Victor Allgeier - President, TTC Group, Inc. Bob Seidel - Vice President - Finance & IR Simon Raab - Chief Executive Officer, Chairman and Co-Founder.

Patrick Newton - Stifel, Nicolaus & Co., Inc. Brandon S. Wright - Stephens, Inc. Richard Eastman - Robert W. Baird & Co., Inc. (Broker) Mark Conrad Jordan - Noble Financial Capital Markets Josh Ward Sullivan - Sterne Agee CRT Hendi Susanto - Gabelli & Company.

Good day, everyone, and welcome to today's FARO Technologies' First Quarter 2016 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later on, you'll have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded.

I'll be standing by should you need any assistance. It is now my pleasure to turn today's program over to Mr. Vic Allgeier. Please go ahead, sir..

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

The press release is also available on FARO's website at www.faro.com. Representing the company today are Dr. Simon Raab, President and Chief Executive Officer; and Bob Seidel, Vice President of Finance and Investor Relations. Simon 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, 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 yesterday's press release and in the company's Form 10-K for the year ended December 31, 2015. I will now turn the call over to Bob..

Thank you, Vic. And good morning, everyone. Sales for the first quarter of 2016 was $75.7 million, an increase of $5.8 million or 8% compared to $69.9 million for the first quarter of 2015. The Americas led the way at 13% sales growth while Asia delivered a modest recovery from the challenging 2015 at 9% sales growth.

Product sales increased by $4.3 million or 8% to $59.3 million for the first quarter of 2016 from $55.0 million for the same prior-year period, driven mostly by higher metrology sales in Americas and Asia.

Service revenue increased by $1.5 million or 10% to $16.4 million for the first quarter of 2016 from $14.9 million for the same prior-year period mostly because of higher warranty revenue.

In the Americas, sales for the first quarter of 2016 increased by $4.1 million or 13% to $34.5 million compared with $30.4 million for the first quarter of last year, primarily driven by an increase in metrology sales and higher warranty revenue.

Despite softness in China, Asia sales increased by $1.5 million or 9% to $18.8 million for the first quarter of 2016 from $17.3 million for the same prior-year period. Similar to the Americas, our sales growth in Asia was primarily a result of higher metrology sales.

In Europe, sales in the first quarter of 2016 were $22.4 million, an increase of $0.2 million or 1% compared with $22.2 million for the first quarter last year, mostly due to an increase in service revenue, partially offset by lower product sales. Gross margin was 56.3% in the quarter compared with 56.6% for the same prior-year period.

Product and service margin remained relatively unchanged. Selling and marketing expenses decreased by $1.5 million or 8% to $17.6 million or 23.3% of sales for the first quarter of 2016 compared with $19.1 million or 27.3% of sales for the first quarter of 2015.

This decrease of $1.5 million or 4.0% of sales was related mostly to not having an annual sales meeting previously held in January. General and administrative expenses for the first quarter of 2016 were $10.5 million compared with $9.8 million for the first quarter last year.

This increase of $0.7 million was mostly due to higher stock-based compensation and certain employee separation cost. As a percentage of sales, general and administrative expenses decreased to 13.9% in the first quarter of 2016 compared with 14.0% for the same prior-year period.

We continue to invest in research and development, in line with our initiative of establishing a new product drumbeat. As a result, research and development expenses increased by $0.7 million or 12% to $7.1 million or 9.4% of sales for the first quarter of 2016 compared with $6.4 million or 9.1% of sales for the first quarter last year.

Operating income for the first quarter of 2016 increased by $2.4 million to $4.3 million compared with $1.9 million for the prior-year period, translating to an operating margin increase of 3.0 percentage points to 5.7%.

For the first quarter of 2016, income tax expense was $0.5 million for an effective income tax rate of 15% compared with an income tax benefit of $0.1 million for the same prior-year period. Net income for the first quarter of 2016 was $3.1 million or $0.19 per share compared with $0.7 million or $0.04 per share for the first quarter last year.

I will now briefly discuss a few balance sheet items. Cash and short-term investments increased by $12.8 million or 13% to $163.2 million as of March 31, 2016 compared with $150.4 million as of December 31, 2015, primarily driven by strong cash flow from operations of $13.1 million.

