Bob Seidel - CFO Simon Raab - CEO, Chairman.

Greg Palm - Craig-Hallum Capital Jim Ricchiuti - Needham & Company Ben Klieve - Noble Capital Markets Ben Rose - Battle Road Research Hendi Susanto - Gabelli & Company.

Good morning, everyone, and welcome to FARO Technologies' Conference Call in conjunction with its Second Quarter 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 second quarter and first six months of 2018. The press release is available on FARO's Web site 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, goals, 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 quarters ended March 31, 2018 and June 30, 2018.

I'll now turn the call over to Simon to provide an update on our company's strategic initiatives and afterwards, we will return with a review of our financial results. After our prepared remarks, we will open the call for questions..

Thanks, Bob, and good morning, everyone. In our second quarter earnings release last year, announced the completion of a challenging comprehensive global reorganization of FARO. We refocused our sales marketing and product management teams into vertical markets. We realigned our support functions to be globally harmonized leveraging best practices.

Our R&D teams introduced all new next generation hardware and software products across every technology platform. The team has delivered important performance over the past four quarters. We’ve taken tangible steps each quarter towards our long-term financial objectives of mid-teen sales growth, 60% gross margin and mid-teens operating margin.

In the second quarter gross profit increased year-over-year by $10.9 million or 23.4% and operating expenses grew only $4.8 million or 9.5%. This resulted in the $6.1 million increase in operating income or seven percentage points of increase in operating margin. We believe that we remain on track to meet our long-term financial goals.

Our quarterly sales of $98.2 million grew 18.8% year-over-year for the first time since releasing the metric of trailing 12-month orders per sales FTE increased quarter-over-quarter to $706,000.

Our gross margin of 58.7% increased 2.1 percentage points year-over-year and our operating income of $1.9 million improved from a loss of $4.2 million last year. We delivered EPS of $0.07 per share in the second quarter of 2018 compared with a loss of $0.22 per share last year.

The hard work, dedication and time to completely reorganize the company and deliver the new products has produced four quarters of mid-teens growth and profit improvement. All our verticals segments delivered strong year-over-year sales growth in the quarter.

Our 3D Factory segment delivered an outstanding quarter of 13.3% year-over-year sales growth, construction BIM was up 25%, and the emerging verticals which include public safety forensics and product design was up 50.3%.

[Indiscernible] to our success in quarter not just by how we delivered the quarter's financial results compared with our expectations, but also how we build for the future with our new product drumbeat and acquisitions.

In the second quarter, we expanded our Quantum ARM platform portfolio in order to better match the technology needs and budgets of our customers.

In May, we introduced the new versions of the Quantum ARM and -- Quantum ARM and laser line probes, which provides our customers with an entry-level value price offering to make that step into three-dimensional measurement at a lower price point, especially for those customers in emerging market.

With our reorganization behind us, we dramatically accelerated our pace of acquisition by closing five transactions to date in 2018.

While our R&D activities are actively creating a new product drumbeat from FARO research labs, we are broadening our hardware and software capabilities with these acquisitions to strengthen existing verticals and build new verticals.

We purchased laser control systems based in United Kingdom and landmark controls based in Massachusetts to strengthen our capabilities in galvanometer based light direction. We will combine these businesses with our prior addition of galvanometer technology to create a market leading photonics technology platform.

In March, we purchased Photokore, which is a strategic investment in the photogrammetry software. The proliferation of high quality, high resolution digital photography provides the potential for 3D data extraction from images using photogrammetry across all verticals.

In April, we made a strategic minority investment in Present4D, which is a software solutions leader in virtual reality. This technology offers our public safety forensics and construction BIM verticals with enhanced virtual-reality opportunities, especially for training and inspection application.

In mid-July, we acquired Open Technologies, which provides us with a rich portfolio of compact 3D structure like scanning solutions and reverse engineering software for our core industrial manufacturing and product design application. In addition, Open Technologies strong presence in the digital dental market opens us to new vertical possibilities.

These products enable dentists and dental technicians to leverage the digital 3D world for the design and manufacture of dental appliances. Our software engineering team introduced several important core Faro software products in the quarter as well.

In April, we released our Faro CAM2 2018 software platform, newly designed with continuous deployment in order to bring product improvements rapidly and continuously to our users.

In May, we expanded our Construction BIM focus software offerings with our all-new Faro As-Built Software platform that enables efficient and cost-effective transfer of 3D reality capture into Construction BIM CAD design tools.

