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Faro (FARO)

Participants
Bob Seidel Chief Financial Officer
Simon Raab Chairman and Chief Executive Officer
Greg Palm Craig-Hallum Capital Group
Jim Ricchiuti Needham & Company
Hendi Susanto Gabelli & Company
Call transcript
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Operator

Good morning, everyone, and welcome to FARO Technologies’ Conference Call in conjunction with its Q3 2018 Earnings Release.

For opening remarks and introductions, I will now turn the call over to Chief Financial Officer, Bob Seidel. Please go ahead.

Bob Seidel

Thank you, and good morning, everyone. Yesterday after the market closed, we released our financial results for the third quarter and first nine months of 2018. available website is www.faro.com. release press on at FARO’s The some in remind help its I the make to call. that of results, statements order this course may and would like company you to during the you management forward-looking understand by be objective, believe, goals, such as may and similar These anticipate, identified expect, potential, plan, statements words, can continue, intent, will, words. results statements. It is these from forward-looking those materially possible that may the projected differ Company’s actual in yesterday’s XXXX materially factors release that the actual cause the June set and XX, Form and quarters press Important XX-Q XX, in Company’s results to in September XXXX, the XXXX. are year forth differ March ended and may XX-K for XX, XXXX ended for December Form XX,

verticals photonics segments. vertical to of During this a vertical business new the and reflecting light created included emerging the three a quarter to as reporting steering XXXX, third We acquisitions name of up we roll segment. part of made and dedicated emerging technology our our changes

With the the reflect former design better technologies, to to recent applications. in order to elected open design vertical product acquisition of XD the of nature rename our we

our the strategic remarks, After call afterwards, accordance results. as During press with prepared questions. an substitute to the prepared for measures provide we will metrics to in reflective GAAP. provide remarks non-GAAP initiatives a information you I’ll These Simon financial measures reconciled do for with are the non-GAAP in Company’s review non-GAAP these our in will with will GAAP the a today, or we on order for certain yesterday’s considered our financial metrics reference of business. of isolation underlying financial over intend performance and more our We open financial of return we not update release. provided in be call to financial financial to now turn metrics earnings to

Simon Raab

Thanks, Bob, and good morning, everyone.

gross in by aggressive the margin XXXX leading end the increase employees our and greater strategy. pricing culture a chosen by in leading at in are growth new and to Sales by driven of mid-teens growth, number mid-teens by markets constant goals implementation into of Gross XX% sales Sales improvement for market a market worldwide investing processes. systematic operating mission, Operating efficiencies clearly marketing of of and minimizing our attention clear sales sales performance We stated by the of through all costs products performance margin. and or introduction is of manufacturing pursue of and driven continue driven is verticals. values propositions. the operating the representation is leading margin and driven costs in platforms product margin value to driven technology driven and

worldwide in are challenge FARO’s the markets. solutions actively pursuing of chosen these strategic efforts. is We of imperatives XD extraordinary multiple advanced our all in elements delivery

FARO’s and Our products safety service by and XD more design challenges product development, ambitions with or photonics to around manufacturing, chosen languages are XX our Factory, deliver in world. users transformed present XD and verticals of representation being market support. technology. forensics, We Construction XD support and BIM, the training all our sales public unique

Our size. mission for aggressive is our

most strong year-to-date XX.X% Sales year-to-date are The future at our growing Construction all gross serve has The immense XD can growth The which service XX% revenue, XX% processes a approaching economy approaching every in providing team growth and in infrastructure of Factory XX% comprises profitability. of of of of scale representing in is which for a does has goal growing representing at addressable benefiting elements where our FARO design making XD to vertical is our together our However, XX% margin to XX%. of growth and total with the progress size sales our emerging opportunity sales markets along and are leverage reliability. our margin the and photonics of FARO of developing with Combined service the verticals sales. gross sales XX% at BIM sales. prior margin level. result XX.X% sales, the we This XD public sales XX% and compared comprising established Metrology safety, XX% attention economies XX.X% growth and to year-to-date revolution fast from product penetrating our achieving overall. large Product representing growth and in year. comprised great is we goals margin are profitability. a XX% improve of of is of