Accounts receivables decreased by $9.8 million to $60.1 million as of March 31, 2016 compared with $69.9 million as of December 31, 2015. DSO was 72 days at the end of first quarter 2016, down nine days from the first quarter last year.

Total inventories increased to $83.5 million as of March 31, 2016 from $79.3 million as of December 31, 2015, mostly driven by new product releases. Finally, I'll conclude with our head count numbers. We had 1,298 employees at the end of first quarter 2016, representing a year-over-year decrease of 10 employees or 0.8%.

Geographically, we had 516 employees in the Americas, 494 in Europe, and 288 in Asia. I will now hand the call over to Simon..

Thanks, Bob, and good morning, everyone. I was encouraged by our first quarter sales growth and increased EPS. We started our planned product drumbeat by releasing several new and revised hardware and software products since the beginning of the year.

We made significant progress on our initiatives to better target specific vertical markets, better leverage our sales organization through process modernization, and harmonize global functions to improve efficiencies to reduce SG&A as a percentage of sales.

Essential to the product drumbeat, we've also began our reorganization of R&D and product management to ensure that our products meet the needs of the vertical markets on which we have focused. As mentioned, we made a good start in Q1 at establishing a drumbeat of new and improved software and hardware products.

In order to facilitate and enhance these product introductions, we've introduced an Early Adopter Program. Early adopter registrants will have access to new product concepts and provide FARO unique and accelerated access to marketplace and critical feedback in certain limited geographies.

We hope that most early adopter products will quickly evolve into full global product releases. In January, we released a new class of automated metrology imager technology with the FARO Factory Array Imager, formerly known as the Cobalt.

This product is targeted to penetrate in-line and near-line industrial manufacturing applications with its unique combination of high resolution, fast processing speed and multi-sensor scalability, which both enhances and in some cases eliminates the need for robots.

In March, we launched the FARO Early Adopter Program by announcing the world's first 3D scan localizer. This product mounts under a FARO Focus laser scanner and makes continuous 2D scan while tracking the laser scanner's location in order to stitch together a complete building material.

This innovative product provides building and construction information management for BIM-CIM customers with efficiency gains of up to 2.5 times over alternative solutions of setting up targets or using overlapping scan.

The FARO Focus laser scanner soon to be renamed FARO BIM-CIM laser scanner is already best-in-class and is dramatically enhanced by the Scan Localizer. In April, we announced the release of our second early adopter product, the Factory Robo-Imager.

This new product pairs our recently released Factory Array Imager with a human collaborative robot to provide highly adaptable safe and automated in-line and near-line inspection for manufacturing processes.

It has always been one of FARO's primary philosophies that small and medium sized businesses can benefit from 3D technology, which in the past has only been available to large manufacturers. The Robo-Imager, which sells for the price of a small CMM, makes the adaptability of a robot and high resolution measurement tool accessible to all.

We also introduced important product enhancements. In April, we announced the release of new 3D laser scanners with high dynamic range, HDR. The new FARO BIM-CIM HDR laser scanner improves the quality of detailed images in bright and dark lighting conditions as well as provides increased resolution for superior color depth.

Simultaneously with the new scanner enhancement, we introduced the latest version of SCENE, which provides nearly instant rendering of scan images, substantially enhancing user experience. We also introduced the new version of Fire Zone with an important reporting improvements for our Public Safety users.

In addition, late last year, we announced the development and introduction of short-range scanners and software bundles, breaking the 30K barrier compared to the typical 60K long-range scanner and software bundle.

In Q1 of this year, we started to see important responses and market specificity of these products and the early interest in certain applications underlines the importance of product's design, packaged and priced for their verticals.

We're very proud of the technical achievements, which allow us to profitably price and package products with substantively different vertical requirement. Beyond driving the new product drumbeat, we took steps forward on FARO renewal by realigning the roles of two of our senior leaders.

Kathleen Hall has now officially assumed her new role as Chief Operating Officer, with responsibility for leading our global operations team. She is directing the focus of the team on the identification, harmonization and optimization of processes around the globe in order to deliver the long-term efficiency gains required to increase margin.

In addition, Joe Arezone has now officially transitioned to his new role as Chief Commercial Officer.

Uniting all sales teams under a single leader is the first step to align the organization to leverage the expertise, knowledge and processes of three diverse regional teams to develop a best-in-class sales force and successfully drive companywide growth.

