Q2 2024 FARO Technologies Inc Earnings Call

Speaker Change: Please stand by, your program is about to begin. Should you need audio assistance during today's program, please press star zero.

Operator: Good day everyone, and welcome to the FARO Technologies second quarter 2024 earnings call. For opening remarks and introductions, I would now like to turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead.

Michael Funari: Good day, everyone, and welcome to the FARO Technologies second quarter 2024 earnings call. For opening remarks and introductions, I would now like to turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead.

Michael Funari: Thank you. Good afternoon.

Speaker Change: Thank you and good afternoon. With me today from FARO are Peter Lau, President and Chief Executive Officer, and Matt Horwath, Chief Financial Officer.

Michael Funari: With me today from FARO are Peter Lau, President and Chief Executive Officer, and Matt Horwath, Chief Financial Officer. Today, after market close, the company released its financial results for the second quarter of 2024. The related press release in Form 10Q is available on Farrow's website at www.farrow.com. Please note certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks of uncertainty, 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, or subsequent events.

Speaker Change: Today, after market close, the company released its financial results for the second quarter of 2024.

Speaker Change: The related press release and Form 10-Q is available on FARO's website at www.faro.com.

Michael Funari: 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.

Speaker Change: Please note, certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties.

Speaker Change: 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, or subsequent events.

Speaker Change: 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 FCC filings.

Speaker Change: 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.

Michael Funari: In the press release, you'll find additional disclosures regarding these non-gap measures, including reconciliation to comparable gap measures. While not recognizing our gap, Matthew believes these non-GAAP financial measures provide investors with relevant peer-to-peer comparisons of core operations. However, they should not be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. Now, I'd like to turn the call over to Peter

Speaker Change: 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.

Speaker Change: In the press release, you'll find additional disclosures regarding these non- GAAP measures , including reconciliations to comparable GAAP measures .

Speaker Change: While not recognized under GAAP, management believes these non-GAAP financial measures provide investors with relevant period-to-period comparisons of core operations.

Speaker Change: 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 Lau.

Peter Lau: Thank you, Mike. Good afternoon, and welcome everyone to our call. In the second quarter, we continued to make significant progress towards the strategic plan we outlined in March and are well ahead of where we expected to be at this time. We exceeded our targets on all items within our control. Non-GAAP gross margin was 55%, an increase of 300 basis points sequentially, and non-GAAP operating expenses were $40 million, down 9% over the prior year and 2% sequentially.

Peter Lau: Thank you, Mike. Good afternoon and welcome everyone to our call.

Peter Lau: In the second quarter, we continued to make significant progress towards the strategic plan we outlined in March, and are well ahead of where we expected to be at this time.

Peter Lau: We exceeded our targets on all items within our control. non-GAAP gross margin was 55%, an increase of 300 basis points sequentially, and non-GAAP operating expenses were $40 million, down 9% over prior year and 2% sequentially.

Peter Lau: As a result, we generated 18 cents of non-gap EPS, which is above the high end of our guidance range, the fifth straight quarter of exceeding expectations. Adjusted EBITDA was $8.4 million, or 10.3% of sales, bringing our first half adjusted EBITDA up to $14 million.

Speaker Change: As a result, we generated $0.18 of non-GAAP EPFs, which is above the high end of our guidance range, the fifth straight quarter of exceeding expectations.

Speaker Change: Adjusted EBITDA was $8.4 million, or 10.3% of sales, bringing our first half adjusted EBITDA up to $14 million.

Peter Lau: That $14 million exceeds our full year 2023 adjusted EBITDA performance and represents an improvement of 1,100 basis points as a percent of revenue. Operating cash flow was positive in the quarter, our third straight quarter of positive operating cash flow generation, a first for our business since 2019. As I reflect on the last year, we've made substantial progress in improving our operational efficiency. Our second quarter gross profit and EBITDA margins represent a step up from our strong first quarter performance, and we believe this validates the targets we set out in March and demonstrates the significant operating levels now built into our business as our organic growth initiatives take hold in the quarters and years ahead.

Speaker Change: That $14 million exceeds our full year 2023 adjusted EBITDA performance and represents an improvement of 1,100 basis points as a percent of revenue.

Speaker Change: Operating cash flow was positive in the quarter, our third straight quarter of operating cash flow generation, a first for our business since 2019.

Speaker Change: As I reflect on the last year, we've made substantial progress in improving our operational efficiency.

Speaker Change: Our second quarter gross profit and EBITDA margins represent a step up from our strong first quarter performance.

Speaker Change: and we believe this validates the targets we set out in March and demonstrates the significant operating leverage now built into our business as our organic growth initiatives take hold in the quarters and years ahead.

Peter Lau: For reference, at our investor event in March, we laid out long-term targets of 600 basis points of improvement in gross margin with flat operating expenses, delivering an even margin of 9 to 11 percent assuming no revenue growth. In Q2, we have already achieved these targets, and we expect to see additional long-term upside in the years ahead as we continue to optimize our operations through a number of initiatives. From a top-line perspective, we delivered $82.1 million in revenue in the second quarter.

Speaker Change: For reference, at our investor event in March, we laid out long-term targets of 600 basis points of improvement and gross margin, with flat operating expenses delivering an EBITDA margin of 9 to 11 percent, assuming no revenue growth.

