Stratasys Q3 Earnings: A Nearly $1 Billion Goodwill Impairment Charge Tops Off Poor Quarter

Stratasys (SSYS 1.02%) reported its official third-quarter 2015 results before the market opened on Wednesday. Investors already knew that the headline numbers were going to be extremely disappointing. That's because on Oct. 22, the leading 3D printing company released preliminary results that fell significantly short of its results in the year-ago period and analysts' expectations. As expected, the company also issued a tepid outlook for the fourth quarter.

Shares of Stratasys were up more than 5% as of Wednesday's market close. This is likely due to the fact that the bad news was already priced into the stock and that adjusted earnings per share came in at the high end of the preliminary range. 

Shares of fellow industry leader 3D Systems (DDD 2.64%) soared more than 10% after it also released fourth-quarter results before the bell. Triple D turned in poor results, though the market is probably relieved that they weren't even worse, since former CEO Avi Reichental abruptly left the company last week. The market's also likely looking ahead to perhaps better times under a new CEO.

Stratasys' Q3 numbers
Here's how the headline numbers stack up to the company's year-ago results, its preliminary results, and analysts' original average estimates: 

Sources: Stratasys and Yahoo! Finance.

Key numbers shared on the conference call:

• Organic revenue (excludes acquisitions made within the last year) decreased 20% from the year-ago period, or about 16% on a constant-currency basis.
• Revenue from Stratasys' core business (excludes MakerBot and its services operation) decreased 14%, or about 10% on a constant-currency basis.
• MakerBot revenue plummeted 55%, which the company attributed to the overall weak market and the cost associated with this unit's restructuring.
• Product revenue decreased 26% to $118.5 million.  
• Within product revenue, system revenue decreased 37%, while consumables revenue was flat.  
• Excluding MakerBot, core consumables revenue grew 3%, or 8% on a constant-currency basis.
• Services revenue increased 13% to $49.1 million.
• Within service revenue, customer support revenue, which includes the revenue generated mainly by maintenance contracts, increased 16%.

What happened with Stratasys this quarter?

Image source: Stratasys.

A third goodwill impairment charge for MakerBot
We knew from Stratasys' preliminary results that it expected to take a goodwill impairment charge of between $140 million and $180 million in the quarter for its beleaguered desktop unit. The company didn't release an exact figure for the MakerBot charge, just the total of $910 million for all goodwill impairment charges in the quarter.

This marks the third writedown for MakerBot, with the total now in the range of $436 million to $476 million, which is more than the $403 million Stratasys initially paid for the company in mid-2013. The MakerBot fiasco is a result of two factors, in my view: poor execution on Stratasys' part and industry predictions about the consumer 3D printing space being much too rosy. The execution issue involved faulty extruders on the fifth-generation Replicator released last year.

A goodwill impairment charge on the enterprise business
As noted above, Stratasys is taking a total goodwill impairment charge of $910 million in the quarter. Backing out the MarkerBot charge, this means that the company's writing down about $730 million to $770 million on the enterprise side of its business.

This writedown wasn't a surprise, as Stratasys said when it released its preliminary results that it was in the process of performing a goodwill impairment analysis of all its reporting units. Be aware that the company stated that the size of this charge could change, as it's not yet completed its analysis. It expects to complete its preliminary analysis within the next week and its final analysis later in the fourth quarter.

What management had to say
Said CEO David Reis:

We believe the current environment is primarily a result of weak investment in capital equipment, which has combined with the negative impact of excess capacity that we believe was created during a period of extraordinary growth for Stratasys, and the overall industry, during 2013 and 2014. Additionally, although we believe that overall penetration in the prototyping market remains low, the segment has matured to an extent that our customers now have a wide selection of technology offerings to evaluate, resulting in lengthened sales cycles [emphasis mine]. Despite these near-term challenges, we continue to observe significant market potential, and remain confident in our long-term growth prospects.

This statement is largely a repeat of what the company's been saying after each earnings report this year. It certainly seems accurate that the macroeconomic environment has played a major role in Stratasys' anemic results; however, the company's subpar execution has also been a factor.

The part of this statement that I emphasized, however, is new. I don't want to put words in Reis' mouth, but it does appear that this statement includes customers who are waiting to make purchases due to expected new competition on the near-term horizon. If so, this is the first time the company has acknowledged this factor. I've suggested for several quarters now that this dynamic is probably at play. Notably, Hewlett-Packard and well-funded start-up Carbon3D plan to release enterprise 3D printers in 2016 that are reportedly considerably faster than those now on the market. 

Looking ahead
As expected, Stratasys issued extremely tepid fourth-quarter guidance.

Source: Stratasys.

Additionally, Stratasys said that it's reviewing its long-term operating model, and will provide an update when visibility into its prospects has improved. This review is long overdue and investors can almost surely count on less optimistic growth projections coming, at least for the intermediate term. 

Final thoughts
There were no huge surprises in today's report, as investors generally knew what to expect after the preliminary results were announced. Even the goodwill impairment charge on the enterprise side was largely anticipated, though we didn't know its size.

This writedown on the enterprise business is certainly concerning, as it indicates Stratasys' near- and likely intermediate-term results will almost surely be considerably less rosy than many investors have been expecting. The enterprise business not only accounts for the vast majority of revenue, it's also the company's profit engine, sporting higher margins than MakerBot. Thus, it's crucial to the company's long-term success.

Positively, once the final total goodwill impairment charge is determined, at least investors should have a better idea as to the true value of Stratasys' business.