Executive Summary

Q3 revenue was $82.6M, at the upper end of guidance ($76–$84M), with non-GAAP EPS of $0.21 and non-GAAP gross margin of 56.1% both above guidance; adjusted EBITDA reached $8.9M (10.7% margin), marking a second straight quarter of double‑digit adjusted EBITDA margins .
Mix and cost actions drove substantial margin expansion: GAAP gross margin rose to 55.7% (up ~770 bps YoY) and non-GAAP to 56.1% (up ~720 bps YoY), while non-GAAP opex held at $40.1M near the low end of target, supporting profitability despite a 5% YoY revenue decline .
Management guided Q4 revenue to $88–$96M, non-GAAP gross margin to 56.0–57.5%, non-GAAP opex to $40.5–$42.5M, and non-GAAP EPS to $0.32–$0.52, while announcing restructuring actions ($6–$9M cash through 1H25) to keep opex flat near current levels despite inflation and reallocation to higher‑growth regions .
Demand was mixed: stable in 3D metrology and sequential improvement in EMEA, offset by continued weakness in Asia (notably China) and softness in commercial construction; recurring revenue rose to 21% of sales .

What Went Well and What Went Wrong

What Went Well
- Non-GAAP EPS ($0.21) and non-GAAP gross margin (56.1%) exceeded guidance, and adjusted EBITDA margin topped 10% for the second consecutive quarter—the first back‑to‑back double‑digit performance in almost a decade .
- Execution on supply‑chain localization and cost initiatives kept non-GAAP opex at $40.1M and pushed non-GAAP gross margin to the highest quarterly level since 2019, despite flat-to-down revenue .
- Operational cash generation continued (fourth straight quarter of positive operating cash flow) and the company repurchased $10M of stock (avg. $16.99), underscoring confidence and balanced capital allocation .
What Went Wrong
- Revenue declined 5% YoY to $82.6M, driven by a 10% YoY decline in hardware; APAC sales fell 17% YoY with China weakness the primary headwind .
- Free cash flow (company definition) was slightly negative at $(0.7)M (adjusted FCF $(0.4)M) as capex and technology investments offset operating cash inflow .
- Macro visibility remains limited: manufacturing PMI below 50, global uncertainty, and continued construction softness in China and Germany prompted cautious Q4 framing and a measured revenue guide .

Financial Results

Overall P&L and cash metrics (oldest → newest)

Metric	Q1 2024	Q2 2024	Q3 2024
Revenue ($M)	$84.24	$82.09	$82.56
GAAP Gross Margin %	51.4%	54.6%	55.7%
Non-GAAP Gross Margin %	51.8%	55.0%	56.1%
GAAP EPS	$(0.38)	$(0.03)	$(0.02)
Non-GAAP EPS	$0.09	$0.18	$0.21
Adjusted EBITDA ($M)	$5.57	$8.44	$8.85
Adjusted EBITDA Margin %	6.6%	10.3%	10.7%
Cash from Operations ($M)	$6.58	$4.21	$2.57

Q3 actual vs guidance (Company guidance issued on 8/8/24)

Metric	Q3 Guidance	Q3 Actual	Result
Revenue ($M)	$76–$84	$82.56	At upper end
Non-GAAP Gross Margin %	53.5%–55.0%	56.1%	Beat
Non-GAAP Opex ($M)	$40–$42	$40.06	At low end
Non-GAAP EPS	$(0.01)–$0.19	$0.21	Beat

Year-over-year snapshot (Q3)

Metric	Q3 2023	Q3 2024	YoY
Revenue ($M)	$86.81	$82.56	(5)%
GAAP Gross Margin %	48.0%	55.7%	+770 bps
Non-GAAP Gross Margin %	48.9%	56.1%	+720 bps
GAAP EPS	$(0.46)	$(0.02)	+$0.44
Non-GAAP EPS	$0.03	$0.21	+$0.18
Adjusted EBITDA ($M)	$3.52	$8.85	+$5.33

Segment mix (Q3)

Metric ($M)	Q3 2023	Q3 2024
Hardware	$55.71	$50.30
Software	$11.21	$11.16
Service	$19.90	$21.10
Total	$86.81	$82.56
Hardware % of Sales	64.2%	60.9%
Software % of Sales	12.9%	13.5%
Service % of Sales	22.9%	25.6%

Regional sales (sequential and YoY view)

Region ($M)	Q2 2024	Q3 2023	Q3 2024
Americas	$40.17	$41.03	$40.35
EMEA	$24.60	$25.62	$25.46
APAC	$17.32	$20.16	$16.75
Total	$82.09	$86.81	$82.56

KPIs and balance/cash

KPI	Q3 2024
Recurring Revenue ($M)	$17.43
Recurring % of Sales	21.1%
Adjusted FCF ($M)	$(0.39)
Cash & Equivalents ($M)	$88.91
Share Repurchases ($M)	$10.0 in Q3 at $16.99 avg

Non-GAAP reconciliation highlight: Q3 GAAP diluted EPS of $(0.02) reconciles to non‑GAAP $0.21 via stock‑based comp (+$0.14), purchase intangible amortization (+$0.08), non‑GAAP tax adjustments (+$0.05), and tax effect of non‑GAAP items (−$0.04) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	Q4 2024	N/A	$88–$96M	New
GAAP Gross Margin	Q4 2024	N/A	55.6%–57.1%	New
Non-GAAP Gross Margin	Q4 2024	N/A	56.0%–57.5%	New
GAAP Operating Expenses	Q4 2024	N/A	$47.4–$49.4M	New
Non-GAAP Operating Expenses	Q4 2024	N/A	$40.5–$42.5M	New
GAAP Diluted EPS	Q4 2024	N/A	$(0.15)–$0.05	New
Non-GAAP Diluted EPS	Q4 2024	N/A	$0.32–$0.52	New
Restructuring Cash Charges	Q4’24–1H’25	N/A	$6–$9M cumulative	New
Expected Annualized Opex Reduction	Post‑actions	N/A	~$(6)M run‑rate reduction (offset by inflation/investments)	New

