Q3 2023 FARO Technologies Inc Earnings Call

Your program is about to begin.

Good day everyone.

Welcome to the Faro technologies third quarter 2023 earnings calls for opening remarks and introduction.

I'll now turn the call over to Michael scenario.

At Sapphire Investor Relations. Please go ahead Sir.

Thank you and good morning, with me today from fair or Peter Lal, President and Chief Executive Officer, and <unk> Chief Financial Officer.

Yesterday after market closed the company released its financial results for the third quarter of 2023.

The press release and Form 10-Q are available on Faros website at Www Dot fair 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 and include statements regarding future business results product and technology development customer demand inventory levels, our outlook and financial guidance economic and industry projections.

For 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.

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 will 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 Peter low.

Thank you Mike Good morning, and welcome everyone to our call.

We made notable progress in the third quarter exceeding the high end of our guidance range by delivering $86 $8 million in revenue.

In addition, due to our lower cost structure and sequential 90 basis points non-GAAP gross margin expansion adjusted EBITDA improved by $2.6 million or 300 basis points over the second quarter. Despite a small sequential decline in revenue.

From a topline perspective, the better than expected performance resulted from focused sales activities to increase our overall pipeline and acceleration in customer decision, making in our target markets that combined with an improved material availability and improved sales and operations execution enabled higher than expected unit.

Yeah.

During the quarter, we continued to make excellent progress on our initiatives to streamline operations by taking a series of actions that reduced our footprint right sized our cloud investment integrated prior acquisitions and increased our overall productivity, we have increasing confidence that these cost actions will <unk>.

Optimize our performance and not adversely affect our ability to capture long term market share.

While we are pleased with the progress we are in the early innings of improving results and driving increased execution.

Our team recognizes that we have more work to do and is committed to executing with intensity.

The revised cost structure reflected in our third quarter expense base and gross margin expansion demonstrates the progress we've made towards improving our operating model.

In the quarters ahead, we will continue to be vigilant in maintaining current spending levels and capturing additional opportunities with a particular focus on expanding gross margins, while continuing our focused investment in new products and technologies.

On the product front, the third quarter, we accelerated our product development process, while focusing on key product launches, which we will we believe will have the greatest impact in the market.

An example of this is our recently launched Orbis mobile scanner, a groundbreaking advancements set to redefined three D reality capture Orbis is the first to market scanner that can be used for both mobile and stationary data capture in one device.

Its best of both worlds performance, providing the ease of use and speed of our mobile scanner, while also providing the unique ability to seamlessly switch to stationary mode, which significantly enhances accuracy.

When combined with automated integration to our recently announced sphere X gene platform stereo provides customers the ability to automatically process three D data, making completed <unk> images available for viewing and collaboration in a cloud.

Desktop or mobile environment up to 90% faster than alternatives.

These advancements reflect a fusion of Faros legacy technologies with those of our recent Geo Slam and hollow builder acquisitions and further demonstrate our commitment to innovation.

Before turning the call over to Alan who will provide greater detail on our third quarter results I wanted to take a moment to share some of my observations.

Since joining ferro My primary focus has been on building a point of view on what is working well.

Where we need to improve our opportunity for sustained technology differentiation and finally on a sustainable financial success model I'm very impressed by what I've learned.

Having met with customers around the world the strength of Faros brand in the market is clear and not only speaks to the trust customers have in us, but also our reputation for three D application expertise and innovation.

Leveraging our core stance in the market, we are well positioned to remain at the leading edge of product performance, while exploring near Adjacencies that expand our addressable market solve our customers' toughest problems and ultimately drive growth.

Customer feedback has affirmed our overarching product solutions strategy.

And speaking with our employees the team's unwavering commitment to our organization is palpable.

Given the macro challenges and uncertainties over the past several years their dedication is truly commendable.

The team has not only engaged but driven I have shared ambition to be a leader in the market through a commitment to our customers shareholders and the legacy of Ferro.

I'm encouraged by the opportunity to improve upon the solid foundation, we have as a company I believe in establishing an operating system centered around an 80 20 philosophy that relentlessly prioritizes key activities that will drive the greatest impact on shareholder value and our financial model that will yield improved profitability in <unk>.

All market conditions.

We are well down the path of implementing organizational initiatives such that all 1300 Ferro employees know how what they do every day contributes to the achievement of the priorities. We've aligned on an agreed to as a team.

I have confidence, the resulting focus and rigor will yield performance improvements.

Having had the chance to assess the market opportunity there is incredible value to be created by the reduction of waste and inefficiencies in the management of the worlds physical assets through the use of <unk> capture and virtual management tools.

Our potential for growth is broad and substantial but will require a focused.

Disciplined product roadmap as well as a go to market strategy targeted toward customers markets and applications, where we have the highest probability of success.

Driving for US remains our underlying strategy of hardware augmented by software to deliver solutions that solve customer problems.

