FARO Technologies - Q2 2022

Transcript

Speaker 0

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

Speaker 1

Thank you and good afternoon. With me today from FARO are Michael Berger, Chief Executive Officer and Alan Miuch, Chief Financial Officer. Today, after market close, the company released its financial results for the Q2 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, may be considered 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 industry 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 are not presented in accordance with U. S.

Generally Accepted Accounting Principles or non GAAP financial measures. In the press release, you will find additional disclosures regarding these non GAAP measures, including reconciliations to comparable GAAP measures. While not recognized under GAAP, management believes these non GAAP financial measures provide investors with the relevant period to period comparisons of core operations. However, they should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. Now, I'd like to turn the call over to Michael Berger.

Speaker 2

Thank you, Mike. Welcome to our call. In the second quarter, demand across our served markets remained healthy with noticeable increases in backlog, driven largely by demand for both our Quantum Max scanner and our newly released Focus Premium laser scanner. However, 2nd quarter results were impacted by continued strengthening of the U. S.

Dollar, which is up approximately 10% against major currencies from the start of the year. Roughly 60% of our revenue in the quarter was transacted outside the United States and impacted by the changes in the U. S. Dollar exchange rate. For comparison purposes, on a constant currency basis, our 2nd quarter revenue would have been $83,900,000 representing a 3% year on year increase and up over 7% sequentially.

Nevertheless, Customer feedback on our Quantum Max and Focus Premium products remains strong, with Quantum Max now qualified by a large portion of our historical customer base. Focus Premium's recent launch in April is following a similar trajectory of the Quantum Max. We believe the improved speed and ease of use of the Focus Premium Scanner coupled with Stream, our new mobile scanning application, are Key differentiating features that compare favorably against our competitors' products. These 2 refresh product lines represents 75% of our historical hardware revenue. In the 2nd quarter, Shipments of our scan arm and our laser tracker product lines were sourced from Sanmina's Thailand facility.

We continue to be pleased with Sanmina's quality levels as well as their ability to meet required volumes. At the end of the second quarter and consistent with our plans, We completed the move of our laser scanner product line to Sanmina. As a result, our manufacturing outsource initiative is now largely complete. We continue to believe in the long term financial and operational benefits of this transition. And while the timing of the previously mentioned $12,000,000 in to a phased shifting of supply chain partners to Southeast Asia that will allow us to begin seeing savings in 2023.

In the Q2, we also launched our new three-dimensional digital reality capture and collaboration platform, which we call FerroSphere. Sphere is a cloud based environment, which enables full 3 d model creation, storage and collaboration. Sphere will be FARO's platform for all future cloud based software applications, workflows as well as our service and training resources. Adoption rates of SPEAR by current generation scanner customers has progressed as expected to our premium offering. While it is still early days, the conversion to paid subscription is on track as we continue to develop New value added software applications that address the specific needs of customer workflows in the AEC and O and M markets.

Turning to Hala Builder, we remain pleased with the progress of the business and are very excited about the scale of the opportunity in front of In the year since acquiring HaulaBuilder, the teams have made progress toward empowering construction professionals We have continued to enhance our offering, releasing significant new features, including premium analytics, the HaloBuilder API and Snapshots. These powerful new tools continue to build upon HaloBuilder's HALO Builders construction progress management application will be integrated into the Sphere platform by the end of this year. In June, we announced that Goldbeck, a leading European commercial construction firm signed an enterprise agreement to deploy hollow builder's construction progress management workflow across its entire organization. Golbeck site managers will use our platform to track and document the progress of their To track and document the progress of their construction projects over time, linking cloud based 360 photos of their site to the digitized building plans and storing them securely in the cloud. Goldbeck is a textbook example of a global firm Realizing the full potential and competitive advantage of using FARO's high accuracy 3 d laser scanning technologies in concert with our real time photo capture technology.

We continue to believe there is a large and growing untapped market opportunity for Ferro's technology that leverages our high accuracy laser scanning expertise along with easy to use photo based solutions coupled ultimately to our mobile scanning solution. With the launch of FerroSphere, we are bringing these capabilities together to provide a one stop 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, both now and over the long We continue to execute on the areas we can control and are closely monitoring both the demand environment and our own operation, given the loud and consistent rhetoric related to recessionary and supply chain risks. While we have not seen direct effects on our opportunities or booking pace, we remain cautious and are managing our business accordingly. With that, I'll turn the call over to Alan to provide an overview of our Q2 financial results.

