Q2 2023 FARO Technologies Inc Earnings Call
Two of <unk>, we appreciate your patience and please continue to stand by.
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Good day, everyone and welcome to the Pharaoh technologies second quarter 20, twenty-three earnings call for opening remarks, and introductions I will now turn the call over to Michael Funari at struck by your investment Investor Relations. Please go ahead Sir.
Good afternoon.
With me today from Sarah Washington, Executive Chairman Pete.
Peter <unk>, President and Chief Executive Officer.
Chief Financial Officer.
Today after Mexico's the comforter released its financial results for the second quarter of 2023.
Latest press release Form 10-Q is available on <unk> website, www dot <unk> dot com.
Please know certain statements in this conference call, which are not historical facts, maybe considered forward looking statements that involve risks and uncertainties some of which are beyond our control.
Statements regarding future business results.
Allergy developing customer demand inventory levels.
Financial guidance, economic and industry projections or substance.
That's.
Various factors.
Actual results to differ materially.
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.
Forward looking statements reflect that he was only as of today.
As required by law.
No obligation to update or revise them.
During today's conference call natural will discuss certain financial measures, they're not the same in accordance with U S. Generally accepted accounting principles or non-GAAP financial measures.
The press release, you'll find the additional disclosures regarding these non-GAAP measures, including reconciliations to comparable measures.
While I recognize that I got.
Management believes these non-GAAP financial measures. That's just robbing period appeared comparisons of core operations. However.
However, they should not be considered in isolation, whereas the substitute for measure financial performance prepared in accordance with gas.
I would like to turn the call quality of all Washington.
Thank you Mike.
Everyone to call <unk>.
Second quarter revenue of $88.2 million was up 10% year over year with hardware revenue $56.8 million up 16%.
April by increased shipment of both our quantum X R.
Laser tracker product lines as well as the addition of <unk> Ah Redfin obeys following the September 2022 acquisition.
While the overall demand development has remained relatively unchanged since our last earnings call.
We did see some customers accelerate their purchase decision, making particularly on quantum Max which when combined with better than expected laser tractor supply availability resulted in higher than expected revenue.
Related to profitability. We also began to see the effects of false previously announced cost reduction activities.
That further contributed to a better than expected bottom line.
Why don't we are pleased with our improved second quarter results, we continue to expect longer than usual self cycle's due to several factors, including the ongoing macro shortness in commercial construction.
<unk> P M I, continuing below 50 and customers signalling a push in purchasing decision interviewed your quarters.
The result, we remain cautious on second half 2023 revenue levels.
In response to the I'm sort of an economic outlook on our last call. We discuss our intention to accelerate an additional $10 million to $20 million, an annualised operating expense reductions to realise reduced quarterly spending rate of 42 $43 million and improve pharoahs underlying problem.
[noise] ability.
I'm pleased to report that during the second quarter. We have completed that these actions, which included first driving synergies by right sizing a software investment to streamline and consolidate multiple cloud environments.
That resulted from the combination of internal development and reset acquisition.
Ah software roadmap continues to include a robust feature set that enables users to view and collaborate or three D models created by various country devices on a single cloud platform with a single user interface software remains a key element of our strategy and we believe by.
Lemonade named the redundancy inherent in our prior model would be able to provide customers valuable solutions more efficiently quickly and cost effectively.
Second executing opportunities to improve productivity in our global sales organization.
We are proactively learning from our higher productivity regions and affecting change in lower productivity areas to optimize our overall investment.
We believe we have the formula execute this change without adversely affecting revenue levels.
Third.
Creating additional synergies across a global organization by consolidating shurtleff function.
And eliminate redundancies within a global cost structure, including those that resulted from acquisitions.
And finally executing on the reduction in our global footprint by consolidating sites exiting inefficient buildings and leveraging are distributed organization Marvel to reduce cost.
With these woken up complete with executed the plan, which in combination with the actions and now it's in February will result in non-GAAP operating expenses of between $40 million to $43 million on a quarterly basis, which represents an approximate 17% reduction.
From our current is run right when considering the effects of inflation, a we can download exchange rate and the addition of Jewish Lamb in September of 2022.
In formalizing this plan I spend time speaking with menu of our stakeholders and would like to share with you some of my observations.
First and foremost is that mess with employees around the globe I'm struck with a passion technical expertise and commitment to abroad offer broth and talented employee base. They believed in farrow and the mission we've set for ourselves in delivering the industries very best for the tools for you.
As in applications, ranging from ranging from three D mythology to construction management progress.
And crime and exit and scene analysis, which in turn a target date at our automotive aerospace H E C and public safety and market.
