Stratasys Earnings: A Mixed Bag

Stratasys (SSYS 3.28%) reported its second-quarter 2017 earnings before the market opened on Wednesday. The 3D printing company's revenue declined 1.2%, loss per share narrowed significantly, and adjusted earnings per share jumped 42% from the year-ago quarter. 

The market's reaction was muted, with shares closing up 0.5% on Wednesday. Stratasys stock is up 34.6% in 2017 through Wednesday, versus the S&P 500's 11.8% return. Shares of rival 3D Systems (DDD 6.96%) are down 3.5% this year, as the market sent shares tumbling more than 21% on the day last week following the company's earnings release; it reported disappointing results and lowered its full-year 2017 guidance.

Here's how the quarter worked out for Stratasys and its investors.

Stratasys' results: The raw numbers 

Data source: Stratasys. GAAP = Generally accepted accounting principles. 

GAAP gross profit margin was 49.1%, up from 46.2% in the year-ago quarter and 47.1% in the first quarter. Adjusted gross margin was 53%, down from 55% in the year-ago period, and up from 51.2% in the prior quarter. 

Stratasys generated $10.9 million in cash from operations, up from $6.9 million in the year-ago quarter. It ended the quarter with $305.3 million in cash and cash equivalents, compared to $297.2 million at the end of the first quarter. The company's balance sheet remains in great shape, as it has no long-term debt.

GAAP operating income came in better than one might expect from the revenue result because of Stratasys' continued focus on increasing efficiencies. The company lopped off more than $8 million from its sales, general, and administrative (SG&A) expenses relative to the year-ago quarter. The improved GAAP gross margin was also a factor. 

Stratasys does not provide quarterly guidance. For some context -- though investors shouldn't pay too much attention to Wall Street's near-term estimates -- analysts were looking for adjusted EPS of $0.07 on revenue of $167.7 million. So Stratasys blew by the EPS consensus and also beat analysts' revenue expectation. 

Image source: Getty Images.

Segment results 

Data source: Stratasys.

Within products, 3D printer revenue declined 6% year over year, consumables (print materials) revenue edged up 2%, and customer support revenue, which mainly includes revenue from service contracts, grew 6%. 

While a 6% year-over-year decline in revenue from sales of 3D printers isn't anything to cheer about, it is an improvement over the first quarter which saw an 11% decline in this metric. For more context, this number declined 19%, 20%, and 4%, respectively, in the second, third, and fourth quarters of 2016. 3D Systems' revenue generated from sales of 3D printers dropped 14% in the quarter, so Stratasys' result was considerably better on this important metric. 3D printer sales power both companies' razor-and-blade-like business models: The more 3D printers they have operating in the field, the more higher-margin print materials as well as service contractors they should sell over the life of those printers.

Recurring revenue (from print materials and service contracts) continued to increase, thanks to the company's business model just discussed. Materials' weak 2% increase is a reflection of sales of 3D printers declining for more than two years.

What happened with Stratasys in the quarter?

• Announced a new solution for making certifiable aircraft interior parts which leverages a qualification program underway with the Federal Aviation Administration (FAA), National Institute of Aviation Research, and America Makes. 
• Announced the adoption of Fortus 900mc Aircraft Interiors Certification Solution by leading parts supplier Western Tool & Mold to produce aircraft cabin components.
• Announced collaborations to leverage its 3D printing solutions to accelerate development and production of next-generation aircraft with Boom Supersonic and Eviation Aircraft.
• Its on-demand 3D-printing service was chosen by Airbus to produce 3D-printed polymer parts for use on A350 XWB aircraft.

What management had to say

Here's what CEO Ilan Levin had to say in the press release: 

We continue to allocate resources toward deepening customer engagement within our key vertical markets, and we are pleased with our progress in developing higher quality revenue opportunities. In addition to these vertical market initiatives, we are pleased with the market reception of our new F123 Series, launched in February of 2017, which has resulted in orders of over 1,000 units to date, and has generated significant interest for rapid prototyping applications among professional users.

Looking ahead

Stratasys' quarter showed improvements in many key metrics, though the company is still struggling to grow revenue. The company's cost-cutting efforts are largely driving the improvements in operating and net income, but there's a limit to cost-cutting. As with the last couple of quarters, there were some initiatives announced in the period that have the potential to help drive long-term growth.

I'd say the market got it right with its negligible reaction to the results.

Stratasys reiterated its previously issued 2017 guidance:

Data source: Stratasys.

Positively, Shane Glenn, VP of investor relations, said on the analyst conference call that the company believes that it is tracking toward the higher end of EPS guidance.