Speaker Change: In Q2, we have already achieved these targets, and we expect to see additional long-term upside in the years ahead as we continue to optimize our operations through a number of initiatives.

Speaker Change: From a top-line perspective, we delivered $82.1 million in revenue in the second quarter. Like many others, we saw a mix of demand levels across both the markets and geographies we serve.

Peter Lau: Like many others, we saw a mix of demand levels across both the markets and geographies we served. Within our various serviced markets, discretionary CapEx spending remains a focus as our customers evaluate the macroeconomic outlook and the potential implications it has for their business. As seen in our Q2 results, deals largely continue to move forward as planned. However, in certain subsectors, such as the construction market, there continues to be a degree of caution in budget spending beyond what we would normally see in a healthy macro environment.

Speaker Change: Within our various serve markets, discretionary CapEx spending remains a focus as our customers evaluate the macroeconomic outlook and the potential implications it has for their business.

Speaker Change: As seen in our Q2 results, deals largely continue to move forward as planned. However, in certain sub-sectors, such as the construction market, there continues to be a degree of caution in budget spending beyond what we would normally see in a healthy macro environment.

Peter Lau: With that said, while discretionary capex spent remains soft, we continue to see strong demand for our software and service offerings, and we continue to believe in our ability to grow faster than the markets we serve. Geographically, in the Americas and in me, demand remains stable, while in Asia, we again saw a decline in the overall region.

Speaker Change: With that said, while discretionary capex spent remains soft, we continue to see strong demand in our software and service offerings, and we continue to believe in our ability to grow faster than the markets we serve over time.

Speaker Change: Geographically, in the Americas and EMEA, demand remained stable, while in Asia, we again saw a decline in the overall region. As we discussed in May, while overall results were stable for Asia-Pac in the first quarter, it was a small number of deals that created the strength.

Speaker Change: Given the ongoing macroeconomic challenges in China, including a slower environment and 3D metrology, market demand proved softer than we had anticipated at the end of the first quarter.

Speaker Change: Operationally, our gross margin came in ahead of expectations, as our focus on variable cost productivity, mitigation of broker fees, and supply chain localization efforts continue to progress.

Peter Lau: In addition, we continue to identify new opportunities to further optimize our operation. Using Logistics as an example, over the last six months, we have enhanced the efficiency of the shipments from our manufacturing facilities, improved shipping methods, and brought on new partners to leverage our global spend that we expect will save us a substantial amount of money in our run rate. Beyond that spend optimization in the second quarter, we also saw an incremental contribution from the pricing actions we took at the start of the year.

Speaker Change: In addition, we continue to identify new opportunities to further optimize our operations.

Speaker Change: Using logistics as an example, over the last six months we have enhanced the efficiency of shipments from our manufacturing facilities, improved shipping methods, and brought on new partners to leverage our global spend that we expect will save us a substantial amount of money in our run rate.

Speaker Change: Beyond that spend optimization in the second quarter, we also saw incremental contribution from the pricing actions we took at the start of the year. Taken together, our operating and pricing initiatives contributed meaningfully to our sequential gross margin improvement despite the nominal decrease in revenue.

Speaker Change: Related to operating expenses, we are focused on initiatives which help drive cost containment while delivering our near and mid-term objectives. As an example, we continue to evaluate ways in which we backfill resources and shift our spend to lowest cost regions to optimize productivity.

Peter Lau: Within R&D, we remain focused on dynamic resource allocation to ensure the investments we make are directly aligned with our focused product roadmap, including addressable market expansion opportunities and refreshing our key products while protecting and enhancing our core competencies in developing our talent. As I mentioned earlier, the improved profit and our emphasis on working capital improvements resulted in our third straight quarter of positive operating cash flow. As the underlying financial foundation of our business continues to improve, we have a growing confidence in the ability of our business model to consistently generate earnings and cash flow. Based on this confidence, we took action in the second quarter to repurchase $3 million of convertible debt at an attractive term.

Speaker Change: Within R&D, we remain focused on dynamic resource allocation, to ensure the investments we make are directly aligned with our focus product roadmap, including addressable market expansion opportunities, and refreshing our key products while protecting and enhancing our core competencies in developing our talent.

Speaker Change: As I mentioned earlier, the improved profit and our emphasis on working capital improvements resulted in our third straight quarter of positive operating cash flow.

Speaker Change: As the underlying financial foundation of our business continues to improve, we have a growing confidence in the ability for our business model to consistently generate earnings and cash flow.

Speaker Change: Based on this confidence, we took an action in the second quarter to repurchase $3 million of convertible debt at attractive terms.

Peter Lau: Going forward, we will continue to closely evaluate opportunities to redeploy our improving cash flow, either through our existing $18 million share repurchase program or debt repurchase to generate the highest return for our shareholders. Looking ahead, we remain focused on improving productivity through both existing and new initiatives to fully realize the strategic targets we already have in place. With these actions well underway, we're placing a greater focus on the strategic investments and actions we can take around customer experience, regional diversification, and new products and technologies to improve our growth profile beyond the growth of the market itself.

Speaker Change: Going forward, we will continue to closely evaluate opportunities to redeploy our improving cash flow, either through our existing $18 million share repurchase program or debt repurchase to generate the highest return for our shareholders.

