Faro Makes Products That Measure To A Fraction Of A Millimeter
Even well-run growth companies with great products can stumble.
That’s a lesson Faro Technologies () learned.
Even as sales grew, problems tripped up the firm: Lawsuits, a corruption probe and rising expenses scared investors.
Now, analysts say, Faro seems back on track. That’s largely due to the ever-growing demand for Faro’s unique products.
The company’s portable devices use lasers to measure in three dimensions. They’re accurate down to a fraction of a millimeter.
The devices are most often used to check products rolling off assembly lines. The idea is to catch errors early and prevent costly re-work. But the products could be useful in construction, forensics and other fields.
The potential market for its products is huge. Faro chief executive and president Jay Freeland pegs the market at $3 billion to $5 billion every year.
Return On Investment
“What we provide is clear return on investment to our customers,” Freeland said in an interview. The Lake Mary, Fla.-based Faro sells products from about $20,000 to more than $100,000 each. Customers typically save enough to see a return on their investment in five or six months, Freeland says.
Factories use them to catch defects much earlier in the manufacturing process. Faro says its devices are easier to use than alternatives like hand measurements or bulkier measurement machines. That makes it possible to check every manufactured item, rather than just checking a sample.
The devices also sync with design software. Every item on an assembly line can be compared with computerized design specifications. That further ensures quality.
Right now, many of Faro’s customers are in the automotive or aerospace businesses. But Freeland says the products are catching on elsewhere. “Every day that goes by, you learn a new application,” he said.
Faro’s goal is to grow sales by 20% to 25% a year. So far that hasn’t been a problem. Sales have grown more than 20% every year since 2001. Faro reported $36 million in sales in 2001 and $152 million by 2006.
Earnings don’t match the stellar sales record. Earnings per share were $1.05 in 2004. But EPS fell to 57 cents in 2005 and 56 cents in 2006.
One reason for the earnings drop: Faro has hired a lot of lawyers lately.
Faro went through what some call the “big three,” all unrelated: Swedish rival Hexagon Metrology sued Faro, saying it had violated its patents. Hexagon’s ROMER Inc. is one of the only firms with a product similar to Faro’s.
Then a group of shareholders sued Faro after earnings, and the stock price fell.
Finally, Faro found that some employees had bribed Chinese officials. That’s illegal under U.S. law. The $552,000 in bribes (on sales of $4.54 million) were reported.
Now, analysts say the legal issues are cooling off. After a long legal battle, Faro and Hexagon settled their dispute March 26. The terms were confidential. Analysts say the shareholder suit is not a significant threat. In the bribery case, Faro is getting credit for reporting it voluntarily and firing offenders. “You’ll see no wavering from our team when it comes to doing the right thing,” Freeland said recently.
Still, the result of all this litigation was millions of dollars in legal fees. That cut into profits.
Also hurting profit was other spending. The firm spent on infrastructure in Asia. It also hired many new salespeople.
Faro feels the need to add sales staff to address its huge market. It’s “one of the biggest drivers of growth right now because the market is so untapped,” Freeland said.
But, selling Faro products isn’t easy. “It’s a sophisticated sale,” said Liam Burke, an analyst at Ferris Baker Watts. New staffers need up to three months of training. Very often, products must be demonstrated in factories for another three months before sales are made. Thus, Burke says, Faro often has a 180-day lag between hiring people and their first sales. Faro incurred a big upfront cost when it hired lots of salespeople at once.
Due to all these higher costs, “Their margins evaporated,” said Richard Eastman, an analyst at Robert W. Baird & Co. Baird seeks banking business from Faro.
Now, Eastman says, Faro seems to be tightening up expenses. Last year, Faro urged each employee to come up with a way to save at least $2,000. The firm saved more than $3 million, Freeland says.
Faro is still hiring sales staff. But it also is focusing on increasing productivity, Burke said. The idea is to get “more sales per employee.”
With its recent cost-cutting, analysts expect Faro to again boost earnings. Thomson Financial says analysts expect earnings per share to nearly double in 2007 to $1.11. Expect earnings of $1.48 in 2008, they say.
Quality Control
Key factors should drive sales, the firm says: Companies are demanding better quality control from their suppliers. Firms want better ways to integrate design software and manufacturing. Other measuring products are slow and cumbersome.
Faro is still at the “cutting edge,” Eastman said. Thus, it’s hard to predict its long-term sales. “The marketplace is still being defined,” he said.
Though many big firms are buying Faro products, they’re not yet standard equipment. “They’re not buying a hundred at a time,” Eastman said. If this ever happens, sales could boom.
Freeland said Faro will “keep educating potential customers (on) what the product can do for them.”
“We’re really sitting at the bottom of the bell curve,” he said.
Faro is also investigating buying up other firms. Freeland says he’s looking for firms with good 3-D technology to add to Faro’s product line.
