Good afternoon. Welcome again to the 26th Annual Needham Growth Conference. Our next presentation will be from FARO Technologies. With us today is the company's CEO, Pete Lau. Joined the company as President and Chief Executive Officer, in July. Yeah. Last July, right? We also have Matthew Horwath, who FARO yesterday announced was promoted to Senior Vice President and CFO from his current position as VP of Finance. My name is Jim Ricchiuti, Senior Analyst in the Equity Research Department at Needham, covering companies in the industrial technology space. Pete's gonna go through some slides, and then we'll have some time for some Q&A. So with that, Pete, take it away. Sounds great. Just waiting on the slides, gang. One moment, please. Okay. You're, um- Yeah. We're waiting on the slide deck. You joined in July? July. At the point- Yeah. Talk to us about how familiar you were with FARO, what your initial observations have been, now that you're in the at the company, you know, half a year, a little? So- Yeah. Yeah, sounds good. I knew FARO by reputation. Didn't know a whole lot about the company of FARO, but been very excited to learn about FARO and the opportunity that we have in our market. And you know, 3D technology adoption is a fast and growing market, and it adds a lot of productivity to our customers in the business-to-business space. And so been very eye-opening to join the company. I like where we're positioned in the market. We have a strategy, high technology hardware enabled by software, which is solid. And we have some real opportunity on the execution of that strategy in the business to drive shareholder value. Okay. Thanks, Jim. Good afternoon, everyone. My name is, as Jim said, Peter Lau, and I'm the President and CEO of FARO Technologies. Great to be here today, and thank you to many of you who braved travel interruptions and weather to be here. And again, thank you, Jim, for having us here at this amazing conference. Look forward to talking today about a really exciting time at FARO. Over the next two months, you know, we're here today speaking with investors. In February, we will plan to release our fourth quarter 2023 earnings, and we'll have a subsequent earnings call to talk about the fourth quarter results. And then in March, we are gonna hold an investor event here in New York City to talk about the elements of our long-term strategy, but also talk about long-term aspirational financial goals. So we're very excited and hope that many of you can attend that. We will get invitations out here shortly in the, in the next week or so. We're just working to finalize the location and the date, but that will be forthcoming really soon. But again, today, I wanna talk about FARO. I wanna spend some time on our markets. I wanna spend some time on our position in those markets. I wanna spend time talking about our executional framework to drive shareholder value. And again, won't be talking today about the fourth quarter or any longer-term financials. So just to set, maybe set the stage there for a second. Wanna take a moment, just to pause briefly and have you look at the safe harbor statement and make sure that we understand that, and I'll pause about 10, 15 seconds before moving forward. [Inaudible]... Okay, so here is a quick primer on FARO. We feel very poised that we are gonna create strategic value and shareholder value over our strategic horizon. I wanna start on the right-hand side of this page and talk to you about a foundation at FARO in which we are very, very proud of. There is a lot to like about FARO, and this 3D capture space is an extremely vibrant and a growing market. Our strategy of hardware enabled by software is extremely solid, and our expansive suite of software solutions is able to unlock value for our customers. We have 15,000 customers and are growing that number every single day, and we have a very high percentage of brand loyalty, which for us means returning customers, which is always a really, really good thing for a business. We have a significant amount of intellectual property with over 1,000 patents, and we have a leadership position in the markets that we serve today. That coveted position encompasses sectors like manufacturing, architecture, engineering, construction, public safety, geospatial, and others. Moving to the left side of the page, we've experienced nice growth over the trailing 12 months, but we've run across some operational challenges, some of which have been in our control, some of which are out of control. But they've caused our financials to take a slight turn in the wrong direction. Things like foreign exchange, things like broker buys in an extremely tight supply chain market over the last few years. Things like rising input costs and OpEx related to acquisitions and square footage. But we have a global presence, a coveted position in attractive sectors, a growing hardware and recurring revenue business, and we will continue to focus on targeted innovation to expand upon the leadership position that we have in our served markets. All of this coupled together, and our lower than historical financial performance, makes FARO a very unique opportunity at this time. We are extremely confident in our ability to execute, which will significantly change our business financial trajectory moving forward. We feel as though FARO is a great investment. For those of you that are new to FARO or have spent some time around the periphery, I wanted to take a moment to simply talk about what we do. We enable customers in the business-to-business space, through our hardware, to scan the physical world through optical, laser scanning, and camera, 360 camera photos. The data that is captured then allows our customers to measure, document, interact, collaborate, and share with each other. This, in turn, enables a massive amount of productivity for our customers. Real, quantifiable productivity with short payback periods. 