Q4 2022 FARO Technologies Inc Earnings Call
Good day, everyone and welcome to the Faro technologies fourth quarter and year end 2022 earnings call.
For opening remarks, and introductions I will now turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead.
Thank you and good afternoon with me today from Faro are Michael Burger, Chief Executive Officer, and Allen <unk> Chief Financial Officer.
Today after market close the company released its financial results for the fourth quarter and full year of 2022.
The related press release and Form 10-K are available on Faros website at Www Dot 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 some of which are beyond our control.
Such statements regarding future business results product and technology development customer demand inventory levels, our outlook and financial guidance economic and industry projections or subsequent events.
Various factors could cause actual results to differ materially.
For a more detailed description of these and other risks and uncertainties. Please refer to today's press release, and our annual and quarterly SEC filings.
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 Youll find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures.
While not recognized in our 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 Burger.
Thank you Mike welcome to our call.
Improving fourth quarter demand driven by strength in our laser scanner in European markets, along with the addition of a full quarter of Geoscience resulted in revenue for the quarter of $103 $9 million up nearly 4% year on year, despite strong currency headwinds.
On a constant currency basis, Q4 revenue was $110 5 million up approximately 10% year over year.
Following september's launch of our new vantage Max tracker I am pleased to report that all three of our major hardware product lines have now been refreshed with new products.
With our new laser scanner, gaining global adoption, we believe the hardware success, we have seen thus far validates our customer driven approach to product definition, we look forward to discussing future product releases in the quarters to come.
Beyond our internally developed products the integration efforts of our recent acquisitions are executing to plan.
Following september's acquisition to Geos Lam, we are pleased with the partnership that has developed quickly.
Their mobile scanning road roadmap is robust and we expect a significant new product launch later this year.
As a reminder, geo slams flexible low cost handheld mobile scanning portfolio closes a gap in our scanning lineup.
We anticipate these products will address several applications within barrels traditional AUC and public safety customer base.
<unk> products have historically targeted the geospatial and mining markets, primarily through an indirect channel. We believe we now have meaningful cross selling opportunities in front of us.
In the fourth quarter, we further expanded our capture technology portfolio through the acquisition of site scale.
<unk> and iOS.
<unk> lidar scanner by enabling lidar standing capabilities inherent in recent generations of iOS devices, we bring the power of potentially millions of devices and deferrals cloud environment sphere give.
Given the limitations on range and speed of capture we don't expect iOS scanning to replace or cannibalize.
Existing scanning technologies within our portfolio.
It does however, provide a simple and readily available option for customers to address scanning gaps and larger projects within the ACO and public safety applications.
By augmenting barrels existing high precision, leading edge capabilities with offerings, such as mobile scanning 360 degree photo and video capture as well as iOS based Lidar, we now offer the broadest set of three D capture devices in the market.
This unique capability enables barrels construction and facilities customers to optimize their capture methods to their scanning application and need.
As we integrate these various capture capabilities in deferral sphere, we will enable cloud based access to 40 models from all of our available capture devices onto a single coordinate system.
This unique and differentiated offering will provide faro customers with unprecedented flexibility along the ease of use and accuracy continuum.
Early feedback on the integration and integrated viewing and usage of <unk> data capture using barrels broad set of capture devices has been strong we believe the market potential for digitizing. The physical world is enormous and we are uniquely positioned to offer the best <unk> solutions that will.
Table, increasing levels of long term adoption.
This is a key differentiator per barrel and we look forward to sharing our progress through 2023 and beyond.
I'll now turn the call over to Alan to provide an overview of our fourth quarter financial results and first quarter guidance.
Thank you Michael and good afternoon, everyone.
Fourth quarter revenue of $103 9 million was up nearly 4% compared with the fourth quarter of 2021.
With roughly 60% of our revenue impacted by U S. Dollar FX rates, our fourth quarter revenue on a constant currency basis was $110 5 million up 10% year over year.
Driving this result was primarily the solid increase in demand for our focused premium scanners, a meaningful improvement in our performance in European markets and the addition of Geo Slam revenue following our September acquisition.
On an actual currency basis, when compared to last year fourth quarter hardware revenue of $70 3 million was up 9%.
Software revenue of $12 9 million was down 5% and service revenue of $20 6 million was down 6%.
Recurring revenue of $18 1 million was up 10% when compared to Q4 of 2021, primarily due to growth in our cloud based software offerings.