Speaker 3

Thank you, Michael, and good afternoon, everyone. 2nd quarter revenue of $79,900,000 was down approximately 3% compared with the Q2 of 2021. As Michael mentioned, with roughly 60% of our revenue impacted by the stronger U. S. Dollar in the 2nd quarter, on a constant currency basis, Our Q2 revenue was $83,900,000 up 3% year over year.

Driving this result was Primarily the increase in demand for both our Focus Premium Scanner and QuantumMax Scan On, particularly in the Americas where overall orders grew 14% year over year. We expect to continue to leverage the strength in the Americas into our other geographies in the coming quarters. On an actual currency basis, hardware revenue of $49,200,000 was down 2% year over year, Software revenue of $10,500,000 was up 4% year over year and service revenue of $20,200,000 was down 7% year over year. Recurring revenue of $17,100,000 was up 8% when compared to Q2 of 2021, primarily due to the growth in our hollow builder construction progress management application. As we discussed last quarter, We've 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 that is improving our customer experience, but adversely impacting revenue realized from time and material billings. And history for two primary reasons. The first is related to the strengthening of the U. S. Dollar exchange rates as our products are often priced in local currency, however manufactured on a U.

S. Dollar basis. The second relates to some geographic specific opportunities for lower margin configurations that closed in the quarter that we believe may continue in upcoming quarters. We remain committed to our success model, which for gross margin targets 55% to 60%. That said, near term pressures from the previously discussed 200 basis points of unfavorable material cost increases to now the effect of USD FX rates and mix shift including lower configuration products implies we will operate below our targeted range until external conditions improve or we begin realizing the savings associated with shifting our supply chain to Southeast Asia.

GAAP operating expenses were 49 $4,000,000 and included approximately $3,900,000 in acquisition related intangible amortization and stock compensation expenses and $2,300,000 in restructuring Non GAAP operating expense of $43,200,000 was $1,400,000 higher than Q2 of 2021, due primarily to the inclusion of Hollow Builder operating expenses in our financial results. Given our acquisition 1 year ago, that more than offset The benefit we're seeing as a result of strengthening U. S. Dollar exchange rates. GAAP operating loss was $9,000,000 in quarter of 2022 compared with an operating loss of $650,000 in the Q2 of 2021.

Non GAAP operating loss was 2 point $5,000,000 Q2 of 2022 compared to a profit of $3,900,000 in the Q2 of 2021. Adjusted EBITDA was approximately $500,000 Our overall operating income levels were relatively unaffected by the strengthening dollar. And while both reported revenue and costs were lower, they virtually offset creating a natural hedge against FX movements today and in the future. Our GAAP net loss was $8,600,000 or $0.47 per share. Our non GAAP net loss was approximately $600,000 or $0.03 per share for the Q2 of 2022 compared to a profit of $2,200,000 or $0.12 per share in Q2 2021.

I should note that included in our non GAAP financial results was a $1,500,000 gain recognized in other income and expense that was primarily due to the remeasurement of U. S. Dollar bank balances held by our foreign legal inventory. We continue to maintain a strong capital structure with a cash balance of $102,000,000 in no debt. We made significant progress on our aged receivables with an approximate 10 day sequential quarter reduction in days sales outstanding that results in a reduced ARR balance despite the sequential increase in revenue.

Further, we saw an approximate $10,000,000 reduction in short term inventory as a result of our Sanmina partnership that didn't affect Q2 cash flow given the timing of payments. We remain focused on reducing overall working capital levels with improvements expected through the remainder of the year. Moving on to guidance. In the Q3, we expect revenue of between $79,000,000 $87,000,000 which assumes a constant exchange rate from today's levels. If the U.

S. Dollar were to further strengthen during the remainder of the quarter, we would again experience a headwind to reported revenue levels. We expect non GAAP earnings per share of between negative $0.08 and positive $0.08 In closing, while all the talk of recession may ultimately prove a challenge, we continue to see several signs of improvement in our business. With our recently launched FerroSphere Ecosystem, we now have the platform from which customers can view, collaborate and ultimately gain greater insight From the 3 d models. We are excited by our software roadmap targeted at new workflows and applications that will enable our customers with new and unique value from the 3 d models they create with FARO hardware.