We goal of XXX margin force selling our quarters. employees expect direct marketing coming the has gross reach to in and XX% FARO worldwide. or a greater

in processes This and of to expenses and a maturity per over percentage once marketing and and reduction XX was the as again reach quarter, there X.X begin by points as new improve. quarter months the hires was all products first sales increasing selling FTE a trailing the orders

We are channels. have X% missionary increasing while the essential a charge The salesforce to bringing products of work us by our in efficiencies. for only puts year-over-year, important XX.X% XX.X% of verticals increased by no salesforce direct in destiny our the sales new disruptive established sales is year-over-year, which XD conventional in there increase and

terms the sales marketing absolute We and marketing in are constant and optimizing in expect XXXX activities hold XXXX. to expenses our

profitability absolute continuing in sales to while sales gross as increase to our and current XXXX, expense as of XXXX. support terms constant while magnificently our with processes year points. also of the of turn personnel keep the R&D mid-teens margins It all and by margin efficiently year-to-date corporate Thank increase the and the and behalf basis of organization objective through to to intention verticals. now intention will X.X of call year-to-date process this our constant further of a verticals particular R&D our worldwide your showing tremendous percentage points, over to G&A the you on benefits R&D operating sales a achieve expanding support In XX% XXXX to end the sales growing today by to The improvements. attendance fastest with product emphasis on I’ll dropped maintain XX our a sales growth. of market also has support reductions IT terms X.X for is improvements reconstruction basis on XXXX. by our G&A product leading efficiency, of expense for the leading our a our total our absolute complete through effort XXXX Bob. We percentage of by on with salesforce as performed a expense in introductions, to percentage XXXX, platform a intend improved employees in designed our market It G&A shareholders. business is the the thanks decreasing all

Bob Seidel

primarily you, XX.X% time. XXXX. third sold new quarter of shifted Sales in at $XX.X driven was last quarter with the shipped We This demand third third for quarter for XXXX third timing increase growth higher XX.X% than these for would approximately additional across quarter BIM region, by in the two our sales models forensics, and our significant the a our have the XXXX the of exceeded in year-over-year by typical selling our the XX.X%, Thank for of segments, million higher third our year-to-date as were highlighted prior an the sales million, this Simon. $XX.X mid-teens represents with of Construction unit growth in Normalizing scanner public of seasonality. to the last of our objective. which order million trailing increase Asia-Pacific year, been year backlog with laser this which focus average safety shipments compared backlog the backlog production quarters. sales the additional quarter for driven higher unique consistent that year year $X compared growth for quarterly long-term capacity between period, increase sales of with entered third all and quarter We prices

New new with ratio of prior our for trend order sales of book-to-bill increased of and FTE for trailing our for from sales $XX.X XXXX, our prior first our metric XXX, headcount months, and and per orders of up quarter third an bookings year With is third approximately X.XX It upward to was quarter quarter the consistent of our million book-to-bill which months quarter this $XXX.X the order million as million, bookings of bookings million XX $XXX.X X.X% XXXX. $XX.X same priority quarter $XXX.X average increase compared well third in as is and in period. million, new were This million the investment. Construction FTE With million our for or of trailing $X,XXX increase continue ratio quarter selling segment driven compared after sales In $XX.X XX this same order service year were XX.X%, segment, sales was for to reported from with order $XXX,XXX, quarter. of by for sales region XXXX $XX.X of was of $XX.X the million growth XXXX. for growth of an our the Pacific mostly as third higher force continued XXXX. in to quarters. of from for leverage the our Asia In This metric modest quarterly our trailing growth XD quarter $XX.X segment, quarter X.X% third sold Factory operating unit million, by $XX.X BIM more of strong prices, increase third two the revenue. sales million, XXXX of drive of XXXX in the the with sales an third

in earlier, strong order being mentioned the shipped with represented I third exceptionally sales quarter quarter uniquely the last Construction comparison backlog As entering year period an BIM high and quarter. the in

