Stratasys Earnings: A Tough Quarter With Some Bright Spots

Shares traded up in the 2% range most of the morning. That's likely because adjusted earnings came in at the high end of the preliminary range and there was some good news, particularly related to consumables. The market appears to be shrugging off the fact that Stratasys again lowered its 2015 guidance for generally accepted accounting principles earnings.

Consumer 3D printing expectations hopped ahead of reality.Source: Stratasys.

The big pictureStratasys grew revenue 14% year over year to $172.7 million, including organic growth of 1%, or 6% on a constant-currency basis. The company turned a profit of $0.04 per share on a non-GAAP basis, and lost $4.24 per share on a GAAP basis.

Product revenue decreased 2.2% to $126.7 million and service revenue increased 112% to $46.1 million. Within products, system revenue dropped 12% and consumable revenue increased 18%.

We knew from the pre-announcement that several factors contributed to the revenue shortfall, most notably a decline in capital spending among certain industries, particularly in North America; the negative impact from a strong U.S. dollar (which came in at $7.8 million); the slower than expected adoption of the high-end Connex products because of the introduction of eight new products within this line in the second half of 2014; and slower than expected channel ramp up in certain parts of the Asia-Pacific and Japan region.

Stratasys CEO David Reis and CFO Erez Simha didn't say anything notable on the conference call about the capital spending environment. It seems likely the slowdown was fairly broad-based across industries. Understandably, Reis said it was too soon to tell how things were looking on this front in the second quarter.

MakerBot's continued woesThe preliminary results showed that MakerBot's year-over-year revenue fell about 18%, and that Stratasys planned to take another goodwill impairment charge against earnings for the desktop 3D printer maker. That $194 million charge equates to $3.81 per share.

During the earnings conference call, management said Stratasys now expects MakerBot's 2015 revenue to be down roughly 25% to 30%. However, Reis reiterated that MakerBot's growth rates are expected to ramp up to, or exceed, overall company averages by 2016.

Drop in gross profit marginInvestors knew from the preliminary results to expect gross margin to fall approximately 190 basis points from the fourth quarter of last year. Here's the gross margin picture:

Source: Stratasys.

The company should include fiverolling quarters in the chart above because it's usually important to look at year-over-year comparisons, not just sequential ones. In first-quarter 2014, the company's gross margin was 60.9% -- 63.5% for product and 45.8% for service.

Stratasys attributed its gross margin decline primarily due to the change in product mix, as well as the impact of acquisitions and the decline in capacity utilization at MakerBot. The product mix slanted more toward lower-margin products, particularly in the Connex line, based on the introduction of new products to this platform in the second half of 2014.

The good news is that the company sees no notable drops in product average selling prices.

The down trend in gross margin due to the changing product mix shouldn't surprise investors who have been closely following this company. There are two factors at play here: MakerBot's gross margin is somewhat less than the company's average margin, so MakerBot has been exerting downward pressure on the product gross margin since being acquired by Stratasys in mid-2013. Second, Stratasys' 3D-printing service business sports a lower gross margin than does its product business, and this business grew revenue faster than the product business in the last two quarters. That's because of the Solid Concepts and Harvest Technologies acquisitions in the third quarter of last year.

Bright spots: consumables and customer supportSimha said during the call that quarterly revenue from consumables (materials) grew 18% over the same period last year, or 25% on a constant-currency basis. Growth was driven not only by the company's expanding installed base of systems, but also by increased system utilization.

Simha also said that within service revenue -- which grew by 112% due largely to acquisitions -- customer support revenue increased by 28%. This is revenue generated mainly by maintenance contracts on the company's 3D printers.

I agree with Simha's take:

Looking aheadThe company reiterated the revenue and adjusted profit portions of its 2015 guidance, but once again pushed down its expectations for GAAP profit.

Sources: Stratasys and Yahoo! Finance.

Final thoughtsIt goes without saying that quarterly revenue growth of 14% and projected annual revenue growth of approximately 11% are unquestionably disappointing in light of the 3D printing industry's robust current and projected growth rates. That said, investors can take some comfort in the fact that the quarterly slowdown on the enterprise-focused end of the business seems an industrywide phenomenon -- fellow leader 3D Systemsalso struggled in this space in the quarter.

There will always be bumps in the road even for established leaders in a fast-growing industry. In Stratasys' case, one primary bump was its own missteps (overpaying for MakerBot), while another was a factor beyond its control (the economic environment).

Positively, the company sees no indications that enterprise customers are delaying purchases to wait to see what competitive offerings from new entrants are on the horizon for 2016, and Stratasys' solid material and customer service revenue growth show how its razor-and-blade-like business model can successfully generate recurring revenue.

The article Stratasys Earnings: A Tough Quarter With Some Bright Spots originally appeared on Fool.com.

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

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