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Why FARO Technologies, Inc.'s Stock Got Crushed on Wednesday

By Steve Heller - Nov 4, 2015 at 5:11PM

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Between a big earnings miss, a weak capital spending environment, and a departing CEO, it wasn't a good day for FARO shareholders.

What: Shares of specialty 3D scanning company FARO Technologies (FARO -5.65%) closed down nearly 31% on Wednesday, following a disappointing third-quarter earnings report it released after the market closed on Tuesday. The company also announced that its CEO of 11 years, Jay Freeland, will be stepping down once a replacement is found.

So what: FARO's third-quarter revenue declined by nearly 12% year over year to $72.5 million, translating to a loss of $0.05 per share on a GAAP basis and a net profit of $0.38 per share on a non-GAAP basis. Prior to the release, the Wall Street consensus was for FARO to generate $83.8 million in revenue and earn $0.29 per share on a non-GAAP basis.

According to management, FARO's results reflected a slowdown in capital spending around the world, in regions like China, Japan, and Brazil, and in key industries like architecture, engineering, and construction. Compared to last year, FARO's third-quarter gross margins compressed from 56% to 48.1%, driven by lower-than-expected year-to-date sales and increased costs associated with new product introductions.

In light of the weakened capital spending environment, FARO has opted to reduce its workforce of 1,300 by 8% and implement further cost-cutting measures. Additionally, FARO announced that it's expanding its share repurchase program from $30 million to $50 million.

Now what: With a large earnings miss, uncertainty surrounding the capital spending environment, and the challenge of finding a new CEO, investors appear to be discounting FARO's future growth prospects today. Until there's more clarity on these fronts, shares could remain under pressure.

Steve Heller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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