From a customer's point of view, it's apparent that perished technology and our brand has demonstrated longterm value.
Market trains customer feedback and competitive analysis reinforces that our efforts to developing.
Ah cloud based solution, which aligns three the model is from a different capture devices onto a single coordinate system will simplify and eliminate waste in the virtual management of both facility construction and operation.
Through this and other reviews with our management team I believe this unique combination of hardware capture cloud processing and hosting along with software application specifically designed for individual use case and workflow.
Further differentiate farrow in the marketplace and over the long term January to increase shareholder value.
To enable the realization that first fatigue initiatives and the labor best in class execution I'm pleased to welcome pizza allow.
Is our new President and C E O pizza.
Peter brings a wealth of experience and expertise with a distinguished career and a proven track broker record of driving business success.
Peter has held key leadership position at several industry, leading companies, including G E Honeywell and Hubble, where he has to deliver exceptional results and demonstrated a strong commitment to operational excellence and driving sustainable growth with demonstrated success in leading organization through the.
<unk> Soffer and solutions Peter has recognized firsthand how software enabled solutions can be a key driver of growth and competitive advantage.
And to repeat his leadership, we are confident that Federer will continue to expand its global presence and and hence his physician as a leader in for the digital reality technology.
With that let me turn it over to Peter to share a few comments.
[noise]. Thank you evolve and good afternoon, everyone. Let me start by saying I am really excited to join feral accompany with a rich legacy of innovation and a track record of delivering high quality solutions to customers across various industries.
And my new leadership role unfortunate to have the opportunity to work alongside a talented team dedicated to driving furrow success.
As we look ahead value creation for customers and shareholders will remain at the heart of our strategy.
Our goal is to deepen our understanding of customer needs enhance our product offerings and continue to provide exceptional service and support.
By forging strong partnerships with our customers, we will ensure that farrah remains their trusted partner in their pursuit of operational excellence and digital transformation.
I feel very privileged to lead furrow into our next chapter.
With our strong foundation unmatched technological capabilities and commitment to our customers employees and shareholders. I believe we are well poised for future growth and success I look forward to speaking with many of you in the months ahead.
With that I'll now turn the call over to Alan to provide an overview of our second quarter financial results.
Thank you Peter and good afternoon, everyone.
Second quarter revenues $88.2 million was at 10% or six per cent organically when compared with the second quarter of 2022.
Primarily due to higher shipments of our quantum Max.
Major factors.
Second quarter hardware revenue $56.8 million was up 16% year over year.
Over the last 12 months hardware revenue, which is a strong leading indicator for service and ultimately software revenue is that 14% as reported or 8% organically over the prior 12 month period, and the continuing longterm longer term reflection of the increased differentiation and text.
<unk> at the hardware products you'd want US 18 to 24 months ago.
Software revenue of $10.8 million was roughly flat year on year and continues to reflect the conversion of customer purchases from perpetual licenses to subscriptions.
We continue to expect this conversion too subscription to be predominantly complete by the end of 2023.
Finally, while service revenue of $26 million represented a modest two per cent increase year over year.
It is the first set year on your service revenue growth, we've recorded and five consecutive quarters.
Gap gross margin was 37.8% and non-GAAP gross margin with 48% for the second quarter of 2023.
During the quarter, we encourage and 8.1 million inventory reserved and cost of goods sold associated predominantly with discontinued non-core products as well as demo accessories, which adversely impacted our GAAP results.
non-GAAP basis continued high raw material costs and relative strength of the U S dollar compared to historical exchange rates.
<unk> and the second quarter's year over year non-GAAP gross margin decline.
As a reminder, a higher cost of raw materials, primarily stem some sourcing semiconductor components in an extremely tight broker market.
We expect to adversely affect reported gross margins to the balance of 2023.
Given their unique nature. These transactions are not expected to adversely affect the timing of the previously committed 12 million an annualized savings that we expected to result in a shift in our supply chain to southeast Asia.
We continue to believe the savings from the shift a lower cost suppliers will begin to be realized.
2023.
I want to emphasize that are underlying average selling prices in local currency and the expectations of longterm product. Max has remained relatively unchanged and therefore as raw material costs normal lives and we capitalized on the southeast Asia supply chain, we expect gross margin to significantly.
Influence in 2024.
Tap operating expenses were $58.7 million and included approximately 5.8 million an acquisition related intangible amortization in stock compensation expenses, and 8.8 million and restructuring and other transactions.
non-GAAP operating with 44.1 million.
Roughly flat with Q2 last year, despite the including <unk> senses as we began to realize the benefits of our restructuring efforts.
