Q2 2020 FARO Technologies Inc Earnings Call
The need any ideas that they don't your calls today.
[music].
Good morning, everyone and welcome to these technologies second quarter 2020 earnings call for opening remarks, an introduction I will now turn the call over at Michaels Laurie.
Hi, Investor Relations. Please go ahead.
Thank you good morning, with me today from fair or Michael Berger, Chief Executive Officer, and Alan You Rich Chief Financial Officer.
Yesterday after the market close the company released its financial results for the second quarter of 2020.
The related press release and form 10-Q for the second quarter are available on barrels website at www Dot Faro Dot com.
Order to help you better understand the company its results management may make forward looking statements during the course of this call.
These statements can be identified by words such as expected.
Ill believe anticipate plan potential continue goals objectives intend may and similar words.
It is possible 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 in the company's form 10-K for the year ended December 31st and form 10-Q for the quarter ended June Thirtyth 2020.
During today's conference call management will discuss certain financial measures that are 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 to comparable GAAP measures.
Well not recognized under GAAP management believes these non-GAAP financial measures provide investors with relevant pureed appeared 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 got.
Now I'd like to turn the call over to Michael.
Thank you Mike.
Good morning, and welcome to our call.
I'd like to start by providing a brief update on our business is fairing through the recent economic downturn.
I'm pleased to report our global manufacturing facilities remain open.
And our supply chain logistics and operations teams have continued to serve and support our customers at the level they have come to expect for Faro.
Our customers continue to pursue threed measurement initiatives they've had in place at the beginning of the year. However, many have chosen to delay projects given the ongoing uncertainty caused by the global pandemic.
That said, we do not believed that we have lost market share in this challenging tomorrow demand environment from an industry perspective, the aerospace market remains the most cautious and placing orders were beginning to see signs that other markets are slowly moving forward on a region by region basis.
It remains difficult to predict how the demand environment will unfold in the coming quarters. All current signs are pointing toward a measured demand recovery in our markets with the second quarter marked in the bottom of the downturn for apparel.
However conditions could deteriorate as as countries respond to newer accelerating outbreaks adversely affecting our customers near term purchase decisions.
Shifting to areas within our control, we're continuing to make progress on our strategic initiatives. We outlined in February our Salesforce has embraced our new go to market strategy and why would that still early in the transition to.
To claim success. The teams optimism is strong and growing we continue to capitalize on existing virtual infrastructure, we have replaced coming into the year with most customers preferring to limit in person interactions sales team quickly shifted to virtual product demos and sales calls.
Virtual demos grew 66% in the second quarter on a year on year basis. We have found success in the use of this critical and scalable tool not only as a standalone introduction to our products, but also as an exceptionally effective and efficient way to prequalify.
Customer interest I had a personal demos.
The combined virtual experience. We've all gained over the last few months, we'll continue to be an important tool in our sales or it's all going forward.
Our marketing and service organizations have also adapted to the current virtual environment. We've seen a three to five fold increase in attendance of our virtual training and product information seminars.
As companies take advantage of the opportunity to remotely educate themselves on the capability on our capabilities and how feral solutions can solve their three d. problems.
This is another example, where we've learned how to more.
Actively inefficiently interface with our customer and communicate that we intend to leverage and grow and NRP future business practices.
Turning to our products in the second quarter, we increased our target market focus with the divestiture <unk> open tech and our photonics businesses. While these two product lines only represented approximately 2% of revenue in 2019, they took up a considerably larger amount of the organizations time and attention.
By divesting these businesses, we were able to reallocate resources to serve our core markets.
In Q2, we announced three exciting new solutions aimed at our core markets first is the freestyle too, which is a differentiated intuitive portable and easy to use handheld scanner.
This tool targeted primarily at the public safety market allows non technical operators to capture photo realistic three d. images in real time.
The second product, we announced is our Swift laser scanner, which is a unique affordable solution that enables colored three d. scans up to 10 times faster.
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10 times faster than competing devices, and there's targeted primarily the E C market.
Finally, the new Faro gauge is our most accurate and personal articulating arm product aimed at Threed metrology.
