Q4 2020 FARO Technologies Inc Earnings Call
Script, a little bit higher as the year goes by due to that as well as due to some of the R&D investments that we've talked about previously, but we still expect to stay within the range.
That's helpful. Thank you.
Sure.
Okay.
Yeah.
Once again that is star and wanted to ask a question.
Yeah.
We have a question from Ben Rose from Battle Road. Your line is open. Please go ahead.
Good good morning, Alan and Michael.
Couple of questions.
Was curious too.
Ask you a little bit about the performance this quarter, specifically of the Faro gauge.
In factory metrology as well as the.
Focus swift on the scanning side.
And whether these products were meaningful contributors.
They are there are there new in terms of.
Adoption.
Pleased with both.
On.
I guess I'm on.
And pleasantly surprised with the.
Gauge adoption rate and.
I think that it kind of goes hand in hand, with some of the <unk> metrology recovery and Asia and Europe.
Lift is a is very positive.
<unk> scanning I think is a trend that we have to capitalize on and we're spending a lot of time and effort on mobile scanning and Swift is really.
Arguably our first real flagship product in that space and we expect that to continue to ramp and you know.
And the ASP differences between the two or are significant.
So.
Yeah, I'm I'm pleased with both of them and we will continue to to innovate and both both and the articulating arm and the mobile scanning space in 2021.
Okay, and I'm curious specifically within <unk> within three D metrology.
And you you had commented earlier in the call that you were pleased with.
How the segment is how the segment is performing and I'm curious to know which of the and markets that you serve appear to be coming back the fastest in terms of their investment and three D measurement.
Yeah.
Well you know, it's it's an interesting interesting phenomenon and we're seeing automotive coming back pretty.
Pretty strong actually and.
And particularly in Europe, and then and Asia.
And we're seeing the smaller machine shops, I'm coming back with some with some force with the exception of North America, we're not seeing broad based recovery in America, and the and the small to medium machine shop area, which.
I think that is kind of a holdover from where we are on the pandemic and.
And for example, the West coast is stronger than the East coast.
And the automotive space and North America is not.
Where we're seeing the recovery as it relates to Asia and Europe.
And.
And aerospace in general is still.
Lagging 2018, 2019 levels, we are seeing activity.
In terms of Ah projects, quoting that type of thing, but theyre not point not pulling the trigger in terms of purchases.
So.
Was that helpful is that what Youre, yes, yes that is.
Very very helpful.
Kind of broad overview, and if I may just one for al and it looked like the services gross margin was.
Very strong in Q4, and I'm curious to know.
Does that have to do with the cell sale of extended warranties for products or.
Whether that kind of level can be sustained.
Into 2021.
And I think we saw a couple of small items within services that enabled us to have a little bit of a one time pick up and margins I would expect that the what we've demonstrated over the last over and over a longer extended period is more what we would expect moving forward.
Nothing nothing.
Out of the.
Overall and nothing out of the ordinary no event, okay. Okay, alright, thanks, very much thanks, Matt.
It appears that we have no further questions at this time I will now turn the call back over to our speakers for any additional closing and additionally.
Closing remarks.
Well, we thank everyone for listening we are very excited about where we are as Alan said in his script. We are very much looking forward to 2021.
And we appreciate your attention thank you Patti and next quarter.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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Good morning, everyone and welcome to the Faro technologies fourth quarter, and full year, 'twenty and 'twenty earnings call for opening remarks, and introductions I will now turn the call over to you and Michael Funari at Sapphire Investor Relations. Please go ahead.
Thank you good morning, with me today from Faro, Michael Burger, Chief Executive Officer, and Allen <unk>, Chief Financial Officer.
Yesterday after the market closed the company released its financial results for the fourth quarter and full year of 2020.
The related press release, and form 10-K, and for the fourth quarter and full year have been filed with the SEC and are available on Faros website at www Dot Faro Dot com and.
In order to help you better understand the company and its results. During the course of this call management may make statements that may be considered forward looking and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements can be identified by words, such as expect will believe anticipate plan potential continue goal objective intend seek estimate may and similar words.
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.
