Q1 2021 FARO Technologies Inc Earnings Call
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Good morning, everyone and welcome to Faro technologies first quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to Michael for and Ari at Sapphire Investor Relations. Please go ahead.
Thank you and good morning, with me today from fair or Michael Burger, Chief Executive Officer, and Allen <unk> Chief Financial Officer.
Yesterday after the market closed the company released its financial results for the first quarter of 2021.
And the related press release and form 10-Q for the first quarter are available on Faros website at Www Dot Faro dot com to.
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. It is possible and the company's actual results may differ materially from those projected and these forward looking statements important factors and a decision discussion of the risks and uncertainties 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 31, and form 10-Q for the quarter on March 31 2021.
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.
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 and in isolation or as a substitute for a measure of financial performance prepared in.
And with GAAP.
Now I'd like to turn the call over to Michael.
Okay.
Thank you, Mike Good morning, and welcome to our call.
First quarter demand for our products reflected a combination of expected seasonality as well as ongoing improvement as our markets continue to recover from the adverse effects of a pandemic.
On a geographic basis each of our served regions exhibited similar levels and seasonal softness.
Within our end markets, we saw broad based seasonality in line with historical trends service revenue, which typically does not have and seasonal component through incrementally on from fourth quarter levels.
Okay.
While near term demand remains below 2019 run rate levels. We continue to believe order activity will improve throughout 2021 as our customers' activities normalize.
And combined with our new cost structure, we continue to have line of sight to achieving our stated success model once revenue levels returned to 2019 levels.
That said, we remain cautious and its market uncertainties, such as global health conditions and semiconductor supply chain shortages may adversely affect near term demand for our products.
And in February.
Apparel celebrated its 40th anniversary, providing an opportunity to acknowledge the contributions and several generations of apparel employees, whose commitment and hard work and created the business we have today.
As and as historically engineering led organization Faro has been a pioneer and developing many of the core measurement technologies used in the industry and as such earned a reputation for being an industry leader and three dimensional measurement in terms of quality and accuracy.
As we look to the future apparel, our strategy is to leverage both our core technology and reputation Faro has created and transition to a marketing led organization focused on understanding the problems. Our customers are trying to solve and delivering hardware and software solutions to meet those needs we believe.
And this will create long term differentiation.
Transitions like this take time.
And begin with developing a better understanding of deeper understanding of our customers and what they are ultimately looking to accomplish with our products from.
And for Faro, dismount, forming a new product marketing organization with a primary focus on capturing voice of the customer and argument and order to ensure our product roadmap is in alignment with our customers' workflow to generate the greatest value possible.
To provide a simple real World example of how this works we can look to the AUC or construction market and specifically the task of pouring concrete.
For large warehouses, requiring precise level floored flatness of.
A typical process is to pour the concrete Medicare.
And measure to verify the floors within tolerance and the floors out of tolerance and.
Emmanuel and expensive processes employed to rework the Florida create the desired result.
My understanding both the process and the problem, we have developed a solution by work whereby before it can be measured with high precision while the concrete is still curing the data and analyze quickly on site and at the floors out and tolerant tolerance actually can be taken to resolve the situation before caring is complete.
Therefore, therefore, thereby saving time and expense associated with rework.
This solution and when combined with the right sales training a targeted lead generation process will ultimately lead to new opportunities that were previously not realized given our historically generic market messaging.
It is this alignment of customer needs and product Roadmaps and supported by and evolving go to market strategy that we believe will enable us to differentiate our solutions and capture share and our targeted markets.
We are presently targeting 26 different workflows over three markets.
Which will ultimately create and ever growing library of solutions that will enable our sales team to move beyond selling scanners arms and trackers to selling comprehensive solutions, which align with our customers' applications.
Our increased focus on voice of the customers and influencing our solutions roadmap and we continue to expect a steady flow of product announcements throughout the balance of the year.
We believe taken together this approach will add more value to our customers and ultimately drive enhanced financial performance at apparel.
Yeah.
In addition to product development alignment, we also understand that and software drives a larger portion of value into our solutions. It is important to aggregate, both our legacy and future software applications into a single cloud based platform, enabling customers to seamlessly leverages suite of applications for the problems. They are looking at.
To solve.
In addition to delivering a unified user experience a cloud platform can also enabled customers to capture and upload data in the field.
Leverage cloud resources to process and analyze this data and real time.
And to access the resulting information and NATO and collaboration both within and across organizational boundaries overtime.
Taken together this forms the basis for our strategic transition, namely developing a deep understanding of our customers' workflows, which could be translated into product features that will enable our hardware to capture better data faster.
