Question-and-Answer Session
Operator
[Operator Instructions] And we’ll take our first question from John Franzreb of Sidoti & Company.
John Franzreb – Sidoti & Company, LLC
Jeff, I applaud you for reinstituting the guidance, and I really want to start right there, because if I just do some simple math, it looks like on a sequential basis, that revenues in Q1 will be pretty similar to what we just had in Q4, but the profit profile is substantially lower. It sounds to me that you’re signaling that it’s all expense related and not mix-related. Is that the case and how much more of incremental expenses are we looking at?
Jeffrey A. Graves
Yes, John, you got it right on the button. So our revenue is — we’re projecting up modestly from Q4. So we said 1% to 3%. EPS drop is entirely due to our investments for growth.
John Franzreb – Sidoti & Company, LLC
So if I kind of quickly annualize that, we’re looking like an $8 million headwind from investments in fiscal 2013, is that a ballpark-type number?
Susan E. Knight
John, I think that’s at the high-end, we’re looking at $6 million to $8 million.
Jeffrey A. Graves
Yes, annualizing the Q1 level, John, is probably too aggressive. So to Sue’s point, it drops throughout the year. It’s front-end loaded because of hiring and training needs.
John Franzreb – Sidoti & Company, LLC
Got it. I didn’t quite catch the order book number for Asia in total. How much was up for the company year-over-year, Sue, when you said that or Jeff have kind of said it. Whats was that number again?
Susan E. Knight
For the year, John, or the quarter?
John Franzreb – Sidoti & Company, LLC
For the quarter.
Susan E. Knight
Let me just look back at the number. At the company level, we didn’t talk about total Asia. Test was the big driver for Asia, was — no, we didn’t highlight that number.
John Franzreb – Sidoti & Company, LLC
Okay. You said that China was up 18%. I guess what I was going to drill down to is why was America so weak in the order bookings?
Jeffrey A. Graves
Yes, we were — we’ve been talking a lot about that as well, John. It’s weaker than you’d probably expect this from kind of macroeconomic factors. But our conclusion, and it’s just based on what we’re — just from discussions with customers, is they’re really focusing most of their invesment around growth in Asia. And because that’s where the consumer base is growing, that’s where a lot of the spending is and the new product needs are. So they could very well be American companies, but they’re growing over there and that’s where most of their investments. So it’s where a lot of our sales are. So I view it that way. I think America’s economy was much like the headline said. But if you look at their investment profile, it was just more driven by their investments in Asia.
John Franzreb – Sidoti & Company, LLC
Okay. And sticking to the geographic theme here, you talked about the opportunity pipeline. Is it equally strong in Test in Europe? Or is there any concerns about the Europe spend rate right now?
Jeffrey A. Graves
Well, it’s a little complicated because we’ve got some very global customers that are spending a lot of money in Asia, but they are headquartered in Europe. So we classify our orders based on the geographies that the first order is received at. And so we can call it Asian, it could still be driven out of Europe. I think our customers are certainly facing big headwinds in Europe like everybody is from a production standpoint, and capacity utilization is off. But from an R&D standpoint, the markets we play in are very, very strong. So Europe for us has still been a good story because they continue to invest in product development and R&D over there.
John Franzreb – Sidoti & Company, LLC
Great. One last question. What was the shares at the end of the quarter? What’s the current share count standing at right now?
Susan E. Knight
About 15.8 million.
Operator
And we’ll take our next question from Liam Burke from Janney Capital Markets.
Liam D. Burke – Janney Montgomery Scott LLC, Research Division
Jeff, part of your growth, or one of the pieces in your growth strategy, are the Test Services business for — to support a fairly extensive embedded base. Could you give us a sense on what the — or how do you feel it did on a start-up basis in 2012 and what’s the outlook for 2013?
Jeffrey A. Graves
Liam, I would tell you, we run today $65 million in what we call services today, which is a combination of parts and services we provide. And frankly, we’re definitely the person they call when they have an extreme issue. And we go in and help them or there’s a unique part type. That’s about 15% of our revenue if you do the math. What we believe that number really should be, frankly, if we were pursuing services in a way that we should like many companies do, is about 30%. So that number as a percentage of revenue should be 30%. If you look at our growth, that $65 million should be north of — well north of 100, probably north of $150 million if we’re actually doing it right and realizing the services from our installed base. So we’ve got a tremendous opportunity. We have to approach it differently, which we’ve organized ourselves to do now and we have to hire and train a lot of field engineers to go after it, which we’re in the process of doing. We started actually back in ’12 — in fiscal ’12 and will continue aggressively in ’13. We’ve estimated, Liam, and just as a rough number to calibrate you, our customers are spending probably — for our $3.5 billion installed base of equipment, they’re spending probably $0.5 billion of expense revenue a year to service the equipment. We capture a very small percentage of that. And so that’s really our target. That’s what we’re going after and training our service folks to do. And we’re also designing our equipment for serviceability now and really embracing this whole services model, which I think is largely untapped from the past year.
