Q3 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for joining today's Faro technologies third quarter 2019 earnings release conference call hosted by Michael Berger.
I'll now turn the call over to Mike sorry at Sapphire Investor Relations. Please go ahead Sir.
Thank you and good morning with me today from feral Michael Berger, Chief Executive Officer, and Alan You Rich Chief Financial Officer.
Yesterday after the close the company released its financial results for the third quarter of 2019.
Related press release and Form 10-Q for the third quarter are available on Ferros website at Www Dot Faro Dot com.
I Hope you better understand the company that's results management may make forward looking statements during the course this call.
These statements can be identified by words, such as expect will believe anticipate plan potential continue goal.
Active intend may and similar words it is possible if the companys actual results may differ materially from those projected these forward looking statements.
Important factors that may cause actual results could differ materially are set forth in yesterday's press release and the company's Form 10-K for the year ended December 30, Onest 2018, and Form 10-Q for the quarters ended March 31st 2019 June Thirtyth 2019 at September Thirtyth 2019.
During today's conference call management will discuss certain financial measures, they're not presented in accordance with U.S. 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 of these measures to comparable GAAP measures management believes that these non-GAAP financial measures provide investors with relevant period to period comparisons of core operations.
Financial measures are not recognized under GAAP and should not be considered in isolation or to substitute for a measure of financial performance prepared in accordance with gap.
Now I'd like to turn the call over to Michael.
Thank you Mike.
Good morning, and working to work.
Third quarter results were disappointing.
As the quarter with revenue of $90.5 million down 9%.
Third quarter 2018.
As a result, we reported a non-GAAP net loss of one cents for sure.
The continued market uncertainty, resulting from trade attentions adversely affected our demand leading to the quarter financial results.
This is a similar situation recently reported by many of our industry peers.
Alan.
Ill provide you with more additional insights into the quarter's financial performance. However, I want to share with you some of the progress we've made on our strategic planning process.
As discussed last quarter one of my first priority is after joining for was to conduct a series of discussions with our employees and customers in an effort to understand the company's technologies markets opportunities as we chartered a path forward for fair.
I've now completed 121 on one interviews with employees customers vendors as well some of our market pace marketplace peers to help build a point of view on the current state of Faro is where as well as what I believe we can be Tom.
While our plan remains incomplete I did want to share with you a couple of key elements you understand where we're headed.
Our customers acknowledge that farrow has been a key provider of hardware that enable some of the industry's fastest and most accurate three dimensional data capture.
That said I don't believe it's enough to simply provide world class hardware products, we need to focus on and getting a better understanding what our problems that customers are trying to solve and in terms and in turn provide them the needed solutions not only for capturing the threed data, but also provide the tools and services that allow them to easily turn the capture.
Data into work flow based information.
In other words, we need to move up the food chain.
By for by providing complete solutions that enable our customers to to realize the full potential virtualize world.
I believe we have a unique opportunity it failed to transform these products into an environment in which any federal customer regardless of industry application or choice of hardware used to capture the data can enter share store analyze and interact with his data.
Let me share with you. An example that illustrates what we believe is solutions based market opportunity.
Within the operation of a high precision manufacturing facility. Our products are used to capture with a high degree of accuracy of factory image that includes the building layout fixturing tubing placement, which results in a manufacturing work flow.
Effectively creating a digital twin of the factory in a virtual environment.
This data can be time based and used to measure tool tolerances workflow efficiencies or inefficiencies and really out simulations to name a few giving the factory operator, the ability to simulate and anticipate the impact of future changes all within a virtual digital model of the existing facility, thereby reducing the risk.
Profile of any factory change were facility change.
This example provides faro an opportunity not only for a hardware sale, but also recurring software and services revenue by virtue of ongoing utilization of our solutions.
This approach by its very nature is also exceptionally sticky.
To enable success, our marketing teams truly need to understand our customers business and workflow. So they can guide our development teams on the products and solutions to solve real world problems in doing so our objective is to become much more market and customer focused we're continuing to leverage our technology leadership.
To lead this process, we have recently added a new via product marketing to team, whose charters to navigate this transition.
As part of our strategic planning process. We've also identified a need to change our go to market strategy.
Today, we are fortunate to have a large portion of our revenues come from repeat customers. However, several years often past between major purchases requiring us to stay in front of and attached to a customer who are relatively long buying cycle.
In today's model, we often have multiple salespeople representing different products from our portfolio, calling on a single customer.
From a customer's perspective, this can be confusing and suboptimal not to mention expensive and on scalable for Faro.