Hardware revenue on a constant currency basis was $75 8 million up 17% year on year and is a strong indicator of our new product customer adoption.
As we discussed in prior quarters, we have seen a modest flattening of overall software revenue as we convert customer purchases of previously perpetual licenses to subscriptions.
Service revenue the lower 2020 in 2021 hardware unit shipments compared to earlier years have reduced the installed base of products eligible for our service offerings that when combined with a meaningful product quality enhancements. We've made over the last 18 months has resulted in continued lower service revenue.
Similarly, but with the opposite effect as 2020 twos higher unit shipments come off warranty.
We would expect to see service revenue pick up later in 2023 and into 2024.
GAAP gross margin was 49, 1% and non-GAAP gross margin was 52, 8% for the fourth quarter of 2022.
Our global footprint for both customer revenue and internal operating expenses results in a relatively effective natural hedge that has limited the overall year to date profitability impact of recent and unprecedented FX changes.
That said the relative strengthening of U S. Dollar exchange rates over the past year have adversely impacted reported gross margins by nearly 350 basis points when compared to the success model. We set in early 2020.
And while unfavorable material costs have predominantly been offset by price increases until FX rates normalize we expect to operate below our targeted gross margin range.
Our supply chain.
Conditions continue to normalize we expect to realize approximately $12 million in annualized material cost savings as we reposition our supply chain to lower cost providers in southeast Asia.
As a result, we remain committed to our long term success model, which for gross margin target of 55% to 60% of revenue.
GAAP operating expenses were $52 7 million and included approximately $4 3 million in acquisition related intangible amortization and stock compensation expenses and $2 6 million in restructuring and other transaction costs.
non-GAAP operating expense of $45 8 million was $1 6 million higher than Q4 of 2021 due primarily to the inclusion of Geo Slam operating expenses, which more than offset the benefit we experienced as a result of strengthening U S dollar exchange rates.
GAAP operating loss was $1 6 million in the fourth quarter of 2022, compared with an operating profit of $3 9 million in the fourth quarter of 2021.
non-GAAP operating income was $9 1 million in the fourth quarter of 2022 compared to $11 7 million in the fourth quarter of 2021.
Adjusted EBITDA was $11 7 million or 11, 3% of sales.
Our GAAP net loss was $2 2 million or <unk> 12 per share.
Our non-GAAP net income was $7 1 million or <unk> 38 per share for the fourth quarter of 2022 compared to net income of $8 7 million or <unk> 48 per share in Q4 2021.
Our cash balance at the end of the quarter was $37 8 million with no debt.
Included in our cash consumption during the quarter was inorganic investments we made in both sites Cape as well as our minority investment in technology targeting lower cost lasers, we have slated for coming years.
We remain focused on reducing overall working capital levels with improvements expected in 2023.
On January 20th after the close of the quarter, we placed $75 million of five 5% convertible senior notes, including the underwriter's option to purchase additional notes at a strike price of $42 36.
Which represents a 20% premium to <unk> closing stock price on January 19th.
The net proceeds from the offering was approximately $72 2 million, which will be reflected in our March 31 balance sheet reporting.
Given relatively high interest rates, we expect to invest a portion of proceeds in short term treasuries that will offset some of our interest expense.
In addition, we are aggressively integrating the recent acquisitions of hollow builder Geo slab and site escape.
As a result in the first quarter, we are announcing an integration plan, which includes the consolidation of our three cloud based environments as well as the rationalization of our facilities footprint and incremental expense savings.
We expect these actions to offset a portion of the inflationary expenses, we've experienced over the past few quarters as well as some of the expected increase in reported expense levels associated with continued normalization of FX rates.
Taken together, we expect to incur $10 million to $16 million in charges through the end of 2023 split roughly evenly between cash and noncash.
Once complete we anticipate an approximate $10 million reduction in annualized operating expenses that will maintain expense levels modestly higher than reported in 2022, given the expected an offsetting expense headwinds of inflation.
FX and variable compensation plans.
Moving on to guidance in the first quarter, we expect revenue of between 81 and $89 million, which assumes a constant exchange rate from current levels.
If the U S dollar were to further strengthen or weaken during the remainder of the quarter, we would experience a corresponding headwind or tailwind to reported revenue levels.
We expect a non-GAAP loss per share of between two and 22.
Yes.
Before closing and based upon feedback from many investors about March 2023 travel challenges, we have made the difficult decision to postpone our previously announced analyst day.