With the sooner than expected completion of our expense reductions we're committed to realizing quarterly spending a pleasant F X rays of approximately 40 to 43 million now beginning in the third quarter instead of the fourth quarter of 2023.
Yup operating loss was 25.4 million in the second quarter of 2023, compared with an operating loss of nine nine in the second quarter of 2022.
non-GAAP operating losses $1.8 million in the second quarter of 2023 compared to a loss of $2.5 million in the second quarter of 2022.
Adjusted EBITDA was 900000.
Our GAAP net loss was $28.2 million or $1.49 for sure.
Or non-GAAP net losses $2.6 million or 14 cents per share for the second quarter of 2023 compared to a net loss of approximately 600000 or three cents per share and Q2 2022.
And May we discussed the total charge between 22 and 28 million to realize our new quarterly extent space.
On a year to date basis, we have incurred $22 million in charges, resulting from cash severance for accepted employees.
Inventory write offs as we increase our focus on core strategic product lines and facility in other acid related right down as we seek to reduce utilized square footage by over 25 per cent given our hybrid work environment.
We continue to expect that approximately 40 per cent of the combined charges to be cash payments.
Our cash balance at the end of the quarter was 88.5 million and remained approximately flat with two two.
We generated 700000 free cash flow during the quarter or $3.9 million, when excluding $3.2 million, a cash restructuring payments incurred during the quarter.
You remain very focused on improving our days sales outstanding with a six days sequential improvement in Q2 and further accelerated collections expect it in the second half of 2023.
Given our current accounts receivable balance.
Expectations for revenue in our new expense space as well as further enhancement store inventory management, we expect to remain free cash flow positive in the second half of 2023.
Moving onto guidance at present F X rates, we expect third quarter revenue of between 76 and $84 million.
At those revenue levels and give it give it a corresponding non-GAAP gross margin of between 46 and 48% and.
And non-GAAP operating expenses of between 41 and 42.5 million.
Would expect a non-GAAP loss per share between 35 and 10 cents.
As a reminder, Q3 tends to be a seasonally soccer quarter for us due primarily to the summer months in Europe .
There are exceptions, such as last year to three and.
Q2, this year, where we experienced a strong benefit some backlog reductions.
Q3, 2023 projected sequential decline of approximately 10% at the bitcoin when considering the effects of these backlogs changes is representative of our historical third quarter Susan Allen.
This concludes our prepared remarks, and 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 withdraw your question at any time by pressing star two.
Once again to join the question queue that is star N. One.
Well my first two Craig Palm.
<unk> yeah.
Your line is open.
Thanks, Good afternoon, everyone and Peter welcome aboard look forward to working with you and congrats on the improved results here in the corner.
Thanks, Greg.
Thank you so I guess, maybe just starting off.
You know revenue you know even ahead of the the top of the range that you provided last quarter and you know it doesn't sound like the demand environment has changed but maybe you can just give us a little bit more color on on what you saw whether it was by and market by geography, whether it was kind of an end of quarter flushed because.
You know clearly the the the quarter came together quite a bit better than I think what anybody plenty of us. We're we're thinking a few months ago.
How long would you like to answer that.
Sure So Greg I think relative to our expectations entering the quarter we were.
We were we were pleasantly surprised to see a couple of folks.
Accelerate some of the decision making related to opportunities that they had provided us at the beginning of the quarter of the day is expected to close out in time, a little bit further and so as we navigated the quarter. We did we did see some incremental demand as we as we closed out the <unk>.
<unk>.
<unk>, we had some upside that we were able to realize based upon material availability, becoming available to us predominantly on the arm and the laser tracker as we indicated.
As we head into the third quarter, you're you're right. We we the underlying demand position remains relatively steady with what we saw at the end of the second quarter.
We saw at the end of the second quarter and it continued into the third quarter, where our pipeline of building opportunities tends to be a bit more out into the outer quarters as opposed to expectations of closing in the third quarter, which is somewhat consistent with traditional seasonality as we highlighted in her prepared remarks, but also.
But but also indicating that that'd be continued softness in the P. M. I and continued push out if customer decisions appears to be to be there. The good news continues to be that we we don't believe we're losing sure.
We we see customers actively pushing a demand sideways as opposed to again, making different decisions in terms of who they are gonna buy or what they're going to buy and so I think that you know given the the longer term revenue growth and especially on the hardware side that we've now demonstrated will be highlighted prepared remarks.
We are cautiously optimistic that as as the market stabilizes and continues to improve it will be able to enjoy the benefits of that.
Understood.
Just on the on the Q3 guide.
Specifically I understand the comments, but I think that you know at least at the mid point it suggests.
You know I think a lot more of a sequential decline in what you've seen.
