Q4 2023 FARO Technologies Inc Earnings Call
Operator: For more information on today's program, please press star zero. Good day, everyone, and welcome to the FARO Technologies fourth quarter and year-end 2023 earnings call. For opening remarks and introductions, I will now turn the call over to Mike Funari at Sapphire Investor Relations. Please go ahead.
Sorry zero.
Good day, everyone and welcome to the Faro technologies fourth quarter and full year.
Good day, everyone and welcome to the Faro technologies fourth quarter and full year.
In 2023 earnings call for opening remarks, and introductions I would now turn the call over to you Mike Funari at Sapphire Investor Relations. Please go ahead.
Thank you and good morning with me today from Farrell, our Peter Lowe, President and Chief Executive Officer, and Matt Horvath Chief Financial Officer.
Mike Funari: Thank you and good morning. With me today from FARO are Peter Lau, President and Chief Executive Officer, and Matt Horwath, Chief Financial Officer. Yesterday after market close, the company released its financial results for the fourth quarter and full year. The related press release in Form 10-K is available on FARO's website, www.faro.com.
Yesterday after market close the company released its financial results for the fourth quarter and full year of 2023.
The related press release and Form 10-K is available on Faros website at Www Dot Farrell Dot com.
Mike Funari: Please note, certain statements in this conference, which are not historical facts, may be considered forward-looking statements that involve risks to incidents, some of which are beyond our www. FARO.com, Inventory Levels, Our Outlook, and Financial Guidance. Economy and Industry, various factors could cause actual results. For a more detailed description of these and other risks...
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.
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 yesterday's press release, and our annual and quarterly SEC filings.
Mike Funari: Please refer to yesterday's press conference. Annual and Quarterly. Forward-looking statements reflect our views only as of today. We accept this as required by law.
Forward looking statements reflect our views only as of today.
As required by law, we undertake no obligation to update or revise them.
Mike Funari: We undertake no obligation to update or replace... During today's conference call, management will discuss certain financial, www.faro.com, U.S. Generally Accepted Accountants, and Nongat, www. FARO.com. You'll find additional disclosures regarding these non-GATT members, including Reconciliations to Comparable Gets. Thank you for watching. However, they should not be considered in isolation.
During today's conference call management will discuss certain financial measures that are not presented in accordance with U S. Generally accepted accounting principles or non-GAAP financial measures.
In the press release, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures.
Not recognized under GAAP management believes these non-GAAP financial measures provide investors with relevant period to period comparisons of core operations.
However, they should not be considered in isolation or substitute for a measure of financial performance prepared in accordance with GAAP.
Peter Lau: Institute for a Measure of Financial Proportions, www. FARO.com. Thank you, Mike. Good morning, and welcome everyone to our call. In the fourth quarter, our focus on execution across all aspects of our operations continued to drive meaningful results. Whether it be refining our product development process and roadmap, enhancing customer experiences, or streamlining our internal processes, we remain committed to delivering on our three core tenets. First, to grow revenue faster than the markets we serve. Second, to grow earnings at a faster rate than revenue, and third, to grow cash at a faster rate than earnings.
Now I'd like to turn the call over to Peter.
Thank you Mike Good morning, and welcome everyone to our call.
In the fourth quarter, our focus on execution across all aspects of our operations continued to drive meaningful results.
Whether it be refining our product development process and roadmap enhancing customer experiences we're streamlining our internal processes, we remain committed to delivering on our three core tenants first to grow revenue faster than the markets we serve.
Second to grow earnings at a faster rate than revenue.
And third to grow cash at a faster rate than earnings.
We not only met but exceeded our targets in the fourth quarter delivering $98 $8 million in revenue, which was towards the high end of our guidance range. We delivered 36 of non-GAAP EPS, which was above the high end of our guidance range.
Peter Lau: We not only met but exceeded our targets in the fourth quarter, delivering $98.8 million in revenue, which was towards the high end of our guidance range. We delivered 36 cents of non-GAAP EPS, which was above the high end of our guidance range. $13.2 million of adjusted EBITDA, a 12% year-over-year increase, and $14.7 million of free cash. $13.7 million of adjusted EBITDA, a 12% year-over-year increase, and $14.7 million of free cash. From a top-line perspective, the better-than-expected performance resulted from strong execution by our sales teams in the Americas and Europe, including a $3 million order with a channel partner in As expected, the industrial and construction markets in China remained especially weak, creating a headwind for year-over-year revenue.
