Q2 2021 FARO Technologies Inc Earnings Call
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Yeah.
Good morning, everyone and welcome.
Today's Faro technologies second quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead.
Yeah.
Thank you and good morning with me today from Faro are Michael Burger, Chief Executive Officer, and Allen <unk> Chief Financial Officer.
Yesterday after the market close the company released its financial results for the second quarter of 2021, and the related press release and form 10-Q for the second quarter are available on Faros website at Www Dot Faro Dot com.
Please note certain statements in this conference call, which are not historical facts may be considered forward looking statements that involve risks and uncertainties.
2 statements regarding future business results product and technology development customer demand inventory levels, economic and industry projections or subsequent events various factors could cause actual results to differ materially.
Some of these factors have been set forth in yesterday's press release and are described at length in our annual and quarterly SEC filings.
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.
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'll find additional disclosures regarding these non-GAAP measures, including.
It includes conciliation to comparable GAAP measures will 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, welcome to our call.
Demand for our products in the second quarter reflected a return to a seasonal growth and terrific.
Following that typically soft first quarter on.
On a geographic basis, the Asia Pacific market and in particular, China performed well.
While euros.
U S and Europe markets continue.
Continue to recover, albeit at a slower pace.
With the second quarter improvement across our served markets. We continue to believe the demand environment will improve throughout 2021.
Customers' activities normalize.
Taken together with our ongoing flow of new product introductions.
We believe year end demand levels will be similar to those experienced in the fourth quarter of 2019.
That said, we remain cautious as market uncertainties, such as the continuing softness in commercial construction starts the prioritization of capacity expansion over quality control initiatives and the ongoing steps local.
<unk> take to combat the pandemic may adversely impact the ultimate slope in the timing of a recovery.
We remain.
Focused on laying the foundation for expanding the breadth and depth of our product offerings, while streamlining our operations to continue to.
To capture the long term opportunities ahead.
As discussed in our prior calls Faro is in the process of transitioning to a marketing led organization focus on understanding our customers' problems and delivering hardware and software solutions to meet their needs.
As an example of these efforts.
An example of this effort can be found in our recently announced quantum Max.
M arm solution quantum Max was conceived by identifying our customers' need for both speed and accuracy.
As a result, we have developed an advanced portable measurement solution, which features 3 purpose built hot Swappable laser line probe each of which offer a distinct.
Scaffolds for specific use cases.
The XR probe.
<unk> 30 per cent better accuracy and resolution for high precision measurement tasks.
Ex S increases scanning speeds by over 65 per cent and versatile XP offers a balance of the ex ours resolution and the ex.
Some speed.
Unlike prior physical arm solutions, the quantum Max allows customers to swap laser heads on the fly, creating a versatile tool, which meets a wide spectrum of speed accuracy and resolution needs in a single solution.
This unique solution results in our productivity and value.
<unk> increase of over 30% compared to prior generation devices.
Another critical component of the scan arm solution was the launch of our latest version of <unk> to.
Our metrology software, which greatly improve scanning with our new laser products.
The combination of our new arm probes and the latest software we believe.
We've set a new standard in the industry from a trial metrology grade measurement solutions.
Why are we continued to introduce new solutions throughout the year, it's worth highlighting that between launching a workflow solution and generating meaningful revenue takes time.
That said, we are very encouraged by our recent customer.
Back.
In addition to our internal product development Roadmaps, we continued to expand the breadth of our offerings through acquisitions.
Building off last year's a T S acquisition, which focused on high precision digital twin applications and the second in the second quarter, we expanded our capabilities with the acquisition.
<unk> vision of hollow builder.
A leading photogrammetry based 3 D platform, which delivers hardware agnostic image capture registration and viewing.
With an initial focus on construction management Hollow builders platform provides general contractors, a solution to efficiently capture and virtually manage.
Acquisition construction progress using off the shelf panoramic cameras.
Hello builders SaaS platform, that's a fast and easy reality capture photo documentation and remote access capabilities to faros highly accurate 3 D point cloud based laser scanning to create an industry's first end to end digital twins.
<unk> solution.
The combined solution will provide a comprehensive scanning and image management capabilities for digital twin market aimed at robotic assembly stimulation construction management facilities operation and management and incident preplanning and the public safety market.
Ultimately.
Twins, those digital twin capabilities will be brought into our soon to be announced cloud based solution, which we call barrels sphere.
With its underlying subscription model, representing Faros future long term software and go to market.
Yeah.
Shifting to operations 2 weeks ago, we announced the signing of an agreement to outsource.
Our manufacturing to Sanmina Corporation.
That's the next step in our business transformation, we plan to transition barrel production from 3 manufacturing sites in Lake Mary, Florida ex in Pennsylvania.
Stuttgart, Germany to Sanmina facility based in Thailand.
Following a rigorous selection process.
It doesn't mean as our partner based upon their proven ability to deliver quality products.
On the required timelines.
Together, we are very confident in our ability to meet our customers' demand throughout this transition process.
Once complete our new operational model greatly simplifies operations.
We chose reduces cost and allows our management team to focus on the development and sale of differentiated solutions to customers in our target markets.
Alan will discuss the financial impact of these changes in the P M on us.
Taken together these actions form the basis of our strategic transition, namely developing.
A deep understanding of our customer workflows, which allow us to further differentiate our capabilities in the marketplace. While at the same time, placing a solid operating structure in place to ensure incremental topline growth translates to greater operating leverage and higher shareholder value overtime.
Finally, we announced the election of 2 new members.
2 our board of directors.
As previously disclosed a key element of enabling our successful transformation is ensuring that we maintain the right experience that on our board to help guide us I.
I am, particularly pleased with the addition of new Moon, He Chen and Alec Davern to the apparel board they.
They each have demonstrated success.
Members, leading hardware and cloud based software businesses in markets that are closely aligned with our strategic direction.