This measurement tool allows small and medium sized machine shops to perform demanding three inspections in record time.
The core value propositions shared amongst these products is the enablement capturing better data faster. We believe these products when combined with our software solution capabilities have unique ability to quickly transform our customers threed data into usable information.
As we continue to bring new solutions to market that are highly aligned with our customers workflow, we will not only create long term differentiation the market, but also increased software content, leading to higher levels of recurring revenue and improved financial performance.
Having passed my one year anniversary Faro in the Middle of June I'm pleased with the progress that we've made as an organization.
We've established <unk>, our new success model and through the combination of restructuring actions taken earlier this year and the savings that we captured by leveraging our virtual sales and service model. Our Q2, non-GAAP operating expenses $37.7 million beat our stated objective awful six months earlier than expected.
I am confident when revenue returns to historical levels, our new scalable operating model will deliver profitability in line with our targeted success model up 20% EBITDA.
I'm extremely proud of the entire Faro team as they have shown tremendous resiliency and dedication as we transform our company in the wake of our current global situation.
With that I'll turn the call over to Alan for an overview of our second quarter financial results.
Thank you Michael and good morning, everyone.
Second quarter non-GAAP revenue was 61.2 million down 38% when compared to 99.3 million in the second quarter of 2019 as a result, so three months of soft end market demand related to the code at 19 pandemic.
Yep product sales were 42.3 million as compared to 71 million in Q2 2019.
Broadly speaking this decrease was experienced across all served markets.
GAAP service revenue of 18.3 million was down 4.1 million when compared to Q2 2019 as a result of our ability to perform onsite training and a reduction in noncontract break six activity.
In the second quarter 2020, we took an additional charge of 600000 related to the previously disclosed GE as a matter.
Including the impact of did you say sales adjustment GAAP net sales were 60.6 million.
At this time, we have so no further update on the status of our self reported yet say pricing issue as we await a response to our proposed solution.
New order bookings were 61.4 million for the second quarter of 2020 down 42% as compared with 106 million for the second quarter of 2019.
GAAP gross margin was 47.7%.
Non-GAAP gross margin was 48.4% sort of second quarter 2020, as compared with 57.2% for the same prior year period.
The reduced gross margin is a result at the overall reduction in revenue, which adversely affected our product fixed cost absorption.
GAAP operating expenses were 40.9.
And included approximately 2.5 million and acquisition related intangible amortization and stock compensation expenses as well as 600000 in restructuring costs.
Non-GAAP operating expenses of 37.7 million.
Were 13.3 million or 26% lower than Q2 2019 as the company benefited from a full quarters worth of cost savings related to our restructuring actions as well as low lower travel expenses given the current environment.
As Michael mentioned with the demand expected to remained at depressed levels through at least a third quarter. We would expect third quarter operating expense to remain similar to the second quarter.
GAAP operating loss was 12 million for the second quarter up 2020, as compared with an operating loss of 4.9 billion for the second quarter 2019, as a result of the lower demand environment.
Adjusted EBITDA was negative 5 million.
Our GAAP net loss was 8.9 million or 50 cents per share.
Non-GAAP net loss was 6.3 million or 36 cents per share for the second quarter of 2020 compared to non-GAAP earnings of 27 cents per share in Q2 2019.
We continue to maintain a strong capital structure with a cash balance of 173.7 million and no debt.
In a second quarter 2020, we generated 500000 in cash primarily driven by collections of outstanding receivables.
This concludes our prepared remarks at this time, we'd be pleased to take any your questions.
And at this time she would like Boston question. Please press Star then one that's on your top down.
We call your question that anytime by Christine Arnold <unk> once again not it started in one.
We'll take our first question from Greg Palm with Craig Hallum Capital. Please go ahead.
Yeah. Thanks, Good morning, everybody I guess, you know firstly looking back in the quarter I'm curious what you saw maybe in the last two weeks a June which typically the strongest part of the quarter was activity consistent what's your expectation then that surprised you.
Actually it was it accelerated so we we kind of less Q2.
Much stronger than we came came into Q2 and you're right seasonally it kinda crescendo toward the ended the quarter, but we were surprised how strong the activity was it in.
