Stratasys Warns on Q1 Earnings, Stock Dives

Shares of Stratasys (SSYS 1.43%) fell 16% in after-hours trading Tuesday after the leading 3D printing company announced preliminary first-quarter 2015 results following the closing bell that fell short of analysts' expectations and lowered its full-year 2015 guidance.

The after-hours plunge means the stock opened substantially lower this morning -- still down 16% as of this writing -- and will likely end the day considerably in the red. 

Source: Stratasys.

Preliminary first-quarter results
For the quarter, Stratasys anticipates revenue in the range of $171 million to $173 million; non-generally accepted accounting principles earnings per share between $0.02 and $0.04; and a GAAP earnings per share loss between $3.40 and $4.09.

Here's how the results stack up to analysts' average estimates:

The company attributed its quarterly revenue shortfall to the following factors:

• A decline in capital spending among certain industries, particularly in North America.
• Negative impact from a strong U.S. dollar of approximately $8.7 million.
• Increased merger-and-acquisition activity among a few large channel partners in North America, which contributed to a slower than expected sales ramp-up among those partners.
• Introduction of eight new products during the second half of 2014 to complete the Connex Triple-Jetting Technology portfolio resulted in slower than expected adoption of the high-end Connex platforms and delays in customer purchases.
• Slower than expected channel ramp-up in certain parts of the Asia-Pacific and Japan region.

The first two reasons -- a decline in capital spending among certain industries and currency foreign exchange rates -- were two of the three reasons fellow 3D printing industry leader 3D Systems (DDD 2.36%) cited for its revenue shortfall when it released preliminary results last Friday. Other than the currency factor -- which accounted for 32% of Stratasys' $26.8 million revenue miss -- we don't know to what degree the other factors contributed to the shortfall.

Unlike 3D Systems, Stratasys didn't specify which industries fell short of the capital spending levels the company had expected. 3D Systems cited the auto, aerospace, and healthcare industries. Stratasys isn't holding a conference call following its preliminary results release, as 3D Systems did, so investors will have to wait until the company releases its official earnings on May 11 for additional details.

Another goodwill impairment charge for MakerBot
MakerBot's revenue declined 18% on a year-over-year basis -- though a revenue drop was expected in light of the events of last quarter. The market, however, was probably thrown a curve ball by Stratasys' announcement that it is taking a goodwill impairment charge for the desktop 3D printer maker of approximately $150 million to $200 million in the first quarter; this equates to roughly $2.90-$3.90 per share, as Stratasys has 50.9 million shares outstanding. In a case of deja vu, this follows the $102 million impairment charge the company took for MakerBot in the previous quarter.

Stratasys acquired MakerBot in mid-2013 for $403 million, so the combined impairment charge of $277 million -- using the midpoint of the expected first-quarter charge -- accounts for 69% of the purchase price. While the first impairment charge was disappointing, a larger one on its heels suggests MakerBot could be a drag on Stratasys' results for longer than the company is forecasting. According to Stratasys' press release, "As the reorganization [of MakerBot] progresses, MakerBot growth rates are expected to ramp up to, or exceed, overall company averages by 2016." I'm not sure investors can count on that.

2015 guidance lowered
In light of the first quarter's subpar results and the fact that Stratasys can't know how long some of the factors it cited for its revenue shortfall will persist, the company naturally ratcheted back its 2015 guidance.

Here's how Stratasys' updated guidance stacks up to its original outlook and analysts' estimates:

It's worrisome that the midpoint of the revenue range represents a year-over-year growth rate of just 10.6%. Unfortunately, we don't know how much of Stratasys' 2015 revenue pare-back is due to MakerBot and how much is due to its enterprise-focused product and service offerings. 

Stratasys said that "in light of the current growth environment," it would reduce its planned 2015 capital expenditures from $160 million-$200 million to $80 million-$110 million. However, the company said it "remains confident in its long-term market prospects."

Is Hewlett-Packard a factor?
It seems a core question is whether some customers are delaying purchases to see what competitive offerings are on the horizon from Hewlett-Packard (HPQ -0.25%) in 2016.

Last quarter, I wrote:

Investors should watch Stratasys' non-MakerBot organic revenue growth going forward ... 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).

While we can't know for sure, it seems possible that some enterprise customers did delay bigger-ticket purchases in the first quarter while they wait to see what HP brings to market next year. While fellow new entrant Carbon3D's CLIP 3D printing technology also appears compelling, the company only in mid-March -- two weeks before the quarter ended -- announced plans to enter the market in 2016, so CLIP's probably not a factor here. 

Final thoughts
While another goodwill impairment charge for MakerBot is concerning, I believe investors should focus more on what is happening with Stratasys' core enterprise-focused offerings. Based on the company's updated 2015 guidance, we know it expects a considerably more challenging year than it did two months ago. However, we don't know a few key things, such as how much of the reduced 2015 revenue guidance is due to MakerBot versus the enterprise offerings, and if the decline in capital spending is just a temporary scenario solely due to the economic climate. 

Once Stratasys releases its full official first-quarter results and holds its conference call on May 11, we should have more insight into the situation.