As-Built is specifically designed to minimize the effort and time required to create an As-Built documentation essential for AEC professionals in building facility and infrastructure design. We keep pushing every vertical horizontal and region to improve its business processes and efficiencies to propel us towards our financial objectives.

In the first quarter, we kicked off an entrepreneurial initiative to instill a continuous improvement lean culture across the company named FARO Best. Business process excellence is essential to leveraging our sales growth and improving operating margin.

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 and product demos and sales growth. The 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 second quarter of 2018, our period ending sales headcount was 673, an increase of 46 or 7% compared with 627 at the end of second quarter of 2017.

Our full-time experienced headcount or sales FTE increased 591 at the end of the second quarter of 2018 compared to 516 at the end of the second quarter of 2017, an increase of 15%.

The difference between our period ending and FTE sales headcount represents a start up sales headcount of 82 and a start up selling expense of approximately $2.1 million or $0.10 per share for the second 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 572 at the end of the second quarter of 2018, an increase of 99 or 21% compared with 473 in the second quarter of 2017. Our new order bookings for the second quarter of 2018 was $106.5 million contributing to a trailing 12-month order total of $403.7 million.

The ratio of our trailing 12-month new order bookings for trailing 12-month sales FTE headcount was approximately 706,000, an increase of 8,000 per FTE from the prior quarter.

Our second quarter performance marked an important milestone by being our first quarter over quarter increase in our trailing 12-month new order bookings for trailing 12-month sales FTE headcount. Since introducing this metric in 2017, it's our expectation that this improvement in the second quarter begins an upward trend in this metric.

Our double-digit new order bookings and sales growth over the trailing 12 -- four quarters provided a positive indication of the success of our strategic sales force initiative. As communicated in our fourth quarter earnings call, we intend to increase our period ending sales headcount by 15% to 20% during 2018 in equal increments by quarter.

In the first half of 2018, we were generally in line with this projection by increasing our ending sales headcount by 42 compared with the end of the fourth quarter of 2017. This 15% to 20% sales force hiring rate will be accompanied by a higher investment and start up selling expense pressuring our near-term earnings potential.

We continued with our clear top priority to be the technology leader in our space by increasing our R&D spending by $1 million or $0.04 per share year-over-year as we continued to invest in new technology acquisitions and accelerating the development of next-generation products to remain the technology leader in the market.

Our teams continue to push our future new product innovations and we remain very excited about the new technology pipeline for 2018.

Our 3D Machine Vision verticals developing new opportunities for automated Machine Vision Sensor such as our previously announced dynamic machine vision sensor or DMVS and provide laser -- radar sensor such as our Vector 3D.

We expect to introduce seven new products in the third quarter alone, continuing our new product drumbeat and reinforcing customer and sales force confidence in our commitment to remain the technology leader in 3D. We deeply appreciate the patience of our shareholders and the hard work of our employees around the world.

I'm very proud of our accomplishments and look forward to presenting our progress in coming quarters.

Bob?.

Thank you, Simon. Sales for the second quarter of 2018 were $98.2 million, an increase of 18.8% compared with $82.7 million for the second quarter of 2017.

Our second quarter sales increase was primarily a result of growth in product unit sales across all segments, and higher average selling prices highlighted by a strong quarter for our 3D Factory segment. New order bookings for the second quarter of 2018 increased by 19.7% to $106.5 million from $89.0 million for the second quarter of 2017.

With new order bookings of $106.5 million and sales at $98.2 million, our book-to-bill ratio was 1.08 for the second quarter of 2018, which is consistent with our book-to-bill ratio for the same prior year period.

Product sales were $75.7 million for the second quarter of 2018, an increase of 21.1% compared with $62.5 million for the second quarter last year, mainly due to an increase in product unit sales across all segments and higher average selling prices in our 3D Factory segment.

Service revenue was $22.5 million for the second quarter of 2018, an increase of 11.8% compared with $20.1 million for the same prior year period. This increase was primarily due to the continued increase in warranty and customer service revenue driven by the growth of our installed serviceable base.

In our 3D Factory segment, sales for the second quarter of 2018 were $65.0 million, an increase of 13.3% compared with $57.4 million for the second quarter of 2017. This increase was mostly driven by increase in product unit sales, higher average selling prices and continued growth in service revenue.

In our Construction BIM segment, sales for the second quarter of 2018 were $23.6 million, an increase of 25.0% compared with $18.9 million for the second quarter of 2017, primarily reflecting a strong increase in product unit sales.