In June in general.
Okay.
Which I think is a real which we think is it's a real positive sign.
And in any you know, maybe you geography fees or end markets that really sort of stood out is from like a recovery standpoint.
Yeah, I think we thought we saw China and Japan relatively strong in at the end of June Europe.
Europe was was.
I would say.
Average and North America was stronger so we kind of TSA Asia kind of bouncing back and we were surprised by the strength out of the U.S.
Okay makes sense I'm, just kind of shifting gears on your go to market strategy I'm curious whether you know your views on this has maybe changed you know whether.
He's web demos can be called me major part of the sales cycle, even in a post Kobin World, where do you think this is a temporary phenomenon and I guess if so.
How might this change the potential cost structure know when you might have a lot less travel expense and other expense that's flowing through the piano.
That's it's a great question, Greg I think we do believe that this is a is a much more efficient way.
Have a prequalifying opportunities and having conversations that are more meaningful in person that we would normally do I think as you recall the company had previously.
I've been very much focused on the activity of doing demos almost it at any cost and I think we believe that that's not the correct approach I think understanding where the customer isn't the by cycle introducing them to our products are our technology, our software or whatever the whatever the demand calls for in a virtual environment prior to.
Actually spending the resources to travel to the customer. We think is the most efficient way. We're in the process of collecting data that that verifies that albeit you know this this market environment, it's strange to say, the least but I do believe that having this capability.
<unk> has given us an advantage through this downturn and we have taken full advantage over there as we said no. Good activity is up big time in terms of the virtual side.
We have actually closed orders from beginning to end virtually now and I think if you were to ask US a year ago. If that was possible I think most of the guys who have been here a long time would say no. It's not possible, but I think we've now proven it is will that be the the norm going forward, probably not but we will amps.
Absolutely leverage the virtual capabilities that we have in terms of Prequalification go forward.
Interesting.
I appreciate that color.
Yes, so I think <unk>, yes from an operating spend standpoint, I think that will provide downward pressure as Michael indicated insert at a minimum though it's certainly going to enable additional scalability the model that we bill.
Yep makes sense on okay. I appreciate all the color thanks, and best of luck going forward. Thank you Greg.
Well take our next question from Jim Ricchiuti like Needham and company. Please go ahead.
Hi, Good morning, just a low like.
You mentioned the pickup in activity last couple of weeks at June what was that what would the trends like or what have they been like so far and.
Q3, and I know.
Yeah, typically you see a lot more or the activity later in the quarter.
Actually the momentum is.
We do go through a seasonal cycle within the quarters, you know right. John we right were loaded toward the end of the quarter and so we we had a.
A really weak.
March or April.
April may right.
And so we've kind of crescendo it into June which felt really good and weve seen a lot of build in the in the funnel, which is a good indication for us that demand is becoming real again and that there's visibility on when that's going to happen, we're nowhere near where we were in terms.
As of the funnel size.
Say Q4 in 2019, so so a lot of the funnel has been pushed out and as I mentioned earlier in the call. We don't believe that we've lost any share and a lot of these these projects have not been canceled just been pushed out. So we're seeing now some of that funnel build again, which is very encouraging for us.
And the the early trends are positive in Q3, but again, we were going through a seasonal build as we do toward the end of the quarter.
Okay, and then just speaking of seasonality yeah. Typically Q3 has been a more seasonally weak quarter, but were in a different world and I I don't know how to think about [laughter] well you know typically your it takes a vacations.
And the August timeframe and and so we've we've heard kind of anecdotally a number of different stories. Some customers obviously have been down for some period of time in airport grown shutting down during the during the summer months, others have actually some of the automotive guys have talked about extending a vacations.
Because of the low demand environment. So I'm with you I'm not really sure what to expect in Q3, we we do believe it and we've said this in the script that <unk> Q2 will be the bottom for US we Q3 and Q4, we should crescendo out of it but we don't believe that it is a of be recovered jumping we think its.
We refer to it kind of as a switch should be well in context of Nike, we think it's going to be a gradual and and steady build hopefully back to historical levels.
