Stratasys' second-quarter earnings were released last week and failed to impress investors. The once-beloved 3D printing maker reported anemic revenue growth of 2% year over year to $182.3 million, translating to a net loss of $0.55 per share, or an adjusted net profit of $0.15 per share.
Although its earnings fell in line with Wall Street expectations, the company withdrew its full-year guidance due to market uncertainty, and instead provided third-quarter guidance, which fell significantly below Street expectations. The combination of withdrawing guidance and providing weak third-quarter expectations prompted the stock to sell off as much as 16% following the release.
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The conference call that management hosted along with its earnings release gave investors an opportunity to gain a greater understanding of the dynamics that are driving Stratasys' business. In total, there were four major takeaways.
1. Customers are digesting existing capacityThe biggest story from management during the call was that customers have far more 3D printing capacity than their current needs, and that's driving them to increase the utilization of their existing capacity before buying more 3D printers.
On the call, CEO David Reis highlighted this dynamic on several occasions:
Compared to the first quarter, total revenue increased by 5.3%.By segment, product revenue grew by about 6.2%, while services revenue expanded by nearly 3.7%.
2. MakerBot continues to drag on resultsWith revenue falling 57% year over year to $14.5 million, demand for MakerBot's 3D printers effectively nosedived in the second quarter. Overall, MakerBot represented nearly 8% of Stratasys' total revenue during the quarter, but its weak performance dragged heavily on its consumable revenue growth rate, which helps measure 3D printer usage trends.
Officially, consumable revenues increased by 6% year over year, down from 18% in the first quarter, but excluding MakerBot and a drag of 700 basis points from currency headwinds, Stratasys' consumable revenue growth would've been much stronger:
3. Underlying technology issues?During the question-and-answer session, an analyst made a powerful observation that although Stratasys' existing customers may be digesting their recent 3D printer purchases, overall market penetration of 3D printing in manufacturing applications remains "minuscule." This led him to the question if there's an underlying issue with Stratasys' technology. After all, if there's such a large addressable market for 3D printing in manufacturing, why isn't Stratasys selling more 3D printers?
Reis agreed that for 3D printing manufacturing applications, penetration remains small, but rapid prototyping is the core driver of Stratasys' business:
In other words, using 3D printing for manufacturing still represents a very small part of Stratasys' overall business, and the rate that manufacturers are embracing 3D printing is slow.
4. Unrealistic growth assumptionsOn the call, Stratasys maintained two previous growth expectations that seem unrealistic in light of the company's slowdown. The first was when COO and CFO Erez Simha told investors that MakerBot will contribute to Stratasys' bottom line in 2016:
Considering MakerBot's initial fall from grace can be largely attributed to product reliability issues with its fifth-generation Replicator 3D printing platform, it remains unclear how management will successfully restore its brand image and grow the unit's revenue to the point that it positively contributes to earnings next year.
The second unrealistic assumption was when Reis highlighted that the company's investment initiatives are aimed at supporting potential annual revenue of $3 billion in 2020:
For perspective, Wall Street expects Stratasys to generate $748 million in revenue this year and $852.5 million in 2016. Modeling off the former's 2016 forecast, Stratasys would have to grow sales by about 250% in four years, or by nearly 37% per year, compounded. Bear in mind that the 3D printing industry is forecasted to grow by over 31% per year between 2013 and 2020, according to Wohlers Associates.
While it's certainly not impossible for Stratasys to achieve this level of revenue growth, it seems like a very tall order to fill, given the company's recent underperformance.
Clouds of uncertaintyAfter Stratasys' second-quarter earnings call, it appears that customers have too much capacity on hand and it's hurting printer sales, MakerBot remains an ongoing challenge, manufacturers are slow to adopt 3D printing, and management hasn't reassessed what are likely unrealistic growth assumptions. Unfortunately, these dynamics are casting clouds of uncertainty around Stratasys' future growth prospects.
The article 4 Must-Read Quotes From Stratasys Ltd.'s Management originally appeared on Fool.com.
Steve Heller has no position in any stocks mentioned. 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.
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