In our Emerging Verticals segment, sales for the second quarter of 2018 were $9.7 million, an increase of 50.3% compared with $6.5 million for the second quarter of last year, mostly due to higher product unit sales in both our public safety forensics and product design verticals.

Our sales headcount investments in these emerging verticals are delivering new opportunities in previously unaddressed markets. Gross margin for the second quarter of 2018 increased by 2.1 percentage points to 58.7% compared with 56.6% for the second quarter of 2017, an increase by 0.8 percentage points compared with the first quarter of 2018.

The year-over-year increase was related mainly to higher average selling prices and improved manufacturing efficiencies. Selling and marketing expenses were $30.1 million for the second quarter of 2018, an increase of 15.6% compared with $26.0 million for the second quarter of 2017.

This increase was driven mostly by an increase in ending sales headcount of 7%, higher sales commissions due to our sales growth, and increased marketing activity. Selling and marketing expenses as a percentage of sales were 30.6% for the second quarter of 2018 compared with 31.5% for the same prior year period.

General and administrative expenses for the second quarter of 2018 were $11.3 million, a decrease of 4.7% compared with $11.9 million for the second quarter last year. This increase was primarily driven by control of headcount and outside professional services spending.

As a percentage of sales, general and administrative expenses decreased to 11.5% for the second quarter of 2018 compared with 14.4% for the same prior year period. Research and development expenses were $10.0 million for the second quarter of 2018, an increase of 10.4% compared with $9.0 million for the second quarter of 2017.

This increase was mostly related to additional engineering headcount to support our recent acquisitions, accelerate new product development activities, and expand our construction as built capabilities.

Research and development expenses decreased to 10.2% of sales for the second quarter of 2018 compared with 10.9% of sales for the same period last year. Operating income increased by $6.1 million to $1.9 million for the second quarter of 2018 compared with an operating loss of $4.2 million for the second quarter last year.

Operating margin increased 2.0% for the second quarter of 2018, up 7.0 percentage points year-over-year. Net income was $1.2 million or $0.07 per share for the second quarter of 2018 compared with a net loss of $3.6 million or loss of $0.22 per share for the second quarter of 2017. Turning now to working capital.

Accounts receivable was $71.6 million at the end of the second quarter of 2018 compared with $58.8 million at the end of the second quarter of 2017. Days sales outstanding was 67 days at the end of the second quarter of 2018, up two days from the same prior year period.

Total inventories were $98.7 million at the end of the second quarter of 2018 compared with $93.1 million at the end of second quarter of 2017, mostly driven by an increase in finished goods to support our sales growth and higher sales demonstration inventory to out fare [ph] new sales hires.

At the end of the second quarter of 2018, cash and short-term investments totaled $144.6 million, of which $88.4 million was held by foreign subsidiaries. A more complete presentation and discussion of our second quarter of 2018 results is available on Form 10-Q for the quarter ended June 30, 2018.

We appreciate your attendance on today's call and will now open the call for questions through the start of market trading. We ask that you hold your questions to [technical difficulty] questions or two. Thank you..

And we will take our first question from Greg Palm with Craig-Hallum. Please go ahead. Your line is open..

Yes, thanks. I guess, first curious from the last time that units actually grew within the 3D Factory segment on a year-over-year basis. And can you give us anymore sort of commentary whether that growth was driven by new products, existing lines, weather you were active in growing headcount there? Any more details would be helpful..

Sure. Well, the entire line was replaced. The new versions of all products came out. So that of course -- the technological leadership was important. At the same time we expanded the lines to have both our high and low end products.

So what we did is we were able to access what was typically covered by a used equipment or previously [indiscernible] equipment sales to all new equipment at both ends of the line. So, I would say it's a broad spectrum of products and new end technology leading products as well..

Got it.

But just to be clear, it was driven from kind of the existing ARM and tracker lines, it wasn’t driven by any -- of the kind of the newer machine vision applications?.

That’s correct..

Got it. Okay. And then, I guess, a second one for me, any commentary you can provide on the cadence of [indiscernible] book-to-bill was really strong again, which I guess kind of implies that the quarter on a revenue basis actually could have been better if you were able to ship anything.

So any commentary on whether it was end of quarter orders or some analysis [ph] would be helpful as well..

It's always end of the quarter orders. We have a very not atypical to the industrial market and other markets for that matter, is that the orders all piling at the end of the quarter relating to budget and negotiating tactics et cetera. So we have a very late load up of orders and we can only manage there a certain number of them.