$13 $2 million of adjusted EBITDA, a 12% year over year increase and $14 $7 million of free cash flow.
From a topline perspective, the better than expected performance resulted from strong execution by our sales teams in the Americas, and Europe, including a 3 million dollar order with a channel partner in Romania.
Outfit, the Romanian police force with Faros public safety solutions.
This deal is the largest public safety order in Faros history, and demonstrates the value of our unique solutions.
As expected the industrial and construction markets in China remained especially weak, creating a headwind to year over year revenue growth.
Operationally, we saw a notable sequential improvement in gross margin in the fourth quarter, which we attribute to several factors first due to seasonality and the strong year end demand environment, we benefited from fixed cost absorption.
Peter Lau: Operationally, we saw a notable sequential improvement in gross margin in the fourth quarter, which we attribute to several factors. First, due to seasonality and the strong year-end demand environment, we benefited from fixed cost absorption. Second, as we have discussed on prior calls, the purchase price variance headwind we have incurred since the beginning of 2023 continued to abate in the fourth quarter, and we have taken a number of steps to ensure PPV remains at nominal levels going forward. Lastly, our supply chain efforts within Southeast Asia continue to progress as planned.
Second as we have discussed in prior calls the purchase price variance headwind, we have incurred since the beginning of 2023 continued to abate in the fourth quarter and we have taken a number of steps to ensure PPV remains at nominal levels going forward.
Lastly, our supply chain efforts.
Within Southeast Asia continue to progress as planned.
Peter Lau: Taken together, our non-gap gross margin improved 360 basis points sequentially to 52.5%. This is very encouraging progress towards our stated objective of expanding gross margin. As I mentioned earlier, from a cash flow perspective, we generated $14.7 million in free cash flow in the fourth quarter, delivering on our commitment to achieve positive cash flow in the second half of 2023. This was achieved by significantly improving our operating performance and driving efficiency in working capital. Although I am pleased with the progress we've made in the last two quarters, it is still clear to me that we are in the early stages of improving execution and results. Our team understands there's still much to accomplish and is dedicated to executing on the plan ahead.
Taken together, our non-GAAP gross margin improved 360 basis points sequentially to 52, 5%.
This is very encouraging progress towards our stated objective of expanding gross margins.
As I mentioned earlier from a cash flow perspective, we generated $14 $7 million in free cash flow in the fourth quarter delivering on our commitment to achieve positive cash flow in the second half of 2023.
This was achieved by significantly improving our operating performance and driving efficiency in working capital.
Yeah.
Although I am pleased with the progress we've made in the last two quarters.
It is still clear to me that we're in the early stages of improving execution and results.
Our team understands there is still much to accomplish and is dedicated to executing on the plan ahead.
Peter Lau: The adjustments made to our cost structure, as evidenced by our fourth-quarter expense base and increased gross margin, as well as working capital performance, indicate the strides we've taken in refining our operational framework. Moving forward, we will remain committed to operational excellence, being diligent in controlling expenses with an emphasis on expanding gross margins while making targeted investments in new products and technology. On the product front, following October's launch of our new FARO Orvis Mobile Scanner, I am very pleased to report that customer feedback thus far has been extremely positive. While still early in the launch cycle, initial interest has been robust, and we are extremely excited about the future prospects of this product. With our new mobile scanner gaining global adoption, we believe the hardware success we have seen thus far from our new products validates our customer-driven approach to product definition.
The adjustments made to our cost structure as evidenced by our fourth quarter expense base and increased gross margin as well as working capital performance indicate the strides we have taken and refining our operational framework.
Moving forward, we will remain committed to operational excellence.
Being diligent in controlling expenses with an emphasis on expanding gross margins, while making targeted investments in new products and technologies.
On the product front following.
Octobers launch of our new Ferro Orvis mobile scanner I am very.
Pleased to report that customer feedback thus far has been extremely positive.
While still early in the launch cycle initial interest has been robust and we are extremely excited about the future prospects of this product with.
