Stratasys Q4 Earnings: Macroeconomic Headwinds Continue, but Stock Soars on Results and Outlook

The decline in capital spending among industrial customers that Stratasys and rival 3D Systems have experienced throughout 2015 has resulted in decreased sales of 3D printers such as the Fortus line shown. Image source: Stratasys. 

Stratasys (SSYS 0.96%) reported its fourth-quarter and full-year 2015 results before the market opened on Thursday. The macroeconomic challenges that the leading diversified 3D printing company has faced throughout 2015 continued into the fourth quarter. Nonetheless, through cost-savings efforts, Stratasys reported revenue and adjusted earnings results that surpassed its guidance, and likely exceeded many investors' expectations since they also surpassed analysts' estimates.

As a result, shares of Stratasys closed up more than 17% on Thursday. Shares of fellow industry bigwig 3D Systems (DDD 2.31%) rose nearly 7%. Movement in the stock of one of the two biggies in the 3D printing space will often cause the stock of the other company to move in the same direction. That's because they're both operating in the same business environment, so investors often infer that good or bad news from one company will often be coming from the other company as well. 

Stratasys' key Q4 and full-year 2015 numbers 
Here's how the headline numbers stack up to the company's year-ago results.

Data sources: Stratasys and Yahoo! Finance.

Notably, Stratasys generated $7.7 million in cash from operations during the fourth quarter. Cash flows often fly under the radar, but are extremely important. Operating and free cash flows are the real McCoys when it comes to money, whereas "earnings" are merely an accounting measure.

Stratasys' quarterly revenue came in at the high end of its guidance of $160 million to $175 million, while its adjusted earnings per share came in significantly better than its guidance of negative $0.17 to negative $0.06. Its GAAP EPS fell far short of its guidance of negative $0.68 to negative $0.54, largely due to the $104 million goodwill impairment charge it took. 

Long-term investors shouldn't place too much weight on analysts' estimates. Nonetheless, analysts' expectations coupled with a company's forward guidance often explain stock-price movements. So, it's worth noting that analysts were looking for a fourth-quarter non-GAAP loss of $0.12 per share on revenue of $168.31 million, and full-year adjusted EPS of $0.08 on revenue of $691.63 million. So, Stratasys crushed quarterly earnings expectations and comfortably beat revenue expectations. 

Macroeconomic headwinds continue
Statasys' revenue in its "core business" -- sales of 3D printers for the enterprise market -- decreased 14% from the previous-year's period. This is exactly the same year-over-year drop experienced in the third quarter. Unfortunately, these results don't suggest that the daunting macroeconomic headwinds the company has faced since the first quarter of 2015 are subsiding.

As a reminder: Stratasys and 3D Systems have experienced a major slowdown in purchasing among industrial customers throughout 2015. This is more concerning than MakerBot's well-publicized woes since the enterprise business is the profit-engine of the company. Stratasys has attributed the tepid demand from industrial customers to overcapacity in the field due to the large number of 3D printers bought during the previous few years. It continues to say that it doesn't have any indication that businesses are holding off purchasing new 3D printers to see what compelling new products might soon come to market. 

Another goodwill impairment charge
Stratasys took a $104 million goodwill impairment charge in the fourth quarter. This marks the fourth such writedown it's taken since the fourth quarter of 2014.

Investors knew that such a charge might be coming. Stratasys stated last quarter that its review of its business units wasn't completed and further writedowns on its enterprise business could be coming. In the third quarter, the company took a whopping $910 million charge, of which $710 million to $730 million was on the enterprise side of the business and the remainder was for beleaguered desktop 3D printer maker MakerBot. 

Gross margin drops
Overall gross profit margin decreased from 56% in the year-ago period to 48.1% in Q4 2015. Here's the gross margin trend for 2015:   

Image source: Stratasys.

Recent significant events

• Initiated a restructuring plan to improve operational efficiencies and working capital; Stratasys expects to see continued positive results of this plan in 2016.  
• Reduced global workforce by about 10% during the fourth quarter.
• Initiated programs to reduce operating expenses and optimize manufacturing.
• Introduced the updated Objet Connex3, which features software powered by the Adobe 3D color print engine that enables new color possibilities.
• Introduced the MakerBot Smart Extruder+, which is designed to provide improved print performance over a longer period of time. (A widespread issue with faulty extruders was the reason MakerBot imploded in the fourth quarter of 2014, so hopefully these new extruders are a huge improvement.)

What management had to say 
In the earnings release, CEO David Reis stated what the company is focusing on:  

Our fourth quarter results reflect the impact of a market environment that is consistent with conditions we have observed throughout the year. ... We are also making progress in optimizing our company's cost structure and improving working capital management, and were satisfied to observe a favorable trend in operating expenses and positive cash flow from operations during the quarter.

Reis also commented on the company's goals in this new "transformative" phase of the company's development:

Our goal is to maintain our leadership position in prototyping, while developing a solutions-based business model that targets key vertical markets and emerging applications for end-use parts. We believe our comprehensive new strategy will help grow our markets and is essential for maintaining our leadership position.

Looking ahead 
Stratasys issued full-year 2016 guidance. Here's how its outlook compares with 2015 results:

Data source: Stratasys.

Going into the earnings release, analysts were expecting 2016 adjusted earnings of $0.08 per share on revenue of $700.62 million. So, Stratasys' earnings outlook is significantly brighter than the consensus, and the lower end of its revenue range outlook matches the consensus.

Stratasys provided these additional targets for 2016:

• Gross margins to improve modestly to a range of 54% to 55%.
• Operating margins of 3% to 5%.

It also provided this expected financial data for 2016:

• Taxes expense of $10 million to $11 million, which includes the negative impact of the planned accounting treatment for tax valuation allowance.
• Capital expenditures are projected at $60 million to $70 million, with approximately $45 million designated for completing the company's new facility in Israel.

There was no update on the company's long-term operating model, which it said last quarter that it was reviewing and would update, if warranted, when visibility into its prospects has improved. 

Final thoughts
Stratasys reported quarterly results that were likely significantly better than most investors were expecting due to the success of its cost-cutting measures. Unfortunately, however, there were no indications that the macroeconomic headwinds related to a decrease in capital spending among industrial customers has improved. That's what needs to happen in order for Stratasys' business performance to improve in a significant way. Positively, Stratasys' outlook for 2016 is also considerably brighter than what most investors were expecting.