I very much look forward to their contributions as they officially join us on October 1.
With that I'll turn the call over to Allen for an overview of our second quarter financial results.
Thank you Michael and good morning, everyone.
Quarter revenue of $82.1 million grew 36% when compared to the second quarter of 2020 as a result of continuing market demand improvement compared to last year's market softness caused by the pandemic.
Product revenue was $60.3 million was up 43 per cent and service revenue of $21.
8 million was up 19% bookings.
Bookings of $88.2 million grew 44% year over year and were slightly ahead of revenue in the quarter Cigna signaling a modest building a backlog.
GAAP gross margin was 55, 4% and non-GAAP gross margin was $55.7 per cent for the second quarter of 2021.
Gross margin increased year over year and sequentially largely due to volume increases versus prior periods, our second quarter material cost did not reflect inflationary pressures prevalent in today's market that said, we do anticipate material cost headwinds to modestly affect gross margins in the near term.
GAAP operating expenses were 40.
$6.1 million and included approximately $3.6 million in acquisition related intangible amortization and stock compensation expenses and 800000 in restructuring costs.
Non-GAAP operating expense of $41.8 million was $4.1 million higher than Q2 of 2020 as we continue to increase our software investments.
As a portion of the travel related expense savings realized during the pandemic began to return cash.
GAAP operating loss was 700000 per the second quarter of 2021, compared with an operating loss of $12 million per the second quarter of 2020, primarily due to lower volumes in the prior year period.
Non-GAAP operating income.
<unk> was $3.9 million in the second quarter of 2021 compared to an $8.1 million loss in the second quarter of 2020 adjust.
Adjusted EBITDA was $6.5 million or approximately 8% of revenue.
Our GAAP net loss was $1.2 million or <unk> <unk> per share on.
Non-GAAP net income was 2.
$2 million or <unk> 12 per share for the second quarter of 2021 compared to a non-GAAP net loss of 36 per share in Q2.2020.
We continue to maintain a strong capital structure with a cash balance of 133 million and no debt.
The second quarter decrease in cash was primarily a result.
2 point acquisition of hollow builder for which we paid $34 million in cash.
With the addition of hollow builder and ongoing investments in our core software platform. Our quarterly non-GAAP operating expenses is expected to increase to mid $40 million run rate as a result to achieve our target model of 20% EBITDA margin.
Margins are quarterly revenue level has increased to $110 million versus the $100 million objective previously set.
Given the long term opportunities within the digital twin market. We believe these are the right investments to ensure future growth.
Offsetting the spend over the midterm, we recently announced our plans.
The <unk> and outsource our manufacturing.
<unk> transitioned to Sanmina is expected to be completed over the next 12 months and results in approximately $12 million in annualized labor and material savings when complete.
We believe the expected savings will have a negligible impact on 2021, followed by steady improvement through 2000.
22, with the full benefit to be realized in the first quarter of 2023.
The company expects to incur a cash charge of approximately $6 million in the second half of 2021, primarily consisting of cash severance.
Total pre tax charges of $15 million to $20 million are expected.
Through the first half of 2022, when including the impact of facility and other asset write down.
With these charges the company expects it will fully realize the $75 million to $85 million in restructuring charges announced in February 2020.
We're pleased and the continued end market demand improvements in the organic.
And inorganic progress, we're making towards realizing our strategic vision of hardware software solutions that solve our customers' real world problems in a cloud based environment.
With the addition of hollow builder, our end to end solution for digital twin management positions us well to capitalize on this large and growing market we.
We have line of.
Site to completing the transformation of our cost structure with our new manufacturing partner Sanmina.
Lastly, we remain committed to the achievement of our financial success model, which as a reminder, as to achieve 55% to 60% gross margin with 40% to 43% operating expense, resulting in 20% adjusted EBITDA that we.
Again, it will be realized with approximately $110 million in quarterly revenue.
We look forward to reporting our continued progress in the coming quarters.
This concludes our prepared remarks at this time and we'd be pleased to take any of your questions.
At this time, if you'd like to ask a question. Please press star 1 on your Touchtone.
Expense you may remove yourself from the queue at any time by pressing the pound key once again that is star and wanted to ask a question, we'll pause for a moment to allow questions to queue.
We'll take our first question from Greg Palm from Craig Hallum Capital. Your line is open. Please go ahead.
Yeah. Thanks, good morning, everyone.
1 I guess, just starting off with the orders it looks like orders outpaced revenue by a decent amount in the quarter. So was there anything you know supply chain related or was that just simply orders received late in the quarter that weren't able to ship just kind of curious if you're seeing any kind of supply chain related logistics issues out there.
Yes, we've experienced some yes.
The order rate was backend loaded for the quarter and so we ended up basically pushing from some of the booking over into Q3.
It's hard to say if that was really supply chain related from a customer perspective.
But we didn't we've seen some logistics issues throughout the quarter, but it really didn't impact the end of quarter revenue. It was more around when we actually receive the order.
Okay. It makes sense and Alan I think you said something about elevated material costs I don't know if that was an impact at all in.
The June quarter, but how should we be thinking about that impact going forward.
Yes.
Right. Good question not much of an impact in the second quarter, we do expect to see some.
Material increases in the third quarter that said, we do have some opportunities to be able to pass those along to our customers and so as I indicated in our prepared.
Perspective, we would expect some modest impact to our gross margins here over the near term depending upon it ultimately how.
The length and duration and depth and change in changes of these material cost, but again at this point in time, we think it's relatively modest but.
Maybe a little bit more towards the lower end of the range.
Repaired women's day.
The middle of the range, which is where we've been operating.
Okay got it and then in terms of the kind of increasing opex some of the investments.
I think most of us understand what the opportunity is but maybe for those that don't can you just go into a little bit more detail.
