FARO Technologies, Inc. (FARO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, everyone, and welcome to today's FARO Technologies' Second Quarter 2021 Earnings Call. For opening remarks and introductions, I will now turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead. Michael Funari: Thank you, and good morning. With me today from FARO are Michael Burger, Chief Executive Officer; and Allen Muhich, Chief Financial Officer. Yesterday, after the market close, the company released its financial results for the second quarter of 2021. The related press release and Form 10-Q for the second quarter 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 and include statements regarding future business results, product and technology development, customer demand, inventory levels, economic and industry projections or subsequent events. Michael Burger: Thank you, Mike. Good morning, welcome to our call. Demand for our products in the second quarter reflected a return to a seasonal growth and -- following the typically soft first quarter. On a geographic basis, the Asia-Pacific market and, in particular, China, performed well, while U.S. and Europe markets continue to recover, albeit at a slower pace. With the second quarter improvement across our served markets, we continue to believe the demand environment will improve throughout 2021 as our customers' activities normalize. Taken together with our ongoing flow of new product introductions, we believe year-end demand levels will be similar to those experienced in the fourth quarter of 2019. That said, we remain cautious as market uncertainties, such as the continuing softness in commercial construction starts, the prioritization of capacity expansion over quality control initiatives and the ongoing steps local governments take to combat the pandemic, may adversely impact the ultimate slope and the timing of our recovery. We remain focused on laying the foundation for expanding the breadth and depth of our product offerings, while streamlining our operations to continue to capture the long-term opportunities ahead. As discussed in our prior calls, FARO is in the process of transitioning to a marketing-led organization focused on understanding our customers' problems and delivering hardware and software solutions to meet their needs. Allen Muhich: Thank you, Michael, and good morning, everyone. Second quarter revenue of $82.1 million grew 36% when compared to the second quarter of 2020 as a result of continuing market demand improvement compared to last year's market softness caused by the pandemic. Product revenue of $60.3 million was up 43% and service revenue of $21.8 million was up 19%. Bookings of $88.2 million grew 44% year-over-year and were slightly ahead of revenue in the quarter, signaling a modest fielding of backlog. GAAP gross margin was 55.4% and non-GAAP gross margin was 55.7% for the second quarter of 2021. Gross margin increased year-over-year and sequentially largely due to volume increases versus prior periods. Our second quarter material costs did not reflect inflationary pressures prevalent in today's market. That said, we do anticipate material cost headwinds to modestly affect gross margins in the near term. GAAP operating expenses were $46.1 million and included approximately $3.6 million in acquisition-related intangible amortization and stock compensation expenses, and $800,000 in restructuring costs. Non-GAAP operating expense of $41.8 million was $4.1 million higher than Q2 of 2020 as we continue to increase our software investments and as a portion of the travel-related expense savings realized during the pandemic began to return. Operator: We'll take our first question from Greg Palm from Craig-Hallum Capital. Greg Palm: I guess, just starting off with the orders, it looks like orders outpaced revenue by a decent amount in the quarter. So was there anything supply chain-related? Or was that just simply orders received late in the quarter that weren't able to ship? Just kind of curious if you're seeing any kind of supply chain-related logistics issues out there. Michael Burger: Yes. We've experienced some. Yes, the order rate was back-end loaded for the quarter, and so we ended up basically pushing some of the booking over into Q3. It's hard to say if that was really supply chain-related from a customer perspective, but we didn't -- we've seen some logistics issues throughout the quarter, but it really didn't impact the end of quarter revenue. It was more around when we actually received the order. Greg Palm: Okay. Makes sense. And Allen, I think you said something about elevated material costs. I don't know if that was an impact at all in the June quarter, but how should we be thinking about that impact going forward? Allen Muhich: Yes. Greg, good question. Not much of an impact in the second quarter. We do expect to see some material increases in the third quarter. That said, we do have some opportunity to be able to pass those along to our customers. And so as I indicated in our prepared remarks, we would expect some modest impact to our gross margins here over the near term, depending upon ultimately how the length and duration and depth in changes of these material costs. But again, at this point in time, we think it's