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 and Q2 2024)	Current Period (Q3 2024)	Trend
Margin expansion & operating discipline	Q1: Non‑GAAP GM 51.8%, Adj. EBITDA 6.6% as operational excellence phase progresses . Q2: Non‑GAAP GM 55.0%, Adj. EBITDA 10.3% above guidance .	Non‑GAAP GM 56.1% (highest since 2019); Adj. EBITDA margin 10.7%; six straight quarters beating internal targets .	Improving
Macro demand & visibility	Q2: “Difficult macro environment,” conservatively investing .	Cautious outlook; PMI <50; China weak; EMEA sequentially improved; Americas steady .	Mixed
Regional dynamics (China/EMEA)	Q2 APAC down YoY; EMEA steady .	APAC −17% YoY on China; EMEA up sequentially (France/Eastern Europe) .	China down; EMEA better seq.
Product/innovation roadmap	Limited prior disclosures in PRs.	New Quantum X Arm and Focus Premium Max launched in Oct; longer range and faster capture via Hybrid Reality Capture (Flash) .	Accelerating
Software/Sphere XG attach	Limited in Q1/Q2 PRs.	Company‑wide Sphere XG win at Royal BAM; cloud/software momentum and hardware attach continue .	Improving
Capital allocation	Q1/Q2 built cash; no buyback disclosed .	Repurchased $10M stock; remaining ~$8.3M authorization .	Active

Management Commentary

“This marks a significant transformation… first time that we have delivered back‑to‑back double‑digit quarterly adjusted EBITDA margins in almost a decade.” — Peter Lau, CEO .
“Non‑GAAP gross margin… marks the highest quarterly level since 2019… continued to execute on… supply chain localization.” — Matthew Horwath, CFO .
“We remain cautious on the outlook beyond next quarter… macroeconomic landscape… PMI… remain thoughtful and measured.” — Peter Lau .
“We… refreshed two of our major product lines… Quantum X… up to a 15% increase in accuracy… Focus Premium Max… range up to 400 meters… reduce scanning time by up to 50% through Hybrid Reality Capture.” — Peter Lau .
“We repurchased $10M of our outstanding shares… expect to be free cash flow positive in Q4 2024.” — Matthew Horwath .

Q&A Highlights

Guidance philosophy: Q4 guide reflects macro conservatism rather than October datapoints; focus on meeting commitments amid choppy environment .
Long‑term earnings power: Margin improvements are baseline, not one‑time; supply chain localization (Sanmina) pulled forward; potential to reset profit targets next year as revenue scales .
Restructuring: Reallocating from underperforming countries (notably China) to higher‑growth geographies; intent is to maintain non‑GAAP opex near ~$40M while absorbing inflation and strategic hires .
Construction end‑market: Commercial construction weak (notably China); health care/institutional more resilient; potential tailwind from rate cuts over 12–18 months .
Software momentum: Sphere XG seeing broader enterprise adoption and attach to hardware; positive customer ROI narratives (e.g., Royal BAM) .

Estimates Context

Wall Street consensus (S&P Global) for Q3 2024 EPS and revenue was unavailable via our S&P Global connection for FARO at this time; therefore, we benchmarked results versus company guidance instead .
Q3 revenue landed at the upper end of guidance, while non‑GAAP gross margin and non‑GAAP EPS were above the high end, implying positive estimate revisions may focus on margin and EPS durability given the sustained cost structure improvements .

Key Takeaways for Investors

Durable margin story: Two consecutive quarters of ~11% adjusted EBITDA margin with non‑GAAP GM at a five‑year high suggests structural cost improvements (localization, opex discipline) are sticking even amid flat revenue .
Demand trough indicators mixed: Stable metrology, sequential EMEA strength, but APAC/China weakness and macro PMI <50 warrant cautious near‑term revenue expectations .
Product catalysts: Quantum X and Focus Premium Max (launched in Oct) expand performance envelope and may aid mix/pricing and hardware pull‑through over time, complemented by software/cloud attach (Sphere XG) .
Capital allocation supports EPS: $10M buyback in Q3 with remaining authorization and potential debt repurchases provide levers alongside expected Q4 positive FCF .
Restructuring underpins opex control: $6–$9M cash through 1H25 to reallocate resources, targeting ~$6M annualized opex reduction to keep spend flat while investing in higher‑growth geos .
Watch Q4 execution vs guide: Delivery on $88–$96M revenue and $0.32–$0.52 non‑GAAP EPS amid macro noise would reinforce credibility in the margin/FCF trajectory entering 2025 .
Non‑GAAP/GAAP gap drivers: Stock comp, amortization, and tax adjustments were key in bridging GAAP loss to non‑GAAP profit; quality of earnings mix should be monitored as revenue growth returns .

Appendix: Additional Data Points

Q3 product/service mix: Hardware $50.3M (−10% YoY), Software $11.2M (~flat YoY), Service $21.1M (+6% YoY) .
Recurring revenue: $17.43M (21.1% of sales), up from 19.6% a year ago; a mix tailwind to stability/margins .
Balance sheet: Cash and equivalents $88.9M at quarter‑end; convertible notes $70.1M .

FARO TECHNOLOGIES INC (FARO)·Q3 2024 Earnings Summary