FARO Technologies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to the FARO Technologies First Quarter 2023 Earnings Call. Opening remarks and introduction, I will now turn the call over to Michael Furnari at Sapphire Investor Relations. Please go ahead, sir.

Speaker 1

Thank you and good afternoon. With me today from FARO are Michael Berger, Chief Executive Officer Alan Juhich, Chief Financial Officer and Yuval Wasserman, Chairman of the Board. Today, after market close, the company released its financial results for the Q1 of 2023. The related press release is available on FARO's website www.ferro.com. Please note, certain statements in this conference call, which are not historical facts, Maybe consider forward looking statements that involve risks and uncertainties, some of which are beyond our control and include statements regarding future business results, Product and Technology Development, customer demand, inventory levels, our outlook and financial guidance, economic and industry projections or subsequent events.

Speaker 1

Various factors could cause actual results to differ materially. For a more detailed description of these and other risks and uncertainties, Please refer to today's press release and our annual and quarterly SEC filings. Forward looking statements reflect our views only as of today And except as required by law, we undertake no obligation to update or revise them. During today's conference call, management will discuss certain financial measures that are not presented in accordance US Generally Accepted Accounting Principles or non GAAP financial measures. In the press release, you will find additional disclosures regarding these non GAAP measures, Including reconciliations to comparable GAAP measures.

Speaker 1

While not recognized under GAAP, management believes these non GAAP financial measures provide investors with the relevant period to period comparisons of core operations. However, they should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. Now I'd like to turn the call over to Michael Berger.

Speaker 2

Thank you, Mike. Welcome to our call. 1st quarter revenue of $85,000,000 was up 11% year on year with hardware revenue of $55,000,000 up 18% And 9% organically that was enabled by increased shipments of our new Focus Premium Laser Scanner As well as the addition of Geoslam to our revenue base following our September 2022 acquisition. Sequentially, revenue benefited from the weakening of the U. S.

Speaker 2

Dollar exchange rates. While we remain pleased with the overall market adoption of our latest products, late in the Q1, we saw sales cycles begin to lengthen. Further, While we saw meaningful growth in our overall opportunity funnel, the expected close date of those opportunities shifted from the 2nd quarter softening of the macro environment is beginning to impact our customers' purchasing behavior. While this phenomenon was evidenced across all geographies and markets, it was especially true in Europe and Asia Pacific. We have recently heard from several large global customers that they are reducing or delaying capital expenditures, which were planned for 2023, Given their higher cost of money and the pessimistic outlook for their business in the second half of this calendar year.

Speaker 2

To help offset this dynamic, we continue to improve our product offering and create further differentiation by streamlining our customers' workflows such that they can realize increasing levels of productivity and value from their three-dimensional models. As an example, we recently released a new product capability, which we call Flash, which is a hybrid reality capture technology, A first of its kind solution that delivers faster stationary scanning for large volume projects. Access through our cloud platform, Sphere, Flash is the newest scan mode for Focus Premium laser scanner users, Combining the accuracy of static 3 d laser scanners with the speed and ease and use of panoramic cameras. The unique combination of BaaS scans with colorized 3 60 degree images enable users to reduce their on time On-site scan time by half. Flash will be available as an annual subscription to current generation scanner customers, Beyond our internally developed products, the integration efforts of our acquisitions are executing to plan.

Speaker 2

Following September's acquisition of Geoslamp, which brings to FARO expertise in mobile scanning, December's acquisition of SiteScan, Which basically adds iOS based LiDAR capture capabilities. And now with the addition of flash to our stationary scanners, We now offer the broadest and most complete set of 3-dimensional capture devices in the market. As we integrate these various capture capabilities into FerroSphere, we will enable cloud based access to 4 dimensional models overlaid Onto a single coordinate system and viewed through a single user interface. This unique and differentiated offering will provide Ferro customers with unprecedented flexibility along the ease of use and accuracy continuums. To date, feedback on our offerings and our roadmap have been very positive.

Speaker 2

When we spoke back in February, we outlined $10,000,000 of annualized savings to be realized in the first half of twenty twenty three. At that time, we also indicated a continued strong demand environment. The delayed customer decision making and extended opportunity pipeline I mentioned earlier is causing us to reconsider our growth expectations for the remainder of 2023. As a result, we are accelerating a further $10,000,000 to $20,000,000 in annualized operating expense reductions that will improve our profitability As we exit the 2nd and third quarters. Taken together, these actions, which we discussed in February, are now totaling a total of $20,000,000 to $30,000,000 of annualized savings.