Liam D. Burke – Janney Montgomery Scott LLC, Research Division
So do you anticipate being able to make any progress towards getting more of that $500 million market — in 2013, excuse me.
Jeffrey A. Graves
’13 yes, it will be, but it certainly won’t be linear. I mean, we’ve got our — I just met with 2 teams of people coming through for training the last couple of weeks and it’s — our equipment is very technical, and it requires a lot of training and there’s a pretty steep learning curve. So — and we’ll certainly see an improvement in ’13. I can’t give you a number. We’ll see an improvement in ’13 on a percentage basis of revenue. And obviously, revenues were up, so that’s good. But the real benefits, Liam, I would expect in year 2 and 3. I think by the third year, the progress will be very clear and you’ll see what kind of a growth rate we’re on.
Liam D. Burke – Janney Montgomery Scott LLC, Research Division
Okay. Great. Thanks, Jeff. And on the Sensors side, you’ve discussed, in 2013, you’d expect that to be weak as well, as it had been in 2012. Is there any particular geography or application that you see weakness? Or is it just across the board?
Jeffrey A. Graves
Well, I can tell you, in my time, the industrial equipment business certainly hit the skids first and those are things like plastic injection molding machines and steel processing equipment, things like that. So that’s been down with the overall economy. The mobile hydraulics piece is again, you’ve probably read the headlines around the big heavy equipment manufacturers, they’ve all slowed down, which means their pace of introducing new platforms has slowed down, and that’s really what drives our Sensors sales. Clearly, we’re making a lot of progress on landing new customers and getting designed in the products, but those products have to move into production and be sold and that’s really what slowed down. It was disappointing last year. I can tell you, we had hoped for a better growth in the second half of the year. In retrospect, I feel pretty good about being flat. Aero was down slightly but — and we held gross margins nicely in that business but — the guys really reacted fast on the cost side and we’re able to hold gross margins reasonably well. But the real problem there is on volume and we just need the economy to cooperate a bit more. So I would tell you it became, by the end of the year, broader based. We would anticipate this year is the same kind of environment in the first half of the year. In the second half, I think we’ll see some improvement, based on our product adoption rates. We are landing a lot of new customers and particularly in Asia, where a lot of the manufacturing is happening now. We’re seeing the Asians move from wanting to compete on price in their marketplace to compete more on technology, and then because of that, they’re adapting our sensors. And that’s — it’s a big, big focus of our investment around sales force and sales support, is in China specifically in the Asian marketplace.
Operator
[Operator Instructions] And we’ll go next to Mike Hamilton of RBC.
Michael A. Hamilton – RBC Wealth Management, Inc., Research Division
Jeff, wondering if you could spend a little time on your feelings of components of your growth targets. What your view is on what’s going to be required in taking market share or what your view is on new market activity? Obviously, you’re talking a pretty healthy step up here in the outlook relative to a very long history for this company.
Jeffrey A. Graves
Yes, absolutely, Mike, and I only just hit the major components. The services thing I talked to with John and Liam on their prior questions. But again, I look at that, and truly, I think 2x to 3x growth in our services revenue from what we saw on ’12 is very doable when you fast forward over the next 5 years. We have an installed base and the relationship with our customers where they would really prefer us to be doing the servicing, but we have to be staffed for it, equipped for it. We’ve got to have the IT infrastructure, which is often overlooked in terms of scheduling and part availability. We have to have all that in place, and that’s why we’re making the capital investments and the people investments we’re making right now. So I think services will certainly be a cornerstone, an absolute cornerstone of our business and it’s been done in many industries by many companies, extremely doable. Because I can tell you from talking to our customers firsthand, they would prefer us to do it a lot of times, but we just aren’t really equipped and priced competitively to do it today. So we will participate much more significantly in that business. Our core markets, when you just walk across our end markets, you’ve got automotive, you’ve got aerospace, materials — advanced materials that go into those products. In spite of a weak economy around the world, there is a huge proliferation of new products required because where the buying is occurring is in new geographies. So you’ve got more Chinese folks, Indian folks, Brazilians, that suddenly have disposable income that want to buy cars and they want to travel to see their relatives or travel out of the country. So aerospace, high-speed rail, new automotive, all of that drives R&D spending and product development. So our customers, to put words in their mouth, they look at us and say, yes, the economy may not be good, I may not be selling a lot of volume, but if I want to be positioned for future sales I better have the products that these folks want to buy. And then they need our test equipment to test those products. So fundamentally, I love the businesses we’re in. I love the R&D and product development focus we have and we have a reputation for them. So all of our core businesses, I think, are positioned for growth because of the emerging markets. If you put on top of that the