Yet there is likely some refinement to key elements and focus areas.

And that will accelerate and optimize our success.

In the coming months I expect to continue building upon our operating cadence and further refine my strategic point of view with our employees executive team and board of directors to develop a cohesive strategy when finalized I plan to publicly communicate to our stakeholders are key priorities target markets targeted.

Financial model and long term goals as well as a roadmap for achievement.

With that I'll now turn the call over to Alan to provide an overview of our third quarter financial results.

Thank you Peter and good morning, everyone.

Third quarter revenue of $86 8 million was up 2% compared with the third quarter of 2022.

Three D metrology demand remained relatively healthy, particularly in the automotive and aerospace industries.

Geographically demand within the Americas, and Europe continued to perform well, but the softness we saw in China, causing a bit of caution near term and into the fourth quarter.

In the third quarter, we continued to see our sales activities yield an expanded pipeline, while too early to call a trend and remaining longer than historical averages are sales cycles modestly shortened after two consecutive quarters of lengthening. This.

It's positive timing change created in an uplift in demand and with improved execution in sales and operations planning positively impacting our finished goods availability, we were able to accelerate product availability.

That aside the increased customer demand.

Third quarter hardware revenue of $55 7 million was up 1% year over year, while software revenue of $11 2 million was up 6% and service revenue of $19 9 million increased slightly.

Recurring revenue was $17 1 million and represented 20% of sales.

As discussed in prior quarters over the past year, we have seen a modest flattening of overall software revenue as we convert customer purchases a perpetual licenses to subscriptions.

In the third quarter, we began to see a resumption in both sequential and year over year growth as we exit this transition stage.

Service revenue showed a modest 1% year over year increase marking the second straight quarter of year on year growth as our service revenue continues to show signs of recovery from the contraction in our serviceable installed base that resulted from softness in 2020 and 2021 hardware shipments.

GAAP gross margin was 48% and non-GAAP gross margin was 48, 9% for the third quarter of 2023.

On a non-GAAP basis continued high raw material costs and relative strength of the U S dollar compared to historical exchange rates resulted in the third quarter's year over year gross margin decline.

Sequentially. We are pleased that reported non-GAAP gross margin improved 90 basis points due in part to improved product mix.

The modest decrease in unfavorable purchase price variances that resulted from our 2022 broker buys and.

And importantly, we saw initial benefits some supply chain localization.

The sequential gross margin improvement from our shift to a southeast Asia supply chain is important as it marks a proof point on our way to realizing $12 million in annualized savings.

Additionally, in Q3, while lower than Q2, we continued to recognize approximately 300 basis points of unfavorable 2022 broker by ppb amortization that will no longer affect us in early 2024.

Taken together, we continue to expect a meaningful improvement in 2020 for gross margin.

GAAP operating expenses were $48 6 million and included approximately $4 6 million in acquisition related intangible amortization and stock compensation expenses.

And $2 5 million in restructuring and other transaction costs.

non-GAAP operating expense of $41 5 million was down $2 8 million from Q3 last year as we realized the first full quarter benefit of our restructuring efforts.

As we stated last quarter with our expense reductions largely completed we remain committed to realizing quarterly spending at present FX rates of approximately $40 million to $43 million.

GAAP operating loss was $6 9 million in the third quarter of 2023, compared with an operating loss of $7 1 million in the third quarter of 2022.

non-GAAP operating income was 900000 in the third quarter of 2023 compared to a loss of approximately 750000 in the third quarter of 2022.

Adjusted EBITDA was $3 5 million or approximately four 1% of sales.

Our GAAP net loss was $8 8 million or 46% share per share. Our non-GAAP net income was approximately 450000 or <unk> <unk> per share for the third quarter of 2023 compared to a net income of approximately 550000 or <unk> <unk> per share in Q3 2020.

Two.

In May we discussed a total charge of between 22 and $28 million to realize our new quarterly expense base.

On a year to date basis, we have incurred approximately $25 million in charges, resulting from cash severance for affected employees inventory write offs as we increase our focus on core strategic product lines and facility and other asset related write downs as we seek to reduce utilized square footage.

We continue to expect that approximately 40% of the combined charges to be cash payments.

Our cash balance at the end of the quarter was $79 9 million down $8 6 million from Q2, largely due to restructuring charges.

The restructuring and other nonrecurring cash payments, our free cash flow would have been approximately neutral in the third quarter.

We remain very focused on improving our days sales outstanding with accelerated collections expected in the fourth quarter of 2023 and into 2024.

Given our current accounts receivable balance expectations for revenue and our new expense space as well as further enhancements to our inventory management, we continue to expect cash flow to be positive in the second half of 2023.

Between 18 and 34 cents.

This concludes our prepared remarks and at this time, we'd be pleased to take questions.

At this time, we will open the floor for questions.

If you would like to ask a question. Please press star followed by the one key on your telephone keypad.

Questions will be taken in the order in which they are received if.