Speaker 2

I'll now turn the call over to Alan to provide an overview of our Q1 financial results.

Speaker 3

Thank you, Michael, and good afternoon, everyone. 1st quarter revenue of $85,000,000 was up 11% Compared with the Q1 of 2022 that primarily resulted from higher shipments of our Focus Premium scanners And the addition of Geoslam revenue following our September acquisition. 1st quarter hardware revenue of $55,000,000 was up 18%, While software revenue of $10,300,000 and service revenue of $19,700,000 were roughly flat respectively. Recurring revenue was $16,700,000 and continues to represent 20% of sales. As discussed in prior quarters, we have seen a modest flattening of overall software revenue as we convert customer purchases of previously perpetual licenses To subscriptions, our perpetual software revenue is down approximately 60% when compared to its high in 2019, Indicating that by the end of 2023, our conversion from perpetual licenses to subscription revenue should be predominantly complete.

Speaker 3

On service revenue, the lower 2020 2021 hardware unit shipments compared to earlier years has reduced the installed base of products eligible for our service offerings and when combined with the meaningful product quality enhancements we've made over the last 18 months Has resulted in continued lower service revenue. GAAP gross margin was 46.7 percent And non GAAP gross margin was 47.6 percent for the Q1 of 2023. Continued increases in the cost of raw materials Adversely impacted gross margin by approximately 250 basis points that when combined with the roughly 300 basis points of the adverse effect That resulted from the relative strength of the U. S. Dollar compared to historic exchange rates we discussed in November resulted in the 1st quarter's low gross margin rate.

Speaker 3

The higher cost of raw material primarily stems from sourcing semiconductor components In an extremely tight broker market, where we have had to make large payments to secure delivery in advance of receiving certain components. In the quarter, we incurred approximately $2,000,000 in incremental costs associated with these broker component receipts. Going forward, we expect to receive and consume additional associated inventory and as a result adversely affect reported gross margins through the balance of 2023. Given their unique nature, these transactions are not to adversely affect the timing of the previously committed $12,000,000 in annualized savings that is expected to result from the shift in our supply chain to Southeast Asia. We continue to believe the savings from the shift to lower cost suppliers will begin to be realized as we exit 2023.

Speaker 3

I want to emphasize that our underlying average selling prices in local currency and the expectations of long term product mix Has remained relatively unchanged. And therefore, as material costs normalize and we capitalize on a Southeast Asia supply chain, expenses were $58,300,000 and included approximately $4,800,000 in acquisition related intangible amortization and stock compensation expenses And $5,000,000 in restructuring and other transaction costs. Non GAAP operating expense of $48,800,000 was $4,600,000 higher than Q1 of 2022 due to the inclusion of Geoslam operating expenses. And sequentially, the increase was primarily due to the impact of weakening U. S.

Speaker 3

Dollar. As Michael mentioned previously, we're committed to realizing now $20,000,000 to $30,000,000 in annualized savings, which is expected to reduce our quarterly spending at present FX rates So approximately $40,000,000 to $43,000,000 beginning in the Q4 of 2023. GAAP operating loss was $18,600,000 in the Q1 of 2023 compared with an operating loss of $7,200,000 in the Q1 of 2022. Non GAAP operating loss was $8,300,000 in the Q1 of 2023 compared to a loss of $3,000,000 in the Q1 of 2022. Adjusted EBITDA was a loss of $5,500,000 Our GAAP net loss was $21,200,000 or $1.12 per share.

Speaker 3

Our non GAAP net loss was $7,100,000 or $0.38 per share for the Q1 of 2023 compared to a net loss of $2,500,000.14 per share in Q1 of 2022. We are disappointed by our greater than expected first quarter loss. The combination of a softer end market, higher material costs and higher than normal mix towards lower margin scanners Adversely affected gross margin and along with an increase in operating expenses due to a weaker U. S. Dollar resulted in an unacceptable operating loss.

Speaker 3

In February, we discussed a $10,000,000 to $16,000,000 charge to realize our $10,000,000 in targeted savings. Given the incremental $10,000,000 to $20,000,000 in savings, that charge is now expected to total between $22,000,000 $28,000,000 Of which we incurred $5,000,000 in the Q1 with the remaining $17,000,000 to $23,000,000 to be incurred over the balance of 2023. Of the total, we expect approximately 40% of the combined charges to be cash payments. Our cash balance at the end of the quarter was $88,600,000 Included in our operating cash consumption during the quarter Was the timing of large non customer receipts totaling over $10,000,000 which moved from the Q1 to the 2nd quarter. These payments have now been received and will benefit 2nd quarter cash flow.