The sales leadership team under Joe's direction will now be focused on the definition of the end customer market, the unique needs of running a global organization, and the ways in which we can best address the needs of our chosen verticals.

In the first quarter, I visited FARO locations across all three geographic regions, and I'm excited how our global team is embracing the core tenets of FARO's reorganization. From the new product drumbeat, the sales modernization to refocusing on vertical applications, FARO's renewal is fundamental to our long-term growth.

We are taking the first steps by unifying our core functions under global leadership, which represents a crucial step to leverage best practices, increase efficiency and to drive innovation.

While we are still early in the overall implementation of the new organization, the strides taken since its original announcement have already shown positive sign. Reinvigorating the entrepreneurial spirit that FARO was founded on and instilling the desired agility in interacting with our organization, customers and market is our immediate goal.

As the renewed organization takes form, we'll continue to provide updates on the progress and exciting new initiatives that will reaffirm FARO as a market leader. I want to thank all FARO employees for their continued focus on driving the company forward, even as we are changing the way we do business. And I'll now open the call for questions..

And we'll take our first question from Patrick Newton from Stifel. Please go ahead..

Yeah, good morning, Simon and Bob. Thank you for taking my questions and congratulations on the nice quarter. I think the thing that stands out the most is the services side of the business, you know, record revenue quarter and a second highest gross margin through our model.

So I'm curious if you could discuss what drove the increase in warranty, and is this a new focus of the company.

And then can you talk to the sustainability of revenue or the gross margin, given both are at peak relative to historical levels?.

Okay. Hey, good morning, Patrick. Thanks for joining the call. First of all, I'll talk about our service, as you indicated. Customer service revenue throughout in Europe was up just based on customer requirement. So that was certainly one driver year-over-year for us.

Number two is, more broadly speaking, is that at the point of sale, all our regions are really focusing on trying to drive warranty revenue. So that is really one of the major other drivers of it. So it's two pieces.

One is the customer service in Europe, which is timing, customer requirement, but really speaking broadly, the strategic of the warranties.

Going forward, certainly that is going to be a strategic priority for us across all our sales regions and as we harmonize it to drive that warranty revenue because it's a nice stream of recurring business for us..

Great.

And then I guess on couple of housekeeping questions, and I'm sorry if I missed this, is – did you provide bookings in the quarter, distribution as a percentage of total sales and then distribution as a percentage of scanner revenue?.

Well, first of all, Patrick, on orders. In the past year, our book-to-bill ratio, as you know, had been near one, reflecting that our customers place the order in the quarter and we ship in the quarter. Therefore, we believe that order performance is not materially different than our sales performance that we reported.

So, going forward, we are not disclosing orders as it's not materially different than our sales in generally. Okay? And in terms of, I believe you said, laser scanners, really over the past year, we've shifted our channel to market for our laser scanner products with expansion of a direct sales force really across many of our key markets.

Going forward, each of our teams will really be working to identify the optimal channels. And so, we're really focusing on the end-market applications and broadening our product portfolio as we go into the verticals. Therefore, we don't really see disclosing any type of distribution has been a material item for our shareholders or analysts..

Okay.

Did you provide laser scanner as a percentage of revenue?.

No, we did not. That's what I was talking about..

I thought you were talking about distribution.

Can you provide us with laser scanner revenue as a percentage of revenue?.

No. What we are focused on, if you read the Q, is really focused on, one, our reporting region. So we talk in the reporting regions about our sales growth, as you know, in the Americas, Asia and Europe. So we did not really talk about anything below that.

What we really see in the quarter though that really talk more broadly is, one, we saw in Asia and in Americas higher metrology sales and across the – really across most of the regions, we did see slightly lower 3D Doc sales. But we did not disclose any numbers at that point..

Okay.

So in the Q, you're not disclosing ASPs by product line anymore? You're not disclosing unit volumes, you're not disclosing bookings, and you're no longer disclosing distribution and no longer disclosing laser scanner revenue?.

That's right. And really broadly, to help you understand kind of our thought process with that is, one is, is that we certainly at this point in time, we are reporting by geographical region. So we are talking about kind of the factors that drive those regions. We talked about those factors in Americas, Europe, Asia.

