FARO Technologies - Q1 2022

Transcript

Speaker 0

Afternoon, everyone, and welcome to the FARO Technologies First Quarter 2022 Earnings Call. For opening remarks and introductions, I will now turn the call over to Michael Furnari at Sapphire Investor Relations. Please go ahead.

Speaker 1

Thank you, and good afternoon. With me today from FARO are Michael Berger, Chief Executive Officer and Alan Yevich, Chief Financial Officer. Today, after market close, the company released its financial results for the Q1 of 2022. The related press release and Form 10 Q are available on FARO's website at www.ferro.com. Please note, certain statements in this conference call, which are not historical facts, Maybe you consider forward looking statements that involve risks and uncertainties and include statements regarding future business results, product and technology development, customer demand, inventory levels, economic and history projections or subsequent events.

Various factors could cause actual results to differ materially. Some of these factors have been set forth in today's press release and are described at length in 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 not presented in accordance with U. S.

General accepted accounting principles or non GAAP financial measures. In the press release, you will find additional disclosures regarding these non GAAP measures, including reconciliations to comparable GAAP measures. While not recognized 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 as a substitute for a measure of financial performance prepared in accordance with GAAP. Now, I'd like to turn

Speaker 2

the call over to Michael Berger.

Speaker 3

Thank you, Mike. Welcome to our call. While broad based demand across our served markets remained healthy in the Q1, Several headwinds impacted our performance, driving results below our expectations. As many of you are aware, at the end of the Q1, the The Chinese government mandated a COVID lockdown throughout the Shanghai area. Shanghai is FARO's loan logistics hub for all Chinese shipments.

As a result, the lockdown prevented the shipment of booked orders at the end of March. This lockdown, which was originally planned to last 1 week remains in effect today and continues to challenge both our own logistics operations as well as those of our Chinese customers. Ultimately, these disruptions could potentially last into the second half of twenty twenty two or beyond. Our logistics operations teams are continuing to work on short term plans to mitigate the situation. Beyond this specific challenge, in the Q1, supply chain constraints and component shortages continue to impact our overall Material availability, limiting the amount of inventory of certain goods we had available to ship.

Our supply chain team continue to work hard to mitigate Sonari. However, at this point, we expect these challenges to continue to impact 2nd quarter shipments. Lastly, in the Q1, we experienced softer than expected demand for our previous generation laser scanner, particularly in the European AEC market, brought on by anticipation of our launch of a new laser scanner. Despite our overall disappointment with our Q1 revenue and profit performance. We remain excited about the continued progress toward our long term strategic goals.

Our manufacturing outsource initiative with Sanmina remains on track as we have now moved manufacturing of both our scan arm and laser tracker product lines to Sanmina's Thailand facility. All future shipments of these two product lines will now be sourced from Sanmina and ship through our existing logistics center. We have stopped manufacturing activities in both of our U. S. Sites as of the end of Q1.

We expect to complete this transition of the remaining laser scanner product line by the end of this current quarter. We continue to believe in the long term financial and operational benefits of this transition that we've Previously outlined, including the realization of a $12,000,000 in annualized savings. However, the timing of these savings continues to be pushed out as our teams wrestle with both cost increases and supply limitations. Earlier this month, we launched our new three-dimensional digital reality capturing collaboration platform, which includes our next generation FARO Focus Premium Laser Scanner, our mobile FerroStream app as well as FerroSphere. Sphere is a cloud based environment, which enables full 3 d model creation, storage and collaboration and will be the platform for all future FARO work Flow and software applications, including Holobuilder.

While each of these offerings taken individually increased customer value, The combination of all three can decrease customer scanning and processing time by over 50%, effectively doubling productivity. Also the interplay between NuStream apps functionality and our new laser scanner has enabled several enhancements including remote scanner control, real time on-site scan validation and pre registration, as well as remote software upgrade capabilities. It is these types of step function performance changes in which we are keenly focused on delivering in the years ahead. While it's early days, feedback from both our beta and early post launch customers has been overwhelmingly positive. With the launch of our new Focus Premium scanner combined with the recently launched Quantum Max ScanArm, we have now refreshed 75% of our high volume hardware product lines with products that have resulted from our maniacal focus on Voice of the Customer.

We believe the differentiation of these products will continue to push Ferro to the forefront and the industry to new levels of productivity. In addition to these exciting new offerings, we continue to see strong demand for our HoloBuilder application and its construction progress management workflow. Hollow Builders' unique 360 degree photo based technology coupled with the Software as a Service business model, continues to have wide ranging applications. The HoloBuilder application and its associated workflows We'll be integrated into our SPEAR platform by the end of this calendar year. We continue to believe there is a large untapped market potential for Ferro's technology that leverages our high accuracy, fixed laser scanning expertise, along with HoloBuilder's easy to use photo based solutions coupled ultimately to our mobile scanning solution.