With our new mobile scanner, gaining global adoption.
We believe the hardware success, we have seen thus far from our new products validates our customer driven approach to product definition.
Peter Lau: Expanding our footprint of data acquisition devices expands our future opportunity to monetize that installed base through software that allows customers to store, analyze, and collaborate in the cloud. In addition, in December, we launched FARO Zone 2024, expanding upon our strong position in the public safety market. Zone 2024 empowers investigators, forensic analysts, and law enforcement agencies to enhance their capabilities in documenting, analyzing, and presenting evidence. Key highlights of the new FARO Zone product include the conversion of photos and videos to 3D visuals, ortho image creation, and collision prediction systems.
Expanding our footprint of data acquisition devices expands our future opportunity to monetize that installed base through software that allows customers to store <unk>.
Allies and collaborate in the cloud.
In addition.
In December we launched Faro zone 2020 for expanding upon our strong position in the public safety market.
Zero in 2024, empowers investigators forensic analyst and law enforcement agencies to enhance their capabilities and documenting analyzing and presenting evidence.
Key highlights of the new fair ozone products include the conversion of photos and videos to three D visuals, or so image creation and collision prediction and systems.
Peter Lau: These advancements reflect the fusion of FARO's legacy technologies with those of our recent acquisitions, GeoSlam and HoloBuilder, and further demonstrate our commitment to innovation. We look forward to discussing more new product launches in the quarters to come. Reflecting on the progress we've achieved thus far, none of it would have been possible without the skill and devotion of all of our teammates that work together every day at FARO. The team's steadfast commitment to our organization was clearly evident this past year.
These advancements reflect a fusion of Faros legacy technologies with those of our recent acquisitions Geo Slammin hollow builder and.
And further demonstrates our commitment to innovation.
We look forward to discussing more new product launches in the quarters to come.
Yeah.
Reflecting on the progress we've achieved thus far none of it would have been possible without the skill and devotion of all of our teammates that work together every day at Ferro.
The team's steadfast commitment to our organization was clearly evident in this past year.
Peter Lau: Despite macro challenges and uncertainties, their dedication to driving results and outcomes is truly commendable. To further support this momentum, we've recently added three new members to our leadership team, including our new Chief Financial Officer, Matt Horwath; Chief Digital Officer, Roger Eisern; and Software Solutions Leader, Shelley Gretlein.
Despite macro challenges and uncertainties their dedication to driving results and outcomes is truly commendable.
To further support this momentum we've recently added three new members to our leadership team.
Including our new Chief Financial Officer, Matt Horvath.
Chief Digital officer, Roger <unk> and.
In software solutions leader Shelley <unk>.
Peter Lau: Overall, I'm proud to say our global organization remains highly motivated by a common goal, namely, to continue our market leadership by prioritizing both customers and shareholders alike. As we look ahead, FARO's brand holds a strong position in the market, reflecting the trust of customers and our reputation for 3D application expertise and innovation. We intend to capitalize on this market position by focusing on where we add value. We will maintain our leading-edge product performance and will leverage our channels to market to solve more of our existing customers' existing challenges. Customer feedback thus far supports our product solution strategy, laying a solid foundation for further improvement operationally to help profitably capture these opportunities. We're utilizing an 80-20 philosophy, prioritizing activities that maximize shareholder value and profitability, irrespective of market conditions. Our ongoing organizational initiatives ensure alignment among our 1,200 employees, fostering a focus and rigor to drive performance enhancement. As we assess the market opportunity ahead, we believe there is significant value in leveraging 3D capture and virtual management tools to reduce waste and inefficiencies in managing physical assets across the globe.
Overall I'm proud to say our global organization remains highly motivated by a common ago, namely to continue our market leadership by prioritizing both customers and shareholders alike.
As we look ahead Faros brand holds a strong position in the market, reflecting the trust of customers and our reputation for three D application expertise and innovation.
We intend to capitalize on this market position by focusing on where we add value.
We will maintain our leading edge product performance and we will leverage our channels to market to solve more of our existing customers existing challenges.
Customer feedback thus far supports our product solutions strategy.
Yeah.
Solid foundation for further improvement.
Operationally to help profitably capture these opportunities.