Are you are you guys see any change from competitors in terms of pricing or is this just such a weak market that yeah that the environment is such that no. One is doing anything more aggressively from from a pricing standpoint to win business that may not be there.
Yeah, I think the latter it's true we've not seen a stupid pricing and that's that's a technical term [laughter], we because again I I think all of us realize our and I'm talking about our competitors a lower price doesn't create demand right and so I think at the end of the demands out there is not there but.
We are seeing an interesting trend, where some customers, particularly smaller companies are interested in buying a certified pre owned versus new.
And.
So that's a trend that has really it's a new one and we haven't really seen.
An updated to say that it is a trend that's going to continue but it it's interesting data point.
Okay last question for me I'll jump back in the kids, it's just you've talked about it.
Environment, where did the weak or somewhat on a more extended basis that there were still some levers to pull that you still think you could get too.
Adjusted EBITDA breakeven at lower levels of revenue in some cases as low as 58 million 60 million is that still.
What you're looking at or had had have you reached bought any of this.
I haven't thought it we have we had very detailed scenarios that say we thought for example that revenues were gonna dipped below Q2 levels and be protracted for some time, we have other other things that we couldn't be doing.
That said I think the assumptions that we have made and our board has made is that no. This is the situation that we're in today is a temporary one and so the objective is to optimize the company continue to to deal with the restructuring and finish it.
Continue the two to focus on new products, New solutions, which we're doing it we've demonstrated in key to launch a three new products.
But but not.
Not cut to the bone just to cut to the bone. Our objective is to come out of this when the market recovers much stronger than we went in and I think were made a lot of progress toward that so the objective.
The objective for us and the management team is really kind of walking that then line Jim between.
One quarter, making making big impact in terms of profitability and the the long term health that the company had we think we walked out like pretty well.
Okay. Thanks, a lot appreciate it.
Thanks, Jim.
Well take your next question from Andrew Degasperi with Berenberg. Please go ahead.
Hi, Thanks, saying.
Hi, how are you a good morning I.
Did that quickly asking a follow up to Jim's question earlier on competition I mean, you're going to go [laughter], you're going to go into restructuring some of your competitor and all that undergoing restructuring I mean, one big International one is undergoing one right now through the end of the year you have already bought in the <unk> market that doing that I just got married.
I'm wondering if you've seen any pulled back from.
Their perspective in terms of how.
We talked about pricing, but I'm thinking more in terms of the product refresh that they ran at a in any kind of slow down from that perspective, it's a great question and I got to tell Ya.
And it's anecdotal right. We don't have a lot of data. So we track now we were laser focused no pun intended on every opportunity that our sales people have identified and we we use salesforce dot com and you know we basically track the funnel bike sales guy. So we're we're maniacal focus than too.
Really understanding every customers opportunities.
And we've not seen pricing moves by competitors, we still see the our competitors, but I must tell you. The intensity is been different and I would argue less than we have experienced for example in Q4 in 2019 from.
Some of the traditional players in this space.
I can explain that I have no real data I I'm aware of the same thing you just mentioned restructuring going on and I'm not sure. If they agree if that's caused.
I see.
A slowdown in there and they're selling activity I I'm not sure right under understand how that happened, but we have not seen for example, a lot of new products from any of our competitors and that's why we took this opportunity in Q2 to.
Really kind of double down we were bringing three I think very significant products to market and the objective is to really do as much as we can to get.
Our customers excited about these products so that when their demand environment returns there in a place to actually placed orders and so that that's been our strategy and we've executed into it.
Great. That's helpful and not I know you mentioned earlier in the quarter that disposed of through assets that were non core.
Did you could you maybe let us know if there's anything else that right now looks well, maybe not specifically, but you have any other assets that you might be interested and potentially accessible a and then maybe secondly, I know that.
Mentioned in the past the potential for some softer Remy says coming up and they a towards the end of the there is that still the case and yeah, but in terms of timing should we think more at the end of this calendar year over year any comment on that right.
From a software perspective, it's actually that's ongoing and yes, we will be releasing a new versions of software almost on a on a continuous basis. So the answer to your last question is yes, we'll be continuing and we are we're doubling doubling down on terms of our investments in software so that hasn't changed.
