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Faro (FARO)

Participants
Robert Seidel CFO
Michael Burger President, CEO & Director
Hendi Susanto G. Research
James Ricchiuti Needham & Company
Gregory Palm Craig-Hallum Capital Group
Andrew DeGasperi Berenberg
Ben Rose Battle Road Research
Call transcript
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Operator

Good morning, everyone, and welcome to FARO Technologies Conference Call Second Quarter 2018 Earnings Release.

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

Robert Seidel

Thank you, and good morning, everyone. Yesterday after the market close, we released our financial results for the second quarter 2019. and FARO's for website release is second press in available at related Form the XX-Q quarter The www.faro.com. during make In understand order forward-looking may the better of statements some company and call. to its results, help the course you this management by be objective, believe, goal, such as may and similar These anticipate, identified expect, potential, plan, statements words, can continue, intend, 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 and set XXXX. Form and quarters press Important XX-Q June in company's results to in XXXX the are year forth differ March ended and may XX-K for XX, XX, ended for December Form XX,

accordance financial conference Principles will measures. During call, including with regarding In measures measures. to discuss Generally we these that measures, non-GAAP GAAP Accepted disclosures press reconciliations find or additional financial of will Accounting measures release, presented these you non-GAAP today's certain U.S. our in are not comparable

non-GAAP accordance investors GAAP and that These in not performance a under terms believes measure our substitute with recognized a financial not in measures of measures be operations. as of comparisons these prepared isolation should considered core Management with for period-to-period GAAP. are relevant, financial or financial provide

up remarks, the prepared will the we with And start afterwards will a Michael, the I will to turn call our for open now for return results. of financial summary to over his questions your After comments. market of trading. call our

Michael Burger

wonderful innovation. XD joining I is to competencies and spirit, technologies which to be FARO's robust the challenges portfolio the of with I'd to our opportunity answer to like edge and to you, share is team. an combination product Thank measurement of today. FARO dedicated call. leading the Bob. products thrilled are how core take facing customers technology, many morning, our and entrepreneurial to a FARO second conference welcome quarter Good you this am

now month after XXX spent the weeks. and charting collaborate to better been a and the I to our and across where directly path for conducting have the to internal Pacific one-on-one over believe, to on an within they suppliers Asia employees listening I company. two the our discussions XX, in FARO with last are from three it order employees discussions June sites it's current visiting joining where company two After in understand hear forward believe order complete partners and external is its our in focus, I perspective. important I've continents. prospective customers, critical to next an team gain After and with plan

My from impressions FARO develop leadership team these available strategic a delivering a multiyear have initial be grow of going and of long-term shareholder we that I'll to Directors to collaborating opportunities with forward. discussions with comprehensive clear improve plan Board and objective to our significant the is value.

current to three product on team reevaluate we leadership the last expanded execute strategic value. the our the and business increased chapter evolution, has increased the the increase deliver years, Over will In margin. model shareholder selected aspects portfolio new competitiveness, and next profitability FARO's and sustained a build successes, gross past of plan of technology our

focus our quarter. turn the most recent to let's Now

impact in our million of which described release. adjustment second for the $XX.X XXXX, included million unfavorable were sales the from Our sales quarter the $X.X GSA earnings of

X% exchange was foreign changes million up headwind year-over-year, a rates. in Our X% non-GAAP sales nearly from which included of $XX.X

time. for initiatives. margin focused aftermarket above mid-teen quarter base sales and by reported With Our our repair sales of revenue service service business growth growth another and first the a service our we've gross our growth XX% reported delivery driven installed improvements, of

quarters. Industrial discretionary Japan second consecutive Mangers' Pacific and region for such conditions Slowing customers by production our purchases PMI, XD to manufacturing as of indicators, laser primarily as a across Purchasing economic customers. reflecting FARO soft driven business their of manufacturing and GDP XD challenging suggests goods manufacturing capital quarter automotive Asia experienced future tracker. and decline Index, [indiscernible] such China Our segment Asia a delaying year-over-year spend

in at Our increased Construction a BIM low sales single-digit segment quarter. percentage second the year-over-year

We realized gains Central Europe. robust region in and in sales growth EMEA Southern with our volume

While showed in sales quarter, region marked second Pacific growth, a the Asia quarter in our delivered our first Asia strong year-over-year sales slowdown. Pacific

Overall, economic was changes exchange performance just impacted discussed. by in second primarily challenging rates and quarter factors our sales foreign non-GAAP as more