And as possible on the company's actual results may differ materially from those projected on these forward looking statements.
Important factors and a discussion on the risks and uncertainties that may cause actual results to differ materially are set forth in yesterday's press release and on the company's form 10-K for the year ended December 31.
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.
And the press release, you will find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures, while 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 a measure of financial performance prepared in accordance with GAAP now I'd like to turn the call over to Michael.
Thank you, Mike Good morning, and welcome to our call.
I am pleased to report our fourth quarter demand continued to improve and SCOR global economies to adjust to the ongoing impacts of the pandemic and our customers gain confidence.
Demand across each of our geographies grew sequentially with particular strength in Europe.
Year end budget utilization helped enable 60% sequential growth.
We experienced sequential demand increase and each of our served markets with notable strength on both AUC and public safety, which enabled year on year growth of our scanner product line.
While near term, while near term demand levels remain below those seen in 2019, the increased activity and the fourth quarter further heightened our confidence that the demand trough is behind us and a market recovery continues.
That said in addition to typical first quarter seasonal softness we remain cautious on the near term outlook and continue to expect a more gradual demand improvement throughout 2021 versus a continuation of the strong sequential growth we experienced in the fourth quarter.
In February of last year, we outlined the new Faro strategy with the objective of realizing profitable revenue growth that would ultimately drive increased long term shareholder value.
<unk> speaking to strategy relied on two key tenets. The first was to create a cost structure that would enable us to realize our success model of 20% EBITDA on flat to 2019 revenue levels by targeting $40 million and annualized savings the targeted savings would primarily results from a transformation.
And of our go to market approach as well as the globalization of our many of our back office processes.
The second strategic tenant was to enable long term product differentiation by better understanding our customers and delivering hardware and software solutions to solve their problems better than our competitors.
And the last 12 months, we've made significant progress on both of these strategies.
And our go to market transformation, we have brought the leadership and our sales team under one executive eliminated our vertical business unit structure reduced sales head count by approximately 40% and enabled our sales teams itself barrels entire product portfolio.
These changes enabled fourth quarter sales productivity per person to improve by 50% when compared to the first half of 2019.
Driven by our new product marketing organization, our customer focused and market focused product managers are now, enabling our engineering team with a product roadmap targeted at delivering long term differentiation.
Our focus is on developing a deep understanding of our customers' workflow, which can be translated into product features that will enable our hard work to capture data faster.
Provide our customers with increased software and intelligence that enables more data automated and finally enable them to access their information everywhere through a cloud based architecture.
<unk> three <unk> simple concepts better data faster and more day to automated and information everywhere encapsulate our industry strategic intent and they influence everything we do.
And we anticipate the rollout of these additional capabilities to occur over time.
And corporate marketing, we previously outlined our strategy to improve the quality of our sales leads to further increase sales force productivity.
Our historical focus on lead quantity versus lead quality resulted and literally.
Hundreds of thousands of leads going to our sales team, which resulted in a very inefficient lead management process and I'm pleased to report last week, our new website Faro Dot Com went live and provides the foundation for a new technology based approach of targeting customers a day.
<unk> qualifying and tracking leads provided to our sales team.
We expect this initiative will further improve the efficiencies, we've already realized and our new sales process.
I am pleased with the progress we've made over the last year, but we have much more to do.
And 2020 and despite the pandemic, we launched 10, new products setting a pace, we expect to accelerate and this coming year on.
Look forward to sharing these with you as they launch.
With that I'll turn the call over to Allen for an overview of our fourth quarter financial results.
Thank you Michael and good morning, everyone.
Fourth quarter revenue of 93 million was down 11% when compared to the fourth quarter of 2019 as a result of continuing market softness caused by the pandemic.
And as Michael indicated earlier in the fourth quarter, we saw continuing demand improvement.
As a result on a sequential basis bookings bookings of $95 1 million were up 32%, while total revenue was up 31%.
Service revenue decreased 6% sequentially off a strong third quarter, our product revenue of $71 7 million was up 49% sequentially.