In the second quarter, we had the highest non Q4 quarter of laser Quarterly levels have increased from below $14,000,000 in Q2 2019 to above $17,000,000 this quarter, representing an 8% CAGR over this time. Increased recurring revenue levels is a key result of the execution of our strategy and we're pleased to show progress. We've entered the last two quarters with material availability concerns. And while the situation remains fluid and can change quickly, material availability challenges

Speaker 2

appear to

Speaker 3

be easing heading into the second half of twenty twenty two. Finally, entering the Q3, we've seen a modest increase in both the absolute size of our pipeline despite the typically slow summer months, as well as a modest increase in our conversion rates in each of our geographic regions. Our recently launched scanner and laser scanner products, which comprise 75% of our hardware portfolio, are gaining good customer attention and we're winning. We're excited about the building momentum in our business for our near term opportunities, while also executing on the long term vision that we have for generating shareholder value from the

Speaker 0

We'll move first to Greg Palm with Craig Hallum Capital Group. Please go ahead.

Speaker 4

Yes, good afternoon. Thanks for taking the questions. I was hoping you could maybe start with just giving us a high level view of kind of How the quarter shook out from a cadence standpoint and really more interested in what you saw sort of in those last Most important couple of weeks of the quarter.

Speaker 2

Yes, we typically have a rush to the end of the quarter as we've talked The past and this quarter was no different. I think, I will say that it probably our quarter built a little bit more linear Then we've seen traditionally and I think that's because some of our products because of material shortage issues, we've been Very vocal about what we think the lead times are and I think that's had some effect to that build. But we saw a lot of momentum Going into the last month of the quarter and as history shows, we've done a lot of Turns in that last month. So we didn't see anything materially different other than perhaps a little bit more linearity in the beginning of the quarter.

Speaker 4

Okay. And from a geographic basis, understand the FX headwinds, I was surprised in the Americas region where FX really isn't an impact And you had revenue that was down a couple of million quarter over quarter, which is inconsistent with normal seasonal trends. Can you maybe just Detail exactly what the reason was for that?

Speaker 2

Well, it was Down in revenue, but up in bookings. And so I think Alan referenced this in his script. We saw really strong demand. Much of it wasn't able to be shipped within the quarter, came in toward the latter part. We're actually feeling pretty good about America today, driven largely by 3dM.

So I think this is more of a timing issue than an actual market change. 3d ms was strong. We also saw public safety actually did really well in the quarter for us as well. So We're feeling really good about the Americas, particularly in the context of bookings going forward.

Speaker 4

Do you have a book to bill by Chancellor, a quarter end backlog, I don't know

Speaker 2

if you gave you those, I missed them if so. Alan, I don't recall if we actually published that in our.

Speaker 3

Those are numbers that we haven't published, Greg. But at the same time, I think that we did indicate at the beginning of Michael's section that we did build some backlog Within the quarter, so I think you can assume that book to bill was greater than 1.

Speaker 4

Yes. Okay, perfect. And On gross margin, maybe Alan, just go in a little bit more detail exactly the reason behind the decline. I think You had said something about the lower price or lower margin configurations. I'm not sure if that was a byproduct of A new geography you entered or new customers or whatnot?

I guess I

Speaker 2

missed the reason behind that as well.

Speaker 3

Yes. I think that, again, we So they're denominated in U. S. Dollar. The second is exactly what you indicated, which is a bit of a shift towards lower priced, Lower margin configurations.

You also recall that we had some backlog that was held up In China, heading out of the Q1 into the Q2, quite a bit of that, of course, shipped in. In fact, all of it shipped here in the Q2. That product tends to be a bit on the lower side of the margin scale for us, which again, I think adversely affected some of the margin profile that we see in the quarter. China continues to be a very strong geography for us, which is why we also made the comment that we don't really expect Too much change from that mix as we head into the next couple of quarters. Our line of sight is not overly long, but from what we can see at this point in time, We expect those lower margin regions to remain relatively strong, which is one of those good news, bad news types of comments.

Speaker 2

Yes, makes sense.

Speaker 4

Okay, I'll leave it there. Thanks and good luck.

Speaker 2

Thanks, Greg. Thanks, Greg. Thanks, Greg. Nice seeing you.

Speaker 0

And we'll take our next question from Andrew DeGasperi with Berenberg. Please go ahead.