In an effort to streamline and provide a more integrated experience to our customers. We plan to enable our members of our sales team with a full breadth of the Faro product line within their assign territory or account base, while technically supporting them with a group of product specialists.
We believe that pivoting to this well established sales model, which is used by many of our peers in the technology space, We'll focus our sales team on better understanding our customer base and provide the foundation of a scalable sales model that will enable us to growth much faster than sales headcount.
We've already begun to make strides in this new direction and plan to be fully transitioned to the new sales model in the first half 2020.
To aid in this initiative, we will be hiring a senior vice president sales to lead our global sales team.
[noise], we've recently hired a new VP of corporate marketing, who is chartered with launching a marketing driven customer engagement process that will leverage front I T technology to help manage our customer relationships.
A task, but as previously fallen entirely to our sales team.
Further will be transitioning our marketing qualified lead generation process to emphasize quality over quantity as an additional steps towards improving sales efficiency.
Finally, while our go to go to market approach will continue to primarily B b to B relationship. We think that there is an opportunity to leverage b to C efficiencies into our sales process. As an example, we have soft launch in E Commerce site, which will initially enable customers to.
More effectively purchase post sale items, such as service contracts and training. However, our intention is to expand our ecommerce offering aggressively overtime. We will also be increasing our use of indirect sales channels, where it makes sense.
As I mentioned previously our full strategic plan remains in process that said I look forward to sharing with you the full extent of our plan, including an updated financial success model in early 2020.
We havent enviable set of technologies that have earned us a meaningful market share in each of our large and growing target markets.
While near near term macro industry trends and economic uncertainty will likely be a headwind to our near term topline growth I strongly believe the revised strategies that I've outlined today, along with others will enable fair to grow the top line and the bottom line at above market rates over the long term.
With that I'll turn the call over to Alan for an overview of our third quarter financial results. Thank you Michael and good morning, everyone.
I joined Faro about three months ago, because I believe combining the strength of ferros product offerings in the Threed sensing market with the strategies. Michael just described positions the company well for increased shareholder value in the years ahead.
Moving onto our financial results total sales were 90.5 million for the third quarter of 2019 as compared to 99.7 million for the third quarter of 2018.
Similar to what others in our space have indicated this year over year decline is primarily the result of continuing softness in many of the company's served markets due to the uncertainty surrounding ongoing trade disputes and the effect of tapping on many countries in Asia Pacific as well as the broader automotive industry.
Service sales were up 70, a 13% year over year to 26.9 million, reflecting our continued focus on the sale of aftermarket products, such as training and tool calibrations.
Product sales were 63.6 million down, 16% as compared with 75.8 million in the third quarter 2018.
In the third quarter charges related to the previously disclosed GSK matter were 145000, consisting of an accrual for interest expense.
Please note that we have no further update on the status of our self reported USA pricing issue as we wait for response to our proposed resolution.
New order bookings were 94.8 million for the third quarter 2019 down 6% as compared with 100.5 million for the third quarter of 2018.
And our Threed manufacturing segment third quarter 2019 sales were 56 million as compared with 64.2 million for the same quarter last year.
This decrease was mostly driven by lower unit sales as a result at a previously mentioned Asia Pacific and automotive market softness.
And our construction then segment third quarter 2019 sales were 23.9 million as compared to 23.7 million for the third quarter of 2018.
And our emerging verticals segment sales were 10.6 million for the third quarter 2019, as compared with 11.8 million for the same prior year period.
This decrease was mainly result of lower unit sales coming from prior acquisitions recorded in this vertical.
GAAP gross margin was 56.1% and non-GAAP gross margin was 56.4% for the third quarter 2019, as compared with 55.8% for the same prior year period.
Overall, our non-GAAP gross margins increased as a result of nearly 10 percentage point increase in our service business gross margins.
As I mentioned previously the sales efforts to ensure our customers maintained well calibrated tools has been is focused area that has also resulted in higher service profitability.
GAAP operating expenses were 56.7 million and included approximately 4 million in acquisition related intangible amortization and stock compensation expenses.
non-GAAP operating expenses at 50.1 million 51.1 million were 800000 higher than Q3 at 2018 as a result of increased sales headcount.
GAAP operating loss was 5.9 million for the third quarter of 2019 as compared with an operating loss of 2.7 million for the third quarter of 2018, driven by the lower demand environment.
Adjusted EBITDA was 3.8 million or 4% of sales.
Our GAAP net loss was 6.2 million our non-GAAP net loss was 153000 or one cents per share for the third quarter 2019, compared to non-GAAP earnings of 26 cents per share in Q3 2018.
We continue to maintain a strong capital structure with high liquidity and no debt.
