Bob Seidel - CFO Simon Raab - CEO, Chairman.

Greg Palm - Craig-Hallum Capital Bobby Burleson - Canaccord Jim Ricchiuti - Needham & Company Hendi Susanto - Gabelli & Company Ben Rose - Battle Road Research Richard Eastman - Baird.

Good morning, everyone, and welcome to the FARO Technologies' conference call in conjunction with its Quarter One 2018 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 financial results for the first quarter of 2018. The related press release and Form 10-Q for the first quarter of 2018 is available on FARO's website at www.faro.com.

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, goal, objective, intent, 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, 2017 and Form 10-Q for the quarter ended March 31, 2018.

I will now turn the call over to Simon to provide his remarks and afterwards, I will return with a discussion of our financial results. After our prepared remarks, we will open the call for your questions through the start of trading at 9:30 a.m. US Eastern..

Thanks, Bob, and good morning, everyone. Our first quarter financial performance continues our trend from the second half of last year of driving towards our long-term financial objectives.

As indicated in our press release, some of the highlights in the quarter are quarterly sales of $92.8 million, up 13.8% year-over-year; Construction BIM segment quarterly sales of $22.7 million, up 19.8% year-over-year; increased gross margin year-over-year to 57.9% for the quarter, up 4.3 percentage points; decreased G&A expense to 11.9% of sales, down 1.2 percentage points year-over-year.

We delivered double-digit sales growth, increased gross margin and continued growth in our emerging verticals with a 62.9% increase in sales.

Even with additional investment expenses to grow our sales force and expand our R&D activities, we also increased our operating margin for the third consecutive quarter versus prior year and delivered an increase in operating income of $2.7 million compared to last year.

As mentioned during our fourth quarter earnings call, we combined the Factory Metrology and 3D Machine Vision verticals under the one name of 3D Factory with two operating groups starting in our first quarter financial reporting.

The rationale for this move is based on the shared customer base of these two verticals and the natural synergy of the customized solutions that the 3D Machine Vision group provides working directly with the Factory Metrology sales team to bring innovative new solutions to the marketplace.

Also we renamed our construction BIM/CIM vertical to Construction BIM as we believe it more accurately reflects our focus to be a hardware and software innovator in building information management for construction applications.

We also renamed our other segment to Emerging Verticals to better reflect the nature of the public safety forensics and product design verticals included in that segment.

In 2016 and the first half of 2017, the entire company worked diligently around the world to develop and execute strategic initiatives to pivot the company into a high growth technology leading 3D measurement and 3D Machine Vision enterprise.

Our financial performance in the last three quarters provides positive support for our strategic initiatives to shift our organization to a vertical market focus and drive a new product drumbeat. Our actions to drive the business have translated to increased shareholder value for our investors.

We keep pushing every vertical, horizontal and region, to improve its business processes and efficiencies to propel us towards our consistent long-term financial objectives for the end of 2019. These include mid-teen sales growth, gross margin to 60% plus and double-digit operating margin.

In the first quarter, we kicked off an entrepreneurial initiative to instill continuous improvement lean culture across the company named FARO Best. The lean team were partnered with the process owners to evaluate our key workflows, identify bottlenecks and execute efficiency enhancing process changes to drive waste out of the business.

No different than how our 3D measurement products drive waste out of an industrial manufacturing process, FARO Best will be driving unproductive activities out of FARO and be a critical ingredient to improve our operating margin in the coming quarters.

At the start of 2017, we began an aggressive expansion of our sales force because of the direct correlation in our business between feet on the street, product demos and sales growth. We also continued to expand our web demo capabilities in order to improve our sales efficiencies.

This growth initiative involved pre-investment in selling expense in the first half of 2017. New sales team members generally mature over a period of a year before becoming fully productive team members.

At the end of the first quarter of 2018, our period ending sales headcount was 653, an increase of 60 or 10% compared with 593 at the end of the first quarter of 2017. Our full-time experienced headcount or sales FTE increased to 581 at the end of the first quarter of 2018 compared to 486 at the end of the first quarter of 2017, an increase of 20%.

The difference between our period ending and FTE sales headcount represents start up sales headcount of 72 and the start up selling expense of approximately $2 million or $0.09 per share in the first quarter of 2018.

The effectiveness of our sales force is closely tracked by our global sales leaders with our trailing 12-month orders for trailing 12-month FTE metric. We hold ourselves accountable to our investors and analysts by reporting this all verticals corporate metric, on quarterly earnings calls.