3D technology is important because it enables time to actionable data. It saves up to 90% of that time versus traditional methods. For over 40 years, when FARO invented the Faro Arm, we've been pioneers and leading innovators in 3D capture technology. The name FARO Technologies is synonymous with innovation. During that time, we have built trusted relationships with some of the most foremost companies in the world, and those companies rely on our technology to drive productivity in their business. On the manufacturing side, we do precision measurement that ensures quality throughout the manufacturing process. We enable our customers to limit rework, improve process productivity, and enable extremely high quality across their manufacturing process. On the digital reality side of our business, we capture and analyze data in a variety of verticals, from public safety to construction, to architecture, geospatial, and others. We enable through productivity, through cataloging of the world's data, but also collaboration and sharing of that data. Our technology aligns to significant mega trends as the world continues to adopt 3D technology and drive productivity throughout their businesses. Our solutions enable complete and entire workflows for our customers in the measurement and digitization of our physical world. We strive to make those workflows automated and intuitive, oftentimes with the click of a button, as we highlighted with our recent launch of Orbis in October of 2023, a groundbreaking new mobile scanner that enables terrestrial scanning all in one solution. The first step of this process is capture. We capture data with our leading suite of portable 3D products. Industry stalwart names such as Orbis, Focus, Quantum, and Vantage, known for innovation. These images then go through what we call a registration process. The data that's gathered and the scans that are gathered are then blended together to create a 3D model or a digital twin with extremely high accuracy. From there, our suite of software offerings can help analyze the twin or the tool. How does this piece part compare to the specifications? How does it compare to the CAD drawing? How does it compare to the BIM model? What did the accident site look like, and what can we learn from the reconstruction of that accident site? Where did we run the pipe and wires behind this wall? How is the pre-construction progress going? And what does our retail store look like in New Mexico? We have a variety of significant use cases that add significant value to our customers. And then lastly, any of these images can be shared and data can be cataloged or managed through our software platform, Sphere XG, which is a new platform that we also launched in October of 2023. This allows for productivity through the enablement of more time or less travel in business, and collaboration across a disparate network of our shareholders—stakeholders, excuse me. So different outcomes in different industries require different solutions. Our technology stack enables many types of work, where accuracy level oftentimes determines the hardware requirements. The cost of failure in these applications at our customers is expensive, and we spend our time helping to mitigate that cost of failure. Our products for manufacturing measure to the micron or the millimeter level, where tolerances are extremely tight. These are often associated with optical measurements, point measurements. On the digital reality side of our business, on the right-hand side of the page, we use laser scanning enabled by LiDAR, and generally requires less, but it's still an extremely high level of accuracy. Again, the key verticals here are construction, architecture, engineering, geospatial, public safety, and the like. Our hardware products are generally sold as a one-time purchase, though it's worth noting that our products also come with recurring revenue stream, as these products often come with service contracts. Remember from the last page that our data is collected, it's registered, analyzed, and shared through our suite of software offerings. Our new software platform, Sphere XG, will house all of these software platforms with a single sign-on and has an open architecture, and over time, harmonizes the user experience for our customers. Importantly, Sphere XG allows our customers to work with their software in the chosen environment of our customers, whether that be on the cloud, on their desktop, or in a mobile environment. This platform gives customers an unrivaled flexibility. It has an open architecture that allows third parties to develop on it and add solutions to our existing software suite, and those softwares enhance outcomes for our customers. Generally, our software is sold as a recurring revenue service, either through software maintenance or as a service. While we expect accelerated adoption with 3D technology and our markets are vibrant, there are five key mega trends that will solidify the attractiveness of our market over the medium to long term. Our business enables outcomes which are significantly aligned with these mega trends. The first one is nearshoring. Increased manufacturing capacity of any sort requires 3D measurement, and that is a good thing for us as we are generally involved in the capital cycle of any business. Digitization drives productivity over traditional capture methods, such as tape measures and photographs, but also enables sharing and a lot of productivity for our customers. Capturing data with one-touch workflows allows us to capture the data, but also process the data faster, and this significantly decreases the need for skilled labor, which this world finds in short supply right now. Increasing remote work and a decreasing willingness to travel is one of the things that allows and makes our platform so attractive. We are able to share and collaborate on the data that we capture, register, and analyze with stakeholders in disparate locations all over the world. And to be sure, we collect a massive amount of data when we do our workflows. Artificial intelligence will play a key role in the future of the dissemination of this data. As