Faro released their 2Q results today, and they continue to be well on the upswing with year-over-year numbers. Everything’s going in the right direction. Well, except one thing, which is just maybe proving some of the naysayers right. Maybe.
Essentially, when everyone openly wonders why there hasn’t been a significant response from any of the other manufacturers to Faro’s Focus3D in terms of a similarly priced offering with similar capabilities, what I always hear is this: “Well, the other guys could do that, but they couldn’t make a profit on it. And I don’t think Faro can either.”
Well, let’s take a look at the numbers and the narrative.
You can find the 2Q summary here if you prefer to read it over yourself first.
The baseline is this: “Sales increased by $7.1 million, or 11.8%, to $66.8 million in the three months ended June 30, 2012 from $59.7 million for the three months ended July 2, 2011.”
Sure, it’s not hockey-stick growth, but no one’s going to shrug at better than 10 percent YoY growth, and by 2Q of 2011, the Focus3D had already hit pretty well and started shipping, so it’s more apples to apples than they’ve been in a while. And, of course, the Focus3D is just a portion of the hardware sales. They’ve also introduced a couple of new arm products in the interim as well.
But we’re looking at profits here, right? So let’s look at those: “Gross profit increased by $3.6 million, or 10.6%, to $37.1 million for the three months ended June 30, 2012 from $33.5 million for the three months ended July 2, 2011.”
So, there’s a little slippage there. Profit, as a percentage, isn’t growing as fast as sales. Why not?
Well, “Gross margin decreased to 55.5% for the three months ended June 30, 2012 from 56.1% for the three months ended July 2, 2011.”
Yeah, obviously, but why did gross margin fall?
The decrease in gross margin is primarily due to a decrease in gross margin from product sales to 59.7% in the three months ended June 30, 2012 from 61.1% for the three months ended July 2, 2011, primarily as a result of lower average selling prices due to promotions in preparing for new product introductions and an increase in the sales mix of the Laser Scanner product sold to Distributors.
Those who want to point to the laser scanner as pulling down profit will latch on to this and say, “See! The scanner is pulling down their margins!” But I think that’s seeing what you want to see. If you just conveniently leave off that “sold to distributors” part, you’ve got your money quote, but that part is kind of important.
But wait just another minute! If you keep reading down to the six-month YoY summary, you get this added subordinate phrase: “and a change in the historical product sales mix caused by the increase in sales of the new Laser Scanner product which currently has a lower gross margin.”
How come that second phrase isn’t in the three-month summary? Did the change in the mix go away after the first three months of 2011 and 2012 were discounted? Maybe it did. In 2Q 2011, perhaps the Focus3D had established itself in the mix as it is in the mix for 2Q 2012. But if that were true, that would mean Focus3D sales haven’t grown any faster than the sales of Faro’s other hardware products over the course of the last year. And maybe that’s true. And maybe Faro is happy about that.
It probably only matters to people like me who focus (no pun intended) solely on the laser scanner marketplace and don’t care as much about their arm products. But it may, just may, indicate that the margins on the Focus3D aren’t what Faro would like them to be, and it almost definitely indicates that there won’t be another price drop coming from Faro in the near future.
Then again, they could prove me wrong.