Our trailing 12-month sales FTE headcount was 553 at the end of the first quarter of 2018, an increase of 103 or 23% compared with 450 in the first quarter of 2017. Our new order bookings for the first quarter of 2018 was $96.1 million contributing to a trailing 12-month order total of $386.1 million.

The ratio of our trailing 12-month new order bookings [technical difficulty] sales FTE headcount was approximately 690,000, a decrease of 13,000 from the prior quarter. Our double-digit new orders bookings and sales growth over the trailing three quarters provide a positive indication of the success of our strategic sales force initiative.

As communicated on our fourth quarter earnings call, we intend to increase our period ending sales headcount by 15% to 20% during 2018 in equal increments by the quarter. In the first quarter of 2018, we were in line with this projection by increasing our ending sales headcount by 22 compared with the end of fourth quarter 2017.

This 15% to 20% sales force hiring rate will be accompanied by a higher investment and start up selling expense and will decrease our trailing 12-month orders per FTE metric through 2018, particularly because we are significantly hiring in emerging verticals and new geographies.

We are focused on building the pillars for long-term sales growth by investing now and expanding our future sales capabilities. We continued with our clear top priority to be the technology leader in our space by increasing our reinvestment in R&D activities and acquiring new technology companies.

We increased our quarterly R&D spending by $0.9 million or $0.04 per share year-over-year as we continued to invest in accelerating the development of our next generation Dynamic Motion Vision Sensor, DMVS, and Vector platforms.

We maintain a cultural discipline to make every dollar of R&D spend account, but are willing to go above analyst expectations to accelerate the development of innovative products in fast moving market. In the first quarter, we made two small technology acquisitions totaling $4 million.

We purchased Laser Control Systems in the United Kingdom, which provides complementary hardware offerings to strengthen our capabilities in galvanometer based light steering. We also purchased Photokore, which is a strategic investment in the photogrammetry software.

The proliferation of high quality, speed and resolution digital photography has improved the potential for 3D data extraction from images. While these acquisitions are not anticipated to add material sales in the coming quarters, they represent key technology bolt-on acquisitions to existing hardware and software in our portfolio.

Even after numerous new product introductions in 2017, our hardware and software R&D teams did not take a break from driving the new product drumbeat forward in the first quarter of 2018.

In February, we introduced the FARO Design ScanArm 2.0 designed to address the most demanding challenges and requirements faced by product design and product engineering professionals. Our teams continue to push our future new product innovations and we remain very excited about the new technology pipeline for 2018.

The Dynamic Machine Vision Sensor, DMVS, will be introduced as an early adopter product that can see in high resolution and accuracy while on the move.

In addition, we will continue to roll out the Vector RI 3D Laser Radar, which will be capable of performing multiple high-speed 3D measurements and imaging operations over large distances and at multiple locations at the same time.

We also intend to introduce major new accessory technologies around our primary platforms of arms, trackers, projectors, laser line probes and laser scanners. The next three quarters will be exciting for all of our customers and sales teams. Our software engineering teams introduced several important four FARO software upgrades in the quarter as well.

We released FARO Zone 3D 2018 designed to enable investigators and security professionals to enhance the quality of site and evidence captured documentation, reconstruction and analysis for crime crash, fire and security applications.

In March, we introduced the first-ever fully featured CAD-based surveying and construction 3D quality control software called BuildIT Construction for use with our FARO Focus Laser Scanners and our tracer and projection systems.

Our value proposition is to help the construction industry reduce the process inefficiencies and costly rework similar to the benefits that our [technical difficulty] products brought to our industrial manufacturing customers years ago.

In April, we released our FARO CAM2 2018 software platform designed to enable users to realize the highest value and level of performance with all FARO metrology products. Consistent with driving towards our 2019 objectives, we invested an additional $0.13 per share in sales force expansion and new product development in this quarter.

We are focused on delivering mid-teen sales growth, increasing gross margin to 60% plus and double-digit operating margin by 2019 as well as technical leadership in all product categories.

As our stock price performance has shown over the past three quarters, we firmly believe that the short-term risk and cost inherent in executing these initiatives will be rewarded with increased sustainable shareholder value. We deeply appreciate the patience of our shareholders and the hard work of our employees around the world.