Historically, and so I I guess the question is did did some of those Q3 sales get pulled into Q2 or maybe it's just a little bit of conservatism, but just just curious what the thought processes on Q3 as well.
I I think <unk> I think that what you see right now is seasonality.
Also getting signals from our customers in some areas that are delaying you know buying decisions Susan.
Excuse analogy of course, you know last you a <unk> I mean Q3 was unique.
And and you know, we basically expect to see a decline I'm sorry, Q to you what did you need can be except to see a decline mainly because she's been ality.
And also we're being cautious you know, we see some headwinds coming from the a C market the <unk> manufacturing market is spotty.
And tend to be changing based on industries in regions.
So what you see is a result of foreign analysis of the market and expectation going forward.
And Greg just another comment around a sequential because recent history is a little bit hard to interpret interpolated, given hoping and the effect in 2020 to recovery from Covid. In 2021, we certainly saw some odd sequential changes by quarter that is not typical of our history and so if you look back and 18.
19, the 10% sequential decline is right in the wheelhouse of where we have historically been and I know that's ancient history, but unfortunately, we do have to go back a while before we see things where it's not affected by the the broader demand environments, where it's not available <unk>.
Where it's not impacted by material availability challenges that caused revenue to be recognized and one quarter in demand in another so so that combined with US you have all indicated just a pipeline of opportunities that we see the to line up and a desire excuse me to be somewhat conservative.
The the three line up to to how we got it.
Yeah, Okay that makes sense.
[noise] I guess last one you know for for Peter If I can do you know this question, maybe it's not [laughter] not fair cause you you've only been in there all for a little over a week, but just kind of curious as as as you've walked around what excites you. Most I mean anything that you think from a strategic standpoint that can be change that can be a.
Proved upon it a little bit more color on why you joined that'd be helpful as well thanks.
Yeah sure Greg. Thanks. Thanks for the question you know strategically I think our strategy is sound and you know, it's all about execution for us in the short term.
You know exciting technology at Ferro right at the convergence of hardware and software and a really fast moving and growing market is is it pretty exciting place to be the opportunity to strategically drive revenue growth and Pharaoh combined with you know our our.
<unk> execution opportunity that's right there in front of US you know will give us the ability to expand margins and generate cash and that's very exciting and and I think it's a great opportunity for us to create value for all shares all of our shareholders.
Okay, Great I'll hop back in the queue. Thanks.
Thanks, Craig.
Thank you.
And what is next to Andrew <unk> with Bahrenburg. Your line is open.
Mm. Thanks, Good afternoon, Peter No. It's only been recently you joined and just wandered in terms of the the strategy that was implemented before your arrival.
You know I I guess, maybe if you could probably.
Discuss do you think there's any changes that you would make going forward.
Number one and number two.
In terms of the previous experience you've had at other firms can you maybe elaborate in terms of how did you how did you essentially commercialized software hardware solutions.
And do you see a similar path for <unk> to do so.
Yeah. Thank you. Thank you very much for the question in terms of strategy changes as I as I mentioned I think the strategy is very sound there may be degrees of of changes as a as a get in and look under the hood, but I don't think material strategy changes.
<unk> on the Horizon again, I think the opportunity for execution ahead of US is is there and it's there for the taking it and I think that execution is going to enable us to create a lot of shareholder value you.
You know over the last two decades, I've spent with industrial multinational corporations.
And pretty high technology businesses were both hardware and software offerings.
Intersected really to create customer value.
And I see the same opportunity here here at feral the similarities between those businesses that I've run in and what's here is is pretty striking most of the businesses where public had the hardware and software sales were all global in nature real all required some form of transformation to new business.
Models, and a keen understanding of agile product development and we're all in really fast paced environment that place to premium you know an urgency and execution all the same stuff that I see here and what the opportunity is ahead of us for Pharaoh and if we do those I think we execute on those key priorities we've got a.
Opportunity to you know continue on this growth trajectory expand the margins, which is grow the bottom line faster than the top line and increase our cash flow generation.
That's how far and then maybe.
If I may on on the on the way you just sat in terms of grow the bottom line and I mean, if if if it's by any chance and I it doesn't sound like it but.
Are you take precautions.
Precautions, taking a precaution and and sort of cutting more on the on the on the expense side to reflect.
The current weakness in the macro or is this ah.
And in other words, we should expect some weaker revenue.
For for Awhile and and.
In other words are you essentially making that training that balance between like a margin and growth.
And it's not.
What kind of revenue level What'd, you say after this change and and it cost structure.
Would you say your EBITDA margins potentially woodland that is it still ran at 20% that was discussed previously.
