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FARO TECHNOLOGIES INC (FARO)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 revenue was $82.1M, down 7% YoY; GAAP EPS was -$0.03 and non-GAAP EPS was $0.18, with gross margin expanding to 54.6% (non-GAAP 55.0%) and adjusted EBITDA at $8.4M (10.3% margin), all ahead of internal margin/earnings guidance despite softer top line .
  • Results benefited from variable cost productivity, supply chain localization, and incremental pricing; APAC (China) demand remained challenged, while software and service showed resilience .
  • S&P Global consensus estimates for Q2 2024 were unavailable; public sources indicate a revenue miss (~$82.1M vs ~$83.65M) and EPS beat (GAAP EPS -$0.03 vs estimates in the -$0.35 to $0.01 range), suggesting a positive surprise on profitability and margin execution amid revenue headwinds .
  • Management guided Q3 revenue to $76–$84M, non-GAAP gross margin 53.5–55.0%, non-GAAP OpEx $40–$42M, and non-GAAP EPS of -$0.01 to $0.19; tone remained confident on operational leverage, with ongoing caution on China and normal EMEA seasonality .

What Went Well and What Went Wrong

What Went Well

  • “We exceeded our targets on all items within our control… Non-GAAP gross margin was 55%, up 300 bps sequentially… Non-GAAP OpEx $40M… Adjusted EBITDA $8.4M (10.3% of sales)… third straight quarter of operating cash flow generation” (CEO) .
  • Gross margin upside vs guidance driven by “acceleration of variable cost productivity, supply chain localization… logistics, mix and price,” producing ~300 bps sequential improvement and the highest quarterly level since 2021 (CFO) .
  • Solution strategy traction: Orbis mobile scanner double-digit YoY revenue growth; new Sphere XG workflow improved customer productivity; notable migrations to Sphere XG with planned 360 TB by end of Q3 (CEO) .

What Went Wrong

  • Top-line softness: total sales down 7% YoY; hardware down 12% YoY, with APAC revenue down >20% YoY due to China weakness; discretionary CapEx caution in construction .
  • Seasonality and macro: management expects normal EMEA seasonality in Q3 and continued demand challenges in China, constraining near-term revenue trajectory despite margin improvements .
  • GAAP profitability remains negative at the net income level in Q2 (-$0.5M, -$0.03 per share), emphasizing reliance on non-GAAP profitability and cost actions while organic growth initiatives roll out .

Financial Results

Metric (Units)Q4 2023Q1 2024Q2 2024
Revenue ($USD Millions)$98.84 $84.24 $82.09
GAAP EPS ($)$0.08 -$0.38 -$0.03
Non-GAAP EPS ($)$0.36 $0.09 $0.18
Gross Margin (%)50.9% 51.4% 54.6%
Non-GAAP Gross Margin (%)52.5% 51.8% 55.0%
GAAP Operating Expenses ($USD Millions)$48.93 $48.62 $43.04
Non-GAAP Operating Expenses ($USD Millions)$41.30 $40.67 $40.03
Adjusted EBITDA ($USD Millions)$13.15 $5.57 $8.44
Adjusted EBITDA Margin (%)13.3% 6.6% 10.3%

Segment revenue mix:

Segment ($USD Millions)Q4 2023Q1 2024Q2 2024
Hardware$66.64 $52.62 $50.05
Software$12.18 $10.92 $11.26
Service$20.02 $20.71 $20.77
Total Sales$98.84 $84.24 $82.09
Recurring Revenue$17.36 $16.72 $17.14
Recurring Revenue (% of Sales)17.6% 19.8% 20.9%

Regional sales:

Region ($USD Millions)Q4 2023Q1 2024Q2 2024
Americas$42.54 $37.23 $40.17
EMEA$33.66 $25.44 $24.60
APAC$22.65 $21.58 $17.32
Total$98.84 $84.24 $82.09

KPIs:

KPIQ4 2023Q1 2024Q2 2024
Cash & Short-Term Investments ($USD Millions)$96.3 $99.3 $97.9
Net Cash from Ops ($USD Millions)$18.66 $6.58 $4.21
Free Cash Flow ($USD Millions)$14.75 $3.81 $1.90

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)Q3 2024N/A$76–$84 New
GAAP Gross Margin (%)Q3 2024N/A53.0–54.5 New
Non-GAAP Gross Margin (%)Q3 2024N/A53.5–55.0 New
GAAP OpEx ($USD Millions)Q3 2024N/A$45–$47 New
Non-GAAP OpEx ($USD Millions)Q3 2024N/A$40–$42 New
GAAP Diluted EPS ($)Q3 2024N/A-$0.32 to -$0.12 New
Non-GAAP Diluted EPS ($)Q3 2024N/A-$0.01 to $0.19 New

Q2 guidance vs actual (from Q1):

MetricPeriodGuidance (Q1 release)ActualOutcome
Revenue ($USD Millions)Q2 2024$79–$87 $82.09 Within range
Non-GAAP Gross Margin (%)Q2 202451.0–52.5 55.0 Raised/Beat
Non-GAAP OpEx ($USD Millions)Q2 2024$41–$43 $40.03 Better
Non-GAAP EPS ($)Q2 2024-$0.08 to $0.12 $0.18 Beat

