Good day, everyone, and welcome to the FARO Technologies First Quarter 2024 Earnings Call. For opening remarks and introductions, I will now turn the call over to Michael Funari at Sapphire Investor Relations. Please go ahead. .

Thank you, and good morning. With me today from FARO are Peter Lau, President and Chief Executive Officer; and Matt Horwath, Chief Financial Officer. Yesterday after market close, the company released its financial results for the first quarter of 2024. The related press release and Form 10-Q is available on FARO's website at www.faro.com.

Please note certain statements in this conference call, which are not historical facts may be considered forward-looking statements that involve risks and uncertainties, some of which are beyond our control and include statements regarding future business results, product technology development, customer demand, inventory levels, our outlook and financial guidance, economic industry projections or subsequent events.

Various factors could cause actual results to differ materially. For a more detailed description of these and other risks and uncertainties, please refer to today's press release and our annual and quarterly SEC filings.

Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise them. During today's conference call, management will discuss certain financial measures that are not presented in accordance with the U.S. generally accepted accounting principles or non-GAAP financial measures.

In the press release, you will find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures. While not recognized on GAAP, management believes these non-GAAP financial measures provide investors with relevant period comparisons of core operations.

However, they should not be considered in isolation or as a substitute for measuring [effect] performance prepared in accordance with GAAP. Now I'd like to turn the call over to Peter Lau. .

first, accelerating revenue growth ahead of the market trends we operate within; second, to grow earnings at a pace exceeding that of our revenue expansion; and third, to expand our free cash flow at a velocity surpassing our earnings growth. FARO operates within highly promising markets poised for growth.

By prioritizing our core customers and understanding their evolving needs, we position ourselves to deliver innovative solutions that effectively address their most pressing challenges, giving us the opportunity to outpace market growth rates.

Through the combination of diligent efforts to expand our gross margins and a milestone funding approach to operating expense management, we expect to be in a position to realize meaningful operating leverage as revenue grows.

This disciplined approach ensures sustainable growth while fostering increased profitability and facilitating heightened cash flow generation. The implementation of the strategic playbook over the last four quarters has significantly bolstered FARO's financial standing.

We are enthusiastic about the continued execution of this strategy in the years ahead and are confident in its capacity to drive substantial shareholder value creation. With that, I'll now turn the call over to Matt to provide an overview of our first quarter financial resorts and our second quarter outlook. .

Thank you, Peter, and good morning, everyone. First quarter revenue of $84.2 million was approximately flat with the first quarter of 2023. Geographically, demand strength in the Europe and Asia Pacific regions helped offset incremental softness in the Americas as a result of lengthening sales cycles, which Peter mentioned earlier.

First quarter hardware revenue of $52.6 million was down 4% year-over-year, while software revenue of $10.9 million was up 6% and service revenue of $20.7 million increased by 5%. Recurring revenue was $16.7 million and represented 20% of sales.

GAAP gross margin was 51.4% and non-GAAP gross margin was 51.8% for the first quarter of 2024 compared to 47.6% in 2023. As Peter mentioned, in the first quarter, we executed on our variable cost productivity initiatives, including mitigating broker fees and incremental benefits from supply chain localization.

Non-GAAP gross margin increased 420 basis points year-over-year. GAAP operating expenses were $48.6 million and included approximately $5.2 million in acquisition-related intangible amortization and stock compensation expenses and $2.7 million in restructuring and other executive transition costs.

Non-GAAP operating expense of $40.7 million was down $8.1 million from Q1 last year as we realized the benefit of our restructuring efforts and continued productivity improvements. GAAP operating loss was $5.3 million in the first quarter of 2024 compared with an operating loss of $18.6 million in the first quarter of 2023.

Non-GAAP operating income was $3 million in the first quarter of 2024 compared to a loss of $8.3 million in the first quarter of 2023. Adjusted EBITDA was $5.6 million for approximately 6.6% of sales compared to an EBITDA loss of $5.5 million in the first quarter of 2023. Our GAAP net loss was $7.3 million or $0.38 per share.

Our non-GAAP net income was $1.7 million or $0.09 per share for the first quarter of 2024 compared to a net loss of $7.1 million or $0.38 per share in Q1 2023. Our cash and short-term investment balance at the end of the quarter was $99.3 million, up $3 million from Q4 due to profitability levels and continued working capital improvements.

Given our current accounts receivable balance, expectations for revenue and our new expense base as well as further enhancements to our inventory management, we continue to expect to be cash flow positive throughout the first half of 2024.

While we are pleased with our first quarter results and view them as evidence the business is moving in the right direction, we remain cautious in the near term. From a geographic perspective, we do not expect the construction market in China to rebound in the second quarter.

And together with the elongating sales cycles in select geographies, we want to remain thoughtful and measured in setting expectations for the second quarter of 2024.

Although the macro environment remains choppy, our confidence level continues to increase in our ability to deliver on our execution priorities that we outlined during our March Investor event, specifically in our ability to expand gross margins, control our operating expenses and generate positive free cash flow.

As a result, at present FX rates, we expect second quarter revenue of between $79 million and $87 million.

At those revenue levels and given corresponding non-GAAP gross margin between 51% and 52.5% and non-GAAP operating expenses of between $41 million and $43 million, we would expect non-GAAP earnings per share ranging from negative $0.08 per share to positive $0.12 per share for second quarter profitability. This concludes our prepared remarks.

