Now that the two leading 3-D printing companies, 3D Systems (DDD 1.08%) and Stratasys (SSYS +0.63%), have both reported second-quarter 2014 earnings, it should prove enlightening to directly compare their results. Keep in mind that qualitative factors can be just as important as quantitative ones, and future results are much more important than current ones. With these caveats in mind, our findings from a face-off between these 3-D printing sector bigwigs on key metrics should nevertheless prove helpful to some in making investing decisions in the 3-D printing space.
I'll use the same format as I did last quarter. First, we'll look at key quarterly stats; then, full-year 2014 guidance; and lastly, valuations.
Total revenue growth
| 3D Systems |
25% to $151.5 million, missing analysts' estimates of $162.3 million. |
|
Stratasys |
67% to $178.5 million, beating estimates of $156.6 million. |
ADVANTAGE: Stratasys.
Details on revenue growth by segment (as well as other facets) can be found in my articles on 3D Systems' and Stratasys' Q2 results.
Organic revenue growth
|
3D Systems |
10% |
|
Stratasys |
35% |
ADVANTAGE: Stratasys.
It's been especially important for investors to focus on 3D Systems' organic growth rate (revenue growth in businesses owned for at least one year), given the company has largely grown through many smaller acquisitions. Turbocharged growth-by-acquisition strategies can present several concerns. That said, until recently, it's seemed that 3D Systems was doing a decent job incorporating the acquisitions into its fold.
This is the first quarter where 3D Systems has seen a significant drop in organic growth rate on a year-over-year basis -- organic growth dropped to 10% from 30%. While this is concerning, one quarter doesn't make a trend. If there is an issue, it should come out during the next two quarters. 3D Systems has stated for the past several quarters that the second half of the year would be much stronger than the first.
Non-GAAP or adjusted earnings per share
|
3D Systems |
$0.16, down 20%, and missing estimates of $0.18. |
|
Stratasys |
$0.55, up 22% from the year-ago period, and beating estimates of $0.45. |
Earnings-per-share numbers are not directly comparable across companies, unlike the above two metrics. That said, in the context in which EPS are usually judged -- changes from the year-ago period and relative to analysts' estimates -- Stratasys had much better results. However, it's important to remember that Stratasys' percentage increase over the year-ago period is getting a boost from the Objet merger now being essentially digested. Both companies have upped their growth games in 2014, and are sacrificing short-term profits for increased spending aimed at capturing market share and fueling long-term growth. So, 3D Systems' decreasing profitability is to be expected.
GAAP EPS
|
3D Systems |
$0.02, down from $0.10 |
|
Stratasys |
$0.00, up from $(0.07) |
A similar thought as above applies with respect to the "winner" here, as well as the effects of the Objet merger on the comparison. This is discussed a bit more with respect to 2014 guidance.
Non-GAAP gross margin
|
3D Systems |
47.8%, down from 52.1% |
|
Stratasys |
59.8%, up from 59.2% |
ADVANTAGE: Stratasys.
GAAP gross margin
|
3D Systems |
47.8%, down from 52.1% |
|
Stratasys |
51.3%, up from 47.3% |
ADVANTAGE: Stratasys.
(Yes, 3D Systems' GAAP and non-GAAP gross margins are the same.)
Stratasys' gross margin got a boost from an increase in gross margin in its service business. This more than offset the small decrease in gross margin in its systems (printer) business.
3D Systems blamed its gross margin decrease on "a one time inventory write down, the residual impact of start up costs of new products, change in quarterly sales mix and timing of shipments." The company stated that the "[f]undamentals of business model remain intact and we expect gross profit margin to rebound and resume its trajectory in the second half."
Research and development spending
|
3D Systems |
11.7% of revenue, up from 7.9% in the year-ago period. |
|
Stratasys |
9.9% of revenue, up from 8.9%, but essentially in line with averages during the past few quarters. |
ADVANTAGE: 3D Systems.
Spending on R&D is surely a good thing, though a company's spending level doesn't always equate to the effectiveness of its efforts.
As with last quarter, 3D Systems is now spending a higher percentage of its revenue on R&D than is Stratasys. However, this is a new development. Stratasys' R&D level has been consistent at about 10% of revenue for some time, whereas 3D Systems recently significantly boosted its spending level. This situation shouldn't come as a surprise, given Stratasys has largely been growing organically, while 3D Systems has relied on acquisitions to fuel much of its growth. Increasing R&D was a must for 3D Systems if it wanted to maintain a leadership position.
2014 guidance
|
3D Systems |
Revenue of $700 million-$740 million, adjusted EPS of $0.73-$0.85, and GAAP EPS of $0.44-$0.56. |
|
Stratasys |
Revenue of $750 million-$770 million, adjusted EPS of $2.25-$2.35, and GAAP EPS of $0.20 and $0.38. |
Advantage: Stratasys for revenue growth; non-comparable for EPS growth.
3D Systems' guidance at the midpoint implies an adjusted earnings decrease of 4.7% on revenue growth of 40.2%, while Stratasys' guidance implies adjusted EPS growth of 25% on revenue growth of 56%. Stratasys has the obvious revenue growth advantage. It also appears to have the adjusted earnings growth advantage. However, we really can't make an apples-to-apples comparison here, as the two companies are in different positions. That's primarily because Stratasys has the Objet wrench thrown in here; the positive effect on earnings of this merger now being essentially completed are kicking in this year. In other words, Stratasys' 2013 comparison bar is lower.
Valuations
|
Company |
Trailing P/E |
Forward P/E |
Five-Year PEG |
|---|---|---|---|
|
3D Systems |
114.3 |
42.6 |
2.8 |
|
Stratasys |
N/A |
38.3 |
2.5 |
Source: Yahoo! Finance.
ADVANTAGE: Stratasys.
There are two main caveats here. First, both forward price-to-earnings ratios and five-year PEGs, or P/Es-to-growth, are based on analysts' estimates of future results. The 2015 projections used in the forward P/Es will likely turn out to be quite accurate, though I wouldn't put much stock in estimates five years out. In high-growth and fast-evolving technology spaces, it's impossible to know what the competitive landscape will look like in five years.
Second, these aren't the only valuation measures. Cash flow valuations are also important, with operating cash flow being a better metric than free cash flow for companies investing in growth. However, this comparison wouldn't be very telling at this point due to the negative effect of the Objet merger on Stratasys' cash flow during the trailing 12 months.
Foolish final thoughts
Stratasys is the hands-down "winner" this quarter, which marks the second quarter it has had the advantage based on the method used here. Last quarter, however, it wasn't as clear-cut. Again, investors should keep in mind the caveats previously mentioned. Namely, we only looked at some current quantitative metrics, whereas qualitative ones matter just as much. (For one example, 3D Systems has printer offerings in the fast-growing metal 3-D printing space, whereas Stratasys does not.) Additionally, for long-term investors, two quarters is still a short period.
That said, 3D Systems needs to crank up one of its metal printers, and churn out a gold-colored medal for its archrival.
Editor's note: Data in tables taken directly, or calculated, from second-quarter-earnings reports, unless otherwise noted.