I am proud of our accomplishments over the past two years and I'm looking forward to presenting our progress in the coming quarters.

Bob?.

Thank you, Simon. Total sales increased by $11.2 million or 13.8% to $92.8 million for the first quarter of 2018 from $81.6 million for the first quarter of 2017.

Our sales increase was driven mainly by an increase in product unit sales within our Construction BIM and Emerging Verticals segments, higher average selling prices and continued service revenue growth.

New order bookings increased by $9.2 million or 10.6% to $96.1 million for the first quarter of 2018 from $86.9 million for the first quarter of 2017. With new order bookings of $96.1 million and sales of $92.8 million, our book-to-bill ratio was 1.04 for the first quarter of 2018.

Total product sales increased by $8.2 million or 13.1% to $70.6 million for the first quarter of 2018 from $62.4 million for the same prior year period.

Our total product sales increase was mostly related to an increase in product unit sales within our Construction BIM and Emerging Verticals segments as well as higher average selling prices in our 3D Factory segment with the recent introduction of our new products.

Total service revenue increased by $3.1 million or 16.0% to $22.3 million for the first quarter of 2018 from $19.2 million for the same prior year period. Our service revenue increase was mostly due to higher warranty and customer service revenue as we executed initiatives to expand our aftermarket sales from our growing installed base.

In our 3D Factory segment, sales for the first quarter of 2018 were $61.4 million, an increase of 7.3% compared with $57.2 million for the same prior year period. This increase was driven by higher average selling prices and growth in service revenue, partially offset by a reduction in product unit sales.

In our Construction BIM segment, sales for the first quarter of 2018 were $22.7 million, an increase of 19.8% compared with $18.9 million for the first quarter of 2017. This increase was mainly related to an increase in product unit sales reflecting the continued strong market demand for our broad portfolio of laser scanner hardware and software.

Our Emerging Verticals segment, formerly called our other segment, is comprised of our product design and public safety forensics verticals. Total sales of the Emerging Verticals segment increased by $3.4 million or 62.9% to $8.8 million for the first quarter of 2018 from $5.4 million for the same prior year period.

This increase was driven by higher product unit sales leveraging our sales headcount additions in these emerging verticals. Gross margin for the first quarter of 2018 was 57.9%, an increase of 4.3 percentage points compared with 53.6% for the first quarter of 2017.

This increase was mainly due to a strong increase in our product gross margin reflecting higher average selling prices in our 3D Factory segment, improved manufacturing efficiencies from higher production volume in our Construction BIM and public safety forensics verticals.

Selling and marketing expenses were $28.3 million for the first quarter of 2018, an increase of 23.6% compared with $22.9 million for the first quarter of 2017.

This increase was primarily driven by higher compensation expense related to our strategic growth initiative to increase sales headcount as well as higher commission expense from our mid-teens sales growth. Selling and marketing expenses were 30.5% of sales for the first quarter of 2018 compared with 28.0% of sales for the same prior year period.

General and administrative expenses for the first quarter of 2018 were $11.1 million, an increase of 3.5% compared with $10.7 million for the first quarter of 2017 relating mostly to business acquisition activity.

As a percentage of sales, general and administrative expenses decreased to 11.9% for the first quarter of 2018 compared with 13.1% for the first quarter of 2017. Research and development expenses were $9.4 million for the first quarter of 2018, an increase of 11.1% compared with $8.5 million for the same prior year period.

This increase was mostly related to additional engineering headcount to support our recent acquisitions and accelerate new product development activities. Research and development expenses decreased to 10.1% of sales for the first quarter of 2018 compared with 10.4% of sales for the first quarter of 2017.

In the coming quarters, we expect our FARO Best initiatives to drive process efficiencies across all departments to improve operating margin. Our net income was $0.5 million or $0.03 per share for the first quarter of 2018 compared with a net loss of $1.5 million or $0.09 per share for the first quarter of 2017. Turning to the balance sheet.

At the end of the first quarter of 2018, cash and short-term investments totaled $149.8 million, of which $93.9 million was held by foreign subsidiaries. Our cash and short-term investments decreased by $2.2 million from the end of 2017 reflecting mostly our growth [ph] spending on two business acquisitions totaling $4.0 million.

Our balance sheet remained strong with no debt. Accounts receivables was $71.6 million at the end of the first quarter of 2018. Day sales outstanding was 70 days at the end of the first quarter of 2018, up two days from the same prior year period given our strong year-over-year sales growth in Europe.

