Bob Seidel - Chief Financial Officer Simon Raab - Chief Executive Officer, Chairman.

Jim Ricchiuti - Needham & Company Richard Eastman - R.W. Baird James Rit Marker - Stifel Mark Jordan - Noble Capital Markets John DiCorsi - Canaccord Hendi Susanto - Gabelli & Company Ben Rose - Battle Road Research.

Good morning, everyone. Welcome to FARO Technologies’ Conference Call in conjunction with its First Quarter 2017 Earnings Release. For opening remarks and introductions, I will now turn the call over to Chief Financial Officer, Bob Seidel. Please go ahead..

Thank you and good morning, everyone. Yesterday after the market closed, we released our first quarter 2017 results. The press release is available on FARO's website at www.faro.com.

As you know, certain prior year stock compensation expenses were reclassified between cost to sales, general administrative, selling and marketing and research and development expenses in the condensed consolidated financial statements to reflect the appropriate departmental costs.

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, continues, goals, objectives, intends, may 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, 2016 and Form 10-Q for the quarter ended March 31, 2017. I will present the Company’s financial results, and Simon will deliver his prepared remarks.

Afterwards, we will open the call for your questions. New order bookings for first quarter 2017 increased by 18.2% to $86.9 million from $73.5 million for first quarter 2016. Sales for first quarter 2017 were $81.6 million, an increase of 7.7% compared to $75.7 million for first quarter 2016.

Excluding the unfavorable foreign exchange impact of approximately $1.5 million first quarter 2017 sales would increase 9.6%, compared to prior year. Our sales increase was primarily driven by an increase in product unit sales especially in construction BIM-CIM and higher service revenue.

With new order bookings of $86.9 million and sales of $81.6 million, our book-to-bill ratio was 1.06 for first quarter 2017.

Product sales were $62.4 million for first quarter 2017, an increase of 5.2%, compared to $59.3 million for the prior year period, reflecting strong unit sales growth in both new and pre owned products and construction BIM-CIM segment sales, partially offset by lower average selling prices mostly related to less favorable product model and geographical sales mix.

Service revenue was $19.2 million for first quarter 2017, a strong increase of 16.7% compared to $16.4 million for the prior year period. This increase was primarily due to higher customer service revenue and continued increase in warranty revenue reflecting our focus sales initiative to increase aftermarket sales revenue.

In our factory metrology segment, sales for first quarter 2017 were $57.2 million, an increase of 6.0% compared to $54.0 million for first quarter 2016.

This increase was mostly driven by higher customer service revenue and an increase in unit sales, especially sales in demonstration and service inventory which generated a slight decline in average product selling price.

In our construction BIM-CIM segment, sales for first quarter 2017 were $18.3 million, an increase of 22.8% compared to $14.9 million for first quarter 2016, primarily reflecting an increase in service revenue and higher unit sales particularly in our Europe and Asia Pacific regions.

In our other segment, sales for first quarter 2017 were $6 million, a decrease of 12.4% compared to $6.8 million for first quarter 2016. Sales and profitability of this segment may fluctuate quarter-to-quarter more than the other two segments as other segment includes our emerging verticals.

We are only in the initial stages of building a sales infrastructure and product offering to suit the need of these emerging verticals, mainly product design, public safety forensics and 2D solutions. Gross margin for first quarter 2017 decreased to 53.6% from 56.3% for first quarter last year, up 0.5 percentage points compared to prior quarter.

This year-over-year decrease was related primarily to the production start-up of new products and lower average selling prices reflecting higher sales of demonstration and service inventory, as well as less favorable product model and geographical sales mix.

Selling and marketing expenses were $22.9 million in first quarter 2017, an increase of 27.8%, compared to $17.9 million for first quarter 2016. We made a strategic decision to expand our sales force aggressively to accelerate revenue growth.

As a percentage of sales, selling and marketing expense increased to 28% for first quarter 2017 compared to 23.6% for the prior year period. General and administrative expenses for first quarter 2017 were $10.7 million, an increase of 5.4% compared to $10.2 million for the prior year period.

This increase was mostly driven by slightly higher compensation expenses and global system implementation cost to facilitate our harmonization initiatives. However, as a percentage of sales, general and administrative expenses decreased to 13.1% for first quarter 2017, compared to 13.4% for the prior year period.

