Stratasys' Stock Plummets After It Reports Preliminary Results

Shares of Stratasys (SSYS 1.43%) fell 27% in after-hours trading on Monday after the leading 3D printing company announced preliminary 2014 results after the market close that fell short of analysts' expectations and its own guidance, and issued guidance for full-year 2015 revenue and earnings that came in below analysts' estimates.

Yesterday's after-hours plunge surely means the stock will open substantially lower today. I think the market overreacted, as it often does, but whether shares will regain some ground as the market digests the information of course remains to be seen.

Stratasys' MakerBot Replicator 2. Source: Stratasys.

Preliminary 2014 results: Earnings hit by goodwill impairment charge
For fiscal 2014, Stratasys said it anticipates revenue in the range of $748 million to $750 million; a net loss on a generally accepted accounting principles, or GAAP, basis of $2.58 to $2.32 per share; and adjusted, or non-GAAP, earnings of $1.97 to $2.03 per share. Here's how the results stack up to analysts' average estimates and Stratasys' previously issued guidance:

Source: Stratasys and Yahoo! Finance.

While the revenue result at the midpoint of $749 million is less than 2% lower than analysts' estimate, it essentially falls at the low end of Stratasys' guidance range. Earnings are where the company came up significantly short.

These preliminary results mean Stratasys' fourth-quarter results will fall short of the consensus when it reports quarterly and full-year 2014 results (expected during the first week of March). The company said fourth-quarter revenue was affected by slower than anticipated growth in its MakerBot unit, which grew by about 7% year over year. As for the earnings hit, Stratasys will take a goodwill impairment charge of about $100 million-$110 million for the MakerBot unit; this equates to roughly $1.96-$2.16 per share, as Stratasys has 50.9 million shares outstanding.

We obviously do not like to see goodwill impairment charges, which indicate that the current value of the assets of an acquired company has fallen below what the company paid for them. That said, they're not uncommon, particularly relatively soon after a purchase in the tech space -- Stratasys bought MakerBot in 2013 -- as companies often must pay up to get a desired acquisition target to sell. This impairment charge does not surprise me, as I've long believed growth estimates for the consumer end of the 3D printing industry as a whole have been too rosy. Many everyday consumers -- beyond "makers" -- see no compelling reason yet to buy a 3D printer. This doesn't mean the consumer market won't grow and strengthen; it just means many in the industry predicted too much, too soon. Another factor to watch for related to MakerBot is competition in the consumer space, which is heating up.

While the MakerBot news is disappointing, let's keep things in perspective: At the midpoint of $749 million, full-year 2014 revenue represents year-over-year total growth of about 54%, including -- according to Stratasys' press release -- organic revenue growth of 31%. For the fourth quarter, Stratasys projected revenue growth of about 38%, including organic revenue growth of 25%. So, even with MakerBot dragging organic revenue growth down, it's still a solid 25%. Stratasys' release states MakerBot represented about 12% of preliminary total revenue for the quarter. So, if we back out MakerBot's results, the rest of the business experienced organic revenue growth of 27.5% in the fourth quarter. Though this figure falls somewhat short of Stratasys' first-, second-, and third-quarter 2014 organic growth rates of 33%, 35%, and 35%, respectively, it's still a very strong number.

Investors should watch Stratasys' non-MakerBot organic revenue growth going forward (hopefully the company will continue to provide this data or enough information that we can calculate this data) to see if there's any indication that some companies are delaying new 3D printer purchases due to Hewlett-Packard's fall announcement that it plans to bring to market in 2016 a 3D printer based on its Multi Jet Fusion technology. My sense is that HP's announcement did not impact Stratasys' fourth-quarter results at all, but it would be premature to rule anything out (or in).

2015 guidance lower than expected as stepped-up growth strategy continues 
Here's how Stratasys' guidance stacks up to analysts' estimates:

Source: Stratasys and Yahoo! Finance.

The 2015 guidance is a small 5% shortfall from the consensus on the revenue side, but a 26% miss at the midpoint on the earnings end. Given Stratasys is known to be conservative in its guidance, I believe the slightly less than expected revenue projection is nothing to be concerned with. While the press release did not explicitly say so, it seems safe to assume this lower than anticipated revenue guidance is probably due to Stratasys ratcheting back expectations for MakerBot as a result of the unit's weaker than expected sales in the fourth quarter.

Stratasys said operating expenses would increase as it pursues a stepped-up growth strategy, which is the reason for the lower than expected earnings forecast. Specifically, the company "expects incremental annual operating expenditures of 2% of anticipated revenues for [the] coming two to three years, with total operating expenses in 2015 to be in the range of 46% to 47% of anticipated revenues. Additionally, the Company expects to incur capital expenditures in the range of $160 [million] to $200 million in 2015."

Importantly, Stratasys' press release stated: "The Company continues to observe strong demand for its design and manufacturing enterprise solutions and expects growth in 2015 at a rate of more than 25% for these higher-end solutions." This is good news, as sales of these printers have an outsize affect on Stratasys' earnings due to a profit margin that exceeds the company average. We'll want to pay particular attention to sales of these printers going forward, given HP's announcement and the likelihood that there will be other new entrants into the enterprise market.

Final thoughts
While MakerBot performed weaker than Stratasys expected in the fourth quarter, there's no indication at this time that the company's core business is not performing well. Additionally, it should come as no surprise to investors that Stratasys' plans to incrementally increase its spending in 2015 and at least a year or two beyond are initiatives intended to help it maintain market leadership and fuel long-term growth. This is a "must" in this fast-growing space, which will surely see increasing competition going forward.  

Once Stratasys releases its full detailed fourth-quarter results, we'll be able to better analyze the situation.