But that -- this quarter was as we pointed out not atypical to the Q2 of last year as well..

Understood. All right. Thanks all. I'll hop back in the queue..

Thanks..

Thanks, Greg..

And we will take our next question from Jim Ricchiuti with Needham & Company. Please go ahead..

Thank you. So as you pointed out, the pace of the acquisitions has picked up in recent months. So, I'm assuming it's fair to say these acquisitions are not material from a revenue standpoint. And two questions.

One, in aggregate, do you expect these acquisitions to contribute to incremental growth in 2019 or as we think about it even further out with some of these in terms of the meaningful benefits. And then, the follow-up question is just relating to OpEx. So maybe we'll just start with that first question..

Yes. They’re all technology bolt-ons. I would expect that to start showing benefits clearly in 2019, in certain verticals that will be important, particularly, in the Emerging Verticals. The technology bolt-ons that we do are really in order to allow us to continue to develop the technologies on each of the platforms.

The Open Technology, the one we recently made does introduce us into a dental 3D digital market, which represents an important new market. But I wouldn’t expect that to show anything important until 2019..

Got it.

And then on the question of OpEx, just given these bolt-on acquisitions, giving -- given the headcount additions that you're making in the core business, I’m wondering how we might think about that operating expense going forward, Bob? Is there any help you can give us? It sounds like there is the potential for some near-term pressure just given what you’ve got going on..

So, certainly we don’t provide specific guidance. But I think what you see is this year we've established a good track record on G&A. You see our pattern there. We're very focused on controlling our G&A spend of our underlying business, excluding acquisition.

The R&D, you'll see that -- you saw the tick up between Q1 and Q2 as we invested more to support acquisitions and support our construction As-Built. So both of those we are very focused on controlling. In terms of the selling and marketing, we indicated, we would be adding about another 40 to 50 people in the second half of the year.

Previously, we talked to you about the fixed cost related to those individuals, which you can put into your forecast and also then any sales commissions for the sales increase.

In terms of the acquisitions, most of those acquisition dollars will come in the form of research and development and then also as we add the selling and marketing carrying it forward. We will be focused on integrating those acquisitions in the second half of the year.

If they become material to any part of the income statement, we will certainly point that out as we go through the year..

Thanks..

Thank you, Jim..

And our next question will come from Ben Klieve with Noble Capital Markets. Please go ahead..

Thank you. Question on the gross margin line, specifically on service gross margins. I’m curious if you can [indiscernible] help me understand the dynamic here that would be the -- leave that margin line to be a bit lumpy in between roughly 43% and 47% over recent history.

And what causes the lumpiness from one quarter to the next? And then, specifically, what would -- where do you see that causes the 150 point -- basis point decrease from the first quarter to the second?.

In terms of service margin, it is variable quarter-to-quarter as our revenue stream there are portions of it that’s recurring. We point that out in our Q, in our ASC 606, what is a recurring stream in terms of warranty.

And then the piece that’s more variable quarter-to-quarter is the rate upon which our customers send back equipment for customer service repair, non-warranty repair and training. Most of that in the quarter that will drive volatility is just that pattern of customers sending back their equipment for repair and replacement of parts.

So the fixed cost is pretty stable. It's mostly the revenue stream that varies quarter-to-quarter with the customers economic situation or their needs.

We are focused absolutely on this area than of our P&L as we see this as an opportunity for us to really focus to help drive to get closer to that 60% gross margin level in the near -- in the long-term..

Okay, very good. Thanks, Bob. And then on -- Simon, you talked about the rollout of the new ARM product.

I’m curious, the impact on -- from that new product here in the second quarter, were you able to roll that out in enough time that it had kind of a full runway on the quarter here, or can we expect that to ramp -- the impact from that new line to ramp here in the third quarter and maybe even into the fourth?.

Yes, the Q2 roll of the new Quantum ARMs, later in the quarter we did introduce the lower-end version of the Quantum ARMs, so now the line is complete. But all through the quarter it was all Quantum ARMS as well as the new laser line probes. So the growth is primarily because of the clear superiority of that product in the marketplace.

As you know FARO ARMs are portable measurement devices which represent the core product, and the clear superiority of the product both in the laser line probe, the software as well as the accuracy and certifications of the device that made it a clear choice.

And now with the broader spectrum of the product line for a lower price entry point, it had quite a profound effect on the marketplace. I would also say that it's probably one of the most reliable and ARMS that we've ever produced and all these are contributing to a strong building reputation as well as performance..

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

Good morning. Thank you..

