FARO Technologies, Inc.

Good day, everyone, and welcome to the Ferro Technologies fourth quarter and year-end 2022 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 afternoon.

With me today from Ferro are Michael Berger, Chief Executive Officer, and Alan Mewich, Chief Financial Officer. Today, after market close, the company released its financial results for the fourth quarter and full year of 2022. The related press release and Form 10-K are available on FERO's website at www.fero.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 and technology development, customer demand, inventory levels, our outlook and financial guidance, economic and 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 FCC 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 U.S. generally accepted accounting principles or non-GAAP financial measures. In the press release, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures. While not recognized under GAAP, management believes these non-GAAP financial measures provide investors with the relevant period-to-period comparisons of core operations. However, they should not be considered in isolation or as a substitute for a measure of financial performance paired in accordance with GAAP. Now I'd like to turn the call over to Michael Berger.

Thank you, Mike. Welcome to our call. Improving fourth quarter demand, driven by strength in our laser scanner in European markets, along with the addition of a full quarter of GSLAM, resulted in revenue for the quarter of $103.9 million, up nearly 4% year-on-year, despite strong currency headwinds. On a constant currency basis, Q4 revenue was $110.5 million, up approximately 10% year-over-year. Following September's launch of our new Vantage MAX tracker, I am pleased to report that all three of our major hardware product lines have now been refreshed with new products. With our new laser scanner gaining global adoption, we believe the hardware success we have seen thus far validates our customer-driven approach to product definition. We look forward to discussing future product releases in the quarters to come. Beyond our internally developed products, the integration efforts of our recent acquisitions are executing to plan. Following September's acquisition of GeoSlam, we are pleased with the partnership that has developed quickly. Their mobile scanning roadmap is robust, and we expect a significant new product launch later this year. As a reminder, GeoSlam's flexible, low-cost, handheld mobile scanning portfolio closes a gap in our scanning lineup. We anticipate these products will address several applications within Ferro's traditional AECO and public safety customer base. GeoSlam's products have historically targeted the geospatial and mining markets, primarily through an indirect channel. We believe we now have meaningful cross-selling opportunities in front of us. In the fourth quarter, we further expanded our capture technology portfolio to the acquisition of SightScape, a leader in iOS-based LiDAR scanning. By enabling LiDAR scanning capabilities inherent in recent generations of iOS devices, we bring the power of potentially millions of devices into Ferro's cloud environment sphere. Given the limitations on range and speed of capture, we don't expect iOS scanning to replace or cannibalize existing scanning technologies within our portfolio. It does, however, provide a simple and readily available option for customers to address scanning gaps in larger projects within the AECO and public safety applications. By augmenting Ferro's existing high-precision, leading-edge capabilities with offerings such as mobile scanning, 360-degree photo and video capture, as well as iOS-based LiDAR, we now offer the broadest set of 3D capture devices in the market. This unique capability enables Ferro's construction and facilities customers to optimize their capture methods to their scanning application and need. As we integrate these various capture capabilities into Ferro's sphere, we will enable cloud-based access to 4D models from all of our available capture devices onto a single coordinate system. This unique and differentiated offering will provide Ferro customers with unprecedented flexibility along the ease of use and accuracy continuance. Early feedback on the integration and integrated viewing and usage of 3D data capture using Ferrell's broad set of capture devices has been strong. We believe the market potential for digitizing the physical world is enormous, and we are uniquely positioned to offer the best 3D solutions that will enable increasing levels of long-term adoption. This is a key differentiator for Ferrell, and we look forward to sharing our progress through 2023 and beyond. I'll now turn the call over to Alan to provide an overview of our fourth quarter financial results and first quarter guidance.

