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Faro (FARO)

Participants
Michael Funari Sapphire Investor Relations
Michael Burger President and Chief Executive Officer
Allen Muhich Chief Financial Officer
James Ricchiuti Needham & Company, LLC
Andrew DeGasperi Berenberg Capital Markets LLC
Greg Palm Craig-Hallum Capital Group
Call transcript
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Operator

Good morning, ladies and gentlemen. Thank you for joining today’s FARO Technologies Fourth Quarter and Fiscal Year 2019 Earnings Release Conference Call and Webcast hosted by Michael Burger.

And next, I will turn the call over to Mr. Michael Funari at Sapphire Investor Relations. Please go ahead.

Michael Funari

morning. good and you Thank With me Officer Burger, Executive are from Allen Muhich, FARO and Michael Chief Chief today Financial Officer.

may close, its quarter www.faro.com. to understand of year are Yesterday, the for call. In for the release order the the on results, during and its XX-K company make released course the after full quarter financial and the forward-looking Form fourth better The FARO's and help this XXXX. year available management you fourth full statements and related press company results of website at

These Important expect, company's words. the statements goal, It plan, can objective, be to factors believe, actual XX, ended continue, in those that possible statements. cause XXXX. company's in actual forth set identified by results words, year forward-looking such potential, differ are similar is will, may as press XX-K may intend, results release yesterday's and December Form differ and may the from anticipate, materially that the in the materially for projected

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

recognized investors the non-GAAP with While core these not provide in GAAP relevant, measures of financial believes management operations. period-to-period comparisons

GAAP. in with isolation a for substitute accordance of in performance as be or these considered prepared not However should a measure financial

Now, I’d like to over the turn Michael. call to

Michael Burger

to and you, Thank Mike. morning our call. welcome Good

employees, differentiated as can where to value. that included and the company embarked efficiencies to provide both FARO customers, As enabling improve opportunities with existed you process value the ago operating on the with sustained aware, strategic eight and months conversations suppliers identify planning and where we and of underlying shareholder investors immediately customer long-term joined I sought are extensive we

EBITDA position our targeted to early for Included completion planning future and we're communicate the a expectations some for this double of the a achieved dramatic our need our of a highest which last the insights revenue recent than process new in more annualized improvement adjusted from provided XX% is model our levels. now success delivering we level growth strategic our margin This is would the in plans represent While probability current on business. without call, level material history. with in

very during an solid foundation What driven this value. markets, market technology customers who that me exceptional planning This have has is to of is about that legacy has by talented FARO clear we become to a in passionate employee and process is to build. differentiation large fortunate which and our share do. a base, meaningful FARO Also growing what from are

our plan increasing future. on to As strong the large market in for it foreseeable can and we we base the and we serve. strongly which began share strategic to protecting as is believe We that markets focus shareholder continue these will the deliver organization provide from growing and close returns adjacencies core an implement presently important markets our we

metrology, where XD driven XXXX. estimate of aviation through and automotive, XXXX, environments enable that market a by $X.X in manufacturing for on growth Let is market we will demand billion In X% measurement me expect roughly other XD total of each continued touch precise the markets. capital-intensive these available annual we

billion the the XD available measurement at total the about construction to growing adoption of architecture, X% given and In estimate solutions. and the $X.X market engineering be advanced accelerating market, we

be technology overall XXXX. analytics, spend billion Finally, growing a in the we public to estimate at and through $X XX% cumulative about safety rate

for in our the and XD displaying vibrant market. analyzing scene opportunity of related crime million and accelerated We believe only accident our adoption of currently solutions compelling capturing, this However, growth. serve technology data and that $XX to creates about a large

these customers and foreseeable markets and X% active XXXX. attention of will FARO and its roughly virtually where to is we level return annually concentration future. in X% grow XX,XXX focus our all in of the to target where through together, of It between we expect our Taken markets normalcy, markets has a largest the

Building core and solution software base, strategic upon products leveraging customer the is our our the extensive strength first through our in our initiative of increase to and markets value strategy.