With the launch of FerroSphere, which centralizes the collection and management of 3 d data projects, we are now bringing these capabilities together to provide a one stop user experience across FARO's application software, workflow insights and customer support tools. The market potential for digitizing the physical world is enormous, and we are excited that our technology and expertise positions us well over the long term. We remain focused and committed to our strategic transition toward developing differentiated solutions and insights to a deeper understanding of our customers' workflows, while at the same time adjusting our operating structure to generate leverage. While the ongoing uncertainties in the market, including the lingering effects of COVID as well as the current geopolitical tensions create risks to our near term results. The long term opportunity for Ferro remains stronger than ever.

With that, I will turn the call over to Alan for an overview of our first quarter financial results.

Speaker 4

Thank you, Michael, and good afternoon, everyone. 1st quarter revenue of 76,700,000 Was approximately equal to the Q1 of 2021, primarily driven by increased demand for our Quantum Max scan arm offset by impacts from the Shanghai lockdown and ongoing supply chain shortages Michael mentioned earlier, as well as a nearly 3% currency headwind that resulted from continued U. S. Dollar Strengthening. On a year over year basis, hardware revenue of $46,500,000 was up 5%.

Software revenue of $10,300,000 was up 1% and service revenue of $19,900,000 was down 8%. Recurring revenue of $16,500,000 was up 6% when compared to Q1 of 2021, primarily due to the increase in subscription revenue. We have begun to see a modest flattening of overall software revenue as we convert customer purchases of previously perpetual licenses to subscriptions. Additionally, we've made meaningful product quality enhancements over the last 12 to 18 months, is improving our customer experience, but adversely impacting revenue realized from time and material repair billings. GAAP gross margin was 53.5 percent and non GAAP gross margin was 53.8% for the Q1 of 2022.

Gross margin increased incrementally year over year, largely due to a shift towards higher margin products that was somewhat offset by material cost increases. Given the ongoing impact of inflation on material costs, we continue to expect to operate near the lower end of our stated Success model of 55% to 60% gross margin with some quarters depending upon revenue levels dipping below the low end of the range. GAAP operating expenses were $48,200,000 and included approximately $3,400,000 in acquisition related intangible amortization and stock Compensation expenses and $600,000 in restructuring costs. Non GAAP operating expense of $44,200,000 was 1,400,000 Higher than Q1 of 2021 as we continue to increase our investments both because of our Hollow Builder acquisition as well as our organic initiatives and as a portion of the travel related expense savings realized during the pandemic return. GAAP operating loss was $7,200,000 in the Q1 of 2022 compared with an operating loss of $6,400,000 in the Q1 of 2021.

Non GAAP operating loss was $3,000,000 in the Q1 of 2022 compared to $2,300,000 in the Q1 of 2021. Adjusted EBITDA was negative $700,000 or 0.9 percent of revenue. Our GAAP net loss was $9,700,000 or $0.53 per share. Our non GAAP net loss was $2,500,000 or $0.14 per share for the Q1 of 2022 compared to a loss of approximately $600,000 or $0.03 per share in Q1 2021. We continue to maintain a strong capital structure with a cash balance of $107,000,000 and no debt.

I should note that our accounts receivable balance remained relatively high despite the reduced quarterly revenue levels. This is due to several factors that include continued high shipment levels in the 3rd month of the quarter as well as certain collection challenges that are well understood. We have not changed any payment term policies or practices and do not have concern about the ultimate collectibility of our outstanding receivables. Moving on to guidance, we are extremely disappointed to have missed the lower end of the range following the Q1 in which we provided guidance. Unfortunately, we did not see coming the hard Shanghai lockdown and its effect on our ability to ship products from our lone Chinese logistics center.

China in 2021 was 12% of revenue and accelerating. Our early Q2 Chinese demand remains And while our logistics team is working on alternatives, we remain concerned about our ability to ship to Chinese customers. Further, we continue to have general material availability challenges that limit our customer As a result, in the Q2 of 2022, we expect revenue of between $77,000,000 $85,000,000 which at the midpoint represents a typical sequential increase from the Q1. We expect non GAAP earnings per share between negative $0.17 and positive $0.04 This concludes our prepared remarks. And at this time, we'd be pleased to take any of your questions.

Speaker 0

You may remove yourself at any time from the question and queue by pressing the pound key. And our first question will come from Greg Palm with Craig Hallum.