Thank you, Michael, and good afternoon, everyone. Fourth quarter revenue of $103.9 million was up nearly 4% compared with the fourth quarter of 2021. With roughly 60% of our revenue impacted by US dollar FX rates, our fourth quarter revenue on a constant currency basis was $110.5 million, up 10% year over year. Driving this result was primarily the solid increase in demand for our focused premium scanners, a meaningful improvement in our performance in European markets, and the addition of GeoSlam revenue following our September acquisition. On an actual currency basis, when compared to last year, fourth quarter hardware revenue of $70.3 million was up 9%, Software revenue of $12.9 million was down 5%, and service revenue of $20.6 million was down 6%. Recurring revenue of $18.1 million was up 10% when compared to Q4 of 2021, primarily due to growth in our cloud-based software offerings. Hardware revenue on a constant currency basis was $75.8 million, up 17% year-on-year, and is a strong indicator of our new product customer adoption. As we discussed in prior quarters, we have seen a modest flattening of overall software revenue as we convert customer purchases of previously perpetual licenses to subscriptions. On service revenue, the lower 2020 and 2021 hardware unit shipments compared to earlier years have reduced the installed base of products eligible for our service offerings that when combined with the meaningful product quality enhancements we've made over the last 18 months, has resulted in continued lower service revenue. Similarly, but with the opposite effect, as 2022's higher unit shipments come off warranty, we would expect to see service revenue pick up later in 2023 and into 2024. Gap gross margin was 49.1%, and non-gap gross margin was 52.8% for the fourth quarter of 2022. Our global footprint for both customer revenue and internal operating expenses results in a relatively effective natural hedge that has limited the overall year-to-date profitability impact of recent and unprecedented FX changes. That said, the relative strengthening adversely impacted reported gross margins by nearly 350 basis points when compared to the success model we set in early 2020. And while unfavorable material costs have predominantly been offset by price increases, until FX rates normalize, we expect to operate below our targeted gross margin range. As supply chain conditions continue to normalize, we expect to realize approximately $12 million in annualized material cost savings as we reposition our supply chain to lower-cost providers in Southeast Asia. As a result, we remain committed to our long-term success model, which for gross margin targets 55% to 60% of revenue. GAAP operating expenses were $52.7 million and included approximately $4.3 million in acquisition-related intangible amortization and stock compensation expenses and $2.6 million in restructuring and other transaction costs. Non-GAAP operating expense of $45.8 million was $1.6 million higher than Q4 of 2021 due primarily to the inclusion of GeoSLAM operating expenses, which more than offset the benefit we experienced as a result of strengthening U.S. dollar exchange rates. GAAP operating loss was $1.6 million in the fourth quarter of 2022, compared with an operating profit of $3.9 million in the fourth quarter of 2021. Non-GAAP operating income was $9.1 million in the fourth quarter of 2022 compared to $11.7 million in the fourth quarter of 2021. Adjusted EBITDA was $11.7 million or 11.3% of sales. Our GAAP net loss was $2.2 million or $0.12 per share. Our non-GAAP net income was $7.1 million or $0.38 per share for the fourth quarter of 2022 compared to net income of $8.7 million or $0.48 per share in Q4 2021. Our cash balance at the end of the quarter was $37.8 million with no debt. Included in our cash consumption during the quarter was inorganic investments we made in both sitescape as well as a minority investment in technology targeting lower cost lasers we have slated for coming years. We remain focused on reducing overall working capital levels with improvements expected in 2023. On January 20th, after the close of the quarter, we placed $75 million of 5.5% convertible senior notes, including the underwriter's option to purchase additional notes at a strike price of $42.36, which represents a 20% premium to Farrow's closing stock price on January 19th. The net proceeds from the offering was approximately $72.2 million, which will be reflected in our March 31st balance sheet reporting. Given relatively high interest rates, we expect to invest a portion of proceeds in short-term treasuries that will offset some of our interest expense. In addition, we are aggressively integrating the recent acquisitions of HoloBuilder, GeoSlam, and Sitescape. As a result, in the first quarter, we are announcing an integration plan, which includes the consolidation of our three cloud-based environments, as well as the rationalization of our facilities footprint and incremental expense savings. We expect these actions to offset a portion of the inflationary expenses we've experienced over the past few quarters, as well as some of the expected increase in reported expense levels associated with continued normalization of FX rates. Taken together, we expect to incur $10 to $16 million in charges through the end of 2023, split roughly evenly between cash and non-cash. Once complete, we anticipate an approximate $10 million reduction in annualized operating expenses that will maintain expense levels modestly higher than reported in 2022, given the expected and offsetting expense headwinds of inflation, FX, and variable compensation plans. Moving on to guidance, in the first quarter, we expect revenue of between 81 and 89 million, which assumes a constant exchange rate from current levels. If the U.S. dollar were to further strengthen or weaken during the remainder of the quarter, we would experience a corresponding headwind or tailwind to reported revenue levels. We expect a non-gap loss per share of between 2 and 22 cents. Before closing, and based upon feedback from many investors about March 2023 travel challenges, we have made the difficult decision to postpone our previously announced analyst day. We continue to have a strong desire to share our progress and provide a hands-on experience for investors to see our virtualization tools. We will be looking for a date in the future that is more suitable to ensure greater investor participation, giving them meaningful distraction effort, and investment necessary to successfully pull off such an event. In closing, and notwithstanding the recessionary concerns echoing throughout the macro environment, our opportunity funnel remains strong. We are increasingly excited about the building momentum in our business and remain committed and optimistic about executing on our long-term vision of digitalizing the physical world. That said, we are actively monitoring demand signals to ensure alignment with spend levels and will adjust should future conditions warrant. The pace of our product announcements, both hardware and software, are accelerating, and we expect to continue providing increasing levels of value from 4D virtualized models to our customers throughout 2023. We look forward to sharing our progress with you in the quarters ahead. This concludes our prepared remarks, and at this time we'd be pleased to take any of your questions.

At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue by pressing star and two. Once again, to ask a question, please press the star and one. And we'll take our first question from Greg Palm with Craig Howland Capital Group. Your line is open.

Hey, good afternoon. Thanks for taking the question. Starting off with, hey, um, wanted to start with some comments on geographic results, because that's kind of what stood out to us. Really, really surprising strength in Europe, and maybe likewise not as strong results in APAC, and so maybe you can just dive into those specific regions a little bit more.

Yeah, I think APAC was not a surprise. I think we, you know, APAC has actually been on a tear here for the last year for us, so we're not necessarily overly disappointed. The opportunity funnel in Asia continues to grow, and I think it was more timing of some of the bigger deals that just kind of got pushed into future quarters. Europe took us all by surprise. We saw a large resurgence in the AEC space. And we had a couple big public safety deals closed. So in general, a very nice surprise. And as you know, you and I have been talking about this now for over a year. And Europe has been, I think, depressed for us. And so it's great to see it back where it I think it belongs, and we're excited, not just from a revenue and booking perspective, but their opportunity funnel also took a very nice turn. So I think we're feeling pretty good, and I think it's a testament both to the AAC market and also now our position in that with our new scanner.