longer have continue our to enabling hardware performance; that this focus reliability is on products we differentiated We customers no high with enough. believe however, will

or our data, ability trying the captures As solve In problems focus an full what gives potential up that of the turn customers easily our our the words, not other from food one realize hardware to we to that captured complete a increasing move and enables to solution into solutions to centric on transition data and understanding also turn which world. our XD company the need workflow but provides chain to customers based them with a organization, we are the provides in only are providing them information. virtualized

We FARO products multiple environment a have at into on to believe have a FARO make which in unique with customers software I collected multiple a working of of teams transform data legacy software device. FARO we opportunity discrete these common long the can platforms. platforms developing by easily use their hardware-centric software

revenue our revenue while value to greater our resources. enabling streams R&D yield to to capture our By provide efforts also added software from the This cannibalizing will opportunity increase we global we new doing so, benefit customers, our productivity traditional have sources. streamlining without development of talented initiative and have an the us

our Moving beyond also opportunity how an innovation, to run product we have significantly streamline we business.

the initiative quarter, market resources to last our enables the sales of strategic application talented and globally. This increasing to change pool our our of of sell This is leveraging outlined the product engineers a very line ownership breadth while base. by change second I made strategy. As is large possible go customer our to change

plan We support model function. this with sales to industry marketing tested refocused a

problems first customer and understanding then workflow, areas; of in we in full the knowledge those is customers that exceed a or positioning, that and optimizes two translating our We customers' focused can considers which product to our ownership. into gain increased solutions to to meet Our is new deliver that marketing, trying applications marketing understanding our of total of effectively aim value-based more priority needs. so cost leadership are an deep team solve, have

And our team pivoting secondly, retooled our sales sales to we understanding believe on are higher which transforming our to model, organization expected quality higher provide process our sales supported this better leads, are lead generation by utilize We drive sales will focus marketing well-established technology productivity. that to customers. best-in-class engine with a in turn to

lower foundation will that model and to enable by of faster Starting scalable sales new grow significantly than Senior this revenue are cost sales led markets. cost the we It transitioning also provides new model, Service, to VP today, Sales us Kevin and for effectively our a Beadle. our

strong organizational On the is overly legacy part enables and expensive this each while to The our ownership, complex on we process matrix for unit a structure structure structure. infrastructure support of a to decentralized that a Finally, resources. our decision-making. unit initiative has third our company organizations management simply centralized top of requisite and of with This strategy, optimization. business strategic long an eliminating geographic with centered led was overlaid is business organization to globalized are moving our of that business. eliminating layers Therefore, functional and structure redundant vertical management too clear as

these while strongly improvement a with our combined looked will of growth, profitability. enabling generate whole, When solid I core significant as initiatives, the same foundation at believe in time strategic markets our long-term at a

in momentum, of to time and product annualized XX% non-GAAP success gross expenses XX% XX% million non-GAAP business complexity is initiatives when often build our operating dramatic These will to strategy in to operating transformation to complete. ships we in achieving and will XX% are take which While our adjusted will an enable cost EBITDA near the savings key $XX% term improvements result believe reductions margin. in $XX yield margins, approximately targeted model our

turn that, overview performance. fourth of financial call Allen With an quarter over I'll our the to for

Allen Muhich

quarter fourth and XXXX. million quarter the sales XXXX Thank Total as of morning million compared were everyone. you, for $XXX.X $XXX.X good the for Michael, to fourth of

reminder, revenue a our million As GSA for a matter which was $X.X non-GAAP QX previously reported $XXX.X a XXXX excludes reduction million.

on broader this in $XX.X markets, is sales as with decrease Asian of was in broader reduction space automotive to Product softness softness particular of in many served primarily XXXX the automotive softness in markets. on of result million the others indicated, were mentioned continuing non-GAAP million Similar year-over-year of basis. have and compared to non-GAAP company's market. in Asian the result previously basis, QX primarily the $XX.X what and our XX% This a a the a

when requested through of revenue compared we tools to bookings paid of quarter ship the ship XXXX of continuing Service million approximately $XX.X grew efforts $XX.X maintenance. customers a XX% that customer to result dates. in of $X in calibrated million maintain Additionally, as ensure million annual late we QX unable to were received given