We're utilizing an 80 20 philosophy prioritizing activities that maximize shareholder value and profitability irrespective of market conditions.
Our ongoing organizational initiatives ensure alignment among our 1200 employees fostering a focus and a rigor to drive performance enhancements.
As we assess the market opportunity ahead, we believe there is significant value in leveraging <unk> capture and virtual management tools to reduce waste and inefficiencies and managing physical assets across the globe.
While our growth potential is vast converting it to demand requires a focused product roadmap and go to market strategy targeting high probability success areas, where we feel we have a right to play and a right to win.
Matt Horwath: While our growth potential is vast, converting it to demand requires a focused product roadmap and go-to-market strategy, targeting high probability success areas where we feel we have a right to play and a right to win. To further expand on our strategy, which I've highlighted over the last two quarters, the company will be hosting an investor event in New York City on March 11, 2024. Myself, as well as several members of the senior executive team, will discuss our key priorities, target markets, Targeted Financial Model, and Long-Term Goals as well as conduct Product Demonstrations. We look forward to seeing many of you in person. With that, I'll now turn the call over to Matt to provide an overview of our fourth quarter financial results. Thank you, Peter. And good morning, everyone.
To further expand on our strategy, which I have highlighted over the last two quarters. The company will be hosting an investor event in New York City on March 11th 2024.
Yourself as well as several members of the senior executive team will discuss our key priorities target markets targeted financial model and long term goals as well as conduct product demonstrations.
We look forward to seeing many of you in person.
With that I'll now turn the call over to Matt to provide an overview of our fourth quarter financial results.
Thank you Peter and good morning, everyone.
Matt Horwath: Fourth-quarter revenue of $98.8 million was down 5% compared with the fourth quarter of 2022. Geographically, while demand remained healthy within Europe and the Americas, particularly Latin America, continuing softness in China was responsible for the year-over-year decline. Fourth quarter hardware revenue of $66.6 million was down 5% year over year, while software revenue of $12.2 million was down 6%, and service revenue of $20 million decreased by 3% in concert with hardware. Recurring revenue was $17.4 million and represented 18% of sales. Gap gross margin was 50.9% and non-gap gross margin was 52.5% for the fourth quarter of 2023, compared to 52.8% in 2022. On a non-GAAP basis, lower revenue levels resulted in the fourth quarter's year-over-year gross margin decline.
Fourth quarter revenue of $98 $8 million was down 5% compared with the fourth quarter of 2022.
Geographically, while demand remained healthy within Europe, and the Americas, particularly Latin America, continuing softness in China was responsible for the year over year decline.
Fourth quarter hardware revenue of $66 6 million was down 5% year over year, while software revenue of $12 2 million was down 6% and service revenue of $20 million decreased by 3% in concert with hardware.
Recurring revenue was $17 4 million and represented 18% of sales.
GAAP gross margin was 59% and non-GAAP gross margin was 52, 5% for the fourth quarter of 2023 compared to 52, 8% in 2022.
On a non-GAAP basis lower revenue levels resulted in the fourth quarters year over year gross margin decline sequentially.
Matt Horwath: In sequential order, as Peter mentioned, we are pleased that reported non-GAAP gross margin improved 360 basis points due in part to higher revenue, a decrease in unfavorable purchase price variance, and increasing benefits from supply chain localization. Related to the purchase price variances, we believe these charges are largely complete, exiting 2023, and together with the opportunity ahead in shifting our supply chain to Southeast Asia, we continue to expect a meaningful improvement in 2024 gross margin. GAAP operating expenses were $48.9 million and included approximately $6.3 million in acquisition-related intangible amortization and stock compensation expenses and $1.3 million in restructuring and other transaction costs.
Sequentially as Peter mentioned, we are pleased that reported non-GAAP gross margin improved 360 basis points due in part to higher revenue a decrease in unfavorable purchase price variance and increasing benefits from supply chain localization.
Related to the purchase price variances. We believe these charges are largely complete exiting 2023 and together with the opportunity ahead and shifting our supply chain to southeast Asia. We continue to expect a meaningful improvement in 2020 for gross margin.