Research and development expenses were $8.5 million for first quarter 2017, an increase of 17.6%, compared to $7.2 million for first quarter 2016. This increase was mostly related to engineering headcount additions from our 2016 acquisitions and additional hires to support our new product drumbeat.

Research and development expenses increased to 10.4% of sales for first quarter 2017, compared to 9.5% of sales for the prior year period. We reported a net loss of $1.5 million or $0.09 per share for first quarter 2017, compared to net income of $3.1 million, or $0.19 per diluted share for the prior year period. Turning now to working capital.

Accounts Receivable was $60.6 million at the end of first quarter 2017, compared to $60.1 million at the end of first quarter 2016. Days sales outstanding were 68 days at the end of first quarter 2017, down four days from the end of first quarter 2016.

Total inventories were $84.5 million at the end of first quarter 2017, compared to $83.5 million at the end of first quarter 2016, mostly driven by an increase in raw materials for new product introductions, offset by lower demonstration and service inventory.

At the end of first quarter 2017, cash and short-term investments totaled $148.8 million, of which $94.8 million was held by foreign subsidiaries down only $0.3 million from year end.

Our aggressive initiatives to grow the sales team, inventory demands for new product introductions and R&D expenses related to 2016 acquisition were funded by cash flow from operations resulting in a neutral cash position relative to year end. I'll conclude with total headcounts.

At the end of first quarter 2017, our total period ending headcount was 1,542 employees, an increase of 18.8% compared to 1,298 employees at the end of first quarter 2016. I'll now hand the call over to Simon..

Good morning, everyone. Over the past five quarter we've been executing an aggressive set of strategic initiatives to reposition FARO to achieve its long-term financial objectives of delivering mid-teen sales growth, strong gross margin of 60% or better and leveraging out cost base to achieve mid-teen operating margin.

The plan was designed with the three years effort. And 2016 was year one and constituted a restructuring year of globalization, harmonization and upgrade of substantially every part of the business.

Restructuring of the sales force around market verticals was intended to drive marketing, sales, product management and development to best serve the specific needs of the factory metrology, construction, public safety, product design and 3D solutions verticals. Each of these verticals represents great potential for growth in 3D measurement.

We are gratified to see the sizable growth in construction in the first quarter of 2017 and believe similar accelerated growth will also appear in the other emerging verticals as they are build out. The growth is a direct result of verticals specific sales and product management efforts.

Our orders growth of 18.2% in the first quarter provided an initial validation of our reorganization and our sales force expansion and process modernization strategy. We believe this demonstrate that FARO has a potential to achieve its mid-teen top line growth objectives with the right strategy, sales force and products.

We anticipate the aggressive pre-investment and the expansion of the sales force and modernization effort will continue for at least two years at a greater than 20% rate to establish these new global verticals and continue our growth in a more established verticals.

In the first quarter, our sales force headcount increased by 30% compared to prior year. An increased our full time experience sales headcount, a term which I'll describe shortly by 13.9%. The incremental feet on the street were a vital ingredient to deliver this quarter's strong orders growth.

While the company's increase in salary expenses negatively impacted operating income, we pre-invested these selling expenses always under the aggressive way to reset our business model to greater revenue to expense ratio by stabilizing expense growth with the intention of achieving double digit operating margins by 2019.

Over the longer term, we would anticipate our sales hiring into transition back to a normalized goal of 10% to 15% per year to stabilize the expansion of sales and marketing expenses.

Sales efficiencies are also expected to increase to the sale modernization initiatives we've discussed in previous calls, in order to sustain the double digit revenue growth rate we aspire to. During last quarter's earnings call, we explained that the sales headcount represents a key business metric for our vertical leaders.

We track sales headcount from two perspectives. Actual period ending headcount and a time when time weighted average experienced headcount which we refer to as FTE or Full Time Experienced headcount. For sales FTE headcount we discount the first year of inventory by an experience factor.

We are continually monitoring the first year sales productivity of our sales force to gain a better understanding how the full time experienced headcount discount factor shifts from vertical and region and over time.