Providing customers with increased software intelligence that enables more day to automated and finally enable them to access their information everywhere through a cloud based architecture.
Okay.
With that I'll turn the call over to Allen for an overview of our first quarter financial results.
Thank you Michael and good morning, everyone.
First quarter revenue was $76 3 million was down 4% when compared to the first quarter of 2020 as a result of continued market softness caused by the pandemic.
Product revenue of $54 6 million was down 3% and service revenue of $21 7 million was down 6%.
Bookings of $80 6 million grew 3% year over year.
Both GAAP and non-GAAP gross margin approximated, 53% for the first quarter of 2021.
Gross margin remained lower than last year, primarily due to lower fixed cost absorption on lower overall demand as well as the ongoing higher demand for lower priced product configurations.
We remain confident and our ability to achieve our 55% to 60% gross margins when revenue returns to pre pandemic levels.
GAAP operating expenses were $46 8 million and included approximately $2 6 million and acquisition related intangible amortization and stock compensation expenses.
And $1 5 million and restructuring costs.
Non-GAAP operating expense of $42 8 million was $1 5 million lower than Q1 of 2020 as the prior year period only included a partial benefit from the cost savings related to restructuring actions announced last February.
GAAP operating loss was $6 4 million for the first quarter of 2021, compared with an operating loss of $16 6 million for the first quarter of 2020 due to the restructuring related expenses incurred last year.
Non-GAAP operating loss was $2 3 million and the first quarter of 2021 compared to a $200000 loss and the first quarter of 2020.
Adjusted EBITDA was approximately 400000.
Our GAAP net loss was $3 2 million or <unk> 18 per share our.
Our non-GAAP net loss was 600000 or <unk> <unk> per share for the first quarter 2021, compared to non-GAAP net loss and <unk> per share in Q1 2020.
Included in the first quarter other income and expense.
With a $1 million gain.
Associated with the Remeasurement, our global cash balances as a result of changes and foreign currency exchange rates and.
As well as the receipt of $300000 of COVID-19 related for and incentives.
We continue to maintain a strong capital structure with a cash balance of $170 million and no debt.
The Q1 decrease and cash was primarily a result of a $12 $3 million payment made to the U S government as a result of the satisfactory resolution to our previously reported and reserved GSA matter that was finalized and closed and the first quarter.
While we expected the combined impact of both the pandemic and our typical first quarter seasonality and are fortunate to have taken the cost reductions cost reduction actions last February we're not satisfied with our near breakeven non-GAAP profitability.
We are looking forward and demonstrating our ability to capitalize on continued market improvements that when combined with our new cost structure will ultimately yield our 20% adjusted EBITDA and success model.
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 a question. Please press the star and one on your Touchtone phone.
Move yourself from the queue at any time by pressing the pound.
Once again that is star.
And wanted to ask a question.
Pause from moment to allow questions to queue.
And we'll take our first question from Jim Ricchiuti from Needham and.
And.
Your line is open. Please go ahead.
Thank you good good morning.
Yeah, I know Q1 is not a not a good indicator just given given the seasonality of the business, but I wanted to maybe focus a little bit.
On whats Youre seeing and the business geographically because just looking at it on a year over year basis. The U S was maybe off a little bit more than we would've thought as was right was APAC just just given yeah and some of the signs of recovery that we're seeing.
Right.
Yeah and that we.
We continue to.
Again, I think Asia was the first to really show some signs of improvement and.
And we've seen that as you know Q3, Q4, we've seen Asia coming back pretty nicely.
And I think seasonality.
From a seasonality perspective, certainly Chinese new year as it is.
The big effect in Q1.
And North America continues to struggle I think we're seeing the northeast opening up a little bit more which is which is encouraging the west coast has been relatively strong the west coast and southwest for us, but the north East has continued to struggle.
And we're seeing signs of recovery now, which is really good I think the automotive space and we're also seeing signs of life and the Detroit area, which is helpful. So we're encouraged by what we're seeing in terms of funnel build and quoting activity, but Q1, we expect it to be to be down.
Europe continues.
<unk> continues to to and process and with its recovery and even though we're.
And we're seeing locked.
Lockdowns and places like Italy, and and and the Netherlands, We were pretty encouraged by what we're seeing and Europe.
Got it Hey, Michael I was intrigued a little bit by that.
Use case and this.
Identifying these 26 different workflows and I and I'm wondering can you talk a little bit about maybe.
What are the top three.
Three or four of these workflows might be or are you now is it still puts your old.
Well, we're going to end up talking about these very much like when we talk about products and so you know.
And.
For construction and the ASC space poor flatness is one and in public safety.
Forensics, where we've been strong in the past, but now we're putting together a complete workflow.