energy scarcity and the drive for more fuel-efficient vehicles and aircraft, you enhance that growth rates further and you add in areas like oil and gas where they’re much more concerned now about testing how they drill and how they refine these products for safety and environmental concerns. It all drives the need for test. And then we see emerging markets, energy and infrastructure, those elements are really driving a great need for R&D and product development around the world. And then I’ll add 2 more quick comments, Mike, and then shut up and let you ask another question if you like. But the civil seismic thing is really an interesting occurrence and it makes a lot of sense when you look backwards. You look at the tragedies that occurred in the last 7 years around earthquakes and tsunamis and tidal waves, floods, that’s destroyed civil infrastructure. And you look at where the migration patterns are in the world, like for example in China, that’s mirrored in India and elsewhere where you’ve got vast migration of people into cities. I heard numbers in the last couple of weeks of — well, I can tell you from my own discussions in China, they’re putting up a new high rise every 5 days. High rise means over 50 stories, every 5 days. You got estimated populations of a 20-plus million in China migrating to cities every year, creating a city the size of New York every single year. Therefore, they’re very concerned, as they should be, about the stability of their buildings. Are they building things that are resistant to these earthquakes and flooding. Because you’ve seen in the press what’s happened in the past and that problem just gets magnified. So they’re making the smart investments in R&D in the design of buildings and materials that go into those buildings, and we’re selling a lot of equipment to support it. So I’m really excited about our position in that market globally, not just in China, but these tragedies have struck everywhere in the world and we’re in a position to really help out with that problem by selling them equipment that will saves lives. And then you switch to the Sensors side of the business. There is a — if the volume comes back because of the economy, there’s a good pent-up demand for more automated machinery. Our sensors go in to help automate it in a very rugged, robust way. So when the world needs more plastic injection molding or steel processing equipment, things like that, we are designed in, increasingly designed in every day and positioned to meet the demand. And then the mobile hydraulics thing in Sensors is we’re really excited about because people that drive heavy — safe — heavy equipment that are concerned about both safety and efficiency. It can be in agriculture or earthmoving or heavy cranes, those people need smart systems. And at the heart of a smart system is our sensor that goes in a mobile hydraulic cylinder. And so that, again, we’re getting design wins to a lot of those platforms. Unfortunately, the lead time is long because the platforms have to go into production and the end markets are still weak. So I’m really excited about the products we have. We’re in an increasingly good cost position in Sensors. I’m just frustrated by the economy. If you look at we had a record year last year, and that was in spite of tremendous headwinds in our Sensors business. So I look at all that and say yes, $1 billion is a big goal, but we’ve certainly got the horsepower. We’ve got the technology base, the customer base and the market exposure to deliver it. So pending some calamity in the world, I feel very, very comfortable with setting the goal and being very public about it.
Operator
And we’ll turn next to John Franzreb of Sidoti & Company.
John Franzreb – Sidoti & Company, LLC
Yes, you actually put up the growth rate and revenue stream over the past couple of years. I’m curious, Jeff, if the company is capacity constrained. Some of the spend that you’re talking about is on the bricks and mortar?
Jeffrey A. Graves
No. No, we’re fine, John, on that piece. Our investment is to make our operations more efficient. And again it’s clearly — updating our IT systems, updating our infrastructure. In the Sensors business, it’s certainly automation and manufacturing to have more output from the factory because if you run the map on our Sensors business, we’ll be — again, by 2018, we’ll be producing at least 3x the number of Sensors in each one of these plants than we are today, and automation is a key component of that. It’s going very well, and we continue to make a lot of progress there. On the Test side of the business, it’s really around productivity and efficiency of our IT systems and putting on front-end systems that help our sales force both identify and quote opportunities more quickly and making our engineers more productive through configuration tools and things like that. So it’s — basically, it’s what’s required for scale and productivity in the business, John. It’s not brick and mortar, we’re fine.
John Franzreb – Sidoti & Company, LLC
More feet on the street?
Jeffrey A. Graves
Yes, certainly. The other part of our investment is hiring — I would tell you, it’s a kind of 3 categories, but sales and sales support — then again we sell to a very technical customer base within our customers, we sell to engineers largely. So our sales people are engineers. We have significant sales support requirements for providing engineering data and technical discussions, dialogue with customers around the world, so we’re expanding that. And we also obviously, as I said, we’re hiring a lot of service folks. We call them field service engineers. And again, it’s a very technical position that requires 1 year or 2 to get good at. So there’s an incubation period, but those are the folks who really call on customers every day to keep their equipment running better and better.
