Stratasys Releases Weak 2018 Earnings Guidance; Stock Plummets 16.5%

Stratasys (SSYS 0.96%) reported its fourth-quarter and full-year 2017 earnings before the market open on Wednesday.

For the quarter, the 3D printing company's year-over-year revenue increased 2.3%, its loss per share narrowed, and its earnings per share (EPS) adjusted for one-time factors edged up to $0.16, from $0.15 in the year-ago period.

Shares plummeted to a closing loss of 16.5% on Wednesday. We can attribute the market's reaction to 2018 earnings guidance coming in lower than Wall Street was expecting, as we'll get to later. 

Stratasys' results: The raw numbers

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

For the quarter, GAAP gross margin was 48.7%, up from 47.3% in the year-ago period. Adjusted gross margin was 52.5%, down from 53.6% in the prior year quarter. Stratasys generated $21 million in cash from operations and ended the period with $328.8 million in cash and cash equivalents. The company's balance sheet remains in top shape, as it has no long-term debt.

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 $0.15 on revenue of $174 million in the quarter. So Stratasys solidly beat the revenue consensus and slightly surpassed the bottom-line expectation.

For full-year 2017, year-over-year revenue inched down 0.6% to $668.4 million. GAAP net loss narrowed to $40 million, or $0.75 per share, from $77.2 million, or $1.48 per share in 2016; and adjusted net income increased 64% year over year to $24.2 million, or $0.45 per share.

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 increased 1% year over year, consumables (print materials) revenue grew 4%, and customer support revenue, which mainly includes revenue from service contracts, increased 7%.

While the 1% year-over-year revenue growth from 3D printer sales is anemic, it's still an improvement over much of the past three years, during which this metric has largely declined. That said, CEO Ilan Levin said last quarter that some revenue from systems sales got pushed back from the third quarter -- when this metric declined 6% -- to the fourth quarter. So investors shouldn't consider the decline in this metric to be over. 3D printer sales are ultra-important because they're central to Stratasys' razor-and-blade-like business model in that they drive sales of the high-margin print materials, as well as service contracts.

What happened with Stratasys in the quarter and recently?

• 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.
• On Wednesday, Stratasys announced that it has developed a new metal 3D printing process designed for short-run manufacturing applications. This is big news, as Stratasys -- unlike prime rival 3D Systems -- doesn't sell metal 3D printers, though it does offer 3D printing in metals in its service operation. Stratasys said that it developed its metal platform internally over the past several years, incorporating the company's proprietary jetting technology, and that the initial material capability will be aluminum. It plans to release more details at the RAPID + TCT 3D Printing Conference that runs April 23-26 in Fort Worth.

What management had to say

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

Our fourth quarter results reflect the momentum that we built throughout the year, which we attribute to the positive market reaction to several new product introductions, including our F123 Series launched in February, 2017 and the more recently commercialized H2000 and J700 Dental Solutions, as well as our investments in specific go-to-market initiatives for our target verticals of aerospace, automotive, and healthcare. Our improved profitability and cash generation in the quarter demonstrates the success our alignment of resources to support our strategic roadmap.

The H2000 that Levin mentioned is designed to produce large parts of engineering-grade plastics. Boeing and Ford were Stratasys' development partners on this system.

Looking ahead

As has largely been the case throughout 2017, Stratasys showed year-over-year improvements in many key metrics in the quarter. However, it's still struggling to grow revenue, with fourth-quarter and full-year 2017 revenue increasing just 2.3% and 0.6%, respectively. Improving operating and bottom-line results by increasing efficiencies can only go so far.  For the company to succeed over the long term, it needs to not only grow revenue, but to do so profitably. 

Stratasys provided 2018 guidance as follows:

Data source: Stratasys.

Going into earnings, Wall Street was looking for adjusted EPS of $0.61 on revenue of $688.7 million in 2018. Stratasys' revenue guidance came in about on target with expectations, but its adjusted EPS outlook fell significantly short of the consensus estimate. 

The press release sheds some light on why the profitability outlook doesn't look as bright as the Street was expecting: "Beginning in 2018, the Company is ramping up investment activity to accelerate long term development programs to expand its addressable markets..." Whether the increased spending on growth initiatives will pay off over the long term remains to be seen.