3D Systems vs. Stratasys: 2015 Earnings Results and Valuation Face-Off

Now that the two leading diversified 3D printing companies, 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS), have reported fourth-quarter and full-year 2015 earnings, we can directly compare their 2015 results. 

Keep in mind that qualitative factors can be just as meaningful as quantitative ones, and future results are more important than current ones. Even with these caveats, these findings should prove helpful in making investing decisions in this space. We'll look at key stats, 2016 guidance, and current valuations.

Revenue 

Data source: 2015 earnings reports.

Advantage: Tie.

Stratasys generated the most revenue in 2015, yet its revenue decreased from 2014, whereas 3D Systems eked out a small gain. So, this one's a draw.

Both companies encountered significant macroeconomic headwinds in their core enterprise businesses throughout 2015. Stratasys has attributed the weak demand from industrial customers to overcapacity of 3D printers in the field due to the large number of printers purchased during the previous few years.

MakerBot, however, is the primary reason that Stratasys' revenue declined from 2014. The desktop 3D-printer maker imploded in the fourth quarter of 2014 due to widespread issues with faulty extruders on the fifth-generation Replicator. MakerBot's quarterly revenue significantly declined on a year-over-year basis throughout 2015.

Stratasys generated $503.9 million in product revenue and $192.0 million in service revenue in 2015. Product revenue declined nearly 18% from 2014, while service revenue jumped 39%. Service revenue increased as much as it did because Stratasys acquired Solid Concepts and Harvest Technologies in the third quarter of 2014.

3D Systems generated $257.4 million in product revenue, $150.7 million in materials revenue, and $258.1 million in service revenue. Product and materials revenue declined 9% and 5%, respectively, from 2014, while service revenue rose 22%. Service revenue got a boost in 2015 from the company's acquisition of Latin American service bureau Robtec in the fourth quarter of 2014.

GAAP EPS 

Data source: 2015 earnings reports.

Advantage: 3D Systems.

Both companies' poor earnings on a generally accepted accounting principles (GAAP) basis were heavily due to goodwill impairment charges, with Stratasys writing down $942.4 million of value in its businesses and 3D Systems writing down $537.2 million. 3D Systems' earnings were also negatively affected by the $27.4 million in charges it took in the fourth quarter related to discontinuing its consumer products and services.

Non-GAAP or adjusted earnings per share

Data source: 2015 earnings reports.

Advantage: 3D Systems.

Directly comparing EPS results between companies isn't usually very telling because companies have a varying number of shares outstanding. Relative to 2014's results, however, 3D Systems is the winner -- or, more accurately, the second-place loser -- as its adjusted EPS declined less than Stratasys' did.

GAAP gross profit margin

Data source: 2015 earnings reports.

Advantage: 3D Systems. 

3D Systems did a solid job here. Stratasys' GAAP gross margin took a huge hit from the MakerBot implosion. Its gross margin is comprised of a 7.5% product gross margin and a 33.6% service gross margin. In 2014, these two numbers were 50.5% and 38.5%, respectfully.

3D Systems' gross margin is comprised of a 19.5% product gross margin, 75.7% materials gross margin, and a 49.3% service gross margin. Stratasys groups its material sales in with its hardware sales in its "product" category. If we did this for 3D Systems -- to compare apples to apples -- its product category's gross margin would be 40.3%. 

I'd venture to guess that 3D Systems' better service gross margin is due to its sizable medical services operation.

Non-GAAP gross profit margin

Data source: 2015 earnings reports.

Advantage: Stratasys.

Both companies posted solid numbers. This metric is the gross margin that's calculated after adding back to gross profit one-time items that increased cost of sales.

These results suggest that average product selling prices are holding up. Stratasys' management, in fact, has said during its 2015 quarterly conference calls that ASPs for its "core" business -- 3D printers sold to enterprise customers -- are, indeed, holding firm. This should be good news when market conditions improve if Stratasys can maintain a leadership position in the industry.

Financial liquidity 

Data source: 2015 earnings reports.

Advantage: Tie.

Both companies are in good shape on the net cash front, though Stratasys has the most cash. However, it needs more cash since its operating cash flow is more negative than 3D Systems'. 

Research and development spending 

Data source: 2015 earnings reports.

Advantage: Stratasys.

Stratasys spent a considerably larger percentage of its revenue on R&D. Positively, both companies increased their absolute-dollar-amount spending on R&D from 2014, despite their flat (3D Systems) or declining (Stratasys) revenue.

Stratasys has generally maintained the advantage on the R&D front. Until 2014, when 3D Systems upped its R&D spending as a percentage of revenue, its R&D spending was only about 7%-8% of its revenue. This isn't surprising, given that 3D Systems has relied on numerous small acquisitions to fuel much of its growth, and less so on its internal product development.

2016 guidance 

Data source: 2015 earnings reports.

Advantage: N/A.

Stratasys' 2016 guidance at the midpoint of each metric implies year-over-year revenue growth of 2.7%, adjusted EPS growth of 58%, and GAAP EPS growth of 95%. However, its adjusted EPS outlook range is very broad, so it's better to consider that the company views adjusted EPS from declining about 11% through to increasing up to 126%.

This broad range makes sense as Stratasys said throughout 2015 that it doesn't have good visibility into future market conditions. I was a bit surprised that it didn't delay providing full-year 2016 guidance. 3D Systems is without a permanent CEO, which is likely one reason it chose to delay providing something so critical as guidance.

Valuation 

Data source: Yahoo! Finance; data as of March 18.

Advantage: Tie.

Stratasys has a lower P/S and five-year PEG (P/E to projected earnings growth), while 3D Systems has a lower forward P/E.

The PEG is the best valuation metric in this bunch, in my view, because it takes projected growth into account. However, if we had included valuations based on cash flows, then 3D Systems would have the advantage. It has better (less negative) cash flows over the trailing 12 months than Stratasys.

It's a tie -- with bigger battles likely ahead
A score of 3 (3D Systems) to 2 (Stratasys) with 3 metrics a tie is too close to call a winner. While 3D Systems outscored Stratasys, a mediating factor is that Stratasys generally posted better results in 2014, so it had generally higher comparison bars to jump.

Qualitative factors are at least as important as quantitative ones, with probably the most critical such factor being top leadership that strategizes and executes well. Despite the MakerBot fiasco, Stratasys has had the edge here in recent years. However, 3D Systems has a chance to reinvent itself by choosing the right CEO. Both companies need to play at the top of their games in the next few years as 2D-printing king HP and well-funded start-up Carbon3D plan to launch polymer 3D printers for the enterprise market that are reportedly super-speedy and sport other compelling features. Other big-name competitors, notably Canon, have also announced their intentions to enter this space within the next few years. Stratasys only makes 3D printers that print in polymers, while polymer 3D printers account for the bulk of 3D Systems' printer sales, making both companies very vulnerable to competition in this space.