Q3 2020 FARO Technologies Inc Earnings Call

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Now for opening remarks, and introduction I will now turn the call over to Michael scenarios Sapphire Investor Relations. Please go ahead.

Thank you and good morning with me today from Ferro, Michael Burger, Chief Executive Officer, and Alan Me Rich Chief Financial Officer yesterday.

Yesterday after market closed the company released its financial results for the third quarter of 2023.

The related press release and form 10-Q for the third quarter are available on Ferros web site at Www Dot Faro dotcom it.

To help you better understand the company and its results management may make forward looking statements. During the course of this call.

These statements can be identified by words, such as expect will believe anticipate plan potential continue go.

Oh objective intend may and similar works it.

It is possible the company's actual results may differ materially from those projected in these forward looking statements import.

Important factors that may cause actual results to differ materially are set forth in yesterday's press release and the company's form 10-K for the year ended December 30, Onest and form 10-Q for the quarter ended September 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 or.

Well not recognized under GAAP management believes these non-GAAP financial measures provide investors with relevant period to period comparisons of core operations.

However, they should not be considered in isolation or as a substitute for financial or measure professional performance prepared in accordance with GAAP.

Now I'd like to turn the call over to Michael.

Thank you Mike good morning.

Come to our call.

I'm pleased to report in the third quarter, we saw improved performance as global economies continue to reopen and our customer resumed their capital investment plans on a geographic basis revenue in the Americas and Europe exhibited the strongest sequential improvement as many of our customers began to overcome the pandemic related.

The challenges they face in the second quarter.

Within Asia Pacific demand improved modestly off a relatively stronger second quarter base.

In the end markets the architecture engineering and construction were eight you see and public safety markets exhibited a sequential uptick as construction projects resumed and <unk> government agencies returned to more normalized operating condition.

Service revenue began to to exhibit steady improvement throughout the quarter as many of our customers returned to work, which allowed for both greater in percentage person training opportunities and greater demand for time and material repairs.

While near term demand remains below 2019 levels are increased activity is heightened dark confidence that the second quarter represents the trough in a slow recovery in the markets. We serve is underway.

That said, we remain cautious as the global health conditions could deteriorate and adversely impact our customers business plans and purchasing decisions.

Shifting to the strategic changes, we announced last February.

Our quarterly non-GAAP operating expense levels remain below our stated target and our go to market transition is progressing very well.

I am pleased that in the third quarter of 2020. Despite the continued market softness our annualized revenue per sales headcount increased nearly 10% when compared to the first half of 2019.

This is an initial indication of the increased sales productivity. We expect will result from the changes in the sales structure.

As it relates to our software and solutions initiatives, we continue to make progress on harmonizing, our existing software solutions into one cohesive platform.

We are particularly focused on improving our customers time to decision through software enabled automation and we believe these increasingly sophisticated capabilities will enable long term differentiation and greater customer value.

To help accelerate our initiatives in the third quarter, we added two industry veterans to Ferros executive team to lead our software and our hardware R&D organizations.

In addition to complement our internal development initiatives in August we announced the acquisition of advanced technical solutions or Ats, a Swedish based leader in Threed dimensional digital twin solutions technology.

Ats has had success in the automotive space and as a result have agreements in place with several well known global automatic automotive manufacturers we.

We believe this acquisition enables faro to accelerate the adoption of digital twin technology, where high accuracy three dimensional measurements allow capital intensive industries, such as automotive to meaningfully reduce their time to market risk profile and cost.

While digital twin technology is primarily used in large complex manufacturing environments. The ultimate value proposition. We can provide is equally applicable to customers in the seed and public safety markets we serve.

In today's world, where people are increasingly looking for ways to create and leverage virtual environments, our market, leading digital twin accuracy can provide unique ways to remotely manage physical assets.

While it will take time for customer adoption to build we believe the way in which the digital twin application marries leading edge hardware with innovative software exemplifies the types of opportunities. We are looking to create with our software and solution strategy.

Nearly three quarters into the strategic transition, including two quarters under a pandemic.

I am proud of the efforts and resiliency of the entire Faro team.

With the new organization and process is largely behind us.

And cost reduction goals realized we're now shifting our focus toward accelerating revenue growth.

With that I will turn the call over to Allan for an overview of our third quarter financial results.

Thank you Michael and good morning, everyone.

Third quarter revenue of 70.7 million was down 22% when compared to the third quarter of 2019 as a result of continuing market softness caused by the pandemic.

As Michael indicated earlier in the third quarter, we saw improving demand conditions that began in June and continued throughout the quarter.

As a result on a sequential basis bookings of 72 million were up 17% and total revenue was also up 17%.