We continue to have a strong desire to share our progress and provide and then provide a hands on experience for investors to see our virtualization tools.
We will be looking for a date in the future that is more suitable to ensure greater investor participation given the meaningful distraction effort and investment necessary to successfully pull off such an event.
In closing and notwithstanding the recessionary concerns echoing throughout the macro environment our opportunity funnel remains strong we are increasingly excited about the building momentum in our business and remain committed and optimistic about executing on our long term vision of digitalization the physical world.
That said, we are actively monitoring demand signals to ensure alignment with spend levels and will adjust should future conditions warrant.
The pace of our product announcements, both hardware and software are accelerating and we expect to continue providing increasing levels of value from 40, Virtualized models to our customers throughout 2023.
We look forward to sharing our progress with you in the quarters ahead.
This concludes our prepared remarks and at this time, we would be pleased to take any of your questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue by pressing star too.
Once again to ask a question please press star one.
And we'll take our first question from Greg Palm with Craig Hallum Capital Group. Your line is open.
Hey, good afternoon, thanks for taking the questions starting on Greg with Okay.
Wanted to start with some comments on geographic results, because that's kind of what stood out to us.
Really really surprising strength in Europe , and maybe likewise.
Not as strong results in APAC and so maybe you can just die.
Diving into those specific regions a little bit more.
Yes, I think APAC was not a surprise I think we.
APAC is.
Actually been on a tear here for the last year for us. So we're not not necessarily overly disappointed the opportunity funnel in Asia continues to grow.
I think it was more timing of some of the bigger deals that just kind of got pushed into.
Future quarters Europe too.
It took us all by surprise, we saw a resurgence of large resurgence in the ADC space and we had a couple of big.
Public safety deals close so in general.
A very nice surprise and as you know you and I have been talking about this now for over a year and Europe has been I think depressed for us and so it's great to see it back where I think it belongs and we're excited not just from a revenue and booking perspective, but they are up.
Opportunity funnel also took a very nice turn so I think we're feeling pretty good at them and I think it's a testament both to the AUC market and also now our position in that with our new scanner.
No. It makes sense that's helpful color.
If I could just shift gears, a little bit to the cost savings program. Alan I may have you repeat a little bit of what you said because I couldn't write it down fast enough, but can you just go through what.
The.
What the potential cost savings or I'm not sure of what you were alluding to is theres going to be.
Sort of a pickup in expenses and so these savings are expected to offset or whether we've already seen some of that pick up and the savings will offset that going forward. So maybe just a little bit more color there.
The areas sure Greg the areas, where we are expecting to see some benefit and again, we outlined $10 million of annualized expense savings that will be feathered in kind of throughout 2024 is predominantly a focus on on finalizing the integrations of the three acquisitions.
<unk> that we've done over the last year and a half.
We have three cloud based environments today that we're supporting we really only need to have that be one and therefore, there is some expense savings associated with that.
Given the remote and hybrid work environments that we've adopted our facilities are underutilized and therefore, we have an opportunity to consolidate those facilities into smaller square footage frankly.
And those also again, we will feather in over 2023.
And then finally, we've always got some tweaking of expense and investment levels around the edges that I think will also help contribute to that $10 million.
As it relates to when we will see it and where we expect expenses to level in some of that will depend of course upon where.
Currency rates normalize too.
At today's FX rates, we would expect that expenses in 2023 remain about where they are where we reported them, maybe just a touch higher than where we reported them in 2022.
Taking into account the savings taking into account inflationary pressures variable compensation plans merit increases for our employee base.
All of those things somewhat net themselves out.
Okay that makes sense and then just lastly, any additional purchase accounting impacts that we should be taking into account either here for Q1 or fiscal 'twenty three.
No.
Okay easy enough alright ill leave it there thanks.
Thanks for your questions Greg I appreciate it.
And our next question comes from Rob Mason with RW Baird. Your line is open.
Yes, good evening.
Wanted to.
To ask just about if you could just speak Michael to how it sounded like the AUC markets.
Public safety performed better than the three D metrology.
That was my impression if you could just maybe clarify how.
Those individual markets performed in the fourth quarter, maybe what youre seeing into the first quarter.
Yes, I think AUC kind of on a global basis was was a very nice surprise.
We did see we saw a significant bump as we talked about in Europe , but it was strong in North America and Asia alike public.
Public safety, we actually had our largest booking quarter in the history of public safety for us.
We feel really excited about that.
<unk>.