At the end of the first quarter 2017, the actual period ending sales headcount is 593, an increase of 30%, compared to 456 for the first quarter of 2016. At the end of the first quarter 2017, our sales FTE headcount was 525, an increase of 13.9% compared to 461 in the same prior year period.

During last quarter's earnings call, we referenced the sales revenue effectiveness factor that we defined as the ratio of our trailing 12 months of sales revenue with sales FTE headcount. For full year 2016, these sales affecting this factor equated to approximately $638,000 of sales revenue per FTE.

As we continue to develop our effectiveness to actively manage our growing sales force, we are shifting our focus and discussion to new sales orders revenue and sales revenue as the book-to-bill fluctuate. As sales accelerated we believe that the sales order growth is more immediately correlated with sales force expansion and performance.

Hence, the sales effectiveness factors to find out the ratio of the quarter's annualized sales orders for sales FTE headcount based on the quarter's historical proportion of a full year. For the first quarter 2017, we saw increase in our sales per FTE to approximately $763,000, compared to up $659,000 in the fourth quarter 2016.

We would caution however that there maybe a seasonal effect of order per FTE and for purposes of planning we continue to use the historically validated annual figure of $670,000 per FTE. We'll review the sales per FTE quarterly.

We continue to look for ways to increase our sales per FTE through the online demonstration studios, our new product drumbeat and other initiatives. Our intention to increase sales FTE headcount by at least 20% in 2017, while keeping all other headcount substantially flat except where require to meet customer demand.

We'll report quarterly on the actual period ending headcount and sales FTE headcount. As part of this complete restructuring, our research and development organization was reorganized to be able to provide the vertical product specificity and new product cadence required to growth this new emerging verticals.

The success of our business starts with the efficiency execution of our research and development team of next generation technical superior product on a consistent timeline. Since the start of 2016, we've introduced 20 new or upgraded hardware and software solutions to the market.

Over the past two quarters, our new product drumbeat introduced the next generation releases of two primary platform products.

In fourth quarter 2016, we introduced our eight generation of the market leading focus laser scanner product line to drive new orders and sales growth primarily in our construction BIM-CIM and public safety forensics vertical.

This eight generation laser scanner was engineered to be better suited to our customer's application with many new features, superiors to be and accuracy along with an advanced ITE readiness rating.

In January, we also introduced our next generation of Vantage Laser Tracker product line which is now fully portable and includes the latest version of our proprietary track on product for large volume and measurement. Very significant product introductions territory different verticals will continue this year.

We expect our M&A strategy and cadence will continue in 2017 to compliment this R&D strategy by adding new product and technologies to support our growth as with in the various vertical. Significant R&D and product management effort is being spent and leverage these small acquisitions through our growing global channel.

R&D and M&A is also focused on mitigating several potential future technology risks by ensuring that FARO is controlled over essential underlying technologies important to future supply.

Further to this strategy, on April 21, we completed the acquisition of Nutfield Technology; a component technology business in Hudson, New Hampshire which specializes in the design and manufacture of advanced galvanometer based optical scanners, scan heads and laser kit.

Our first quarter operating margin maybe below the expectations of our analysts or investors. We made this strategic decision to act now to aggressively expand our sales force and development of these new products recognizing that there maybe a short-term impact to our financial results.

We are often asked about private cash holding and apart from the obvious use of cash and M&A, review the operational use of cash to finance our aggressive return to grow company status and expand into new market as an obvious corporate advantage of our cash holding, which will necessarily depress operating margin in the short term.

The aggressive early introduction of new major revisions of our core platform is mainly to focus laser scanner and Vantage Laser Tracker, challenge the organization. And resulted in efficiencies which are seen as short-term reduction in gross margin.

New approaches to new product development process, these are being developed to mitigate product risk in the future and adapt to our new cadence of product introduction and improvement. Our goal is still to continue the reorganization activities by the end of the current quarter within our 18 months previously stated timeline.

The primary remain reorganization for priorities in the second quarter will be to continue to expand the sale force, as well as drive global process harmonization and manufacturing efficiencies to best practice. In summary, we are delighted with our reorganization progress as we ended this central global effort this quarter.