GAAP operating expenses were $48 9 million and included approximately $6 3 million in acquisition related intangible amortization and stock compensation expenses and $1 3 million in restructuring and other transaction costs.
non-GAAP operating expense of $41 3 million was down $4 5 million from Q4 of last year as we realize the benefit of our restructuring efforts.
Matt Horwath: Non-GAAP operating expense of $41.3 million was down $4.5 million from Q4 last year, as we realized the benefit of our restructuring efforts. GAAP operating income was $1.4 million in the fourth quarter of 2023, compared with an operating loss of $1.6 million in the fourth quarter of 2022. Non-GAAP operating income was $10.6 million in the fourth quarter of 2023, compared to income of $9.1 million in the fourth quarter of 2022.
GAAP operating income was $1 4 million in the fourth quarter of 2023, compared with an operating loss of $1 6 million in the fourth quarter of 2022.
non-GAAP operating income was $10 6 million in the fourth quarter of 2023 compared to income of $9 1 million in the fourth quarter of 2022 <unk>.
Matt Horwath: Adjusted EBITDA was $13.2 million, or approximately 13.3% of sales compared to $11.7 million and 11.3% of sales in the fourth quarter of 2022. I want to highlight that adjusted EBITDA grew 12% year over year and expanded 200 basis points despite the lower fourth quarter revenue. Our gap net income was approximately $1.6 million, or $0.08 per share.
Adjusted EBITDA was $13 2 million or approximately 13, 3% of sales compared to $11 7 million and 11, 3% of sales in the fourth quarter of 2022.
Want to highlight that adjusted EBITDA grew 12% year over year and expanded 200 basis points, despite the lower fourth quarter revenue.
Our GAAP net income was approximately $1 $6 million or <unk> <unk> per share. Our non-GAAP net income was $6 $8 million or <unk> 36 per share for the fourth quarter of 2023 compared to net income of $7 1 million or <unk> 38 per share in Q4 2022.
Matt Horwath: Our non-GAAP net income was $6.8 million, or $0.36 per share, for the fourth quarter of 2023, compared to net income of $7.1 million, or $0.38 per share, in Q4 2022. Our cash and short-term investment balance at the end of the quarter was $96.3 million, up $16.4 million from Q3, largely due to improved profitability and improvements in our cash conversion cycle. Free cash flow of $14.7 million in the fourth quarter of 2023 was up $24.2 million versus the fourth quarter of 2022, with free cash flow of $14.
Our cash and short term investment balance at the end of the quarter was $96 3 million up $16 4 million from Q3, largely due to improved profitability and improvements in our cash conversion cycle.
Free cash flow of $14 $7 million in the fourth quarter 2023 was up $24 $2 million versus the fourth quarter of 2022.
Free cash flow of 2014.
We remain very focused on our working capital efficiency.
Matt Horwath: We remain very focused on our work in capital efficiency and currently expect to be cash flow positive in 2020. We are pleased with our fourth quarter results and view them as evidence the business is moving in the right direction. As Peter mentioned, the team continues to execute well on the operations priorities we have established, namely refining our product development process and roadmap, enhancing customer experiences, gross margin expansion, streamlining and improving internal processes, including our IT, and Free Cash Flow Generation. That said, we remain cautious in the near term. From a geographic perspective, we do not expect Chinese demand to rebound in the first quarter, and together with global manufacturing PMI remaining at or below 50 and sales cycles remaining above historical levels, we want to remain thoughtful and measured in setting expectations for the first quarter of 2024 while looking forward to a macro recovery. As a result, at present foreign exchange rates, we expect first-quarter revenue of between $77 and $85 million. At those revenue levels, and given corresponding non-GAAP gross margins between 49.5% and 51% and non-GAAP operating expenses of between $41 and $43 million, we would expect non-GAAP losses per share of between $0.20 and $0.00 per share.
And currently expect to be cash flow positive in 2024.
We are pleased with our fourth quarter results and view them as evidenced the business is moving in the right direction.
As Peter mentioned the team continues to execute well on the operations priorities, we have established namely refining our product development process on roadmap enhancing customer experiences gross margin expansion streamlining and improving internal processes, including our it systems and free cash flow generation.
