the last several years.

But I wonder if you could talk a little bit about if you have a view of what the operating margins could look like as you execute on this strategy, more of a longer-term question..

Clearly, the two parts of that equation, the topline and then our operating expenses give you what you're looking for there. We would like to be at the top of the band of comparables and we would like to benchmark other companies. We would like to be the more profitable of them.

So if you took our comparables and then you looked at the variations of those, I would look for us trying to achieve or exceed the best in our comparables..

Okay. Thank you..

Yeah..

We'll go next to Rick D'Auteuil with Columbia. Your line is open..

Yeah. I think, two between Rick Eastman and Jim Ricchiuti, they asked my question, but I'll try it again. You began your comments today, Simon, saying that you're unhappy with the growth rate of 10% under Jay's watch. You also said, you're unhappy with the operating leverage and the margins.

And then you talked about what you're going to do to fix it? And what you haven't answered is, what's the reward we're going to get post this? And even in the past, we've owned the stock even since you were CEO, your last time around, there were goals and targets out there and the company has progressively retreated from those, frustrating shareholders and I understand the CapEx spending cycles go up and down, but it would be nice to know what are goals and rewards are for sort of waiting out the transition and what you're seeking to gain post that.

So I know both Rick and Jim just asked the question separately, but I'll roll them together and see if I can get an answer from..

So, first, my comment about the 10% was in no reference to Jay's performance, one which I respect deeply. Jay did a fantastic job for the decade, shepherding the company through various cycles and through significant changes and expansion in the world. So, thanks to Jay for that.

What is in it for shareholders is an interesting question because from a management point of view one expects that by increasing the topline and reducing cost, generating more profit that you have an EPS.

I know it's going to sound patronizing because the question was in a way, the most generic question you could ask about what a company does in a public market. So you will note that I have not stated any unrealistic goals, I've talked about returning to topline growth, this is better than the 10%.

I've talked about getting gross margins to historical highs. I tied that to the fact that, if we lose technological leadership, then we lose the ability to charge premium prices and margins start to drop. So the importance thereby of good R&D and good response of this to the market.

So we are going to improve our efficiencies around the world that should reduce SG&A simply tracking sales that give us a little bit more leverage. What do I expect for shareholders from that? I expect that if we generate a better return on every dollar of volume that you will get EPS, you will get a growth rate and you will have a stock going up.

Now it's true that in the past couple of years and more, four years or five years, the stock has hit numbers like in the mid-$50s and in the $60s. In general, if you look back over the last 10 years, the stock has significantly beat the NASDAQ growth overall.

And so from that point of view, only last few quarters has the pricing been kind of anomalous to the NASDAQ and the reasons which I don't completely understand because the basic nature of the company has not changed that much.

You raised the point though of numbers that are goals that are set and while we won't be the first with stated goals that we didn't quite live up to; however, the return to shareholders has been quite extensive for holders of FARO stock and particularly long-term holders of FARO stock. So I hope I answered your question a little bit.

It's little bit hard to know exactly what you meant by it and I wasn't sure if it was a criticism or if it was a support for doing the kinds of things that you need..

Yeah.

Just I mean again, I presented the data to Jay and to Laura more recently at a conference in January and the lack of operating leverage here is very frustrating for a long-term shareholder like us, and you guys have grown – done a lot better job even though you might be disappointed with the 10% growth, a lot better job on the topline than you have on the operating leverage line.

There hasn't been any. The company's had a tendency to invest through the cycles and never get the full returns for that investment and part of it, might be addressed here, I guess time will tell, as it relates to the sales force and the leverage that you are hoping to gain there.

But, I guess, I was hoping that you'd go one step further and say under this reorganization, here is where our operating leverage or our operating margin goals will be a year plus out. The company has historically provided those, but – provided the date you get there and you've never gotten there.

So we are kind of hoping that you would get a little more specific about that since we're I guess being asked to give you the time to work this transition..

Okay. Well, I am not sure the question is fair or unfair. But I am going to make an effort to answer it. I think our analysis shows that one of the reasons we haven't been able to scale the earnings with this topline growth is the fact that the business is very, very complex.

We sell into enormous number of markets, we operate in eight languages, we do it globally even though we are a small – relatively small company and contracts with a lot of global players. And as I noted in my preamble, the complexity of the operations has gone commensurately in the different regions.

And when you are in China you are operating or in the APAC you are operating in quite a few different companies, countries rather and in Europe, same situation irrespective of the common market.

So that's been complicated, and part of that has resulted in regionalization of processes which we analyze as one of the major contributors to not being able to scale the SG&A down as a percentage of sales.

So you might ask, well, what's the natural thing you can do for that and that's what we're trying to do, is to harmonize and reduce those expenses while also pushing the topline. The best thing that we can do is we can provide you our best intentions.

And with respect to the modeling of it – there's a lot of companies that operate just in the United States that have G&A of 10%, let alone one like us at 10% or 11% and having something global like we do. So we are not doing terribly, but I believe that we can do much better.

And it's going to be these little incremental pieces of every part of our operational lines and hopefully they will add up to something significant..

Okay. Thank you..

Sure..

And we will go next to Ben Rose with Battle Road Research. Your line is open..

Hi, Simon, Laura. I realize it has been kind of a long call, so I'll try to limit myself to five follow-up questions. But on a serious note, very solid DSO performance, I don't know if this was mentioned earlier, I don't think it was.

But the solid DSO performance that you had Laura in the quarter, how much of it was traceable to just timing of receipt on customer invoices versus perhaps a reduction in the level of extended payment terms, which I gather the company had been doing a few quarters back, whether customers are not asking for extended payment terms as much as they have recently..

It's really a combination of a few things, the fact that the team, the global finance team working in combination with the sales team really made an effort to improve collections with various efficiencies and processes.

And it was I think also the nature that we are seeing some strong financials with many of our customers who have the ability to pay..

Okay. Thanks very much..

And there are no further questions at this time..

Well, thank you everybody for taking our talk and asking terrific questions. We look forward to reporting to you on how the reorganization goes in subsequent quarters. Thank you and good night..

And thank you for joining us today ladies and gentlemen. This does conclude today's program. We certainly appreciate everyone's participation. You may disconnect at any time..