Service revenue increased 24% sequentially as customers Reengage down repair and on site training activities, while product revenue of 48 million was up 14% sequentially.

While pleased to see a healthy sequential demand increase off the second quarter lows. We continue to believe that the recovery in the markets. We serve barring any unforeseen pandemic impacts will lead to a gradual demand improvement over the coming quarters.

GAAP gross margin was 51.3% and non-GAAP gross margin was 51.5% for the third quarter of 2020.

While gross margin remains lower than last year. It did improve sequentially due primarily to the increased revenue and its positive effect on fixed cost absorption.

GAAP operating expenses were 41.2 million and included approximately $2.5 million in acquisition related intangible amortization and stock compensation expenses and 240000 restructuring costs.

Non-GAAP operating expenses of 38.5 million were 12.6 million lower than Q3 of 2019 as the company benefited from cost savings related to restructuring actions taken earlier in the year and lower travel expenses given the current environment.

Non-GAAP operating expenses increased sequentially, primarily as a result and variable compensation on higher revenue as well as R&D investments were making into our software and hardware roadmaps.

GAAP operating loss was $4.9 million for the third quarter of 2024 1 million better when compared with an operating loss of 5.9 million for the third quarter of 2019, with our lower expense base more than offsetting the soft demand environment.

Adjusted EBITDA was approximately 800000.

Our GAAP GAAP net loss was $3 million or 17 cents per share.

Our non-GAAP net loss was $1.3 million or eight cents per share for the third quarter 2020, compared to non-GAAP net loss of one cents per share in Q3 of 2019.

We continue to maintain a strong capital structure with a cash balance of $163.6 million and no debt.

In the third quarter of 2020 cash decreased by $10.3 million, primarily driven by changes in working capital and the Ats acquisition, Michael mentioned earlier.

I would also like to note that despite the soft soft demand environment. Our current inventory balance has decreased steadily throughout 2020 by a total of nearly $9 million or over 14% when compared to December of 2019.

Our global operations team has done a fantastic job improving our inventory management practices and we expect further inventory reductions in the future that will result from their efforts.

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

And at this time, if you would like to ask a question. Please press Star then one on your testimony filed.

You May recall your question at any time by placing the bounty.

None that im sorry.

And we'll take our first question from Greg Palm with Craig Hallum Capital. Please go ahead.

Yeah, Hey, Mike Doyle and good morning, I'm wondering if you could really grow start maybe you can start by talking about the cadence of orders or just sort of overall demand activity.

The quarter, you mentioned I think you see in public safety is maybe some some outsized strength, but any you know maybe end markets or other verticals that may be surprised you to the upside.

I don't think there were surprises we.

We had a relatively strong Q2 recovery in a threed metrology, primarily driven out of Asia and.

And as we mentioned in the call that.

Asia's sequential growth was probably <unk> as a percentage less than North America and Europe.

Because we had a relatively strong stronger Q2 than than in North America and in.

A Europe based on historical rates, So I think Asia recovered so.

First I.

I was pleased by the recovery in Europe, we were a bit concerned.

Certainly you know Q3 is traditionally a slower quarter in Europe.

Based on vacations and anecdotally there were a number of our customers that kind of extended.

The vacation period, so we had concern but it actually it ended up in a pro.

It is pretty strong.

We do still have that kind of into quarter dash, albeit I think this was a little bit more.

Deliberate and so we felt we felt the momentum really kind of begin to build a in in August and it and it looks like it's continuing into a into the fourth quarter.

India Medicine, I might add is that the other thing I might add is that the demand across our end verticals also was relatively good and as Michael indicated we did see an uptick in the a and the public safety and agency market that affected our scanner business a little bit more than what we saw in the arm.

Okay. Good and you know this end of quarter Dash and usually you know Q4, and I guess December specifically him and that tends to be a very big driver of business and certainly we're not in a normal year, but but how are you thinking about things given your customer conversations can you say, what you're seeing thus far in October as well.

No I think we're encouraged that the companies are coming back I think that the $99 question is.

What typically is happened traditionally and again.

This is my second year the company, but what happened in 2019 is a capital budgets that Werent spent were spent in Q4, you know the spend it or lose it or capital.

I guess I would call it phenomenon.

It is it is difficult for us to assume that that's going to happen again, we're cautiously optimistic, but but I would say that we don't expect it to be.

As.

Robust it is as it has been in past years, but again, we don't really know this is kind of unwanted unchartered waters.

It is great to see our customers coming back and mass and our ability to have face to face meetings and face to face demos and that type of thing is becoming a easier, which I think should bode well for us, but I think we do not believe that Q4 will bounce back to.