we mentioned, 3D software or 3D capture is growing at a very fast clip due to the productivity it adds. But FARO is committed to making sure not just to ride the wave of that adoption, but to differentiate ourselves and set ourselves apart, to make sure that our customers have a bias for FARO. We invented the Faro Arm over 40 years ago, and since then, we have been known for our reliable accuracy and market-leading precision measurement. Our broad set of capture devices enable customers of all types, end users, channel partners, to be able to get all of their needs serviced at FARO in the portable market. Our direct sales force is a leading sales force in the industry and is known for significant application expertise. We have a global presence so that we can meet customers where they are. Easy collaboration, harmonized software, platform on the cloud, enables customers to drive productivity through their processes. And then our ease of use, simple, one touch, intuitive, and automated workflows make FARO a very easy-to-use product and a very easy workflow to complete. And the proof's in the pudding. Our offerings and solutions enable quantifiable business impact, and the return on investment periods are short. We eliminate costly rework and construction. We digitize the process for labor productivity.... We save travel costs for site visits, we drive productivity in the manufacturing process, and we enable production at scale, which allows our customers to accelerate their revenues and their profitability. The biggest opportunity that I see for FARO is focus in every area of our business. Based on an 80/20 approach, that focus will drive two main outcomes. The first is growth. With our gross margins, growth is important. We've talked about the market, but our aspiration is to grow faster than the market. An improved execution mindset is the second pillar. This mindset will help us build a focused and agile company that can respond to market changes and deliver earnings growth in a variety of scenarios. Taken together, we've developed an operating system for sustainable, multi-year value creation. Our framework for success, for net financial success, is to grow our revenue faster than the market, grow our earnings at a faster rate than revenue, and grow our cash flow at a faster rate than earnings. We believe we're well positioned to do that. We spent a lot of time on our position in the market and the drivers of that, but how do we grow faster? Investing and focusing on innovation that play to our strengths and are close to our core, and expand upon our leadership position in those markets served, and expanding addressable markets will help us do that. We have a continued commitment to investing in our research and development. The focus will also help drive a much improved process relative to our NPI velocity, and we expect to get products out quicker and quicker as we go through the short and the medium term. Partnerships will also play a key role in enabling our growth. We have a direct sales force that are application experts, but there are parts of the world and customers that we don't touch today, and we believe that building out our channel across the world will help us continue to grow at a pace that's faster than the market. On the gross margin side, we've spoken a lot about this publicly. We were a mid-fifties gross margin business pre-pandemic, and mid-forties earlier this year. We have a tremendous opportunity to get that back in a much better position. Two years ago, we moved our manufacturing to Southeast Asia and Thailand with a partner named Sanmina. We have not yet moved our supplier base and our supply chain to be close to Thailand. As we do that over the next few years, we will see our input cost abate, and we believe that this is a tremendous opportunity for us to expand gross margins. In 2023, we spent 300 basis points on broker buys in an extremely tight supply chain market. Activities such as value engineering, sales and operations, and inventory planning process, has since allowed those broker buys to abate, and we expect to keep those to a minimum in the future. In the last two years, input costs have slightly outpaced our price offset. We'll look to reverse this trend as subsiding costs and new price increases will help expand our gross margin. On the operating cost side of the business, we spent a lot of time in 2023 restructuring our business. We've integrated acquisitions, removing duplicity in our cost structure, and reduced unnecessary square footage. Over the last four years, our average OpEx was 52% of sales. Through the restructuring and the control of our expenses through milestone investing, we plan to keep our costs under 50% moving forward. And publicly, we've said for the short term, $40 million-$43 million of quarterly operating non-GAAP operating costs. On the free cash flow side, increasing profitability will help build up our free cash flow. Implementing that sales, operations, and planning process will allow us to forecast more accurately, and moving our supply chain to Southeast Asia will eliminate the need for a lot of inventory in our system. Our days sales outstanding has ballooned in the last couple of years, and we have a plan and have invested precious resources in making sure that we get that DSO back to the level that it was two years ago. Working capital improvement, in addition to earnings, will help us drive that free cash flow faster than earnings. We've talked about our trailing twelve revenue growth of 6%, which we're proud of, but I wanted to spend some time highlighting operating metrics, key operating metrics, and how we've improved them in 2023. This demonstrated improvement gives us great confidence in our ability to execute our strategy moving forward. On the non-GAAP gross margin side, we've talked about the Southeast Asia supply chain, we've talked about the broker fees, and we saw demonstrated improvement in the third quarter of 2023... such that we were able to deliver 90 basis points of sequential