Speaker 2

Yes. Thanks for the time and taking the Questions here, I guess, kind of getting right into it on the China impacts. Can you maybe quantify exactly what Kind of impact you saw maybe, I don't know, asked a different way. How important are those last 2 weeks in a typical quarter?

Speaker 3

Good afternoon, Greg. I think we've talked about this in previous calls, but We typically ship and Al, correct me if I'm wrong, but in the typical last 3 weeks of the quarter, we are shipping probably 30% to 40% of our total quarter?

Speaker 4

Correct.

Speaker 2

Okay. I mean, that makes sense. It would help explain, I guess, some of the shortfall, but clearly not nearly the entirety. So I guess it sounds like the AEC market was equally as soft or challenged. Is it across all geographies?

Is it mostly EMEA related? Maybe a little bit more color on what's going on there?

Speaker 3

Actually, the second biggest impact, Greg, was Actual material availability, we continue to get surprised throughout the quarter with what is Able to be shipped from our supply chain. So I would argue that of the three factors, the largest was China followed by material shortage For availability and then finally, the EMEA market in the AEC space. And frankly, We believe largely, again, we track opportunities. We've not seen opportunities cancel, but we've seen them push. And we think this was largely due to I think there was some press about us potentially offering a new laser scanner and I think That actually stalled shipments in EMEA, at least that's our sense.

Our number of opportunities, our win rate And our funnel continue to be very, very robust. So I don't think it's I think that is our perspective in terms of why EMEA and the AUC market.

Speaker 2

I guess the more important question with the new product, the new laser scanner product, what types of demand are you seeing with that now that that's been really To the market?

Speaker 3

Very positive. We track number of leads generated, the number of inquiries, the number of web hits. On the day that we announced the product, was our single largest or single busiest day on our website. I think we had 20 3,000 views. The teaser video for the product itself is the largest or the most watched FARO Video on YouTube.

So it seems that there's a great deal of excitement and kind of pent up Opportunity for us. So the funnel has grown since we've launched that pretty nicely. And what we learned from Quantum Max launch, which was in July, is there is a bit of a delay between the time that you actually launch it and people get it in their hands And test it, but so far it looks really, really good.

Speaker 2

Okay, good to hear. And then last one, just a housekeeping item. Did you guys give a bookings number? I didn't See that in the release?

Speaker 3

No, I don't

Speaker 4

think we have. We have not. And frankly, yes, frankly, we're not Providing it any longer because we think that as we continue to shift towards more of a subscription model that bookings becomes less of a valuable leading indicator and can be misleading. And so We are reporting revenue at

Speaker 3

this point in time.

Speaker 2

Okay, understood. All right. I'll hop back in the queue. Thanks.

Speaker 3

Thanks, Greg.

Speaker 0

Thank you. Our next question will come from Jim Ricchiuti with Needham and Company.

Speaker 5

Hi, good afternoon. Just wanted to spend a moment on the EMEA region, Right. A couple of things there. So, the AEC market was softer, but I'm wondering if you're seeing, the effects Any slowing as it relates to the concerns, the macro concerns over in Europe? Have you seen that In either the metrology business or other parts of the scanner business.

Speaker 3

No, I think overall EMEA As a region for us to probably better than we expected actually. I think that the one downside was the AEC space. 3dm and Public Safety continue to be relatively robust in the EMEA region. What we've seen, Jim, is that we've seen a lot of projects kind of be pushed, not canceled, but pushed. And I think it's probably a mix of anticipation waiting for the new scanner.

And I do believe that Some projects are being pushed by virtue of something nothing to do with us at all. But again, we're not seeing cancellations, we're just seeing a delay. Okay. And

Speaker 4

as we

Speaker 5

think about the relationship with Sanmina, As you move further along this path, how soon do we think do you see that the whole challenge That you're facing, you cited probably as the second biggest factor, the materials availability issue. When do you see that gradually improving with Sanmina. Well,

Speaker 3

honestly, and I think Yes, go ahead. Yes. I think we mentioned in previous calls, Sanmina, once we've actually inked the deal with them and even before we had actually Transition manufacturing to them. They've been helping us with supply chain. So, they're in the middle of it now.

And certainly, We've been kind of a benefactor of the relationship for probably the last quarter and a half, but it really hasn't completely mitigated the problem. And I don't expect it really to mitigate the problem. They have got similar issues with other vendors or with other customers that they're building for. And I think It's like we've said before, it's very much a whack a mole. What was our problem in the beginning of the quarter is no longer our problem.

And We're concerned about particularly semiconductors and some plastic resins and things like that that we've talked about So Sanmina has helped, but they haven't completely mitigated the problem.