While I'm pleased to see a healthy sequential increase in demand. We continue to believe that recovery and the markets. We serve barring any unforeseen pandemic impacts will continue to reflect the historical seasonality patterns and gradually improve over the coming quarters.
Fourth quarter GAAP gross margin was 54, 6% and non-GAAP gross margin was 54, 9%.
And while gross margin remained lower than last year and improved sequentially due primarily to the increased revenue and its positive effect on fixed cost absorption.
Shelley offset by unfavorable product mix as demand and the fourth quarter returned more strongly for our lower priced lower margin configuration.
GAAP operating expenses were $48 1 million and included approximately $2 3 million and acquisition related intangible amortization and stock compensation expenses.
$1 6 million and one time product related charges, and $1 2 million and restructuring costs.
With respect to the product charges during the quarter, we elected to replace certain of our customers prior generation edge arm products, and we're exhibiting lower than desired reliability as part of our ongoing focus on customer satisfaction.
And specific issues were fixed and subsequent product generations, and we do not anticipate the need for further charges.
Non-GAAP operating expenses of $42 9 million or $10 3 million lower than Q4 of 2019 as the company benefited from cost savings related to restructuring actions taken earlier in the year and our continued focus on making prudent investments.
This $10 million Q4 year over year reduction is aligned with our committed $40 million and annualized savings. While it also resulted in a $41 million reduction on our full year 2020 basis when compared to 2019.
That said the sequential increase in Q4 non-GAAP operating expense was primarily a result of performance based compensation on higher than expected revenue as well as continuing R&D investments, we're making into our software and hardware roadmaps.
GAAP operating income was $2 7 million for the fourth quarter of 2020, while non-GAAP operating income was $8 1 million compared to $4 7 million for the fourth quarter of 2019, as our lower expense base more than offset lower revenue.
Adjusted EBITDA was $11 1 million or 11, 9% of revenue.
Our Q4 GAAP net income was $27 4 million or $1 52 per share and included an approximate $24 million benefit that resulted primarily from the from the completion of changes made to our international tax structure.
In the quarter, we recognized deferred tax assets that will be amortized over a multiyear period effectively reducing future international taxable income.
Barring any unforeseen global tax rate changes, we continue to believe our normalized tax rate will approximate 20% on both a GAAP and non-GAAP basis.
Our non-GAAP net income was $6 3 million or <unk> 35 per share for the fourth quarter 2020, compared to non-GAAP net income of <unk> 18 per share and Q4 2019.
We continue to maintain a strong capital structure with a cash balance of $185 6 million and no debt.
And the fourth quarter of 2020 cash increased by $22 million, primarily as a result of working capital reductions and a benefit from the exercise of previously issued stock options.
And I'd also like to note that despite the soft demand environment. Our current short term inventory balance has decreased steadily by a total of nearly $11 million or 19% throughout 2020 as our operations team has done a fantastic job of tightening our inventory management processes.
Further overall combined levels and accounts receivable short and long term inventory and accounts payable have decreased by nearly $44 million from the first half of 2019 on similar revenue levels, representing a meaningful reduction in on working capital necessary to operate our business.
In summary, despite the impact the global pandemic has had on our business. We are pleased with our progress over the last 12 months.
We have executed on the necessary changes to our cost structure and.
Have now delivered on the promise of increased sales efficiency and scalability are.
Our focus on understanding and translating the voice of customer into product roadmap requirements has improved significantly and our marketing team is also on the verge of providing focused and qualified leads towards sales team that will further our go to market efficiencies.
Finally, we've significantly we're significantly more efficient with the assets required to support our operations as evidenced by our lower working capital levels and this <unk>.
Reduction provides a glimpse into the broader operational improvements we've made throughout our business.
While we remain cautious about the near term demand levels were excited about 2021, and we expect the foundation, we have built in 2020 and deliver long term profitable revenue growth and strong shareholder returns.
Concludes our prepared remarks and at this time, we'd be pleased to take any of your questions.
Yes.
At this time, if you'd like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again and that is star and wanted to ask a question, we'll pause for a moment to allow questions to queue.
Our first question comes from Greg Palm from Craig Hallum Capital. Your line is open. Please go ahead.