I wouldn't say it was down and frankly overall, we felt really good about the quarter in general it just it wasn't up as much as what we saw in public safety.
Yes.
AUC and I would argue that thats.
A combination of nice market activity, but but I also believe.
The adoption of our new focused premium scanner as is.
Is exceptional and we have in Q4 booked our largest number of units for scanner in the history of the company. So all based on the strength of.
Of the focus premium so I think.
We're pretty excited about what that what that says.
The other thing I might add related to the three D. Metrology space is last year was a bit of a difficult compare for us because we had very strong performance with our next generation quantum Max arm in Q4 of 2021, and so that's why for US. It felt like things were continuing on nicely, but then when you do the year on year.
Compare apps I think are challenging.
That's exactly right.
How would you characterize.
Just the sales cycle the order cycle again as we came through.
The end of the year.
Did you notice any any changes shifts.
The ability to close orders deals.
No actually actually not.
I think we have been relatively.
Pleasantly surprised with the.
The funnel growth.
It's now continued now for probably two five quarters and that bodes well for us and by the way if it goes against everything we're reading right in terms of what's happening in the marketplace. So we're cautiously optimistic and I think al said in his prepared remarks, we continue to kind of watch this but.
Is it still looks quite positive.
The sales cycle in terms of length of closing deals in terms of <unk>.
Capital approval cycles, we didn't see a significant change from Q3 to Q4.
It sounded like again, you noted public safety.
A largest booking quarter that you'd had is that product that will ship in 'twenty three or did some of that.
Sounded like some shipped anyway.
Q4, but I'm just curious what your carryover and then maybe just.
<unk> comment on how backlog finished the year end.
Did that come down.
Supply constraints alleviated or just maybe how that trended.
Let me start with the back let me start with the backlog we effectively started with this we ended Q4 with pretty much the same backlog we started it with so we had.
Relative to very strong bookings overall.
We haven't talked about that but strong bookings and that kept the backlog into Q1 quite healthy. So we're we're feeling good about that.
Your first question was what I'm sorry, Rob.
Yeah.
The large public safety.
Bookings that you referenced is that a 2023 shipment or did we already shipped it.
We shipped we shipped quite.
Quite a bit of it within the quarter and as I mentioned backlog quarter on quarter for the companies was flat in terms of what we started Q Q4 with what we're now starting Q1 some of that is public safety, but I don't think a disproportionate number I think we shipped a large portion of what we booked in Q4.
Very good just one quick one and I'll hop off.
Alan how are you how should we model.
Net interest expense in the first quarter, so a partial quarter.
For the convert offering and not sure when you're investing the cash but I'm just curious what's embedded in the guidance.
Around that.
Yes, what's embedded in the guidance is again, we closed the transaction on the convert in the third week of January and so we will have 75 million times five 5%.
Over that time over the.
The balance of the quarter.
There is also some amortization of.
Fees in <unk>.
Fees that need to be buried in there as well and so we have assumed that and those fees I believe or just a bit shy of $3 million that will be amortized over the five year term.
Okay, and then we would expect to invest.
Somewhere in the $30 million to $40 million range is kind of the current thought process.
The final month of the quarter.
And therefore, you should you should expect to see.
Whatever T bills are somewhere in the 404, 5% range.
Interest income to offset hopefully that gives you the pieces you need.
Excellent yes. It does thank you.
Thanks, Rob.
And our next question comes from Andrew <unk> with Baird. Your line is open.
Hi, This is Stephanie on for Andrew.
First question is about.
Revenue and how we should think about the recurring software and services getting towards that 25% of revenue.
Whether these integrations of the acquisitions will change that in any way.
So first of all I don't believe that the integration of the cloud based environments will affect that trajectory at all and and so the recurring revenue component I think we will continue to grow and continue to be a.
An increasing level of our overall revenue. It is a focus area of ours as you know recurring revenue for US is both the software components as well as there is some repair contract revenue that's in there as well that's being somewhat.
Blunted today, so as we continue to grow our hardware revenue that ultimately positively affects recurring revenue as we indicated in our prepared remarks towards the end of 2023 into 2024.
And therefore again as we also continue to make investments.
And our SaaS based cloud applications that will drive increased levels of software revenue through <unk>.
Recurring revenue and therefore still believe strongly that we will be able to achieve the 25% objective that we've thrown out there.
The only reason why we may not is it hardware revenue continues to grow nicely and then we ended up with a good problem that both of those revenue streams are growing but right now we see differentiated growth.
