Q1 2023 FARO Technologies Inc Earnings Call

Speaker 1: Oh and.

Speaker 2: Please stand by your program as about to begin. If you need assistance during your conference today, please press star zero. See you again tomorrow on Kindle Hill.

Speaker 2: Good day everyone and welcome to the Farrow Technology First Quarter 2023 Ernie's Call for opening remarks and introduction and we now turn the call over to Michael Finari at Sapphire Investor Relations. Please go ahead sir.

Speaker 3: Thank you and good afternoon. With me today from Pharaoh, a Michael Berger chief executive officer, Alan Miewicz chief financial officer, and Yvonne Wasserman, chairman of the board.

Speaker 3: Today after Market Clothes, the company released its financial results for the first quarter of 2023. The Related Press release is available on Farrow's website at www.farrow.com

Speaker 3: Please note certain statements in this conference call, which are not historical facts, maybe consider forward-looking statements that involve risks and uncertainties, some of which are beyond our control, and include statements regarding future business results, product and technology development, customer demand, inventory levels, outlook and financial guidance.

Speaker 3: economic and industry projections or subsequent events. Various factors could cause actual results to different materially.

Speaker 3: For more detailed description of these and other risks and uncertainties, please refer to today's press release and our annual and quarterly SEC filings.

Speaker 4: Now I'd like to turn the call over to Michael Berger. Thank you Mike. Welcome to our call. First quarter revenue of $85 million was up 11% year on year with hardware revenue of $55 million, up 18% and 9% organically that was enabled by increased shipments of our new focus premium laser scanner, as well as the addition of Gioslam to our revenue base, following our September 2022 acquisition.

Speaker 4: To quenchally, revenue benefited from the weakening of the US dollar exchange rates. While we remain pleased with the overall market adoption of our latest products, late in the first quarter, we saw sales cycles begin to lengthen.

Speaker 4: Further, while we saw meaningful growth in our overall opportunity funnel, the expected close-8 of those opportunities shifted from second quarter later into 2023.

Speaker 4: We believe these are two relatively strong indicators that the long anticipated softening of the macro environment is beginning to impact our customers purchasing behavior.

Speaker 4: whether added is an upgrade to existing hardware or at the time of initial hardware purchase. Beyond our internally developed products, the integration efforts of our acquisitions are executing to plan. Following September's acquisition of GIsLAIM, which brings to Pharaoh expertise in mobile scanning, December's acquisition of SitesGet, which basically adds iOS-based light art capture capabilities, and now with the addition of flash to our stationary standards, we now operate the broadest and most complete set of three-dimensional capture devices in the market.

Speaker 3: Thank you, Michael, and good afternoon, everyone. First quarter revenue of 85 million was up 11 percent compared with the first quarter of 2022 that primarily resulted from higher shipments of our focus premium scanners and the addition of geoslam revenue following our September acquisition. First quarter hardware revenue of 55 million was up 18 percent.

Speaker 3: software revenue as we convert customer purchases of previously perpetual light features to subscriptions.

Speaker 3: Our perpetual software revenue is down approximately 60% when compared to its high in 2019, indicating that by the end of 2023, our conversion from perpetual licenses to subscription revenues should be predominantly complete.

Speaker 3: On service revenue, the lower 2020 and 2021 hardware unit shipments.

Speaker 3: Compared to earlier years, has reduced the installed base of products eligible for our service to thought forings.

Speaker 3: that when combined with the meaningful product quality enhancements we've made over the last 18 months has resulted in continued lower service revenue.

Speaker 3: Gap Ghost Margin was 46.7% and non-Gap Ghost Margin was 47.6% for the first quarter of 2023.

Speaker 3: Continued increases in the cost of raw materials adversely impacted gross margin by approximately 250 basis points.

Speaker 3: That when combined with the roughly 300 basis points of the adverse effect that resulted from the relative strength of the US dollar compared to historic exchange rates we discussed in November resulted in the first quarter's low gross margin rate.