Speaker Change: Looking ahead, we remain focused on improving productivity through both existing and new initiatives to fully realize the strategic targets we already have in place.

Speaker Change: With these actions well underway, we're placing a greater focus on the strategic investments and actions we can take around customers' experience, regional diversification, and new products and technologies to improve our growth profile beyond the growth of the market itself.

Peter Lau: Related to our product roadmap, as we discussed in March, in addition to refreshing our existing product portfolio, we firmly believe there are opportunities to leverage FARO's technology and innovation beyond the markets we currently serve. As we look out over the next few quarters, our intention is to begin introducing these products to the market. As we do so, we look forward to discussing these impactful new solutions with you in greater detail, including the markets they target and the opportunities they represent.

Speaker Change: Related to our product roadmap, as we discussed in March, in addition to refreshing our existing product portfolio, we firmly believe there are opportunities to leverage FARO's technology and innovation beyond the markets we currently serve.

Speaker Change: As we look out over the next few quarters, our intention is to begin introducing these products to the market. As we do so, we look forward to discussing these impactful new solutions with you in greater detail, including the markets they target and opportunities they represent.

Peter Lau: Within our existing portfolio, our Orbis mobile scanner continues to see great receptivity in the market, with revenue for our mobile scanning solutions again increasing double digits year over year. In Q2, we delivered a new SPRXG workflow for mobile scanning, which allowed us to capture more share of wallet with key customers through our full differentiated workflow that merges two fully processed 3D scans in the cloud automatically, without requiring manipulation in the desktop software.

Speaker Change: Within our existing portfolio, our Orbis mobile scanner continues to see great receptivity in the market, with revenue for our mobile scanning solutions, again increasing double digits year over year.

Speaker Change: In Q2, we delivered a new SphereXG workflow for mobile scanning, which has allowed us to capture more share of wallet with key customers through our full, differentiated workflow that merges two fully processed 3D scans in the cloud automatically, without requiring manipulation in the desktop software.

Peter Lau: This workflow is providing productivity and insights to some of our most strategic customers. In one case, an existing customer focused on commercial real estate measurement recently refreshed their fleet of Farrell Hardware by upgrading to the Orvis platform and integrating Sphere XG into their workflows. They were able to significantly improve productivity through the ability to quickly scale an expedite project to live. In addition to Orbis' success, we continue to see further traction with our solution strategy, combining the power of our hardware offerings with SphereXG's software platform to create greater value for our customers. This quarter Ferguson, a leading distributor of HVAC products to a variety of markets, upgraded their Pharaoh terrestrial and mobile scanners, emphasizing the growth and enhancement of the reality capture solution.

Speaker Change: This workflow is providing productivity and insights to some of our most strategic customers.

Speaker Change: In one case, an existing customer focused on commercial real estate measurement recently refreshed their fleet of Ferro hardware.

Speaker Change: By upgrading to the Orbis platform and integrating Sphere XG into their workflows, they were able to significantly improve productivity through the ability to quickly scale and expedite project deliveries.

Speaker Change: In addition to Orbis' success, we continue to see further traction with our solution strategy, combining the power of our hardware offerings with SphereXG's software platform to create greater value for our customers.

Speaker Change: This quarter, Ferguson, a leading distributor of HVAC products to a variety of markets, upgraded their ferro-terrestrial and mobile scanners, emphasizing the growth and enhancement of their reality capture solutions.

Peter Lau: By using 360-degree photo documentation, model import, and FARO scanners with SpherXG, Ferguson now uses the FARO platform to remotely scope mechanical, electrical, and plumbing project bids nationwide, monitor progress of projects, and be more competitive against local contractors. Specific to SPHERICS-G, we continue to make promising progress on delivering bi-weekly value feature releases while upgrading legacy customers to our SaaS platform. Customers increasingly recognize the productivity and quality in utilizing our leading collaboration and viewing platform.

Speaker Change: by using 360 degree photo documentation.

Speaker Change: Model Import and Farrow Scanners is FRIXG, Ferguson now uses a Farrow platform to remotely scope mechanical, electrical and plumbing project bids nationwide. Monitor progress of projects and be more competitive against local contractors.

Speaker Change: Specific to SPHERICS-G, we continue to make promising progress on delivering bi-weekly value feature releases while upgrading legacy customers to our SaaS platform. Customers increasingly recognize the productivity and quality in utilizing our leading collaboration and viewing platform.

Peter Lau: To help provide context for the pace of our progress, in the last month alone, we migrated roughly 18 terabytes of customer data to the platform, with the expectation of reaching over 360 terabytes by the end of Q3. Finally, we've made a number of investments in our customer experience over the last year. Our NPS scores are up 10 points year over year.

Speaker Change: To help provide context for the pace of our progress in the last month alone, we have migrated roughly 18 terabytes of customer data to the platform, with the expectation of reaching over 360 terabytes by the end of Q3.

Speaker Change: Finally, we've made a number of investments in our customer experience over the last year.

Speaker Change: Our NPS scores are up 10 points year over year. We also recently completed our latest brand loyalty survey, which reflected an 80% overall loyalty score, with 82% likely to continue buying from us.

Peter Lau: We also recently completed our latest brand loyalty survey, which reflected an 80% overall loyalty score, with 82% likely to continue buying from us. These metrics speak to our commitment to operating a customer-focused business, and customers are responding with their loyalty and satisfaction. This further reinforces our view that the Farrow brand is a significant asset and is renowned in the markets we serve.