On sort of the excitement and opportunity around digital twin because it certainly seems like a kind of a theme that lots and lots of companies are starting to talk about.
Yes, I think digital twin is the manifestation of <unk>.
I think many of our customers desire to plan.
Versus both facility changes or <unk>.
Facility layouts or.
In some cases.
Public safety incident planning to be able to actually have a very accurate.
Model in a virtual environment that allows you to plan and I think the better your plan.
<unk> waste and I think we all know in the construction space and and frankly running factories..1 of the biggest issues. You have is how do you how do you minimize waste and digital twin is becoming.
A catch all if you will and in digital twin means different things to different people, but our digital twin is a physical representation.
<unk>, the space and the ability to take that space and it's as close to accurate.
As close to the truth as you can and then change it virtually and plan all in the context of reducing waste. It seems that it is to your point.
A kind of a catch all but it definitely.
It's a conversation we're having with a lot of customers a lot of customers that we didn't really anticipate having that conversation with.
Got it.
Interest in and then just last 1 so the the EBITDA 20 per cent run rate with the revenue increasing to a $110 million to achieve that.
<unk> what would that number look like if you were if you were to be able to capture all of the savings from the the manufacturing outsourcing would that number be closer to the number you've been alluding to in the past just sort of curious how how that will affect that number once those are those costs are fully realized.
But I guess.
So it's a very good question and I think that the.
The timing and you picked up on the new ones right. The timing difference between the expenses coming on with the hollow builder acquisition versus our ability to be able to realize the savings with our outsource manufacturing does cause over the next.
See I would call it.
<unk> months to 18 months.
An adverse impact on our model I do think that there is a path towards getting to that 20% EBITDA on a lower revenue number or at the higher revenue number over achieving that 20%, but we're not ready to commit to that just yet.
Okay.
Alright, thanks for the help best of luck going forward.
Thanks, Craig.
Thanks, Mike.
Our next question comes from Jim Ricchiuti from Needham <unk> Company. Your line is open. Please go ahead.
Hi, good morning.
Question wanted to talk about.
Let's.
That's fair value that Youre seeing you normally experience in this quarter and I'm wondering if there's anything that you've seen in the first month and that may not be a fair question just given how back end loaded typically the quarters are but is there anything that you're seeing that you might be able to share with us that give us a little better sense is.
The momentum might be.
Entering Q3.
Actually we've started Q3 pretty.
Typical fashion as we have probably most quarters.
We're typically backend loaded within the quarter and I think.
The concern that we all have.
Around Q3 is typically the vacation.
M. The broad based vacations that our customers are experiencing in Europe, which typically starts in August so the first part of the quarter as kind of as expected, but again, we're not really.
We traditionally see August kind of take a sideways step.
And that's that's borne out in our history Q2 to Q3 over the last several years so.
<unk> started off pretty normal and.
We're anxious to see how August stacks up.
Okay.
On the transition to Sanmina.
Maybe this question.
Yes.
Is there a is there any reason why as this process really gets going you would see shelf or be able to realize some sort of supply chain benefits just from some of their their buying tower yeah.
I know you're talking about seeing opportunities.
In 'twenty to gradually over the course of the year, but I'm wondering how to think about just some of the supply chain benefits at what point do they perhaps take a more active role on that side of the business.
Yes, it's a good question and again I think as we've articulated the savings opportunity we have indicated that.
There's both a labor and a material component.
As everybody knows our manufacturing has been centered in a couple of locations you asked and 1 in Germany and the supply chain for those manufacturing are localized to those facilities. So as we move more toward day Sanmina, Thailand.
Land based facility there is an opportunity absolutely too.
2.
Enhance the supply chain from a cost standpoint at the same time leverage sanmina purchasing power. So we do think that there is an opportunity for decreased material cost savings as time.
It goes by and that's built into the numbers that we've been talking about Jim.
But I would also really ahead of the move to Thailand, you really need to be there with them before you're really able to realize some of that buying the purchasing power that they have.
I think that's correct.
I would say from a from a cost perspective.
Correct, but what Sanmina has already begun to help us in some of the hard to source materials.
US in advance of actually the announcement.
In anticipation thereof, they've been they've been a big help so we're excited about what we think they can do maybe not not short term in terms of better pricing.
On materials, but really access to materials.
Got it and then just a question on the Danish.
The initiatives you have underway to build out the recurring revenue on the software side are there other.
Deals out there to hollow builder that you see.
<unk> areas.
Actually hold the most day interest per year.
I think.
Having the ability to actually capture.
Whatever the truth is from the truth is the actual measurement.
There are technologies out there.
<unk>.
Which we're looking at nothing that's burning a hole in our pocket at this at this juncture, but theres a quite a few companies that are kind of getting into this space. If you will from a software perspective, or a algorithm perspective that that speeds up either our processing or as in Harlem builders case adds a completely different technologies.
<unk> that we didn't really have commercially so we're looking at all of those Jim but again theres nothing.
Burning a hole in our pocket right now.
Okay and sphere.
On track when should we think about this.
Launching and how should we think about it looking out to next year.
Keith.
Q4 is our.
As is our current schedule and I think as I've said I think it will be a slow ramp from a revenue perspective is as we sign up subscribers. So I would expect.
Very much too.
Probably towards the end of 2022.
2 where we can actually start pointing to I think meaningful revenue impact that said coincident with the launch of sphere.
We'll begin to break out our recurring revenue.
For you guys. So that we're talking about it and you can track us on it.
Okay Alright.
Alright, Thanks, a lot.
Thanks, Tim.
Okay.
Take our next question from Andrew just guess Barry from Varian Bird capital. Your line is open. Please go ahead.
Thanks, Good morning, Michael Good morning, Andrew Good morning.
I had a quick 1 on <unk>.
So.
Said in the past.
Net when there.
Shouldn't that we're generating and so $4 million or so of revenue per year and it is growing at a compounded annual basis at 75% from 2019 ex.