But as we transition to an approach of our verticals, we talked about – Dr. Raab talked about in Q4, we would be focused more on our end markets, number one. And number two, we will be taking really our products and trying to differentiate through our product drumbeat.

You've seen in the course of the last several months just that we released either six new or revised products in materiality of one specific product, we've become less so.

So that's why we're trying to talk more as we go forward about markets and end market applications, and we do not see that is impacting the abilities of the analyst to forecast our sales..

Okay. And then I guess just last one from me, Simon, is on the strategy of the web-based demos.

I know it's still very early stages here, but are you seeing any indications of success or challenges associated with the strategy?.

The basic challenge is, of course, converting an organization that was doing the sales process one way through another way and in our several hundred salespeople and ISS – our internal sale specialists and application engineers. So it's really in the formative stage. We are setting up studios.

We have started to define the underlying software infrastructure to deal with that, and we are experimenting with different sales processes to see how we can best leverage that technology. So it's a little early for that. We have started doing a number of important demos to learn based on the web processes that we've developed.

So I think I can report more clearly on that in terms of our close rate and other factors later in the year..

Okay.

And just – Bob, just to circle back and just kind of chewing on your statement just on the focus on applications and end markets and verticals, will you as a company be starting to disclose revenue trends as you target these markets or are you just going to be talking about them in generic terms?.

We were right at this point in the process is we are still internally kind of analyzing what is going to take us from our financial reporting structure to move to fully vertical reporting. So we are reporting by geographies now and as we continue.

Once we get to that point, we'll certainly provide you an update when that financial reporting will happen, number one. Second piece is that as we talk involving calls, you will hear more about as we – about the end market applications, how we're developing products to those end market applications and trends.

I think you've seen that somewhat over the past several months. One is we released the Robo-Imager. That kind of really much talks about the end market application there. We released an HDR scanner. It talks about what we're trying to do for our BIM-CIM market. So I would say that's how you will see us focused..

Great. Thank you for taking my questions. Good luck..

Sure. Thank you, Patrick..

And we'll take our next question from Ben Hearnsberger from Stephens, Inc. Please go ahead..

Hey, thanks for taking my question. This is Brandon in for Ben. First off, just congrats on the quarter.

And hopping right in to my first question, kind of on the top-line, given the weak metrics we're seeing in the industrial economy right now, what do you think is really propelling the top-line and getting you to high-single digit growth in the quarter and is this sustainable?.

Well, I mean, apart from working harder and being better focused and defining targets well and working on process and efficiency, I would say that it's hard to tell whether there is a sector change or regional changes in demand. In the past, I've always found FARO sales to be kind of a leading indicator.

So maybe there is a slight resurgence, but that's hard to say. The externally available evidence is contrary. So I would say that part of the reinvigoration of FARO meant a very clear focus on performance. Every process that we're going through right now is being analyzed.

I have to say also that we are very under-penetrated even with an installed base of upwards of 25,000, let's say, on products that the opportunities there are actually hundreds of thousands of products in fruition.

So the lack of penetration that irrespective of the economies, we can contribute a lot by being very effective and efficient in how we do our work. So I would say this growth has really got a lot to do with the organization refocusing on doing what it does well, doing it better..

Understood. Thanks for the color there. And then just honing in on the scanner sales, I think you kind of spoke about in the Q that maybe this is a little weak.

I guess, is that the case, and was this isolated to any particular geo?.

What we indicated in the Q is that we saw slightly lower laser scanner sales across the globe. It was certainly not isolated to any specific geography. One of things – really two pieces of that is we primarily sell into the BIM-CIM market.

Some of the sectors that we've seen there have been somewhat affected by kind of the slowdown in some of the construction projects on the oil and gas side. That's been maybe one factor of a slowdown. Number two, like, parts of the U.S., we've seen some surveying.

I would say the last piece is that we are pushing very hard on the public safety side to try to shorten those lead times. But overall, it was not contained within one specific region.

But certainly what you see over the last several months is how we're trying to address it is, one, we've come out with the HDR laser scanner, really trying to take that product to the next level. Number two, we've come out with a new version of our SCENE software.

So you've seen kind of how the product won't be defined to address those market channels. And the Scan Localizer as well, that's really a product that's really first of its kind. So that's how we're trying to kind of address any shortfalls we've seen over the past several quarters..