Yeah, makes sense. That's helpful, Collar. If I could just shift gears a little bit to the cost savings program, Alan, I might have you repeat a little bit of what you said because I couldn't write it down fast enough. But can you just go through what the potential cost savings are? And I'm not sure if what you were alluding to was there's going to be, you know, sort of a pickup in expenses. And so these savings are expected to offset or whether we've already seen some of that pick up. and the savings will offset that going forward. So maybe just a little bit more color there.

Sure, Greg. The areas where we are expecting to see some benefit, and again, we outlined $10 million of annualized expense savings that will be feathered in kind of throughout 2024, is predominantly a focus on finalizing the integrations of the three acquisitions that we've done over the last year and a half. We have three cloud-based environments today that we're supporting. We really only need to have that be one. And therefore, there's some expense savings associated with that. Given the remote and hybrid work environments that we've adopted, our facilities are underutilized. And therefore, we have an opportunity to consolidate those facilities into smaller square footage, frankly. And those also, again, will feather in over 2023 And then finally, we've always got some tweaking of expense and investment levels around the edges that I think will also help contribute to that $10 million. As it relates to when we'll see it and where we expect expenses to level in, some of that will depend, of course, upon where currency rates normalize to. At today's FX rates, we would expect that expenses in 2023 remain about where they are or where we reported them maybe just a touch higher than where we reported them in 2022 taking into account the savings taking into account inflationary pressures variable compensation plans merit increases for employee base all of those things somewhat net themselves out okay that makes sense and then just lastly any

additional purchase accounting impacts that we should be taking into account either here for Q1 or fiscal 23?

No.

Okay, easy enough. All right, I'll leave it there. Thanks.

Thanks for these questions, Greg. Appreciate it.

And our next question comes from Rob Mason with RW Baird.

Your line is open.

Yes, good evening. I wanted to ask just about if you could just speak, Michael, to how it sounded like the AEC markets, public safety performed better than the 3D metrology. That was my impression. If you could just maybe clarify how those individual markets performed in the fourth quarter, maybe what you're seeing into the first quarter.

Yes, I think AEC kind of on a global basis was a very nice surprise, and we saw a significant bump, as we talked about, in Europe, but it was strong in North America and Asia alike. Public safety, we actually had our largest booking quarter in the history of public safety for us, and we feel really excited about that. I think 3DM, I wouldn't say it was down. Frankly, overall, we felt really good about the quarter in general. It just wasn't up as much as what we saw in public safety and AEC. I would argue that that's a combination of nice market activity, but I also believe The adoption of our new focus premium scanner is exceptional, and we have in Q4 booked our largest number of units for scanner in the history of the company, all based on the strength of the focus premium. So I think we're pretty excited about what that says.

The only other thing I might add related to the 3D metrology space is last year was a bit of a difficult compare for us because we had very strong performance with our next generation quantum max arm in Q4 of 2021. And so that's why for us it felt like things were continuing on nicely, but then when you do the year-on-year compare, it's a bit challenging.

That's exactly right.

How would you characterize – Just the sales cycle, the order cycle, again, as we came through the end of the year, did you notice any changes, shifts in the ability to close orders, deals?

No, actually not. I think we have been relatively pleasantly surprised with the funnel growth that And it's now continued now for probably two and a half quarters. And that bodes well for us. And by the way, it goes against everything we're reading, right, in terms of what's happening in the end marketplace. So we're cautiously optimistic. And I think Al said in his prepared remarks, we continue to kind of watch this. But it still looks quite positive. The sales cycle in terms of length of closing deals, in terms of capital approval cycles, we didn't see a significant change from Q3 to Q4.

It sounded like, again, you noted public safety, largest booking quarter that you'd had. Is that product that will ship in 23, or did some of that – it sounded like some shipped anyway in – Q4, but I'm just curious what you carry over, and then maybe just a broader comment on how backlog finished the year, and did that come down as supply constraints alleviated, or just maybe how that trended?

Let me start with the backlog. We effectively started with the – we ended Q4 with pretty much the same backlog we started it with. So we had – Relative, very strong bookings overall. We haven't talked about that, but strong bookings. And that kept the backlog in the Q1 quite healthy. So we're feeling good about that. Your first question was what? I'm sorry. Rob?

Just the large public safety booking that you referenced, is that a 2023 shipment or did we already ship that?

We shift quite a bit of it within quarter, and as I mentioned, backlog quarter on quarter for the companies was flat in terms of what we started Q4 with and what we're now starting Q1. Some of that is public safety, but I don't think a disproportionate number. I think we shift a large portion of what we booked in Q4. Very good.

Just one quick one, and then I'll hop off. Alan, how should we model the net interest expense in the first quarter as a partial quarter for the convert offering? I'm not sure when you're investing the cash, but I'm just curious what's embedded in the guidance around that.

Yeah, what's embedded in the guidance is, again, we closed the transaction on the convert in the third week of January, and so we will have 75 million times 5.5% over the balance of the quarter. There's also some amortization of fees and fees that need to be buried in there as well, and so we have assumed that And those fees, I believe, are just a bit shy of $3 million that would be amortized over the five-year term. And then we would expect to invest somewhere in the $30 to $40 million range is kind of the current thought process for the final month of the quarter. And therefore, you should expect to see whatever T-bills are somewhere in the 4%, 4.5% range of interest income to offset. Hopefully that gives you the pieces you need.