Yeah. Thanks, Good morning, Michael Hey on congrats on a good quarter here.
Thanks, Thanks, Greg.
Maybe to start it'd be good to get some color on maybe the cadence of activity. It sounds like Europe outperformed a bit but anything more to add and I am guessing when it was all set and on the revenue number surprise you guys.
A little bit I think we were we were taken back by the strength in Europe, we kind of discounted the traditional trends that we would see at the end of the year base.
Based on.
What we've been through this year, we didn't expect that there was a lot of pent up capital budgets to be placed and.
And certainly that was not the case and it happened in Europe and so it was a positive surprise for sure.
Yeah.
Michael has your view on the pace of the recovery changed at all on you've been pretty clear that this is this is gradual but based on what we saw on Q4 and just sort of end market demand. I mean do you think the pace is running ahead of our prior expectations or is it just too early to make that conclusion.
No I don't think it is I think we still feel and I think we've said publicly that I would be disappointed if we're not back to 2019 levels by exiting Q4 of this calendar year 2021.
But I think the recovery to that.
To that level will be gradual throughout the balance of the year and we still expect to see kind of the seasonal swings that we've gone through traditionally we don't see any reason that that won't be.
M won't be repeated.
Yes, Okay makes sense and then just as far as new product introductions go I'm curious so this year should we view that more as upgrades to existing product lines or is it something more substantial I'm thinking sort of adjacent incremental.
On something new to the market that can be incremental to what you are what youre going to market with today.
Yes, it's always a mix right youre always delivering on on upgrades from products, but.
We are also planning on doing some things that are differentiated and.
And should put us in a different position than we have historically been and when I say historic I'm talking about over the last three or four four years. So.
It's a mix Greg and.
And I am very pleased with what we were able to achieve despite working from home primarily through the bulk of 2020, but I think we've got a rhythm and I believe we will actually eclipse the number of products that we introduced in 2020 in 2021.
Yeah, Okay, all Florida here and those best of luck going forward. Thanks.
Thanks for your interest Greg I appreciate it.
Our next question comes from Jim Ricchiuti at Needham. Your line is open. Please go ahead.
Hi, Good morning, and wanted to go back to the what the business that you saw on Europe in the quarter.
And any color you can give.
Michael Earl and I would just say in terms of the metrology business versus <unk> scanning and the strength you saw there.
Yes, we saw we saw strength and <unk> metrology, particularly at the end of the quarter type of.
Forever.
We're very pleased with our scanning business overall, and conscious and Europe, but around the world and Europe, certainly led the charge there and the AUC business. So I think.
We were also very surprised.
Kind of just the the level of recovery and three metrology.
And we've been working hard on public safety and the outside of the United States and and that's begun to bear fruit and we saw a couple of relatively big deals happen in Europe and public safety. So I would say Europe in general is kind of hitting on all cylinders.
And it looks even germany's back and locked down and there are other countries talking about it I don't think that.
Should have a negative effect on.
M on the levels that we've traditionally seen and Europe. So I think Europe feels pretty strong growth right now and I think it was driven really across the board three D. Metrology was the lead followed by AUC and and some big deals and public safety.
Got it and then if we look at the other markets are North America, or APAC, which of these.
Areas of the business or maybe potentially give you a little bit more confidence that recovery and which hurts.
Maybe lagging.
That's a great question.
We feel really good about where we are in Asia and.
And.
And they were the first to recover for us and we're seeing by virtue of the way, we've restructured and we're seeing a lot of.
A lot of benefit, particularly in China proper. So China. We believe it is back and strong and we have a lot of confidence clearly right now theyre on Chinese new year holidays. So.
And Q1 will be down from Q4, and Asia, just because of that.
And probably the most concerning is North America and.
And it's spotty at best and it's really hard to predict versus Europe, and where we are with with Asia right. Now. So I think from a strength perspective, Europe was very strong last quarter Asia continues to grow and shrink and north America's lagging.
Got it and maybe one more and I'll jump back on the Q Allen.
And if I may just.
How should we be thinking about you executing against the financial model in terms of the margin profile of targets that you've laid out I mean youre.