Emerging increase XX.X% quarter primarily unaddressed $X.X are quarter the sold the our For for year-over-year. dedicated as XX.X% were increased million sales to In investments with compared of headcount Construction XXXX Verticals previously delivering opportunities sales for markets. in an million, our $XX.X XXXX year, new year-to-date, last due segment, BIM third sales unit of higher third

products certain projections. service the for inventory third and driven connection performed was XX.X% XXXX, reserve of our and of our on-hand margin. introductions with quarter reserves XXXX, third acquisitions revised quarter of lower recorded with of product for the million, on mainly or recent in excess third X% our sales, determination reserve, total our margin product that obsolete compared by legacy the our of demo $X.X During increase new inventory Gross charge for mix inventory, sales and the XXXX, XX.X% the approximately increasing in used for quarter quantities an of we based and exceeded the of a inventory analysis

entering XX.X%, million unfavorably in been reserve, compared compared tariff Selling this cannot The the our prior of same gross with subject be to mix an marketing year points quarter, trailing increase would margin our margin Product impacted inventory $X.X underlying gross have down X.X period. percentage Excluding the with fully expenses impact and in China this tariff. will be products fourth determined the time. Starting our higher $XX.X and expansion quarters. driven $XX.X quarter at our the of with were XX.X% period. of for of due prior quarter increase an our the commissions compared mostly XXXX, for and increase growth. of third sales sales of XXXX the expenses the of sales third compared to percentage as XXXX. by quarter force XX.X% decreased third X.X% million to for a sales was marketing with million Selling This year for same import

quarter quarter, the ending of in end delivered end XXXX, or third consecutive At XXX second and same an our XXX, prior of third compared selling with sales the the XX.X% of XX expenses compared For a at headcount marketing of year of XXXX. with reduction increase as a period. was the quarter of percentage sales we the

of and earnings As were equal XXX compared of At projection to in to increasing with or plan the the quarter mainly with headcount expenses services the headcount million activities. in ending in professional associated headcount of sales increase quarter this end XX.X% by ending by an the between quarter to of of recent XXXX line million, for our during advisory $XX.X approximately increase was third we by compared XX% sales and quarter administrative were XXXX. XXXX, by fourth business XX% in our end by the increments last increase with XX quarter quarter. XXXX an communicated driven our we $XX.X third third our related call, fourth acquisitions increase the integration of General and This for year.

expenses As XXXX increased the a same year quarter third period. the with for prior general XX.X% of percentage administrative and for XX.X% of to compared sales,

new million expenses administrative and percentage to X.X and our and a by sales third sales prior third XXXX. to general both development. quarter Research percentage by XX.X% the increase the expenses XX.X% million XXXX. for product activities percentage to quarter related was points quarter an acquisitions and third XXXX, year-to-date, a engineering development compared increase accelerate XXXX to headcount of mainly expenses of our year. as XXXX $XX.X XX.X% of were the as Research for This were of For compared $X.X with decreased driven development of higher for of and

research For net to third development $X.XX sales loss X.X $X.X was income a XX.X% per per percentage and prior or to XXXX decreased compared for XXXX, as of million share of by or quarter share percentage $X.XX year-to-date, with the Net XXXX. third for of million compared the loss expenses year. of $X.X of quarter points

Excluding million inventory would $X.XX been the increase share. share in our $X.X earnings per reserve, have per

XXXX performance prior over improvements financial Our marked year-to-date third year. demonstrated of quarter

year. growth Our expanded year-to-date new XX.X% and drumbeat versus sales prior sales product delivered force

on our XX.X% the quarter, year increased $X.XX gross XXXX, was foreign and $X.X Excluding which an for our through employees $X.X first quarter discussion for third and to of today’s work totaled quarter margin for of Thank used held the the cash we our in cash the by XXXX with $X.X flow trading. $X.X increased would per We around of per increase our of quarter our share of operations of and call presentation the short-term XX-Q share the million and Cash At of of $XXX.X same have will million, year-to-date in to available would Form third questions more increase million, $XX.X to was reserve XXXX. X prior your the XX, from investments end attendance for the start operations support per XXXX million, for months subsidiaries. September during market period. compared third of shareholders have share by by and A of $X.XX in XXXX. points earnings you of appreciate your the the percentage compared open the inventory million deeply is ended million call world. results the our complete our now hard nine

Operator

and Greg Craig-Hallum go Instructions] ahead take our from Capital [Operator first question we’ll And Group. Palm with

line now open. Your is

Greg Palm

Yes, than overall a start that’s helpful be Anything morning. maybe maybe an that commentary the geographic seeing end Maybe that Thanks. standpoint as would different good feeling that the last market or well. with on you’re some environment demand standpoint and from from quarter.