X% about total represented sales sales in Pacific regions sales quarter XX% -- the year-over-year. of with regional the down Asia the with

to and slowing more On customers general sectors to industrial the and selected comprehensive in market the Inspector Our tentative submitted noncompliance are July a as uncertainty manufacturing and on we its contracts. related XX, demand of commit given services capital internal February our a potential General our office discretionary to follow-up report wars globally to trade regarding administration with provisions government general countries. preliminary review of certain XX

of dated disclosure X-K matter business risks. current this future additional XXXX, provides associated XX, July Our and

As him his to departure, past for you Bob, five contributions I announced turn thank publicly over I'd call FARO and to we know, to years. before have Bob the the over

Robert Seidel

unfavorable rates. Total $XX.X million from the for adjustment for impacts sales of and from changes sales were second million $XX.X Michael. million quarter quarter exchange which second foreign compared XXXX, with you, GSA $X.X in included XXXX, Thank as $X.X the million

XXXX, non-GAAP X.X% second revenue for in second Our driven service year-over-year our by compared our growth second by We up $XX.X XXXX. million were grew quarter quarter XXXX focused sales of sales our million XX.X% with installed-base for and total the initiatives. quarter as $XX.X aftermarket

within in and year-over-year decreased in second of the sales unit our manufacturing XD adjustment, in segment, impact rates for sales GSA our a product to Our especially foreign region. Pacific changes XXXX decrease sales the exchange primarily Asia due quarter

XXXX with X.X% growth for lower manufacturing XXXX. as quarter prior for down the partially down mostly $XXX.X XD by second million, for second $XXX.X million second $XX.X New were our offset compared order year were service quarter compared $XX.X bookings segment sales sales million quarter revenue. $XX.X million in were was period. for sales with as for non-GAAP in million decrease compared same year. Non-GAAP second continued with unit quarter XXXX X.X% This In our segment, as second XD for last driven quarter manufacturing sales by XXXX,

In quarter our as XXXX were with increase $XX.X $XX.X year. Construction sales to quarter higher were of quarter compared quarter second increase BIM due segment, as $XX.X Verticals average compared as $XX.X million, for This for million with year second mostly and businesses million XX.X% segment. million up quarter BIM Construction for second second quarter prices non-GAAP non-GAAP increase was same year. sales the with in sales X.X% were second second were sales service period. as prior in compared Verticals compared our second with for Non-GAAP segment XXXX. million $XX.X revenue for XXXX an selling last our in sales all for Emerging in XXXX mainly reflected higher Emerging this products. This across million, segment In our XXXX for for emerging our quarter $XX.X segment, last the sales Non-GAAP unit up sales

mostly was Executive for XXXX. the XX.X% marketing expense as X.X% than for was second reflecting year increase quarter compensation compared XXXX. margin to for compared our compared This expenses second increase and were gross in related second period margin was sales Selling of related period. million prior $XX.X the offset an partially quarter lower margin, XX.X% same incurred due XXXX driven increase XX.X% offset expenses to second with GSA quarter selling was million prior the for service and second strong with compared GSA XX.X% advisory marketing for year impact $XX.X by by same more as with mostly Gross an fees as in of marketing a quarter of This for quarter million a and second aggregate the XXXX, sales decrease of Officer's headcount. succession for expenses $X.X for $XX.X adjustment. the administrative second was which decrease by quarter in incremental the were decrease XX.X% sales commission and with matter. and for $XX.X sales of Non-GAAP XXXX higher to Chief a million million cost expense expenses General for XXXX. Selling were XXXX, quarter

Research was expenses development XX.X% period. and quarter This XXXX for development consulting second for as second XXXX, quarter the as administrative of currencies. were year and quarter year decrease changes decrease second with million XXXX as XX.X% second and same prior sales X.X% well with compared of sales a XX.X% Research materials sales quarter same as favorable mainly for sales for X.X% driven prior of for of foreign and the with General period. in XXXX. compared of compared for million expenses by lower cost expenses were were $X.X $XX.X

year. quarter quarter second for $X.XX million $X.X with was income second as loss last of million operating operating Our XXXX compared of

non-GAAP X.X%. XXXX, income for of second representing non-GAAP $X.X margin was operating Our million quarter operating a