Excellent.

Yes, it does. Thank you. Thanks, Rob.

And our next question comes from Andrew DeGestneri with Barenburg. Your line is open.

Hi, this is Stephanie. I'm on for Andrew. My first question is about recurring revenue and how we should think about the recurring software and services getting towards that 25% of revenue. and whether these integrations of the acquisitions will change that in any way?

So, first of all, I don't believe that the integration of the cloud-based environments will affect that trajectory at all. And so the recurring revenue component, I think, will continue to grow and continue to be an increasing level of our overall revenue. It's a focus area of ours. As you know, recurring revenue for us is both the software components as well as there's some repair contract revenue that's in there as well that's being somewhat blunted today. So as we continue to grow our hardware revenue, that ultimately positively affects recurring revenue as we indicated in our prepared remarks towards the end of 2023 into 2024. And therefore, again, as we also continue to make investments in our SaaS-based cloud applications that will drive increased levels of software revenue through recurring revenue and therefore still believe strongly that we will be able to achieve the 25% objective that we've thrown out there. The only reason why we might not is if hardware revenue continues to grow nicely and then we end up with a good problem that both of those revenue streams are growing. But right now we see differentiated growth.

Okay, thank you. That makes sense. And one more question on your recent acquisition of Sitescape. If you could just elaborate a little bit on the market and competitors and whether this will require investment on your part in the near term or longer. Thank you.

The answer is yes, it will require investment. We have a plan internally to develop this capability organically. And the opportunity with Sidescape came up and we jumped at it. I think this will be integrated and not necessarily affect the overall software spend at the rate that we're currently talking to. So it's inculcated into our plan and our model. So I think you should feel comfortable with that. I think the market itself is massive. Sightscape, however, was very much focused on consumers and, I would argue, for lack of a better term, hobbyists. And what we're doing is taking this low-resolution LIDAR capture capability and really inculcating it into Sphere and then really focusing it on our current markets, which are AEC and ultimately public safety. we're taking a technology that's been proven in the consumer world and now applying it very much to our strategy. So we don't see it change our direction or our strategy or our focus from a market perspective, but it does accelerate our roadmap and it does accelerate our technologies.

Just one comment to confirm as well, the revenue contribution from Sitescape is very, very immaterial.

Yes.

And therefore, think about it more as a technology acquisition as opposed to a market or revenue expansion.

Got it. Thank you. That's helpful.

You're welcome. Thank you, Stephanie.

And once again, to ask a question, please press the star and 1. And you may remove yourself from the queue by pressing star and two. And we'll take a question from Ben Rose with Battle Road Research. Your line is open.

Yes, good afternoon, Alan and Michael. Good. Michael, a question for you. In addition to, you had mentioned that there were separate cloud platforms for some of these recent acquisitions. Are there other integration tasks that need to be done beyond kind of harmonizing around one cloud platform?

Yeah, I think there's always, you know, we're integrating the GSLAM hardware engineering organization into our current hardware engineering organization, which is going extremely well. And there are always, you know, GNA sides of that. There are... IT projects. There are all kinds of kind of behind the scenes that we don't spend a lot of time talking about tasks that need to be done when you integrate companies the size of GeoSlam. Sidescape is a relatively small company with few employees and so that integration I would argue is already complete. HoloBuilder was roughly the size of GeoSLAM from a population perspective, and that's pretty much behind us as well. So GeoSLAM is probably the largest task we've got in place right now. But when we bought SideScape, when we bought HoloBuilder, and before we bought them, we were developing our own cloud-based environment. That's really what we're alluding to when we say three cloud environments. And that's a big task because, frankly, there's customers in each of those environments. They're using, in some cases, different service providers. And their APIs, the way they actually interface with the cloud is different. So there is a lot of development that has been going on. We're just announcing it this quarter.

Okay. And just a follow-up question with regard to the strength in the AEC market in Europe. How much of it would you say is sort of a general bounce back in the economy versus other things that might be going on in terms of product acceptance or perhaps changes in the competitive environment?

Yeah, it's a great question. I wish I had a real... finite answer for you, but I don't. What we saw in the quarter was a great pull from our customer base on projects that we had been tracking. Frankly, we had seen many of these projects continue to be pushed quarter to quarter, and I think actually you and I have talked about this in the past. So I believe that it was somewhat market-driven because, frankly, a lot of the projects were not pushed into the following quarter but actually did close in Q4. That could be very much around capital budget flush. You know, if you don't spend it, you lose it. And we see that actually every year. But we hadn't seen that in the AEC market before. through 2020 and 2021, and I think largely because of COVID-related issues. So it's good to see the budget flush, and so we did see that. But I do believe it's hard to really distinguish between budget flush and the adoption and excitement around the new scanner, which is absolute. So it's positive. The projects are closing soon. And as I mentioned, we had our highest booking quarter for scanner in the history of the company.

Great. Great. Okay, that's a very helpful color. Appreciate it.

You're welcome, Ben.

Thanks for your question. Thanks, Ben.

Thanks.

And it appears we have no further questions at this time.

I'll turn the program back to Michael Berger for any closing remarks.