Total inventories were $100.1 million at the end of first quarter 2018 compared with $93.4 million at the end of fiscal year 2017, mostly driven by an increase in sales demonstration inventory to equip our new sales hires, higher finished goods to support our sales growth around the world and strengthening of local currencies relative to the US dollar.

A more complete presentation and discussion of our first quarter of 2018 results is available on our Form 10-Q for the quarter ended March 31, 2018. We appreciate your attendance on today's call. We will now open the call for questions through the start of market trading..

[Operator Instructions] Your first question comes from Greg Palm with Craig-Hallum Capital..

So, I know historically you've tended to see some sales impacts whether it be from kind of end of quarter stock market volatility, news events, etcetera. I mean Brexit comes to mind a couple years ago.

Curious if you saw any similarities in Q1 this year, if you heard of any deals that got pushed out given all the tariff related noise?.

We're really not seeing anything like that. I mean there's always deals moving around and pushing, but nothing that could be correlated to any macroeconomics. No, we haven't..

And I think that that's really highlighted the strength of that. As you see in our 10-K, we started disclosing our sales by region and you see we were up about 14.7% in the Americas and that would have most likely been one of the regions that would have been impacted by this..

Got it.

And I noticed APAC was - the growth rate there moderated a little bit, anything to read into?.

No, not really. I think first quarter in APAC is always a little bit volatile from the perspective of Chinese New Year, which has become a bigger and bigger piece of our business overall, but still the strength remains strong there and we actually see a very growing interest in our Construction BIM products in that region as it continues to mature..

Okay, got it. And then I guess just maybe talk about this global lean initiative that you're now kicking off officially.

I mean what is it expected to yield in terms of cost improvements and I guess more specifically, what areas are you targeting with this program?.

Every area of the company actually, I mean every line of the P&L statement is being drilled into. And so, I would say it's broadly it's all regions and all lines of the P&L..

Okay.

But I guess anything incremental from some of the stuff you've been focusing on recently? I mean are you talking about any sort of headcount reductions, G&A kind of stuff or I guess I'm just sort of asking for what kind of specific items you're looking to implement?.

Well, I'll answer this question, then we'll have to move down the queue. But I believe that what we're trying to do is slow the increase of all the support functions in the headcount and all the support functions in the company as an effort to increase efficiency and throughput to deal with the sales growth.

At the same time, we're trying to reduce in the meantime the actual cost of the products to increase the gross margin. So, we're also doing tax planning around jurisdictional issues relating to maximizing our bottom line.

So, there really is no single line and it will have impact in some cases on headcount, probably more to do with the rate of growth of headcount..

Perfect. Okay. Thank you..

So just for the analysts calling in, if you just limit your first round of questions to two and then you could jump back in the queue and we'll stay here till 9:30 the start of trading..

Thank you. Your next question comes from Bobby Burleson with Canaccord. Your line is open..

So just curious, you've recently released CAM2 2018 and it sounds like you have very high accuracy there, we're stitching together multiple scans and in compared with a Geomagic, etcetera.

And I'm wondering kind of does that change the game a little bit in terms of the customers decision making process, maybe not having to buy third-party software and kind of what's the feedback you've gotten since the launch?.

It's probably a little bit early to say. We are trying to deal with the metrology issues in terms of accuracy with respect to our CAM2 software while products which we're very happy to sell and which are great products like Geomagic are usually focused around more reverse engineering applications. So, the specificity of the products differentiates it.

But I should say that we have very strong partnerships with all our third-party suppliers. We make reasonably strong margins on them. Software as you know is very sticky in installations, so we make a point of being adaptive to - our products adaptive to all third-party softwares.

But I would say we continue to improve the metrology aspects of our own software since that's the core of what CAM2 is about..

Great. And then just my follow-up in terms of maybe some investments you've been making ramping up in different regions. Curious what the state of Mexico is right now, I understand it ramping up in aerospace and automotive and then your build-out in Germany for Visual Inspect.

Can you give us any sense of where those operations are and kind of what the impact has been on your overall kind of demand?.

Well, the Mexico issues with respect to expansion of automotive and aerospace and or them [ph] are moving back forth depending on the politics around it. We continue to pursue those as two major segments and expand sales force where the pull is.