We will then turn our fullest attention to driving revenue, improving gross margin and achieving double digit operating margin by 2019. Finally, I'd like to thank all our FARO employees for the tremendous hard work and dedication over the past five quarters and reinvigorating the growth of this company. I'll now open the call to questions. .

[Operator Instructions] And we'll take our first question from Jim Ricchiuti with Needham & Company. Please go ahead. .

Hi. Thanks, good morning. So I think we -- I recognize the investment that you have going on in the business particularly in the sales side, but if we just look at the sequential change in revenues from Q4 to Q1, and I think you are down about $10 million but up quite a bit OpEx I think about $700,000.

So I am trying to get a sense as to how we might think about OpEx over the next one to two quarters, Bob. I don't know if you could help us a little bit with that. .

As Simon indicated, our goal in terms of our operating expenses being R&D and G&A is to hold the headcount where it is. Manage the headcount tightly. So in terms of where OpEx is going, it should be relatively consistent over the next three quarter in terms of G&A and R&D. On the selling side, we are pre-investing in our sales force.

You saw what Simon indicated was we will be growing our sales force upwards of 20% this year. So you'll see an uptick in our selling and marketing cost throughout the year both from the perspective of added headcount and then as our sales grow so will our commission.

What you can expect to see in terms of incremental headcount cost would be call it about $100,000 base, 6% to 7% commission going forward on those incremental heads. .

Simon, you've talked about this three year plan and you being in year two, you've also talked about June having, by the end of Q2 I think, having the platform in place.

So help us maybe with what type of milestones we should be looking for both in the second half of this year and just -- and potentially just the year as a whole in terms of the strategy that you’ve laid out. .

So I have mentioned we could start to see important increases in gross margin. Our hope is while we have 1Q of period-over-period double digit growth [indiscernible] we should be looking for the same thing in Q2, over Q2 of last year.

I understand your sequential comment of obviously that because of a seasonality, I am not sure that's relevant but Q-over-Q the growth should continue at the high double digit commensurate with the sales per FTE and the increase in the headcount. So increase in gross margins and it should start to be [thinning] [ph[.

Clearly introduction of another few major revisions of core products will be expected as well with introduction of product lines that came out of the prior acquisitions as we now converted them over to FARO standards and introduce them into our full production line.

You should also see I believe an increase in the sales per FTE if in fact, our sales modernization effort improved. Now you saw a number change from about $650,000 to about $750,000 or $730,000 per FTE. And that's an important change.

It may represent important changes in our sales process but we want to give it a couple more quarters to actually decide whether that the real effect or not rather than a seasonal effect. So you should also be looking for that. G&A will continue to drop as a percentage of the sale.

And as Bob mentioned the R&D will remain basically headcount flat except as it relates to potential acquisition in [its space] [ph], those will be outside of the current model. .

Last question.

Just with respect to the new product efforts, should that be skewed more towards the second half of this year in terms of new product introductions?.

Yes, we have -- well we have maybe I'll call the three core platform which is [indiscernible] technology, the Laser tracker and scanner market, the other ones are growing and catching up. We've already done a major platform conversion of the two of those platforms and we would expect to continue that in other core platforms as well.

So I think that's the only answer I can give on that question. .

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

Yes, good morning, Simon and Bob. Could you just kind of reference -- you made enough [indiscernible] references Bob and I think Simon you did as well. But you just talked a little bit about the geographic sales mix influencing the gross margin.

And I am curious if you could shed little bit a color on that and also if the gross margin and I presume this is mostly on the product side, if the gross margin by geography, has there been any change in what each of the geographies is delivering? In other words either competitive or pricing.

Can you just speak to the geographic mix here?.

Sure. In terms of sales growth year-over-year, Europe and Asia [indiscernible], they got very similar year-over-year sales growth. Our North America business was relatively flat. So how does that impact our gross margin generally speaking? Our North America is a strong margin area for us in factory and metrology.

There is the automotive sector, space sector there so that being flat certainly creates an unfavorable geographical mix. The second place of reference to geographical mix was we really saw a flat Japan sales year-over-year. Japan is a price -- a very good margin country for us. So that's for us the other area.

In terms of product mix, what I also mentioned is we did release some more aggressive value priced products, Vantage Tracker, the [EAM70] [ph], those products certainly while they are there to get market share for us, they are there to expand the technology. They also put some pressure on the margin.