New order $XX.X the fourth for million down quarter million X% quarter compared $XXX.X bookings of as with fourth XXXX were the of XXXX. for

impairments. we million of million and amounts half million with charges fourth to nonrecurring includes incur and approximately transformation, As a the assets incurred asset the the write-offs This business comprised to million remaining noncash to and and announced quarter of in expect booked $XX be XXXX. in strategy remaining with related to million to and balance tangible beginning remaining $XX about $XX $XX $XX result goodwill $XX today's being about overall charges intangible million charge cash the of first the balance of in

million gross with which XX.X% the year a and affected compared GAAP reduced cost fourth was gross is of gross included margin XX.X% The margin result the fixed Non-GAAP reduction for the inventory revenue our absorption. for margin in overall XXXX write-downs. approximately same was prior quarter as adversely at period. XX.X% in $XX

expenses lower associated were XXXX include and charges, approximately amortizations $XX well compensation lower intangible previously GAAP than of $XX.X restructuring as expenses. $X revenue. million commission million million expenses of in $X as of expenses lower operating the a million mentioned Non-GAAP were of stock operating QX with million acquisition-related $XX.X result as and

for income XXXX fourth the was $X.X or of XXXX, driven quarter the fourth loss million of by the compared XXXX. of of million operating $X.X EBITDA $XX.X fourth demand quarter quarter operating was of environment. lower for in as GAAP Adjusted the million sales with X%

non-GAAP our XXXX in of loss per million, was $XX.X net to share earnings QX net fourth $X.XX $X.XX the share per for quarter of compared million non-GAAP GAAP income or was Our XXXX. $X.X

exiting as our of maintain no a structure our liquidity for which vertical eliminating of fourth business million cash $XX.X longer balance In we basis We the million and segment reporting, a I segment result unit results. the no capital in a note will structure, resulting cash year. quarter was reporting generated strong in should we with high $XXX.X that the debt. continue XXXX be to of

will today that the cost approximately outlined As efforts our will XXXX realized $XX be million from yield XXXX. expense annualized Michael of believe quarter levels mentioned, we the restructuring savings by fourth

non-GAAP These approximately not from are revenue financial expected XX% We the XX% to XX% operating to non-GAAP reductions levels of XX% levels required targeted enable growth gross to our and margin new expenses believe model realize of and our revenue. is financial yield adjusted meaningful current of XX% do to model.

these near-term ahead. led we the go-to-market, and sales our making believe structural leadership years in the marketing are Beyond changes in we in necessary all markets drive outsized and evolution by areas actions, growth to new in product core both

are may closely coronavirus our outbreak business. impact on the we the Finally, potential monitoring have

said, others a Given not to it relatively may on what what and That presently in reporting, do impact we expect soft our footprint operational too limited Southeast operations. with consistent material demand it Asia, have environment. is already our soon say are impact to our

be and we'd time prepared concludes This to our questions. pleased this any remarks your of take at

Operator

take Jim ahead. We Needham will from Instructions] question Ricchiuti & Please first [Operator company. our go with

James Ricchiuti

Hi, thank you. Thanks, good morning.

margins, quick missed the when with question, targets that, that think associated about it how the some I the respect any XX% it, to about a should have may on margin? particularly we you talk or to but XX% timeframe with timeline Just of gross

Allen Muhich

the in targeted the expect realize standpoint, the adjusted million as or half I of year $XX think overall from profitability again indicated. we at realize we to Well, least back worth EBITDA QX of more towards the savings an

impact, some higher margin of end gross the margin we are. the the again improvement kind towards From see on impact throughout and presently year where range, the we starting moving would gradual the to of at expect

range fourth quarter of margin range, end improvement XX.X don't kind we towards of any lower assumption be Jim. and of the operating current As you to frankly our there need the so within that's the is know, non-GAAP the