Curious to know like.
With the integration should we expect that high level of growth to continue.
I know if not even accelerate as you. Thank.
As you potentially look at other use cases for that asset.
Yeah.
We expect we expect the growth rate to continue on its current trajectory.
I think we're.
Were planning on talking about accelerating that at this point, it's early days for us we've.
Under our belt here for just about 6 weeks, so we're still learning from them.
We're excited by what they buy what they offer and were.
Extremely excited by the feedback that we're getting from their customer base, which we have some overlap, but frankly, they brought a different customer base to us so the feedback.
How do you think it's fantastic. So we believe that we should be able to continue.
The growth rate that they've already experienced.
That's helpful.
Excuse me I guess when it comes to the Q4 revenue number I think that that's a quarter day, you expect you actually.
We're getting back to what we consider a normalized rate.
Is that still kind of that plan based on what youre seeing in the market or should you know has that changed at all or do you think that.
The issues that you mentioned earlier essentially.
Localized lockdown.
<unk> may impact that.
Well I think we're optimistic.
I think we've said publicly we're not really giving guidance, but what we said is we would be disappointed if we werent back at those levels.
I don't think things have fundamentally changed with perhaps the the the supply chain shortages and supply chain shortages may not.
Necessarily affect our ability to ship product, but more our customers ability for them to ship their products and therefore may.
Maybe dampen their appetite to buy capital that's a concern yet.
The supply chain situation is real and while I.
I don't see it.
I don't see it coming to an M. In the next quarter or 2 our sales force is very optimistic about customer demand in general and as we said in her script, our new products are really beginning to gain traction so.
Everything is headed the right direction, it's just.
[laughter] it's.
It's been a crazy because it's been a crazy crazy year. So we're we're just we're we're cautiously optimistic how's that.
That's helpful. And then I guess the last 1 I have and just a follow up to Jim's question in terms of the Semina.
Right I guess from Asia.
A better.
Better supply chain ecosystem.
You know materials perspective than what you would've had.
What's your own free sites.
Absolutely and I think Alan alluded to it.
Faro had not really integrated many of the supply chains that were attached to each of the factories.
Each of.
Trees.
And as a result, we werent really even internally gaining any buying power. If you will by consolidating our internal demand.
By transitioning to Sanmina, not only do we get their manufacturing expertise, but we actually get to leverage their supply chain and as I mentioned to Jim.
We've already seen some benefit of that even prior to the announcement in helping helping us source some hard to get material. So we're very very confident that they'll be able to help us on the supply chain side.
In this environment, however, where supply is really tight.
M, you're really not talking about getting.
<unk> reduction you're more talking about getting access to materials.
And that's where Sanmina is off to a short term I think long term they should be able to help us with cost.
And the way our contracts are written they are very motivated to help us with cost is a big part of the.
Their business model and that industry's business model. So we're very.
I think we're very fortunate to have Sanmina and we're we're looking forward to.
Our streamlined and probably a healthier supply chain than we currently have.
Great. Thank you.
You're welcome thank you.
And once again that is star.
And wanted to ask a question.
We'll take our next question from Rob Mason from Baird. Your line is open. Please go ahead.
Yes, good morning.
Good morning, Michael.
Michael If you think about.
What are your targets may be may reside for getting back to these 2019 levels.
The fourth quarter I'm, just curious in terms of your sales force and its productivity level.
How much capacity does the existing sales force have beyond that level or do we need to consider adding more resources. Once you get you get back to call it $100 million a quarter or type revenue level.
Levels, but we don't believe that we need to add sales to get to the 100, and we're feeling really good about our productivity metrics of our selling organization as we kind of come out of the Covid situation.
I don't anticipate that we would need to add any any dramatic resource much beyond I would say probably the 100.
$30 million to $140 million a quarter. So I think we've got a lot of gas in the tank. If you will with our current sales force.
Hum.
What's.
The demand environment.
Precluded us from getting to those levels I don't believe its the number of salespeople.
Okay. Okay.
Yes.
Just on that point I mean could you offer some perspective on how you're seeing the 3 day metrology.
Versus your AUC markets.
Perform as you came through the second quarter and into the third any distinctions either by geography or again between those 2 key markets that you'd call out.
Yes, we've seen the automotive space recover a bit which is very encouraging.
M..3 D metrology in Asia, I think we've been underserved in that market and so we've seen.
Really nice day.
Gain if you will particularly in China.
<unk> and <unk> led led by 3 day metrology.
I think North America other than automotive has been slower than we'd hoped.
Particularly in some of the smaller smaller machine shops, which.
Provide a long tail in terms of the number of customers that we have so it looks like the big guys are at.
Our our buying again, maybe not at the rates they were but they are buying again, which is super encouraging.
Sure.
In Europe, we've seen 3 D metrology.
Bounce along we haven't seen a huge recovery yet.
Hopeful that it'll be a driver for Q4 so.
Horizon, 3 new <unk> metrology in general has been slower than for example in 2019, but we're seeing nice signs of recovery.
Just within AUC you had you had made a reference to commercial construction starts does that that still.
Maybe the trigger point for.
Uptake on the AUC product.
Is the new starts and it comes at the front end.
We believe so many of our customers actually buy capital based on the project that they are actually working on so they actually bill out or.
Such charge against the project.
Some of the equipment costs that they buy from us and so as new projects start there's opportunity for us to actually add equipment, but.
But it's been relatively slow, particularly in commercial we don't really participate as a company much on the residential side, that's changing albeit.
It's relatively small.
So really the commercial starts is really kind of I think should be the bellwether for us.
Okay.
Okay very good thank you.
Hey, congratulations on your new position.
Thank you.
Okay.
Yeah.
And it appears that we have no further questions at this time I will now turn the program back over to Michael Burger.