Thank you very much for attending. We're very pleased with the quarter, and we're actually really excited about what the future holds. Thank you very much. We'll talk to you next quarter.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time. Thank you. Bye. Thank you. Thank you. music music Good day, everyone, and welcome to the Ferro Technologies fourth quarter and year-end 2022 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. Good afternoon. With me today from Ferro are Michael Berger, Chief Executive Officer, and Alan Muhic, Chief Financial Officer. Today, after market close, the company released its financial results for the fourth quarter and full year of 2022. The related press release and Form 10-K are available on FERO's website at www.fero.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 and technology development, customer demand, inventory levels, our outlook and financial guidance, economic and 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 FCC 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 U.S. generally accepted accounting principles or non-GAAP financial measures. In the press release, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures. While not recognized under GAAP, management believes these non-GAAP financial measures provide investors with the relevant period-to-period comparisons of core operations. However, they should not be considered in isolation or as a substitute for a measure of financial performance paired in accordance with GAAP. Now I'd like to turn the call over to Michael Berger.

Thank you, Mike. Welcome to our call. Improving fourth quarter demand, driven by strength in our laser scanner in European markets, along with the addition of a full quarter of GeoSlam, resulted in revenue for the quarter of $103.9 million, up nearly 4% year on year, despite strong currency headwinds. On a constant currency basis, Q4 revenue was $110.5 million, up approximately 10% year over year. Following September's launch of our new Vantage Max tracker, I am pleased to report that all three of our major hardware product lines have now been refreshed with new products. With our new laser scanner gaining global adoption, we believe the hardware success we have seen thus far validates our customer-driven approach to product definition. We look forward to discussing future product releases in the quarters to come. Beyond our internally developed products, the integration efforts of our recent acquisitions are executing to plan. Following September's acquisition of GeoSlam, we are pleased with the partnership that has developed quickly. Their mobile scanning roadmap is robust, and we expect a significant new product launch later this year. As a reminder, GeoSlam's flexible, low-cost handheld mobile scanning portfolio closes a gap in our scanning lineup. We anticipate these products will address several applications within Ferro's traditional AECO and public safety customer base. GeoSlam's products have historically targeted the geospatial and mining markets, primarily through an indirect channel. We believe we now have meaningful cross-selling opportunities in front of us. In the fourth quarter, we further expanded our capture technology portfolio through the acquisition of SiteScape, a leader in iOS-based LiDAR scanning. By enabling LiDAR scanning capabilities inherent in recent generations of iOS devices, we bring the power of potentially millions of devices into Ferro's cloud environment sphere. Given the limitations on range and speed of capture, we don't expect iOS scanning to replace or cannibalize existing scanning technologies within our portfolio. It does, however, provide a simple and readily available option for customers to address scanning gaps in larger projects within the AECO and public safety applications. By augmenting Ferro's existing high-precision, leading-edge capabilities with offerings such as mobile scanning, 360-degree photo and video capture, as well as iOS-based LiDAR, we now offer the broadest set of 3D capture devices in the market. This unique capability enables Ferro's construction and facilities customers to optimize their capture methods to their scanning application and need. As we integrate these various capture capabilities into Ferro's sphere, we will enable cloud-based access to 4D models from all of our available capture devices onto a single coordinate system. This unique and differentiated offering will provide Ferro customers with unprecedented flexibility along the ease of use and accuracy continuums. Early feedback on the integration and integrated viewing and usage of 3D data capture using Ferrell's broad set of capture devices has been strong. We believe the market potential for digitizing the physical world is enormous, and we are uniquely positioned to offer the best 3D solutions that will enable increasing levels of long-term adoption. This is a key differentiator for Ferrell, and we look forward to sharing our progress through 2023 and beyond. I'll now turn the call over to Alan to provide an overview of our fourth quarter financial results and first quarter guidance.