margin improvement on lower revenue versus Q2. Our non-GAAP OpEx, as I said, we've worked hard in 2023 to restructure, and we've made a lot of progress. We will invest going forward, but we will be disciplined, and we will be responsible, and we will dynamically allocate our resources to put our investments in the priorities that are gonna drive the greatest business impact. Adjusted EBITDA, we've seen a dramatic expansion throughout 2023. With our operating model and the framework that I've laid out today, we absolutely expect there to be more opportunity and for us to continue to expand our Adjusted EBITDA margins as we move forward. In summary, FARO Technologies is an attractive investment, especially from this base of trailing twelve financials. We have a deep heritage and application expertise in the market and are significantly well-aligned with megatrends, which will enable us to grow faster than the market. We have clear line of sight and execution priorities to gross margin expansion and getting those back to historical levels. With focused execution and disciplined investing, we will be able to grow our earnings faster than we grow our revenue. And last, through optimized execution and optimization of working capital, we expect to deliver a faster rate of free cash flow growth than we do earnings growth. So again, our financial framework for success is to grow revenue faster than the market, grow earnings at a faster rate than revenue, and grow our free cash flow at a faster rate than earnings. Thank you very much, and I look forward to taking your questions. Pete, I have a couple of questions. You know, the company has, over the years, looked at its go-to-market strategy, and we've seen several different variations and strategies. And I realize you're only seven months into this- Yep. But what's your, you know, how would you view the current go-to-market strategy and maybe where you need to tweak things? Yeah. Yeah, it's a great question, Jim, and like I said, I love our direct sales force. We are one of the few in the industry that has a direct sales force, and that drives our ability to create real value for customers on the application side, and that is what our customers covet from us. With that being said, I think we have a real opportunity to expand our channel presence, and I know we've been through several iterations of go-to-market strategy. What I think this talented team really needs is some time to really have one strategy, and as a business, we've got to help them deliver products, deliver products that expand our addressable market and give them some more quivers in their arrows to help them really drive revenue growth faster than market. So a couple little tweaks around the edges, Jim, but ultimately, I think some stability will do us a world of good. The other question I had, it relates to software. The company has made some acquisitions and has really looked at developing a recurring revenue model, which is challenging with a hardware company- Yeah Even though FARO, you know, clearly has software embedded in its products. But but are you looking at making any changes at all at this point to that strategy and focusing on? Yeah, I think, you know, look, our strategy is solid. You know, hardware enabled by software, and we've been doing that since the very beginning. You know, software has always been a big component of our solution and our workflow and how we add value to our customers. You know, recently, we've made some acquisitions, and we've gotten more excited about the software as a service, you know, business. But what's important to us is we've got to make sure that we deliver solutions that our customers are pulling on us for and not trying to push solutions on the market. And so what's gonna be important for us moving forward is making sure that we deliver solutions that our customers value. We absolutely do see the opportunity to expand our our subscription model and our as- a- service model, but we see that operating in concert with our hardware and our total solutions and feel like as we grow the hardware and we grow the total solutions, that tide will raise the ship for the software and the hardware. Any questions? Can you talk about China? How meaningful is it to your model? Obviously, it's been a tough place to be. What you're seeing there? Yeah. Hey, Dave, how are you? Good. Good to see you. Yeah, it's been. The question was, China and, how, you know, how, how much of a part of our business and, and how important it is to us. So, you know, obviously, a lot's been in the news recently about, about China going through a, a little bit of a difficult time there, over there, and we called out in our Q3 earnings that, that it was a drag on, uh, on, on our growth in, uh, in the third quarter of 2023. China, you know, makes up a significant portion of our business. If you refer back to the slide in the beginning, Asia Pacific is, you know, a decent chunk of our business. I would say we expect, and we're planning for, you know, China to continue to be difficult for a period of time. But, you know, as we build this agile business, we expect to deliver earnings growth, irrespective of what happens in the market, and profitability expansion. And so we'll take what the market gives us. We will react in a quick and agile manner, and make sure that we are investing responsibly around that. You wanna address the CFO news? Address the CFO news? Yes, I'd love to. Yesterday, we announced that Matthew Horwath, who's in the room today, is the new CFO, SVP and CFO at FARO Technologies. That was a press release that went out after market close yesterday. Matt is an extremely impressive individual. We searched long and hard for our next CFO, and ultimately, Matt's familiarity with FARO. He's done almost every financial discipline in FARO. He is extremely, extremely focused on business results. He is an excellent executor, and he is exactly what FARO Technologies needs right now, and I'm very, very excited to partner with Matt, and hope you get a chance to