That said, we remain cautious in the near term from a geographic perspective, we do not expect China demand to rebound in the first quarter and together with global manufacturing PMI remaining at or below 50, and sales cycles remaining above historical levels, we want to remain thoughtful and measured.
And setting expectations for the first quarter of 2024, while looking forward to a macro recovery.
As a result at present foreign exchange rates, we expect first quarter revenue of between 77 and $85 million.
At those revenue levels and given corresponding non-GAAP gross margin between 49, 5% and 51% and non-GAAP operating expenses of between 41 and $43 million, we would expect non-GAAP loss per share of between 20 and zero cents per share.
This concludes our prepared remarks and at this time, we'd be pleased to take questions.
At this time, if he would like to ask a question. Please press star one on your telephone Keypad. You May group you may remove yourself from the queue at any time by pressing star to once again that is fair and want to ask a question. We will take our first question from Jim Ricchiuti with Needham <unk> Company. Your line is open.
Operator: This concludes our prepared remarks, and at this time, we'd be pleased to take questions. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2.
Hi, good morning.
Good to go back to the reference you made about the.
The large public safety order that you got and I believe you said it was Romania, you said from.
Operator: Once again, that is a star and 1 to ask a question. We will take our first question from Jim Ricchiuti with Needham & Company. Your line is open. Hi, good morning.
From a channel partner I'm, just trying to get a little bit more color on that is this a channel partner that you've been working with for a while because this channel partner cover other parts of EMEA.
Jim Ricchiuti: I wanted to go back to the reference you made about the large public safety order that you got, and I believe you said it was Romania, you said it was from a channel partner. I was trying to get a little bit more color on that. Is this a channel partner that you've been working with for a while? Does this channel partner cover other parts of EMEA? If you could, just a little bit more color on that, given the nice wind.
If you could just a little bit more color on that given the.
A nice win.
Hi, Jen Thanks, and thanks for the question and good morning.
It is a channel partner, we've been working with for a while and they cover the Romania territory. It was a tender Jim competitive tender with that with other bidders and we are.
The end user ultimately decided to go.
With the Faro product again, it was a $3 million order, we shipped about half of that in the first quarter and we would expect in the fourth quarter and we would expect.
Peter Lau: Hi Jim. Thanks. And thanks for the question. And good morning.
Ship the rest of it throughout the day.
Peter Lau: It is a channel partner we've been working with for a while, and they cover the Romanian territory. It was a tender, Jim, a competitive tender with other bidders. And, you know, the end user ultimately decided to go with the FARO product. Again, it was a $3 million order. We shipped about half of that in the first quarter and would expect – or in the fourth quarter, and would expect to, you know, ship the rest of it throughout the year of 2024. But a very exciting win.
The year of 2024, but very exciting win again, as we said our largest public safety order ever.
And BT.
Between our local teams there and our channel partner really really nice win for us.
Got it congrats on that the last call I think you alluded to you talked about sales cycles.
Sure thing a bit and I was wondering what you saw as you went through Q4 and whether there's been any change.
Thus far in 2024.
The macro is clearly a challenge I'm just wondering what you've been seeing in terms of sales cycles.
Yeah.
Right, we did mentioned that they shortened in Q3 relative to some of the earlier quarters. What I would say is we expect them to stay the same as Q3.
Really kind of the same in Q4 and again just to remind you that that's above our historical levels right. So.
Peter Lau: Again, as we said, our largest public safety order ever, and, you know, between our local teams there and our channel partner, a really, really nice win for us. Got it. Congratulations on that.
We still see the macro continuing to be a little bit challenged but we're working through it Jim and.
Expect our operational initiatives to.
Peter Lau: You know, on the last call, I think you alluded to, you talked about sales cycles shortening a bit, and I was wondering, you know, what you saw as you went through Q4 and whether, you know, there's been any change, you know, thus far in 2024. Yeah, the macro is clearly a challenge, but I'm just wondering what you've been seeing in terms of sales. Yeah, and you're right; we did mention that they had shortened in Q3 relative to some of the earlier quarters. What I would say is we expect them to stay the same as Q3, really kind of the same in Q4. And again, just a reminder that that's above our historical levels, right?
To drive financial performance.
In the current environment.
And last question if I could just slip one in just on the decline that we saw in the software business.