Pretty clear certainly Q4, you you hit some of those targets and I'm just wondering as we think about the business and 21 anything we should be mindful of in terms of those targets either investments or additional potentially even the additional costs that you're and car occurring as it relates to COVID-19.
No just is there and I appreciate the question, Jim and Thats a good one.
Again, a year ago, we outlined our success model that had us at 55% to 60% gross margins. We still believe that that is a very good achievable range for US again, we were right at the lower end of that here in the fourth quarter and.
And in operating expenses, we outlined $40 to 43% on relatively flat revenue, which would translate into again approximately $40 million to $43 million, we were a bit at the higher end of that range, but I think it's more of a temporary thing caused by some some additional compensation given that the higher revenue levels that will again be reset a bit as we head.
And the 2021 overall, we still anticipate and are.
Focused on the adjusted EBITDA of 20%. That's our success model, we have every intention of delivering on that and 2021.
Yeah.
Got it.
Okay.
Thank you Jim.
Our next question comes from Andrew.
And from there and bird capital. Your line is open. Please go ahead.
Good morning.
Hey, Andrew I, just had Ah hi, I just had a few questions.
First on in terms of I mean.
This year being a little bit of an odd year given the pandemic.
And if there was about.
But just thinking about 'twenty 'twenty one.
And the seasonality that we should expect for next year because day.
I'm just wondering if theres anything that we should be mindful looking at 2020 and as we look at our models next year that the.
Don't repeat themselves, particularly given the larger deals that you saw on public safety and Q4.
No I think we are planning on and seeing evidence of the same seasonal pattern that we experienced in 2019 forget 2020, right, but and in 2019 and if you go back and historically look at Q4 to Q1 and Q1 to Q2 et cetera, we're planning on and expect.
To see that same revenue profile in.
In 2021 that we that we experienced at the end of 2018 through 19 and.
That's what we're planning on.
Got it and.
I know you can't tell us how big that feels more but like if we were to look at public safety and how lumpy. It is I mean is it.
And as is typical on.
And so as of the deal sizes that you get how does the and market.
Yes, they're typical I think what's really encouraging is if you look back historically, where we've been strong and public safety, it's primarily been North America and.
And we've been working hard over the last 18 months really trying to grow that outside of North America, and we're beginning to see kind of fruits of that labor and Europe and by the way also in Asia. So.
Asia Hasnt.
And materialize and new business, but the but the opportunity funnel is growing dramatically and so I'm really encouraged and public safety overall and you are right. They are relatively lumpy.
So.
Theres nothing unusual about the size of the deals or the lumpiness.
Deal structure that we're seeing and Europe and.
And Asia.
That's helpful. Just one on the sales force productivity I mean, obviously, that's been a big focus for you since you.
And the Faro to attack and just wondering it.
And you obviously pleased with where that ended up I was just wondering if there's anything more that you think you could get out of that not that I'm thinking of doing a good job on not just curious to know what would be the ideal level, where you're you're you think the sales force can deliver.
Yes, as we mentioned in the script, we're spending a lot of time and effort on lead generation and.
And as we said in the script, where historically, we've just thrown.
And as of leads and the individual sales guy and.
It's mind numbing to expect that people are going to follow up on all those lease et cetera, and so as a result, I think we had a very low efficiency.
We.
Just last week and introduced our new website, which is pretty exciting and if you get a chance you should check it out and it's a completely new look and.
And that's kind of.
Will act as the front end, but behind that front and we have put in.
A lot of time and effort and money and a technology stack behind that that will help our corporate marketing people our product marketing people direct leads to our to the right sales Guy and the right region and the right market set that that basically adds more value than what we've been doing historically.
We think that will will be another productivity hit upside if you will for the sales for the selling organization and then of course, you know as as we begin to add more and more value by virtue of the products that we're offering to the market the hit rate of opportunity conversion to revenue.
Continue to improve and so yeah, I think theres a lot to be done still in terms of improving the productivity of our sales force, but we're pretty excited about having a metric to share with you and.
And to show the first first substantiation is that productivity improvement, but there's more to come.