Yeah, So maybe a little early to you know to get into real detail about you know kind of what we expect on on the expenses and certainly on the revenue given the uncertainty and the the macro economic environment. What I can say is I I think we have a tremendous off.
Fertility.
<unk> and the gross margin I think we have an opportunity as we grow to lever the improved fixed cost base.
That we've set out the actions for here in Q2 that will begin to see the benefit oven and three and four and then and then obviously into 2024 as well yeah. If if I may chime in this issue of all you know the queue to actions we've taken.
The majority of the actions will be realized and keeps me in queue for.
In fact, we have accelerated our program.
In the restructuring to realize the benefit as soon as possible and also with a look into the future.
The way we approach to it was very surgical we restructured for efficiency simplicity speed focus and synergies.
And a lot of the benefit of these restructuring in cost savings will be realized during the second half of this year as earliest Q3.
Obviously is P. T is going to you know spend more time under the hood more than that we can have he's going to have the opportunity to really look deep into the company <unk>.
And addressing the question that you raised.
Both myself and Pete has deep deep experience in operational excellence.
Operational leverage running companies, an efficient way driving execution fast and realizing shareholder value and and a lot of what we expect to see a lot of the excitement that we see right now is the cross section between the faster opportunity.
We have here and the experienced management has to deliver on those opportunities.
I guess that magenta, Max sorry, Hey, Andrew the only other thing I might add is you ask the question around revenue What's act and I think as your ball indicated in again and are prepared remarks, how we've outlined in how we surgically made those changes we do not expect those changes to adversely affect our our ability to be able to generate <unk>.
<unk> over the longer term and even in the in the near term. It's it's not going to have an effect on us at least that's the current expectation we were able to eliminate redundancies, resulting from acquisitions. Some redundancy in terms of cloud environments et cetera. So we we feel pretty good about our ability to be able to continue on with revenue levels.
That's helpful. Thank you.
And once more for your questions today.
<unk> N one.
Next to Joseph Donahue with Barrett.
<unk>.
Everyone. It looks like geographically the trend for maybe the strongest sphere of a year in the Americas mucus in Asia could you just give me a general overview of how sales are trending by geography, they give us some more perspective into that.
How long do you have this information.
Sure I sure do so in the Americas I think we've benefited from a very strong organization and strong leadership with the organization and the relative growth in the Americas. Since then quite song. It also has not had the the unfortunate effect.
Weakening dollar weakening dollar <unk> excuse me a strengthening dollar over the prior 12 months and therefore, you know we've seen some relatively steady steady performance that has continued in the first half of 2023 and EMEA, it's been a little bit more sporadic.
The the second quarter in India, We had a very strong particular period I think we saw some very nice performance within a three D mythology space, specifically with an automotive and aerospace that's that helped us as we closed out the quarter and then Asia Pacific tends to be a bit of a an area, where we need to spend a bit of time and focus on.
Because in the quarter.
<unk> was a bit of a decliner for us leading us overall to have a 10% revenue growth basis as we as they commented earlier the hardware growth for US overall has been quite strong over the last year, where we've grown roughly about eight per cent on an actual currency basis.
When you exclude the act the effects of acquisitions in on a constant currency basis closer to 12 per cent. So we think we've got the right products. We think we've got the right sales organization to go capitalize on these products and we look forward to continuing the progress that we've made here over the last 12 months into the next several quarters.
That's great. Thank you and kind of continuing on that line.
Today mentioned, taking some products out of the portfolio can you get any perspective on how.
To contribute to a gross margin in the second half and maybe 2024, how could potentially impact the top line.
The products that we're referring to our our products that are a bit around the periphery. So there of course, not our laser scanner not our arm and not our laser tracker I won't go into the details of specifically, which ones, but there's a couple of them that have watched over I Wanna say, probably three or four years ago that have not.
Benefited our revenue materially and therefore, it is not really affected our gross margin materially either and so we don't expect to see any significant change in top line or bottom line as a result of the changes what you will see though internally at least isn't the ability to be able to focus more heavily on the products that really mad.
To us and that streamlining and that focus has been a mantra of ours that we expect to continue on with the future and help us become more and more successful overtime.
Great. Thanks, I'll have it on.
And it does appear that there are no further questions. At this time I would now like to turn the call back T involved wasserman for any closing remarks.
Thanks, everyone for joining us today Q2 was a good quote for us realizing some of the changes with implementing and realizing earlier results than we planned.
We're excited about a future we excited about the opportunities ahead of us and we're excited within new leadership in a company.
And we're looking forward to speaking to many of you in the near future. Thank you so much.
This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful evening.
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