But really, Rich, the main primary driver of margin was the start-up of two core platform products in our production process. .

Okay, all right. And then also just perhaps you could maybe shed a little bit more light on this demo inventory issue. We've seen this for a number of quarters and I think one of the things that’s probably -- it's difficult to see that on the balance sheet. The demo inventory doesn't look like it's changed much.

And I am curious how is it that this inventory is kind of aging, we are shipping, selling it but we are not seeing any real reduction in the demo inventory numbers on the balance sheet. So just kind of explain that dynamic a little bit. .

Yes. In terms of the demo inventory, one year ago Q1, 2016 we were $34.8 million, our demo and service. We are $31.9 million. So we have in total reduced that number. And so what we are actively trying to do is sell those what we call at risk or older items, so we call three years are older.

Right now we have in terms of the at risk inventory, we are trying to reduce that actively. There is about $7 million remain for us. That's where the lowest margins come from. Once we go forward from there we'll continue to have their new product drumbeat after continue to sell. So we'll be complete part of our business.

In as we said in our press release the new sales accounting for 11% of our total product sales this quarter. So it will be continue part of our process. The only thing I'd say different Rich is it will be newer units that we will be selling..

Okay, great, thank you. And then just --.

Rich, sorry to interrupt. I wanted to just add one nuance to Bob's response on the -- it was really a mix -- the margin was affected by geographical mix primarily by the shipments not by the orders. Actually orders in Americas were up about 15%. It was not flat.

So it's the -- it just happened to be the dynamic of the quarter of where we did the shipping to which was primarily the Europe and the Far East. I just don't want you to be left with the impression that there was no growth in the Americas. There was a 15% growth..

In orders, I understand. Okay and then just the last question.

In terms of the other segment here with the businesses that are maybe a little bit more in their infancy, how do we expect that those businesses to scale from a profit standpoint? Do we absorb increased losses there as we move forward or will the profit line scale with sales? Because it sounds like we have more investment to make there.

And I am just curious how that relationship will look going forward in other segments?.

So, Rich, those emerging --actually only verticals are viewed from upper end margin contribution point of view, where we include the gross margin and the salary expenses and product management expenses and marketing expenses related to simply to that vertical. So there is a positive contribution magnitude to those verticals.

We expect that to be diminished at the beginning while we accelerate the sales hiring. But they contribute pretty quickly and they are not a drag. They are not as greater contribution as the other more established player. They will contribute quite quickly..

And we will take our next question from Patrick Newton with Stifel. Please go ahead..

Hi, Simon and Bob. It's [James Rit Marker] on for Patrick. Just curious as to what drives the increase in your FTE headcount guidance? I believe last quarter you said 10% to 15% now we are raising that up to 20%.

Just want to know if there is anything specific that's causing you to increase that? And then also as we think about these recent headcount additions gaining experiencing over the year, and adding to the FTE metric, would it be fair to assume that in terms of absolute headcount growth we won't see anything greater than the 30% year-over-year that you just posted?.

So your first question is why do we apparently change our tact -- we decided as we noted in our prepared comments that we decided to accelerate the growth of the FTE headcount. We started getting very positive indicators that the correlations sales growth was as exclusive as we had suspected.

And that the sales per FTE headcount were a number which have regular consistency in the past to the company. And then we had a lot of under penetrated market in new emerging verticals.

So we decided that we would want to create a new balance between the revenue side and expense side of the company's current structure by accelerating the headcount and resetting the amount of revenues versus our -- what we try to fix is our expenses in R&D and G&A as well as depreciation. So we made the conservative decision to accelerate that.

We would not be exceeding the 30%. We are shooting for 20%. However, I have to say that we always retain the freedom to -- if we see positive results and increases in the margin and the bifurcation between revenues and expenses which goes to operating margin that we remain satisfied to continue to accelerate even further.

Obviously, we will review that quarterly and make those decisions appropriately. Your last question on the -- obviously 30%, yes I think I answered that. Thanks. .

And we will take our next question from Jordan Mark with Noble Capital Markets. Please go ahead. .

Yes. Good morning. Question relative to the service revenue. Obviously, very strong quarter there.