<unk> to Q4 2019 level, but we do see it we do see some strength over Q3.

Okay, and I just want to sneak one more in I didn't hear anything maybe I missed it but on the virtual demos I wanted to focus in on that because I think that's somewhat differentiated maybe gives you a leg up versus some of the other competitors I mean looking back on.

I'll just this past quarter I mean do you feel like that's a tool that can help you gain share or did it maybe going forward I mean, especially in the environment. We're in.

Absolutely.

We we track both.

Both virtual and then phase demos as one of the indices around the productivity.

And virtual demos it continues to be a tool that I think has now been inculcated in our in our sales culture, but I would argue also perhaps in our customers' culture, which I think is very positive and and to your point I think bodes very well for apparel.

Okay. Thanks for the color best of luck going forward.

Thanks, Greg I appreciate it.

And well take our next question from Kimberly King with Needham. Please go ahead.

Hi, Good morning that you May have commented on this I may have missed it but can you speak to.

What you're seeing on the service side of your business I mean, if I look at the year over year decline fairly modest and I'm. Just wondering is that part of this new go to market strategy, where you are a little bit more successful on the service side of the business in terms of selling that area of the business.

Yes service is definitely a big part of our business and it's been a focus for us, particularly through the last quarter and a half in terms of really streamlining the processes ensuring that we've got.

The best user experience I think what's really driving the revenue today in terms of reference to Q2 is really the fact that a lot of our customers are just coming back and when you know calibrations or machines that needed repair didnt really get shipped out because frankly nobody was using as they were in their factory.

With people coming back that's that's I think we've come back to more normal levels trading has also been a.

A big part of our service efforts.

And certainly there was there was a lot of virtual trading being done and.

In Q2, but we actually saw an increase in person training, which virtual training is fantastic that you really can't get hands on so in person training is obviously the best and so we saw we saw a resurgence.

Resurgence there so I think.

I wouldn't say that it's going to change in terms of the dollar mix in favor of service over product revenue I. Just think that is returning to kind of more normalized levels faster than product revenue has based on where we started in Q2.

Got it and Alan it if we have should we think that the components of the Opex going forward is or you had a bit of an increase on the R&D side sequentially.

Is this a level of R&D that we should be thinking about as a base going forward or were there was there anything unusual in that R&D number.

There wasn't anything unusual on the R&D number and I think as we indicated in prior calls that we are adding to our resource level to be able to deliver both our hardware as well as software Roadmaps I think from an overall operating expense level certainly it was the R&D, which you can see there is also some variable comp and.

Station built in for the increased revenue.

As we expect and looking forward I think we as Michael just indicated I think we expect the fourth quarter to increase revenue a little bit more from where it is an acute in the third quarter and therefore would expect operating expenses to tick up again again with continued hiring as as well as the variable compensation.

Both affecting us in Q4 as well as Q3, so a bit of a further uptick but certainly well within the success model that we talked about back in February.

And let Jim <unk>.

Please I was just gonna I was just going to add Jim that I think during the pandemic. We we were very cognizant of the project spend and the the headcount spends that where you know we were kind of.

Already underway in Q1 before this thing hit and so we we slowed a lot a lot of spending a lot of areas around the company, but we were very prudent in terms of cutting expenses and run rate expenses and in R&D through this pandemic in other words, we we kept running as fast as hard as we could in R&D.

And final question, just wait we're hearing more and more of that.

Signs of recovery in the automotive market and just wondering what you are seeing across your geographic regions. If in fact, that's consistent with what we are hearing.

Well, there's a lot of activity. The the question is are they pulling capital triggers and I think there's still some reticence.

Automotive has come back, albeit.

Not as strong at least in Q3 as a.

We saw recovery in public safety in construction so.

But again as we mentioned we saw Q2, probably a little bit stronger in terms of Threed metrology versus public safety and AC.

I think companies coming back to work is a lot different than spending money on capital and I I think factories.

Factories are coming back and back on line and I think that bodes well, but I don't expect.

Q4 to be back at 2019 levels, even though I think many of the automotive factories or or back to and ramping.

Yeah, Okay that I might add as the backup the automotive guys that we are engaged with on the digital twin side appear to be also very active in so.

Again, I think we're making relatively good progress on that front, which isn't necessarily going to be all capital in nature, which I again, I think will give us a slightly different flavor than the automotive market than what we've had historically, which is why we're one of the reasons were excited about it.

Got it thanks very much.

Thank you Jim.

Just as a reminder, that it doesnt seem like one point any question today, you can find one.