Speaker Change: These metrics speak to our commitment of operating a customer-focused business and customers are responding with their loyalty and satisfaction. This further reinforces our view that the pharaoh brand is a significant asset and is renowned through the markets we serve.

Peter Lau: In summary, we are very excited about our progress to the plan that we set out over the last 12 months. We are not only executing on that plan but exceeding our own expectations ahead of schedule. We believe that Farrow has great potential to outgrow both the markets we currently serve as well as those we look to target. By leveraging our strong brand name with our reputation for innovation and high-performance solutions, we position ourselves well to deliver innovation that effectively addresses our customers' most pressing challenges.

Speaker Change: In summary, we are very excited about our progress to the plan that we set out over the last 12 months.

Speaker Change: We are not only executing to that plan, but are exceeding our own expectations ahead of schedule.

Speaker Change: We believe that Pharaoh has great potential to outgrow both the markets we currently serve as well as those we look to target.

Speaker Change: By leveraging our strong brand name with our reputation for innovation and high-performance solution, we position ourselves well to deliver innovation that effectively addresses our customers' most pressing challenges.

Peter Lau: Combined with both existing and new operational excellence initiatives to expand gross margins and profitability, we expect to be in a position to realize meaningful operating leverage as revenue grows. We are enthusiastic about our strategy for the years ahead and are confident in its capacity to drive substantial shareholder value. With that, I'll now turn the call over to Matt to provide an in-depth overview of our second quarter financial results and third quarter out.

Speaker Change: Combined with both existing and new operational excellence initiatives to expand gross margins and profitability, we expect to be in a position to realize meaningful operating leverage as revenue grows. We are enthusiastic about our strategy in the years ahead, and are confident in its capacity to drive substantial shareholder value.

Speaker Change: With that, I'll now turn the call over to Matt to provide an in-depth overview of our second quarter financial results and third quarter outlook.

Matt Horwath: Thank you to you, Peter, and good afternoon, everyone.

Matt Horwath: Second quarter revenue of $82.1 million was down 7% versus prior year.

Matt Horwath: Geographically, America's region demand improved sequentially in the second quarter versus a soft Q1, while in the Asia-Pacific region we experienced a $4.7 million decline, or over 20% versus the second quarter of 2023.

Speaker Change: The Europe region remains stable with a 1% decline year over year in Q2 and up 2% year to date versus the first half of 2023.

Matthew Horwath: Second quarter hardware revenue of $50.1 million was down 12% year over year, while software revenue of $11.3 million was up 4%, and service revenue of $20.8 million increased by 1%. Recurring revenue was $17.1 million and represented 21% of sales. Gapgro's margin was 54.6% and non-Gapgro's margin was 55% for the second quarter of 2024 compared to 37.8% in 2023. As Peter mentioned, in the second quarter, we executed on our variable cost productivity initiatives, including mitigating broker fees and incremental benefits from supply chain localization.

Matt Horwath: Second quarter hardware revenue of $50.1 million was down 12% year over year, while software revenue of $11.3 million was up 4%. And service revenue of $20.8 million increased by 1%.

Speaker Change: Recurring revenue was $17.1 million and represented 21% of sales.

Speaker Change: Gap gross margin was 54.6% and non-gap gross margin was 55% for the second quarter of 2024 compared to 37.8% in 2023.

Matt Horwath: As Peter mentioned, in the second quarter we executed on our variable cost productivity initiatives, including mitigating broker fees and incremental benefits from supply chain localization.

Speaker Change: non-GAAP gross margin increased over 300 basis points sequentially versus Q1 and marks the highest quarterly level since 2021 as Peter mentioned.

Matthew Horwath: Non-GAAP Gross Margin increased over 300 basis points sequentially versus Q1 and marks the highest quarterly level since 2021, as Peter mentioned. Get operating expenses were $43 million, and included approximately $1.6 million in acquisition-related and tangible amortization, and stock compensation expense, and $1.4 million in restructuring and other executive transition costs. Non-Gap operating expense of $40 million was down $4.1 million from Q2 last year. As we realize the benefit of our restructuring efforts and continued productivity improvement.

Matt Horwath: Gap operating expenses were $43 million, and included approximately $1.6 million in acquisition-related and tangible amortization and stock compensation expenses, and $1.4 million in restructuring and other executive transition costs.

Matt Horwath: non-GAAP operating expense of $40 million was down $4.1 million from Q2 last year, as we realized the benefit of our restructuring efforts and continued productivity improvements.

Matthew Horwath: Gap operating income was $1.8 million in the second quarter of 2024, compared with an operating loss of $25.4 million in the second quarter of 2023. Now I'm getting operating income of 5.1 million dollars in the second quarter of 2024 compared to a loss of $9.9 million in the second quarter of 2023. Adjusted EBITDA was $8.4 million, or approximately 10% of sales, compared to an EBITDA loss of $7.2 million in the second quarter of 2023.

Matt Horwath: Gap operating income was $1.8 million in the second quarter of 2024, compared with an operating loss of $25.4 million in the second quarter of 2023.

Matt Horwath: non-GAAP operating income was $5.1 million in the second quarter of 2024, compared to a loss of $9.9 million in the second quarter of 2023.