Q4 versus year ago.
Can you talk a little bit about what.
What.
Contributing to that.
Yes. Thanks for the question Jim its largely in concert with our hardware in the perpetual software licenses that we sell we actually saw our service increase a little bit in the first the first quarter. There are our subscriptions increase in the fourth quarter, but.
The overall headline of software being down was it related to the perpetual license that get attached at point of sale with the hardware.
Peter Lau: So, you know, we still see the macro continuing to be a little bit challenged, but we're working through it, Jim, and expect our operational initiatives to, you know, drive financial performance in the current environment. And last question, if I could just slip in on the decline that we saw in the software business in Q4 versus a year ago. Can you talk a little bit about what contributed to that?
Got it got it okay. Thanks very much.
Thanks, Jim.
Thank you and as a reminder, that is star one if you would like to ask a question. We will take our next question from Greg Palm with Craig Hallum Capital Group. Your line is open.
Hey, good morning, everybody. Thanks for taking the questions congrats on the quarterly results.
Matt Horwath: Yeah, thanks for the question, Jim. It's largely in concert with our hardware and the perpetual software licenses that we sell. We actually saw our service increase a little bit in the first quarter there, and our subscriptions increase in the fourth quarter. But the overall headline of software being down was related to the perpetual licenses that get attached at point of sale with the hardware.
Yes.
Curious to think about how you're sort of viewing the year in terms of drivers of growth how much of that is required from some sort of macro recovery or stabilization. How do you think about volume versus price any just thoughts on kind of how do you think fiscal 'twenty.
Matt Horwath: Got it. Got it. Okay. Thanks very much.
Four will play out from a revenue standpoint, I know you don't give guidance for the for the year per se.
Jim Ricchiuti: Okay. Thanks, Jim. Thank you, and as a reminder, that is star and one if you would like to ask a question. We'll take our next question from Greg Palm with Craig Hallam, Capital Group. Your line's open. Hey, good morning, everybody.
No we don't Greg and thanks for the question good morning and.
Appreciate your congratulations on the quarter, we're pleased with it what I would say is in our prepared remarks, we talked about China and the expectation that it doesn't get better in.
Gregory William Palm: Thanks for taking the questions. Congratulations on the quarterly results. I guess, you know, curious to think about how your sort of view for the year in terms of drivers of growth, you know, how much of that is required from some sort of macro recovery or stabilization? You know, how do you think about volume versus price? Any just thoughts on kind of how you www.
In the first quarter.
As we say.
The macro is I think kind of.
One of those things where it's at.
Anyone's guess, but what I will say is that we do we are very excited about our product roadmap for this year again, we talked about Orbis, we talked about zone and we've got some exciting launches coming in the quarters ahead.
Peter Lau: FARO.com: No, we don't, Greg, and thanks for the question. Good morning, and I appreciate your congratulations on the quarter. We were pleased with it. You know, what I would say is, in our prepared remarks, we talked about China and the expectation that it wouldn't get better in, you know, the first quarter. As we say, the macro is, I think, kind of, you know, one of those things where it's, you know, anyone's guess, but what I will say is that we are very excited about our product roadmap for this year. Again, we talked about Orbis, we talked about Zone, and we've got some exciting launches coming in the quarters ahead. You know, we look to get a little bit of price, which we've talked about with you previously, and ultimately, you know, Greg, our core tenet is to grow revenue faster than the markets we serve, and we think that between price, sales productivity, and new products, we should be able to deliver on that, and then again, growing our earnings at a faster rate than revenue and cash flow at a faster rate, you know, than We feel strongly about those core tenets.
We look to get a little bit of price, which we've talked about.
With you previously.
And ultimately you know Greg our tenant our core tenant is to grow revenue faster than the markets. We serve and we think that between price sales productivity and new products, we should be able to deliver on that and then again growing our earnings at a faster rate than revenue and cash flow at a faster rate.
Our earnings we feel that we feel strongly about those core tenants.
Yes makes sense.
To be clear.
The overall demand environment have you seen any change over the last three months and specific to what your visibility is in and China is it about the same or has it gotten better or worse since last quarter.
Yes, I would say, Greg we expect it to be.
Not recover in the first quarter as we said and.
