What to Watch When Stratasys Reports Q3 Earnings

Stratasys Ltd. (SSYS -1.61%) is slated to report its third-quarter 2016 earnings before the market opens on Tuesday, Nov. 15.

Investors will be looking for signs in the report that point to a light at the end of a tunnel that's brought several challenges over approximately two years for the diversified 3D printing company. Along with fellow industry leader 3D Systems, Stratasys has been struggling to grow revenue amid a widespread slowdown in demand for enterprise 3D printers.

This will be the second quarterly report released since CEO Ilan Levin was appointed to the top spot on July 1, but it's just the first that covers a period for which he's been CEO.

Stratasys' in-development Infinite-Build next-generation 3D printing technology. Image source: Stratasys.

Benchmark numbers

Here are the year-ago results to use as benchmarks.

Data source: Stratasys.

As of Oct. 28, analysts expected Stratasys to deliver adjusted EPS of $0.05 on revenue of $174.5 million, representing year-over-year growth of 400% and 4.2%, respectively. Of course, long-term investors shouldn't give too much credence to analysts' estimates, since Wall Street is focused on the short term. However, these expectations can be helpful to keep in mind, since, together with forward guidance, they often help explain market reactions.

While analysts' expectations might appear heady, keep in mind that the comparables bar is very low -- Stratasys posted particularly weak results in the year-ago period. It took a nearly $1 billion combined goodwill impairment charge for MakerBot and its enterprise business in that quarter. 

Enterprise 3D printer sales and the capital spending environment

Last quarter, the tepid capital spending environment among industrial companies continued to particularly negatively affect Stratasys' enterprise 3D printer sales, which declined roughly 19% year over year. (Stratasys doesn't break out 3D printer sales between enterprise and MakerBot.) However, we can deduce that enterprise sales were down roughly 19% because MakerBot sales were about flat.

Stratasys has attributed this weak demand that it's faced since the calendar flipped to 2015 to oversupply of 3D printers in the field, resulting from the large numbers that were purchased during the preceding few years. It's likely, however, that at least some businesses were postponing buying decisions to see what new offerings would soon be brought to market, especially by HP Inc. and venture capital-backed Carbon. These companies launched speedy and otherwise compelling 3D printers in May and April. Carbon's 3D printer, available via subscription, was available at launch, while HP's printer was slated for deliveries starting this fall.

There doesn't appear to be any data that suggests investors can expect notable improvements in Stratasys' overall 3D printer sales, so even small signs that an upturn is on the horizon should be viewed very positively.

Sales of the J750

Stratasys launched the compelling J750, the world's first full-color, multimaterial 3D printer, in the first quarter. Last quarter, management said the early market reaction to this product was very favorable and called out early sales of the J750 as a bright spot in a generally very tough market. The J750 falls within the company's Objet Connex line and surely sports higher profit margins like Stratasys' other multicolor, multimaterial 3D printers. 

While it isn't likely Stratasys will break out sales of the J750, investors can probably expect comments on the analyst conference call providing some color on this topic. 

Progress on next-generation 3D printing technology

In August, Stratasys announced that it has been partnering with Ford, Boeing, and Siemens on two innovative fused deposition modeling-based 3D printing technologies for production applications. It demonstrated these techs at the International Manufacturing Technology Show in September. 

Stratasys' Infinite-Build technology turns the traditional 3D printer concept on its side to print on a vertical plane, which allows for a practically unlimited part size in the build direction. Boeing worked with Stratasys on the development of this tech and is currently testing one of these systems. Ford is also evaluating or will soon evaluate this technology.

Stratasys has been working with Siemens -- which has expertise in motion-control hardware and CNC automation -- to develop its Robotic Composite 3D technology designed to make strong yet lightweight parts from composite materials. Currently, composite production is constrained by labor-intensive processes and geometric limitations.

Hopefully Stratasys' management will comment on the progress in developing these innovative technologies.

Final word 

In short, a sustained turnaround for Stratasys depends upon an upturn in its enterprise 3D printer sales, so investors don't need to focus too much on MakerBot. Moreover, the last two quarters' results suggest that the worst is probably over for the beleaguered desktop 3D printing unit.