Speaker 3: The higher cost of raw material primarily stems from sourcing semiconductor components in an extremely tight broker market where we have had to make large payments to secure delivery in advance of receiving certain components.

Speaker 3: In the quarter, we incurred approximately 2 million in incremental costs associated with these broker component receipts.

Speaker 3: Going forward, we expect to receive and consume additional associated inventory, and as a result, adversely affect reported gross margins through the balance of 2023. Given their UV nature, these transactions are not expected to adversely affect the timing of the previously committed 12 million in annualized savings that is expected to result from the shift in our supply chain to Southeast Asia. We continue to believe the savings from the shift to lower cost suppliers will begin to be realized as we exit 2023.

Speaker 3: I want to emphasize that our underlying average selling prices in local currency and the expectations of long-term product mix has remained relatively unchanged.

Speaker 3: And therefore, as material costs normalize, and we capitalize on a Southeast Asia supply chain, we would expect Rostmargine to significantly improve in 2024.

Speaker 3: Gap operating expenses were 58.3 million and included approximately 4.8 million in acquisition-related and tangible amortization and stock compensation expenses and 5 million in restructuring and other transaction costs.

Speaker 3: non-GAAP operating expense of $48.8 million, with $4.6 million higher than Q1 of 2022 due to the inclusion of GeoSLAM operating expenses, and sequentially the increase was primarily due to the impact of a weakening US dollar.

Speaker 3: As Michael mentioned previously, we're committed to realizing now 20 to 30 million in annualized savings, which is expected to reduce our quarterly spending at present as X-rays to approximately 40 to 43 million dollars, beginning in the fourth quarter of 2023.

Speaker 3: Gap operating loss was $18.6 million in the first quarter of 2023, compared with an operating loss of $7.2 million in the first quarter of 2022. Non-gap operating loss was $8.3 million in the first quarter of 2023, compared to a loss of $3 million in the first quarter of 2022.

Speaker 3: Adjusted EBITDA was a loss of 5.5 million.

Speaker 3: Our gap net loss was $21.2 million or $1.12 per share. Our non-gap net loss was $7.1 million or $0.38 per share for the first quarter of 2023, compared to a net loss of $2.5 million or $0.14 per share in Q1 of 2022. Our non-gap net loss was $1.8 million or $0.14 per share in Q1 of 2022. Our non-gap net loss was $1.8 million or $0.14 per share in Q1 of 2022.

Speaker 3: We are disappointed by our greater than expected first quarter loss. A combination of a softer end market.

Speaker 3: by our greater than expected first quarter loss. The combination of a softer end market, higher material costs.

Speaker 3: and higher than normal mix towards lower margin scanners, adversely affected gross margin, and along with an increase in operating expenses due to a weaker US dollar, resulted in an unacceptable operating loss.

Speaker 3: In February , we discussed a $10 to $16 million charge to realize our $10 million in targeted savings. Given the incremental $10 to $20 million in savings, that charge is now expected to total between $22 and $28 million, of which we incurred $5 million in the first quarter.

Speaker 3: was a remaining 17 to 23 to be incurred over the balance of 2023. Of the total, we accept approximately 40% of the combined charges to be cash payments. Our cash balance at the end of the quarter was 88.6 million.

Speaker 3: including included in our operating cash consumption during the quarter, was the timing of large non-tustomer receipts totaling over 10 million, which moved from the first quarter to the second quarter. These payments have now been received and will benefit second quarter cash flow.

Speaker 3: Additionally, worsening shipment linearity, as well as the lunar new year, which historically has reduced Q1 shipments into China, where most invoices are on a pay and advance terms, has resulted in extended day sales outstanding.

Speaker 3: We remain confident in the collectability of our trade receivables, where our greater-than-90-day past due balance remains relatively unchanged.

Speaker 3: Despite the unfavorable cash timing in the quarter, our team has targeted improved collections and reduced overall working capital levels.

Speaker 3: In addition for 2023, our internal incentive program was modified such that all executives and the senior leadership team are now incented on achieving certain levels of both total company revenue.