While we're excited we're very pleased with where we are in terms of momentum and where we're making a lot of progress to our stated plans. So we appreciate everyone's interest and look forward.
Where to giving you an update next quarter. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
[music].
[music].
Yeah.
[music].
Good morning, everyone and welcome to today's Faro technologies second quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to my girlfriend at Sapphire Investor Relations. Please go ahead.
[laughter]. Thank you and good morning, with me today from fair or Michael Burger Chief Executive Officer, now in New <unk>, Chief Financial Officer yesterday. After the market close the company released its financial results for the second quarter of 2021 day related press release and form 10-Q for the second quarter are available on Pharos website at Www Dot Faro Dot com.
Please note certain statements in this conference call, which are not historical facts, maybe considered forward looking statements that involve risks and uncertainties and include statements regarding future business results.
And technology development customer demand inventory levels, economic and industry projections or subsequent events [laughter] various factors could cause actual results to differ materially. Some of these factors have been set forth in yesterday's press release and are described at length in our annual and quarterly SEC filings.
Forward looking statements reflect our views only as of today and accept that's required by law, we undertake no obligation to update or revise them.
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.
The press release, you'll find that there is some disclosures regarding these non-GAAP measures, including reconciliation to comparable GAAP measures, while not recognized under GAAP management believes these non-GAAP financial measures provide investors with relevant period 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.
Now I'd like to turn the call over to Michael.
Thank you Mike Good morning, welcome to our call.
Demand for our products from the second quarter reflected a return to a seasonal growth and typically.
Following the typically soft first quarter on.
On a geographic basis, the Asia Pacific market and in particular, China performed well.
While Europe U S and Europe markets continue.
Continue to recover, albeit at a slower pace.
With the second quarter improvement across our served markets. We continue to believe that demand environment will improve throughout 2021.
Our customers activities normalized.
Taken together with our ongoing flow of new product introductions, we believe you're in demand levels will be similar to those experienced from the fourth quarter of 2019.
That said, we remain cautious as market uncertainties, such as the continuing softness in commercial construction starts the prioritization of capacity expansion over quality control initiatives and the ongoing saps local governments take to combat the pandemic may adversely impact the ultimate slope and the timing of a recovery.
We remain focused on laying the foundation for expanding the breadth and depth of our product offerings, while streamlining our operations to continue.
To capture the long term opportunities I had.
I have discussed in our prior calls sparrows in the process of transitioning to a marketing led organization focus on understanding our customers problems and delivering hardware and software solutions to meet their needs.
As an example of these efforts.
An example of this I've heard can be found in our recently announced quantum Max scan arms solution quantum Max was conceived by identifying our customers need for both speed and accuracy.
As a result, we don't we have developed an advanced portable measurements solution, which features 3 purpose built hot Swappable laser line probes each of which offer distinct advantages for specific use cases.
The XR probe per.
530 per cent better accuracy and resolution per high precision measurement past, yeah ex S increases scanning speeds by over 65 per cent and the versatile X P offers a balance of the ex ours resolution and the ex S as speed.
Unlike prior physical arms solutions, the quantum Max allows customers to swap laser heads on the fly, creating a versatile tool, which means a wide spectrum of speed accuracy and resolution is in a single solution.
This unique solution results in a productivity and value increase of over 30 per cent compared to prior generation devices.
Another critical component the scan arms solution was the launch of our latest version of can't too.
Our metrology software, which greatly improved scanning with our new laser probes.
Through the combination of our new arm probes in the latest software. We believe we've set a new standard in the industry from a trial metrology grade measurements solutions.
Why would you continue to introduce new solutions throughout the year, it's worth highlighting that between launching a work flow solution and generating meaningful revenue takes time.
That said, we are very encouraged by our our recent customer feedback.
In addition to our internal product development Roadmaps, we continued to expand the breath of our offerings through acquisitions.
Building off last year's a T S acquisition, which focused on high precision digital twin applications and the second in the second quarter, we expanded our capabilities with the acquisition of Hallow builder.
A leading photogrammetry based 3 D platform, which delivers hardware agnostic image capture registration and viewing.
With an initial focus on construction management Hollow builders platform provides general contractors, a solution to efficiently capture and virtually manage construction progress using off the shelf panoramic cameras.
Hello builders fast platform as a fast and easy reality capture photo documentation and remote access capabilities to pharoahs highly accurate 3 D point cloud base Lazer scary to create an industry spurs into and digital twin solution.
The combined solution will provide a comprehensive scanning and image management capabilities for digital twin Margaret themed at robotic Assembly simulation construction management facilities operation and management and incident preplanning and the public safety Margaret.
Alternately these digital twin capabilities will be brought into our soon to be announced cloud based solution, which we call Faro sphere.
With his underlying subscription model, representing Pharoahs future longterm software I go to market.
Shifting to operations 2 weeks ago, we announced the signing of an agreement to outsource our manufacturing to send me in a corporation.
That's the next step in our business transformation, we plan to transition for production from 3 manufacturing sites in Lake Mary, Florida ex in Pennsylvania in Stuttgart, Germany to ascend Sanmina facility based in Thailand.
Following a rigorous selection process. We chose Sanmina is our partner based upon their proven ability to deliver quality products on.
On the required timelines.
Together, we are very confident in our ability to meet our customers demand throughout this transition process.
Once complete our new operational model greatly simplifies operations reduces costs and allows her management team to focus on the development and sale of differentiated solutions to customers in our target markets.
Alan will discuss the financial impact of these changes in a few minutes.
Taken together. These these actions form the basis of our strategic transition, namely developing a deep understanding of our customer workflows, which allow us to further differentiate our capabilities in the marketplace. While at the same time, placing a solid operating structure in place to ensure incremental top line growth translates to greater.
Operating leverage and higher shareholder value overtime.
Finally, we announced the election of 2 new members to our board of directors.