If anything its intensified and.
So yes as it relates to disposing of businesses, we have no other plans to divest of any businesses like the photonics business or the open tech business.
We're always looking at opportunities to optimize the company in terms of.
Specific assets, but short term, we don't have anything on our radar that would affect for example, Q3.
[noise] great. That's helpful. Thank you.
You're welcome thank you.
Well take our next question Richard Eastman with <unk>. Please go ahead, yes, good morning.
A couple of things like Okay is it possible you could just.
Put a little bit of color around you know the three maybe business groups or end markets Threed measurement potentially in C. And then public safety and just.
He did any of those performed less bad in the quarter [laughter] kind of left.
[laughter] I'm kind of thinking about just you know where the funding comes from you know for these different end market buckets and you know how quickly could you know recover.
Right. It's it's great question.
So our biggest market is threed metrology and you know we are aligned and have been aligned.
With the aerospace business and the automotive business and you know there they're going through some tough times, the automotive business seems to be a lot of noise about recovery et cetera, although I'm not I'm not convinced that their demand environment is going to drive a lot of capital purchases early or in the second half of this year, but we'll see it.
It's positive positive signs.
The other big part of Threed Metrology is really you know these smaller companies that are doing metal work up some of some sort and in general that demand, we've actually seen kind of research, particularly in America and in Asia. So that's a positive sign and that is when you talk about.
15000 customers a big part about 15000 are these smaller businesses that are kind of spread it you know that machine shops or.
[noise] heavy metal working types of a places and so that's that's kind of been our core and we are seeing a lot of these smaller businesses coming back and projects being a put back on the on the on the docket, which I think is very positive.
Public safety was a nice surprise for us and that seems to be coming back, particularly in North America. So that's a positive sign as well I think you know the.
During the early days of the pandemic it was hard to get anyone's attention. If you will well I'm talking about a capital purchases in law enforcement and I think that's that's changing and I think we're kind of leveling out in terms of the new norm.
The construction business a easy we are we're seeing signs of life and in North America Europe has actually been surprisingly slow for us in the construction space, even though there are some construction projects going on but I think that there's an apprehension to place capital. So so.
Rheumatology driven by the metal working seems to be on them and.
Okay, and there's good signs and automotive a public safety seems to be coming back and construction in America, who is making the right noise. So I don't know if that's what you were looking but okay. [laughter], we need noise, we need more nice [laughter] noises positive these days.
Right. The interest just one other question maybe around the the restructuring you know again I think given given the initial maybe restructuring.
Commentary that you gave I think you you talk to 12 to 22 million.
Planned restructuring kind of in a range, where at the kind of lower end of that and I'm I'm trying to maybe just gauge.
What does the second half look like and where is that restructuring targeted have you have you started to look at the footprint at all or <unk> or taken any additional steps or is it still primarily focused around that head count number.
Well pretty much the headcount situation has done we have some lingering issues and some of the European countries, where the government is mandated that you're not able to do any restructuring until a certain point, but but the bulk of the large large part.
Signage of other headcounts situations Dom.
I'll, let Alan talked to to where we are financially, but I will say that that we.
We are planning on coming under the number that we announced in February which was $75 million to $80 million and restructuring when we're done will be below that number in terms of cost of restructuring and I'll, let al talked to kind of where we're up.
Yeah.
I think Michael characterize it right.
Communicated 75 to 85, and we think we are doing well relative to that number as Michael indicated in his prepared remarks, our operating expense of 30, almost just almost got $38 million.
Is that a bit lower than we had guided to until we feel very good about our cost structure and our ability to demonstrate that while were.
You know continuing to manage the business and frankly invest in the business in areas and so as Michael indicated we're pretty well done with that at this point in time outside of a couple of lingering areas that that we'll continue to to layer in okay.
Okay very good thank you.
Thank you.
Yeah.
Sorry to ask your questions today.
And well go next to the inroads with Battle Road Research. Please go ahead.
Yes, good good morning Island, and good morning, Michael <unk> warning.
