FARO Technologies, Inc. (NASDAQ:FARO) Q3 2023 Earnings Call Transcript

FARO Technologies, Inc. (NASDAQ:FARO) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day, everyone, and welcome to the FARO Technologies Third Quarter 2023 Earnings Call. For opening remarks and introductions, I’ll now turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead, sir.

Michael Funari: Thank you, and good morning. With me today from FARO are Peter Lau, President and Chief Executive Officer; and Allen Muhich, Chief Financial Officer. Yesterday, after market close, the company released its financial results for the third quarter of 2023. The related press release and Form 10-Q are available on FARO’s website at www.faro.com. Please note certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties, some of which are beyond our control and include statements regarding future business results, product and technology development, customer demand, inventory levels, our outlook and financial guidance, economic and industry projections or subsequent events.

Various factors could cause actual results to differ materially. For a more detailed description of these and other risks and uncertainties, please refer to today’s press release and our annual and quarterly SEC filings. Forward-looking statements reflect our views only as of today and except as required by law, we undertake no obligation to update or revise them. During today’s conference call, management will discuss certain financial measures that are not presented in accordance with U.S. generally accepted accounting principles or non-GAAP financial measures. In the press release, you will find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures. While not recognized in our GAAP, management believes these non-GAAP financial measures provide investors with relevant period-to-period comparisons of core operations.

However, they should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. Now I’d like to turn the call over to Peter Lau.

Peter Lau: Thank you, Mike. Good morning, and welcome, everyone, to our call. We made notable progress in the third quarter, exceeding the high end of our guidance range by delivering $86.8 million in revenue. In addition, due to our lower cost structure and sequential 90 basis point non-GAAP gross margin expansion, adjusted EBITDA improved by $2.6 million or 300 basis points over the second quarter despite a small sequential decline in revenue. From a top line perspective, the better-than-expected performance resulted from focused sales activities to increase our overall pipeline and acceleration in customer decision-making in our target markets that, combined with an improved material availability and improved sales and operations execution enabled higher-than-expected unit shipments.

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Q&A Session

During the quarter, we continued to make excellent progress on our initiatives to streamline operations by taking a series of actions that reduced our footprint, rightsized our cloud investment, integrated prior acquisitions and increased our overall productivity. We have increasing confidence that these cost actions will optimize our performance and not adversely affect our ability to capture long-term market share. While we are pleased with the progress, we are in the early innings of improving results and driving increased execution. Our team recognizes that we have more work to do and is committed to executing with intensity. The revised cost structure reflected in our third quarter expense base and gross margin expansion demonstrates the progress we’ve made towards improving our operating model.

In the quarters ahead, we will continue to be vigilant on maintaining current spending levels and capturing additional opportunities with a particular focus on expanding gross margins while continuing our [fist] investment in new products and technologies. On the product front, the third quarter, we accelerated our product development process while focusing on key product launches, which we believe will have the greatest impact in the market. An example of this is our recently launched Orbis Mobile Scanner, a groundbreaking advancement set to redefine 3D reality capture. Orbis is the first-to-market scanner that can be used for both mobile and stationary data capture in 1 device. It’s best of both world’s performance, providing the ease of use and speed of a mobile scanner while also providing the unique ability to seamlessly switch to stationary mode which significantly enhances accuracy.

When combined with automated integration to our recently announced Sphere XG platform, FARO provides customers the ability to automatically process 3D data, making completed 3D images available for viewing and collaboration in a cloud, a desktop or mobile environment up to 90% faster than alternatives. These advancements reflect the fusion of FARO’s legacy technologies with those of our recent GeoSLAM and HoloBuilder acquisitions and further demonstrate our commitment to innovation. Before turning the call over to Allen, who will provide greater detail on our third quarter results, I want to take a moment to share some of my observations. Since joining FARO, my primary focus has been on building a point of view on what is working, where we need to improve our opportunity for sustained technology differentiation and finally, on a sustainable financial success model.

I’m very impressed by what I’ve learned. Having met with customers around the world, the strength of FARO’s brand in the market is clear and not only speaks to the trust customers have in us, but also our reputation for 3D application expertise and innovation. By leveraging our core stance in the market, we are well positioned to remain at the leading edge of product performance while exploring near adjacencies that expand our addressable market, solve our customers’ toughest problems and ultimately drive growth. Customer feedback has affirmed our overarching product solutions strategy. In speaking with our employees, the team’s unwavering commitment to our organization is palpable. Given the macro challenges and uncertainties over the past several years, their dedication is truly commendable.

The team is not only engaged but driven by a shared ambition to be a leader in the market through a commitment to our customers, shareholders and the legacy of FARO. I’m encouraged by the opportunity to improve upon the solid foundation we have as a company. I believe in establishing an operating system centered around an 80/20 philosophy, that relentlessly prioritizes key activities that will drive the greatest impact on shareholder value and a financial model that will yield improved profitability in all market conditions. We are well down the path of implementing organizational initiatives such that all 1,300 FARO employees know how what they do every day contributes to the achievement of the priorities we’ve aligned on and agreed to as a team.

I have confidence the resulting focus and rigor will yield performance improvements. Having had the chance to assess the market opportunity, there is incredible value to be created by the reduction of waste and inefficiencies in the management of the world’s physical assets through the use of 3D capture and virtual management tools. Our potential for growth is broad and substantial but will require a focused and disciplined product road map as well as a go-to-market strategy targeted toward customers, markets and applications where we have the highest probability of success. The driving force remains our underlying strategy of hardware augmented by software to deliver solutions that solve customer problems. Yet there is likely some refinement to key elements and focus areas that will accelerate and optimize our success.

In the coming months, I expect to continue building upon our operating cadence and further refine my strategic point of view with our employees, executive team and Board of Directors to develop a cohesive strategy. When finalized, I plan to publicly communicate to our stakeholders, our key priorities, target markets, targeted financial model and long-term goals as well as a road map for achievement. With that, I’ll now turn the call over to Allen to provide an overview of our third quarter financial results.

Allen Muhich: Thank you, Peter, and good morning, everyone. Third quarter revenue of $86.8 million was up 2% compared with the third quarter of 2022. 3D metrology demand remained relatively healthy, particularly in the automotive and aerospace industries. Geographically, demand within the Americas and Europe continue to perform well, but the softness we saw in China causes a bit of caution near term and into the fourth quarter. In. The third quarter, we continued to see our sales activities yield an expanded pipeline. While too early to call a trend in remaining longer than historical averages, our sales cycles modestly shortened after 2 consecutive quarters of lengthening. This positive timing change created an uplift in demand and with improved execution in sales and operations planning positively impacting our finish availability, we were able to accelerate product availability and satisfy the increased customer demand.

Third quarter hardware revenue of $55.7 million was up 1% year-over-year, while software revenue of $11.2 million was up 6% and service revenue of $19.9 million increased slightly. Recurring revenue was $17.1 million and represented 20% of sales. As discussed in prior quarters, over the past year, we have seen a modest flattening of overall software revenue as we convert customer purchases of perpetual licenses to subscriptions. In the third quarter, we began to see a resumption in both sequential and year-over-year growth as we exit this transitionary stage. Service revenue showed a modest 1% year-over-year increase, marking the second straight quarter of year-on-year growth, as our service revenue continues to show signs of recovery from the contraction in our serviceable installed base that resulted from softness in 2020 and 2021 hardware shipments.