relatively modest, but maybe a little bit more towards the lower end of the range versus the middle of the range, which is where we've been operating. Greg Palm: Okay. Got it. And then, in terms of the kind of increasing OpEx, some of the investments, I think most of us understand what the opportunity is, but maybe for those that don't, can you just go in a little bit more detail on sort of the excitement and opportunity around digital twin? Because it certainly seems like a kind of a theme that lots and lots of companies are starting to talk about? Michael Burger: Yes. I think digital twin is a manifestation of, I think, many of our customers' desire to plan both facility changes or facility layouts or in some cases, in public safety, pre-incident planning, to be able to actually have a very accurate model in a virtual environment that allows you to plan. And I think, the better you plan, the less waste. And I think we all know in the construction space and frankly, running factories, one of the biggest issues you have is how do you minimize waste? And digital twin is becoming a catch-all, if you will. And digital twin means different things to different people. But our digital twin is a physical representation of the space and the ability to take that space and it's as close to accurate, as close to the truth as you can and then change it virtually and plan, all in the context of reducing waste. It seems that it is, to your point, kind of a catch-all, but it definitely -- it's a conversation we're having with a lot of customers. A lot of customers that we didn't really anticipate having that conversation with. Greg Palm: Got it. That's interesting. And then, just last one. So the EBITDA 20% run rate with the revenue increasing to $110 million to achieve that. What would that number look like if you were to be able to capture all of the savings from the manufacturing outsourcing? Would that number be closer to the number you've been alluding to in the past? Just sort of curious how that will affect that number once those are -- those costs are fully realized at those stages, I guess? Allen Muhich: Yes. It's a very good question. And I think that the timing -- and you picked up on the nuance, right? The timing difference between the expenses coming on with the HoloBuilder acquisition versus our ability to be able to realize the savings with our outsource manufacturing does cause over the next, call it, 12 to 18 months, an adverse impact on our model. I do think that there is a path towards getting to that 20% EBITDA on a lower revenue number or at the higher revenue number, overachieving the 20%, but we're not ready to commit to that just yet. Operator: Our next question comes from Jim Ricchiuti from Needham & Company. James Ricchiuti: Question just about the seasonality that you're seeing -- you normally experience in this quarter. And I'm wondering if there's anything that you've seen in the first month -- and that may not be a fair question, just given how back-end loaded, typically the quarters are. But is there anything that you're seeing that you might be able to share with us that give us a little better sense as to how the momentum might be entering Q3? Michael Burger: Actually, we've started Q3 pretty -- in typical fashion as we have probably most quarters. We're typically back-end loaded within the quarter. And I think the concern that we all have around Q3 is typically the vacation -- the broad-based vacations that our customers are experiencing in Europe, which typically starts in August. So the first part of the quarter is kind of as expected. But again, we're not really -- we traditionally see August kind of take a sideway step, and that's born out in our history, Q2 to Q3 over the last several years. So I think, started off pretty normal, and we're anxious to see how August stacks up. James Ricchiuti: Okay. On the transition to Sanmina, Allen, maybe this is a question for you, is there any reason why as this process really gets going, you wouldn't see some or be able to realize some supply chain benefits just from some of their buying power? I know you're talking about seeing opportunities in '22 gradually over the course of the year, but I'm wondering how to think about just some of the supply chain benefits? At what point do they'd be perhaps take a more active role on that side of the business? Allen Muhich: Yes. It's a good question. And again, I think, as we've articulated the savings opportunity, we have indicated that there's both a labor and a material component. As everybody knows, our manufacturing has been centered in a couple of locations in U.S. and one in Germany. And the supply chains for those manufacturing are localized to those facilities. So as we move more towards a Sanmina, Thailand-based facility, there is an opportunity, absolutely, to enhance the supply chain from a cost standpoint, at the same time, leverage Sanmina's purchasing power. So we do think that there is an opportunity for decreased material cost savings as time goes by, and that's built into the numbers that we've been talking about, Jim. Michael Burger: I would also... James Ricchiuti: Okay, but not necessarily ahead of the move to Thailand. You really need to be there with them before you're really able