Hey, Ben. Good morning..

Good morning.

How are you? How are you guys doing?.

Good..

Okay, good. To start up, Simon, I know that some time ago you had said sort of a 60% gross profit margin as kind of a target for FARO with this quarter kind of bumping up against that target.

Could you speak sort of longer-term, what the prospects are for gross profit improvement? Could we see perhaps something exceeding 60% given the progress you’re making on the product gross profit side, specifically?.

I do see the possibility of that. I mean, as I've always said from beginning, it is strongly related to the technical superiority. You cannot charge premium prices unless you are technically superior in the product category. So that's extremely important to that process. The second most important thing, of course, is the production efficiencies.

We have implemented, as I noted in my announcement that FARO best initiatives, which is lean -- in production lean, lean manufacturing and efficiencies of that type. So, we expect that to put an upward or downward pressure on costs.

At the same time, we are entering a little bit of the componentry market as you’ve noticed we talking about The Photonics Group, which provides componentry for light direction to a number of industries. The selling expenses are lower there, but the margins can be higher because of the nature of the underlying technology.

And so the -- I see generally on a prospect that once we maintain technical superiority, keep working on efficiencies that we could exceed the 60%. It's certainly a goal of ours despite the fact that we said 60s are our 2019 expectation..

Okay. And with regard to Open Technology, specifically, it looks like there are some vertical markets that they address specifically for the 3D creation of crowns implants and prosthesis et cetera.

Do you see these more of a -- and I understand that they also bring expertise in kind of the core markets that you focus, but with regard to the former do you see these as sort of an opportunistic pickup to address some of those markets or could we see kind of a more formal focus on that particular market for FARO, for growth?.

Yes, I do believe it's the later. We do view custom manufacturing and just because it's [indiscernible] it's really not that different than producing car parts. Except the difference here is that its highly a bespoken sense that everyone is made as a custom product for the user.

So that means that product design, three dimensional information is extremely important. The trend in the digitization, if you will, are the three-dimensionalization of the entire dental profession is profound and we felt that we are experts in three-dimensional measurement.

There's no reason why we shouldn't enter that in with the same kind of aggressiveness that we’ve entered the application of 3D in other areas such as BIM. So it will be an important contributor going forward. At some point it may qualify to stand on its own as a segment.

In the meantime, we are seriously looking at all the elements of that marketplace to play a role in it..

Okay.

I’m sorry and finally just one question on the automotive sector, in particular, historically when we’ve seen some discussion about changes in terms of order flow for the automotive OEMs, there does seem to be some decrease in terms of their appetite to invest in various different tech technologies, given your position in that sector, could you maybe just speak to what you're seeing there and sort of maybe state of the state general health terms of the spending? I guess from an OEM and from supplier standpoint, from what you're seeing in the core kind of FARO ARM market?.

Well, I think that was the first evidence to be put in the ARM numbers are significantly up worldwide. I recently heard there was about 480 new electric car startups in China alone. There's a tremendous amount of energy around that market. So that’s certainly driving demand.

In the past, we have generally seen that when there's a downturn in the market that people are looking to squeeze out more efficiencies and reduce -- problems in manufacturing, that usually involves portable equipment.

So, we’ve -- our growth is generally been fairly steady irrespective of changes in the automotive market because we're going through low-cost high-efficiency, quality enhancing tool with broad application and adaptability in the factory. So, I’d say that everything looks really strong right now.

There's a lot of activity out there, despite may be ups and downs, in particular, automotive segments, there's a lot of activity..

[Operator Instructions] We will take our next question from Hendi Susanto with Gabelli & Company. Please go ahead..

Good morning, Simon and Bob, and congratulation on delivering double-digit top line growth for four quarters in a row..

Thank you..

Thank you, Hendi. Good morning to you as well..

Bob, how should we think about the path to what your year-end 2019 goals of mid-teen operating margin. You pointed process efficiencies as a major driver. And if I look at your OpEx, then OpEx will have to be around like 45%.

What kind of leverage should we think about that?.

So, in terms of how we get from where we’re at today in our 2% operating margin to our goals again to mid-teens, it starts with mid-teen sales growth which we demonstrated over the past four quarters. It then leads to taking our gross margin to 60%.

We’ve demonstrated that to really increase back that two, three percentage points over the past four quarters. So check and check on those two. The G&A expenses we've shown that we've been able to manage that line and decrease that as a percentage of sales year-over-year you saw a nice reduction through active controls there.