Speaker 3

Additionally, worsening shipment Linearity as well as the Lunar New Year, which historically has reduced Q1 shipments into China, where most invoices on a pay in advance terms has resulted in extended days sales outstanding. We remain confident in the collectability of our trade receivables where our greater than 90 day past due balance remains relatively unchanged. Despite the unfavorable cash timing in the quarter, our team has targeted improved collections and reduced overall working capital levels. In addition for 2023, our internal incentive program was modified such that all executives and the senior leadership team As such, the combined team is now focused on driving broad working capital efficiencies, and we remain confident in our ability to realize our free cash flow objectives. Moving on to guidance.

Speaker 3

We have incorporated the recent slowing of customer decision making in our projections. And as a result, At present, FX rates would expect 2nd quarter revenue of between $79,000,000 $87,000,000 At those revenue levels and given corresponding non GAAP gross margin of between 45% and 48% and operating expenses of between 45 $46,500,000 we would expect a non GAAP loss per share of between $0.47 $0.22 With that, I'll turn the call back over to Michael for some closing comments.

Speaker 2

Thank you, Alan. Over the last several years, we have made tremendous strategic project progress. Beyond the manufacturing and go to market restructuring efforts we've implemented, We have executed on the strategy that has created the industry's broadest set of 3 d capture devices. This portfolio ranges from iOS space lidar to 3 60 degree cameras to mobile scanners and finally to ultra high accuracy stationary scanners. We have created a cloud environment that will host the data generated by this portfolio onto a single coordinate system for viewing, collaboration and storage.

Speaker 2

We have also begun the process of developing real applications that target streamlining workflows between various parties within the construction ecosphere, such that they're able to realize increasing levels of value from the 3 d models hosted Finally, as stated in today's press release, I am announcing my retirement coincident with my 65th birthday, which is today. I remain extremely excited and bullish about Ferro and its short and long term future. I want to thank the Board of Directors for the courage pursue our strategy. My management team and the entire Ferrell family for their tireless dedication to making the strategy reality. Yuval Wasserman, our Executive Chairman, will be stepping in as Interim CEO.

Speaker 2

And with that, I'd like to turn the call over to Yuval.

Speaker 4

Thank you, Michael, and hello, everyone. First, I'd like to thank Michael for his contributions to FARO And wish him all the best in his retirement. As we move forward, my key message to you is that FARO is a key player In exciting and growing markets, we have a very solid foundation of unique technology, a valued brand, Incredible talent and a sound strategy. However, our performance has been challenged And I believe while pursuing our strategy, we need a sharper focus to optimize our business and deliver on our great potential. My priority and that of our next CEO will be to ensure that we focus on delivering more value to our customers, Stability and career paths for our employees and a better return for our shareholders.

Speaker 4

Over the next few weeks, I will be meeting with many of our stakeholders with the objective of identifying and accelerating Our business optimization plan, which we will update you on in our next earnings call. Thank you.

Speaker 3

This concludes our prepared remarks. And at this time, we'd be pleased to take any of your questions.

Operator

First question comes from Greg Palm, Greg Hallum with Capital Group.

Speaker 5

Yes, thanks. This is Danny Eggerich on for Greg today. Thanks for taking the questions. I guess, I will start by offering my congratulations to you, Michael.

Speaker 2

Thank you. Thank you very much.

Speaker 5

Yes, I guess just starting there, anything noteworthy on your retirement, the why, maybe the timing, anything you want to You want to point out there?

Speaker 2

No, the details will be announced obviously in our Q. But I'm 65 years old. I think that's the why. I've been at this game for a long time. And I think We're at a place now from a transition perspective where I think it's probably appropriate.

Speaker 2

And I feel very excited and very proud of the team We're leaving behind there as you've all said extremely talented and I feel like the strategy is well underway and in place And I feel like it's around execution. And I think this is this would be probably an optimum time for me To move on and so that's how we made the decision.

Speaker 5

Yes, fair enough. Totally get it. Well, congrats on that again.

Speaker 2

Thank you very much.