Speaker 5

Yes. Thanks for taking my question. I guess from my perspective, it seems like the tone from year end seems to have improved Quite a bit since last quarter. I guess, one, just take painting like a broad picture. I mean, is it a function of demand that you've seen come back much Stronger, like the question that Greg just asked towards the latter part of the quarter.

Is it pipeline? Is it a function of The inflation pressures that you were seeing, I guess, can you maybe break out a little bit why you feel that The second half is going to improve quite a bit versus the first.

Speaker 2

Well, like we said, I think, Andrew, we're cautiously optimistic. We hear the same and read the same snippets that everyone does. And so we're cautiously optimistic. I think what's making us I think what's making us optimistic is the traction we're seeing in our new products and that includes the new hardware products, both QuantumMax and the Focus Premium, we kind of gave you some statistics, but this was our 2nd highest booking quarter in some time in terms of scanners and that was driven largely by the strength of demand for the new product. Quantum Max continues To do really, really well globally.

And so we're very encouraged by the adoption rate of the new hardware products. We're also very excited by the feedback that we're getting from our customer base and the premium sign up For subscribers for FerroSphere also very, very positive. And then finally, the HoloBuilder traction continues to grow. And I'm We believe all of this is kind of coming together at a really great time. We also have Seeing our total opportunity pipeline grow, despite all the bad news in the world, Our funnel continues to grow.

That has an effect on our confidence around our Q3 guide. If you notice, we're guiding up off of Q2, which Frankly, hasn't happened seasonally since I've been here. So this is a very positive trend for us and again driven largely by the new products. Something could change tomorrow, but everything that we know and everything that we can control is pointing up into the right. And so we are feeling really good about where we are right now.

Speaker 3

And Andrew, maybe just to quantify it a little bit as well and This is a repeat, but we provided constant currency performance just to simply also provide what's really happening under the covers. And so with $83,900,000 of constant currency revenue, that places us more towards the higher end of the range that we had provided 90 days ago. And at the same time, we built a little bit of backlog. The combination of seeing that quantified combined with what Michael indicated around some of the drivers, I think is also a bit of why we're feeling a bit more bullish than what you indicated last quarter.

Speaker 5

Got it. And then that's helpful. And then I guess when it comes to the Sphere and Hollow Builder, which I guess you're going to include towards the end of the year, Should we expect the rapid like should we expect the product expansion to improve Dramatically once that happens, like are you going to say we're going to see customers essentially use more of that product once it's in that environment?

Speaker 2

We believe that growing ARR is a slow and steady race. It takes time to build Recurring revenue of any real girth that moves the needle. As Alan mentioned in his remarks, We continue to see recurring revenue grow at a comp annual growth rate of around 8% From last year, that's a very positive or from 2019, I believe, that's a very positive sign for us and HoloBuilder has continued to accelerate. We do believe that Sphere and Hollow Builder combined with some of the new Application suite we have in our roadmap should continue to accelerate that. But again, I think to put it in proper context, I believe growing ARR is a multi year approach.

And I think we've said in the past, our objective is to have 20 5% of our total revenue recurring in nature and we feel really good about the progress we're making toward that.

Speaker 5

That's helpful. And then the last one is on the margins. I understand the issues and why you might be trending below range. Just curious to know like what in terms of the things that you do know, like when can we see that Sort of return to the historical range that you've guided to like, is it essentially entirely Baked on FX or do you think particularly the product mix situation, is there a timeline as to when that would improve?

Speaker 2

Well, the product mix is I think product mix is harder to control. What we've seen is in the developing countries, particularly China and Southeast Asia, actually also Eastern Europe, these guys are Typically buying lower technology products, and I don't mean that the way it sounds, but from the way it is actually The configurations are put together, for example, China typically uses, probing versus laser scanning and that has a net on the QuantiMax margin for that particular country. Those applications seem to be growing at this point. And so that mix, as Alan said, we continue to we don't think it's going to change overnight. We think that as other economies, for As Europe comes back for vacations, that type of thing should drive a stronger mix, but I think that's a multi quarter kind of move.

I think FX continues to be a part of this, but I also believe that supply chain and supply chain pricing that we've seen, I think We talked about 200 basis points increase in cost and that has had a negative effect on gross margins as well. So I think gross margins from a mix perspective or a longer term deal, who knows when the supply chain thing will completely Reversed itself and I think currency, your guess is as good as ours.