Thank you, Michael, and good afternoon, everyone. Fourth quarter revenue of $103.9 million was up nearly 4% compared with the fourth quarter of 2021. With roughly 60% of our revenue impacted by US dollar FX rates, our fourth quarter revenue on a constant currency basis was $110.5 million, up 10% year over year. Driving this result was primarily the solid increase in demand for our focused premium scanners, a meaningful improvement in our performance in European markets, and the addition of GeoSlam revenue following our September acquisition. On an actual currency basis, when compared to last year, fourth quarter hardware revenue of $70.3 million was up 9%, Software revenue of $12.9 million was down 5%, and service revenue of $20.6 million was down 6%. Recurring revenue of $18.1 million was up 10% when compared to Q4 of 2021, primarily due to growth in our cloud-based software offerings. Hardware revenue on a constant currency basis was $75.8 million, up 17% year on year, and is a strong indicator of our new product customer adoption. As we discussed in prior quarters, we have seen a modest flattening of overall software revenue as we convert customer purchases of previously perpetual licenses to subscriptions. On service revenue, the lower 2020 and 2021 hardware unit shipments compared to earlier years have reduced the installed base of products eligible for our service offerings that when combined with the meaningful product quality enhancements we've made over the last 18 months, has resulted in continued lower service revenue. Similarly, but with the opposite effect, as 2022's higher unit shipments come off warranty, we would expect to see service revenue pick up later in 2023 and into 2024. Gap gross margin was 49.1% and non-gap gross margin was 52.8% for the fourth quarter of 2022. Our global footprint for both customer revenue and internal operating expenses results in a relatively effective natural hedge that has limited the overall year-to-date profitability impact of recent and unprecedented FX changes. That said, the relative strengthening of U.S. dollar exchange rates over the past year have adversely impacted reported gross margins by nearly 350 basis points when compared to the success model we set in early 2020. And while unfavorable material costs have predominantly been offset by price increases, until FX rates normalize, we expect to operate below our targeted gross margin range. As supply chain conditions continue to normalize, we expect to realize approximately $12 million in annualized material cost savings as we reposition our supply chain to lower cost providers in Southeast Asia. As a result, we remain committed to our long-term success model, which for gross margin targets 55% to 60% of revenue. GAAP operating expenses were $52.7 million and included approximately $4.3 million in acquisition-related intangible amortization and stock compensation expenses and $2.6 million in restructuring and other transaction costs. Non-GAAP operating expense of $45.8 million was $1.6 million higher than Q4 of 2021 due primarily to the inclusion of GeoSLAM operating expenses which more than offset the benefit we experienced as a result of strengthening U.S. dollar exchange rates. GAAP operating loss was 1.6 million in the fourth quarter of 2022, compared with an operating profit of 3.9 million in the fourth quarter of 2021. Non-GAAP operating income was 9.1 million in the fourth quarter of 2022, compared to 11.7 million in the fourth quarter of 2021. Adjusted EBITDA was $11.7 million or 11.3% of sales. Our GAAP net loss was $2.2 million or $0.12 per share. Our non-GAAP net income was $7.1 million or $0.38 per share for the fourth quarter of 2022 compared to net income of $8.7 million or $0.48 per share in Q4 2021. Our cash balance at the end of the quarter was $37.8 million with no debt. included in our cash consumption during the quarter was inorganic investments we made in both sitescape as well as a minority investment in technology targeting lower cost lasers we have slated for coming years. We remain focused on reducing overall working capital levels with improvements expected in 2023. On January 20th, after the close of the quarter, we placed 75 million of 5.5% convertible senior notes including the underwriter's option to purchase additional notes at a strike price of $42.36, which represents a 20% premium to Farrow's closing stock price on January 19th. The net proceeds from the offering was approximately $72.2 million, which will be reflected in our March 31st balance sheet reporting. Given relatively high interest rates, we expect to invest a portion of proceeds in short-term treasuries that will offset some of our interest expense. In addition, we are aggressively integrating the recent acquisitions of HoloBuilder, GeoSlam, and SiteScape. As a result, in the first quarter, we are announcing an integration plan, which includes the consolidation of our three cloud-based environments, as well as the rationalization of our facilities footprint and incremental expense savings. We expect these actions to offset a portion of the inflationary expenses we've experienced over the past few quarters, as well as some of the expected increase in reported expense levels associated with continued normalization of FX rates. Taken together, we expect to incur 10 to 16 million in charges through the end of 2023, split roughly evenly between cash and non-cash. Once complete, we anticipate an approximate $10 million reduction in annualized operating expenses that will maintain expense levels modestly higher than reported in 2022, given the expected and offsetting expense headwinds of inflation, FX, and variable compensation plans. Moving on to guidance, in the first quarter, we expect revenue of between $81 and $89 million, which assumes a constant exchange rate from current levels. If the U.S. dollar were to further strengthen or weaken during the remainder of the quarter, we would experience a corresponding headwind or tailwind to reported revenue levels. We expect a non-gap loss per share of between 2 and 22 cents. Before closing, and based upon feedback from many investors about March 2023 travel challenges, we have made the difficult decision to postpone our previously announced analyst day. We continue to have a strong desire to share our progress and provide a hands-on experience for investors to see our virtualization tools. We will be looking for a date in the future that is more suitable to ensure greater investor participation, giving the meaningful distraction, effort, and investment necessary to successfully pull off such an event. In closing, and notwithstanding the recessionary concerns echoing throughout the macro environment, our opportunity funnel remains strong. We are increasingly excited about the building momentum in our business and remain committed and optimistic about executing on our long-term vision of digitalizing the physical world. That said, we are actively monitoring demand signals to ensure alignment with spend levels and will adjust should future conditions warrant. The pace of our product announcements, both hardware and software, are accelerating, and we expect to continue providing increasing levels of value from 4D virtualized models to our customers throughout 2023. We look forward to sharing our progress with you in the quarters ahead. This concludes our prepared remarks, and at this time, we'd be pleased to take any of your questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue by pressing star and 2. Once again, to ask a question, please press the star and 1. And we'll take our first question from Greg Palm with Craig Howland Capital Group. Your line is open.

Hey, good afternoon. Thanks for taking the questions. Starting off with, hey, I wanted to start with some comments on geographic results because that's kind of what stood out to us. Really, really surprising strength in Africa. in Europe and maybe likewise not as strong results in APAC. And so maybe you can just dive into those specific regions a little bit more.

Yeah, I think APAC was not a surprise. I think we, you know, APAC has actually been on a tear here for the last year for us. So we're not surprised. not necessarily overly disappointed. The opportunity funnel in Asia continues to grow and I think it was more timing of some of the bigger deals that just kind of got pushed into future quarters. Europe took us all by surprise. We saw a large resurgence in the AEC space and we had a couple big public safety deals closed. So in general, a very nice surprise. And as you know, you and I have been talking about this now for over a year. And Europe has been, I think, depressed for us. And so it's great to see it back where I think it belongs. And we're excited, not just from a revenue and booking perspective, but their opportunity funnel also took a very nice turn. So I think We're feeling pretty good, and I think it's a testament both to the AEC market and also now our position in that with our new scanner.