Speaker 5

Okay. Last question for me. It's very early days with But I'm wondering if there's any color you could provide on what you're seeing in terms of initial market reception.

Speaker 3

It's been really positive. As we talked about in previous calls, we've gone through several Beta arrangements, I think we had 18 customers that participated in beta, all very positive feedback. We have not announced yet and I think going forward, we'll begin to talk about kind of the metrics around the user base. It's early days clearly, But feedback has been really, really good. Fantastic actually.

Speaker 4

And Jim, I think it's important to keep in mind that it's not just Sphere, right. It is the interplay between Sphere, the new mobile stream app and the new laser scanner and how they work together And how they enable a much more efficient process for scanning and capturing the information and then ultimately working with the information on the web. So it's A combination of those that I think has really been obviously received well.

Speaker 5

Okay. Thank you.

Speaker 3

Thanks, Jim.

Speaker 0

Thank you. Our next question will come from Rob Mason with R. W. Baird.

Speaker 6

Yes, good evening. Thanks for taking the question.

Speaker 3

Hey, Rob.

Speaker 6

Hey, Michael. I just wanted to be clear on the Q2 guidance. You're assuming what for China revenue, 0? Just assume no shipments into that region?

Speaker 3

No, I don't think that's completely accurate. That said, we're handicapping it pretty hard. I think we're not in control and certainly we got bit this quarter. So we are approaching Q2 guidance very conservatively.

Speaker 6

Okay. But the I guess the countermeasures if this doesn't alleviate itself, you have the ability to I guess Export into that region would

Speaker 3

be Yes. In fact, we are exploring and actually shipping through Other logistics centers that are not our own. Okay. What we can't control is What's happening in other cities within China, as you probably have all read. And so We're very conservative.

And I will say, and I think Al said this in his remarks that Demand in China is still very robust. In fact, we're trending higher than frankly, I think we've ever Achieved in terms of kind of a crawl chart, if you will, in terms of bookings. But it's about getting the product to them, getting through. So for today, for example, if we We shift through Beijing. It's a 10 day quarantine on products.

So it's challenging and because we haven't used these centers in Sonari. Other cities, we're establishing and setting them up and we're working it. And I think Sanmina is trying to help us. But the reality is we still want the Product to go through our logistics center because it's early days in Sanmina, we want to make sure that we're shipping quality product all the way through. Understand.

Okay.

Speaker 6

And could you just, I guess, take a you discussed Europe, but maybe touch on Americas and in broader Asia as well. Without Some visibility on the bookings. I'm just curious how did bookings fair towards the end of the quarter? That's when things got noisy From a macro perspective, just what you saw and how you trended in April in those regions?

Speaker 3

From a forecast perspective internal forecast Perspective, Asia got very close even despite what was going on in Shanghai. And of course, many of the customers that are That we deal with are were affected by the lockdown themselves. So not really I don't know if you've read much about it, but they literally didn't allow anybody into the facilities, etcetera. So That had, I think, a muting effect on Asia's bookings. North America was as pretty much And as I mentioned, I think North Europe, EMEA in general was very healthy with the exception of the AAC business.

Speaker 6

Okay. Okay. Just last question. The service business did drop down year over year as well as sequentially. I know the installed base has some impact on that, but just the sequential drop stepped out as well.

Is that the trend line level that we should think of the Q1 through this year? Or Can that was that step down sequentially, indicative of something else?

Speaker 3

Hal, do you want to take that one?

Speaker 4

Sure. As I indicated in my prepared remarks, one of the things that we've been working very diligently on is to improve the quality of our products That we're shipping and I think we are beginning to see some benefit from that. And so our time and material billings that we've had in the past For repairing products that are not under contract, took a little bit of a dip. I think some of that has to do with the dynamics that are happening in Shanghai and I think some of it has to do with just overall improvements in the quality of the product, which From a service revenue standpoint, it's not great, but from a customer experience standpoint is exactly what we're trying to do. So I think that There will be some rebound in the service revenue, but I think that it will be lower than it has historically run because of those quality changes that I I see.

Quality improvements.

Speaker 6

Yes. Very good. I'll jump back in the queue. Thank you.

Speaker 3

Thank you. Thank

Speaker 0

you. All right. And we will take our last question from Ben Rose with Battle Road Research.

Speaker 7

Yes. Good afternoon, Michael and Alan. Excuse me. With regard to North America, which did look to be something of a bright spot this quarter, could you comment at all on the product mix? Is there anything to call out from that standpoint?