Is that level of 19 plus millions sustainable through the year and/or do you believe that there is a growth rate that you should expect to see of this space over time?.

I think the right answer to that question is that since the primary component of those revenues and the increase in revenues is the sales of the warranties and extended warranties to established and installed base.

So one would expect that if one can get high double digit growth rates in the installed base to sales and product saving the subsequent year after the first year of build in warranty that we have the opportunity to substantially increase sales of warranties to that increasing installed base.

So I believe properly executed that that should accelerate along with the installed base. .

Okay. Question with regards to your cash position. As you pointed out you do have 90 some odd million outside of the United States.

What can you do to deploy that successfully -- because obviously I don't think you are bringing back to the US because of the tax burden that you would face?.

Well, you know there are two uses of the cash. There is two uses of the cash primarily M&A and of course working capital. Our installed FTE headcount around the world is smaller APAC and in EMEA. So we see a long investment to expand those emerging verticals in those regions.

And we continue to be interested and have initiatives underway to look at M&A potentials in other parts of the world. As you know, last year we also did an acquisition in Germany and we are looking elsewhere as well.

So part of the deployment of that cash will be to focus our efforts on looking at M&A targets in those regions and use of working capital to kind of fill up the locations for sales and service around the world outside of the Americas to bring it to better balance versus GDP around the world. .

Okay. Final question for me just would be to go back towards the demo inventory. You talked about monitoring what you call the at risk component which is the old product typically greater than three years old.

How do you manage the turn over of that demo inventory on a quarterly basis so that you minimize the amount of product that drifts down into that at risk category?.

So we have a process that we follow between our Chief Commercial Officer, Joe Arezone, our Chief Operating Officer, Kathleen Hall, they constantly monitor this. We look at unit by unit and then we look for opportunity to sell that at best possible price around our global sales network.

This is an active piece that we manage and as we go forward with our new product drumbeat we like to continue to manage that process as well. .

And we'll take our next question from Bobby Burleson with Canaccord. Please go ahead..

Hi, guys. This is John DiCorsi on for Bobby. So just two questions. First, revisit your OpEx comment.

Would the expectation for R&D to be flat in terms of headcount this year? Would you still be expecting the total dollar spend to be down year-over-year as you mentioned in the last quarter?.

Well, it is a good piece of the R&D which is obviously expenditure on development and materials related to development. So we are continually aggressively development process and we do intend to come out with many new products which are under development as we speak.

So the reorganization of the R&D was to make that department more efficient and generate more products suited to the different verticals. So there was an internal reorganization but I would expect material costs to go up relating to the efforts of generate significant new product introductions in the other vertical.

So it would be a bit of mixed bag in addition to that we have a habit of purchasing a small type bolt-on type of company that we can then process new technologies through channel.

And lot of those come in with R&D and or primarily R&D and development stuff so there could be -- and I did mention in my remarks that part of our effort to keep our organic component flat. There will be additions through the M&A drumbeat that we are continuing. .

And you work it out from $7.2 million to the $8.5 million year-over-year is primarily the acquisitions. .

Okay. And then my second question is just on the new products that came out in 2016.

Can you just give any color on the reception to date by customers? Which were kind of the leading products? I know it sound -- some of their gross margin hit was new products that were value oriented but just any additional color on what the reception has been would be great. .

Well, the increase in the construction BIM-CIM market reflects the very significant uptick of the new V8 scanner. It continues to be market leading all the various market surveys indicated that it's still the leading product in that market. Its new improvements substantially move it beyond the competition.

The new introduction of Vantage Tracker, it's a little early to make any statements about it but it represents a leading class portable performance that has not been seen in that market sector along with the track on concept. It's a little bit early to see the benefit.

We have an uptick in imagery which is a technology leading product which is benefiting from the 3D solutions vertical. So it's a little bit early to say but I'd say the biggest indicator is the scanner so far. .

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

Good morning, Simon and Bob.

How should we view your aggressive sales force and sales and marketing initiatives along your major vertical and geographies? Which verticals and geography carry the most promising sales leverage when you increase your sales headcount?.