Yeah, makes sense. That's helpful, Culler. If I could just shift gears a little bit to the cost savings program, Alan, I might have you repeat a little bit of what you said because I couldn't write it down fast enough. But can you just go through what the – What the potential cost savings are, and I'm not sure if what you were alluding to was there's going to be, you know, sort of a pickup in expenses. And so these savings are expected to offset or whether we've already seen some of that pickup and the savings will offset that going forward. So maybe just a little bit more color there.

The areas where we are expecting to see some benefit, and again, we outlined $10 million of annualized expense savings that will be feathered in kind of throughout 2024, is predominantly a focus on finalizing the integrations of the three acquisitions that we've done over the last year and a half. We have three cloud-based environments today that we're supporting. We really only need to have that be one. and therefore there's some expense savings associated with that. Given the remote and hybrid work environments that we've adopted, our facilities are underutilized, and therefore we have an opportunity to consolidate those facilities into smaller square footage, frankly, and those also, again, will feather in over 2023. And then finally, we've always got some tweaking of expense and investment levels around the edges that I think will also help contribute to that $10 million. As it relates to when we'll see it and where we expect expenses to level in, some of that will depend, of course, upon where currency rates normalize to. At today's FX rates, we would expect that expenses in 2023 remain about where they are or where we reported them, maybe just a touch higher than where we reported them in 2022, taking into account the savings, taking into account inflationary pressures, variable compensation plans, merit increases for employee base, all of those things somewhat net themselves out.

Okay, that makes sense. And then just lastly, any... additional purchase accounting impacts that we should be taking into account either here for Q1 or fiscal 23?

No.

Okay, easy enough. All right, I'll leave it there. Thanks.

Thanks for these questions, Greg. Appreciate it.

And our next question comes from Rob Mason with RW Baird. Your line is open.

Yes, good evening. I wanted to ask just about if you could just speak, Michael, to how it sounded like the AEC markets, public safety, you know, performed better than the 3D metrology. Just that was my impression. If you could just maybe clarify how those individual markets performed in the fourth quarter, maybe what you're seeing into the first quarter.

Yes, I think AEC kind of on a global basis was a very nice surprise, and we saw a significant bump, as we talked about, in Europe, but it was strong in North America and Asia alike. Public safety, we actually had our largest booking quarter in the history of public safety for us, and we feel really excited about that. I think 3DM, I wouldn't say it was down. Frankly, overall, we felt really good about the quarter in general. It just wasn't up as much as what we saw in public safety and AEC. And I would argue that that's a combination of nice market activity, but I also believe The adoption of our new Focus Premium scanner is exceptional. And we have, in Q4, booked our largest number of units for scanner in the history of the company, all based on the strength of the Focus Premium. So I think we're pretty excited about what that says.

The only other thing I might add related to the 3D metrology space is last year was a bit of a difficult compare for us because we had very strong performance with our next generation quantum max arm in Q4 of 2021. And so that's why for us it felt like things were continuing on nicely, but then when you do the year-on-year compare, it's challenging. That's exactly right.

How would you characterize – Just the sales cycle, the order cycle, again, as we came through the end of the year, did you notice any changes, shifts in the ability to close orders, deals?

No, actually not. I think we have been relatively pleasantly surprised with the funnel growth. And it's now continued now for probably two and a half quarters. And that bodes well for us. And by the way, it goes against everything we're reading, right, in terms of what's happening in the end marketplace. So we're cautiously optimistic. And I think Al said in his prepared remarks, we continue to kind of watch this. But it still looks quite positive. The sales cycle in terms of length of closing deals, in terms of capital approval cycles, we didn't see a significant change from Q3 to Q4.

It sounded like, again, you noted public safety, largest booking quarter that you'd had. Is that product that will ship in 23, or did some of that – it sounded like some shipped anyway in – Q4, but I'm just curious what you carry over, and then maybe just a broader comment on how backlog finished the year, and did that come down as supply constraints alleviated, or just maybe how that trended?

Let me start with the backlog. We effectively started with the – we ended Q4 with pretty much the same backlog we started it with. So we had – Relative, very strong bookings overall. We haven't talked about that, but strong bookings. And that kept the backlog in the Q1 quite healthy. So we're feeling good about that. Your first question was what? I'm sorry. Rob?

Just the large public safety booking that you referenced, is that a 2023 shipment or did we already ship that?

We shift quite a bit of it within quarter, and as I mentioned, backlog quarter on quarter for the companies was flat in terms of what we started Q4 with and what we're now starting Q1. Some of that is public safety, but I don't think a disproportionate number. I think we shift a large portion of what we booked in Q4.

Very good. Just one quick one, and then I'll hop off. Alan, how should we model the net interest expense in the first quarter as a partial quarter for the convert offering? I'm not sure when you're investing the cash, but I'm just curious what's embedded in the guidance around that.

Yeah, what's embedded in the guidance is, again, we closed the transaction on the convert in the third week of January, and so we will have $75 million times 5.5% over the balance of the quarter. There's also some amortization of fees and fees that need to be buried in there as well, and so we have assumed that And those fees, I believe, are just a bit shy of $3 million that would be amortized over the five-year term. And then we would expect to invest somewhere in the $30 million to $40 million range is kind of the current thought process for the final month of the quarter. And therefore, you should expect to see whatever T-bills are somewhere in the 4%, 4.5% range of interest income to offset. Hopefully, that gives you the pieces you need.