Taking fishing phones <unk> gas field Banbury capital. Please go ahead.

Great Good morning.

Hi.

Good morning, I, just said it.

Quick question first I was just wondering if you noticed any change in the competitive environment on the manufacturing side.

Particularly with as it relates to you know the products and the arm and the scanner and then secondly, I was just wondering if you could expand a little bit on Ats in terms of what the impact would be to revenue or or or on the bottom line EPS.

And expand a little in terms of what that asset will do to help you bridge on the digital twin side.

Yeah from a competitive perspective.

Not big changes we.

We've commented I believe in Q2 that the competitive scenario seem to be less than typical and by typical.

Who knows what that means but two that I would reference probably Q3 or Q4 2019.

We have.

You know, we we do see.

Pockets of Super aggressive pricing.

I won't say across the board from our traditional competitors.

So nothing that we that surprised us from a competitive perspective.

I think a there is a new competitor for Threed metrology in Asia.

And we've run across a a new arm manufacturer in.

In Asia, but frankly hasn't.

Hasn't caused us any any consternation to date.

But you know it is a it is a competitive market, particularly in Threed metrology. So we.

We keep our eyes out, but we're not no nothing dramatic that has changed competitively in Q2 or Q3, so far.

Digital twin and the acquisition of HTS is really well, albeit a business, what we really well.

What we really wanted from 80 asked was what they bring in terms of their knowledge of work flow.

And they've been very successful in Europe, with several car manufacturers and and effectively becoming a digital twin provider, which includes using faro equipment.

Creating a data set and then hosting that dataset on a cloud based environment and that is actually our in state. So they are they have been a partner of ours for over a decade and so it made a lot of sense for us to inculcate him into Faro take their work flow.

And be able to leverage their their capabilities beyond just a.

Several car manufacturers that they are currently involved and as we said in the script. We also believe the digital twin is applicable beyond three D.

Metrology, we believe that there's applications in a public safety around catastrophe planning or or a public facility.

Mapping.

And also any see around building a building ownership and building management. So we believe that this application we don't see it as a separate market, but we see it as an application that is applicable in threed metrology, obviously in automotive and in very complex manufacturing, but also in the sea in public safety and these guys bring with it with them.

A decade plus of experience and really developing a workload that is repeatable.

Were accurate and it has utilized the faro equipment. So they it was like a perfect marriage for us and we're very excited we our objective is to leverage what they know into into the markets that we just discussed.

And the third question I forgot what that was.

I was going to ask and I, you know I'm not sure if it's de minimis or not but like in terms of any any ocwen quantifiably impacts your topline.

And but you know I love to what you just mentioned I mean do they bring software to the table in other words is their software component that.

Actually helps on the digital twin side in other words do day to day, just something like what Ansys and others do on the simulation, where they tried to essentially provide some kind of a digital images of the product and sort of simulate real real time stresses on the that overtime.

From a from a revenue perspective, it's relatively the many a diminishment, but not.

Not very important [laughter] very important at this time, we think that the opportunity in the market is huge and growing.

Okay.

What they bring to US is software and as I mentioned workload their software actually is not simulation software as measurement software and basically allows the point cloud to be viewed in a virtual environment.

Very easy and very quickly and we're inculcating. What these these guys have developed into our own into our software suite.

And we are.

Very anxious in terms of taking their work flow understanding and being able to to spread that to new manufacturers that haven't seen the ferro a digital twin application yet.

That's helpful. Mike One for my last question I, just wonder if you can update us on the product road map for the next six to 12 months just getting an idea in terms of what we should expect conclusive new releases.

[noise] what today are for this year 2020, Weve introduced three new products, we expect to introduce two more before the end of the year well I won't say, what they are but to to what I would consider major product releases before the end of the year. We we are working very diligently to create a drumbeat if you will of new.

New products.

And we mentioned in the call that we've hired two new executives that report directly to me one in charge of a hardware.

Hardware engineering and one in charge of software engineering, and so part of their challenge in charter is really to create this this drumbeat in which customers can expect.

Differentiated new products on a much more regular and frequent basis than we've done in the past.

That's helpful. Thank you.

You're welcome thank you.

Oh, Okay. No further question at this time on the call back over to Michael Burger King for any additional or closing remarks.

We appreciate everybodys attention. This morning, we're very excited about where we are it's it's great to see the business beginning to.

Recover back to I would think 2019 levels, so ultimately, but but we don't believe this is of the recovery. We think this is a slow and steady recovery in Q3 as an example of that we look forward to giving you an update next quarter. Thank you for your attention.

Thank you. This does conclude todays program. Thank you for your participation you may disconnect at anytime.

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