Around for example, ballistics or blood spatter are examples of workflows that borger and adult on.
And three D metrology and digital twin will be a big part of are or will be one of our leading workflows and the three D metrology slash AUC space.
Okay.
Got it any and last question just if theres any color you could provide in terms of.
And what you might be seeing and the kind of book and ship.
Short cycle business for the current quarter.
Yeah, it's encouraging I think.
Honestly, Jim the reality is Q1 and the seasonality actually returning to a seasonal kind of cadence is encouraging for US frankly, you know.
None of us really knew what kind of cycle to expect weeks.
And we were planning and forecasting around a seasonality March whereas Q1 typically is our softest quarter and then we begin to Q2 is better and Q3, we we kind of go sideways based on the European Vacations, and then Q4, if that holds and then I think R. R.
Our.
I wouldn't say forecast, but our our.
Yeah.
Prediction is that we'll end up.
And Q4 of 2021 right back to.
Similar levels in 2019, and that's what we said a year ago, and we're holding to it and it looks like it's coming true which is great.
Got it thanks, a lot thanks.
Thanks, Tim I appreciate your interest.
Yeah.
And next question comes from Greg Palm from Craig Hallum. Your line is open. Please go ahead.
Hi, guys. This is Danny aggregate John's been dragged day.
And then just looking from an end market standpoint, just wondering if there was if we could get a little more color. There. If there was any outperformance or underperformance relative to your expectations and the corridor.
Sure.
And we've seen them.
We've seen the ADC market and construction business continue to kind of build some strength, even though you know seasonality, we we saw softness across the board but.
And we expect that and as it relates to looking at past years, AUC seems to be pretty strong.
And public safety is a small market for us, but where we're showing signs of penetration both in Europe, and Asia, which is new for us and exciting three D. Metrology is really kind of the the last hold out if you will from a recovery perspective, and that's where we saw some nice recovery in Europe and three D. <unk>.
G, but as Jim Ricchiuti was asking and we've seen.
The north east and kind of north central portions of the United States still continued to be solved and that's and that's a big part of our three day metrology market and you know in North America.
Got it that's helpful and then and I appreciate all the color on on maybe new product and draws as we go on throughout the year, especially that where any update on on maybe a timeline for that for that kind of aggregated.
Software offering launch.
We were still planning on the second half and we're working our butts off for it it's a it's a big thing for us.
As it relates to the total cadence and 2020, we introduced about 10, new products and I think last quarter. We mentioned that will will do better this year and and we're on track for that.
Great and then.
And as it relates to that and and Opex.
How should we look at Opex with these new product launches come on maybe remain a little elevated as we move.
Throughout the year.
I think from this is Alan from an operating expense standpoint, again, our success model has us being around that $40 million to $43 million level.
And we were at the higher end of the range. Obviously in Q1, I think we would expect to remain approximately in that range as we continue throughout the balance of the year.
Okay, Great. That's it from me thanks for my questions.
Thanks, Dan appreciate it.
Yeah.
We'll take our next question from Andrew.
Yes.
From Baron Berg Capital. Your line is open. Please go ahead.
Hi, This is Alex Ross on behalf of Andrew the Asbury and thank you for taking our question.
And on to the auto industry, you have heard that auto manufacturers are cutting production from that and you started so and just wondering if you've heard anything from your customers about that and how do you think.
Yeah.
Yeah.
We're fortunate and in a sense that b.
Automotive capacity is not a direct tie to capital purchases for our products as we are primarily offline.
So we're not tied directly to kind of ebb and flow of capacities, which I think bodes well for us.
That said, however, with the press revenue levels spending on capital.
May take longer longer cycles, and we believe that that's part of the reason that we've seen are kind of the northwest or the northeast and the.
And north central and kind of slow.
Because the automotive world has not really fully recovered yet I think semiconductor shortages part of it yes.
Okay. That's helpful and if I could just ashwin Laura on the competitive landscape, how do you see and any change and competition and competitive.
No nothing dramatic I think price.
Were fortunate and that we've got some pretty good competitors and in the context of how they price their products.
We're a we haven't seen anything unusual or anything that or any new competitor of merit.
Great. That's it for me. Thank you. Thank.
Thank you and thank you for your questions.
Right.
Okay.
Our next question comes from Richard Eastman from Baird. Your line is open. Please go ahead.
Yes, Thank you and good morning.
Good morning, Mike.
Good morning, Richard.
On a very quick question Michael.
And Michael you, you've alluded a bit to the supply chain.
Issues that we're seeing everywhere and I guess at this point.
And is it your your perspective that maybe that's more of a top line impact.
For Faro, just when you think about your customer base and their inability to produce and and.