Speaker 3: and annual recurring revenue, as well as free cash load generation. As such, the combined team is now focused on driving broad working capital efficiency.

Speaker 3: and we remain confident in our ability to realize our free cash flow objectives. Moving on to guidance, we have incorporated the weekly slowing of customer decision making in our projections, and as a result, at present FX rates, we expect second quarter revenue of between 79 and 87 million.

Speaker 3: At those revenue levels and giving corresponding non-GAP growth margin of between 45 and 48 percent, an operating expenses of between 45 and 46.5 million, we would accept a non-GAP loss per share between 47 and 22 cents.

Speaker 4: With that, I'll turn the call back over to Michael for some closing comments. Thank you, Alan. Over the last several years, we have made tremendous strategic progress beyond the manufacturing and go-to-market restructuring efforts we've implemented.

Speaker 4: We have executed on a strategy that has created the industry's broadest set of 3D capture devices.

Speaker 4: This portfolio ranges from IOS-based LIDAR to 360-degree cameras to mobile scanners.

Speaker 4: And finally to ultra high accuracy stationary scanners.

Speaker 4: We have created a cloud environment that will host the data generated by this portfolio onto a single coordinate system for viewing, collaboration, and storage.

Speaker 4: We have also begun the process of developing real applications that target streamlining workflows between various parties within the construction ecosphere.

Speaker 4: such that they're able to realize increasing levels of value from the 3D models hosted in Ferro's cloud environment.

Speaker 4: All of which will be enabled by a SaaS business model. Our products are targeted at markets that are expected to have healthy long-term growth profiles. Finally.

Speaker 4: As stated in today's press release, I am announcing my retirement coincident with my 65th birthday, which is today.

Speaker 4: I remain extremely excited and bullish about Pharaoh and its short and long-term future.

Speaker 4: I want to thank the Board of Directors for the courage to pursue our strategy.

Speaker 4: my management team, and the entire Ferrell family for their tireless dedication to making the strategy reality.

Speaker 4: Yuval Vasserman, our Executive Chairman, will be stepping in as interim CEO .

Speaker 4: And with that, I'd like to turn the call over to Yvonne. Thank you, Michael, and hello, everyone. First, I'd like to thank Michael for his contributions to Faro and wish him all the best in his retirement.

Speaker 5: As we move forward, my key message to you is that Farrow is a key player in exciting and growing markets.

Speaker 5: We have a very solid foundation of unique technology, a valued brand, incredible talent, and a sound strategy.

Speaker 5: of unique technology, a valued brand, incredible talent, and a sound strategy. However,

Speaker 5: Our performance has been challenged, and I believe while pursuing our strategy, we need a sharper focus to optimize our business and deliver on our great potential. My priority and that of our next CEO will be to ensure that we focus on delivering more value to our customers.

Speaker 5: stability and career paths for our employees and a better return for our shareholders.

Speaker 5: Over the next few weeks, I will be meeting with many of our stakeholders.

Speaker 5: with the objective of identifying and accelerating our business optimization plan, which we will update you on in our next earnings call.

Speaker 2: Thank you. This concludes our prepared remarks, and at this time, we'd 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 at any time by pressing star two. Once again, that is star one to ask a question.

Speaker 2: We'll pause for a moment to allow questions to cue. I refer to the first question, comments from Greg Palm, Greg Hallam, the capital group.

Speaker 6: Thanks. This is Danny Eggert, John , for Greg today. Thanks for taking the questions.

Speaker 6: I guess I will start by offering my congratulations to you, Michael.

Speaker 6: Thank you. Thank you very much. Yeah, I guess just starting there. Anything noteworthy on your retirement, the why, maybe the timing, anything you want to point out there.

Speaker 4: Now the details will be announced obviously in our queue, but you know I'm 65 years old, I think that's the why. I've been at this game for a long time and I think...

Speaker 4: We're at a place now from a transition perspective where I think it's probably appropriate. And I feel very excited and very proud of the team that we're leaving behind. As you've all said, extremely talented. And I feel like the strategy is well underway and in place.