meet him after the meeting today. On some of the comments about gross margins, you've talked about the company's talked about the headwinds from supply chain over the past year. That sounds like that gets reversed, as we go further into 2024. To what extent is that improvement in gross margin hinge on some better macro, or can you, you know, if the business were to stay at the current state, could you still see that kind of improvement in gross margins? Yeah, we do see improvement in gross margins, both on the localization, and the broker buy, frankly. You know, like all things, we have to execute, right? And we have to focus on the execution of those items, and so, you know, value engineering is gonna be an important component of what we do to make sure that we are updating our products, and we are updating to the latest, you know, the latest and greatest on the electronic side. Southeast Asia, same thing, localization. We have plans. We've got to go execute that. We still buy a lot of our raw materials and our in-process modules from the Western worlds, and we see a tremendous opportunity not to just find different suppliers at lower prices, but also, frankly, to move our products around the world less. Today, we buy the raw material in the West, we ship it to the East, we assemble it, and then we ship it back out. It's not productive, and we need to do that. To your question on revenue, I believe that there's gonna be gross margin expanse and irrespective. Ultimately, demand will probably impact how quickly we get the benefit on the localization and some of the broker buys. Obviously, we're gonna have to cycle through some of the older inventory after we execute on those supply-based changes and some of those broker fees to move that through the system and ultimately allow us to, you know, to realize the benefits of those, of those execution and operational activities. But we're very bullish on our ability to expand margins. The other thing you mentioned was, I believe you talked about accelerating the pace of product development. As you look at the product portfolio today, is, you know, my impression is you've refreshed a fair amount of the product portfolio. Where do you stand with that? Yeah. Yeah, we and we have, over the last several years, refreshed the product portfolio. But in a high-tech business, you know, it's that... It's, it's never ending. You know, you always have to do that, and so as we look at all of the things that we can do in the market and are in front of us, one of the things that we are really driving in this 80/20 philosophy is, where are we gonna spend our time? And what are the products that are most important to us, and what's gonna deliver the most significant impact to FARO and our shareholders? And I believe that by decreasing the amount of things that we focus on, we'll be able to bring more resources on each of those programs to bear, which should translate into quicker turnaround cycles on those products. But I feel a good amount of the portfolio had been refreshed in the last couple of years. You know, we've got us some exciting new products that we launched in Q3 with Orbis and Sphere XG. We've got an exciting product roadmap over the next couple of years. Some of those will be refreshes, some of those will be new products, and we'll look forward to sharing more about those as they come. Okay. Yeah. There's a sort of a follow-on question to what was just asked, but it sounds like you have many hundreds of basis points of gross margin improvement, 200-300 on the broker components, particularly semiconductors, localization, and then you've got these new product with price increases. I mean, is it 400-600 basis points of gross margin, getting it back towards 50%? I mean, is that a reasonable expectation over the next few years? Yeah, so look, I think, obviously Jim and his team have a model, which we are- A good model. Yeah, closely aligned to. But I would say that, you know, what I said in the presentation today before is that our aim and our goal would get back to, you know, historical levels of gross margin. And so if you think about, you know, kinda, you know, pre-2021 in the, you know, in, in the mid-50s, that is absolutely an aspirational goal for us. And as you add those pieces and parts together, you know, over the next several years, that's where, you know, we would, we would aim to, you know, to add a, a significant amount of gross margin to the business. Well, I have another one, following up on Mr. Shea again. If you're successful on some of the endeavors as you've come in, what are the things that seem most relevant to you? I mean, one thing that seems odd to me, a company like yours in hardware, that you don't have a larger channel, that you don't have a larger world VAR representation, and you are a direct sales force orientation. You said that would change. Is that a primary goal of yours, to change that go-to-market strategy? Yeah, look, I think maybe change. And again, the question was around our direct sales force versus a channel model. Yeah. Yeah. Just wanna say that for the webcast. I think our opportunity is really additive. You know, the reason that we are a direct sales model is because when we started the company, we have always been a direct sales model. You know, and again, it's a huge benefit for us. It adds a massive amount of application expertise, which is a clear differentiator for us in the market. That being said, you know, to invest from here is obviously an expensive proposition, and there are places in the world, there are thousands of customers in the world that we don't touch today, who need an education on why 3D technology makes sense versus traditional methods, why FARO versus, you know, the competition. And we think that probably the most cost-effective way to do that, and the fastest payback, would be to add channel partners in different parts of the world to extend our reach. Thanks for the questions, John. Okay. Okay? Thank you. Thank you very much, Jim. Appreciate your time. Thanks, team!