Stratasys' Earnings Move in Right Direction, but It's Still Struggling to Grow Revenue

Stratasys (SSYS +3.90%) reported its third-quarter 2017 earnings before the market opened on Tuesday. The 3D printing company's revenue edged down nearly 1%, loss per share narrowed significantly, and adjusted earnings per share (EPS) came in at $0.08, up from $0.00 in the year-ago period.

Shares closed higher 4.3% on Tuesday. We can attribute the market's reaction to adjusted EPS that comfortably beat Wall Street's expectation of $0.05, as well as Stratasys' increase in its full-year 2017 earnings guidance. 

Stratasys stock is up 26.7% in 2017 through Tuesday, versus the S&P 500's 17.2% return. Shares of rival 3D Systems (DDD +2.92%) are down 38.3% this year, with the market sending shares tumbling nearly 24% earlier this month, after the company reported disappointing earnings and withdrew its full-year guidance. 

Stratasys' results: The raw numbers

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

GAAP gross margin was 48.3%, up from 46.9% in the year-ago quarter. Adjusted gross margin was 52.5%, down from 54% in the year-ago period. Stratasys generated $4.6 million in cash from operations and ended the quarter with $302.8 million in cash and cash equivalents. 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 improved GAAP gross margin also helped. 

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 $0.05 on revenue of $161 million. So Stratasys solidly beat the earnings consensus, as previously noted, though it fell somewhat short of the revenue expectation.

Image source: Getty Images.

Segment results 

Data source: Stratasys. *Stratasys provides segment revenue rounded to the nearest million dollar; the percentage-change metrics are provided by the company and reflect the more exact segment revenue. 

Within products, 3D printer revenue declined 6% year over year, consumables (print materials) revenue increased 3%, and customer support revenue, which mainly includes revenue from service contracts, grew 5%.

As for the all-important 3D printer revenue metric, a 6% year-over-year decline is on par with the decline in the second quarter and an improvement over the first quarter's 11% decline. For some context, 3D Systems' revenue from 3D printer sales dropped 11% year over year in the third quarter, so Stratasys continues to perform better than its rival on this metric in 2017. The reason 3D printer sales are so critical is that they 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 contracts, they should sell over the life of those printers.

What happened with Stratasys in the quarter and recently?

• The H2000 Large Part FDM 3D Production System (the demonstrator was called Infinite Build) has recently begun transitioning into the commercializing phase. Following early installations with its development partners, Boeing and Ford, the company recently completed a commercial delivery of a system to a new customer. The system is designed to produce large parts of engineering-grade plastics, including aircraft interior panels, hybrid structures, composite tooling, and large prototypes. 
• The more affordable F123 Series, launched in February, continues to sell well, as customers increasingly adopt a workgroup-oriented approach to design and rapid prototyping.
• It announced the launch of GrabCAD Voxel Print, a new software solution for its J750 3D printer that's designed to take its PolyJet tech's unique full-color, multi-material capabilities and add true voxel-level control during the design and printing process. (A voxel is the 3D equivalent of a 2D pixel in traditional printing.) The company touts that the "solution provides users an unprecedented level of material control to facilitate the creation of advanced structures, digital materials, gradient color patterns, internal properties, and textures" for applications including product design, biomedical, animation, and others. 

What management had to say

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

We achieved significant improvements in operating profit during the third quarter compared to the prior year, driven by our continued focus on aligning our resources to support our long-term strategy of deepening customer engagement and developing high-value applications within our key vertical markets. Our revenue for the third quarter was partially impacted by several large, multi-system orders that were deferred until October. Driven by a more holistic approach to adopting our solutions, we are observing customer behavior characterized by orders for our products that are made up of multiple systems, which introduces higher quarter-to-quarter variations in order timing.

Looking ahead

Once again, Stratasys showed improvements in many key metrics in the quarter, driven largely by cost cutting. The company's long-term success will hinge on it being able to profitably growing revenue, driven by increasing demand for its products and services.

Stratasys narrowed its full-year revenue guidance -- the midpoint remains the same -- and increased its GAAP and adjusted EPS guidance as follows:

Data source: Stratasys.