Stratasys Earnings Preview: What to Watch on Wednesday

Stratasys Ltd. (SSYS 11.35%) is slated to report its second-quarter 2017 earnings before the market opens on Wednesday, August 9.

Stratasys stock is considerably outperforming the market in 2017: It's up 36.6% through August 7, versus the S&P 500's 12.1% return. Given this strong performance, the market could be primed to pummel the stock if the company posts weaker-than-expected earnings and/or lowers its full-year 2017 guidance. Last week, investors beat rival 3D Systems (DDD 4.76%) stock down 21% after it turned in worse-than-expected quarterly results and pared back its 2017 outlook.

Image source: Getty Images.

Key numbers

Here are Stratasys' year-ago results and Wall Street analysts' estimates to use as benchmarks.

Data sources: Stratasys and Yahoo! Finance.

While long-term investors shouldn't place too much weight on Wall Street's near-term estimates, they can be helpful to know because they often help explain market reactions.

Last quarter, Stratasys met analysts' adjusted EPS target on the bulls-eye and edged by the revenue consensus. Its revenue declined 2.8%, while adjusted EPS jumped 400% to $0.05 from the year-ago quarter. 

Also for context, 3D Systems reported on August 2 that its second-quarter revenue inched up about 1% -- though organic revenue was probably slightly down, or flat at best -- and its adjusted EPS declined 33% year over year. 

Beyond the headline numbers, here's what to focus on in Stratasys' report.

3D printer sales

As was the case with 3D Systems, investors' primary focus should be on 3D printer sales. While both companies have other operations -- notably on-demand 3D-printing operations -- sales of 3D printers are critical to their razor-and-blade-like business models. Sales of 3D printers, the "razors," drive sales of the high-margin print materials, or "blades," over the life of the printers. They also drive sales of another recurring revenue stream: maintenance contracts.

In the first quarter, Stratasys' revenue from sales of 3D printers declined 11% year over year. So, while one quarter doesn't make a trend, it would likely be a good sign if we saw an improvement in this result. Last quarter's 11% decline was disappointing since revenue from 3D printer sales declined only 4% in the fourth quarter of 2016, after having been walloped by 20% and 19%, respectively, in the third and fourth quarters.

For additional context, 3D Systems' revenue from 3D printer sales declined 14% year over year in the second quarter. 

Both Stratasys and 3D Systems have been struggling to sell their 3D printers since 2015. It seems likely that two factors are at play -- a glut of 3D printers in the field thanks to the brisk sales that preceded the slowdown in demand, and increased competition from new entrants such as HP Inc. and Carbon, both of which entered the polymer 3D printing market last year via launches of speedy 3D printers.  

Status of next-generation technologies

Stratasys has been working on developing several new 3D printing technologies aimed at production applications: Infinitive Build, Robotic Composite, and Continuous Build. The company has launched demonstrators for all of these technologies. 

Infinite Build prints on a vertical plane rather than the usual horizontal one, which reportedly will allow for the production of parts with a nearly infinite dimension in the direction of the build. Robotic Composite uses automation to make parts comprised of composite materials. Continuous Build is for low-volume production applications and needs only limited operator intervention. The company has some big-name partners on these techs, including Ford, Boeing, and Siemens. 

Stratasys' long-term success will largely depend upon its success in selling its systems for use in production applications, in my opinion. Thus, these next-generation technologies could be make or break for the company. Management will likely provide a status update on these development-stage technologies during the analyst conference call.