Speaker 4: And I feel like it's a round execution. And I think this would be probably an optimum time for me to move on. And so that's how we made the decision.

Speaker 6: Yeah, fair enough. Totally get it. We'll congrats on that again. Thank you very much. Maybe just dig in into the quarter a little bit more. Sounds like it was kind of late in the quarter where you saw the big slowdown. Just wondering if you can give any more detail there. Obviously you said outside weakness and you're up an A-pack.

Speaker 6: So maybe a little more detail there and what you saw in this first month here, whether or not America has kind of stayed steady or you've started to see that leg behind or just kind of overall.

Speaker 4: What we saw at the end of the quarter, the end of Q1.

Speaker 4: And as you know, we talked about this in the past that we are very back in quarter loaded as it relates to closing orders to be shipped and frankly this was probably the worst we've seen. We've had a lot of orders that were actually booked that

Speaker 4: continue to be pushed through the quarter toward the end and it actually made it extremely extremely difficult for us to ensure that we had the right mix of products in the right regions to optimize revenue. Our operations team did a fantastic job, but that said it's troubling what we've seen as it relates to.

Speaker 4: to the orders and how they actually folded into the quarter.

Speaker 4: Q1 is pretty or Q2 is pretty much on track with historical backlog and backlog booking. So I feel good about our guidance and I feel good about the strength of the portfolio.

Speaker 4: But the time will tell. And I think it's concerning that we've seen kind of that push through the end of the quarter. The other concerning thing, and it was mentioned in our prepared remarks, is that our opportunity funnel, which we've talked about a lot, actually grew very, very significantly within Q1, which is good news.

Speaker 4: That said, the number of opportunities that are slated for Q2 is a bit lower than we've seen traditionally and so a large portion of that funnel growth is really for Q3 and Q4 and that's a change that That is something that we had not seen traditionally, and so I think a couple

Speaker 4: With the funnel being pushed toward the end of the year and the way the orders have tracked throughout the quarter, those are kind of the two things that really kind of keep us awake at night and has been the impetus for us to really rethink.

Speaker 6: what we think the revenue growth opportunity is for the balance of the year. We think they're leading indicators of a slowing in the second half. Yeah, got it. Maybe if I can just sneak one more in on kind of the additional cost savings. I think just to get details right, I think you said full run rate starting Q4, is that right?

Speaker 3: Yes, that's correct, Danny.

Speaker 6: Okay, and then I guess just any additional detail you can give on what exactly you're doing there and how you get to the top or bottom end of that range? Well, I think we're really... Go ahead Michael. Go ahead. No, please. No, well what I was just going to comment on is that again I think a little bit of that is work that will begin to continue to flesh out with you all.

Speaker 3: and how we manage the business, and how we manage some of the back office functions as well.

Speaker 6: Okay, great, I'll leave it there, thanks.

Okay, great. I'll leave it there. Thanks. Thank you.

Our next question comes from Andrew Degaspre, Baron Bird Capital Markets. Hi, this is Stephanie, actually, I'm for Andrew. He's traveling, I'm filling in tonight. But thank you for taking the question. We're wondering with the change in leadership, if going forward there's going to be any change to the software.

So the board and myself stand behind the strategy.

The board and myself stand behind the strategy. We believe that a strategy is sound.

We believe that the future of the application space we're pursuing

is fantastic and expected to grow in multiple markets and multiple applications yet.

It's all about the pace, the efficiency, and execution.

All right, so we're very cognizant of the dynamic in the market around us.

and hence the comment about optimizing what we do. And it's not about what we do, it's how we do it.

to the point that Alan made about efficiency and optimization. We continue to pursue the strategy of software.

we continue to pursue the strategy of SaaS and looking at recurrent revenue as we broaden our applications from hardware only into hardware and software and with the systems associated with allowing our customers to use the software.

effectively to generate actionable information.

Thank you. That's helpful. Just a reminder, if you would like to ask a question, please press star 1. Thank you.