As previously disclosed the key element of enabling are successful transformation is ensuring that we maintain the right experience that on our board to help guide us.
I am, particularly pleased with the addition of moving Moon, Hey, Chen and Alec that run to the fair aboard.
They each have demonstrated success and leading hardware and cloud based software businesses at markets that are closely aligned with our strategic direction.
I I very much look forward to their contributions as they officially join us on October 1st.
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 revenue of 82.1 million grew 36% when compared to the second quarter of 2020 as a result of continuing market demand improvement compared to last year's market softness caused by the pandemic.
Product revenue at 63 million would that 43 per cent and service revenue of 21.8 million was up 19 per cent bookings.
Bookings at 88.2 million grew 44 per cent year over year, and we're slightly ahead of revenue in the quarter.
Signaling a modest building a backlog.
Yeah gross margin was 55.4 per cent and non-GAAP gross margin was $55.7 per cent for the second quarter of 2021.
Gross margin increased year over year and sequentially largely due to volume increases versus prior periods, our second quarter material costs did not reflect inflationary pressures prevalent in today's market that said, we do anticipate material talk headwinds to modestly if that gross margins in the near term.
GAAP operating expenses were $46.1 million and included approximately 3.6 million an acquisition related intangible amortization in stock compensation expensive and 800000 and restructuring pop.
Non-GAAP operating extent of 41.8 million.
4.1 million higher than Q2 of 2020, as we continue to increase our software investments and as a portion of the travel related expense savings realized during the pandemic began to return.
GAAP operating loss was 700000 per the second quarter of 2021, compared with an operating loss of 12 million for the second quarter of 2020, primarily due to lower volumes in the prior year period.
Non-GAAP operating income was 3.9 million in the second quarter of 2021 compared to an $8.1 million lost in the second quarter of 2020.
Jested EBITDA was 6.5 million or approximately 8 per cent of revenue.
Our GAAP net loss with 1.2 million or 6 cents per share are.
Non-GAAP net income with 2.2 million or 12 cents per share for the second quarter of 2021 compared to a non-GAAP net loss of 36 cents per share in Q2.2020.
We continue to maintain a strong capital structure with a cash balance of 133 million and no debt.
The second quarter decrease in cash was primarily a result of the acquisition Apollo builder for which we paid $34 million in cash.
With the addition of hollow builder, an ongoing investments in our core software platform or quarterly non-GAAP operating expenses is expected to increase to mid $40 million run rate as a result to achieve our target model of 20 per cent EBITDA margins are quarterly revenue level has increased to 110 million versus the 1.
Hundred million dollar objective previously set.
Given the longterm opportunities within the digital twin market, you believe me to the right investments to ensure future growth.
Upsetting to spend over the midterm, we recently announced are plans to consolidate and outsource our manufacturing.
<unk> transition to Sanmina is expected to be completed over the next 12 months and result in approximately 12 million, an annualized labor and materials savings when complete weed.
We believe the expected savings will have a negligible impact on 2021, followed by steady improvement through 2022 with the full benefit to be realized in the first quarter of 2023.
The company expects to incur a cash charge of approximately 6 million in the second half of 2021, primarily consisting of cash severance.
Total pretax charges at $15 million to $20 million are expected through the first half of 2022, when including the impact of facility and other asset right down.
With these charges the company expects it will fully realize the $75 million to $85 million in restructuring charges announced in February 2020.
We're pleased and the continued and market demand improvements in the organic and inorganic progress, we're making towards realizing our strategic vision of hardware software solution. That's all of our customers real world problems in a cloud based environment.
With the addition of hollow builder, our end to end solution for digital twin management positions as well to capitalize on this large and growing market.
We have line of sight to completing the transformation of our cost structure with our new manufacturing partner Sanmina.
Lastly, we remain committed to the achievement of our financial success model, which is a reminder, as to achieve 55 to 60 per cent gross margin with 40 to 43 per cent operating expense, resulting in 20 per cent adjusted EBITDA that we expect will be realized with approximately $110 million quarterly revenue.
We look forward to reporting or continued progress in the coming quarters.
This concludes our prepared remarks at this time and we'd be pleased to take any of your questions.
At this time I think I'd like to ask a question. Please pass the start and 1 on your Touchtone phones, you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star and 1 to ask a question they'll pause for a moment to allow questions to Q.
We'll take our first question from Greg from Craig How and capital. Your line is open. Please go ahead.
Yeah. Thanks, Good morning, everyone I guess, just starting off with the orders it looks like orders outpaced revenue by a decent amount in the corner. So was there anything you know supply chain related or was that just simply orders received late in the corner that weren't able to share just kind of curious if you've seen any kind of supply chain related logistics is.
He was out there.
Yeah, we we've experienced some yeah. The the the order right was backing loaded for the quarter and so we ended up basically pushing some some of the booking over into into Q3.
It's hard to say if that was really supply chain related from a customer perspective, but we didn't we've seen some logistics issues throughout the quarter, but it really didn't impact the end of the quarter revenue. It was more around when we actually received the order.
Okay. It makes sense and Alan I I think you said something about elevated material costs I don't know if that was an impact at all in the June quarter, but how should we be thinking about that impact going forward.
Yeah <unk>, Okay. Good question not much of an impact in the second quarter, we do expect to see some.
Material increases in the third quarter that said, we do have some opportunities to be able to pass those along to our customers and so as I indicated in our prepared remarks, we would expect some modest impact of our gross margin here over the near term depending upon it ultimately how.
The the length and duration and depth and change and changes of these material cost, but again at this point in time, we think it's relatively modest, but maybe a little bit more towards the lower end of the range versus the the middle of the range, which is where we've been operating.
Okay got it and then in terms of the kind of increasing opex. Some of the investments you know I think most of us understand what the opportunity is but maybe for those that don't can you just go into a little bit more detail on sort of the excitement and opportunity around digital twin because.