to realize some of that buying -- the purchasing power that they have? Allen Muhich: I think that's correct, yes. Michael Burger: I would say from a cost perspective, correct, but Sanmina has already begun to help us in some of the hard to source materials. They've helped us in advance of actually the announcement in anticipation thereof. They've been a big help. So we're excited about what we think they can do, maybe not for -- not short term in terms of better pricing on materials, but really access to materials. James Ricchiuti: Got it. And then, just a question on the initiatives you have underway to build out the recurring revenue on the software side. Are there similar deals out there to HoloBuilder that you see? Which areas actually hold the most interest for you? Michael Burger: I think, we -- having the ability to actually capture whatever the truth is and the truth is the actual measurement. We -- there are technologies out there that we're looking at, nothing that's burning a hole in our pocket at this juncture. But there's quite a few companies that are kind of getting into this space, if you will, from a software perspective or a algorithm perspective that speeds up either our processing or as in HoloBuilder's case, adds a completely different technology that we didn't really have commercially. So we're looking at all of those, Jim, but again, there's nothing burning a hole in our pocket right now. James Ricchiuti: Okay. And Sphere on track, when should we think about this launching? And how should we think about it looking out to next year? Michael Burger: Q4 is our current schedule. And I think -- as I've said, I think it will be a slow ramp from a revenue perspective as we sign up subscribers. So I would expect very much to -- probably toward the end of 2022, where we can actually start pointing to, I think, meaningful revenue impact. That said, coincident with the launch of Sphere, we'll begin to break out our recurring revenue for you guys so that we're talking about it, and you can track us on it. Operator: Take our question from Andrew DeGasperi from Berenberg Capital. Andrew DeGasperi: I had a quick one on HoloBuilder. I know you said in the -- when you announced acquisition that was generating a so -- $4 million or so of revenue per year, and it's growing on a compounded annual basis at 75% since 2019. Just curious to know, like, with the integration, should we expect that high level of growth to continue, if not even accelerate as you potentially look at other use cases for that asset? Michael Burger: We expect the growth rate to continue on its current trajectory. I don't think we're planning on talking about accelerating that at this point. It's early days for us. We've had it under our belt here for just about 6 weeks. So we're still learning from them. We're very excited by what they offer, and we're extremely excited by the feedback that we're getting from their customer base, which we have some overlap, but frankly, they brought a different customer base to us. So the feedback that we're getting is fantastic. So we believe that we should be able to continue the growth rate that they've already experienced. Andrew DeGasperi: That's helpful. And I guess when it comes to the Q4 revenue number, I think that, that's a quarter that you expect to actually reach back to what we would consider a normalized rate. Is that still kind of the plan based on what you're seeing in the market? Or should -- has that changed at all? Or do you think that the issues that you mentioned earlier potentially in localized locked up and think that may impact that? Michael Burger: Well, I think we're optimistic. I think we've said publicly, we're not really giving guidance, but what we said is we would be disappointed if we weren't back at those levels. I don't think things have fundamentally changed with perhaps the supply chain shortages. And supply chain shortages may not necessarily affect our ability to ship product, but more our customers' ability for them to ship their products and, therefore, maybe dampen their appetite to buy capital. That's our concern. The supply chain situation is real. And while I don't see it coming to an end in the next quarter or 2, our sales force is very optimistic about customer demand in general. And as we said in our script, our new products are really beginning to gain traction. So we're -- everything is headed the right direction. It's just -- it's been a pretty -- it's been a crazy year. So we're just -- we're cautiously optimistic, how's that? Andrew DeGasperi: That's helpful. And I guess the last one I have and just a follow-up to Jim's question in terms of the Sanmina, I guess, transition. Do they have a better supply chain, like access to from materials perspective than what you would have had with your own 3 sites? Michael Burger: Absolutely. And I think Allen alluded to it. FARO had not really integrated many of the supply chains that were attached to each of the factories -- to each of our factories. And as a result, we weren't really even internally gaining any buying power, if you will, by consolidating our internal demand. By transitioning to Sanmina, not only do we get their manufacturing expertise, but we actually get to leverage their supply chain. And