In the third quarter of 2019, we consumed 1.5 million in cash as a result of our near breakeven non-GAAP financial performance and payments of 2.9 million and contingent consideration for previously disclosed acquisitions.
Our accounts receivable balance of 64.7 million decreased in the quarter by approximately 10 million while days sales outstanding remained relatively steady at 65 days.
Combined short and long term inventory decreased slightly to 109.3 million from 111.4 million in the second quarter of 2019 and accounts payable of 11.7 million decreased 4.5 late in the quarter.
Overall, our combined accounts receivable short and long term inventory and accounts payable balance netted to a 162.3 million or over $9 per share with a cash conversion cycle of 291 days.
Improving overall working capital levels will be an important area of focus for us.
Finally, I want to comment on a couple of reporting changes we made this quarter.
First you'll have noted an increased use of non-GAAP financial measures in our communications. Our definition of non-GAAP is typical in the industry, where we estimate stock compensation and acquisition related intangible amortization expenses, along with material nonrecurring items. We believe this supplemental information increases the transparency.
The underlying performance of our operations.
Additionally, our reporting no longer calls out depreciation and amortization expense as its own lot line reported within operating expenses. Instead, we are including those expenses in the function. They support on the income statement.
Taken together, we believe these changes provide a reporting in a way more consistent with industry industry practice, and therefore enables improved compare ability to our peers for your convenience. Our press release includes a set a supplemental tables, including historical trend of our previously reported results updated to reflect these changes.
This concludes our prepared remarks and at this time, we'd be pleased to take any of your questions.
At this time, if you'd like to ask your question. Please press star and one keeps on your telephone keypad keep in mind, we remove yourself from the question Keith at any time by pressing the Bankey again to ask your question today. Please press star one keys on your Touchtone telephone keypad.
We'll take our first question from Andrew Degasperi with Robert Baird. Please go ahead. Your line is open.
Thanks for taking my question.
In terms of the three while the three prong strategy you have I wanted to focus a little bit on the software a sounds like there's a there's going to be a big change in the software.
Potentially moving truss software as a service model.
I just wanted to know.
I know you're going to discuss most of this.
Capital markets, but just trying to understand mostly the timing around this.
Had necessary tools.
To transition of this award M&A via a vehicle for that and then maybe.
If you wanted to transition to this model do you potentially see a drop in sales.
Perpetual licensing that you're trying to provide as part of the hardware.
Greg It's a great question.
Initially we believe we've got a lot of the basic capabilities today and by the way the company has been working on a.
Software as a service interface for some period of time. So this is not necessarily a brand new initiative, but I think the real issue or the real difference will be emphasis.
We have quite a large number of software.
Engineering organizations today, I think we actually have.
Almost 13 individual software platforms that have been developed overtime and our challenges to to sift through those.
Optimize where we believe the real value is and.
And then offer it as kind of a if you will and environment and so we've been working on this for some period of time. We think initially we have enough resources, but I think overtime, we will grow the software resource and that wouldn't be part of our R&D spending will be part of the discussion that we talked about when we release our go to market.
Model, which or success model, which we'll talk about.
Early next year, and then as it relates to the transition to a more of a recurring revenue stream as opposed to perpetual license model.
We don't anticipate seeing a drop in revenue over the time horizon with that we make that transition we think that it might level, our software revenue out as a percentage for a period of time and then ultimately grow as I'm sure you've seen other companies that make that transition, but but again, we don't expect day material decrease in any software revenue as we go through the transition.
Got it and just.
I don't know if you can disclose it bodes for in terms of timing around this do you think this is a 2020 early 2020 event, where you're going to start pushing this or potentially later on.
I think incent transition, we believe that it's something as we as we talked about we we've been developing the capability for some period of time I believed that we will be in a position to kind of roll it out second half of 2020.
Got it and just on the indirect sales trend I think you made some comments about expanding that I think.
Fair in the past was a change to direct because they felt the close rates are higher.
But it sounds like you're potentially moving back in that direction can you maybe elaborate on that.
So it's not a major shift from from direct indirect we still believe in the direct sales model.
We do believe that we could leverage indirect sales models better and so as I said in our script, we will continue to look at it and where where it makes sense, we'll use it but it will not replaced our direct.
Sales channel going forward it wouldn't be augment to sort of an opportunistic where it makes sense, we might to play, but we're certainly not adverse to it dietary nature.
Got it and then lastly from me terms and optimizing the sales force you this potentially deliver incremental margins. If you don't see a recovery on the revenue side.
I'm sure I'm, sorry, I don't understand the question could you.
In terms of your strategy on optimizing the Salesforce right is there potential for margin improvement.