Speaker 5

Maybe just digging into the quarter a little bit more. It sounds like it was kind of late in the quarter where you saw the big slowdown. Just wondering if you can give any more detail there. Obviously, you said, outsized weakness in Europe and APAC. So maybe a little more detail there and what you saw in this 1st month here, whether or not Americas has kind of stayed steady or you start to see that lag behind or Just kind of overall.

Speaker 2

What we saw at the end of the quarter, the end of Q1 And as you know, we've talked about this in the past that we are very back end quarter loaded as it relates to Closing orders to be shipped. And frankly, this was probably the worst we've seen. We've had a lot of orders that were actually booked That continued to be pushed through the quarter toward the end

Speaker 6

and it actually made it extremely difficult for us to ensure that we had

Speaker 2

the right mix of products in the right region. For us to ensure that we have the right mix of products in the right regions to optimize revenue. Our operations team did a fantastic job. But that said, it's troubling what we've seen as it relates to the orders and how they actually folded into the quarter. Q1 is pretty or Q2 is pretty much on track with historical backlog and backlog bookings.

Speaker 2

So I feel Good about our guidance and I feel good about the strength of the portfolio, but time will tell. And I think it's concerning that we've seen Kind of that push through the end of the quarter. The other concerning thing is and it was mentioned in our prepared remarks is that Our opportunity funnel, which we've talked about a lot, actually grew very significantly within Q1, which is good news. That said, the number of opportunities that are slated for Q2 is a bit lower than we've seen Traditionally. And so a large portion of that funnel growth is really for Q3 and Q4.

Speaker 2

And that's a change. That is something that we had not seen traditionally. And so I think couple With the funnel being pushed toward the end of the year and the way the orders have tracked Throughout the quarter, those are kind of the 2 things that really kind of keep us awake at night and has been the impetus for us to really rethink What we think the revenue growth opportunity is for the balance of the year. We think they're leading indicators of a slowing in the second half.

Speaker 5

Yes, got it. Maybe if I can just sneak one more in on kind of the additional cost savings. I think Just to get details right, I think you said full run rate starting Q4, is that right?

Speaker 3

Yes, that's correct, Danny.

Speaker 5

Okay. And then I guess just any additional detail you can give on what exactly you're doing there and how you get to the Top or bottom end of that range?

Speaker 3

Well, we're really go ahead, Michael.

Speaker 2

Go ahead. No, please.

Speaker 3

No. Well, what I was just going to comment on is that, again, I think a little bit of that is work that will begin to continue to flesh out with Yuval. But the focus is really on how do we make the engine more efficient, how do we refine and continue to drive and enable the things that will Enable us to realize the long term growth objectives that we have between both hardware and software, but it's really about getting more efficient in How we manage the business and how we manage some of the back office functions as well.

Speaker 5

Okay, great. I'll leave it there. Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Andrew DeGasperi, Berenberg Capital Markets.

Speaker 2

Hi, Andrew. How are you?

Speaker 7

This is Stephanie actually on for Andrew. He's traveling and filling in tonight. But thank you for taking the question. We're wondering with the change in leadership if going forward there's going to be any change to the software strategy and whether the Board supports strategy and efforts that Michael implemented, particularly with the transition to more software recurring revenue? Thank you.

Speaker 4

Michael, would you like me to answer the question? Yes.

Speaker 2

Yes. I think you've all go ahead.

Speaker 4

So, the Board and myself stand behind the strategy. We believe that the strategy is sound. We believe that the future of the application space we're pursuing It's fantastic and expected to grow in multiple markets and multiple application sets. It's all about the pace, The efficiency and execution, right. So we're very cognizant of the dynamic in the market around us And hence the comment about optimizing what we do.

Speaker 4

And it's not about what we do, it's how we do it. To the point that Alan made about efficiency and optimization. We continue to pursue the strategy of software. We continue to pursue the strategy of SaaS and looking at recurrent revenue as we broaden our applications from hardware only

Speaker 7

Thank you. That's helpful.

Operator

Our next question comes from Robert Mason, Baird.

Speaker 6

Yes, good evening and best wishes to you, Michael.

Speaker 2

Thanks, Robert.

Speaker 6

I wanted to see if just first, maybe this is a question for Alan. Just Could you speak to the trajectory that we may be on to get to those cost savings in the interim As well as the gross margin trajectory until that improves here over the next few quarters. Is it linear Just on the savings and what does the gross margin curve look like until it It gets past some of the inflation impacts.