Excellent. Yes, it does. Thank you. Thanks, Rob.

And our next question comes from Andrew De Gasperi with Barenburg. Your line is open.

Hi, this is Stephanie. I'm on for Andrew. My first question is about recurring revenue and how we should think about the recurring software and services getting towards that 25% of revenue. and whether these integrations of the acquisitions will change that in any way?

So, first of all, I don't believe that the integration of the cloud-based environments will affect that trajectory at all. And so the recurring revenue component, I think, will continue to grow and continue to be an increasing level of our overall revenue. It's a focus area of ours. As you know, recurring revenue for us is both the software components as well as there's some repair contract revenue that's in there as well that's being somewhat blunted today. So as we continue to grow our hardware revenue, that ultimately positively affects recurring revenue, as we indicated in our prepared remarks, towards the end of 2023 into 2024. And therefore, again, as we also continue to make investments in our SaaS-based cloud applications that will drive increased levels of software revenue through recurring revenue and therefore still believe strongly that we will be able to achieve the 25% objective that we've thrown out there. The only reason why we might not is if hardware revenue continues to grow nicely and then we end up with a good problem that both of those revenue streams are growing. But right now we see differentiated growth.

Okay, thank you. That makes sense. And one more question on your recent acquisition of Sitescape. If you could just elaborate a little bit on the market and competitors and whether this will require investment on your part in the near term or longer. Thank you.

The answer is yes, it will require investment. We have a plan internally to develop this capability organically. And the opportunity with Sidescape came up and we jumped at it. I think this will be integrated and not necessarily affect the overall software spend at the rate that we're currently talking to. So it's inculcated into our plan and our model. So I think you should feel comfortable with that. I think the market itself is massive. Sightscape, however, was very much focused on consumers and, I would argue, for lack of a better term, hobbyists. And what we're doing is taking this low-resolution LiDAR capture capability and really inculcating it into Sphere and then really focusing it on our current markets, which are AEC and ultimately public safety. we're taking a technology that's been proven in the consumer world and now applying it very much to our strategy. So we don't see it change our direction or our strategy or our focus from a market perspective, but it does accelerate our roadmap and it does accelerate our technologies.

Just one comment to confirm as well, the revenue contribution from Sitescape is very, very immaterial. And therefore, think about it more as a technology acquisition as opposed to a market or revenue expansion.

Got it. Thank you. That's helpful.

You're welcome. Thank you, Stephanie.

And once again, to ask a question, please press the star and 1. And you may remove yourself from the queue by pressing star and two. And we'll take a question from Ben Rose with Battle Road Research. Your line is open.

Yes, good afternoon, Alan and Michael. Good. Michael, a question for you. In addition to, you had mentioned that there were separate cloud platforms for some of these recent acquisitions. Are there other integration tasks that need to be done beyond kind of harmonizing around one cloud platform?

Yeah, I think there's always, you know, we're integrating the GSLAM hardware engineering organization into our current hardware engineering organization, which is going extremely well. And there are always, you know, GNA sides of that. There are... IT projects. There are all kinds of kind of behind the scenes that we don't spend a lot of time talking about tasks that need to be done when you integrate companies the size of GeoSlam. Sightscape is a relatively small company with few employees and so that integration I would argue is already complete. HoloBuilder was roughly the size of GeoSlam from a population perspective, and that's pretty much behind us as well. So GeoSlam is probably the largest task we've got in place right now. But when we bought Sidescape, when we bought HoloBuilder, and before we bought them, we were developing our own cloud-based environment, That's really what we're alluding to when we say three cloud environments. And that's a big task because, frankly, there's customers in each of those environments. They're using, in some cases, different service providers. And their APIs, the way they actually interface with the cloud is different. So there is a lot of development that has been going on. We're just announcing it this quarter.

Okay. Okay. And just a follow-up question with regard to the strength in the AEC market in Europe. How much of it would you say is sort of a general bounce back in the economy versus other things that might be going on in terms of product acceptance or perhaps changes in the competitive environment?

Yeah, it's a great question. I wish I had a real... finite answer for you, but I don't. What we saw in the quarter was a great pull from our customer base on projects that we had been tracking. And frankly, we had seen many of these projects continue to be pushed quarter to quarter. And I think actually you and I have talked about this in the past. So I believe that it was somewhat market-driven because, frankly, a lot of the projects were not pushed into the following quarter but actually did close in Q4. That could be very much around capital budget flush. You know, if you don't spend it, you lose it. And we see that actually every year. But we hadn't seen that in the AEC market before. through 2020 and 2021, and I think largely because of COVID-related issues. So it's good to see the budget flush, and so we did see that. But I do believe it's hard to really distinguish between budget flush and the adoption and excitement around the new scanner, which is absolute. So it's positive. The projects are closing. And as I mentioned, we had our highest booking quarter for scanner in the history of the company.

Great. Great. Okay, that's a very helpful color. Appreciate it.

You're welcome, Ben. Thanks for your question. Thanks, Ben.

Thanks.

And it appears we have no further questions at this time. I'll turn the program back to Michael Berger for any closing remarks.

Thank you very much for attending. We're very pleased with the quarter, and we're actually really excited about what the future holds. Thank you very much. We'll talk to you next quarter.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.