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’23, Q1’24)Current Period (Q2’24)Trend
Gross margin expansionQ4: sequential non-GAAP GM +360 bps; PPV headwind largely behind; 2024 improvement expected . Q1: non-GAAP GM 51.8%; variable cost productivity; supply chain localization .Non-GAAP GM 55%; +300 bps seq; driven by localization, logistics, mix, pricing .Improving faster than plan
Supply chain localizationSoutheast Asia localization as key lever .Middle innings; $12M annualized savings targeted; step-ups as contracts roll .Ongoing tailwind
Pricing actionsQ1: price increase announced; lag in realization .Incremental price benefit contributed to GM; more to come .Building
China/APAC demandQ4: softness in China persisted . Q1: APAC strength via large mfg orders; caution on China construction .APAC down >20% YoY; continued China weakness; comps ease in H2’24 .Mixed to negative near term
Software/SaaS & recurringQ4: recurring $17.4M (18% of sales) . Q1: recurring $16.7M (20%) .Recurring $17.1M (21%); Sphere XG migration accelerating, biweekly releases .Positive mix shift
Product roadmap (Orbis, Sphere XG, Zone)Q4: Orbis launch feedback positive; Zone 2024 enhancements . Q1: Orbis mobile scanning double-digit growth; multiple software releases .Orbis double-digit growth; Sphere XG workflow; customer productivity case studies .Strengthening adoption
Capital allocation (debt/equity)Q4: focus on cash generation; 2024 cash flow positive expected . Q1: cash and ST investments +$3M seq .Repurchased $3M convertible debt; $18M share buyback authorization remains; evaluating returns .Opportunistic

Management Commentary

  • CEO: “We exceeded our targets on all items within our control… Non-GAAP gross margin was 55%… Adjusted EBITDA was $8.4M or 10.3%… third straight quarter of operating cash flow generation, a first since 2019.” .
  • CFO: “Most of the upside [vs gross margin guide] came from acceleration of variable cost productivity… supply chain localization… logistics… mix and price layered in gives you that 3% incremental.” .
  • CEO on growth: “We firmly believe there are opportunities to leverage FARO's technology and innovation beyond the markets we currently serve… begin introducing these products to the market… bullish about our prospects in the next several years.” .
  • CEO on China: “Biggest issue right here right now is in China… manufacturing and construction… that’s the bulk driving lack of revenue growth.” .
  • CFO on Q3 outlook: “We expect third quarter revenue $76–$84M… non-GAAP gross margin 53.5–55%… non-GAAP OpEx $40–$42M… non-GAAP EPS -$0.01 to $0.19.” .

Q&A Highlights

  • Macro and guidance cadence: Management sees Q3 guide as achievable with July tracking in line; macro remains challenged with discretionary CapEx caution, notably in construction .
  • Gross margin drivers: Upside came from localization, logistics, mix and pricing; $12M annualized savings from supply chain localization are “middle innings” and not linear .
  • Capital allocation: Repurchased $3M convertible debt; $18M remaining share buyback authorization; will deploy improving cash flows where returns are best; noted stock was down after-hours .
  • China outlook: No near-term rebound expected; year-over-year comps should ease in H2’24; persistent weakness across manufacturing and construction .
  • Product contribution: Orbis and Sphere XG showing strong adoption; continuous releases and data migrations underscore SaaS traction .

Estimates Context

  • S&P Global consensus estimates for FARO in Q2 2024 were unavailable due to missing mapping; therefore, estimate comparisons are not anchored to SPGI and are not included.
  • External sources indicate a revenue miss and EPS beat: Revenue $82.1M versus ~$83.65M estimate (≈1.9% miss); GAAP EPS -$0.03 versus estimates ranging from -$0.35 to $0.01 (beat), and non-GAAP EPS $0.18 above guidance .
MetricPeriodS&P Global ConsensusActualNote
Revenue ($USD Millions)Q2 2024Unavailable$82.09 Public sources ~$83.65M est
GAAP EPS ($)Q2 2024Unavailable-$0.03 Public sources range -$0.35 to $0.01
Non-GAAP EPS ($)Q2 2024Unavailable$0.18 Guidance beat

Key Takeaways for Investors

  • Margin and cash execution are the core upside: non-GAAP GM 55.0% (+300 bps seq), non-GAAP OpEx $40.0M, adjusted EBITDA margin 10.3%, and third straight quarter of operating cash flow—evidence of structural cost progress .
  • Top-line risk persists in APAC, especially China; investors should expect continued choppiness and normal EMEA seasonality, biases that could cap near-term revenue despite improving mix (software/service) .
  • Product roadmap/solutions (Orbis, Sphere XG) are increasingly a differentiator; accelerating SaaS migrations and workflow enhancements support recurring revenue expansion and multi-year growth drivers .
  • Q3 setup: Guide implies flat-to-down revenue vs Q2, but profitability guardrails remain intact (non-GAAP GM 53.5–55.0%, non-GAAP OpEx $40–$42M), sustaining the earnings/cash narrative even if macro is softer .
  • Capital deployment optionality: with $97.9M cash/ST investments and operational cash generation, flexibility exists between debt repurchase and buybacks under the remaining $18M authorization—monitor subsequent announcements .
  • Trading lens: EPS/margin beats vs revenue misses can lead to mixed stock reactions; focus on sequential margin/cash momentum and visibility on China normalization; watch for product launch catalysts in H2’24 that could aid revenue re-acceleration .
  • Risk factors: macro-driven discretionary CapEx, China exposure, and execution on supply chain localization/price realization; ongoing restructuring/integration and tax adjustments impact GAAP/Non-GAAP bridges—model with care .