John Franzreb – Sidoti & Company, LLC
Do you have any sense of how many people you’ll be adding this fiscal year, Jeff?
Jeffrey A. Graves
Oh, John, I would tell you it’ll be at least in the range of a couple of hundred folks.
Operator
And up next is Chris MacDonald of Kennedy Capital.
Chris McDonald – Kennedy Capital Management, Inc.
Could you share the assumption relative to the tax rate and then also maybe comment on the potential impact if the R&D tax credit is extended.
Susan E. Knight
So typically our annualized tax rate is in the low 30%, and that range is driven by geographic mix primarily. But the R&D tax credit that’s currently expired could have a benefit next year if it’s reintroduced in the legislature and approved. We would get a full year benefit in ’13, and we would get a retroactive benefit associated with 3 quarters of fiscal ’12. So year-over-year, that would give us about a 2 point — 1 to 2 point improvement in the rate.
Chris McDonald – Kennedy Capital Management, Inc.
Okay. And that’s not assumed in the guidance, I imagine?
Susan E. Knight
It’s a pretty granular point. When we look at the overall tax rate range, we would say that we are assuming, at the low end, that it doesn’t happen — excuse me, at the high-end, it’s not happening. At the lower end, it would be included in the outcome.
Chris McDonald – Kennedy Capital Management, Inc.
Okay. And then the $6 million to $8 million of incremental spending in the coming year on this growth initiative, maybe first, how much of that is — from a year-over-year comparison perspective, how much of that is offset by the nonrecurring spending associated with legal and compliance that was incurred during fiscal 2012?
Susan E. Knight
Well, certainly, the nonrecurring settlement is different. But on an operating cost basis, the compliance expenditures that we had are ongoing. And then from a legal cost perspective, we should be down $1 million or so.
Chris McDonald – Kennedy Capital Management, Inc.
Okay. How does that $6 million to $8 million — how is that spread over the 3 areas that you discussed, just innovation and generically emerging markets, then the services expansion?
Susan E. Knight
Now that’s a level of detail that I’m not prepared to get into today. But I think you can be confident that we are spending in all 3 areas.
Chris McDonald – Kennedy Capital Management, Inc.
And how…
Jeffrey A. Graves
It gets a little tricky by what you call innovation. Certainly, our sales folks and sales support people are out working with customers to develop specific solutions with them. Either you could classify that as innovation, what I usually think of through is more basic R&D spending and things like this, which is up as well. But again, a lot of other expenses here are around sales, sales support and field service engineers to grow our services business. So we have a tremendous innovation machine internally already. And frankly, we’ll tune and tweak it, but we don’t need significant increases in people doing R&D work, frankly.
Chris McDonald – Kennedy Capital Management, Inc.
And just relative to the measuring in the services business, specifically, where it would seem like you did have pretty good granular data there, what systems and processes do you have in place to measure the return on that investment and what’s your plan as far as maybe sharing that externally with just the progress that’s being made given that the investment is pretty significant and it’s certainly weighing on profitability next year?
Susan E. Knight
Best measure of our return on investment will be the top line growth in service.
Chris McDonald – Kennedy Capital Management, Inc.
Okay. And that’s something that we can maybe track quarterly too?
Susan E. Knight
That information is available in our quarterly filings where we separate service as a line item.
Chris McDonald – Kennedy Capital Management, Inc.
Okay. And then just since it’s a new area of emphasis, what’s the historical experience relative to how quickly you might start to see a return on that investment? And when do you reach breakeven, if you will, or what’s a payback period-type thought process to apply to that?
Jeffrey A. Graves
It’s probably — it’s really kind of hard to estimate because it’s around how fast are folks trained, how quickly can they go out and start realizing revenue. The margin in that business is among our highest margin businesses today. And we assume it will remain so as we grow it. I think there’s a lot of good demand out there. But in terms of return, it’s really hard to put a real specific number on.
Susan E. Knight
Yes. On the people aspect, it’s 1 year for them to get to, I would say, up the learning curve far enough to start paying back that investment. On the capital, we expect to achieve hurdle rates well beyond our cost of capital in the service business in particular. And that’s going to take a few years to generate that kind of result.
Operator
And there are no further questions at this time. I’d like to turn the conference back over to Dr. Graves for additional or closing remarks.
Jeffrey A. Graves
Thanks, Chris. And thank you, all, for participating on the call today. I’m very pleased about MTS’s performance in fiscal ’12 and believe we have a promising future. We’ve already begun working to accelerate our pace so that we can achieve our $1 billion revenue goal in 2018. I look forward to updating you on the progress in our future calls. Thanks and have a great day.
Operator
And this does conclude today’s presentation. Thank you for joining, and have a nice weekend.
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