Stratasys, Ltd. Earnings: 2 Key Areas to Watch on Monday

By Markets Fool.com

Stratasys is slated to report its fourth-quarter and full-year 2014 earnings before the market opens on Monday, March 2. Investors already know what to expect with respect to the headline numbers. On Feb. 2, the leading 3D printing company shocked the market when it preannounced preliminary 2014 results that fell short of analysts' expectations and its own guidance, and issued guidance for 2015 revenue and earnings that came in below analysts' estimates.

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First, a recap of what we already know, and then what investors should watch for on Monday.

The preliminary 2014 results and 2015 guidance
This chart should give you the big picture all in one place:

Metric

Revenue

Adjusted EPS

GAAP EPS

Preliminary 2014 results

$748 million-$750 million (represents YOY growth of about 54%)

$1.97-$2.03

($2.58)-($2.32)

Analysts' 2014 consensus before preannouncement

$763.6 million

$2.25

N/A

Stratasys' previous 2014 guidance

$750 million-$770 million

$2.21-$2.31

($0.63)-($0.49)

Analysts' current 2014 consensus

$749 million

$2.00

N/A

Stratasys' 2015 guidance

$940 million-$960 million (represents YOY growth of 25%-28% compared to preliminary 2014 results)

$2.07-$2.24

($0.45)-($0.20)

Analysts' 2015 consensus before preannouncement

$1 billion

$2.91

N/A

Analysts' current 2015 consensus

$950 billion

$2.12

N/A

Sources: Stratasys and Yahoo! Finance.

What we know: MakerBot's weakness and increased spending in 2015

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Source: Stratasys.

We know from Stratasys' preannouncement that slower-than-anticipated year-over-year revenue growth of about 7% in its MakerBot unit is the reason Q4 revenue, and hence full-year revenue, will fall short of original expectations. We also know Stratasys will take a goodwill impairment charge of about $100 million-$110 million in Q4 for MakerBot, which equates to about $1.96-$2.16 per share. Stratasys attributed the tepid MakerBot sales to the shift to a third-party distribution model. While this might have accounted for a good portion of the weaker-than-anticipated sales, it's likely that a somewhat more sluggish than projected consumer 3D printer market was also a contributing factor.

While the MakerBot news is disappointing, investors should keep in mind that this desktop 3D printer business only accounted for about 12% of total revenue in Q4. So, as long as Stratasys' core enterprise-focused business keeps chugging along, the company can perform well. In fact, despite the weak MakerBot results, Q4 and full-year 2014 revenue growth will still be strong, per Stratasys' preliminary results. At the midpoint of $749 million, 2014 revenue represents year-over-year growth of about 54%, including organic revenue growth of 31%. For Q4, Stratasys projected revenue growth of about 38%, including organic revenue growth of 25%.

As to 2015 guidance, the slight revenue shortfall is likely due to pared-back MakerBot expectations. The more significant earnings shortfall is due to Stratasys' plans to further ramp up its spending on initiatives intended to fuel long-term growth. As per its Feb. 2 press release, Stratasys "expects incremental annual operating expenditures of 2% of anticipated revenues for [the] coming two to three years, with total operating expenses in 2015 to be in the range of 46% to 47% of anticipated revenues. Additionally, the Company expects to incur capital expenditures in the range of $160 [million] to $200 million in 2015."

Here's what investors should focus on in Stratasys' report:

Gross profit margins
Investors should continue to watch gross margins to determine if the company's average selling prices are holding up. Here's a look at non-GAAP, or adjusted, gross margins over the trailing four-quarter period.

Source: Stratasys.

The "product" category includes 3D printers and consumables, or 3D printing materials. While I think it's best to focus on adjusted gross margins, we shouldn't lose sight of the GAAP picture. GAAP quarterly gross margins for Q4 2013 through Q3 2014 are: 50.2%, 51.5%, 51.3%, and 43.1%.

Stratasys' near-term gross margins will likely remain under pressure for two reasons. First, MakerBot's gross margins are somewhat less than the company's average margin. The reason Stratasys' gross margins have held up even with MakerBot in the fold since Q3 2013 is due to strong sales of its higher-end, higher-margin enterprise-focused 3D printers. These include the Fortus and PolyJet lines, and more specifically, the newer Objet500 Connex line of multi-material printers.

Secondly, Stratasys closed on its Solid Concepts and Harvest Technologies acquisitions in the third quarter. Stratasys' on-demand 3D-printing services business sports lower margins than its product business, so we'd expect to see these new acquisitions exert downward pressure on margins. This isn't to say that these weren't solid moves. Stratasys has a long-term strategy and believes there is synergy between these acquisitions and its product business. The game plan involves some customers who use its 3D-printing services eventually deciding to purchase their own 3D printers, which would also mean they'd need to buy consumables from Stratasys. Additionally, information gleaned from the services operations should help Stratasys increase its technical expertise.

Design and manufacturing enterprise solutions
Stratasys' preannouncement press release stated, "The Company continues to observe strong demand for its design and manufacturing enterprise solutions and expects growth in 2015 at a rate of more than 25% for these higher-end solutions."

This is good news, as investors need Stratasys' higher-end enterprise 3D printers to keep selling well if the company is to perform well going forward. It should be telling to see how well these printers sold in Q4, and take in whatever additional color the company provides during the conference call.

Another reason to monitor sales of Stratasys' enterprise printers is because of Hewlett-Packard's announcement in October that it plans to bring an enterprise-focused 3D printer based upon itsMulti Jet Fusion technologyto market in 2016. I don't think any notable number of businesses will delay buying new 3D printers at this point, but there's a possibility that it could happen as we get closer to HP's planned launch date.

Final thoughts
Investors know what to expect on the headline numbers, given Stratasys' preannouncement a month ago. Focus should be on the gross margin -- the overall trend and more specifically how the two new service bureau acquisitions are affecting it. On a related note, we'll also want to home in on sales of the higher-end enterprise 3D printers, as collectively these printers -- along with consumables -- are the engine powering Stratasys' gross margin and, hence, overall profitability.

The article Stratasys, Ltd. Earnings: 2 Key Areas to Watch on Monday originally appeared on Fool.com.

Beth McKennahas no position in any stocks mentioned. However, she thinks fellow 3D printing specialist Steve Heller should break open his wallet for a MakerBot, so investors can see some live demonstrations! The Motley Fool recommends and owns shares of Stratasys. 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.