Bob Seidel

every sales sold particularly most across changes Factory. the segments, two versus China in the and quarters. growth of of the was we note in Then third year all nice were across from our from the was quarter Asia-Pacific. in segments. the prior Well, third out what saw are sold saw to things higher a products last than our stable coming one I one quarters of America’s We quarter commented the We in that across it strong fairly XD increase is but our demand unit one three our our prior perspective,

at quarters So we’ve Europe three quarter. in trailing the had of segment. our nice slightly a weaker was America end the

products from as from very the we a vertical for and still you our And good year Europe. we’ve of related BIM, bit within a but quarter – quarter and FTE perspective we’ve a in in of quarter terms FX, we’re quarter, saw QX people forward nice there, nice the that we the forward that of have this a churn number. as seen very third put looking and talked the Factory in in quarter mean kind X% digits, If perspective, expecting the we’re that you in and consistently eight I about fourth segment, adjust new out QX. above that last we XD in Construction a sales its the little in certainly XX% weakening saw to certainly, we emerging the growing last we high-single product then And the hired from in range that solid order products new we’re was development. year The in verticals, go year-to-date. new of that last

Greg Palm

been products contribution customer interested I’m platforms specifically helpful. Any the be the good the really from a how of so sizable newer in and far would talking segue knowing new lines feedback more and the that’s Okay, Maybe to base. from question. my has next along in QX it’s

Bob Seidel

So customer advantages the excitement team that from the that is those It most I’ve mainly feedback on of to a is This specifically our provides be our really and from base that eight-axis. from to sales a talked customers I’ve some sales our teams there gotten lot product. use our as time sold will necessary.

sales not as do of I it QX and necessarily it’s So expect saw would some but revenue driver, that we would in demos QX, we significant see you addition. in

quarter, several we teams safety at has our in not certainly been for are the demo of to that’s has field to takes design. in FARO product released we’ve in It excited sales process released quarter. gets of forensics, interest quite to new have did we something us Plan but into an terms certainly it looking October, BIM, we In is Construction also the labs was great kind as could to interior XD the through group. we quarters This very something may Tracker go forward that a I’ll start public out released a get developed that’s go demo. of applications be the there, impact Factory and But into of till as the have market and Scan product, about. in that XDoF starts in in QX the XXXX. out opportunity it for a and last The that Again bit new take that talk the our

Greg Palm

back Thanks. queue. in I’ll Right. hop

Operator

our Needham from next Ricchiuti Company. & will with take we Jim And question

now is line open. Your

Jim Ricchiuti

margins. Hi, back morning. to wanted Good thank gross you. I go to just

margins, wondering also I’m alluded the are quarters to at new introduction. back for your over a the going inventory reserve and I’m mix, but had lower at adjust thinking of gross we you you several level least number a just if product even So last like looks

gross So how puts we takes about margins? various think and respect to do the with

Simon Raab

– of this for Well, Simon, the thanks question. is one the

side number of of of demo One new number the are introducing products large of point. products effects damage, a presented that we legacy you is or will if that that such a collateral large are at with

to of that So material. we a had move lot

demo reserve in took is the equipment. part mean I fact, large In we

So drops changeover margin and the periods. that pricing drops during these the

market see going leading now not they’re to there. getting needed – they that going products that happy that the are to effect degree very we’re all at position finally So about at be forward, to because and that the

to expect that bounce back. we So

I little the think are very that it being and we up was focused a that come there but back a is margins around that to disappointment service as effort dropping, taken on well. expect

blip pre-owned just So a for are getting product through. we platforms, company, certified of then to the really we introduction constituted our it’s relating which significant many new believe so which challenge

Bob Seidel

see And it. kind just you as margin or Jim of you quantify to understand help we for that to underlying

