Stratasys Earnings: 3D Printer Sales Drop 20%, Stock Plummets 12%

By Markets Fool.com

Stratasys(NASDAQ: SSYS)reported its third-quarter 2016 earnings before the market opened on Tuesday. The diversified 3D printing company posted a year-over-year revenue decline of 6.2%, driven by a 20% drop in 3D printer sales. Adjusted earnings per share -- the most important earnings metric -- declined from $0.01 to nearly $0.00.

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In light of the weaker-than-expected results and what it views as a continuing challenging macroeconomic environment, Stratasys cut its full-year guidance for revenue and adjusted EPS and narrowed -- with the midpoint edging down -- its outlook for EPS based on generally accepted accounting principles (GAAP). Stratasys and archrival 3D Systems (NYSE: DDD) have struggled to grow revenue since early 2015 due to a widespread slowdown of 3D printer purchases among enterprise customers.

Shares of Stratasys plunged upon the earnings release and closed down 12.4% on Tuesday.

The Robotic Composite Demonstrator. Image source: Stratasys.

Stratasys' results: The raw numbers

Metric

Q3 2016

Q3 2015

Year-Over-Year Change

Sales

$157.2 million

$167.6 million

(6.2%)

Operating income

($19.4 million)

($931.3 million)

97.9%

Adjusted operating income

$3.3 million

($10.0 million)

N/A

Net income

($20.8 million)

($901.3 million)

97.7%

Adjusted net income

$0.1 million

$0.7 million

(85.7%)

Earnings per share (EPS)

($0.40)

($17.35)

97.7%

Adjusted EPS

$0.00

$0.01

(100%)

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Data source: Stratasys.

Investors should focus on the adjusted results, not the GAAP results.The adjusted results compare apples to apples, whereas the GAAP results are skewed because Stratasys took a huge goodwill impairment charge in the year-ago period. On an adjusted basis, there was one bright spot: Operating income flipped from a loss in the year-ago period to a gain in the quarter. This can largely be attributed to Stratasys' focus on improving efficiencies and cost-cutting this year.

To provide some context -- though long-term investors shouldn't give much credence to Wall Street's near-term estimates -- analysts were looking for adjusted EPSof $0.05 on revenue of $174.5 million. So Stratasys fell quite short on both the top and bottom lines.

Segment results

Segment

Q3 2016 Revenue

Q3 2015 Revenue

Year-Over-Year Change

Product

$110.1 million

$118.5 million

(7.1%)

Service

$47.1 million

$49.1 million

(4.1%)

Data source: Stratasys.

Within the product category, revenue generated from 3D printer sales fell 20% -- which follows a 19% year-over-year decline last quarter -- while sales of consumables (materials) rose 12%. (Stratasys doesn't break out 3D printer sales by enterprise vs. MakerBot. However, since MakerBot's total sales fell by 29% year over year, we can probably safely assume that the decline in enterprise 3D printer sales was a little less than 20%.)

To provide some context, 3D Systems' year-over-year revenue generated from 3D printer sales declined 6% and materials sales grew 9% when the company reported its Q3 earnings earlier this month.

Like materials, customer support revenue was another bright spot, increasing 7%. These two recurring income streams are generated from a growing installed base and keep on flowing even as quarterly 3D printer sales decline on a year-over-year basis. Since these higher-margin revenue streams are driven from sales of 3D printers, the slowdown in printer sales is particularly concerning.

MakerBot's revenue was more hard-hit than the overallbusiness

Desktop 3D printer unit MakerBot's product and service revenue declined 29% from the year-ago period, which Stratasys' management attributed to overall market weakness and the timing of new product introductions.

Investors shouldn't focus too heavily on MakerBot, because the enterprise business accounts for the lion's share of Stratasys' revenue and is the profit engine of the company. That said, the 29% year-over-year decline was somewhat disappointing, as last quarter's 2% year-over-year decline and the sequential increases in the last two quarters suggested that we had possibly seen a bottoming at the beleaguered desktop 3D printer maker.

What else happened with Stratasys in the quarter?

  • GAAP gross margin was 46.9%, up from negative 47.7% in the prior-year period (that poor gross margin was heavily due to a huge goodwill impairment charge).
  • Adjusted gross margin was 54%, up from 50.8% in the prior-year period -- driven largely by cost-cutting -- but down from 55.9% last quarter.
  • Stratasys announced that Airbus"is standardizing on Ultem 9085 3D printing material for the production of flight parts for its A350 XWB aircraft."
  • The company demonstrated next-generation 3D manufacturing technologies at the International Manufacturing Technology Show 2016. These include theInfinite-Build 3D Demonstrator, developed with Boeing and Ford,"designed for low-volume production of large thermo-plastic parts," and theRobotic Composite Demonstrator, developed with Siemens,"designed for the automated production of composite material structures for advanced manufacturing applications."
  • It also launched and began shipping various new MakerBot 3D printing solutions.

What management had to say

Here's what CEO Ilan Levin -- who assumed the top spot on July 1 -- had to say in the press release:

The introductions of the Stratasys Infinite-Build and Robotic Composite 3D Demonstrators both evidence the unique long-term value of our core technologies and highlight the importance of strategic relationships in developing solutions that target specific, high-value added applications. These innovations demonstrate our potential to meet the needs of customers by leveraging our core assets within key vertical markets. We believe these types of opportunities remain significant across multiple industries, and we are committed to seeking their further development.

Looking ahead

Stratasys pared back full-year 2016 revenue and adjusted EPS guidance and narrowed its EPS based on generally accepted principles outlook as follows:

Metric

Updated 2016 Guidance

Previous Guidance

Sales

$662 million to $673 million

$700 million to $730 million

EPS

($1.44) to ($1.35)

($1.60) to ($1.28)

Adjusted EPS

$0.13 to $0.21

$0.17 to $0.43

Data source: Stratasys.

In short, Stratasys posted a disappointing quarter, though there were some bright spots -- namely, sales of consumables and an improved adjusted operating performance from the year-ago period. The company's overall results are unlikely to improve meaningfully until it has more success selling its enterprise 3D printers.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends 3D Systems and 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.