$X.XX was loss to quarter $X.X share XXXX. XXXX compared per second net second net of share $X.XX million $X.X Our for or income or million for quarter per

non-GAAP or for second quarter million share $X.XX XXXX. was per Our income net $X.X

past totaling We collaboration attendance second structure cash greatly in short-term appreciate finance as years three liquidity your among debt. available continue second operations presentation to maintain ended million is XXXX. your accomplishments. discussion dedication A and XXXX second generated I XXXX, of Form with proud teleconference. the high the from I our and for today's work, investments XX-Q am quarter in quarter flow $XXX.X our no a of on cash capital June for and strong with over In you XX, and Thank complete hard your results more quarter quarter million. we my $XX.X CFO. team the

We the of trading. to market call the up will for start now open questions

Operator

go Hendi our Research. from [Operator from Instructions]. we G. question take will and first ahead And

Hendi Susanto

and Michael Welcome all and on for best board Bob. next the chapter congratulations your

Robert Seidel

much, during We years Thanks. CFO. all of you my Andy. here very three appreciate your support as Thank

Hendi Susanto

for First question is Michael.

style we leadership? the of should how Michael, you like think about that would And implement to major FARO? kind So what changes your at of

Michael Burger

what on working still to do we we're actually Well, forward. going want

of get team management or down and and I then changes when conducting to work will about any a model, done I talk as strategic and et objective any on plans. cetera. that's really And business a I my conversations mentioned completed really haven't externally done until that with I We I'm number yet. -- we complete, plan, the them reticent -- script, get think the the internally we're sit be in a when

Hendi Susanto

it. some the continue then Got light the in Asia. longer macroeconomic XXXX? third ago, XXXX. Should XD and disruption manufacturing months war of trade we anticipation And about QX mentioned, And of quarter beyond weaknesses anticipate share in in that stay you management disruption to might that through uncertainties three

Robert Seidel

saw of Asia. Hendi, across the know, slowing was quarter course in one second things we the the You of

XX% versus in at XX-Q, look first we perspective, you from decline China quarter. X% it If the our a in disclosed saw year-over-year we of which

see We at expect capital that we two manufacturing based indicators continue forward to continue and spend, we -- on as would in the GDP, next quarters just feedback to PMI from and other our a least. based in XD the for on discretionary trend going headwinds see market to continue customers goods

Operator

ahead from our take [Operator next go Instructions]. and And question Needham from Company. we'll Jim

James Ricchiuti

of report, the very helpful. I'm you for -- couple the the if adjustment? looking add we you a wondering margins, in sales all you. the What thank GSA were can gross questions earnings Bob, way, product disclosures like for if back by the

Robert Seidel

had gross the that only have you the we sales if the million So adjustment $X.X for would profit. at was the affected in that -- metric and GSA, look

I'll Jim, broken first, on So GAAP margin with at basis was a our start XX.X%, non-GAAP XX.X%. GAAP. non-GAAP if you down, was basis, look a Product that's from how

look GAAP XX.X, was you non-GAAP XX.X. service, our at If our was

James Ricchiuti

also or I products were this to What surprised emerging see impacted hit vertical the did. there? issue potential Perfect. much that as it applications were that the as GSA was

Robert Seidel

So that and U.S. several business, one the Safety is to business law have business would the of the is of that through and Public the really businesses over enforcement talked seeing for the that is about selling us truly sales that see in is law years enforcement our portion we emerging you past GSA. of much the Forensics to

because others than is these Forensics. of one Emerging is Safety Verticals segments of the that impacted the So Public more

Operator

our from Greg . from We'll question next Capital take Instructions]. [Operator Craig-Hallum

Gregory Palm

Michael, welcome over you and aboard so enjoyed best the years, of Bob, luck forward. with working going

up for the here of a is on we following So half those that second of potential Or the just I potential reductions done? should assume GSA, sort are more year? there the in guess

Robert Seidel

with counsel best that of as So we and report. our $XX.X report assistance this alignment outside in submitted from and comprehensive accrued July time, legal released liability our we the point XX. estimate based GSA, in the At in on million, terms the with experts forensics total our we've of X-K

process Now And our it's will advisers, at our this with to through that we advisers. the will go government through really a that. going assistance up the government point, process of review the with

The So and though risk at describe million the this may best X-K of it our does describe is understanding other does company liability. time, occur. a $XX.X to that details more

Gregory Palm

earlier years? plan it. most in not what Got just curious what enough. on for might up look over following one's the around specific look at looking sort for question, Fair any are I'm And opportunities this the when strategic an for general, then of you Michael. FARO details the coming But like. excited potential you about just