James Ricchiuti

guidance, way of kind term square Got it. XX%. focus. gross Is we're And that's targets, any company And might but trying solutions you're longer to excess had think you margins? software wanted previous of gross your that how with the sure as not clearly has I know, about what just there increased we think some looking in I'm about margins do for with maybe to to the that

Michael Burger

we're No, mix of solutions yield should I And software think as revenue the to trying software solutions down to be be the the the but higher I to very software. guidance the and conservative forward it we're margins. that, - really to to think as giving believe gross strategy space current mix, do actually relates it margins accretive comes about I hardware should

there upside talking. not potential So we're is I but there's think

really yet. talked about haven't We publicly it

Allen Muhich

we're more some software a time, bit And or as the is to that Jim, think from creates – terms are subscription making in I model model, from bit going a and that transition that calls. revenue growth. indicated does little that And time. license - a as everybody making drag will perpetual a take little And aware timeline that temper of we've the software towards and again, of transitioning around at prior aware a on solutions, in probably just same of it you a be - pivot

and So take impact it again, mix the that time. gross likely will on have might change, that margin some

James Ricchiuti

Okay, also components, just not question sense. guys back like standpoint a - I'll curious issues, the wise what from necessarily you're makes an are sounds are about I'm not issues, the supply what what lot in direct Asia, supply the in and have logistics which may queue. that jump of It key hearing you you or revenue from while seeing - seeing in China, coronavirus. exposure seeing impact of Last you But any in is chain chain?

Michael Burger

we and of bit that the the Actually, us concerned Europe coronavirus bulk many down companies we're will do are supply is America, our would I it. believe that much just we would impact equipment isolated and focused from about as in opening. be a purchasing from of chain North that in have that that shut been delayed so the on demand have - or pretty

has part you quarter as big of through, a turn. think, I you know, revenue way know, not its actually and is So that our a worked in

it's we're So not real event huge It's time like effect on a a backlog. seeing us. for

reading stuff are the got we've you the kind there. So disclaimer that's in of why We're guys same reading.

really operational we customer are have is big but footprint the chain about in Our not really supply habits China, impacted. We our buying concerned don't a of current base.

James Ricchiuti

Got it. Thanks very much.

Michael Burger

you. You’re welcome, Jim. Thank

Operator

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

Andrew DeGasperi

Thanks for question. taking my

the your First a given possibility seems you impact relatively to potentially these any that could force or your marketing there how sales on of like this this change near-term is restructuring sales marketing products? your are efforts, large

Michael Burger

is this interface risk always I anytime change customers. with new Of existing in course, about base. the the This say; there's will however, you customer really not is customers. about

particular of a people situations we're on multiple the calling doing side eliminating And Our that. some situation sales have in is account. we're we is, today multiple what

basically We're I direct than that basically you from and customers. force think not intent. uncovering versa. or vice to a will, less any if a rep has risky So a we're sales footprint That's for going focusing, our not example

is We're still sales We're But the utilizing is always sales just that force. and up not giving anytime you Andrew then individual there change, our the risk to and a answer direct particular any ownership clear backing make technically. individual focusing with force. a

Allen Muhich

each teams that change The vertical weren't - requisite exactly eliminating necessarily a management had different I structure of unit of we comes that as well. with to business on lot the might calling from specific four the therefore add where other customers redundancy thing again because support and structure, is essentially sales our

Andrew DeGasperi

this And secondly, guess do and how then, I metrology Got us weaker, market XD construction I was or Could qualitative and for quarter engineering longer the no in guess it. segment AEC you standpoint. QX? but know far so maybe you're giving information, did I architecture tell but maybe probably

Allen Muhich

say quarters again to the in was prior would at forward would reported we've what is if I quarter been, information that of compared fourth I what say we looked and basis. not not what there recently. rates on lot haven't a a growth are But there you change Yes, go providing the

we least soft, soft had And be where at to where strength, moderate pockets performance continued we were remained we so or unchanged. and of that