It certainly seems like a kind of a theme that lots and lots of you know companies are starting to talk about.
Yeah, I think digital 20th is the manifestation of of I think many of our customer's desire to plan both facility changes or facility layouts or in some cases in public safety cramps within planning to be able to actually have.
Have a very accurate.
Model in a virtual environment that allows you to to plan and I think the better you plan the less waste and I think we all know in the construction space M and frankly running factory is 1 of the biggest issues. You have is how do you how do you minimize waste and digital twin is becoming a catch all if you will and and <unk>.
Your appointment.
Different things to different people, but our digital twin is a physical representation of the space and the ability to to take that space and it's as close to accurate as is as close to the truth as you can and then change it virtually and plan all in the context of reducing waste it seems that day.
It is to your point, a kind of a catch all but it definitely is a conversation we're having with a lot of customers a lot of customers that we didn't really anticipate having that conversation with.
Got it it's interesting and then just last 1 so the the EBITDA 20 per cent run rate with the revenue increasing to 110 million to achieve that what would that number look like if you were a you. If you were to be able to capture all of the.
Savings from the the manufacturing outsourcing would that number be closer to the number you've been alluding to in the past just sort of curious how how that affect that number. Once those are those costs are fully realized so yeah. I guess, yeah. It's a it's a very good question and I think that the the timing and you picked up on the.
<unk> right the timing difference between the expenses coming on with the hollow builder acquisition versus our ability to be able to realize the savings with our outsource manufacturing does cause over the next you know call it.
12 to 18 months, an adverse impact on our model I do think that there is a path towards getting to that 20 per cent EBITDA on a lower revenue number or at the higher revenue number over achieving the 20 per cent, but we're not ready to commit to that just yet.
Okay Fair enough alright, thanks for the help best of luck going forward.
Thanks, Craig.
Thanks for that [laughter].
Our next question comes from cameras Yoshi from need him.
Company. Your line is open. Please go ahead.
Alright.
Credit shortage of about the seasonality that you're you're saying you you would normally experienced in this quarter and I'm wondering if there's anything that you've seen in the first month and that may not be a fair question just given how back M. Loaded typically the quarters are but is there anything that you're saying that you might.
Be able to share with us they give us a little better Sanchez have the momentum might be.
And doing Q3.
Actually we've started the Q3 pretty typical.
Typical fashion as as we have probably most quarters.
We're typically backend loaded within the quarter and I think.
The concern that we all have around Q3 is typically the vacation the broad base vacation. So that our customers are experiencing in Europe, which typically starts in August. So the first part of the quarter is kind of as expected, but again, we're not really.
We <unk>, we traditionally see August kind of take a sideways step and that's that's borne out in our history Q2 Q3 over the last several years. So I think started off pretty normal and we're anxious to see how August stacks up.
Okay on the transition to Sanmina L. M. Maybe this question for Ya.
Is there is there any reason why as this process really gets going you would see south or be able to realize some so supply chain benefits just from some of their their buying power <unk> yeah. Okay, I know you're talking about seeing opportunities.
In 22 gradually over the course of the year, but I'm wondering how to think of that just some of the supply chain benefit day at what point today.
Perhaps take a more active role on that side of the business.
Yeah. It's a it's a good question and again I think as we've articulated that savings opportunity. We have indicated that there is both a labor and a material component.
As as as everybody knows our manufacturing has been centered in a couple of location you asked and 1 in Germany and the supply chains for those manufacturing are localized to those facilities. So as we move more toward day Sanmina, Thailand based facility there is an opportunity.
Salute ready to to.
Enhance the supply chain from a cost standpoint at the same time leverage sanmina purchasing power. So we do think that there is an opportunity for decreased material cost savings as time goes by and that's built into the numbers that we've been talking about Jim.
But not like with all day really ahead of the move to Thailand, you really need to to be there with them before you really able to realize some of that by the the purchasing power that they have.
I think that is correct <unk>.
I would say from a from a cost perspective, correct, but could send me and it has already begun to help us and some of the hard the source materials. They they've helped us in advance of of actually the announcements and you know in in anticipation thereof, they've been they've been a big help. So we're excited about what we think they can do maybe not <unk> not.
Short term in terms of better pricing on on materials, but really access to materials.
Got it and then just a question of the the initiatives you have on your way to build out the recurring revenue. Other software side are there Sarah deals out there to hello builder that used to which areas.
Yeah actually hold the most dangerous for Ya.
I think.
We have having the ability to actually capture.
Whatever the truth is from the truth is the actual measurement. We there there are technologies out there that that we're looking at nothing that's burning a hole in our pocket at this at this juncture, but there's a quite a few companies that are kind of getting into this space. If you will from a software perspective or a algorithm person.
<unk> that speeds up either or processing R. As in Harlem builders case adds a completely different technologies that we didn't really have commercially. So we're looking at all of those jump, but again, there's nothing burning a hole in her pocket right now.
And sphere Uhm on track when should we think about this launching and how should we think about it looking out to next year.
Q4 is our.
<unk> is is our current schedule and I think as I've said I think it it it'll be a slow ramp from a revenue perspective as <unk> as we sign up subscribers. So I would expect very much too you know.
Probably toward the end of 2022, where we can actually start pointing to cause a meaningful revenue impact that said coincident with the launch of sphere will begin to break out a recurring revenue for you guys. So that we're we're talking about it and you can track us on it okay.
Alright, Thanks, a lot.
Sure.
Take our next question from Andrew.
Theory from Banbury capital Your line is open.
Thanks, Good morning from out with good morning under morning.
I had a quick 1 unhallow builder I know you said in the pet and when they're you know a technician that was generating itself for married ourselves revenue per year and items growing compounded annual basis at 75 per cent 2019.
Just curious to know like with the integration should we expect at high level of growth to continue with if not even accelerate as you.
