Business Overview
FARO Technologies, Inc. (NASDAQ:FARO) is a global leader in 4D digital reality solutions, empowering customers across diverse industries to capture, measure, and analyze their physical world with unparalleled accuracy and efficiency. With a rich history spanning four decades, the company has established itself as a trusted partner in the manufacturing, architecture, engineering, construction (AEC), operations and maintenance (O&M), and public safety analytics markets.
FARO's core competency lies in its ability to design, develop, manufacture, market, and support software-driven, three-dimensional (3D) measurement, imaging, and realization solutions. The company's broad technology portfolio equips customers with a wide range of 3D capture technologies, ranging from ultra-high accuracy laser-scanner-based technology to lower-accuracy, photogrammetry-based technology. These solutions enable customers to capture, measure, manipulate, interact with, and share 4D, 3D, and 2D data from the physical world in a virtual environment, and then translate this information back into the physical domain.
FARO's suite of 3D products and software solutions are utilized for a variety of applications, including inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volumes or structures in 3D, surveying and construction, construction management, assembly layout, machine guidance, and investigation and reconstruction of crash and crime scenes. The company sells the majority of its solutions through a direct sales force, with an increasing volume being sold through an indirect channel across a range of sectors.
Financials
In the fiscal year ended December 31, 2023, FARO reported annual revenue of $358,831,000, a decrease from the previous year's revenue of $372,450,000. The company's annual net income for the same period was -$56,577,000, compared to -$49,321,000 in the prior year. FARO's annual operating cash flow was $1,075,000, and its annual free cash flow was -$12,919,000.
For the first quarter of 2024, FARO reported revenue of $84,244,000, which was relatively flat compared to the first quarter of 2023. The company's GAAP net loss for the quarter was $7,267,000, or $0.38 per share, compared to a net loss of $21,164,000, or $1.12 per share, in the same period of the prior year. FARO's non-GAAP net income for the first quarter of 2024 was $1,700,000, or $0.09 per share, compared to a non-GAAP net loss of $7,100,000, or $0.38 per share, in the first quarter of 2023.
Geographical Performance
FARO's revenue is generated across three main geographical regions: the Americas, Europe, Middle East, and Africa (EMEA), and Asia-Pacific (APAC). In the first quarter of 2024, the company reported revenue of $37,228,000 from the Americas, $25,435,000 from EMEA, and $21,581,000 from APAC.
The company's performance in the APAC region was bolstered by several large manufacturing orders, particularly in China, which helped offset softness in the construction market within the country. However, FARO remains cautious about the near-term outlook in the APAC region due to the ongoing challenges in the Chinese construction market.
In the Americas and Western Europe, FARO experienced an elongation of sales cycles, as customers prioritized larger capacity-related investment initiatives and exhibited increasing caution in the commercial construction market. This shift in customer behavior contributed to the company's geographical revenue mix in the first quarter.
Product and Service Performance
FARO's revenue is derived from the sale of its measurement equipment and related multi-faceted software programs, as well as extended warranties, training, and technology consulting services. In the first quarter of 2024, the company reported product revenue of $63,536,000, down 2.6% year-over-year, and service revenue of $20,708,000, up 5.0% year-over-year.
The decrease in product revenue was primarily driven by a decline in the company's Laser Scanner products, while the increase in service revenue was attributable to growth in hardware service contracts and software maintenance contracts. FARO's recurring revenue, which includes hardware service contracts, software maintenance contracts, and subscription-based software applications, was $16,700,000 in the first quarter of 2024, representing 20% of total sales.
Operational Efficiency and Margin Improvement
FARO has made significant strides in enhancing its operational efficiency and profitability. In the first quarter of 2024, the company's GAAP gross margin improved to 51.4%, compared to 46.7% in the same period of the prior year. On a non-GAAP basis, gross margin increased by 420 basis points to 51.8%, driven by the company's focus on variable cost productivity, mitigation of broker fees, and supply chain localization efforts in Southeast Asia.
The company's non-GAAP operating expenses decreased by $8.1 million year-over-year, reflecting the benefits of its restructuring efforts and continued productivity improvements. FARO's non-GAAP operating income for the first quarter of 2024 was $3,000,000, compared to a non-GAAP operating loss of $8,300,000 in the first quarter of 2023.
Liquidity
FARO's cash and short-term investment balance at the end of the first quarter of 2024 was $99,300,000, up $3,000,000 from the end of the previous quarter. The company generated $4,200,000 in free cash flow during the first quarter, marking its second consecutive quarter of meaningful cash flow generation and the first positive first quarter in several years.
The company's focus on monetizing its balance sheet and working capital improvements have contributed to its improved cash flow generation. FARO expects to remain cash flow positive throughout the first half of 2024, given its current accounts receivable balance, revenue expectations, and enhanced expense base, as well as further enhancements to its inventory management.
Outlook
For the second quarter of 2024, FARO expects revenue to be in the range of $79,000,000 to $87,000,000. At these revenue levels, and with corresponding non-GAAP gross margin between 51% and 52.5% and non-GAAP operating expenses of $41,000,000 to $43,000,000, the company expects non-GAAP earnings per share to range from negative $0.08 per share to positive $0.12 per share.
While the company remains cautious about the near-term outlook, particularly in the Chinese construction market and the elongating sales cycles in select geographies, its confidence continues to increase in its ability to deliver on its execution priorities, including expanding gross margins, controlling operating expenses, and generating positive free cash flow.
Strategic Initiatives and Innovation
FARO is focused on driving innovation and expanding its served addressable market through strategic investments in its core product portfolio and the development of new solutions. The company recently launched its Orbis mobile scanner, which has received positive feedback from customers and contributed to double-digit year-over-year growth in the company's mobile scanning solutions revenue.
Additionally, FARO has showcased a strong software release cadence, with advancements across its portfolio, including enhancements to its leading 3D metrology software, FARO CAM2, and the introduction of new features in its FARO Connect mobile scanning software and FARO Zone 3D solutions for public safety customers.
The company's R&D roadmap, which integrates both hardware and software into value-added solutions for its customers, is aimed at increasing its served addressable market by 40% over its strategic horizon. FARO is committed to fostering innovation and growth through focused investments in its core, while maintaining a balanced approach to drive shareholder value and expand its competitive position in the marketplace.
Conclusion
FARO Technologies, Inc. is navigating the digital transformation landscape with precision, leveraging its expertise in 3D measurement, imaging, and realization solutions to serve a diverse range of industries. The company's focus on operational efficiency, margin improvement, and strategic investments in innovation has positioned it for long-term success.
Despite the near-term challenges, FARO's confidence in its ability to deliver on its execution priorities, including revenue growth, earnings expansion, and free cash flow generation, continues to increase. As the company executes on its strategic plan, it is well-positioned to create substantial shareholder value and solidify its position as a global leader in the 4D digital reality solutions market.