Matt Horwath: Adjusted EBITDA was $8.4 million, or approximately 10% of sales, compared to an EBITDA loss of $7.2 million in the second quarter of 2023.

Matthew Horwath: Our gap net loss was $500,000, or three cents per share. Our non-gap net income was $3.4 million, or 18 cents per share. For the second quarter of 2024, compared to a net loss of $10.8 million, or $57 per share, in Q2 2023. Our cash and short-term investment balance at the end of the quarter was $97.9 million, up $1.6 million from Q4, and down $1.4 million sequentially. As Peter mentioned, we repurchased $3 million of our convertible debt principal in the second quarter.

Matt Horwath: Our gap net loss was $500,000, or $0.03 per share. Our non-gap net income was $3.4 million, or $0.18 per share, for the second quarter of 2024, compared to a net loss of $10.8 million, or $0.57 per share, in Q2 2023.

Matt Horwath: Our cash and short-term investment balance at the end of the quarter was 97.9 million dollars, up 1.6 million dollars from Q4, and down 1.4 million dollars sequentially.

Matt Horwath: As Peter mentioned, we repurchased $3 million of our Convertible Debt Principle in the second quarter. Excluding debt repurchases and the impact of foreign exchange, cash and short-term investments increased $2.3 million sequentially.

Matthew Horwath: Excluding debt repurchases and the impact of foreign exchange, cash and short-term investments increased $2.3 million sequentially. Given our current working capital levels, expectations for revenue, and our new expense base, we expect to be free cash flow positive throughout the second half of 2024. We're very pleased with our second quarter results, especially with a just EBITDA margin reaching over 10% and the continued generation of positive cash flow from operations. The macro environment remains choppy, and we expect continued demand challenges in China and normal seasonality trends in the European region, driven by the summer holiday schedule in the third quarter.

Matt Horwath: Given our current working capital levels, expectations for revenue, and our new expense base, we expect to be free cash flow positive throughout the second half of 2024.

Matt Horwath: We are very pleased with our second quarter results, especially with adjusted EBITDA margin reaching over 10% and continued generation of positive cash flow from operations.

Matt Horwath: The macro environment remains choppy, and we expect continued demand challenges in China and normal seasonality trends in the Europe region driven by the summer holiday schedule in the third quarter.

Matthew Horwath: Given these and the potential of a weakening macroeconomic environment, at present FX rates, we expect third quarter revenue of between $76 million and $84 million. At those revenue levels and given corresponding non-gap growth margins between 53.5% and 55% and non-gap operating expenses of between $40 million and $42 million, we would expect non-gap earnings per share ranging from negative 1 cent per share to positive 19 cents This concludes our prepared remarks, and at this time, we'd be pleased to take your questions.

Matt Horwath: Given these and the potential of a weakening macroeconomic environment at present FX rates, we expect third quarter revenue of between $76 million and $84 million.

Matt Horwath: at those revenue levels and given corresponding non-gap growth margin between 53.5%.

Matt Horwath: and 55%, and non-GAAP operating expenses of between $40 million and $42 million, we would expect non-GAAP earnings per share ranging from negative one cent per share to positive 19 cents per share for third quarter profitability.

Matt Horwath: This concludes our prepared remarks and at this time we'd be pleased to take your questions.

Speaker Change: At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you would like to ask a question. And we'll take our first question from Greg Palm with Craig Hallam Capital Group. Your line is open.

Gregory Palm: Unknown Speaker Hey, good afternoon. Thanks for taking the questions and congrats on the continued progress on the gross margin and overall profitability front. Thanks, Greg. Good afternoon to you. I guess maybe just starting with a little bit around kind of the macro and kind of what you're seeing in terms of sales cycles, you know, kind of cadence of activity. I'd be really curious to kind of hear what you're seeing so far in July as it relates to kind of the guidance and sort of what's baked in or what's assumed in the Q3 guidance versus what you just achieved in Q2.

Greg Palm: Hey, good afternoon. Thanks for taking the questions and congrats on the continued progress and on the gross margin and overall profitability front.

Peter Lau: Greg, I think, you know, look, the macro continues to remain very challenged, as we've seen across a number of industries, especially those You know, kind of looking at or exposed to discretionary cat backs. We feel that our Q3 guidance is certainly achievable, and through July, we would have no indication at this point that it's not, although we'll continue to look at the market and make sure that we're adjusting, you know, as necessary and, you know, making the right decisions for business to continue to deliver positive earnings, positive cash flow, and the best revenue results we can.

Speaker Change: Thanks, Greg. Good afternoon to you.

Speaker Change: I guess.

Greg Palm: Maybe just starting with a little bit around kind of the macro and kind of what you're seeing in terms of sales cycles You know kind of cadence of activity would be really curious to kind of hear what you're seeing so far

Speaker Change: in July , you know, as it relates to kind of the guidance and sort of what's baked in, or what's what's assumed in the in the Q3 guidance versus what you just achieved in Q2.

Speaker Change: Alright, I think, you know, look, the macro continues to remain very challenge as we've seen across a number of industries, especially those.

Speaker Change: You know, kind of looking at or exposed the discretionary capex, we feel that our Q3 guides certainly is achievable and through July we would have no indication at this point that it's not.