Our next question comes from Robert Mason, Bayard. Yes, good evening, and best wishes to you, Michael. Thank you, Robert. Wanted to see if, just first, maybe this is a question for Alan, just could you speak to the trajectory that we may be on to get to those cost savings in the interim, as well as the gross.

and it's partly why we chose to provide a little bit more granularity within our guidance because we do have some moving parts and so we want to make sure that we are being as transparent as we can be.

From the guidance you can bleed that there is a level of savings that we expect to realize. Those are some of the savings that we had talked about back in February that will begin to realize. And therefore we do see a bit of a decrease in expenses in Q2 compared to the first quarter.

As we go through the balance of the year, I think I would expect a bit of a further decrease in the third quarter, and then in the fourth quarter get down to the level that we discussed in our prepared remarks, as we phase in some of the changes that again we're going to be working here over the next several weeks.

On the gross margin line, what we tried to articulate is that the incremental material costs that we're seeing, we expect those to continue through the balance of 2023, and so margin profiles.

Assuming a consistent revenue level with where we are today because again our contribution margins tend to be a bit higher than our corporate average gross margins. So fluctuations in revenue can also drive fluctuations in gross margins. But we would expect gross margins to remain relatively steady with where we reported in the first quarter.

And then finally, we would expect that the efforts that we're making to transition our supply base towards Southeast Asia, which we've been talking about for a period of time here, we're beginning to see traction there, we're beginning to see some benefit and therefore, as we end of 2023, it should become a bit more meaningful. And I think that as we...

exit 2023 into 2024, the combination of those two effects should see a pretty meaningful increase into our gross margins.

I just want to go with this margin question. How I'm just curious how the...

You kind of broke our impacts, escape your guidance here in the first quarter. Do you have the level of visibility with your manufacturing partner to be able to see how sourcing it maybe is tracking in real time? It's a very good question. And we certainly, as we've set guidance, we certainly saw a...

is just the underlying effect of FX.

So we did see Benastet in the quarter in terms of our revenue from SS.

That's buried in the $85 million. Without FX, we would have had a lower revenue. And so, again, we kind of met the revenue number at the midpoint because of FX. But FX also increases our cost of goods sold. And so at a fixed revenue level, if you will, we will have lower gross margins.

And so that's a long-winded way of saying that the softening in the overall market, partially offset by FX, but that FX affected our cost of goods sold as well. The combination of that combined with a portion of the increased material cost is why we ended up being lower than expectations.

I see, I see. If I could just ask one more, just again around the broader demand picture, you said the weakness that you've seen to slow down more elongated cell cycles is broad base. From your earlier commentary did not sound like the 3D metrology business.

And then a follow on to that is, could you dive a little bit deeper into AEC and just help us understand where you're

You know, the types of projects you're more or less exposed to just given what's going on in non-resconstruction. Yeah, let me answer the last question first. Our exposure in the AAC market is primarily commercial real estate. And so, you know, large.

large commercial buildings, even smaller commercial buildings, but commercial represents probably 85% of our AEC marketplace. 3DM, we did see some weakness in 3DM and I referenced in my prepared remarks that we had talked to several large customers.

about their capital plans for the balance of 2023. And specifically, two of those customers that we talked to anecdotally were...

plans for the balance of 2023. And specifically, two of those customers that we talked to anecdotally were, were are basically

paring back their initial capital spend for 2023. Both of these guys are automotive guys, large multinational automotive guys. And I think there's a lot of press recently that I've read about both of these guys dating this publicly. And I think that, you know, that tends to ripple through the entire automotive supply chain.

And so I think that's a level of concern that we have around 3DM.

Did that answer both of your questions? Yes, very helpful, Akal. Thank you. All right. Thank you.

We have no further questions in the queue at this time. I will now let you turn the call over to Michael Berger for any closing remarks.

We appreciate very much your attention today and your interest in Feral. And we look forward to talking in the future about our progress. Again, thank you again.

We appreciate very much your attention today and your interest in Feral. We look forward to talking in the future about our progress. Again, thank you again. Bye-bye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.