Michael Burger

it's value. think increasing shareholder I Well, actually

has gross XX% is margins think think margins, high business I gross that. enviable I any and FARO XX% in demonstrated

is think then actually defendable a how technology, baby So we company out shareholders position. with the the got bath with return we've actually for really deep real a I interesting get do The a that for our me, throwing that objective through without and market higher water. the we've baseline got is

baseline So a excited now question? the line. objective that as shore got is we I'm bottom is very we've very well, answer the up do your business doing the that That how and

Operator

question take from Berenberg. our next we'll from And Andrew

Andrew DeGasperi

to and Michael, Welcome, luck you Bob. good

Michael Burger

the you, report night. and thanks flash last it. Appreciate for Thank

Andrew DeGasperi

in find So think I want in us you what know you But think on of what strategy. to -- to guess, share are able guess -- was in know thinking I the first I you'd relative background? software you I or get that your I markets where secondly, decent timeframe? know we're with trying something And call do also, people head, you like its your has see Michael I do maybe has timing, terms be is future to given new then How earnings a monetized feel enough. see mean hasn't some a, can I might well that next you by to software? but FARO peers, And you platform, discuss maybe people interesting been

Michael Burger

around very Okay. Well, questions your let me I'm on .I think software. jump by kind of excited

very FARO think last can company prospect. it's that portfolio that. understand the a the we monetize has better over software about I but and as don't a that I'm answer the excited I have I'm or and of large acquired excited to yet, developed anxious how decade by

As where it is market. in is on to of complex you and commit, we're at. obviously I'm timing But FARO earnings relates plan, but technology complex reticent update I a to very on each company it the will call a

understanding very I like. think looks versus thoughtful very years be the So need very Board next interested And we is quick. and my to supportive what in kind three of

So the of I'm be already have begun, so years scope leadership three will and out my I and excited. plan the team

Andrew DeGasperi

think growth, we that What know you this, in -- Construction macro digits in you mid-single do mentioned weakness probably second And you quarter. organic manufacturing this weighing answer Great. at Asia the XD in were can seeing when know you segment the you growth your story that. ex you I at of is guess around GSA Bob, point? something do there maybe well? half, are still I I side? the the think look BIM the that's on as Or -- terms Is besides double-digit that

Robert Seidel

and the So QX Michael mitigated we is, first basis, of were that slowing quarter. about let's see on I a which look the we in that if X.X%. versus growth of table. saw in QX up We set on in What a the kind to quarter, did non-GAAP Asia all, prior commented business, were the we

it strong so look be traditionally would QX. Europe in a us for to though, forward, has region and I continued As been

the continuing half wars market. can't trade that forecast we Asia. fundamentally, year. it interrupted going So have have But that leading in in certainly piece our business The the the I the see would is remaining product may of a I forward expect to in

software We have delivery. leading

address We technology. those have growing and actively been the to team sales adopted markets

space I'm indicated, see is My on side, more the as Michael in stuff. on XD to If for capital year customers' the the So as the continue industrial environment forward. confident the the favorable concern of go manufacturing BIM we is manufacturing half second us we'll that.

Operator

follow-up Hendi G. take and And we'll from from ahead Research. go a

Hendi Susanto

still FARO target Is goal operating its QX mid-teen by margin of maintaining XXXX?

Robert Seidel

the in we see and forward business we highlighted we and the of as look, and some more as the a a look for that of high we things continued Hendi, headwinds XD I Q&A, kind will margin current double-digit the Michael just operating manufacturing conditions highlighted now So business the how midterm, based customers as in in of discretionary quarter we fourth on At see that see capital embracing spend. our not point, at would this time. likelihood this

Hendi Susanto

share you matters, product And revenue? and would to Got it. excluding be able GSA Bob, service

Robert Seidel

and service million service. $XXX,XXX $X million, Yes. Product product, related terms to the was $X.X was of in revenue to related

first GAAP -- or GAAP the the service $XX,XXX. at service from So $XX,XXX, non-GAAP you basis, -- GSA $XX,XXX the a of if for of $XX,XXX out look number it, was GAAP, non-GAAP the and product the then all, million a adjusting was $X

at of income, also tables, what understanding you So do, you, sales vertical. gross margin, that all good you reconciliation profit, to look we'll net by and you income, for encourage the to operating release, to GAAP earnings the non-GAAP of I by provide gross EPS sales, total a very if go also

Operator

next Research. Road from Ben take Battle We'll from our question

Ben Rose

begin more XX specific to near-term manufacturing of differently, next the than of Or look things within say turn put could some that the XX months, looking just kind any to your aboard Michael, a Is that there to malaise. just of terms thoughts a area, XD well. state something Michael of Welcome scenario at manufacturing wanted see around? over of promising verticals or currently, get as you where there are the in in others?