Potentially look at other use cases for that asset.
We expect we expect a growth rate to continue on its current trajectory I I don't think we're.
We're planning on talking about accelerating that at this point, it's early days for US we've had it.
Under our belts here for just about 6 weeks. So we're still learning from them, we're very excited by what they what they offer and where it is.
Extremely excited by the feedback that we're getting from their customer base, which we have some overlap, but frankly, they brought a different customer base to it. So the feedback that we're getting is fantastic. So we believe that we should be able to continue.
The growth rate that they've already experienced.
Council.
<unk> excuse me I guess when it comes to the cure for revenue number I think that that's a quarter that you expect to actually reach back to what we consider a normalized right.
Uhm is that still kind of that plan based on what you're seeing in the market. What should you know has that changed at all but do you think that.
The issues that you you mentioned earlier, Pennsylvania.
Localized laska.
My my impact that.
Well I I think we're optimistic.
I think we've said publicly we're not really giving guidance, but what we said is we would be disappointed if we went back at those levels.
I don't think things have fundamentally changed with perhaps the the <unk> the supply chain shortages in supply chain shortages may not necessarily affect our ability to ship product, but more our customers ability for them to ship their products and therefore, maybe dampen their appetite to buy capital that's I can.
CERN.
The supply chain situation is real and while I.
I don't see it.
I don't see it coming to in in in the next quarter or to our sales forces very optimistic about customer demand in general and as we said in a script or new products are really begin integrating gain traction so where.
Everything is headed the right direction is just.
[laughter], it's been a crazy it's been a crazy crazy year. So we're we're just we're we're cautiously optimistic how's that.
That's helpful and I guess the last 1 I have I'm just a follow up to Jim's question in terms of the Semina Uhm.
Uhm, Alright, I guess strawberry shake.
A better better supply chain, but like I said.
From from you know materials perspective than what you would have had what's your own free sites.
Absolutely and I think Alan alluded to it Faro had not really integrated many of the supply chain that were attached to each of the factories.
Each of our factories.
And as a result, we weren't really even internally gaining any buying power. If you will by consolidating our internal demand.
Bye <unk>.
Transitioning to send me not not only do we get their manufacturing expertise, but we actually get to leverage their supply chain and as I mentioned to Jim we've already seen some benefit of that even prior to the announcement in helping helping a source some hard to get material. So we're very very confident that there'll be able to help us on this.
<unk> sighed.
In this environment, However, where supply is really tight uhm, you're really not talking about getting price reduction you're more talking about getting access to materials and that's where send me that has helped a short term I think long term they should be able to help us with cost and the way our contracts are written they're very motivated to help us with cost Ah.
<unk> part of the their business model and that industry's business model. So we're very <unk> I think we're very fortunate to have semina and we're we're looking forward to.
Ah streamline that probably healthier supply chain then we currently have.
Great. Thank you.
You're welcome thank you.
And once again that is star and 1 to ask you a question.
We'll take our next question from Rob Mason from your.
Your line is open. Please go ahead.
Yes, good morning.
Michael M I.
Michael If you think about.
Where your targets may be may reside for getting back to these 2019 levels by the fourth quarter I'm. Just curious in terms of your sales force in its productivity level, how much capacity does the existing sales force have beyond that level or do we need to consider adding more resources once you get get back.
To call it 100 million a quarter or type revenue level.
We don't believe that we need to add sales to get to the hundred and we're feeling really good about our productivity matrix of our selling organization as we kind of come out of the Covid situation I don't anticipate that we would need to add any any.
Dramatic resource you know much beyond I would say, probably the 130 to 140 million a quarter. So I think we've got a lot of a gas in the tank. If you will with our current sales force.
Uh-huh Uh-huh.
What's what's it's it's the demand environment, that's that's precluded us from getting into those levels I don't believe it's the number of salespeople.
Okay. Okay.
Just on that point I mean could you offer some perspective on how you are seeing the 3 D metrology.
Versus your AC markets.
Perform as you came through the second quarter and into the third any distinctions either by geography or again between those those 2 key markets that you'd call out.
Yeah, we've seen the automotive space recover a bit which is very encouraging.
3 day metrology in Asia.
Think we've been underserved in that market and so we've seen a really nice guy.
Day, and if you will particularly in China in <unk> led led by 3 day Petrology, I think North America other than automotive has been slower than we'd hoped and particularly in some of the smaller smaller machine shops, which.
Provide a long tail in terms of the number of customers that we have so it looks like the big guys are are are buying again, maybe not at the race. They were but they are buying again, which is super encouraging uhm and in Europe, We've seen 3 day metrology uhm.
Bounce along we haven't seen a huge recovery, yet and we're and we're hopeful that'll be a driver for Q4 so.
Summarize 3 <unk> 3 the metrology in general has been slower than for example in 2019, but we're seeing nice signs of recovery.
Just within a C. Ah you had you had made a reference to commercial construction starts does that that's still.
Maybe the trigger point for uptake on the a E C product.
Is the new starts comes at the front in.
We believe so.
Many of our customers actually by capital based on the project that they are actually working on so they actually bill out or.
Or charge against the project.
Some of the equipment costs that they buy it from us and so as new project start there's opportunity for us to actually add equipment, but.
But it's been relatively slow, particularly in commercial we don't really participate as a company much on the residential side, that's changing albeit it's relatively small.
So really the commercial starts is really kind of I think should be the the bellwether for us.
Hum Hum.
Okay very good thank you.
Hey, congratulations on your new position okay. Thank.
Thank you.
[laughter].
And it appears that we have no further questions at this time I will now turn the program back over to Michael's or yeah.
While we're excited we're very pleased with where we are in terms of momentum and we're we're making a lot of progress to our stated plans. So we appreciate everyone's interest and look forward to giving you an update next quarter. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect day anytime.