3 Things to Watch When Stratasys Reports Q1 Earnings on Monday

Image source: Stratasys.

Stratasys (SSYS +0.29%) is slated to report its first-quarter 2016 earnings before the market opens on Monday, May 9.

Investors could use some encouraging news, as shares of the leading diversified 3D printing company, along with rival 3D Systems (DDD +0.00%), have been crushed since the start of 2014. While optimism has crept back into the space, especially with respect to 3D Systems, whose stock is up nearly 67% year to date through May 4, it hasn't been based on notable improvements in fundamentals.

Stratasys' headline numbers 
As a benchmark, here are Stratasys' year-ago results:

Data source: Stratasys.

Long-term investors shouldn't place too much weight on analysts' estimates, since Wall Street is focused on the short term. That said, market reactions can often be explained by these estimates, so they're worth knowing. Analysts are expecting Stratasys to deliver an adjusted EPS loss of $0.04 on revenue of $164.82 million, which represents year-over-year decreases of 200% and 4.6%, respectively.

Beyond the headline numbers, here's what to focus on. 

1. Stratasys' "core business" and the capital spending environment
All eyes should be on Stratasys' results in its critical "core business" -- sales of 3D printers for the enterprise market – which the company recently began breaking out in its earnings releases. Its core business revenue in the third and fourth quarters decreased 14% year over year. Signs of just a slight rebound could suggest that the brisk macroeconomic headwinds Stratasys has faced since the first quarter of 2015 might be letting up a bit. (Keep in mind that year-over-year comparisons will be easier starting this quarter because we've now lapped a year since these headwinds have negatively affected sales.)

Stratasys, along with 3D Systems, experienced a major slowdown in purchasing among enterprise customers throughout 2015. This is a huge concern because the company's enterprise business -- core business plus services operation -- accounts for the lion's share of its revenue and sports higher margins than its MakerBot business. Stratasys has attributed the weak demand to overcapacity in the field because of the large number of 3D printers bought during the previous few years. It seems probable that this explanation accounts for the bulk of the slowdown, but it's possible that at least some companies are holding off purchasing new 3D printers to see what compelling new products soon come to market. 

2. Do quarterly results suggest 2016 guidance is realistic?  
We want to see Q1 results that suggest Stratasys' 2016 guidance seems realistic. Stratasys released its full-year outlook last quarter, which was a bit surprising given management has maintained that it has a lack of visibility into the company's future prospects. Moreover, its adjusted earnings outlook was significantly brighter than analysts were projecting. 3D Systems did not issue 2016 guidance last quarter, presumably for the same reason. However, part of the reason for 3D Systems' move could be because it didn't have a permanent CEO at the time.

Data source: Stratasys.

3. Changes to long-term operating model?
Stratasys management said when the company released third-quarter 2015 results that it was reviewing its long-term operating model and would provide an update when visibility into its prospects has improved. Given the events of 2015 -- poor revenue growth and earnings results coupled with huge writedowns across its business -- it seems a good possibility that Stratasys could ratchet back these long-standing growth projections.

This doesn't mean there isn't tremendous growth potential in the 3D printing industry, nor that Stratasys won't capture a good share of the industry growth. It just means that Stratasys management might not view its prospects as being quite as rosy as it once did. 

Taking a backseat: MakerBot 

MakerBot's hopping away from all internal manufacturing. Image source: Stratasys.

Since last quarter, there's been one notable MakerBot happening: In late April, Stratasys' beleaguered desktop 3D printer unit announced that over the coming months it will be phasing out all manufacturing at its factory in Brooklyn, New York. MakerBot has partnered with global contract manufacturer Jabil Circuit to produce all its 3D printers. Jabil is headquartered in the U.S., with its production facilities located overseas. 

This is a good business move, as it provides MakerBot with the flexibility to scale manufacturing up or down based on demand without being saddled with the fixed costs involved in operating a factory. Jabil Circuit is a solid choice, as it's been in business for 50 years and is well regarded. That said, MakerBot's "flip-flop" within a span of about nine months is a bit concerning. Last July, MakerBot top management was pledging allegiance to Brooklyn with respect to its manufacturing operation, while celebrating the opening of the company's new 170,000-square-foot facility, which doubled production capacity. Mind you, MakerBot imploded well before this event -- in the fourth quarter of 2014 -- with its sales having plummeted on a year-over-year basis ever since. (This implosion was largely set off by widespread quality issues with the "smart" extruders on the fifth-generation Replicator.) 

While it's unfortunate that factory workers will lose their jobs and yet another product will be stripped of the increasingly rare "Made in the USA" label, this is a necessary move. MakerBot will be less of an anchor on Stratasys' overall financial performance. 

Takeaway 
Stratasys' core business, sales of 3D printers for the enterprise market, is critical to the company's overall success. Its performance is highly dependent upon the macroeconomic environment. Investors shouldn't expect much to have changed in one quarter, but even small indications that enterprise customers are starting to once again buy 3D printers in a more meaningful way can be viewed as a considerable positive.