Speaker Change: Although, we'll continue to look at the market and make sure that we're adjusting, you know, as necessary and, you know, making the right decisions for the business to continue to deliver, you know, positive earnings, positive cash flow and the best revenue result we can.

Matthew Horwath: Thank you, Peter, and good afternoon, everyone. The second quarter revenue of $82.1 million was down 7% versus the prior year. Geographically, America's region demand improved sequentially in the second quarter versus a soft Q1, while in the Asia-Pacific region, we experienced a $4.7 million decline, or over 20% versus the second quarter of 2023. The Europe region remains stable with a 1% decline year over year in Q2, and up 2% year to date versus the first half of 2023.

Peter Lau: And, you know, just I know macro when the market, you know, it's outside your control. But, you know, in the release, it talks about, you know, kind of delivering on the next You know, sort of growth plans, you know, part of that probably new products, but give us some sense of how you're thinking about the next, you know, few years and your ability to at least outgrow the market.

Speaker Change: And, you know, just, I know macro and market, you know, it's outside your control, but, you know, I think what, you know, in the release, it talks about, you know, kind of delivering on the next

Speaker Change: You know, sort of growth plans, you know, part of that's probably new products, but give us some sense in how you're thinking about the next, you know, a few years in your ability to at least outgrow the market.

Peter Lau: Yeah, we're very confident in our strategy, and as we've been talking over the last 12 months, the first job in delivering that strategy was getting ourselves to a place where we could continually deliver consistent earnings and cash flow generation. And that has always been our focus for the last 12 months as we've come in, Matt and I, and really focused on getting ourselves into that position.

Speaker Change: Yeah, Greg, as we said, we're very confident in our strategy, and as we've been talking over the last 12 months, you know, the first job in delivering that strategy was getting ourselves to a place.

Speaker Change: where we could continually deliver.

Speaker Change: consistent earnings and cash flow generation and and that has always been our focus.

Speaker Change: for the last 12 months as we've come in, Matt and I, and really focused on...

Speaker Change: You know, getting ourselves in that position.

Speaker Change: And from there, you know, the second phase was always going to be, you know, really looking at, you know, our ways to grow the business organically.

Speaker Change: And we have a very, very robust and very exciting plan that we've always said our goal was to outgrow the markets that we serve.

Speaker Change: And we believe that, you know, through a combination of new products.

Speaker Change: A refresh of some of our products that are maybe a little longer in the tooth and partnerships to aid all of that stuff. We believe very firmly in our strategy that we'll be able to outgrow the market in the coming years.

Peter Lau: Can any of that benefit this year, Q4 for instance, or should we be thinking about that as more of a 25 and beyond impact?

Speaker Change: Can any of that benefit this year, you know, Q4 for instance, or should we be thinking about that as more of a 25 and beyond impact?

Peter Lau: Yeah, I think we would look to introduce new products this year and certainly hope that they would contribute to 2024, but we certainly are very, very bullish about our prospects in the next several years, for the long term.

Speaker Change: Yeah, I think we would love to introduce more new products this year and certainly hope that they would contribute to 2024, but we certainly are very, very bullish about our prospects in the next several years over the long term.

Gregory Palm: Yep. Okay.

Speaker Change: And then my last question is more of a capital allocation question.

Peter Lau: And then my last question is more of a capital allocation question. You know, I appreciate the thoughts around buying back some of the debt. You know, I feel like Pete, since you've come on board, you've done a lot of things right for the P&L. And, you know, again, you can't control the macro, but you've certainly done a great job of controlling what you can control. And you're seeing the benefits in gross margin and overall profitability.

Speaker Change: Question, you know, I appreciate the thoughts around buying back some of the debt.

Speaker Change: You know, I feel like Peter's...

Peter Lau: You've come on board. You've done a lot of things right.

Speaker Change: You know, for the P&L and, you know, again, you can't control the macro, but you've certainly done a great job of controlling what you can control and you're seeing the benefits and gross margin and overall profitability.

Peter Lau: And, you know, if the stock is not performing well, and it looks like it's down quite a bit here in the after hours, again, why not put a buyback, you know, in place? If you're buying back the debt, why not buy back the equity as well? Are you willing to at least comment on that?

Speaker Change: You know, the stock is not performing well and it looks like it's down quite a bit here in the after hours again.

Speaker Change: Why not put a buyback, you know, in place, you know, if you're buying back the debt, why not buy back the equity as well? Are you willing to at least come in on that?

Peter Lau: Let me start with that, Greg, and then I can turn it over to Matt. I did reference in our in our prepared remarks that we have an existing $18 million share by-back program. Certainly, at the levels that are stock as that, we would look at that as what we believe would be a fairly attractive investment in the second quarter. We saw the debt, we saw it at attractive levels and we decided to pull the trigger, but, you know, now that we've got an ourselves to a place where we are really comfortable in our ability to generate cash flow in earnings, you know, we'll continue to look to deploy that, we have the repurchase program in place already, we have $18 million left on it, and we will continue to, you know, we'll continue to evaluate what the best return for our share holders is going to be.

Matt Horwath: Let me start with that, Greg, and then I can turn it over to Matt. I did reference in our

Speaker Change: and our prepared remarks that we have an existing $18 million share by-back program.