Got it. That's helpful. Thanks. And then last one, just on the OpEx, couple of puts and takes in the quarter there. How should we think about this playing out through the rest of the year, given R&D spend for product refresh and kind of this business model revamp? Thanks..

This is Simon again. Under normal circumstances, you'd expect on a reorganization, we would be hiring new position, filling always that there would be an expense increase.

We didn't believe in the first quarter that we would have that and we don't believe now either that we will have significant changes in that regard primarily because every process in the company is under examination now for efficiency.

You can see the head count went down actually in the quarter, yet we have accommodated and adapted to a significant number of requirements for the new organization.

So I think the effects of efficiency evaluations and changes relating to those evaluations will have a predominant effect over any kind of increased spending that we might have to do to take care of the reorg and – or handle the R&D. So I see no substantive increase in the OpEx..

Understood. Thanks for your time..

And we'll take our next question from Richard Eastman with Robert W. Baird. Please go ahead..

Yes, good morning..

Good morning, Rick..

Simon and Bob, are you willing to disclose the account manager number? I'm curious as you refocus the sales process geographically on verticals, is this – has it and will it require more account managers? In other words, more direct sales? Could you maybe just speak to that? If you can't give us a number, at least speak to the strategy there in terms of adding more feet on the street or is it take less or is it take the same redirected?.

Good morning. You have a couple of countervailing effects. You have new process, the sales process modernization, which is intended to, of course, increase the number of demos and the effectiveness of the selling process and the demos for the existing sales force, or the sales force as it exists today. We have a certain close ratio over demos.

The other force that contrasts with is the one that when you're increasing down the verticals and the specialization that you would normally add people. So I think we have two effects.

With regards to the increase of people, we mentioned in the last call that we would be developing emerging verticals using a cooperative management from the existing growing verticals to the emerging one. For example, metrology has been tied to factory automation.

So the factory automation staffing has begun from the bottom up, including at the product management level. But they are being managed by the metrology management organization. So, yes. The answer is yes to the question, will we be adding people to the vertical? Yes, we will.

They would be focused on their vertical and speaking to those customers with a particular product line. So, inevitably, we were two categories before, our measurement of metrology and 3D Doc. Those have now been split into five, possibly six verticals. So we expect growth there.

At the same time though, we expect the efficiency and effectiveness of the individuals that we do have in place to increase because of the modernization. So the net effect on the sales or the expenses – selling expenses versus sales may even out. It's hard to say at this point which effect will prevail first..

And Simon, with the promotion of Kathleen and Joe, again, it kind of effectively eliminated at least on paper here maybe the Senior VP of the Americas and EMEA and Asia Pac on the sales side.

I understand we're focusing on verticals, but do we intend with the same sales management at the vertical level to reach each of the geographies?.

Yes. Let me just describe the structure. We will have a global leader, for example, in metrology. And that global leader happens to reside in the Americas. And under that leadership, there would be an individual responsible for sales management in Americas, EMEA and APAC..

Okay..

So there is now a global leader for that vertical sales across the world with separate responsibility by sales management in each of the territory. So it's clearly there are differences, there is the time zone, there is the need to be close to the ground. And so that's the current structure.

So there will be global accountability with regional accountability up to the global accountability for each of the verticals. In addition, it's not specifically in response to your question, but we are – we do believe that there are regional differences and issues with accountability in each of the regions.

And so we have a team set up of leadership of important departments in each of the regions, which represent the regional accountability issues while sales, however, is managed globally..

Okay. And then just could you just provide – and it's my last question, thank you. But could you just provide a little bit added color on the startup of this Early Adopter Program in March.

And what – is this – I mean, what does this entail? Does this entail a sale? Just how does that look and how is that structured?.

Okay. Well, the concept behind it is that it's to emulate as a entrepreneurial startup in the context of a large multinational and complex company with its own inertia. The idea is to re-attain the ability of being a small startup with disruptive technology.

Without the incumbency result, global rollouts and significant issues of product quality and control that normally are much – as a global company, would be much more vigilant about.

This allows rapid introduction into the marketplace to specific customer groups that are perhaps fault tolerant and also extremely interested in new technology that gives us immediate feedback into the nature of the product to meet the vertical requirement that allows R&D to be extremely agile in introducing those products.