Obviously, there is there is initiatives in China.
That we're looking at doing the Chinese government.
Has.
It has has done some things over there and we've not seen it take calls we don't expect it to get any better in the first quarter, but I think time will tell and we will continue to be vigilant about.
Taking opportunities that we do see over there.
Peter Lau: Yeah, it makes sense. And just to be clear, on kind of the overall demand environment, have you seen any change, you know, over the last three months and specific to what your visibility is? And in China, is it about the same?
And acting with urgency to close as many deals as we can.
Okay.
And just last one on gross margin I think.
You talked about still.
Realizing some significant improvements this year any help with kind of the cadence of those improvements as we progressed throughout the year and I'm assuming that you know.
Peter Lau: Or has it gotten better or worse since last quarter? Yeah, I would say, Greg, we expect it to not recover in the first quarter, as we said. And, you know, obviously, there's initiatives in China that we're looking at doing. The Chinese government has, you know, done some things over there, and we've not seen them take hold.
The gross margin bridge from Q4 to the guidance in Q1 as you know.
So we sort of revenue or volume driven.
The volumes recover.
That's when you see better absorption is that right.
Yes, I think thats, the right way, Greg to think about it.
Peter Lau: We don't expect it to get any better in the first quarter, but I think time will tell and, you know, we'll continue to be vigilant about, you know, taking opportunities that we do see over there and acting with urgency to close as many deals as we can. Okay, and just last one on gross margin, I think you talked about still realizing some significant improvements this year.
The seasonality that we've baked in from Q4 to the Q1 guide naturally you have got the fixed cost absorption kind of headwind as you kind of sequentially go from Q4 to Q1 and as we mentioned in the prepared remarks.
That negative purchase price variance kind of pretty much.
Behind us exiting 2023.
You'll see a little bit of that but it's not going to be linear but most of it is due to volume and that step down from Q4 to Q1 guide.
Matt Horwath: Any help with kind of the cadence of those improvements as we progress throughout the year? And I'm assuming that, you know, the gross margin bridge from Q4 to the guidance in Q1 is, you know, solely revenue or volume driven. And as the volumes, you know, recover, that's when you see better absorption, is that right?
And remind us that unfavorable impact of a couple million a quarter was that what the broker by impact was.
Yes, I think what we've said externally is about 300 basis points.
Kind of the way the way to think about it is more at the lower end of the gross margin range and the kind of first half of 2023, and so with that behind us there's not as much sequentially as you exit Q4 to Q1.
Matt Horwath: Yeah, I think that's the right way, Greg, to think about it. You know, the seasonality that we've baked in from Q4 to the Q1 guide, naturally, you've got the fixed cost absorption kind of headwind as you kind of sequentially go from Q4 to Q1. And as we mentioned in the prepared remarks, you know, that negative purchase price variance is kind of, you know, pretty much behind us exiting 2023. You'll see a little bit of that, but it's not going to be linear, but most of it is due to volume and that step down from Q4 to Q1 guidance. Yep, and remind us that unfavorable impact of, you know, a couple million a quarter. Was that what the broker's impact was? Yeah, I think what we've said externally is about 300 basis points. And, you know, kind of the way to think about it is more at the lower end of the gross margin range in the first half of 2023.
Understood, Okay, I will leave it there thanks.
Thanks, Greg.
Thank you we have no further questions in the queue. At this time I will turn the program back over to Peter <unk> for any additional or closing remarks.
Okay. Thank you very much for your time today and continued interest in Ferro, we look forward to speaking with you again soon as the year progresses and thanks again.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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Matt Horwath: And so I, you know, with that behind us, there's not as much sequentially as you exit q4 to q1. Yeah, understood. Okay, I will leave it there. Thanks, Greg. Thank you. We have no further questions in the queue at this time.
Okay.
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Peter Lau: I will turn the program back over to Peter Lau for any additional or closing remarks. Okay, thank you very much for your time today and continued interest in FARO. We look forward to speaking with you again soon as the year progresses, and thanks again. This does conclude today's program. Thank you for your participation. You may disconnect at any time. www. FARO.com www.faro.com www.faro.com Please subscribe and leave a comment if you enjoyed the video! www. FARO.com www.faro.com
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