That's great and then last one for Alan just.
And just in terms of the model on the Opex side going forward I mean, some companies. We're speaking with are starting to assume that the second half of next year kind of see a resumption and travel Mara.
Getting I guess conferences and the like.
Should we assume a similar kind of trend in terms of sales and marketing costs for that for 2021.
Yeah, we certainly today have.
Less than normal or less than typical.
Travel and related expenses within our run rate.
We have however increased some of that activity as we exited.
2020, compared to what it was and the earlier parts of 2000, Twenty's and so certainly Q4 was higher than and the second quarter and third quarter as an example.
We still despite that we still remain very committed to that $40 million to $43 million and staying within that range as we continue to grow revenue.
And.
And that will then ultimately enable us to deliver the model that we've talked about earlier, but so you might see us drift a little bit higher as the year goes by due to that as well as due to some of the R&D investments that we've talked about previously, but we still expect to stay within the range.
That's helpful. Thank you.
Mhm.
Okay.
Once again that is star and wanted to ask a question.
Yeah.
We have a question from Ben Rose from Battle Road. Your line is open. Please go ahead.
Yes, good good morning, Alan and Michael.
Couple of questions.
Was curious too.
Ask you a little bit about the performance this quarter, specifically of the Faro gauge.
And factory metrology as well as the.
Our focus swift on the <unk>.
Scanning.
And whether these products were meaningful contributors.
But they are there are there new in terms of.
Adoption.
Pleased with both.
On.
I guess I'm on.
Pleasantly surprised with the.
Gauge adoption rate and.
I think that it kind of goes hand in hand, with some of the three D metrology recovery and Asia and in Europe.
<unk> is a is very positive.
Mobile scanning I think is a trend that we have to capitalize on and we're spending a lot of time and effort on mobile scanning and Swift is really.
Arguably our first real flagship product in that space, and we expect that to continue to ramp.
The ASP differences between the two are significant.
So.
Yes, I am pleased with both of them and we will continue to.
To innovate and both both and the articulating arm and the mobile scanning space in 2021.
Okay and.
Curious specifically within <unk> within <unk> and metrology.
Ryan you had commented earlier in the call that you were pleased with.
And how this segment is how the segment is performing and I'm curious to know which of the end markets that you serve.
Appear to be coming back the fastest in terms of their investment and <unk> measurement.
Well you know, it's an interesting interesting phenomenon, we're seeing automotive coming back pretty.
Pretty strong actually and.
And particularly in Europe, and then and <unk>.
Uh huh.
And we're seeing the smaller machine shops.
And coming back with some with some force with the exception of North America, we're not seeing broad based recovery in America, and the and the small to medium machine shop area, which.
I think that is kind of a holdover from where we are on the pandemic and.
And for example, the west coast and stronger than the East coast.
And the automotive space and North America is not.
Where we're seeing the recovery as it relates to Asia and Europe.
So and aerospace and general is still lagging 2018 2019 levels, we are seeing activity.
In terms of projects quoting that type of thing, but theyre not pulling them not pulling the trigger in terms of purchases.
So.
Was that helpful is that what Youre, yes, yes, yes.
That's a very very very helpful.
On a broad overview and if I may just one for al and it looked like.
The services gross margin was.
Very strong in Q4, and I'm curious to know.
Does that have to do with the.
So sale of extended warranties for products or.
Whether that kind of level can be sustained and.
Into 2021.
And I think we saw a couple of small items within services that enabled us to have a little bit of a onetime pickup and margins I would expect that the what we've demonstrated over the last over and over a longer extended period is more what we would expect moving forward.
Nothing nothing.
Out of the.
Overall, nothing out of the ordinary November okay.
Alright, thanks, very much thanks Pat.
It appears that we have no further questions at this time I will now turn the call back over to our speakers for any additional closing and an additional or closing remarks.
Well, we thank everyone for listening we are very excited about where we are as Alan said in his script. We are very much looking forward to 2021 and.
We appreciate your attention thank you Patti and next quarter.
This does conclude today's program. Thank you for your participation you may disconnect at any time.