And now what we hope is very quickly those products transition to a global rollout in their second version. And so, conceptually, it's about bringing entrepreneurialism back into a larger corporation. The alterative, which other companies have done, is things like skunk works and/or M&A of smaller organizations.

And clearly skunk works is an acknowledgement that we can't do anything original inside, so we have to get to sneak outside to try to do something original. We're trying to institutionalize the entrepreneurialism of small companies in the context of a large company..

And so, again, is this a product though – I mean, are these products, say, on the metrology side or the scanner side, are these provided to early adopters customers that utilize it, provide feedback or is this actually – is it recorded as a sale?.

Yes, these are products that are sold..

Okay..

Absolutely. And they would apply to all the verticals. There is an internal mandate to provide early adopter product introductions in each of the verticals..

I see..

And we are working on the R&D re-organization to make sure that we supply those..

I see. Okay. Okay. Well, thank you, and very nice quarter to start the year. Thank you..

Thank you..

Thank you..

And we'll take our next question from Mark Jordan from Noble Financial. Please go ahead..

Good morning, gentlemen.

First, I'd just like to clarify, is it the new policy moving forward that you will not be releasing account reps by geographic reason?.

That is correct..

Okay. Second question, could you give us a flavor as to, say, you had roughly I think at the end of the year-end, there's 239 account reps.

How do you see that account rep base being broken down into the six new verticals that you'll be creating on a worldwide basis?.

As you know, predominantly we are in two categories right now. Three dimensional documentation and measurement and metrology. Some of those individuals will be – and it's very much in discussion right now according to their wishes and their needs of the vertical are transitioning to some of the other vertical.

So there will be some backfilling and then there will also be some new hires in each of the verticals as a function of how we roll out the new products in the different areas. So it's very much a bit of a jazz dance at this point. There will be a net increase in account managers overall to get the representation who need.

But there is shuffling between the existing and the new verticals..

Okay. Final question for me.

From a – could you make any comment as to how you see the seasonality of sales playing out this year? Would you assume that it should follow a similar pattern that you've had in prior years?.

Yes, it should follow a pattern that we've had in the prior year unless we do something extraordinary to change that trend. If you look back over the last few years, by quarter, as a proportion of sales, it's a fairly consistent pattern.

We would suggest that that pattern would continue unless we do something dramatic to change that by a significant increase in growth rate, for example. So that needs to be seen because we're not sure how successful or how quickly it will be successful with the various initiatives that we're undertaking.

But for the moment, I would view seasonality to be consistent with the pattern you've seen in prior years..

Thank you..

And we'll take our next question Josh Sullivan with Stern Agee Capital. Please go ahead..

Good morning..

Good morning, Josh..

So I guess one on the Robo-Imager, I think you said that was a first of its kind product in automation.

What kind of ROI your early adopters seeing or any other tangential details you may have?.

Do you want to be more specific, Josh. I'm not sure how to answer that question..

Well, I'm just trying to get an idea of – you have some of these new products coming out, just trying to get some understanding, the customer feedback on the automation side seems like an interesting product..

Right. Well, clearly part of the idea of early adopter product introduction means we don't comment to a worldwide global introduction. We introduce at a very measured level in certain specific geographies. With respect to Robo-Imager, it's very early in that process.

We have seen, as I mentioned also in my talk, that FARO has been a company that in the past has reduced the cost of and the price of access to small and medium sized businesses, so technology, which could have only been afforded by larger companies.

So we imagine that there is a number of small and medium-sized businesses with serial production of various things. And we need the adaptability of a robotic imager to do automated or semi-automated inspection near the line. That's our aspiration.

The very reason, it's in an early adopter introductory phase, is in fact find out what that interest is like. I was at the Control Show in Stuttgart, Germany last week, and there was a great deal of interest around it as well as on the Cobalt Imager for the arrays and/or the arrays on larger robots. So it's very much a new foray for us.

The product is unique, and as you can put multiple imagers on a single computer, which is unique in the industry, which provides the ability to create arrangements that don't require robotics and only require one computer. So it's a bit of a new wave in factory automation, and this is all an experiment.

I think that we could speak to the reception to it probably in the next couple of quarters..

Okay. Got it. Thanks. Then I guess just one on the M&A front.

What's your strategic focus as it stands?.