as I mentioned to Jim, we've already seen some benefit of that even prior to the announcement in helping us source some hard to get material. So we're very confident that they'll be able to help us on the supply chain side. In this environment, however, where supply is really tight, you're really not talking about getting price reduction, you're more talking about getting access to materials. And that's where Sanmina has helped us short term. I think long term, they should be able to help us with cost. And the way our contracts are written, they're very motivated to help us with cost. It's a big part of the -- of their business model and that industry's business model. So we're very -- I think, we're very fortunate to have Sanmina, and we're looking forward to a streamlined and probably healthier supply chain than we currently have. Operator: We'll take our next question from Rob Mason from Baird. Robert Mason: Michael, if you think about where your targets may be -- may reside for getting back to these 2019 levels by the fourth quarter. I'm just curious, in terms of your sales force and its productivity level, how much capacity does the existing sales force have beyond that level? Or do we need to consider adding more resources once you get back to, call it, $100 million a quarter or type revenue level? Michael Burger: We don't believe that we need to add sales to get to the $100 million, and we're feeling really good about our productivity metrics of our selling organization as we kind of come out of the COVID situation. I don't anticipate that we would need to add any dramatic resource much beyond, I would say, probably the $130 million to $140 million a quarter. So I think, we've got a lot of gas in the tank, if you will, with our current sales force. What's -- it's the demand environment that's precluded us from getting to those levels. I don't believe it's the number of salespeople. Robert Mason: Okay, okay. Just on that point, I mean, could you offer some perspective on how you're seeing the 3D metrology versus your AEC markets perform as you came through the second quarter and into the third, any distinctions either by geography or again between those 2 key markets that you'd call out? Michael Burger: Yes. We've seen the automotive space recover a bit, which is very encouraging. 3D metrology in Asia, I think, we've been underserved in that market, and so we've seen a really nice gain, if you will, particularly in China in 3D -- led by 3D metrology. I think, North America, other than automotive, is been slower than we'd hoped in -- particularly in some of the smaller machine shops, which provide a long tail in terms of the number of customers that we have. So it looks like the big guys are buying again, maybe not at the rates they were, but they are buying again, which is super encouraging. In Europe, we've seen 3D metrology bounce along. We haven't seen a huge recovery yet, and we're hopeful that will be a driver for Q4. So summarizing 3D metrology in general has been slower than, for example, in 2019, but we're seeing nice signs of recovery. Robert Mason: Just within AEC, you had made a reference to commercial construction starts. Is that still maybe the trigger point for uptake on the AEC product? Is the new starts comes at the front end? Michael Burger: We believe so. Many of our customers actually buy capital based on the project that they are actually working on. So they actually build out our -- or charge against the project, some of the equipment costs that they buy from us. And so as new projects start, there's opportunity for us to actually add equipment. But it's been relatively slow, particularly in commercial. We don't really participate as a company much on the residential side. That's changing, albeit it's relatively small. So really, commercial starts is really kind of, I think, should be the bellwether for us. Hey, congratulations on your new position. Operator: And it appears that we have no further questions at this time. I will now turn the program back over to Michael Burger. Michael Burger: Well, we're excited. We're very pleased with where we are in terms of momentum, and we're making a lot of progress to our stated plans. So we appreciate everyone's interest and look forward to giving you an update next quarter. Thank you. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.FARO Ratings Summary
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FARO Technologies Reported Q3 Results, Slightly Below Expectations
FARO Technologies, Inc. (NASDAQ:FARO) reported its Q3 results, which were slightly below Street estimates. Total sales were $79.2 million. The company’s management explained that the lower-than-expected sales growth of 12% in Q3 was tied to a $5 million slippage of deals into the next quarter, entirely tied to Asia.
Analysts at Berenberg Bank provided their view on the company following the report, mentioning that Q3 activity was somewhat soft sequentially, however, funnel activity remains strong for Q4.
FARO Sphere is currently in beta testing and is expected to launch in Q4. The analysts, which lowered their price target on the company’s shares to $93 from $98, believe FARO Sphere, alongside Holobuilder will be the key lever to improving the recurring revenue mix.