Speaker 3

Yes. No, I think we were pretty pleased with what we were Seeing in the recovery of 3dm, and that's been very positive. I think we talked about last quarter, the automotive business or the aerospace business And automotive, we're seeing glimmers of hope and Very encouraging. AEC market in North America was strong. Public safety kind of went Sideways and I think that's primarily because end of the year, there's a lot of push at the end of the year from a budget perspective and then you come into Q1 and it's relatively quiet.

I think it's within the seasonal sphere. So I think 3DM was strong, led primarily by Some recovery in automotive, but aerospace. And then I think AEC in North America was relatively strong.

Speaker 4

Maybe just to put a little bit more color on it as well. If you look at the year on year performance from a revenue standpoint, within the Americas, you're exactly right, Ben. Revenue was up Again, year on year in the quarter, about 13% based on what Michael was talking about. In EMEA, it was actually down 13%, which approximates How much the U. S.

Dollar has strengthened. So on a local currency basis relatively flat and again a bit worse than where the Americas was because of what Michael is Talking about in terms of some of the AUC softness. And then in APAC, relatively flat year on year predominantly because of the Shanghai shipments. Otherwise, we would have Expected it to be in the double digit growth rates that we saw in the Americas. So hopefully that gives you a little bit more color on what's happening by geography as well.

Speaker 7

Yes, that does. And I guess one just one more question for Michael. You had mentioned the very sizable Facilities management order in retail last quarter. I was just curious to know whether, how that Pipeline might be shaping up, moving in here for the rest of the year.

Speaker 3

Very good. I think we haven't Close in order of that magnitude, but obviously there's a large number of orders closed. We're still on track to, as we Talked about last quarter to double the size of that business this year and we're very encouraged by the activity level overall.

Speaker 7

Okay. Thank you very much.

Speaker 3

Thanks, Ben. Appreciate it.

Speaker 0

Thank you. Our last question will come from Andrew DeGasperi with Berenberg Capital Markets.

Speaker 8

Hi, Andrew. Thanks for fitting me in. I just had one question. I think you mentioned the software revenue was kind of flattish because The transition to subscription from, I guess, permanent license or on prem. Just wondering if, can you give us like maybe a little bit of timeline around when you think that transition might be less of a headwind going forward?

Speaker 4

I think that we will continue to see some transition towards Through the balance of 2022 and as we get into the early parts of 2023, we would expect that transition to be predominantly done.

Speaker 8

Got it. And maybe when just on a follow-up in terms of the Quantumax, I think you said the delays, Yes, this pushed out some deals. Should we expect some kind of pent up demand from that region As availability for the product comes in, I mean, I guess like how meaningful could that be? Or do you have any visibility on that?

Speaker 3

Well, as I think we've mentioned, we haven't really seen any cancellations, Including from the Chinese customer base despite the situation that they're enduring. We did push obviously some orders into the next quarter. And so I yes, we do believe there's some pent up demand. It's hard to quantify how that is going to ripple through. I think our logistics team is Very much concerned, not so much just about our own site, but the Shanghai port and all the Kind of pent up ripple effect of what's going on in China is a concern.

This is why, Andrew, we've really handicapped what think we're going to be able to do in China. I hope we're wrong. But it really bit as hard this quarter and it's Frankly, it's embarrassing. We didn't anticipate it, but this is the Q1 that we've given guidance. We're not proud of missing the Q1 that we give guidance.

So we're not going to do that again. And so we are very concerned about getting too far over our skis and hoping that all of it's Just going to go away tomorrow. I don't think that's realistic personally.

Speaker 8

Right. That makes a little sense. Maybe a last one in terms of the gross margin range. I think you mentioned some quarters might be below that. I just wonder, is it If I heard it correctly, you mentioned is the mix a factor here or is it the level of revenue that you expect that would drive that gross margin?

Speaker 4

Yes. So I think we did comment in our prepared remarks that we have seen a shift towards higher margin products Here in the near term and again it can fluctuate quarter to quarter a bit. But I think that by and large we would Expect to be towards the lower end of the 55% to 60% as we commented, as well as we can dip below it depending upon where revenue is Just like we just reported, right, with just almost 54%, but revenue at about $77,000,000 So You can kind of get a sense for where we where that break point is for margins being below that 55% to 60% range.

Speaker 8

Got it. Perfect. Thank you very much.

Speaker 3

You bet. Thanks.

Speaker 0

All right. Thank you. At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Michael Berger for any closing remarks.

Speaker 3

Thank you very much. Thank you for your time and your interest in Ferro and we will talk to you next quarter, If not before. Thank you.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's conference and we appreciate your participation. You may disconnect at any time.