And at this time, we'd be pleased to take your questions. .

[Operator Instructions] I will take our first question from James Ricchiuti with Needham. .

So I'm looking at the low end and the midpoint of your guidance and it implies virtually no seasonal improvement, which you almost always experience. So I'd like to go into that a little more.

Is that conservatism? Or are you seeing something additional in the market that maybe represents more headwinds exiting Q1? Or are there some comparisons at work here? You've talked about China still being weak. And clearly, there were some larger orders that you did call out in APAC, which I'd like to follow up on.

But I wonder if you could frame that a little bit for us. .

I mean as we look at our range, normally you would see seasonality. What we talked about in our remarks was a couple of large orders out of China, which a little bit skewed our expectations and our geographical mix in the first quarter.

And coupled with some slowing in the developed markets due to larger capacity initiatives from some of our customers. We saw a little bit of a slowdown in longer sales cycles in those developed countries, along with some large orders that we don't necessarily expect to repeat in Q2.

So, as we think about the seasonality of the business, you're right, normally it goes up. But if you take those orders out of Q1, the Asia Pacific orders out of Q1, we would expect to see that seasonality along with a cautious outlook in those developed regions as we see kind of how the second quarter develops. .

And can you elaborate on these large orders in APAC.

Were they entirely in China? Or were there some other countries? What kind of customer or application [without] and was this direct sale or a channel partner as you called out last quarter?.

Yes, it's a good question, Jim. And I would say a mix between direct sale and channel partners. But as we've seen the construction market in China continued to remain muted. We've shifted a lot of our sales resources from construction over to manufacturing.

And in the manufacturing space, obviously, the Chinese government has put in place measures to stimulate that Chinese economy.

And we came across and we were pleasantly surprised, came across some very nice large orders in China in the manufacturing space, both through channel partners and our direct sales teams, and we're really pleased with those orders. But ultimately, those large orders are different from kind of what we experienced quarter-to-quarter.

So again, if we remove those from our base, we would see sequential improvement first quarter to second quarter. Obviously, our aim is to always get more large orders, but those orders come with less frequency than our normal flow of business, I would say. .

And our next question comes from Greg Palm with Craig-Hallum. .

I just want to follow up a little bit on what you're seeing out there in terms of the elongated sales cycles. Just to be clear, is it concentrated in a certain geography, in certain end markets or segments? I just want to be clear exactly what you're saying. .

Thank you for the question. What I would say is we see the market specifically in the U.S. and Western Europe. We see those markets continuing to be strong in the manufacturing side of our business. So strong in fact that our customers are so busy with larger type CapEx and capacity-related initiatives.

And ultimately, our products tend to be smaller CapEx-related initiatives. And so, as those customers move through their cycles to increase their capacity, it's just elongated our sales cycle and a little bit in the first quarter. And we would hope and expect to see those sales cycles sort of normalize as we move into the second quarter.

But we want to be cautious because we did see that elongation in the first quarter. Again, I would say, in Western Europe and specifically in the U.S. .

Because I was going to follow up with trying to tie out what you're seeing with some better maybe macro data or at least a stabilization in some of the manufacturing data, the PMIs, especially over in Europe. And I know that's kind of a good sort of -- it's a metric, maybe a lagging metric for your business.

But how do you sort of tie what we're seeing in some of the macro indicators with kind of what you're sort of hearing or seeing in your own business? And I'm more asking about as we progress throughout the year, not just Q2. .

And you're right. We have seen the PMI stabilized and maybe uptick a little bit. Although I would call out that in certain countries, it's better than others around the world. But on the whole, you're right. Generally, I think you're also right to point out that it is a bit of a leading indicator.

And historically, if you remember back to our March event, we showed our revenue growth and the correlation to the PMI trends. And we typically see a 2- to 3- to 4-quarter lag relative to the PMI and our revenue. And so it is good news for us as the PMI continues to strengthen.

And of course, it depends on our mix and where those countries, the PMI is being strong and where it's weakening a little bit. But on the whole, I would definitely classify it as a leading indicator, and we generally lag that by a couple of quarters. .

And then last one, I recall you talking about price a little bit as a lever.

And I'm curious where you're at if you've taken price up across certain product lines across most product lines? How that was received by the customer base, the feedback, maybe the timing of some of those price increases? Can you just give us a little bit of color there, please?.

We announced a price increase at the beginning of the year. And ultimately, when we announced price increases, our quotes are good for a period of time. And so I would say feedback so far has been positive.

But ultimately, because of that lag between announced date and implementation date, while we've seen positive outlook and feedback to that price increase, we've not recognized a ton of price in our results yet and view that as an opportunity moving forward. .

And this concludes our Q&A session. I will now turn the call over to Peter Lau for closing remarks. .

Thank you, operator. On behalf of all of our colleagues, I want to thank you for your interest in FARO. FARO has a strong foundation, and we continue to improve our financial performance. As we outlined in our March investor event, we are extremely enthusiastic about our strategic playbook and ability to create short- and long-term shareholder value.

Our first quarter performance was a significant step towards achieving our long-term goals as we demonstrated a fundamental shift in our operating model. We look forward to sharing our progress towards those goals and the execution of our strategy in future quarters. This concludes our call today. Thank you very much for your time. .

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