If at any time, you would like to remove yourself from the questioning queue. Please press star two again to ask a question. Please press star one we will go first.

Calm with Craig Helen Capital Group.

Your line is open.

Yeah. Thanks, good morning, everybody in <unk>.

Congrats on the results and Pete and especially a good start for Ya, so congrats as well.

Thanks, Greg nice to speak to you.

Mmm, maybe just kind of starting on the on the revenue in the sort of demand outlook side of things.

You know as you kind of look back on on the corner and just general activity I'm. I'm curious you know are are you characterizing the better than.

You know expected activity due to you know how much is due to market conditions versus you know just better execution and sort of you know companies specific I'm I'm guessing, it's a mix of both but maybe leans towards the ladder, but just wanted to get some kind of further input on on what your thoughts are.

Yeah, Greg Thanks for the question I mean geographically I would say, we continue to see broad strength in the Americas region with a mere staying steady.

APAC contraction, driven driven by China, I would say that the execution was you know driven by a number of factors probably most notably.

Uhm normalization of material availability, which obviously allows us to react.

To our sales forecast, a little bit better be in a better position.

With finished goods are better positioned to move our products around the world to satisfy said customer demand, so a little bit of market, a little bit of execution, which which obviously drove a better expect the unexpected results Greg.

And other than calling out you know China as a maybe a region of weakness is there anything out there you know.

Geographic wise or and market wise that that cautions you going forward relative to maybe what you would've thought a few months ago.

Yeah, I mean look Greg I think we're all kind of looking at the developing situation in the middle East and and trying to understand what that means for the the broader macro economic environment.

You know the a C market continues to remain a little soft with a decline in <unk> and commercial project, but you know that said I would say you know industrial applications on the three D M side.

Still pretty strong I would say a good macroeconomic environment, they're so <unk>.

We're watching it closely the continue normalization of our supply chain should allow us to continue to react in and drive execution of that demand and and we'll be particularly focused on that execution in the fourth quarter.

Understood.

And then if I could just shift gears a little bit on gross margin you know in terms of the outlook for Q4.

Alan does that take into account a lower you know maybe headwind from from the broker fees or is that still take into account kind of a full 300 basis points.

If you think about the purchase price variance that we experienced in two three I think we expect that the.

<unk> between the 2022 broker buys as well as the localization of our supply chains to southeast Asia.

The effect that we're seeing in Q3, we expect to modestly improve in Q4, but generally by and large remain the same the margin improvement that we see in Q3 from Q3 to Q4 is mainly going to be driven by the increase in revenue in our corporate average contribution margin.

And better fixed cost absorption.

Okay, and and so do you realise than than most of that benefit in Q1 or is it sort of exiting Q1, where you see you know most of that you know headwind dissipated.

There's certainly going to be a sizable improvement in Q1, but not to the full extent that we've outlined that would be more they enter this into the second half to.

Two two into the second half not to get too precise.

Okay understood Alright, I will I'll leave it there are best of luck.

Thanks, Greg Thanks.

Thanks, Greg.

Once again, if you would like to ask a question. Please press star N y.

We will go next to Jim machine with medium.

Company.

Your line is open.

Hi, Good morning. This is actually Kris kringle on for for Jim and congrats on the on the corner by the way.

With the with the release of of the sphere X G. I was just wondering if you could talk about the trend that you're seeing in terms of bookings in terms of the revenues per user any any color even at a high level. He could provide there that'd be great.

Hey, Chris Thanks for the the question and appreciate the commentary probably too early to talk about sphere X G and and that trend does it just released in the middle of August what I will say is the added functionality Unsphere X G along with.

The workflow component and the integration with you know our our new Orbis product will allow many of our customers to seamlessly automate the capture and the readiness of that three D.

Data and so we expect that we expect really big things from severe X G and look forward to talking more about that in quarters to come.

Got it and.

On automotive.

Could you just maybe talk a little bit more about what you're seeing there and and was there any exposure to sort of what we're hearing about with with respect to the U a W situation. Thank you.

Thanks, Chris Yeah, No look at something that we are we're we're watching closely as I as I commented, we are still seeing broad strengths and are America's business and <unk> and and at this point would expect that to continue into the fourth the fourth quarter. So no no no specific.

<unk>, but what we'll continue to watch that situation pretty closely.

Great. Thank you very much.

Thank you ladies and gentlemen.

Does conclude today's program you may now disconnect.

Mmm.

[music].

Mmm.

Mmm.

Mmm.

[noise] [noise].

Mmm.

Okay.

Mmm.

Mmm.

Mmm Mmm.

Mhm.

Mmm.

Mmm Mmm.

Mm.

Mmm Mmm.

Mmm Mmm mmm.

Mmm.

Mmm.

Mmm Mmm.

Mmm.

Mmm Mmm.

Mmm Mmm Mmm Mmm.

Mmm.

Mmm.

[music].