But we - Mexico has been a good region for us, but we're not seeing any particular effect plus or minus with all the discussions that are being had. It may have more impact as NAFTA solidifies. With regards to the acquisitions of companies like Visual Inspect, we don't expect those to have real immediate impact.

I mean we're talking about the - in that particular case, enhanced reality and the manner in which that starts to penetrate the different markets. We're working with some very big clients like BMW with those products and introducing them - the Visual Inspect products to a number of other large enterprises.

We believe Visual Inspect is more of a large enterprise product category and we're just going to have to do a wait and see.

There's a lot of interest in enhanced and - or ER and VR and in metrology and in manufacturing quality control and we intend to remain a player in that area and a leader in that area and that's why we made that acquisition, we just have to wait and see how it all rolls out..

Great. Thank you..

And your next question comes from Jim Ricchiuti with Needham & Company. Your line is open..

Bob, just wanted to go back to a comment that you made, I just want to make sure I heard it correctly. On the 3D Factory side of the business, did I hear - number one, you sound like you benefited from higher ASPs, but I thought you said that unit sales were lower.

Did I hear that correctly?.

That is correct. So, we launched in August last year in 2017, we launched the Quantum S and the Quantum M Arm products for us and they've been received very well in the market as well as other Factory Metrology products. We've seen higher ASPs attached with our Factory Metrology products, but slightly lower unit sales on a year-over-year basis..

I think just to comment further on that. We introduced Quantum S and Quantum M, which occupies certain accuracy and price ranges. These are all top end products with very significant improvements in ASP.

What we noted is that the product line expansion needed to be continued and so we are going to be introducing lower end lines to deal with, which is where we had the major impact on unit numbers.

Our used product sales continued, but we also need a new product line at the lower performance level for certain types of users and that'll be corrected this quarter..

One thing, Jim, too, for us we really look for that Factory Metrology business to be in that high-single digits. We recorded 7.3% overall sales growth so that vertical's on the edge performing..

Okay.

And just with respect to the Construction BIM market, can you give us some sense about the magnitude of the unit growth that you saw?.

We don't discuss really unit sales on a percentage basis at the platform level..

Okay. Just if I could slip this question on tax rate.

What are we - what should we be assuming, Bob, on the tax rate looking out over the balance of the year?.

I mean historically we've not guided on tax rate. This quarter was 22%. I think you can look historically to kind of get a guide for us. We went through the US tax reform process in Q4. We also disclosed in our 10-Q that we don't really see a material impact off guilty [ph] at this point. So, I think history is what you have to work off of..

Thanks..

And your next question comes from Ben Klieve with NOBLE Capital Market. Your line is open..

Couple of questions. First on the selling expense line here. I certainly understand kind of elevated level of expenditures related to the ramping in the sales force.

And I'm curious as we look out for the rest of this year, do you think that escalation is going to be offset by these lean initiatives that you're implementing relative to '17 or do you think you're going to see elevated levels as a percentage of revenue for the balance of this year?.

We're expecting to see a lower dollars expenditure per headcount so, there's two forces at play. One, we're increasing the sales force as we noted evenly over the quarters to try to achieve 15% increase in headcount. At the same time, the lean efforts will be to drop the dollars per headcount.

In fact there was an increase over the last couple of quarters in the dollars per headcount of expenses around and that's going to be remedied in short order as well. So, we expect those to be - we'd like to get back to the 27% to 28% selling expenses from where the 30% is right now..

Okay. And a question kind of about the overall health of the market and seasonality that you're looking at this year.

If you strip away the higher ASPs that you saw on the metrology side and just overall growth from the expanded sales force, how did the first quarter this year look relative to say the past couple of years in terms of the health of the overall market? Do you think this is setting out to be a seasonally weak quarter in the same magnitude as prior years or do you think that this quarter was a little better, little worse than in years past?.

Our order level was a little bit higher than we had projected so that's a positive thing. I think that we continue to see the same seasonality. Typically Q1 is about 0.23% or 23% of the full year and we don't see any reason macroeconomically or from our actions that would substantively change that..

Okay, perfect. Thank you both. I'll get back in queue..

And your next question comes from Hendi Susanto from Gabelli & Company. Your line is open..

Bob and Simon, how should we see operating expenses for the rest of the year as we see higher investment, your effort to drive operating efficiency and your goal of double-digit operating margin by 2019? I mean that there's also some timing that you're leaning initiatives may take time to produce the outcome..