Greg Palm: Certainly, at the levels that our stock is at, we would look at that as what we believe would be a fairly attractive investment. In the second quarter, we saw the debt, we saw it at attractive levels, and we decided to pull the trigger.

Speaker Change: You know, now that we've gotten ourselves to a place where we are really comfortable in our ability to generate cash flow and earnings.

Speaker Change: We'll continue to look to deploy that. We have the repurchase program in place already. We have $18 million left on it, and we will continue to evaluate what the best return for our shareholders is going to be.

Gregory Palm: Okay, fair enough. I'll leave it there. Thanks and best of luck.

Speaker Change: Okay, fair enough. I'll leave it there. Thanks and best of luck.

Peter Lau: Okay, thanks, Greg.

Operator: Thank you. And once again, that is a star and one if you would like to ask a question, we'll take our next question from Jim Ricchuti with Neum Capital. Your line is open.

Greg Palm: Okay. Thanks, Greg.

Speaker Change: Thank you and once again that is star and one if you would like to ask a question we'll take our next question from Jim Ricchuti with Niamh Capital your line is open.

James Ricchiuti: Thanks, good afternoon. I wanted to ask you about the gross margins, you know, came in better than expected and highlighted a few facts. I'm kind of understanding a little more what drove the upside relative to your expectations going into court. You're not gonna have to tell me, I'm like Symbax, but maybe you could just give us a better idea, please.

Jim Ricchuti: Thanks, good afternoon. I wanted to ask you about the gross margins.

Jim Ricchuti: came in, they gross ones just came in, jettard and expected and highlighted a few facts. I'm trying to understand a little more what drove the upside relative to your expectations, going into the quarter.

Speaker Change: You thought about that? Yeah, I think so. Maybe you could just give us a better idea, please.

Matthew Horwath: Yeah, yeah, Jen, this is Matt, and I appreciate the question. I think, you know, versus the guy, let's just say kind of the midpoint of the guy, on the gross margin line, on the non-gapside was 52%, and if you kind of bridge that to the 55 actual, I think, most of the upside came from just acceleration of variable cost productivity. You know, we've been talking a lot about localization and the savings there as we move the supply chain to Southeast Asia, and there was a little bit of acceleration on that line, plus Pete mentioned in his prepared remarks, even some incremental goodness on the logistics line as we kind of look to be as productive as we can.

Greg Palm: Yeah, yeah, this is Matt and I appreciate the question. I think you know versus the guy, let's just say kind of midpoint of guide on the gross margin line on the non-gapside was 52%.

Greg Palm: and if you kind of bridge that to the 55 actuals, I think most of the upside came from just acceleration of variable cost productivity, you know, we've been talking a lot about the localization.

Greg Palm: and the savings there as we moved the supply chain to Southeast Asia. And there was a little bit of acceleration on that line, plus Pete mentioned in his prepared remarks, even some incremental goodness on the logistics line as we kind of look to be as productive as we can. And then I would say at a smaller level, a little bit of mix at the hardware line. And then if you look at our overall revenue profile, had a little bit of mix shift to software which had higher gross margins. And then price kind of layered in gives you that 3% kind of incremental versus the midpoint of the guide.

Matthew Horwath: Thanks, Matt. In terms of what, have the bulk of those benefits that you cited early on in your response been realized, or is there still some upside that potentially could impact the current quarter?

Matthew: That, thanks, Matthew, in terms of what has the bulk of those benefits that you cited early on in your response, and realize there is still some upsides potentially to impact the conpholder.

Matthew Horwath: Yeah. Yeah.

Matthew Horwath: No, I think as you think about variable cost productivity and what we've been signaling for the last, you know, kind of six quarters is that we think there's $12 million of kind of annualized cost savings on the localization of the supply chain. And we think we're kind of in the middle innings there, right? We think there's some to go, and that's not going to be linear, Jim. It kind of steps up as old contracts roll off and new contracts come online.

Speaker Change: Yeah, yeah, no, I think as you think about the variable cost productivity and what we've been signaling for the last, you know, kind of six quarters is, is we think there's $12 million of kind of annualized cost savings on the localization of supply chain.

Matthew: and we think we're kind of in middle innings there, right? We think there's something to go and that's not going to be linear gym. It kind of steps up as old contracts roll off and new contracts come online.

Matthew Horwath: So we think there's a little bit of goodness over the longer term on that particular line item. And then, you know, mix can shift a little bit quarter to quarter. So I wouldn't get too hung up on mix.

Matthew: So we think there's a little bit of goodness over the longer term on that particular line item. And then mix can shift a little bit quarter to quarter, so I wouldn't get too hung up on mix. I think that may bounce around 50 bps, 80 bps from quarter to quarter. And then price, we still think there's some to go. We signaled that we never really expect to realize too much from price, because historically we really didn't show the ability to realize that, but we saw some goodness in price in Q2, and we think there's a little bit of incremental upside there as well.

Matthew Horwath: I think, you know, that may bounce around 50 bips, 80 bips from quarter to quarter. And then price, we still think there's some to go. You know, we signaled that we never really, you know, expect to realize too much from price because, historically, we really didn't show the ability to realize that. But we saw some goodness in price in Q2, and we think there's a little bit of incremental upside there as well.

James Ricchiuti: Finally, a final question for me, talking about the end markets, you call that construction as being one of the markets. I think we're probably seeing some slowing in terms of the decision making. We're also seeing changes in demand as it relates to folks maybe picking a little longer to give the PO.