If quarter quarter, a at of versus our look the quarters and margin decrease mix you demos by third gross X%. the about trailing our sales prior

we So as XX% put reserve XX.X% the in first that XX.X% were excluding for low us would’ve quarter, the in well that if that, look at I third and at quarter. the

you. So that’s quantifies it just for

Jim Ricchiuti

I China of you good your say big for know it tariffs button markets. market to We how Okay, is but is for and hot fair showed is China, bigger one that’s growth in helpful. to I’m it’s a Asia-Pacific. the just guess you, guess I shifting everyone don��t

ahead any, this? to of same – secondly, relating two of is to that, think not you And pressures do questions competitor been respect tariff. your facing any there the So there was types with pre-buying has

for China think outlook about do you? how So for we forward going the

Simon Raab

we competitors to I that that was regard that be be the increase would in if outside mentioned produced with China. smaller obviously of regards the over I may part produced are most there increase But hard our XX% – APAC. out of product know to also there in China. point of some mean So that that it’s pre-buying elements could

will I product with facing think I the all generation value a propositions. pressure. the So the fact similar leading bigger be the impact we’ll And that think have we highest be

that up. I our think So – And all China. leading our in ASPs still which fact context, and APAC we of in competitive the remain in means are that we in going generational technology, in products are will

Jim Ricchiuti

Okay, thank you.

Bob Seidel

you, Thank Jim.

Operator

[Operator Gabelli question from Instructions] our Susanto with Company. We & will Hendi next take

Hendi Susanto

morning, and Good Bob. Simon

Simon Raab

morning. Good

Bob Seidel

Hendi. Good morning,

Hendi Susanto

those about Along you discussion Jim labor colors higher areas? with China similar companies that line Can and up, some talk brought share with costs. material on some on

Simon Raab

would perspective, that cost is raw The expect China share perspective it cost material the will just whether administrative, we the really manufacturing pressures More China, in limited specifically materials that’s globally. from on overall our of of factor I labor, it tariffs, finance, comments a in we for because manufacturing our a tariffs basis a board, from not going would to I us, have across that several excluding what IT, up. with with the are is accounting, the seeing products the labor is footprint.

having other are certainly, in costs we you so our labor than regions higher And maybe escalates see.

have So Shanghai, in other the marketing, a administrative for significant that we that functions, G&A presence us, is as well us as costs, for selling pressuring and

Hendi Susanto

And estimate, of be? that much then impact how any could an

Bob Seidel

China is us, number two I market Asia. in mean, for our

kind And G&A to planning to but absorb have on G&A. that XXXX. would does costs, our hope pressure constant certainly Simon those so, in hold our we that comment those we’re costs, did of

merit through initiatives. our through cost will to and best we ways increases look So lean to FARO increases offset other have

Hendi Susanto

Bob, share run able acquisitions of rates will at and can your last And to share from It. you acquisitions Got recent you contribution tool Technologies. Open revenue landmark revenue be

Bob Seidel

the were overall the in results financial So financial for significant the for us recent contribution acquisitions our quarter. not of

they out. ongoing Hendi, our significant become such see So XXXX. in talked to would overall last infrastructure. we – We financial But But one-way results. the most as of you as the in And headcount in we in the the expenses point the quarter, and Simon not to those queue terms more some we did course quarter’s they acquisition more start growth if quarter, had and as process, mentioned significant call, mostly for this about the separately these, call. realize would well as expenses an not relating incremental disclose of would to did in G&A, become some of integration the in

Simon Raab

add Hendi, really a I product mitigate to believe or have acquisitions the risk line standalone Often the the technical that our becomes also where acquisitions not forward. really technology lines all term. as standalone made they’re their used, are going product won’t would and I integrated and almost into are that, be technology bolt-ons,

So to to it’s going be that. measure difficult

Hendi Susanto

Got it.

Okay, thank you.

Operator

And Palm. question we will from take a Greg next follow-up

Your line is open. now

Greg Palm

Yes, thanks follow-ups. for the

higher past also First, ASPs, driver to been three and the big a growth over of four that’s quarters. to somewhat margins

I’m forward, So just bumps. those initial curious as first start how anniversary you feel you going about that some of and