We would like to see all the elements of the operating expenses drop as a percentage of sales. As in absolute numbers, we'd like to flatten some would as we did as noted in G&A for example where it dropped as a percentage of sales.

I mean clearly depreciation and amortization are a little bit less easy to control and related to acquisitions, R&D also may be affected by acquisitions but even there, what we're trying to do is flatten it as a percentage of sales. So, our biggest efforts are around the selling and marketing expenses to try to level those out.

So, I would say just overall that you should see a reduction in the rate of increase in those and I expect substantive improvements from the lean effort where our focus is this year..

And in terms of timing just for clarification, are we expecting those in 2018?.

Yes, we should see savings in 2018 from these efforts. I expect to see them progressively implemented quarter by quarter and actually have them and have some good strong visibility around those improvements..

And then, Simon, would you share where sales force productivity is and where it is relative to expectations, whether it's ahead or in line with your expectation as of today?.

Sure. So as we noted, we dropped our trailing 12-month orders per FTE versus trailing 12-month headcount in Q4 '17 from 711,000 to 698,000. That's a small decrease, it has to do with the fact that we're putting new sales people into the emerging verticals in areas where new geographies and less well developed product portfolios.

But substantively the sales increase in the company has tracked pretty much with the headcount increase and so we're confident that that number probably will decrease again continuously in 2018 and at some point in '19, we expect that number to start coming back up as the maturity - as the new hires in the emerging verticals mature and as the product line continue to fill out in these new emerging verticals.

So, everything seems to be on track and clearly the efficiency exercise that we're going through too, we intend to counter as a counter force against this dilution of the sales per headcount, but we feel it's pretty much on track..

Got it. Thank you Simon. Thank you Bob..

And your next question comes from Ben Rose with Battle Road Research. Your line is open..

Question on the dynamic motion vision sensor product initiative for the company.

My question is for the early adopter program, which I know you've used with other product lines in the past, can you remind us of sort of the typical number of customers that might engage in that program and what the duration of the program would be sort of prior to general launch?.

That's a great question and it's one that's very pertinent to our strategy. Coming up with the early adopter program has allowed us to introduce products at a much less costly level, getting early market feedback. We try to accelerate that process and we try to focus on a very - a small number of very important customers.

So usually below 50 would be the early adopters in any particular range and we really try to shorten the cycle in which we get our feedback, make the variations in changes. And you'll remember, for example, last year we introduced the Scan Localizer device that was used to enhance the registration of scans in the BIM market.

That quickly resulted in a number of important changes and will result in important product introductions full fledge product introductions this year. So, I would say a typical year is involved in not only getting the EA product out, getting the feedback, making the changes and having the confidence to make a full roll-out.

So the DMVS, which was introduced at the Control Show in Germany actually this last week, represents a new product concept, a product that we call the QualityGate, which can be easily implemented on existing serial lines.

It provides a degree of measurement capability and robot visualization that is unprecedented and we have integrators looking at it and trying to understand it. And so, that process can take a little time. So I think it's fair to imagine the 1 year between EA introduction and full roll out..

Okay. And then just a quick question for Bob.

In terms of the share count, looks like it's been creeping up a little bit, if I'm correct in looking at this and just to ask you how should we think about share count in the coming year? And I also seem to recall that FARO has a share repurchase authorization and has - is there any thought being given to executing that?.

So, the EPS number that we report is based on a diluted share count. And with positive earnings, of course we use the diluted share count of about 17.1 million. What you'd see is part of that is certainly the strength of our stock price that has helped increase that number of diluted shares.

I think we would consider later in the year as we move forward to potentially kind of true that back up more and we'll our share buyback as a way to kind of keep that number fairly constant. So that is something that we have discussed, but I'm not ready to announce that's what we're going to do..

Okay, thanks very much..

And your next question comes from Richard Eastman with Baird. Your line is open..

Simon, could you kind of respond to when I look at the FTE adds and we're on track there so we have more salespeople. But I look at a couple of the metrics here that you disclose like the 3D Factory business, sounds like unit volume was down and most of the growth there came out of service and also price.

And I also look at Europe and I'm looking at the sales number there and although probably not fair, I take all the currency out of the revenue number in Europe and it looks like flattish to maybe even down sales a little bit.

So, I'm a little bit curious as to where are we seeing growth that correlates to the sales headcount if not in unit volume?.