R&D expenditure at 10% of sales, we still believe that we can bring that number down and still execute on the new product developments. So I’m not going to say a number, but I will just say we feel we’ve additional leverage in G&A, in R&D.

So the net for us is certainly crack in terms of is how do we leverage the selling and marketing expenses? For us, that’s all about the orders per FTE. That's why we focus on that metric.

You saw us pick that up from 698 to 706 and really try to drive that forward because as we drive back to more of our target internal numbers, that's where we'll see the true leverage of the operating expenses in that selling and marketing back more to that mid 20s, lower 20s historically where we've been. You see the pathways, we stated.

We believe in the long-term mid-teens operating margin, but it's really for us to continue what we’ve been doing. The market leader in R&D drives top line, drive pricing in the market, and then get that orders per FTE up and lift that selling and marketing get that leverage..

Got it. Thank you, Bob.

And then, my second question is would you be able to share more colors on the increase of product ASP? How much of it is driven by change in product mix? And I'm wondering whether the increase of product ASP in Q2 is similar to what you have been seeing or whether they are some like new drivers there?.

In terms of the ASP really were its driven our core strategy, Hendi, is be the market leader in technology and drive price in the market. And that's really what you're seeing across especially our 3D Factory segment is the core products there that we've been able to do is come out with a premium pricing and deliver that in the market.

The other piece that we've done is, if you look at our ARM portfolio, you look at our laser scanner portfolio, we have a complete portfolio for our customers. It's not about mix, it's about technology into the marketplace that’s driving that ASP..

Thank you..

And next we will go to a follow-up question from Greg Palm with Craig-Hallum. Please go ahead..

Yes, thanks for taking the follow-up..

Good morning, Greg..

Yes..

Good morning, Greg..

Yes, thanks. Simon, in the last quarter you alluded to the orders per FTE and I think your commentary suggested that you’ve thought that sort of my trend down for the rest of the year before turning upwards in 2019, obviously, that changed in Q2 and commentary suggests that you believe that might see upward pressure here for the remaining quarter.

So, I guess, just curious what’s changed? Whether it's just more adoption from the product lines, whether it's macro, whether it's just better productivity, I mean, any color you can provide to us?.

You know apart from just being -- trying to be a little bit conservative about the expectations, we were hiring at a 15% rate that’s kind of diluted the sales per FTE. So it was a very positive surprise to see us go up in the dollars per FTE.

Now we could bounce around at the bottom of this value, if you will, or go up and down a little bit as we increase, but clearly the new product -- the additional concept that if the sales force is given market-leading technology products at good prices with a broad product mix, that they’re going to be more effective and efficient at selling and that certainly has come true as well.

So, yes, I'm positively surprised. I expected it to continue to downtrend. The pickup on the new technology has been fantastic. So, I think that’s great news for us. The new products that we mentioned in our announcement of about seven new products in this quarter alone, our technology add ons and new products -- standalone new products.

And so we expect that also to contribute to the dollars per FTE. So I’m confident that at a minimum we have bottomed out and now we have to see how quickly we can see that dollars per FTE rise.

So I'm going to -- I’m always going to tend to be a little bit more conservative until I see the facts and we did everything we thought that should increase that number and apparently it had its effect. Now we need that for a few more quarters before I could call it a trend, but we're hopeful..

Yes. That’s great to hear. And I guess just secondly, your comment earlier about sort of pressuring near-term earnings potential, I guess I look at that in your earnings have been pressured for the last couple of years, given a lot of these investments.

So is that something new and in incremental that do you expect in the near-term or was that just sort of a continuation of what's been going on given your elevated investment levels here recently?.

Right. It's a continuation. There's nothing new here. I mean we are getting a bifurcation between the rate of growth of the operating expenses, the OpEx and the gross margin, which I -- what I talked about in my announcement that you are now getting a change in increase between the two, which gives you that increased operating margin.

But we have been averaging on it -- in general around $2.2 million in startup per quarter and we just want to remind everybody that if you -- which represents about $0.10 and -- but that is an investment component.

If we stop the hiring and this work on dollars per FTE, clearly the $2.2 million could come out, the 10 points could come out of or $0.10 could come out of the operating expenses and go to bottom line. So it's just a reminder that we continue to invest in headcount growth..

And at this time, we’ve no further questions. I’d like to hand it back to our presenters for any closing remarks..

Like to thank everybody for attending our Q2 call, and we look forward to talking to you next time..

Thank you very much..

And this does conclude today’s call. Thank you again for your participation. You may disconnect at any time..