Speaker 3

Yes, it's a good question, Bob. And so from an operating expense It's partly why we chose to provide a little bit more granularity within our guidance because we do have some moving parts. And so we want to make Sure that we are being as transparent as we can be. From the guidance, you can glean that there is not a there is A level of savings that we expect to realize, those are some of the savings that we had talked about back in February that we'll begin to realize. And therefore, we do see a bit of a decrease in expenses in Q2 compared to the Q1.

Speaker 3

As we go through the balance of the year, I think I would expect a bit of a further decrease in the 3rd quarter And then in the Q4, get down to the level that we've discussed in our prepared remarks as we phase in some of the changes that again we're going to be working here over the next Several weeks. On the gross margin line, what we tried to articulate is that the incremental material costs that we're We expect those to continue through the balance of 2023. And so margin profiles, Assuming a consistent revenue level with where we are today, because again our contribution margins tend to be a bit higher than our Corporate average gross margins, and so fluctuations in revenue can also drive fluctuations in gross margins. But we would expect gross margins to remain relatively steady with where we reported in the Q1. And then we do see Line of sight towards those inflated material costs ending as we exit 2023, given some of the recent conversations we've had within the broker market and within some of our other vendors.

Speaker 3

And then finally, we would expect that the efforts that we're making to Transition our supply base towards Southeast Asia, which we've been talking about for a period of time here, we're beginning to see traction there. We're beginning to see benefit and therefore as we exit 2023, it should become a bit more meaningful. And I think that as we Exit 2023 into 2024, the combination of those two effects should see a pretty meaningful increase Into our gross margins.

Speaker 6

Understood. And just as a follow-up on the gross margin question, how I'm just curious how the Any kind of broker impacts escape your guidance here in the Q1. Just do you have The level of visibility with your manufacturing partner to be able to see how sourcing it maybe is tracking in real time?

Speaker 3

It's a very good question. And we certainly as we've set guidance, we certainly saw a portion of it. We did not see all of it. And that's a process that we have now modified so that we make sure that we've got that visibility, as early as we possibly can. The other dynamic that adversely affected us within the quarter that caught us a little bit on the downside for margin is Just the underlying effect of FX.

Speaker 3

So we did see benefit in the quarter in terms of our revenue from FX. That's buried in the $85,000,000 Without FX, we would have had a lower revenue. And so again, we kind of met The revenue number at the midpoint because of FX, but FX also increases our cost of goods sold. And so at a constant or at a fixed revenue level, if you will, we will have lower gross margins. So that's a long winded way of saying that the softening in the overall market partially offset by FX, But that FX affected our cost of goods sold as well.

Speaker 3

The combination of that combined with A portion of the growth of the increased material cost is why we ended up being lower than expectations.

Speaker 6

I see. If I could just ask one more, just again around the broader demand picture, you said the weakness that you've seen to slow down more elongated sales cycles in broad based. From your earlier commentary, it did not sound like the 3 d neurology business contributed to growth, maybe it did, but that wasn't my interpretation. And Is there a distinction you're seeing in the marketplace between 3 d metrology and your AEC business? And then a follow on to that is, could you dive a little bit deeper into AEC and just help us understand where you're The types of projects you're more or less exposed to just given what's going on in non res construction?

Speaker 2

Yes, let me answer the last question first. Our exposure in the AEC market is primarily commercial real estate. And so large commercial buildings, even smaller commercial buildings, but commercial is it represents Probably 85% of our AEC marketplace. 3dM, we did see some weakness in 3DM and I referenced in my prepared remarks that we had talked to several large customers about their capital plans for the balance of We are basically pairing back their initial capital spend for 2023. Both of these guys are automotive guys, large Multinational Automotive guys.

Speaker 2

And I think there's a lot of press recently that I've read about both of these guys stating this publicly. And I think that tends to ripple through the entire automotive supply chain. And so I think That's a level of concern that we have around 3dM. Did that answer both of your questions?

Speaker 6

Yes. Very helpful. Thank you.

Speaker 2

All right. Thank you.

Operator

We have no further questions in the queue at this time. I would now like to turn the call over to Michael Berger for any closing remarks.

Speaker 2

We appreciate very much your attention today and your interest in FARO. And we look forward to talking in the future about our progress.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any

Remove Ads
Powered by Quartr
Earnings Conference Call
FARO Technologies Q1 2023
00:00 / 00:00
Remove Ads