Well, clearly we talked about the ASPs on the new products. I think we - it's important to note that we have a lot of countervailing forces as you work through. We have productivity differences between the different regions.

We have different regions that, for example, Europe has had a lot of difficulty just as a sales force getting used to the idea of the verticalization and the higher efficiency. We've had headcount reductions in some areas, which have been compensated for by headcount increases. So, I would say that the formula is not simplistic.

We had regions where the ASP is up and the quantities are up and then other regions where it's down. And I think you make a valid point, the correlation is not straightforward and 1 thing is clear.

If you're not driving the headcount up, ultimately that equation of demos done doesn't work out and we do correlate directly to demos done and follow through.

But I don't want to deny the fact that we have regional issues and vertical issues and individual performance issues and this last couple years have been challenging in that regard because of the renewed aggressiveness of the company.

So we have a churn in sales force, which I don't find unacceptable because we have to work out people that are prepared to work in the manner that we work. So, I'm trying to be sensitive to your question. I think it's a complicated answer.

I think your observation is accurate and that depending on where you look regionally and vertically, you're going to see different correlations to headcount. And for us overall corporate number is making sense, but underneath that, there is a lot of noise. The making of the sausage is not necessarily pretty..

One comment I wanted to make sure everybody was on board with and understood is Europe was up even adjusting for currency. I mean one year you take a currency benefit, one year you take a currency hit to your top line translationally [ph].

But I just wanted to make sure all the analysts and investors on the line understand that we did have a sales gain excluding currency in Europe..

Okay. And just a quick follow-up. Simon, it's interesting you quickly noted the Laser Control Systems acquisition. I'm a little bit curious. That one maybe steps away from FARO acquiring maybe software content maybe for the analytics of the point cloud file that you put together here.

And I'm a little bit curious, is there still in your mind meaningful room in the product gross margin from more of a vertical integration on the hardware side? Is that still an opportunity or?.

Absolutely. I mean we are - I don't want to overstate it, but I'm so enthusiastic for example about the Vector. Vector will displace a huge amount of the market, it is completely disruptive. I mean there is a whole category of sensors on robots that this will replace and it's an unprecedented product.

The technology that these kinds of products involve relates to the steering of light. And so, we will always make these technology component bolt-ons to increase our ability to innovate in those areas.

The acquisition that we made a couple of years ago of Nutfield, the acquisition of the Laser Controls in United Kingdom and a couple of other things that we're working on are all meant to provide us a clear necessary vertical control over the process of steering light, which will be used in everything that we do.

I mean we measure with light and we have a number of primary methodologies for steering light and we just want to make sure that we're fully vertically integrated in those. But absolutely, I mean I will personally predict great disruptions in the technology market, in metrology in particular, over the next 24 months..

Okay, awesome. Thank you..

And you have a follow-up question from Greg Palm with Craig-Hallum Capital. Your line is open..

Apologies for not playing by the rules earlier. I'm juggling a couple of calls so if I missed this, hopefully maybe you can repeat it for me.

But in terms of the two acquisitions you did, it sounds like in the Q you noted some acquisition related costs so I was curious if you're willing to quantify what those were and were - was there any - I don't want say meaningful, but was there some amount of operating expense apart from the acquisition related costs associated with those two acquisitions in the month of March that flowed through the P&L?.

So in terms of the acquisitions, we did those late in March so there was no real material benefit or impact to our P&L per se from the acquisitions themselves. Given the size of those really early stage, we would not really see material sales or benefit out of them coming forward, maybe an incremental as we move forward R&D expense.

In terms of the direct costs we saw though from the deals, I would say the main driver of our G&A being up year-over-year was related to the cost to go along with executing the transactions. We are very focused internally on managing our headcount G&A and we were able to achieve maintaining our headcount to maintain our underlying G&A..

That's helpful. Thanks. And then I guess just on - I'm thinking about raw material inflation and potential impacts there.

Can you just remind us where you have the most exposure there and rising raw material costs especially aluminum, does that concern you at all or not necessarily?.

At this point in time, it doesn't. We certainly added a risk factor to our 10-Q based on some of the market events that you see. As it kind of unfolds and develops, I think all companies are kind of pivoting along with this as the market kind of changes based on the policies of administration.

But at this point time, we're not ready to say that we have a headwind to our gross margin because of it..

Okay, thanks..

And there are no further questions at this time..

Well, thank you very much everyone for joining our [Ends Abruptly].