Stratasys, Ltd. Earnings: What Can We Expect for Q2 on Thursday?

Stratasys (NASDAQ: SSYS  ) is slated to report its second-quarter 2014 earnings before the market opens on Thursday, Aug. 7. The 3-D printing company's report follows on the heels of that of fellow industry leader, 3D Systems, which reported disappointing results last Thursday. 

If you know what analysts expect and what to focus on in a report before earnings are announced, you'll be better prepared to make good decisions, especially if thrown a curveball. So, let's take a look at analysts' expectations.

Analysts' Q2 Adjusted EPS Estimate

$0.45

Change From Year-Ago EPS

0%

Q2 Revenue Estimate

$156.6 million

Change From Year-Ago Revenue

46.8%

2014 Revenue Estimate

$683.4 (representing 40.4% growth)

2014 Adjusted EPS Estimate

$2.20 (a 19.6% increase from 2013)

Source: Yahoo! Finance.

The consensus earnings per share estimate is unchanged from Stratasys' EPS for the year-ago quarter. That's because Stratasys upped its growth game earlier this year, announcing it was planning on sacrificing short-term profits for spending on activities aimed at fueling long-term growth and capturing market share.

With that said, other than the usual headliner numbers of revenue and earnings, here's what investors should focus on in the report.

Organic growth
Organic growth (growth in businesses owned for at least one year) is a key metric for all companies, and especially important for those that have grown significantly through acquisitions. We'd like to see Stratasys' organic growth come in at or above what it did in the year-ago period.

Organic growth Q2 2013: 20%

Stratasys' organic growth came in at a very strong 33% in the first quarter, so we could get a nice positive year-over-year surprise if the first quarter's momentum carried over into the second quarter.

Source: Stratasys.

Let's review Stratasys' recent acquisition history. The company hasn't been a serial acquirer, though when it has been a buyer, it has favored larger leader-in-class acquisitions. Stratasys merged with Objet in 2012, which netted it Objet's patented PolyJet technology. Notably, the first quarter of this year marked Stratasys' return to profitability on a GAAP basis following this megamerger.

Stratasys bought MakerBot, a popular maker of desktop 3-D printers, in 2013. This buy gave Stratasys entry into the consumer market, though MakerBots' products are also popular with "prosumers" (professional consumers who use them in their small businesses), and are also used for prototyping by engineers in some larger companies. The MakerBot deal closed in the third quarter of 2013, which means MakerBot sales won't be included in Stratasys' organic growth number this quarter. 

Stratasys announced earlier this year that it was acquiring two service bureaus, Solid Concepts and Harvest Technologies. Solid Concepts is the largest independent 3-D printing services operation in North America, while Harvest Technologies has expertise in advanced parts production and materials. The Solid Concepts deal closed in mid-July; the Harvest Technologies deal is also slated to close in the third quarter. Stratasys also announced earlier this year that it was buying "certain assets" of Interfacial Solutions, which is a contract provider of thermoplastics R&D and production services. That deal was expected to close in the second quarter.

None of the 2014 acquisitions will affect organic growth. However, Stratasys could update its 2014 guidance to reflect the expected contributions from these acquisitions.

Gross margin
We'd also like the gross margin, based on generally accepted accounting principles, or GAAP, and the non-GAAP gross margin to come in at or above what they did in the year-ago period.

  • GAAP gross margin Q2 2013: 47.3%
  • Non-GAAP or adjusted gross margin: 59.2%

I think investors can likely expect a nice increase in GAAP gross margin. Stratasys' GAAP gross margin jumped to 51.5% from 38.4% last quarter. The company attributed this big leap to the combining of operations and R&D from the 2012 Objet merger being essentially complete.

2014 guidance
Last quarter, Stratasys merely reaffirmed its previous guidance, which seemed to disappoint investors. I wrote at that time that it was unrealistic to expect a guidance bump up that early in the year. However, there seems a good possibility that Stratasys will increase 2014 revenue guidance on Thursday. CEO David Reis stated on last quarter's conference call that the company would reconsider its guidance once the acquisitions of Solid Concepts and Harvest Technologies have closed -- and Solid Concepts, the largest of the two (it generated revenue of approximately $65 million last year) has closed. However, the company could play it safe and wait until after Harvest closes to update guidance. 

Currently, Stratasys expects adjusted EPS for 2014 in the range of $2.15-$2.25, GAAP EPS between $0.20 and $0.38, and revenue of $660 million-$680 million. Further, Stratasys expects organic sales, which exclude MakerBot sales, to grow at least 25%; MakerBot is expected to grow at a higher rate.

Going into earnings, the consensus estimates are for adjusted EPS of $2.20 on revenue of $683.4 million. So, analysts are expecting revenue to be higher than Stratasys' current guidance, and adjusted EPS to come in at the midpoint of guidance.

Foolish final thoughts
There seems a good possibility that Stratasys will raise revenue guidance, though raising earnings guidance is likely considerably less of a possibility. Companies like to play it conservatively on their projections, as they know the market will punish their stocks for missing guidance. That said, if Stratasys' momentum from last quarter continued into the second quarter, it does seem possible the company will raise EPS guidance sometime this year.


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