Bob Seidel

work improve we which our year-over-year we kind will get become of The manufacturing to continue the ARM, into of our XXXX. look go will ASP would of ASPs, as from less, My of drivers into expect higher anniversaries. the be It really extensive certainly team as as you it us is one is certainly the once done mentioned, that that primary margins, efficiencies, places. has I for impact Quantum operations two other comes XXXX

products. commented XX at out now we’re new we as beyond. the So that other we forward, with real Certainly, certainly say the margin to XX is we’re ways the if and service go fifth year And Simon service get to is question. bringing you a at margins, right the looking we and on increase piece continue do how as

content cost look will and out efficiencies of on our to bring margins We higher products. also and work raw with continue material our products to the manufacturing

and of out that work bring margin. on additional to it’s So, really from could we focused efficiencies products terms here, the deliver the in higher

Greg Palm

on from to marketing, little over surprised just I standpoint, XXXX, And Okay, think, even And next sequentially. to attempting standpoint, to you makes a that. commentary though even on increase million a it that in $X spend to expect you’re sales a dollar XXXX in was suggest think I dollar sense. that wanted lower from increase was with I fiscal hold year. headcount and fiscal the headcount your that again versus in QX I minute Simon, steady

going you comfortable what on feel is and of So that with in terms exactly efficiencies that. there productivity,

Simon Raab

Greg, marketing, me I the it’s expenses. for believe, marketing there. point the actually only I important referring to was I made clarify I said

variable new to clearly, – any salesperson. fixed of expense have So we expense addition fixed related a of and the

the go each save about. selling that talked than expenses will processes the did the So salesperson’s expense, efforts were we money the is increase and efforts. Where XX% commensurate we around we looking up at higher with

efficient other are our efficient various about relate about to expenses travel And more and so more we be trying demoing. to

have also the of resulted are in web In in being reduction through number what expenses. demos We improvement all, that’s an demo done that of the studios. the

So anywhere X.X% And that I a the keep we XXXX. generally for which was referring marketing X% expect expenses, to flat represents from to sales to of historically.

Greg Palm

Got It. it. clarification, Thanks for appreciate the

Simon Raab

Sure.

Operator

[Operator Instructions] another Jim Ricchiuti. take follow-up And will from we

Your line is now open.

Jim Ricchiuti

of We’ve global automotive slowing been hearing market. commentary the in

seeing maybe that So demand you guys I’m decisions? seeing wondering Are what vertical. in you any in change purchasing or in

Bob Seidel

the intimated they’re doing that the taking we previously of for measures on have quarter. strong saw fourth where General and of cost token, by that for we’re But in Ford the demos, our related, we’re tariffs from certainly you the looking for here. look some Motors some concern announcements recaps certainly same yesterday the that Jim, raised cutting as

executing last us, same from strong for following the demos. quarters group, automotive we’re from three And Europe, Americas, process. The those been We’re Asia. have

time say it based comes change. the that real So demos opportunities, there’s Certainly, on no well that down based that reason this leads, the any conducting, the of on we’re see end on business this we would quarter. currently to to as based the the

quarter. of products that’s efficiency increase quality, and their need now, right But So what to the those they end we’ll on. certainly, at to see for increase their the we’re focused

Jim Ricchiuti

with about if you stand can I give where we also Vector? that. a That’s wonder ask update helpful. us on Can question I an

potentially year. having beta you I think you in announcement part in the with to next testing respect early that? Where had possibly of some talked are and an QX about

Simon Raab

on much track. still We’re very

next as the on well. working generation already We’re

you’re is has So what we the quarter. about taken. current and generation, excited and speaking technology with this to have quarter the where next respect very which we’re early And

in there’s that this introduction that high so our piece generation of next on And extremely the XXXX. equipment. And in schedule working doubt product already of reason to hold time. for still current no at later disruptive we’re potential We

Jim Ricchiuti

conversations the it you of time sites. with Is customers? having plan? beta been Would This have that be about a potential handful customers

Simon Raab

absolutely. yes, Yes,

So the – our have program. what we Vector, early under we adopter call introduced – what the we are

necessary clients, We clients provide we in Vector to have have could taken and registered adopter automotive have a of feedback, are interested I specific They’re us who interest mention. another early primarily absolutely. in who

Jim Ricchiuti

Thanks very much.

Operator

this And have we questions. further time, no at

additional remarks. to So back our I the call will speakers for any turn

Bob Seidel

you time. Thank speaking next all you your we look to for attendance today to forward and

Operator

does conclude for today’s This participation. you your program. Thank

You at a any day. may disconnect have and time wonderful