Just a question with regard to gross margin, one or two I guess better understand the gross margin in the quarter.
Is there anything in particular that depressed it in.
From a product standpoint, I'll start first and what do you think the key is to kinda revitalize it in through the second half of here.
Go ahead.
Yeah, I think the.
As Weve indicated in the <unk> prepared remarks really the reduction down into the high Fortys from a gross margin standpoint for non gap was driven by the reduction in revenue we have.
Relatively consistent contribution margin cross the product line, and therefore reductions and they're obviously higher than what our corporate averages.
Therefore revenue comes down.
Margin comes down commensurate.
Our success model of 55% to 60% remains unchanged at this point in time that is our objective.
And at this point in time.
You know our expectation is that when revenue rebounds.
Two more historic levels, we will see a natural increase back up into that's 55% to 60% range that we had been operating asked for an extended period of time as Michael indicated pricing remains.
Steady we haven't seen any draconian efforts by our south certainly.
That would have some started the permanent change to our gross margin on anything from a mix standpoint would generally be more positive as we tend to focus more on software and solutions that have higher gross margins for instance, so.
In general I I don't want it to your Cavalier by any stretch the imagination, we're not concerned about 48% because.
What I've just talked about in terms that really being just a volume driven.
Okay, Great and then on the service side I know that a big focus over the last.
In fact more than the last year has been.
Selling warranty service and having a pretty successful in high attach rate.
On that warranty service.
Are you able to continue that you know success, even in this tough environment and.
Look up here or there.
Yeah, No I think we we've been very successful in terms of Ah.
Selling a service contracts and and a NR attach rate through this process I think there.
There's a phenomenon, particularly in smaller companies that that are still working but don't really have an understanding of what their demand environment.
They're taking advantage of of this slower time, and sending equipment back for certification and calibration and and that's.
That's we've seen that positive trend through this covert environment I think you know when when the demand environment gets back to where.
Where it is where it was <unk> for our customers I.
I think we'll we'll see it returned back to normal levels, but I think it's been positive through <unk>.
Okay, Great and then [noise].
Michael just a keen on something that you said with respect to the noise level.
On the factory metrology side.
You know, there's there's obviously been positive data coming out of some of these macro sources. The I.S.M. the federal the Feds book on the industrial production and so forth.
And I'm wondering if.
Your comments.
With respect to it being noise rather than substance you know has to do with kind of factories, we opening for the first time.
As a and getting things back online versus making new purchases of equipment.
Just wanted to get your thoughts on that when when do you think we might see.
Some of the purchase cycles for your product was just start to kick in.
Yeah, well I think we're beginning to see it now and that's why we in our script. We kinda said that Q twos is the is the trough. It's it's the lowest point we believe.
So the so the noise is is is positive I think there was a lot of talked in the.
April may timeframe that you know the automotive guys some of them more coming back to work et cetera, and I think there's a big difference between a factory coming back and starting to operate and guys going off and buying new equipment. There's a big difference right then and I think new equipment is typically a fine competence.
On either capacity needs or a technology purchase and so we're.
We're seeing our funnel again in were were maniacal focus on tracking every opportunity our sales guys see.
We're seeing the funnel building again, which is positive and I think for a lot of the customers to pull the trigger and actually placed an order it really comes down to their in demand environment and I think automotive is a perfect example, <unk> you know there's a.
I don't know how many people are buying new cars right. Now. So I think you know that's I think as as their confidence bills in the consumer and <unk> and things start happening a as it relates to activity I think we'll see us returning back to where we were the trends are positive and again, we're calling Q2 the trial.
Okay. Thanks, that's very helpful.
Thank you.
And there appears to be no further questions at this time I'll turn the call back over to Michael Piken for any additional remarks.
We want to thank everybody for your attention, we again I want to reemphasize, we're calling Q2 the trough.
And we are better position today than we were a year ago to take advantage of that.
Three new products introduced this quarter and and we're continuing to focus on our solution strategy. So we appreciate everyone's attention and look forward and talking to you a next quarter.
Thank you.
Thank you.
Great. Thanks for your participation you may disconnect at any time.
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