Okay. Thank you that makes sense.
And one more question on here.
The recent acquisition of <unk>, if you could just elaborate a little bit on that market and competitors and whether this will require investment on your part in the near term or longer.
Yes.
The answer is yes, it will require investment.
We.
We have a plan internally to.
To develop this capability.
Organically and the opportunity Besides escape came up and we jumped at it.
I think.
This will be integrated and not necessarily affect the overall software spin at the rate that we're currently talking to so it's inculcated into our our plan in our model.
So I think.
You should feel comfortable with the I think the market itself is massive.
<unk>, however was very much focused on consumers and.
I would argue for lack of better term hobbyists and what we're doing is taking this this low resolution lidar capture capability and really inculcating it into sphere, and then really focusing in on our current markets, which are AUC and ultimately public safety and so we're taking.
Technology, that's been proven in the consumer world and now applying it very much to our strategy. So we don't see a change.
Our direction or our strategy or our focus from a market perspective, but it does accelerate our roadmap and it does accelerate our technologies.
Maybe just one comment to confirm as well the revenue contribution from sites Cape is very very immaterial, yes, and there for I think about it more as a technology acquisition as opposed to a market or revenue expansion.
Got it. Thank you that's helpful.
Youre welcome. Thank you Stephanie.
And once again to ask a question. Please press the star one and you may remove yourself from the queue by pressing star two.
And we'll take a question from Ben Rose Battle Road Research Your line is open.
Yes, good afternoon, Allan and Michael.
Bad debt.
Hey, good Michael question for you.
<unk> two you.
You had mentioned that there were.
Separate cloud platforms for some of these recent acquisitions are there other.
Are there other integration tasks that need to be done.
Beyond.
Harmonizing <unk>.
Around one.
Cloud platform.
Yes, I think theres always.
We're integrating the Geo Slam hardware engineering organization into our current hardware.
Engineering organization, which has gone extremely well.
And there are always G&A sides of that there are.
Projects, there are all kinds of of kind of behind the scenes that we don't spend a lot of time talking about tasks that need to be done when you integrate companies.
The size of the Geo Slam soundscape.
It's a relatively small company with very.
With few employees and so that integration I would argue is already complete.
Hollow builder.
Roughly the size of GSA Lam from a from a.
The population perspective, and that's that's pretty much behind us as well so Geo Slam is <unk>.
Probably the largest task we've got in place right now.
But when we bought when we bought when we bought hollow builder in before we bought them we were developing our own cloud based environment.
That's really what we're alluding to when we say three cloud environments.
And that's a big task because frankly, there is customers in each of those environments, they're using in some cases different service providers.
And their API is the way they actually interface with the cloud is different. So there is a lot of development that has been going on we're just announcing it this quarter.
Okay.
And just a follow up question with regard to the strength in the ADC market in Europe .
How much of it would you say is sort of a general bounce back in the economy.
As other things that might be going on in terms of <unk>.
Product acceptance or perhaps.
Perhaps changes in the competitive environment.
Yes, it's a great question I wish I had a real finite answer for you, but I don't what we saw in the quarter was a great pull from our customer base on projects.
That we had been tracking and frankly, we had seen many of these projects continue to be pushed quarter to quarter and I think I think actually you and ive talked about this in the past. So I believe that it was somewhat market driven because frankly, a lot of the projects were not pushed into the following quarter, but actually didn't.
Did close in Q4 that could be very much around capital.
Capital budget flush.
If you don't spend it you lose it.
And we see that occasionally we see that all actually every year.
But we haven't seen that in the AUC market through 2020, and 2021, and I think largely because of COVID-19 related issues. So.
It's good to see the budget flush and so we did see that.
But I.
I do believe it's hard to really distinguish between budget flush and the adoption and excitement around the new scanner, which is absolute so.
It's positive the projects are closing.
And as I mentioned, we had our highest bookings quarter.
For scanner in the history of the company.
Great great. Okay. That's very helpful color I appreciate it.
Youre welcome Ben Thanks, Thanks for your question. Thanks, Pat.
Thanks, Tom.
And it appears we have no further questions at this time I'll turn the program back to Michael Berger for any closing remarks.
Thank you very much for attending we are.
We're very pleased with the quarter and we're actually really excited about what the future holds thank you very much and we'll talk to you next quarter.
This does conclude today's program. Thank you for your participation and you may disconnect at any time.
Okay.
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Okay.
No.
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Perfect.
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Okay.
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