Speaker Change: and Final Question for me. Talking about the end markets, you call that construction as being one of the markets, I think we are seeing probably some.

Speaker Change: Some slowing in terms of the decision-making. Where else have you seen changes in demand as it relates to folks maybe taking a little longer to to give the PO?

Speaker Change: Yeah, I think it's just in general, you know, I point to probably regionally, you know, a biggest issue right here right now is in China. And that's something that...

Matthew: We're focused on, but it's manufacturing in China, it is construction in China.

Speaker Change: And that's the bulk of what's driving the revenue, or lack thereof, revenue growth in our business.

Speaker Change: And the outlook for China, I don't want to put words in your mouth, but in terms of, you know, as you look beyond this quarter, do you see any signs of that picking up?

Operator: At this time, if you would like to ask a question, please press the star in one or your telephone keypad. You may remove yourself from the queue at any time by pressing star two.

Speaker Change: We don't, Jim, at this right right here right now, but I will point out that you know I think we're probably Q2 was the last of our really tough comps related to China. We really start to see the China business drop off in the second half of

Speaker Change: 2023, so while we don't see it, materially getting better from here, it should start to ease a little bit in terms of, you know, kind of the year over your comps as we move forward into the second half of this year and then into 2025.

Speaker Change: God, thank you.

Speaker Change: Thank you, and we have no further questions in the queue at this time. I'll turn the program back over to Peter Lau for any additional or closing remarks.

James Ricchiuti: [inaudible]

James Ricchiuti: And the outlook for China, I don't want to put words in your mouth, but in terms of, you know, as you look beyond this quarter, do you see any signs of that picking up? You, we, we, we

Matthew Horwath: We don't, Jim, do this right here, right now, but I will point out that, you know, I think we're probably in Q2 was the last of our really tough comps related to China. We really start to see the Chinese business drop off in the second half of 2023. So while we don't see it materially getting better from here, it should start to ease a little bit in terms of, you know, kind of the year-over-year comps as we move forward into the second half of this year and then into 2025.

Peter Lau: Okay, thank you operator. On behalf of all of our colleagues, I want to thank everyone for your interest in FARO. Despite a really challenging market, we continue to exceed our targets in all areas we can control and are excited about our progress.

Operator: Thank you, and we have no further questions in the queue at this time. I will turn the program back over to Peter Lau for any additional or closing remarks.

Peter Lau: Okay, thank you, Operator. On behalf of all of our colleagues, I want to thank everyone for your interest in FARO. Despite a really challenging market, we continue to exceed our targets in all areas we can control and are excited about our progress. Our second quarter performance demonstrates the operational leverage we've already built into our business, with gross margin, operating expenses, overall profitability, and cash flow generation all tracking ahead of our plan.

Peter Lau: Our second quarter performance demonstrates the operational leverage we've already built into our business with gross margin, operating expenses, overall profitability, and cash flow generation, all tracking ahead of our plan.

Peter Lau: While we continue to focus on ways to further improve these results, our success thus far gives us confidence that as we execute on our organic growth initiatives in the quarters ahead, we believe we'll be in a position to unlock short and long-term shareholder value. We look forward to sharing our progress and execution in the quarters ahead. This concludes our call today. Thank you very much for your interest.

Peter Lau: While we continue to focus on ways to further improve these results, our success thus far gives us confidence that as we execute on our organic growth initiatives in the quarters ahead, we believe we'll be in a position to unlock short and long-term shareholder value.

Speaker Change: We look forward to sharing our progress and execution in the quarters ahead. This concludes our call today. Thank you very much for your interest.

Operator: Once again, this test concludes today's program.

Peter Lau: As we discussed in May, while overall results were stable for Asia pack in the first quarter, it was a small number of deals that created the strength. However, given the ongoing macroeconomic challenges in China, including a slower environment for 3D Metrology, market demand was softer than we had anticipated at the end of the first quarter. Operationally, our gross margin came in ahead of expectations as we focused on variable cost productivity, mitigation of broker fees, and supply chain localization efforts continue to progress.

Peter Lau: Taken together, our operating and pricing initiatives contributed meaningfully to our sequential gross margin improvement despite the nominal decrease in revenue. Related to operating expenses, we are focused on initiatives that help drive cost containment while delivering our near and mid-term objectives. As an example, we continue to evaluate ways in which we backfill resources and shift our spend to the lowest cost regions to optimize productivity.

Operator: Once again, let us start with one if you would like to ask a question, and we'll take our first question from Greg Palm with Craig Kalim, capital group. Your mind is open. Hey, get up.

Peter Lau: And from there, you know, the second phase was always going to be, you know, really looking at our ways to grow the business organically. And we have a very, very robust and very exciting plan that we've always had our goal was to outgrow the markets that we serve. And we believe that, through a combination of new products, a refresh of some of our products that are maybe a little longer in the tooth, and partnerships to aid all of that stuff, we'll be able to outgrow the market in the coming years.

Matthew Horwath: And then I would say, you know, at a smaller level, a little bit of mix at the hardware line, and then if you look at our overall revenue profile, there was a little bit of mix shift to software, which has higher gross margins, and then price kind of layered in gives you that 3% kind of incremental versus the midpoint of the guy.