Stratasys (SSYS -1.67%) reported its official third-quarter 2015 results last week. The headline numbers were anticlimactic because the leading 3D printing company had previously released preliminary results that fell significantly short of its results in the year-ago period and analysts' expectations. It also issued a tepid outlook for the fourth quarter.
Our purpose here isn't to rehash the results (you can read my take on earnings here), but to supplement the earnings release data with color from Stratasys' conference call. Here are four key things you should know about.
An Objet Connex 3D printer. Image source: Stratasys.
Results show the benefit of a razor-and-blades business model
From CFO Erez Simha's prepared remarks:
Consumables [print materials] revenue was flat when compared to the same period last year. Excluding MakerBot, core consumables revenue grew 3% over the last year, or 8% on a constant currency basis. We believe the slowdown in consumables is driven primarily by the recent weakness in hardware sales.
Investors in a so-called "growth company" naturally want to see revenue increase faster than the numbers that Stratasys posted. Nonetheless, a core consumables growth rate of 8% on a constant-currency basis still demonstrates how the company's razor-and-blades business model continues to generate recurring revenue from the installed base, even in a period of slow or negative overall growth.
In addition to print materials, Stratasys has another recurring revenue stream: maintenance contracts on its installed 3D printers. Customer support revenue, which includes the revenue generated mainly by maintenance contracts, increased a solid 16% in the quarter.
Gross margin drop is not due to falling average selling prices
From Simha's response to an analyst's question:
[The] decline in gross margin is only due to the changing product mix that we observed during the last few quarters, and the decline in Connex [a higher-margin product line] mix. We don't see any ASP pressure. ... [W]e don't see any change in competitive landscape in the markets in the verticals we operate, not at all.
For background: Stratasys' gross margin declined to 51% in the third quarter, compared with 58% in the same period last year. Product gross margin decreased to 59%, compared with 63% in the year-ago period, while service gross margin decreased to 32%, compared with 40% in the year-ago period.
Stratasys quantifies the opportunities in the prototyping market
From CEO David Reis' prepared remarks:
[We] believe that significant opportunity remains for rapid prototyping applications. Earlier this year, we conducted an extensive market analysis that includes the data from 845 responses to an industry survey that targeted product developers. Based on our research and that survey, we believe prototyping application remains a significant opportunity. We estimate the global prototyping market to be a $10 billion to $15 billion opportunity with only 23% of this opportunity currently addressed by additive manufacturing.
These numbers certainly suggest that the "3D printing revolution" is far from dead, as headlines from naysayers have been declaring, but rather just experiencing some to-be-expected growing pains. Stratasys' prototyping products, most especially its Connex line, garner high praise. It remains to be seen, however, whether Stratasys will be able to successfully compete in the long term, as new entrants launch products. Notably, deep-pocketed Hewlett-Packard and well-funded start-up Carbon3D are both expected to enter the market in 2016 with printers for the enterprise market that are reportedly significantly faster than the ones currently available.
No indication that expected new competition is affecting customers' buying behavior
From Reis' response to an analyst's question:
[W]hat we hear from the market, Troy, this [products from new entrants expected to come to market in the near future] is not a factor in the slowdown at this point of time, OK. We don't have such an indication. This is the only thing I can say. We are -- we're obviously concerned about the same issue, we've asked [about] it many times. We don't get this indication.
I don't doubt that Stratasys' slowdown is predominantly the result of macroeconomic issues and overcapacity in the field. However, I do think that it's probable that at least some entities, especially those with relatively smaller capital expenditure budgets, are holding off on some new 3D printer purchases to see what new offerings come to market in the near future. Delaying new purchases isn't risky in this market because of the availability of 3D printing services offered by Stratasys, 3D Systems, and others.