Without any increase in revenue or.
In other words without any improvement in revenue.
We believe so yes.
I think this will be part of the success model that will talk about.
Okay. Thanks again.
Thank you for your questions.
We'll take our next question from Greg phone with Craig Hallum Capital Group. Please go ahead. Your line is open.
Hi, guys is actually Danny Agra, John for Greg today.
Hi, Danny.
So just wondering on that Salesforce is there anyway to quantify those disruption challenges to the top line there for the quarter.
Actually we don't believe I think that change is scary and.
But we don't believe we believe that we've got.
Very very talented salesforce today that is primarily direct and so the transition in our view should be relatively straightforward I think.
The objective should be too to really continue the revenue and revenue growth as as we have in the past, but we do not see.
There's always risk, but we don't we're not.
We're not really concerned about the disruption short term.
Got it I appreciate that and then I guess in light of the more challenging broader macro environment, just wondering what you're seeing throughout your competitive and competitive environment.
Yes, we've seen a softness and primarily in Asia, and and I think actually we've read most of our peers.
Releases and it looks like they're seeing exactly the same effect, we don't believe that we're seeing significant share loss anywhere.
So we believe this is probably primarily macroeconomic driven.
And so were.
Got a lot of new products in the market, we're driving new product adoption and I think we are still very well positioned win win when the economy, Rick returns to kind of a normal state.
Got it that's good.
Just one last one from me looking at the emerging verticals.
Revenue down low double digits year over year.
I know you said that this was due to possibly lower unit sales coming from prior acquisitions.
But I guess is there any deemphasizing or something there are what's what's the cause for for those lower unit sales from those acquisitions.
Yes, I think this is part of the this strategy that we're going through and will be part of.
Our strategy rollout when we when we release that early next year, we do believe that there's some opportunity for optimization in some of the acquisitions that have been.
Purchase overtime.
All of these acquisitions I think we're really technology focused.
Granted there was a business associated with several of them I think we're a little bit disappointed with the.
Business aspect of some of these technology acquisitions that being said were overall relatively pleased with the contribution from a technical perspective, and so part of this strategy is really to kind of rationalize the business versus the technology that was originally purchased.
So that's part of the sifting that we're going through and will be reflected in the strategy going forward.
Alright, great. That's a that's all for me thanks for the color.
Thanks Stanley.
As a reminder, tens good question today, Please press the star and one keys on your telephone keypad.
We'll take our next question from Hendi Susanto with GE Research. Please go ahead. Your line is open.
Good morning, Michael and Alan.
Turning.
Can you characterize the covered marketing environment in terms of pricing pressure or mark competition and visibility.
Yes, I think it really hasn't changed from last quarter much I think.
We've not seen any big competitive pricing moves from our competitors that cause any more concern than.
The normal course of business, we don't we've not seen a general change or shift.
Competitively I think we're all concerned about many of the projects that we've been working on in Asia. They continue to be pushed we don't believed that the projects are going away, but I think access to capital has somehow dried up and particularly China and Japan. So we're we're.
We're watching that very closely but we don't think thats driven primarily by competitors, we think thats driven by kind of the macro economic.
Situation.
And then we do go to microeconomic, let's say if theoretically you as China trade then Jim gets resolved.
How soon and how fast can market demand recovery opinion.
[noise] relatively quickly I believe I think.
We.
Our situation in China, I don't believe is directly affected by tariffs as much as it is by the sentiment of the Chinese customers.
To move away from buying us products and so I think if that was to be resolved that would have a positive impact I would think within a quarter.
That said I it doesn't look like thats going to happen in the short term and we're not planning on it. So we've got we've got to come up with our own the.
Resolution to how to how to resolve this so right now I think.
We believe that certainly for the next quarter the environment that we're in today probably won't change.
Got it and then anything that May change in Japan.
We've got some major projects going on in Japan, we've seen some push out and.
Primarily in automotive.
And so I think.
When the automotive market recovers I think we'll be in a really good position, we continue to invest in Japan, we believe.
Automotive businesses is absolutely perfect for Faro, and we've had a lot of success historically there. So we're going to continue to focus on it.
But I think that is a macroeconomic driven.
Demand situation and I think once resolve we should be a benefactor.
Got it thank you Michael I think Alan.
You're welcome thank you.
And there are no further questions on the line at this time or turn the call to your CEO , Michael Berger for any closing comments. Thank you very much we really appreciate you.
Attending the call today, and we look forward to.
Our next quarter in which.
Hopefully, we can go into a little bit more depth to run our strategy. Thank you.
This does conclude today's program. Thank you for your participation you may now disconnect.