Our strategic focus there is to – as I mentioned in the last call, we have a number of opportunities, which have emerged because we've now segregated our interest in a number of verticals. So I can say that our M&A process is active and vigorous, and obviously we'll be announcing those as they occur..

All right. Thank you..

Thank you..

Instructions] And we'll take our next question from Hendi Susanto from Gabelli & Company. Please go ahead..

Good morning, Simon and Bob. And great Q1 results, by the way..

Good morning..

Thank you..

With regard to just strong in-service revenue, how should we think of the strength in warranty sales in Q1 among new purchases and/or existing installed base?.

Well, first of all, we don't necessarily provide guidance as to forward-looking quarters. But in terms of kind of, I would believe, if you look back over the course of our history, you'll see kind of a percentage of the total revenue that's service.

I did mention that previously that we are actively driving to sell at the point of sale and on the renewal basis of warranties. So that is actively something that our sales team – our inside sales team is working on each and every day, but I'm not going to provide a kind of a forward-looking guidance for you..

Okay. So I didn't mean to ask for the forward-looking guidance.

So, is it reasonable to assume that your strategic focus on warranty is more geared towards renewal and new purchases?.

It is absolutely. So – it is absolutely. We have initiatives across our company that we make sure that we reach out to those customers whose warranties that, after the point of sale, are expiring as we reach out. We remind them that and try to renew their contracts. So it's absolutely a piece of revenue that we do not want to leave off the table.

We're going to bring that forward, and we have inside sales working actively every day to do that..

Yeah. And then one question for Simon.

What is your assessment on your key verticals for 2016?.

How do you mean assessment?.

Like, what are you seeing in the market?.

Okay. Well, it's kind of a passive situation right now because we try to deduce from our installed base where primary interest lies. So the verticals we've selected are metrology obviously. We have expanded metrology to clearly include both the building and verifying. So it's metrology build and verify.

We also have factory automation, which is an outgrowth of that, something that we started to touch on with the new product introduction. So factory automation would be the number two, and it's also build and verify. Then we have the AEC market, which was, in our opinion, a little bit too broad and conflicted with the idea of surveying.

So we are not a surveying company, but we are a building information and modeling company. So we have focused that on the BIM-CIM side of the AEC market. In addition, we would define probably safety as one of our primary verticals. And we've done, as you know, acquisitions and product introductions around that.

We also have, of course, the product design, which is one of the areas that a lot of our products have been used for to reverse engineering that clearly differentiate from the demand with the metrology market. So we define product design as one of those verticals.

If you want to review the split from the year-end conference call, in there, I give a fairly detailed review of how the verticals are decided upon. And the sixth one would be the services market. As you can see, our service revenue and warranty revenue increases.

Part of expanding that, we want to do specific product development, 3D services and provide access to early product concepts through that..

Okay.

And then would you be able to share more colors on weaknesses in 3D Documentation sales in Q1 and higher ASP?.

In terms of really the – let me start by the ASP side. First of all is we offer several different models out there in the marketplace. One is our X 30; one is our X 130. The other is our higher price model, X 330. So, one of the things certainly we try to do on our sales approach is try to correctly fit that product to the application.

One of the things we have seen over the course of the last several quarters, we've seen a shift to that X 330 based on the needs of the external market. So that does help our average selling price because it's about $10,000 or so higher than our X 130. So that's the ASP side.

And also, as we shift away from distribution, what you will see is, is that you will see an increase in our average selling price, again that's somewhat offset by the commissions in the sales and marketing line. So I will say two factors. One is the model shift and then number two is just the inventories to direct.

In terms of the demand side, we're trying to actively address that in terms of Scan Localizer, in terms of the HDR. And one of the things we are impacted is certainly by macro conditions. We're certainly impacted by some sector conditions. As I said before, there are parts of our EMEA business that were affected by oil and gas.

They are somewhat affected in the U.S. by surveying, but certainly what we're trying to do to address that is find other places in the market for this early adopter technology really and there is a lot of applications out there that we will be looking at to really penetrate further those applications..

That's helpful. Thank you..

And it appears we have no further questions at this time. I'd like to turn the call over to our presenters for any additional or closing remarks..

Okay. We just want to say thank you very much for all the attendees, your questions, and we look forward to talk to you at Q2..

This does conclude today's call. We appreciate your participation. You may disconnect at any time and have -..