Speaker 3

The only thing I guess I would add also is that the material Cost savings that we expect to realize from the transition to a supply chain that's located more in Southeast Asia. We're beginning to see as we indicated in our prepared remarks, we're beginning to see line of sight as to when that ultimately happens. And I think that throughout 2023, we now expect to see some benefit And that ultimately, of course, will bolster gross margins back to the historic level depending upon what's happening With mix and what's happening with currency and some of the other effects that we've had.

Speaker 5

Great. Thanks, Alan.

Speaker 2

I think the long term fix here for us As mix goes to recurring revenue that will be very accretive to gross margins.

Speaker 3

Right. Thank you.

Speaker 2

You're welcome. Thank you, Andrew.

Speaker 0

We'll move next to Rob Mason with Baird. Please go ahead.

Speaker 6

Yes. Good afternoon. Thanks for taking the question. Michael, I was just curious hi. I'm just curious your thoughts around just given the tone of business And order input that you are seeing, are you seeing a bookings level that gives you and quoting activity that gives you Any kind of comfort around the typical 4th quarter seasonal step up that we typically get from a level standpoint?

Speaker 2

Yes. We're not giving guidance out that far, but we're feeling much more confident about The year in general and yes, you're right, seasonality, it tends to crescendo to Q4. So yes, we think this builds confidence. As the funnel builds, As the funnel builds, it really it cures a lot of ills. And I think also in Alan's remarks, we talked about conversion And that continues to increase with primarily due to the new products.

So I think both of those things bode well for Q4 for us, yes. Okay.

Speaker 3

All that said, we hear the same language and the words out there around recession occurring. We haven't necessarily seen any effect But we certainly hear it and so that's a wild card that may cause things to be a little bit different than what we're seeing today

Speaker 2

certainly. Sure.

Speaker 6

Sure. Could you comment a little more expansively just across the regions what you saw from an order standpoint. I think you didn't comment on Americas or even quantify that, but the other two main regions as well.

Speaker 2

Yes. Asia Pacific in general from a bookings perspective, not from a revenue perspective, from a bookings perspective remains Relatively strong for us and driven primarily by China. Japan is still lagging where it has been pre COVID And we haven't seen that really bounce back yet. Europe was slower than we'd like to see from a bookings perspective and that's Driven largely by what we've seen in the AEC marketplace from a traditional perspective. 3 dm in the 3 d metrology world in Europe has shown signs of life and it gives us Confidence going into Q3 and Q4.

North America was driven largely by the 3dM segment. And I mentioned earlier, public safety also had a nice showing From a booking perspective, the interesting thing about the new scanner, the interesting we as we mentioned, it was our 2nd highest bookings of scanners since I think in history actually, but certainly from 2019. And I think What was exciting about that is that was almost a third, a third, a third in terms of geographic split. So I think there was A lot of pent up demand waiting for FARO's new scanner and it materialized in new bookings. And again, on a global scale, no one region Really dominated, which I think is encouraging long term.

Speaker 6

Michael, with the new products out and the reception that they're getting, are you Making any changes with the sales force by that I mean account reps, are you adding reps or you think you have existing capacity or I'm just curious how the dynamics are trending there.

Speaker 2

We are not adding. I do believe that we have adequate Capacity, I think in the context of just managing our business close to the chest through this Market dynamic that we're all talking about, but no one's really seen. We're just cautiously optimistic. We do believe that we've got Enough capacity to fulfill our internal goals for 2022. If in fact we continue to see Continued demand growth, we can always we can change that.

But right now, we're sticking to our knitting and I think we have enough From the selling organization to get to where we need where we believe we need to be in 2022.

Speaker 6

Very good. Thank you.

Speaker 2

You're welcome. Thank you.

Speaker 0

It does appear there are no further questions at this time. I would now like to turn the call back to Michael Berger for any closing remarks.

Speaker 2

Thank you very much. I think as you guys have denoted, we are feeling really good about where we are right now. Our new products And new product traction is happening and the major milestones around manufacturing consolidation and Sphere are happening. So we feel really good about where we are. We look forward to talking to you about where we end up in Q3.

Thank you very much for your time. Goodbye.

Speaker 0

This does conclude today's program. Thank you for your participation. You may disconnect at any time.