Michael Burger

enough Ben, I don't really insight. have

if scenario certainly, curve, we think we a have a would aerospace was the one could strong -- And I from automotive the which that business and benefit position relatively that. in. I that think is recover,

We kind sub at the land of Right be of opportunity me. as disparate I what number are and in space. we days these priority within the these perhaps and we're on but now, strategic of for part verticals. -- of a some we're parts, kind have do sub treat manufacturing on it's I early think looking it, verticals those focus an identifying we to And specifically about XD verticals focus of sub more will what are going think

Ben Rose

of -- me, of last strategic the commenting Okay. of on sort And part the the look And deemphasizing new question. perhaps product sort significant forward excuse proliferation over make without or at product areas, just there's of -- specifically maybe moving to a just I'm Obviously, look important an at take then and these XX products curious a plan is one important a months. of follow-up the part been an ones take others? closer which see products versus since these XX

Michael Burger

Absolutely.

hardware that of of part all I conjunction opportunity part that, around think looking want a some make drive think a I I the And strategic really then very been those the at not, or regard. and FARO at be reposition some decisions in not but and them some at which plan. company context that in of roadmap And more will to I all of will think driven of of an the part is products -- of of look company kind portfolio may has space. really level. in XX,XXX-foot to product the process engineering killing very, may solution definitely successful and as in about be markets and we the the fit of entire

Operator

& Company. take go a from Jim [Operator Needham we'll from ahead Instructions]. And follow-up and

James Ricchiuti

to your best. you're for -- want at questions so understanding Any the none for markets. in experience the any I relative FARO's are or you the help can cap I'm have Bob, you wish differences of have you're business. the semi looking investors all component prior just fair. regarding provided none a the and question you Maybe the business in the Michael, side thank share way these over you equipment month, if in in similarities I But business. and tuck capital want again, the a little and of wondering in kind the sell that to you of to observations you this in

Michael Burger

I a great -- think the -- Jim, question. good thanks, it's

the FARO probably surprised in things has think equipment is I capital of is where and the me that that's end. the business one so similarities definitely

with in other is, that published company number this is business. different think in customers been customers than a the I XX,XXX involved I XX,XXX lot have or businesses the whatever capital

type instances, So in -- some in it's B-to-consumer cases a of some company. more like

what not base. keeping side require got cheap so really are is we've within devices, strategy a which business, go-to-market this do capital understand of a these of they And with And customer is. the kind capital signator the the

service then used to to customers complexity, I I'm got and what company. that's what way used way opportunities think regard. actually in and a the strategy company that what design, deep much are to I electronics to. cycles requirements, are the that's looks what really for more difference me product to go-to-market the a the similar new similar the requirements very the so And inventory is rationalize is team do. product capital that really -- manufacturing And the But to. like definition, and think digging So It's purchase than different think of I've I'm is seems cycles some part need I big a that I the to. the are the still consumer It the I'm we some equipment reach from -- do work find used to the strategy? But requirements, we've we than got go-to-market

James Ricchiuti

you would environment prior versus the How experience? characterize your competitive

Michael Burger

companies we've like think, really we that with big Yes, and got some are competing that. I I

to. used the I to think what it's and -- I'm similar

is It's which innovate think about the understanding done innovate. model of cost position, customers' really to what out in job continue admirable to and an I to ownership continue FARO all think and has out history. our out objective I is its

and that anything in want to fact, want So accelerate lose I that. don't if to I

give focused that, manner do and markets to a it, And of we do in from to need we long-term revenue the but are going it we I very believe think to think, that context sustainable need able us consistent prospective, to via need But company's in an the growth. business to an revenue a more and bottom way. I model think in a done and be a from line more we margin drive job. competitive gross admirable arguably the perspective I

out like I Again, really go questions. look done everyone's it's anxious over company Well, he He's the Thank in we of appreciate interest for been you steady as the want to Bob I interest. rock I'm we're to forward. give in FARO. all look five has years. updates I the that. the through QX. I for last forward appreciate process to you. and appreciate you really talking to thank your

Robert Seidel

Thank you.

Operator

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

disconnect. may You now