Is Stratasys Morphing From A 3D Printer Name Into A Materials Company?

Summary

• 3D printer shipments by Stratasys have been plummeting from a high in Q2 2014, while consumable revenues have been showing growth in the same period.
• Increase growth in third-party consumables companies offering comparable products to Stratasys but at lower costs will erode revenues.
• Stratasys needs to move to an open architecture for consumable utilization to re-energize its printer business.

I discussed in a Seeking Alpha article yesterday entitled "3-D Printer Companies Need To Make Critical Adjustments - And Soon" that, among other things, printer companies need to reduce costs of consumables. I also mentioned that 3D Systems (DDD) CEO Vyomesh Josh commented at a recent conference that 3D Systems is a "Materials Company."

I haven't heard any similar remarks from Stratasys (NASDAQ:SSYS) CEO Ilan Levin, but looking at the company's financials, it may indeed be the case. That is the problem from two standpoints: (1) price of materials is driving away printer customers and (2) third-party consumable merchants are selling material at lower prices.

Stratasys is commonly known as a 3D printer company, not a materials company. While Stratasys' printer shipments increased 56.6% between 2013 and 2014 when the company acquired MakerBot, shipments dropped 46.9% in 2015 as shown in Table 1 Consumable revenues increased 32.5% in 2014 and 5.1% in 2015 driven by the addition of advanced material offerings and a growing installed base of systems.

Table 1
	2013	2014	2015
Printers	29,327	45,843	24,363
Printer Change (units)		56.3%	-46.9%
Source: The Information Network (theinformationnet.com)

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If we look at printers on a QoQ basis, shipments have dropped significantly from early 2014 as shown in Table 2 below. The graph below is a better illustration in the drop in shipments from Q1 2014 through Q2 2016.

Table 2
	2014				2015				2016
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Printers	8,802	14,909	10,965	11,167	7,536	6,731	5,467	4,629	5,125	5,394
Source: The Information Network (theinformationnet.com)

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Stratasys reports in its Q2 financials that it has a huge selection of consumable materials for sale:

"We also develop, manufacture and sell materials for use with our systems and provide related services offerings. We offer a powerful range of additive manufacturing materials, including clear, rubberlike and biocompatible photopolymers, and tough high-performance thermoplastics. We believe that the range of 3D printing consumable materials that we offer, consisting of 14 Fused Deposition Modeling, or FDM, cartridge-based materials, 25 Polyjet cartridge-based materials, five Smooth Curvature Printing, or SCP, inkjet-based materials and 158 non-color digital materials, and over 1,500 color variations, is the widest in the industry."

Of the eight acquisitions made by SSYS, only one, Interfacial Solutions, is a materials company. Nevertheless, as shown in Table 3 below, consumable revenues increased 32.5% in 2014 and 5.1% in 2015 driven by the addition of advanced material offerings and a growing installed base of systems.

Table 3
	2013	2014	2015
Printers	29,327	45,843	24,363
Printer Change (units)		56.3%	-46.9%
Consumable Change (revenue)		32.5%	5.1%
Source: The Information Network (theinformationnet.com)

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If we look at YoY changes in quarterly revenues for consumables in Table 4, they have been up in double digits for two of the four listed quarters.

Table 4
Consumables Change	Q2 2014	Q2 2015		Q3 2014	Q3 2015		Q1 2015	Q1 2016		Q2 2015	Q2 2016
	11.5%			0.0%			5.9%			10.8%

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Clearly, printer shipments have plummeted while consumable revenues have shown solid growth. However, competition from third-party material suppliers will grow and put pressure on revenues.

One such company, Argyle Materials makes an important statement on its website, which supports my above first thesis that the price of materials is driving away printer customers

"Most people think about the Hardware cost when buying a new 3D printer. What most people do not realize is that over a 5 year period the Hardware cost of the printer will only represent approximately 10%-35% of the Total Cost of running the Printer over that period. Materials will account for ~70% - 90% of your Total Costs of running your Printer."

Supporting my second thesis that third-party consumable merchants are selling material at lower prices, as illustrated in Table 5 below from Argyle Materials.

Table 5
	Stratasys	Argyle Materials
Stratasys Dimension 1200® Printer	$25,000	$25,000
Price Per Spool	$250	$195
8 Spools/Year 5 Years	$120,000	$93,600
Cost Savings		$26,400

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In another example of the third-party materials companies addressing the 3D printer market, Japan-based JSR recently invested in start-up Carbon.

Investor Takeaway

Stratasys generates revenue from two divisions, Products and Services. Total Net sales in 2015 were $696.0 million as compared to net sales of $750.1 million in 2014, representing a decrease of 7.2%, as shown in Table 6 below. Stratasys includes printer and materials revenues in its Products division. The company doesn't break out its revenues for printers or consumables.

Because of the growth in consumables shown in Tables 3 and 4 and the drop in printer shipments in Tables 1 and 2, SSYS has become more of a consumable company. But that could change as an increase in third party consumable suppliers. While Table 6 shows that the Products division dropped in 2015, it continued to drop for the six months ended 2016, as shown in Table 7.

Table 6
$ in thousands	2015	2014	2013	% Change 2015-2014	% Change 2014-2013
Products	503,946	612,138	414,853	-17.70%	47.60%
Services	192,049	137,991	69,550	39.20%	98.40%
Total	695,995	750,129	484,403	-7.20%	54.90%

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Table 7
$ in thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Products	$123,758	$134,490	$242,392	$261,157
Services	48,315	47,832	97,587	93,896
Total net sales	172,073	182,322	339,979	355,053

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What is more interesting is Stratasys' Services division, which makes prototypes for customers. Chief competitors are DDD and Materialize (MTLS). For 2016, SSYS generated 29% of revenues from services compared to 40% for DDD and 35% for MTLS.

The entry of GE (GE) into the services sector through its earlier September acquisition of Arcam and SLS Solutions presents competition to SYS, but more so for DDD because of GE's emphasis on metal-based parts. So far in 2016, GE's services sector generated 46% of total company revenues.

The revenue and printer shipment data for SSYS shown in the tables above suggest that the company needs to refocus its business model by moving away from the high cost of developing and selling high-priced materials by establishing an open architecture, thereby making its printers more attractive. Secondly, the company needs to strengthen its services business, increasing from its 29% to the 35-40% range of competitors. One way of doing so is moving to metal 3D printing from additional acquisitions. 3D printing of metal products is achieving significantly stronger growth than plastic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.