And spend for that matter or or as you know.
Are you seeing some impact around your gross margins on the product line side for that.
No. It's the the semiconductors situation hasn't really impacted us directly and the context of building our own products. So I think we're fortunate and.
At least two to this stage.
And.
So I think it's more of a second order effect and and and.
And affecting our customers' ability or confidence to actually build capacity, which ultimately I think depresses earnings and when earnings are depressed and then you basically have an effect on on capital buys.
And typically what we've seen in this situation is not so much that we the opportunities go away. They just get pushed out because capital signature authorities typically.
On.
A long day, so I think I think the effect may be pushing out of revenue for us.
Relatively short term.
Okay, and thats, it thats going to be more on the <unk> measurement side as well.
Presumably yes.
Yeah, I actually yes.
Across the board globally, you know automotive automotive and three D metrology and general I think we'll probably be affected the most.
Okay. Okay.
And then maybe just a quick question around you know I noticed in the in the queue.
There was some inventory obsolescence charges taken.
And what did that do to the to the product gross margin in the quarter.
Maybe this huh.
And he says.
On it.
Let me talk about how that occurred and then I'll, let al talk about the financial implications.
As you know we have been pretty critical and I think I'm very aggressive in terms of looking at our product portfolio and the situation. There was a product that was being developed but we did not believe was going to be competitive or cost effective. So we ended up.
Basically canceling that product and redirection and R&D elsewhere and.
And then.
Salting and the result, resulting of that move was basically some excess inventory and.
Go ahead.
Yeah, and the impact on the quarter financially from a margin standpoint on the overall.
Our revenue profile was just a bit north of one percentage point.
Okay. Okay.
And gross margins and then yes.
And then just this product mixed dynamic we've spoken to this before and and I understand you know again this kind of mix issue a shift maybe towards lower lower price point product.
Again, presumably and three D measurement and you said.
Is that kind of stabilizing here in terms of product mix impact.
Yes. It is.
I think on a quarter to quarter basis, we have seen it stabilize which we think is positive.
And Oh go ahead.
And maybe just to add a little bit there I think our product marketing team initiated a couple of actions in the quarter and frankly, they had a little bit of a positive impact. So I think we saw not only stabilization, but a bit of improvement and that mix, but it's still relative to historic levels a bit worse than we were at previously a year or two ago.
Mhm, Okay, Okay excellent all right well thank you.
Thank you.
Once again that is star and one to ask a question.
Our next question comes from Ben Rose from Battle Road. Your line is open. Please go ahead.
Yes, hi, good morning.
Michael and out.
Just a question you had mentioned the digital twin use case.
Right on the three D metrology side and I know that you have had some.
I believe interesting evaluations going on and perhaps and some of the European automotive companies for the use of digital twin technology could you speak.
Two dose could you speak to those evaluations and perhaps.
And you think they might stand.
And don't really have an announcement today as it relates to where we are with customers, but I will say that.
I'm.
Super excited about where we are with digital twin and the evaluations that are ongoing.
Boeing have the increase in terms of the number of evaluations and the feedback continues to be extremely positive and leveraging the acquisition that we made a.
T S. Sweden, So we're really I think we're actually making making great progress.
Great Great and then on the public safety side, I know, you mentioned last quarter and it sounds like even this quarter some pretty good.
Opportunities and public excuse me public safety.
Could you speak to.
That part of the business in North America, and perhaps how that's performing.
Including seasonal.
Impact.
And.
And General North America continues to be our largest market and for public safety and we're continuing to make I think positive and roads. The sales cycle for public safety is quite a bit longer than our other products and even including construction.
So when we're selling to municipalities and and.
And townships if you will and so in many cases that that sales cycle takes time and in Europe, and Asia and in many cases, we're selling other country level, which actually as you can imagine it takes even longer so it's it's a it's.
It's a marathon not a sprint and we did expect to see some seasonality as many municipalities are on a fiscal year and so many of them have are in the process of getting new budgets for the year, which impact their ability to buy equipment and so that you know the process.
To start it all over again, there's some uncertainty about obviously funding and particularly police departments and so there's some concern about you know, let's make sure that our our capital budgets are intact before we.
And we move that said our funnel for public safety continues to grow and it's quite healthy healthy both in North America and and external.
Okay, great. Thanks, very much Youre welcome. Thank you.
And it appears that we have no further questions. At this time I will now turn the program back over to our speakers for any additional or closing remarks.
We really appreciate everybody's attention today, and you know, you're obviously and we look forward to giving you an update next quarter. Thank you very much.
This does conclude today's program. Thank you for your participation you may disconnect at this time.
Yeah.
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