Well, clearly our in balance of about 40% of our sales in the US and 20 odd in the other two regions demand that -- while there are still even GDPs between those regions are approximately even GDPs between those regions, we feel that we need to expand primarily in the EMEA and APAC regions while still also supporting significant increases here.

There has tendency for the FTE deeper headcount to be lower in the APAC regions and some of that has to do with competitive pricing issues and others issues around the APAC region but the balance is a moving target.

And as we introduce new products and new categories that suit different market, you are going to be seeing that affect geographically in a different way. So we are just going to report on a regular basis. And it is being measured. .

And how about among verticals?.

Well among the verticals, clearly the emerging verticals are demanding the greatest increase in our staffing.

Now we want to be careful about that because we also have -- you don't have a fairly developed product line in some of those verticals like product design for example has only a couple of products in while we would like to add and we are on the process of working on several others that add to it.

So we don't want to get the headcount too far ahead of the product availability so that they can sustain the typical sales per FTE that we would like.

Public safety forensics benefits tremendously from our product so we -- from our current product line so we believe that we can aggressive grow that resale scan arms, forensic scan arms and resell scanners into that market which are to primary co products that are market leading.

So we see a greater increase in the headcount in public safety forensics as an emerging one. So we are trying to strike balance between keeping our growth in construction in BIM-CIM and metrology market while giving attention to these emerging verticals.

We don't want fall into trap of feeding the ones that have always been our primary producers in the past. And we are trying to level load all the verticals over the next three years. .

And then a question for Bob. Looking at construction building information, they had 23% year-over-year growth in Q1 so it is -- it has like a very strong growth.

Any seasonality factor that we should keep in mind when we look into that segment?.

No. The growth in that area was predominately driven by higher unit sales which are in correlation with the release of our new Focus S150/350. So standard is always seasonal. We follow the same pretty much seasonal pattern as the rest of our business Q4 being highest. .

And then Simon in 2016 you talked about FARO's strategic interest in factory automation.

Do you have any update on that? And whether it will on your product roadmap in 2017?.

Yes, absolutely. We are in the process of working our major agreements with important worldwide robotic manufactures. We are in the process of continuing developing sensors for the automated metrology market. And it's kind of very big focus.

You will have -- and we have introduced the Robo image or mobile last year in EA product as an early adopter product that will be converted to mainline product this year.

3D solutions is a new vertical which is having some very great early success and that is entirely around automation with contracts for robotic installation -- robotic inspection installation around the world. So we are very focused on that on two perspectives. The 3D solutions vertical will be primarily around on automated inspection.

And our R&D around sensors and important 2D measuring devices specifically for that market as the other part of that mission. .

And we will take our next question from Ben Rose with Battle Road Research. Please go ahead. .

Good morning. Just another question on the nice year-over-year growth in the construction BIM-CIM market. Simon realizes that the new product introduction is a play but you see a cyclical recovery in that market.

Some of the end user segments in that market and to what extent are your appetite for adding additional sales headcount kind of confidence that that market is kind of coming back to life?.

Well, I think we should separate what's going on at the macro and economic level and construction from what's happening for FARO. And I'll explain that. First of all, we are extremely under penetrated with -- almost no penetration of that market. And it's a very new market.

And so really what happened at a macro economic level, I don't believe that that should have an impact on what's going on for us. I'll say however that there is a revolution going on in construction.

And that is related to the use of 3D measurement as part of the management of as build and in the construction process in the renovation process post construction and so on and so forth.

Everybody is realizing that the significant savings that were made through metrology and manufacturing to reduce scrap and rework has the exact same potentials for savings in the construction business.

So if we have seen anything it is that there is deep, deep interest for the implementation of 3D measurement technology in the construction industry irrespective of the downturn.

And as it turns out in the past when we had downturns in macroeconomic level, people are more interested in getting low cost adaptable and portable measurable equipment into the manufacturing environment to squeeze out profit in those contexts. So upside or downside in the construction industry, they benefit tremendously from this technology.

So we will continue to invest aggressively in the headcount growth around the world irrespective of what the macroeconomic of construction are doing for those regions. .

And we have no further questions at this time. .

Okay. Well then I'll close the call. Thank you everybody for your interest today. And we look forward to reporting on next quarter. .

This does conclude today's call. You may disconnect at any time. And have a wonderful day..