Andrew DeGasperi

up a That's helpful. about lastly the setting then recurring where peers potentially terms of is payment And from are and of plans, considering hardware as kind me, element well? in of your that thinking one something you their making is revenue

Michael Burger

is lot leasing a models, at different looking We're one them. of of

some leasing stuff, not average expensive may for we've a it. that for sense reality, our make seen Our price such huge is more demand in of but selling

sorts revenue I lot seeing leasing but today. think we're of hardware we're stream different of of looking ideas, at a now all right not for demand example, reoccurring and,

Andrew DeGasperi

Got it.

Okay, thank you much. very

Michael Burger

Andrew. Thanks

Allen Muhich

Andrew. Thanks,

Operator

Instructions] And Palm [Operator Capital Greg we'll ahead. go question Please from next take with our Craig-Hallum Group.

Greg Palm

Yes, good for this. details around all morning. Thanks the

this, So just just make a want sure to we're on right. understanding previous question, following up

So cost math, the your if so a the $XX mean, you million maybe you consistent that do get model. alone, inside in XX% just margin I from margin targeted EBITDA range. gross and assume you is to which close savings a

math the what that implies? is up. want square that Just to So,

Michael Burger

correct. That's

Greg Palm

the so margin revenue or you obviously a and to that. markets solutions, contribution gross targeted guess I from starting kind term, rate growth and mean, software upside to And that get upside this question that is point? maybe are, I would your if incremental longer guess gets is, we assume where I of more in some assume you

right that is to point? the starting a the XX% about this, that is think So way

Michael Burger

it. Correct. thinking That's the we're way about

Greg Palm

that revenue factor can of level guess product those, if what walking the are are to relates are, completely lines away the we so our there you from? that it. I contribution into Got is models? revenue as impacts, And you And it any

Michael Burger

Actually, significant organization will contribution a primary from minimis. support focus a in is impact. our the being de service actually three it perspective, focus We focusing revenue to in That don't from field on pretty that is the our said, revenue the a think, markets have from believe a I dramatic.

I don't perspective, huge. perspective So revenue focus that it is but Greg material think internally from impact a a financial from it has a

Greg Palm

Okay, or actual sales of reductions, be the number headcount those spread the and of people XXX in across company? out are how the will most terms

Allen Muhich

primarily SG&A. it way the it's to is think I think about

Greg Palm

Okay.

Michael Burger

manufacturing R&D remains our organization untouched. large pretty untouched. And much pretty much remains at

Greg Palm

I sort of eight guess threw of Got us months the at lot mean, of appreciate. numbers last there's which company than mean, a more I here, it? all just think I lot detail can been you But with one, Michael, you've and now. a we I

So sort have the if excites of sort your us? helpful forward most and really months up you sort of could I of it go for you I what about be been period, mean, wrap eight last what would think

Michael Burger

been in do that with our huge get never talking that to for have company operationally think opportunity we're we to there's a the out us. that just very a customers way, know, I more. own It's can You And that assuming markets think, I involved are of I us a asking even opportunity within XX,XXX exciting about. three satisfy

And have very, can business bright scalable, Assuming to is start. potential, that a very, I it's a to think we our live we future. from have which that up basis great we a model now that very

more when it I it was today I'm excited joined. than actually, So about

Greg Palm

the appreciate color. I luck right, going Good All forward.

Michael Burger

Thank I it. appreciate Greg. you,

Operator

this questions further at there And no time. are

to back for any it speakers turn I'll remarks. closing the So

Michael Burger

now lot Well, scalable. extremely we we have And done I business think we're model is a work. are. where very about We've that excited a of

and how quarters the we So doing very and you you your we'll Thank changes in again appreciate updating quarter. with to strategy. you next We talk much. to future the forward look on interest we're

Operator

patience program. This does do and… your conclude today's appreciate We